Back to GetFilings.com
================================================================================
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
SEPTEMBER 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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ X ] No [ ]
As of September 30, 2002, 56,135,459 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 September 30, 2002
(unaudited)................................................................................. Page 3
Consolidated Statements of Operations for the Three Months and Nine
Months ended September 30, 2001 (unaudited) and 2002 (unaudited)............................ Page 4
Consolidated Statements of Cash Flows for the Nine Months ended
September 30, 2001 (unaudited) and 2002 (unaudited)......................................... Page 5
Consolidated Statement of Stockholders' Deficit for the Nine Months ended
September 30, 2002 (unaudited).............................................................. Page 6
Notes to Consolidated Financial Statements...................................................... Page 7
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1.................................................... Page 39
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................................... Page 44
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK..................................... Page 77
ITEM 4. CONTROLS AND PROCEDURES........................................................................ Page 78
PART II. OTHER INFORMATION:
ITEM 1. LEGAL PROCEEDINGS.............................................................................. Page 79
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K............................................................... Page 85
SIGNATURE.............................................................................................. Page 86
CERTIFICATIONS......................................................................................... Page 87
EXHIBIT INDEX.......................................................................................... Page 91
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
------------------------------
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in millions, except per share data)
December 31, September 30,
ASSETS 2001 2002
---- ----
(Unaudited)
-----------
CURRENT ASSETS:
Cash and cash equivalents............................................................. $ 38 $ 18
Notes and accounts receivable......................................................... 95 103
Inventories:
Raw materials and supplies.......................................................... 33 38
Work in process..................................................................... 111 98
Finished goods...................................................................... 33 31
----------- ---------------
177 167
Prepaid expenses and deferred income taxes............................................ 12 16
----------- ---------------
Total current assets................................................................ 322 304
----------- --------------
Property, plant and equipment............................................................. 931 963
Less: accumulated depreciation........................................................... 650 677
----------- --------------
Net fixed assets.................................................................... 281 286
----------- --------------
Deferred income taxes..................................................................... 140 169
Goodwill.................................................................................. 17 14
Other assets.............................................................................. 37 53
----------- --------------
Total assets........................................................................ $ 797 $ 826
=========== ==============
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable...................................................................... $ 101 $ 75
Short-term debt....................................................................... 7 15
Accrued income and other taxes........................................................ 45 30
Other accrued liabilities............................................................. 57 63
----------- --------------
Total current liabilities................................................................. 210 183
Long-term debt:
Long-term debt due after one year................................................... 631 706
Fair value of hedged debt obligations............................................... - 7
Unamortized bond premium............................................................ - 7
----------- --------------
Total long-term debt....................................................... 631 720
----------- --------------
Other long-term obligations............................................................... 231 226
Deferred income taxes..................................................................... 32 32
Minority stockholders' equity in consolidated entities.................................... 25 28
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, 59,104,398 shares issued at September 30,
2002............................................................................... 1 1
Additional paid-in capital............................................................ 629 636
Accumulated other comprehensive loss.................................................. (269) (288)
Retained deficit...................................................................... (602) (618)
Less: cost of common stock held in treasury, 2,322,412 shares at December
31, 2001, 2,542,539 shares at September 30, 2002................................. (85) (88)
Less: common stock held in employee benefits trust, 426,400 shares at December
31, 2001 and September 30, 2002.................................................. (6) (6)
----------- --------------
Total stockholders' deficit........................................................... (332) (363)
----------- --------------
Total liabilities and stockholders' deficit........................................... $ 797 $ 826
=========== ==============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(Dollars in millions, except per share data)
(Unaudited)
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
2001 2002 2001 2002
---- ---- ---- ----
Net sales............................................ $ 157 $ 154 $ 499 $ 453
Cost of sales........................................ 114 120 356 352
---------- ---------- ---------- ----------
Gross profit.................................... 43 34 143 101
Research and development............................. 3 3 9 9
Selling, administrative and other expenses........... 19 20 59 58
Compensation expense - stock grant................... - - - 5
Global realignment and related expenses.............. - - - 3
Restructuring charge and impairment loss of long-
lived and other assets.......................... - 1 58 19
Antitrust investigations and related lawsuits
and claims...................................... - - 10 -
Other (income) expense, net.......................... (1) 2 (1) (14)
Interest expense..................................... 14 15 49 45
---------- ----------- ---------- ----------
35 41 184 125
Income (loss) before provisions (benefits) for
income taxes, minority interest and
extraordinary items........................ 8 (7) (41) (24)
Provision for (benefit from) income taxes............ 3 (3) (11) (13)
---------- ---------- ---------- ----------
Income (loss) of consolidated entities before
minority interest and extraordinary items. 5 (4) (30) (11)
Less: minority stockholders' share of income......... 1 1 2 2
---------- ---------- ---------- ----------
Income (loss) before extraordinary items...... 4 (5) (32) (13)
Extraordinary items, net of tax...................... - - - 3
---------- ---------- ---------- ----------
Net income (loss)............................... $ 4 $ (5) $ (32) $ (16)
========== ========== ========== ==========
BASIC INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary items........ $ 0.07 $ (0.08) $ (0.68) $ (0.23)
Extraordinary items, net of tax................. - - - (0.05)
---------- ---------- ---------- ----------
Net income (loss) per share..................... $ 0.07 $ (0.08) $ (0.68) $ (0.28)
========== ========== ========== ==========
Weighted average common shares outstanding
(in thousands).............................. 52,389 55,925 47,679 55,874
========== ========== ========== =========
DILUTED INCOME (LOSS) PER COMMON SHARE:
Income (loss) before extraordinary items........ $ 0.07 $ (0.08) $ (0.68) $ (0.23)
Extraordinary items, net of tax................. - - - (0.05)
---------- --------- ---------- ---------
Net income (loss) per share..................... $ 0.07 $ (0.08) $ (0.68) $ (0.28)
========== ========= ========== =========
Weighted average common shares
outstanding (in thousands).................. 53,203 55,925 47,679 55,874
========== ========= ========== =========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
PART I
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
(Unaudited)
Nine Months Ended
September 30,
-------------
2001 2002
---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net loss..................................................................... $ (32) $ (16)
Extraordinary items, net of tax.............................................. - 3
Non-cash charges to net loss:
Depreciation and amortization............................................ 27 22
Deferred income taxes.................................................... (21) (27)
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 19
Other non-cash charges................................................... (1) (27)
Working capital *............................................................ (57) (55)
Long-term assets and liabilities............................................. 2 -
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES................. (19) (76)
-------- -------
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures......................................................... (22) (32)
Sale of assets............................................................... 4 -
-------- -------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES................. (18) (32)
-------- -------
CASH FLOW FROM FINANCING ACTIVITIES:
Short-term debt borrowings (reductions), net................................. (1) 8
Revolving credit facility borrowings (reductions), net....................... (3) (78)
Long-term debt borrowings.................................................... 2 557
Long-term debt reductions.................................................... (87) (392)
Minority interest investment................................................. 9 -
Proceeds from interest rate swap............................................. - 10
Sale of common stock under stock options..................................... 94 1
Financing costs.............................................................. (3) (21)
-------- -------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES ................ 11 85
-------- -------
Net increase (decrease) in cash and cash equivalents.............................. (26) (23)
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........................................ $ 20 $ 18
======== =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Net cash paid during the period for:
Interest expense......................................................... $ 44 $ 46
======== =======
Income taxes............................................................. $ 21 $ 23
======== =======
* Net change in working capital due to the following components:
(Increase) decrease in current assets:
Notes and accounts receivable............................................ $ 15 $ (6)
Inventories.............................................................. (33) 11
Prepaid expenses......................................................... - (2)
Increase (decrease) in accounts payable and accruals......................... (13) (52)
Antitrust investigations and related lawsuits and claims..................... (14) (2)
Restructuring payments....................................................... (12) (4)
-------- -------
WORKING CAPITAL..................................................... $ (57) $ (55)
======== =======
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' DEFICIT
(Dollars in millions)
(Unaudited)
Accumulated Common Stock
Additional Other Unearned Held in
Common Paid-in Comprehensive Retained Restricted Treasury Employee
Stock Capital Loss Deficit Stock Stock Benefits Trust
----- ------- ---- ------- ----- ----- --------------
BALANCE AT DECEMBER 31, 2001....... $ 1 $ 629 $ (269) $ (602) $ - $ (85) $ (6)
Comprehensive loss:
Net loss...................... - - - (16) - - -
Foreign currency translation
adjustments............... - - (19) - - - -
------- ------- ------- ------- ------ ------ -------
Total comprehensive
loss............. - - (19) (16) - - -
Issuance of restricted stock....... - 6 - - (6) - -
Amortization of restricted stock... - - - - 1 - -
Accelerated vesting of restricted
stock......................... - - - - 5 - -
Repurchase of treasury stock....... - (3) -
Sale of common stock............... - 1 - - - - -
------- ------- ------- ------- ------ ------ -------
BALANCE AT SEPTEMBER 30, 2002...... $ 1 $ 636 $ (288) $ (618) $ - $ (88) $ (6)
======= ======= ======= ======= ====== ====== =======
Total
Stockholders'Equity
(Deficit)
---------
BALANCE AT DECEMBER 31, 2001....... $ (332)
Comprehensive loss:
Net loss...................... (16)
Foreign currency translation
adjustments............... (19)
---------
Total comprehensive
loss............. (35)
Issuance of restricted stock....... -
Amortization of restricted stock... 1
Accelerated vesting of restricted
stock......................... 5
Repurchase of treasury stock....... (3)
Sale of common stock............... 1
---------
BALANCE AT SEPTEMBER 30, 2002...... $ (363)
=========
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) INTERIM FINANCIAL PRESENTATION
These interim Consolidated Financial Statements are unaudited; however,
in the opinion of management, they have been prepared in accordance with Rule
10-01 of Regulation S-X adopted by the SEC and reflect all adjustments (all of
which are of a normal, recurring nature) which are necessary for a fair
presentation of financial position, results of operations and cash flows for the
periods presented. Results of operations for the nine months ended September 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.
7
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
"SUBSIDIARIES" refers to those companies that, at the relevant time,
are or were majority owned or wholly owned directly or indirectly by GTI or its
predecessors to the extent that those predecessors' activities related to the
graphite and carbon business. All of GTI's subsidiaries have been wholly owned
(with de minimis exceptions in the case of certain foreign subsidiaries) from at
least January 1, 2000 through September 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 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.
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.
8
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 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.
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 exit
or disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost as defined in Issue No. 94-3 is recognized at the
date an entity commits to an exit plan. We 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." Currently,
generally accepted accounting principles require that gains and losses from
extinguishment of debt be classified as an extraordinary item, net of related
income tax effect. Based on SFAS No. 145, gains and losses from extinguishment
of debt are classified as extraordinary items only if they meet the
criteria of Accounting Principle Boards Opinion 30 ("APB 30"), "Reporting the
Effects of Disposal of a Segment of a Business, and Extraordinary,
9
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unusual and Infrequently Occurring Events and Transactions." The provisions of
APB 30 distinguish transactions that are part of an entity's recurring
operations from those that are unusual or infrequent or that meet the criteria
for classification as an extraordinary item. As such, those that do not meet the
criteria of APB 30 are included in the statement of operations before income
(loss) before provisions (benefits) for income taxes, minority interest and
extraordinary items. All prior periods presented that do not meet the criteria
in APB 30 for classification, as an extraordinary item shall be reclassified.
SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible Assets of
Motor Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for Leases," to
eliminate an inconsistency between the required accounting for sale-leaseback
transactions and the required accounting for certain lease modifications that
have economic effects that are similar to sale-leaseback transactions. SFAS No.
145 also amends other existing authoritative pronouncements to make various
technical corrections, clarify meanings or describe their applicability under
changed conditions. We do not expect the provisions of SFAS No. 145 relating to
SFAS No. 4 to have a material impact 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. 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 $2 million in the 2001 first
nine months.
10
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(2) EARNINGS PER SHARE
Basic and diluted earnings per share are calculated using the following
share data:
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
2001 2002 2001 2002
---- ---- ---- ----
Weighted average common shares
outstanding for basic calculation............... 52,389,057 55,924,975 47,678,518 55,873,696
Add: Effect of stock options........................ 814,001 - - -
------------- ------------- ------------- --------------
Weighted average common shares
outstanding for diluted calculation............. 53,203,058 55,924,975 47,678,518 55,873,696
============= ============= ============= ==============
Basic earnings (loss) per common share are calculated by dividing net
income (loss) by the weighted average number of common shares outstanding during
the period. Diluted earnings (loss) per share is calculated by dividing net
income (loss) by the sum of the weighted average number of common shares
outstanding plus the additional common shares that would have been outstanding
if potentially dilutive securities had been issued. As a result of the net loss
reported for the nine months ended September 30, 2001, 870,515 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 nine months ended September 30, 2002,
217,848 and 1,012,516, 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 5,938,477 and 4,237,199 shares in each of the three months ended
September 30, 2001 and 2002, respectively, and 4,853,960 and 4,257,430 shares in
each of the nine months ended September 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 following table summarizes information about stock options
outstanding at September 30, 2002.
11
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------- -------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
REMAINING AVERAGE AVERAGE
RANGE OF NUMBER CONTRACTUAL EXERCISE NUMBER EXERCISE
EXERCISE PRICES OUTSTANDING LIFE PRICES EXERCISABLE PRICES
--------------- ----------- ---- ------ ----------- ------
(Shares in thousands)
Time vesting options:
$7.60 1,060 4 years $ 7.60 1,060 $ 7.60
$8.44 to 8.90 3,674 9 years $ 8.69 202 $ 8.73
$10.50 to $19.06 2,638 6 years $ 16.31 2,262 $ 16.85
$22.81 to $40.44 1,644 4 years $ 33.63 1,371 $ 33.33
----- -----
9,016 $ 15.34 4,895 $ 19.13
===== =====
Performance vesting options:
$7.60 361 4 years $ 7.60 361 $ 7.60
=== ===
The calculation of both basic and diluted earnings (loss) per share
gives effect to, among other things, the grant of 413,397 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 currently evaluate the performance of our operating segments based
on gross profit. Intersegment sales and transfers of goods and services are not
material. We may in the future evaluate performance based on additional or
different measures.
The following tables summarize financial information concerning our
reportable segments.
12
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Three Months Ended Nine Months Ended
September 30, September 30,
------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
(Dollars in millions)
Net sales to external customers:
Graphite Power Systems Division................. $ 126 $ 126 $ 399 $ 370
Advanced Energy Technology Division............. 31 28 100 83
--------- --------- --------- --------
Consolidated net sales....................... $ 157 $ 154 $ 499 $ 453
========= ========= ========= ========
Gross profit:
Graphite Power Systems Division................. $ 33 $ 28 $ 112 $ 83
Advanced Energy Technology Division............. 10 6 31 18
--------- --------- --------- --------
Consolidated gross profit.................... $ 43 $ 34 $ 143 $ 101
========= ========= ========= ========
Depreciation and amortization:
Graphite Power Systems Division................. $ 7 $ 6 $ 24 $ 18
Advanced Energy Technology Division............. 1 1 3 4
--------- --------- --------- --------
Consolidated depreciation and amortization... $ 8 $ 7 $ 27 $ 22
========= ========= ========= ========
(4) RESTRUCTURING AND IMPAIRMENT CHARGES
In the 2002 third quarter, we recorded a $1 million charge related to
the impairment of available-for-sale securities.
In the 2002 second quarter, we recorded a $13 million ($8 million after
tax) non-cash charge primarily related to the impairment of our long-lived
carbon electrode assets in Columbia, Tennessee as a result of a decline in
demand and loss of market share. The primary end market for carbon electrodes is
silicon metal, which remains very depressed in the U.S. where our main customer
base is located. This 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.
13
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
14
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
performed at our other facilities in the future. Based on subsequent
developments in the 2000 third quarter, we decided not to demolish certain
buildings. Therefore, in the 2000 third quarter, we reversed the $4 million of
the charge related to demolition and related environmental costs. The $2 million
balance of the charge included estimated severance costs for 65 employees. The
restructuring was completed in 2000.
The following table summarizes activity relating to the accrued expense
in connection with the restructuring charges.
Plant Post
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)
Plant Post
Shutdown Monitoring
Severance and and Related and Related
Related Costs Costs Costs Total
------------- ----- ----- -----
(Dollars in millions)
Non-cash write-offs in 2001.............. - (4) - (4)
Reclassification of on-site disposal and
monitoring costs..................... - - (4) (4)
------ ------ ------ ------
BALANCE AT DECEMBER 31, 2001............. $ 4 $ 8 $ - $ 12
Restructuring charges in 2002............ 6 - - 6
Impact of currency rate changes.......... - 1 - 1
Payments in 2002......................... (5) 1 - (4)
------ ------ ------ ------
BALANCE AT SEPTEMBER 30, 2002............ $ 5 $ 10 $ - $ 15
====== ======= ====== ======
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, September 30
2001 2002
---- ----
(Dollars in millions)
Senior Facilities:
Tranche A euro facility.................................... $ 194 $ -
Tranche A U.S. dollar facility............................. 23 -
Tranche B U.S. dollar facility............................. 313 137
Revolving credit facility.................................. 95 18
---------- ---------
Total Senior Facilities.................................. 625 155
Other European debt............................................. 6 1
Senior Notes:
Senior Notes due 2012...................................... - 550
Fair value of hedged debt obligations...................... - 7
Unamortized bond premium................................... - 7
---------- ---------
Total Senior Notes....................................... - 564
---------- ---------
Total...................................................... $ 631 $ 720
========== =========
15
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SENIOR NOTES
On February 15, 2002, GrafTech Finance issued $400 million aggregate
principal amount of Senior Notes. Interest on the Senior Notes is payable
semi-annually on February 15 and August 15 of each year, commencing August 15,
2002, at the rate of 10.25% per annum. The Senior Notes mature on February 15,
2012.
In April 2002, we obtained consent from the holders of the Senior Notes
issued in February 2002 to amend the Indenture so as to waive the requirement to
use the gross proceeds from the issuance of up to $150 million aggregate
principal amount of additional Senior Notes to make intercompany loans to our
foreign subsidiaries. On April 30, 2002, we entered into a Supplemental
Indenture.
On May 6, 2002, GrafTech Finance issued $150 million aggregate
principal amount of additional Senior Notes at a purchase price of 104.5% of
principal amount, plus accrued interest from February 15, 2002, under the same
Indenture pursuant to which it issued the Senior Notes in February 2002. The
Senior Notes constitute one class of debt securities under the Indenture. The
additional Senior Notes bear interest at the same rate and mature on the same
date as the Senior Notes issued in February 2002. The $7 million premium
received upon issuance of the additional Senior Notes was added to the principal
amount of the Senior Notes shown on the Consolidated Balance Sheets and is
amortized (as a credit to interest expense) over the term of the additional
Senior Notes. As a result of our receipt of such premium, the effective annual
interest rate on the additional Senior Notes is about 9.5%.
On June 5, 2002, GrafTech Finance offered to exchange new registered
Senior Notes (and related guarantees) that are substantially identical to the
previously outstanding Senior Notes (and related guarantees), except that
certain transfer restrictions and registration rights relating to the previously
outstanding Senior Notes would not apply to the new registered Senior Notes (and
related guarantees). All of the previously outstanding Senior Notes (and related
guarantees) were exchanged under the exchange offer.
Except as described below, GrafTech Finance may not redeem the Senior
Notes prior to February 15, 2007. On or after that date, GrafTech Finance may
redeem the Senior Notes, in whole or in part, at specified redemption prices
beginning at 105.125% of the principal amount redeemed for the year commencing
February 15, 2007 and reducing to 100% 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.
16
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
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
17
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
subordinated to debt and obligations, including trade payables, of subsidiaries
that are neither guarantors of the Senior Notes nor unsecured intercompany term
note obligors.
GTI, GrafTech Global and UCAR Carbon and other U.S. subsidiaries
holding a substantial majority of our U.S. assets have guaranteed the Senior
Notes on a senior unsecured basis, except that the guarantee by UCAR Carbon is
secured as described below.
Unsecured intercompany term notes in an aggregate principal amount
equal to $419 million (based on currency exchange rates in effect at September
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 a result
of this limitation, the principal amount of unsecured intercompany term notes
pledged to secure the Senior Notes equals $402 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 September
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.
18
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 ($16 million of which debt was
outstanding at September 30, 2002)).
At September 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
19
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
o 50% of the net proceeds of the issuance of certain GTI equity
securities.
We may make voluntary prepayments under the Senior Facilities. There is
no penalty or premium due in connection with prepayments (whether voluntary or
mandatory).
GrafTech Finance has made and may make secured and guaranteed
intercompany loans of the net proceeds of borrowings under the Senior Facilities
to GrafTech Global's subsidiaries. The obligations of GrafTech Finance under the
Senior Facilities are secured, with certain exceptions, by first priority
security interests in all of these intercompany loans (including the related
security interests and guarantees). We used the proceeds from the issuance of
the Senior Notes in February 2002 to finance the repayment of all of these
intercompany loans that were outstanding at that time, except for intercompany
revolving loans to UCAR Carbon and our Swiss subsidiary.
GTI unconditionally and irrevocably guarantees the obligations of
GrafTech Finance under the Senior Facilities. This guarantee is secured, with
certain exceptions, by first priority security interests in all of the
outstanding capital stock of GrafTech Global and GrafTech Finance, all of the
intercompany debt owed to GTI and GTI's interest in the lawsuit initiated by us
against our former parents.
GTI, GrafTech Global and each of GrafTech Global's subsidiaries
guarantees, with certain exceptions, the obligations of GrafTech Global's
subsidiaries under the intercompany loans, except that our foreign subsidiaries
do not guarantee the intercompany loan obligations of our U.S. subsidiaries.
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.
20
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2002, the interest rates on outstanding debt under
the Senior Facilities was 5.4%. The weighted average interest rate on the Senior
Facilities was 5.4% during the 2002 third quarter and 7.1% during the 2001 third
quarter, and 5.6% during the 2002 first nine months and 7.5% during the 2001
first nine months.
The Senior Facilities contain a number of significant covenants that,
among other things, significantly restrict our ability to sell assets, incur
additional debt, repay or refinance other debt or amend other debt instruments,
create liens on assets, enter into sale and lease back transactions, make
investments or acquisitions, engage in mergers or consolidations, make capital
expenditures, make intercompany dividend payments to GTI, pay intercompany debt
owed to GTI, engage in transactions with affiliates, pay dividends to
stockholders of GTI or make other restricted payments and that otherwise
significantly restrict corporate activities. In addition, we are required to
comply with financial covenants relating to specified minimum interest coverage
ratios and maximum net senior secured debt leverage ratios (which is the ratio
of our net senior secured debt to our EBITDA), which become more restrictive
over time, beginning September 30, 2003.
