Exhibit 99.3
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Independent Auditors' Reports....................................... 2
Consolidated Balance Sheets......................................... 4
Consolidated Statements of Operations............................... 5
Consolidated Statements of Cash Flows............................... 6
Consolidated Statements of Stockholders' Equity (Deficit)........... 7
Notes to Consolidated Financial Statements.......................... 8
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
GrafTech International Ltd.
Wilmington, Delaware
We have audited the accompanying consolidated balance sheets of GrafTech
International Ltd. (formerly UCAR International Inc.) and subsidiaries (the
"Company") as of December 31, 2001 and 2002, and the related consolidated
statements of operations, cash flows and stockholders' equity (deficit) for the
years then ended. These consolidated financial statements are the responsibility
of the Company's management. Our responsibility is to express an opinion on
these financial statements based on our audits. The financial statements of the
Company for the year ended December 31, 2000, before the reclassifications
described in Note 19 to the financial statements, were audited by other auditors
whose report, dated February 15, 2001, expressed an unqualified opinion on those
statements.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 2001
and 2002, and the results of its operations and its cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America.
As discussed in Note 2 to the consolidated financial statements, the Company
adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other
Intangible Assets, effective January 1, 2002.
We also audited the adjustments described in Note 19 that were applied to
reclassify the 2000 financial statements to give retroactive effect to the
Company's discontinued operations, change in segments, and adoption of Statement
of Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections. In
our opinion, such adjustments are appropriate and have been properly applied.
/s/ Deloitte & Touche LLP
Philadelphia, Pennsylvania
February 14, 2003, except for Note 18, as to
which the date is March 25, 2003 and Note 19,
as to which the date is August 14, 2003
2
INDEPENDENT AUDITORS' REPORT
To the Board of Directors
UCAR International Inc.:
We have audited the accompanying consolidated statements of operations, cash
flows and stockholders' equity (deficit) of UCAR International Inc. and
subsidiaries for the year ended December 31, 2000, before the restatements
described in Note 19 to the consolidated financial statements. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the 2000 consolidated financial statements referred to above
present fairly, in all material respects, the results of operations and cash
flows of UCAR International Inc. and subsidiaries for the year ended December
31, 2000, in conformity with accounting principles generally accepted in the
United States of America.
/s/ KPMG LLP
Nashville, Tennessee
February 15, 2001
3
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
AT DECEMBER 31,
---------------
2001 2002
---- ----
(includes reclassifications; see Note 19)
ASSETS
Current assets:
Cash and cash equivalents................................................... $ 38 $ 11
Notes and accounts receivable, net.......................................... 91 104
Inventories:
Raw materials and supplies................................................ 32 39
Work in process........................................................... 110 102
Finished goods............................................................ 33 30
------ -------
175 171
Prepaid expenses and deferred income taxes.................................. 12 21
Current assets of discontinued operations................................... 6 14
------ -------
Total current assets...................................................... 322 321
------ -------
Property, plant and equipment................................................... 918 995
Less: accumulated depreciation................................................. 646 695
------ -------
Net fixed assets.......................................................... 272 300
Deferred income taxes........................................................... 140 171
Goodwill........................................................................ 17 17
Other assets.................................................................... 37 50
Assets of discontinued operations............................................... 9 -
------ -------
Total assets.............................................................. $ 797 $ 859
====== =======
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Accounts payable............................................................ $ 99 $ 105
Short-term debt............................................................. 7 18
Accrued income and other taxes.............................................. 44 23
Other accrued liabilities................................................... 56 57
Current liabilities of discontinued operations.............................. 4 3
------ -------
Total current liabilities................................................. 210 206
Long-term debt:
Carrying value............................................................. 631 699
Fair value of hedged debt obligation....................................... - 8
Unamortized bond premium................................................... - 6
------ -------
Total long-term debt................................................. 631 713
Other long-term obligations..................................................... 231 258
Deferred income taxes........................................................... 31 33
Liabilities of discontinued operations......................................... 1 -
Minority stockholders' equity in consolidated entities.......................... 25 30
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, 58,623,713
shares issued at December 31, 2001, 59,211,664 shares issued at
December 31, 2002........................................................ 1 1
Additional paid-in capital.................................................. 629 636
Accumulated other comprehensive loss........................................ (269) (304)
Accumulated deficit......................................................... (602) (620)
Less: cost of common stock held in treasury, 2,322,412 shares at December
31, 2001, 2,542,539 shares at December 31, 2002.......................... (85 (88)
Common stock held in employee benefit trust, 426,400 shares at December 31,
2001 and December 31, 2002................................................ (6) (6)
------ -------
Total stockholders' deficit................................................. (332) (381)
------ -------
Total liabilities and stockholders' deficit............................... $ 797 $ 859
====== =======
See accompanying Notes to Consolidated Financial Statements.
4
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(includes reclassifications; see Note 19)
Net sales............................................................... $ 763 $ 634 $ 596
Cost of sales........................................................... 549 455 461
---------- ----------- ----------
Gross profit......................................................... 214 179 135
Research and development................................................ 11 12 13
Selling, administrative and other expenses.............................. 84 75 76
Restructuring charges................................................... 6 12 6
Impairment losses on long-lived and other assets ....................... 3 80 17
Restricted stock vesting................................................ - - 5
Antitrust investigations and related lawsuits and claims................ - 10 -
Corporate realignment and related expenses................................. - 2 3
Other expense (income), net............................................. 20 1 (12)
Interest expense........................................................ 75 60 60
---------- ----------- ----------
199 252 168
Income (loss) from continuing operations before provision for income
taxes, minority interest........................................... 15 (73) (33)
Provision for (benefit from) income taxes............................... 2 14 (16)
---------- ----------- ----------
Income (loss) from continuing operations
before minority interest........................................... 13 (87) (17)
Less: minority stockholders' share of income........................... 3 2 2
---------- ----------- ----------
Income (loss) from continuing operations............................. 10 (89) (19)
Income from discontinued operations (less income tax expense of $1
and $1 in 2001 and 2002, respectively)............................. - 2 1
---------- ----------- ----------
Net income (loss).................................................. $ 10 $ (87) $ (18)
========== =========== ==========
Income (loss) per common share:
Basic:
- -----
Income (loss) from continuing operations........................... $ 0.22 $ (1.79) $ (0.35)
Income from discontinued operations................................ - 0.04 0.02
---------- ----------- ----------
Net income (loss) per share ....................................... $ 0.22 $ (1.75) $ (0.33)
========== =========== ==========
Diluted:
- -------
Income (loss) from continuing operations........................... $ 0.22 $ (1.79) $ (0.35)
Income from discontinued operations................................ - 0.04 0.02
---------- ----------- ----------
Net income (loss) per share ....................................... $ 0.22 $ (1.75) $ (0.33)
========== =========== ==========
See accompanying Notes to Consolidated Financial Statements.
5
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions, except per share data)
FOR THE YEAR ENDED DECEMBER 31,
2000 2001 2002
---- ---- ----
(includes reclassifications; see Note 19)
Cash flow from operating activities:
Net income (loss)................................................... $ 10 $ (87) $ (18)
Income from discontinued operations................................. - 2 1
----- ----- -------
Income (loss) from continuing operations............................ 10 (89) (19)
Non-cash (credits) charges to net income (loss):
Depreciation and amortization..................................... 42 35 28
Deferred income taxes............................................. (33) (9) (27)
Securities class action and stockholder derivative lawsuits....... (1) - -
Antitrust investigations and related lawsuits and claims....... - 10 -
Restructuring charges............................................. 6 12 6
Impairment losses on long-lived and other assets.................. 3 80 17
Restricted stock vesting.......................................... - - 5
Other non-cash charges............................................ 27 13 (20)
Working capital*.................................................... 42 (32) (38)
Long-term assets and liabilities.................................... (4) (6) (12)
Net cash provided by (used in) operating activities from continuing
operations........................................................ 92 14 (60)
Net cash provided by operating activities from discontinued operations.. 2 3 -
----- ----- -------
Net cash provided by (used in) operating activities............... 94 17 (60)
Cash flow from investing activities:
Capital expenditures................................................ (52) (40) (50)
Purchase of investment.............................................. (1) (2) -
Maturities of short-term investments................................ 2 - -
Sale of assets...................................................... 1 3 -
----- ----- -------
Net cash used in investing activities............................. (50) (39) (50)
Cash flow from financing activities:
Short-term debt borrowings, net..................................... 3 3 11
Revolving credit facility borrowings, net........................... 56 7 (86)
Long-term debt borrowings........................................... 661 2 557
Long-term debt reductions........................................... (707) (96) (392)
Minority interest investment........................................ - 9 -
Financing costs..................................................... (28) (4) (21)
Proceeds from reset of interest rate swap........................... - - 10
Sale of common stock................................................ 2 94 1
Dividends paid to minority stockholder.............................. - - (1)
----- ----- -------
Net cash provided by (used in) financing activities............... (13) 15 79
----- ----- -------
Net increase (decrease) in cash and cash equivalents................... 31 (7) (31)
Effect of exchange rate changes on cash and cash equivalents........... (1) (2) 4
Cash and cash equivalents at beginning of period....................... 17 47 38
----- ----- -------
Cash and cash equivalents at end of period............................. $ 47 $ 38 $ 11
===== ===== =======
Supplemental disclosures of cash flow information:
Net cash paid during the year for:
Interest expense.................................................. $ 81 $ 56 $ 48
Income taxes...................................................... $ 13 $ 25 $ 24
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable..................................... $ 30 $ 19 $ (6)
Inventories....................................................... 17 (21) 11
Prepaid expenses.................................................. 3 - (2)
Payments for antitrust investigations and related lawsuits and claims... (23) (16) (3)
Restructuring payments.............................................. (7) (18) (4)
Increase (decrease) in payables and accruals........................ 22 4 (34)
----- ----- -------
Working capital.............................................. $ 42 $ (32) $ (38)
===== ===== =======
See accompanying Notes to Consolidated Financial Statements.
