================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------
FORM 10-Q
---------------
(MARK ONE)
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ........TO.........
---------------
COMMISSION FILE NUMBER: 1-13888
---------------
GRAFTECH INTERNATIONAL LTD.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 06-1385548
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
---------------
1521 CONCORD PIKE
BRANDYWINE WEST, SUITE 301 19803
WILMINGTON, DE (ZIP CODE)
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (302) 778-8227
---------------
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [ X ] No [ ]
As of June 30, 2002, 55,829,730 shares of common stock, par value $.01 per
share, were outstanding.
================================================================================
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION:
ITEM 1. FINANCIAL STATEMENTS:
Consolidated Balance Sheets at December 31, 2001 and June 30, 2002........................... Page 2
Consolidated Statements of Operations for the Three Months and Six Months
ended June 30, 2001 and 2002............................................................. Page 3
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2002........ Page 4
Consolidated Statement of Stockholders' Deficit for the Six Months ended June 30, 2002....... Page 5
Notes to Consolidated Financial Statements................................................... Page 6
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1................................................. Page 36
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................. Page 42
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS................................ Page 74
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS......................................................................... Page 76
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS................................................. Page 81
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................................... Page 82
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.......................................................... Page 82
SIGNATURE .......................................................................................... Page 84
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
----------------------------
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
DECEMBER 31, JUNE 30,
ASSETS 2001 2002
---- ----
CURRENT ASSETS:
Cash and cash equivalents........................................................ $ 38 $ 51
Notes and accounts receivable.................................................... 95 117
Inventories:
Raw materials and supplies..................................................... 33 41
Work in process................................................................ 111 102
Finished goods................................................................. 33 29
----------- -----------
177 172
Prepaid expenses and deferred income taxes....................................... 12 21
----------- -----------
Total current assets........................................................... 322 361
----------- -----------
Property, plant and equipment........................................................ 931 972
Less: accumulated depreciation...................................................... 650 684
----------- -----------
Net fixed assets............................................................... 281 288
----------- -----------
Deferred income taxes................................................................ 140 158
Goodwill............................................................................. 29 25
Less: accumulated amortization...................................................... 12 11
----------- -----------
17 14
Other assets......................................................................... 37 48
----------- -----------
Total assets................................................................... $ 797 $ 869
=========== ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable................................................................. $ 101 $ 106
Short-term debt.................................................................. 7 17
Accrued income and other taxes................................................... 45 48
Other accrued liabilities........................................................ 57 59
----------- -----------
Total current liabilities................................................... 210 230
Long-term debt....................................................................... 631 693
Unamortized bond premium............................................................. - 7
Other long-term obligations.......................................................... 231 229
Deferred income taxes................................................................ 32 31
Minority stockholders' equity in consolidated entities............................... 25 27
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, par value $.01, 10,000,000 shares authorized, none issued....... - -
Common stock, par value $.01, 100,000,000 shares authorized, 58,532,209 shares
issued at December 31, 2001, 58,798,669 shares issued at June 30, 2002........ 1 1
Additional paid-in capital....................................................... 629 636
Accumulated other comprehensive loss............................................. (269) (278)
Retained deficit................................................................. (602) (613)
Unearned restricted stock........................................................ - -
Less: cost of common stock held in treasury, 2,322,412 shares at December
31, 2001, 2,542,539 shares at June 30, 2002.................................. (85) (88)
Less: common stock held in employee benefits trust, 426,400 shares at December
31, 2001 and June 30, 2002.................................................... (6) (6)
----------- -----------
Total stockholders' deficit...................................................... (332) (348)
----------- -----------
Total liabilities and stockholders' deficit.................................. $ 797 $ 869
=========== ===========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
(UNAUDITED)
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
2001 2002 2001 2002
---- ---- ---- ----
$ $ $ $
Net sales............................................ 171 161 342 299
Cost of sales........................................ 120 125 242 232
---------- ------------ --------- ---------
Gross profit.................................... 51 36 100 67
Research and development............................. 3 3 6 6
Selling, administrative and other expenses........... 19 20 40 38
Compensation expense-stock grant..................... - 5 - 5
Global realignment and related expenses.............. - 2 - 3
Restructuring charge and impairment loss of long-
lived and other assets.......................... 58 13 58 18
Antitrust investigations and related lawsuits
and claims...................................... 10 - 10 -
Other (income) expense, net.......................... - (13) - (16)
Interest expense..................................... 16 17 35 30
---------- ------------ --------- ---------
106 47 149 84
Loss before provisions (benefits) for
income taxes, minority interest and
extraordinary items........................ (55) (11) (49) (17)
Benefit for income taxes............................. (16) (5) (14) (10)
---------- ------------ --------- ---------
Loss of consolidated entities before
minority interest and extraordinary items. (39) (6) (35) (7)
Less: minority stockholders' share of income......... - - 1 1
---------- ------------ --------- ---------
Loss before extraordinary items............... (39) (6) (36) (8)
Extraordinary items, net of tax...................... - 1 - 3
---------- ------------ --------- ---------
Net loss........................................ $ (39) $ (7) $ (36) $ (11)
========== ============ ========= =========
BASIC LOSS PER COMMON SHARE:
Loss before extraordinary items................. $ (0.87) $ (0.12) $ (0.80) $ (0.15)
Extraordinary items, net of tax................. - (0.02) - (0.05)
---------- ------------ --------- ----------
Net loss per share.............................. $ (0.87) $ (0.14) $ (0.80) $ (0.20)
========== ============ ========= ==========
Weighted average common shares outstanding
(IN THOUSANDS).............................. 45,346 55,872 45,284 55,848
========== ============ ========= ==========
DILUTED LOSS PER COMMON SHARE:
Loss before extraordinary items................. $ (0.87) $ (0.12) $ (0.80) $ (0.15)
Extraordinary items, net of tax................. - (0.02) - (0.05)
========== ============ ========= ==========
Net loss per share.............................. $ (0.87) $ (0.14) $ (0.80) $ (0.20)
========== ============ ========= ==========
Weighted average common shares 45,346 55,872 45,284 55,848
outstanding (IN THOUSANDS).................. ========== ============ ========= ==========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
2001 2002
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (36) $ (1)
Extraordinary items, net of tax.............................................. - 3
Non-cash charges to net loss:
Depreciation and amortization............................................ 19 15
Deferred income taxes.................................................... (21) (13)
Antitrust investigations and related lawsuits and claims................. 10 -
Compensation expense - stock grant....................................... - 5
Restructuring charge and impairment loss on
long-lived and other assets......................................... 53 18
Other non-cash charges................................................... (3) (28)
Working capital *............................................................ (21) (25)
Long-term assets and liabilities............................................. - -
------- ------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................. 1 (36)
------- ------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (11) (20)
Sale of assets............................................................... 4 -
------- ------
NET CASH USED IN INVESTING ACTIVITIES............................... (7) (20)
------- ------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net................................. (1) 10
Revolving credit facility borrowings (reductions), net....................... 13 (95)
Long-term debt borrowings.................................................... 1 557
Long-term debt reductions.................................................... (29) (387)
Minority interest investment................................................. 9 -
Sale of common stock under stock options..................................... 2 1
Financing costs.............................................................. - (20)
------- ------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ (5) 66
------- ------
Net increase (decrease) in cash and cash equivalents.............................. (11) 10
Effect of exchange rate changes on cash and cash equivalents...................... (1) 3
Cash and cash equivalents at beginning of period.................................. 47 38
------- ------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................................ $ 35 $ 51
======= ======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense......................................................... $ 33 $ 17
======= ======
Income taxes............................................................. $ 15 $ 4
======= ======
* Net change in working capital due to the following components: (Increase)
decrease in current assets:
Notes and accounts receivable............................................ $ 18 $ (18)
Inventories.............................................................. (26) 10
Prepaid expenses......................................................... (1) (2)
Increase (decrease) in accounts payable and accruals......................... 1 (13)
Antitrust investigations and related lawsuits and claims..................... (8) -
Restructuring payments....................................................... (5) (2)
------- ------
WORKING CAPITAL..................................................... $ (21) $ (25)
======= ======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PART I (CONT'D)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(DOLLARS IN MILLIONS)
(UNAUDITED)
ACCUMULATED COMMON STOCK TOTAL
ADDITIONAL OTHER UNEARNED HELD IN STOCKHOLDERS'
COMMON PAID-IN COMPREHENSIVE RETAINED RESTRICTED TREASURY EMPLOYEE EQUITY
STOCK CAPITAL LOSS DEFICIT STOCK STOCK BENEFITS TRUST (DEFICIT)
----- ------- ---- ------- ----- ----- -------------- ---------
BALANCE AT DECEMBER 31, 2001....... $ 1 $ 629 $ (269) $ (602) $ - $ (85) $ (6) $ (332)
Comprehensive loss:
Net loss...................... - - - (11) - - - (11)
Foreign currency translation
adjustments............... - - (9) - - - - (9)
------- ------- ------- ------ ------ ------ ------- --------
Total comprehensive
loss............. - - (9) (11) - - - (20)
Issuance of restricted stock....... - 6 - - (6) - - -
Amortization of restricted stock.. - - - - 1 - - 1
Accelerated vesting of restricted
stock......................... - - - - 5 - - 5
Repurchase of treasury stock....... - (3) - (3)
Sale of common stock............... - 1 - - - - - 1
------- ------- ------- ------ ------ ------ ------- --------
BALANCE AT JUNE 30, 2002...........$ 1 $ 636 $ (278) $ (613) $ - $ (88) $ (6) $ (348)
======= ======= ======= ====== ====== ====== ======= ========
5
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL PRESENTATION
These interim Consolidated Financial Statements are unaudited; however,
in the opinion of management, they have been prepared in accordance with Rule
10-01 of Regulation S-X adopted by the SEC and reflect all adjustments (all of
which are of a normal, recurring nature) which are necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. Results of operations for the six months ended June 30, 2002
are not necessarily indicative of the results of operations that may be expected
for the entire year ending December 31, 2002.
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. 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. 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.
"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"). Prior to June 7, 2002, GrafTech Finance was named
UCAR Finance Inc.
"GRAFTECH" refers to Graftech Inc. only. Graftech is our 97.5% owned
(wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products.
"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 graphite and carbon cathodes.
6
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"SUBSIDIARIES" refers to those companies which, 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 June 30, 2002, except for:
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100% owned until it became 97.5% owned in June
2001.
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie and, as a result, became 70% owned on March 31, 2001.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, GrafTech Global or GrafTech Finance,
individually.
We have realigned the corporate organizational structure of our foreign
subsidiaries. As a result, most of the non-U.S. businesses of each of our two
divisions are segregated into separate companies along divisional lines. In
addition, because most of the operations, net sales and growth opportunities of
our Graphite Power Systems Division are located outside the U.S., most of its
operations 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 similarly
realign the corporate organizational structure of our U.S. subsidiaries.
FOREIGN CURRENCY TRANSLATION
Generally, except for financial statements of our subsidiary in Russia
where high inflation has existed, unrealized gains and losses resulting from
translation of financial statements of our foreign subsidiaries from their
functional currencies into dollars are accumulated in other comprehensive income
(loss) on the Consolidated Balance Sheets until such time as the subsidiaries or
their operations are sold or the subsidiaries are substantially or completely
liquidated. Translation gains and losses relating to financial statements of
foreign subsidiaries in countries where high inflation has existed or which
predominantly use the dollar for their operations are included in other (income)
expense, net in the Consolidated Statements of Operations.
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-denominated. Our Mexican subsidiary began using the dollar as its
functional currency during 1999 because its sales and purchases are
predominantly dollar-denominated.
Prior to the 2002 first quarter, we had designated (euro)125 million of
Tranche A Term Loans as a net equity hedge for our net investments in Europe.
The currency effects associated with the
7
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
designated Tranche A Term Loans were reflected in accumulated other
comprehensive income (loss) in the Consolidated Balance Sheets where they offset
gains and losses recorded on our net investment in Europe. In the 2002 first
quarter, a majority of the Tranche A Term Loans were repaid, the net equity
hedge was eliminated and the resulting $1 million of loss in accumulated other
comprehensive income (loss) was charged to other (income) expense, net in the
Consolidated Statements of Operations.
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). 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.
NEW ACCOUNTING STANDARDS
In June 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 146, "Accounting for
Costs Associated with Exit or Disposal Activities," which is effective for
financial statements issued for fiscal years beginning 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)." We are currently evaluating the impact of SFAS No. 146 on our
consolidated financial position and results of operations.
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." 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 are currently evaluating the impact of the provisions of
SFAS No. 145 relating to SFAS No. 4 on our consolidated financial position and
results of operations. The provisions of SFAS No. 145 relating to SFAS No. 13
and the other provisions of SFAS No. 145,
8
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
excluding the provisions relating to SFAS No. 4, did not have a significant
impact on our consolidated financial position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
SFAS No. 144 effective January 1, 2002. The adoption of SFAS No. 144 did not
have a significant impact on our consolidated financial position or results of
operations.
In July 2001, FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 requires that the fair value of a
liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. SFAS
No. 143 will be effective for financial statements issued for fiscal years
beginning after June 15, 2002. We anticipate that the adoption of SFAS No. 143
will not have a significant impact on our consolidated financial position or
results of operations.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," both of which are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS No. 141 and SFAS No. 142 establish accounting and
reporting standards for business combinations, goodwill and intangible assets.
We adopted SFAS No. 141 and SFAS No. 142 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 $1 million in the 2001 first
half.
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
share data:
THREE MONTHS SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
-------------- --------------
2001 2002 2001 2002
---- ---- ---- ----
Weighted average common shares
outstanding for basic calculation............... 45,345,828 55,872,417 45,284,211 55,848,004
Add: Effect of stock options........................ - - - -
---------- ---------- ---------- ----------
Weighted average common shares
outstanding for diluted calculation............. 45,345,828 55,872,417 45,284,322 55,848,004
========== ========== ========== ==========
Basic earnings (loss) per common share is calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus the additional common shares that would have been outstanding
if potentially dilutive securities had been issued. As a result of the net loss
reported
9
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for the three months and six months ended June 30, 2001, 986,196 and
898,781, respectively, of potential common shares have been excluded from the
calculation of diluted earnings (loss) per share because their effect would
reduce the loss per share. As a result of the net loss for the three months and
six months ended June 30, 2002, 1,709,758 and 1,409,850, respectively, of
potential common shares underlying dilutive securities have been excluded from
the calculation of diluted earnings (loss) per share because their effect would
reduce the loss per share.
In addition, the calculation of weighted average common shares
outstanding for the diluted calculation excludes consideration of stock options
covering 4,305,447 and 4,205,994 shares in each of the three months ended June
30, 2001 and 2002, respectively, and 4,311,847 and 4,267,546 shares in each of
the six months ended June 30, 2001 and 2002, respectively, because the exercise
of these options would not have been dilutive for those periods due to the fact
that the exercise prices were greater than the weighted average market price of
our common stock for each of those periods.
The calculation of both basic and diluted earnings (loss) per share
gives effect to, among other things, the grant of 412,300 shares of restricted
stock to employees in March 2002. 50% of the shares granted to each employee
were scheduled to vest on January 1, 2003 and 50% on January 1, 2004 if the
employee was still employed on the vesting date. GTI's Board of Directors
accelerated the vesting of all of these shares in June 2002. As a result, we
recorded $5 million of compensation expense in the 2002 second quarter.
In September 1998, GTI's Board of Directors adopted an executive
employee loan program and an executive employee stock purchase program. In the
2002 first quarter, the programs were closed. In the 2002 second quarter, all of
the outstanding loans, an aggregate of $3 million, were repaid with shares of
common stock, valued at the closing sale price on the date of repayment. Those
shares were added to common stock held in treasury.
(3) SEGMENT REPORTING
We evaluate the performance of our operating segments based on gross
profit. Intersegment sales and transfers of goods and services are not material.
The following tables summarize financial information concerning our
reportable segments.
10
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2001 2002 2001 2002
---- ---- ---- ----
(DOLLARS IN MILLIONS)
Net sales to external customers:
Graphite Power Systems Division .................. $137 $133 $273 $244
Advanced Energy Technology Division .............. 34 28 69 55
---- ---- ---- ----
Consolidated net sales ........................ $171 $161 $342 $299
==== ==== ==== ====
Gross profit:
Graphite Power Systems Division .................. $ 41 $ 30 $ 79 $ 55
Advanced Energy Technology Division .............. 10 6 21 12
---- ---- ---- ----
Consolidated gross profit ..................... $ 51 $ 36 $100 $ 67
==== ==== ==== ====
Depreciation and amortization:
Graphite Power Systems Division .................. $ 8 $ 6 $ 17 $ 12
Advanced Energy Technology Division .............. 1 2 2 3
---- ---- ---- ----
Consolidated depreciation and amortization .... $ 9 $ 8 $ 19 $ 15
==== ==== ==== ====
4. RESTRUCTURING AND IMPAIRMENT CHARGES
In the 2002 second quarter, we recorded a $13 million ($8 million after
tax) non-cash charge primarily related to the impairment of our long-lived
carbon electrode assets in Columbia, Tennessee, primarily due to 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 non-cash charge also includes a $1 million impairment loss
related to 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 includes estimated pension, severance
and other related employee benefit costs for 102 employees and other costs
related to the mothballing.
In the 2001 fourth quarter, we recorded a $7 million restructuring
charge and a $27 million impairment loss on long-lived and other assets. The
restructuring charge related primarily to exit costs related to the mothballing
of our graphite electrode operations in Caserta, Italy. $24 million of the
impairment loss related to assets located at our facility in Caserta. The
remaining $3 million of the impairment loss related to 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 the restructuring and
realignment of our businesses into our Advanced Energy Technology and Graphite
Power Systems Divisions, the relocation of our corporate headquarters and the
shutdown of our coal calcining operations located in Niagara Falls, New York. As
part of the realignment, we centralized management functions of our Advanced
Energy Technology Division in Cleveland, Ohio, and management functions of our
11
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Graphite Power Systems Division in Etoy, Switzerland. We relocated our corporate
headquarters, consisting of approximately 10 employees, from Nashville,
Tennessee, to Wilmington, Delaware. The relocation was substantially completed
by the end of 2001. The charge includes severance and related benefits
associated with a workforce reduction of 24 employees and impairment of
leasehold improvement assets.
In the 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 the 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 included restructuring charges of $2 million for severance and
related benefits associated with a work force reduction of 171 employees and $3
million in plant shutdown and related costs. The remaining $53 million of the
charge related to the impairment loss on long-lived assets. The shutdown was
completed on schedule by the end of 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.
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 non-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.
12
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
POST
PLANT SHUTDOWN MONITORING
SEVERANCE AND AND RELATED AND RELATED
RELATED COSTS COSTS COSTS TOTAL
(DOLLARS IN MILLIONS)
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............ 5 - - 5
Payments in 2002......................... (3) 2 - (1)
------ ---- ----- -----
BALANCE AT JUNE 30, 2002................. $ 6 $ 10 $ - $ 16
======= ====== ====== ======
The restructuring accrual is included in other accrued liabilities on
the Consolidated Balance Sheets.