Under the Senior Facilities, GTI is permitted to pay dividends on, and
repurchase, common stock in an aggregate annual amount of $25 million, plus up
to an additional $25 million if certain 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
21
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ($16 million of which debt
was outstanding at September 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 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 that is added to either euro LIBOR or
the alternate base rate in order to determine the interest rate payable
thereunder increased by 25 basis points.
In December 2001, the Senior Facilities were amended to, among other
things, permit 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 that is added to either euro LIBOR or the alternate base
rate in order to determine the interest rate payable thereunder increased by
37.5 basis points.
In May 2002, the Senior Facilities were amended to, among other things,
permit us to issue up to $150 million aggregate principal amount of Senior
Notes. In connection with this amendment, our maximum permitted leverage ratio
was changed to measure the ratio of net senior secured debt to EBITDA as against
new specified amounts. Our interest coverage ratio was also changed. We believe
that these changed ratios provide us with greater flexibility. In addition, the
amendment reduced the maximum amount available under the Revolving Facility to
(euro)200 million from (euro)250 million ((euro)25 million of which can only be
used to pay or secure payment
22
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ($16 million of
which debt was outstanding at September 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 the 2002 second quarter, we entered into two ten-year
interest rate swaps for a total notional amount of $250 million to effectively
convert that amount of fixed rate debt (represented by Senior Notes) to variable
rate debt. These interest rate swaps are fair value swaps and are accounted for
based on the short-cut method. These swaps reduced our interest expense in the
2002 third quarter by $3 million and in the 2002 first nine months by $4
million. In the 2002 third quarter, we reset our interest rate swaps to allow
the accelerated collection of $10 million in cash. The collection of this cash
will be amortized over the term of the Senior Notes and recorded as a credit
against interest expense. The adjustment for the fair value of the hedged debt
obligations was $7 million at September 30, 2002 and has been recorded as part
of other assets in the Consolidated Balance Sheet. The weighted average pay
rate on the swaps is 5.11% and the weighted average receive rate is 10.25% plus
the six month LIBOR in arrears.
LEVERAGE
We are highly leveraged and, as discussed in Note 7, have
substantial obligations in connection with antitrust investigations, lawsuits
and claims (in respect of which we have an unfunded reserve totaling $99
million). We had total debt of $735 million (including $7 million for
unamortized bond premium and $7 million for fair value of hedged debt
obligations) and a stockholders' deficit of $363 million at September 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 nine months,
certain of our subsidiaries sold receivables totaling $140 million. If we had
not sold such receivables, our accounts receivable (and our net debt, which is
total debt, net of cash, cash equivalents, short-term investments, fair value
of hedged debt obligations and unamortized bond premium) would have been about
$36 million higher at September 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 enforcement authority of the European Union (the "EU COMPETITION
AUTHORITY") pending resolution of our appeal regarding the amount of the fine,
the payment would be financed by borrowing under, or the letter of credit would
constitute a borrowing under, the Revolving Facility. Our leverage and
obligations, as well as changes in conditions affecting our industry, changes in
global and regional economic conditions and other factors, have adversely
impacted our recent operating results.
23
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We use, and are dependent on, funds available under the Revolving
Facility, subject to continued compliance with the financial covenants under the
Senior Facilities, as well as monthly or quarterly cash flow from operations as
our primary sources of liquidity. While our revolving credit facility provides
for maximum borrowings of up to (euro)200 million ($198 million, based on
currency exchange rates in effect at September 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 or minimum interest coverage ratio required under the Senior
Facilities.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Cash flow from operations services payment of our debt and these
obligations, thereby reducing funds available to us for other purposes. Our
leverage and these obligations make us more vulnerable to economic downturns or
in the event that these obligations are greater or timing of payment is sooner
than expected.
Our ability to service our debt, as it comes due, including maintaining
compliance with the covenants under the Senior Facilities, and to meet these and
other obligations as they come due is dependent on our future financial and
operating performance. This performance, in turn, is subject to various factors,
including certain factors beyond our control, such as changes in conditions
affecting our industry, changes in global and regional economic conditions,
changes in interest and currency exchange rates, developments in antitrust
investigations, lawsuits and claims involving us and inflation in raw material,
energy and other costs.
Even if we are able to meet our debt service and other obligations when
due, we may not be able to comply with the covenants and other provisions under
the Senior Facilities. These covenants and provisions include financial
covenants and representations regarding absence of material adverse changes
affecting us. A failure to so comply, unless waived by the lenders thereunder,
would be a default thereunder. This would permit the lenders to accelerate the
maturity of the Senior Facilities. It would also permit them to terminate their
commitments to extend credit under the Revolving Facility. This would have an
immediate material adverse 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.
24
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EXTRAORDINARY ITEM
In May 2002, we recorded an extraordinary charge of $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 $140 million in
the 2002 first nine months and $169 million in the 2001 first nine months. None
of the receivables sold were recorded on the Consolidated Balance Sheets at
September 30, 2002 or December 31, 2001. If we had not sold such receivables,
our accounts receivable (and our net debt) would have been about $36 million
higher at September 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 court approved the plea agreement 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 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. At September 30, 2002, the statutory rate of interest was 1.68% per
annum. Accrued interest will be payable together with each quarterly payment.
The court approved the revised payment schedule. 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
25
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 ($569,000 based on currency
exchange rates in effect at the time of payment). Five other graphite electrode
producers were also fined by it in amounts ranging up to 4,396 million KRW
(approximately $3.3 million based on currency exchange rates in effect at the
time of the decision imposing the fine). Our fine 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, an
aggregate of $584,000, in August 2002.
In January 2000, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of graphite
electrodes. The statement alleges that we and other producers violated 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 September 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 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
an 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 EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of specialty
graphite. The statement alleges that we and other producers violated European
antitrust laws in connection with the sale of specialty
26
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 EU Competition Authority, we believe that we
will benefit from the maximum reduction possible (a 100% reduction) with the
result that no fine will be payable. We cannot assure you how the EU
Competition Authority will ultimately decide.
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 September 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 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
27
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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"). Three companies and
the estate of a bankrupt company filed the complaints. 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. In September 2002, we settled the lawsuit
commenced by the first 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"). Two
producers of aluminum filed the complaint. 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, one 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 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.
28
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September
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 September 30, 2002, we have paid an aggregate of $251 million
of fines and net settlement and expense payments and $14 million of imputed
interest. At September 30, 2002, $99 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
September 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 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. The court approved
a motion to disqualify certain of our counsel in November 2002. We do not
believe that this will adversely affect this lawsuit. The court has not ruled
on the motion to dismiss. Through September 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.
29
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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.
Pursuant to the 2002 plan, we amended our U.S. post-retirement medical
coverage on July 1, 2002. 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 current employees not covered
by a collective bargaining agreement, all current retirees who were not covered
by a collective bargaining agreement when they retired, as well as those
retirees who retired under a former collective bargaining agreement. This change
is expected to reduce our net post-retirement medical benefit obligation by
about $7 million, and the reduction will be amortized over the remaining life of
the retiree population.
We intend to sell real estate, non-strategic businesses and certain
other non-strategic assets over the next two years.
(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 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
30
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 September 30, 2002 and December 31,
2001 and condensed consolidating statements of operations and cash flows for the
three months and nine months ended September 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 September 30, 2002, retained earnings of our subsidiaries subject to such
restrictions were approximately $460 million. Investments in subsidiary
companies are recorded on the equity basis.
31
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEET
AT SEPTEMBER 30, 2002
September 30, 2002
------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
ASSETS
CURRENT ASSETS:
Cash and cash equivalents..................... $ - $ - $ 1 $ 17 $ - $ 18
Notes and accounts receivable................. - 715 460 263 (1,335) 103
Inventories:
Raw materials and supplies................ - - 3 36 (1) 38
Work in process........................... - - 32 64 2 98
Finished goods............................ - - 8 23 - 31
--------- -------- ---------- --------- --------- ---------
- - 43 123 1 167
Prepaid expenses and deferred income taxes.... - - 8 11 (3) 16
--------- --------- ---------- --------- --------- ---------
Total current assets...................... - 715 512 414 (1,337) 304
--------- ---------- ---------- --------- --------- ---------
Property, plant and equipment.................... - - 309 659 (5) 963
Less: accumulated depreciation.................. - - (266) (397) (14) (677)
--------- ---------- ---------- --------- --------- ---------
Net fixed assets.............................. - - 43 262 (19) 286
--------- ---------- ---------- --------- --------- ---------
Deferred income taxes and other assets........... 44 36 (25) 88 93 236
--------- ---------- ---------- --------- --------- ---------
Total assets.................................. $ 44 $ 751 $ 530 $ 764 $ (1,263) $ 826
========= ========== =========== ========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES:
Accounts payable.............................. $ 11 $ 12 $ 19 $ 83 $ (50) $ 75
Short-term debt............................... 416 - 224 648 (1,273) 15
Accrued income and other taxes................ (20) (6) 41 17 (2) 30
Other accrued liabilities..................... - - 39 37 (13) 63
--------- --------- ----------- --------- --------- ---------
Total current liabilities................. 407 6 323 785 (1,338) 183
--------- --------- ----------- --------- --------- ---------
Long-term debt................................... - 719 - 1 - 720
Other long-term obligations...................... - 9 182 35 - 226
Deferred income taxes............................ - (5) 3 31 3 32
Minority stockholders' equity in consolidated
entities....................................... - - - 28 - 28
Stockholders' equity (deficit)................... (363) 22 22 (116) 72 (363)
--------- --------- ----------- --------- --------- ---------
Total liabilities and stockholders' equity
(deficit)................................... $ 44 $ 751 $ 530 $ 764 $ (1,263) $ 826
========= ========= =========== ========= ========= =========
32
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
======= ======== ========= ========= ========= =========
33
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
Three Months Ended September 30, 2002
-------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales........................................... $ - $ - $ 56 $ 136 $ (38) $ 154
Cost of sales....................................... - - 46 107 (33) 120
------- --------- --------- -------- --------- ---------
Gross profit..................................... - - 10 29 (5) 34
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. - 38 24 (28) (8) 26
Interest income..................................... - (19) 2 - 17 -
Interest expense.................................... (2) 15 8 11 (17) 15
------- --------- --------- -------- --------- ---------
Income (loss) before provision for income taxes.. 2 (34) (24) 46 3 (7)
Provision for (benefit from) income taxes........... 1 (13) 15 (6) - (3)
------- --------- --------- -------- --------- ---------
Income (loss) of consolidated entities........... 1 (21) (39) 52 3 (4)
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. 6 - (54) - 48 -
------- --------- --------- -------- --------- ---------
Net income (loss)............................. $ (5) $ (21) $ 15 $ 51 $ (45) $ (5)
======= ========= ========= ======== ========= =========
Three Months Ended September 30, 2001
-------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales........................................... $ - $ - $ 62 $ 133 $ (38) $ 157
Cost of sales....................................... - - 52 98 (36) 114
------- --------- --------- -------- -------- ---------
Gross profit..................................... - - 10 35 (2) 43
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. 4 - (34) 55 (4) 21
Interest income..................................... - (18) - (6) 24 -
