AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 2003
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
________________________
FORM 20--F
________________________
___
___ REGISTRATION STATEMENT PURSUANT TO SECTION 12(b) OR (g)
OF THE SECURITIES EXCHANGE ACT OF 1934
OR
___
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
___ THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 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 1-14398
SGL CARBON AKTIENGESELLSCHAFT
(Exact name of Registrant as specified in its charter)
SGL CARBON CORPORATION FEDERAL REPUBLIC OF GERMANY
(Translation of Registrant's name into English) (Jurisdiction of incorporation or organization)
________________________
RHEINGAUSTRASSE 182
D-65203 WIESBADEN
GERMANY
(Address of principal executive offices)
________________________
Securities registered or to be registered pursuant to Section 12(b) of the Act.
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
American Depositary Shares, New York Stock Exchange
each representing one-third of one Ordinary
Bearer Share, no par value
Ordinary Bearer Shares, no par value New York Stock Exchange*
________________________
*Not for trading, but only in connection with the registration of American
Depositary Shares, pursuant to the requirements of the Securities and Exchange
Commission.
Securities to be registered pursuant to Section 12(g) of the Act: NONE
Securities for which there is a reporting obligation pursuant to Section 15(d)
of the Act: NONE
Indicate the number of outstanding shares of each of the issuer's classes of
capital or common stock as of the close of the period covered by the annual
report:
ORDINARY BEARER SHARES, NO PAR VALUE....................... 22,184,958
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 which financial statement item the
registrant has elected to follow
Item 17 Item 18 X
-- --
_______________________________________________________________________________
TABLE OF CONTENTS
Page
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CERTAIN TERMS............................................................ 1
FORWARD-LOOKING STATEMENTS............................................... 1
PART I................................................................... 2
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS........ 2
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE...................... 2
ITEM 3. KEY INFORMATION.............................................. 2
Selected Financial Data...................................... 2
Capitalization and Indebtedness.............................. 5
Reasons for the Offer and Use of Proceeds.................... 5
Risk Factors................................................. 5
ITEM 4. INFORMATION ON THE COMPANY................................... 10
INTRODUCTION................................................. 10
History...................................................... 10
BUSINESS..................................................... 13
Industry and Market Overview................................. 13
Organizational Structure..................................... 24
Property, Plants and Equipment............................... 24
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS................. 27
Operating Results............................................ 32
Liquidity and Capital Resources.............................. 40
Research and Development..................................... 47
Trend Information............................................ 48
Significant Differences Between IFRS and U.S. GAAP........... 49
ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES................... 52
Directors and Senior Management.............................. 52
Compensation................................................. 55
Board Practices.............................................. 60
Employees.................................................... 60
Share Ownership.............................................. 61
ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS............ 62
Major Shareholders........................................... 62
Related Party Transactions................................... 62
Interest of Experts and Counsel.............................. 63
ITEM 8. FINANCIAL INFORMATION........................................ 64
Consolidated Statements and Other Financial Information...... 64
Significant Changes.......................................... 67
ITEM 9. THE OFFER AND LISTING........................................ 68
Offer and Listing Details.................................... 68
Plan of Distribution......................................... 70
Selling Shareholders......................................... 70
Dilution..................................................... 70
Expenses of the Issue........................................ 70
ITEM 10. ADDITIONAL INFORMATION...................................... 71
Share Capital................................................ 71
Memorandum and Articles of Association....................... 71
Material Contracts........................................... 74
Exchange Controls............................................ 78
Taxation..................................................... 79
Dividends and Paying Agents.................................. 83
Statements by Experts........................................ 84
Documents on Display......................................... 84
Subsidiary Information....................................... 84
ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK........................................................ 85
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Page
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY
SECURITIES.................................................. 89
PART II.................................................................. 90
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES............. 90
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY
HOLDERS AND USE OF PROCEEDS................................. 90
ITEM 15. CONTROLS AND PROCEDURES..................................... 90
ITEM 16. [RESERVED].................................................. 90
PART III................................................................. 90
ITEM 17. FINANCIAL STATEMENTS........................................ 90
ITEM 18. FINANCIAL STATEMENTS........................................ 91
ITEM 19. EXHIBITS.................................................... 91
SIGNATURES............................................................... 92
CERTIFICATION............................................................ 93
CERTIFICATION............................................................ 94
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CERTAIN TERMS
SGL CARBON Aktiengesellschaft is organized as a stock corporation under the
laws of the Federal Republic of Germany. In this annual report on Form 20-F, we
refer to SGL CARBON Aktiengesellschaft and (unless the context requires
otherwise) its consolidated subsidiaries as the "SGL Group" or the "Group".
References to "SGL" are to SGL CARBON Aktiengesellschaft without its
consolidated subsidiaries. We refer to the ordinary bearer shares, no par
value, of SGL as the "Shares".
The following abbreviated references to the Business Areas of the SGL Group
will also be used in this annual report: CG for the "Carbon and Graphite"
Business Area, GS for the "Graphite Specialties" Business Area, CP for the
"Corrosion Protection" Business Area, and SGL T or T for the "SGL Technologies"
Business Area. We use the term "Business Area" for financial reporting
purposes, whereas the term "Business Unit" is used in business-related
discussions in this annual report. Both terms refer to the reporting units of
the SGL Group described above.
FORWARD-LOOKING STATEMENTS
This annual report contains forward-looking statements and information
relating to the SGL Group. Words such as "anticipate", "believe", "estimate",
"expect", "intend", "plan", "project" and similar expressions identify forward-
looking statements. These statements reflect the current belief of our
management as well as assumptions made by, and information currently available
to, the SGL Group.
Forward-looking statements are subject to risks and uncertainties. If these
risks and uncertainties materialize, or if our assumptions prove incorrect, our
actual results, performance or achievements could differ materially from any
future results, performance or achievements expressed or implied by our
forward-looking statements. Factors that could cause our forward-looking
statements to prove incorrect include changes in general economic and business
conditions, changes in currency exchange rates and interest rates, introduction
of competing products by other companies, lack of acceptance of new products or
services by the SGL Group's targeted customers, changes in business strategy
and various other factors. See Item 3, "Key Information---Risk Factors" for a
discussion of risks that we believe particularly significant to the Group and
our business. We do not intend, and do not assume any obligation, to update
these forward-looking statements.
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PART I
ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS
Not applicable.
ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE
Not applicable.
ITEM 3. KEY INFORMATION
SELECTED FINANCIAL DATA
We prepare our consolidated financial statements in accordance with
International Financial Reporting Standards (IFRS). Since 2002, IFRS is the
term for the entire body of accounting standards issued by the International
Accounting Standards Board, replacing the earlier IAS, or International
Accounting Standards. Individual accounting standards that the IASB issued
prior to this change in terminology continue to use the prefix "IAS". We have
prepared our consolidated financial statements in accordance with IFRS since
our 1999 fiscal year. In 2001, we discontinued preparing consolidated financial
statements in accordance with the accounting standards set forth in the German
Commercial Code (Handelsgesetzbuch), generally referred to as German GAAP.
We derived the following selected financial data for each of the years in
the four-year period ended December 31, 2002 from our consolidated financial
statements. We prepared this information in accordance with IFRS or, where
indicated, in accordance with U.S. generally accepted accounting principles.
IFRS differs in certain significant respects from U.S. GAAP. See Item 5,
"Operating and Financial Review and Prospects-Significant Differences Between
IFRS and U.S. GAAP" as well as Notes 34 and 35 to the consolidated financial
statements contained elsewhere in this annual report for a discussion of these
differences.
As indicated in their reports that appear elsewhere in this annual report,
BDO Deutsche Warentreuhand Aktiengesellschaft, Wirtschaftsprufungsgesellschaft,
independent auditors, have audited our consolidated financial statements for
the year ended December 31, 2002, and KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft, Wirtschaftsprufungsgesellschaft, independent auditors, have
audited our consolidated financial statements for the years ended December 31,
2001 and 2000.
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AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2002(1) 2002(2) 2001(2) 2000(2) 1999(2)
---------- ---------- ---------- ---------- ----------
$ [E] [E] [E] [E]
(IN MILLIONS; EXCEPT PER SHARE AND CERTAIN OTHER DATA)
STATEMENT OF OPERATIONS DATA:
IFRS
Sales revenue................ 1,158.5 1,112.3 1,233.3 1,262.5 980.1
Cost of sales(3)............. (923.3) (886.5) (941.8) (950.8) (691.4)
Gross profit................. 235.2 225.8 291.5 311.7 288.7
Selling, research and
development,
administration and other
operating
income (net)(3)............ (205.4) (197.2) (232.8) (232.5) (197.5)
Costs relating to anti-trust
proceedings
and restructuring(3)....... (31.6) (30.3) (76.0) 0.0 (130.2)
Profit/(loss) from operations (1.8) (1.7) (17.3) 79.2 (39.0)
Result of investments ....... (1.9) (1.8) 3.2 0.6 (0.4)
Interest expense (net)(4).... (33.5) (32.2) (38.5) (42.6) (1.6)
Other financial result....... 8.9 8.5 (13.2) (17.2) (16.0)
Income tax benefit (expense). 3.7 3.6 (29.2) (55.7) 13.7
Net loss (including minority
interests)(5).............. (24.6) (23.6) (95.0) (35.7) (43.3)
Net loss attributable to
shareholders............... (24.6) (23.6) (95.2) (36.0) (43.5)
Loss per Share(6)............ (1.12) (1.08) (4.42) (1.68) (2.05)
Loss per ADS(6).............. (0.37) (0.36) (1.47) (0.56) (0.68)
U.S. GAAP
Net loss (11)................ (23.0) (22.0) (148.0) (3.3) (54.1)
Basic loss per Share(6)...... (1.05) (1.01) (6.87) (0.15) (2.55)
Basic loss per ADS (6)....... (0.35) (0.34) (2.29) (0.05) (0.85)
Diluted loss per Share(6).... (1.05) (1.01) (6.87) (0.15) (2.55)
Diluted loss per ADS(6)...... (0.35) (0.34) (2.29) (0.05) (0.85)
BALANCE SHEET DATA:
IFRS
Working capital(7)........... 402.0 386.0 548.7 565.3 487.5
Total assets................. 1,339.8 1,286.4 1,495.0 1,547.0 1,406.0
Financial debt............... 467.1 448.5 538.9 502.4 391.8
Shareholders' equity......... 204.4 196.3 255.2 337.0 350.8
Number of Shares
outstanding(14)............ 21,813,930 21,813,930 21,530,563 21,376,753 21,210,200
U.S. GAAP
Total assets................. 1,388.6 1,333.3 1,531.8 1,629.9 1,480.5
Shareholders' equity......... 218.3 209.7 264.1 402.9 380.1
OTHER DATA:
IFRS
Gross profit margin (%) (3).. 20.3 20.3 23.6 24.7 29.5
Operating margin (%) (3)..... (0.2) (0.2) (1.4) 6.3 (4.0)
Depreciation and amortization 84.6 81.2 95.8 83.0 73.4
Capital expenditures......... 43.2 41.5 90.6 67.2 78.4
Ratio of debt to
shareholders' equity
(%)(8)..................... 217.5 217.5 206.4 146.2 103.3
Return on capital employed
(%)(9)..................... (0.2)% (0.2)% (1.4)% 6.6% (3.7)%
Research and development
expenses................... 26.5 25.4 31.1 29.2 24.3
Quantity of graphite
electrodes sold
(thousands of metric tons.. 173 173 175 188 171
Number of employees worldwide
(end of year).............. 7,360 7,360 8,197 8,082 6,656
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AS OF AND FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
2002(1) 2002(2) 2001(2) 2000(2) 1999(2)
---------- ---------- ---------- ---------- ----------
$ [E] [E] [E] [E]
(IN MILLIONS; EXCEPT PER SHARE AND CERTAIN OTHER DATA)
BUSINESS AREA DATA:
Sales Revenue(10)
Carbon and Graphite ........ 573.5 550.7 619.8 619.5 539.7
Graphite Specialties(12) ... 203.9 195.9 230.7 242.0 227.8
Corrosion Protection (12) .. 221.1 212.4 235.8 247.3 82.8
SGL Technologies(12) ....... 156.5 150.4 135.1 151.8 127.8
Operating profit (loss) (13)
Carbon and Graphite ........ 54.0 51.9 78.9 108.0 103.1
Graphite Specialties(12) ... 1.9 1.9 22.3 16.9 5.9
Corrosion Protection(12) ... 4.9 4.8 12.6 (1.4) 4.8
SGL Technologies(12) (12.3) (11.7) (33.7) (17.3) (6.5)
(1) Amounts in this column have been translated solely for the convenience of
the reader at an exchange rate of [E]1.00 = $ 1.0415, the middle rate of
exchange on December 31, 2002 as published by Deutsche Bank.
(2) Beginning January 1, 2002, we have consolidated SGL Brakes GmbH and SGL
Information-Systems LLC, whose net assets were previously included in
other consolidated companies. Beginning January 1, 2001, we have
consolidated SGL Information-Services GmbH, SGL Technologies GmbH and RK
Technologies International Ltd., which were previously non-consolidated
subsidiaries. As of January 1, 2001, we acquired all shares in SGL ACOTEC
Ltda (formerly KCH-ANCOBRAS Ltda.), which we have consolidated as of this
date. Effective December 31, 2000, we began to consolidate ZEW in our
year end balance sheet, although we did not recognize ZEW in our
consolidated statement of operations for that year. As of January 1,
2000, the SGL Group began consolidating Keramchemie GmbH (now SGL Acotec
GmbH). Beginning January 1, 1999, we have consolidated HAW Linings GmbH,
Germany (now part of SGL Acotec GmbH).
(3) Costs relating to anti-trust proceedings and major restructuring expenses
for the years under review are presented separately in the statement of
operations.
(4) For 2002, 2001 and 2000, we have included the interest component of
additions to the pension provision of [E] 10.4 million, [E]9.9 million
and [E] 9.2 million, respectively, as an expense in the financial result
in accordance with IFRS. Under U.S. GAAP, this interest component is
included in operating profit.
(5) Net loss (before minority interests) and shareholders' equity/minority
interests includes amounts attributable to minority interests. Net loss
attributable to minority interests and minority interests in
shareholders' equity for the years 2002, 2001 and 2000 were [E] 0.0
million, [E]0.2 million and [E] 0.3 million, respectively, and [E]1.4
million, [E]1.6 million and [E] 2.1 million, respectively.
(6) We have calculated loss per Share for each period based upon net loss
less amounts attributable to minority interests divided by the weighted
average number of Shares outstanding. We have calculated loss per ADS as
loss per Share divided by three. Because of the net loss for the year and
the resulting lack of any dilutive effect, the diluted loss per Share for
2002, 2001 and 2000 was identical to the loss per Share.
(7) Total net inventories plus total net trade receivables, less trade
payables. Under U.S. GAAP, working capital at December 31, 2001, 2000 and
1999 would have been [E] 41.3 million, [E]5.5 million and [E]83.6
million, respectively.
(8) Total financial debt less cash and cash equivalents, divided by
shareholders' equity at year-end.
(9) Operating results divided by the amount of goodwill, tangible fixed
assets, inventories and trade accounts receivables, less trade accounts
payables at the end of the year.
(10) Business area data for sales revenue do not include certain amounts for
sales not allocable to a business area. For the years 2002, 2001 and 2000
these amounts were [E] 2.9 million, [E]11.9 million and [E]1.9 million
respectively.
(11) Net loss under U.S. GAAP is presented before cumulative changes in
accounting principles.
(12) As of January 1, 2001, we reorganized our operations into four business
areas: Carbon and Graphite, Graphite Specialties (formerly Specialty
Graphite), Corrosion Protection and SGL Technologies (formerly Fibers and
Composites). As of January 1, 2002, we reclassified our expanded graphite
business in Europe from Graphite Specialties to SGL Technologies. We have
adjusted the corresponding figures from the previous years to reflect our
current segment reporting structure.
(13) Operating profit (loss) before costs relating to anti-trust proceedings
and restructuring for the years 2002, 2001 and 2000 do not include
unallocated corporate costs and consolidation adjustments. See Note 28 to
the consolidated financial statements.
(14) Weighted average number of shares.
EXCHANGE RATES
The following table shows the high, low, average and period-end euro-dollar
exchange rates for the five years ended December 31, 2002 and the high and low
euro-dollar exchange rates for the six months ended March 31, 2003 and for
April 8, 2003. In each case, these rates are based on the noon buying rates
published by Deutsche Bank. For 1998, the table reflects exchange rates between
the dollar and Deutsche Mark translated into euros at the irrevocably fixed
Deutsche Mark-euro rate of
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DM 1.95583 = [E]1.00. You should not assume that these translated exchange
rates would be the same as the dollar-euro exchange rates that would have
prevailed during 1998 had the euro existed at that time.
PERIOD PERIOD
PERIOD HIGH LOW AVERAGE END
--------------------------------- ------ ------ ------- ------
(IN DOLLARS PER EURO)
1998............................. 1.1961 1.0548 1.1144 1.1733
1999............................. 1.1802 1.0020 1.0658 1.0027
2000............................. 1.0395 0.8286 0.9213 0.9305
2001............................. 0.9548 0.8388 0.8957 0.8820
2002............................. 1.0477 0.8600 0.9448 1.0415
October 2002..................... 0.9894 0.9725
November 2002.................... 1.0156 0.9903
December 2002.................... 1.0415 0.9887
January 2003..................... 1.0881 1.0371
February 2003.................... 1.0924 1.0691
March 2003....................... 1.1055 1.0564
April 8, 2003.................... 1.0887 1.0581
Fluctuations in the euro-dollar exchange rate will affect the dollar
equivalent of the Share price in euros on the Frankfurt Stock Exchange and, as
a result, are likely to affect the market price of the American Depositary
Shares on the New York Stock Exchange as well as the amount of any dividends
received by holders of American Depositary Receipts.
DIVIDENDS
In 1999, SGL declared and paid a dividend of [E]1.20 ($1.31) per Share for
the 1998 fiscal year. SGL did not declare dividends for the fiscal years 1999-
2002.
Except as described herein, holders of ADRs are entitled to receive
dividends on the Shares represented by the ADSs evidenced by such ADRs. SGL
will pay any cash dividends payable to such holders to JPMorgan Chase Bank, as
depositary, in euro; subject to certain exceptions, the depositary will convert
these payments into dollars. Dividends paid on Shares and dividends paid to
holders and beneficial owners of ADRs are subject to deduction of German
withholding tax. See Item 10, "Additional Information --- Taxation".
CAPITALIZATION AND INDEBTEDNESS
Not applicable.
REASONS FOR THE OFFER AND USE OF PROCEEDS
Not applicable.
RISK FACTORS
WE FACE PRICE AND OTHER FORMS OF COMPETITION FROM OUR COMPETITORS.
The industries in which we operate are highly competitive. Competition is
based primarily on price, product quality and customer service. Price
competition is strong due to the capital intensive nature of most of our
production processes, which results in high fixed costs. In addition, price
decreases can be aggravated by temporary imbalances in supply and demand.
Graphite electrodes, in particular, are subject to strong price competition ---
the average price of our graphite electrodes declined by approximately 16%
during 2002. Our market share could be adversely affected if we increased
prices, or a competitor reduced prices, or if we decided to maintain profit
margins rather than market share or pursued other competitive strategies.
Continuing competition could prevent us from raising prices or force price
reductions, could reduce our sales volumes, require us to spend more for sales,
marketing, and research and development. Any of these developments could harm
our financial condition and results of operations.
-5-
DECLINES IN DEMAND FOR GRAPHITE ELECTRODES COULD ADVERSELY AFFECT OUR
BUSINESS.
In 2002, we derived approximately 36% of our sales revenue from the sale of
graphite electrodes, our core business. We sell our graphite electrodes
primarily to the electric arc furnace (or EAF) steel industry. The EAF industry
is global and customers are located in every major geographic market. As a
result, our customers are affected by changes in global and regional economic
conditions. The recent economic slowdown in the steel industry, and in
particular, the present structural crisis in the U.S. steel industry, led to an
overall drop in the demand for graphite electrodes during early 2002. At the
end of 2002, almost one-third of steel producers in the United States had filed
for bankruptcy protection under Chapter 11.
In addition, demand for our products sold to the EAF steel industries may
be adversely affected by technological improvements in those products as well
as in the manufacturing operations of our customers, which reduce the rate of
consumption or use of our products for a given level of production by our
customers. Since the early 1980s there has been a steady gradual decrease in
"specific consumption" -- the quantity of graphite electrodes consumed per
metric ton of steel produced -- due to improved efficiency in EAF steel-making
processes and equipment design. Since the mid-1990s, increased EAF steel
production has offset the decrease in specific consumption, resulting in steady
to slightly increasing demand for graphite electrodes over the cycle. Despite
the overall long-term trend, the year-to-year and quarter-to-quarter
fluctuations in the demand for graphite electrodes have been significant. We
cannot assure you, however, that future improvements in steel-making processes
and technology or a decline in EAF steel production will not result in a net
decrease in demand for graphite electrodes. A significant drop in demand for
our graphite electrodes could have a material adverse effect on our financial
condition and results of operations.
WE FACE VARIOUS LEGAL PROCEEDINGS THAT ARE OR COULD BE MATERIAL.
In the past several years, we have faced various court actions and
investigations in connection with anti-trust violations, and have been assessed
substantial fines by the United States Department of Justice and the European
Commission for price fixing in the graphite electrode and specialty graphite
industries. We have also settled a large number of civil actions, however there
are a small number of civil actions remaining. We have appealed the two fines
by the European Commission, however there can be no assurance that these
appeals will be successful in reducing the amount of the fines that have been
assessed. In addition, other lawsuits and investigations, and appeals from
penalties, are currently pending. See Item 8, "Financial Information --- Legal
Proceedings".
Although we cannot predict the ultimate outcome of these proceedings,
lawsuits and investigations, if a court were to order us to pay substantial
damages, or we were assessed further substantial fines in relation to future or
pending proceedings or investigations, this could harm our business, financial
condition and results of operations.
WE OPERATE GLOBALLY AND FACE UNPREDICTABLE INTERNATIONAL ECONOMIC
CONDITIONS, GOVERNMENT POLICIES, REGULATORY CONTROLS AND CHANGES IN PUBLIC
POLICY THAT COULD ADVERSELY AFFECT OUR BUSINESS.
We operate 40 manufacturing facilities in 13 countries on three continents
and sell our products in approximately 100 countries. In 2002, sales revenue of
our products outside Germany accounted for approximately 81% of our total sales
revenue. As a result, we are subject to risks associated with operating in
foreign countries, including fluctuations in currency exchange rates, declines
in regional or global economic activity, limitations, if any, on the conversion
of foreign currencies into euro, and the possible imposition of investment and
other restrictions by governments. In addition, our business is subject to
changes in the public policies of individual countries or states, including
potential increases in taxes and tax rates.
We must comply with a broad range of regulatory controls on the testing,
manufacture and marketing of our products. In some countries, including the
United States and member states of the European Union, regulatory controls have
become increasingly demanding. We expect that this trend will continue. A
proposed new European Union chemicals policy could mandate a significant
increase in the testing and assessment of basic chemicals and chemical
intermediates, leading to increased costs and reduced operating margins for
these products.
-6-
Although many regulations and policies increase our costs, changes in
public policy and regulations have not had a material adverse effect on the
Group during the past decade. However, we cannot assure you that changes in
policies or regulations will not harm our operating results or financial
condition in the future.
OUR FINANCIAL CONDITION DEPENDS TO A SIGNIFICANT EXTENT ON OUR ABILITY TO
GENERATE FUNDS AND MAINTAIN SUFFICIENT FINANCING.
We require significant funds for the SGL Group's operations, financing
costs, and the payment of antitrust liabilities and other obligations. In
recent years, we have raised capital through public and private debt
financings, and have generated positive cash flow from operating activities
since 1993. We cannot assure you that we will be able to generate or obtain
sufficient funds needed for our future operations and our other cash
requirements, or that we will meet all loan covenants and other obligations in
connection with our present financing arrangements. In addition, we cannot
assure you that we will be able to refinance our financial liabilities as they
mature or that we will be able to negotiate the same or better terms in future
loan agreements. If our ability to raise or generate funds were impaired, this
could have a material adverse effect on our business operations, financial
condition and results of operations.
If we breach the covenants of a credit agreement and are unable to cure the
breach (to the extent the breach is capable of being cured) or obtain a waiver
from the lender (to the extent the covenant is capable of being waived), we
could be in default under the terms of that agreement. A default could have
significant harmful consequences, including acceleration, which would cause all
debt under the agreement to become due. Moreover, a default under one credit
agreement could cause lenders under other credit agreements to terminate those
agreements, in which case amounts under those agreements would become due as
well. In addition, in an event of default, the lenders under our lines of
credit could terminate their commitments to extend credit up to the full amount
of the facility. This would have an immediate material adverse effect on our
liquidity.
As of December 31, 2002, we were not in default under any credit agreement.
Our latest forecast of operating results and cash flows indicates that we are
in compliance with all covenant tests for the current fiscal year. Seasonal
effects may have an impact on the course of our business over the year. These
effects could have an impact on our ability to meet quarterly ratios required
under our covenants. We will perform the compliance tests for the first quarter
of 2003 in the second half of April 2003, after completing the financial
closing process for the first quarter. Although we expect those tests to
indicate that we remain in compliance with our covenants, we cannot assure you
that we will in future be in compliance with the provisions of our debt
agreements, nor that the lending banks, in the event of a default, would agree
to a waiver. See Item 5, "Operating and Financial Review and Prospects --
Liquidity and Capital Resources -- Overview of Bank Debt and Cash Flows" and
"--Consolidated Cash Flows -- Financing Cash Flows".
WE MAY ENCOUNTER SUPPLY SHORTAGES AND INCREASES IN THE COST OF RAW
MATERIALS AND ENERGY.
We are exposed to commodity price risks through our dependence on various
raw materials, such as petroleum coke, coal tar pitch, petroleum pitch,
anthracite coal and natural graphite flake as well as energy supplies. We
purchase raw materials and energy from a variety of sources and do not enter
into long-term purchase contracts. The principal raw material we use in the
manufacture of our products is petroleum coke, an engineered by-product of
petroleum refining. Although we believe that the raw materials we require will
remain available in adequate quantities, the availability and price of raw
materials and energy may be affected by new regulations, suppliers'
allocations, interruptions in production by suppliers and market conditions.
High energy prices continue to significantly influence our costs of production.
Although we have reduced the impact of price increases for energy and raw
materials through increased efficiency and cost savings, we cannot assure you
that we will be able to mitigate any future price increases in the same way. A
substantial increase in raw material or energy prices, or a continued
interruption in energy supplies, could harm our business operations, financial
condition and results of operations.
-7-
WE MAY NOT REALIZE EXPECTED BENEFITS FROM OUR RESTRUCTURING AND COST
SAVINGS PROGRAMS.
During 2002 we reorganized our operating structure and implemented a
restructuring program to manage and integrate all our operations within four
global Business Units. The restructuring program announced in December 2001 and
subsequent initiatives have included reductions in our work force, idling or
closure of selected production sites, rationalization and specialization of
remaining sites and other cost reduction initiatives. In addition, we
continually strive to reduce costs and increase efficiencies (through our SGL
Excellence program, SGL One information systems and other initiatives). We
cannot assure you, however, that we will be able to realize the expected
benefits from our restructuring and cost savings programs.
WE ARE EXPOSED TO CURRENCY EXCHANGE RATE RISKS AND INTEREST RATE RISKS.
We conduct a significant portion of our operations outside the euro zone.
Fluctuations in the rate of exchange between the euro and non-euro currencies,
especially the U.S. dollar, can materially affect our revenue and operating
results which are reported in euros. For example, changes in currency exchange
rates may affect the relative prices at which we and our competitors sell
products in the same market, and the cost of raw materials and other items we
require for our operations.
These fluctuations can benefit or harm our financial results. The weighted
average value of the U.S. dollar relative to the euro during 2002 declined by
approximately 5% compared to 2001. This decreased our reported revenue in 2002
by approximately [E]24 million. From time to time, we may use financial
instruments to hedge our exposure to foreign currency and interest rate
fluctuations. However, we cannot assure you that our hedging activities will be
successful.
ENVIRONMENTAL MATTERS COULD RESULT IN SIGNIFICANT INCREASES IN COSTS.