6
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(Dollars in millions, except share data)
ACCUMULATED
SHARES OF ADDITIONAL OTHER
COMMON COMMON PAID-IN COMPREHENSIVE ACCUMULATED
STOCK STOCK CAPITAL LOSS DEFICIT
----- ----- ------- ---- -------
Balance at January 1, 2000......................... 47,416,414 $ - $ 523 $ (205) $ (525)
----------- -------- -------- --------- ---------
Comprehensive income (loss):
Net income...................................... - - - - 10
Other comprehensive income:
Unrealized loss on available-for-sale
securities................................ - - - (1) -
Foreign currency translation adjustments..... - - - (35) -
------------ -------- -------- --------- ---------
Total comprehensive income (loss)............... - - - (36) 10
Sale of common stock - stock options............ 50,473 - 2 - -
Sale of common stock - treasury stock........... 18,556 - - - -
------------ -------- -------- --------- ---------
Balance at December 31, 2000....................... 47,485,443 $ - $ 525 $ (241) $ (515)
------------ -------- -------- ---------- ---------
Comprehensive income (loss):
Net loss........................................ - - - - (87)
Other comprehensive income:
Recognized loss on available-for-sale
securities................................ - - - 1 -
Foreign currency translation adjustments..... - - - (29) -
------------ -------- -------- --------- ---------
Total comprehensive income (loss).............. - - - (28) (87)
Sale of 2.5% equity interest in AET............ - - 4 - -
Common stock issued to employee
benefit trust.............................. - - 6 - -
Sale of common stock, net...................... 11,138,270 1 94 - -
------------ --------- -------- --------- ---------
Balance at December 31, 2001...................... 58,623,713 $ 1 $ 629 $ (269) $ (602)
------------ --------- -------- --------- ---------
Comprehensive loss:
Net loss....................................... - - - - (18)
Other comprehensive loss:
Minimum pension liability................... - - - (15) -
Foreign currency translation adjustments.... - - - (20) -
------------ --------- -------- --------- ---------
Total comprehensive income (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...................... 59,211,664 $ 1 $ 636 $ (304) $ (620)
============ ========= ======== ========= =========
COMMON
STOCK
HELD IN
UNEARNED EMPLOYEE TOTAL
RESTRICTED TREASURY BENEFIT STOCKHOLDERS'
STOCK STOCK TRUST DEFICIT
----- ----- ----- -------
Balance at January 1, 2000......................... $ - $ (86) $ - $ (293)
-------- ------- ------- ----------
Comprehensive income (loss):
Net income...................................... - - - 10
Other comprehensive income:
Unrealized loss on available-for-sale
securities................................ - - - (1)
Foreign currency translation adjustments..... - - - (35)
-------- ------- ------- ----------
Total comprehensive income (loss)............... - - (26)
Sale of common stock - stock options............ - - - 2
Sale of common stock - treasury stock........... - 1 1
-------- ------- ------- ----------
Balance at December 31, 2000....................... $ - $ (85) $ - $ (316)
-------- ------- ------- ----------
Comprehensive income (loss):
Net loss........................................ - - - (87)
Other comprehensive income:
Recognized loss on available-for-sale
securities................................ - - - 1
Foreign currency translation adjustments.... - - - (29)
-------- ------- ------- ----------
Total comprehensive income (loss)............... - - (115)
Sale of 2.5% equity interest in AET............. - - - 4
Common stock issued to employee
benefit trust............................... - - (6) -
Sale of common stock, net....................... - - - 95
-------- ------- ------- ----------
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 income (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)
======== ======= ======= ==========
See accompanying Notes to Consolidated Financial Statements.
7
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) DISCUSSION OF BUSINESS AND STRUCTURE
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.
"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 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 December 31, 2002, 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.
8
Our 100% owned Brazilian cathode manufacturing operations were
contributed to Carbone Savoie and, as a result, became 70% owned on March 31,
2001. In 2002, we substantially completed a 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.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, GrafTech Global or GrafTech Finance,
individually.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Consolidated Financial Statements include the financial statements
of GTI and its majority-owned subsidiaries. All significant intercompany
transactions have been eliminated in consolidation.
CASH EQUIVALENTS
Cash equivalents consist of overnight repurchase agreements and
certificates of deposit with an initial term of less than three months. For
purposes of the Consolidated Statements of Cash Flow, we consider all highly
liquid debt instruments with original maturities of three months or less to be
cash equivalents.
INVESTMENTS
Investments in marketable debt and equity securities are generally
classified and accounted for as investment, held-to-maturity or
available-for-sale securities. We determine the appropriate classification of
debt and equity securities at the time of purchase and reassess the
classification at each reporting date. Debt securities classified as
held-to-maturity are reported at amortized cost plus accrued interest.
Securities classified as available-for-sale are reported at fair value with
unrealized gains and losses, net of related tax, recorded as a separate
component of comprehensive income in the Consolidated Statement of Stockholders'
Equity (Deficit) until realized. Interest plus accrued interest and amortization
of premiums and discounts for debt securities are included in interest expense.
Gains and losses on securities sold are determined based on the specific
identification method and are included in other (income) expense, net.
Unrealized losses on investment securities that are other than temporary are
recognized in net income (loss). We do not hold securities for speculative or
trading purposes.
REVENUE RECOGNITION
Sales of our products and technology are recognized when persuasive
evidence of an arrangement exists, delivery has occurred, title has passed, the
revenue amount is determinable and collection is reasonably assured. Licenses of
technology are recognized over the term of the license agreements. Revenue from
service transactions is recognized based upon performance.
INVENTORIES
Inventories are stated at cost or market, whichever is lower. Cost is
determined on the "first-in first-out" ("FIFO") or the "average cost" method.
9
FIXED ASSETS AND DEPRECIATION
Fixed assets are carried at cost. Expenditures for replacements are
capitalized and the replaced assets are retired. Gains and losses from the sale
of property are included in other (income) expense, net.
Depreciation is calculated on a straight-line basis over the estimated
useful lives of the assets. We generally use accelerated depreciation methods
for tax purposes, where appropriate.
The average estimated useful lives are as follows:
YEARS
-----
Buildings......................................... 25
Land improvements................................. 20
Machinery and equipment........................... 20
Furniture and fixtures............................ 10
Transportation equipment.......................... 6
The carrying value of fixed assets is assessed when events and
circumstances indicating impairment are present. We determine such impairment by
measuring undiscounted estimated future cash flows. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the
assets to future net cash flows expected to be generated by the assets. If the
assets are considered to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the asset exceeds the
fair value of the assets. At December 31, 2002, accumulated depreciation
included about $216 million related to previously impaired long-lived assets.
Assets to be disposed are reported at the lower of the carrying amount or fair
value less costs to sell. We capitalized $1 million in interest in 2001 and
2002.
DERIVATIVE FINANCIAL INSTRUMENTS
Effective January 1, 2001, we adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137 and SFAS No. 138. The adoption did not
have a significant impact on our consolidated financial position or results of
operations. We do not use derivative financial instruments for trading purposes.
They are used to manage well-defined currency exchange rate risks and interest
rate risks.
We enter into foreign currency instruments to manage exposure to
currency exchange rate fluctuations. These instruments, which include, but not
limited to, forward exchange contracts and purchased currency options, attempt
to hedge global currency exposures, net, relating to euro-denominated debt,
identifiable foreign currency receivables, payables and commitments held by our
foreign and domestic subsidiaries. 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. Forward
exchange contracts and purchased currency options are carried at market value.
Gains and losses due to the recording of such contracts at fair value are
recognized currently as other (income) expense, net.
10
We enter into agreements with financial institutions that are intended
to limit, or cap, our exposure to the incurrence of additional interest expense
due to increases in variable interest rates. Since we deal with counterparties
that are major banks, we do not anticipate credit-related losses from
non-performance by such counterparties.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and for operating loss and tax credit carryforwards. Deferred tax assets
and liabilities are measured using enacted tax rates expected to apply to
taxable income in the years in which temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and liabilities of a
change in tax rate is recognized in income in the period that includes the
enactment date. A valuation allowance is recorded when it is determined that it
is more likely than not that any portion of a recorded deferred tax asset will
not be realized.
STOCK-BASED COMPENSATION PLANS
We account for stock-based compensation plans using the intrinsic value
method prescribed by Accounting Principles Board Opinion No. 25, "Accounting for
Stock Issued to Employees" ("APB 25"). As such, compensation expense is recorded
on the date of grant only if the market price of the underlying stock exceeded
the exercise price or if ultimate vesting is subject to performance conditions.
If an award results in recordable compensation expense, the total amount of
recorded compensation expense is based on the number of awards that eventually
vest. No compensation expense is recognized for forfeited awards, including
awards forfeited due to a failure to satisfy a service requirement or failure to
satisfy a performance condition. Our accruals of compensation expense for awards
subject to performance conditions are based on our assessment of the probability
of satisfying the performance conditions.
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 December 31, 2002, 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 below:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions,
except per share data)
Net income (loss) as reported................................. $ 10 $ (87) $ (18)
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards, net of related tax
effects............................................... (1) (7) (7)
------ ------ ------
11
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions,
except per share data)
Pro forma net income (loss)................................... 9 (94) (25)
Earnings per share:
Basic - as reported...................................... $ 0.22 $ (1.75) $ (0.33)
Basic - pro forma........................................ 0.20 (1.88) (0.45)
Diluted - as reported.................................... $ 0.22 $ (1.75) $ (0.33)
Diluted - pro forma...................................... 0.20 (1.88) (0.45)
RETIREMENT PLANS
The cost of pension benefits under our retirement plans is recorded in
accordance with SFAS No. 87, "Employee Accounting for Pensions," as determined
by independent actuarial firms using the "projected unit credit" actuarial cost
method. Contributions to the qualified U.S. retirement plan are made in
accordance with the requirements of the Employee Retirement Income Security Act
of 1974. Benefits under the non-qualified retirement plan have been accrued, but
not funded. Plan settlements and curtailments are recorded in accordance with
SFAS No. 88, "Employers' Accounting for Settlements and Curtailments of Defined
Benefit Pension Plans and Termination Benefits." In the 2003 first quarter, we
announced that we will freeze our U.S. qualified defined benefit plan effective
March 31, 2003. We started a new defined contribution plan on January 1, 2002
for U.S. employees.
POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFITS
The estimated cost of future postretirement medical and life insurance
benefits is determined by independent actuarial firms using the "projected unit
credit" actuarial cost method. Such costs are recognized as employees render the
service necessary to earn the postretirement benefits. Benefits have been
accrued, but not funded. Effective November 1, 2001, the U.S. plan was modified
to limit our cost of future annual postretirement medical benefits to the cost
2001. Effective March 31, 2003, we will discontinue the Medicare supplement plan
(for retirees 65 years or older or those eligible for Medicare benefits). This
change will apply to all current employees not covered by a collective
bargaining agreement when they retire, as well as those retirees who retired
under a former collective bargaining agreement. These modifications are
accounted for prospectively.
Environmental, Health and Safety Matters
Our operations are governed by laws addressing protection of the
environment and worker safety and health. These laws provide for civil and
criminal penalties and fines, as well as injunctive and remedial relief, for
noncompliance and require remediation at sites where hazardous substances have
been released into the environment.
We have been in the past, and may become in the future, the subject of
formal or informal enforcement actions or proceedings regarding noncompliance
with these laws or the remediation of company-related substances released into
the environment. Historically, such matters have been resolved by negotiation
with regulatory authorities resulting in commitments to compliance, abatement or
remediation programs and in some cases payment of penalties.
12
Historically, neither the commitments undertaken nor the penalties imposed on us
have been material.