Interest expense.................................... 9 18 6 5 (24) 14
------- --------- --------- -------- -------- ---------
Income (loss) before provision for income taxes.. (13) - 38 (19) 2 8
Provision for (benefit from) income taxes........... (5) (1) 3 6 - 3
------- --------- --------- -------- -------- ---------
Income (loss) of consolidated entities........... (8) 1 35 (25) 2 5
Minority stockholders' share of income.............. - - - 1 - 1
Equity in earnings of subsidiaries.................. (12) - 24 - (12) -
------- --------- --------- -------- -------- ---------
Net income (loss)............................. $ 4 $ 1 $ 11 $ (26) $ 14 $ 4
======= ========= ========= ======== ======== =========
34
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
Nine Months Ended September 30, 2002
-------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales........................................... $ - $ - $ 172 $ 388 $ (107) $ 453
Cost of sales....................................... - - 143 302 (93) 352
------- --------- --------- -------- -------- ---------
Gross profit..................................... - - 29 86 (14) 101
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 (78) 11 123 80
Interest income..................................... - (43) (10) (4) 57 -
Interest expense.................................... 10 47 17 28 (57) 45
------- --------- --------- -------- -------- ---------
Income (loss) before provision for income taxes.. (15) (23) 100 51 (137) (24)
Provision for (benefit from) income taxes........... (5) (9) (10) 11 - (13)
------- --------- --------- -------- -------- ---------
Income (loss) of consolidated entities........... (10) (14) 110 40 (137) (11)
Minority stockholders' share of income.............. - - - 2 - 2
Equity in earnings of subsidiaries.................. 6 - 99 - (105) -
------- --------- --------- -------- -------- ---------
Income (loss) before extraordinary item.......... (16) (14) 11 38 (32) (13)
Extraordinary item, net of tax...................... - 3 - - - 3
------- --------- --------- -------- -------- ---------
Net income (loss)............................. $ (16) $ (17) $ 11 $ 38 $ (32) $ (16)
======= ========= ========= ======== ======== =========
Nine Months Ended September 30, 2001
-------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net sales........................................... $ - $ - $ 193 $ 411 $ (105) $ 499
Cost of sales....................................... - - 156 293 (93) 356
------- --------- --------- -------- -------- ---------
Gross profit..................................... - - 37 118 (12) 143
R&D, SG&A, global realignment and related expenses,
restructuring charge and impairment loss of
long-lived and other assets, and other expenses.. 4 (1) 119 82 (69) 135
Interest income..................................... - (58) - (16) 74 -
Interest expense.................................... 28 60 17 18 (74) 49
------- --------- --------- -------- -------- ---------
Income (loss) before provision for income taxes.. (32) (1) (99) 34 57 (41)
Provision for (benefit from) income taxes........... (12) (1) (40) 20 22 (11)
------- --------- --------- -------- -------- ---------
Income (loss) of consolidated entities........... (20) - (59) 14 35 (30)
Minority stockholders' share of income.............. - - - 2 - 2
Equity in earnings of subsidiaries.................. 12 - (47) - 35 -
------- --------- --------- -------- -------- ---------
Net income (loss)............................. $ (32) $ - $ (12) $ 12 $ - $ (32)
======= ========= ========= ======== ======== =========
35
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2002
Nine Months Ended September 30, 2002
-------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities. $ (20) $ 31 $ 82 $ (160) $ 9 $ (76)
Net cash provided by (used in) investing activities. - 159 94 83 (368) (32)
Net cash provided by (used in) financing activities. 20 (206) (183) 77 377 85
------- --------- --------- -------- --------- ---------
Net increase (decrease) in cash and cash equivalents - (16) (7) - - (23)
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.......... $ - $ - $ 1 $ 17 $ - $ 18
======= ========= ========= ======== ========= =========
Nine Months Ended September 30, 2001
---------------------------------------
U.S. Non-
Parent Issuer Guarantors Guarantors Eliminations Consolidated
------ ------ ---------- ---------- ------------ ------------
(Dollars in millions)
Net cash provided by (used in) operating activities. $ (32) $ 1 $ (50)$ 54 $ 8 $ (19)
Net cash provided by (used in) investing activities. - 20 5 (67) 24 (18)
Net cash provided by (used in) financing activities. 32 (40) 39 12 (32) 11
------- --------- --------- -------- --------- ---------
Net increase in cash and cash equivalents........... - (19) (6) (1) - (26)
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.......... $ - $ 12 $ 1 $ 7 $ - $ 20
======= ========= ========= ======== ========= =========
36
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unsecured intercompany term notes in an aggregate principal amount, at
September 30, 2002, equal to $419 million (based on currency exchange rates in
effect at September 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 Nine Months Ended
September 30,
-------------
2001 2002
---- ----
Interest income.................................. $ (2) $ (2)
Currency (gains) losses.......................... (2) (20)
Bank fees........................................ 2 2
Loss on sale of accounts receivable.............. 2 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) 3
------ ------
Total other (income) expense, net............ $ (1) $ (14)
====== ======
37
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
38
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
INTRODUCTION TO PART I, ITEM 2, AND PART II, ITEM 1
---------------------------------------------------
IMPORTANT TERMS
We use various terms to identify companies, groups of companies or
other matters. These terms help to simplify the presentation of information and
are defined in the Notes to Consolidated Financial Statements in this Report.
PRESENTATION OF FINANCIAL, MARKET AND LEGAL DATA
We present our financial information on a consolidated basis. This
means that we consolidate financial information for all subsidiaries where our
ownership is greater than 50%. 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. 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 U.S. 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 for purposes of the financial
covenants 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
39
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 currency exchange rates). For these
purposes, our average graphite electrode production cost per metric ton was
$1,691(relative to annual graphite electrode production volume of about 180,000
metric tons), 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 or interest rate management
initiatives related thereto.
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.
40
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
The GRAFTECH logo, GRAFCELL(R), eGraf(TM), GRAFOIL(R), GRAFGUARD(R) and
GRAFSHIELD(R) are our trademarks and trade names. This Report also contains
trademarks and trade names belonging to other parties.
We 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, our representatives or we 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 operating levels and operational and financial
performance of various businesses; impacts of regional and global economic
conditions; strategic restructuring, realignment, strategic alliance, supply
chain, technology development and collaboration, investment, acquisition, joint
venture, operating, organizational, compensation, capacity expansion,
integration, tax planning, rationalization, financial and capital plans and
projects or the impact thereof; 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 for producing aluminum
may not occur or that additions to such capacity or increases in
production of steel in electric arc furnaces or of aluminum may
not result in stable or increased demand for or prices or sales
volume of graphite electrodes or cathodes;
41
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility that announced or anticipated decreases or
increases in graphite electrode manufacturing capacity or
production by us or other producers may not occur or may or may
not offset each other, that any net decrease in such capacity or
production may not result in stable or increased demand for or
prices or sales volume of graphite electrodes and that any net
increase in such capacity or production may result in increased
competition and reduced prices or sales volumes of graphite
electrodes;
o the possibility that increases in graphite cathode manufacturing
capacity or production by us or other producers may result in
increased competition and reduced prices or sales volumes of
graphite cathodes;
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 or that
manufacturers of PEM fuel cells may obtain those materials or
components 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 be 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, lawsuits or claims, including the
commencement of new investigations, lawsuits or claims relating to
the same subject matter as the pending investigations, lawsuits or
claims;
42
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o the possibility that expected cost savings or reductions may not
be fully realized;
o the occurrence of unanticipated events or circumstances relating
to health, safety or environmental compliance or remediation
obligations, labor relations or the plans or projects mentioned
above;
o changes in interest or currency exchange rates, in competitive
conditions or in inflation affecting our raw material, energy,
euro-denominated antitrust liabilities or other costs;
o the possibility of our failure to satisfy conditions or milestones
to, or the occurrence of breach of the terms of, 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 other
provisions, 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.
43
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 realigned our company and management around two 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 opportunities for
each of our businesses. We may also adopt compensation plans designed to
incentivize management of each of our businesses 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 of our businesses. As we
continue to refine the strategies for each of our businesses, we may further
refine the allocation of businesses between divisions, including moving
businesses from one division to another or changing the divisional structure.
To reflect our new emphasis on graphite and carbon technology and our
new corporate vision, we changed the name of our parent public company to
GrafTech International Ltd. in May 2002. Our 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
44
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
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 77% of this division's net sales during the 2002 first nine
months. 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 and continue to institute various 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. As appropriate, we have instituted and continue to institute
strategic initiatives in this division similar to those in our Graphite Power
Systems Division. This division also focuses unique emphasis on developing
45
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
and exploiting our patented and proprietary technologies related to graphite and
carbon materials science and 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 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 11 new patent applications during the 2002 third quarter and
40 during the 2002 first nine months. We received 6 new patents during the 2002
third quarter and 10 during the 2002 first nine months. The new patent filings
primarily relate to fuel cell, industrial heat management and sealing
applications. In the 2002 third quarter, total patent application and patent
application rights filings increased to more than 300 and total issued patents
increased to 177.
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
46
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
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;
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;
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 by the end of 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.
In the 2001 fourth quarter and 2002 first quarter, we redesigned and implemented
changes in our retiree medical insurance plan and our U.S. retirement and
savings plans for active and retired employees. These changes resulted in
47
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
annual cost savings of $2 million in 2001 and are expected to result in annual
cost savings of more than $11 million in 2002 and thereafter. In addition, 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 current employees not covered by a collective bargaining
agreement, all current retirees who were not covered by a collective bargaining
agreement when they retired, as well as those retirees who retired under a
former collective bargaining agreement. This change is expected to reduce our
net post-retirement medical benefit obligation by about $7 million, and the
reduction will be amortized over the remaining life of the retiree population.
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 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. We anticipate receiving about $50 million during 2003 and the remainder
in 2004, which is later than previously expected primarily due to less favorable
than anticipated general economic conditions. We believe that successful
completion of these asset sales will strengthen our balance sheet.
We are targeting recurring annual cost savings of $30 million in 2003,
$60 million in 2004 and $80 million in 2005, which is later than previously
expected due to a variety of factors. These factors include the sale of higher
cost inventories associated with low operating levels in early 2002, higher than
planned costs associated with activities to transition graphite electrode
production capacity from our higher cost facilities to our lower cost facilities
in Mexico, Brazil and South Africa, including the sourcing of graphite
electrodes from other producers and extended preparations at our existing
facilities to run at capacity, the reintroduction of our global incentive
programs during the 2002 first half and certain impacts of net changes in
currency exchange rates. Savings achieved under the 2002 plan are additive to
those which we achieved by the end of 2001 under the 1998 plan that is now
completed.
We achieved cost savings of about $10 million in the 2002 first nine
months.
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;
48
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
o better enable us to optimize our product mix ranging from higher
value added "supersize" ultra-high power graphite electrodes to
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 or interest rate management initiatives related
thereto).
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 nine months as a result of these
working capital needs and low net sales of graphite electrodes, primarily due to
economic conditions.
We believe that implementation of the 2002 plan will require about $20
million of cash exit costs (excluding taxes), of which about $15 million has
been recorded through September 30, 2002. Approximately $8 million of the $15
million has been paid through September 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 manufacturing 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 remaining actions associated with the 2002 plan,
primarily the implementation of global work process changes and additional
overhead cost reductions, could result in additional restructuring charges.