(5) LONG-TERM DEBT AND LIQUIDITY
The following table presents our long-term debt:
DECEMBER 31, JUNE 30,
2002 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 -
---------- --------
Total Senior Facilities.......................... 625 137
Swiss mortgage and other European debt.................. 6 6
Senior Notes due 2012................................... - 550
---------- --------
Total.............................................. $ 631 $ 693
========== ========
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.
13
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In April 2002, we obtained consent from the holders of the Senior Notes
issued in February 2002 to amend the Indenture so as to waive the requirement to
use the gross proceeds from the issuance of up to $150 million aggregate
principal amount of additional Senior Notes to make intercompany loans to our
foreign subsidiaries. On April 30, 2002, we entered into a Supplemental
Indenture.
On May 6, 2002, GrafTech Finance issued $150 million aggregate
principal amount of additional Senior Notes at a purchase price of 104.5% of
principal amount, plus accrued interest from February 15, 2002, under the same
Indenture pursuant to which it issued the Senior Notes in February 2002. The
Senior Notes constitute one class of debt securities under the Indenture. The
additional Senior Notes bear interest at the same rate and mature on the same
date as the Senior Notes issued in February 2002. The $7 million premium
received upon issuance of the additional Senior Notes was added to the principal
amount of the Senior Notes shown on the Consolidated Balance Sheets and is
amortized (as a credit to interest expense) over the term of the additional
Senior Notes. As a result of our receipt of such premium, the effective annual
interest rate on the additional Senior Notes is about 9.5%.
On June 5, 2002, GrafTech Finance offered to exchange new registered
Senior Notes (and related guarantees) that are substantially identical to the
previously outstanding Senior Notes (and related guarantees), except that
certain transfer restrictions and registration rights relating to the previously
outstanding Senior Notes would not apply to the new registered Senior Notes (and
related guarantees). All of the previously outstanding Senior Notes (and related
guarantees) were exchanged under the exchange offer.
Except as described below, GrafTech Finance may not redeem the Senior
Notes prior to February 15, 2007. On or after that date, GrafTech Finance may
redeem the Senior Notes, in whole or in part, at specified redemption prices
beginning at 105.125% of the principal amount redeemed for the year commencing
February 15, 2007 and reducing to 100% 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 (which includes
additional Senior Notes, if any) in an aggregate principal amount not to exceed
35% of the aggregate principal amount of the Senior Notes (which includes
additional Senior Notes, if any) originally issued 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 offering 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 (which
includes additional Senior Notes, if any) remains outstanding
immediately after each such redemption (other than Senior Notes held,
directly or indirectly, by us); and
14
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
o each such redemption occurs within 60 days after the date of the
related public offering.
Upon the occurrence of a change of control, GrafTech Finance will be
required to make an offer to repurchase the Senior Notes at a price equal to
101% 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.
The Senior Notes have been guaranteed on a senior unsecured basis by
GTI, GrafTech Global and UCAR Carbon and other U.S. subsidiaries holding a
substantial majority of our U.S. assets, except that the guarantee by UCAR
Carbon is secured as described below.
Unsecured intercompany term notes in an aggregate principal amount
equal to $420 million (based on currency exchange rates in effect at June 30,
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
15
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $403 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 $17 million (based on currency exchange rates in effect at June 30,
2002), and any pledged unsecured intercompany term notes that cease to be
pledged due to a reduction in the principal amount of the then outstanding
Senior Notes due to redemption, repurchase or other events, will not be subject
to any pledge and will be available to satisfy the claims of creditors
(including the lenders under the Senior Facilities and the holders of the Senior
Notes) of GrafTech Finance, as their interests may appear. The Senior Notes
contain provisions restricting, subject to certain exceptions, the pledge of
those unsecured intercompany term notes to secure any debt or obligation unless
they are equally and ratably pledged to secure the Senior Notes for so long as
such other pledge continues in effect.
The guarantee by UCAR Carbon has been secured by a pledge of all of our
shares of Graftech, 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 Graftech 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
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 of 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.
16
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SENIOR FACILITIES
The Senior Facilities consist of:
o A Tranche A Facility providing for initial term loans of $137 million
and of (euro)161 million (equivalent to $158 million based on currency
exchange rates in effect at February 22, 2000) to GrafTech Finance. In
October 2000, we converted $78 million of these loans from
dollar-denominated to euro-denominated loans.
o A Tranche B Facility providing for initial term loans of $350 million
to GrafTech Finance.
o A Revolving Facility providing for dollar and euro-denominated
revolving and swingline 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(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 ($23 million of which debt was
outstanding at June 30, 2002)).
At June 30, 2002, after giving effect to the issuance of the Senior
Notes in February and May 2002 and the application of the net proceeds
therefrom:
o the term loans under the Tranche A Facility have been fully repaid;
and
o the principal amount of term loans outstanding under the Tranche B
Facility is $137 million, all of the scheduled principal payments of
which are due in 2007.
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
17
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 which 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.
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.
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). 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 June 30, 2002, the interest rates on outstanding debt under the
Senior Facilities were: Tranche B Facility, 5.5%. The weighted average interest
rate on the Senior Facilities was 5.5% during the 2002 second quarter and 8.0%
during the 2001 second quarter, and 5.6% during the 2002 first half and 8.4%
during the 2001 first half.
18
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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 net debt leverage ratio and excess cash
flow requirements are satisfied. We are also permitted to repurchase common
stock from present or former directors, officers or employees in an aggregate
amount of up to the lesser of $5 million per year (with unused amounts permitted
to be carried forward) or $25 million on a cumulative basis since February 22,
2000.
In addition to the failure to pay principal, interest and fees when
due, events of default under the Senior Facilities include: failure to comply
with applicable covenants; failure to pay when due, or other defaults permitting
acceleration of, other indebtedness exceeding $7.5 million; judgment defaults in
excess of $7.5 million to the extent not covered by insurance; certain events of
bankruptcy; and certain changes in control.
CERTAIN AMENDMENTS TO SENIOR FACILITIES
In 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 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 ($23 million of which debt was outstanding at June 30, 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
19
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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, and the maximum amount of capital expenditures permitted
under the Senior Facilities would be reduced in 2001 and 2002. We do not expect
that our capital expenditures would exceed such maximums. In connection
therewith, we paid an amendment fee of $2 million and the margin which 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 the 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 Commission. In
addition, the amendment expanded our ability to make certain investments,
including investments in Graftech, and eliminated provisions relating to a
spin-off of Graftech. In connection therewith, we paid an amendment fee of $1
million and the margin which 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
Commission) 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 ($23 million of which debt was outstanding at June 30, 2002).
In connection with the amendment and the consent, we paid fees and costs of $1
million.
The net proceeds from the sale of the Senior Notes in February and May
2002 were applied to repay term loans under the Tranche A and B Facilities and
reduce the outstanding balance under the Revolving Facility.
INTEREST RATE 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 2002 first half, we entered into two ten-year interest
rate swaps for a total notional amount of $250 million to
20
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effectively convert that amount of fixed rate debt 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 the 2002 second
quarter by $1 million.
LEVERAGE
We are highly leveraged and, as discussed in Note 7 on page 22, have
substantial obligations in connection with antitrust investigations, lawsuits
and claims (in respect of which we have an unfunded reserve totaling $101
million). We had total debt of $710 million and a stockholders' deficit of $348
million at June 30, 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 the 2002
first half, certain of our subsidiaries sold receivables totaling $94 million.
If we had not sold such receivables, our accounts receivable would have been
about $47 million higher at June 30, 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, including 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.
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 financial covenants under the Senior
Facilities. A failure to so comply, unless waived by the lenders thereunder,
would be a default thereunder. This would
21
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
permit the lenders to accelerate the maturity of the Senior Facilities. It would
also permit them to terminate their commitments to extend credit under the
Revolving Facility. This would have an immediate material adverse effect on our
liquidity. An acceleration of maturity of the Senior Facilities would permit the
holders of the Senior Notes to accelerate the maturity of the Senior Notes. A
breach of the covenants contained in the Senior Notes would also permit the
holders of the Senior Notes to accelerate the maturity of the Senior Notes.
Acceleration of maturity of the Senior Notes would permit the lenders to
accelerate the maturity of the Senior Facilities and terminate their commitments
to extend credit under the Revolving Facility. If we were unable to repay our
debt to the lenders and holders or otherwise obtain a waiver from the lenders
and holders, the lenders and holders could proceed against the collateral
securing the Senior Facilities and the Senior Notes, respectively, and exercise
all other rights available to them.
EXTRAORDINARY ITEM
In May 2002, we recorded an extraordinary charge $1 million ($1 million
after tax) for write-off of capitalized fees associated with the term loans
under Tranche A and B Facilities repaid with the net proceeds from the issuance
of Senior Notes.
In February 2002, we recorded an extraordinary charge of $3 million ($2
million after tax) for write-off of capitalized fees associated with the term
loans under Tranche A and B Facilities repaid with the net proceeds from the
issuance of Senior Notes.
(6) FINANCIAL INSTRUMENTS
Certain of our subsidiaries sold receivables totaling $94 million in
the 2002 first half and $119 million in the 2001 first half. None of the
receivables sold were recorded on the Consolidated Balance Sheets at June 30,
2002 or December 31, 2001, respectively. If we had not sold such receivables,
our accounts receivable would have been about $47 million higher at June 30,
2002.
(7) CONTINGENCIES
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between the U.S. Department
of Justice (the "DOJ") and GTI, GTI pled guilty to a one count charge of
violating U.S. federal antitrust law in connection with the sale of graphite
electrodes and was sentenced to pay a non-interest-bearing fine in the aggregate
amount of $110 million, payable in six annual installments of $20 million, $15
million, $15 million, $18 million, $21 million and $21 million, commencing July
23, 1998. The plea agreement was approved by the 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 2001, the due date of each of the
remaining three payments was deferred by one year and, at our request, in
January 2002, the payment schedule for the $60 million unpaid balance
outstanding at that time was revised to
22
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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. In
January 2002, the statutory rate of interest was 2.13% per annum. Accrued
interest will be payable together with each quarterly payment. The revised
payment schedule has been approved by the court. All payments due have been
timely made.
In March 1999, pursuant to a plea agreement between our Canadian
subsidiary and the Canadian Competition Bureau, our Canadian subsidiary pled
guilty to a one count charge of violating Canadian antitrust law in connection
with the sale of graphite electrodes and was sentenced to pay a fine of Cdn. $11
million. The relevant Canadian court approved the plea agreement and, as a
result, under the plea agreement we will not be subject to prosecution by the
Canadian Competition Bureau with respect to any other violations of Canadian
antitrust law occurring prior to the date of the plea agreement. The fine was
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 it had, after holding a hearing, assessed a
fine against us in the amount of 676 million KRW (approximately $560,000, based
on currency exchange rates in effect on June 30, 2002). Five other graphite
electrode producers were also fined by it in amounts ranging up to 4,396 million
KRW (approximately $3.6 million based on currency exchange rates in effect on
June 30, 2002). Our fine represented 0.5% of our graphite electrode sales in
Korea during the relevant time period. 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, in August 2002.
In January 2000, the antitrust enforcement authority of the European
Union (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 European antitrust
law in connection with the sale of graphite electrodes. In July 2001, the EU
Competition Authority issued its decision regarding the allegations. Under the
decision, it assessed a fine of (euro)50.4 million (about $50 million, based on
currency exchange rates in effect at June 30, 2002) against us. Seven other
graphite electrode producers were also fined, with fines ranging up to
(euro)80.2 million. From the initiation of its investigation, we have cooperated
with the EU Competition Authority. 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. After an in-depth analysis of the decision, in October 2001, we filed an
appeal to the court 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 are currently in discussions with the EU Competition
Authority regarding the appropriate form of
23
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
collateral security during the pendency of the appeal. If the results of these
discussions are not acceptable to us, we may file an interim appeal with the
court to waive the requirement for collateral security or to allow us to provide
alternative security for payment. We cannot predict how or when the court would
rule on such interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We have provided that information.
In May 2002, the antitrust authority of the European Union 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. As a
result of our substantial cooperation to date and our intention to continue to
cooperate, under the Notice of Non-Imposition or Reduction of Fines in Cartel
Cases issued by the antitrust authority of the European Union, we believe that
we will benefit from the maximum reduction possible (a 100% reduction) with the
result that no fine will be payable.
Except as described above, antitrust investigations against us in the
U.S., Canada, the European Union, Japan and Korea have been resolved. We are
continuing to cooperate with some of these antitrust authorities 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 by antitrust authorities in Brazil or other jurisdictions.
The guilty pleas and decisions described above 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 June 30, 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 of the actual and potential
claims against us by customers in the U.S. and Canada arising out of alleged
antitrust violations occurring prior to the date of the relevant settlement in
connection with the sale of graphite electrodes. One of the settlements also
covers the actual and potential claims against us by certain foreign customers
arising out of alleged antitrust violations occurring prior to the date of that
settlement in
24
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
settlement payments due have been timely made.
In 1999, 2000 and 2002, we and other producers of graphite electrodes
were served with four complaints commencing four separate civil antitrust
lawsuits (the "FOREIGN CUSTOMER LAWSUITS"). The complaints were filed by an
aggregate of 37 steelmakers and related parties, all but one 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 regard to these dismissals. The third complaint was dismissed
without prejudice to refile pending the resolution of such appeals. The fourth
complaint was filed in March 2002 and also names Mitsubishi Corporation as a
defendant. We filed a motion to stay the lawsuit commenced by the fourth
complaint pending the resolution of such appeals 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 complaints were
filed by an aggregate of three companies and the estate of a bankrupt company.
Other producers of carbon electrodes are named as defendants in two of the
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. We filed motions to dismiss the second and third
complaints. In May 2001, our motion to dismiss the second complaint was denied.
In October 2001, we settled the lawsuit commenced by the third complaint. The
guilty pleas and decisions described above do not relate to carbon electrodes.
In March 2002, we received notice that a complaint had been filed
commencing a civil antitrust lawsuit (the "CARBON CATHODE LAWSUIT"). The
complaint was filed by two producers of aluminum. One of our subsidiaries and
other producers of carbon cathodes are 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 carbon cathodes and seek, among
other things, an award of treble damages resulting from such alleged violations.
We intend to vigorously defend against such lawsuit. The guilty pleas and
decisions described above do not relate to carbon cathodes.
The foreign customer lawsuits, two of the three carbon electrode
lawsuits and the carbon cathode lawsuit are still in their early stages. We have
been vigorously defending, and intend to continue to vigorously defend, against
these remaining lawsuits as well as all threatened lawsuits
25
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax charge of an additional $10 million
against results of operations for the 2001 second quarter, as a reserve for
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims. The aggregate reserve of $350 million is
calculated on a basis net of, among other things, imputed interest on
installment payments of the fine payable to the DOJ. 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. In the aggregate (including the assessment of the fine by the EU
Competition Authority and the additional $10 million charge), 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 June 30, 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 June 30, 2002, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At June 30, 2002, $101 million remained in the reserve. The balance of
the reserve is available for the fine payable to the DOJ, 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 June 30,
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, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation. In the lawsuit, we allege,
among other things, that certain payments made to our former parents in
connection with our leveraged equity recapitalization in January 1995 were
unlawful under the General Corporation Law of the State
26
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
of Delaware, that our former parents were unjustly enriched by receipts from
their investments in us and that our former parents aided and abetted breaches
of fiduciary duties owed to us by our former senior management in connection
with illegal graphite electrode price fixing activities. The defendants have
filed motions to dismiss this lawsuit and a motion to disqualify certain of our
counsel from representing us in this lawsuit. We are vigorously opposing those
motions. Oral hearings were held on those motions in the 2001 first and second
quarters. We expect that a decision on those motions will be rendered by the end
of September 2002. Through June 30, 2002, we had incurred about $4 million of
legal expenses in connection with this lawsuit. This lawsuit is in its earliest
stages. The ultimate outcome of this lawsuit is subject to many uncertainties.
We may at any time settle this lawsuit.
(8) OTHER TRANSACTIONS
In January 2002, we announced a new major cost savings plan. The key
elements of the 2002 plan include:
o the rationalization of graphite electrode manufacturing capacity at
our higher cost facilities, including the mothballing of our graphite
electrode plant in Caserta, Italy, which was completed in the 2002
first quarter, and the incremental expansion of capacity at our lower
cost facilities;
o the redesign and implementation of changes in our U.S. benefit plans
for active and retired employees;
o the implementation of work process changes, including the
consolidation and streamlining of order fulfillment, purchasing,
finance and accounting, and human resource processes, along with the
identification and implementation of outsourcing opportunities;
o the implementation of additional plant and corporate overhead cost
reductions; and
o the corporate realignment of our subsidiaries, consistent with the
operational realignment of our divisions, to generate significant tax
savings, which was substantially completed in the 2002 first half.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. These non-strategic
businesses contributed net sales of about $25 million in 2001.
(9) 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
27
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Graftech, but in no event will the value of the pledged portion of such
shares exceed 19.99% of the principal amount of the then outstanding Senior
Notes. All of the guarantees are full, unconditional and joint and several, and
the Issuer, and each of the U.S. Guarantors are 100% owned by the Parent.
Graftech and our other subsidiaries which are not guarantors are called the
"NON-GUARANTORS." The following table sets forth condensed consolidating balance
sheets at June 30, 2002 and December 31, 2001 and condensed consolidating
statements of operations and cash flows for the six months ended June 30, 2002
and 2001 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 June 30, 2002, retained earnings of our
subsidiaries subject to such restrictions were approximately $462 million.
Investments in subsidiary companies are recorded on the equity basis.