Environmental considerations are part of all significant capital
expenditure decisions. Environmental remediation, compliance and management
expenses were approximately $14 million in 2000, $12 million in 2001 and $10
million in 2002. The accrued liability relating to environmental remediation was
$5 million at December 31, 2001 and December 31, 2002. A charge to income is
recorded when it is probable that a liability has been incurred and the cost can
be reasonably estimated. Our environmental liabilities do not take into
consideration possible recoveries of insurance proceeds. Because of the
uncertainties associated with environmental remediation activities at sites
where we may be potentially liable, future expenses to remediate sites could be
considerably higher than the accrued liability. However, while neither the
timing nor the amount of ultimate costs associated with known environmental
remediation matters can be determined at this time, we do not expect that these
matters will have a material adverse effect on our financial position, results
of operations or cash flows.
POST-EMPLOYMENT BENEFITS
We accrue the estimated cost of post-employment benefits expected to be
paid before retirement, principally severance, over employees' active service
periods.
USE OF ESTIMATES
We have made a number of estimates and assumptions relating to the
recording and disclosure of assets and liabilities, including contingent assets
and liabilities, to prepare the Consolidated Financial Statements in conformity
with accounting principles generally accepted in the United States. Actual
amounts and values could differ from those estimates.
RECLASSIFICATION
Certain amounts previously reported have been reclassified to conform
to the current year presentation.
FOREIGN CURRENCY TRANSLATION
Generally, except for operations in Russia where high inflation has
existed, unrealized gains and losses resulting from translation of the financial
statements of our foreign subsidiaries from their functional currencies into
dollars are accumulated in other comprehensive income on the Consolidated
Balance Sheets until such time as the operations are sold or substantially or
completely liquidated. Translation gains and losses relating to operations,
where high inflation has existed, are included in other (income) expense, net in
the Consolidated Statements of Operations. Our Mexican subsidiary began using
the dollar as its functional currency during 1999 because its sales and
purchases are predominantly dollar-denominated. Prior to August 1, 2000, our
Swiss subsidiary used the dollar as its functional currency. Beginning August 1,
2000, our Swiss subsidiary began using the euro as its functional currency
because its operations became predominantly euro-dominated. 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 Consolidated Balance
Sheets. The
13
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.
Translation gains (losses) on these intercompany loans amounted to a $24 million
gain in 2001 and a $35 million gain in 2002 recorded in accumulated other
comprehensive income (loss), and a $8 million gain in 2000, a $4 million loss in
2001 and a $21 million gain in 2002 recorded in other (income) expense, net.
GOODWILL
Goodwill represents the excess of the purchase price over the fair
value of net assets acquired and amounted to $17 million at December 31, 2001
and December 31, 2002. Prior to January 1, 2002, goodwill was amortized on a
straight-line basis over the expected periods to be benefited, generally 20
years. Effective January 1, 2002, we adopted SFAS No. 142, "Goodwill and Other
Intangible Assets." The adoption of 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.
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions,
except per share data)
Reported net income (loss).................................... $ 10 $ (87) $ (18)
Add back: Goodwill amortization (net of tax)................. 2 1 -
------ ------ ------
Adjusted net income........................................... 12 (86) (18)
====== ====== ======
Basic earnings per share:
Reported net income (loss)............................... $ 0.22 $ (1.75) $ (0.33)
Goodwill amortization (net of tax)....................... 0.03 0.03 -
------ ------ ------
Adjusted net income...................................... $ 0.25 $ (1.72) $ (0.33)
====== ====== ======
Diluted earnings per share:
Reported net income (loss)............................... $ 0.22 $ (1.75) $ (0.33)
Goodwill amortization (net of tax)....................... 0.03 0.03 -
------ ------ ------
Adjusted net income...................................... $ 0.25 $ (1.72) $ (0.33)
====== ====== ======
IMPAIRMENT REVIEW
Periodically, we assess the carrying value of our long-lived and
intangible assets. Our assessment involves comparing the carrying value of the
asset on our Consolidated Balance Sheet to the cash flows we expect to generate
in the future by that asset. We forecast the cash flows based on our assessment
of our business. If the expected cash flows are less than the asset's carrying
value, we record an impairment loss on that asset.
At December 31, 2002, there were no additional impairments required
that we have not already recorded in our Consolidated Statement of Operations.
However, future events and circumstances, some of which are described below, may
result in an impairment charge:
14
o new technological developments that provide significantly
enhanced benefits over our current technology;
o significant negative economic or industry trends;
o changes in our business strategy that alter the expected usage
of the related assets;
o significant increase or decrease in our cost of capital; and
o future economic results that are below our expectations used
in the current assessments.
NEW ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board ("FASB")
issued SFAS No. 148 "Accounting for Stock-Based Compensation - Transition and
Disclosure." SFAS No. 148 amends SFAS No. 123 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
results of operations or financial position because the impact is limited to
additional disclosure.
In November 2002, FASB issued Interpretation ("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 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. As required, at December 31, 2002, we have enhanced
our disclosures for certain guarantees, indemnification arrangements and product
warranties. We provide insurance coverage and are required to indemnify
directors and officers for actions taken on our behalf.
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 will adopt SFAS No. 146 effective
January 1, 2003.
15
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 shall be applied in fiscal years beginning after May 15, 2002. The
provisions of SFAS No. 145 related to SFAS No. 13 shall be effective for
transactions occurring after May 15, 2002 and all other provisions of SFAS No.
145 shall be 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." Currently,
generally accepted accounting principles require 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. Items
presented in prior periods that do not meet the criteria in APB 30 for
classification as an extraordinary item have been 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 write-offs
of capitalized bank fees and other debt extinguishment costs in the amount of
approximately $21 million, nil and $4 million for the years ended December 31,
2000, 2001 and 2002, respectively, from extraordinary items to other (income)
expense, net. The corresponding provisions for income taxes have been adjusted
accordingly in the amount of approximately $8 million, nil and $1 million for
the years ended December 31, 2000, 2001 and 2002, respectively. 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. See Note
19 regarding the discussion of discontinued 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. SFAS
No. 143 will be effective for financial statements issued for fiscal years
beginning after June 15, 2002. We are currently evaluating the impact of SFAS
No. 143 on our consolidated financial position or results of operations.
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 was 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 142 and the results of these reviews did not
require our existing goodwill to be written down.
16
(3) FINANCIAL INSTRUMENTS
We do not use derivative financial instruments for trading purposes.
They are used to manage well-defined currency exchange rate and interest rate
risks.
FOREIGN CURRENCY CONTRACTS
The amount of foreign exchange contracts used by us to minimize foreign
currency exposure was $37 million at December 31, 2001 and $99 million at
December 31, 2002. Of the total foreign exchange contracts outstanding,
approximately $4 million (11%) were offsetting at December 31, 2001 and
approximately $43 million (43%) were offsetting at December 31, 2002.
SALE OF RECEIVABLES
Certain of our U.S. and foreign subsidiaries sold receivables of $223
million in 2001 and $187 million in 2002. Receivables sold and remaining on the
Consolidated Balance Sheets were $1 million at December 31, 2001 and December
31, 2002.
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. 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 interest rate swaps are fair value swaps and are accounted for
based on the short-cut method. These swaps reduced our interest expense in 2002
by $6 million. In the 2002 third quarter, we reset our interest rate swaps to
allow for the accelerated collection of $10 million in cash. The collection of
this cash will be amortized over the term of the Senior Notes and recorded as a
credit against interest expense. The adjustment for the fair value of the hedged
debt obligations was $8 million at December 31, 2002 and has been recorded as
part of other assets in the Consolidated Balance Sheet. 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%.
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.
17
Debt-Fair value of debt was approximately $631 million at December 31, 2001
and $586 million at December 31, 2002.
Foreign currency contracts-Foreign currency contracts are carried at market
value. The market value of the contracts was approximately nil at December
31, 2001 and $3 million at December 31, 2002.
Interest Rate Swaps-See above under Interest Rate Risk Management.
(4) SEGMENT REPORTING
We evaluate the performance of our operating segments based on gross
profit. Intersegment sales and transfers are not material. We may in the future
evaluate performance based on additional or different measures. The accounting
policies of the reportable segments are the same as those described in Note 2.
The following tables summarize financial information concerning our
reportable segments.
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Net sales to external customers:
Synthetic Graphite.............................. $ 681 $ 559 $ 538
Other........................................... 82 75 58
------ ------ ------
Consolidated net sales....................... $ 763 $ 634 $ 596
====== ====== ======
Gross profit:
Synthetic Graphite.............................. $ 192 $ 161 $ 125
Other........................................... 22 18 10
------ ------ ------
Consolidated gross profit.................... $ 214 $ 179 $ 135
====== ====== ======
Depreciation and amortization:
Synthetic Graphite.............................. $ 36 $ 29 $ 24
Other........................................... 6 6 4
------ -------- -------
Consolidated depreciation and
amortization............................... $ 42 $ 35 $ 28
====== ====== =======
"Other" in the table above has been restated for the periods presented
to exclude our composite tooling business that was sold in June 2003. See Note
19 for further discussions.
We do not report assets by reportable segment. Assets are managed based
on geographic location because both reportable segments share certain
facilities. The following tables summarize information as to our operations in
different geographic areas:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Net sales (a):
U.S.......................................... $ 227 $ 176 $ 164
Canada....................................... 34 21 12
Mexico....................................... 43 33 37
Brazil....................................... 46 44 33
France....................................... 142 137 150
Italy........................................ 39 30 22
Switzerland ................................. 104 79 77
South Africa................................. 59 53 47
Spain........................................ 31 29 30
Other countries.............................. 38 32 24
-------- -------- --------
18
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Total...................................... $ 763 $ 634 $ 596
-------- ======== ========
(a) Net sales are based on location of seller.
AT DECEMBER 31,
---------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Long-lived assets (b):
U.S.......................................... $ 105 $ 67 $ 64
Mexico....................................... 38 37 48
Brazil....................................... 37 34 25
France....................................... 93 94 109
Italy........................................ 31 6 7
South Africa................................. 43 27 37
Switzerland.................................. 23 7 8
Other countries.............................. 20 17 20
------- ------- -------
Total...................................... $ 390 $ 289 $ 318
======= ======= =======
(b) Long-lived assets represent fixed assets net of accumulated
depreciation and goodwill.
(5) LONG-TERM DEBT AND LIQUIDITY
The following table presents our long-term debt:
DECEMBER 31, DECEMBER 31,
2001 2002
---- ----
(DOLLARS IN MILLIONS)
Senior Facilities:
Tranche A euro facility.................................... $ 194 $ -
Tranche A U.S. dollar facility............................. 23 -
Tranche B U.S. dollar facility............................. 313 137
Revolving credit facility.................................. 95 10
---------- ---------
Total Senior Facilities.................................. 625 147
Other European debt............................................. 6 2
Senior Notes:
Senior Notes due 2012...................................... - 550
Fair value of hedged debt obligations...................... - 8
Unamortized bond premium................................... - 6
---------- ---------
Total Senior Notes....................................... - 564
---------- ---------
Total................................................ $ 631 $ 713
========== =========
The aggregate maturities of long-term debt (excluding the fair value of
hedged debt obligations and unamortized bond premium relating to our Senior
Notes) for each of the five years subsequent to December 31, 2002 are:
2007
2003 2004 2005 2006 (AND THEREAFTER) TOTAL
---- ---- ---- ---- ---------------- -----
(DOLLARS IN MILLIONS)
$ 1 $ - $ - $ 10 $688 $699
19
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.
