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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
_______________
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM
.................... TO ....................
_______________
COMMISSION FILE NUMBER: 1-13888
_______________
GRAFTECH INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
_______________
1521 CONCORD PIKE
BRANDYWINE WEST, SUITE 301 19803
WILMINGTON, DE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 778-8227
_______________
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of March 31, 2003, 56,779,778 shares of common stock, par value $.01 per
share, were outstanding.
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TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 2002 and March 31, 2003 (unaudited).............. Page 3
Consolidated Statements of Operations for the Three Months ended
March 31, 2002 and 2003 (unaudited)..................................................... Page 4
Consolidated Statements of Cash Flows for the Three Months ended March 31, 2002 and 2003
(unaudited)............................................................................. Page 5
Consolidated Statement of Stockholders' Deficit for the Year ended December 31, 2002 and the
Three Months ended March 31, 2003 (unaudited)........................................... Page 6
Notes to Consolidated Financial Statements................................................... Page 7
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1................................................. Page 38
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................................. Page 43
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK................................. Page 77
ITEM 4. CONTROLS AND PROCEDURES.................................................................... Page 79
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS.......................................................................... Page 80
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.................................................. Page 80
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................................................... Page 81
SIGNATURE........................................................................................... Page 82
SECTION 302 CERTIFICATIONS.......................................................................... Page 83
EXHIBIT INDEX....................................................................................... Page 87
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
(Unaudited)
December 31, March 31,
ASSETS 2002 2003
---- ----
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 11 $ 9
Notes and accounts receivable, net.................................................... 108 99
Inventories:
Raw materials and supplies.......................................................... 40 42
Work in process..................................................................... 103 115
Finished goods...................................................................... 30 30
------------- -----------
173 187
Prepaid expenses and deferred income taxes............................................ 21 23
------------- -----------
Total current assets................................................................ 313 318
------------- -----------
Property, plant and equipment............................................................. 1,008 1,038
Less: accumulated depreciation........................................................... 700 719
------------- -----------
Net fixed assets.................................................................... 308 319
------------- -----------
Deferred income taxes..................................................................... 171 182
Goodwill.................................................................................. 17 19
Other assets.............................................................................. 50 42
------------- -----------
Total assets........................................................................ $ 859 $ 880
============= ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 106 $ 83
Short-term debt....................................................................... 18 12
Accrued income and other taxes........................................................ 24 31
Other accrued liabilities............................................................. 57 73
------------- -----------
Total current liabilities.......................................................... 205 199
Long-term debt:
Carrying value........................................................................ 699 734
Fair value of hedged debt obligations................................................. 8 2
Unamortized bond premium.............................................................. 6 6
------------- -----------
Total long-term debt..................................................... 713 742
------------- -----------
Other long-term obligations............................................................... 258 262
Deferred income taxes..................................................................... 34 37
Minority stockholders' equity in consolidated entities.................................... 30 27
Commitments and contingencies............................................................. - -
STOCKHOLDERS' DEFICIT:
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued............ - -
Common stock, par value $.01, 100,000,000 shares authorized, 59,120,160 shares
issued at December 31, 2002, 59,748,717 shares issued at March 31, 2003.......... 1 1
Additional paid-in capital............................................................ 636 639
Accumulated other comprehensive loss.................................................. (304) (304)
Accumulated deficit................................................................... (620) (629)
Less: cost of common stock held in treasury, 2,542,539 shares at December
31, 2002 and March 31, 2003......................................................... (88) (88)
Less: common stock held in employee benefits trust, 426,400 shares at December
31, 2002 and March 31, 2003...................................................... (6) (6)
------------- -----------
Total stockholders' deficit........................................................... (381) (387)
------------- -----------
Total liabilities and stockholders' deficit......................................... $ 859 $ 880
============= ===========
See accompanying Notes to Consolidated Financial Statements
3
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Three Months Ended
------------------
March 31, March 31,
2002 2003
---- ----
Net sales............................................................ $ 138 $ 174
Cost of sales ....................................................... 107 134
---------- ---------
Gross profit.................................................... 31 40
Research and development............................................. 3 3
Selling, administrative and other expenses........................... 18 21
Other (income) expense, net.......................................... - (4)
Global realignment and related expenses.............................. 1 -
Restructuring charges................................................ 5 19
Interest expense..................................................... 13 14
---------- ---------
40 53
---------- ---------
Loss before provision from income taxes and minority interest... (9) (13)
Benefit from income taxes (6) (4)
---------- ---------
Loss before minority interest................................... (3) (9)
Less: Minority stockholders' share of income......................... 1 -
---------- ---------
Net loss........................................................ $ (4) $ (9)
========== =========
BASIC LOSS PER COMMON SHARE:
Net loss per share.............................................. $ (0.06) $ (0.16)
========== =========
Weighted average common shares outstanding
(in thousands)................................................ 55,823 56,621
========== =========
DILUTED LOSS PER COMMON SHARE:
Net loss per share.............................................. $ (0.06) $ (0.16)
========== =========
Weighted average common shares outstanding
(in thousands)................................................ 55,823 56,621
========== =========
See accompanying Notes to Consolidated Financial Statements
4
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Three Months Ended
------------------
March 31, March 31,
2002 2003
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss............................................................... $ (4) $ (9)
Non-cash charges (credits) to net loss:
Depreciation and amortization...................................... 7 7
Deferred income taxes.............................................. (8) (5)
Restructuring charges.............................................. 5 19
Other non-cash charges (credits)................................... 1 (14)
Working capital*....................................................... (45) (19)
Long-term assets and liabilities....................................... (3) (3)
------------ -----------
NET CASH USED IN OPERATING ACTIVITIES....................... (47) (24)
------------ -----------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures................................................... (9) (9)
------------ -----------
NET CASH USED IN INVESTING ACTIVITIES....................... (9) (9)
------------ -----------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net........................... 1 (6)
Revolving credit facility borrowings (reductions), net................. (25) 35
Long-term debt borrowings.............................................. 400 -
Long-term debt reductions.............................................. (312) -
Purchase of interest rate caps......................................... - (4)
Proceeds from reset of interest rate swap.............................. - 10
Sale of common stock .................................................. 1 -
Financing costs........................................................ (14) -
Dividends paid to minority stockholders................................ - (4)
------------ -----------
NET CASH PROVIDED BY FINANCING ACTIVITIES................... 51 31
------------ -----------
Net decrease in cash and cash equivalents.................................. (5) (2)
------------ -----------
Effect of exchange rate changes on cash and cash equivalents............... - -
Cash and cash equivalents at beginning of period........................... 38 11
------------ -----------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................................. $ 33 $ 9
============ ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the periods for:
Interest expense................................................... $ 12 $ 25
Income taxes....................................................... $ 3 $ 1
*Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable.......................................... $ (3) $ 13
Inventories............................................................ 4 (9)
Prepaid expenses and other current assets.............................. (3) 1
Decrease in accounts payable and accruals.............................. (40) (19)
Antitrust investigations and related lawsuits and claims, net.......... - (4)
Restructuring payments................................................. (3) (1)
------------ -----------
WORKING CAPITAL............................................. $ (45) $ (19)
============ ===========
See accompanying Notes to Consolidated Financial Statements
5
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Dollars in millions, except share data)
December 31, 2002 (Audited) and March 31, 2003 (Unaudited)
Accumulated
Shares of Additional Other
Common Common Paid-in Comprehensive Accumulated
Stock Stock Capital Loss Deficit
----- ----- ------- ---- -------
BALANCE AT DECEMBER 31, 2001............... $ 1 58,532,209 629 $ (269) $ (602)
Comprehensive loss:
Net loss.............................. - - - - (18)
Other comprehensive loss:
Minimum pension liability............ - - - (15) -
Foreign currency translation
adjustments....................... - - - (20) -
---------- ---------- ---------- ----------- ---------
Total comprehensive loss................. - - - (35) (18)
Issuance of restricted stock............. - 412,200 6 - -
Amortization of restricted stock......... - - - - -
Accelerated vesting of restricted stock.. - - - - -
Sale of common stock under stock options. - 175,751 1 - -
Repurchase of treasury stock............. - - - - -
---------- ---------- ---------- ----------- ----------
BALANCE AT DECEMBER 31, 2002............... 1 59,120,160 636 (304) (620)
Comprehensive loss:
Net loss.............................. - - - - (9)
Other comprehensive loss:
Foreign currency translation
adjustments........................ - - - - -
---------- ---------- ---------- ----------- ----------
Total comprehensive loss................... - - - - (9)
Issuance of common stock to savings and
pension plans.......................... - 628,557 3 - -
---------- ---------- ---------- ----------- ----------
BALANCE AT MARCH 31, 2003.................. $ 1 59,748,717 639 $ (304) (629)
========== ========== ========== =========== ==========
Common Stock
Unearned Held in Total
Restricted Treasury Employee Stockholders'
Stock Stock Benefits Trust (Deficit)
----- ----- -------------- ---------
BALANCE AT DECEMBER 31, 2001............... $ - $ (85) $ (6) $ (332)
Comprehensive loss:
Net loss.............................. - - - (18)
Other comprehensive loss:
Minimum pension liability............ - - - (15)
Foreign currency translation
adjustments....................... - - - (20)
---------- --------- --------- -------------
Total comprehensive loss................. - - - (53)
Issuance of restricted stock............. (6) - - -
Amortization of restricted stock......... 1 - - 1
Accelerated vesting of restricted stock.. 5 - - 5
Sale of common stock under stock options. - - - 1
Repurchase of treasury stock............. - (3) - (3)
--------- --------- --------- -------------
BALANCE AT DECEMBER 31, 2002............. - (88) (6) (381)
Comprehensive loss:
Net loss............................ - - - (9)
Other comprehensive loss:
Foreign currency translation
adjustments...................... - - - -
--------- --------- --------- -------------
Total comprehensive loss................. - - - (9)
Issuance of common stock to savings and
pension plans........................ - - - 3
--------- --------- --------- -------------
BALANCE AT MARCH 31, 2003................ $ - (88) (6) (387)
========== ========= ========= =============
See accompanying Notes to Consolidated Financial Statements
6
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL PRESENTATION
These interim Consolidated Financial Statements are unaudited; however,
in the opinion of management, they have been prepared in accordance with Rule
10-01 of Regulation S-X adopted by the SEC and reflect all adjustments (all of
which are of a normal, recurring nature) which are necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. These interim Consolidated Financial Statements should be
read in conjunction with the audited Consolidated Financial Statements,
including the related Notes, contained in our Annual Report on Form 10-K at and
for the year ended December 31, 2002 (the "ANNUAL REPORT"). Results of
operations for the three months ended March 31, 2003 are not necessarily
indicative of the results of operations that may be expected for any other
interim period or for the entire year ending December 31, 2003.
Certain amounts in the Consolidated Financial Statements for the
quarter ended March 31, 2002 have been reclassified as described in this Note 1
below.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and judgments that affect the amounts reported in
the financial statements and accompanying notes. The accounting estimates that
require our management's most difficult and subjective judgments include:
employee benefit plans, financial instruments, contingencies, impairments of
long-lived assets, inventories and accounting for income taxes. Actual amounts
may differ materially from our management's estimates.
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies in the Consolidated Financial Statements.
"GTI" refers to GrafTech International Ltd. only. GTI is our public
parent company and the issuer of the publicly traded common stock covered by the
Consolidated Financial Statements. GTI is a guarantor of the Senior Notes and
the Senior Facilities. Prior to our Annual Meeting of Stockholders for 2002, GTI
was named UCAR International Inc.
"GRAFTECH GLOBAL" refers to GrafTech Global Enterprises Inc. only.
GrafTech Global is a direct, wholly owned subsidiary of GTI and the direct or
indirect holding company for all of our operating subsidiaries. GrafTech Global
is a guarantor of the Senior Notes and the Senior Facilities. Prior to June 7,
2002, GrafTech Global Enterprises Inc. was named UCAR Global Enterprises Inc.
"UCAR CARBON" refers to UCAR Carbon Company Inc. only. UCAR Carbon is
our wholly owned subsidiary through which we conduct most of our U.S.
operations. UCAR Carbon is a guarantor of the Senior Notes and the Senior
Facilities.
7
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"GRAFTECH FINANCE" refers to GrafTech Finance Inc. only. GrafTech
Finance is a direct, wholly owned special purpose finance subsidiary of GTI and
the borrower under our senior secured bank credit facilities (as amended, the
"SENIOR FACILITIES"). GrafTech Finance is the issuer of our 10.25% senior notes
due 2012 (the "SENIOR NOTES"). The Senior Notes were issued under an Indenture
dated February 15, 2002, as supplemented on April 30, 2002 (as supplemented, the
"INDENTURE"). Prior to June 7, 2002, GrafTech Finance was named UCAR Finance
Inc.
"AET" refers to Advanced Energy Technology Inc. only. AET is our 97.5%
owned (wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products. Prior to January 1,
2003, AET was named Graftech Inc.
"CARBONE SAVOIE" refers to Carbone Savoie S.A.S. and its subsidiaries.
Carbone Savoie is our 70% owned subsidiary engaged in the development,
manufacture and sale of cathodes.
"SUBSIDIARIES" refers to those companies that, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by GTI or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of GTI's subsidiaries have been wholly owned
(with de minimis exceptions in the case of certain foreign subsidiaries) from at
least January 1, 2000 through March 31, 2003, except for:
o Carbone Savoie, which has been and is 70% owned; and
o AET, which was 100% owned until it became 97.5% owned in June
2001.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie and, as a result, became 70% owned on March 31, 2001.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, GrafTech Global or GrafTech Finance,
individually.
In 2002, we substantially completed the realignment of our foreign
subsidiaries. Most of the operations and net sales of our synthetic graphite
line of business are located outside the U.S. and are held by our Swiss
subsidiary or its subsidiaries. Most of our technology is held by our U.S.
subsidiaries. We may in the future realign the corporate organizational
structure of our U.S. subsidiaries.
New Accounting Standards
In April 2003, FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149 "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." SFAS No. 149 amends and clarifies accounting for derivative
instruments, including certain derivative instruments embedded in other
contracts, and for hedging activities under SFAS No. 133. SFAS No. 149 is
effective for contracts entered into or modified, and for hedging
8
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
relationships designated, after June 30, 2003. Other provisions of SFAS No. 149
that related to SFAS No. 133 implementation issues should continue to be applied
in accordance with their respective dates. Management has not yet determined the
impact that SFAS No. 149 will have on our results of operations or financial
position.
In December 2002, FASB issued SFAS No. 148 "Accounting for Stock-Based
Compensation - Transition and Disclosure." SFAS No. 148 amends SFAS No. 123,
"Accounting for Stock-Based Compensation," to provide alternative methods of
transition for a voluntary change to the fair value method of accounting for
stock-based employee compensation. In addition, SFAS No. 148 amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. The adoption of SFAS No. 148 did not have a significant impact on our
consolidated results of operations or financial position because the impact was
limited to additional disclosure. The additional disclosure is set forth below.
No compensation expense has been recognized for our time vesting
options granted with exercise prices at not less than market price on
the date of grant. At March 31, 2003, all awards subject to performance
conditions were fully vested. If compensation expense for our
stock-based compensation plans was determined by the fair value method
prescribed by SFAS No. 123, "Accounting for Stock Based Compensation,"
our net income (loss) and net income (loss) per share would have been
reduced or increased to the pro forma amounts indicated in the
following table.
Three Months Ended
March 31,
---------
2002 2003
---- ----
(Dollars in millions,
except per share data)
Net income (loss) as reported................................. $ (4) $ (9)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects.............................................. 1 1
Pro forma net income (loss)................................... $ (5) $ (10)
Earnings per share:
Basic - as reported...................................... $ (0.06) $ (0.16)
Basic - pro forma........................................ $ (0.10) $ (0.18)
Diluted - as reported.................................... $ (0.06) $ (0.16)
Diluted - pro forma...................................... $ (0.10) $ (0.18)
In November 2002, FASB issued FIN No. 45, "Guarantor's Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness to Others." The initial recognition and measurement provisions of
FIN No. 45 are applicable on a prospective
9
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
basis to guarantees issued or modified after December 31, 2002, and require that
we record a liability, if any, for the fair value of such guarantees in the
Consolidated Balance Sheet. The adoption of FIN No. 45 did not have a
significant impact on our consolidated financial position or results of
operations because the impact was limited to additional disclosure. The
additional disclosure is set forth below.
Certain of our subsidiaries have guaranteed the Senior
Facilities and the Senior Notes as described in Notes 5 and 8.
Under the by-laws and other organizational documents of GTI
and our subsidiaries as well as certain laws, we are obligated
to indemnify our directors and officers for certain
liabilities or expenses arising out of service to us, and we
maintain insurance with respect to certain of those
obligations. Under certain circumstances, we may be entitled
to recover from them expenses advanced on their behalf. No
amounts have been recorded in respect of such obligations.
We generally sell products with a limited warranty. We accrue
for known warranty claims if a loss is probable and can be
reasonably estimated, and accrue for estimated incurred but
unidentified claims based on historical activity. The accruals
were not significant for either the 2002 first quarter or the
2003 first quarter.
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost as defined in Issue No. 94-3 is recognized at the
date an entity commits to an exit plan. We adopted SFAS No. 146 effective
January 1, 2003 and recorded $19 million ($12 million, net of tax) of
restructuring charges in the 2003 first quarter, $8 million of which related to
organization changes and $11 million for the closure and settlement of our U.S.
non-qualified defined benefit plan for the participating salaried workforce.
In April 2002, FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." The provisions of SFAS No. 145 related to the rescission of SFAS
No. 4 must be applied in fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions
occurring after May 15, 2002 and all other provisions of SFAS No. 145 are
effective for financial statements issued on or after May 15, 2002. SFAS No. 145
rescinds SFAS No. 4, "Reporting Gains and Losses from Extinguishment of Debt,"
and an amendment thereto, and SFAS No. 64, "Extinguishments of Debt Made to
Satisfy Sinking-Fund Requirements."
10
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Previously, accounting principles generally accepted in the United States of
America required that gains and losses from extinguishment of debt be classified
as an extraordinary item, net of related income tax effect. Based on SFAS No.
145, gains and losses from extinguishment of debt are classified as
extraordinary items only if they meet the criteria of Accounting Principle
Boards Opinion 30 ("APB 30"), "Reporting the Effects of Disposal of a Segment of
a Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." The provisions of APB 30 distinguish transactions that are part
of an entity's recurring operations from those that are unusual or infrequent or
that meet the criteria for classification as an extraordinary item. As such,
those that do not meet the criteria of APB 30 are included in the statement of
operations before income (loss) before provisions (benefits) for income taxes,
minority interest and extraordinary items. All prior periods presented that do
not meet the criteria in APB 30 for classification as an extraordinary item must
be reclassified. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for
Intangible Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13,
"Accounting for Leases," to eliminate an inconsistency between the required
accounting for sale-leaseback transactions and the required accounting for
certain lease modifications that have economic effects that are similar to
sale-leaseback transactions. SFAS No. 145 also amends other existing
authoritative pronouncements to make various technical corrections, clarify
meanings or describe their applicability under changed conditions. We adopted
SFAS No. 145 relating to SFAS No. 4 effective January 1, 2003. The effect of the
adoption was to require reclassification of certain write-offs of capitalized
bank charges for the three months ended March 31, 2002 in the amount of $3
million from extraordinary items to other (income) expense, net.
Correspondingly, the provision for income taxes for the three months ended March
31, 2002 was increased by $1 million. The adoption of the provisions of SFAS No.
145 relating to SFAS No. 13 and the other provisions of SFAS No. 145, excluding
the provisions relating to SFAS No. 4, did not have a significant impact on our
consolidated financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not
have a significant impact on our consolidated financial position or results of
operations.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. We
adopted SFAS No. 143 effective January 1, 2003. The adoption of SFAS No. 143 did
not have a significant impact on our consolidated financial position or results
of operations.