28
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
AT JUNE 30, 2002
JUNE 30, 2002
-------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ 10 $ 2 $ 39 $ - $ 51
Notes and accounts receivable................. - 731 454 112 (1,180) 117
Inventories:
Raw materials and supplies................ - - 3 39 (1) 41
Work in process........................... - - 33 67 2 102
Finished goods............................ - - 8 22 (1) 29
------ ---------- ---------- --------- --------- -------
- - 44 128 - 172
Prepaid expenses and deferred income taxes.... - - 11 11 (1) 21
------ ---------- ---------- --------- --------- -------
Total current assets...................... - 741 511 290 (1,181) 361
------ ---------- ---------- --------- --------- -------
Property, plant and equipment................... - - 308 669 (5) 972
Less: accumulated depreciation................. - - (266) (404) (14) (684)
------ ---------- ---------- --------- --------- -------
Net fixed assets.............................. - - 42 265 (19) 288
------ ---------- ---------- --------- --------- -------
Deferred income taxes and other assets........... 50 29 (58) 83 116 220
------ ---------- ---------- --------- --------- -------
Total assets.................................. $ 50 $ 770 $ 495 $ 638 $ (1,084) $ 869
====== ========== ========== ========= ========= =======
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ - $ 28 $ 21 $ 86 $ (29) $ 106
Short-term debt............................... 419 10 200 527 (1,139) 17
Accrued income and other taxes................ (21) 2 34 32 1 48
Other accrued liabilities..................... - - 32 37 (10) 59
------ ---------- ---------- --------- --------- -------
Total current liabilities................. 398 40 287 682 (1,177) 230
------ ---------- ---------- --------- --------- -------
Long-term debt................................... - 694 - 6 - 700
Other long-term obligations...................... - - 193 35 1 229
Deferred income taxes............................ - - 1 31 (1) 31
Minority stockholders' equity in consolidated
entities....................................... - - - 27 - 27
Stockholders' equity (deficit)................... (348) 36 14 (143) 93 (348)
------ ---------- ---------- --------- --------- -------
Total liabilities and stockholders' equity
(deficit)................................... $ 50 $ 770 $ 495 $ 638 $ (1,084) $ 869
======== ========== ========== ========= ========= =======
29
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
AT DECEMBER 31, 2001
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................. - 885 442 365 (1,597) 95
Inventories:
Raw materials and supplies................ - - 3 32 (2) 33
Work in process........................... - - 45 66 - 111
Finished goods............................ - - 8 26 (1) 33
-------- -------- ------- --------- --------- ---------
- - 56 124 (3) 177
Prepaid expenses and deferred income taxes.... - - 7 5 - 12
-------- -------- ------- --------- --------- ---------
Total current assets...................... - 901 513 508 (1,600) 322
--------
Property, plant and equipment................... - - 308 627 (4) 931
Less: accumulated depreciation................. - - (256) (394) - (650)
-------- -------- ------- --------- --------- ---------
Net fixed assets.............................. - - 52 233 (4) 281
-------- -------- ------- --------- --------- ---------
Deferred income taxes and other assets........... 58 29 216 74 (183) 194
-------- -------- ------- --------- --------- ---------
Total assets.................................. $ 58 $ 930 $ 781 $ 815 $ (1,787) $ 797
======== ======== ======= ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 8 $ 13 $ 50 $ 92 $ (62) $ 101
Short-term debt............................... 397 274 407 450 (1,521) 7
Accrued income and other taxes................ (15) - 42 18 - 45
Other accrued liabilities..................... - - 39 33 (15) 57
-------- -------- ------- --------- --------- ---------
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............................ - - 5 32 (5) 32
Minority stockholders' equity in consolidated
entities....................................... - - - 23 2 25
Stockholders' equity (deficit)................... (332) 17 41 112 (170) (332)
-------- -------- ------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit)................................... $ 58 $ 930 $ 781 $ 815 $ (1,787) $ 797
======== ======== ======= ========= ========= =========
30
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 2001 AND 2002
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales........................................... $ - $ - $ 63 $ 133 $ (35) $ 161
Cost of sales....................................... - - 52 103 (30) 125
-------- -------- -------- --------- --------- ---------
Gross profit..................................... - - 11 30 (5) 36
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. 5 (16) (91) 19 113 30
Interest income..................................... - (12) (6) - 18 -
Interest expense.................................... 6 16 4 9 (18) 17
-------- -------- -------- --------- --------- ---------
Income (loss) before provision for income taxes.. (11) 12 104 2 (118) (11)
Provision for (benefit from) income taxes........... (4) 4 (13) 8 - (5)
-------- -------- -------- --------- --------- ---------
Income (loss) of consolidated entities........... (7) 8 117 (6) (118) (6)
Minority stockholders' share of income.............. - - - - - -
Equity in earnings of subsidiaries.................. - - 124 - (124) -
-------- -------- -------- --------- --------- ---------
Income (loss) before extraordinary item.......... (7) 8 (7) (6) (6) (6)
Extraordinary item, net of tax...................... - 1 - - - 1
-------- -------- -------- --------- --------- ---------
Net income (loss)............................. $ (7) $ 7 $ (7)$ (6) $ (6) $ (7)
======== ======== ======== ========= ========= =========
THREE MONTHS ENDED JUNE 30, 2001
--------------------------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales........................................... $ - $ - $ 63 $ 139 $ (31) $ 171
Cost of sales....................................... - - 49 97 (26) 120
-------- -------- -------- --------- --------- ---------
Gross profit..................................... - - 14 42 (5) 51
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. - (1) 141 15 (65) 90
Interest income..................................... - (19) - (5) 24 -
Interest expense.................................... 9 21 4 6 (24) 16
-------- -------- -------- --------- --------- ---------
Income (loss) before provision for income taxes.. (9) (1) (131) 26 60 (55)
Provision for (benefit from) income taxes........... (3) - (41) 6 22 (16)
-------- -------- -------- --------- --------- ---------
Income (loss) of consolidated entities........... (6) (1) (90) 20 38 (39)
Minority stockholders' share of income.............. - - - - - -
Equity in earnings of subsidiaries.................. 33 - (58) - 25 -
-------- -------- -------- --------- --------- ---------
Net income (loss)............................. $ (39) $ (1) $ (32)$ 20 $ 13 $ (39)
======== ======== ======== ========= ========= =========
31
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2002
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales........................................... $ - $ - $ 116 $ 252 $ (69) $ 299
Cost of sales....................................... - - 97 195 (60) 232
-------- -------- -------- --------- --------- ---------
Gross profit..................................... - - 19 57 (9) 67
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. 5 (19) (102) 39 131 54
Interest income..................................... - (24) (12) (4) 40 -
Interest expense.................................... 12 32 9 17 (40) 30
-------- -------- -------- --------- --------- ---------
Income (loss) before provision for income taxes.. (17) 11 124 5 (140) (17)
Provision for (benefit from) income taxes........... (6) 4 (25) 17 - (10)
-------- -------- -------- --------- --------- ---------
Income (loss) of consolidated entities........... (11) 7 149 (12) (140) (7)
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. - - 153 - (153) -
-------- -------- -------- --------- --------- ---------
Income (loss) before extraordinary item.......... (11) 7 (4) (13) 13 (8)
Extraordinary item, net of tax...................... - 3 - - - 3
-------- -------- -------- --------- --------- ---------
Net income (loss)............................. $ (11) $ 4 $ (4)$ (13) $ 13 $ (11)
======== ======== ======== ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2001
------------------------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net sales........................................... $ - $ - $ 131 $ 278 $ (67) $ 342
Cost of sales....................................... - - 104 195 (57) 242
-------- -------- -------- --------- --------- ---------
Gross profit..................................... - - 27 83 (10) 100
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. - (1) 153 27 (65) 114
Interest income..................................... - (40) - (10) 50 -
Interest expense.................................... 19 42 11 13 (50) 35
-------- -------- -------- --------- --------- ---------
Income (loss) before provision for income taxes.. (19) (1) (137) 53 55 (49)
Provision for (benefit from) income taxes........... (7) - (43) 14 22 (14)
-------- -------- -------- --------- --------- ---------
Income (loss) of consolidated entities........... (12) (1) (94) 39 33 (35)
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. 24 - (71) - 47 -
-------- -------- -------- --------- --------- ---------
Net income (loss)............................. $ (36) $ (1) $ (23)$ 38 $ (14) $ (36)
======== ======== ======== ========= ========= =========
32
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE SIX MONTHS ENDED JUNE 30, 2001 AND 2002
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by (used in) operating activities. $ (23) $ 70 $ 109 $ (243) $ 51 $ (36)
Net cash provided by (used in) investing activities. - 133 92 255 (500) (20)
Net cash provided by (used in) financing activities. 23 (209) (207) 10 449 66
-------- -------- -------- --------- --------- ---------
Net increase (decrease) in cash and cash
equivalents...................................... - (6) (6) 22 - 10
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - 3 - 3
Cash and cash equivalents at beginning of period.... - 16 8 14 - 38
-------- -------- -------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ 10 $ 2 $ 39 $ - $ 51
======== ======== ======== ========= ========= =========
SIX MONTHS ENDED JUNE 30, 2002
------------------------------
U.S. NON-
PARENT ISSUER GUARANTORS GUARANTORS ELIMINATIONS CONSOLIDATED
------ ------ ---------- ---------- ------------ ------------
(DOLLARS IN MILLIONS)
Net cash provided by (used in) operating activities. $ (19) $ (8) $ (68) $ 89 $ 7 $ 1
Net cash provided by (used in) investing activities. - (54) 8 (83) 122 (7)
Net cash provided by (used in) financing activities. 19 60 55 (10) (129) (5)
-------- -------- -------- --------- --------- ---------
Net increase in cash and cash equivalents........... - (2) (5) (4) - (11)
Effect of exchange rate changes on cash and cash
equivalents...................................... - - - (1) - (1)
Cash and cash equivalents at beginning of period.... - 31 7 9 - 47
-------- -------- -------- --------- --------- ---------
Cash and cash equivalents at end of period.......... $ - $ 29 $ 2 $ 4 $ - $ 35
======== ======== ======== ========= ========= =========
33
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured intercompany term notes in an aggregate principal amount, at
June 30, 2002, equal to $403 million (based on currency exchange rates in effect
at June 30, 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 Graftech, but at no time
will the value of the pledged portion of such shares exceed 19.99% of the
principal amount of the then outstanding Senior Notes.
Rule 3-16 of Regulation S-X adopted by the SEC provides that, for each
of the registrant's affiliates whose securities constitute a "substantial"
portion of the collateral for registered securities, financial statements (that
would be required to be filed if the affiliate were a registrant) must be filed
with this Report. Under Rule 3-16(b), securities of a person will be deemed to
constitute a "substantial" portion of the collateral if the aggregate principal
amount, par value, or book value of securities as carried by the registrant, or
the market value of such securities, whichever is the greatest, equals 20% or
more of the principal amount of the registered securities. In this case, the
pledges of common stock of Graftech and the intercompany notes and related
guarantees have been limited such that they will never be more than 19.99% of
the principal amount of the outstanding Senior Notes. Therefore, no such
financial statements are required to be included in this Report.
(10) OTHER (INCOME) EXPENSE, NET
The following table presents an analysis of other (income) expense,
net:
FOR THE SIX MONTHS ENDED
JUNE 30,
-------
2001 2002
---- ----
Interest income.................................. $ (2) $ (2)
Currency (gains) losses.......................... (1) (20)
Bank fees........................................ 1 1
Loss on sale of accounts receivable.............. 1 1
Amortization of goodwill......................... 1 -
(Gain) loss on sale of assets.................... (1) -
Legal liability reserve (other than antitrust
investigations and related lawsuits and
claims)...................................... - 2
Other............................................ 1 2
----- -----
Total other (income) expense, net............ $ - $ (16)
===== =====
34
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
(11) SUBSEQUENT EVENT
On July 1, 2002, we amended our U.S. post-retirement medical coverage.
Effective December 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 employees not covered by a collective bargaining
agreement, all current retirees and those employees who retire while their
current collective bargaining agreement is in effect. This change will reduce
our net post-retirement medical benefit obligation by about $7 million.
35
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1
IMPORTANT TERMS
We use the following terms to identify various companies or groups of
companies or other matters. These terms help to simplify the presentation of
information in this Report.
"GTI" refers to GrafTech International Ltd. only. GTI is our public
parent company and the issuer of the publicly traded common stock covered by
this Report. GTI is a guarantor of the Senior Notes. 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. 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.
"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"). Prior to June 7, 2002, GrafTech Finance was named
UCAR Finance Inc.
"GRAFTECH" refers to Graftech Inc. only. Graftech is our 97.5% owned
(wholly owned, prior to June 2001) subsidiary engaged in the development,
manufacture and sale of natural graphite-based products.
"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 graphite and carbon cathodes.
"SUBSIDIARIES" refer to those companies which, 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 June 30, 2002, except for:
o Carbone Savoie, which has been and is 70% owned; and
o Graftech, which was 100%, owned until it became 97.5% owned in June
2001.
36
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Our 100% owned Brazilian cathode manufacturing operations were contributed to
Carbone Savoie and, as a result, became 70% owned on March 31, 2001.
"WE," "US" or "OUR" refers to GTI and its subsidiaries collectively or,
if the context so requires, GTI, GrafTech Global or GrafTech Finance,
individually.
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
We present our financial information on a consolidated basis. This
means that we consolidate financial information for all subsidiaries where our
ownership is greater than 50%. We use the equity method to account for 50% or
less owned entities (excluding less than 20% owned entities accounted for using
the cost method), and we do not restate financial information for periods prior
to the acquisition of subsidiaries. This means that the financial information
for our consolidated subsidiaries is consolidated on each line of the
Consolidated Financial Statements and the equity of the other minority owners is
reflected on the lines entitled "minority stockholders' equity in consolidated
entities" and "minority stockholders' share of income."
Unless otherwise stated, when we refer to "EBITDA" we mean gross
profit, less research and development expense, selling, administrative and other
expenses, restructuring charges (credits), investigation, class action, lawsuit
and claim expenses, global realignment and related expenses and other (income)
expense, net, plus depreciation, amortization, inventory write-downs and that
portion of restructuring charges (credits) applicable to non-cash asset
write-offs. Compensation expense associated with stock grants and impairment
losses on long-lived assets and securities held-for-sale are excluded from
EBITDA. The amount of restructuring charges (credits) applicable to non-cash
asset write-offs was a charge of $3 million in the 2001 first half and nil for
the 2002 first half. We believe that EBITDA is generally accepted as providing
useful information regarding a company's ability to incur and service debt.
EBITDA should not be considered in isolation or as a substitute for net income,
cash flows from continuing operations or other consolidated income or cash flow
data prepared in accordance with generally accepted accounting principles or as
a measure of a company's profitability or liquidity. Our method for calculating
EBITDA may not be comparable to methods used by other companies and is not the
same as the method for calculating EBITDA under the Senior Facilities or the
Senior Notes. The method for calculating EBITDA under the Senior Facilities is
not the same as it is under the Senior Notes.
References to cost in the context of our low-cost supplier strategy do
not include the impact of special or non-recurring charges or credits, such as
those related to investigations, lawsuits or claims, restructurings, impairment
losses, inventory write-downs or expenses incurred in connection with lawsuits
initiated by us, or the impact of accounting changes.
All cost savings and reductions relating to our 1998 enhanced global
restructuring and rationalization plan are estimates based on a comparison, with
respect to provision for income taxes, to costs in 1998 or, for all other costs,
to costs in the 1998 fourth quarter (annualized). All cost savings and
reductions relating to our new major cost savings plan announced in January 2002
are estimates or targets based on a comparison to costs in 2001 (and assuming no
change in
37
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
currency exchange rates). For these purposes, in 2001, our average graphite
electrode production cost per metric ton was $1,691, our annual overhead costs
were $78 million and our effective income tax rate was 45% before taking into
account the corporate realignment of our subsidiaries. Estimates and targets of
savings in interest expense resulting from the 2002 plan do not give effect to
the increase in interest expense resulting from the issuance of the Senior
Notes.
Neither any statement made in this Report nor any charge taken by us
relating to any legal proceedings constitutes an admission as to any wrongdoing
or liability.
Unless otherwise specifically noted, market and market share data in
this Report are our own estimates. Market data relating to the steel industry,
our general expectations concerning such industry and our market position and
market share within such industry, both domestically and internationally, are
derived from publications by the International Iron and Steel Institute and
other industry sources as well as assumptions made by us, based on such data and
our knowledge of the industry, which we believe to be reasonable. Market data
relating to the fuel cell power generation industry, our general expectations
concerning such industry and our market position and market share within such
industry, both domestically and internationally, are derived from publications
by securities analysts relating to Ballard Power Systems Inc. ("BALLARD POWER
SYSTEMS"), other industry sources and public filings, press releases and other
public documents of Ballard Power Systems as well as assumptions made by us,
based on such data and our knowledge of the industry, which we believe to be
reasonable. Market and market share data relating to the graphite and carbon
industry as well as cost information relating to our competitors, our general
expectations concerning such industry and our market position and market share
within such industry, both domestically and internationally, are derived from
the sources described above and public filings, press releases and other public
documents of our competitors as well as assumptions made by us, based on such
data and our knowledge of the industry, which we believe to be reasonable.
Although we are not aware of any misstatements regarding any industry or market
share data, our estimates involve risks and uncertainties and are subject to
change based on various factors, including those discussed under "Risk Factors"
and "Forward-Looking Statements" in this Report and the Annual Report. We cannot
guarantee the accuracy or completeness of this data and have not independently
verified it. We have not sought the consent of any of the sources mentioned
above to the disclosure or use of data in this Report.
Unless otherwise noted, when we refer to dollars, we mean U.S. dollars.
Unless otherwise noted, references to "MARKET SHARES" are based on unit
volumes in 2001. As used herein, references to "MAJOR PRODUCT LINES" mean
graphite and carbon electrodes and cathodes and flexible graphite.
The GRAFTECH logo, GRAFCELL(R), eGraf(TM), GRAFOIL(R), GRAFGUARD(R) and
GRAFSHIELD(R) are our trademarks and trade names. This Report also contains
trademarks and trade names belonging to other parties.
38
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
We maintain a Web site at http://www.graftechinternational.com, our
subsidiary Graftech maintains a Web site at http://www.graftech.com and our High
Tech High Temp ("HT2") business unit maintains a Web site at http://www.HT2.com.
The information contained on these Web sites is not part of this Report.
Reference is made to our Annual Report on Form 10-K for the year ended
December 31, 2001, filed under GTI's former name, UCAR International Inc. (the
"ANNUAL REPORT"), for background information on various risks and contingencies
and other matters related to circumstances affecting us and our industry.
FORWARD LOOKING STATEMENTS AND RISKS
This Report contains forward looking statements. In addition, from time
to time, we or our representatives have made or may make forward looking
statements orally or in writing. These include statements about such matters as:
future production and sales of steel, aluminum, fuel cells, electronic devices
and other products that incorporate our products or that are produced using our
products; future prices and sales of and demand for graphite electrodes and our
other products; future operational and financial performance of various
businesses; strategic plans; impacts of regional and global economic conditions;
restructuring, realignment, strategic alliance, supply chain, technology
development and collaboration, investment, acquisition, joint venture,
operating, integration, tax planning, rationalization, financial and capital
projects; legal matters and related costs; consulting fees and related projects;
potential offerings, sales and other actions regarding debt and equity
securities of us and our subsidiaries; and future costs, working capital,
revenue, business opportunities, values, debt levels, cash flows, cost savings
and reductions, margins, earnings and growth. The words "will," "may," "plan,"
"estimate," "project," "believe," "anticipate," "intend," "expect," "should,"
"target," "goal" and similar expressions identify some of these statements.