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
20
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.
Unsecured intercompany term notes in an aggregate principal amount
equal to $448 million (based on currency exchange rates in effect at December
31, 2002) 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 a result
of this limitation, the principal amount of unsecured intercompany term notes
pledged to secure the Senior Notes equals $399 million, or about 73% 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 $49 million (based on currency exchange rates in effect at December
31, 2002), and any pledged unsecured intercompany term notes that cease to be
pledged due to a reduction in the principal
21
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.
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 December 31, 2002, 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 December 31, 2002, 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.
22
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 December 31, 2002,(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 ($22 million of which debt
was outstanding at December 31, 2002)).
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).
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 unconditionally and irrevocably 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.
23
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.
At December 31, 2002, 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
December 31, 2002, 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 December 31,
2002, the interest rates on outstanding debt under the Senior Facilities were:
Tranche B Facility, 5.4%; dollar-denominated borrowings under the Revolving
Facility, 4.8%; and euro-denominated borrowings under the Revolving Facility,
6.4%. The weighted average interest rate on the Senior Facilities was 5.6%
during 2002.
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 the Senior Facilities
In April 2001, the Senior Facilities were amended to, among other
things, exclude certain expenses incurred in connection with the lawsuit
initiated by us against our former parents (up to
24
a maximum of $20 million, but not more than $3 million in any quarter) and
certain charges and payments in connection with antitrust fines, settlements and
expenses from the calculation of financial covenants. After giving effect to
subsequent amendments to the Senior Facilities, payments within the $340 million
charge recorded in 1997 are excluded from the calculation of financial covenants
and charges over and above the $340 million charge are excluded from the
calculation of financial covenants (until paid) up to a maximum of $75 million
reduced by the amount of certain debt (other than the Senior Notes) incurred by
us that is not incurred under the Senior Facilities ($22 million of which debt
was outstanding at December 31, 2002). As a result, the fine assessed by the EU
Competition Authority, as well as the additional $10 million charge recorded in
July 2001 and any payments related to such fine (including payments within the
$340 million charge), are excluded from such calculations.
In July 2001, in connection with an underwritten public offering of
common stock, the Senior Facilities were amended to, among other things, change
our financial covenants so that they were less restrictive than would otherwise
have been the case. In connection therewith, we agreed that our investments in
unrestricted subsidiaries after this amendment will be made in the form of
secured loans, which will be pledged to secure the Senior Facilities. In
connection therewith, we paid an amendment fee of $2 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 25 basis points.
In December 2001, the Senior Facilities were amended to, among other
things, permit a corporate realignment of our subsidiaries. In connection
therewith, we paid an amendment fee of $1 million.
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 to exclude any letter of credit issued to secure payment of the
antitrust fine assessed against us by the EU Competition Authority. In addition,
the amendment expanded our ability to make certain investments, including
investments in AET, and eliminated provisions relating to a spin-off of AET. 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 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 ($22 million of which debt was outstanding at December 31,
2002). In connection with the amendment and the consent, we paid fees and costs
of $1 million.
25
Leverage
We are highly leveraged and, as discussed in Note 14, have substantial
obligations in connection with antitrust investigations, lawsuits and claims (in
respect of which we have an unfunded reserve totaling $98 million). We had total
debt of $731 million (including $6 million for unamortized bond premium and $8
million for fair value of hedged debt obligations) and a stockholders' deficit
of $381 million at December 31, 2002. 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 2002, certain of our subsidiaries sold receivables totaling $186
million. If we had not sold such receivables, our accounts receivable and our
debt would have been about $46 million higher at December 31, 2002. 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 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 ($210 million, based on
currency exchange rates in effect at December 31, 2002), our 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.
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
26
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.
Equity Offering
On July 31, 2001, we sold an aggregate of 10,350,000 shares of our
common stock in a registered public offering at a public offering price of $9.50
per share. The gross proceeds from the offering were $98 million and the net
proceeds to us were $91 million. Sixty percent of the net proceeds were used to
prepay term loans under the Senior Facilities. Prepayments of $23 million under
the Tranche A Facility and $32 million under the Tranche B Facility were applied
against scheduled maturities of each Tranche in the order in which they were
due. The balance of the net proceeds were applied to reduce the outstanding
balance under the Revolving Facility.
Write-off of Capitalized Bank Fee and Related Debt Extinguishment Costs
In February 2000, we recorded a charge of $21 million related to our
debt recapitalization. The charge includes $5 million of bank and third party
fees and expenses, $9 million of redemption premium on our previously
outstanding senior subordinated notes, and write off of $7 million of deferred
debt issuance costs.
In February 2002, we recorded a charge of $3 million 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.
In May 2002, we recorded a charge of $1 million 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.
(6) INCOME TAXES
The following table summarizes the U.S. and non-U.S. components of
income (loss) before provision for income taxes, minority interest and income
from discontinued operations:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
U.S......................................................... $ (90) $ (139) $ (88)
Non-U.S..................................................... 105 66 55
------ ------- -------
$ 15 $ (73) $ (33)
====== ======== =======
27
Total income taxes were allocated as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Income from continuing operations........................... $ 2 $ 14 $ (16)
Income from discontinued operations......................... - 1 1
------ ------- -------
$ 2 $ 15 $ (15)
====== ======= =======
Income tax expense attributable to income from operations consists of:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
U.S. federal income taxes:
Current............................................ $ - $ - $ (12)
Deferred........................................... (23) (10) (25)
------ ------- -------
$ (23) $ (10) $ (37)
======= ======= =======
Non-U.S. income taxes
Current............................................ $ 27 $ 23 $ 22
Deferred........................................... (2) 1 (1)
------ ------- -------
$ 25 $ 24 $ 21
======= ======= =======
We have an income tax exemption from the Brazilian government on income
generated from graphite electrode and cathode production through 2006 and 2005,
respectively. The exemption reduced the net expense associated with income taxes
by $2 million in 2000 and $1 million in 2001 and 2002.
In 1998, we obtained an income tax exemption from the Swiss government.
The exemption reduced the net expense associated with income taxes by $8 million
in 2000, $8 million in 2001 and nil in 2002.
Income tax expense attributable to income from operations differed from
the amounts computed by applying the U.S. federal income tax rate of 35% to
pretax income from operations as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Tax at statutory U.S. federal rate................................ $ 5 $ (25) $ (12)
Nondeductible expenses associated with antitrust
investigations and related lawsuits and claims................. 1 5 -
State tax expense (benefit) (net of federal tax benefit).......... - (5) (13)
Restructuring charges with no tax benefit......................... - 9 3
Adjustments related to investment in subsidiaries................. - 26 -
Impact of dividend of foreign earnings ........................... 22 9 8
Non-U.S. net operating losses..................................... - - (1)
Non-U.S. tax exemptions and holidays.............................. (10) (9) -
Adjustments to deferred tax asset valuation allowance............. (20) (3) 16
Other............................................................. 4 7 (17)
---- ----- -----
$ 2 $ 14 $ (16)
==== ===== =====
28
The significant components of deferred income tax expense attributable
to income from operations are as follows:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Deferred tax expense (exclusive of the effects of changes in
the valuation allowance described below)............. $ (5) $ (6) $ (42)
Increase (decrease) in beginning of the year balance of the
valuation allowance for deferred tax assets.......... (20) (3) 16
------- ------- -------
$ (25) $ (9) $ (26)
======= ======= =======
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
2001 and December 31, 2002 are as follows:
AT DECEMBER 31,
---------------
2001 2002
---- ----
(Dollars in millions)
Deferred tax assets:
Fixed assets.............................................. $ 46 $ 38
Estimated liabilities and expenses associated with
antitrust investigations and related lawsuits and claims 1 1
Postretirement and other employee benefits................ 55 65
Foreign tax credit and other carryforwards................ 52 97
Provision for scheduled plant closings and other
restructurings.......................................... 4 2
Other..................................................... 35 38
------ ------
Total gross deferred tax assets......................... 193 241
Less: valuation allowance.............................. (27) (43)
------ -------
Total deferred tax assets............................. $ 166 $ 198
====== ======
Deferred tax liabilities:
Fixed assets................................................... $ 43 $ 43
Inventory...................................................... 6 6
Other.......................................................... 4 1
------ ------
Total deferred tax liabilities................................. 53 50
------ ------
Net deferred tax asset................................ $ 113 $ 148
====== ======
Deferred income tax assets and liabilities are classified on a net
current and non-current basis within each tax jurisdiction. Net deferred income
tax assets are included in prepaid expenses in the amount of $9 million at
December 31, 2001 and $14 million at December 31, 2002 and in other assets in
the amount of $140 million at December 31, 2001 and $171 million at December 31,
2002. Net deferred tax liabilities are included in accrued income and other
taxes in the amount of $5 million at December 31, 2001 and $4 million at
December 31, 2002 and separately stated as deferred income taxes in the amount
of $31 million at December 31, 2001 and $33 million at December 31, 2002.
During the 2000 fourth quarter, we entered into an intercompany
sale-leaseback transaction between two subsidiaries relating to a U.S. graphite
electrode facility, which allowed for utilization of foreign tax credits. This
transaction resulted in a tax effect of a book gain of $22 million being
classified as a deferred charge, which was included in other assets and was to
be amortized into income. In June 2001, as a result of the decision to shutdown
this facility, the
29
facility was sold back to the original subsidiary owner and impaired.
Accordingly, we then recognized a deferred tax asset for the resulting tax basis
in excess of the amount for financial reporting.
The net change in the total valuation allowance for 2002 was an
increase of $16 million. The change results primarily from the determination
that certain of our foreign tax credits and state net operating losses may not
be utilizable prior to expiration and the provision of an allowance related to
the impairment and restructuring of our Italian graphite electrode operations
for which the realization of a tax benefit is not probable.
We have total excess foreign tax credit carryforwards of $79 million at
December 31, 2002. Of these tax credit carryforwards, $20 million expire in
2003, $15 million expire in 2004, $6 million expire in 2006 and $38 million
expire in 2007 and beyond. On a recomputed basis, we used foreign tax credits to
reduce U.S. current tax liabilities in the amount of $16 million in 2001 and $2
million in 2002. Based upon the level of historical taxable income and
projections for future taxable income over the periods during which these
credits are utilizable, we believe it is more likely than not that we will
realize the tax benefits of these deferred tax assets net of the corresponding
$22 million of valuation allowances that exist at December 31, 2002.
Specifically, it is our intention to pursue tax planning strategies and one-time
events in order to utilize our foreign tax credit carryforwards prior to
expiration.
U.S. income taxes have not been provided on undistributed earnings of
foreign subsidiaries. Our intention is to reinvest these undistributed earnings
indefinitely. To the extent that our circumstances change or future earnings are
repatriated, we will provide for income tax on the earnings of the affected
foreign subsidiaries. We believe that any U.S. income tax on repatriated
earnings would be substantially offset by U.S. foreign tax credits.