11
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In June 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 requires
business combinations initiated after June 30, 2001 to be accounted for using
the purchase method of accounting. It also specifies the types of acquired
intangible assets that are required to be recognized and reported separately
from goodwill. SFAS No. 142 requires that goodwill and certain other intangibles
no longer be amortized, but instead be tested for impairment at least annually.
SFAS No. 142 became effective January 1, 2002. The adoption of SFAS No. 141 and
SFAS No. 142 did not have a significant impact on our consolidated financial
position or results of operations, except that we no longer amortize goodwill.
Goodwill amortization was $2 million in 2001. We have performed the goodwill
impairment reviews required by SFAS No. 142 and the results of these reviews did
not require our existing goodwill to be written down.
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
share data:
Three Months
Ended March 31,
---------------
2002 2003
---- ----
Weighted average common shares
outstanding for basic calculation......... 55,823,444 56,621,283
Add: Effect of stock options.................. - -
----------- ----------
Weighted average common shares
outstanding for diluted calculation....... 55,823,444 56,621,283
=========== ===========
Basic earnings (loss) per common share are calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus the additional common shares that would have been outstanding
if potentially dilutive securities had been issued. As a result of the net loss
reported for the three months ended March 31, 2002 and 2003, 1,109,941 and
93,527, respectively, of potential common shares underlying dilutive securities
have been excluded from the calculation of diluted earnings (loss) per share
because their effect would reduce the loss per share.
In addition, the calculation of weighted average common shares
outstanding for the diluted calculation excludes consideration of stock options
covering 4,329,097 and 9,216,580 shares in the three months ended March 31, 2002
and 2003, respectively, because the exercise of these options would not have
been dilutive for those periods due to the fact that the exercise prices were
greater than the weighted average market price of our common stock for each of
those periods.
12
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at March 31, 2003.
Options Outstanding Options Exercisable
------------------- -------------------
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Prices Exercisable Prices
--------------- ----------- ---- ------ ----------- ------
(Shares in thousands)
Time vesting options:
$ 2.83 to $10.77 4,737 7 years $ 8.40 3,223 $ 8.13
$11.60 to $19.06 2,534 6 years $ 16.47 2,207 $ 16.61
$22.82 to $29.22 141 5 years $ 25.71 135 $ 25.85
$30.59 to $40.44 1,458 3 years $ 34.35 1,236 $ 34.15
----- -----
8,870 6,801
===== =====
Performance vesting options:
$7.60 361 4 years $ 7.60 361 $ 7.60
The calculation of both basic and diluted earnings (loss) per share
gives effect to, among other things, the grant of 412,200 shares of restricted
stock to employees in March 2002. 50% of the shares granted to each employee
were to vest on January 1, 2003 and 50% on January 1, 2004 if the employee was
still employed on the vesting date. GTI's Board of Directors accelerated the
vesting of all of these shares in June 2002. As a result, we recorded $5 million
of compensation expense in the 2002 second quarter.
In September 1998, GTI's Board of Directors adopted an executive
employee loan program and an executive employee stock purchase program. In the
2002 first quarter, the programs were closed. In the 2002 second quarter, all of
the outstanding loans, an aggregate of $3 million, were repaid and discharged.
GTI received an aggregate of 220,127 shares of common stock, valued at the
closing sale price on the date of repayment, and cash as repayment of the loans.
Those shares were added to common stock held in treasury.
(3) SEGMENT REPORTING
In 2002, our businesses were organized around two operating divisions,
our Graphite Power Systems Division, which included our graphite electrode and
cathode businesses, and our Advanced Energy Technology Division, which included
our natural graphite, advanced synthetic graphite and advanced carbon materials
businesses. In 2003, we further refined the organization of our businesses into
three lines of business:
o a synthetic graphite line of business called Graphite Power
Systems, which primarily serves the steel, aluminum,
semiconductor and transportation industries and includes graphite
electrodes, cathodes and other advanced synthetic graphite
materials;
13
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o a natural graphite line of business called Advanced Energy
Technology, which primarily serves the transportation, power
generation, electronics and chemical industries and includes fuel
cell, electronic thermal management and sealant products and
services; and
o a carbon materials line of business called Advanced Carbon
Materials, which primarily serves the silicon metal and
ferro-alloy industries and includes carbon electrodes and
refractories.
In accordance with SFAS No. 131 "Segment Reporting", we have segregated
our businesses into three operating segments as noted above. "Other" in the
table below includes Advanced Energy Technology, Advanced Carbon Materials as
well as UCAR Composites Inc., which designs and manufactures composite tooling.
The following segment data for prior periods has been restated to give effect to
the further refinement of our organizational structure described above.
We evaluate the performance of our reportable segments based on gross
profit. Intersegment sales and transfers of goods and services are not material.
The following tables summarize financial information concerning our reportable
segments.
Three Months Ended
------------------
March 31, June 30, September 30, December 31, March 31,
2002 2002 2002 2002 2003
---- ---- ---- ---- ----
(Dollars in millions)
(Unaudited)
Net sales:
Synthetic Graphite................. $ 118 $ 142 $ 136 $ 142 $ 149
Other.............................. 20 19 18 18 25
-------- -------- -------- -------- -------
Total........................... $ 138 $ 161 $ 154 $ 160 $ 174
======== ======== ======== ======== =======
Cost of Sales:
Synthetic Graphite................ $ 90 $ 110 $ 105 $ 108 $ 115
Other............................. 17 15 15 13 19
-------- -------- -------- -------- -------
Total.......................... $ 107 $ 125 $ 120 $ 121 $ 134
======== ======== ======== ======== =======
Gross profit:
Synthetic Graphite................ $ 28 $ 32 $ 31 $ 34 $ 34
Other............................. 3 4 3 5 6
-------- -------- -------- -------- -------
Total.......................... $ 31 $ 36 $ 34 $ 39 $ 40
======== ======== ======== ======== =======
Depreciation and amortization:
Synthetic Graphite................. $ 6 $ 6 $ 6 $ 7 $ 6
Other.............................. 1 1 1 1 1
-------- -------- -------- -------- -------
Consolidated ................... $ 7 $ 7 $ 7 $ 8 $ 7
======== ======== ======== ======== =======
14
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(4) RESTRUCTURING AND IMPAIRMENT CHARGES
In the 2003 first quarter, we recorded $19 million ($12 million net of
tax) of restructuring charges, consisting of $8 million for organizational
changes and $11 million for the closure and settlement of our U.S. non-qualified
defined benefit plan for the participating salaried workforce. The $8 million
($5 million, net of tax) charge for organizational changes related to U.S.
voluntary and selective severance programs and related benefits associated with
a workforce reduction of 103 employees. The closure of our non-qualified U.S.
defined benefit plan resulted in recognition of net non-cash actuarial losses of
$11 million ($7 million, net of tax).
In the 2002 fourth quarter, we recorded $3 million ($2 million after
tax) of impairment charges relating to our investment in our joint venture with
Jilin Carbon Co. Ltd. (together with its affiliates, "JILIN"). The impairment
resulted from uncertainty about the completion and start-up of the planned
graphite electrode facility in Changchun, China due to the effects that the
challenging 2002 graphite electrode industry conditions have had on Jilin. We
also recorded a $1 million (nil after tax) change in estimate for the
restructuring charge for our graphite electrode operations in Caserta, Italy.
In the 2002 third quarter, we recorded a $1 million charge related to
the impairment of available-for-sale securities.
In the 2002 second quarter, we recorded a $13 million ($8 million after
tax) non-cash charge primarily related to the impairment of our long-lived
carbon electrode assets in Columbia, Tennessee as a result of a decline in
demand and loss of market share. The primary end market for carbon electrodes is
silicon metal, which remains very depressed in the U.S. where our main customer
base is located. This charge also includes $1 million related to the impairment
of available-for-sale securities.
In the 2002 first quarter, we recorded a $5 million restructuring
charge related primarily to the mothballing of our graphite electrode operations
in Caserta, Italy. This charge included estimated pension, severance and other
related employee benefit costs for 102 employees and other costs related to the
mothballing.
In the 2001 fourth quarter, we recorded a $7 million restructuring
charge and a $27 million impairment loss on long-lived and other assets. The
restructuring charge related primarily to exit costs related to the mothballing
of our graphite electrode operations in Caserta, Italy. $24 million of the
impairment loss related to assets located at our facility in Caserta, and the
remaining $3 million related to the impairment of available-for-sale securities.
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
15
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plant Shutdown
Severance and and Related
Related Costs Costs Total
------------- ----- -----
(Dollars in millions)
BALANCE AT DECEMBER 31, 2001............. $ 4 $ 8 $ 12
Restructuring charges in 2002............ 6 - 6
Payments in 2002......................... (5) 1 (4)
------- ------- -------
BALANCE AT DECEMBER 31, 2002............. 5 9 14
Restructuring charges in 2003............ 19 - 19
Payments in 2003......................... (1) - (1)
------- ------- -------
BALANCE AT MARCH 31, 2003................ $ 23 $ 9 $ 32
======= ======= =======
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
(5) LONG-TERM DEBT AND LIQUIDITY
The following table presents our long-term debt:
December 31, March 31,
2002 2003
---- ----
(Dollars in millions)
Senior Facilities:
Tranche A euro facility.................... $ - $ -
Tranche A U.S. dollar facility............. - -
Tranche B U.S. dollar facility............. 137 137
Revolving credit facility.................. 10 46
---------- ---------
Total Senior Facilities.................. 147 183
Other European debt............................. 2 1
Senior Notes:
Senior Notes due 2012...................... 550 550
Fair value of hedged debt obligations...... 8 2
Unamortized bond premium................... 6 6
---------- ---------
Total Senior Notes....................... 564 558
---------- ---------
Total................................ $ 713 $ 742
========== =========
Senior Notes
On February 15, 2002, GrafTech Finance issued $400 million aggregate
principal amount of Senior Notes. Interest on the Senior Notes is payable
semi-annually on February 15 and August 15 of each year, commencing August 15,
2002, at the rate of 10.25% per annum. The Senior Notes mature on February 15,
2012.
16
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, we obtained consent from the holders of the Senior Notes
issued in February 2002 to amend the Indenture so as to waive the requirement to
use the gross proceeds from the issuance of up to $150 million aggregate
principal amount of additional Senior Notes to make intercompany loans to our
foreign subsidiaries. On April 30, 2002, we entered into a Supplemental
Indenture.
On May 6, 2002, GrafTech Finance issued $150 million aggregate
principal amount of additional Senior Notes at a purchase price of 104.5% of
principal amount, plus accrued interest from February 15, 2002, under the same
Indenture pursuant to which it issued the Senior Notes in February 2002. The
Senior Notes constitute one class of debt securities under the Indenture. The
additional Senior Notes bear interest at the same rate and mature on the same
date as the Senior Notes issued in February 2002. The $7 million premium
received upon issuance of the additional Senior Notes was added to the principal
amount of the Senior Notes shown on the Consolidated Balance Sheets and is
amortized (as a credit to interest expense) over the term of the additional
Senior Notes. As a result of our receipt of such premium, the effective annual
interest rate on the additional Senior Notes is about 9.5%.
On June 5, 2002, GrafTech Finance offered to exchange new registered
Senior Notes (and related guarantees) that are substantially identical to the
previously outstanding Senior Notes (and related guarantees), except that
certain transfer restrictions and registration rights relating to the previously
outstanding Senior Notes would not apply to the new registered Senior Notes (and
related guarantees). All of the previously outstanding Senior Notes (and related
guarantees) were exchanged under the exchange offer.
Except as described below, GrafTech Finance may not redeem the Senior
Notes prior to February 15, 2007. On or after that date, GrafTech Finance may
redeem the Senior Notes, in whole or in part, at specified redemption prices
beginning at 105.125% of the principal amount redeemed for the year commencing
February 15, 2007 and reducing to 100.00% of the principal amount redeemed for
the years commencing February 15, 2010, and thereafter, in each case plus
accrued and unpaid interest to the redemption date.
In addition, before February 15, 2005, GrafTech Finance is entitled at
its option on one or more occasions to redeem Senior Notes in an aggregate
principal amount not to exceed 35% of the aggregate principal amount of Senior
Notes originally issued by GrafTech Finance at a redemption price of 110.25% of
the principal amount redeemed, plus accrued and unpaid interest to the
redemption date, with the net cash proceeds from one or more underwritten
primary public offerings of common stock of GTI pursuant to an effective
registration statement under the Securities Act so long as:
o at least 65% of such aggregate principal amount of Senior Notes
remains outstanding immediately after each such redemption (other
than Senior Notes held, directly or indirectly, by us); and
17
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o each such redemption occurs within 60 days after the date of the
related public offering.
Upon the occurrence of a change of control, GrafTech Finance will be
required to make an offer to repurchase the Senior Notes at a price equal to
101.00% of the principal amount redeemed, plus accrued and unpaid interest to
the redemption date. For this purpose, a change in control occurs on:
o the date on which any person beneficially owns more than 35% of
the total voting power of GTI; or
o the date on which individuals, who on the issuance date of the
Senior Notes were directors of GTI (or individuals nominated or
elected by a vote of 66 2/3% of such directors or directors
previously so elected or nominated), cease to constitute a
majority of GTI's Board of Directors then in office; or
o the date on which a plan relating to the liquidation or
dissolution of GTI is adopted; or
o the date on which GTI merges or consolidates with or into another
person, or another person merges into GTI, or all or
substantially all of GTI's assets are sold (determined on a
consolidated basis), with certain specified exceptions; or
o the date on which GTI ceases to own, directly or indirectly, all
of the voting power of GrafTech Global, UCAR Carbon and GrafTech
Finance.
The Senior Notes rank senior to present and future subordinated debt
and equally with present and future senior debt and obligations of GrafTech
Finance. The Senior Notes are effectively subordinated to present and future
secured debt and obligations of GrafTech Finance, to the extent of the value of
the assets securing such debt and obligations, and are structurally subordinated
to debt and obligations, including trade payables, of subsidiaries that are
neither guarantors of the Senior Notes nor unsecured intercompany term note
obligors.
GTI, GrafTech Global and UCAR Carbon and other U.S. subsidiaries
holding a substantial majority of our U.S. assets have guaranteed the Senior
Notes on a senior unsecured basis, except that the guarantee by UCAR Carbon is
secured as described below. Additional information with respect to the
guarantees is set forth in Note 8.
Unsecured intercompany term notes in an aggregate principal amount
equal to $465 million (based on currency exchange rates in effect at March 31,
2003) and guarantees of those unsecured intercompany term notes issued to
GrafTech Finance by certain of our foreign subsidiaries have been pledged by
GrafTech Finance to secure the Senior Notes, subject to the limitation that at
no time will the combined value of the pledged portion of any foreign
18
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subsidiary's unsecured intercompany term note and unsecured guarantee of
unsecured intercompany term notes issued by other foreign subsidiaries exceed
19.99% of the principal amount of the then outstanding Senior Notes. As a result
of this limitation, the principal amount of unsecured intercompany term notes
pledged to secure the Senior Notes equals $387 million, or about 70% of the
principal amount of the outstanding Senior Notes. The remaining unsecured
intercompany term notes held by GrafTech Finance in an aggregate principal
amount of $78 million (based on currency exchange rates in effect at March 31,
2003), and any pledged unsecured intercompany term notes that cease to be
pledged due to a reduction in the principal amount of the then outstanding
Senior Notes due to redemption, repurchase or other events, will not be subject
to any pledge and will be available to satisfy the claims of creditors
(including the lenders under the Senior Facilities and the holders of the Senior
Notes) of GrafTech Finance, as their interests may appear. The Senior Notes
contain provisions restricting, subject to certain exceptions, the pledge of
those unsecured intercompany term notes to secure any debt or obligation unless
they are equally and ratably pledged to secure the Senior Notes for so long as
such other pledge continues in effect.
The guarantee by UCAR Carbon has been secured by a pledge of all of our
shares of AET, but at no time will the value of the pledged portion of such
shares exceed 19.99% of the principal amount of the then outstanding Senior
Notes. The pledge of the shares of AET is junior to the pledge of the same
shares to secure UCAR Carbon's guarantee of the Senior Facilities.
The unsecured intercompany term note obligations rank senior to present
and future subordinated guarantees, debt and obligations of the respective
obligors, and equally with present and future senior guarantees, debt and
obligations of the respective obligors. The unsecured intercompany term note
obligations are effectively subordinated to present and future secured
guarantees, debt and obligations of the respective obligors, to the extent of
the value of the assets securing such guarantees, debt and obligations, and are
structurally subordinated to guarantees, debt and obligations, including trade
payables, of subsidiaries of the respective obligors that are not also unsecured
intercompany term note obligors.
The Senior Notes contain a number of covenants that, among other
things, restrict our ability to incur additional indebtedness, pay dividends,
make investments, create or permit to exist restrictions on distributions from
subsidiaries, sell assets, engage in certain transactions with affiliates or
enter into certain mergers and consolidations.
In addition to the failure to pay principal and interest when due or to
repurchase Senior Notes when required, events of default under the Senior Notes
include: failure to comply with applicable covenants; failure to pay at maturity
or upon acceleration indebtedness exceeding $10 million; judgment defaults in
excess of $10 million to the extent not covered by insurance; and certain events
of bankruptcy.
The Senior Notes contain provisions as to legal defeasance and covenant
defeasance.
19
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Senior Facilities
The Senior Facilities consist of:
o A Tranche A Facility which provided for initial term loans of
$137 million and (euro)161 million (equivalent to $158 million
based on currency exchange rates in effect at February 22, 2000)
to GrafTech Finance. At March 31, 2003, the Tranche A Facility
had been fully repaid and terminated.
o A Tranche B Facility providing for initial term loans of $350
million to GrafTech Finance. At March 31, 2003, the principal
amount of term loans outstanding under the Tranche B Facility was
$137 million, all of the scheduled principal payments of which
are due in 2007.
o A Revolving Facility providing for dollar and euro-denominated
revolving and swing line loans to, and the issuance of
dollar-denominated letters of credit for the account of, GrafTech
Finance and certain of our other subsidiaries in an aggregate
principal and stated amount at any time not to exceed,
initially,(euro)250 million and, at March 31, 2003,(euro)200
million ((euro)25 million of which can only be used to pay or
secure payment of the fine assessed by the EU Competition
Commission). The Revolving Facility terminates on February 22,
2006. As a condition to each borrowing under the Revolving
Facility, we are required to represent, among other things, that
the aggregate amount of payments made (excluding certain imputed
interest) and additional reserves created in connection with
antitrust, securities and stockholder derivative investigations,
lawsuits and claims do not exceed $340 million by more than $75
million (which $75 million is reduced by the amount of certain
debt (excluding the Senior Notes) incurred by us that is not
incurred under the Senior Facilities ($16 million of which debt
was outstanding at March 31, 2003)).
We are generally required to make mandatory prepayments in the amount
of:
o Either 75% or 50% (depending on our net debt leverage ratio,
which is the ratio of our net debt to our EBITDA) of excess cash
flow. The obligation to make these prepayments, if any, arises
after the end of each year with respect to adjusted excess cash
flow during the prior year;
o 100% of the net proceeds of certain asset sales or incurrence of
certain indebtedness; and
o 50% of the net proceeds of the issuance of certain GTI equity
securities.
We may make voluntary prepayments under the Senior Facilities. There is
no penalty or premium due in connection with prepayments (whether voluntary or
mandatory).
20
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
GrafTech Finance has made and may make secured and guaranteed
intercompany loans of the net proceeds of borrowings under the Senior Facilities
to GrafTech Global's subsidiaries. The obligations of GrafTech Finance under the
Senior Facilities are secured, with certain exceptions, by first priority
security interests in all of these intercompany loans (including the related
security interests and guarantees). We used the proceeds from the issuance of
the Senior Notes in February 2002 to finance the repayment of all of these
intercompany loans that were outstanding at that time, except for intercompany
revolving loans to UCAR Carbon and our Swiss subsidiary.