Our operations are subject to normal risks associated with manufacturing,
including the related storage and transportation of raw materials, products and
wastes. We are also subject to numerous domestic and foreign laws and
regulations relating to the storage, handling, generation, treatment, emission,
release, discharge and disposal of potentially hazardous substances and wastes.
We cannot assure you, however, that a previously unknown or future
contamination event or new more stringent regulations will not increase our
environmental costs in the future. A significant increase in environmental
liabilities or costs could harm our business operations, financial condition
and results of operations.
PROLONGED WORK STOPPAGES DUE TO LABOR DISPUTES COULD ADVERSELY AFFECT OUR
BUSINESS.
Most of our workforce is covered by collective bargaining agreements.
Although we believe that we have satisfactory relations with our works councils
and unions, we cannot assure you that we will reach new agreements with our
workforce on satisfactory terms when existing collective bargaining agreements
expire. Nor can we assure you that we would reach such new agreements without
work stoppages, strikes or similar industrial actions. If industrial actions
substantially obstructed our manufacturing operations for an extended period,
our business, financial condition and results of operations could suffer.
THE SEASONALITY OF OUR BUSINESS COULD ADVERSELY AFFECT OUR REPORTED RESULTS
OF OPERATIONS.
Our sales revenue fluctuates from quarter to quarter due to such factors as
scheduled plant shutdowns by customers, vacations, changes in customer
production schedules in response to seasonal changes in energy costs, weather
conditions, strikes and work stoppages at customer plants, and changes in
customer order patterns in response to the announcement of price increases.
Generally, these factors tend to adversely affect our results of operations.
During the period following the effective date of a price increase for graphite
electrodes, customers tend to reduce their inventories before placing further
orders. This tends to reduce our sales revenue during such periods.
-8-
WE MAY NOT BE ABLE TO PROTECT THE INTELLECTUAL PROPERTY CRITICAL FOR THE
DEVELOPMENT OF SGL TECHNOLOGIES' BUSINESS.
We generally have a number of new patent applications or trademark
registration applications pending at any given time relating to product
enhancements and new product developments. We do not believe that the success
of our established businesses is materially dependent on trade secrets,
knowledge, patents, trademarks or other proprietary information. However, in
the future competitors may obtain patents for technologies which could
adversely affect our business and financial condition.
The new product lines that we are developing in our SGL Technologies
business, however, do currently rely to a significant extent on such
proprietary rights and information. We cannot assure you that any patents or
trademarks that we obtain will adequately protect the covered products and
technologies. Nor can we assure you that our confidentiality covenants and
agreements will adequately protect our trade secrets, knowledge or other
proprietary information not covered by patents or trademarks, or that others
will not obtain this information through independent development or other legal
means. Furthermore, we cannot assure you that our activities will not infringe
on the proprietary rights of others or that we will be able to obtain licenses,
on reasonable terms or otherwise, to technology that we need. In addition, we
cannot assure you that our proprietary rights and information will not become
obsolete as a result of the development of new technologies by our competitors,
or that we will be able to develop and grow the demand for our fuel cell
components, brake discs and other products of our SGL Technologies business. If
we fail to protect our proprietary information, or if we infringe upon the
proprietary rights of others, the business, financial condition or results of
operations of our SGL Technologies business could suffer significant harm.
EXISTING INSURANCE COVERAGE MAY TURN OUT TO BE INADEQUATE.
We aim to cover foreseeable material risks by insurance. Our insurance
coverage, however, may prove inadequate to fully cover the risks to which the
Group is exposed. For certain risks, adequate insurance coverage may not be
available on the market or at reasonable conditions.
-9-
ITEM 4. INFORMATION ON THE COMPANY
INTRODUCTION
SGL Carbon Aktiengesellschaft is incorporated as a stock corporation for
unlimited duration under the laws of the Federal Republic of Germany. SGL's
registered office is at Rheingaustrasse 182, D-65203 Wiesbaden, Germany,
telephone number +49-611-60-29-100. Our English-language home page on the World
Wide Web is at www.sglcarbon.com/index.html; this annual report does not
incorporate information found on our web site. SGL's agent in the United States
for U.S. federal security law purposes is SGL Carbon LLC, located at our North
American headquarters, 8600 Bill Ficklen Drive, Charlotte, North Carolina
28269.
HISTORY
Our corporate origins lie in the second half of the 19th century. Two of
the earliest industrial manufacturers of carbon products, Gebruder Siemens &
Co. (founded 1872) and the Plania Werke (founded 1896) merged in 1928 into the
Siemens Plania Werke AG fur Kohlefabrikate. This company and its successors
underwent a series of international mergers and acquisitions, becoming Sigri
Great Lakes Carbon GmbH, SGL's immediate predecessor company, in 1992. At that
time, Hoechst AG was the majority shareholder of Sigri Great Lakes.
On December 21, 1994, Sigri Great Lakes became SGL through a change in
corporate form (Umwandlung). In April 1995, SGL completed its initial public
offering and listed its Shares on the Frankfurt Stock Exchange. SGL became
fully independent of Hoechst in June 1996, when Hoechst divested substantially
all of its ownership in SGL in a global placement of approximately 10.5 million
Shares. Approximately 40% of that issue was placed in North America in the form
of American Depositary Shares listed on the New York Stock Exchange under the
symbol "SGG".
We have recently completed several acquisitions and divestitures as part of
our strategy to enhance our position as the world's largest producer of carbon
and graphite products and to concentrate our business on areas where we see
growth opportunities. The following are the principal acquisitions and
divestitures that we have made since the beginning of 2000:
* With effect from January 1, 2000, SGL acquired 100% of Keramchemie
GmbH, or KCH. On that date, we merged KCH and our subsidiary HAW
LININGS GmbH into SGL TECHNIK GmbH (now SGL Acotec GmbH).
* During 2000 we increased our interest in ZEW Zaklady Elektrod Weglowych
S.A., a Polish subsidiary, from 19.6% to 97.2%. We fully consolidated
ZEW with effect from December 31, 2000, although we did not recognize
it in the income statement for fiscal year 2000.
* As of January 1, 2001, we acquired all shares in our Brazilian
subsidiary, SGL Acotec Ltda. (formerly KCH-ANCOBRAS Ltda.). SGL Acotec
Ltda. is now fully consolidated.
* As of January 1, 2001, we increased our interest in SGL Acotec (Wuhan)
Co. Ltd., a Chinese joint venture, from 70% to 90%. SGL Acotec (Wuhan)
is fully consolidated.
* In April 2002, SGL and Tokai Carbon Co. Ltd of Japan formed SGL Carbon
Tokai Shanghai, a joint venture for the production, marketing and sales
of UHP graphite electrodes for the Chinese market. We hold a 51%
interest in this joint venture.
* In January 2003, we sold all shares in SGL PanTrac Gesellschaft fur
elektrische Kontakte mbH, a German subsidiary. PanTrac was still fully
consolidated in the consolidated financial statements for fiscal year
2002.
* As of April 8, 2003 we sold all shares in Risomesa S.p.A., Italy to the
Schunk Group, Germany. This transaction was effective as of January 1,
2003. Risomesa was still fully consolidated in the consolidated
financial statements for fiscal year 2002.
STRATEGY
The carbon and graphite markets have changed considerably in recent years.
Key driving forces have been the Asian economic crises in 1998 and 1999;
economic recession in 2001, which had a particularly negative effect on the
steel industry, especially in the United States; the market downturn
-10-
following the events of September 11, 2001; and the continuing worldwide
recessionary trend in 2002. In addition, the increasing globalization of our
customers and competitors has had a significant effect on our changing markets.
We have responded to these challenges by reviewing and realigning our
overall strategy. We have condensed this strategy into our "Five Point
Program":
1. Increase returns
2. Continuously increase efficiency
3. Improve capital structures
4. Optimize portfolio
5. Enhance corporate governance
The relative priority of these five points can vary according to our needs
at any given time. SGL's Executive Committee sets annual priorities in
consultation with the Supervisory Board. In 2001, we emphasized the first point
of our program -- increase returns. Beginning in 2002, we have set the third
point -- improve capital structures -- as our priority. Our goal under this
strategic point is to improve cash flow and reduce net debt.
This section describes our long term objectives under the Five Point
Program, focusing on actions we have taken during 2002 to implement the
program.
INCREASE RETURNS:
Our goal is to steadily increase the returns from our business to achieve a
profitability level above industry average. To this end, we significantly
reduced our costs during 2002 compared with 2001. The restructuring program for
our Carbon and Graphite and Graphite Specialties businesses, initiated in late
2001, contributed nearly half these savings. Savings achieved through this
program during 2002 significantly exceed our original target. Additional cost
cutting and restructuring measures in all four Business Units contributed the
remainder of these savings. These measures focused on a further concentration
in our Graphite Specialties feederstock production and specialization in our
electrode plants. By year-end 2002 we had reduced headcount by approximately
840, more than 10% of the entire workforce in the SGL Group. We plan to
continue implementing the restructuring program for Carbon and Graphite and
Graphite Specialties during 2003 and 2004.
CONTINUOUSLY INCREASE EFFICIENCY:
In early 2002, we initiated the Group-wide "SGL Excellence" initiative to
continuously improve core processes throughout all our businesses. In employing
methods like Six Sigma, this initiative substantially expands our historical
Total Quality Management program. The main objective of the SGL Excellence
initiative is to continuously achieve sustained improvements in productivity,
competitiveness and customer satisfaction.
The components of SGL Excellence fall under three headings:
* Operational Excellence, focusing on production flow, productivity and
costs;
* Commercial Excellence, concentrating on customer requirements, customer
satisfaction, marketing and sales; and
* People Excellence, emphasizing the selection, training and
incentivization of a high-quality workforce.
We believe that the SGL Excellence initiative will be a key factor in our
efforts to increase the value of our business and forge a revitalized corporate
culture.
IMPROVE CAPITAL STRUCTURES:
We aim to reduce the net financial debt of the SGL Group, lower its working
capital and improve key financial ratios such as net debt to EBITDA, sales to
net working capital and return on capital employed.
-11-
This objective was our top priority during 2002. We succeeded in reducing
net financial debt by nearly four times our original target. We accomplished
this primarily by reducing working capital and curtailing capital expenditures.
Because of the impact of these measures on our operating results, we do not
expect to achieve the same level of reductions during 2003. Nevertheless, we
intend to continue reducing working capital and net debt levels over the next
several years in a manner that balances our objective of continuously
increasing returns.
In late 2002, we also finalized a refinancing project by signing a [E]495
million syndicated loan agreement. See Item 10, "Additional Information --
Material Contracts" for a description of the refinancing. We believe that these
measures have substantially provided for the financial requirements of the SGL
Group over the near and medium term.
OPTIMIZE PORTFOLIO:
To improve the Group's portfolio, we concentrate on further strengthening
our market and technology position in our established businesses Carbon and
Graphite, Graphite Specialties and Corrosion Protection, reducing their
cyclical sensitivity and improving cash flow. For our SGL Technologies growth
businesses, we intend to focus on high yield growth areas and on becoming a
leader in selected markets.
We base portfolio decisions on considerations of Group companies' fit in
the core competencies of the SGL Group -- high-temperature technology, advanced
materials and engineering -- as well as on our vision and mission statements.
We seek to streamline our portfolio by finding joint venture partners for, or
by divesting, businesses that do not meet our criteria.
Recently, we streamlined our portfolio by divesting our German and Italian
machined electrical carbon businesses. We believe that divesting these non-core
businesses will enable us to further concentrate on high-tech applications
within the Graphite Specialties business area.
ENHANCE CORPORATE GOVERNANCE:
We seek to continuously promote transparency and stakeholder confidence. We
support national and international initiatives to further enhance corporate
governance.
In late 2002, the members of SGL's Executive Committee and Supervisory
Board signed a revised version of our Corporate Governance Principles to bring
these Principles in line with the new German Corporate Governance Code. We also
intend to continue implementing the requirements of rules promulgated under the
U.S. Sarbanes-Oxley Act of 2002 as they become applicable to us. SGL
established an official Disclosure Committee in February 2003.
-12-
BUSINESS
The SGL Group is the largest manufacturer of carbon and graphite products
in the world, based on 2002 sales revenue. In 2002, we had sales in
approximately 100 countries; sales outside Germany accounted for approximately
81% of our sales revenue. We currently operate manufacturing facilities in 13
countries. Our customers are located throughout the industrialized world.
We organize our business operations into business areas that reflect the
products that we produce and market. As of January 1, 2001, we reorganized our
operations into four business areas: Carbon and Graphite, Graphite Specialties,
Corrosion Protection and SGL Technologies. We renamed our former Specialty
Graphite segment "Graphite Specialties" and the former Fibers and Composites
segment "SGL Technologies". As of January 1, 2002, we transferred parts of our
Graphite Specialties activities to SGL Technologies.
* Carbon and Graphite manufactures and markets graphite electrodes and
certain carbon and graphite products (carbon electrodes, cathodes and
furnace linings).
* Graphite Specialties manufactures and markets products with a wide
variety of applications and for a large number of industrial sectors,
including high-technology, tool manufacturing, ferrous and non-ferrous
metallurgy, high-temperature processes, chemicals, automotive, glass
and ceramics.
* Corrosion Protection produces heat exchangers, columns and synthesis
units for the treatment of aggressive or corrosive media. It
manufactures and applies rubber linings and other anti-corrosive
materials, such as acid-proof bricks and coatings, engineered plastics,
flakes and pumps. Corrosion Protection also offers complete engineered
systems to customers in the chemical and environmental protection
industries.
* SGL Technologies manufactures carbon fibers, aerospace and industrial
composites, expanded graphite (including yarns and fabrics), carbon
ceramic brake discs and fuel cell components. SGL Technologies covers
the entire value chain from fibers through to composites. We believe
that we are the only major competitor in this market that can cover
this broad range.
INDUSTRY AND MARKET OVERVIEW
The SGL Group is active in a broad range of markets for carbon-based
industrial products. Historically, a significant portion of our sales has been
to the metallurgical industries, especially steelmaking. The chief factors that
drive our business are conditions in our main customer industries as well as
general economic conditions in the industrialized and newly industrialized
countries.
Many of the industries served by our established Carbon and Graphite,
Graphite Specialties and Corrosion Protection businesses---in particular, the
steel, aluminum and chemicals industries---are mature global industries that
tend to grow at approximately the same rate as the economy as a whole and may
be marked by cyclicality. Demand for products used in these industries tends to
fluctuate with global and regional business cycles as well as specific industry
developments. Our SGL Technologies business area, by contrast, focuses on
emerging technologies that we believe have significant potential for growth.
In the late 1990s and through the first part of 2000, the world economy
generally expanded, as industrialized Western nations recovered from the Asian
economic crisis of 1997. Our businesses benefited from this positive trend,
particularly from growth in the semiconductor markets and in the steel
industry. Since mid-2000, however, there has been a significant economic
downturn in the developed industrial nations of the OECD. The effects of the
terrorist attacks on the United States on September 11, 2001 exacerbated this
slowdown. These negative developments have adversely affected our customer
industries.
In the discussion that follows, we describe the primary markets in which
our four business areas are active.
-13-
CARBON AND GRAPHITE
Our Carbon and Graphite business area serves the metallurgical industries.
Our graphite electrodes are a necessary component of electric arc furnace, or
EAF, steelmaking, while our carbon electrodes and cathode blocks play an
important role in the production of aluminum and other non-ferrous metals. We
also produce carbon-based furnace linings that help furnaces withstand the
extreme temperatures needed in metals production. In 2002, the worldwide market
for products made by our Carbon & Graphite business area was approximately
[E]2.8 billion.
The manufacture of high-quality graphite and carbon electrodes is a mature,
capital intensive business that requires extensive process know-how developed
over years of experience working with the various raw materials and their
suppliers, furnace manufacturers and steelmakers (including working on the
specific applications for finished electrodes). It also requires high-quality
raw material sources and a developed energy supply infrastructure. There have
been no significant new entrants in the manufacture of electrodes since the
1940s. Accordingly, we believe that it is unlikely that there will be
significant new entrants in the manufacture of graphite electrodes over the
next several years.
Graphite electrodes
Graphite electrode production is our single largest business. Graphite
electrodes are a necessary component of EAF steelmaking, the principal
technology used in "mini-mills". To a lesser extent, they may also be used in
traditional blast furnace/basic oxygen furnace, or BF/BOF, steel production.
EAF steelmaking consumes graphite electrodes, for which there are currently no
substitute products.
Demand for graphite electrodes, therefore, varies directly with demand for
finished steel and, in particular, with production of EAF steel. The steel
industry generally is cyclical in nature and experiences significant
fluctuations based on numerous factors. In general, the EAF steel industry,
however, has been less cyclical than the crude steel industry and has grown
fairly steadily since the early 1970s. See below, "---EAF steelmaking". Volume
and percentage of EAF steel to total steel production increased through 2001.
Despite a significant increase in volume, the percentage of EAF steel
production to total steel production declined slightly during 2002, primarily
as a result of a significant increase of steel production in China, where EAF
steelmaking currently represents a smaller portion of total steel production.
We believe that long-term growth prospects for the EAF steel industry remain
favorable. See Item 5, "Operating and Financial Review and Prospects-Operating
Results" and "---Trend Information".
Beginning in the 1970s, technological improvements reduced "specific
consumption", or the total mass of graphite electrodes consumed per metric ton
of steel produced. During the same period, graphite electrode manufacturing
capacity began to expand. As a result, by the mid-1980s there was significant
excess manufacturing capacity in this industry. In the late 1980s and early
1990s, graphite electrode producers began to consolidate, reducing
manufacturing capacity. As a result, supply and demand were generally in
balance during the 1990s. In the late 1990s, however, external factors began to
affect the graphite electrode industry, causing oversupply and price erosion.
These factors included the Asian financial crises of 1998-1999, the structural
crisis in the U.S. and Japanese steel industries in 2001 and worldwide
recessionary trends in 2002. In the wake of these developments, two graphite
electrode producers in Germany and the United States have become insolvent or
filed for protection under Chapter 11 of the U.S. Bankruptcy Code. In the
second half of 2002, the steel industry appeared to be recovering, causing an
upturn in demand for graphite electrodes.
Technological improvements in equipment design and production process, use
of higher quality scrap metals and other raw materials and improvements in the
size, strength and quality of graphite electrodes (including improvements
developed by the SGL Group) have increased the efficiency and reduced the cost
of EAF steel production. According to our estimates, these improved
efficiencies have reduced worldwide specific consumption from approximately 6.5
kilograms of graphite electrodes per ton of steel produced in the early 1980s
to approximately 2.3 kilograms per ton in 2002. We expect that, as the cost of
further marginal improvements in the efficiency of EAF steelmaking increases,
the rate of decline in specific consumption will grow slower. We believe that
the long-term growth potential of EAF steel will tend to offset reductions in
specific consumption, resulting in steady to slightly increased demand for
graphite electrodes over the long term.
-14-
According to our estimates, our share of the worldwide market for graphite
electrodes was approximately 19%. We believe that our regular customers for
graphite electrodes include most of the world's major EAF steel producers.
EAF steelmaking. Electric arc furnace production and blast furnace/basic
oxygen furnace production are the two primary steelmaking technologies. EAF
steelmaking operations are commonly referred to as mini-mills because their
production capacity is generally smaller than that of BF/BOF facilities.
Electric arc furnaces range in size from those producing approximately 25 tons
of steel per production cycle, or "heat", to those producing approximately 150
tons per heat. Graphite electrodes act as conductors of electricity in the
furnace, generating sufficient heat to melt scrap metal or other material used
to produce steel or other materials. EAF steelmaking is generally regarded as
more efficient and cost-effective than BF/BOF steelmaking. Although EAF
production is unlikely to replace BF/BOF altogether, a number of factors have
favored its growth at the expense of the older technology. These include lower
required investments, lower energy consumption, greater environmental
sustainability, technological advances and, in many cases, producers with a
lean and innovative corporate culture.
Since its development in the 1960s, mini-mill technology has produced a
steadily increasing portion of total steel production. Due primarily to the
cost effectiveness of EAF steelmaking, EAF steel production worldwide has grown
steadily from 100 million tons in 1972 (approximately 16% of total steel
production) to about 304 million tons in 2002 (approximately 34% of total steel
production), according to industry and SGL Group estimates. The following table
shows worldwide crude and EAF steel production in 1972, in 1980 and from 1990
through 2002.
WORLDWIDE STEEL PRODUCTION*
EAF PROPORTION OF
YEAR CRUDE1 EAF CRUDE PRODUCTION
------------------------------- ------------- ------------- -----------------
(IN THOUSANDS OF TONS) (%)
1972........................... 632,009 99,749 16
1980........................... 716,493 160,511 22
1990........................... 770,694 215,124 28
1991........................... 733,974 209,873 29
1992........................... 719,398 210,508 29
1993........................... 726,247 222,511 31
1994........................... 723,958 229,063 32
1995........................... 750,309 245,330 33
1996........................... 750,611 249,741 33
1997........................... 797,135 270,051 34
1998........................... 778,032 266,144 34
1999........................... 789,900 269,150 34
2000........................... 849,200 293,600 35
2001........................... 846,000 295,000 35
2002........................... 893,000 304,000 34
* Source: International Iron and Steel Institute, 2002.
(1) "Crude" steel production, a term used in the steelmaking industry, refers
to total steel production by all methods.
Other Carbon and Graphite products
Carbon electrodes serve as conductors of electricity in a furnace to
generate sufficient heat to reduce silicon dioxide in a continuous process. The
production of silicon metal in furnaces that use carbon electrodes involves a
process similar to that used for graphite electrodes, but at lower
temperatures. Demand for carbon electrodes is directly related to the volume of
silicon and phosphorus production. Silicon and phosphorus production, and hence
demand for carbon electrodes, have been relatively stable since the early
1990s. In 2001, demand declined by approximately 20%, primarily as a result of
the energy crisis in Brazil. Demand for carbon electrodes returned to stability
-15-
in 2002; assuming that silicon and phosphorus production remain stable, we
expect this trend to continue. Our primary markets for carbon electrodes are in
the United States, France, Norway, Australia and Brazil. We estimate that our
share of the worldwide market for carbon electrodes was approximately 31% in
2002.
Cathode blocks and other products are used to equip electrolysis cells for
the production of primary aluminum. Cathode blocks for the production of
primary aluminum are produced according to customers' specifications and
design. Hence we expect demand for cathodes to grow by 1%-2% annually, compared
to an annual increase in aluminum production of 2%-3%. We sell cathodes to
major aluminum smelters in the United States, Canada, Brazil, Norway, France,
South Africa and other countries. According to our estimates, our share of the
worldwide market for cathodes in 2002 was approximately 17%.
Carbon blocks for furnace linings are also produced in a variety of
dimensions and grades, depending on the furnace size, the position of the block
within the blast furnace and the function the block is required to perform.
They are used for bottom lining, wall protection and heat conduction in the
hotter areas of blast furnaces. A modern furnace design allows for more than 10
years of furnace operation before the replacement of the linings becomes
necessary. Our main markets for furnace linings are Europe and North America.
Furnace linings typically account for a modest portion of our business (for
example, approximately 1% of our sales revenue in 2002).
GRAPHITE SPECIALTIES
The worldwide market for graphite specialties was approximately [E]1.8
billion in 2002 (excluding China and the Commonwealth of Independent States,
for which no data are available). We estimate that, in 2002, our share of this
market was approximately 12%. Many of our customer industries, including the
chemicals industry and most areas of the electronics industry, are mature, with
growth rates at or below the overall rate of growth in the industrialized
world. The semiconductor industry and the portion of the electronics industry
serving automotive and household applications, however, are more volatile.
After a deep recession during 1998 and most of 1999, the semiconductor business
recovered in 2000, but has experienced another downturn since the beginning of
2001.
We estimate that the worldwide market for technical carbon (excluding China
and the CIS) was approximately [E]0.6 billion in 2002, and that our share of
this market was approximately 18%. We have a leading position in graphite
products for the semiconductor industry in both Europe and North America, with
an estimated 20% share of the worldwide market. The growth rate of the other
major industrial applications for technical products has historically been
closely linked to the general industrial growth rate in the United States,
Japan and Europe. The market growth rate for mechanical carbons during the last
ten years has also been in the range of his general industrial growth rate.
CORROSION PROTECTION
The Corrosion Protection business area combines the Process Equipment and
Rubber Linings business lines of our former Technik business area with the
business activities of Keramchemie, which we acquired and consolidated as of
January 1, 2000. Historically, our Process Equipment and Rubber Linings
business lines primarily served the chemicals industry. In recent years, the
chemicals industry has experienced decline. After integrating KCH, however, our
current Corrosion Protection business area has significantly broadened its
customer base, reducing its dependence on a single industry. In addition to the
chemicals industry, Corrosion Protection now serves the engineering, energy,
environmental, metals, transportation, electronics, pharmaceuticals and food
industries. We estimate the worldwide market for industrial corrosion
protection solutions to be approximately [E]2.8 billion, of which we have a
share of approximately 10%.
SGL TECHNOLOGIES
SGL Technologies, our newest business area, aims for growth in specific
niche markets, where we expect cyclicality to be generally lower than in the
customer industries of our established businesses. SGL Technologies serves a
number of diverse specialty markets with carbon fiber and carbon composite-
based solutions. The worldwide market for carbon fibers is estimated to be
approximately [E]1.0 billon. We hold established market positions in the
segments for oxidized fiber and chopped carbon fiber. In the more diverse
market segments, such as those for continuous carbon fiber, aircraft
-16-
structural components and carbon fiber reinforced plastics, our market shares
are relatively small. We also have strong market shares in certain markets for
composite materials and components, such as in rocket motor nozzles, carbon-
carbon for wet friction applications and high purity carbon felts.
We expect these markets to grow as new applications are developed. For
example, the market for high-performance carbon-ceramic brake discs is in the
initial stages of development. We believe that the market for our fuel cell
components, which are currently in the research and development phase, also has
significant potential for growth. Development of this business, and of the fuel
cell industry in general, is dependent on the achievement of significant
reductions in fuel cell production and operating costs by both SGL Technologies
and fuel cell stack manufacturers. Our increasingly important aerospace and
defense business grew by 15% last year; our U.S. subsidiary HITCO Carbon
Composites Inc has entered into a Special Security Agreement for defense
contracts with the U.S. government. This agreement makes HITCO eligible for
defense projects that are only open to U.S. companies.
PRINCIPAL PRODUCTS BY BUSINESS AREA
CARBON AND GRAPHITE
The Carbon and Graphite business area manufactures and markets graphite
electrodes and specialized carbon products such as carbon electrodes, cathodes
and furnace linings. Carbon and graphite are based on petroleum coke, coal tar,
petroleum pitch and anthracite coal, which are our primary raw materials.
Carbon and graphite have many exceptional properties that we optimize for
various applications through our manufacturing processes. See "---Manufacturing
Process and Operations". Our carbon and graphite products exhibit stability
under high temperatures, are non-corrosive and conduct heat and electricity. As
a result, these products are used in a wide range of applications.
The Carbon and Graphite business area's key products include:
* Graphite electrodes, our principal product, used primarily in electric
arc furnace or EAF steel production, the steelmaking technology used
by virtually all "mini-mills", as well as in some ladle furnaces and
foundries. Steel production requires temperatures as high as
2,760[degree] Celsius to melt scrap metal, iron ore or other raw
materials for processing. Electricity passing through our electrodes
creates an electric arc that generates these extreme temperatures. The
electrodes, which vary in size depending on the individual furnace's
requirements, are consumed regularly in the production process. We
believe we provide the full range of sizes in graphite electrodes and
that their quality is equal to, or in specific segments, better than,
that of any other manufacturer. We further believe that there are
currently no commercially viable substitutes for graphite electrodes
in EAF steel making.
* Carbon electrodes, used primarily to produce silicon metal. This
process is similar to the melting process in EAF steelmaking, though it
uses lower temperatures. Electrodes vary in size but are typically
larger than the graphite electrodes used in EAF steelmaking and require
a different manufacturing process. A typical silicon metal furnace uses
18 electrodes, consuming three of them every five days.
* Cathode blocks and related products, used to equip electrolysis cells
for the production of primary aluminum. Cathode blocks require a
significant degree of custom fitting; we produce them to our customers'
specifications and design. Newly constructed aluminum smelters tend to
require larger electrolysis cells than older facilities; we believe
that we are equipped to meet this trend in demand.
* Furnace linings, used for wall protection and heat conduction in the
hotter areas of blast furnaces used to produce liquid pig iron, an
intermediary material in the production of steel from iron ore.