(7) OTHER (INCOME) EXPENSE, NET
The following table presents an analysis of other (income) expense,
net:
FOR THE YEAR ENDED
DECEMBER 31,
------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Interest income............................................... $ (6) $ (2) $ (2)
Currency (gains) losses....................................... (4) (2) (28)
Bank fees..................................................... 2 2 2
Loss on sale of accounts receivable........................... 1 3 2
Legal expenses and settlements................................ 3
- -
Employee benefit curtailment costs............................ 1
- -
Former parent company lawsuit legal expenses.................. 3 1 1
Amortization of goodwill...................................... 2 2 -
(Gain) loss on sale of assets................................. 2 (1) -
Insurance related gains....................................... (5) - -
Expenses for withdrawn initial public offering of AET......... 2 - -
Write-off of capitalized bank fees and related debt
extinguishment costs......................................... 21 - 4
Securities class action and stockholder derivative lawsuits... (1) - -
Other......................................................... 3 (2) 5
------- ------- --------
Total other (income) expense, net............................. $ 20 $ 1 $ (12)
======= ======= ========
30
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 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. In 2002, we had $28 million in currency
gains, $21 million of which gain was due to currency translation on intercompany
loans and translation of financial statements of foreign subsidiaries which use
the dollar as their functional currency and $7 million of which related to
transactions with third parties.
(8) INTEREST EXPENSE
The following table presents an analysis of interest expense:
FOR THE YEAR ENDED
DECEMBER 31,
-------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Interest incurred on debt..................................... $ 69 $ 54 $ 56
Amortization of debt issuance costs........................... 2 2 3
Interest imputed on antitrust fine............................ 4 4 1
------- ------- -------
Total interest expense................................... $ 75 $ 60 $ 60
======= ======= =======
(9) SUPPLEMENTARY BALANCE SHEET DETAIL
The following tables present supplementary balance sheet details.
AT DECEMBER 31,
---------------
2001 2002
---- ----
(Dollars in millions)
Notes and accounts receivable:
Trade............................................................. $ 77 $ 85
Other............................................................. 19 24
------ ------
96 109
Allowance for doubtful accounts................................... (5) (5)
------ -------
$ 91 $ 104
====== ======
Property, plant and equipment:
Land and improvements............................................. $ 38 $ 41
Buildings......................................................... 158 166
Machinery and equipment and other................................. 695 753
Construction in progress.......................................... 27 35
------ ------
$ 918 $ 995
====== ======
Other assets:
Fair value of interest rate swap.................................. - 8
Pension assets.................................................... 4 4
Long-term receivables............................................. 6 2
Long-term investments............................................. 6 2
Capitalized bank fees............................................. 14 28
Cash surrender value of executive life insurance.................. 2 3
31
AT DECEMBER 31,
---------------
2001 2002
---- ----
(Dollars in millions)
Other............................................................. 5 3
------ ------
$ 37 $ 50
====== ======
Accounts payable:
Trade............................................................. $ 94 $ 82
Interest.......................................................... 5 23
------ ------
$ 99 $ 105
====== ======
Other accrued liabilities:
Accrued accounts payable.......................................... $ 19 $ 14
Accrued imputed interest.......................................... 6 5
Payrolls.......................................................... 3 4
Restructuring..................................................... 12 14
Employee compensation and benefits................................ 9 9
Liabilities and expenses associated with antitrust investigations
and related lawsuits and claims............................... 2 3
Other............................................................. 5 8
------ ------
$ 56 $ 57
====== ======
Other long-term obligations:
Postretirement benefits............................................... $ 80 $ 70
Employee severance costs.............................................. 4 4
Pension and related benefits.......................................... 26 59
Liabilities and expenses associated with antitrust investigations
and related lawsuits and claims................................... 52 49
Long-term portion of DOJ fine......................................... 47 46
Long-term environmental liabilities................................... 5 5
Unamortized gain on interest rate swap................................ - 9
Other................................................................. 17 16
------ ------
$ 231 $ 258
====== ======
The following table presents an analysis of the allowance for doubtful
accounts:
AT DECEMBER 31,
---------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Balance at beginning of year................................ $ 5 $ 4 $ 5
Additions................................................... 1 2 1
Deductions.................................................. (2) (1) (1)
------- ------ -----
Balance at end of year...................................... $ 4 $ 5 $ 5
======= ====== =====
(10) LEASES AND OTHER LONG TERM OBLIGATIONS
Lease commitments under noncancelable operating leases extending for
one year or more will require the following future payments:
(Dollars in millions)
2003...................................................................... $1
2004...................................................................... 1
2005...................................................................... 1
2006...................................................................... -
2007...................................................................... -
After 2007................................................................ 1
32
Total lease and rental expenses under noncancelable operating leases
extending one month or more were $4 million in 2000, $3 million in 2001 and $1
million in 2002.
During 2001, we outsourced our information technology function to CGI
Group Inc. ("CGI"). Under this ten-year agreement, CGI will manage our data
services, networks, desktops, telecommunications and legacy systems. The
following is a schedule of future payments for base services:
(Dollars in millions)
2003...................................................................... $6
2004...................................................................... 6
2005...................................................................... 5
2006...................................................................... 5
2007...................................................................... 5
After 2007................................................................ 17
In addition, we have a remaining commitment to purchase $3 million in
services above the base level over the remaining term of the agreement.
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. The following is a schedule of future payments for base services:
(Dollars in millions)
2003...................................................................... $2
2004...................................................................... 3
2005...................................................................... 4
2006...................................................................... 4
2007...................................................................... 4
After 2007................................................................ 18
(11) BENEFIT PLANS
RETIREMENT PLANS AND POSTRETIREMENT BENEFIT PLANS
Until February 25, 1991, we participated in the U.S. retirement plan of
Union Carbide Corporation ("UNION CARBIDE"). Effective February 26, 1991, we
formed our own U.S. retirement plan which covers substantially all U.S.
employees. Retirement and death benefits related to employee service through
February 25, 1991 are covered by the Union Carbide plan. Benefits paid by the
Union Carbide plan are based on final average pay through February 25, 1991,
plus salary increases (not to exceed 6% per year) until January 26, 1995 when
Union Carbide ceased to own at least 50% of the equity of GTI. All our employees
who retired prior to February 25, 1991 are covered under the Union Carbide plan.
Pension benefits under our plan are based primarily on years of service and
compensation levels prior to retirement. Net pension cost for our plan was $7
million in 2000 and 2001 and $6 million in 2002. Prior to January 1, 2002, our
plan was a defined benefit plan. Effective January 1, 2002, a new defined
contribution plan was established for U.S. employees. Some employees will have
the option to remain in the defined benefit plan for five more years. At the end
of five years, the value of the employees' retirement benefit will be frozen,
and the employee will then begin participating in the defined contribution plan.
Those employees without the option to remain in the defined benefit plan will
begin participating in the defined contribution plan and their benefits under
the defined benefit
33
plan were frozen as of December 31, 2001. Under the new defined contribution
plan, we will make quarterly contributions to each individual employee account
equal to 2.5% of the employee's pay up to the social security wage base ($84,000
in 2002) plus 5% of their pay above the social security wage base.
Pension coverage for employees of foreign subsidiaries is provided, to
the extent deemed appropriate, through separate plans. Obligations under such
plans are systematically provided for by depositing funds with trustees, under
insurance policies or by book reserves. Net pension costs for plans of foreign
subsidiaries amounted to nil in 2000, $4 million in 2001 (which includes a $4
million settlement loss for the Canadian pension plan) and $1 million in 2002.
The components of our consolidated net pension costs are as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Service cost.................................................. $ 7 $ 7 $ 6
Interest cost................................................. 15 14 11
Expected return on assets..................................... (15) (14) (11)
Amortization ................................................. - - -
Settlement (gain) loss........................................ - 4 1
Curtailment loss.............................................. - - -
----- ----- -----
Net pension cost......................................... $ 7 $ 11 $ 7
===== ===== =====
We also provide health care and life insurance benefits for eligible
retired employees. These benefits are provided through various insurance
companies and health care providers. We accrue the estimated net postretirement
benefit costs during the employees' credited service periods. The components of
our consolidated net postretirement benefit costs are as follows:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
---- ---- ----
(Dollars in millions)
Service cost.................................................. $ 2 $ 2 $ -
Interest cost................................................. 6 6 4
Amortization of prior service cost............................ (1) (2) (8)
---- ----- -----
Net postretirement benefit cost.......................... $ 7 $ 6 $ (4)
==== ===== =====
The reconciliation of beginning and ending balances of benefit
obligations under, and fair value of assets of, all of our pension and
postretirement benefit plans, and the funded status of the plans, are as
follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(Dollars in millions)
Changes in benefit obligation:
Net benefit obligation at beginning of year.... $ 205 $ 177 $ 83 $ 63
Service cost................................... 7 6 2 -
Interest cost.................................. 14 11 6 4
Impact of plan amendments...................... - - (68) (9)
34
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(Dollars in millions)
Changes in benefit obligation:
Foreign currency exchange rate changes......... (8) 6 (2) (1)
Actuarial loss................................. 4 14 48 (3)
Curtailment.................................... - (8) - -
Settlement..................................... (36) (6) - -
Gross benefits paid............................ (9) (8) (6) (7)
------ ------ ------ ------
Net benefit obligation at end of year.... $ 177 $ 192 $ 63 $ 47
====== ====== ====== ======
Changes in plan assets:
Fair value of plan assets at beginning of year. $ 179 $ 127 $ - $ -
Actual return on plan assets................... (5) (11) - -
Foreign currency exchange rate changes......... (10) 5 - -
Employer contributions......................... 8 5 6 7
Participants contributions..................... - - - -
Settlement..................................... (36) (6) - -
Gross benefits paid............................ (9) (8) (6) (7)
------ ------ ------ ------
Fair value of plan assets at end of year. $ 127 $ 112 $ - $ -
====== ====== ====== ======
Reconciliation of funded status:
Funded status at end of year $ (50) $ (80) $ (63) $ (47)
Unrecognized net transition
asset....................................... (2) (1) - -
Unrecognized prior service cost................ 1 1 (67) (64)
Unrecognized net actuarial loss................ 21 49 50 41
------ ------ ------ ------
Net amount recognized at end of year........ $ (30) $ (31) $ (80) $ (70)
====== ====== ====== ======
Amounts recognized in the statement of financial
position consist of:
Prepaid benefit cost........................... $ 4 $ 4 $ (3) $ -
Accrued benefit liability...................... (36) (60) (77) (70)
Intangible asset............................... - 1 - -
Accumulated other comprehensive income......... 2 24 - -
------ ------ ------ ------
Net amount recognized....................... $ (30) $ (31) $ (80) $ (70)
====== ====== ====== ======
Assumptions used to determine net pension costs, pension projected
benefit obligation, net postretirement benefit costs and postretirement benefits
projected benefit obligation are as follows:
PENSION BENEFITS POSTRETIREMENT BENEFITS
---------------- -----------------------
AT DECEMBER 31, AT DECEMBER 31,
--------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
Weighted average assumptions as of measurement date:
Discount rate............................... 7.34% 6.71% 7.79% 7.04%
Expected return on plan assets ............. 8.59% 7.80% - -
Rate of compensation increase............... 4.73% 4.04% 3.39% -
Health care cost trend on covered charges:
Initial.............................. N/A N/A 6.88% 6.68%
Ultimate............................. N/A N/A 5.34% 5.38%
Years to ultimate.................... N/A N/A 6 6
35
Assumed health care cost trend rates have a significant effect on the
amounts reported for net postretirement benefits. A one percentage point change
in the health care cost trend rate would change the accumulated postretirement
benefits net benefit obligation by approximately $5 million at December 31, 2001
and December 31, 2002 and change net postretirement benefit costs by
approximately $1 million for both 2001 and 2002.