GTI guarantees the obligations of GrafTech Finance under the Senior
Facilities. This guarantee is secured, with certain exceptions, by first
priority security interests in all of the outstanding capital stock of GrafTech
Global and GrafTech Finance, all of the intercompany debt owed to GTI and GTI's
interest in the lawsuit initiated by us against our former parents.
GTI, GrafTech Global and each of GrafTech Global's subsidiaries
guarantees, with certain exceptions, the obligations of GrafTech Global's
subsidiaries under the intercompany loans, except that our foreign subsidiaries
do not guarantee the intercompany loan obligations of our U.S. subsidiaries.
The obligations of GrafTech Global's subsidiaries under the
intercompany loans as well as these guarantees are secured, with certain
exceptions, by first priority security interests in substantially all of our
assets, except that no more than 65% of the capital stock or other equity
interests in our foreign subsidiaries held directly by our U.S. subsidiaries,
and no other foreign assets, secure obligations or guarantees of our U.S.
subsidiaries.
Each of the guarantees is full, unconditional and joint and severable,
except as otherwise required to comply with applicable non-U.S. laws. Payment
under the guarantees could be required immediately upon the occurrence of an
event of default under the Senior Facilities. If a guarantor makes a payment
under its guarantee, it would have the right under certain circumstances to seek
contribution from the other guarantors.
At March 31, 2003, the interest rate applicable to the Revolving
Facility is, at our option, either euro LIBOR plus a margin ranging from 1.375%
to 3.375% (depending on our leverage ratio) or the alternate base rate plus a
margin ranging from 0.375% to 2.375% (depending on our leverage ratio). At March
31, 2003, the interest rate applicable to the Tranche B Facility is, at our
option, either euro LIBOR plus a margin ranging from 2.875% to 3.625% (depending
on our leverage ratio) or the alternate base rate plus a margin ranging from
1.875% to 2.625% (depending on our leverage ratio). The alternate base rate is
the higher of the prime rate announced by JP Morgan Chase Bank or the federal
funds effective rate, plus 0.50%. GrafTech Finance pays a per annum fee ranging
from 0.375% to 0.500% (depending on our leverage ratio) on the undrawn portion
of the commitments under the Revolving Facility. At March 31, 2003, the interest
rates on outstanding debt under the Senior Facilities were: Tranche B Facility,
5.1%;
21
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
dollar-denominated borrowings under the Revolving Facility, 4.8%. The weighted
average interest rate on the Senior Facilities was 5.1% during the 2003 first
quarter and 5.6% during the 2002 first quarter.
The Senior Facilities contain a number of significant covenants that,
among other things, significantly restrict our ability to sell assets, incur
additional debt, repay or refinance other debt or amend other debt instruments,
create liens on assets, enter into sale and lease back transactions, make
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, make intercompany dividend payments to GTI, pay intercompany debt
owed to GTI, engage in transactions with affiliates, pay dividends to
stockholders of GTI or make other restricted payments and that otherwise
significantly restrict corporate activities. In addition, we are required to
comply with financial covenants relating to specified minimum interest coverage
ratios and maximum net senior secured debt leverage ratios (which is the ratio
of our net senior secured debt to our EBITDA), which become more restrictive
over time, beginning September 30, 2003.
Under the Senior Facilities, GTI is permitted to pay dividends on, and
repurchase, common stock in an aggregate annual amount of $25 million, plus up
to an additional $25 million if certain leverage ratio and excess cash flow
requirements are satisfied. We are also permitted to repurchase common stock
from present or former directors, officers or employees in an aggregate amount
of up to the lesser of $5 million per year (with unused amounts permitted to be
carried forward) or $25 million on a cumulative basis since February 22, 2000.
In addition to the failure to pay principal, interest and fees when
due, events of default under the Senior Facilities include: failure to comply
with applicable covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million; judgment defaults in
excess of $7.5 million to the extent not covered by insurance; certain events of
bankruptcy; and certain changes in control.
Certain Amendments to Senior Facilities
In February 2002, the Senior Facilities were amended to, among other
things, permit us to issue up to $400 million aggregate principal amount of
Senior Notes. The amendment also changed the manner in which net debt and EBITDA
are calculated for financial covenant purposes with respect to certain expenses
incurred in connection with the lawsuit initiated by us against our former
parents and any letter of credit issued to secure payment of the antitrust fine
assessed against us by the EU Competition Authority. In connection therewith, we
paid an amendment fee of $1 million and the margin that is added to either euro
LIBOR or the alternate base rate in order to determine the interest rate payable
thereunder increased by 37.5 basis points.
In May 2002, the Senior Facilities were amended to, among other things,
permit us to issue up to $150 million aggregate principal amount of Senior
Notes. In connection with this amendment, our maximum permitted leverage ratio
was changed to measure the ratio of net senior secured debt to EBITDA as against
new specified amounts. Our interest coverage ratio
22
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
was also changed. We believe that these changed ratios provide us with greater
flexibility. In addition, the amendment reduced the maximum amount available
under the Revolving Facility to (euro)200 million from (euro)250 million
((euro)25 million of which can only be used to pay or secure payment of the fine
assessed by the EU Competition Authority) and reduced the basket for certain
debt incurred by us that is not incurred under the Senior Facilities (excluding
the Senior Notes) to $75 million from $130 million ($16 million of which debt
was outstanding at March 31, 2003). In connection with the amendment and a
consent to amend the Senior Notes to permit such issuance, we paid fees and
costs of $1 million.
Leverage
We are highly leveraged and, as discussed in Note 7, have substantial
obligations in connection with antitrust investigations, lawsuits and claims (in
respect of which we have an unfunded reserve totaling $94 million). We had total
debt of $754 million (including $6 million for unamortized bond premium and $2
million for fair value of hedged debt obligations) and a stockholders' deficit
of $387 million at March 31, 2003. A substantial portion of our debt has
variable interest rates or has been effectively converted from a fixed rate
obligation to a variable rate obligation pursuant to interest rate management
initiatives. We typically discount or factor a portion of our accounts
receivable. In the 2003 first quarter, certain of our subsidiaries sold
receivables totaling $48 million. If we had not sold such receivables, our
accounts receivable and our debt would have been about $47 million higher at
March 31, 2003. In addition, if we are required to pay or issue a letter of
credit to secure payment of the fine assessed by the antitrust enforcement
authority of the European Union (the "EU COMPETITION AUTHORITY") pending
resolution of our appeal regarding the amount of the fine, the payment would be
financed by borrowing under, or the letter of credit would constitute a
borrowing under, the Revolving Facility. Our leverage and obligations, as well
as changes in conditions affecting our industry, changes in global and regional
economic conditions and other factors, have adversely impacted our recent
operating results.
We use, and are dependent on, funds available under the Revolving
Facility, subject to continued compliance with the financial covenants under the
Senior Facilities, as well as monthly or quarterly cash flow from operations as
our primary sources of liquidity. While our revolving credit facility provides
for maximum borrowings of up to (euro)200 million ($218 million, based on
currency exchange rates in effect at March 31, 2003), our future ability to
borrow under this facility may effectively be less because of the impact of
additional borrowings upon our compliance with the maximum net senior secured
debt leverage ratio permitted or minimum interest coverage ratio required under
the Senior Facilities.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations are greater or timing of payment is sooner
than expected.
23
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Our ability to service our debt as it comes due, including maintaining
compliance with the covenants under the Senior Facilities, and to meet these and
other obligations as they come due is dependent on our future financial and
operating performance. This performance, in turn, is subject to various factors,
including certain factors beyond our control, such as changes in conditions
affecting our industry, changes in global and regional economic conditions,
changes in interest and currency exchange rates, developments in antitrust
investigations, lawsuits and claims involving us and inflation in raw material,
energy and other costs.
Even if we are able to meet our debt service and other obligations when
due, we may not be able to comply with the covenants and other provisions under
the Senior Facilities. These covenants and provisions include financial
covenants and representations regarding absence of material adverse changes
affecting us. A failure to so comply, unless waived by the lenders thereunder,
would be a default thereunder. This would permit the lenders to accelerate the
maturity of the Senior Facilities. It would also permit them to terminate their
commitments to extend credit under the Revolving Facility. This would have an
immediate material adverse effect on our liquidity. An acceleration of maturity
of the Senior Facilities would permit the holders of the Senior Notes to
accelerate the maturity of the Senior Notes. A breach of the covenants contained
in the Senior Notes would also permit the holders of the Senior Notes to
accelerate the maturity of the Senior Notes. Acceleration of maturity of the
Senior Notes would permit the lenders to accelerate the maturity of the Senior
Facilities and terminate their commitments to extend credit under the Revolving
Facility. If we were unable to repay our debt to the lenders and holders or
otherwise obtain a waiver from the lenders and holders, the lenders and holders
could proceed against the collateral securing the Senior Facilities and the
Senior Notes, respectively, and exercise all other rights available to them. If
we were unable to repay our debt to the lenders or the holders, or otherwise
obtain a waiver from the lenders or the holders, we could be required to limit
or discontinue, temporarily or permanently, certain of our business plans,
activities or operations, reduce or delay certain capital expenditures, sell
certain of our assets or businesses, restructure or refinance some or all of our
debt or incur additional debt, or sell additional common stock or other
securities. We cannot assure you that we would be able to obtain any such waiver
or take any of such actions on favorable terms or at all.
As described above, we are dependent on our revolving credit facility
and continuing compliance with the financial covenants under the Senior
Facilities for liquidity. The Senior Facilities require us to, among other
things, comply with financial covenants relating to specified minimum interest
coverage and maximum net senior secured debt leverage ratios that become more
restrictive over time. At March 31, 2003, we were in compliance with the
financial covenants under the Senior Facilities. Based on our current business
plan, we believe we will remain in compliance with our senior secured bank
credit facility covenants for 2003. If we were to believe that we would not
continue to comply with such covenants, we would seek an appropriate waiver or
amendment from the lenders thereunder. We cannot assure you that we would be
able to obtain such waiver or amendment on acceptable terms or at all.
24
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(6) FINANCIAL INSTRUMENTS
We use derivative financial instruments for managing well-defined
currency exchange rate risks and interest rate risks. We do not use
derivative financial instruments for trading purposes.
Foreign Currency Contracts
The amount of foreign exchange contracts used by us to minimize foreign
currency exposure was $56 million at December 31, 2002 and $30 million at March
31, 2003.
Sale of Receivables
Certain of our U.S. and foreign subsidiaries sold receivables of $187
million in 2002 and $48 million in the 2003 first quarter. Receivables sold and
remaining on the Consolidated Balance Sheets were $1 million at December 31,
2002 and nil at March 31, 2003.
Interest Rate Risk Management
We implement interest rate management initiatives to seek to minimize
our interest expense and optimize our portfolio of fixed and variable interest
rate obligations. Use of these initiatives is allowed under the Senior Notes and
the Senior Facilities. Our interest rate swaps are designated as hedging the
exposure to changes in the fair value of our related debt obligation (referred
to as a fair value hedge). The gain or loss on the fair value hedge is
recognized, together with the offsetting gain or loss on the debt obligation
(sometimes referred to as the short-cut method) in earnings in the period of
change in value.
In the 2002 second quarter, we entered into two ten-year interest rate
swaps for a total notional amount of $250 million to effectively convert that
amount of fixed rate debt (represented by Senior Notes) to variable rate debt.
These swaps reduced our interest expense in 2002 by $6 million. In the 2002
third quarter, we sold the total notional amount of $250 million of swaps to
allow for the accelerated collection of $10 million in cash. We subsequently
entered into two interest rate swaps for the total notional amount of $250
million to effectively convert that amount of fixed rate debt to variable rate
debt. In the 2003 first quarter, we entered into an additional $200 million
notional amount interest rate swap, for a new total notional amount of $450
million, through the remaining term of the Senior Notes effectively converting
that amount of fixed rate debt to variable rate debt. In the 2003 first quarter,
we also entered into five-year interest rate caps for a notional amount of $300
million, which extend through August 2007. Subsequently in the 2003 first
quarter, we sold the entire $450 million notional amount of swaps for $10
million in cash. The adjustment of the carrying amount of the Senior Notes will
be amortized over the term of the Senior Notes and recorded as a credit against
interest expense. Following the sale of the swaps, in March 2003, we entered
into $350 million notional amount of interest rate swaps through the remaining
term of the Senior Notes. The weighted average pay rate on the swaps is 5.11%
plus the six month LIBOR in arrears and the weighted average
25
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receive rate is 10.25%. The adjustment for the fair value of the hedged debt
obligation was $8 million at December 31, 2002 and $2 million at March 31, 2003
and has been recorded as part of other assets in the Consolidated Balance Sheet.
The adjustment for the fair value of the interest rate caps was $1 million for
the period ended March 31, 2003, and has been recorded in other (income) and
expense, net in the Consolidated Statements of Operations.
Fair Market Value Disclosures
SFAS No. 107, "Disclosure about Fair Market Value of Financial
Instruments," defines the fair value of a financial instrument as the amount at
which the instrument could be exchanged in a current transaction between willing
parties. Such fair values must often be determined by using one or more methods
that indicate value based on estimates of quantifiable characteristics as of a
particular date. Values were estimated as follows:
Cash and cash equivalents, short-term notes and accounts receivables,
accounts payable and other current payables-The carrying amount
approximates fair value because of the short maturity of these
instruments.
Debt-Fair value of debt was approximately $707 million at December 31,
2002 and $736 million at March 31, 2003.
Foreign currency contracts-Foreign currency contracts are carried at
market value. The market value of the contracts was a loss of
approximately $3 million at December 31, 2002 and March 31, 2003.
Interest rate swaps-See Interest Rate Risk Management.
(7) CONTINGENCIES
Antitrust Investigations
In April 1998, pursuant to a plea agreement between the U.S. Department
of Justice (the "DOJ") and GTI, GTI pled guilty to a one count charge of
violating U.S. federal antitrust law in connection with the sale of graphite
electrodes and was sentenced to pay a non-interest-bearing fine in the aggregate
amount of $110 million. The plea agreement was approved by the U.S. District
Court for the Eastern District of Pennsylvania (the "DISTRICT COURT") and, as a
result, under the plea agreement, we will not be subject to prosecution by the
DOJ with respect to any other violations of U.S. federal antitrust law occurring
prior to April 1998. At our request, in January 2002, the payment schedule for
the $60 million unpaid balance outstanding at that time was revised to require a
$2.5 million payment in April 2002, a $5.0 million payment in April 2003 and,
beginning in April 2004, quarterly payments ranging from $3.25 million to $5.375
million, through January 2007. Beginning in 2004, the DOJ may ask the District
Court to accelerate the payment schedule based on a change in our ability to
make such payments. Interest will begin to accrue on the unpaid balance,
commencing in April 2004, at the statutory
26
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate of interest then in effect. At March 31, 2003, the statutory rate of
interest was 1.19% per annum. Accrued interest will be payable together with
each quarterly payment. The revised payment schedule has been approved by the
District Court. All payments due have been timely paid.
In October 1999, we became aware that the Korean antitrust authority
had commenced an investigation as to whether there had been any violation of
Korean antitrust law by producers and distributors of graphite electrodes. In
March 2002, we were advised that the Korean antitrust authority had assessed a
fine against us in the amount of 676 million KRW ($569,000, based on currency
exchange rates in effect at the time of payment) and assessed fines against five
other graphite electrode producers in amounts ranging up to 4,396 million KRW
(approximately $3.3 million, based on currency exchange rates in effect at the
time of the decision imposing the fine). Our fine, which represented 0.5% of our
graphite electrode sales in Korea during the relevant time period and was the
lowest fine as a percentage of sales imposed by the Korean antitrust authority,
reflected a substantial reduction as a result of our cooperation with that
authority during its investigation. In May 2002, we appealed the decision. In
July 2002, the Korean antitrust authority affirmed its decision on appeal. We
paid the fine together with accrued interest, an aggregate of $584,000, in
August 2002.
In January 2000, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of graphite
electrodes. The statement alleges that we and other producers violated antitrust
laws of the European Community and the European Economic Area in connection with
the sale of graphite electrodes. In July 2001, the EU Competition Authority
issued its decision regarding the allegations. Under the decision, the EU
Competition Authority assessed a fine of (euro)50.4 million (about $55 million,
based on exchange rates in effect at March 31, 2003) against us and assessed
fines against seven other graphite electrode producers in amounts ranging up to
(euro)80.2 million. From the initiation of its investigation, we have cooperated
with the EU Competition Authority. As a result of our cooperation, our fine
reflects a substantial reduction from the amount that otherwise would have been
assessed. It is the policy of the EU Competition Authority to negotiate
appropriate terms of payment of antitrust fines, including extended payment
terms. We have had discussions regarding payment terms with the EU Competition
Authority. After an in-depth analysis of the decision, in October 2001, we filed
an appeal to the Court of First Instance of the European Communities in
Luxembourg challenging the amount of the fine. Appeals of this type may take two
years or longer to be decided and the fine or collateral security therefor would
typically be required to be paid or provided at about the time the appeal was
filed. We have had discussions with the EU Competition Authority regarding the
appropriate form of collateral security during the pendency of the appeal. If
the EU Competition Authority seeks to require payment of the fine or provision
of collateral security therefor, we may file an interim appeal to the Court to
waive or modify such requirement. We cannot predict how or when the Court would
rule on such an interim appeal.
27
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2001, we became aware that the Brazilian antitrust authority had
requested written information from various steelmakers in Brazil. In April 2002,
our Brazilian subsidiary received a request for information from that authority.
We have provided that information.
In May 2002, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of specialty
graphite. The statement alleges that we and other producers violated European
antitrust laws in connection with the sale of specialty graphite. In December
2002, the EU Competition Authority issued its decision regarding the
allegations. Under the decision, the EU Competition Authority assessed no fine
against us and assessed fines against seven other producers in amounts ranging
up to (euro)28 million. We received a 100% reduction from the amount that
otherwise would have been assessed against us due to our cooperation.
Except as described above, the antitrust investigations against us in
the U.S., Canada, the European Union, Japan and Korea have been resolved. We are
continuing to cooperate with the DOJ, the EU Competition Authority and the
Canadian Competition Bureau in their continuing investigations of others. In
October 1997, we were served with subpoenas by the DOJ to produce documents
relating to, among other things, our carbon electrode and bulk graphite
businesses. It is possible that antitrust investigations seeking, among other
things, to impose fines and penalties could be initiated against us by antitrust
authorities in Brazil or other jurisdictions.
To the extent that antitrust investigations involving us have been
resolved with guilty pleas or by adverse decisions, such guilty pleas and
decisions make it more difficult for us to defend against other investigations
as well as civil lawsuits and claims. We have been vigorously protecting, and
intend to continue to vigorously protect, our interests in connection with the
investigations described above. We may, however, at any time settle any possible
unresolved charges.
Antitrust Lawsuits
Through March 31, 2003, except as described in the following
paragraphs, we have settled or obtained dismissal of all of the civil antitrust
lawsuits (including class action lawsuits) previously pending against us,
certain civil antitrust lawsuits threatened against us and certain possible
civil antitrust claims against us by certain customers who negotiated directly
with us. The settlements cover, among other things, virtually all claims against
us by customers in the U.S. and Canada arising out of alleged antitrust
violations occurring prior to the date of the relevant settlements in connection
with the sale of graphite electrodes. One of the settlements also covers the
actual and respective potential claims against us by certain foreign customers
arising out of alleged antitrust violations occurring prior to the date of that
settlement in connection with the sale of graphite electrodes sourced from the
U.S. Although each settlement is unique, in the aggregate they consist primarily
of current and deferred cash payments with some product credits and discounts.