Although modern furnace design allows 10 or more years of operation
before lining replacement becomes necessary, a typical furnace will
have its lining replaced a number of times over its useful life. We
produce the carbon blocks used in furnace linings in conjunction with
our production of cathode blocks.
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GRAPHITE SPECIALTIES
Our Graphite Specialties products have a wide variety of applications in
such sectors as high technology, tool manufacturing, ferrous and non-ferrous
metallurgy, high-temperature processes, chemicals, automotive, glass and
ceramics.
Our Graphite Specialties products consist of:
* technical carbons for use in high technology, including semiconductor
materials;
* mechanical carbons, machined or pressed components and graphite- filled
high-performance plastic parts; and
* electrical carbons, including machined products (such as brushes used
in electrical motors and generators) and feederstock.
Technical applications are used in laboratory and medical analytical
technology, ferrous and non-ferrous metallurgy, electrochemistry and high-
temperature technology. Semiconductor materials made from high purity graphite
and carbon-reinforced carbon are used for semiconductor fabrication. Mechanical
carbon comprises carbon and graphite components that are machined or pressed to
specified sizes and shapes and graphite-filled high-performance plastic parts.
Such mechanical carbons are mainly used in the automotive industry and in
mechanical engineering applications such as seal rings, bearings and components
for pumps. Electrical carbons are used as pantograph carbons for railways, and
brushes made of carbon, graphite and metal-graphite are used in electrical
motors and generators. Because we no longer regard machined electrical carbon
products as part of our core businesses, we have divested substantially all of
these operations.
CORROSION PROTECTION
Corrosion Protection concentrates on producing process equipment for the
treatment of aggressive or corrosive media as well as on producing and applying
rubber linings and other anti-corrosive materials such as acid-proof bricks and
coatings, engineered plastics, flakes, coatings and pumps. We have
strategically bundled the individual product areas into Corrosion Protection's
Surface Protection and Process Technology business lines to offer complete
systems and solutions for specific applications from a single source.
The Corrosion Protection business area offers engineered and packaged
solutions for industrial corrosion protection, has enhanced engineering support
to meet its customers' specific requirements, and is characterized by a high
level of investment in research and development relative to sales. The products
of the Corrosion Protection business area include rubber linings for corrosion
protection in flue gas desulphurization plants (as protection for metals or in-
depth surface protection), graphite-based heat exchangers, graphite pumps,
exotic metals, polymer coatings and floorings, tiles and bricks to protect
against corrosion. Our broad product range and our engineering and application
know-how enable us to offer comprehensive solutions in the corrosion protection
market.
SGL TECHNOLOGIES
SGL Technologies consists of six businesses lines manufacturing carbon
fibers, aerospace/defense and industrial composites, expanded graphite
(including yarns and fabrics), carbon ceramic brake discs and fuel cell
components.
Carbon fibers serve as base materials in the manufacture of products that
must be both stiff and lightweight, particularly in the aviation and aerospace
industries. We produce carbon fibers in two forms. Oxidized fibers are used in
high performance carbon-carbon aircraft brakes and racing car brakes as well as
for specialty insulation applications. Carbonized fibers are used primarily in
chopped form as reinforcement in conductive plastics, such as mobile telephone
and computer housings.
Carbon composites include carbon fiber reinforced carbon, or CFRC, and
carbon fiber reinforced plastics, or CFRP. CFRC is processed into mechanical
parts that are used in mechanical engineering, semiconductor and other high
temperature applications and in packaging in the chemicals industry. CFRP are
used in optical equipment, medical technology and the textile and wire making
industries. The composite materials and components we produce range from
relatively standard carbon or
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fiberglass reinforced plastics, used for x-ray tables and secondary aircraft
structures, to high performance, high temperature composites, used for fixtures
in vacuum heat-treated furnaces for semiconductor monocrystal production as
well as for rocket motor nozzles.
Expanded graphite consists primarily of manufactured graphite foils that
can withstand extremely high temperatures and are used in sealing applications
instead of asbestos. In addition, milled exfoliated graphite can be used for
the growing market of fillers in high-performance batteries.
We have developed new materials and components for developing high-
technology applications, such as carbon ceramics for high performance
automotive brakes and components for fuel cells. SGL Technologies began serial
production of carbon ceramic brake discs in a newly constructed plant to serve
expected increasing demand from Porsche and other car manufacturers.
SEASONALITY
Our sales revenue from graphite electrodes fluctuates from quarter to
quarter due to such factors as customer inventory levels, scheduled customer
plant shutdowns, vacations and changes in customer production schedules in
response to seasonal changes in energy costs, weather conditions, strikes and
work stoppages. In addition, customers may change their order patterns in
response to price changes. During the period prior to the effective date of a
price increase, customers tend to buy additional quantities of graphite
electrodes at the then lower price, which adds to our sales revenue during that
period. During the period following the effective date of a price increase,
customers tend to use those additional quantities before placing further
orders, which reduces our sales revenue during that period. Similarly,
customers tend to use up their inventories and delay purchases when they expect
price reductions. Sales of the Corrosion Protection business area are normally
lowest in the first quarter and highest in the fourth quarter.
RAW MATERIALS AND SUPPLIERS
The primary raw materials for graphite electrodes and graphite specialties
products are petroleum coke (needle coke for electrodes and regular grades for
specialty products), coal tar pitch and petroleum pitch. The primary raw
materials for carbon electrodes are anthracite coal and coal tar pitch and, in
some instances, a petroleum coke-based material. The primary raw material for
flexible graphite is natural graphite flake, which is obtained primarily from
China and Canada.
We purchase all of our raw materials from a variety of sources. We maintain
contacts with the ten most important petroleum coke suppliers and purchase from
most vendors on an ongoing basis to satisfy our needs in our four business
areas. We buy the most strategically important grades of needle coke for
graphite electrodes from four major producers and purchase a majority of our
needle coke requirements from multiple plants of a single major petroleum
company. Binder pitch and impregnation pitch are bought locally from eight
different binder pitch and six different impregnation pitch vendors. We have
established strong ties to these suppliers and have been cooperating with them
on the implementation of joint quality improvement and quality monitoring
programs for many years. We believe that, under current conditions, our raw
materials are available in adequate quantities at current market prices.
We purchase electric power and natural gas used in our manufacturing
processes from supra-regional linked supply systems or from local suppliers
under short-term contracts. The availability and price of raw materials and
energy may be affected by limitations imposed under new legislation or
governmental regulations, suppliers' allocations to meet the demand of other
purchasers during periods of shortage (or, in the case of energy suppliers,
extended cold weather), interruptions in production by suppliers, and market
and other events and conditions. In recent years, prices for petroleum coke
have gone through cycles of increase, decrease and stability. During this time,
we mitigated the effect of price increases by improving operating efficiency,
by implementing cost-cutting measures, and by passing price increases on to
customers.
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MARKETING CHANNELS AND CUSTOMER SERVICE
We sell our products in our local markets primarily through our direct
Sales force, which operates from the Group's sales offices and is supported by
our own customer service personnel. Export customers are serviced by the
Group's local sales organizations, or local sales representatives with the
assistance of our direct sales force. Most of these sales representatives have
worked with the SGL Group for many years.
In the Graphite Specialties, Corrosion Protection and SGL Technologies
business area, we make the majority of our sales through our specialized sales
organizations specifically dedicated to each such business. We also use
exclusive sales agents in certain locations. From time to time, the CG sales
organization also assists in sales of GS products, particularly outside of
Europe and North America.
Since we are globally oriented with a diverse customer base, we regularly
hold regional conferences to present and discuss our business strategies,
targets and philosophy with our representatives in Germany and throughout the
world. Sales to customers outside Germany accounted for 81% of our net sales in
2002. No single customer or group of affiliated customers accounted for more
than 5% of the SGL Group's net sales in 2002.
For many years, we have been strongly committed to supporting our sales
activity by providing a high level of customer service. Together with our sales
and distribution organizations, each of our customer service personnel is
specifically dedicated to one of our four business areas. In addition to
providing basic support services, we assist our customers with their technical
problems, focusing on the design and operation of production equipment (such as
EAF technology), as well as on specifications for and use of the Group's
products. Since 1992 we have established long-term cooperative arrangements
with several key customers to focus on technical challenges and product
development.
The customers in the CG Business generally place orders for electrodes
three to six months prior to the specified delivery date, as well as pursuant
to annual framework agreements with a forecasted full year demand. A customer
may cancel any such order, and we accordingly manufacture electrodes and manage
electrode inventory levels on the basis of rolling sales forecasts. Other
products, particularly in the GS, CP and SGL T Business, are generally
manufactured to order. Finished products are generally stored at our
manufacturing facilities. We ship our finished products to customers primarily
overland and by sea, using "just in time" techniques where practicable.
Proximity of manufacturing facilities to customers can provide a
competitive advantage in terms of cost of delivery of certain products to
customers. The significance of these costs is affected by fluctuations in
exchange rates, methods of shipment, import duties and whether the
manufacturing facilities are located in the same economic trading region as the
customer.
DEPENDENCE ON PATENTS OR LICENSES, INDUSTRIAL, COMMERCIAL OR FINANCIAL
CONTRACTS
We own over 280 patents registered in the United States, Europe and in
other major world markets, and have over 300 patent applications pending for
new technologies and processes. In addition, we have obtained licenses to
various domestic and foreign patents. These patents, patent applications and
licenses are, in the aggregate, important to our competitive position, and the
loss of a great number of patents worldwide could have a material adverse
effect on our business. However, we believe that we are not currently dependent
on any individual patent or license or group of patents or licenses.
We enter into industrial, commercial and financial contracts with a number
of parties throughout the world and consider our relationships with these
counterparties to be sound and productive. However, we also have a policy of
locating alternative sources for all of our industrial, commercial and
financial needs, and thus we believe that we are not dependent on our existing
industrial, commercial or financial contracts.
MANUFACTURING PROCESSES AND OPERATIONS
The manufacture of graphite electrodes takes, on average, approximately two
months. Graphite electrodes range in size from three inches to 32 inches in
diameter and two feet to nine feet in length and weigh between 20 pounds and
4,800 pounds (2.2 metric tons). Carbon electrodes, cathodes and
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furnace linings are manufactured in a process comparable to that for graphite
electrodes, except that impregnation and graphitization are used only for
particular grades of cathodes and furnace linings. For these products we also
manufacture "green" material with vibro moulding techniques.
The manufacture of graphite electrodes involves the following six primary
processes.
FORMING -- Calcined petroleum coke is crushed, screened, sized and blended
in a heated vessel with coal tar pitch, applying highly specialized
techniques. The resulting plastic mass is extruded through a forming press
and cut into cylindrical lengths (called "green" electrodes) before cooling
in a water bath.
BAKING -- The "green" electrodes are baked at approximately 900[degree]
Celsius in specially designed furnaces to further carbonize the pitch.
After cooling, the electrodes are cleaned, inspected and sample-tested.
IMPREGNATION -- Baked electrodes are impregnated with a special pitch when
higher density, mechanical strength and capability to withstand higher
electric currents are required.
REBAKING -- The impregnated electrodes are rebaked to "coke out" the pitch,
thereby adding strength to the electrodes.
GRAPHITIZING -- The rebaked electrodes are heated in longitudinal electric
resistance furnaces at approximately 3,000o Celsius to restructure the
carbon to its characteristically crystalline form, graphite. After this
process, the electrodes are gradually cooled, cleaned, inspected and
sample-tested.
MACHINING -- After graphitizing, the electrodes are machined to comply with
international specifications governing outside diameters, overall lengths
and joint details. Tapered sockets are machine-threaded at each end of the
electrode to permit the joining of electrodes in columns by means of
correspondingly double-tapered machine-threaded graphite connecting pins.
The production of the variety of graphite specialties grades generally
follows the process described above, but uses additional forming techniques
(such as isostatic and die molding), additional treatments like purification
and more intricate machining. Specialty graphite products use different
mixtures of raw materials due to fine grain formulations and different
processing time periods.
Expanded graphite is made from mined natural graphite flake, which is acid-
treated, heat-treated and rolled into sheets of desired thickness and width and
produced in highly specialized production lines. Fibers and composites that use
polymer raw materials also require highly sophisticated and highly specialized
facilities in addition our main production lines for carbon and graphite
products. The manufacture of graphite fibers and composites also relies upon
our high temperature technology expertise.
We use statistical process controls in all manufacturing processes and have
implemented a teamwork and quality management program that involves continuous
in-house training. We generally warrant to our customers that our products will
meet the SGL Group's and the customers' specifications. With the exception of
1997, in which we conducted a recall of graphite electrodes in North America
due to a defect in a new piece of production equipment at one of our U.S.
production sites, electrode returns and replacements have historically amounted
to approximately 1% of sales revenue
COMPETITIVE POSITION OF THE SGL GROUP
The carbon and graphite products industry is highly competitive.
Competition is based primarily on price, product quality and customer service.
There are approximately 10 to 15 major manufacturers of carbon and graphite
products worldwide. Of these manufacturers, the SGL Group is the largest, and
GrafTech International Ltd. (formerly UCAR International Inc.) is the second
largest, based on 2002 net sales.
Carbon and Graphite
For graphite electrodes, our principal product, there are approximately 10
to 15 major manufacturers worldwide. GrafTech and the SGL Group are the largest
of these manufacturers on basis of metric tons produced. Other producers
include The Carbide/Graphite Group in the United
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States, four Japanese manufacturers and several manufacturers in India and
China. We estimate that GrafTech's share of global market for graphite
electrodes was approximately 20% in 2002, followed by the SGL Group with a
market share of 19%, The Carbide/Graphite Group with 4% and the four Japanese
manufacturers with an aggregate of 18%.
We believe that we are the largest manufacturer of carbon electrodes
worldwide, with GrafTech second largest. According to our estimates in 2002 we
supplied approximately 31% of the worldwide market for carbon electrodes, while
GrafTech supplied 25%.
Some ten manufacturers compete in the global market for cathodes for the
aluminum industry. We believe GrafTech supplied approximately 18% of this
market in 2002, while we supplied approximately 17%. Other major manufacturers
include Erft Carbon GmbH, Nippon Denkyoku K.K. (NDK), SEC Corporation and
VESUVIUS. We believe that none of these other manufacturers reached a market
share of more than 10% in 2002.
Graphite Specialties
The graphite specialties market is served by many competitors with
different product ranges and value-added segments. We believe that
globally-oriented international companies including the SGL Group as well as
Morgan Crucible Company plc, Le Carbone Lorraine S.A., Schunk Gruppe, GrafTech
and Toyo Tanso Company, account for only about two thirds of the total market
volume worldwide (excluding China and the CIS, for which limited data are
available). A significant part of the market is served by small, local machine
shops, which machine and finish goods supplied to them by the major graphite
producers in a semi-finished state. We believe that we have leading positions
in the supply of graphite and CFC products to the semiconductor and technical
carbon industry in Europe and North America.
Corrosion Protection
We estimate that the worldwide market for industrial corrosion protection
is approximately [E]2.5 billion, of which we have an approximately 10% share.
This market is highly fragmented with many locally-oriented, often family-owned
smaller companies. The key competitors in the market for carbon-based process
equipment applications are Le Carbone Lorraine and Carbon Everflow (India).
Companies such as Tip Top and Ohji are competitors in the rubber-linings
market, while Steuler and Stebbins are key competitors in the market for
ceramic bricks and tiles. We believe, however, that we are the only company
that supplies all heavy corrosion protection market segments with complete
systems.
SGL Technologies
The competitors of our SGL Technologies business area are carbon based
advanced material and composites companies. Our main competitors for fiber
products are Zoltek, Fortafil and several Japanese producers. In the market
segments for carbon composites the key competitors include Thiokol, Hexcel,
ATPX and Cytec. Key competitors in expanded graphite are GrafTech and Le
Carbone Lorraine.
GOVERNMENT REGULATION
Our domestic and international manufacturing facilities and operations are
subject to numerous environmental laws and regulations as well as
administrative orders relating to alleged prior violations of laws or
regulations. These legislation and orders could require us to install
additional controls for certain emission sources or to change our manufacturing
processes in future years. We believe we possess all material permits necessary
for the current operation of our facilities. Although we believe that we are
currently in material compliance with applicable laws, regulations and permits,
our operations, like those of our competitors, involve certain environmental
risks.
We seek to minimize environmental risk by developing, implementing and
improving material resources, production and abatement techniques. Using
advanced techniques, we aim to improve working conditions and reduce the
environmental impact of our own operations and those of our customers'
businesses. Our goal is to comply with the European Union's Integrated
Pollution Prevention and Control (IPPC) directive while at the same time
creating economically and technically viable conditions to assure long-term
competitiveness. We augment the efforts of our internal auditors,
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research and development team and operations supervisors with periodic, active
cooperation with national and international state agencies and organizations.
We are currently adjusting the organization of our environmental team to create
an integrated Environmental, Health & Safety Audit (EHSA) management system
tailored to the demands of our industry. Our goal, which we believe we are
approaching, is to achieve certification under ISO 14000, generally recognized
as the highest standard in this field. We use our system of continuous EHSA
risk assessment in our efforts to achieve permanent, sustainable improvements
in performance.
International regulations govern the transportation of hazardous goods. Air
pollution, wastewater, solid waste and occupational health and safety are
generally regulated by national laws. In the European Union, these areas are
generally covered by EU directives and guidelines. In particular, the EU's IPPC
directive requires certain industries, including the carbon and graphite
industry, to implement advanced techniques. The IPPC directive does not itself
create binding regulation. Rather, it serves as a framework for regulators in
the EU member states in establishing national regulations. Although national-
level implementation of the IPPC directive may lead to more restrictive
national environmental regulations, based on our experience in Germany we
believe that national regulations based on the IPPC directive will tend to be
more lenient than those proposed in the directive itself. We believe that we
are in compliance, or in the process of achieving compliance, with the
heightened requirements of IPPC directive-based regulation.
In Germany we are subject to environmental laws and regulations including
the Federal Pollution Control Act, the Water Resources Management Act and the
Waste Act. Under these statutes and their related bodies of regulation, the
authorities may inspect our production sites every one to three years. We must
also comply with the Plant Security Act, the Employment Security Act,
Regulations for the Prevention of Accidents and the Toxic Substances Control
Act (which includes technical regulations on hazardous substances) and the
Dangerous Chemicals Ordinance.
Similar laws are already in force in Austria, Italy and a number of other
EU countries; France and Spain are in the process of adopting new laws to
comply with EU requirements. We expect that most European national
environmental laws and regulations will be replaced over the near- to
medium-term by common EU requirements (or by national regulations based on EU
directives). National governments will remain free to adopt requirements
stricter than those required by the EU.
In the United States we are subject to environmental requirements including
those imposed by the Clean Air Act, the Clean Water Act, the Resource
Conservation and Recovery Act, the Safe Drinking Water Act and similar federal,
state and local laws regulating air emissions, water discharges and solid and
hazardous waste generation, storage, transportation and disposal. The
Comprehensive Environmental Response, Compensation and Liability Act of 1980
(Superfund) and similar state laws can impose joint and several liability for
releases of hazardous substances into the environment, without regard to fault
or the lawfulness of the original activity. Categories of potentially
responsible parties can include current or former owners and operators of a
contaminated site and companies that generated or sent waste to a site. The
Toxic Substances Control Act and related laws are designed to assess the risk
to health and the environment of new products at early developmental stages. In
addition, laws adopted or proposed in various states impose reporting or
remediation requirements if historical contamination is discovered, operations
cease or property is transferred or sold. We believe that we are currently in
material compliance with applicable U.S. laws and regulations.
From time to time we have received claims seeking environmental cleanup or
similar costs with respect to properties that we or others currently or
previously owned or operated. We believe that the extent of contamination and
our liability, if any, arising from such claims will not have a material
adverse effect on our financial condition or results of operations.
We have established and continue to establish accruals for environmental
liabilities where it is probable that a liability has been incurred and the
amount of the liability can be reasonably estimated. We adjust accruals on a
periodic basis as we make new remediation commitments or receive information
indicating that previous estimates should be changed. We believe that, taking
into account our environmental accruals, our current environmental liabilities
will not have a material adverse effect on our financial condition or results
of operations.
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Estimates of future costs of environmental protection are necessarily
imprecise. Uncertainties affecting these estimates include the impact of new
laws and regulations, the availability and application of new and diverse
technologies and the extent of insurance coverage. Subject to this inherent
imprecision, on the basis of our experience in managing environmental matters
we believe that costs and capital expenditures related to environmental
protection over the next several years will not have a significant impact on
our financial condition or results of operation.
ORGANIZATIONAL STRUCTURE
As a management holding company, SGL is legally separate from its various
operating subsidiaries in the SGL Group. SGL's Executive Committee, however,
provides overall strategic direction and monitors the operations of the Group.
Individual members of the Executive Committee also have direct responsibility
for specific operational areas on a business area, function or regional basis.
See Item 6, "Directors, Senior Management and Employees---Directors and Senior
Management---Executive Committee".
Our operational business is managed by business areas. At the beginning of
2002, we combined the former regional business units of Carbon and Graphite and
Graphite Specialties into global business areas to improve efficiency and
respond to the increasing globalization of our key customers. With this change,
all four of our business areas---Carbon and Graphite, Graphite Specialties,
Corrosion Protection and SGL Technologies---are now organized on a global
basis. Our organizational structure is thus identical with our segment
reporting by business areas.
Our production sites and Group companies are managed by the relevant
business area (or, in the case of multi-business area sites, by a management
committee). The boards of directors of individual Group companies have
responsibility for those companies' legal and financial affairs. Centralized
corporate functions support the Executive Committee and provide services to all
business areas and to individual legal entities within the Group.
PRINCIPAL SUBSIDIARIES
The following table lists the principal direct and indirect subsidiaries of
the SGL Group as of December 31, 2002:
OWNERSHIP
COMPANY NAME LOCATION BUSINESS AREA INTEREST %
-------------------------------------- --------------------- ------------- ----------
SGL Carbon LLC........................ Charlotte, NC CG, GS, SGL T 100.0
HITCO Carbon Composites Inc........... Gardena, CA GS, SGL T 94.0
SGL Technic Inc....................... Valencia, CA GS, SGL T 100.0
SGL Carbon GmbH....................... Meitingen, Germany CG, GS 100.0
SGL Technic SA........................ Grenoble, France GS, CP 100.0
SGL Canada Inc........................ Lachute, Canada CG 100.0
SGL Carbon SpA........................ Milan, Italy CG 99.7
SGL Carbon SA......................... La Corupa, Spain CG 99.9
SGL Carbon SA......................... Nowy Sacz, Poland CG 100.0
SGL Carbon GmbH & Co.................. Steeg, Austria CG 100.0
ZEW Zaklady Electrod Weglowych SA..... Ratibor, Poland CG 97.2
SGL Carbon SA......................... Chedde, France GS 100.0
SGL Acotec GmbH....................... Siershahn, Germany CP 100.0
SGL Technologies GmbH................. Meitingen, Germany SGL T 100.0
SGL Technic Ltd....................... Muir of Ord, Scotland SGL T 100.0
SGL Carbon Beteiligung GmbH*.......... Wiesbaden, Germany Corporate 100.0
* SGL Carbon Beteiligung GmbH is a 100% subsidiary of SGL Carbon AG that serves
as a holding company for various other subsidiaries in the SGL Carbon Group.
PROPERTY, PLANTS AND EQUIPMENT
As of December 31, 2002, we operated 40 major manufacturing facilities
worldwide of which 36 are located in Europe and North America. As part of the
restructuring program announced in December 2001, we closed or idled three
plants during 2002. Effective January 2003, we sold our
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Berlin, Germany manufacturing facility and, in March 2003, sold our land and
building in Milan, Italy. We also have other properties, including office
buildings, research laboratories and warehouses, primarily in Germany and the
United States. We own most of our manufacturing facilities and other
properties.
We are harmonizing our manufacturing processes throughout the Group to
permit global sourcing from all locations with consistent and interchangeable
quality levels. We produce electrodes in the United States, Canada, Germany,
Italy, Spain, Austria and Poland. Carbon electrode production is concentrated
in Italy and cathodes and furnace linings are manufactured in Germany and
Poland. Our feeder stock for specialty graphite products is manufactured in
Germany, France and the United States. In Europe, we have further optimized
production by concentrating extruded, molded and isostatic pressed graphite
product grades in the facilities best suited for this work. We have taken
similar restructuring measures in North America, discontinuing manufacture of
molded and isostatic products in the United States. We produce most of our
corrosion protection materials in Germany, with additional production
facilities in France, the United States, Brazil, Singapore, Italy, United
Kingdom and China. About four-fifths of our fibers and composites are
manufactured outside of Germany, primarily in the United States and the United
Kingdom.
We conduct major maintenance of our facilities on an ongoing basis. We
currently have capacity to manufacture approximately 280,000 metric tons of
heavy carbon and graphite products annually (excluding graphite specialties).
This capacity includes approximately 215,000 metric tons of graphite
electrodes. In 2002, we sold approximately 173,000 metric tons of graphite
electrodes compared with 175,000 metric tons in 2001. We also sold 22,000
metric tons of carbon electrodes in 2002, an increase from the 17,000 metric
tons we sold in 2001.
As of December 31, 2002 we operated the following major facilities
PRIMARY USE
------------------------------------------------------- OWNED/
LOCATION MANUFACTURING SALES ADMINISTRATION BUSINESS AREA LEASED
------------------------- ------------- ----- -------------- ----------------- ------
EUROPE
Wiesbaden, Germany(1).... x Corporate Leased
Meitingen, Germany....... x x x CG, GS, CP, SGL T Owned
Berlin, Germany(3)....... x GS Leased
Griesheim, Germany(4).... x CG Owned
Bonn, Germany............ x x GS Owned
Siershahn, Germany....... x x CP Owned
Bornum, Germany.......... x x CP Leased
Leuna, Germany........... x x CP Owned
Augsburg, Germany........ x Corporate Leased
Steeg, Austria........... x x CG Owned
Milan, Italy(2).......... x x CG Leased
Milan, Italy............. x x x GS Owned
Pero, Italy.............. x x x CP Owned
Narni, Italy............. x CG Owned
Ascoli Piceno, Italy..... x CG Owned
Chedde, France........... x x GS Owned
Houdain, France.......... x x CP Owned
Grenoble, France......... x x CP Owned
La Coruna, Spain......... x x x CG Owned
Ratibor, Poland.......... x x CG Owned
Nowy Sacz, Poland........ x x CG Owned(4)
Nowy Sacz, Poland........ x x GS Owned
Inverness, Scotland...... x x SGL T Owned
Alcester, England........ x x GS Leased
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PRIMARY USE
------------------------------------------------------- OWNED/
LOCATION MANUFACTURING SALES ADMINISTRATION BUSINESS AREA LEASED
------------------------- ------------- ----- -------------- ----------------- ------
Sandbach, England........ x x CP Owned
NORTH AMERICA
Charlotte, North
Carolina(5)............ x x CG, GS Owned
Morganton, North
Carolina............... x CG Owned
Hickman, Kentucky........ x CG Owned
Ozark, Arkansas.......... x CG Owned
Niagara Falls, New York(6) x GS Owned
Valencia, California..... x x x SGL T, GS Owned
Lachute, Quebec, Canada.. x x x CG Owned
Kitchener, Ontario,
Canada................. x x GS Leased
St. Marys, Pennsylvania.. x x GS, SGL T Owned
Strongsville, Ohio....... x x CP Owned
Houston, Texas........... x CP Owned
Arkadelphia, Arkansas.... x SGL T Leased
Robesonia, Pennsylvania.. x GS Leased
Womelsdorf, Pennsylvania. x GS Leased
Gardena, California...... x x x SGL T, GS Owned
Cheshire, Connecticut.... x GS Leased
Brecksville, Ohio........ x x CP Leased
REST OF WORLD
Mexico City, Mexico...... x x CP Leased
Wuhan, China............. x x CP Leased
Singapore, Singapore..... x x CP Leased
Guarnlhos, Brazil........ x x CP Owned
__________
(1) Corporate Headquarters
(2) Head Office, Italy
(3) Sold effective January 2003
(4) Hereditary building right (Erbbaurecht) under German law, comparable to a
long-term ground lease
(5) Head Office, North America
(6) Idled
As of December 31, 2002 we had not created any material encumbrances on our
property other than customary security interests created in connection with
their purchase. In connection with our recent refinancing we have encumbered a
number of our properties; see Item 10, "Additional Information -- Material
Contracts". We believe that our facilities, which are of varying ages and types
of construction, are in good condition, are suitable for our operations and
generally provide sufficient capacity to meet our requirements for the
foreseeable future.