Actual future events and circumstances (including future performance,
results and trends) could differ materially from those set forth in these
statements due to various factors. These factors include:
o the possibility that global or regional economic conditions affecting
our products may not improve or may worsen;
o the possibility that anticipated additions to capacity for producing
steel in electric arc furnaces, or announced or anticipated reductions
in graphite electrode manufacturing capacity, may not occur;
o the possibility that increased production of steel in electric arc
furnaces or reductions in graphite electrode manufacturing capacity
may not result in stable or increased demand for or prices or sales
volume of graphite electrodes;
39
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility that economic or technological developments may
adversely affect growth in the use of graphite cathodes in lieu of
carbon cathodes in the aluminum smelting process;
o the possibility of delays in or failure to achieve widespread
commercialization of proton exchange membrane, or "PEM," fuel cells
which use natural graphite materials and components and that
manufacturers of PEM fuel cells may obtain those materials or
components used in them from other sources;
o the possibility of delays in or failure to achieve successful
development and commercialization of new or improved electronic
thermal management or other products;
o the possibility of delays in meeting or failure to meet product
development milestones or delays in expanding or failure to expand
manufacturing capacity;
o the possibility that we may unable to protect our intellectual
property or may infringe the intellectual property rights of others;
o the possibility that the lawsuit against our former parents initiated
by us could be dismissed or settled, our theories of liabilities or
damages could be rejected, material counterclaims could be asserted
against us, legal expenses and distraction of management could be
greater than anticipated, or unanticipated events or circumstances may
occur;
o the occurrence of unanticipated events or circumstances relating to
antitrust investigations or lawsuits or to lawsuits initiated by us
against our former parents;
o the commencement of new investigations, lawsuits or claims relating to
the same subject matter as the pending investigations, lawsuits or
claims;
o the possibility that expected cost savings from our various cost
savings efforts may not be fully realized;
o the occurrence of unanticipated events or circumstances relating to
health, safety or environmental compliance or remediation obligations
or labor relations;
o the occurrence of unanticipated events or circumstances relating to
strategic plans or relating to restructuring, realignment, strategic
alliance, supply chain, technology development and collaboration,
investment, acquisition, operating, tax planning, rationalization,
financial or capital projects;
o changes in interest or currency exchange rates, in competitive
conditions or in inflation affecting our raw material, energy or other
costs;
40
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility of our failure to satisfy conditions or milestones to
our strategic alliances with Jilin, Pechiney, Ballard Power Systems,
Conoco or others;
o the possibility that changes in our financial performance may affect
our compliance with financial covenants or the amount of funds
available for borrowing under the Senior Facilities; and
o other risks and uncertainties, including those described elsewhere or
incorporated by reference in this Report.
Occurrence of any of the events or circumstances described above could
also have a material adverse effect on our business, financial condition,
results of operations or cash flows.
No assurance can be given that any future transaction about which
forward looking statements may be made will be completed or as to the timing or
terms of any such transaction.
All subsequent written and oral forward looking statements by or
attributable to us or persons acting on our behalf are expressly qualified in
their entirety by these factors. Except as otherwise required to be disclosed in
periodic reports required to be filed by public companies with the SEC pursuant
to the SEC's rules, we have no duty to update these statements.
41
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
We are one of the world's largest manufacturers and providers of high
quality natural and synthetic graphite- and carbon-based products and services,
offering energy solutions to industry-leading customers worldwide. We
manufacture graphite and carbon electrodes and cathodes, used primarily in
electric arc furnace steel production and aluminum smelting. We also manufacture
other natural and synthetic graphite and carbon products used in, and provide
services to, the fuel cell power generation, electronics, semiconductor and
transportation markets. We believe that we have the leading market share in all
of our major product lines. We have over 100 years of experience in the research
and development of graphite and carbon technology, and currently hold numerous
patents related to this technology.
We are a global business, selling our products and engineering and
technical services in more than 70 countries. We have 13 manufacturing
facilities strategically located in Brazil, Mexico, South Africa, France, Spain,
Russia and the U.S. Our customers include industry leaders such as Nucor
Corporation and Arcelor in steel, Alcoa Inc. and Pechiney in aluminum, Ballard
Power Systems in fuel cells, Intel Corporation in electronics, MEMC Electronic
Materials, Inc. in semiconductors and The Boeing Company in transportation.
REALIGNMENT AND NAME CHANGE
In early 2001, we launched a strategic initiative to strengthen our
competitive position and to change our corporate vision from an industrial
products company to an energy solutions company. In connection with this
initiative, we have realigned our company and management around two new
operating divisions, our Graphite Power Systems Division and our Advanced Energy
Technology Division. We believe that this realignment is enabling us to develop
and implement strategies uniquely designed to maximize the value of each of our
businesses. We may also adopt compensation plans designed to incentivize
management of each division on a basis consistent with its particular
strategies. In addition, we believe that this transparent, unified divisional
focus has and will continue to better enable us to structure and enter into
strategic alliances beneficial to each respective division.
To reflect our new emphasis on graphite and carbon technology, our new
corporate vision, we changed the name of our parent public company to GrafTech
International Ltd. in May 2002. Our new trading symbol on the NYSE is "GTI."
We have realigned the corporate organizational structure of our foreign
subsidiaries. As a result, most of the non-U.S. businesses of each of our two
divisions are segregated into separate companies along divisional lines. In
addition, because most of the operations, net sales and growth opportunities of
our Graphite Power Systems Division are located outside the U.S., most of its
operations are held by our Swiss subsidiary or its subsidiaries. Most of our
42
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
technology is held by our U.S. subsidiaries. We may in the future similarly
realign the corporate organizational structure of our U.S. subsidiaries.
As part of our new major cost savings plan announced in January 2002,
we have used and are continuing to use opportunities created by this corporate
organizational realignment to change our U.S. benefit plans, improve cash
management, intellectual property management and corporate services delivery,
reduce associated costs, reduce taxes and reallocate intercompany debt. This
reallocation of intercompany debt better matches intercompany debt with cash
flow from operations. Debt service on our intercompany debt provides an
important source of funds to repay our debt to third parties, including the
Senior Facilities and the Senior Notes.
OUR DIVISIONS
Our Graphite Power Systems Division manufactures and delivers high
quality graphite and carbon electrodes and cathodes and related services that
are key components of the conductive power systems used to produce steel,
aluminum and other non-ferrous metals. Graphite electrodes are consumed in the
production of steel in electric arc furnaces, the steel making technology used
by all "mini-mills." Mini-mills constitute the higher long-term growth sector of
the steel industry. Graphite electrodes are also consumed in refining steel in
ladle furnaces and in other smelting processes. Our graphite electrodes
accounted for about 76% of this division's net sales during the 2002 first half.
Carbon electrodes are used in the production of silicon metal, a raw material
primarily used in the manufacture of aluminum. Graphite and carbon cathodes are
used in aluminum smelting.
Because of its strong competitive position, we believe that this
division is well positioned to benefit from the expected cyclical recovery in
production of steel and other metals. To maintain its strong competitive
position, we have instituted a number of strategic initiatives to improve the
cost structure, increase the revenues and maximize the cash flow generated by
this division. These strategic initiatives include pursuing cost savings,
leveraging our global presence with industry leading customers, expanding
value-driven enterprise selling, delivering exceptional and consistent quality,
and providing superior technical service.
Our Advanced Energy Technology Division develops, manufactures and
sells high quality, highly engineered natural and synthetic graphite- and
carbon-based energy technologies, products and services for both established and
high-growth-potential markets. We currently sell these products primarily to the
transportation, chemical, petrochemical, fuel cell power generation and
electronic thermal management markets. In addition, we provide cost effective
technical services to a broad range of markets and license our proprietary
technology in markets where we do not anticipate engaging in manufacturing
ourselves. We believe that this division will be successful because of our
patented and proprietary technologies related to graphite and carbon materials
science and our processing and manufacturing technology.
Natural graphite-based products, including flexible graphite, are
developed and manufactured by our subsidiary, Graftech. We are the world's
leading manufacturer of natural graphite-based products, including flexible
graphite. Flexible graphite is an excellent gasket and
43
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
sealing material that to date has been used primarily in high temperature and
corrosive environments in the automotive, chemical and petrochemical markets.
Advanced flexible graphite can be used in the production of materials,
components and products for proton exchange membrane fuel cells and fuel cell
systems, electronic thermal management applications, industrial thermal
management applications, and battery and supercapacitor power storage
applications. Our synthetic graphite- and carbon-based products are developed
and manufactured by our Advanced Graphite Materials and Advanced Carbon
Materials business units, respectively. Their products range from established
products, such as graphite and carbon refractories, graphite molds and rocket
nozzles and cones, to new carbon composites used in fuel cell power generation
and electronic thermal management markets. Our technology licensing and
technical services are marketed and sold by our HT2 business unit.
We are focused on leveraging our strengths to build the value of this
division through the development and commercialization of our technologies into
high-growth-potential markets. These strengths include:
o developing intellectual property;
o developing and commercializing prototype and next generation products
and services; and
o establishing strategic alliances with leading customers and suppliers
as well as key technology focused companies.
We seek to identify technologies where this division's products and
services offer advantages in performance or cost as compared to competitive
technologies, materials, products or services.
We filed 18 new patent applications during the 2002 second quarter and
29 during the 2002 first half. We received 6 new patents during the 2002 second
quarter and 4 during the 2002 first quarter. The new patent filings primarily
relate to fuel cell and electronic thermal management applications. In the 2002
second quarter, total patent application and patent application rights filings
increased to more than 280 and total issued patents increased to 168.
COST REDUCTION PLANS
OVERVIEW. GTI's Board of Directors adopted a global restructuring and
rationalization plan in September 1998 and we launched additional initiatives to
enhance the plan in October 1999. The 1998 plan is now completed. By the end of
2001, we delivered recurring annualized run rate cost savings of $132 million.
In January 2002, we announced a new major cost savings plan. Like the 1998 plan,
we believe that the 2002 plan is by far the most aggressive major cost reduction
plan being implemented in the graphite and carbon industry.
44
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
2002 PLAN. In January 2002, we announced a new major cost savings plan
designed to generate cost savings to strengthen our balance sheet. The key
elements of the 2002 plan consist of:
o the rationalization of graphite electrode manufacturing capacity at
our higher cost facilities and the incremental expansion of capacity
at our lower cost facilities;
o the redesign and implementation of changes in our U.S. benefit plans
for active and retired employees, which was completed in the 2002
first quarter;
o the implementation of global work process changes, including the
consolidation and streamlining of order fulfillment, purchasing,
finance and accounting, and human resource processes, along with the
identification and implementation of outsourcing opportunities,
targeted for completion by the end of 2003;
o the implementation of additional plant and corporate overhead cost
reduction projects; and
o the corporate realignment of our subsidiaries, consistent with the
operational realignment of our businesses into two operating
divisions, to generate significant tax savings.
As part of the 2002 plan, we mothballed our graphite electrode
manufacturing operations in Caserta, Italy during the 2002 first quarter, ahead
of schedule. These operations had the capacity to manufacture 26,000 metric tons
of graphite electrodes annually. After the shutdown of our graphite electrode
manufacturing operations in Clarksville and Columbia, Tennessee in the 2001
third quarter, these operations were our highest cost graphite electrode
manufacturing operations. We expect to further incrementally expand graphite
electrode manufacturing capacity at our facilities in Mexico, France and Spain
over the next nine to twelve months. After the mothballing and incremental
expansion, our total annual graphite electrode manufacturing capacity will
remain about 210,000 metric tons. During the 2002 second quarter, we launched
the expansion at our facility in Monterrey, Mexico, which will increase its
capacity from about 40,000 metric tons to about 60,000 metric tons annually. We
expect to complete this expansion during the 2003 first quarter.
We have identified a number of additional plant and overhead cost
reduction projects. One of the major projects is employee benefit plan redesign.
We have redesigned and implemented changes in our retiree medical insurance plan
and our U.S. retirement and savings plans for active and retired employees.
These benefit plan changes resulted in annual cost savings of $2 million in 2001
and are expected to result in annual cost savings of more than $19 million in
2002 and thereafter. We expect that about half of the other plant and overhead
cost reduction projects will be completed in 2002.
The corporate realignment of our subsidiaries was substantially
completed in the 2002 first half and resulted in substantial tax savings. As a
result of the corporate realignment of our
45
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
subsidiaries, the effective income tax rate for 2002, excluding non-recurring
charges or benefits associated with the corporate realignment of our
subsidiaries, is expected to be about 35%.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years. We anticipate that the
aggregate estimated pre-tax, cash proceeds from these sales will total $75
million by the end of 2003. These non-strategic businesses contributed net sales
of about $25 million in 2001. We believe that satisfactory progress is being
made on the planned asset sales and that successful completion of those asset
sales will strengthen our balance sheet.
We are targeting recurring annual cost savings of $80 million by the
end of 2004. These savings are additive to those which we achieved by the end of
2001 under the 1998 plan that is now completed. The following table summarizes
the targeted savings under the 2002 plan:
SUMMARY OF TARGETED ANNUAL COST SAVINGS
YEAR ENDED DECEMBER 31,
----------------------
2002 2003 2004 CUMULATIVE
---- ---- ---- ----------
(PRE-TAX DOLLARS IN MILLIONS)
Cost of sales:
Graphite Power Systems Division................... $ 24 $ 43 $ 43 $ 110
Advanced Energy Technology Division............... 4 4 4 12
---- ---- ---- -------
Total cost of sales............................ 28 47 47 122
Overhead costs........................................ 9 10 11 30
---- ---- ---- -------
Total cost of sales and overhead costs......... 37 57 58 152
Interest expense savings due to the 2002 plan......... 2 8 12 22
Tax expense........................................... 6 10 10 26
---- ---- ---- -------
Total savings.................................. $ 45 $ 75 $ 80 $ 200
==== ==== ==== =======
We achieved cost savings of about $2 million in the 2002 second quarter
and about $9 million in the 2002 first half. While we expect increased cost
savings during the 2002 second half as our operating levels improve, we also
expect that targeted savings for 2002 will be realized over a longer period
primarily due to recent changes in currency exchange rates, lower than expected
graphite electrode production during the 2002 first half and the reintroduction
of our global incentive programs during the 2002 first half. As a result, we
expect that cost savings targets for 2002 will not be achieved until mid-2003.
We remain confident that we will achieve the $80 million recurring annual cost
savings target for 2004.
We believe that the 2002 plan will:
o further strengthen our position and our competitive advantage as a low
cost supplier to the steel and other metals industries;
o better enable us to largely maintain our gross profit margin and
operating margin during the current global economic downturn;
46
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o rationalize our capacity to manufacture both higher value added
"supersize" ultra-high power graphite electrodes as well as cost
competitive high power small diameter graphite electrodes for ladle
furnaces;
o further improve our position to benefit, in terms of operations,
earnings and cash flow from operations, from the expected cyclical
recovery in electric arc furnace steel production; and
o enable us to further reduce total debt, which should result in savings
in interest expense (interest expense savings do not take into account
higher interest expense resulting from the sale of the Senior Notes).
We completed the mothballing of our Italian graphite electrode
operations during the 2002 first quarter. As expected and previously announced,
working capital requirements temporarily increased similar to what we
experienced with the closure of our U.S. graphite electrode operations, and net
debt levels increased during the 2002 first half as a result of these working
capital needs and lower net sales of graphite electrodes, due to both seasonal
factors and economic conditions.
We believe that implementation of the 2002 plan will require about $20
million of cash exit costs, of which about $15 million has been recorded and
expensed through June 30, 2002. Approximately $7 million of the $15 million has
been paid through June 30, 2002. The 2002 plan resulted in about $29 million of
non-cash restructuring charges and impairment losses on long-lived assets, of
which about $24 million was recorded in the 2001 fourth quarter. In addition, in
the 2002 first quarter, we recorded a $5 million restructuring charge that
related primarily to the mothballing of our graphite electrode operations in
Italy under the 2002 plan. This charge includes estimated pension, severance and
other related employee benefit costs for 102 employees and other costs related
to the mothballing. These costs are additive to the $3 million of cash exit
costs and $58 million of non-cash restructuring charges and impairment losses on
long-lived assets related to the shutdown of our graphite electrode
manufacturing operations in Tennessee recorded in 2001.
The mothballing of our graphite electrode operations in Italy will
enable us to avoid annually an average of $2 million of otherwise necessary
capital expenditures. We expect to make the planned incremental expansions of
graphite electrode manufacturing capacity for capital expenditures of $15
million and complete such expansion within the next nine to twelve months.
1998 PLAN. The key elements of our global restructuring and
rationalization plan announced in September 1998 and enhanced in October 1999
included the shutdown of our graphite electrode manufacturing operations at our
facilities in Canada and Germany and the downsizing of our graphite electrode
manufacturing operations at our facilities in Russia.
47
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
As a result of the 1998 plan and other cost savings initiatives, we have reduced
our average graphite electrode production cost per metric ton by the end of 2001
by 15% since the 1998 fourth quarter.
OTHER COST SAVINGS ACTIVITIES. Since 1998, we have initiated other cost
savings activities. Some of these activities will continue while the 2002 plan
is being implemented.
We began to implement in 2000 and are continuing to implement a global
business process rationalization and transformation initiative. Through June 30,
2002, our investment in the initiative included about $4 million of consulting
fees and $3 million of capital expenditures, primarily for advanced planning and
scheduling software and global treasury management systems. We believe that most
of the future investment for this initiative will be funded from realized cost
savings.
We have evaluated every aspect of our supply chain and improved and
continue to improve performance through realignment and standardization of
supply chain processes and systems and improvement of interfaces with trading
partners. We reduced inventory levels from 1998 by about 33%, or to about $180
million, by the end of 2001 and reduced our cash cycle time, as compared to
1998, by about 25% by the end of 2001.
Effective April 2001, we entered into a ten year service contract with
CGI Group Inc. pursuant to which CGI became the delivery arm for our global
information technology service requirements, including the design and
implementation of our global information and advanced manufacturing and demand
planning processes, using J.D. Edwards software. Through this contract, we are
seeking to transform our information technology service capability into an
efficient, high quality enabler for our global supply chain initiatives as well
as a contributor to our cost reduction objectives. Under the outsourcing
provisions of this contract, CGI manages our data center services, networks,
desktops, telecommunications and legacy systems. Through this contract, we
believe that we will be able to leverage the resources of CGI to assist us in
achieving our information technology goals and our target cost savings.
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 at our facilities in
Clarksville and Columbia, Tennessee. In 2000, these operations were our highest
cost graphite electrode manufacturing operations. We expect that the shutdown
will result in total annual cost savings of $18 million and will enable us to
avoid about $9 million in otherwise necessary capital expenditures. Certain of
these cost savings were realized in 2001 and the balance are expected to be
realized in 2002. The shutdown was completed on schedule near the end of the
2001 third quarter. We incrementally expanded graphite electrode manufacturing
capacity at our facilities in Mexico, Spain and South Africa for a capital
investment of about $3 million.
In the 2001 third quarter, we recorded a $2 million charge for
restructuring and impairment loss on long-lived assets related to the
realignment of our businesses into our Advanced Energy Technology Division and
Graphite Power Systems Division, the relocation of
48
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
our corporate headquarters and the shutdown of our coal calcining operations
located in Niagara Falls, New York. We shut down our coal calcining operations
primarily because we entered into a five-year agreement to purchase calcined
coal from a third party at a lower net effective cost than we can produce it for
ourselves. The shutdown was completed at the end of 2001. As part of the
business realignment, we have centralized management functions of our Advanced
Energy Technology Division in Cleveland, Ohio, and management functions of our
Graphite Power Systems Division in Etoy, Switzerland. On December 21, 2001, we
relocated our corporate headquarters, consisting of about 10 employees, from
Nashville, Tennessee, to Wilmington, Delaware. The charge relates primarily to a
workforce reduction of 24 employees.