The mothballing of our graphite electrode manufacturing 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. As a result of the 1998
plan and other cost savings initiatives, we have reduced our average graphite
49
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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
September 30, 2002, our investment in the initiative included about $10 million
of consulting fees and internal costs and $7 million of capital expenditures,
primarily for advanced planning and scheduling software, global treasury
management systems and costs related to implementation of global information
technology systems.
We have evaluated every aspect of our supply chain and improved and
continue to improve performance through realignment and standardization of
supply chain processes and systems and improvement of interfaces with trading
partners. 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. valued at $75 million. Pursuant to the contract, CGI became the
delivery arm for our global information technology service requirements,
including the design and implementation of our global information and advanced
manufacturing and demand planning processes, using J.D. Edwards software.
Through this contract, we are seeking to transform our information technology
service capability into an efficient, high quality enabler for our global supply
chain initiatives as well as a contributor to our cost reduction 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 cost savings
targets.
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 is 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.
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 our corporate headquarters
and the shutdown of our coal calcining operations located in
50
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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. In December 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 as a result of a decline in
demand and loss of market share. The primary end market for carbon electrodes is
silicon metal, which remains very depressed in the U.S. where our main customer
base is located.
In the 2002 third quarter, we entered into a ten year outsourcing
contract with CGI Group Inc. valued at $36 million. Pursuant to the contract,
CGI will become the delivery arm for our finance and accounting business process
services, including accounts receivable and accounts payable activities. CGI
will also provide various related analytical services such as general
accounting, cost accounting and financial analysis activities. Through this
contract, we believe that we will be able to further leverage the resources of
CGI to assist us in achieving our cost savings targets.
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
51
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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. In 2001, we entered into a seven year
contract with Conoco relating to the supply of petroleum coke.
We have developed a strategic alliance in the cathode business with
Pechiney, the world's recognized leader in aluminum smelting technology. To
broaden our alliance, in March 2001, we contributed our Brazilian cathode
manufacturing operations to Carbone Savoie. Pechiney, the 30% minority owner of
Carbone Savoie, contributed approximately $9 million in cash to Carbone Savoie
as part of this transaction. The cash contribution was used to upgrade
manufacturing operations in Brazil and France, which was completed by the end of
the 2002 first quarter. Ownership in Carbone Savoie remains 70% by us and 30% by
Pechiney. Under our now broadened alliance, Carbone Savoie holds our entire
cathode manufacturing capacity.
In April 2001, we entered into a 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. If successfully
implemented, the joint venture would utilize renovated capacity at Jilin's main
facility in Jilin City, complete additions at another facility in Changchun that
were begun by Jilin and 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 successful implementation and completion of the parties' capital
contributions to the joint venture is subject to the receipt of required Chinese
governmental approvals and satisfaction of other conditions.
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 (valued at
the time of investment) 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
52
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 fluctuate.
2001. 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. Many steel
companies in the U.S. were subject to or filed for protection under the U.S.
Bankruptcy Code. 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 (that have been largely relieved in 2002) 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.
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
53
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
2001 as compared to 2000 by about 20% due primarily to the decline in electric
arc furnace steel production as well as our efforts to implement and maintain
local currency selling price increases and our efforts to seek to minimize
credit risks.
The global and regional economic conditions that impacted demand and
prices for graphite electrodes also impacted demand and prices for most of our
other products sold to the metals, transportation and other industries (other
than graphite cathodes). In general, demand was relatively stable and pricing
remained relatively weak. Demand and prices for graphite cathodes remained
relatively strong primarily due to construction of new aluminum smelters using
graphite cathodes, even as old smelters using carbon cathodes are removed from
service.
2002. We estimate global electric arc furnace steel production
increased in the 2002 first nine months as compared to the 2001 first nine
months by about 1%. This increase was primarily due to an increase in production
in China, partially offset by a decline in production in Europe. Electric arc
furnace steel production remained weak in Asia (other than China), but increased
slightly in the U.S. Total global steel production inceased in the 2002 first
nine months as compared to the 2001 first nine months by about 5%. This increase
was primarily due to an increase of about 24% in China, partially offset by
declines of about 2% in each of Western Europe and the U.S. We are seeing the
building of steel inventory levels, especially 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 are 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. 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.
Notwithstanding the slight increase in global electric arc furnace
steel production, we believe that worldwide graphite electrode demand in the
2002 first nine months was relatively stable as compared to the 2001 first nine
months. We also believe that graphite electrode pricing declined in the 2002
first nine months as compared to the 2001 first nine months by about 12% (in
dollar terms).
Weak global and regional economic conditions in 2002 have resulted
in relatively low demand and weak pricing for our other products sold to metals,
transportation and other industries (other than graphite cathodes). Demand and
54
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
prices for graphite cathodes remained stable primarily due to construction of
new aluminum smelters using graphite cathodes, even as old smelters using carbon
cathodes are removed from service.
OUTLOOK. We believe that business conditions for most of our products
(other than cathodes) will remain challenging through the 2002 fourth quarter
and well into 2003. In particular, demand for carbon electrodes in the U.S.
(where our main customer base is located) and demand for advanced graphite and
carbon material products used in semiconductor, telecommunication and electronic
industries is depressed.
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 is
full for 2002 and our cathode order book is virtually full for the 2003 first
half. During the 2002 fourth quarter, we expect graphite electrode sales volume
to be between approximately 47,000 and 48,000 metric tons and a 1% to 2%
improvement in average graphite electrode prodution cost per metric ton. Our
outlook for the businesses in the Advanced Energy Technology Division remains
flat as compared to 2002 third quarter. We announced, effective for new orders
placed after July 15, 2002, an increase of about 10% in the price for our
graphite electrodes sold in Europe, the Commonwealth of Independent States and
the Middle East and, effective for new orders placed after November 5, 2002, an
increase of about 10% in the price for our graphite electrodes sold in the U.S.
We cannot predict whether we will be able to maintain such price increases
without adversely affecting sales volume.
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 nine months. We also expect to benefit
from our cost savings activities. We believe that this will mitigate the impact
on gross profit of pressure on net sales. We expect to deliver a 4% to 6% lower
average graphite electrode production cost in 2003 as compared to 2002 as we
realize the annualized impact of our plant rationalization activities, cost
reduction programs and increased economies of scale.
In the Advanced Energy Technology Division, we currently have
approximately 20 active component development programs for our electronic
thermal management business, 9 of which are in the product-testing phase,
offering greater opportunity for the commercialization of our eGraf(TM) products
to drive our future growth.
We have implemented interest rate management initiatives to seek to
minimize our interest expense and optimize our portfolio of fixed and variable
interest rate obligations. In the 2002 second quarter, we entered into and, in
the 2002 third quarter, we reset 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 in 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
55
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
fiscal policies by the U.S. and other governments, the occurrence of further
terrorist acts and 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 September 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 $155 million of our total debt
of $735 million (including $7 million for unamortized bond premium and $7
million for fair value of hedged debt obligations) of which $137 million was
borrowings under term loans and all of the scheduled principal payments of which
term loans are 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.
56
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.
In November 2002, Moody's Investor Service reduced its rating on the
Senior Notes from B2 to B3. Moody's confirmed its Ba3 rating on the Senior
Facilities.
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 ($16 million of which debt was outstanding at September 30,
2002). As a result, the fine assessed by the antitrust authority of the European
Union, as well as the additional $10
57
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 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 would 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 ($16 million of which debt
was outstanding at September 30, 2002). In connection therewith, we paid fees
and costs of $1 million.
58
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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.
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. Oral hearings were held on those motions in the 2001 first and
second quarters. The court approved a motion to disqualify certain of our
counsel in November 2002. We do not believe that this will adversely affect this
lawsuit. The court has not ruled on the motions to dismiss. 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 September
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
59
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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. At September 30, 2002, the statutory
rate of interest was 1.68% 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 ($569,000 based on currency
exchange rates at time of payment). Five other graphite electrode producers were
also fined by it in amounts ranging up to 4,396 million KRW (approximately $3.3
million, based on currency exchange rates in effect at the time of the decision
imposing the fine). Our fine, which represented 0.5% of our graphite electrode
sales in Korea during the relevant time period and was the lowest fine as a
percentage of sales imposed, reflected a substantial reduction as a result of
our cooperation with that authority during its investigation. In May 2002, we
appealed the decision. In July 2002, the Korean antitrust authority affirmed its
decision on appeal. We paid the fine together with accrued interest, an
aggregate of $584,000, in August 2002.
In January 2000, the EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of graphite
electrodes. The statement 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
September 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 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 EU
Competition Authority to negotiate appropriate terms of payment of antitrust
fines, including extended payment terms. We have had discussions regarding
payment terms. After an in-depth analysis of the decision, in October 2001, we
filed an appeal to the court challenging the amount of the fine. The fine or
collateral security therefor would typically be required to be paid or provided
at about the time the appeal was filed. We are currently in discussions with EU
Competition Authority regarding the appropriate form of
60
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
collateral security during the pendency of the appeal. If the results of these
discussions are not acceptable to us, we may file an interim appeal to the court
to waive the requirement for collateral security or to allow us to provide
alternative security for payment. We cannot predict how or when the court would
rule on such an interim appeal.
In the 2001 second quarter, we became aware that the Brazilian
antitrust authority had requested written information from various steelmakers
in Brazil. In April 2002, our Brazilian subsidiary received a request for
information from that authority. We have provided that information.
In May 2002, the EU Competition Authority 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 EU Competition Authority, we believe that we will benefit from the
maximum reduction possible (a 100% reduction) with the result that no fine will
be payable. We cannot assure you how the EU Competition Authority will
ultimately decide.
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 September 30, 2002, we have paid an aggregate of $251 million
of fines and net settlement and expense payments and $14 million of imputed
interest. At September 30, 2002, $99 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 EU Competition Authority and other matters. The
aggregate amount of remaining committed payments payable to the U.S. Department
of Justice for imputed interest at September 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 EU Competition Authority of the
61
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 EU
Competition Authority 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 nine months, the euro declined about 3%, the
Brazilian real declined about 27% and the South African rand declined about 16%.
During the 2002 first nine months, the South African rand and the euro
strengthened about 13% and 11%, respectively, while the Brazilian real declined
about 41%.
RESULTS OF OPERATIONS
HIGHLIGHTS OF 2002 THIRD QUARTER AS COMPARED TO 2002 SECOND QUARTER.
Net sales of $154 million in the 2002 third quarter represented a $7 million, or
4%, decrease from net sales of $161 million in the 2002 second quarter. Gross
profit of $34 million in the 2002 third quarter represented a $2 million, or 6%,
decrease from gross profit of $36 million in the 2002 second quarter. Gross
margin was essentially the same at 22.3% of net sales in 2002 third quarter as
compared to 22.5% of net sales in 2002 second quarter. Earnings before
non-recurring charges and benefits, were net loss of $5 million, or $0.08 per
diluted share, in the 2002 third quarter as compared to net income of $3
million, or $0.05 per diluted share in the 2002 second quarter. Earnings, after
those charges and benefits, were a net loss of $5 million, or $0.08 per diluted
share, in the 2002 third quarter as compared to a net loss of $7 million, or
$0.14 per diluted share, in the 2002 second quarter.