-26-
ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS
You should read this discussion together with our consolidated financial
statements, including the Notes thereto, as well as the other financial
information contained elsewhere in this annual report. We have prepared our
consolidated financial statements in accordance with IFRS. There are
significant differences between IFRS and U.S. GAAP. These differences could be
material to the financial information in this annual report. For a discussion
of the significant differences between IFRS and U.S. GAAP as they relate to the
SGL Group, see "--Significant Differences between IFRS and U.S. GAAP" as well
as Notes 34 and 35 to our consolidated financial statements.
This discussion includes forward-looking statements within the meaning of
the U.S. Private Securities Reform Act of 1995. These forward-looking
statements are subject to risks, uncertainties and other factors that could
cause our actual results to differ materially from those expressed or implied
by our forward-looking statements. See "Forward-Looking Statements".
OVERVIEW
The SGL Group manufactures carbon and graphite products. We manufacture
graphite and carbon electrodes and cathodes, used primarily in EAF steel
production and aluminum smelting. We also manufacture natural and synthetic
graphite products for, and provide services in connection with, a variety of
industrial applications world-wide. Our customers are located in industrialized
countries throughout in the world. In 2001, we sold products in approximately
100 countries, with sales outside Germany accounting for approximately 81% of
our sales revenue. We operate manufacturing facilities in 13 countries.
BUSINESS REALIGNMENT
We manage our operations in business areas that reflect the products that
we produce and market. During 2001 we restructured our organization into the
four current business areas--Carbon and Graphite, Graphite Specialties,
Corrosion Protection, and SGL Technologies. As of January 1, 2002 we
reclassified our European foils business from Graphite Specialties to SGL
Technologies. The discussion for 2001 and 2000 that follows reflects this
reorganization.
COST REDUCTION PROGRAM
In 2001 we announced a major cost reduction and restructuring program,
which includes significant cost containment measures and other steps to
increase our financial results and cash flows from operations. As part of this
restructuring program, we reduced our total number of employees by 837, from
8,197 at the end of 2001 to 7,360 at the end of 2002. In addition, we plan to
achieve further cost savings through our SGL Excellence initiative, through
which we train our managers in Six Sigma methods to identify other
cost-reduction measures. In 2002, we incurred costs of approximately [E]2.3
million relating to SGL Excellence. In that year, we achieved savings of more
than [E]4.0 million that we attribute to this initiative, and expect to achieve
further sustained savings of approximately [E]3.0 million in each subsequent
year as a result. The total non-recurring charges that we expect to incur in
connection with our various restructuring and cost reduction initiatives amount
to [E]41.0 million on a pretax basis in 2001, of which we incurred
approximately [E]15.0 million as cash expense in 2002. In addition, we
identified a number of additional plant and overhead cost reduction projects
during 2002, which generated an expense of [E]8.3 million in 2002.
CURRENCY EXCHANGE EXPOSURE
We invoice our sales primarily in U.S. dollars and in euro. The remainder
of our sales is denominated principally in other western European currencies
(primarily sterling and the Polish zloty). Purchases of our principal raw
material--petroleum coke, which on average comprise approximately 25% of the
total production costs of our Carbon and Graphite business area--are
denominated in U.S. dollars. Our other principal production costs, labor and
energy, are denominated in the currency of the country in which the relevant
production facilities are located. We currently operate our main manufacturing
facilities in Europe and North America.
Fluctuations in currency rates, especially between the dollar and the euro,
can influence our financial results. Through early 2001, the value of the
dollar generally increased relative to the euro. The relative strength of the
dollar positively impacted our operating results. In early 2002, the value
-27-
of the dollar began to decline relative to the euro. If this decline continues,
we expect that it would have several effects on our financial results, some of
which could offset others. In addition to the dollar- and euro-denominated
revenue and expense items discussed above, we also have major assets and
liabilities in the United States or denominated in dollars, including antitrust
liabilities and dollar-denominated debt. Fluctuations in the euro-dollar
exchange rate can cause translation effects in the SGL Group's consolidated
balance sheet. A continued increase in the value of the euro relative to the
dollar would tend to reduce our antitrust-related expenses as well as expenses
related to dollar-denominated debt. On the other hand, it would also tend to
reduce the contribution of our U.S. businesses to our consolidated results of
operations. A stronger dollar will tend to increase our non-current and current
assets as well as equity and liabilities, whereas a weaker dollar rate will
tend to decrease assets, equity and liabilities. The ultimate impact of
currency exchange rate fluctuations on our net income will depend on the
circumstances at any given time.
SALES REVENUE
We generate revenue primarily through the manufacture and sale of carbon
and graphite products to customers from several industries, including
steel-making, aluminum smelting, chemicals, manufacturing and electronics. Our
revenue from trading and other sources is not significant.
Our consolidated sales revenue reflects net sales, that is, sales revenue
after elimination of intersegment sales. The following table shows our sales
revenue and its year-on-year change for the SGL Group on a consolidated basis
as well as by business area and geographical region from 2000 to 2002.
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------
2002 2001 2000
-------------------------- --------------------------- ----------------
([E]IN MILLIONS) (% CHANGE) ([E] IN MILLIONS) (% CHANGE) ([E] IN MILLIONS)
SGL Group consolidated total 1,112.3 (9.8) 1,233.3 (2.3) 1,262.5
By business area:
Carbon and Graphite ....... 550.7 (11.1) 619.8 0.0 619.5
Graphite Specialties * .... 195.9 (15.1) 230.7 (4.7) 242.0
Corrosion Protection ...... 212.4 (9.9) 235.8 (4.7) 247.3
SGL Technologies * ........ 150.3 11.3 135.1 (11.0) 151.8
Other....................... 3.0 (74.8) 11.9 526.3 1.9
By geographical region:
Germany ................... 216.6 (12.0) 246.0 2.1 241.0
Rest of Europe ............ 373.8 (8.7) 409.2 13.8 359.6
North America ............. 281.6 (10.8) 315.8 (19.2) 390.6
Rest of World ............. 240.3 (8.4) 262.3 (3.3) 271.3
__________
* As of January 1, 2002, we reclassified the European graphite foils business
from Graphite Specialties to SGL Technologies. Sales for 2000 and 2001 have
been adjusted to reflect this reclassification.
We recognize sales revenue at the time of transfer of risk to the
purchaser, generally after delivery of the products or the rendering of the
services and net of any discounts and rebates. We record most of our sales
revenue through invoices under purchase contracts with major industrial
customers, with the timing of revenue recognition dependant on the specific
terms of these contracts. If product sales are subject to customer acceptance,
we do not recognize revenue until the customer accepts the product. We do not
account for any sales under the "percentage of completion" method. See "--
Critical U.S. GAAP accounting policies -- Revenue Recognition".
Our sales revenue from graphite electrodes fluctuates as a result of
changes in customer purchasing patterns due to shifts in inventory levels and
production schedules, plant shutdowns and vacations as well as in response to
energy cost fluctuations, adverse weather conditions, strikes and work
stoppages. Due to the long production cycles for graphite products and
fluctuations in order patterns and inventory levels within customer industries,
there is often a considerable time lag between changes in demand for customer
products and any impact on our businesses. In addition, our
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customers frequently alter their ordering patterns as a result of, or in
anticipation of, price changes for our products. Just prior to the
effectiveness of an announced price increase, customers tend to build their
inventories of graphite electrodes, which boost our sales revenue during that
period. Immediately after a price increase, customers typically deplete these
stocks, which reduces orders and sales revenue during that period. Similarly,
when customers anticipate price reductions, they will tend to deplete their
stock and delay orders. Sales of the Corrosion Protection business area tend to
be seasonal, with the highest sales in the fourth quarter and the lowest sales
in the first quarter each year.
Over the last decade, we have significantly broadened the geographical
distribution of our sales revenue. In particular, a decline in North American
steel production has reduced our sales revenue in that market, while
consolidation of our Polish subsidiary ZEW in 2001 has increased the percentage
of our sales revenue generated in Europe. We have also significantly increased
our sales revenue in Asia, a trend that we expect to continue in the next few
years with the continuing industrialization of eastern and southern Asia. We
believe that our broad product portfolio across many industries and the global
distribution of our business reduces our exposure to economic cyclicality in
any one region or customer industry. In particular, and although results may
vary in any given period,. Graphite Specialties' large number of target
industries enables it to diversify, thereby reducing exposure to economic slow-
down in any one key industry. Following the integration of KCH and the
organization of Corrosion Protection in its current form, we believe that this
business area is also better diversified than in its earlier form, in which it
was significantly dependent on the chemicals industry.
COST OF SALES
Major components of cost of sales include personnel expenses, the cost of
raw materials and energy and other variable and fixed costs. Personnel
expenses, including wages, salaries, social security and pension expense, are
the most significant items in our cost of sales. Raw material cost in the
Carbon and Graphite business area consists primarily of purchases of petroleum-
based needle coke and coal tar binder and impregnation pitch. Historically, we
have not had difficulty obtaining these raw materials. In addition, we incur
substantial energy costs, primarily for electricity, in connection with the
production of our graphite electrode and other carbon products. The production
of these products is energy intensive and energy costs over the last several
years have been highly volatile. Graphite Specialties production uses similar
raw materials as well as additional forming techniques, treatments and
combinations of other raw materials. Our cost of sales includes straight-line
depreciation of property, plant and equipment having estimated useful lives
ranging from four to 41 years. In the periods discussed below, raw material and
energy prices have generally increased, reducing our gross profit margin
(calculated as sales revenue less cost of sales, divided by sales revenue).
SELLING EXPENSES
Our selling expenses consist primarily of the sales organization expenses
as well as distribution expenses, such as packaging materials, freight charges
and sales commission expenses. We include in sales organization expenses wages
and salaries, social security, pension expense, office space and expenses, in
each case related to our sales force. Selling expenses typically comprise about
13% of sales revenue. We expect this percentage to remain relatively stable or
to decrease slightly as a percentage of sales revenue.
RESEARCH COSTS
We incur research costs in connection with the development of new materials
and compounds for high technology applications, such as carbon ceramics for
high performance automotive brakes and components for fuel cells. In recent
years, this expense has increased as a percentage of our sales revenue. We have
invested considerable amounts in carbon ceramics technology and commenced
production of carbon -ceramic brake discs at our plant in Meitingen, Germany in
July 2002. Another principal area of research expense has been the development
of a fuel cell components business, which is currently in the research phase.
We expect our research costs to remain stable or to decrease as a percentage of
sales revenue in the next few years.
-29-
GENERAL AND ADMINISTRATIVE EXPENSES
Our general and administrative expenses comprise personnel and
non-personnel costs attributable to headquarters and other administrative
centers, including accounting, legal and regulatory expenses and pension
expense related to administrative personnel. In recent years, the main factors
contributing to these expenses have included overhead attributable to our
consolidated subsidiaries and strategic technology projects related to the
development of a common management information system platform, conversion of
our information systems to the euro and external consulting expenses related to
acquisitions and other corporate projects. While we expect the significance of
these and similar expenses to vary from period to period, we would expect
aggregate general and administrative expenses to remain stable or to decrease
as a percentage of sales revenue in the future.
OTHER OPERATING INCOME (NET)
The major components of other operating income (net) are amortization of
goodwill from acquisitions, insurance payments received, exchange gains and
losses from operating activities, gains and losses from sales of property,
plant and equipment, bank charges and income and/or loss from the adjustment of
accruals and provisions.
COSTS RELATING TO ANTITRUST PROCEEDINGS
We record costs relating to antitrust proceedings as a separate item in our
statement of operations. On May 3, 1999 we pleaded guilty to charges of price
fixing raised at the initiative of the U.S. Department of Justice. As a result,
we are obligated to pay $135 million in fines and have guaranteed the payment
of an additional $10 million in fines payable by the Chairman of our Executive
Committee over the next six years. We have subsequently settled most of the
claims arising from related civil lawsuits alleging damages from the activities
upon which the DOJ's antitrust action was based. We believe that we will reach
economically reasonable settlements in the remaining civil lawsuits. In April
2002, SGL reached an agreement with the DOJ revising the payment schedule for
the antitrust penalties assessed in 1999. This agreement extended the payment
period for this liability until 2007, delaying payment of $50 million of the
remaining $65 million liability from 2002 and 2003, as contemplated under the
original payment plan, to 2004 through 2007 under the revised payment plan.
In mid-July 2001, the European Commission imposed a fine of [E]80.2 million
for alleged anti-competitive practices in the graphite electrodes market. We
believe that the amount of this fine is unjustified. In particular, we believe
that the European Commission is assessing fines twice for certain alleged
violations. We have filed an appeal against the Commission's decision. Payment
of the fine has been suspended pending final judgment in the appeal. Appeals of
this type may take two years or longer to be decided. Appellants must typically
provide security for the amount of the contested fine when filing an appeal. We
have used funds drawn under the Term B Facility of our new syndicated credit
facility to provide this security.
See "--- Liquidity and Capital Resources --- Overview of Bank Debt and Cash
Flows".
RESTRUCTURING EXPENSES
We present major restructuring expenses separately in our statement of
operations. These expenses include plant closure costs, expenses for workforce
reduction and write-downs on plant, equipment and inventory.
NET FINANCING COSTS
The components of our net financing costs include net interest expense and
other net financing costs, including the non-cash currency impact of antitrust
liabilities and other non-cash financing costs. Net interest expense includes,
among other things, interest expense on loans, the interest component of
appropriations to pension provisions and accrued interest on liabilities from
antitrust proceedings. Other recurring non-cash related net financing costs
include the interest component of appropriations to pension provisions.
-30-
When the DOJ imposed a fine on SGL Carbon in connection with an antitrust
investigation, we discounted the resulting antitrust fine to its net present
value and recorded this amount as a liability on our balance sheet. This
antitrust liability resulted in a positive, non-cash reduction in financing
costs in 1999. In each succeeding reporting period, we have recalculated the
net present value of this liability, which has resulted in a regular imputed
interest expense for each such period. In the first half of 2002, we agreed to
an amended fine payment schedule with the DOJ. This amended payment schedule
resulted in a one-time reduction in our net financing costs due to a reduction
in the net present value of the outstanding antitrust liability.
Because the antitrust liability is denominated in dollars, changes in the
euro/dollar exchange rate from period to period may give rise to transaction
and translation effects on our balance sheet. To reduce the resulting exposure
to currency exchange rates, we hedge the antitrust liability using currency
options. However, we retain exposure to non-cash adjustments in the amount of
the antitrust liability, which we record at the end of each reporting period in
other net financing costs. As a result of the financing of antitrust-related
payments, the funding of our brake disc and fuel cell component businesses and
the acquisition of KCH and ZEW, our interest expense has increased
significantly in recent years. We expect that, as a percentage of sales revenue
in future periods, net interest expense will increase due to our new syndicated
credit facility, which we expect to have a higher stated interest rate than the
credit facilities it refinanced. See Item 10, "Additional Information--Material
Contracts". This increase should be offset, in part, by a decrease in accrued
interest on liabilities from antitrust proceedings as we pay off those
liabilities as well as by further reductions in our net financial debt.
INCOME TAX BENEFIT (EXPENSE)
Tax expenses include current and deferred income tax expenses. Our income
tax expense reflects income tax liability in respect of pre-tax earnings from
our consolidated group companies that cannot be set off against existing loss
carryforwards or other tax credits. Deferred tax income and expense result from
the capitalization or write-down of tax loss carryforwards to deferred tax
assets and also arise as a result of temporary differences between the carrying
amounts of assets and liabilities in financial statements prepared under IFRS
as compared to tax accounts prepared using the liability method. We recognize
on a consistent basis deferred tax assets on tax loss carryforwards based on
internal projections. These projections reflect uncertainties concerning
assumptions and other general conditions.
When we first prepared IFRS (then IAS) annual financial statements, we
retrospectively adjusted our recognition of deferred tax assets on tax loss
carryforwards previously booked in the United States for the reporting periods
covered. These adjustments resulted in changes in the amounts of deferred tax
assets reported in 2000 as compared with amounts previously reported in
published quarterly reports. In 2001, we wrote down the full amount of deferred
tax assets on tax loss carryforwards as a consequence of the recession in the
United States and the weak economic situation of the U.S. steel industry, our
principal customer for graphite electrodes. To ensure a comparable basis for
earnings projections prepared at the end of 2000 with respect to the uncertain
U.S. economy and the U.S. steel industry, in particular, we shortened the time-
frame used as a basis for recognizing U.S. deferred taxes as of the end of
2000. This resulted in a non-cash adjustment in the value of deferred tax
assets as of the end of 2000 and 2001 and an increase in our income tax expense
in each of those years.
Until fiscal year 2000, the German Corporation Tax Act used a full
imputation system with split tax rates for the taxation of corporate income of
German companies. Under this system, once a dividend was distributed, the
corporation tax payable by the distributing company with respect to such
dividend was reduced (the "split tax rate"). German-domiciled shareholders
entitled to offset corporation tax were able to claim a tax credit in the
amount of the corporation tax originally paid by the distributing company (the
so-called "corporation tax imputation procedure"). The German Tax Reduction Act
came into effect in January 2001. Under this statute, net profits of German
companies became subject to a standard 25% rate of corporation tax, plus a
solidarity surcharge of 5.5% on the corporation tax rate. The aggregate German
corporation tax rate for 2001 was 26.4%, and the trade tax rate was 12%. As a
result of the German Tax Reduction Act, all deferred tax items not realized
-31-
until after January 1, 2001 are measured at an average tax rate of 38.4%. We
recognized the effect of this change in the effective German tax rate as a
deferred tax liability in the taxable income of 2000 in accordance with IAS
12.60.
OPERATING RESULTS
------------------------------
2002 2001 2000
--------- --------- --------
([E] IN MILLIONS)
Sales revenue........................................ 1,112.3 1,233.3 1,262.5
Cost of sales........................................ (886.5) (941.8) (950.8)
--------- --------- --------
Gross profit......................................... 225.8 291.5 311.7
Selling expenses..................................... (139.4) (154.5) (156.6)
Research costs....................................... (25.4) (31.1) (29.2)
General and administrative expenses.................. (47.5) (57.8) (43.2)
Other operating income (expense) (net................ 15.1 10.6 (3.5)
Profit from operations before costs relating to
antitrust proceedings and restructuring, net ...... 28.6 58.7 79.2
Costs relating to antitrust proceedings.............. (22.0) (35.0) ---
Restructuring expenses............................... (8.3) (41.0) ---
--------- --------- --------
Profit (loss) from operations........................ (1.7) (17.3) 79.2
Net financing costs.................................. (25.5) (48.5) (59.2)
--------- --------- --------
Profit (loss) before tax............................. (27.2) (65.8) 20.0
Income tax benefit (expense.......................... 3.6 (29.2) (55.7)
--------- --------- --------
Net loss before minority interests................... (23.6) (95.0) (35.7)
Minority interests................................... --- (0.2) (0.3)
--------- --------- --------
Net loss............................................. (23.6) (95.2) (36.0)
========= ========= ========
The following table shows selected consolidated statement of operations data
for expressed as a percentage of total sales revenue:
------------------------------
2002 2001 2000
--------- --------- --------
(%) (%) (%)
Sales revenue........................................ 100.0 100.0 100.0
Cost of sales........................................ (79.7) (76.4) (75.3)
--------- --------- --------
Gross profit......................................... 20.3 23.6 24.7
Selling, research and development, general
administration and other operating expenses, net... (17.7) (18.9) (18.4)
Costs relating to antitrust proceedings and
restructuring expenses............................. (2.8) (6.1) 0.0
--------- --------- --------
Profit (loss) from operations........................ (0.2) (1.4) 6.3
Result of investments and other financial result..... 0.7 (0.9) (1.3)
Net financing costs.................................. (2.9) (3.0) (3.4)
Income taxes......................................... 0.3 (2.4) (4.4)
--------- --------- --------
Net loss (includes minority interests)............... (2.1) (7.7) (2.8)
========= ========= ========
Net loss attributable to shareholders................. (2.1) (7.7) (2.8)
========= ========= ========
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2002 COMPARED TO 2001
Sales revenue
Sales revenue decreased by 10% from [E]1,233.3 million in 2001 to
[E]1,112.3 million in 2002. The positive business developments at SGL
Technologies were unable to offset the reduction in the price of graphite
electrodes and the downturn in key customer industries for our established
businesses. The global economy did not recover in 2002.
The unfavorable operating environment affected most of our customer
industries leading to reduced investment activity in key sectors such as the
chemical industry and mechanical and plant engineering. Demand also continued
to decline in the electronics industry and in the semiconductor market. The
steel industry almost matched the previous year's production levels , despite
the difficult economic environment and bankruptcies among U.S. steel producers.
The protective tariffs that the United States has imposed against steel imports
in the United States since March 2002 led to a reduction in supply in the
United States. The resulting price increases in that market had a follow-on
effect in Europe and Asia. In the first quarter in particular, the downturn in
the steel industry in Japan and North America and the inventory reduction in
Europe had a negative impact on sales. The steel industry recovered slowly over
the rest of the year, but could not fully compensate for the downturn at the
beginning of the year.
Changes in regional sales revenue breakdowns were minimal in 2002, with a
slight decline in the share of sales revenue attributable to Germany, at 19%
(previous year: 20%), and North America, at 25% (previous year: 26%). Sales in
the rest of Europe to 34% (previous year: 33%) and in the remaining world rose
to 22% (previous year: 21%).
The CARBON AND GRAPHITE business area accounted for 50% of our sales
revenue in 2002(previous year: 51%). Sales of graphite electrodes accounted for
36% of the Group`s total sales revenue (previous year: 40%) while sales of
other carbon and graphite products accounted for 14% (previous year: 11%).
Sales volumes of graphite electrodes decreased by 1% from 175,000 tons in 2001
to 173,000 tons in 2002. Reduced demand along with the existing overcapacity
resulted in continuous price pressure in all markets. This price pressure
combined with the weaker U.S. dollar, caused a 16% decrease in the average
price for graphite electrodes compared to the previous year. Due to continuing
strong demand from the aluminum industry, cathodes sales increased by 21% to
[E]91.1 million. While Furnace lining sales revenue remained almost unchanged
at [E]13.8 million, we increased sales revenue of carbon electrodes for silicon
metal production by 11% to [E]41.5 million.
The GRAPHITE SPECIALTIES business area accounted for approximately 18% of
our sales revenue in 2002. As a consequence of ongoing economic weakness in our
customer industries (semiconductor, tool manufacturing, metals, high-
temperature processes, chemicals, automotive) sales revenue declined by 15%
from [E]230.7 million in 2001 to [E] 195.9 million in 2002. All product areas
were affected, with the exception of mechanical carbons. In addition to weak
sales, the planned reduction in inventory levels affected earnings by
approximately [E]12 million, due to the high level of internal value added and
associated high fixed cost portions.
Sales revenue in the CORROSION PROTECTION business area decreased by 10%
from [E]235.8 million in 2001 to [E] 212.4 million in 2002. This was primarily
due to lower levels of investment in our key customer industries and an overall
drop in customer maintenance and repair expenditures, as well as to the
postponement of orders by our customers in the chemical, energy and
environmental industries. These developments affected all Corrosion Protection
product areas.
SGL TECHNOLOGIES' sales revenue increased by 11.3% from [E]135.1 million in
2001 to [E]150.4 million in 2002. The defense-related business of our U.S.
subsidiary HITCO developed encouragingly with sales revenue increasing by 15%.
We were also able to increase sales volumes of oxidized fibers for the aircraft
industry
Cost of sales and gross profit
Consolidated costs of sales decreased by 6% from [E]941.8 million in 2001
to [E]886.5 million in 2002. Raw material costs, primarily petroleum coke and
energy decreased by 18.5% from [E]297.1 million in 2001 to [E] 242.2 million in
2002, while total material expenses decreased by 19.1% to [E]303.5 million.
Personnel expenses decreased by 8.6% during 2002 to [E]368.2 million primarily
due to our
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reduction in headcount.Gross profit amounted to [E]225.8 million, 22.5% below
the previous year, and the gross profit margin on sales, which we define as
sales revenue less cost of sales divided by sales revenue fell from 23.6% to
20.3%. This development reflects the drop in the price of graphite electrodes,
the reduction of inventory levels (which partly affected earnings), and the
economic downturn in the customer industries of our Graphite Specialties and
Corrosion Protection businesses. We were able to prevent a further reduction in
the gross profit margin through our restructuring program in Carbon and
Graphite and Graphite Specialties. These cost-cutting measures delivered
savings in excess of our original expectations, contributing to the reduction
in cost of sales compared with the previous year.
Selling expense, research costs, general and administrative expenses, other
operating income (net)
Our selling expenses decreased by 9.8% from [E]154.5 million in 2001 to
[E]139.4 million in 2002. This decrease is in line with the reduced sales
revenue during 2002. We significantly reduced research and development costs by
18.3% from [E]31.1 million in 2001 to [E] 25.4 million in 2002, primarily as a
result of the finalization of our carbon ceramic brake discs development and a
further organizational streamlining. General and administrative expenses
decreased by 17.8% from [E]57.8 million in 2001 to [E] 47.5 million in 2002. We
achieved these savings through our restructuring program in North America and
Europe, as well as by reducing variable incentive compensation. Other operating
income (net) increased by 42.5% from [E]10.6 million in 2001 to [E] 15.1
million in 2002. This increase was due to increased gains on the sale of
noncurrent assets and reduced net goodwill amortization.
Costs relating to antitrust proceedings and restructuring expenses
Our costs relating to antitrust proceedings decreased 37.1%, from [E]35.0
million in 2001 to [E]22.0 million in 2002. In 2002, these costs related
primarily to an increase in the provision for a fine imposed by the European
Commission in December 2002. Restructuring expenses decreased significantly,
from [E]41.0 million in 2001 to [E] 8.3 million in 2002. Our restructuring
expenses in 2002 related to Graphite Specialties and Corrosion Protection. In
2002, we accelerated restructuring measures in these business areas that we
originally planned for 2003.
Profit (loss) from operations
In 2002 we substantially reduced our consolidated loss from operations,
from [E](17.3) million in 2001 to [E]( 1,7) million in 2002. This improvement
was primarily the result of the lower operating costs we achieved in 2002
through our cost-cutting measures, as well as of the reduced level of costs
relating to antitrust proceedings and restructuring expenses in 2002 compared
with the previous year. Our operating margin, which we define as profit (loss)
from operations divided by sales revenue, improved from (1.4)% in 2001 to
(0.2)% in 2002.
Profit from operations in the Carbon and Graphite Business area decreased
to [E]51.9 million in 2002 (previous year: [E] 78.9 million). The cost savings
that we achieved could only partly offset the effect of lower prices for
graphite electrodes in Europe and North America. The reduced production costs
from our restructuring program had a one-time negative non-cash effect of [E]6
million related to the valuation of inventory at the end of the year. In
addition, the reduction in inventory levels to improve cash flow led to a lower
coverage of our fixed costs and reduced profit from operations by [E]6 million.
Before restructuring expenses, Graphite Specialties' profit from operations
decreased significantly, from [E]22.3 million in 2001 to [E] 1.9 million in
2002. Besides weak sales, the reduction in inventory levels affected our
earnings by approximately [E]12.0 million as a result of lowered capacity
utilization and related uncovered fixed costs. After restructuring expenses, we
reduced our loss from operations in Graphite Specialties from [E](7.2) million
in 2001 to [E](2.8) million in 2002. This improvement primarily reflects the
significantly lower level of restructuring expenses in 2002 compared with 2001.
In 2002, we accelerated restructuring measures for Graphite Specialties in
Europe originally planned for 2003, including an additional headcount reduction
of 91 employees. Costs associated with this restructuring were approximately
[E]4.7 million.
Corrosion Protection's profit from operations before restructuring expenses
decreased from [E]12.6 million in 2001 to [E] 4.8 million in 2002. The primary
cause of this decrease was a decline in capacity utilization, which was only
partly offset by savings through ongoing rationalization measures. This
-34-
development led us to accelerate additional structural adjustments, which we
had originally planned for the coming years, to fiscal 2002. In the course of
these restructuring measures, we reduced headcount by a total of 196 employees
at our two German sites in Siershahn and Bornum, as well as in Houston, Texas
and at various other sites. The costs involved were approximately [E]3.6
million in 2002. As a result, Corrosion Protection's profit from operations
after restructuring expenses was [E]1.2 million in 2002 (previous year: [E]
12.6 million).