In the 2001 fourth quarter, we recorded an impairment loss on
long-lived and other assets of $27 million, $24 million of which was associated
with the mothballing of our Italian graphite electrode operations. We also
recorded a $7 million non-cash restructuring charge, $5 million of which was
associated with our Italian operations and $2 million of which was associated
with the shutdown of our U.S. graphite electrode operations in addition to the
charge recorded in the 2001 second quarter.
In the 2002 second quarter, we recorded a $13 million ($8 million after
tax) non-cash charge primarily related to the impairment of our long-lived
carbon electrode assets in Columbia, Tennessee, primarily due to 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.
STRATEGIC ALLIANCES
We are pursuing strategic alliances that enhance or complement our
existing or related businesses and have the potential to generate strong cash
flow. Strategic alliances may be in the form of joint venture, licensing, supply
or other arrangements that leverage our strengths to achieve cost savings,
improve margins and cash flow, and increase net sales and earnings growth.
We have developed a strategic relationship with Conoco. In December
2000, we entered into a license and technical services agreement with Conoco to
license our proprietary technology for use at the carbon fiber manufacturing
facility that Conoco is building in Ponca City, Oklahoma. We also will continue
to provide a wide variety of technical services to Conoco. Under a separate
manufacturing tolling agreement entered into February 2001, we are providing
manufacturing services to Conoco at our facility in Clarksburg, West Virginia
for carbon fibers. Under the three-year manufacturing tolling agreement, we are
using raw materials provided by Conoco to manufacture carbon fibers. Conoco's
new carbon fiber technology could be used in portable power applications, such
as batteries for personal computers and cell phones, as well as a wide range of
other electronic devices and automotive applications. We are working with Conoco
to expand our strategic relationship in supply chain and other areas.
We have developed a strategic alliance in the cathode business with
Pechiney, the world's recognized leader in aluminum smelting technology. To
broaden our alliance, in March
49
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
2001, we contributed our Brazilian cathode manufacturing operations to Carbone
Savoie. Pechiney, the 30% minority owner of Carbone Savoie, contributed
approximately $9 million in cash to Carbone Savoie as part of this transaction.
The cash contribution was used to upgrade manufacturing operations in Brazil and
France, which was completed by the end of the 2002 first quarter. Ownership in
Carbone Savoie remains 70% by us and 30% by Pechiney. Under our now broadened
alliance, Carbone Savoie holds our entire cathode manufacturing capacity.
In April 2001, we entered into a joint venture agreement with Jilin to
produce and sell high-quality graphite electrodes in China, which we believe to
be the largest market for graphite electrodes in the world. The joint venture is
expected to utilize renovated capacity at Jilin's main facility in Jilin City
and complete additions at another facility in Changchun that were begun by
Jilin. The joint venture facilities are expected to commence operations in 2003.
We are required to make capital contributions of $6 million of cash ($2 million
of which has been contributed to date) plus technical assistance (a substantial
portion of which has already been contributed) for our 25% ownership interest in
the joint venture. The completion of the parties' capital contributions to the
joint venture is subject to the receipt of required Chinese governmental
approvals and satisfaction of other conditions.
We have been working with Ballard Power Systems since 1992 on
developing natural graphite-based materials for use in Ballard Power Systems
fuel cells for power generation. In June 2001, our subsidiary, Graftech, entered
into a new exclusive development and collaboration agreement and a new exclusive
long-term supply agreement with Ballard Power Systems, which significantly
expand the scope and term of the prior agreements. In addition, Ballard Power
Systems became a strategic investor in Graftech, investing $5 million in shares
of Ballard Power Systems common stock for a 2.5% equity ownership interest, to
support the development and commercialization of natural graphite-based
materials and components for proton exchange membrane fuel cells.
The scope of the new exclusive development and collaboration agreement
includes natural graphite-based materials and components, including flow field
plates and gas diffusion layers, for use in proton exchange membrane fuel cells
and fuel cell systems for transportation, stationary and portable applications.
The initial term of this agreement extends through 2011. Under the new supply
agreement, we will be the exclusive manufacturer and supplier of natural
graphite-based materials for Ballard Power Systems fuel cells and fuel cell
systems. We will also be the exclusive manufacturer of natural graphite-based
components, other than those components that Ballard Power Systems manufactures
for itself. The initial term of this agreement, which contains customary terms
and conditions, extends through 2016. We have the right to manufacture and sell,
after agreed upon release dates, natural graphite-based materials and components
for use in proton exchange membrane fuel cells to other parties in the fuel cell
industry.
GLOBAL ECONOMIC CONDITIONS AND OUTLOOK
We are impacted in varying degrees, both positively and negatively, as
global, regional or country conditions affecting the markets for our products
fluctuate.
50
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Beginning in mid-2000, economic conditions began to weaken in North
America, becoming more severe in the 2000 fourth quarter. Even with this
weakening, worldwide electric arc furnace steel production was 285 million
metric tons in 2000 (about 34% of total steel production).
The economic weakening in North America continued and became more
severe in 2001. This economic weakness was exacerbated by the impact on economic
conditions of the terrorist acts in the U.S. in September 2001. More than 29
steel companies in the U.S. filed for protection under the U.S. Bankruptcy Code
since January 1, 2000. Electric arc furnace steel production declined in 2001 as
compared to 2000 by about 11% in the U.S.
The economic weakness in North America adversely impacted Europe, Asia
(except for China), Brazil and other regional economies, and this impact became
more severe during 2001. Electric arc furnace steel production declined in 2001
as compared to 2000 by about 11% in Asia (excluding China) and 11% in Brazil.
The decline of electric arc furnace steel production in Brazil was caused both
by shortages of electricity brought on by a drought that reduced hydroelectric
power generation (although allocations of electricity in response to the
shortages have since been terminated) as well as by the weakening in global
economic conditions. Brazil was also impacted by developing currency, debt and
related economic crises in Brazil itself as well as in neighboring Argentina.
Electric arc furnace steel production in China remained relatively stable.
We believe that worldwide electric arc furnace steel production
declined by about 2% in 2001 (to a total of about 279 million metric tons, about
33% of total steel production) as compared to 2000.
These fluctuations in electric arc furnace steel production resulted in
corresponding fluctuations (to a greater or lesser extent, depending on economic
conditions affecting, and decisions by, electric arc furnace steel producers) in
demand for graphite electrodes. We estimate that worldwide graphite electrode
demand declined in 2001 as compared to 2000 by about 10%. Overall pricing
worldwide was weak throughout most of this period. While we implemented
increases in local currency selling prices of our graphite electrodes in 2000
and early 2001 in Europe, the Asia Pacific region, the Middle East and South
Africa, we were not able to maintain all of these price increases.
We have been experiencing intense competition in the graphite electrode
industry. One of our U.S. competitors, The Carbide/Graphite Group, Inc., filed
for protection under the U.S. Bankruptcy Code in October 2001. In order to seek
to minimize our credit risks, we have reduced our sales of, or refused to sell
(except for cash on delivery), graphite electrodes to some customers and
potential customers in the U.S. and, to a limited extent, elsewhere. Our unpaid
trade receivables from steel companies in the U.S. that have filed for
protection under the U.S. Bankruptcy Code since January 1, 2000 have aggregated
only 1.4% of net sales of graphite electrodes in the U.S. during the same
period. Our volume of graphite electrodes sold declined in 2001 as compared to
2000 by about 20% due primarily to the decline in electric arc furnace steel
51
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
production as well as our efforts to implement and maintain local currency
selling price increases and our efforts to seek to minimize credit risks.
Demand and prices for most of our other products sold to the metals and
transportation industries are affected by the same global and regional economic
conditions that affect graphite electrodes. During 2000, demand for most of
these products as a group was relatively stable. Overall pricing did not
strengthen. The global and regional economic conditions that have impacted
demand and prices for graphite electrodes since mid-2000 have also similarly
impacted demand and prices for most of these products (other than graphite
cathodes). Demand and prices for graphite cathodes has remained relatively
strong since 1999 primarily due to construction of new aluminum smelters using
graphite cathodes, even as old smelters using carbon cathodes are removed from
service.
We believe that this global economic weakness bottomed in the 2002
first half and that a modest recovery is occurring. Total global steel
production increased in the 2002 first half as compared to the 2001 first half
by about 4%. This increase was primarily due to an increase in production of
about 24% in China, partially offset by declines in production of about 3% in
Western Europe, 5% in the U.S. and 6% in Mexico. If this production level is
maintained through the 2002 second half, total global steel production would set
a new record. Electric arc furnace steel production increased in the 2002 first
half as compared to the 2001 first half by about 1%. This increase was primarily
due to an increase in production of about 5% in China, partially offset by a
decline in production of about 3% in Europe. Electric arc furnace steel
production remains weak in Asia (other than China) but has increased modestly in
the U.S.
In March 2002, President Bush announced his decision to impose tariffs,
of up to 30% initially and declining thereafter over a three year period, on
most imported steel as part of a broader plan to rescue the financially troubled
steel industry in the U.S. There is a pending review of the tariffs by the World
Trade Organization and several additional exemptions being considered by the
Bush administration. We believe that the tariffs are having a modest positive
impact on electric arc furnace steel production in the U.S. The change in steel
shipments by steel service centers in the U.S. has begun to improve relative to
the change in their inventories. While steel imported from Mexico is exempt from
those tariffs, steel imported from Europe, Asia and Brazil is not exempt. Steel
production in those regions has been adversely impacted by the tariffs. In
addition, steel production in Brazil continues to be impacted by its own
economic crises (although the debt restructuring recently approved by the World
Bank may mitigate the impact of those crises). Further, import duties in China
on both steel and graphite electrodes have declined as a result of the admission
of China to the World Trade Organization. We cannot predict whether and to what
extent these developments will impact our global business over the long-term.
We believe that worldwide graphite electrode demand in the 2002 first
half as compared to the 2001 first half was stable and as compared to the 2001
second half increased by about 3%. We also believe that graphite electrode
pricing worldwide in the 2002 first half as compared to the 2001 fourth quarter
declined about 7%, but bottomed in the 2002 second quarter. We believe that
graphite electrode prices worldwide, in local selling currencies, in the 2002
second quarter
52
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
as compared to the 2002 first quarter increased by about 1% as price weakness in
the U.S. and Asia was offset by a strengthening in Europe.
We believe that business conditions for most of our products (other
than cathodes) will remain challenging through 2002 and that a strong recovery
in the steel, metals and transportation industries will not occur until the end
of 2002, at the earliest. In particular, demand for carbon electrodes in the
U.S. (where our main customer base is located) is still very depressed. Carbon
electrodes are used in the production of silicon metal.
We believe that the rebound we have experienced in graphite electrode
demand from the extraordinarily low level in the beginning of the 2002 first
quarter is primarily due to the modest improvement in conditions in the steel
industry and an increase in our market share as we continue to implement our
enterprise selling and other strategies. Our graphite electrode order book has
strengthened significantly since the middle of the 2002 first quarter, and for
the remainder of 2002 is now over 90% full. We announced, effective for new
orders placed after July 15, 2002, an increase of $200 or (euro)200, as the case
may be, in the price for our graphite electrodes sold in Europe, the
Commonwealth of Independent States and the Middle East. During the third
quarter, typically a lower volume quarter than the second quarter, particularly
in Europe, we expect graphite electrode sales volume to be approximately 45,000
metric tons. We plan to continue to operate our plants at capacity to meet
demand, which is expected to positively impact average electrode production cost
per metric ton as compared to the 2002 first half. Our cathode order book is
virtually full for the remainder of 2002 and into the beginning of 2003.
In the Advanced Energy Technology Division, we currently have over 20
active component development programs for our electronic thermal management
business, offering greater opportunity for the commercialization of our
eGraf(TM) products to drive our future growth.
We expect our cost savings to mitigate the impact on gross profit of
pressure on net sales. We expect to achieve a graphite electrode production cost
per metric ton of approximately $1,600 by the end of 2002 and $1,400 by the end
of 2004. Although conditions are improving for graphite electrode price
increases over the long-term, we do not expect worldwide graphite electrode
prices to strengthen significantly in 2002. Under current global and regional
economic conditions, we cannot assure you that we will have the same success in
minimizing our credit risks in the future that we have had in the U.S. relating
to sales of graphite electrodes in the past.
We have implemented interest rate management initiatives to minimize
our interest expense and optimize our portfolio of fixed and variable interest
rate obligations. We entered into two ten-year interest rate swaps for a total
notional amount of $250 million that effectively converted that amount of fixed
rate debt to variable rate debt. We are targeting interest expense of $60
million for 2002, essentially the same as 2001.
Our outlook could be significantly impacted by, among other things,
changes in interest rates by the U.S. Federal Reserve Board and the European
Central Bank, changes in tax and fiscal policies by the U.S. and other
governments, the occurrence of further terrorist acts and
53
developments (including increases in security, insurance, data back-up,
transportation and other costs, transportation delays and continuing or
increased economic uncertainty and weakness) resulting from terrorist acts and
the war on terrorism, and changes in global and regional economic conditions.
FINANCING TRANSACTIONS
We believe that the offerings described below together with the
repayment of term loans under the Senior Facilities, the reduction in the
outstanding balance under our revolving credit facility and other amendments to
the Senior Facilities have strengthened our balance sheet and enhanced our
flexibility to implement our business strategies.
2002 PRIVATE SENIOR NOTE OFFERINGS. On February 15, 2002, we completed
a private offering of $400 million aggregate principal amount of Senior Notes at
a price of 100% of principal amount. On May 6, 2002, we completed a private
offering of $150 million aggregate principal amount of additional Senior Notes
at a price of 104.5% of principal amount, plus accrued interest from February
15, 2002. The Senior Notes bear interest at an annual rate of 10.25% and mature
in 2012.
The net proceeds from the offering completed in February 2002 were $387
million. The net proceeds (excluding accrued interest paid by the purchasers of
the Senior Notes) from the offering completed in May 2002 were $151 million. We
used all of these net proceeds to reduce the balance outstanding under our
revolving credit facility and to repay term loans under the Senior Facilities.
We paid approximately $13 million of debt issuance costs related to the Senior
Notes sold in February 2002 and $6 million related to the Senior Notes sold in
May 2002. These costs are being amortized over the term of the Senior Notes.
The $7 million premium received upon issuance of the additional Senior
Notes issued in May 2002 is classified as long-term liability on the
Consolidated Balance Sheets and amortized (as a credit to interest expense) over
the term of the additional Senior Notes. As a result of our receipt of such
premium, the effective annual interest rate on the additional Senior Notes is
about 9.5%.
At June 30, 2002, after giving effect to the offerings, the application
of the net proceeds and the corporate realignment of our subsidiaries, the
Senior Facilities constituted $137 million of our total debt of $710 million,
all of which $137 million was borrowings under term loans and all of the
scheduled principal payments of which are term loans due in 2007.
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 the additional Senior Notes issued in May
2002 to make intercompany loans to our foreign subsidiaries and, on April 30,
2002, entered into a Supplemental Indenture to give effect to such amendment.
54
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
We recorded an extraordinary charge of $3 million ($2 million after
tax) in the 2002 first quarter and an extraordinary charge of $1 million ($1
million after tax) in the 2002 second quarter for write-off of capitalized fees
associated with the term loans under Senior Facilities repaid with the net
proceeds from the issuance of the Senior Notes.
2001 PUBLIC EQUITY OFFERING. In July 2001, we completed a public
offering of 10,350,000 shares of common stock at a public offering price of
$9.50 per share. The net proceeds from that offering were $91 million. 60% of
the net proceeds were used to repay term loans under the Senior Facilities. The
balance of the net proceeds will be used to fund growth and expansion of our
Advanced Energy Technology Division, including growth through acquisitions, and,
pending such use, has been applied to reduce outstanding balance under our
revolving credit facility.
2000 DEBT RECAPITALIZATION. In February 2000, we completed a debt
recapitalization and obtained the Senior Facilities. The Senior Facilities
consist of a six year term loan facility in the initial amount of $137 million
and (euro)161 million, an eight year term loan facility in the initial amount of
$350 million and a six year revolving credit facility in the initial maximum
amount of (euro)250 million. The debt recapitalization lowered our average
annual interest rate, extended the average maturities of our debt and replaced
our financial and other covenants. In light of changes in conditions affecting
our industry, changes in global and regional economic conditions, our recent
financial performance and other factors, we closely monitor our compliance with
those covenants.
In the 2000 third quarter, pursuant to our debt recapitalization in
February 2000, our Italian subsidiary entered into a (euro)17 million (about $15
million, based on currency exchange rates in effect at December 31, 2001)
long-term debt arrangement with a third party lender. We also placed on deposit
with the third party lender funds in the same amount, which secure the debt.
Since we had the legal right to set-off, and the intent to do so, such amounts
had been netted and were not reflected separately in the Consolidated Balance
Sheets. In February 2002, in connection with the corporate realignment of our
subsidiaries, we exercised our right of set-off and retired the debt
arrangement.
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 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 ($23 million of which debt was outstanding at June 30, 2002).
As a result, the fine assessed by the antitrust authority of the European Union,
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.
55
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In July 2001, in connection with the 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, and that
the maximum amount of capital expenditures permitted under the Senior Facilities
would be reduced in 2001 and 2002. We do not expect that our capital
expenditures would exceed such maximums. In connection therewith, we paid an
amendment fee of $2 million and the margin which 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 the 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. In addition, our maximum permitted leverage ratio was
substantially increased and our minimum required interest coverage ratio was
substantially decreased. 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 antitrust authority of
the European Union. In addition, the amendment expanded our ability to make
certain investments, including investments in Graftech, and eliminated
provisions relating to a spin-off of Graftech. In connection therewith, we paid
an amendment fee of $1 million and the margin which 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 additional
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 will provide us with greater flexibility. In
addition, the amendment reduced the maximum amount available under our revolving
credit 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
antitrust authority of the European Union) 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 ($23 million of which debt
was outstanding at June 30, 2002). In connection therewith, we paid fees and
costs of $1 million.
The net proceeds from the sale of the Senior Notes in February and May
2002 were applied to repay term loans under the Senior Facilities and to reduce
the outstanding balance under our revolving credit facility.
56
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
LITIGATION AGAINST OUR FORMER PARENT COMPANIES INITIATED BY US
In February 2000, we commenced a lawsuit against our former parents,
Mitsubishi Corporation and Union Carbide Corporation. In the lawsuit, we allege,
among other things, that certain payments made to our former parents in
connection with our leveraged equity recapitalization in January 1995 were
unlawful under the General Corporation Law of the State of Delaware, that our
former parents were unjustly enriched by receipts from their investments in GTI
and that our former parents aided and abetted breaches of fiduciary duties owed
to us by our former senior management in connection with illegal graphite
electrode price fixing activities. We are seeking to recover more than $1.5
billion 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. We are vigorously opposing those motions. Oral hearings were
held on those motions in the 2001 first and second quarters. We expect that a
decision on those motions will be rendered by the end of September 2002.