All payments due have been timely paid.
28
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1999 and 2000, we and other producers of graphite electrodes were
served with three complaints commencing three separate civil antitrust lawsuits
in the District Court. In March 2002, we were served with another complaint
commencing a separate civil antitrust lawsuit in the District Court. These
lawsuits are collectively called the "FOREIGN CUSTOMER LAWSUITS". The first
complaint, entitled Ferromin International Trade Corporation, et al. v. UCAR
International Inc., et al. was filed by 27 steelmakers and related parties, all
but one of whom are located outside the U.S. The second complaint, entitled BHP
New Zealand Ltd. et al. v. UCAR International Inc., et al. was filed by 4
steelmakers, all of whom are located outside the U.S. The third complaint,
entitled Saudi Iron and Steel Company v. UCAR International Inc., et al., was
filed by a steelmaker who is located outside the U.S. The fourth complaint,
entitled Arbed, S.A., et al. v. Mitsubishi Corporation, et al., was filed by 5
steelmakers, all of whom are located outside the U.S. In each complaint, the
plaintiffs allege that the defendants violated U.S. federal antitrust law in
connection with the sale of graphite electrodes sold or sourced from the U.S.
and those sold and sourced outside the U.S. The plaintiffs seek, among other
things, an award of treble damages resulting from such alleged antitrust
violations. We believe that we have strong defenses against claims alleging that
purchases of graphite electrodes outside the U.S. are actionable under U.S.
federal antitrust law. We filed motions to dismiss the first and second
complaints. In June 2001, our motions to dismiss the first and second complaints
were granted with respect to substantially all of the plaintiffs' claims.
Appeals have been filed by the plaintiffs and the defendants with the U.S. Court
of Appeals for the Third Circuit with regard to these dismissals. The U.S. Court
of Appeals for the Third Circuit heard oral argument on these appeals on March
11, 2003, and we are awaiting its decision. The third complaint was dismissed
without prejudice to refile pending the resolution of such appeals. We filed a
motion to stay the lawsuit commenced by the fourth complaint pending resolution
of appeals in the other foreign customer lawsuits and such motion was granted in
July 2002.
In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "CARBON ELECTRODE LAWSUITS"). The first complaint,
filed in the District Court, is entitled Globe Metallurgical, Inc. v. UCAR
International Inc., et al. The second complaint, initially filed in the U.S.
Bankruptcy Court for the Northern District of Ohio and subsequently transferred
to the U.S. District Court for the Northern District of Ohio, Eastern Division,
is now entitled Cohen & Co., Distribution Trustee v. UCAR International Inc., et
al. (In re Simetco, Inc.). The third complaint, filed in the U.S. District Court
for the Southern District of West Virginia, is entitled Elkem Metals Company Inc
and Elkem Metals Company Alloy LLP v. UCAR Carbon Company Inc., et al. SGL
Carbon AG is also named as a defendant in the first complaint and SGL Carbon
Corporation is also named as a defendant in the first and third complaints. In
the complaints, the plaintiffs allege that the defendants violated U.S. federal
antitrust law in connection with the sale of carbon electrodes and seek, among
other things, an award of treble damages resulting from such alleged violations.
In October 2001, we settled the lawsuit commenced by the third complaint. In
September 2002, we settled the lawsuit commenced by the first complaint. In
January 2003, we settled the lawsuit commenced by the second complaint. The
guilty pleas and decisions described above do not relate to carbon electrodes.
29
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In the 2002 first quarter, we and other producers of cathodes were
served with a complaint commencing a civil antitrust lawsuit in the U.S.
District Court for the District of Oregon entitled Northwest Aluminum Company,
et al. vs. VAW Aluminum A.G., et al (the "CARBON CATHODE LAWSUIT"). The
complaint was filed by two producers of aluminum. Other producers of cathodes
are also named as defendants in the complaint. In the complaint, the plaintiffs
allege that the defendants violated U.S. federal antitrust law in connection
with the sale of cathodes and seek, among other things, an award of treble
damages resulting from such alleged violations. In November 2002, we settled
this lawsuit. The guilty pleas and decisions described above do not relate to
cathodes.
In December 2002 and January 2003, we and other producers of bulk
graphite were served with two complaints commencing two civil class action
antitrust lawsuits. The first complaint, filed in the U.S. District Court for
the District of New Jersey, is entitled Industrial Graphite Products, Inc. v.
Carbone Lorraine North America Corporation, et al. The second complaint, filed
in the same court, is entitled Ceradyne, Inc. v. Carbone Lorraine North America
Corporation, et al. In February 2003, we learned that a class action complaint
commencing a civil class action antitrust lawsuit had been filed against us and
other producers of bulk graphite in the District Court entitled General
Refractories Company v. GrafTech International Ltd., et al. In March 2003, this
lawsuit was dismissed by the District Court without prejudice. In March 2003, we
learned that two complaints commencing civil class action antitrust lawsuits had
been filed against us and other producers of bulk graphite in the U.S. District
Court for the District of New Jersey entitled General Refractories Company v.
GrafTech International Ltd., et al. and Midwest Graphite Co., Inc. v. SGL
Carbon, LLC, et al., respectively. The lawsuits commenced by the first, second,
fourth and fifth complaints, along with a lawsuit commenced by a sixth complaint
filed only against SGL Carbon, LLC, SGL Carbon A.G. and SGI Carbon GmbH, were
subsequently consolidated or are subject to consolidation into a single lawsuit
in the United States District Court for the District of New Jersey entitled In
re: Bulk [Extruded] Graphite Products Antitrust Litigation (the "BULK GRAPHITE
LAWSUITS"). In the bulk graphite lawsuits, the plaintiffs allege that the
defendants violated U.S. federal antitrust law in connection with the sale of
bulk graphite and seek, among other things, an award of treble damages resulting
from such alleged violations. In March 2003, we reached an agreement to settle
the bulk graphite lawsuits.
The foreign customer lawsuits are still in their early stages. We have
been vigorously defending, and intend to continue to vigorously defend, against
these remaining lawsuits as well as all threatened lawsuits and possible
unasserted claims. We may at any time, however, settle these lawsuits as well as
any threatened lawsuits and possible claims. It is possible that additional
civil antitrust lawsuits seeking, among other things, to recover damages could
be commenced against us in the U.S. and in other jurisdictions.
Antitrust Earnings Charges
We have recorded pre-tax charges of $350 million against results of
operations as a reserve for potential liabilities and expenses in connection
with antitrust investigations and related lawsuits and claims. The reserve of
$350 million is calculated on a basis net of, among
30
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other things, imputed interest on installment payments of the DOJ fine. Actual
aggregate liabilities and expenses (including settled investigations, lawsuits
and claims as well as continuing investigations, pending appeals and unsettled
pending, threatened and possible lawsuits and claims mentioned above) could be
materially higher than $350 million and the timing of payment thereof could be
sooner than anticipated. The fines and net settlements and expenses are within
the amounts we used to evaluate the aggregate charge of $350 million. To the
extent that aggregate liabilities and expenses, net, are known or reasonably
estimable, at March 31, 2003, $350 million represents our estimate of these
liabilities and expenses. Our insurance has not and will not materially cover
liabilities that have or may become due in connection with antitrust
investigations or related lawsuits or claims.
Through March 31, 2003, we have paid an aggregate of $256 million of
fines and net settlement and expense payments and $15 million of imputed
interest. At March 31, 2003, $94 million remained in the reserve. The balance of
the reserve is available for the fine payable to the DOJ (excluding imputed
interest thereon), the fine assessed by the EU Competition Authority and other
matters. The aggregate amount of remaining committed payments payable to the DOJ
for imputed interest at March 31, 2003 was about $5 million.
Other Proceedings Against Us
We are involved in various other investigations, lawsuits, claims and
other legal proceedings incidental to the conduct of our business. While it is
not possible to determine the ultimate disposition of each of them, we do not
believe that their ultimate disposition will have a material adverse effect on
us.
Lawsuit Initiated by Us Against Our Former Parents
In February 2000, at the direction of a special committee of
independent directors of GTI's Board of Directors, we commenced a lawsuit in the
U.S. District Court for the Southern District of New York against our former
parents, Mitsubishi and Union Carbide. The other defendants named in the lawsuit
include two of the respective representatives of Mitsubishi and Union Carbide
who served on GTI's Board of Directors at the time of our 1995 leveraged equity
recapitalization, Hiroshi Kawamura and Robert D. Kennedy. Mr. Kennedy, who was a
director of GTI at the time the lawsuit was commenced, resigned as such on March
14, 2000.
In the lawsuit, we allege, among other things, that, in January 1995,
Mitsubishi and Union Carbide had knowledge of facts indicating that GTI had
engaged in illegal graphite electrode price fixing activities and that any
determination of GTI's statutory capital surplus would be overstated as a result
of those activities. We also allege that certain of their representatives knew
or should have known about those activities. In January 2000, Mitsubishi was
indicted by the DOJ on a one count charge of aiding and abetting violations of
U.S. federal antitrust law in connection with the sale of graphite electrodes.
Mitsubishi entered a plea of not guilty. In February 2001, a jury found
Mitsubishi guilty of the charge. Mitsubishi entered into a sentencing agreement
with the DOJ, which was approved by the District Court, pursuant to
31
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
which Mitsubishi agreed to pay a fine of $134 million and not appeal its
conviction. Mitsubishi has also been named as a defendant in several civil
antitrust lawsuits commenced by electric arc furnace steel producers with
respect to its alleged participation in those activities. In addition, we allege
that, in January 1995, GTI did not have the statutory capital surplus required
to lawfully authorize the payments that GTI made to its former parents. We also
allege that Mitsubishi and Union Carbide were unjustly enriched by receipts from
their investments in GTI and that they knowingly induced or actively and
substantially assisted former senior management of GTI to engage in illegal
graphite electrode price fixing activities in breach of their fiduciary duties
to GTI.
Based on the allegations summarized above, we are seeking to recover
from Mitsubishi and Union Carbide more than $1.5 billion in damages, including
interest. Some of our claims provide for joint and several liability; however,
damages from our various claims would not generally be additive to each other.
The defendants have filed motions to dismiss this lawsuit and a motion
to disqualify certain of our counsel from representing us in this lawsuit. Oral
hearings were held on those motions in the 2001 first and second quarters. The
court approved a motion to disqualify certain of our counsel in November 2002,
and denied our motion to reconsider that decision. We do not believe that either
that decision or the adverse ruling on such motion for reconsideration will
adversely affect this lawsuit. The court has not ruled on the motions to
dismiss.
We expect to incur $10 million to $20 million for legal expenses to
pursue this lawsuit from the date of filing the complaint through trial. Through
March 31, 2003, we had incurred about $5 million of these legal expenses. This
lawsuit is in its earliest stages. The ultimate outcome of this lawsuit is
subject to many uncertainties. We may at any time settle this lawsuit.
(8) FINANCIAL INFORMATION ABOUT THE PARENT, THE ISSUER, THE GUARANTORS AND THE
SUBSIDIARIES WHOSE SECURITIES SECURE THE SENIOR NOTES AND RELATED
GUARANTEES
On February 15, 2002, GrafTech Finance (the "ISSUER") issued $400
million aggregate principal amount of Senior Notes and, on May 6, 2002, $150
million aggregate principal amount of additional Senior Notes. The Senior Notes
have been guaranteed on a senior basis by GTI (the "PARENT") and GrafTech
Global, UCAR Carbon and other subsidiaries holding a substantial majority of our
U.S. assets, which subsidiaries are UCAR International Holdings Inc., UCAR
International Trading Inc., UCAR Carbon Technology LLC, UCAR Composites Inc. and
UCAR Holdings III Inc. The guarantors (other than the Parent) are collectively
called the "U.S. GUARANTORS." The guarantees of the U.S. Guarantors are
unsecured, except that the guarantee of UCAR Carbon has been secured by a pledge
of all of our shares of AET, but in no event will the value of the pledged
portion of such shares exceed 19.99% of the principal amount of the then
outstanding Senior Notes. All of the guarantees are full, unconditional and
joint and several, and the Issuer and each of the U.S. Guarantors are 100%
owned by the Parent. If a U.S. Guarantor makes a payment under its guarantee, it
would have the right under certain circumstances to seek contribution from the
other U.S. Guarantors. Payment under the guarantees could be required
32
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
immediately upon the occurrence of an event of default under the Senior Notes.
AET and our other subsidiaries, which are not guarantors, are called the
"NON-GUARANTORS." The following table sets forth condensed consolidating balance
sheets at December 31, 2002 and March 31, 2003 and condensed consolidating
statements of operations and cash flows for the three months ended March 31,
2002 and 2003 of the Parent, the Issuer, the U.S. Guarantors and the
Non-Guarantors. Provisions in the Senior Facilities restrict the payment of
dividends by our subsidiaries to the Parent. At March 31, 2003, retained
earnings of our subsidiaries subject to such restrictions were approximately
$474 million. Investments in subsidiary companies are recorded on the equity
basis.
33
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2002
December 31, 2002
-----------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
ASSETS
<s> <c> <c> <c> <c> <c> <c>
CURRENT ASSETS:
Cash and cash equivalents................... $ - $ - $ 4 $ 7 $ - $ 11
Notes and accounts receivable, net.......... - 752 470 255 (1,369) 108
Inventories:
Raw materials and supplies.............. - - 3 38 (1) 40
Work in process......................... - - 31 71 1 103
Finished goods.......................... - - 10 23 (3) 30
-------- --------- ---------- --------- --------- ---------
- - 44 132 (3) 173
Prepaid expenses and deferred income taxes.. - - 8 13 - 21
-------- --------- ---------- --------- --------- ---------
Total current assets.................... - 752 526 407 (1,372) 313
Net fixed assets............................ - - 44 268 (4) 308
Deferred income taxes and other assets......... 47 34 (33) 120 70 238
-------- --------- ---------- --------- --------- ---------
Total assets................................ $ 47 $ 786 $ 537 $ 795 $ (1,306) $ 859
======== ========= ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable............................ $ 21 $ 26 $ 31 $ 89 $ (61) $ 106
Short-term debt............................. 416 - 231 668 (1,297) 18
Accrued income and other taxes.............. (24) (3) 37 18 (4) 24
Other accrued liabilities................... - - 36 39 (18) 57
-------- --------- ---------- --------- --------- ---------
Total current liabilities............... 413 23 335 814 (1,380) 205
-------- --------- ---------- --------- --------- ---------
Long-term debt................................. - 711 - 2 - 713
Other long-term obligations.................... - 9 203 45 1 258
Deferred income taxes.......................... - (5) - 36 3 34
Minority stockholders' equity in consolidated
entities..................................... - - - 30 - 30
Stockholders' equity (deficit)................. (366) 48 (1) (132) 70 (381)
-------- --------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit)................................. $ 47 $ 786 $ 537 $ 795 $ (1,306) $ 859
======== ========= ========== ========= ========= =========
34
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
AT MARCH 31, 2003
(Unaudited)
March 31, 2003
--------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ - $ 3 $ 6 $ - $ 9
Notes and accounts receivable................. - 801 458 233 (1,393) 99
Inventories:
Raw materials and supplies................ - - 3 41 (2) 42
Work in process........................... - - 34 80 1 115
Finished goods............................ - - 8 25 (3) 30
--------- -------- ---------- --------- --------- ---------
- - 45 146 (4) 187
Prepaid expenses and deferred income taxes.... - 4 7 15 (3) 23
--------- -------- ---------- --------- --------- ---------
Total current assets...................... - 805 513 400 (1,400) 318
--------- -------- ---------- --------- --------- ---------
Property, plant and equipment.................... - - 313 732 (7) 1,038
Less: accumulated depreciation.................. - - (265) (454) - (719)
--------- -------- ---------- --------- --------- ---------
Net fixed assets.............................. - - 48 278 (7) 319
--------- -------- ---------- --------- --------- ---------
Deferred income taxes and other assets........... 32 28 (56) 121 118 243
--------- -------- ---------- --------- --------- ---------
Total assets.................................. $ 32 $ 833 $ 505 $ 799 $ (1,289) $ 880
========= ======== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 32 $ 12 $ 39 $ 80 $ (80) $ 83
Short-term debt............................... 392 - 238 681 (1,299) 12
Accrued income and other taxes................ (4) 6 3 24 2 31
Other accrued liabilities..................... - - 60 38 (25) 73
--------- -------- ---------- --------- --------- ---------
Total current liabilities................. 419 18 340 823 (1,401) 199
--------- -------- ---------- --------- --------- ---------
Long-term debt................................... - 740 - 2 - 742
Other long-term obligations...................... - 19 198 46 (1) 262
Deferred income taxes............................ - (9) - 34 12 37
Minority stockholders' equity in consolidated -
entities....................................... - - - 27 27
Stockholders' equity (deficit)................... (387) 65 (33) (133) 101 (387)
--------- -------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit)................................... $ 32 $ 833 $ 505 $ 799 $ (1,289) $ 880
========= ========== ========== ========= ========= =========
35
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003
(Unaudited)
<table>
<caption>
Three Months Ended March 31, 2002
---------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net sales........................................... $ - $ - $ 53 $ 119 $ (34) $ 138
Cost of sales....................................... - - 45 92 (30) 107
-------- ---------- ---------- -------- -------- ---------
Gross profit..................................... - - 8 27 (4) 31
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets and other expenses... - - (11) 20 18 27
Interest income..................................... - (12) (6) (4) 22 -
Interest expense.................................... 6 16 5 8 (22) 13
-------- ---------- ---------- -------- -------- ---------
Income (loss) before provision for income taxes.. (6) (4) 20 3 (22) (9)
Provision for (benefit from) income taxes........... (2) (1) (12) 9 - (6)
-------- ---------- ---------- -------- -------- ---------
Income (loss) of consolidated entities........... (4) (3) 32 (6) (22) (3)
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. - - 29 - (29) -
-------- ---------- ---------- -------- -------- ---------
Net income (loss)............................. $ (4) $ (3) $ 3 $ (7) $ 7 $ (4)
======== ========== ========== ======== ======== =========
</table>
<table>
<caption>
Three Months Ended March 31, 2003
---------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net sales........................................... $ - $ - $ 62 $ 150 $ (38) $ 174
Cost of sales....................................... - - 51 121 (38) 134
-------- ---------- ---------- --------- --------- ---------
Gross profit..................................... - - 11 29 - 40
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets and other expenses... 1 5 35 (2) - 39
Interest income..................................... - (16) - (1) 17 -
Interest expense.................................... 10 13 - 8 (17) 14
-------- ---------- ---------- --------- --------- ---------
Income (loss) before provision for income taxes.. (11) (2) (24) 24 - (13)
Provision for (benefit from) income taxes........... (4) 3 (8) 5 - (4)
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entries............ (7) (5) (16) 19 - (9)
Minority stockholders' share of income.............. - - - - - -
Equity in earnings of subsidiaries.................. 2 - (19) - 17 -
-------- ---------- ---------- --------- --------- ---------
Net income (loss)............................. $ (9) $ (5) $ 3 $ 19 $ (17) $ (9)
======== ========== ========== ========= ========= =========
</table>
36
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2002 AND 2003
(Unaudited)
<table>
<caption>
Three Months Ended March 31, 2002
---------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) operating activities. $ (4) $ (4) $ - $ (123) $ 84 $ (47)
Net cash provided by (used in) investing activities. - 110 79 163 (361) (9)
Net cash provided by (used in) financing activities. 4 (122) (86) (22) 277 51
-------- ---------- ---------- --------- --------- -------
Net increase (decrease) in cash and cash equivalents - (16) (7) 18 - (5)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - - - -
Cash and cash equivalents at beginning of period.... - 16 8 14 - 38
-------- ---------- ---------- --------- --------- -------
Cash and cash equivalents at end of period.......... $ - $ - $ 1 $ 32 $ - $ 33
======== ========== ========== ========= ========= =======
</table>
<table>
<caption>
Three Months Ended March 31, 2003
---------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
<s> <c> <c> <c> <c> <c> <c>
Net cash provided by (used in) operating activities. $ 24 $ (4) $ (31) $ (16) $ 3 $ (24)
Net cash provided by (used in) investing activities. - (43) 23 12 (1) (9)
Net cash provided by (used in) financing activities. (24) 47 7 3 (2) 31
------- ---------- --------- --------- ------- ---------
Net increase in cash and cash equivalents........... - - (1) (1) - (2)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - - - -
Cash and cash equivalents at beginning of period.... - - 4 7 - 11
------- ---------- --------- --------- ------- ---------
Cash and cash equivalents at end of period.......... $ - $ - $ 3 $ 6 $ - $ 9
======= ========== ========= ========= ======= =========
</table>
37
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured intercompany term notes in an aggregate principal amount, at
March 31, 2003, equal to $465 million (based on currency exchange rates in
effect at March 31, 2003), and guarantees of those unsecured intercompany term
notes, issued to GrafTech Finance by certain of our foreign subsidiaries have
been pledged by GrafTech Finance to secure the Senior Notes, subject to the
limitation that at no time will the combined value of the pledged portion of any
foreign subsidiary's unsecured intercompany term note and unsecured guarantee of
unsecured intercompany term notes issued by other foreign subsidiaries exceed
19.99% of the principal amount of the then outstanding Senior Notes.