In 2002 we reduced SGL Technologies' loss from operations to [E](11.7)
million from [E](33.7) million in 2001. This improvement exceeded our original
target of a 50% reduction. The primary factors contributing to the 2002 loss
were start-up costs for the commencement of full-scale carbon-ceramic brake
disc production, underutilization of our fiber facilities and expenses relating
to the further development of both fuel cell components and defense-related
business.
Net financing costs
Our net financing costs decreased 47.4%, from [E](48.5) million in 2001 to
[E](25.5) million in 2002. The primary factors contributing to this improvement
were non-cash currency adjustments of our antitrust liabilities, a positive
impact of the recalculated net present value of these antitrust liabilities due
to the revised payment schedule and the reversal of the fair value of an option
issued to a third party. Major elements of financing costs in 2002 were [E]27.4
million in net interest expenses and a [E]10.4 million interest component in
pension provisions.
2001 COMPARED TO 2000
Sales revenue
Sales revenue decreased by 2%, from [E]1,262.5 million in 2000 to
[E]1,233.3 million in 2001. Currency effects and the first-time consolidation
of our Polish subsidiary ZEW, with sales revenue of [E]48.5 million, largely
offset the drop in sales volumes of graphite electrodes. For the first time in
decades, there was a simultaneous economic downturn in all the key OECD
economic regions. After years of a strong growth in the United States, falling
industry growth rates pushed the United States into recession -- a process that
was further accelerated by the events of September 11. Growth forecasts for
Europe and Japan were also downgraded considerably for 2002.
These negative developments also affected our customer industries. The
global economic slowdown led to a further reduction in capacity utilization in
the international steel industry. The effects of the North American recession,
particularly in the United States steel sector, also worsened. Approximately a
third of U.S. steel producers filed for Chapter 11 protection from their
creditors. In Europe, major steel manufacturers merged to increase the
efficiency of their steelworks and to reduce market capacity. Outside the steel
sector, demand declined in the electronics industry as well. This decline was
compounded by a significant drop in the price of memory chips. In addition, the
chemicals industry downgraded its economic forecasts substantially.
The breakdown of our business by geographic region changed in 2001. The
proportion of sales generated in Europe rose to 53% due to the first-time
consolidation of ZEW, while sales in Germany rose slightly to 20%. The
proportion of business accounted for by North America fell from 31% to 26% due
to the weaker business in North America, while sales in the rest of the world
decreased from 22% to 21%.
In the CARBON AND GRAPHITE business area, which accounted for 51% of our
consolidated sales revenue in 2001 and 49% in 2000, sales rose slightly, from
[E]619.5 million in 2000 to [E]61 9.8 million in 2001. This increase was the
result of our first-time consolidation of ZEW, without which sales revenue
would have declined 8% from the previous year. Demand for graphite electrodes
dropped, with sales volume decreasing by 7%, from 188,000 tons to 175,000 tons
(including 9,000 tons from ZEW). One consequence of this falling demand was
increased price pressure in the United States, which also began to appear in
Europe by the end of 2001. As a result of exchange rate effects, however, our
average price for graphite electrodes in euros increased 2% from the previous
year.
-35-
Sales revenue in GRAPHITE SPECIALTIES decreased by 4.7%, from [E]242.0
million in 2000 to [E]230.7 million in 2001. Sales in the industrial application
business line, which accounted for more than half the business area's sales
revenue, remained almost flat. Demand for semiconductor industry materials
business dropped by around one fifth due to the sharp downturn in this market.
The electrical contacts and mechanical carbons business lines also lost ground.
In the CORROSION PROTECTION business area, sales revenue decreased by 5%,
from [E]247.3 million in 2000 to [E] 235.8 million in 2001. This drop was the
result the disposal of non-core businesses in the previous year. Revenue
generated by the surface protection business line, dropped slightly by 1%,
while revenue for process technology rose by 9%.
SGL TECHNOLOGIES' sales revenue decreased 11.0%, from [E]151.8 million in
2000 to [E]135.1 million in 2001. Our fibers business was directly affected by
the events of September 11, 2001, after which orders for oxidized fibers for
aircraft brakes and nozzles were postponed or cancelled. Sales of carbon fibers
used in the manufacture of PC casings also decreased considerably. In total,
sales revenue in the fibers and composites businesses fell by 32%. Sales
revenue generated by SGL Technologies' newer business lines, although amounting
only to approximately 10% of the business area's total, increased by 39.0% in
2001 compared with the previous year.
Cost of sales and gross profit
Our consolidated cost of sales decreased by 0.9%, from [E]950.8 million in
2000 to [E]941.8 million in 2001. Raw material costs, primarily petroleum coke
and energy, increased by 2.3%, from [E]290.4 million in 2000 to [E] 297.1
million in 2001, while total material expenses decreased by 2.2% to [E]375.3
million. Personnel expenses decreased by 3.1% during 2001 to [E]403.2 million.
Our gross profit declined by 6.5%, from [E]311.7 million in 2000 to [E] 291.5
million in 2001. Gross profit margin declined from 24.7% in 2000 to 23.6% in
2001. The decline in gross profit was due to the fact that cost of sales
declined at a lower rate than sales revenue, reflecting increased raw materials
and energy costs as well as start-up and expansion costs for our new business.
Selling expense, research costs, general and administrative expenses, other
operating income (expense) (net)
Selling expense decreased slightly by 1.3%, from [E]156.6 million in 2000
to [E]154.5 million in 2001. Over the same period, research costs increased --
primarily driven by the product development in SGL Technologies -- by 6.5%,
from [E]29.2 million in 2000 to [E] 31.1 million in 2001. General
administrative costs increased by 33.8%, from [E]43.2 million in 2000 to [E]
57.8 million in 2001. In addition to the first-time consolidation of ZEW and
SGL ACOTEC (Brazil), the increase in general and administrative expenses during
2001 was due to the costs of strategic IT projects and euro conversion as well
external consulting expenses relating to acquisition projects. Other operating
income (net) amounted to [E]10.6 million in 2001, compared to operating expense
(net) of [E](3.5) million in 2000. This improvement related predominantly to
operational currency gains and insurance refunds received in 2001.
Costs relating to antitrust proceedings and restructuring expenses
Costs relating to antitrust proceedings amounted to [E]35.0 million in
2001. These costs related primarily to an increased provision for a fine
imposed by the European Commission during that year. Restructuring expenses
amounted to [E]41.0 million in 2001, including closure costs for three plants
in the United States, expenses for reducing the workforce and for write-downs
on plant and equipment and inventory in the United States, as well as workforce
resizing costs in Europe. We did not incur costs relating to antitrust
proceedings or restructuring expenses during 2000.
Profit (loss) from operations
Our loss from operations in 2001 was [E](17.3) million in 2001, compared
with a profit from operations of [E]79.2 million in 2000. This decline
primarily reflects costs relating to antitrust proceedings and restructuring
expenses during 2001; these were absent in 2000. Before these costs and
expenses, our profit from operations had decreased 25.9%, from [E]79.2 million
in 2000 to [E]58.7 million in 2001. The primary factors contributing to this
decrease were related to higher raw material and energy costs, reduced volumes
of graphite electrodes sold and the development and start-up costs for our new
products in the SGL Technologies business area. Our operating margin (defined
as operating profit divided by sales revenue) decreased from 6.3% in 2000 to
(1.4)% in 2001.
-36-
Net financing costs
Our net financing costs decreased 18.1%, from [E](59.2) million in 2000 to
[E](48.5) million in 2001. In 2001, the amount included [E] 27.4 million in net
interest expenses, primarily in connection with recent acquisitions and
antitrust obligation financing, a [E]9.9 million interest component in pension
provisions and a [E]5.0 million charge for the fair value of an option granted
to a related party. See Item 7, "Major Shareholders and Related Party
Transactions -- Related Party Transactions".
INFLATION
During the past three years, the effects of inflation on our operations in
Germany and other countries have generally been immaterial.
CRITICAL U.S. GAAP ACCOUNTING POLICIES
The Securities and Exchange Commission recently issued disclosure guidance
for "critical accounting policies." The SEC defines "critical accounting
policies" as those that are the most important to the portrayal of our
financial position and results and that require application of management's
most difficult, subjective or complex judgments, often as a result of the need
to make estimates about the effect of matters that are inherently uncertain and
may change in subsequent periods.
The preparation of our financial statements requires our management to make
estimates and judgments that affect the reported amounts of assets,
liabilities, revenues, and expenses, and related disclosure of contingent
assets and liabilities. On an on-going basis, we evaluate our estimates,
including those related to customer programs and incentives, doubtful accounts,
inventory valuation, impaired assets, restructuring of operations, investments,
environmental costs, pensions and other post-employment benefits, goodwill and
intangible assets, and litigation and contingencies. We base our estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions.
We believe the following critical U.S. GAAP accounting policies are the
most important to the portrayal of our financial condition and results and
require management's more significant judgments and estimates in the
preparation of our consolidated financial statements.
ACCOUNTING FOR BUSINESS COMBINATIONS
During the past three years, we have completed several significant business
combination transactions. In the future, we may continue to grow our business
through business combinations. Prior to the issuance of SFAS No. 141, Business
Combinations, in 2001, we applied the guidance provided by Accounting
Principles Board Opinion (APB) No. 16, and its interpretations, as well as
various other authoritative literature and interpretations that address issues
encountered in accounting for business combinations. We accounted for our past
combinations using the purchase method. Accounting for business combinations,
by the purchase method, is complicated and involves the use of significant
judgment.
Under the purchase method of accounting, a business combination is
accounted for at a purchase price based upon the fair value of the
consideration given, whether it is in the form of cash, assets, stock or the
assumption of liabilities. The assets and liabilities acquired are measured at
their fair values, and the purchase price is allocated to the assets and
liabilities based upon these fair values. Fair values are recognized, and any
remaining excess of cost of acquisition over net assets acquired is recognized
as goodwill. Since January 1, 2002, goodwill arising from acquisitions is no
longer amortized under US GAAP. Instead, SFAS 142 requires that goodwill be
tested for impairment at least annually using a two-step approach at the
reporting unit level. In the first step, the fair value of the reporting unit
is compared to the book value including goodwill. In order to determine the
fair value of the reporting unit, significant management judgement is applied
in order to estimate the underlying discounted future free cash flows. In the
case, that the fair value of the reporting unit is less than its book value, a
second step needs to be performed which compares the fair value of the
reporting unit's goodwill to the book value of the goodwill. The fair value of
goodwill is determined
-37-
based upon the difference between the fair value of the reporting unit and the
net of the fair values of the identifiable assets and liabilities of the
reporting unit. If the fair value is less than the book value, the difference
is recorded as an impairment. In 2002, no goodwill was impaired based on the
present value of estimated future cash flows. The actual cash flows may differ
significantly, thereby requiring an impairment in later periods.
Determining the fair values of the assets and liabilities acquired involves
the use of judgment, since the majority of the assets and liabilities acquired
do not have fair values that are readily determinable. Different techniques may
be used to determine fair values, including market prices, where available,
appraisals, comparisons to transactions for similar assets and liabilities and
present value of estimated future cash flows, among others. Since these
estimates involve the use of significant judgment, they can change as new
information becomes available.
ALLOWANCE FOR DOUBTFUL ACCOUNTS
Each quarter we classify doubtful receivable balances and determine the bad
debt reserve as follows:
* Customers balances are reserved based on the historical write-off
percentages.
* Risk accounts are individually reviewed and the reserve is based on the
probability of potential default.
If circumstances change for example, if the rate of default is higher or
lower than expected or if a major customer's ability to meet its financial
obligations to us changes unexpectedly and materially, our estimates of the
recoverability of amounts due to us could be reduced or increased by a material
amount.
INVENTORY OBSOLESCENCE
Inventories are valued under U.S. GAAP at the lower of cost or market. The
cost of all inventories is determined by the weighted average cost method and
last in first out (lifo). We write down our inventories for estimated
obsolescence or unmarketable inventory equal to the difference between the cost
of inventory and the estimated market value based upon assumptions about future
demand and market conditions. If actual market conditions are less favorable
than those projected by management, additional inventory write-downs may be
required.
At December 31, 2002, we reported inventory of [E]288.4 million. Each
quarter we review the inventory and make an assessment of the realizable value.
There are many factors that management considers in determining whether or not
a reserve should be established. These factors include the following:
* return or rotation privileges with vendors,
* expected usage during the next twenty-four months,
* whether or not a customer is obligated by contract to purchase the
inventory,
* current market pricing, and
* risk of obsolescence.
If circumstances change for example, if there are unexpected shifts in
market demand or there could be a material impact on the net realizable value
of our inventory.
IMPAIRED ASSETS
We review the carrying values of long-lived assets and amortizable
intangibles for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. An impairment loss
for an asset to be held and used is recognized when the fair value of the asset
is less than the carrying value of the asset. For assets to be disposed of, an
impairment loss is recognized when the fair value of the asset, less costs to
dispose, is less than the carrying value of the asset. The fair value of the
assets is generally based on discounted estimated cash flows using annual
discount rates of 5% to 7%. The estimates reflect our assumptions about selling
prices, production and sales volume levels, costs, and market conditions over
the estimated remaining operating period which can range from three months to
over fifteen years. If our assumptions related
-38-
to assets to be held and used are inaccurate, additional write-downs may be
required in the future. If estimates of fair value less costs to sell are
revised, the carrying amount of the related assets is adjusted, resulting in
recognition of a credit or debit to earnings.
RESTRUCTURING OF OPERATIONS
We record restructuring charges incurred in connection with consolidation
or relocation of operations, exited business lines, or shutdowns of specific
sites. These restructuring charges, which reflect management's commitment to a
termination or exit plan that will begin within twelve months, are based on
estimates of the expected costs associated with site closure, legal and
environmental matters, demolition, contract terminations, or other costs
directly related to the restructuring. If the actual cost incurred exceeds the
estimated cost, an additional charge to earnings will result. If the actual
cost is less than the estimated cost, a credit to earnings will be recognized.
In December 2001 we recorded a [E]41.0 million restructuring and asset
impairment charge in connection with our 2001 repositioning efforts, of which
[E]16.2 million represented restructuring charges. The repositioning effort
affected two of our business areas and will take approximately twelve months to
complete from date of commencement. The [E]16.2 million of restructuring
charges included [E]11.8 million of severance termination benefits for 430
employees affected by plant closings or capacity reductions, as well as various
personnel in corporate, administrative and shared service functions.
In the latter part of 2002 we identified further cost-cutting potential and
took immediate action. Restructuring measures in our European Corrosion
Protection and Graphite Specialties business areas that were implemented led to
287 additional positions being eliminated. These actions resulted in a one-time
charge on profit from operations of approximately [E]8.3 million.
Severance termination benefits were based on various factors including
length of service, contract provisions and salary levels. Management estimated
the restructuring charge based on these factors as well as projected final
service dates. Given the complexity of estimates and broad scope of the 2002
repositioning effort, actual expenses could differ from management's estimates.
If actual results are different from original estimates, we will record
additional restructuring expenses or reverse previously recorded expense
through the statement of operations. Management will make adjustments if
necessary as actions under the plan are carried out.
DEFERRED TAX ASSETS
Deferred income taxes are recognized for the tax consequences in future
years of the differences between the tax basis of assets and liabilities and
their financial reporting amounts at each period end based on enacted tax laws
and statutory tax rates applicable to the periods in which the differences are
expected to affect taxable earnings. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount more likely than not to
be realized.
TAX CONTINGENCIES
We believe we have a reasonable basis in applicable tax law for the
positions we take on the various tax returns we file. However, we maintain tax
reserves in recognition of the fact that various tax authorities may take
opposing views on some issues, that the costs and hazards of litigation in
maintaining the positions that we have taken on various returns might be
significant and that the tax authorities may prevail in their attempts to
overturn these positions. The amounts of these reserves, the potential issues
they are intended to cover and their adequacy to do so, are topics of frequent
review internally and with outside tax professionals. Where necessary,
adjustments are periodically made to such reserves to reflect the lapsing of
statutes of limitations, closings of ongoing examinations or the commencement
of new examinations.
LITIGATION AND CONTINGENT LIABILITIES
Antitrust and competition matters
We have accrued amounts for estimated settlements of antitrust actions
pending against us as of December 31, 2002. Computing our liability for pending
antitrust actions requires us to make judgments as to the most likely outcome
of litigation, future settlements and judgments to be paid for
-39-
open claims. We estimate the cost of final judgments by reviewing with our
legal counsel the probable outcome of pending appeals. If the actual cost of
settlements and final judgments differs from our estimates, our reserves for
open claims may not be sufficient. If so, any deficiency would be a loss that
we would be required to recognize at the time it becomes reasonably estimable.
Litigation
We are currently involved in other legal proceedings resulting from the
antitrust investigations and settlements. As discussed in Note 21 of our
consolidated financial statements, as of December 31, 2002, we have accrued an
estimate of the probable costs for the resolution of these claims. Attorneys in
our legal department specializing in litigation claims monitor and manage all
claims filed against us. Our management develops estimates of probable costs
related to these claims in consultation with outside legal counsel who are
defending us in these actions. We base our estimates on an analysis of
potential results, assuming a combination of litigation and settlement
strategies. We attempt to resolve claims through mediation and arbitration
where possible. If the actual settlement costs and final judgments, after
appeals, differ from our estimates, our future financial results may be
adversely affected.
LIQUIDITY AND CAPITAL RESOURCES
OVERVIEW OF BANK DEBT AND CASH FLOWS
DECEMBER 31,
--------------------
2001 2002
--------- ---------
(MILLIONS OF EUROS)
Short term debt and current maturities................... 300.7 193.1
Long term debt........................................... 238.2 255.4
--------- ---------
Total debt............................................... 538.9 448.5
Cash and cash equivalents................................ (12.1) (21.5)
--------- ---------
Net bank debt............................................ 526.8 427.5
========= =========
Our financing arrangements at December 31, 2002 consisted primarily of
short-term bank debt with a number of financial institutions ([E]243 million),
a convertible bond ([E]134 million), and a syndicated revolving credit facility
([E]72 million). The following table summarizes our debt and significant
obligations as of December 31, 2002:
MATURING IN:
-----------------------------------------------------------------
LESS THAN AFTER
OBLIGATION TOTAL ONE YEAR 2004 2005 2006 2006
------------------------------ --------- --------- --------- --------- --------- ----------
(MILLIONS (MILLIONS (MILLIONS (MILLIONS (MILLIONS (MILLIONS
OF EURO) OF EURO) OF EURO) OF EURO) OF EURO) OF EURO)
Convertible Bond.............. 133.6 0.0 0.0 133.6 0.0 0.0
Other financial Debt.......... 314.9 193.1 5.3 79.4 7.7 29.4
--------- --------- --------- --------- --------- ----------
Financial Debt................ 448.5 193.1 5.3 213.0 7.7 29.4
Operating and Capital leases.. 12.2 3.5 2.1 0.9 0.8 4.9
Purchase obligations.......... 21.1 21.1 0.0 0.0 0.0 0.0
DOJ and Canadian settlements
and payments................ 80.9 8.0 17.1 24.6 23.9 7.3
Other short-term obligations.. 69.2 69.2 0.0 0.0 0.0 0.0
--------- --------- --------- --------- --------- ----------
Total......................... 631.9 294.9 24.5 238.5 32.4 41.6
========= ========= ========= ========= ========= ==========
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Our net bank debt (which we define as long term debt plus short term debt,
less cash and cash equivalents) increased [E]129.6 million in 2000 and [E] 34.5
million in 2001, but decreased in 2002 by [E]99.3 million to [E] 427.5 million.
An important factor in 2001 contributing to the increase were payments relating
to antitrust proceedings in North America. They consisted primarily of payments
of antitrust penalties imposed by the U.S. Department of Justice (DOJ) as well
as settlements in civil actions relating to the DOJ action. A small portion of
the total payments related to similar actions in Canada. Together with the
ongoing capital expenditure programs and acquisitions, these antitrust-related
payments significantly increased the financing requirements of the Company.
In line with the strategy for 2002 to improve capital structures the SGL
Group focused on the reduction of working capital and on improvement of cash
flow. The key element was the reduction of inventories of [E]82.7 million net
of currency effects. In addition, at the end of December 2001 and at the end of
December 2002, we sold accounts receivable in the amounts of [E]11.4 million
and 41.2 million, respectively, to financial service companies.
On December 20, 2002 we entered into a syndicated credit facility with a
number of banks. See Item 10, "Additional Information-Material Contracts". On
January 7, 2003 we used this new facility to refinance then existing bank debt.
The following table summarizes our debt and significant obligations as of
January 7, 2003:
MATURING IN:
-----------------------------------------------------------------
LESS THAN AFTER
CREDIT FACILITIES TOTAL ONE YEAR 2004 2005 2006 2006
------------------------------ --------- --------- --------- --------- --------- ----------
(MILLIONS (MILLIONS (MILLIONS (MILLIONS (MILLIONS (MILLIONS
OF EURO) OF EURO) OF EURO) OF EURO) OF EURO) OF EURO)
Convertible Bond.............. 133.6 0.0 0.0 133.6 0.0 0.0
Term Facility A............... 335.0 25.0 50.0 260.0 0.0 0.0
Term Facility C............... 20.0 0.0 2.3 4.7 4.7 8.3
Revolving Credit Facility..... 55.0 0.0 0.0 55.0 0.0 0.0
BNP Paribas Poland*........... 15.0 0.0 0.0 15.0 0.0 0.0
--------- --------- --------- --------- --------- ----------
Subtotal...................... 558.6 25.0 52.3 468.3 4.7 8.3
--------- --------- --------- --------- --------- ----------
Term Facility B............... 85.0 0.0 0.0 85.0 0.0 0.0
Letter of Credit Facilities... 99.0 99.0 0.0 0.0 0.0 0.0
--------- --------- --------- --------- --------- ----------
Total......................... 742.6 124.0 52.3 553.3 4.7 8.3
========= ========= ========= ========= ========= ==========
* In addition our Polish subsidiaries entered into a credit facility
agreement with BNP Paribas Bank Polska S.A. in the amount of [E]15 million.
This facility is governed by Polish Law.
On May 3, 1999 we pleaded guilty to charges of price fixing raised at the
initiative of the DOJ. As a result, SGL is obligated to pay $ 135 million in
fines and has guaranteed the payment of an additional $ 10 million in fines to
be paid by the Chairman of the Executive Committee over the next six years. We
have settled most of the claims arising from related civil lawsuits alleging
damages from the activities upon which the DOJ's antitrust action was based. We
believe economically reasonable settlements will be reached in the remaining
lawsuits. In April 2002 the Company reached an agreement with the DOJ resulting
in a revision to the payment plan for the antitrust penalties assessed in 1999.
This agreement extended the payment period for this liability until 2007,
delaying payment from 2002-2003 under the original payment plan to 2004 -- 2007
under the revised payment plan as shown in the maturity table in this section.
In mid-July 2001, the European Commission imposed a fine of [E]80.2 million
for alleged anti-competitive practices in the graphite electrodes market. We
believe that the amount of this fine is unjustified. In particular, we believe
that the European Commission is assessing fines twice for certain alleged
violations. We have filed an appeal against the Commission's decision. Payment
of the fine has been suspended pending final judgment in the appeal. Appeals of
this type may take two years or
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longer to be decided. Appellants must typically provide security for the amount
of the contested fine when filing an appeal. We have used funds drawn under the
Term Facility B of our new syndicated credit facility to provide this security.
As part of its investigation of the graphite industry for anti-competitive
behavior between 1992 and 1998, which has been ongoing since 1997, the European
Commission imposed a fine of [E]27.8 million on SGL in December 2002 with
regard to its Graphite Specialties activities. We do not believe this fine to
be justified and filed an appeal against the decision with the European Court
in March 2003. The potential amount to be paid is already included in the
refinancing agreement.
CONSOLIDATED CASH FLOWS
The following table shows our consolidated cash flows (adjusted for
currency fluctuations) for the three years ending December 31, 2002:
2002 2001 2000
--------- --------- ---------
([E] IN MILLIONS)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net profit (loss) before taxes ................ (27.2) (65.8) 20.0
Gain (loss) on sale of property, plant and
equipment.................................... (2.8) 1.0 0.8
Gain (loss) on sale of equity investments...... (1.0) --- 4.8
Depreciation and amortization expense.......... 81.4 86.8 83.2
Write-downs on noncurrent assets .............. --- 9.8 ---
Taxes paid .................................... (22.3) (13.6) (2.9)
Changes in provisions, net .................... (2.8) 16.3 (26.9)
Change in working capital, net of changes in
basis of consolidation:
Inventories ................................. 82.7 (26.8) 0.6
Write-downs on inventories .................. --- 15.0 ---
Trade receivables ........................... 44.7 33.8 10.5
Trade payables .............................. 6.8 6.2 2.6
Other operating assets/liabilities........... (10.4) 30.0 (47.1)
--------- --------- ---------
Cash provided by operating activities before
payment of antitrust fines................... 149.1 92.7 45.6
--------- --------- ---------
Payments relating to antitrust proceedings..... (10.1) (36.9) (89.0)
--------- --------- ---------
Cash provided by (used in) operating activities 139.0 55.8 (43.4)
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property, plant and equipment
and intangible assets, excluding goodwill.... (53.6) (96.1) (69.8)
Proceeds from sale of property, plant and
equipment and intangible assets.............. 7.8 3.8 2.0
Cost of acquisitions........................... (0.7) (5.7) (23.3)
Proceeds from sale of equity investments....... 5.6 5.5 2.1
--------- --------- ---------
Cash used in investing activities.............. (40.9) (92.5) (89.0)
--------- --------- ---------
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2002 2001 2000
--------- --------- ---------
([E] IN MILLIONS)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net change in financial liabilities............ (87.6) 36.5 97.8
Dividends paid................................. (0.2) (0.1) (0.4)
Net proceeds from capital increase............. 0.8 2.2 5.5
--------- --------- ---------
Cash provided by financing activities.......... (87.0) 38.6 102.9
--------- --------- ---------
Cash received from first-time consolidation.... --- --- 8.6
Effect of foreign exchange rate changes........ (1.7) 0.4 2.1
Net increase (decrease) in cash and cash
equivalents.................................. 9.4 2.3 (18.8)
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR. 12.1 9.8 28.6
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR....... 21.5 12.1 9.8
========= ========= =========
Operating cash flows
Our cash provided (used) by operating activities (adjusted for currency
effects) totaled [E]139.0 million in 2002, compared to [E] 55.8 million in
2001, a net improvement of [E]83.2million. Key drivers of the increase in cash
provided from operations were a decrease in working capital and the reduction
in payments relating to antitrust proceedings. Inventories increased during
2000 and 2001, but decreased substantially in 2002 by [E]82.7 million net of
currency impacts. The primary cause of the decrease of inventories in 2002 was
the realization of one point of our strategy program with focus on improving
capital structure through increased cash flow and reduced debt level. The
planned reduction of inventories led to a lower utilization of capacities and
therefore to unabsorbed fixed costs of approximately [E]18.0 million which were
charged to the statement of operations. Working capital (which we define as net
book value of inventories and trade receivables less trade payables and
advanced payments) was [E]386.0 million at December 31, 2002, compared to
[E]548.7 million at December 31, 2001. Besides the reduction of inventories
receivables declined to [E]208.1 million with a reduction of [E] 44.7 million
net of currency effects. This decrease in receivables reflected sales of
accounts receivable in the total amount of [E]41.2 million in December 2002 and
[E]11.4 million in December 2001.
Non-cash expense for depreciation and amortization of non-current assets
decreased from [E]86.8 million in 2001 to [E] 81.4 million in 2002. In 2002 and
2001 there was a negative impact on the operating cash flow due to the payment
of accrued liabilities for antitrust proceedings by an amount of [E]10.1
million and [E]36.9 million, respectively.
In 2001 we announced a major cost reduction and restructuring program. The
total non-recurring charges of the restructuring plan amount to [E]41 million
on a pretax basis. This plan had a cash effect of approximately [E]15 million
in 2002. In addition, we took further restructuring charges of [E]8.3 million
in 2002, primarily for the acceleration of headcount reductions in Corrosion
Protection and Graphite Specialties originally planned for 2003.