Litigation such as this lawsuit is complex. Complex litigation can be lengthy
and expensive. 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 June 30, 2002, we had incurred about $4 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.
ANTITRUST AND OTHER LITIGATION AGAINST US
Since 1997, we have been subject to antitrust investigations by
antitrust authorities in the U.S., the European Union, Canada, Japan and Korea.
In addition, civil antitrust lawsuits have been commenced and threatened against
us and other producers and distributors of graphite and carbon products in the
U.S., Canada and elsewhere. We recorded a pre-tax charge against results of
operations for 1997 in the amount of $340 million as a reserve for estimated
potential liabilities and expenses in connection with antitrust investigations
and related lawsuits and claims.
In April 1998, GTI pled guilty to a one count charge of violating U.S.
federal antitrust law in connection with the sale of graphite electrodes and was
sentenced to pay a non-interest-bearing fine in the aggregate amount of $110
million, payable in six annual installments of $20 million, $15 million, $15
million, $18 million, $21 million and $21 million, commencing July 23, 1998. The
payments due in 1998, 1999 and 2000 were timely made. In January 2001, at our
request, the due date of each of the remaining three payments was deferred by
one year and, at our request, in January 2002, the payment schedule for the $60
million unpaid balance outstanding at that time was revised to $2.5 million
payment in April 2002, a $5.0 million payment in April 2003 and, beginning in
April 2004, quarterly payments ranging from $3.25 million to $5.375 million
through January 2007. Beginning in 2004, the U.S. Department of Justice may ask
the court to accelerate the payment schedule based on a change in our ability to
make such payments. Interest will begin to accrue on the unpaid balance,
commencing in April 2004, at the statutory rate of interest then in effect. In
January 2002, the statutory rate of interest
57
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
was 2.13% per annum. Accrued interest will be payable together with each
quarterly payment. Of the $110 million aggregate amount and before giving effect
to the restructured payment schedule, $90 million is treated as a fine and $20
million is treated as imputed interest for accounting purposes. In March 1999,
our Canadian subsidiary pled guilty to a one count charge of violating Canadian
antitrust law in connection with the sale of graphite electrodes and was
sentenced to pay a fine of Cdn. $11 million. All payments due have been timely
made.
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 it had, after holding a hearing, assessed a
fine against us in the amount of 676 million KRW (approximately $560,000, based
on currency exchange rates in effect on June 30, 2002). Five other graphite
electrode producers were also fined by it in amounts ranging up to 4,396 million
KRW (approximately $3.6 million, based on currency exchange rates in effect on
June 30, 2002). 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, 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, in August
2002.
In January 2000, the antitrust authority of the European Union issued a
statement of objections initiating proceedings against us and other producers of
graphite electrodes. The statement alleged that we and other producers violated
European antitrust laws in connection with the sale of graphite electrodes. In
July 2001, that authority issued its decision. Under the decision, it assessed a
fine of (euro) 50.4 million ($50 million, based on currency exchange rates in
effect at June 30, 2002) against GTI resulting from the role of our former
management in a graphite electrode price fixing cartel. Seven other graphite
electrode producers were also fined, with fines ranging up to (euro) 80.2
million. As a result of the assessment of the fine against us, we recorded a
pre-tax charge of $10 million against results of operations in the 2001 second
quarter as an additional reserve for potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims. This
decision has brought to a conclusion our last major antitrust liability. From
the initiation of its investigation, we have cooperated with the antitrust
authority of the European Union. 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 that authority to negotiate appropriate terms of
payment of antitrust fines, including extended payment terms. We have had
discussions regarding payment terms. After an in-depth analysis of the decision,
in October 2001, we filed an appeal to the court challenging the amount of the
fine. The fine or collateral security therefor would typically be required to be
paid or provided at about the time the appeal was filed. We are currently in
discussions with that authority regarding the appropriate form of collateral
security during the pendency of the appeal. If the results of these discussions
are not acceptable to us, we may file an interim appeal to the court to waive
the requirement for collateral security or to allow us to provide alternative
security for payment. We cannot predict how or when the court would rule on such
interim appeal.
58
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We have provided that information.
In May 2002, the antitrust authority of the European Union 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. As a
result of our substantial cooperation to date and our intention to continue to
cooperate, under the Notice on Non-Imposition or Reduction of Fines in Cartel
Cases issued by the antitrust authority of the European Union, we believe that
we will benefit from the maximum reduction possible (a 100% reduction) with the
result that no fine will be payable.
We are continuing to cooperate with the U.S., European and Canadian
antitrust authorities in their continuing investigations of others. It is
possible that antitrust investigations seeking, among other things, to impose
fines and penalties could be initiated against us by authorities in Brazil or
other jurisdictions.
We have settled, among others, virtually all of the actual and
potential claims against us by customers in the U.S. and Canada arising out of
alleged antitrust violations occurring prior to the date of the relevant
settlement in connection with the sale of graphite electrodes. All settlement
payments due have been timely made. None of the settlement or plea agreements
contain restrictions on future prices of our graphite electrodes. There remain,
however, certain pending claims as well as pending lawsuits in the U.S. relating
to the sale of carbon electrodes and carbon cathodes as well as graphite
electrodes sold to foreign customers. It is also possible that additional
antitrust lawsuits and claims could be asserted against us in the U.S. or other
jurisdictions.
Through June 30, 2002, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At June 30, 2002, $101 million remained in the reserve. The balance of
the reserve is available for the balance of the fine payable by us to the U.S.
Department of Justice (excluding imputed interest thereon), the fine assessed
against us by the antitrust authority of the European Union and other matters.
The aggregate amount of remaining committed payments payable to the U.S.
Department of Justice for imputed interest at June 30, 2002 was about $6
million.
We cannot assure you that remaining liabilities and expenses in
connection with antitrust investigations, lawsuits and claims will not
materially exceed the remaining uncommitted balance of the reserve or that the
timing of payment thereof will not be sooner than anticipated. In the aggregate
(including the assessment of the fine by the antitrust authority of the European
Union and the additional $10 million charge), the fines and net settlements and
expenses are within the amounts we used to evaluate the $350 million charge. To
the extent that aggregate liabilities and expenses, net, are known or reasonably
estimable, $350 million represents our estimate of these liabilities and
expenses. The guilty pleas and the decision by the antitrust
59
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
authority of the European Union make it more difficult to defend against other
investigations, lawsuits and claims. Our insurance has not and will not
materially cover liabilities that have or may become due in connection with
antitrust investigations or related lawsuits or claims.
CURRENCY MATTERS
We incur manufacturing costs and sell our products in multiple
currencies. As a result, in general, our results of operations, cash flows and
financial condition are affected by changes in currency exchange rates as well
as by inflation in countries with highly inflationary economies where we have
manufacturing facilities. To manage certain exposures to risks caused by changes
in currency exchange rates, we use various off-balance sheet financial
instruments. To account for translation of foreign currencies into dollars for
consolidation and reporting purposes, we record foreign currency translation
adjustments in accumulated other comprehensive income (loss) as part of
stockholders' equity in the Consolidated Balance Sheets, except in the case of
operations in highly inflationary economies (or which use the dollar as their
functional currency) where we record foreign currency translation gains and
losses as part of other (income) expense, net in the Consolidated Statement of
Operations. We also record foreign currency transaction gains and losses as part
of other (income) expense, net.
During the 2001 first half, the euro declined about 10%, the Brazilian
real declined about 16% and the South African rand declined about 6%. During the
2002 first half, the South African rand and the euro strengthened about 15% and
11%, respectively, while the Brazilian real declined about 19%.
RESULTS OF OPERATIONS
HIGHLIGHTS OF 2002 SECOND QUARTER AS COMPARED TO 2002 FIRST QUARTER.
Net sales of $161 million in the 2002 second quarter represented a $23 million,
or 17%, increase from net sales of $138 million in the 2002 first quarter. Gross
profit of $36 million in the 2002 second quarter represented a $5 million, or
16%, increase from gross profit of $31 million in the 2002 first quarter. Gross
margin was consistent at 22.5% of net sales in 2002 second quarter and 22.3% of
net sales in 2002 first quarter. Earnings in the 2002 second quarter, before
non-recurring charges and benefits, was net income of $3 million, or $0.05 per
diluted share, and, after those charges and benefits, was a net loss of $7
million, or $0.14 per diluted share. Earnings in the 2002 first quarter, before
non-recurring charges and benefits, was a net loss of $1 million, or $0.02 per
diluted share, and, after those charges and benefits, was a net loss of $4
million, or $0.06 per diluted share. The following table summarizes the impact
of those non-recurring charges and benefits.
60
THREE MONTHS ENDED THREE MONTHS ENDED
JUNE 30, 2002 MARCH 31, 2002
------------- --------------
(DOLLARS IN MILLIONS)
Net loss............................................. $ (7) $ (4)
Non-recurring charges:
Restructuring charges (including global
realignment and related expenses) and
impairment loss on long-lived and other
assets, net of tax............................ 9 6
Extraordinary item, net of tax.................. 1 2
Non-recurring tax benefit related to legal and
tax restructuring............................... - (5)
----- ------
Net income before non-recurring charges and
benefits..................................... $ 3 $ (1)
====== =======
The legal and tax restructuring and global realignment mentioned in the
preceding table and elsewhere in this Report are part of the corporate
realignment of our subsidiaries. The tax benefits from the corporate realignment
(which are referred to as tax benefits from legal and tax restructuring) have
been recorded separately from expenses to implement the corporate realignment
(which are referred to as global realignment and related expenses).
GRAPHITE POWER SYSTEMS DIVISION. Net sales increased to $133 million in
the 2002 second quarter from $111 million in the 2002 first quarter, primarily
due to higher volume of graphite electrodes and cathodes sold. Volume for
graphite electrodes sold increased 27% to 48,800 metric tons in 2002 second
quarter from 38,500 metric tons in 2002 first quarter. The higher volume of
graphite electrodes sold in 2002 second quarter contributed $21 million to net
sales. Average sales revenue per metric ton of graphite electrodes in the 2002
second quarter was $2,095, a slight improvement over the average in the 2002
first quarter of $2,083. Of this increase of $12 per metric ton, changes in
currency exchange rates resulted in an increase of $48 per metric ton, partially
offset by a decline in average local currency selling prices of $36 per metric
ton.
Average graphite electrode production cost per metric ton in the 2002
second quarter increased to $1,666, about $28 higher than in the 2002 first
quarter. The average was higher than anticipated primarily due to changes in
currency exchange rates during the 2002 second quarter, which increased the
average by about $32 from the 2002 first quarter and the impact of the sale of
higher cost inventories associated with low operating levels in the 2002 first
quarter. In the 2002 second half, the average is expected to decline by
approximately 3-4% from the 2002 second quarter level.
Gross profit in the 2002 second quarter was $30 million (22.5% of net
sales), an increase of $5 million from gross profit in the 2002 first quarter of
$25 million (22.3% of net sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales increased to $28 million
in the 2002 second quarter from $27 million in the 2002 first quarter. Sales of
advanced graphite and carbon
61
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
materials strengthened in the 2002 second quarter as compared to the 2002 first
quarter. New product development and commercialization efforts continued to
progress successfully. During the 2002 second quarter, this division launched
the planned commercialization of new, advanced eGraf(TM) HiTherm thermal
interface products designed to aid the cooling of chip sets and other heat
generating components in computers, telecommunications equipment and other
electronic devices. Tests conducted on the new product line and confirmed by
customers, including IBM Corporation and Intel Corporation, indicate an
approximately 40% improvement in thermal conductivity and 45% reduction in
thermal resistance as compared to our first generation product line. Gross
profit in the 2002 second quarter was $6 million (22.4% of net sales), virtually
the same as in the 2002 first quarter.
OTHER ITEMS. Selling, administrative and other expenses were $20
million in the 2002 second quarter as compared to $18 million in 2002 first
quarter. The increase was primarily due to the reintroduction of our global
incentive programs. In the 2002 second quarter, we also recorded a $5 million
non-cash compensation charge associated with the accelerated vesting of a 2002
employee restricted stock grant. We recorded other income of $13 million for the
2002 second quarter, primarily due to a currency exchange gain on
euro-denominated intercompany loan receivables that are expected to be repaid in
the foreseeable future, partially offset by losses on currency forward and
option contracts. Interest expense was $17 million in the 2002 second quarter,
an increase of $4 million from the 2002 first quarter, due to an increase in
average annual interest rates and average total debt outstanding. Those
increases were primarily due to costs associated with the issuance of the Senior
Notes and the fact that the Senior Notes bear interest at a higher rate than the
term loans under the Senior Facilities that were repaid with the net proceeds
therefrom. Our average total debt outstanding was $708 million in 2002 second
quarter as compared to $668 million in 2002 first quarter. Our average annual
interest rate was 9.1% in 2002 second quarter as compared to 7.6% in 2002 first
quarter.
NET DEBT AND WORKING CAPITAL. Net debt (total debt less cash, cash
equivalents and short-term investments) decreased to $659 million at June 30,
2002 from $663 million at March 31, 2002. Total debt at June 30, 2002 was $710
million. Working capital improved by $20 million in 2002 second quarter
primarily because of changes in our interest payment schedule. Interest is
payable during the first and third quarters on the Senior Notes while interest
was payable quarterly on the term loans under the Senior Facilities that were
repaid with the net proceeds from the issuance of the Senior Notes. As a result,
working capital benefited during the 2002 second quarter due to the reduction in
interest payments. We have an interest payment of approximately $26 million due
on the Senior Notes in August 2002. This change in our interest schedule is
expected to introduce greater volatility in our working capital as measured on a
quarterly basis (but not in total on an annual basis). In addition, in the 2002
second quarter, we incurred $6 million of cash costs associated with the
issuance of Senior Notes in May 2002 and the related amendment of the Senior
Facilities as compared to $14 million associated with the issuance of Senior
Notes in February 2002 and the related amendment of the Senior Facilities. These
costs were capitalized and will be amortized over the term of the Senior Notes.
62
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
THREE MONTHS ENDED JUNE 30, 2002 AS COMPARED TO THREE MONTHS ENDED JUNE
30, 2001. Net sales of $161 million in the 2002 second quarter represented a $10
million, or 6%, decrease from net sales of $171 million in the 2001 second
quarter, primarily due to the lower average local currency selling prices of
graphite electrodes and lower net sales in our Advanced Energy Technology
Division, partially offset by increased net sales of cathodes. Cost of sales of
$125 million in the 2002 second quarter represented a $5 million, or 4%,
increase from cost of sales of $120 million in the 2001 second quarter,
primarily due to higher volume of graphite electrodes and cathodes sold. Gross
profit of $36 million in the 2002 second quarter represented a $15 million, or
29%, decrease from gross profit of $51 million in the 2001 second quarter. Gross
margin declined to 22.5% of net sales in 2002 second quarter from 29.9% in 2001
second quarter.
GRAPHITE POWER SYSTEMS DIVISION. Net sales decreased to $133 million in
the 2002 second quarter from $137 million in the 2001 second quarter, primarily
due to lower average graphite electrode sales revenue per metric ton. Volume of
graphite electrodes sold was 48,800 metric tons in the 2002 second quarter as
compared to 46,000 metric tons in the 2001 second quarter. The higher volume of
graphite electrodes sold represented an increase of $7 million in net sales. The
increase was primarily a result of stronger demand for graphite electrodes in
North America. Average sales revenue per metric ton of graphite electrodes in
the 2002 second quarter was $2,095 as compared to the average in the 2001 second
quarter of $2,367. The lower average sales revenue per metric ton represented a
decrease of $13 million in net sales. Changes in currency exchange rates
represented $2 million of the $13 million decrease in net sales of graphite
electrodes. Net sales of cathodes increased in the 2002 second quarter by 32%,
or $5 million, from the 2001 second quarter.
Cost of sales increased to $103 million in the 2002 second quarter from
$96 million in the 2001 second quarter. Average cost of sales per metric ton of
graphite electrodes was $1,666 in the 2002 second quarter, virtually unchanged
from $1,663 in the 2001 second quarter. Cost savings largely offset an increase
of $60 per metric ton due to changes in currency exchange rates. Gross profit in
the 2002 second quarter was $30 million (22.5% of net sales), a decrease from
gross profit in the 2001 second quarter of $41 million (29.8% of net sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales decreased to $28 million
in the 2002 second quarter from $34 million in the 2001 second quarter,
primarily due to a decrease in the volume of refractories sold, lower technology
sales and lower volume and prices of products sold to customers in the
semiconductor and industrial sectors, particularly in Europe. New product
development and commercialization efforts continued to progress successfully.
Cost of sales was $22 million in the 2002 second quarter as compared to $24
million in the 2001 second quarter. Gross profit in the 2002 first quarter was
$6 million (22.4% of net sales) as compared to gross profit in the 2001 second
quarter of $10 million (31.2% of net sales).
ITEMS AFFECTING US AS A WHOLE. Selling, administrative and other
expenses were $20 million in the 2002 second quarter, an increase of $1 million
from the 2001 second quarter. The increase was primarily due to the
reintroduction of our global incentive programs and additional charges for
potential bad debts. In addition, in June 2002, in recognition of, among other
things,
63
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
extraordinary efforts by employees during difficult economic and business
conditions without significant salary increases or cash bonuses due to the
desire to preserve our cash resources, GTI's Board of Directors accelerated the
vesting of 412,300 shares of restricted stock granted to employees in March
2002. The shares had been scheduled to vest in 2003 and 2004. The accelerated
vesting resulted in a $5 million non-cash charge to compensation expense.
In the 2002 second quarter, we recorded a $13 million ($8 million after
tax) non-cash charge, primarily related to the impairment of our long-lived
carbon electrode assets in Columbia, Tennessee and a charge of $2 million
related to the corporate realignment of our subsidiaries. In the 2001 second
quarter, we recorded restructuring impairment and antitrust charges totaling $68
million, primarily related to our graphite electrode business.
Other (income) expense, net was income of $13 million in the 2002
second quarter as compared to nil in the 2001 second quarter. This change was
primarily associated with $16 million of currency exchange gains primarily
associated with euro-denominated intercompany loan receivables that are expected
to be repaid in the foreseeable future, net of $3 million of losses on currency
forward and option contracts.
Interest expense was $17 million in the 2002 second quarter as compared
to $16 million in the 2001 second quarter. Average total debt outstanding was
$708 million in the 2002 second quarter as compared to $703 million in the 2001
second quarter. The average annual interest rate was 9.1% in 2002 second quarter
as compared to 8.0% in the 2001 second quarter. These average annual rates
excluded inputed interest of the fine payable to the DOJ. The increase in the
average annual interest rate was primarily due to the fact that the interest
rate on the Senior Notes is higher than the interest rate on the term loans
under the Senior Facilities repaid with the net proceeds therefrom.
Provision for income taxes was a $5 million benefit in the 2002 second
quarter as compared to a $16 million benefit in the 2001 second quarter. The
effective income tax rate, before non-recurring charges, was 35% in the 2002
second quarter as compared to 48% in 2001 second quarter. The lower rate
reflects the impact of our legal and tax restructuring.