As described above, the guarantee of the Senior Notes by UCAR Carbon
has been secured by a pledge of all of our shares of AET, but at no time will
the value of the pledged portion of such shares exceed 19.99% of the principal
amount of the then outstanding Senior Notes.
Rule 3-16 of Regulation S-X adopted by the SEC provides that, for each
of the registrant's affiliates whose securities constitute a "substantial"
portion of the collateral for registered securities, financial statements (that
would be required to be filed if the affiliate were a registrant) must be filed
with this Report. Under Rule 3-16(b), securities of a person will be deemed to
constitute a "substantial" portion of the collateral if the aggregate principal
amount, par value, or book value of securities as carried by the registrant, or
the market value of such securities, whichever is the greatest, equals 20% or
more of the principal amount of the registered securities. In this case, the
pledges of common stock of Graftech and the intercompany notes and related
guarantees have been limited such that they will never be more than 19.99% of
the principal amount of the outstanding Senior Notes. Therefore, no such
financial statements are required to be included in this Report.
(9) OTHER (INCOME) EXPENSE, NET
The following table presents an analysis of other (income) expense,
net:
Three Months Ended
March 31,
---------
2002 2003
---- ----
Currency gains................................... $ (4) $ (8)
Bank fees........................................ 1 1
Fair value adjustment on interest rate caps...... - 1
Write-off of capitalized bank fees............... 3 -
Legal fees (other than antitrust investigations
and related lawsuits and claims)............. - 1
Other............................................ - 1
----- -----
Total other (income) expense, net............ $ - $ (4)
===== =====
We have intercompany loans between GrafTech Finance and some of our
subsidiaries. Some of these loans are denominated in currencies other than the
dollar and, accordingly, are
38
<page>
subject to translation gains and losses due to changes in currency exchange
rates. Some of these intercompany loans are deemed to be essentially permanent
and, as a result, translation gains and losses on these loans are reflected in
accumulated other comprehensive income (loss) on the Consolidated Balance
Sheets. The remaining intercompany loans are expected to be repaid in the
foreseeable future and, as a result, translation gains and losses on these loans
are reflected in other (income) expense, net on the Consolidated Statement of
Operations. The translation gains and losses on these loans were a net gain of
$3 million and $5 million in the 2002 first quarter and the 2003 first quarter,
respectively.
In February 2002, we recorded an extraordinary charge of $3 million ($2
million after tax) for write-off of capitalized fees associated with the term
loans under Tranche A and B Facilities repaid with the net proceeds from the
issuance of Senior Notes. This amount has been reclassified and included as
other (income) expense, net, for the three months ended March 31, 2002 in
accordance with SFAS No. 145 relating to SFAS No. 4.
(10) SUBSEQUENT EVENT
In April 2003, we entered into an additional interest rate swap for a
notional amount of $50 million to effectively convert that amount of fixed rate
debt to variable rate debt. As a result, our interest rate swaps currently
relate to $400 million notional amount of debt in the aggregate.
39
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1
IMPORTANT TERMS
We use various terms to identify companies, groups of companies or
other matters. These terms help to simplify the presentation of information and
are defined in the Notes to Consolidated Financial Statements in this Report.
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
We present our financial information on a consolidated basis. This
means that we consolidate financial information for all subsidiaries where our
ownership is greater than 50%. This means that the financial information for
Carbone Savoie and AET is consolidated on each line of the Consolidated
Financial Statements and the equity of the other owners in those subsidiaries is
reflected on the lines entitled "minority stockholders' equity in consolidated
entities" and "minority stockholders' share of income." We use the equity method
to account for 50% or less owned interests. This means that the only financial
information for our 25% owned joint venture with Jilin in China recorded in the
Consolidated Financial Statements relates to our net investment in,
contributions to and distributions from the joint venture.
References to cost in the context of our low-cost supplier strategy do
not include the impact of special or non-recurring charges, expenses or credits,
such as those related to investigations, lawsuits or claims, restructurings or
impairments, or the impact of changes in accounting principles.
The legal and tax restructuring and global realignment mentioned in
this Report are part of the corporate realignment of our subsidiaries. The tax
benefits from the corporate realignment (which are referred to as tax benefits
from legal and tax restructuring) have been recorded separately from expenses to
implement the corporate realignment (which are referred to as global realignment
and related expenses).
All cost savings and reductions relating to our 1998 enhanced global
restructuring and rationalization plan are estimates based on a comparison, with
respect to provision for income taxes, to costs in 1998 or, for all other costs,
to costs in the 1998 fourth quarter (annualized). All cost savings and
reductions relating to our 2002 major cost savings plan are estimates or targets
based on a comparison to costs in 2001 (and assuming no change in currency
exchange rates from the average rates we used to prepare the Consolidated
Financial Statements at and for the year ended December 31, 2001 and no change
in annual graphite electrode production volume). For these purposes, our average
graphite electrode production cost per metric ton was determined based on annual
graphite electrode production volume of about 180,000 metric tons, our annual
overhead costs, together with research and development costs, were $90 million
and our effective income tax rate was 45% before taking into account the
corporate realignment of our subsidiaries. Estimates and targets of savings in
interest expense resulting from the 2002 plan do not give effect to the increase
in interest expense resulting from the issuance of the Senior Notes or interest
rate management initiatives related thereto.
40
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Neither any statement made in this Report nor any charge taken by us
relating to any legal proceedings constitutes an admission as to any wrongdoing.
Unless otherwise specifically noted, market and market share data in
this Report are our own estimates. Market data relating to the steel industry,
our general expectations concerning such industry and our market position and
market share within such industry, both domestically and internationally, are
derived from publications by the International Iron and Steel Institute and
other industry sources as well as assumptions made by us, based on such data and
our knowledge of the industry. Market data relating to the fuel cell power
generation industry, our general expectations concerning such industry and our
market position and market share within such industry, both domestically and
internationally, are derived from publications by securities analysts relating
to Ballard Power Systems Inc., other industry sources and public filings, press
releases and other public documents of Ballard Power Systems as well as
assumptions made by us, based on such data and our knowledge of the industry.
Market and market share data relating to the graphite and carbon industry as
well as cost information relating to our competitors, our general expectations
concerning such industry and our market position and market share within such
industry, both domestically and internationally, are derived from the sources
described above and public filings, press releases and other public documents of
our competitors as well as assumptions made by us, based on such data and our
knowledge of the industry. Although we are not aware of any misstatements
regarding any industry or market share data, our estimates involve risks and
uncertainties and are subject to change based on various factors, including
those discussed under "Risk Factors." We cannot guarantee the accuracy or
completeness of this market and market share data and have not independently
verified it. None of the sources mentioned above has consented to the disclosure
or use of data in this Report.
Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Unless otherwise noted, references to "MARKET SHARES" are based on
sales volumes in 2002. As used herein, references to "MAJOR PRODUCT LINES" mean
graphite electrodes, cathodes and natural graphite-based products.
The GRAFTECH logo, GRAFCELL(R), eGRAF(TM), GRAFOIL(R), GRAFGUARD(R) and
GRAFSHIELD(R) are our trademarks and trade names. This Report also contains
trademarks and trade names belonging to other parties.
We make available free of charge on or through our Web site copies of
our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports
on Form 8-K and amendments to those reports filed or furnished pursuant to
Section 13(a) or 15(d) of the Securities Exchange Act of 1934 as soon as
reasonably practicable after we electronically file them with, or furnish them
to, the SEC. A copy of our Code of Conduct and Ethics and any waivers thereunder
are also available on or through our Web site. We maintain a Web site at
http://www.graftech.com. The information contained on our Web site is not part
of this Report.
Reference is made to the Annual Report for background information on
various risks and contingencies and other matters related to circumstances
affecting us and our industry.
41
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
FORWARD LOOKING STATEMENTS AND RISKS
This Report contains forward looking statements. In addition, from time
to time, we or our representatives have made or may make forward looking
statements orally or in writing. These include statements about such matters as:
future production and sales of steel, aluminum, fuel cells, electronic devices
and other products that incorporate our products or that are produced using our
products; future prices and sales of and demand for graphite electrodes and our
other products; future operational and financial performance of various
businesses; strategic plans; impacts of regional and global economic conditions;
interest rate management activities; restructuring, realignment, strategic
alliance, supply chain, technology development and collaboration, investment,
acquisition, joint venture, operating integration, tax planning,
rationalization, financial and capital projects; legal matters and related
costs; consulting fees and related projects; potential offerings, sales and
other actions regarding debt or equity securities of us or our subsidiaries; and
future costs, working capital, revenues, business opportunities, values, debt
levels, cash flows, cost savings and reductions, margins, earnings and growth.
The words "will," "may," "plan," "estimate," "project," "believe," "anticipate,"
"intend," "should," "target," "goal," "expect" and similar expressions identify
some of these statements.
Actual future events and circumstances (including future performance,
results and trends) could differ materially from those set forth in these
statements due to various factors. These factors include:
o the possibility that global or regional economic conditions
affecting our products may not improve or may worsen due to
geopolitical events, governmental actions or other factors;
o the possibility that anticipated additions to capacity for
producing steel in electric arc furnaces or anticipated
reductions in graphite electrode manufacturing capacity may
not occur;
o the possibility that increased production of steel in electric
arc furnaces or reductions in graphite electrode manufacturing
capacity may not result in stable or increased demand for or
prices or sales volume of graphite electrodes;
o the possibility that economic or technological developments
may adversely affect growth in the use of graphite cathodes in
lieu of carbon cathodes in the aluminum smelting process;
o the possibility that anticipated additions to aluminum
smelting capacity using graphite cathodes may not occur or
that increased production of graphite cathodes by competitors
may occur;
42
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility that increased production of aluminum or
stable production of graphite cathodes by competitors may not
result in stable or increased demand for or prices or sales
volume of graphite cathodes;
o the possibility of delays in or failure to achieve widespread
commercialization of PEM fuel cells which use natural graphite
materials and components or that manufacturers of PEM fuel
cells may obtain those materials or components used in them
from other sources;
o the possibility of delays in or failure to achieve successful
development and commercialization of new or improved
electronic thermal management or other products;
o the possibility of delays in meeting or failure to meet
contractually specified or other product development
milestones or delays in expanding or failure to expand our
manufacturing capacity to meet growth in demand for new or
improved products, if any;
o the possibility that end markets for our other products may
not improve or may worsen;
o the possibility that we may be unable to protect our
intellectual property or may infringe the intellectual
property rights of others;
o the occurrence of unanticipated events or circumstances
relating to antitrust investigations or lawsuits or to
lawsuits initiated by us against our former parents;
o the possibility that expected cost savings from our 2002 major
cost savings plan or our other cost savings efforts will not
be fully realized;
o the possibility that the anticipated benefits from the
corporate realignment of our subsidiaries or the refinement of
our organizational structure into three lines of business may
be delayed or may not occur or that our provision for income
taxes and effective income tax rate (as distinguished from our
tax payments) may fluctuate significantly based on changes in
financial performance of subsidiaries in various countries,
changes in estimates of future ability to use foreign tax
credits, changes in tax laws and other factors;
o the occurrence of unanticipated events or circumstances
relating to health, safety or environmental compliance or
remediation obligations or liabilities to third parties, labor
relations, raw material or energy supplies or cost, or
strategic plans;
o changes in interest or currency exchange rates, in competitive
conditions or in inflation affecting our raw material, energy
or other costs;
43
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility of failure to satisfy conditions or milestones
under, or occurrence of breach of terms of, our strategic
alliances with Pechiney, Ballard, ConocoPhillips or others;
o the possibility that changes in financial performance may
affect our compliance with financial covenants or the amount
of funds available for borrowing under the Senior Facilities;
and
o other risks and uncertainties, including those described
elsewhere or incorporated by reference in this Report, as well
as future decisions by us.
Occurrence of any of the events or circumstances described above could
also have a material adverse effect on our business, financial condition,
results of operations or cash flows.
No assurance can be given that any future transaction about which
forward looking statements may be made will be completed or as to the timing or
terms of any such transaction.
All subsequent written and oral forward looking statements by or
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these factors. Except as otherwise required to be disclosed in
periodic reports required to be filed by public companies with the SEC pursuant
to the SEC's rules, we have no duty to update these statements.
44
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite- and carbon-based products and services,
offering energy solutions to industry-leading customers worldwide. We
manufacture and deliver high quality graphite and carbon electrodes and
cathodes, used primarily in electric arc furnace steel production and aluminum
smelting. We also manufacture other natural and synthetic graphite and carbon
products used in, and provide services to, the fuel cell power generation,
electronics, semiconductor, transportation, chemical and petrochemical markets.
We have over 100 years of experience in the research and development of graphite
and carbon technology, and currently hold numerous patents related to this
technology.
We believe that our electrode and cathode businesses have the leading
market shares in the world. We are a global business, selling our products and
engineering and technical services in more than 70 countries. We have 13
manufacturing facilities strategically located in Brazil, Mexico, South Africa,
France, Spain, Russia and the U.S. Our customers include industry leaders such
as Nucor Corporation and Arcelor in steel, Alcoa Inc. and Pechiney in aluminum,
Ballard Power Systems Inc. in fuel cells, Intel Corporation in electronics, MEMC
Electronic Materials in semiconductors and The Boeing Company in transportation.
Our core competencies include graphite and carbon material sciences and
high temperature processing know-how. We believe that we operate industry
leading research, development and testing facilities. We also have strategic
alliances with Pechiney, the world leader in aluminum smelting technology,
Ballard Power Systems, the world leader in PEM fuel cell technology, and leaders
in the electronic thermal management and other industries.
In 2002, our businesses were organized around two operating divisions,
our Graphite Power Systems Division, which included our graphite electrode and
cathode businesses, and our Advanced Energy Technology Division, which included
our natural graphite, advanced synthetic graphite and advanced carbon materials
businesses. In 2003, we further refined the organization of our businesses into
three lines of business:
o a synthetic graphite line of business called Graphite Power
Systems, which primarily serves the steel, aluminum,
semiconductor and transportation industries and includes
graphite electrodes, cathodes and other advanced synthetic
graphite materials;
o a natural graphite line of business called Advanced Energy
Technology, which primarily serves the transportation, power
generation, electronics and chemical industries and includes
fuel cell, electronic thermal management and sealant products
and services; and
45
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o a carbon materials line of business called Advanced Carbon
Materials, which primarily serves the silicon metal and
ferro-alloy industries and includes carbon electrodes and
refractories.
We believe that our new organizational structure better aligns our
advantaged manufacturing platform with market opportunities and enables
accelerated decision-making to respond to those opportunities. Under this
organizational structure, we are further streamlining our operations and
revising our compensation programs to strengthen our business strategies. A main
component of our compensation programs is a direct link between cash incentive
compensation and cash profitability of our businesses.
Our management team has actively repositioned our manufacturing
network, improved product quality, reduced costs, reduced debt and other
obligations, and managed antitrust liabilities. We have also implemented an
enterprise-wide risk management process whereby we assess the business risks to
our goal of maximizing cash flow, using a structured and disciplined approach.
This approach seeks to align our people and processes with our critical
strategic uncertainties so that our management team and GTI's Board of Directors
may better evaluate and manage those uncertainties.
COST REDUCTION PLANS
OVERVIEW. GTI's Board of Directors adopted a global restructuring and
rationalization plan in September 1998 that delivered recurring annualized run
rate cost savings of $132 million by the end of 2001. In January 2002, we
announced a major cost savings plan that we believe is one of the most
aggressive major cost reduction plans being implemented in the graphite and
carbon industry.
2002 PLAN. The key elements of the 2002 plan consist of:
o the rationalization of graphite electrode manufacturing
capacity at our higher cost facilities and the incremental
expansion of capacity at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit
plans for active and retired employees;
o the implementation of global work process changes;
o the corporate realignment of our subsidiaries to generate
significant tax savings; and
o non-strategic asset sales.
Under the 2002 plan, we are targeting recurring annual pre-tax cost
savings of $30 million in 2003, $60 million in 2004 and $80 million in 2005.
Savings achieved under the 2002 plan are additive to those which we achieved by
the end of 2001 under the 1998 plan that is now completed. We achieved total
cost savings of $14 million in 2002. Our target of $30 million of
46
<page>
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
savings in 2003 represents an increase of $16 million over the savings achieved
in 2002, and should benefit primarily cost of sales and overhead over the last
three quarters of 2003.
Rationalization of graphite electrode manufacturing capacity. As part
of the 2002 plan, we mothballed our graphite electrode manufacturing operations
in Caserta, Italy during the 2002 first quarter, ahead of schedule. These
operations had the capacity to manufacture 26,000 metric tons of graphite
electrodes annually. After the shutdown of our graphite electrode manufacturing
operations in Clarksville and Columbia, Tennessee in the 2001 third quarter,
these operations were our highest cost graphite electrode manufacturing
operations. During the 2002 second quarter, we launched the expansion of our
facility in Monterrey, Mexico, which has increased its capacity from about
40,000 metric tons to about 60,000 metric tons annually. We completed 10,000
metric tons of expansion at this facility by the end of 2002. We completed the
remaining expansion during the 2003 first quarter. We expect to deliver finished
product from this recent expansion by the end of the 2003 second quarter. We
have also incrementally expanded graphite electrode manufacturing capacity at
our other facilities. After the mothballing and incremental expansion, our total
annual graphite electrode manufacturing capacity remains about 210,000 metric
tons.
The mothballing of our graphite electrode manufacturing operations in
Caserta, Italy resulted in a $7 million restructuring charge and a $27 million
impairment loss on long-lived and other assets. These charges were recorded in
the 2001 fourth quarter. In the 2002 first quarter, we recorded an additional $5
million restructuring charge that included the estimated pension, severance and
other related employee benefit costs for the 102 employees affected by, and
other costs related to, the mothballing. In the 2002 fourth quarter, we recorded
an additional $1 million cash charge relating to a change in the estimate for
the restructuring charges previously recorded.