OTHER NON-QUALIFIED PLANS
Since January 1, 1995, we have established various unfunded,
non-qualified supplemental retirement and deferred compensation plans for
certain eligible employees. We established benefits protection trusts (the
"Trust") to partially provide for the benefits of employees participating in
these plans. At December 31, 2001 and December 31, 2002, the Trust had assets of
approximately $2 million, which are included in other assets on the Consolidated
Balance Sheets. These assets include 426,400 shares of common stock which we
contributed to the Trust in March 2001. These shares, if later sold, could be
used for partial funding of our future obligations under certain of our
compensation and benefit plans. The shares held in Trust are not considered
outstanding for purposes of calculating earnings per share until they are
committed to be sold or otherwise used for funding purposes.
SAVINGS PLAN
Our employee savings plan provides eligible employees the opportunity
for long term savings and investment. Participating employees can contribute
1.0% to 7.5% of employee compensation as basic contributions and an additional
0.5% to 10.0% of employee compensation as supplemental contributions. For 2001
and 2002, we contributed on behalf of each participating employee an amount
equal to 50% of the employee's basic contribution. We contributed $2 million in
2000 and $1 million in 2001 and 2002.
INCENTIVE PLANS
In 1998, we implemented a global profit sharing plan for our worldwide
employees. This plan is based on our global financial performance. The cost for
this plan was $2 million in 2000 and nil in 2001 and 2002.
(12) RESTRUCTURING AND IMPAIRMENT CHARGES
We have had several restructuring and impairment charges during the
past few years. At December 31, 2002, the outstanding balance of our
restructuring reserve was $14 million. The components of this balance are $8
million related to the mothballing of our graphite electrode operations in
Caserta, Italy, $4 million related primarily to remaining lease payments on our
former corporate headquarters, and $2 million related to plant closure cost
associated with the closure of our Canadian graphite electrode operations.
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. (together with its affiliates, "JILIN"). The impairment results
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.
36
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) 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 that 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 on long-lived assets related to assets located at our facility
in Caserta, Italy. The remaining $3 million related to the impairment of
available-for-sale securities.
In the 2001 third quarter, we recorded a $2 million restructuring
charge and impairment loss on long-lived assets related to a corporate
realignment of our businesses, the relocation of our corporate headquarters and
the shutdown of our coal calcining operations located in Niagara Falls, New
York. The relocation was substantially completed in 2001. The charge includes
severance and related benefits associated with a workforce reduction of 24
employees and impairment of leasehold improvement assets.
In 2001 third quarter, we reversed $2 million of prior restructuring
charges based on revised lower estimates of workforce reductions and plant
closure costs, and we reclassified $4 million of prior restructuring charges
related to on-site waste disposal post-monitoring costs to other long term
obligations.
In the 2001 second quarter, we recorded a $58 million charge for
restructuring and impairment loss on long-lived assets related to the shutdown
of our graphite electrode manufacturing operations in Clarksville and Columbia,
Tennessee and our coal calcining operations in Niagara Falls, New York. The $58
million charge includes restructuring charges of $2 million for severance and
related benefits associated with a workforce reduction of 171 employees and $3
million in plant shutdown and related costs. The remaining $53 million relates
to the impairment loss on long-lived assets. The shutdown was completed in the
2001 third quarter.
In the 2000 fourth quarter, we recorded a charge of $4 million in
connection with a corporate restructuring, mainly for severance and related
benefits associated with a workforce reduction of 85 employees. The functional
areas affected included finance, accounting, sales, marketing and
administration. In 2001, we paid about $1 million of these expenses. In the 2001
third quarter, we revised the workforce reduction estimate to 45 employees and
reversed a portion of the $4 million charge. The reversal is part of the $2
million reversal described above.
37
In the 2000 third quarter, we recorded an impairment loss on long-lived
assets of $3 million in connection with the re-sourcing of our U.S. cathode
production to our facilities in Brazil and France and the reduction of graphite
electrode production capacity to accommodate such increased cathode production
in Brazil and France. This cash charge related to the write-off of certain
long-lived assets located at one of our facilities in the U.S.
In the 2000 first quarter, we recorded a restructuring charge of $6
million in connection with a restructuring of our advanced graphite materials
business. Key elements of the restructuring included elimination of certain
product lines and rationalization of operations to reduce costs and improve
profitability of remaining product lines. This rationalization included
discontinuing certain manufacturing processes at one of our facilities in the
U.S. that will be performed at our other facilities in the future. Based on
subsequent developments in the 2000 third quarter, we decided not to demolish
certain buildings. Therefore, in the 2000 third quarter, we reversed the $4
million of the charge related to demolition and related environmental costs. The
$2 million balance of the charge included estimated severance costs for 65
employees. The restructuring was completed in 2000.
The fair value of the long-lived assets was calculated on the basis of
discounted estimated future cash flows. Estimates of the discounted future cash
flows are subject to significant uncertainties and assumptions. Accordingly,
actual values could vary significantly from such estimates.
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
PLANT
SHUTDOWN
SEVERANCE AND AND RELATED POST MONITORING
RELATED COSTS COSTS AND RELATED COSTS TOTAL
------------- ----------- ----------------- -----
(Dollars in millions)
BALANCE AT JANUARY 1, 2000............... $ 13 $ 10 $ 5 $ 28
-------- -------- -------- ---------
Restructuring charges in 2000............ 6 3 1 10
Payments in 2000......................... (5) (1) (1) (7)
Change in estimate and impact of currency
rate changes in 2000................. (1) (3) (1) (5)
--------- ---------- --------- ---------
BALANCE AT DECEMBER 31, 2000............. $ 13 $ 9 $ 4 $ 26
Restructuring charges in 2001............ 4 8 - 12
Payments in 2001......................... (13) (5) - (18)
Non-cash write-offs in 2001.............. - (4) - (4)
Reclassification of on-site disposal and
monitoring costs..................... - - (4) (4)
--------- -------- --------- ---------
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
========= ========== ========= =========
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
38
(13) MANAGEMENT COMPENSATION AND INCENTIVE PLANS
We have adopted several stock incentive plans. The aggregate number of
shares reserved under the plans since their initial adoption was 14,500,000
shares at December 31, 2001 and December 31, 2002. The plans permit options and
restricted stock to be granted to employees and, in the case of one plan since
March 1998, also to non-employee directors.
STOCK OPTIONS
In 1995, we granted 12-year options to management to purchase 4,761,000
shares at an exercise price of $7.60 per share, of which options for 3,967,400
shares vested at the time of our initial public offering in 1995, and the
balance were performance options, one half of which were to vest in each of 1998
and 1999 on achievement of designated EBITDA targets. In December 1997, GTI's
Board of Directors accelerated the vesting of the 1998 performance options. We
did not achieve the 1999 performance targets and, accordingly, the 1999
performance options were cancelled.
In 1996, we granted 10-year options to mid-management to purchase
960,000 shares at an exercise price of $35.00 per share, and granted additional
10-year options to mid-management to purchase 4,000 shares at an exercise price
of $40.44 per share. In 1997, we granted 10-year options to mid-management to
purchase 61,500 shares at an exercise price of $39.31 per share. The options
vest eight years from the grant date. Accelerated vesting occurs if the market
price of the common stock equals or exceeds specified amounts. At December 31,
2002, 451,350 of such options were vested.
In 1997, we granted vested 10-year options to management to purchase
155,000 shares at an exercise price of $37.59 per share. At December 31, 2002,
all such options were vested.
In 1998, we granted 10-year options to purchase shares as follows:
o Options for 641,000 shares were granted to certain officers and
directors at exercise prices ranging from $29.22 to $34.36 per
share. Options for 320,000 shares vest one year from the grant
date, options for 221,000 shares vest two years from the grant
date and options for 100,000 shares vest three years from the
grant date. At December 31, 2002, all of such options were
vested.
o Options for 1,935,000 shares were granted to certain officers and
management at exercise prices ranging from $15.50 to $17.06 per
share. Options for 17,000 shares vested on the grant date,
options for 628,000 shares vest after one year from the grant
date, and all remaining options vest seven years from the grant
date, subject to accelerated vesting if the market price for the
common stock equals or exceeds specified amounts. At December 31,
2002, 1,834,732 of such options were vested.
In 1999, we granted 10-year options to purchase shares as follows:
o Options for 409,000 shares were issued to certain officers,
management and directors at exercise prices ranging from $14.13
to $25.81 per share. Options for 45,359 shares vested on the
grant date, options for 274,101 shares vest one year from the
grant date, and all remaining options vest seven years from the
grant date, subject to accelerated vesting if the market price
for the common stock equals or exceeds specified amounts. At
December 31, 2002, 345,232 of such options were vested.
39
In 2000, we granted 10-year options to purchase shares as follows:
o Options for 2,615,511 shares were issued to certain officers,
management and directors at exercise prices ranging from $8.56 to
$19.06 per share. Options for 2,070,100 shares vest two years
from the grant date, options for 200,000 shares vest five years
from the grant date, 175,901 shares vest one year from the grant
date, options for 12,200 vested at the grant date, options for
35,040 shares vested ratably over the course of 2000 and all
remaining options vest seven years from the grant date, subject
to accelerated vesting if the market price for the common stock
equals or exceeds specified amounts. At December 31, 2002,
2,136,645 of such options were vested.
In 2001, we granted 10-year options to purchase shares as follows:
o Options for 1,755,170 shares were issued to certain officers,
management and directors at exercise prices ranging from $8.56 to
$11.95 per share. Options for 1,644,300 shares vest two years
from the grant date and options for 110,870 shares vested on the
grant date. At December 31, 2002, 120,870 of these options were
vested.
In 2002, we granted 10-year options to purchase shares as follows:
o Options for 114,101 shares were issued to certain officers,
management and directors at exercise prices ranging from $5.13 to
$10.77 per share. Options for 19,400 shares vest in two years
from the grant date, options for 31,000 shares vest as of January
1, 2003, options for 10,321 shares vest as of February 26, 2003,
options for 30,000 shares vest as of September 17, 2004, options
for 5,000 shares vest as of November 12, 2004, options for 8,380
shares vested at one grant date and options for 10,000 shares
vested as of December 31, 2002. At December 31, 2002, 18,380 of
these options were vested.