In the 2002 second quarter, we recorded an extraordinary item, net of
tax, of $1 million in connection with the write-off of capitalized fees
associated with term loans under the Senior Facilities repaid with the net
proceeds from the issuance of the Senior Notes.
As a result of the changes described above, net loss was $7 million in
the 2002 second quarter as compared to net loss of $39 million in the 2001
second quarter. Net income per diluted share, before non-recurring charges, was
$0.05 in the 2002 second quarter as compared to earnings per diluted share of
$0.13 in the 2001 second quarter. Net loss per diluted share, after
non-recurring charges, was $0.14 in the 2002 second quarter.
SIX MONTHS ENDED JUNE 30, 2002 AS COMPARED TO SIX MONTHS ENDED JUNE 30,
2001. Net sales of $299 million in the 2002 first half represented a $43
million, or 13%, decrease from net sales of $342 million in the 2001 first half.
Gross profit of $67 million in the 2002 first half
64
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
represented a $33 million, or 33%, decrease from gross profit of $100 million in
the 2001 first half. Gross margin declined to 22.4% of net sales in 2002 first
half from 29.2% in 2001 first half. The decrease in net sales, gross profit and
gross margin was primarily due to lower net sales of all products with the
exception of cathodes, which had a 16% improvement in net sales.
GRAPHITE POWER SYSTEMS DIVISION. Net sales decreased to $244 million in
the 2002 first half from $273 million in the 2001 first half, primarily due to
the lower volume of graphite electrodes sold and lower average graphite
electrode sales revenue per metric ton. Volume of graphite electrodes sold was
87,300 metric tons in the 2002 first half as compared to 89,000 metric tons in
the 2001 first half. The lower volume of graphite electrodes sold represented a
decrease of $4 million in net sales. The decrease was primarily a result of a
decline in North American electric arc furnace steel production, weaker demand
in Europe and Russia, actions taken by us to manage credit risk and limited
availability of finished graphite electrode inventories to meet increased demand
in June 2002. Average sales revenue per metric ton of graphite electrodes in the
2002 first half was $2,090 as compared to the average in the 2001 first half of
$2,392. The lower average sales revenue per metric ton represented a decrease of
$26 million in net sales. Changes in currency exchange rates represented $8
million of the $26 million decrease.
Cost of sales decreased to $189 million in the 2002 first half from
$194 million in the 2001 first quarter. The decrease was primarily due to lower
sales volumes. Average cost of sales per metric ton of graphite electrodes
benefited from improved productivity, head-count reductions, plant cost
reductions and lower maintenance spending as compared to the 2001 first half,
partially offset by higher than anticipated graphite electrode production costs
of approximately $2 million resulting from activities associated with the
accelerated mothballing of our Italian graphite electrode plant and extensive
furnace maintenance, which resulted in extended production down time, at our
Brazilian graphite electrode plant in preparation for higher operating levels
during the remainder of 2002. Average cost of sales per metric ton of graphite
electrodes was $1,653 per metric ton in the 2002 first half, a decline of $63,
or about 4%, as compared to the 2001 first half, despite lower operating levels
and lower sales volumes. Low operating levels were due to both reductions in
production in response to weakness in economic conditions that continued into
the middle of the 2002 first quarter as well as reductions in production
associated with the mothballing of our Italian graphite electrode plant as part
of the 2002 plan and furnace maintenance at our Brazilian graphite electrode
plant. Gross profit in the 2002 first half was $55 million (22.5% of net sales),
a decrease from gross profit in the 2001 first half of $79 million (28.6% of net
sales).
ADVANCED ENERGY TECHNOLOGY DIVISION. Net sales decreased to $55 million
in the 2002 first half from $69 million in the 2001 first half, primarily due to
decreases in volume of refractories sold, in new business sales, in volume of
flexible graphite sold for gasket applications due to lower demand from the
automotive industry and in products sold to customers in the semiconductor and
industrial sectors, particularly in Europe. We believe that the core businesses
in this division bottomed during the 2002 first half. New product development
and commercialization efforts continued to progress successfully. During the
2002
65
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
first half, IBM Corporation and Intel Corporation approved and purchased
eGraf(TM) thermal interface products for computer, consumer electronic and
telecommunication applications. Cost of sales was $42 million in the 2002 first
half as compared to $48 million in the 2001 first half. The decrease was
primarily due to the decreases in volumes sold. Gross profit in the 2002 first
half was $12 million (22.3% of net sales) as compared to gross profit in the
2001 first half of $21 million (31.6% of net sales).
ITEMS AFFECTING US AS A WHOLE. Selling, administrative and other
expenses were $38 million in the 2002 first half, a decline of $2 million, or
5%, from 2001 first half. The decline was primarily due to a reduction in
franchise and other non-income taxes and redesign of benefit plans. In the 2002
first half, we recorded a $5 million non-cash charge to compensation expense
associated with the accelerated vesting of restricted stock.
In the 2002 first half, we recorded a $13 million ($8 million after
tax) non-cash charge primarily related to the impairment of our long-lived
carbon electrode assets in Columbia, Tennessee, a restructuring charge of $5
million related to the mothballing of our graphite electrode plant in Italy, and
a charge of $3 million related to the corporate realignment of our subsidiaries.
In the 2001 first half, we recorded restructuring, impairment and antitrust
changes of $68 million, primarily related to our graphite electrode business.
Other (income) expense, net was income of $16 million in the 2002 first half as
compared to nil in the 2001 first half. This change was primarily associated
with $20 million of currency exchange gains primarily associated with
euro-denominated intercompany loan receivables that are expected to be repaid in
the foreseeable future, net of $9 million of losses on currency forward and
option contracts.
Interest expense was $30 million in the 2002 first half, a decrease of
$5 million from the 2001 first half. The decrease resulted from lower average
debt outstanding. Average total debt outstanding was $688 million in the 2002
first half as compared to $716 million in the 2001 first half. The average
annual interest rate was 8.5% in 2002 first half as compared to 8.4% in the 2001
first half. These average annual rates excluded imputed interest of the fine
payable to the DOJ. The increase in the average annual interest rate was
primarily due to the fact that the interest rate on the Senior Notes is higher
than the interest rate on the term loans under the Senior Facilities repaid with
the net proceeds therefrom.
Provision for income taxes was a $17 million benefit in the 2002 first
half as compared to a $49 million benefit in the 2001 first half. Excluding the
benefit of $6 million, which was related to the corporate realignment of our
subsidiaries, the provision for income taxes for the 2002 first half would have
been $11 million. No tax benefit was provided on the restructuring charge and
impairment loss on long-lived and other assets of $6 million related to the
mothballing of our graphite electrode plant in Italy.
The effective income tax rate, before non-recurring charges, was 35% in
the 2002 first half as compared to 45% in 2001 first half. The lower rate
reflects the impact of our legal and tax restructuring.
66
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In the 2002 first half, we recorded an extraordinary item, net of tax,
of $3 million in connection with the write-off of capitalized fees associated
with the term loans under the Senior Facilities repaid with the net proceeds
from the issuance of the Senior Notes.
As a result of the changes described above, net loss was $11 million in
the 2002 first half as compared to net loss of $36 million in the 2001 first
half. Net loss per diluted share was $0.20 in the 2002 first half as compared
net loss per diluted share of $0.80 in the 2001 first half.
LIQUIDITY AND CAPITAL RESOURCES
Our sources of funds have consisted principally of invested capital,
cash flow from operations, debt financing and, since July 2001, net proceeds
from our public offering of common stock. Our uses of those funds (other than
for operations) have consisted principally of debt reduction, capital
expenditures, payment of fines, liabilities and expenses in connection with
investigations, lawsuits and claims and payment of restructuring costs.
We are highly leveraged and have substantial obligations in connection
with antitrust investigations, lawsuits and claims (in respect of which we have
an unfunded reserve totaling $101 million). We had total debt of $710 million
and a stockholders' deficit of $348 million at June 30, 2002 as compared to
total debt of $638 million and a stockholders' deficit of $332 million at
December 31, 2001. A substantial portion of our debt has variable interest rates
or has been effectively converted from a fixed rate obligation to a variable
rate obligation pursuant to interest rate management initiatives. We typically
discount or factor a portion of our accounts receivable. In the 2002 first half,
certain of our subsidiaries sold receivables totaling $94 million. If we had not
sold such receivables, our accounts receivable would have been about $47 million
higher at June 30, 2002. In addition, if we are required to pay or issue a
letter of credit to secure payment of the fine assessed by the antitrust
authority of the European Union pending resolution of our appeal regarding the
amount of the fine, the payment would be financed by borrowing under (or secured
by a letter of credit that would constitute a borrowing under) our revolving
credit facility. 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. The
following tables summarize our long-term contractual obligations and other
commercial commitments at June 30, 2002.
67
SUMMARY OF LONG-TERM CONTRACTUAL OBLIGATIONS
AND OTHER COMMERCIAL COMMITMENTS
PAYMENTS DUE BY PERIOD
----------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ------ ----- ----- -----
(DOLLARS IN MILLIONS)
CONTRACTUAL AND OTHER OBLIGATIONS
---------------------------------
Long-term debt...................................... $ 693 $ - $ 1 $ 1 $ 691
Operating leases.................................... 11 4 6 1 -
Unconditional purchase obligations.................. 62 7 18 20 17
--------- -------- ------ -------- ---------
Total contractual obligations.................... 766 11 25 22 708
Liabilities and expenses associated with antitrust
investigations and related lawsuits and claims... 99 3 80 16 -
Postretirement, pension and related benefits........ 109 11 51 16 31
Other long-term obligations......................... 21 3 5 2 11
--------- -------- ------ -------- ---------
Total contractual and other obligations.......... $ 995 $ 28 $ 161 $ 56 $ 750
========= ======== ====== ======== =========
AMOUNT OF COMMITMENT EXPIRATION BY PERIOD
-----------------------------------------
LESS
THAN 1 1-3 4-5 AFTER 5
TOTAL YEAR YEARS YEARS YEARS
----- ---- ----- ----- -----
(DOLLARS IN MILLIONS)
OTHER COMMERCIAL COMMITMENTS
----------------------------
Lines of credit..................................... $ 11 $ 11 $ - $ - $ -
Letters of credit................................... 13 13 - - -
Guarantees.......................................... 27 - - - 27
------ ------ ------ -------- --------
Total other commercial commitments................ $ 52 $ 25 $ - $ - $ 27
====== ====== ====== ======== ========
The first preceding table includes the fine of (euro)50.4 million
(about $50 million based on currency exchange rates in effect at June 30, 2002)
assessed against us by the antitrust authority of the European Union under the
column captioned "payments due in 1-3 years" on the line entitled "liabilities
and expenses associated with antitrust investigations and related lawsuits and
claims." It is the policy of that authority to negotiate appropriate terms of
payment of antitrust fines, including extended payment terms. We have had
discussions regarding such payment terms. We have also filed an appeal to the
court challenging the amount of the fine. Although we cannot predict how or when
the court would rule on the appeal, appeals of this type may take two years or
longer to be decided. While we cannot assure you that such will be the case, we
believe that amount of the fine will be impacted by the appeal and that, after
such ruling, we will be permitted to pay the fine over an extended period.
The second preceding table includes a line "lines of credit." These are
local lines of credit established by our foreign subsidiaries for working
capital purposes and are not part of our revolving credit facility.
68
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Cash and cash equivalents were $51 million at June 30, 2002 as compared
to $38 million at December 31, 2001. Net debt (which is total debt, net of cash,
cash equivalents and short-term investments) was $659 million at June 30, 2002
as compared to $660 million at June 30, 2001.
As a result of our high leverage and substantial obligations in
connection with antitrust investigations, lawsuits and claims, changes in
conditions affecting our industry, changes in global and regional economic
conditions and other factors, we have placed high priority on efforts to manage
cash and reduce debt.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY. For at least the past five
years, we have had positive annual cash flow from operations, excluding cash
used for capital expenditures and payments in connection with restructurings and
investigations, lawsuits and claims. Typically, the first quarter of each year
results in neutral or negative cash flow from operations (before such
exclusions) due to various factors. These factors include customer order
patterns, customer buy-ins in advance of annual price increases, fluctuations in
working capital requirements and payment of variable compensation with respect
to the immediately preceding year. Typically, the other three quarters result in
significant positive cash flow from operations (before deducting such
exclusions). The third quarter tends to produce relatively less positive cash
flow primarily as a result of scheduled plant shutdowns by our customers for
vacations. Following a recovery in the steel and other metals and transportation
industries, we believe that our cash flow would follow this historical pattern.
Prior to 2000, our cash flow from operations (before such exclusions) in the
first and third quarters was adversely impacted by the semi-annual interest
payments on our previously outstanding senior subordinated notes. The second and
fourth quarters correspondingly benefited from the absence of interest payments
on such notes. We expect the semi-annual interest payments on the Senior Notes
to have a similar impact.
We use, and are dependent on, funds available under our revolving
credit facility, including 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. We believe that our cost savings
initiatives will, over the next one to two years, continue to improve our cash
flow from operations for a given level of net sales. Improvements in cash flow
from operations resulting from these initiatives are being partially offset by
associated cash implementation costs, while they are being implemented.
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 is dependent on our
future financial and operating performance. Our ability to maintain compliance
with the covenants under the Senior Facilities is also 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
69
changes in conditions affecting our industry, changes in global and regional
economic conditions, changes in interest and currency exchange rates,
developments in antitrust investigations, lawsuits and claims involving us and
inflation in raw material, energy and other costs.
We cannot assure you that our cash flow from operations and capital
resources will be sufficient to enable us to meet our debt service and other
obligations when due. Even if we are able to meet our debt service and other
obligations when due, we may not be able to comply with the financial covenants
under the Senior Facilities. A failure to comply with any of the covenants under
the Senior Facilities, unless waived by the lenders, would be a default under
the Senior Facilities. This would permit the lenders to accelerate the maturity
of the Senior Facilities. It would also permit the lenders to terminate their
commitments to extend credit under our revolving credit facility. This would
have an immediate material adverse effect on our liquidity. An acceleration of
maturity of the Senior Facilities or a breach of the covenants contained in the
Senior Notes would permit the holders of the Senior Notes to accelerate the
maturity of the Senior Notes. Acceleration of maturity of the Senior Notes would
permit the lenders to accelerate the maturity of the Senior Facilities and
terminate their commitments to extend credit under our revolving credit
facility. If we were unable to repay our debt to the lenders or holders, the
lenders and holders could proceed against the collateral securing the Senior
Facilities and the Senior Notes, respectively, and exercise all other rights
available to them. If we were unable to repay our debt to the lenders or the
holders, or otherwise obtain a waiver from the lenders or the holders, we could
be required to limit or discontinue, temporarily or permanently, certain of our
business plans, activities or operations, reduce or delay certain capital
expenditures, sell certain of our assets or businesses, restructure or refinance
some or all of our debt or incur additional debt, or sell additional common
stock or other securities. We cannot assure you that we would be able to obtain
any such waiver or take any of such actions on favorable terms or at all.
As described above, we are dependent on our revolving credit facility
and continuing compliance with the financial covenants under the Senior
Facilities for liquidity. The Senior Facilities require us to, among other
things, comply with specified minimum interest coverage and maximum net senior
secured debt leverage ratios that become more restrictive over time. At June 30,
2002, we were in compliance with the financial covenants under the Senior
Facilities. If we were to believe that we would not continue to comply with such
covenants, we would seek an appropriate waiver or amendment from the lenders
thereunder. There can be no assurance that we would be able to obtain such
waiver or amendment on acceptable terms or at all.
While our revolving credit facility provides for maximum borrowings of
up to (euro)200 million ($198 million, based on currency exchange rates in
effect at June 30, 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
under the Senior Facilities. In addition, (euro)25 million of the (euro)200
million is reserved exclusively for use to pay or secure payment of the fine
assessed by the antitrust authority of the European Union. At June 30, 2002, we
had full availability under our revolving credit facility and the outstanding
balance thereunder was nil. In addition, payment of the fine or issuance of a
letter of credit to
70
secure payment of the fine assessed by the antitrust authority of the European
Union would significantly reduce remaining funds available under our revolving
credit facility for operating and other purposes.
We believe that the long-term fundamentals of our business continue to
be sound. Accordingly, although we cannot assure you that such will be the case,
we believe that, based on our expected cash flow from operations, our expected
resolution of our remaining obligations in connection with antitrust
investigations, lawsuits and claims, and our existing capital resources, and
taking into account our efforts to reduce costs and working capital needs,
improve efficiencies and product quality, generate growth and earnings and
maximize funds available to meet our debt service and other obligations, we will
be able to manage our working capital and cash flow to permit us to service our
debt and meet our obligations when due.
CASH FLOW FROM OPERATING ACTIVITIES. Cash flow used in operating
activities was $36 million in the 2002 first half as compared to cash flow
provided by operating activities of $1 million in the 2001 first half. The
decreased generation of cash flow of $37 million resulted primarily from a $33
million decline in gross profit. Working capital was a use of cash of $25
million in the 2002 first half as compared to $21 million in the 2001 first
half. The benefit from an increase in accounts receivable, a decrease in
accounts payable and a reduction in restructuring payments and fines and net
settlements and expenses in connection with antitrust investigations and related
lawsuits and claims were largely offset by an increase in inventories in
anticipation of higher sales volumes in the 2002 second half. Careful management
of credit risk allowed us to avoid significant accounts receivable losses in
light of the poor financial condition of many of our potential and existing
customers. In light of current global and regional economic conditions, we
cannot assure that we will not be materially adversely affected by accounts
receivable losses in the future.
CASH FLOW FROM INVESTING ACTIVITIES. We used $20 million of cash flow
for investing activities during the 2002 first half as compared to $7 million
during the 2001 first half. This increase of $13 million was primarily due to
higher capital expenditures for expansion in the 2002 first half as compared to
a reduced level of capital expenditures in the 2001 first half to preserve cash
resources.
CASH FLOW FROM FINANCING ACTIVITIES. Cash flow provided by financing
activities was $66 million in the 2002 first half as compared to cash flow used
for financing activities of $5 million in the 2001 first half. The increase was
primarily due to additional borrowings in the 2002 first half to fund working
capital needs and $20 million in cash costs associated with the issuance of the
Senior Notes in February and May 2002. During the 2001 first half, we received
$9 million from an additional minority investment in connection with the
broadening of our strategic alliance in the cathode business with Pechiney.
During the 2002 first half, we completed private offerings of $550 million
aggregate principal amount of Senior Notes. Net proceeds (excluding accrued
interest paid by the purchasers) were $538 million, all of which were used to
repay term loans under the Senior Facilities and reduce the outstanding balance
under our revolving credit facility.
71
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CRITICAL ACCOUNTING POLICIES
The SEC recently issued disclosure guidance for critical accounting
policies. The SEC defines critical accounting policies as those that require
application of management's most difficult, subjective or complex judgments,
often as a result of the need to make estimates about the effect of matters that
are inherently uncertain and may change in subsequent periods.