Redesign and implementation of U.S. benefit changes. In the 2001 fourth
quarter and 2002 first quarter, we redesigned and implemented changes in our
retiree medical insurance plan and our U.S. retirement and savings plans for
active and retired employees. Among other things, we froze our qualified defined
benefit plan and established a new defined contribution plan for most of our
U.S. employees. In addition, on July 1, 2002, we amended our U.S.
post-retirement medical coverage. Effective March 31, 2003, we discontinued the
Medicare supplement plan (for retirees 65 years or older or those eligible for
Medicare benefits). This change applies to all current employees not covered by
a collective bargaining agreement, all current retirees who were not covered by
a collective bargaining agreement when they retired and those retirees who
retired under a former collective bargaining agreement. Effective March 31,
2003, we also froze our qualified defined benefit plan for our remaining U.S.
employees and closed our non-qualified U.S. defined benefit plan for the
participating salaried workforce. The closure and settlement of our
non-qualified defined benefit plan resulted in a $11 million restructuring
charge in the 2003 first quarter.
Implementation of global work process changes. We continue to implement
global business process transformation initiatives, including the streamlining
of our organizational
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structure into three major lines of business, the consolidation and streamlining
of order fulfillment, purchasing, finance and accounting, and human resource
processes, along with the identification and implementation of outsourcing
opportunities. Through March 31, 2003, our investment in the initiative included
about $11 million of consulting fees and internal costs and $12 million of
capital expenditures, primarily for costs related to implementation of global
information technology systems for advanced planning and scheduling software and
global treasury management systems. We have evaluated every aspect of our supply
chain and improved and continue to improve performance through realignment and
standardization of supply chain processes and systems and improvement of
interfaces with trading partners.
Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. valued at $75 million. Pursuant to this contract, CGI became the
delivery arm for our global information technology service requirements,
including the design and implementation of our global information and advanced
manufacturing and demand planning processes, using J.D. Edwards software.
Through this contract, we are seeking to transform our information technology
service capability into an efficient, high quality enabler for our global supply
chain initiatives as well as a contributor to our cost reduction activities.
Under the outsourcing provisions of this contract, CGI manages our data center
services, networks, desktops, telecommunications and legacy systems. Through
this contract, we believe that we will be able to leverage the resources of CGI
to assist us in achieving our information technology goals and our cost savings
targets.
In the 2002 third quarter, we entered into a ten year outsourcing
contract with CGI Group Inc. valued at $36 million. Pursuant to this contract,
CGI became the delivery arm for our finance and accounting business process
services, including accounts receivable and accounts payable activities. CGI
also provides various related analytical services such as general accounting,
cost accounting and financial analysis activities. Through this contract, we
believe that we will be able to further leverage the resources of CGI to assist
us in achieving our cost savings targets.
Under the 2002 plan, we implemented voluntary and selective severance
programs. These programs were designed to compliment our global work process and
organizational redesign. From 1998 through 2002, we reduced our global workforce
by about 1,600 employees (or 30%). The voluntary and selective severance
programs are expected to reduce our global workforce by up to an additional 200
employees (or about 5%). During the first quarter of 2003, we substantially
completed the U.S. voluntary and selective severance programs resulting in a
reduction of 103 U.S. employees, or 27% of the U.S. salaried workforce. As a
result, we recorded an $8 million restructuring charge in the 2003 first
quarter. We expect additional severance costs or charges associated with further
global work process changes of approximately $6 million to occur over the next
12 to 18 months.
Corporate realignment of our subsidiaries. The corporate realignment of
our subsidiaries was substantially completed in the 2002 first half and has
contributed, and is expected to contribute, to achievement of our
targeted cost savings.
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Non-strategic asset sales. We intend to sell real estate, non-strategic
businesses and certain other non-strategic assets over the next two years. We
anticipate that the aggregate estimated pre-tax, cash proceeds from these sales
will total $75 million.
The remaining actions associated with the 2002 plan could result in
additional restructuring charges.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses. Strategic alliances may be in the form of joint
venture, licensing, supply or other arrangements.
We have developed a strategic alliance in the cathode business with
Pechiney, the world's recognized leader in aluminum smelting technology. To
broaden our alliance, in March 2001, we contributed our Brazilian cathode
manufacturing operations to Carbone Savoie. Pechiney, the 30% minority owner of
Carbone Savoie, contributed approximately $9 million in cash to Carbone Savoie
as part of this transaction. The cash contribution was used to upgrade
manufacturing operations in Brazil and France, which was completed by the end of
the 2002 first quarter. Ownership in Carbone Savoie remains 70% by us and 30% by
Pechiney. Under our now broadened alliance, Carbone Savoie holds our entire
cathode manufacturing capacity.
In April 2001, we entered into a graphite electrode production joint
venture with Jilin in China. We are required to make capital contributions of $6
million of cash ($2 million of which has been contributed to date) plus
technical assistance ($1 million of which has been contributed to date) for our
25% ownership interest in the joint venture. The successful implementation and
completion of the parties' capital contributions to the joint venture is subject
to the receipt of required Chinese governmental approvals and satisfaction of
other conditions. During the 2002 fourth quarter, we recorded an impairment loss
of $3 million associated with the investment in the joint venture. This
impairment resulted from uncertainty about the completion and start-up of the
joint venture facilities in China due to the effects that the challenging 2002
graphite electrode industry conditions have had on Jilin. We continue to work
closely with Jilin on production alternatives. However, we will make no further
contributions to the joint venture until we have agreed upon production
alternatives.
We have been working with Ballard Power Systems since 1992 on
developing natural graphite-based materials for use in its PEM fuel cells for
power generation. In June 2001, our subsidiary, AET, entered into an expanded
exclusive development and collaboration agreement and an expanded exclusive
long-term supply agreement with Ballard Power Systems. In addition, Ballard
Power Systems became a strategic investor in AET in June 2001, investing at that
time $5 million in shares of Ballard Power Systems common stock for a 2.5%
equity ownership interest in AET.
The scope of the expanded exclusive development and collaboration
agreement includes natural graphite-based materials and components, including
flow field plates and gas diffusion
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layers, for use in PEM fuel cells and PEM fuel cell systems for transportation,
stationary and portable applications. The initial term of this agreement extends
through 2011. Under the new supply agreement, we will be the exclusive
manufacturer and supplier of natural graphite-based materials for Ballard Power
Systems fuel cells and fuel cell systems. We will also be the exclusive
manufacturer of natural graphite-based components, other than those components
that Ballard Power Systems manufactures for itself. The initial term of this
agreement, which contains customary terms and conditions, extends through 2016.
We have the right to manufacture and sell, after agreed upon release dates,
natural graphite-based materials and components for use in PEM fuel cells to
other parties in the fuel cell industry.
GLOBAL ECONOMIC CONDITIONS AND OUTLOOK
We are impacted in varying degrees, both positively and negatively, as
global, regional or country conditions fluctuate.
Over the past three years, we have faced challenging business
conditions. Many of the customers in the markets that we serve have reduced
production levels (which reduced demand and adversely impacted prices for
products sold by us and our competitors), become less creditworthy, filed for
bankruptcy protection or were acquired as part of the consolidation and
rationalization trends within their industries. In order to seek to minimize our
credit risks, we reduced our sales of, or refused to sell (except for cash on
delivery), graphite electrodes to some customers and potential customers in the
U.S. and, to a limited extent, elsewhere. Our unrecovered trade receivables from
steel companies worldwide that have filed for bankruptcy protection over the
past three years have aggregated only 0.4% of global net sales of graphite
electrodes in the U.S. during the same period. In addition, we have been
experiencing intense competition, particularly in the graphite electrode
industry. Two of our competitors, one in the U.S. and one in Europe, have filed
for bankruptcy protection. The competitor in the U.S. recently announced that it
was selling a portion of its graphite electrode capacity to a third party bidder
in a bankruptcy auction process. Our volumes sold declined significantly in 2001
as compared to 2000 due primarily to the decline in customer production levels
as well as our efforts to attempt to implement and maintain certain price
increases and to minimize credit risks in the face of intense competition.
2002. Global economic conditions remained relatively weak in 2002.
However, electric arc furnace steel production rebounded from the depressed
level in 2001. We estimate that worldwide electric arc furnace steel production
increased by about 7% in 2002 (to a total of about 299 million metric tons,
about 33% of total steel production) from 2001. This increase was primarily due
to an increase in production in the U.S. and China and, to a limited extent, in
Mexico and Asia (other than China).
In March 2002, President Bush announced his decision to impose tariffs,
of up to 30% initially and declining thereafter over a three year period, on
most imported steel as part of a broader plan to rescue the financially troubled
steel industry in the U.S. Several additional exemptions were granted in 2002 by
the Bush administration. We believe that the tariffs are
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having a modest positive impact on electric arc furnace steel production in the
U.S. While steel imported from Mexico is exempt from those tariffs, steel
imported from Europe and Asia is not exempt. Steel production in those regions
has been adversely impacted by the tariffs. Further, import duties in China on
both steel and graphite electrodes have declined as a result of the admission of
China to the World Trade Organization. We cannot predict whether and to what
extent these developments will impact our global business over the long-term.
However, the U.S. steel tariffs are expected to remain in place through 2004,
and China has extended temporary graphite electrode tariffs into May 2003.
Worldwide graphite electrode demand was very depressed in the 2002
first quarter, but rebounded from those depressed levels during the balance of
2002. We utilized virtually 100% of our graphite electrode manufacturing
capacity during the last three quarters of 2002 and our volume of graphite
electrodes sold increased about 4% in 2002 from 2001. Overall, we believe that
worldwide graphite electrode demand increased modestly in 2002 as compared to
2001. While we attempted to implement increases in graphite electrode prices in
2002, we believe that graphite electrode pricing declined by about 10% (in
average dollar terms) in 2002 as compared to 2001, driven by supply/demand
imbalance as well as global and industry economic conditions.
Demand and prices for cathodes remained strong primarily due to
construction of new aluminum smelters using graphite cathodes, even as old
smelters using carbon cathodes are removed from service. We used virtually 100%
of our cathode manufacturing capacity during 2002 and our volume of cathodes
sold increased about 10% in 2002 from 2001. Weak economic conditions in 2002
resulted in relatively low demand and weak pricing for our other products sold
to metals, transportation and other industries.
2003 FIRST QUARTER. Global and regional economic conditions remained
relatively weak in the 2003 first quarter. While steel production remained
stable globally and particularly strong in China, certain end markets such as
non-residential construction in the U.S. remained weak. We estimate that
worldwide steel production was about 231 million metric tons in the 2003 first
quarter. While this production level would represent a decline of about 1% from
the production level in the 2002 fourth quarter, it would represent an increase
of about 8% from the 2002 first quarter. We estimate that electric arc furnace
steel production in the 2003 first quarter was about the same as in the 2002
fourth quarter and 6% higher than in the 2002 first quarter. We operated our
graphite electrode manufacturing capacity at very high levels in the 2003 first
quarter and estimate that industry wide graphite electrode manufacturing
capacity utilization rate was over 95% in the 2003 first quarter.
Graphite electrode price increases announced in 2002 and early 2003
have been successfully implemented. We announced, effective for new orders
placed after February 2003, price increases of (euro)100 per metric ton for our
graphite electrodes sold in Europe, $200 per metric ton for our graphite
electrodes sold in Asia, the Middle East, North Africa and South America and
$0.05 per pound for our graphite electrodes sold in the U.S. We cannot predict
whether we will be able to maintain such price increases without adversely
affecting sales volume.
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Demand for cathodes continued to remain strong due primarily to
construction of new aluminum smelters using graphite cathodes. We used virtually
100% of our cathode manufacturing capacity in the 2003 first quarter. Weak
economic conditions resulted in relatively low demand and weak pricing in the
2003 first quarter for our other products sold to metals, transportation and
other industries.
OUTLOOK. We do not expect a significant and sustainable recovery in
global economic conditions until the end of 2003, at the earliest. We believe
that the rebound we experienced in graphite electrode demand from the depressed
level in the 2002 first quarter was primarily due to a correction from overly
depressed conditions in the steel industry and an increase in our market share
primarily due to the implementation of our strategies and the bankruptcy of two
graphite electrode competitors. We are now seeing the building of steel
inventory levels, especially in the U.S. Our graphite electrode order book, as
expected based on annual order pattern, is about 80% full for 2003 and our
cathode order book is virtually full for 2003. While we are encouraged by our
graphite electrode and cathode order books and expect to operate at capacity to
meet demand, we continue to monitor closely the steel and aluminum industries in
light of global and regional economic conditions.
Operation of our plants at capacity is expected to positively impact
graphite electrode and cathode production cost in 2003 as compared to 2002. In
addition, we also expect to benefit from the impact of our plant rationalization
activities, cost saving activities and cost reduction programs as well as
increased economies of scale.
We believe that business conditions for most of our products (other
than graphite electrodes and cathodes) will remain challenging well into 2003.
In particular, demand for carbon electrodes in the U.S. and demand for advanced
graphite and carbon material products used in semiconductor, telecommunication
and electronic industries continues to be depressed. Accordingly, we expect the
financial performance of our businesses selling those products to remain similar
to 2002 levels. We will continue to seek to drive productivity improvements in
these businesses through our cost savings plans and activities.
We continue to focus on commercializing new technologies. In our
natural graphite line of business, we are seeking to commercialize approximately
20 active eGRAF(TM) thermal management product development programs that are
currently underway. Approximately half of these programs are already in the
product testing phase.
We have implemented interest rate management initiatives to seek to
minimize our interest expense and optimize our portfolio of fixed and variable
interest rate obligations as described under "Interest Rate Risk Management" in
Note 6 to the Notes to Consolidated Financial Statements contained in this
Report. We are targeting interest expense of $57 to $60 million for 2003,
essentially the same as in 2002.
Our outlook could be significantly impacted by, among other things,
changes in interest rates by the U.S. Federal Reserve Board and the European
Central Bank, changes in tax and fiscal policies by the U.S. and other
governments, developments in the Middle East, the
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occurrence of further terrorist acts and developments (including increases in
security, insurance, data back-up, energy and transportation and other costs,
transportation delays and continuing or increased economic uncertainty and
weakness) resulting from terrorist acts and the war on terrorism, and changes in
global and regional economic conditions.
FINANCING TRANSACTIONS
On February 15, 2002, we completed a private offering of $400 million
aggregate principal amount of Senior Notes at a price of 100% of principal
amount. On May 6, 2002, we completed a private offering of $150 million
aggregate principal amount of additional Senior Notes at a price of 104.5% of
principal amount, plus accrued interest from February 15, 2002. The Senior Notes
bear interest at an annual rate of 10.25% and mature in 2012.
The net proceeds from the offering completed in February 2002 were $387
million. The net proceeds (excluding accrued interest paid by the purchasers of
the Senior Notes) from the offering completed in May 2002 were $151 million. We
used all of these net proceeds to reduce the balance outstanding under our
revolving credit facility and to repay term loans under the Senior Facilities.
We paid approximately $13 million of debt issuance costs related to the Senior
Notes sold in February 2002 and $6 million related to the Senior Notes sold in
May 2002. These costs are being amortized over the term of the Senior Notes. The
$7 million premium received upon issuance of the additional Senior Notes issued
in May 2002 is classified as long-term liability on the Consolidated Balance
Sheets and amortized (as a credit to interest expense) over the term of the
additional Senior Notes. As a result of our receipt of such premium, the
effective annual interest rate on the additional Senior Notes is about 9.5%. We
recorded an extraordinary charge of $3 million ($2 million after tax) in the
2002 first quarter and an extraordinary charge of $1 million ($1 million after
tax) in the 2002 second quarter for write-off of capitalized fees associated
with the term loans under Senior Facilities repaid with the net proceeds from
the issuance of the Senior Notes. These extraordinary charges have been
reclassified and included in other (income) expense, net in accordance with SFAS
No. 145 relating to SFAS No. 4.
LITIGATION AGAINST OUR FORMER PARENT COMPANIES INITIATED BY US
In February 2000, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation, to recover certain
payments made to them in connection with our leveraged equity recapitalization
in January 1995 as well as certain unjust receipts by them from their
investments in us and damages for aiding and abetting breaches of fiduciary
duties owed to us by our former senior management in connection with illegal
graphite electrode price fixing activities. We are seeking to recover more than
$1.5 billion, including interest. The defendants have filed motions to dismiss
this lawsuit. Oral hearings were held on those motions in the 2001 first
quarter. The court has not ruled on these motions. We expect to incur $10
million to $20 million for legal expenses to pursue this lawsuit from the date
of filing the complaint through trial. Through March 31, 2003, we had incurred
about $5 million of these legal expenses. This lawsuit is in its earliest
stages, and the ultimate outcome of this lawsuit is subject to many
uncertainties.
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ANTITRUST AND OTHER LITIGATION AGAINST US
Since 1997, we and other producers and distributors of graphite and
carbon products have been subject to antitrust investigations by antitrust
authorities in the U.S., the European Union, Canada, Japan and Korea. In
addition, civil antitrust lawsuits have been commenced and threatened against us
and other producers and distributors of graphite and carbon products in the
U.S., Canada and elsewhere. We recorded pre-tax charges against results of
operations in the aggregate amount of $350 million as a reserve for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims.
In April 1998, GTI pled guilty to a one count charge of violating U.S.
federal antitrust law in connection with the sale of graphite electrodes and was
sentenced to pay a non-interest-bearing fine in the aggregate amount of $110
million, payable in six annual installments. At our request, in January 2002,
the payment schedule for the $60 million unpaid balance outstanding at that time
was revised to $2.5 million payment in April 2002, a $5.0 million payment in
April 2003 and, beginning in April 2004, quarterly payments ranging from $3.25
million to $5.375 million through January 2007. The payments due in 2002 and
2003 were timely made. Beginning in 2004, the DOJ may ask the court to
accelerate the payment schedule based on a change in our ability to make such
payments. Interest will begin to accrue on the unpaid balance, commencing in
April 2004, at the statutory rate of interest then in effect. At March 31, 2003,
the statutory rate of interest was 1.19% per annum. Accrued interest will be
payable together with each quarterly payment. Of the $110 million aggregate
amount, $90 million is treated as a fine and $20 million is treated as imputed
interest for accounting purposes. In addition, in 1999, 2001 and 2002,
investigations by the antitrust authorities in Canada, Japan and Korea were
resolved.
In January 2000, the EU Competition Authority alleged that we and other
producers violated European antitrust laws in connection with the sale of
graphite electrodes. In July 2001, that authority issued its decision regarding
the allegations and assessed a fine of (euro)50.4 million ($55 million, based on
currency exchange rates in effect at March 31, 2003) against GTI. As a result of
our cooperation, this fine reflects a substantial reduction from the amount that
otherwise would have been assessed. This decision has brought to a conclusion
our last major antitrust liability.
It is the policy of EU Competition Authority to negotiate appropriate
terms of payment of antitrust fines, including extended payment terms. We have
had discussions regarding payment terms. After an in-depth analysis of the
decision, in October 2001, we filed an appeal to the court challenging the
amount of the fine. The fine or collateral security therefor would typically be
required to be paid or provided at about the time the appeal was filed. We are
currently in discussions with EU Competition Authority regarding the appropriate
form of collateral security during the pendency of the appeal. If the results of
these discussions are not acceptable to us, we may file an interim appeal to the
court to waive the requirement for collateral security or to allow us to provide
alternative security for payment. We cannot predict how or when the court would
rule on such an interim appeal.
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In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We have provided that information.
In May 2002, the EU Competition Authority alleged that we and other
producers violated European antitrust laws in connection with the sale of
specialty graphite. In December 2002, the EU Competition Authority assessed
fines against other producers, but assessed no fine against us due to our
cooperation.
We are continuing to cooperate with the U.S., European and Canadian
antitrust authorities in their continuing investigations of others. It is
possible that antitrust investigations seeking, among other things, to impose
fines and penalties could be initiated against us by authorities in Brazil or
other jurisdictions.
We have settled, among others, virtually all of the actual and
potential claims against us by customers in the U.S. and Canada arising out of
alleged antitrust violations occurring prior to the date of the relevant
settlement in connection with the sale of graphite electrodes. All settlement
payments due have been timely made. None of the settlement or plea agreements
contain restrictions on future prices of our graphite electrodes. There remain,
however, certain pending claims as well as pending lawsuits in the U.S. relating
to the sale of graphite electrodes sold to foreign customers. It is also
possible that additional antitrust lawsuits and claims could be asserted against
us in the U.S. or other jurisdictions.