Expenditures for research and development declined by 18.3% to [E]25.4
million in 2002, representing 2.3% (2001: 2.5%) of our consolidated net sales,
as a result of a restructuring and efficiency enhancement program. As in
previous periods, the main emphasis of our research and development activities
was in high technology fields within the SGL T Business Area for the further
development of applications for carbon fibers and composites, as well as for
the optimization of fuel cell technology components. We also invested in
research related to high performance carbon-ceramic disc brakes used in sports
cars as well as by the aerospace industry. In the CG Business Area, emphasis
was placed on the further development of large diameter graphite electrodes.
Research and development expenditures in the GS Business Area were concentrated
on developing ultra graphite powder for lithium batteries used in laptop
computers, cell phones and other mobile communication devices.
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Investing cash flows
Cash used for investing activities was [E]40.9 million in 2002, compared to
[E]92.5 million in 2001 and [E]89 .0 million in 2000. The high levels in 2001
and 2000 were due to the construction of our carbon-ceramic brake disc
production plant in Meitingen and the acquisition activity.
Capital expenditures for property, plant and equipment decreased by 41.8%
from [E]71.3 million in 2001 to [E] 41.5 million in 2002. In 2001, we reduced
investments in established businesses in order to channel more funds into new
growth projects in the SGL Technologies business area. Capital expenditures in
property, plant and equipment in 2002 were primarily for replacements. Capital
expenditure in intangible assets increased by [E]6.6 million to [E] 12.1
million primarily due to the implementation of our new standardized Group-wide
SAP system. We spent [E]0.7 million for additions to financial assets in 2002
compared to [E]5.7 million in 2001.
In past years, our capital expenditures focused on defending the global
position of Carbon and Graphite, our core business area, and on developing new
businesses in SGL Technologies to reduce our long-run dependence on EAF
steelmaking. Our capital expenditures peaked in 2001, when (in contrast to 2000
and 2002) they significantly exceeded depreciation. Almost 80% of our capital
expenditures in 2001 were in Carbon and Graphite and SGL Technologies. The most
important capital expenditures for Carbon and Graphite in 2001 were [E]4.3
million for new milling and batching equipment in our Frankfurt-Griesheim
facility. Our investments in SGL Technologies related primarily to the
Meitingen production facility. This investment is now largely completed; we
believe this facility now has sufficient capacity for the next several years.
In 2002, we began to reduce capital expenditures as part of our strategic
priority to increase cash flow and reduce net debt. We intend to reduce capital
expenditures in 2003 to a level significantly below depreciation. We expect
these expenditures to be limited primarily to replacement and maintenance.
Financing cash flows
Our liabilities decreased by [E]133.6 to [E]710.2 million in 2002 compared
to the increase by [E]12.6 million to [E] 843.8 million in 2001. The decrease
in financial liabilities in 2002 resulted from positive cash flows from
operating activities before antitrust payments and reduced investing
activities. Antitrust payments decreased by [E]26.8 million, amounting to [E]
10.1 million in 2002.
Our corporate debt decreased to [E]448.5 million at December 31, 2002 from
[E]538.9 million at December 31, 2001. Our corporate debt carried an average
interest rate of 4.4% during 2002, compared to an average rate of 4.8% in 2001.
On September 18, 2000, we issued 133,650 convertible bonds at an issue price of
100% of the nominal value of [E]1,000 per bond. The bonds bear annual interest
of 3.5% on their nominal value. Each bond may be converted into 11.2233 fully
paid-in Shares at any time between October 18, 2000 and September 4, 2005,
subject to adjustment of the conversion price. The bonds will become repayable
on September 18, 2005 at their nominal value, provided that they have not been
repaid or converted at an earlier date. We used the proceeds from the sale of
these bonds primarily for the long-term financing of the SGL Group, especially
for the development and growth of our Corrosion Protection and SGL Technologies
business areas.
We also received approximately [E]0.8 million in 2002 and [E]2.2 million in
2001 in connection with the issuance of Shares to current and former employees
and managers who elected to exercise stock options during those years.
We believe that cash flows from operations, combined with the available
borrowing capacity described above will be sufficient to meet our future
capital requirements for the current fiscal year, including scheduled debt
principal amortization payments, if we maintain compliance with the financial
covenants and other requirements of our credit facilities. Our ability to meet
these covenants in 2003 will depend upon a number of operational and economic
factors. In the event that we are unable to meet these covenants, we would
consider several options to meet our cash flow needs. These options could
include further renegotiations with our credit lenders, additional cost
reduction, or restructuring initiatives, sales of assets or capital stock, or
other alternatives to enhance our financial and operating position.
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Due to losses incurred in 1999 through 2002, SGL has not distributed
dividends for those years. The payment of future dividends will be dependent on
our earnings, the terms of our syndicated credit facility agreement, our
financial condition, and cash requirements, general business conditions in the
markets in which we operate, legal, tax, and regulatory considerations and
other factors. See Item 10, "Additional Information -- Material Contracts"
U.S. GAAP RECONCILIATION
We prepare our consolidated financial statements in accordance with IFRS,
which differ in certain significant respects from U.S. GAAP. See "--Significant
Differences Between IFRS and U.S. GAAP" as well as Notes 34 and 35 to our
consolidated financial statements for a discussion of these differences.
2002 2001 2000
--------- --------- ---------
([E] IN MILLIONS)
Net loss per IAS............................... (23.6) (95.2) (36.0)
--------- --------- ---------
Goodwill amortization.......................... 5.1 (2.7) (1.6)
Intangible/tangible fixed assets............... (3.0) (0.9) 2.2
Inventory...................................... 5.8 3.9 2.1
Pension provisions............................. (2.1) (1.1) (1.1)
Incentive plans................................ (2.2) (4.9) (9.3)
Restructuring.................................. (7.1) 7.9 0.0
First time implementation of IAS............... --- (41.9) 37.6
Deferred tax on U.S. GAAP adjustments.......... 5.1 (13.1) 2.8
--------- --------- ---------
Net loss per U.S. GAAP......................... (22.0) (148.0) (3.3)
--------- --------- ---------
Cumulative Change in Accounting Principles..... 9.4 0.0 0.0
--------- --------- ---------
Net loss per U.S. GAAP after Cumulative Change
in Accounting Principles..................... (12.6) (148.0) (3.3)
========= ========= =========
Under U.S. GAAP our operating profit (loss) before cost relating to
antitrust proceedings and restructuring expenses for the years ended December
31, 2002, 2001 and 2000 was [E](5.1) million, [E] (36.6) million and [E]59.7
million, respectively, compared to an operating profit (loss) under IFRS for
the same periods of [E](1.7) million, [E] (17.3) million and [E]79.2 million,
respectively. Our U.S. GAAP operating profit in 2002, 2001 and 2000 differed
from our IFRS operating profit for the same years, primarily due to differences
in goodwill amortization, deferred taxes, provisions, reserves and valuation,
as well as differing provisions for pensions. Furthermore, we reclassified the
interest component associated with our annual pension provision of [E]10.4
million in 2002 (2001: [E]9.9 million; 2000: [E] 9.2 million) as interest
expense under IFRS. See Note 34 to our consolidated financial statements for a
description of the differences between our IFRS accounting policies and those
that would be required under U.S. GAAP.
Basic loss per Share in accordance with U.S. GAAP in 2002 was [E](1.01),
compared to [E](6.87) in 2001 and [E] (0.15) in 2000. Basic loss per ADS in
accordance with U.S. GAAP in 2002 was [E](0.34), compared to [E] (2.29) in 2001
and [E](0.05) in 2000. Due to the net loss in each year, the diluted loss per
Share was the same as the basic loss.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria that intangible assets acquired in a purchase method business
combination must meet to be recognized and
-45-
reported apart from goodwill, noting that any purchase price allocable to an
assembled workforce may not be accounted for separately. Statement 142 requires
that goodwill and intangible assets with indefinite useful lives no longer be
amortized, but instead tested for impairment at least annually in accordance
with the provisions of Statement 142. Statement 142 also requires that
intangible assets with estimable useful lives be amortized over their
respective estimated useful lives to their estimated residual values, and
reviewed for impairment in accordance with FAS Statement No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of.
We adopted the provisions of SFAS 141 and SFAS 142 as of July 1, 2001, and
January 1, 2002, respectively. These Statements require that goodwill acquired
in a business combination completed after June 30, 2001, and any intangible
asset determined to have an indefinite useful life acquired after June 30,
2001, should not be amortized. Goodwill acquired in business combinations
completed before July 1, 2001, and any intangible assets with indefinite useful
lives acquired before July 1, 2001, were amortized until December 31, 2001.
SFAS 142 required the Group to evaluate its existing intangible assets and
goodwill and to make any necessary reclassifications in order to conform with
the new separation requirements at the date of adoption. The Group reassessed
the estimated useful lives and residual values of all intangible assets other
than goodwill and determined that no adjustments regarding amortization periods
were necessary.
In connection with the transitional impairment evaluation, SFAS 142
required SGL to perform an assessment of whether there is an indication that
goodwill is impaired as of January 1, 2002. To accomplish this, SGL (1)
identified its reporting units, (2) determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units, and (3) determined
the fair value of each reporting unit. SGL completed this first step of the
transitional assessment for all of the Group's reporting units by June 30,
2002, and determined there was no indication that goodwill had been impaired as
of January 1, 2002. Accordingly, no transitional goodwill impairment charge was
necessary. Finally, any unamortized negative goodwill existing at the date
Statement 142 was adopted was written off as the cumulative effect of a change
in accounting principle.
In June 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" which is effective for fiscal years beginning after June 15, 2002.
SFAS No. 143 addresses financial accounting and reporting for obligations and
costs associated with the retirement of tangible long-lived assets.
In October 2001 the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" "SFAS No. 144" supersedes FASB
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of APB Opinion No. 30, "Reporting the Results of Operations-
Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions," for
the disposal of a segment of a business. SFAS No. 144 also amends Accounting
Research Bulletin No. 51, "Consolidated Financial Statements," to eliminate the
exception to consolidation for a subsidiary for which control is likely to be
temporary and also broadens the existing definition of discontinued operations
to include a component of an entity (rather than a segment of a business).
Under SFAS No. 144 all long-lived assets to be disposed of and discontinued
operations shall be measured at the lower of carrying amount or fair value less
cost to sell. Goodwill is excluded from the scope of SFAS No. 144 and is tested
separately for impairment under SFAS No. 142. We adopted SFAS 144 effective
January 1, 2002. The adoption of SFAS 144 did not to have a material impact on
our financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections." SFAS
145 requires gains and losses on extinguishments of debt to be classified as
gains or losses from continuing operations rather than as extraordinary items
as previously required under SFAS 4, unless the gains and losses meet the
criteria to be classified as extraordinary pursuant to APB 30. SFAS 145 also
amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-lease back transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-lease back transactions. The rescission of SFAS 4 is effective
for fiscal
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years beginning after May 15, 2002. The provisions of SFAS 145 related to SFAS
13 are effective for transactions occurring after May 15, 2002. The adoption of
these provisions had no impact on the Group's consolidated financial
statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The Statement requires that a liability for
costs associated with exit or disposal activities be recognized in the period
in which the costs are incurred if a reasonable estimate of fair value can be
made. Under current accounting guidance, a liability can be recognized when
management has committed to an exit plan. The requirements under SFAS 146 are
effective prospectively for exit or disposal activities initiated after
December 31, 2002. Restatement of previously issued financial statements is not
permitted. The adoption of this Statement will affect the Group's accounting
for exit and disposal activities initiated after December 31, 2002.
December 31, 2002 the Financial Accounting Standards Board issued SFAS No.
148 "Accounting for Stock-Based Compensation -- Transition and Disclosure",
which amends the disclosure requirements relating to stock-based employee
compensation previously contained in SFAS No. 123. The amendments in SFAS No.
148 relevant to the SGL Group are effective for all fiscal years ending after
December 15, 2002. The disclosure requirements have been included in the
additional information provided on U.S. GAAP, see Note 35d to our consolidated
financial statements.
In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The required disclosures
and a roll-forward of product warranty liabilities are effective for financial
statements of interim or annual periods ending after December 15, 2002. At this
time, we do not believe that the adoption of this interpretation will have a
material effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights ("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity in which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. We are currently evaluating the impact of FIN
46 on our financial statements, but do not expect that there will be any
material impact.
We are required to and will adopt SFAS Nos. 143, 145, and 146 as well as
FIN 45 and FIN 46 and are currently reviewing these statements to determine
their impact on our U.S. GAAP results of operations and shareholders' equity.
We did not consider recent IAS pronouncements that are scheduled for
adoption after December 31, 2002 to be applicable to the activities of SGL
covered by this annual report.
RESEARCH AND DEVELOPMENT
We conduct research and development activities, both independently and in
conjunction with suppliers, customers and others, to develop new products and
to improve product quality and manufacturing processes. We carry out research
and development activities primarily at our German sites in Bonn and Meitingen
and at the U.S. sites located in Gardena and Valencia, California. Our research
and development activities are decentralized and closely linked to the business
units. At the
-47-
same time, our research and development staff is actively sharing knowledge and
experience across business units thus making effective use of the overall
research and development resources within the Group.
Supported by a well educated technical staff in the manufacturing
facilities, research activities are a fully integrated part of the SGL Group`s
organization. As a result, we are able to adapt our products quickly to the
changing requirements of the markets in which we compete and also successfully
enter into new product segments. We have recently developed large diameter
graphite electrodes for use in ultra high power (UHP) furnaces, which
contribute to a more efficient and more cost effective EAF steel process. In
early 2001, we became the first supplier in the world to introduce a 32-inch
(800mm) diameter electrode at a customer's facility. In the past two years we
have also established a leading position as supplier of ceramic brake disks for
automotive applications based on novel material developments. In addition, the
effort to cooperate closely and continuously with our key customers during the
improvement process ensures a high level of product and service quality. We
sponsor educational and informal programs for our customers and create problem
solving teams to improve customers' operations.
Our activities in new product development concentrate on high-tech
innovations with substantial growth potential. Our primary focus is currently
on ceramic brake disks for cars, new energy applications such as graphite
powders for lithium batteries and carbon components for fuel cells, and
composite structures for aerospace and defense applications. We are also
increasing efforts to develop non-sealing applications for our expanded
graphite materials. Primarily as a result of our recent growth efforts in those
high-tech areas, our research and development expenses increased to [E]29
million in 2000 and [E]31 million in 2001. In 2002, research and development
expenses were [E]25 million. This decrease is mostly related to re-structuring
efforts in our established business units. The efficiency of our research and
development processes has been increased by using more centralized research and
development resources and applying targeted innovation techniques.
TREND INFORMATION
We do not expect the global economy to recover significantly in 2003. We
cannot currently predict the economic impact on our business of the war in
Iraq. The ultimate impact could, however, be serious, especially if it affects
business with our customers in the Middle East. Because we can neither predict
not quantify the possible effects of the war, the following discussion of trend
information does not take these possible effects into account.
We expect that increased demand from the steel and aluminum industries will
lead to higher sales volumes of graphite electrodes and cathodes in 2003
compared to 2002. As of the date of this annual report, our order book has
already reached approximately 90% of our budgeted shipments of graphite
electrodes and 80% of our budgeted shipments of cathodes for 2003. Thus our
capacities are almost fully booked until the fourth quarter of this year.
Demand and orders for our carbon electrodes and for furnace linings are
currently in the normal range for this time of the year.
We do not anticipate a significant economic recovery in the key customer
industries of our Graphite Specialty business area -- semiconductors, tool
manufacturing, metals, chemicals, automotive--during 2003. We expect sales
revenue in this business area to remain substantially unchanged compared with
2002 or, if the economy recovers during the second half of the year, to
increase slightly.
Similarly, we expect no significant economic recovery during the current
year in the key customer industries of our Corrosion Protection business.
Participants in these industries, particular chemicals and plant engineering,
are currently reluctant to spend money on maintenance and investment. Order
entries during 2003 are low for this time of the year. We do, however, expect
that large orders relating to an Australian magnesium plant project may have a
positive effect on Corrosion Protection's sales revenue during 2003 and 2004.
Our SGL Technologies business is developing in accordance with our plans.
We expect a further increase in sales revenue from our carbon fibers and
carbon- ceramic brake discs as well as from the aerospace and defense-related
business of our U.S. subsidiary HITCO.
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Overall, we aim to achieve a slight increase in consolidated sales revenue,
driven primarily by higher sales volumes for graphite electrodes and cathodes
as well as further growth in SGL Technologies. We also aim to achieve an
improvement in consolidated operating results compared with 2002. We expect
that this improvement would primarily be the result of the positive effects of
past and current cost reduction programs as well as higher capacity utilization
in the Carbon and Graphite and SGL Technologies business areas.
SIGNIFICANT DIFFERENCES BETWEEN IFRS AND U.S. GAAP
This section describes the significant differences between IFRS and U.S.
GAAP as they relate to the SGL Group. See also Notes 34 and 35 to our
consolidated financial statements.
BUSINESS COMBINATIONS
Prior to the adoption of IAS 22 (revised 1993) on January 1, 1995, we
wrote- off all goodwill directly to equity in accordance with IAS existing at
that time. The adoption of IAS 22 "Business Combinations" (revised 1993) did
not require prior -period restatement. Accordingly, a U.S. GAAP difference
exists with respect to the recognition of goodwill and amortization before
January 1, 1995 and for the amortization of goodwill after January 1, 2002. For
U.S. GAAP reconciliation purposes, the pre-1995 goodwill is being amortized
through the statement of operations over the estimated useful lives between
five and 20 years. Since January 1, 2002, as stated in SFAS 142 goodwill should
no longer be amortized over its estimated useful life but evaluated annually
using an impairment test approach as described in SFAS 142. Under IFRS goodwill
was still amortized in 2002 and, accordingly, a reconciliation difference
exists.
In accordance with IFRS, any negative goodwill resulting in a business
combination as an excess of the acquirer's interest in the fair value of the
indentifiable assets and liabilities over the cost of the acquisition for which
the acquisition was before July 1, 2001 was presented as a deduction from the
assets of the reporting enterprise, in the same balance sheet classification as
goodwill, and recognized in the income statement over its remaining estimated
useful live. Accordingly, under U.S. GAAP an excess of the acquirer interest in
the fair value of the identifiable assets and liabilities over the cost of the
acquisition was allocated to reduce proportionately the values assigned to non-
current assets. The remainder of the excess over costs was classified as a
deferred credit. As of January 1, 2002 these amounts were written off and
recognized as the effect of a change in accounting principle. Subsequent to
January 1, 2002 any negative goodwill arising from a business combination is
recognized as income immediately.
INTANGIBLE AND TANGIBLE FIXED ASSETS
Statement of Position (SOP) 98-1 provides guidance on accounting under U.S.
GAAP for the costs of computer software developed or obtained for internal use.
Once the capitalization criteria of the SOP have been met, external direct
costs of materials and services consumed in developing internal-use computer
software; payroll and payroll-related costs for employees who are directly
associated with and who devote time to the internal-use computer software
project should be capitalized. Under U.S. GAAP, overhead costs should not be
capitalized as costs of internal-use software while under IFRS directly
allocated overhead costs are included.
For U.S. GAAP purposes, we capitalize interest on borrowings during the
active construction period of major capital projects. Capitalized interest is
added to the cost of the underlying assets and is depreciated as part of the
assets cost over the useful life of the asset. In accordance with IAS 23
"Borrowing Costs", benchmark treatment interest cost should be recognized as an
expense in the period in which they occur.
INVENTORY
IAS 2 "Inventories" identifies two alternatives as benchmark valuation
methods, the FIFO (first in, first out) method and the weighted-average cost
method. The LIFO (last in, first out) method is permitted as an alternative. In
valuing inventories for IFRS reporting, we have elected to apply the benchmark
method using the weighted average cost method. For certain inventories held in
the United States, under U.S. GAAP we have elected to continue recording
inventories on the LIFO method,
-49-
consistent with historical accounting practices. This is due, in part, to U.S.
income tax laws, regulations and rulings, which require that an entity using
LIFO for income tax purposes must use LIFO in its financial statements.
PENSION PROVISIONS
Under IFRS, pension costs and similar obligations are accounted for in
accordance with IAS 19, "Employee Benefits". For purposes of U.S. GAAP, pension
costs for defined benefit plans are accounted for in accordance with SFAS No.
87 "Employers' Accounting for Pensions" and the disclosure is presented in
accordance with SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits". IAS 19, as we apply it, is substantially similar to
the methodology required under SFAS No. 87. The adjustment between IFRS and
U.S. GAAP comprises amortization of the unrecognized transition obligation over
the remaining average service lives of employees and the recognition of an
additional minimum liability under SFAS No. 87, which is not required under IAS
19. Under IFRS, changes in the market value of plan assets are recognized in
the calculation immediately; under U.S. GAAP they are deferred over five years.
The interest component of additions to the pension provision has been shown as
an expense in the financial result under IFRS, which is below operating profit,
while under U.S. GAAP it is included in operating profit.
INCENTIVE PLANS
IFRS provides that, in the absence of a specific International Accounting
Standard or an Interpretation of the Standing Interpretations Committee of the
IASB, management should use its judgment in developing an accounting policy
that provides the most useful information to users of the enterprise's
financial statements. In making this judgment, management should consider,
among others, pronouncements of other standard setting bodies and accepted
industry practices. We have elected, for purposes of IFRS reporting, to
continue the accounting treatment for the incentive plans, consistent with
prior practices under German GAAP.
RESTRUCTURING
The only significant difference between the restructuring guidance under
both IAS 37, "Commitments and Contingencies" and Emerging Issues Task Force
(EITF) Issue 94-3 "Liability Recognition for Certain Employee Termination
Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred
in a Restructuring)" is found in the criteria for the initial recognition of a
restructuring provision. For employee termination benefits, EITF 94-3 requires
that prior to the date of the financial statements, the benefit arrangement be
communicated to employees, including sufficient detail to enable employees to
determine the type and amount of benefits they will receive when they are
terminated. IAS 37 does not require that the communication to employees be in
such detail but rather that the communication simply include the main features
of the plan. As a result, there may be situations in which an enterprise
following IAS 37 could recognize a restructuring provision before it would be
permitted to do so if it were following EITF 94-3.
FIRST TIME ADOPTION OF IFRS
A deferred tax asset for tax loss carryforwards has been recognized in the
IFRS consolidated financial statements on the basis of five-year projected
earnings before taxes of the individual companies consolidated. The projections
reflect uncertainties about certain assumptions and other general conditions,
and, in exceptional cases, a deferred tax asset for tax loss carryforwards has
not been recognized.
When we first prepared annual financial statements in accordance with IFRS
(then IAS), we adjusted recognition of deferred tax asset for tax loss
carryforwards in the United States retrospectively for the reporting periods.
These adjustments under U.S. GAAP also resulted in restatement of the amounts
reported in the published 2001 quarterly reports prepared in accordance with
IFRS. The deferred tax asset for tax loss carryforwards in the United States
was written down in full in the 2001 consolidated financial statements as a
consequence of the recession and the economic situation of the steel industry
in the United States. To ensure a comparable basis for the projection prepared
at end-2000 as regards uncertainties surrounding the U.S. economy and the U.S.
steel
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industry, the analysis horizon used as the basis for recognizing U.S. deferred
taxes at the end of fiscal year 2000 was truncated to three years under IFRS,
while the U.S. GAAP deferred tax assets as of December 31, 2000 remained.
DEFERRED TAXES
The items discussed above create differences between the U.S. GAAP book and
tax basis of assets and liabilities, requiring the recognition of associated
deferred tax assets and liabilities. With some exceptions, deferred tax assets
and liabilities are recognized for all differences between the book and tax
basis of the assets and liabilities using future statutory tax rates. In
addition, a valuation allowance is established when it is more likely than not
that deferred tax assets will not be realized.
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ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES
DIRECTORS AND SENIOR MANAGEMENT
In accordance with the German Stock Corporation Act (Aktiengesetz), SGL has
two distinct boards of directors. These are the Vorstand, or board of
management, which we refer to as our Executive Committee, and the Aufsichtsrat
or Supervisory Board. The two boards are separate; no individual may be a
member of both boards.
The Executive Committee is responsible for managing the business of SGL in
accordance with applicable laws and the Articles of Association (Satzung) of
SGL.
The principal function of the Supervisory Board is to supervise the
Executive Committee.It is also responsible for appointing and removing the
members of the Executive. Certain transactions, such as purchases and sales of
real estate, commencement or discontinuance of business lines, the granting of
guarantees, or buying and selling equity interests require the prior consent of
the Supervisory Board if the transaction goes beyond SGL's ordinary course of
business. To ensure that these functions are carried out properly, the
Executive Committee must, among other things, regularly report to the
Supervisory Board with regard to current business operations and future
business planning. The Supervisory Board is also entitled to request special
reports at any time. The Supervisory Board oversees our management but is not
permitted to make management decisions.
Both the members of the Executive Committee and the members of the
Supervisory Board are responsible for and manage their own affairs
(Kompetenztrennung). In carrying out their duties, the individual board members
must exercise the standard of care of a diligent and prudent businessman. In
complying with this standard of care, the boards must take into account a broad
range of considerations including the interests of SGL and its shareholders,
employees and creditors.
As a general rule under German law, a shareholder has no direct recourse
against the members of the Executive Committee or the Supervisory Board in the
event that they are believed to have breached a duty to SGL. Apart from
insolvency or other special circumstances, only SGL has the right to claim
damages from members of either board. We may only waive these damages or settle
these claims if at least three years have passed and if the shareholders
approve the waiver or settlement at the shareholders' meeting with a simple
majority of the votes cast, provided that opposing shareholders do not hold, in
the aggregate, one tenth or more of our share capital and do not have their
opposition formally noted in the minutes maintained by a German notary.
EXECUTIVE COMMITTEE
The Executive Committee of SGL currently consists of five members (the
total number is determined by the Supervisory Board) who are appointed by the
Supervisory Board in accordance with the German Stock Corporation Act.
Pursuant to the Articles of Association of SGL, any two members of the
Executive Committee or one member of the Executive Committee together with the
holder of a general power of attorney (Prokura) recorded in the commercial
register (Handelsregister) may bind SGL.
The Executive Committee must report regularly to the Supervisory Board, in
particular, on proposed business policy and strategy, profitability and on the
current business of SGL Group as well as on any exceptional matters that may
arise from time to time.
The members of the Executive Committee are appointed by the Supervisory
Board for a maximum term of five years. They may be reappointed or have their
term extended for one or more terms of five years. Under certain circumstances,
such as a serious breach of duty or a bona fide vote of no confidence by the
shareholders' meeting, a member of the Executive Committee may be removed by
the Supervisory Board prior to the expiration of his or her term. A member of
the Executive Committee may not deal with, or vote on, matters relating to
proposals, arrangements or contracts between himself and SGL.
According to the Articles of Association of SGL, board decisions are made
by a simple majority of the votes, if the law does not require a larger
majority. In the event of a tie, the vote of the Chairman of the Executive
Committee is decisive. In practice, SGL reaches its decisions by consensus.
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The current members of the Executive Committee of SGL and the year in which
they were appointed to their positions are as follows:
YEAR
NAME APPOINTED END OF TERM TITLE
-------------------- --------- ------------- -----------------------------------
Robert J. Koehler... 1994 December 2006 Chairman of the Executive Committee
Theodore H. Breyer.. 1999 June 2005 Member of the Executive Committee
Dr. Hariolf Kottmann 2001 March 2007 Member of the Executive Committee
Dr. Bruno Toniolo... 1996 December 2004 Member of the Executive Committee
Dr. Klaus Warning... 1997 June 2006 Member of the Executive Committee
Mr. Koehler has served as Chairman of the Executive Committee since SGL's
transformation into a stock corporation in 1994. From 1992 until that time, he
served as Chairman of the Board of Managing Directors of SGL CARBON GmbH. Prior
to joining the SGL Group, he held various positions with the Hoechst Group.
From 1989 to 1991, Mr. Koehler was Head of Corporate Planning of Hoechst AG,
and from 1987 until 1989, he served as President of Hoechst Colombiana S.A.
From 1985 to 1987, he was responsible for the Industrial Division of Hoechst
U.K. Limited and was a member of the Management Committee. Prior to his
position as Director of Chemical Division of Hoechst U.K. Limited from 1975 to
1985, he was Product Manager of Organic Chemicals at Hoechst AG from 1971 to
1975.