Our significant accounting policies are described in Note 2 to the
Consolidated Financial Statements. Not all of these significant accounting
policies require management to make difficult, subjective or complex judgments
or estimates. However, the following accounting policies could be deemed to be
critical by the SEC.
USE OF ESTIMATES. In preparing the Consolidated Financial Statements,
we use estimates in determining the economic useful lives of our assets,
obligations under our employee benefit plans, provisions for doubtful accounts,
provisions for restructuring charges, tax valuation allowances and various other
recorded or disclosed amounts. Estimates require us to use our judgment. While
we believe that our estimates for these matters are reasonable, if the actual
amount is significantly different than the estimated amount, our assets,
liabilities or results of operations may be overstated or understated.
CONTINGENCIES. We account for contingencies in accordance with SFAS No.
5, "Accounting for Contingencies." SFAS No. 5 requires that we record an
estimated loss from a loss contingency when information available prior to
issuance of the Consolidated Financial Statements indicates that it is probable
that an asset has been impaired or a liability has been incurred at the date of
the Consolidated Financial Statements and the amount of the loss can be
reasonably estimated. Accounting for contingencies such as environmental, legal
and income tax matters requires us to use our judgment. While we believe that
our accruals for these matters are adequate, if the actual loss from a loss
contingency is significantly different from the estimated loss, our results of
operations may be overstated or understated.
IMPAIRMENTS OF LONG-LIVED ASSETS. We record impairment losses on
long-lived assets used in operations when events and circumstances indicate that
the assets might be impaired and the undiscounted future cash flows estimated to
be generated by those assets are less than the carrying amount of those assets.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future net cash flows expected to be generated by
the asset. If the asset is 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 asset. Assets to be disposed are reported at the
lower of the carrying amount or fair value less costs to sell. If the actual
value is significantly less than the estimated value, our assets may be
overstated.
INVENTORIES. We record the value of inventory at the lower of cost or
market, and periodically review the book value of products and product lines to
determine if they are properly valued. We also periodically review the
composition of our inventories and seek to identify slow-moving inventories. In
connection with those reviews, we seek to identify
72
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
products that may not be properly valued and assess the ability to dispose of
them at a price greater than cost. If it is determined that cost is less than
market value, then cost is used for inventory valuation. If a write down to
current market value is necessary, the market value cannot be greater than the
net realizable value, sometimes called the ceiling (defined as selling price
less costs to complete and dispose), and cannot be lower than the net realizable
value less a normal profit margin, sometimes called the floor. Generally, we do
not experience issues with obsolete inventory due to the nature of our products.
If the actual value is significantly less than the recorded value, our assets
may be overstated.
RECENT ACCOUNTING PRONOUNCEMENTS
In June 2002, FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which is effective for financial
statements issued for fiscal years beginning 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)." We
are currently evaluating the impact of SFAS No. 146 on our consolidated
financial position and results of operations.
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." 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 are currently evaluating the impact of the provisions of
SFAS No. 145 relating to SFAS No. 4 on our consolidated financial position and
results of operations. The provisions of SFAS No. 145 relating to SFAS No. 13
and the other provisions of SFAS No. 145, excluding the provisions relating to
SFAS No. 4, did not have a significant impact on our consolidated financial
position or results of operations.
In August 2001, FASB issued SFAS No. 144, "Accounting for Impairment or
Disposal of Long-Lived Assets," which addresses financial accounting and
reporting for the impairment or disposal of long-lived assets, excluding
goodwill and other intangible assets not being amortized pursuant to SFAS No.
142, and certain other assets. SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. We adopted
SFAS No.
73
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 anticipate that the adoption of SFAS No. 143
will not have a significant impact on our consolidated financial position or
results of operations.
In July 2001, FASB issued SFAS No. 141, "Business Combinations," and
SFAS No. 142, "Goodwill and Other Intangible Assets," both of which are
effective for financial statements issued for fiscal years beginning after
December 15, 2001. SFAS No. 141 and SFAS No. 142 establish accounting and
reporting standards for business combinations, goodwill and intangible assets.
We adopted SFAS No. 141 and SFAS No. 142 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 $1 million in the 2001 first
half.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS
We are exposed to market risks primarily from changes in interest rates
and currency exchange rates. To manage our exposure to these changes, we
routinely enter into various transactions that have been authorized according to
documented policies and procedures. We do not use derivatives for trading or
speculative purposes or to generate income, and we do not use leveraged
derivatives.
We implement interest rate management initiatives to seek to minimize
our interest expense and optimize our portfolio of fixed and variable interest
rate obligations. Our exposure to changes in interest rates results primarily
from floating rate long-term debt (or derivatives that effectively convert fixed
rate debt to variable rate debt) tied to LIBOR or euro LIBOR. We enter into
agreements with financial institutions, which are intended to limit, or cap, our
exposure to the incurrence of additional interest expense with respect to a
portion of such debt (or derivatives) due to increases in variable interest
rates. At June 30, 2002, we had entered into two ten-year interest rate swap for
a total notional amount of $250 million to effectively convert that amount of
fixed rate debt to variable rate debt. These interest rate swaps are fair value
swaps and are accounted for based on the short-cut method. Fees related to these
agreements or swaps are charged to interest expense over the term of relevant
agreement or swap.
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
74
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
the foreseeable future and, as a result, translation gains and losses are
reflected in other (income) expense, net on the Consolidated Statement of
Operations.
In addition to these intercompany loans, our exposure to changes in
currency exchange rates results primarily from:
o investments in our foreign subsidiaries and in our share of the
earnings of those subsidiaries, which are denominated in local
currencies;
o raw material purchases made by our foreign subsidiaries in a currency
other than their local currencies; and
o export sales made by our subsidiaries in a currency other than their
local currencies.
When we deem it appropriate, we may attempt to limit our risks
associated with changes in currency exchange rates through both operational and
financial market activities. Financial instruments are used to attempt to hedge
existing exposures, firm commitments and, potentially, anticipated transactions.
We use forward, option and swap contracts to reduce risk by essentially creating
offsetting currency exposures. We held contracts for the purpose of hedging
against these risks with an aggregate notional amount of about $37 million at
December 31, 2001 and $24 million at June 30, 2002. All of our contracts mature
within one year. All of our contracts are marked-to-market monthly and,
accordingly, transaction gains and losses are reflected in other (income)
expenses, net in the Consolidated Statements of Operations. Unrealized gains and
losses on our outstanding contracts were nil at December 31, 2001 and a $7
million loss at June 30, 2002.
75
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between the Antitrust
Division of the U.S. Department of Justice (the "DOJ") and GTI, GTI pled guilty
to a one count charge of violating U.S. federal antitrust law in connection with
the sale of graphite electrodes and was sentenced to pay a non-interest-bearing
fine in the aggregate amount of $110 million, payable in six annual installments
of $20 million, $15 million, $15 million, $18 million, $21 million and $21
million, commencing July 23, 1998. The payments due in 1998, 1999 and 2000 were
timely made. 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. In January 2001, at our request, the due date of each of the
remaining three payments was deferred by one year and, 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 (which was paid), 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. In January 2002,
the statutory rate of interest was 2.13% 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 March 1999, pursuant to a plea agreement between our Canadian
subsidiary and the Canadian Competition Bureau, our Canadian subsidiary pled
guilty to a one count charge of violating Canadian antitrust law in connection
with the sale of graphite electrodes and was sentenced to pay a fine of Cdn. $11
million. The relevant Canadian court approved the plea agreement and, as a
result, under the plea agreement we will not be subject to prosecution by the
Canadian Competition Bureau with respect to any other violations of Canadian
antitrust law occurring prior to the date of the plea agreement. The fine was
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, after holding a
hearing on this matter, assessed a fine against us in the amount of 676 million
KRW (approximately $560,000, based on currency exchange rates in effect on June
30, 2002). Five other graphite electrode producers were also fined by the Korean
antitrust authority in amounts ranging up to 4,396 million KRW (approximately
$3.6 million, based on currency exchange rates in effect on June 30, 2002). Our
fine, which represented 0.5% of our graphite electrode sales in Korea during the
relevant time period and was the lowest fine as a percentage of sales imposed by
the Korean antitrust authority, reflected a substantial reduction as a result of
our cooperation with that authority during its investigation. In May 2002, we
appealed the
76
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
decision. In July 2002, the Korean antitrust authority affirmed its
decision on appeal. We paid the fine, together with accrued interest, in August
2002.
In January 2000, the Directorate General-Competition of the Commission
of the European Communities, the antitrust enforcement authority of the European
Union (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. On July 18, 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 $50 million, based on
exchange rates in effect at June 30, 2002) against us. Seven other graphite
electrode producers were also fined under the decision, with fines 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 are currently in discussions with the EU Competition Authority
regarding the appropriate form of collateral security during the pendency of the
appeal. If the results of these discussions are not acceptable to us, we may
file an interim appeal to the Court to waive the requirement for collateral
security or to allow us to provide alternative security for payment. We cannot
predict how or when the Court would rule on such interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We have provided that information.
In May 2002, the antitrust authority of the European Union 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. As a
result of our substantial cooperation to date and our intention to continue to
cooperate, under the Notice of Non-Imposition or Reduction of Fines in Cartel
Cases issued by the antitrust authority of the European Union, we believe that
we will benefit from the maximum reduction possible (a 100% reduction) with the
result that no fine will be payable.
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 and the Canadian Competition Bureau in
their continuing investigations of others. In
77
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
The guilty pleas and decisions described above 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 June 30, 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 of the actual and potential
claims against us by customers in the U.S. and Canada arising out of alleged
antitrust violations occurring prior to the date of the relevant 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 settlement payments due thereunder have been timely
made.
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 were 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
78
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
granted with respect to substantially all of the plaintiffs' claims. Appeals
have been filed by the plaintiffs and the defendants with the Third Circuit
Court of Appeals with regard to these dismissals. The third complaint was
dismissed without prejudice to refile pending the resolution of such appeals. We
have filed a motion to stay the lawsuit commenced by the fourth complaint
pending resolution of appeals in the other foreign customer lawsuits and such
motion was granted in July 2002.
In 1999 and 2000, we were served with three complaints commencing three
civil antitrust lawsuits (the "CARBON ELECTRODE LAWSUITS"). The first complaint,
filed in the District Court, is entitled GLOBE METALLURGICAL, INC. V. UCAR
INTERNATIONAL INC., ET AL. The second complaint, filed in the U.S. Bankruptcy
Court for the Northern District of Ohio, is entitled 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. We filed motions to
dismiss the second and third complaints. In May 2001, our motion to dismiss the
second complaint was denied. In October 2001, we settled the lawsuit commenced
by the third complaint. The guilty pleas and decisions described above do not
relate to carbon electrodes.
In March 2002, we received notice that a complaint had been filed
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. Our subsidiary, Carbone Savoie, is named as a defendant in the
complaint, but has not been served with the complaint. Other producers of carbon
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 carbon cathodes and seek, among other things, an
award of treble damages resulting from such alleged violations. We intend to
vigorously defend against such lawsuit. The guilty pleas and decisions described
above do not relate to carbon cathodes.
The foreign customer lawsuits, two of the three carbon electrode
lawsuits and the carbon cathode lawsuit are still in their early stages. We have
been vigorously defending, and intend to continue to vigorously defend, against
these remaining lawsuits as well as all threatened lawsuits and possible
unasserted claims. We may at any time, however, settle these lawsuits as well as
any threatened lawsuits and possible claims. It is possible that additional
civil antitrust lawsuits seeking, among other things, to recover damages could
be commenced against us in the U.S. and in other jurisdictions.
1997 AND 2001 SECOND QUARTER ANTITRUST EARNINGS CHARGES
We recorded a pre-tax charge of $340 million against results of
operations for 1997 and, as a result of the assessment of a fine by the EU
Competition Authority, we recorded a pre-tax
79
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
charge of an additional $10 million against results of operations for the 2001
second quarter, as a reserve for potential liabilities and expenses in
connection with antitrust investigations and related lawsuits and claims. The
aggregate 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. In the aggregate (including the assessment of the fine
by the EU Competition Authority and the additional $10 million charge), 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 June 30,
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 June 30, 2002, we have paid an aggregate of $249 million of
fines and net settlement and expense payments and $14 million of imputed
interest. At June 30, 2002, $101 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 June 30, 2002 was about $9 million.
OTHER PROCEEDINGS AGAINST US
We are involved in various other investigations, lawsuits, claims and
other legal proceedings incidental to the conduct of our business. While it is
not possible to determine the ultimate disposition of each of them, we do not
believe that their ultimate disposition will have a material adverse effect on
us.
LAWSUIT INITIATED BY US AGAINST OUR FORMER PARENTS
In February 2000, at the direction of a special committee of
independent directors of GTI's Board of Directors, we commenced a lawsuit in the
U.S. District Court for the Southern District of New York against our former
parents, Mitsubishi and Union Carbide. The other defendants named in the lawsuit
include two of the respective representatives of Mitsubishi and Union Carbide
who served on GTI's Board of Directors at the time of our 1995 leveraged equity
recapitalization, Hiroshi Kawamura and Robert D. Kennedy. Mr. Kennedy, who was a
director of GTI at the time the lawsuit was commenced, resigned as such on March
14, 2000.
In the lawsuit, we allege, among other things, that, in January 1995,
Mitsubishi and Union Carbide had knowledge of facts indicating that GTI had
engaged in illegal graphite electrode price fixing activities and that any
determination of GTI's statutory capital surplus would be overstated as a result
of those activities. We also allege that certain of their representatives knew
or should have known about those activities. In January 2000, Mitsubishi was
indicted by the DOJ on a one count charge of aiding and abetting violations of
U.S. federal
80
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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. We
are vigorously opposing those motions. Oral hearings were held on those motions
in the 2001 first and second quarters. We expect that a decision on those
motions will be rendered by the end of September 2002.
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
June 30, 2002, we had incurred about $4 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.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
On March 1, 2002, GTI's Board of Directors granted 412,300 shares of
restricted stock to more than 175 management employees, including executive
officers, pursuant to various employee incentive compensation plans. The
issuance of the shares granted was registered pursuant to various registration
statements previously filed under the Securities Act of 1933. On June 28, 2002,
GTI's Board of Directors accelerated the vesting of all of those shares of
restricted stock. Those shares may be freely resold at any time and from time to
time by employees. In the case of employees who are deemed to be affiliates of
the Company (i.e., executive officers), any such resale may be made pursuant to
a registration statement previously filed under the Securities Act of 1933. It
is expected that approximately 123,690 of the shares will be resold to cover
income and other taxes associated with the restricted stock and required to be
withheld from or otherwise paid by the employee.
81
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 7, 2002, GTI held its annual meeting of stockholders in Wilmington,
Delaware.
The stockholders elected directors, and the shares present at the meeting
were voted for or withheld from each nominee, as follows:
NUMBER OF PERCENTAGE NUMBER OF
SHARES OF VOTES SHARES
NAME OF DIRECTOR CAST FOR CAST FOR WITHHELD
- ---------------- -------- -------- --------
R. Eugene Cartledge 49,355,602 98.52 739,334
Mary B. Cranston 49,026,132 97.87 1,068,804
John R. Hall 49,351,173 98.52 743,763
Thomas Marshall 48,913,511 97.64 1,181,425
Ferrell P. McClean 49,491,618 98.80 603,318
Michael C. Nahl 48,922,178 97.66 1,172,758
Gilbert E. Playford 49,366,600 98.55 728,336
The stockholders voted on a proposal to change the name of our public
parent company from UCAR International Inc. to GrafTech International Ltd. The
proposal was approved and the name change became effective May 7, 2002. The
shares present at the meeting were voted on the proposal as follows:
NUMBER OF PERCENTAGE OF NUMBER OF SHARES NUMBER OF
SHARES CAST FOR SHARES CAST FOR CAST AGAINST SHARES ABSTAINING
- --------------- --------------- ------------ -----------------
49,965,954 99.74 104,916 24,066
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
The exhibits listed in the following table have been filed as part of this
Quarterly Report on Form 10-Q.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
4.5 Amendment No. 2 to Rights Agreement among GrafTech International
Ltd. and ComputerShare Investor Services LLC dated as of May 21,
2002.
10.30 Letter amending Employment and Restricted Stock Agreements between
GrafTech International Ltd. and Gilbert E. Playford dated as of
July 22, 2002.
82
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(B) REPORTS ON FORM 8-K
The following Reports on Form 8-K were filed during the quarter ended June
30, 2002:
(i) Report on Form 8-K dated April 23, 2002 as filed by UCAR
International Inc., filing a press release dated April 23, 2002
announcing the launching of a solicitation for consents of
holders of its outstanding senior notes to permit the issuance
of up to an additional $150 million of senior notes. No
financial statements were filed.
(ii) Report on Form 8-K dated May 1, 2002 as filed by UCAR
International Inc., filing a press release dated May 1, 2002
announcing preliminary 2002 first quarter results. No financial
statements were filed.
(iii) Report on Form 8-K dated May 1, 2002 as filed by UCAR
International Inc., filing a press release dated May 1, 2002
announcing the private offering of additional senior notes of
UCAR Finance Inc. No financial statements were filed.
(iv) Report on Form 8-K dated May 2, 2002 as filed by UCAR
International Inc., filing a press release dated May 1, 2002
announcing the pricing of the private offering of $150 million
aggregate principal amount of additional senior notes of UCAR
Finance Inc. No financial statements were filed.
(v) Report on Form 8-K dated May 7, 2002 as filed by UCAR
International Inc., filing a press release dated May 6, 2002
announcing the closing of the private offering of $150 million
aggregate principal amount of additional senior notes of UCAR
Finance Inc. No financial statements were filed.
(vi) Report on Form 8-K dated May 7, 2002 as filed by GrafTech
International Ltd., filing a press release dated May 7, 2002
announcing the change of UCAR International Inc.'s corporate
name to GrafTech International Ltd. No financial statements were
filed.
(vii) Report on Form 8-K dated May 9, 2002 as filed by GrafTech
International Ltd., filing a press release dated May 8, 2002
announcing 2002 first quarter results. Summary financial
information for the quarter ended March 31, 2002 was filed.
(viii) Report on Form 8-K dated May 24, 2002 as filed by GrafTech
International Ltd., filing a press release dated May 23, 2002
announcing key commercial approvals of its eGraf(TM) thermal
interface products. No financial statements were filed.
83
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAFTECH INTERNATIONAL LTD.
Date: August 13, 2002 By: /S/ CORRADO F. DE GASPERIS
--------------------------------------------
Corrado F. De Gasperis
VICE PRESIDENT, CHIEF FINANCIAL OFFICER
AND CHIEF INFORMATION OFFICER
(PRINCIPAL ACCOUNTING OFFICER)
84
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
------ ----------------------
4.5 Amendment No. 2 to Rights Agreement among GrafTech International
Ltd. and ComputerShare Investor Services LLC dated as of May 21,
2002.
10.30 Letter amending Employment and Restricted Stock Agreements between
GrafTech International Ltd. and Gilbert E. Playford dated as of
July 22, 2002.
85