Through March 31, 2003, we have paid an aggregate of $256 million of
fines and net settlement and expense payments and $15 million of imputed
interest. At March 31, 2003, $94 million remained in the reserve. The balance of
the reserve is available for the balance of the fine payable by us to the DOJ
(excluding imputed interest thereon), the fine assessed against us by the EU
Competition Authority and other matters. The aggregate amount of remaining
committed payments payable to the DOJ for imputed interest at March 31, 2003 was
about $5 million.
We cannot assure you that remaining liabilities and expenses in
connection with antitrust investigations, lawsuits and claims will not
materially exceed the remaining uncommitted balance of the reserve or that the
timing of payment thereof will not be sooner than anticipated. In the aggregate,
the fines and net settlements and expenses are within the amounts we used to
evaluate the $350 million charge. To the extent that aggregate liabilities and
expenses, net, are known or reasonably estimable, $350 million represents our
estimate of these liabilities and expenses. The guilty pleas and the decisions
by the antitrust authorities make it more difficult to defend against other
investigations, lawsuits and claims. Our insurance has not and will not
materially cover liabilities that have or may become due in connection with
antitrust investigations or related lawsuits or claims.
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RESULTS OF OPERATIONS
THREE MONTHS ENDED MARCH 31, 2003 AS COMPARED TO THREE MONTHS ENDED
MARCH 31, 2002. Net sales of $174 million in the 2003 first quarter represented
a $36 million, or 27%, increase from net sales of $138 million in the 2002 first
quarter, primarily due to higher graphite electrode prices and higher sales
volumes of synthetic graphite and advanced carbon materials. Cost of sales of
$134 million in the 2003 first quarter represented a $27 million, or 25%,
increase from cost of sales of $107 million in the 2002 first quarter, primarily
due to higher sales volumes. Gross profit of $40 million in the 2003 first
quarter represented a $9 million, or 30%, increase from gross profit of $31
million in the 2002 first quarter.
Synthetic Graphite Segment. Net sales of $149 million in the 2003 first
quarter represented a $31 million, or 27%, increase from net sales of $118
million in the 2002 first quarter, primarily due to higher average sales revenue
per metric ton of graphite electrodes and higher sales volumes of graphite
electrodes and cathodes. Volume of graphite electrodes sold was 47,000 metric
tons in the 2003 first quarter as compared to 38,500 metric tons in the 2002
first quarter. The higher volume of graphite electrodes sold represented an
increase of $18 million in net sales. The increase was primarily a result of
stronger demand for graphite electrodes in the United States and Europe. Average
sales revenue per metric ton of graphite electrodes in the 2003 first quarter
was $2,272 as compared to the average in the 2002 first quarter of $2,083. The
increase was primarily due to changes in currency exchange rates. The higher
average sales revenue per metric ton represented an increase of $9 million in
net sales. Net sales of cathodes increased in the 2003 first quarter by 26%, or
$5 million, from the 2002 first quarter sales of $21 million.
Cost of sales of $115 million in the 2003 first quarter represented a
$25 million, or 28%, increase from cost of sales of $90 million in the 2002
first quarter, primarily due to higher volumes of graphite electrodes and
cathodes sold. Gross profit for the synthetic line of business in the 2003 first
quarter was $34 million, or 21% or $6 million higher than in the 2002 first
quarter. The increase in gross profit was primarily due to higher graphite
electrode net sales and improved productivity throughout the production network.
These improvements were partially offset by increasing energy costs over the
course of the 2003 first quarter, higher freight costs and the negative impact
of net changes in currency exchange rates on costs. Gross margin was 22.7% in
the 2003 first quarter, lower than the 23.4% in the 2002 first quarter primarily
due to changes in the cathode sales mix and higher energy and freight costs.
Other Segment. Net sales of $25 million in the 2003 first quarter
represented a $5 million, or 22%, increase from $20 million in the 2002 first
quarter, primarily due to increased net sales in the advanced carbon materials
line of business. Cost of sales of $19 million in the 2003 first quarter
represented a $2 million, or 10%, increase from $17 million in the 2002 first
quarter. The increase in cost of sales was primarily related to higher volumes
and higher energy costs, primarily natural gas. Gross profit in the 2003 first
quarter was $6 million (24.7% of net sales) as compared to gross profit in the
2002 first quarter of $3 million (16.0% of net sales).
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Items Affecting Us as a Whole. Selling, administrative and other
expenses were $21 million in the 2003 first quarter, an increase of $3 million
from the 2002 first quarter. The increase was primarily due to the fact that
there was a one time reduction in franchise and other taxes in the 2002 first
quarter associated with the corporate realignment of our subsidiaries.
Other (income) expense, net was income of $4 million in the 2003 first
quarter, primarily due to currency exchange benefits associated with euro
denominated intercompany loans, which were partially offset by other expenses,
including an approximately $1 million fair value adjustment on $300 million
notional amount of five-year interest rate caps. Other (income) expense, net was
nil for the 2002 first quarter. Among other things, income of $3 million
primarily associated with currency exchange benefits relating to euro
denominated debt was offset by $3 million for the write-off of previously
capitalized bank charges.
Interest expense was $14 million in the 2003 first quarter as compared
to $13 million in the 2002 first quarter. Average total debt outstanding was
$756 million in the 2003 first quarter as compared to $663 million in the 2002
first quarter. The average annual interest rate was 7.1% in the 2003 first
quarter as compared to 7.6% in the 2002 first quarter. These average annual
rates include the benefits of our interest rate swaps and exclude imputed
interest of the fine payable to the DOJ.
Restructuring charges were $19 million in the 2003 first quarter as
compared to $5 million in the 2002 first quarter.
In the 2003 first quarter, we recorded $19 million ($12 million, net of
tax) of restructuring charges, consisting of $8 million for organizational
changes and $11 million for the closure and settlement of our U.S. non-qualified
defined benefit plan for the participating salaried workforce. The $8 million
($5 million, net of tax) charge for organizational changes related to U.S.
voluntary and selective severance programs and related benefits associated with
a workforce reduction of 103 employees. Half of the $8 million will involve cash
outlays. The closure of the non-qualified defined benefit plan resulted in
recognition of net actuarial losses of $11 million ($7 million, net of tax) that
are expected to be non-cash, based on our intent to use shares of common stock
to fund contribution requirements as described in Part II, Item 2 "Changes in
Securities and Use of Proceeds."
In the 2002 first quarter, we recorded a $5 million restructuring
charge that related primarily to the mothballing of our graphite electrode
operations in Caserta, Italy. This charge includes estimated pension, severance
and other related employee benefit costs for 102 employees and other costs
related to the mothballing.
Provision for income taxes was a benefit of $4 million in the 2003
first quarter as compared to a benefit of $6 million in the 2002 first quarter.
The effective income tax rate was 32% in the 2003 first quarter as compared to
71% in the 2002 first quarter. The higher effective income tax rate in the 2002
first quarter was a result of non-recurring charges and impairment losses that
related to the mothballing of our graphite electrode manufacturing operations in
Italy and the corporate realignment of our subsidiaries. The effective income
tax rate for the 2003
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first quarter was lower than the anticipated income tax rate of 40% primarily
because of a lower effective tax rate associated with the restructuring charges.
As a result of the changes described above, net loss was $9 million in
the 2003 first quarter as compared to a net loss of $4 million in the 2002 first
quarter.
EFFECTS OF INFLATION
We incur costs in the currency of each of the six non-U.S. countries in
which we have a manufacturing facility. In general, our results of operations,
cash flows and financial condition are affected by the effects of inflation on
our costs incurred in each of these six countries.
During 2002, the effects of inflation on our cost of sales globally
(except for highly inflationary countries) were generally mitigated by a
combination of improved operating efficiency and permanent on-going cost
savings. Accordingly, during 2002, these effects were not material to us. During
the 2003 first quarter, we experienced higher energy and freight costs primarily
due to the substantial increase in the worldwide market price of oil and natural
gas. We believe that these costs are peaking and should, over the course of
2003, return to levels consistent with those experienced in 2002. During the
2003 first quarter, we did not experience significant inflation with respect to
other costs. We cannot assure that future increases in our costs will not occur
or exceed the rate of inflation or the amounts, if any, by which we may be able
to increase prices for our products.
CURRENCY TRANSLATION AND TRANSACTIONS
We account for our non-U.S. subsidiaries under the provisions of SFAS
No. 52, "Foreign Currency Translation." Accordingly, except for highly
inflationary countries, the assets and liabilities of our non-U.S. subsidiaries
are translated into dollars for consolidation and reporting purposes. Foreign
currency translation adjustments are generally recorded as part of stockholders'
equity and identified as part of accumulated other comprehensive income (loss)
in the Consolidated Balance Sheets until such time as their operations are sold
or substantially or completely liquidated.
We have subsidiaries in Russia, Mexico, Brazil and other countries
which have had in the past, and may have now or in the future, highly
inflationary economies, defined as cumulative inflation of about 100% or more
over a period of three calendar years. In general, the financial statements of
foreign operations in highly inflationary economies have been remeasured as if
the functional currency of their economic environments were the dollar and
translation gains and losses relating to these foreign operations are included
in other (income) expense, net in the Consolidated Statements of Operations
rather than as part of stockholders' equity in the Consolidated Balance Sheets.
We also record foreign currency transaction gains and losses as part of other
(income) expense, net.
Currently, we account for our Mexican subsidiary using the dollar as
its functional currency, irrespective of Mexico's inflationary status, because
its sales and purchases are
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predominantly dollar-denominated. In addition, we account for our Russian
subsidiary using the dollar as its functional currency because Russia is
considered to have a highly inflationary economy.
Significant changes in currency exchange rates impacting us are
described under "Effects of Changes in Currency Exchange Rates." Foreign
currency translation adjustments decreasing stockholders' equity amounted to $20
million, including $16 million associated with our Brazilian subsidiary, in
2002. These adjustments, net, were nil for the 2003 first quarter.
EFFECTS OF CHANGES IN CURRENCY EXCHANGE RATES
We incur costs in the currency of each country in which we have a
manufacturing facility and we sell our products in multiple currencies. In
general, our results of operations, cash flows and financial condition are
affected by changes in currency exchange rates affecting the currencies of these
and other countries. We account for translation of non-U.S. currencies into
dollars.
When the currencies of non-U.S. countries in which we have a
manufacturing facility decline (or increase) in value relative to the dollar,
this has the effect of reducing (or increasing) the dollar equivalent cost of
sales and other expenses with respect to those facilities. This effect is,
however, partially offset by the cost of petroleum coke, a principal raw
material used by us, which is priced in dollars. In certain countries where we
have manufacturing facilities, and in certain instances where we price our
products for sale in export markets, we sell in currencies other than the
dollar. Accordingly, when these currencies increase (or decline) in value
relative to the dollar, this has the effect of increasing (or reducing) net
sales. The result of these effects is to increase (or decrease) operating profit
and net income.
Many of the non-U.S. countries in which we have a manufacturing
facility have been subject to significant economic pressures, which have
impacted currency exchange rates. We seek to mitigate adverse impacts of changes
in currency exchange rates on net sales by increasing local currency prices for
some of our products in various regions as circumstances permitted. During the
2003 first quarter, the average exchange rate of the euro and the South African
rand increased about 22% and 37%, respectively, when compared to the average
exchange rate for the 2002 first quarter. During the 2003 first quarter, the
average exchange rate for the Brazilian real and the Mexican peso declined about
33% and 15%, respectively, when compared to the average exchange rate for the
2002 first quarter. We cannot predict changes in currency exchange rates in the
future or whether those changes will have positive or negative impacts on our
net sales or cost of sales. We cannot assure you that we would be able to
mitigate any adverse effects of such changes.
We have intercompany loans between GrafTech Finance and some of our
subsidiaries. Some of these loans are denominated in currencies other than the
dollar and, accordingly, are subject to translation gains and losses due to
changes in currency exchange rates. Some of these intercompany loans are deemed
to be essentially permanent and, as a result, translation gains and losses on
these loans are reflected in accumulated other comprehensive income (loss) on
the
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Consolidated Balance Sheets. The remaining intercompany loans are expected to be
repaid in the foreseeable future and, as a result, translation gains and losses
on these loans are reflected in other (income) expense, net on the Consolidated
Statement of Operations. Foreign currency translation gains and losses relating
to these loans included in other (income) expense, net, were a gain of $3
million in the 2002 first quarter and a gain of $5 million in the 2003 first
quarter.
To manage certain exposures to specific financial market risks caused
by changes in currency exchange rates, we use various financial instruments. The
amount of currency exchange contracts used by us to minimize these risks was $56
million at December 31, 2002 and $30 million at March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations, debt financing and, since July 2001, net proceeds
from our public offering of common stock. Our uses of those funds (other than
for operations) have consisted principally of debt reduction, capital
expenditures, payment of fines, liabilities and expenses in connection with
investigations, lawsuits and claims and payment of restructuring costs.
We are highly leveraged and have substantial obligations in connection
with antitrust investigations, lawsuits and claims. We had total debt of $754
million and a stockholders' deficit of $387 million at March 31, 2003 and total
debt of $731 million and a stockholders' deficit of $381 million at December 31,
2002. We expect that our debt will increase by about $35 to $40 million at the
end of 2003 as compared to the end of 2002, before taking into account possible
asset sales. At March 31, 2003, a substantial portion of our debt had variable
interest rates. In addition, if we are required to pay or issue a letter of
credit to secure payment of the fine assessed by the EU Competition Authority
pending resolution of our appeal regarding the amount of the fine, the payment
would be financed by borrowing under (or secured by a letter of credit that
would constitute a borrowing under) our revolving credit facility. Cash and cash
equivalents were $11 million at December 31, 2002 and $9 million at March 31,
2003. We believe that we will have a net use of cash from operating and
investing activities in 2003. We believe that we will generate positive cash
flow from operations in 2004.
Our leverage and obligations, as well as changes in conditions
affecting our industry, changes in global and regional economic conditions and
other factors, have adversely impacted our recent financial performance. In
light of those factors, we closely monitor compliance with our debt covenants.
LONG-TERM CONTRACTUAL, COMMERCIAL AND OTHER OBLIGATIONS AND
COMMITMENTS. The following tables summarizes our long-term contractual
obligations and other commercial commitments at March 31, 2003.
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<table>
<caption>
PAYMENT DUE BY PERIOD
---------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
(Dollars in millions)
CONTRACTUAL AND OTHER OBLIGATIONS
---------------------------------
<s> <c> <c> <c> <c> <c>
Long-term debt................................. $ 734 $ - $ 46 $ 138 $ 550
Capital lease obligations...................... 2 - 1 - 1
Operating leases............................... 8 3 4 1 -
Unconditional purchase obligations............. 51 8 16 12 15
-------- ------- ------- ------- -------
Total contractual obligations............. 795 11 67 151 566
Estimated liabilities and expenses in
connection with antitrust investigations
and related lawsuits and claims.......... 94 - 51 41 2
Postretirement, pension and related benefits... 135 14 30 29 62
Other long-term obligations.................... 11 - 2 - 9
-------- ------- ------- ------- -------
Total contractual and other obligations... $ 1,035 $ 25 $ 150 $ 221 $ 639
======== ======= ======= ======= =======
</table>
<table>
<caption>
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
-----------------------------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
(Dollars in millions)
OTHER COMMERCIAL COMMITMENTS
----------------------------
<s> <c> <c> <c> <c> <c>
Lines of credit................................ $ 8 $ 8 $ - $ - $ -
Letter of credit............................... 14 14 - - -
Guarantees..................................... 3 2 - - 1
-------- ------- ------- ------- -------
Total other commercial commitments........ $ 25 $ 24 $ - $ - $ 1
======== ======= ======= ======= =======
</table>
The first preceding table includes our reserve for estimated
liabilities and expenses in connection with antitrust investigations and related
lawsuits and claims, which includes the fine of (euro)50.4 million assessed
against us by the EU Competition Authority. The timing of such payments is not
known and for purposes of this table is split between the columns captioned
"payments due in 1-3 years" and "payments due in 4-5 years" on the line entitled
"estimated liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims." It is the policy of EU Competition Authority
to negotiate appropriate terms of payment of antitrust fines, including extended
payment terms. We have had discussions regarding such payment terms. We have
also filed an appeal to the court challenging the amount of the fine. We cannot
predict how or when the court will rule on the appeal. While we cannot assure
that such will be the case, we believe the amount of the fine will be impacted
by the appeal and that, after such ruling, we will be permitted to pay the fine
over an extended period. In addition, if we are required to pay (or issue a
letter of credit to secure payment of) the fine pending resolution of our
appeal, the payment would be financed by a borrowing under (or the letter of
credit would
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constitute a borrowing under) our revolving credit facility. Such a
requirement would result in a change in the manner in which such amount is
reflected in the preceding tables.
Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. valued at $75 million. Pursuant to this contract, CGI provides a
majority of our global information technology service requirements. We are
dependent on CGI for these services. A failure by CGI to provide these services
to us in a timely manner could have a material adverse effect on our operations
and results of operations. The first preceding table includes a line entitled
"unconditional purchase obligations" that includes, but is not limited to, the
minimum purchases under that contract. In September 2002, we entered into a ten
year outsourcing contract with CGI to provide finance and accounting business
process services valued at $36 million. That contract does not constitute an
unconditional purchase obligation and therefore is not included in the first
preceding table.
The second preceding table includes a line entitled "lines of credit."
These are local lines of credit established by our foreign subsidiaries for
working capital purposes and are not part of our revolving credit facility.
Our pension benefit obligations were underfunded by $80 million at
December 31, 2002 as compared to $50 million at December 31, 2001. This increase
in underfunding was primarily due to the decline in asset values resulting from
the decline in the capital markets in the U.S. in 2002. We value our pension
obligations on an annual basis.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY. Changes in conditions
affecting our industry, changes in global and regional economic conditions and
other factors have adversely impacted our recent financial performance. As a
result of these changes, our high leverage, our substantial obligations in
connection with antitrust investigations, lawsuits and claims and our
substantial other long-term contractual and commercial obligations and
commitments, we have placed high priority on efforts to manage cash, generate
additional cash flow and reduce debt. Our longer term efforts include our 1998
major cost savings plan, our 2002 major cost savings plan and our other cost
savings activities, our strategic alliances and our financing activities. Our
shorter term efforts include our interest rate management and working capital
initiatives.
During the four years prior to 2002, we had positive annual cash flow
from operations, excluding payments in connection with restructurings and
investigations, lawsuits and claims. Typically, the first quarter of each year
resulted in neutral or negative cash flow from operations (excluding payments in
connection with restructurings and investigations, lawsuits and claims) due to
various factors. Factors impacting seasonality included customer order patterns,
customer buy-ins in advance of annual price increases, fluctuations in working
capital requirements and payment of variable compensation with respect to the
immediately preceding year. Typically, the other three quarters resulted in
positive cash flow from operations (before such exclusions). The third quarter
tended to produce relatively less positive cash flow primarily as a result of
scheduled plant shutdowns by our customers for vacations. During 2002, we had
negative cash flow from operations before such exclusions primarily due to
negative net income before non-
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cash charges (credits) primarily from lower net sales, and to a use of cash for
working capital. We expect financial performance to improve in 2003 and to have
positive cash flow from operations before such exclusions.
Prior to 2000, our cash flow from operations (before such exclusions)
in the first and third quarters was adversely impacted by the semi-annual
interest payments on our previously outstanding senior subordinated notes. The
second and fourth quarters correspondingly benefited from the absence of
interest payments on such notes. We expect the semi-annual interest payments on
the Senior Notes to have a similar impact.