Mr. Breyer was appointed as a member of the Executive Committee in 1999. In
addition to this appointment, he took over the responsibility for the global
Carbon and Graphite business area effective January 1, 2002. In 1970, Mr.
Breyer joined the Caltex Petroleum Corporation. Between 1974 and joining SGL
Group in 1995, Mr. Breyer held various positions in Hoechst Celanese, most
recently as Vice President and General Manager for Bulk Pharmaceuticals
Products of the Specialty Chemicals Group. From 1997 to 1999, Mr. Breyer served
as Chairman of our the Carbon and Graphite North America business unit.
Mr. Kottmann was appointed as a member of the Executive Committee in 2001.
In addition to this appointment, he took over the responsibility for the global
Graphite Specialties business area effective January 1, 2002. Prior to joining
the SGL Group, Mr. Kottmann acted as Executive Vice President of Celanese Ltd.
(Dallas, Texas). Mr. Kottmann has also held several management positions as
divisional head of research and development, divisional head of production and
head of divisions with Hoechst AG or affiliated companies.
Mr. Toniolo was appointed as a member of the Executive Committee in 1996.
Between 1992 and 1995, he served as Chairman of the Carbon and Graphite Europe
business unit and was Managing Director of SGL CARBON S.p.A., Italy. Prior to
joining the SGL Group in 1983, he held positions as Controller and Treasurer at
Singer S.p.A. and Kodak S.p.A. in Italy.
Mr. Warning was appointed as a member of the Executive Committee in 1997.
Prior to joining the SGL Group, he acted as a member of the Board of Management
and Senior Vice President of Hoechst Celanese Corp. in the United States. Mr.
Warning has also held several management positions, mainly in the area of
research and development, with Hoechst AG.
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OTHER SENIOR MANAGEMENT
The table below sets forth the SGL Group's senior executive officers, the
year they were appointed and their positions within the SGL Group:
YEAR
NAME APPOINTED MANAGEMENT POSITION
----------------------- --------- -----------------------------------------------
Reinhard Damerow....... 1992 Group Coordination -- Treasury
Wilhelm Hauf........... 2001 Group Coordination -- Accounting
Dr. Joachim Heins-Bunde 1992 Group Coordination -- Corporate Planning
Gernot Hochegger....... 2002 Managing Director -- SGL Technologies
Dr. Thomas Kosack...... 2000 Corrosion Protection business area
Helmut Muhlbradt....... 1989 Group Coordination -- Human Resources and Legal
Dr. Jan Verdenhalven... 2001 Managing Director -- SGL Technologies
Thomas Werner.......... 2000 Group Coordination -- Information Services
Mr. Damerow joined SGL as Head of Finance and Accounting in 1992. In 2001
he took over the newly formed position as Head of Group Treasury. Prior to
joining the SGL Group, he held the position of Head of the Securities
Department of Hoechst AG.
Mr. Hauf was appointed Head of Group Accounting in 2001. From 1994 until
2001, he was Controller of the Carbon and Graphite Europe business unit. He
joined SGL Group in 1992 as a member of the Corporate Planning and Coordination
Department. Prior to joining the SGL Group, Mr. Hauf was in the Central
Auditing Department of Hoechst AG.
Mr. Heins-Bunde has served as Head of Corporate Planning and Coordination
since 1992. He joined SGL Group in 1982, holding various positions in sales,
business unit management and central coordination.
Mr. Hochegger was appointed Chairman of the Graphite Specialties Europe
business unit in 1997. From 1995 until 1997, he was Chairman of the Specialty
Graphite business area, and prior to that position, he served as Chairman of
the Specialty Graphite North America business unit. Mr. Hochegger joined the
SGL Group in 1965 and has served in various research, marketing and general
management positions. Effective January 1, 2002, Mr. Hochegger was appointed
Managing Director of SGL Technologies.
Mr. Kosack was appointed Chairman of the Corrosion Protection business area
at the beginning of 2000. He joined the SGL Group in 1997 as Strategic
Controller of the former Process Equipment and Linings business unit. Prior to
joining the SGL Group, Mr. Kosack was responsible for the European polyethylene
business of Hoechst AG.
Mr. Muhlbradt joined SGL as Head of Human Resources and of the Legal
Department in 1989. Prior to joining the SGL Group, he held similar positions
with other companies of the Hoechst Group.
Mr. Verdenhalven was appointed Managing Director of SGL Technologies in May
2001. He joined the SGL Group in March 2000 as Head of Corporate Controlling
and Development. Prior to joining the SGL Group, he held several management
positions with Hoechst AG and a consulting company.
Mr. Werner joined the SGL Group as Chief Information Officer in 2000. Prior
to joining the SGL Group, he held similar positions including operations
research with other international companies.
SUPERVISORY BOARD
The current Supervisory Board of SGL consists of twelve members, six of
whom were elected by the shareholders in the general meeting in accordance with
the provisions of the Stock Corporation Act and six of whom were elected by the
employees in accordance with the Co-Determination Act (Mitbestimmungsgesetz).
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A member of the Supervisory Board elected by the shareholders may be
removed by a majority of at least three-quarters of the votes cast at a general
meeting of shareholders. A member of the Supervisory Board elected by the
employees may be removed by a majority of at least three-quarters of the votes
cast by the relevant class of employees. The Supervisory Board appoints a
chairman and a deputy chairman from among its members. The Chairman of the
Supervisory Board must be elected by a majority of two-thirds of the members of
the Supervisory Board. If this majority is not reached in the first vote, the
chairman will be elected in a second vote solely by the representatives of the
shareholders. At least half the members of the Supervisory Board must be
present to constitute a quorum. Unless otherwise provided for by law or the
Articles of Association, resolutions are passed by a simple majority of the
Supervisory Board. In the event of a tie, another vote is held, and the
chairman then has a tie-breaking vote.
The members of the Supervisory Board are each elected for a term of about
five years (the term expires at the end of the general meeting of shareholders
in which the shareholders discharge the Supervisory Board member for the fourth
fiscal year following the year in which such member was elected). The
remuneration of the members of the Supervisory Board is determined by the
Articles of Association of SGL.
The current members of the Supervisory Board of SGL, the years in which
they were first elected to the Supervisory Board of SGL or its predecessor
companies, respectively, and their principal occupations are as follows:
YEAR END OF
NAME FIRST ELECTED TERM(1) PRINCIPAL OCCUPATION
--------------------------------------- ------------- ------- ----------------------------------------------------------
Prof. Dr. rer. nat. Utz-Hellmuth Felcht
(Chairman)........................... 1992 2003 Chairman of the Board of Management of Degussa AG
Franz Schaffer(2)
(Vice Chairman)...................... 1978 2003 Metal worker, SGL CARBON AG, Meitingen
Hans-Georg Bartel(2)(3)................ 1999 2002 Electrician, SGL CARBON GmbH, Bonn
Peter Fischer(2)....................... 1993 2003 Legal Counsel of SGL CARBON AG, Wiesbaden
Dr-Ing. Claus Hendricks................ 1996 2003 Member of the Board of Management of Thyssen Stahl AG
Hansgeorg B. Hofmann................... 1996 2003 Banker
Authorized Representative of IG Metall, Verwaltungsstelle
Juergen Kerner(2)...................... 2002(4) 2003 Augsburg
Dr.-Ing. Hubert H. Lienhard............ 1996 2003 Enterpreneur
Jacques Loppion........................ 1993 2003 Chairman of Giat Industries S.A.
Authorized Representative of IG Metall, Verwaltungsstelle,
Lutz Muhring(2)........................ 1998 2003 Bonn-Rhein-Sieg
Authorized Representative of IG Metall, Verwaltungsstelle,
Karl-Heinz Schneider(2)(5)............. 1985 2003 Augsburg
Heinz Schroth(2)....................... 1988 2003 Administrative clerk, SGL ACOTEC GmbH
Andrew H. Simon........................ 1998 2003 Consultant and Member of the Board of various companies
Technician Mechanical Engineering, SGL CARBON
Hans-Werner Zorn(2).................... 2003(6) 2003 GmbH, Bonn
(1) Terms end upon the adjournment of the annual shareholders' meeting held in
the year indicated.
(2) Employee representatives.
(3) Mr. Bartel died on November 11, 2002 before the scheduled expiry of his
term.
(4) Appointed by court as replacement on September 13, 2002.
(5) Mr. Schneider resigned on June 11, 2002 before the scheduled expiry of his
term.
(6) Appointed by court as replacement on February 27, 2003.
COMPENSATION
In 2002 SGL paid aggregate compensation of [E]3.1 million (including a 54%
variable component from the management incentive plans) to the members of its
Executive Committee who held office in 2002, and aggregate compensation of
[E]2.2 million to its executive officers (excluding the Executive Committee,
including a 44% variable component) who held office in 2002. The aggregate
amount of
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compensation paid by SGL to the members of its Supervisory Board in 2002
amounted to [E]0.3 million. In addition, SGL paid [E] 0.1 million to retired
members of the Executive Committee and their surviving dependents. Pension
reserves for these persons were [E]1.1 million as of December 31, 2002.
In accordance with the provisions of the Articles of Association of SGL,
the remuneration paid to the Supervisory Board contained fixed and variable
components until fiscal year 1999. Effective from fiscal year 2000, only a
fixed remuneration in the amount of [E]20,000 was to be paid to each
Supervisory Board member. The chairperson received twice this amount and the
deputy chairperson received one and one-half times this amount. In addition,
members of Supervisory Board committees received [E]2,000 for each committee
meeting attended.
Approximately 500 key managers are eligible for participation in our annual
bonus program. This program provides for annual bonus payments subject to (i)
SGL's income before tax, (ii) the operating results of the respective business
unit and (iii) the personal performance of the participating manager. Depending
on the seniority and the position held by the participating manager, these
bonus payments can equal between 25% and 70% of base salary.
Since 1998, a similar bonus plan was introduced for all non-exempt
employees in Germany, replacing the previous profit-sharing plan. The bonus
payment under this plan can amount to up to 20% of an employee's yearly base
salary and is distributed in the form of Shares.
MANAGEMENT INCENTIVE PLANS
Effective January 1, 1996, the SGL Group implemented an incentive program
that grants to the members of the Executive Committee and selected senior
managers participation in a Stock Appreciation Rights Plan (SAR-Plan). The
Long-Term Cash Incentive Plan (LTCI-Plan) 1999-2001 has been followed by the
LTCI-Plan 2002-2004. A share ownership plan open to all employees became
effective in March 1996. A Share Plan and a new Stock Option Plan were approved
by the annual meeting of shareholders of SGL on April 27, 2000. The Stock
Option Plan was implemented in June 2000, and the share plan was implemented in
March 2001.
SAR-Plan
Under the SAR-Plan, certain managers of the SGL Group have been granted
stock appreciation rights (SARs). Each SAR represents (i) with respect to a
participant who is a member of the Executive Committee, the right to receive an
amount equal to the difference between the exercise price, which ranges from
[E]33.03 to [E]102.26, and the Sh are price as officially quoted on the
Frankfurt Stock Exchange on March 16 of each year until termination of the SAR-
Plan, and (ii) with respect to a participant who is an employee of the SGL
Group, the right to purchase one Share at the exercise price.
One SAR is equivalent to one Share. The total number of Shares associated
with the SAR-Plan is 840,500, which represents approximately 4% of all Shares
outstanding. SARs representing a total of 797,300 Shares have been allocated to
the members of the Executive Committee and 74 senior managers as of December
31, 2002. Of these SARs, 637,350 had been exercised as of December 31, 2002.
Under the SAR-Plan, a specific number of SARs, as determined by the
Executive Committee, or by the Supervisory Board if the participant was a
member of the Executive Committee, were allocated to a participant at the
beginning of the SAR performance cycle (January 1, 1996 -- December 31, 2000).
The options allocated to each participant vest on January 1 of each year from
1997 through 2001, in annual installments of 20% during the vesting period (the
12 month period immediately preceding the vesting date). Each vested option can
be exercised between March 1 and March 15 of each year, but not later than
March 15, 2006, or upon termination of service as described below.
From the net proceeds derived from the exercise of SARs by a member of the
Executive Committee, an equivalent of 15% of the gross proceeds must be applied
by the participant for the purchase of Shares in the stock market. For this
purpose, SGL will instruct a financial institution to acquire the Shares for
the account and in the name of the member of the Executive Committee. SGL or
the relevant subsidiary will provide the financial means to effect the purchase
directly to the financial institution from the participants' funds derived from
the exercise of the SARs. The financial
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institution will retain these Shares on behalf of the member of the Executive
Committee for the next twelve months, after which period the Shares will be
delivered to the participant. The remaining net proceeds will be paid to the
member of the Executive Committee.
All of the Shares purchased by a participant who is an employee of the SGL
Group upon exercise of a SAR must immediately be resold by such employee except
for a number of Shares equivalent to the number of Shares that can be purchased
with 15% of the gross proceeds from the sale of all the Shares. Such retained
Shares may not be sold and are restricted for a period of twelve months.
If a participant's employment with the SGL Group terminates due to
disability, death or termination without cause within one year of a change of
control, any vested or non-vested part of a SAR will be deemed exercised or, in
the case of employees, will be exercisable during the exercise period following
the termination of employment. In the case of termination for cause, the
participant's right to exercise any vested and non-vested part of the SAR
terminates and the SAR lapses. In this event, the Supervisory Board is
authorized to grant the participant the right to exercise immediately or, in
the case of employees, to exercise during the exercise period following the
termination of employment any vested part of the option to the extent such part
of the option is exercisable at the date of such termination. In the case of
retirement, termination without dispute, or voluntary termination of
employment, the participant's right to exercise any non-vested part of the SAR
terminates and such option lapses. Any vested part of the option is deemed
exercised or, in the case of employees, will be exercisable during the exercise
period following the termination of service to the extent such part was
exercisable at the date of termination of employment. If the employment of a
participant who is a member of the Executive Committee terminates voluntarily
without dispute within one year of a change in control, any vested and non-
vested part of the SARs of such members of the Executive Committee will be
deemed exercised.
LTCI Plan 2002-2004
Under the LTCI-Plan, the members of the Executive Committee and 36 senior
managers were granted cash awards by SGL subject to the achievement of certain
performance targets over a three-year period. The current plan period is 2002
through 2004. The maximum aggregate award is [E]7.8 million.
The performance target that the SGL Group must reach in order for
participating senior managers and directors to be entitled to the maximum award
under the LTCI-Plan was set at a 2.3 ratio of net debt to EBITDA.
Of the net proceeds from the LTCI premium, an amount equal to 15% of the
gross proceeds must be used by the participants to buy Shares of SGL Carbon AG.
The shares must be locked up for 12 months.
If a participant's employment with the SGL Group or its affiliates
terminates due to retirement, disability, death, transfer to another affiliate
or termination without cause, the participant will have the right to obtain a
prorated award proportional to such participant's tenure in the LTCI-Plan until
the date of termination of service. If a participant who is a member of the
Executive Committee terminates employment with the SGL Group due to a voluntary
termination for good cause within one year of a change of control, such
participant will have the right to obtain a prorated award proportional to the
participant's tenure in the LTCI-Plan until the date of termination of service.
In the case of termination for cause or voluntary termination that is not
caused by a change of control, the participant's right to obtain any LTCI award
terminates and such award lapses.
Share Ownership Plan
Under the Share Ownership Plan, each German and Austrian employee was
offered 25, 50 or 60 Shares at a price of [E]4.42 per share for the first 25 or
50 Shares (basic offer) and at a price of [E]5.50 for the additional 10 Shares
(additional offer). In total, 1,631 employees participated in this program and
purchased an aggregate number of 88,775 Shares. These Shares were issued on the
basis of the capital increase from authorized capital in 2002. The Shares of
the basic offer are subject to a two-year internal lock-up period until
November 30, 2004, and those of the additional offer to a one-year lock-up
period until November 31, 2003.
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For accounting purposes, under German GAAP and IFRS , the difference
between the Share purchase price paid by the SGL Group and that paid by the
employees will represent compensation expense that is recognized through a
charge in the statement of operations at the date of each transaction.
For additional information related to the incentive programs, see Note 31
to our consolidated financial statements for the year ended December 31, 2002.
Share Plan
The Share Plan of SGL was adopted by the Shareholders of SGL at the annual
meeting of shareholders held on April 27, 2000. The maximum number of Shares
that may be reserved for the issuance of Shares under the Plan shall not exceed
250,000 new Shares. The Share Plan was implemented, effective March 31, 2001.
No Shares were issued under the Share Plan as of December 31, 2002. At the end
of March 2003, for the first time 20,508 new shares were issued from the
authorized capital increase to the senior managers and officers participating
in the Share Plan 2001; 6,490 already outstanding shares, acquired in the stock
market, are granted to the members of the Executive Committee.
The Supervisory Board will administer the Plan for the members of the
Executive Committee Under the Share Plan, the Supervisory Board is authorized
to grant Shares in SGL to members of the Executive Committee. The Executive
Committee will administer the Share Plan for the senior managers and officers
of SGL and those companies in which SGL, directly or indirectly, holds a
majority interest. For the "purposes of the Share Plan, the Stock Option Plan
and the Change in Control Agreement described below, these companies are
referred to as Affiliates"). Under the Share Plan, the Executive Committee is
authorized to grant Shares to those senior managers of the SGL Group as it
selects, and to members of the management and senior managers of Affiliates.
The Shares will be issued as a result of a capital increase against
contributions in kind in form of bonus claims. Such bonuses will be granted to
the participants under the Share Plan.
Level 1, 2 and 3 senior managers of SGL and its Affiliates selected by the
Executive Committee and members of the Executive Committee selected by the
Supervisory Board may participate in the Plan on a voluntary basis.
In order to participate in the Plan, the selected employees and members of
the Executive Committee must acquire Shares in the stock market in an amount
not exceeding 50% of their bonuses under SGL's annual bonus plan at the
relevant current price of the Shares in the Xetra securities trading system on
the Frankfurt Stock Exchange prior to the start of the Plan. The Shares
acquired in the stock market are held for the participants in a blocked custody
account for a two year lock-up period. The participants may not dispose of the
Shares during the lock-up period in order to retain their entitlements to be
granted matching Shares (at the end of the Plan as described below).
After the lock-up period, SGL will grant each participant a number of new
matching Shares from the authorized capital increase in an amount equal to the
number of Shares held for the benefit of each participant in the blocked
custody account. The contribution in kind by the participants is a claim for
the bonus payment payable at the end of the lock-up period. After the end of
the lock-up period, the participants receive the released Shares and the
matching Shares.
The 76 senior managers who participated in the Share Plan as of March 2003
have purchased 38,381 Shares in the stock market in connection with the Share
Plan.
Stock Option Plan
SGL`s shareholders adopted the Stock Option Plan at their annual meeting
held on April 27, 2000. The maximum number of Shares that may be reserved for
issuance under the Plan may not exceed 1,600,000. The options may be granted
until the end of the year 2004. The Stock Option Plan has been implemented
effective June 2000.
The Supervisory Board will administer the Plan for the members of the
Executive Committee. Under the Plan, the Supervisory Board is authorized to
grant options on Shares to members of the Executive Committee. The Executive
Committee will administer the Plan for approximately 150 senior managers and
officers of SGL and its Affiliates. Under the Plan, the Executive Committee is
authorized to grant options to those senior managers of SGL as it determines,
and to members of the
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management and senior managers of its Affiliates. In each case, the Supervisory
Board or the Executive Committee, will offer and transfer new Shares upon
exercise of the options out of the conditional capital created for that
purpose.
The options available under the Plan will be distributed as follows:
* Executive Committee, up to 30%;
* senior managers of SGL, up to 20%;
* members of management of Affiliates, up to 20%; and
* remaining senior managers of Affiliates, up to 30%.
If any of the groups mentioned above is not granted its maximum number of
options, the remaining options may be cumulatively distributed to the
participants in the next or previous group, in addition to the maximum number
of options that are distributed to that group, to the extent that the total
volume of subscription rights are exhausted. The Executive Committee or, to the
extent that members of the Executive Committee are affected, the Supervisory
Board, will decide on the allocation of any remaining options. However, no more
than 30% of the available options may be distributed to members of the
Executive Committee.
The options have a term of 10 years starting on the date of grant and will
expire, without compensation, if they are not exercised before this period
elapses.
The options may not be exercised until a two-year qualifying period has
elapsed, which period begins on the day following the date of grant, resulting
in an exercise period of eight years. During the exercise period, exercise of
the options is possible only on trading days during defined trading windows.
For each tranche of options, there will be two trading windows of 10 days in
which options may be exercised following SGL's public reporting dates. These
periods will be determined by the Supervisory Board if members of the Executive
Committee are granted options, and by the Executive Committee for options
granted to the remaining participants.
Options may be exercised only if the SGL Group has met its performance
target at the time the options are exercised. The performance target is the
increase in the total shareholder return of the Shares. The plan defines total
shareholder return as the Share price plus reinvested dividends plus the value
of the options. Total shareholder return must increase by at least 15% against
the exercise price for options to be exercised.
The exercise price to be paid by participants under the Plan will be
calculated based upon the average closing price of the Shares on the Xetra
securities trading system of the Frankfurt Stock Exchange for the last 20
trading days before the relevant options are granted, without taking into
account incidental purchase costs. The minimum amount to be paid will be the
proportional interest in SGL's share capital per Share.
The options are subject to certain terms and conditions of sale, namely,
participants must retain a minimum number of Shares equal to 15% of the gross
proceeds for an additional twelve months.
The number of options granted, and their respective exercise prices, are as
follows:
* as of July 3, 2000, 234,500 options were granted to the members of
the Executive Committee and 151 senior managers at an exercise
price of [E]72.45;
* as of January 16, 2001, 257,000 options were granted to the members
of the Executive Committee and 155 senior managers at an exercise
price of [E]57.82;
* as of January 16, 2002, 261,000 options were granted to the members
of the Executive Committee and 170 senior managers at an exercise
price of [E]25.00;
* as of August 12, 2002, 247,000 options were granted to the members
of the Executive Committee and 154 senior managers at an exercise
price of [E]17.65; and
* as of January 16, 2003, 258,500 options were granted to the members
of the Executive Committee and 168 senior managers at an exercise
price of [E]8.35.
A total of 1,258,000 options have been granted to participants under the
Plan.
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CHANGE IN CONTROL
In March 2002 the Personnel Committee (Personalausschuss) of the
Supervisory Board resolved to enter into a "Change in Control" Agreement with
the members of the Executive Committee, and the Executive Committee resolved to
enter this agreement with senior management.
For the purposes of this agreement, a change in control will occur if
* an investor or a group of investors directly or indirectly acquires
more than 30% of the voting rights in the general meeting of SGL's
shareholders;
* the general meeting of shareholders consents to a combination by
merger with another entity, a takeover by another entity or the new
formation of another entity, or
* the Affiliate in which the senior managers are employed leaves the
SGL Group.
If, following a change in control, SGL or an Affiliate intends to terminate
without cause the employment of a manger who is party to the change in control
agreement, or if the manager intends to end the employment relationship with
good reasons, the manager will offered a separation agreement terminating
employment with a notice period of 3 months from the end of the then current
month. This offer will lapse if the manager is offered a position appropriate
to his qualifications in another Group company.
The settlement under the separation agreement will include payment of three
times annual salary for the Chairman of the Executive Committee and two times
annual salary for other members of the Executive Committee and senior managers.
Annual salary will consist of the most recent annual base salary plus the
annual target bonus.
Managers may assert a claims for a separation agreement only within 18
months following the change in control.
BOARD PRACTICES
We have entered into service agreements with all current members of our
Executive Committee. These agreements generally provide for base salary, an
annual bonus plan, a pension plan and fringe benefits. For a discussion of the
stock option and similar plans in which the management of the SGL Group
participate, see "--Management Incentive Plans". We believe that the service
agreements between SGL and the members its Executive Committee provide for
ordinary payments and benefits upon termination of employment that are in line
with customary market practices.
All compensation paid to the members of SGL's Executive Committee must be
approved by the Personnel Committee of the Supervisory Board. The Personnel
Committee consists of three members who meet four times annually, or on an as-
needed basis. The chairman and the deputy chairman of the Supervisory Board sit
on the Committee as permanent members, and the third member is a member of the
Supervisory Board who represents the shareholders and is elected to the
Committee by the other members of the Supervisory Board. The current members of
SGL's Personnel Committee are Prof. Dr. Utz-Hellmuth Felcht, Mr. Hans-Georg
Hofmann and Mr. Franz Schaffer.
For a discussion of the terms of office of the current members of the
Supervisory Board and the Executive Committee of SGL, see "--Directors and
Senior Management".
EMPLOYEES
At the end of 2002, we employed a global workforce of 7,360 people, a
decrease of 837, or 10% from the end of the previous year. The number of people
employed in our established Carbon and Graphite, Graphite Specialties and
Corrosion Protection business areas declined by 884 to 6,551 at December 31,
2002. As a result of the transfer of the graphite foils business from Graphite
Specialties to SGL Technologies, our growth businesses area, headcount at SGL
Technologies rose by 52 to 757 at the end of 2002.
As a result of these changes, the percentages of the global workforce
employed in individual business areas and regions differed compared with the
previous year. Employees in Germany accounted for 43% of the total workforce at
the end 2002, compared to 41% at the end of 2001. The proportion of employees
in the Carbon and Graphite business area dropped to 42% (2001: 43%),
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while the employees in the Corrosion Protection business area slightly
increased from 27% in 2001 to 28% in 2002. The percentage of employees in the
Graphite Specialties business area dropped to 20% (2001: 21%) and the
percentage of employees in SGL Technologies was 10% (2001: 9% ) of the total.
Approximately 90% of our employees are covered by collective bargaining or
similar agreements that expire at various times over the next several years.
Except for non-material strikes at our Italian plants and one plant in France,
we have not experienced any work stoppages or strikes as a result of labor
contract negotiations in the past decade at our current locations. We believe
that we have satisfactory relations with our workers councils and unions and,
therefore, anticipate reaching new agreements on satisfactory terms as the
existing agreements expire.
SHARE OWNERSHIP
Neither the members of the Supervisory Board and Executive Committee nor
any other officers serving in the management of the SGL Group beneficially own
1.0% or more of the outstanding Shares or of the shares of any of SGL`s
subsidiaries.
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ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS
MAJOR SHAREHOLDERS
As of March 13, 2003, SGL had 22,184,958 Shares outstanding.
The Shares are issued only in bearer form. We are therefore unable to
determine how many shares any given shareholder owns. To the best of our
knowledge, SGL is not controlled, directly or indirectly, by another
corporation or by any government, and there are no arrangements known to us
that may at a subsequent date result in a change in control of SGL.
As of March 2003, there were 408 registered holders of American Depositary
Receipts under our sponsored program with JPMorgan Chase Bank. Our ADRs are
listed on the New York Stock Exchange. Each ADR represents one third of a
share.
Under Section 21 of the German Securities Trading Act
(Wertpapierhandelsgesetz), holders of voting securities of a German company
(including SGL) admitted to official trading on a stock exchange within the
European Union or the European Economic Area are obliged to notify both the
company and the German Federal Supervisory Authority for Financial Services
(Bundesanstalt fur Finanzdienstleistungsaufsicht) promptly and in writing of
the level of their holdings whenever such holdings reach, exceed or fall below
certain thresholds. These thresholds are set at 5%, 10%, 25%, 50% and 75% of a
company's outstanding voting rights. If a shareholder fails to notify the
company as required, the shareholder will be disqualified from exercising the
voting rights attached to its shares, for so long as such failure continues.
The German Securities Trading Act contains various rules designed to ensure the
attribution of shares to the person who has effective control over the shares.
SGL has been informed, that as of January 20, 2003, the Abu Dhabi
Investment Authority had reduced its beneficial ownership to 762,794 Shares,
corresponding to 3.49% of voting rights. On January 28, 2003, SGL also received
notification that The Capital Group Companies held 1,108,200 Shares,
corresponding to 5.068% of voting rights. On February 8, 2003, SGL received
notification that Oppenheimer Funds held 1,134,432 Shares, corresponding to
5.19% of voting rights. On February 22, 2003, SGL was also informed that
Allianz AG held 1,304,786 Shares, or 6% of voting rights.
RELATED PARTY TRANSACTIONS
During the course of its business activities, the SGL Group renders
services to related companies and persons. In turn, these persons and companies
deliver goods or render services to the SGL Group as part of their business
purpose. These transactions are on an arm's length basis. Receivables from
unconsolidated subsidiaries and associates amount to [E]12.9 million, and the
corresponding liabilities amount to [E]6.4 million. Details are presented in
the notes to the relevant balance sheet and income statement items in our
consolidated financial statements.