The legal and tax restructuring and global realignment mentioned in
this Report are part of the corporate realignment of our subsidiaries. The tax
benefits from the corporate realignment
62
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
(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 decreased to $126 million in
the 2002 third quarter from $133 million in the 2002 second quarter, primarily
due to lower volume of graphite electrodes sold. Volume of graphite electrodes
sold decreased 6% to 45,900 metric tons in the 2002 third quarter from 48,800
metric tons in the 2002 second quarter. The lower volume of graphite electrodes
sold in the 2002 third quarter resulted in a decrease of $7 million in net
sales. Average sales revenue per metric ton of graphite electrodes in the 2002
third quarter was $2,107, an increase of $12 per metric ton over the average in
the 2002 second quarter of $2,095. Of this increase of $12 per metric ton,
changes in currency exchange rates resulted in an increase of about $59 per
metric ton, which was partially offset by a decline in average local currency
selling prices and changes in customer and product sales mix.
Average graphite electrode production cost per metric ton in the 2002
third quarter increased to $1,676, $10 higher than in the 2002 second quarter.
These costs were negatively impacted in the 2002 third quarter as compared to
the 2002 second quarter primarily due to sourcing graphite electrodes from other
producers to meet demand from our customers, higher than planned costs
associated with the transition of graphite electrode production capacity from
our higher cost facilities to our lower cost facilities in Mexico, Brazil and
South Africa, as well as net changes in currency exchange rates and the seasonal
slowdown in Europe.
Gross profit in the 2002 third quarter was $28 million (22.3% of net
sales), a decrease of $2 million from gross profit in the 2002 second quarter of
$30 million (22.5% of net sales).
Advanced Energy Technology Division. Net sales were $28 million in the
2002 third quarter, virtually the same as in the 2002 second quarter, as lower
sales volume of products sold to the automotive industry was offset by higher
sales volume of carbon refractories. Sales of advanced graphite and carbon
materials remained consistent in the 2002 third quarter as compared to the 2002
second quarter. New product development and commercialization efforts continued
to progress successfully. During the 2002 third quarter, this division continued
to expand commercialization opportunities for its heat sink and heat spreader
components and thermal interface products. During the 2002 third quarter, this
division shipped 26 electronic thermal management prototype components to
potential customers, for a total of 61 prototypes shipped this year. For thermal
interface materials, this division has over 55 applications formally approved by
customers.
Other Items. Selling, administrative and other expenses were $20
million in the 2002 third quarter, virtually the same as in the 2002 second
quarter. Interest expense was $15 million in the 2002 third quarter, $2 million
lower than in the 2002 second quarter, due to the impact of our interest rate
swaps for a full quarter. Our average total debt outstanding was $706 million in
2002 third quarter as compared to $708 million in 2002 second quarter. Our
average annual interest rate was 8.4% in 2002 third quarter as compared to 9.1%
in 2002 second quarter. These
63
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
average annual rates include the benefits of our interest rate swaps and exclude
imputed interest of the fine payable to the DOJ.
Net Debt and Working Capital. Net debt (which is total debt, net of
cash, cash equivalents, short-term investments, fair value of hedged debt
obligations and unamortized bond premium) increased to $703 million at
September 30, 2002 from $659 million at June 30, 2002. Total debt at September
30, 2002 was $735 million (including $7 million for unamortized bond premium and
$7 million for fair value of hedged debt obligations). Working capital decreased
by $30 million in the 2002 third quarter primarily due to an increase in the
use of cash for accounts payable. We made a $29 million interest payment in the
2002 third quarter, including $26 million, net, for the first semi-annual
interest payment under the Senior Notes. 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. 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). During the
2002 third quarter, we also paid $19 million of taxes, approximately $11 million
related to non-recurring transaction taxes and accelerated withholding taxes
associated with our completed legal and tax restructuring and $4 million related
to tax settlements. During 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. These costs were capitalized and
will be amortized over the term of the Senior Notes.
THREE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO THREE MONTHS ENDED
SEPTEMBER30, 2001. Net sales of $154 million in the 2002 third quarter
represented a $3 million, or 2%, decrease from net sales of $157 million in the
2001 third 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 $120 million in the 2002 third quarter represented a $6 million, or
5%, increase from cost of sales of $114 million in the 2001 third quarter,
primarily due to higher volume of graphite electrodes and cathodes sold. Gross
profit of $34 million in the 2002 third quarter represented a $9 million, or
21%, decrease from gross profit of $43 million in the 2001 third quarter. Gross
profit margin declined to 22.3% of net sales in 2002 third quarter from 27.6% in
2001 third quarter.
Graphite Power Systems Division. Net sales of $126 million in the 2002
third quarter were virtually the same as in the 2001 third quarter, as the
impact of higher volumes sold was offset by the impact of lower average graphite
electrode sales revenue per metric ton. Volume of graphite electrodes sold was
45,900 metric tons in the 2002 third quarter as compared to 42,200 metric tons
in the 2001 third quarter. The higher volume of graphite electrodes sold
represented an increase of $9 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 third quarter
was $2,107 as compared to the average in the 2001 third quarter of $2,323. The
lower average sales revenue per metric ton represented a decrease of $10 million
in net sales. Changes in currency exchange rates benefited net sales by $1
64
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
million. Net sales of cathodes increased in the 2002 third quarter by 18%, or $3
million, from the 2001 third quarter.
Cost of sales increased to $98 million in the 2002 third quarter from
$93 million in the 2001 third quarter. Average cost of sales per metric ton of
graphite electrodes was $1,676 in the 2002 third quarter, virtually unchanged
from $1,679 in the 2001 third quarter. Higher than planned costs associated with
the transition of production capacity to lower cost facilities and the impact of
changes in currency exchange rates largely offset benefits from cost savings
initiatives. Gross profit in the 2002 third quarter was $28 million (22.3% of
net sales), a decrease from gross profit in the 2001 third quarter of $33
million (27.2% of net sales).
Advanced Energy Technology Division. Net sales decreased to $28 million
in the 2002 third quarter from $31 million in the 2001 third quarter, primarily
due to lower technology sales, 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. New product
development and commercialization efforts continued to progress successfully.
Cost of sales was $22 million in the 2002 third quarter as compared to $21
million in the 2001 third quarter. The increase in cost of sales despite lower
net sales was primarily a result of the reintroduction of our global incentive
programs and additional inventory write-offs. Gross profit in the 2002 third
quarter was $6 million (22.3% of net sales) as compared to gross profit in the
2001 third quarter of $10 million (29.0% of net sales).
Items Affecting Us as a Whole. Selling, administrative and other
expenses were $20 million in the 2002 third quarter, an increase of $1 million
from the 2001 third quarter. The increase was primarily due to a credit of $1
million in the 2001 third quarter for a change in our U.S. vacation policy.
Other (income) expense, net was a charge of $2 million in the 2002
third quarter as compared to income of $1 million in the 2001 third quarter.
Interest expense was $15 million in the 2002 third quarter as compared
to $14 million in the 2001 third quarter. Average total debt outstanding was
$706 million in the 2002 third quarter as compared to $657 million in the 2001
third quarter. The average annual interest rate was 8.4% in 2002 third quarter
as compared to 7.6% in the 2001 third quarter. These average annual rates
include the benefits of our interest rate swaps and exclude 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, net of interest rate
management initiatives, 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 benefit of $3 million in the
2002 third quarter as compared to a provision of $3 million in the 2001 third
quarter. The effective income tax rate, before non-recurring charges, was 35% in
the 2002 third quarter as compared to 45% in 2001 third quarter. The lower rate
reflects the impact of our legal and tax restructuring.
65
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
As a result of the changes described above, net loss was $5 million in
the 2002 third quarter as compared to net income of $4 million in the 2001 third
quarter. Net income per diluted share, before and after non-recurring charges,
was a loss of $0.08 in the 2002 third quarter as compared to earnings per
diluted share of $0.07 in the 2001 third quarter.
NINE MONTHS ENDED SEPTEMBER 30, 2002 AS COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 2001. Net sales of $453 million in the 2002 first nine months
represented a $46 million, or 9%, decrease from net sales of $499 million in the
2001 first nine months. Gross profit of $101 million in the 2002 first nine
months represented a $42 million, or 29%, decrease from gross profit of $143
million in the 2001 first nine months. Gross profit margin declined to 22.4% of
net sales in 2002 first nine months from 28.7% in 2001 first nine months. The
decrease in net sales, gross profit and gross profit margin was primarily due to
lower net sales of all products with the exception of cathodes, net sales of
which increased by 16%.
Graphite Power Systems Division. Net sales decreased to $370 million in
the 2002 first nine months from $399 million in the 2001 first nine months,
primarily due to the lower average graphite electrode sales revenue per metric
ton. Volume of graphite electrodes sold was 133,200 metric tons in the 2002
first nine months as compared to 131,200 metric tons in the 2001 first nine
months. The higher volume of graphite electrodes sold represented an increase of
$5 million in net sales. Average sales revenue per metric ton of graphite
electrodes in the 2002 first nine months was $2,096 as compared to the average
in the 2001 first nine months of $2,370. The lower average sales revenue per
metric ton represented a decrease of $36 million in net sales. Changes in
currency exchange rates represented $7 million of the $36 million decrease.
Cost of sales was $287 million in the 2002 first nine months, virtually
the same as in the 2001 first nine months. Average cost of sales per metric ton
of graphite electrodes was $1,661 per metric ton in the 2002 first nine months,
a decline of $43, or about 3%, as compared to the 2001 first nine months.
Average cost of sales per metric ton of graphite electrodes benefited from cost
savings initiatives and net changes in currency exchange rates, partly offset by
the impact of lower operating levels in early 2002 and higher than planned costs
associated with activities to transition graphite electrode production capacity
from our higher cost facilities to our lower cost facilities in Mexico, Brazil
and South Africa. Gross profit in the 2002 first nine months was $83 million
(22.4% of net sales), a decrease from gross profit in the 2001 first nine months
of $112 million (28.2% of net sales).
Advanced Energy Technology Division. Net sales decreased to $83 million
in the 2002 first nine months from $100 million in the 2001 first nine months,
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. Our core
businesses in this division remained at trough levels. New product development
and commercialization efforts continued to progress successfully. During 2002,
IBM Corporation and Intel Corporation approved and purchased eGraf(TM) thermal
interface products for computer, consumer electronic and telecommunication
applications. Cost of sales was $65 million in the
66
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
2002 first nine months as compared to $69 million in the 2001 first nine months.
The decrease was primarily due to the decreases in volumes sold. Gross profit in
the 2002 first nine months was $18 million (22.3% of net sales) as compared to
gross profit in the 2001 first nine months of $31 million (30.8% of net sales).
Items Affecting Us as a Whole. Selling, administrative and other
expenses were $58 million in the 2002 first nine months, a decline of $1
million, or 2%, from 2001 first nine months. The decline was primarily due to a
reduction in franchise and other non-income taxes and redesign of benefit plans.
In the 2002 second quarter, we recorded a $5 million non-cash charge to
compensation expense associated with the accelerated vesting of restricted
stock.
In the 2002 first nine months, 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 nine months, we recorded restructuring, impairment and
antitrust changes of $68 million, primarily related to our graphite electrode
business. Other (income) expense, net was income of $14 million in the 2002
first nine months as compared to income of $1 million in the 2001 first nine
months. 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 $8
million of losses on currency forward and option contracts.