The following table summarizes the status of our stock-based
compensation plans at the dates and for the period indicated:
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
------------------------- -------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
(Shares in thousands)
Time vesting options:
Outstanding at beginning of
year............................... 5,277 $ 20.15 7,842 $ 16.55 9,194 $ 15.28
Granted at market price.............. 2,615 9.53 1,755 8.99 114 9.42
Granted at price exceeding
market............................. - - - - - -
Granted at price below market........ - - - - - -
Exercised............................ (16) 13.81 (188) 7.60 (134) 7.60
Forfeited/canceled................... (34) 32.37 (215) 17.12 (221) 13.49
-------- -------- --------
Outstanding at end of year......... 7,842 16.55 9,194 15.28 8,953 15.36
======== ======== ========
Options exercisable at year
40
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------
2000 2001 2002
------------------------- -------------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
(Shares in thousands)
end................................ 4,710 $ 18.65 5,309 $ 18.11 6,797 $ 16.19
Weighted-average fair value of
options granted during year:
At market.......................... 5.97 5.58 6.01
Exceeding market................... - - -
Below market....................... - - -
Performance vesting options:
Outstanding at beginning of
year............................... 546 $ 7.60 401 $ 7.60 378 $ 7.60
Granted.............................. - - - - - -
Exercised............................ (22) 7.60 (23) 7.60 - -
Forfeited/canceled................... (123) 7.60 - - - -
-------- -------- --------
Outstanding at end of year......... 401 7.60 378 7.60 378 7.60
======== ======== ========
Options exercisable at year
end................................ 401 $ 7.60 378 $ 7.60 378 $ 7.60
The fair value of each stock option is estimated on the grant date
using the Black-Scholes option pricing model with the following weighted-average
assumptions for grants in 2000, 2001 and 2002, respectively: dividend yield of
0.0% for all years; expected volatility of 50% in 2000, 52% in 2001 and 55% in
2002; risk-free interest rates of 5.5% in 2000, 4.8% in 2001 and 4.3% in 2002;
and expected lives of 8 years for all years.
The following table summarizes information about stock options
outstanding at December 31, 2002:
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:
$5.13-10.77 4,728 7 years $ 8.48 3,166 $ 8.26
$11.60 to $19.06 2,587 6 years 16.38 2,254 16.87
$22.81 to $29.22 142 6 years 25.74 141 25.74
$30.59 to $40.44 1,496 4 years 34.37 1,236 34.15
----- -----
8,953 15.36 6,797 16.19
===== =====
Performance vesting options:
$7.60 378 5 years $ 7.60 378 $ 7.60
41
OTHER
In 1998, we entered into a five-year employment agreement with our
current chairman of the board.
In 2000, we granted 100,000 restricted shares to our current chairman
of the board, and we are amortizing the value of those shares as of the grant
date ($2 million) over the vesting period which extends through 2004.
In 2002, we granted 512,200 shares of restricted stock to employees. We
also recorded a $5 million non-cash compensation charge associated with the
accelerated vesting of those shares.
Under our executive employee loan program, certain members of
management borrowed less than $1 million in 2000 and none in 2001 or 2002.
During 2002, all these loans were repaid as described below. Under our executive
employee stock purchase programs, certain members of management purchased, at
the fair market value on the date of purchase, 18,556 shares in 2000 and none in
2001 or 2002. In 2002, management participating in these programs repaid all
outstanding loans with shares of common stock valued at fair market value on the
date of repayment and cash. These programs have been discontinued.
(14) CONTINGENCIES
Antitrust Investigations
In April 1998, pursuant to a plea agreement between 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 rate of interest then in effect. At December 31,
2002, the statutory rate of interest was 1.41% 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
42
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 $53 million,
based on exchange rates in effect at December 31, 2002) 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.
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.
43
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 December 31, 2002, 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.
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
44
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.
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
45
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 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 December
31, 2002, $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 December 31, 2002, we have paid an aggregate of $252 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At December 31, 2002, $98 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 December 31, 2002 was about $6 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
46
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
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
December 31, 2002, 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.
(15) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated based upon the
provisions of SFAS No. 128, adopted in 1997, using the following share data:
2000 2001 2002
---- ---- ----
Weighted-average common shares outstanding for basic
calculation.......................................... 45,224,204 49,719,938 55,941,878
Add: Effect of stock options............................. 589,208 - -
------------- ----------- -----------
Weighted-average common shares outstanding, adjusted
for diluted calculation.............................. 45,813,412 49,719,938 55,941,878
============= ========== ==========
As a result of the net loss from operations reported in 2002, all
779,051 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. The calculation of weighted average
common shares outstanding for the diluted calculation excludes options for
3,669,498 shares in 2000, 5,243,593 shares in 2001 and 5,524,535 shares in 2002
because they
47
were not dilutive due to the fact that the exercise prices were greater than the
weighted average market price of the common stock.
(16) STOCKHOLDER RIGHTS PLAN
Effective August 7, 1998, GTI adopted a Stockholder Rights Plan (the
"RIGHTS PLAN"). Under the Rights Plan, one preferred stock purchase right (a
"RIGHT") was distributed on September 21, 1998 to stockholders of record on
August 20, 1998 as a dividend on each share of common stock outstanding on the
record date. Each share of common stock issued after the record date is
accompanied by a Right.
When a Right becomes exercisable, it entitles the holder to buy one
one-thousandth of a share of a new series of preferred stock for $110. The
Rights are subject to adjustment upon the occurrence of certain dilutive events.
The Rights will become exercisable only when a person or group becomes the
beneficial owner of 15% or more of the outstanding shares of common stock or 10
days after a person or group announces a tender offer to acquire beneficial
ownership of 15% or more of the outstanding shares of common stock. No
certificates representing the Rights will be issued, and the Rights are not
transferable separately from the common stock, unless the Rights become
exercisable.
Under certain circumstances, holders of Rights, except a person or
group described above and certain related parties, will be entitled to purchase
shares of common stock (or, in certain circumstances, other securities or
assets) at 50% of the price at which the common stock traded prior to the
acquisition or announcement (or 50% of the value of such other securities or
assets). In addition, if GTI is acquired after the Rights become exercisable,
the Rights will entitle those holders to buy the acquiring company's common
shares at a similar discount.
GTI is entitled to redeem the Rights for one cent per Right prior to
the time when the Rights become exercisable. If not redeemed, the Rights will
expire on August 7, 2008.
The preferred stock issuable upon exercise of Rights consists of Series
A Junior Participating Preferred Stock, par value $.01 per share, of GTI. In
general, each share of that preferred stock will be entitled to a minimum
preferential quarterly dividend payment equal to the greater of $10.00 per share
or 1,000 times the quarterly dividend declared on the common stock, will be
entitled to a liquidation preference of $110,000 and will have 1,000 votes,
voting together with the common stock.
(17) 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
48
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. GTI 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, 2001 and December 31, 2002 and
condensed consolidating statements of operations and cash flows for the years
ended December 31, 2001 and 2002 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 December 31, 2002, retained
earnings of our subsidiaries subject to such restrictions were approximately
$459 million. Investments in subsidiary companies are recorded on the equity
basis. See Note 19 for discussion regarding discontinued operations.
49
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2002
At December 31, 2002
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ - $ 4 $ 7 $ - $ 11
Notes and accounts receivable, net............ - 752 466 255 (1,369) 104
Inventories:
Raw materials and supplies................ - - 2 38 (1) 39
Work in process........................... - - 30 71 1 102
Finished goods............................ - - 10 23 (3) 30
--------- ---------- ---------- --------- --------- ---------
- - 42 132 (3) 171
Prepaid expenses and deferred income taxes.... - - 8 13 - 21
Current assets of discontinued operations..... - - 14 - - 14
--------- ---------- ---------- --------- --------- ---------
Total current assets...................... - 752 534 407 (1,372) 321
Net fixed assets.............................. - - 36 268 (4) 300
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 $ 30 $ 89 $ (61) $ 105
Short-term debt............................... 416 - 231 668 (1,297) 18
Accrued income and other taxes................ (24) (3) 36 18 (4) 23
Other accrued liabilities..................... - - 36 39 (18) 57
Current liabilities of discontinued
operations.................................. - - 3 - - 3
--------- ---------- ---------- --------- --------- ---------
Total current liabilities................. 413 23 336 814 (1,380) 206
--------- ---------- ---------- --------- --------- ---------
Long-term debt................................... - 711 - 2 - 713
Other long-term obligations...................... - 9 203 45 1 258
Deferred income taxes............................ - (5) (1) 36 3 33
Minority stockholders' equity in consolidated
entities....................................... - - - 30 - 30
Stockholders' equity (deficit)................... (366) 48 (1) (132) 70 (381)
--------- ---------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity $ 47 $ 786 $ 537 $ 795 $ (1,306) $ 859
(deficit)................................... ========= ========== ========== ========= ========= =========
50
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2001
At December 31, 2001
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ 16 $ 8 $ 14 $ - $ 38
Notes and accounts receivable, net............ - 885 438 365 (1,597) 91
Inventories:
Raw materials and supplies................ - - 2 32 (2) 32
Work in process........................... - - 44 66 - 110
Finished goods............................ - - 8 26 (1) 33
-------- -------- ---------- --------- --------- ---------
- - 54 124 (3) 175
Prepaid expenses and deferred income taxes.... - - 7 5 - 12
Current assets of discontinued operations..... - - 6 - - 6
-------- -------- ---------- --------- --------- ---------
Total current assets...................... - 901 513 508 (1,600) 322
-------- -------- ---------- --------- --------- ---------
Net fixed assets.............................. - - 43 233 (4) 272
Deferred income taxes and other assets........... 58 29 216 74 (183) 194
Assets from discontinued operations............. - - 9 - - 9
-------- -------- ---------- --------- --------- ---------
Total assets.................................. $ 58 $ 930 $ 781 $ 815 $ (1,787) $ 797
======== ======== ========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 8 $ 13 $ 48 $ 92 $ (62) $ 99
Short-term debt............................... 397 274 407 450 (1,521) 7
Accrued income and other taxes................ (15) - 41 18 - 44
Other accrued liabilities..................... - - 38 33 (15) 56
Current liabilities of discontinued
operations.................................. - - 4 - - 4
-------- -------- ---------- --------- --------- ---------
Total current liabilities................. 390 287 538 593 (1,598) 210
Long-term debt................................... - 626 - 21 (16) 631
Other long-term obligations...................... - - 197 34 - 231
Deferred income taxes............................ - - 4 32 (5) 31
Liabilities from discontinued operations......... - - 1 - - 1
Minority stockholders' equity in consolidated
entities....................................... - - - 23 2 25
Stockholders' equity (deficit)................... (332) 17 41 112 (170) (332)
-------- -------- ---------- --------- --------- ---------
Total liabilities and stockholders' equity $ 58 $ 930 $ 781 $ 815 $ (1,787) $ 797
(deficit)................................... ======== ======== ========== ========= ========= =========
51