As part of our cash management activities, we seek to manage accounts
receivable credit risk, collections, and accounts payable and payments thereof
to seek to maximize our free cash at any given time and minimize accounts
receivable losses. We typically discount or factor a portion of our accounts
receivable. Certain of our subsidiaries sold receivables totaling $187 million
in 2002 and $48 million in the 2003 first quarter. Accounts receivable sold and
remaining on the Consolidated Balance Sheet aggregated $1 million at December
31, 2002 and nil at March 31, 2003. If we had not sold such receivables, our
accounts receivable and our debt would have been about $46 million higher at
December 31, 2002 and about $47 million higher at March 31, 2003. If we were
unable to factor our accounts receivable, our debt would increase, which could
adversely affect our financial condition and compliance with our financial
covenants. In addition, careful management of credit risk over at least the past
two years has allowed us to avoid significant accounts receivable losses
notwithstanding the poor financial condition of many of our potential and
existing customers. In light of current global and regional economic conditions,
we cannot assure you that we will not be materially adversely affected by
accounts receivable losses in the future.
We use, and are dependent on, funds available under our revolving
credit facility as our primary source of liquidity. As a result, we are also
dependent upon continued compliance with the financial covenants under the
Senior Facilities. We believe that our cost savings initiatives will, over the
next one to two years, continue to improve our cash flow from operations for a
given level of net sales. Improvements in cash flow from operations resulting
from these initiatives are being partially offset by associated cash
implementation costs, while they are being implemented. We also believe that our
planned asset sales together with these improvements in cash flow from
operations should allow us to reduce our debt over the long term.
We may from time to time and at any time, at prevailing market prices,
exchange or purchase Senior Notes in open market or privately negotiated
transactions for cash (from cash on hand, borrowings under our revolving credit
facility or new credit facilities, or proceeds from sale of debt or equity
securities or assets), common stock or other equity or debt securities, or a
combination thereof. We may at any time and from time to time seek and obtain
consent from the lenders under the Senior Facilities with respect to any
restrictions thereunder applicable to such transactions. We will evaluate any
such transaction in light of then prevailing market conditions and our then
current and prospective liquidity and capital resources, including
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projected and potential needs and prospects for access to capital markets. Any
such transactions may, individually or in the aggregate, be material.
Our high leverage and substantial antitrust related and other
obligations could have a material impact on our liquidity. Cash flow from
operations services payment of our debt and these obligations, thereby reducing
funds available to us for other purposes. Our leverage and these obligations
make us more vulnerable to economic downturns or in the event that these
obligations are greater or timing of payment is sooner than expected.
Our ability to service our debt as it comes due, including maintaining
compliance with the covenants under the Senior Facilities, and to meet these and
other obligations as they come due is dependent on our future financial and
operating performance. This performance, in turn, is subject to various factors,
including certain factors beyond our control, such as changes in conditions
affecting our industry, changes in global and regional economic conditions,
changes in interest and currency exchange rates, developments in antitrust
investigations, lawsuits and claims involving us and inflation in raw material,
energy and other costs.
We cannot assure you that our cash flow and capital resources will be
sufficient to enable us to meet our debt service, antitrust-related and other
obligations when due. Even if we are able to meet our debt service,
antitrust-related and other obligations when due, we may not be able to comply
with the covenants and other provisions under the Senior Facilities. These
covenants and provisions include financial covenants and representations
regarding absence of material adverse changes affecting us. A failure to comply,
unless waived by the lenders, would be a default under the Senior Facilities.
This would permit the lenders to accelerate the maturity of the Senior
Facilities. It would also permit the lenders to terminate their commitments to
extend credit under our revolving credit facility. This would have an immediate
material adverse effect on our liquidity. An acceleration of maturity of the
Senior Facilities or a breach of the covenants contained in the Senior Notes
would permit the holders of the Senior Notes to accelerate the maturity of the
Senior Notes. Acceleration of maturity of the Senior Notes would permit the
lenders to accelerate the maturity of the Senior Facilities and terminate their
commitments to extend credit under our revolving credit facility. If we were
unable to repay our debt to the lenders or holders, the lenders and holders
could proceed against the collateral securing the Senior Facilities and the
Senior Notes, respectively, and exercise all other rights available to them. If
we were unable to repay our debt to the lenders or the holders, or otherwise
obtain a waiver from the lenders or the holders, we could be required to limit
or discontinue, temporarily or permanently, certain of our business plans,
activities or operations, reduce or delay certain capital expenditures, sell
certain of our assets or businesses, restructure or refinance some or all of our
debt or incur additional debt, or sell additional common stock or other
securities. We cannot assure you that we would be able to obtain any such waiver
or take any of such actions on favorable terms or at all.
As described above, we are dependent on our revolving credit facility
and continuing compliance with the financial covenants under the Senior
Facilities for liquidity. The Senior Facilities require us to, among other
things, comply with financial covenants relating to specified
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minimum interest coverage and maximum net senior secured debt leverage ratios
that become more restrictive over time. At March 31, 2003, we were in compliance
with the financial covenants under the Senior Facilities. Based on our current
business plan, we believe we will remain in compliance with these covenants for
2003. If we were to believe that we would not continue to comply with such
covenants, we would seek an appropriate waiver or amendment from the lenders
thereunder. We cannot assure you that we would be able to obtain such waiver or
amendment on acceptable terms or at all.
While our revolving credit facility provides for maximum borrowings of
up to (euro)200 million ($218 million, based on currency exchange rates in
effect at March 31, 2003), our future ability to borrow under this facility may
effectively be less because of the impact of additional borrowings upon our
compliance with the maximum net senior secured debt leverage ratio permitted or
minimum interest coverage ratio required under the Senior Facilities. In
addition, (euro)25 million of the (euro)200 million is reserved exclusively for
use to pay or secure payment of the fine assessed by the EU Competition
Authority. At March 31, 2003, we had drawn $45 million under this facility with
the remaining $158 million (after consideration of outstanding letters of
credit) fully available. In addition, payment of the fine or issuance of a
letter of credit to secure payment of the fine assessed by the EU Competition
Authority would significantly reduce remaining funds available under our
revolving credit facility for operating and other purposes.
We believe that the long-term fundamentals of our business continue to
be sound. Accordingly, although we cannot assure you that such will be the case,
we believe that, based on our expected cash flow from operations, our expected
resolution of our remaining obligations in connection with antitrust
investigations, lawsuits and claims, and our existing capital resources, and
taking into account our efforts to reduce costs and working capital needs,
improve efficiencies and product quality, generate growth and cash flow and
maximize funds available to meet our debt service and other obligations, we will
be able to manage our liquidity to permit us to service our debt and meet our
obligations when due.
DESCRIPTION OF SENIOR FACILITIES, CERTAIN AMENDMENTS THERETO AND SENIOR
NOTES. A description of the Senior Facilities, certain amendments thereto and
the Senior Notes is set forth in Note 5 to the Notes to Consolidated Financial
Statements contained in this Report, and such description is hereby incorporated
herein by reference.
RELATED PARTY TRANSACTIONS. We have not, since January 1, 2002, engaged
in any material transactions with affiliates or related parties other than
transactions with our subsidiaries (including Carbone Savoie and AET),
compensatory transactions (including employee benefits, stock option and
restricted stock grants, compensation deferral and executive employee loans and
stock purchases) with directors or officers, and transactions with our 25%-owned
joint venture with Jilin in China.
SPECIAL PURPOSE ENTITIES. We have not been, since January 1, 2002,
affiliated with or related to any special purpose entity other than GrafTech
Finance.
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OFF-BALANCE-SHEET FINANCINGS AND COMMITMENTS. We have not, since
January 1, 2002, undertaken any material off-balance-sheet financing
arrangements or other commitments (including non-exchange traded contracts),
other than:
o Commitments under non-cancelable operating leases that, at
December 31, 2002 and March 31, 2003, individually totaled
less than $1 million in each year and $5 million in the
aggregate.
o Minimum required purchase commitments under our information
technology outsourcing services agreement with CGI Group Inc.
described under "-Long-Term Contractual, Commercial and Other
Obligations and Commitments" above that, at December 31, 2002
and March 31, 2003, totaled approximately $5 million in each
year and about $43 million in the aggregate.
o Discounting or factoring accounts receivable as described
under "Liquidity and Capital Resources - Cash Flow and Plans
to Manage Liquidity."
CASH FLOW USED IN OPERATING ACTIVITIES. Cash flow used in operating
activities was $24 million in 2003 first quarter as compared to cash flow used
in operating activities of $47 million in 2002 first quarter, an improvement of
$23 million. The improvement was primarily due to a reduction in the use of cash
for working capital to $19 million in the 2003 first quarter from $45 million in
the 2002 first quarter. The higher use of cash in the 2002 first quarter was
almost entirely attributable to settlement of payables outstanding at December
31, 2001. Payables had increased at December 31, 2001 primarily due to
preparations and other activities at facilities globally to accommodate the
mothballing of our Italian graphite electrode plant and the shut down of our
graphite manufacturing operations in Tennessee.
CASH FLOW USED IN INVESTING ACTIVITIES. We used $9 million of cash flow
in investing activities during both the 2003 first quarter and the 2002 first
quarter, in each case primarily for capital expenditures. Capital expenditures
in 2003 first quarter related primarily to expansion of manufacturing graphite
electrode capacity in our facility in Mexico, implementation of JD Edwards
information systems and essential capital maintenance. Capital expenditures in
the 2002 first quarter related primarily to expansion of manufacturing graphite
electrode capacity.
CASH FLOW PROVIDED BY FINANCING ACTIVITIES. Cash flow provided by
financing activities was $31 million during 2003 first quarter as compared to
cash flow provided by financing activities of $51 million in 2002 first quarter.
During the 2003 first quarter, we received proceeds of $10 million from the sale
of interest rate swaps and $35 million from additional borrowings under our
revolving credit facility. We used these proceeds to fund, in part, the
semi-annual interest payment on the Senior Notes, a dividend payment to our
minority shareholder, a purchase of interest rate caps and a repayment of short
term debt borrowings. In the 2002 first quarter, we completed a private offering
of $400 million of Senior Notes. Net proceeds were $387 million, which were used
to repay term loans under the Senior Facilities,
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reduce the outstanding balance under our revolving credit facility and fund
increased working capital.
RESTRICTIONS ON DIVIDENDS AND STOCK REPURCHASES
Under the Senior Facilities, we are generally permitted to pay
dividends on common stock and repurchase common stock in an aggregate annual
amount of between $25 million and $50 million, depending on our leverage ratio
and excess cash flow. Under the Senior Notes, we are generally permitted to pay
dividends on common stock and repurchase common stock in an aggregate cumulative
(from February 15, 2002) amount of $25 million, plus certain consolidated net
income, equity proceeds and investment gains.
RECENT ACCOUNTING PRONOUNCEMENTS
A description of recent accounting pronouncements is set forth in "New
Accounting Standards" in Note 1 to the Notes to Consolidated Financial
Statements contained in this Report, and such description is hereby incorporated
herein by reference.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. We routinely enter into various transactions that
have been authorized according to documented policies and procedures to manage
well-defined currency exchange rate risks and interest rate risks. These
transactions relate primarily to financial instruments described below. Since
the counterparties to these financial instruments are large commercial banks and
similar financial institutions, we do not believe that we are exposed to
material counterparty credit risk. We do not use derivative financial
instruments for trading purposes.
Our exposure to changes in interest rates results primarily from
floating rate long-term debt tied to LIBOR or euro LIBOR. We implement interest
rate management initiatives to seek to minimize our interest expense and
optimize our portfolio of fixed and variable interest rate obligations. Use of
these initiatives is allowed under the Senior Notes and Senior Facilities. These
interest rate swaps are designated as hedging the exposure to changes in the
fair value of our debt obligation (referred to as a fair value hedge.) The gain
or loss on the fair value hedge is recognized, together with the offsetting gain
or loss on the debt obligation (sometimes referred to as the short-cut method)
in earnings in the period of change in value.
In the 2002 second quarter, we entered into two ten-year interest rate
swaps for a total notional amount of $250 million to effectively convert that
amount of fixed rate debt (represented by Senior Notes) to variable rate debt.
These swaps reduced our interest expense in 2002 by $6 million. In the 2002
third quarter, we sold the total notional of $250 million of swaps to allow the
accelerated collection of $10 million in cash. We subsequently entered into two
interest rate swaps for the total notional amount of $250 million to effectively
convert that amount of fixed rate debt to variable rate debt. In the 2003 first
quarter, we also entered into an additional $200 million notional amount
interest rate swap, for a new total notional amount of
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$450 million, through the remaining term of the Senior Notes effectively
converting that amount of fixed rate debt to variable rate debt. In the 2003
first quarter, we entered into five-year interest rate caps for a notional
amount of $300 million. Subsequently in the 2003 first quarter, we sold the
entire $450 million notional amount of swaps for $10 million in cash. The
adjustment of the carrying amount of the Senior Notes is being amortized over
the term of the Senior Notes and recorded as a credit against interest expense.
Following the sale of the swaps, in March 2003, we entered into $350 million
notional amount of interest rate swaps through the remaining term of the Senior
Notes. The weighted average pay rate on the swaps is 5.11% plus the six month
LIBOR in arrears and the weighted average receive rate is 10.25%. The adjustment
for the fair value of the hedged debt obligation was $8 million at December 31,
2002 and $2 million at March 31, 2003 and has been recorded as part of other
assets in the Consolidated Balance Sheet. The adjustment for the fair value of
the interest rate caps was $1 million for the period ended March 31, 2003, and
has been recorded in other (income) and expense, net in the Consolidated
Statements of Operations.
Our exposure to changes in currency exchange rates results primarily
from:
o investments in and intercompany loans to our foreign
subsidiaries and our share of the earnings of those
subsidiaries, to the extent denominated in local currencies;
o raw material purchases made by our foreign subsidiaries in a
currency other than local currencies; and
o export sales made by our subsidiaries in currencies other than
local currencies.
When we deem it appropriate, we may attempt to limit our risks
associated with changes in currency exchange rates through both operational
activities and financial instruments. Financial instruments may be used to
attempt to hedge existing exposures, firm commitments and, potentially,
anticipated transactions. We use these instruments to reduce risk by essentially
creating offsetting currency exposures. These instruments include forward
exchange contracts and purchased foreign currency options, and are primarily
used to attempt to hedge net global currency exposures relating to
euro-denominated debt and identifiable foreign currency receivables, payables
and commitments. Forward exchange contracts are agreements to exchange different
currencies at a specified future date and at a specified rate. Purchased foreign
currency options are instruments which give the holder the right, but not the
obligation, to exchange different currencies at a specified rate at a specified
date or over a range of specified dates. The result is the creation of a range
in which a best and worst price is defined, while minimizing option cost.
We held contracts against these risks with an aggregate net notional
amount of about $56 million at December 31, 2002 and $30 million at March 31,
2003. All of our contracts mature within one year. All of our contracts are
marked to market monthly. Gains and losses are included in other (income)
expense, net. Unrealized gains and losses on outstanding foreign
68
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PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
currency contracts were nil for the 2002 first quarter and a loss of $3 million
for the 2003 first quarter.
We used a sensitivity analysis to assess the potential effect of
changes in currency exchange rates and interest rates on reported earnings for
the 2003 first quarter. Based on this analysis, a hypothetical 10% weakening or
strengthening in the dollar across all other currencies would have changed our
reported gross margin for the 2003 first quarter by about $1 million. A
hypothetical increase in interest rates of 100 basis points across all
maturities would have increased our interest expense for the 2003 first quarter
by about $2 million.
ITEM 4. CONTROLS AND PROCEDURES
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this Report. Based
on that evaluation and subject to the limitations described below, our Chief
Executive Officer and our Chief Financial Officer have concluded that these
controls and procedures are effective. There were no significant changes in our
internal controls or in other factors that could significantly affect these
controls subsequent to the date of that evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include controls and procedures designed to ensure that information required to
be disclosed by us in the reports that we file under the Exchange Act is
accumulated and communicated to our management, including our Chief Executive
Officer and our Chief Financial Officer, as appropriate to allow timely
decisions regarding required disclosure.
A control system is subject to inherent limitations and, as a result,
can provide only reasonable, not absolute, assurance that the system's
objectives will be achieved. In the first instance, the design of a control
system must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs. Further,
decision-making in connection with system design or operation can be faulty, and
breakdowns can occur because of simple error or mistake. In addition, controls
can be circumvented by the acts of single individuals, by collusion of two or
more individuals, or by management override of the controls. The design of any
system of controls is based in part upon certain assumptions about the
likelihood of future events, and there can be no assurance that any design will
succeed in achieving its stated objectives under all potential future
conditions. Over time, controls may become inadequate because of changes in
conditions or deterioration in the degree of compliance with policies or
procedures. In light of the inherent limitations in a cost-effective control
system, misstatements due to error or fraud may occur and not be detected.
69
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PART II
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
This information required in response to this Item is set forth in Note
7 to the Notes to Consolidated Financial Statements contained in this Report,
and such information is hereby incorporated herein by reference.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In the 2003 first quarter, we contributed 500,000 shares of common
stock into the trust for our qualified U.S. retirement plan. These shares may be
sold by the trust in the future to provide funding to meet obligations under the
plan. We intend to make a voluntary excess contribution of up to an additional
1,500,000 shares of common stock to the trust in the 2003 second quarter and may
make additional similar contributions to this and other plans in future periods.
Such transactions were and would be exempt from the registration under Section
4(2) of the Securities Act of 1933 because such transactions did and will not
involve the public offering of securities.
We are contributing 1,573,600 shares of common stock into a benefits
protection trust which we adopted to assist us in providing for payment of
nonqualified retirement and other benefit plan obligations to management as well
as payment of obligations with respect to certain compensation deferred by
management and earnings thereon under our compensation deferral plan. These
shares, in addition to the 426,400 shares similarly contributed in 2001, may be
sold in the future to provide funding to meet such obligations under our
non-qualified retirement plans. Such transaction was exempt from registration
under Section 4(2) of the Securities Act of 1933 because such transaction did
not involve the public offering of securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the following table have been filed as part of this
Quarterly Report on Form 10-Q.
<table>
<caption>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
<s> <c>
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Craig S. Shular, Chief Executive Officer and President, dated
May 15, 2003.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as adopted Pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, by Corrado F. De Gasperis, Chief Financial Officer, Chief
Information Officer and Vice President, dated May 15, 2003.
</table>
70
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PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(B) REPORTS ON FORM 8-K
None.
71
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAFTECH INTERNATIONAL LTD.
Date: May 15, 2003 By: /s/ Corrado F. De Gasperis
----------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial Officer
and Chief Information Officer
(Principal Accounting Officer)
72
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SECTION 302 CERTIFICATIONS
I, Craig S. Shular, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q;
2. based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date");
and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officers and I have indicated in
this Quarterly Report whether there was significant changes in internal controls
or in other factors that could
73
<page>
SECTION 302 CERTIFICATIONS (CONT'D)
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ Craig S. Shular
-----------------------------------------
Craig S. Shular
Chief Executive Officer and President
74
<page>
SECTION 302 CERTIFICATIONS (CONT'D)
I, Corrado F. De Gasperis, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q;
2. based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date");
and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officers and I have indicated in
this Quarterly Report whether there was significant changes in internal controls
or in other factors that could
75
<page>
SECTION 302 CERTIFICATIONS (CONT'D)
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: May 15, 2003 By: /s/ Corrado F. De Gasperis
-----------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial Officer
and Chief Information Officer
(Principal Accounting Officer)
76
<page>
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------- ----------------------
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Craig S. Shular, Chief Executive Officer and
President, dated May 15, 2003.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as
adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002, by Corrado F. De Gasperis, Chief Financial
Officer, Chief Information Officer and Vice President,
dated May 15, 2003.
77
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