Interest expense was $45 million in the 2002 first nine months, a
decrease of $4 million from the 2001 first nine months. The decrease resulted
from $2 million of lower imputed interest on the DOJ fine and lower average
interest rates and slightly lower average total debt outstanding. Average total
debt outstanding was $694 million in the 2002 first nine months as compared to
$696 million in the 2001 first nine months. The average annual interest rate was
8.5% in 2002 first nine months as compared to 8.6% in the 2001 first nine
months. These average annual rates include the benefits of our interest rate
swaps and exclude imputed interest of the fine payable to the DOJ.
Provision for income taxes was a provision of $13 million in the 2002
first nine months as compared to a benefit of $11 million in the 2001 first nine
months. Excluding the benefit of $6 million related to the corporate realignment
of our subsidiaries, the provision for income taxes for the 2002 first nine
months would have been a provision of $7 million. No tax benefit was provided on
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 nine months as compared to 45% in 2001 first nine months. The
lower rate reflects the impact of our legal and tax restructuring.
67
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
In the 2002 first nine months, 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 $16 million in
the 2002 first nine months as compared to net loss of $32 million in the 2001
first nine months. Net loss per diluted share was $0.28 in the 2002 first nine
months as compared net loss per diluted share of $0.68 in the 2001 first nine
months.
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. Cash and cash equivalents were $18
million at September 30, 2002 as compared to $38 million at December 31, 2001.
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 $99 million). We had total debt of $735 million
(including $7 million for unamortized bond premium and $7 million for
fair value of hedged debt obligations) and a stockholders' deficit of $363
million at September 30, 2002 as compared to total debt of $638 million and a
stockholders' deficit of $332 million at December 31, 2001. Net debt (which is
total debt, net of cash, cash equivalents and short-term investments, fair value
of hedged debt obligations and unamortized bond premium) was $703 million at
September 30, 2002 as compared to $600 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.
The following tables summarize our long-term contractual obligations
and other commercial commitments at September 30, 2002.
68
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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...................................... $ 706 $ - $ 1 $ - $ 705
Capital lease obligations........................... 1 - - - 1
Operating leases.................................... 7 1 5 1 -
Unconditional purchase obligations.................. 57 8 18 14 17
------- ------ ------- ------- --------
Total contractual obligations.................... 771 9 24 15 723
Liabilities and expenses associated with antitrust
investigations and related lawsuits and claims... 99 6 62 31 0
Postretirement, pension and related benefits........ 103 15 49 16 23
Other long-term obligations......................... 30 5 8 5 12
------- ------ ------- ------- --------
Total contractual and other obligations.......... $ 1,003 $ 35 $ 143 $ 67 $ 758
======= ====== ======= ======= ========
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................................... $ 15 $ 15 $ - $ - $ -
Letters of credit................................. 13 13 - - -
Guarantees........................................ 1 - - - 1
------- -------- ------- ------- --------
Total other commercial commitments.............. $ 29 $ 28 $ - $ - $ 1
======= ======== ======= ======= ========
The first preceding table includes the fine of (euro)50.4 million
assessed against us by the EU Competition Authority 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 EU Competition Authority to negotiate appropriate terms of payment
of antitrust fines, including extended payment terms. We have had discussions
regarding such payment terms. We have also filed an appeal to the court
challenging the amount of the fine. 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. In
addition, if we are required to pay (or issue a letter of credit to secure
payment of) the fine pending resolution of our appeal, the payment would be
financed by a borrowing under (or the letter of credit would constitute a
borrowing under) our revolving credit facility. Such a requirement would result
in a change in the manner in which such amount is reflected in the preceding
tables.
69
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
Unconditional purchase obligations include $55 million relating to our
ten-year service contract with CGI Group Inc., which is the delivery arm for our
global information technology services, including the design and implementation
of our global information and advanced manufacturing and demand planning
processes, using J.D. Edwards software. In addition, in September 2002, we
entered into a ten-year outsourcing contract with CGI Group Inc. to provide
finance and accounting business process services valued at $36 million ("BPO
CONTRACT"). Through the BPO contract, we believe that we will be able to further
leverage the resources of CGI to assist us in achieving our cost savings
targets. The BPO Contract does not constitute as an unconditional purchase
obligation and therefore is not included in the table above.
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.
We intend to make a voluntary excess contribution of about 500,000
shares of common stock to the trust that holds assets for our U.S. qualified
retirement plan during the next several months and may make additional similar
contributions to this and other plans in future periods.
CASH FLOW AND PLANS TO MANAGE LIQUIDITY AND REDUCE DEBT. Changes in
conditions affecting our industry, changes in global and regional economic
conditions and other factors have adversely impacted our recent operating
results. As a result of these changes and our high leverage and substantial
obligations in connection with antitrust investigations, lawsuits and claims, we
have placed high priority on efforts to manage cash, generate additional cash
flow and reduce debt. Our longer-term efforts include our 1998 major cost
savings plan, our 2002 major cost savings plan and our other cost savings
activities, our strategic alliances and our financing activities. Our shorter
term efforts include our interest rate management initiatives and management of
quarterly cash flow from operations.
Typically, the first quarter of each year results in neutral or
negative cash flow from operations (excluding cash used for capital expenditures
and payments in connection with restructurings and investigations, lawsuits and
claims) due to various factors. Factors impacting seasonality 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 positive cash flow from operations (before 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. Prior to 2000, our cash flow from operations (before such exclusions)
in the first and third quarters was adversely impacted by the semi-annual
interest payments on our previously outstanding senior subordinated notes. The
second and fourth quarters correspondingly benefited from the absence of
interest payments on such notes. We expect the semi-annual interest payments on
the Senior Notes to have a similar impact.
As part of our cash management, we typically discount or factor a
portion of our accounts receivable. In the 2002 first nine months, certain of
our subsidiaries sold receivables totaling $140 million. If we had not sold such
receivables, our accounts receivable (and our net debt, which is total debt, net
of cash, cash equivalents, short-term investments, fair value of hedged debt
obligations and unamortized bond premium) would have been about
$36 million higher at September 30, 2002. In addition, careful management of
credit risk over the past two years has allowed us to avoid significant accounts
receivable losses notwithstanding the poor financial condition of many of our
potential and existing customers. In light of current global and regional
economic conditions, we cannot assure you that we will not be materially
adversely affected by accounts receivable losses in the future.
We do not believe that we will have positive annual cash flow from
operations this year. We believe that, following a recovery in the
70
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
graphite electrode and our other core industries, our cash flow from operations
will return to positive levels.
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 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. We also believe that our
planned asset sales together with these improvements in cash flow from
operations should allow us to reduce our net debt (which is total debt, net of
cash, cash equivalents, short-term investments, fair value of hedged debt
obligations and unamortized bond premium).
In order to reduce our net debt, we may from time to time and at any
time, at prevailing market prices, exchange or purchase Senior Notes in open
market or privately negotiated transactions for cash (from cash on hand,
borrowings under our revolving credit facility or new credit facilities, or
proceeds from sale of debt or equity securities or assets), common stock or
other equity or debt securities, or a combination thereof. We may at any time
and from time to time seek and obtain consent from the lenders under the Senior
Facilities with respect to any restrictions thereunder applicable to such
transactions. We will evaluate any such transaction in light of then prevailing
market conditions and our then current and prospective liquidity and capital
resources, including projected and potential needs and prospects for access to
capital markets. Any such transactions may, individually or in the aggregate, be
material.
Our high leverage and substantial obligations in connection with
antitrust investigations, lawsuits and claims could have a material impact on
our liquidity. Our cash flow 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 changes
in conditions affecting our industry, changes in global and regional economic
conditions, changes in interest and currency exchange rates, developments in
antitrust investigations, lawsuits and claims involving us and inflation in raw
material, energy and other costs.
We cannot assure you that our cash flow and capital resources will be
sufficient to enable us to meet our debt service 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 covenants and other provisions under the
Senior Facilities. These covenants and provisions include financial covenants
and representations regarding absence of material adverse changes affecting us.
A failure to comply, unless waived by the lenders, would be a default under the
Senior Facilities. This would permit the lenders to accelerate the maturity of
the Senior Facilities. It would also
71
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
permit the lenders to terminate their commitments to extend credit under our
revolving credit facility. This would have an immediate material adverse effect
on our liquidity. An acceleration of maturity of the Senior Facilities or a
breach of the covenants contained in the Senior Notes would permit the holders
of the Senior Notes to accelerate the maturity of the Senior Notes. Acceleration
of maturity of the Senior Notes would permit the lenders to accelerate the
maturity of the Senior Facilities and terminate their commitments to extend
credit under our revolving credit facility. If we were unable to repay our debt
to the lenders or holders, the lenders and holders could proceed against the
collateral securing the Senior Facilities and the Senior Notes, respectively,
and exercise all other rights available to them. If we were unable to repay our
debt to the lenders or the holders, or otherwise obtain a waiver from the
lenders or the holders, we could be required to limit or discontinue,
temporarily or permanently, certain of our business plans, activities or
operations, reduce or delay certain capital expenditures, sell certain of our
assets or businesses, restructure or refinance some or all of our debt or incur
additional debt, or sell additional common stock or other securities. We cannot
assure you that we would be able to obtain any such waiver or take any of such
actions on favorable terms or at all.
As described above, we are dependent on our revolving credit facility
and continuing compliance with the financial covenants under the Senior
Facilities for liquidity. The Senior Facilities require us to, among other
things, comply with financial covenants relating to specified minimum interest
coverage and maximum net senior secured debt leverage ratios that become more
restrictive over time. At September 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 September 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 or
minimum interest coverage ratio required under the Senior Facilities. In
addition, (euro)25 million of the (euro)200 million is reserved exclusively for
use to pay or secure payment of the fine assessed by the antitrust authority of
the European Union. At September 30, 2002, we had full availability under our
revolving credit facility and the outstanding balance thereunder was $18
million. In addition, payment of the fine or issuance of a letter of credit to
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 cash flow and
maximize funds available to
72
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
meet our debt service and other obligations, we will be able to manage our
liquidity to permit us to service our debt and meet our obligations when due.
CASH FLOW FROM OPERATING ACTIVITIES. Cash flow used in operating
activities was $76 million in the 2002 first nine months as compared to cash
flow used in operating activities of $19 million in the 2001 first nine months.
The decreased generation of cash flow of $57 million resulted primarily from a
$42 million decline in gross profit. Working capital was a use of cash of $55
million in the 2002 first nine months as compared to $57 million in the 2001
first nine months.
Working capital for the 2002 first nine months as compared to the 2001
first nine months resulted in increases in the use of cash of $39 million from
accounts payable, $21 million from accounts receivable, and $2 million from
prepaid expenses. These increases in cash usage were offset by $44 million of
cash provided from inventory reductions, and $20 million of lower restructuring
payments and fines and net settlements and expenses in connection with antitrust
investigations and related lawsuits and claims. Accounts payable declined due
to, among other factors, the mothballing of our Italian facility, the seasonal
slowdown in Europe and the timing of vendor payments. Increase in the use of
cash from accounts receivable resulted from slower collections, offset by
reductions in inventories due to our plant rationalization.
CASH FLOW FROM INVESTING ACTIVITIES. We used $32 million of cash flow
for investing activities during the 2002 first nine months as compared to $18
million during the 2001 first nine months. This increase of $14 million was
primarily due to higher capital expenditures, primarily for incremental
expansion of our lower cost facilities in Mexico, Brazil and South Africa as
part of the 2002 plan, in the 2002 first nine months as compared to a reduced
level of capital expenditures in the 2001 first nine months to preserve cash
resources.