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
For the Year Ended December 31, 2002
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales............................................. $ - $ - $ 211 $ 529 $ (144) $ 596
Cost of sales......................................... - - 175 408 (122) 461
-------- ---------- ---------- --------- --------- ---------
Gross profit....................................... - - 36 121 (22) 135
Research and development, selling, administrative and
other expenses, restructuring charges, impairment
losses on long-lived and other assets, restricted
stock vesting, antitrust investigations and related
lawsuits and claims, corporate realignment and
related expenses, and other (income) expense, net.. 7 16 (53) 23 115 108
Interest income....................................... - (59) - (4) 63 -
Interest expense...................................... 21 62 5 35 (63) 60
-------- ---------- ---------- --------- --------- ---------
Income (loss) before provision for (benefits
from) income taxes............................... (28) (19) 84 67 (137) (33)
Provision for (benefit from) income taxes............. (10) (6) (19) 19 - (16)
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entities............. (18) (13) 103 48 (137) (17)
Minority stockholders' share of income................ - - - 2 - 2
Income from discontinued operations................... - - 1 - - 1
Equity in earnings of subsidiaries.................... - - 91 - (91) -
-------- ---------- ---------- --------- --------- ---------
Net income (loss)............................... $ (18) $ (13) $ 13 $ 46 $ (46) $ (18)
======== ========== ========== ========= ========= =========
For the Year Ended December 31, 2001
------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales............................................. $ - $ - $ 226 $ 547 $ (139) $ 634
Cost of sales......................................... - - 201 372 (118) 455
-------- ---------- ---------- --------- --------- ---------
Gross profit....................................... - - 25 175 (21) 179
Research and development, selling, administrative and
other expenses, restructuring charges, impairment
losses on long-lived and other assets, restricted
stock vesting, antitrust investigations and related
lawsuits and claims, corporate realignment and
related expenses, andother (income) expense, net... 4 (2) 110 93 (13) 192
Interest income..................................... - (73) (4) (21) 98 -
Interest expense.................................... 34 74 25 24 (97) 60
-------- ---------- ---------- --------- --------- ---------
Income (loss) before provision for (benefits
from) income taxes............................. (38) 1 (106) 79 (9) (73)
Provision for (benefit from) income taxes........... (15) - 8 21 - 14
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entities........... (23) 1 (114) 58 (9) (87)
Minority stockholders' share of income.............. - - - 2 - 2
Income from discontinued operations................. - - 2 - - 2
Equity in earnings of subsidiaries.................. 64 - (47) - (17) -
-------- ---------- ---------- --------- --------- ---------
Net income (loss)............................. $ (87) $ 1 $ (65)$ 56 $ 8 $ (87)
======== ========== ========== ========= ========= =========
52
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
(CONTINUED)
At December 31, 2000
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales........................................... $ - $ - $ 293 $ 626 $ (156) $ 763
Cost of sales....................................... - - 264 422 (137) 549
-------- ---------- ---------- --------- --------- ---------
Gross profit..................................... - - 29 204 (19) 214
Research and development, selling, administrative and
other expenses, restructuring charges, impairment
losses on long-lived and other assets, restricted
stock vesting, antitrust investigations and related
lawsuits and claims, corporate realignment and
related expenses, and other (income) expense, net. 1 1 12 73 37 124
Interest income.................................. (8) (60) (32) (21) 121 -
Interest expense.................................... 38 61 74 23 (121) 75
Income (loss) before provision for (benefits -------- ---------- ---------- --------- --------- ---------
from) income taxes............................. (31) (2) (25) 129 (56) 15
Provision for (benefit from) income taxes........... - - (26) 28 - 2
-------- ---------- ---------- --------- --------- ---------
Income (loss) of consolidated entities........... (31) (2) 1 101 (56) 13
Minority stockholders' share of income.............. - - - 3 - 3
Income from discontinued operations................. - - - - - -
Equity in earnings of subsidiaries.................. (41) - (42) - 83 -
-------- ---------- ---------- --------- --------- ---------
Net income (loss)............................. $ 10 $ (2) $ 43 $ 98 $ (139) $ 10
======== ========== ========== ========= ========= =========
53
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 2001 AND 2002
At December 31, 2002
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities
from continuing operations....................... $ (20) $ 76 $ 81 $ (188) $ (9) $ (60)
Net cash provided by operating activities from
discontinued operations.......................... - - - - - -
-------- ---------- ---------- --------- --------- ---------
Net cash provided by (used in) operating activities. (20) 76 81 (188) (9) (60)
Net cash provided by (used in) investing activities. - 127 91 77 (345) (50)
Net cash provided by (used in) financing activities. 20 (219) (176) 100 354 79
-------- ---------- ---------- --------- --------- ---------
Net increase (decrease) in cash and cash equivalents - (16) (4) (11) - (31)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - 4 - 4
Cash and cash equivalents at beginning of period.... - 16 8 14 - 38
-------- ---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ - $ 4 $ 7 $ - $ 11
======== ========== ========== ========= ========= =========
At December 31, 2001
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities
from continuing operations....................... $ (38) $ 15 $ 183 $ (63) $ 83 $ 14
Net cash provided by operating activities from
discontinued operations.......................... - - 3 - - 3
-------- ---------- ---------- --------- --------- ---------
Net cash provided by (used in) operating activities. (38) 15 186 (63) (83) 17
Net cash provided by (used in) investing activities. - 18 (427) (71) 441 (39)
Net cash provided by (used in) financing activities. 38 (48) 242 141 (358) 15
-------- ---------- ---------- --------- --------- ---------
Net increase in cash and cash equivalents........... - (15) 1 7 - (7)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (2) - (2)
Cash and cash equivalents at beginning of period.... - 31 7 9 - 47
-------- ---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ 16 $ 8 $ 14 $ - $ 38
======== ========== ========== ========= ========= =========
At December 31, 2000
--------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities
from continuing operations....................... $ (169) $ (26) $ 351 $ 96 $ (160) $ 92
Net cash provided by operating activities from
discontinued operations.......................... - - 2 - - 2
-------- ---------- ---------- --------- --------- ---------
Net cash provided by (used in) operating activities. (169) (26) 353 96 (160) 94
Net cash provided by (used in) investing activities. 97 (873) 283 (58) 501 (50)
Net cash provided by (used in) financing activities. 72 930 (630) (44) (341) (13)
Net increase in cash and cash equivalents........... - 31 6 (6) - 31
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (1) - (1)
Cash and cash equivalents at beginning of period.... - - 1 16 - 17
-------- ---------- ---------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ 31 $ 7 $ 9 $ - $ 47
======== ========== ========== ========= ========= =========
54
Unsecured intercompany term notes in an aggregate principal amount, at
December 31, 2002, equal to $492 million (based on currency exchange rates in
effect at December 31, 2002), 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 an annual report on Form 10-K. 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 AET 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.
(18) SUBSEQUENT EVENTS
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. Such transaction was exempt from the registration under Section 4(2) of
the Securities Act of 1933 because such transaction did not involve the public
offering of securities.
In the 2003 first quarter, we entered into an additional $200 million
notional amount interest rate swap through the remaining term of our 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 our interest rate swaps for $11 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 our Senior Notes.
(19) CURRENT AND PRIOR YEAR RECLASSIFICATIONS
We reclassified certain financial information at December 31, 2001 and
2002 and for each of the three years ended December 31, 2000, 2001 and 2002 to
give effect to changes in
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accounting for reportable segments, discontinued operations and the adoption of
SFAS No. 145.
These changes have been previously disclosed either in our Annual
Report on Form 10-K for the year ended December 31, 2002 or Quarterly Report
on Form 10-Q for the quarter ended March 31, 2003 or June 30, 2003. The
reclassifications do not change previously reported consolidated net income,
basic or diluted earnings per share, consolidated total assets or liabilities,
or consolidated cash flows from operating activities, investing activities or
financial activities.
Change in Reportable Segments
In 2002, our businesses were organized around two operating divisions,
the Graphite Power Systems Division, which included the electrode and cathode
businesses, and the Advanced Energy Technology Division, which included the
natural graphite and advanced synthetic graphite and carbon materials
businesses. In accordance with SFAS No. 131, "Segment Reporting," we segregated
our businesses into two reportable segments which corresponded with our two
divisions.
In 2003, we further refined the organization of our businesses into the
following 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
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, we segregated our businesses into the
following segments: Synthetic Graphite, which consists of the synthetic graphite
line of business; and Other, which consists of the natural graphite and advanced
carbon materials lines of business. We began reporting financial information
using these new segments in our Quarterly Report on Form 10-Q for the quarter
ended March 31, 2003. See note 4.
As required by SFAS No. 131, consolidated financial statements
published by us in the future will reflect modifications to our reportable
segments resulting from this organizational change, including reclassification
of all comparable prior period segment information.
Treatment of Discontinued Operations
As part of our ongoing asset sale program, we sold our non-strategic
composite tooling business based in Irvine, California in June 2003 for
approximately $17 million. This business was previously included in "Other" for
segment presentation in accordance with SFAS No. 131. As a result,
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under SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," the composite tooling business is reflected as a discontinued
operation in the Consolidated Financial Statements. We have reflected prior year
results of the composite tooling business as a discontinued operation on the
Consolidated Statements of Operations and reclassified the assets and
liabilities of the business separately on the Consolidated Balance Sheets.
The following table sets forth the results of the discontinued
operation:
Year Ended December 31,
2000 2001 2002
----- ---- ----
(Dollars in millions)
Net sales......................... $ 12 $ 20 $ 17
Income before provision for
income taxes.................... $ - $ 3 $ 2
The following table sets forth the assets and liabilities of the
discontinued operation.
December 31, 2002 December 31, 2002
----------------- -----------------
(Dollars in millions)
Current assets.......................... $ 6 $ 6
Property, plant and equipment, net...... 9 8
----- -----
Total assets........................ $ 15 $ 14
===== =====
Current liabilities..................... $ 4 $ 2
Long-term liabilities................... 1 1
----- -----
Total liabilities................... $ 5 $ 3
===== =====
Adoption of SFAS No. 145
Effective January 1, 2003, we adopted SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections," relating to SFAS No. 4, "Reporting Gains and Losses from
Extinguishment of Debt." Previously, accounting principles generally accepted in
the U.S. 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 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. Items presented in prior periods that do not meet the
criteria in APB 30 for classification as an extraordinary item must be
reclassified. The effect of the adoption was to require reclassification of
write-offs of capitalized bank charges and related debt extinguishment costs
resulting from the prepayment of associated bank debt in the amount of
approximately $21 million and $4 million for the years ended December 31, 2000
and 2002, respectively, from extraordinary items to other (income) expense, net.
The corresponding provisions for taxes have been adjusted accordingly in the
amount of approximately $8 million and $1 million for the years ended December
31, 2000 and 2002, respectively.
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