CASH FLOW FROM FINANCING ACTIVITIES. Cash flow provided by financing
activities was $85 million in the 2002 first nine months as compared to cash
flow provided by financing activities of $11 million in the 2001 first nine
months. The increase was primarily due to additional borrowings in the 2002
first nine months to fund working capital needs, capital expenditures and $21
million in cash costs associated with the issuance of the Senior Notes in
February and May 2002. During the 2001 first nine months, we received $9 million
from an additional minority investment in connection with the broadening of our
strategic alliance in the cathode business with Pechiney and $94 million from
the issuance of common stock. During the 2002 first nine months, we received $10
million in connection with the reset of interest rate swaps. During the 2002
first nine months, 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.
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
73
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 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
74
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 exit or
disposal activities initiated after December 31, 2002. SFAS No. 146 addresses
financial accounting and reporting for costs associated with exit or disposal
activities and nullifies Emerging Issues Task Force Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under Issue No. 94-3, a
liability for an exit cost as defined in Issue No. 94-3 is recognized at the
date an entity commits to an exit plan. We 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." Currently,
generally accepted accounting principles require that gains and losses from
extinguishment of debt be classified as an extraordinary item, net of related
income tax effect. Based on SFAS No. 145, gains and losses from extinguishment
of debt are classified as extraordinary items only if they meet the criteria of
ABP 30 "Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions." The
provisions of APB 30 distinguish transactions that are part of an entity's
recurring operations from those that are unusual or infrequent or that meet the
criteria for classification as an extraordinary item. As such, those that do not
meet the criteria of APB 30 are included in the statement of operations before
income (loss) before provisions (benefits) for income taxes, minority interest
and extraordinary items. All prior periods presented that does not meet the
criteria in APB 30 for classification as an extraordinary item shall be
reclassified. SFAS No. 145 also rescinds SFAS No. 44, "Accounting for Intangible
Assets of Motor Carriers." SFAS No. 145 amends SFAS No. 13, "Accounting for
Leases," to eliminate an inconsistency between the required accounting for
sale-leaseback transactions and the required accounting for certain lease
modifications that have economic effects that are similar to sale-leaseback
transactions. SFAS No. 145 also amends other existing authoritative
pronouncements
75
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
to make various technical corrections, clarify meanings or describe their
applicability under changed conditions. We do not expect the provisions of SFAS
No. 145 relating to SFAS No. 4 to have a material impact 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. 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 $2 million in the 2001 first
nine months.
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 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
76
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
derivatives) due to increases in variable interest rates. In the 2002 second
quarter, we 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
(represented by Senior Notes) to variable rate debt. These interest rate swaps
are fair value swaps and are accounted for based on the short-cut method. Fees
related to these agreements or swaps are charged to interest expense over the
term of relevant agreement or swap. These swaps reduced our interest expense in
the 2002 third quarter by $3 million and in the 2002 first nine months by $4
million. In the 2002 third quarter, we reset our interest rate swaps to allow
the accelerated collection of $10 million in cash. The collection of this cash
will be amortized over the term of the Senior Notes and recorded as a credit
against interest expense. The mark-to-market adjustment on the reset swaps was
$7 million at September 30, 2002.
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 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 September 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)
expense, net in the Consolidated Statements of Operations. Unrealized gains and
losses on our outstanding contracts were nil at December 31, 2001 and a $4
million loss at September 30, 2002.
77
PART I (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 4. CONTROLS AND PROCEDURES
-------------------------------
Under the supervision and with the participation of our management,
including our Chief Executive Officer and our Chief Financial Officer, we have
evaluated the effectiveness of the design and operation of our disclosure
controls and procedures within 90 days of the filing date of this Report, and,
based on that evaluation, our Chief Executive Officer and our Chief Financial
Officer have concluded that these controls and procedures are effective. There
were no significant changes in our internal controls or in other factors that
could significantly affect these controls subsequent to the date of that
evaluation.
Disclosure controls and procedures are our controls and other
procedures that are designed to ensure that information required to be disclosed
by us in the reports that we file or submit under the Securities Exchange Act of
1934 is recorded, processed, summarized and reported within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by us in the reports that we file under the
Exchange Act is accumulated and communicated to our management, including our
Chief Executive Officer and our Chief Financial Officer, as appropriate to allow
timely decisions regarding required disclosure.
78
PART II
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
ITEM 1. LEGAL PROCEEDINGS
-------------------------
ANTITRUST INVESTIGATIONS
In April 1998, pursuant to a plea agreement between the DOJ and GTI,
GTI pled guilty to a one count charge of violating U.S. federal antitrust law in
connection with the sale of graphite electrodes and was sentenced to pay a
non-interest-bearing fine in the aggregate amount of $110 million, 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. At September 30, 2002, the statutory rate of interest was 1.68% 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 ($569,000 based on currency exchange rates in effect at the time of
payment). Five other graphite electrode producers were also fined by the Korean
antitrust authority in amounts ranging up to 4,396 million KRW (approximately
$3.3 million, based on currency exchange rates in effect at the time of the
decision imposing the fine). Our fine, which represented 0.5% of our graphite
electrode sales in Korea during the relevant time period and was the lowest fine
as a percentage of sales imposed by the Korean antitrust authority, reflected a
substantial reduction as a result of our cooperation with that authority during
its investigation. In
79
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
May 2002, we appealed the decision. In July 2002, the Korean antitrust authority
affirmed its decision on appeal. We paid the fine together with accrued interest
an aggregate of $574,000, in August 2002.
In January 2000, the EU Competition Authority, issued a statement of
objections initiating proceedings against us and other producers of graphite
electrodes. The statement alleges that we and other producers violated antitrust
laws of the European Community and the European Economic Area in connection with
the sale of graphite electrodes. 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 September 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
an 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 EU Competition Authority issued a statement of
objections initiating proceedings against us and other producers of specialty
graphite. The statement alleges that we and other producers violated European
antitrust laws in connection with the sale of specialty graphite. 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 EU Competition Authority, we believe that we will benefit from the
maximum reduction possible (a 100% reduction) with the result that no fine will
be payable. We cannot assure you how the EU Competition Authority will
ultimately decide.
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 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
80
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 September 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 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
81
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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. In September 2002, we settled the lawsuit commenced by
the first 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, one 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 charge of an additional $10 million
against results of operations for the 2001 second quarter, as a
82
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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 September 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 September 30, 2002, we have paid an aggregate of $251 million
of fines and net settlement and expense payments and $14 million of imputed
interest. At September 30, 2002, $99 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 September 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, at the direction of a special committee of
independent directors of GTI's Board of Directors, we commenced a lawsuit in the
U.S. District Court for the Southern District of New York against our former
parents, Mitsubishi and Union Carbide. The other defendants named in the lawsuit
include two of the respective representatives of Mitsubishi and Union Carbide
who served on GTI's Board of Directors at the time of our 1995 leveraged equity
recapitalization, Hiroshi Kawamura and Robert D. Kennedy. Mr. Kennedy, who was a
director of GTI at the time the lawsuit was commenced, resigned as such on March
14, 2000.
In the lawsuit, we allege, among other things, that, in January 1995,
Mitsubishi and Union Carbide had knowledge of facts indicating that GTI had
engaged in illegal graphite electrode price fixing activities and that any
determination of GTI's statutory capital surplus would be overstated as a result
of those activities. We also allege that certain of their representatives knew
or should have known about those activities. In January 2000, Mitsubishi was
indicted by the DOJ on a one count charge of aiding and abetting violations of
U.S. federal antitrust law in connection with the sale of graphite electrodes.
Mitsubishi entered a plea of not
83
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
guilty. In February 2001, a jury found Mitsubishi guilty of the charge.
Mitsubishi entered into a sentencing agreement with the DOJ, which was approved
by the District Court, pursuant to which Mitsubishi agreed to pay a fine of $134
million and not appeal its conviction. Mitsubishi has also been named as a
defendant in several civil antitrust lawsuits commenced by electric arc furnace
steel producers with respect to its alleged participation in those activities.
In addition, we allege that, in January 1995, GTI did not have the statutory
capital surplus required to lawfully authorize the payments that GTI made to its
former parents. We also allege that Mitsubishi and Union Carbide were unjustly
enriched by receipts from their investments in GTI and that they knowingly
induced or actively and substantially assisted former senior management of GTI
to engage in illegal graphite electrode price fixing activities in breach of
their fiduciary duties to GTI.
Based on the allegations summarized above, we are seeking to recover
from Mitsubishi and Union Carbide more than $1.5 billion in damages, including
interest. Some of our claims provide for joint and several liability; however,
damages from our various claims would not generally be additive to each other.
The defendants have filed motions to dismiss this lawsuit and a motion
to disqualify certain of our counsel from representing us in this lawsuit. Oral
hearings were held on those motions in the 2001 first and second quarters. The
court approved a motion to disqualify certain of our counsel in November
2002. We do not believe that this will adversely affect this lawsuit. The court
has not ruled on the motions to dismiss.
We expect to incur $10 million to $20 million for legal expenses to
pursue this lawsuit from the date of filing the complaint through trial. Through
September 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.
84
PART II (CONT'D)
GRAFTECH INTERNATIONAL LTD. AND SUBSIDIARIES
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
None
(B) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K dated August 13, 2002 furnishing
under Item 9 thereof certain information regarding the certifications of our
Chief Executive Officer and our Chief Financial Officer accompanying our
Quarterly Report on Form 10-Q for the quarter ended June 30, 2002.
85
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
GRAFTECH INTERNATIONAL LTD.
Date: November 14, 2002 By: /s/ Corrado F. De Gasperis
----------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial Officer
and Chief Information Officer
(Principal Accounting Officer)
86
CERTIFICATIONS
I, Gilbert E. Playford, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q;
2. based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date");
and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officers and I have indicated in
this Quarterly Report whether there was significant changes in internal controls
or in other factors that could
87
CERTIFICATIONS (CONT'D)
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Gilbert E. Playford
----------------------------------------
Gilbert E. Playford
Chairman of the Board and
Chief Executive Officer
88
CERTIFICATIONS (CONT'D)
I, Corrado F. De Gasperis, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q;
2. based on my knowledge, this Quarterly Report does not contain any
untrue statement of a material fact or omit to state a material fact necessary
to make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by this
Quarterly Report;
3. based on my knowledge, the financial statements and other financial
information included in this Quarterly Report fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this Quarterly Report;
4. the registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
(a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
Quarterly Report is being prepared;
(b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to the
filing date of this Quarterly Report (the "Evaluation Date");
and
(c) presented in this Quarterly Report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. the registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors and the audit
committee of the registrant's board of directors (or persons performing the
equivalent function):
(a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the registrant's
ability to record, process, summarize and report financial data
and have identified for the registrant's auditors any material
weaknesses in internal controls; and
(b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. the registrant's other certifying officers and I have indicated in
this Quarterly Report whether there was significant changes in internal controls
or in other factors that could
89
CERTIFICATIONS (CONT'D)
significantly affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to significant
deficiencies and material weaknesses.
Date: November 14, 2002 By: /s/ Corrado F. De Gasperis
----------------------------------------
Corrado F. De Gasperis
Vice President, Chief Financial Officer
and Chief Information Officer
(Principal Accounting Officer)
90
INDEX TO EXHIBITS
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
None
91