In August 2001, Paul W. Pendorf was appointed Chief Executive Officer of
HITCO. Mr. Pendorf has acquired a 6% minority interest in this company. The SGL
Group has granted a loan to Mr. Pendorf, secured by the proceeds from the sale
of his HITCO shares, to finance the purchase price. The shareholders agreement
also provides for options that can be exercised by both sides at a variable
price after no later than four years.
Mr. Pendorf is also a shareholder (AMT II, a company that has entered into
two service and option agreements with HITCO. Under the terms of the option
agreement, AMT II has an option to buy up to 43% of the shares of HITCO on the
basis of a defined calculation formula. This option expires no later than three
years after signing in August 2001 or after exercise of the put or call option
from the shareholders' agreement. SGL can extend this option by a further year.
In order to assist in our endeavors to ensure solid long-term financing,
the Executive Committee signed a temporary consulting contract with Hansgeorg
Hofmann on June 24, 2002, which was approved by the Supervisory Board. The
consultant expense in 2002 amounted to [E]75,000.
At December 31, 2002 and 2001, there were also call-in obligations of $3.6
million and $36.2 million, respectively, for shares in an unconsolidated
subsidiary. The contribution of the company to a joint venture in fiscal year
2002 and the resulting reduction of the commitment has significantly reduced
this amount in 2002. SGL believes that its dealings with Group companies and
companies
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with which members of its Supervisory Board are affiliated take place on an
arm's length basis, and that all terms and conditions of sale are comparable to
those currently contracted with unrelated, third party suppliers, manufacturers
or service providers.
INTEREST OF EXPERTS AND COUNSEL
Not applicable.
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ITEM 8. FINANCIAL INFORMATION
CONSOLIDATED STATEMENTS AND OTHER FINANCIAL INFORMATION
See Item 19 for a list of financial statements filed under Item 18
EXPORT SALES
In 2002 approximately 64% of all products produced by the SGL Group in
Germany, having an estimated total value of [E]369.3 million, and approximately
9% of all products produced by the SGL Group in the United States, having an
estimated total value of [E]21.7 million, were exported to other countries.
LEGAL PROCEEDINGS
SGL was subject to an investigation by the United States Department of
Justice in connection with allegations of price fixing in the graphite
electrodes industry. This investigation culminated in a negotiated plea
agreement, pursuant to which SGL pleaded guilty on June 16, 1999 in the U.S.
District Court for the Eastern District of Pennsylvania to a violation of the
Sherman Act. SGL was fined a total of $145 million, consisting of $135 million
to be paid by SGL and $10 million to be paid by the Chairman of the Executive
Committee of SGL, Mr. Robert J. Koehler. Mr. Koehler's fine has now been paid
in its entirety. SGL has made payments of its fine in the aggregate amount of
$50.75 million. The payment terms for SGL's fine have been restructured and
extended twice; the remainder of the fine is now scheduled to be paid in
additional installments through March 2007. The DOJ took no action against any
of SGL's other employees and has concluded its investigation into the business
activities of SGL and its subsidiaries. In connection with an investigation by
Canadian antitrust authorities, on July 18, 2000, SGL entered a plea and was
fined C$12.5 million. We have also been subject to investigations by the
competition directorate of the European Commission. Like the DOJ investigation
in the United States, these investigations refer to acts alleged to have taken
place through the late 1990s. Unlike the DOJ investigation, which concluded in
a single plea agreement covering all carbon and graphite products, the European
Commission is investigating each group of carbon and graphite products
separately. On July 18, 2001, two years after the pleas agreement with the DOJ,
the European Commission fined SGL [E]80.2 million with respect to graphite
electrodes. We are currently appealing the total amount of this fine before the
European Court in Luxembourg. Our appeal contends that the fine includes
amounts penalizing the same actions more than once and that the total amount of
the fine is disproportionate. The Commission has also conducted a separate
investigation of similar allegations with respect to specialty graphites
(isostatic graphite and extruded graphite) for the period between 1992 and
1998. SGL cooperated fully with the Commission and was assessed a fine of
[E]27.75 million on December 17, 2002. We are also appealing the total amount
of this second fine, on substantially the same grounds as in the graphite
electrodes case. In connection with the proceedings described above, the
Commission has continued its investigation into other carbon/graphite products
during the period through the late 1990s.
On March 20, 2002, the Korean Fair Trade Commission decided to impose a
fine of US$731,000 against SGL for alleged cartel activities in violation of
Korean antitrust laws. SGL filed an appeal to the KFTC in May 2002. After the
KFTC confirmed its original ruling, SGL appealed this decision to the Seoul
High Court in September 2003.
In July 1997, four separate putative class action suits were filed against
The Carbide/Graphite Group, Inc., UCAR International, Inc., SGL and SGL Carbon
Corp. in the U.S. District Court for the Eastern District of Pennsylvania.
Those suits, which were later consolidated into a single action, alleged
violations of Section 1 of the Sherman Act and sought unspecified damages on
behalf of all persons who purchased graphite electrodes in the United States
from the defendants during the period from 1992 through the filing of the
litigation. The District Court certified a class consisting of all purchasers
of graphite electrodes in the United States during the period from July 1, 1992
through and including June 30, 1997. Seven additional suits against SGL, SGL
Carbon Corp. and other defendants, which contained allegations similar to those
asserted in the consolidated action, were either filed in or transferred to the
District Court. An eighth suit, initially filed in 1998 by Chaparral Steel Co.
and two affiliates against SGL, SGL Carbon Corp. and other defendants in a
Texas state court alleged violations of Section 15.05(a) of the Texas Business
and Commerce Code, asserted other
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claims and sought unspecified damages. We have reached settlements in all of
these cases. In addition, in 1999 we settled a civil lawsuit filed in Ontario
court in Canada by fourteen Canadian purchasers of graphite electrodes.
On April 19, 2000, Bethlehem Steel Corp. sued SGL and SGL Carbon Corp. in
the U.S. District Court for the Middle District of Pennsylvania. This action
was transferred to the District Court for the Eastern District of Pennsylvania
for pretrial proceedings. On December 30, 2002, that District Court issued an
order dismissing the action without prejudice and tolled the statute of
limitations. The order provided that the action was to remain active and
discovery was to continue. Four additional suits were filed in the District
Court against SGL and a number of other graphite electrode manufacturers or
their affiliates by predominantly non-U.S. based purchasers of graphite
electrodes. One such action, filed on February 10, 1999, was instituted on
behalf of Ferromin International Trade Corp. and a group of graphite electrode
purchasers from six countries in Europe and Asia. A second suit, filed on
September 24, 1999, was brought on behalf of Broken Hill Proprietary Co., Ltd.,
an Australian company, and three of its subsidiaries. In a single opinion
covering both cases, on June 14, 2001, the District Court granted in part and
denied in part the defendants' motions to dismiss the plaintiffs' claims for
lack of standing and lack of subject matter jurisdiction. The District Court
dismissed with prejudice the claims of twenty plaintiffs whose purchases of
graphite electrodes had no connection to the United States (which claims
accounted for the majority of the damages sought by the plaintiffs), but
allowed the claims of thirteen other plaintiffs to proceed. The plaintiffs
appealed the portion of the order dismissing their complaints; the defendants
appealed the portion of the order denying their motion to dismiss. The Ferromin
and Broken Hill appeals were argued on March 11, 2003, but the District Court
has not yet issued an opinion. In addition, an action filed in the District
Court by Saudi Iron and Steel Company named SGL and SGL Carbon, LLC as
defendants. The District Court dismissed this action without prejudice in July
2001 pending the outcome of the Ferromin and Broken Hill appeals. The order
dismissing the case provided that the case would be "still considered active"
in the interim, although no further proceedings have occurred since the order
was issued. Arbed, S.A. and four additional graphite electrode purchasers filed
another action on February 19, 2002, against defendants including SGL and SGL
Carbon Corp. This action has been stayed pending the outcome of the Ferromin
and Broken Hill appeals. All of these suits make allegations similar to those
in the consolidated action before the District Court for the Eastern District
of Pennsylvania and seek similar relief
In addition, in December 1999, Globe Metallurgical, Inc. filed a complaint
in the District Court for the Eastern District of Pennsylvania against SGL and
others, seeking damages for alleged violations of Section 1 of the Sherman Act
in connection with the sale of carbon electrodes. We have settled this case. In
July 2000, Elkem Metals Company, Inc. and Elkem Metals Company Alloy L.P. sued
defendants including SGL Carbon Corp. in the District Court for the Southern
District of West Virginia, also alleging violation of Section 1 of the Sherman
Act in connection with the sale of carbon electrodes. That case was transferred
to the District Court for the Eastern District of Pennsylvania for pretrial
proceedings and subsequently settled.
On April 10, 2000, a purchaser of isostatic graphite, Industrial Graphite
Products, Inc, filed a putative class action in the District Court for the
Eastern District of Pennsylvania against defendants including SGL and SGL
Carbon Corp. That complaint seeks damages for alleged violations of Section 1
of the Sherman Act on behalf of all those who purchased non-machined and semi-
machined isostatic graphite in the United States from the defendants during the
period from July 1, 1993 through March 13, 2000. Four other purchasers of
isostatic graphite, Ceradyne, Inc., Schutte & Koerting, Inc., Graphite
Machining Inc., and Graphite Sales & Machine, Inc., filed putative class
actions against both SGL and SGL Carbon Corp. based on substantially identical
claims on July 3, 2000, July 27, 2000, August 4, 2000 and October 2, 2000,
respectively. SGL Carbon Corp. has filed answers in all of the aforementioned
cases involving isostatic graphite.
On March 27, 2002, two purchasers of carbon cathode block, Northwest
Aluminum Company and Goldendale Aluminum Company, filed a complaint in the U.S.
District Court for the District of Oregon against, among others, SGL and SGL
Carbon Corp. This suit seeks damages for alleged violations of Section 1 of the
Sherman Act in connection with the sale of carbon cathode block. SGL
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has filed a motion to dismiss this suit for lack of personal jurisdiction; SGL
Carbon Corp. has filed a motion to dismiss for improper venue based on a forum
selection clause in a contract between the parties. Both motions have been
fully briefed and await decision.
On December 27, 2002, Ceradyne filed another putative class action in the
U.S. District Court for the District of New Jersey, against defendants
including SGL and SGL Carbon Corp. That complaint seeks damages for alleged
violations of Section 1 of the Sherman Act on behalf of all those who purchased
bulk (extruded) graphite products in the United States from the defendants
during the period from July 1, 1992 to the present. Since then, four other
companies have filed separate complaints, in the District Courts for the
District of New Jersey and for the Eastern District of Pennsylvania, based on
substantially identical claims. The various plaintiffs have indicated their
intention to file a consolidated complaint.
We are currently awaiting the decision of the Higher Regional Court
(Oberlandesgericht) in Koblenz, Germany in the appeal of a decision in a
lawsuit between Keramchemie and American Insurance. In 1987 a U.S. federal
court in Portland, Oregon rendered a judgment in favor of American Insurance in
the amount of $1.3 million. Arguing that this judgment was invalid because the
Portland court lacked jurisdiction to hear the case, KCH refused to pay.
American Insurance then commenced litigation in the courts at Koblenz to obtain
enforcement of the judgment. After the trial court ruled in favor of American
Insurance, KCH appealed to the Higher Regional Court. This appeal is still
pending.
After a decision of its Special Committee on June 4, 1998, the Italian
National Social Security Agency informed SGL CARBON S.p.A., a wholly owned
subsidiary of SGL, that SGL CARBON S.p.A. was not entitled to certain payments
it received from the Italian government from 1991 to 1993 under a law providing
for reimbursements to corporations that used reduced operating time. It is
possible that the National Social Security Agency could impose civil sanctions
against SGL CARBON S.p.A. To cover these potential sanctions, we have
established a reserve in the amount of [GBP]1.2 million.
We cannot predict the ultimate outcome of the proceedings discussed above
in which a final decision is still pending. However, in light of the nature of
the allegations, the unspecified amounts of the damages sought and the
potential for treble damages in the antitrust suits, liabilities arising from
the proceedings could be material to our business, results of operations and
financial condition. See Item 3, "Key Information -- Risk Factors."
In addition, from time to time SGL and its subsidiaries are parties to or
targets of lawsuits, claims, investigations and proceedings in the ordinary
course of business. We do not expect any liabilities that may arise from these
proceedings to have a material effect on our business, results of operations
and financial condition.
DIVIDEND DISTRIBUTIONS
Dividends are jointly proposed by the Executive Committee and the
Supervisory Board. They are approved for payment with respect to the prior
financial year by the shareholders at the annual general meeting in the
following year. Dividends approved at the annual general meeting are payable on
or after the business day following the annual general meeting. Since all
Shares are in bearer form, dividends are either remitted to the depositary bank
(Depotbank) on behalf of the shareholder, or, in the case of shareholders
holding physical certificates, are paid through the paying agents appointed by
SGL against presentation of the relevant dividend coupon. Details of the paying
agents are published in the German Federal Gazette (Bundesanzeiger).
Except as described herein, holders of ADRs are entitled to receive
dividends on the Shares represented by the ADSs evidenced by such ADRs. Any
cash dividends payable to such holders are paid to JPMorgan Chase Bank of New
York as Depositary in Euros and, subject to certain exceptions, converted into
U.S. dollars. The amount of dividends received by holders of ADRs will be
affected by fluctuations in exchange rates. See Item 3. "Key Information --
Selected Financial Data -- Exchange Rates".
Dividends paid on Shares and dividends paid to holders and beneficial
owners of ADRs are subject to deduction of German withholding tax. See Item 10,
"Additional Information -- Taxation".
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The payment of future dividends will be dependent on SGL's earnings, the
terms of our syndicated credit facility agreement, its financial condition and
cash requirements, general business conditions in the markets in which it
operates, legal, tax and regulatory considerations and other factors. Although
SGL generally expects to pay annual dividends on its Shares, there can be no
assurance as to particular amounts that would be paid from year to year. See
Item 10, "Additional Information -- Material Contracts".
SIGNIFICANT CHANGES
See Note 36 to our consolidated financial statements.
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ITEM 9. THE OFFER AND LISTING
OFFER AND LISTING DETAILS
NATURE OF TRADING MARKET AND STOCK PRICE HISTORY
The table below shows the high and low sales prices of the SGL`s American
Depositary Receipts on the New York Stock Exchange for the periods indicated.
AVERAGE
DAILY
$ PER TRADING
ADR(1)(2) VOLUME(3)
------------ --------
YEAR ENDED HIGH LOW
--------------------------- ----- -----
December 31, 1998.......... 44.13 19.25 3,200
December 31, 1999.......... 28.75 13.25 2,800
December 31, 2000.......... 37.25 16.25 700
December 31, 2001.......... 22.00 4.60 1,200
December 31, 2002.......... 8.45 1.60 1,600
AVERAGE
DAILY
$ PER TRADING
ADR(1)(2) VOLUME(3)
------------ --------
QUARTER ENDED HIGH LOW
--------------------------- ----- -----
March 31, 2001 ............ 22.00 10.70 2,300
June 30, 2001 ............. 14.45 9.60 1,100
September 30, 2001......... 11.60 4.60 1,300
December 31, 2001.......... 8.25 6.00 1,400
March 31, 2002............. 8.45 6.20 1,300
June 30, 2002.............. 7.85 6.00 1,200
September 30, 2002......... 6.96 1.95 1,900
December 31, 2002.......... 3.25 1.60 2,800
March 31, 2003............. 5.30 2.78 7,300
(1) Source: JP Morgan/Bloomberg.
(2) Each ADS represents one third of one share.
(3) Rounded to the nearest 100.
AVERAGE
DAILY
$ PER TRADING
ADR(1)(2) VOLUME(3)
------------ --------
MONTH ENDED HIGH LOW
--------------------------- ---- ----
October 31, 2002........... 3.25 1.60 3,300
November 30, 2002.......... 2.80 2.15 3,900
December 31, 2002.......... 3.07 2.60 1,100
January 31, 2003........... 4.60 2.78 2,700
February 28, 2003.......... 4.30 3.57 2,600
March 31, 2003............. 5.30 4.10 16,000
(1) Source: JP Morgan/Bloomberg.
(2) Each ADS represents one third of one share.
(3) Rounded to the nearest 100.
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The table below shows the high and low sales prices in Euro of SGL's shares on
the Frankfurt Stock Exchange for the periods indicated.
AVERAGE
DAILY
[E] PER TRADING
SHARE(1) VOLUME(2)
------------- ---------
YEAR ENDED HIGH LOW
--------------------------- ------ -----
December 31, 1998.......... 127.30 49.10 106,900
December 31, 1999.......... 78.80 36.20 71,400
December 31, 2000.......... 115.00 55.00 85,400
December 31, 2001.......... 72.00 15.10 98,700
December 31, 2002.......... 28.90 5.10 110,800
AVERAGE
DAILY
EURO PER TRADING
SHARE(1) VOLUME(2)
---------- ---------
QUARTER ENDED HIGH LOW
---------------------------- ---- ----
March 31, 2001.............. 72.0 34.7 63,400
June 30, 2001............... 51.2 31.6 100,300
September, 2001............. 41.5 15.1 65,700
December 31, 2001........... 28.9 17.9 110,800
March 31, 2002.............. 28.9 18.8 95,600
June 30, 2002............... 25.8 18.1 73,100
September 30, 2002.......... 20.4 5.5 93,900
December 31, 2002........... 9.6 5.1 192,000
March 31, 2003.............. 13.8 7.8 173,000
(1) Source: JP Morgan/Bloomberg.
(2) Rounded to the nearest 100.
Share prices before January 1999 reported in Deutsche Mark were converted
into Euro at the official fixed conversion rate of DM 1.95583 per [E]1.00.
AVERAGE
DAILY
EURO PER TRADING
SHARE(1) VOLUME(2)
------------ ---------
MONTH ENDED HIGH LOW
--------------------------- ----- -----
October 31, 2002........... 9.67 5.10 175,200
November 30, 2002.......... 8.26 6.30 229,500
December 31, 2002.......... 9.5 7.5 171,300
January 31, 2003........... 12.25 7.75 216,000
February 28, 2003.......... 11.46 9.50 129,900
March 31, 2003............. 13.77 11.35 159,400
(1) Source: JP Morgan/Bloomberg.
(2) Rounded to the nearest 100.
The entire share capital of SGL consists of the Shares. All Shares are in
bearer form and freely transferable. On March 13, 2003, we had 22,184,958
Shares outstanding. The Shares are listed on the Frankfurt Stock Exchange under
the trading symbol "SGL". The Shares are also listed in Germany
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on the Berlin, Bremen, Dusseldorf, Hamburg, Hanover, Munich and Stuttgart stock
exchanges. Since March 18, 1996, the Shares have been included in the MDAX
Index. On March 24, 2003, the new index model of the Frankfurt Stock Exchange
came into effect. SGL will remain in the MDAX, which now consists of only 50
companies.
The ADRs, each representing one third of one Share, are listed on the NYSE
under the trading symbol "SGG" and have traded on the NYSE since June 5, 1996.
On January 14, 2003, we had 278,970 outstanding ADRs. The ADRs are issued under
the terms of a Deposit Agreement, dated June 4, 1996, as amended as of February
22, 2000, among SGL, JPMorgan Chase Bank (formerly the Morgan Guaranty Trust
Company of New York), as depositary, and the holders and beneficial owners from
time to time of the ADRs issued thereunder.
PLAN OF DISTRIBUTION
Not applicable.
SELLING SHAREHOLDERS
Not applicable.
DILUTION
Not applicable.
EXPENSES OF THE ISSUE
Not applicable.
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ITEM 10. ADDITIONAL INFORMATION
SHARE CAPITAL
Not applicable.
MEMORANDUM AND ARTICLES OF ASSOCIATION
REGISTRATION AND CORPORATE PURPOSE
SGL is registered in the commercial register (Handelsregister) of the local
court (Amtsgericht) in Wiesbaden, Germany under the number HRB 9448. SGL's
Articles of Association provide that the purpose of SGL is to operate as a
holding company for a group of firms, particularly those that manufacture and
market:
* any kind of carbon products, especially industrial products of natural
and artificial carbon and graphite,
* materials and products on the base of carbon or graphite, such as
fibers, composite materials, foils and process equipment including
industrial facilities,
* other ceramic materials and products,
* corrosion resistant materials, and
* other substances and products that can be produced or extracted in
connection with these fields of activities.
SGL may also itself engage in activities described above and may make
resources and funds available to companies in which it holds an interest. In
addition, SGL may establish, acquire, take holdings in or consolidate other
companies, and is authorized to take shares in any kind of company, especially
for the purpose of investing Group funds.
CORPORATE GOVERNANCE
In contrast to corporations organized under the laws of the United States,
German stock corporations are governed by three separate bodies: the annual
general meeting of shareholders, the Supervisory Board and the Executive
Committee. Their roles are defined by German law and by the corporation's
Articles of Association, and may be described generally as follows:
The annual general meeting of Shareholders ratifies the actions of the
corporation's Supervisory Board and Executive Committee. It decides on the
amount of the annual dividend, the appointment of an independent auditor, and
certain significant corporate transactions. The law requires that an annual
general meeting of shareholders must be held within the first eight months of
each fiscal year.
The Supervisory Board appoints and removes the members of the Executive
Committee and oversees the management of the corporation. Although prior
approval of the Supervisory Board may be required in connection with certain
significant matters, the law does not ordinarily entitle the Supervisory Board
to make management decisions.
The Executive Committee manages the corporation's business and represents
it in dealings with third parties. The Executive Committee submits regular
reports to the Supervisory Board about the corporation's operations and
business strategies, and prepares special reports upon request. No person may
serve concurrently on the Executive Committee and the Supervisory Board of the
same corporation.
MATTERS REGARDING THE POWERS OF DIRECTORS
Under German law, the members of the Supervisory Board and of the Executive
Committee of a stock corporation, such as SGL, have a duty of loyalty and care
toward the company itself. They must act in the best interest of the company,
its employees and, to a certain extent, the general public, and must exercise
the standard of care expected from a prudent and diligent businessman in their
actions. If an action of a member of the Supervisory Board or the Executive
Committee is challenged, such member bears the burden of proving compliance
with the applicable standard of care. Board members who violate their duties
may be held jointly and severally liable for any damages, unless their actions
were approved by the shareholders' meeting.
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A member of either the Supervisory Board or the Executive Committee may not
participate in the adoption of any resolution that involves a transaction or
settlement of a dispute between the company and the member, nor may a board
member who is also a shareholder vote his or her Shares on any matter that
concerns ratification of his or her own acts or the release of his or her
obligations. The compensation of the Executive Committee is set by the
Personnel Committee of the Supervisory Board and the compensation of the
Supervisory Board is set in SGL's Articles of Association as determined by the
shareholders. Therefore, no member of any board may participate in the adoption
of a resolution affecting his or her own compensation. Pursuant to our
corporate governance guidelines we have not granted and do not intend to grant
loans to any member of the Supervisory Board or the Executive Committee.
Pursuant to Article 10 of the Articles of Association of SGL, the Executive
Committee must have the approval of the Supervisory Board in order to enter
into the following transactions if they exceed SGL's ordinary course of
business:
* acquisition, disposal or encumbrance of real estate, rights equivalent
to real property and rights to real estate;
* commencement of new or discontinuance of existing lines of production
or business;
* issuing of debt and long-term borrowing;
* acceptance of guarantees, sureties and similar liabilities;
* granting loans and other credits;
* opening and closing branch offices; or
* purchasing or disposing of interests in other companies.
The Articles of Association of SGL do not specify age limits at which the
members of the Supervisory Board or Executive Committee of SGL must resign
their office. However, it is customary for the service contracts between SGL
and the members of its Executive Committee to provide for retirement at age 65.
Neither the members of the Supervisory Board nor those of the Executive
Committee are required to own Shares in order to hold their offices. For
further discussion of the Supervisory Board and Executive Committee of SGL, see
Item 6, "Directors, Senior Management and Employees".
MATTERS REGARDING THE RIGHTS ATTACHING TO SHARES
The capital stock of SGL consists of the Shares, which are ordinary bearer
shares without par value (Stuckaktien). The Shares grant each shareholder an
equal right to receive dividends and participate in any surplus in the event of
liquidation in proportion to his or her shareholding. With respect to
dividends, Article 3 of SGL's Articles of Association allows dividend rights,
in the event of a capital increase, to be limited or even excluded for new
issues of Shares. No such limitation or exclusion has been implemented as of
the date hereof. Pursuant to German law, dividends may only be paid out of
distributable profits as they are shown in the German statutory annual
financial statements of SGL, and the decision to pay dividends is made by the
annual shareholders' meeting. If a valid resolution to pay out dividends has
been made, a shareholder's right to make a claim to receive such dividends
would generally be time barred after expiration of the applicable period of
limitation. Each Share carries one vote, and gives its owner the right to
attend, pose questions and speak at the shareholders' meeting, as well as to
file a judicial challenge to any resolution adopted. Cumulative voting is not
permitted. Although staggered terms are not explicitly provided for in German
law and are not foreseen by SGL's Articles of Association, it would be possible
to create such terms.
The Shares grant each shareholder a preemptive right to subscribe, in
proportion to his or her shareholding, to any new issues of Shares. However,
pursuant to German law, such preemptive rights may be excluded for individual
issues of shares (including in connection with conditional and authorized
capital) by a vote of 75% of the share capital in attendance at a shareholders'
meeting. SGL has excluded preemptive rights on certain new issues of Shares in
connection with its stock option plans. See "Item 6 Directors, Senior
Management and Employees -Management Incentive Plans".
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German stock corporations may, in certain circumstances, repurchase their
own shares. The German Stock Corporation Act generally limits share repurchases
to 10% of our share capital. The Articles of Association of SGL do not prohibit
such repurchases. The annual general meeting decided in April 2002 to allow SGL
to repurchase up to 10% of the stock available at that time. The shares of a
German stock corporation are generally non-assessable, and no provision has
been made in the Articles of Association of SGL for further capital calls.
Neither German law nor SGL's Articles of Association contain any provision
discriminating against any existing or prospective holder of Shares as a result
of such shareholder owning a substantial number of Shares.
CHANGES TO THE RIGHTS OF SHAREHOLDERS
In principle, all changes to the rights of shareholders require an
amendment of the Articles of Association by a resolution of the majority of the
share capital in attendance at the relevant shareholders' meeting. In addition,
changes to most rights attaching to shares require the explicit consent of all
those shareholders who are negatively affected by the change. There are also
certain shareholder rights, such as the right to attend a shareholders'
meeting, that may not be changed under German law, even with the shareholder's
consent. SGL's Articles of Association do not provide for any conditions that
extend beyond the requirements of law.
CONVENING AND PARTICIPATING IN SHAREHOLDERS' MEETINGS
Pursuant to German law, the Supervisory Board and the Executive Committee
may call a shareholders' meeting. In addition, shareholders who together own at
least 5% of the outstanding Shares may request the Executive Committee to call
a shareholders' meeting. The call to meeting must be published in a business
newspaper at least one month before the meeting, and must contain the items of
the agenda to be addressed at the meeting. There is no minimum quorum
requirement for shareholder meetings.
According to the Articles of Association of SGL, shareholders must, in
order to attend and vote at a shareholders' meeting, deposit their Shares at a
designated location at least seven days before the shareholders' meeting and
keep them deposited until after the close of the meeting. Deposit is also
deemed to be made if Shares are blocked in a securities account in favor and
with the approval of a designated depository for the same time frame. The
Articles of Association of SGL also provide that if share certificates are not
issued, the Executive Committee may require shareholders to register with SGL
at least three days prior to the meeting.
LIMITATIONS ON RIGHTS TO OWN SHARES
No limitations, in particular no limitations on ownership by non-residents,
exist on the rights to own or to vote the Shares of SGL.
LIQUIDATION RIGHTS
In accordance with the German Stock Corporation Act, if we were liquidated,
any liquidation proceeds remaining after all our liabilities have been paid off
would be distributed among our shareholders in proportion to the number of
Shares they hold.
CHANGE OF CONTROL
The Articles of Association of SGL contain no provision that would have an
effect of delaying, deferring or preventing a change in control of SGL in the
context of a merger, acquisition or corporate restructuring.
DISCLOSURE OF SHAREHOLDINGS
The Articles of Association of SGL do not contain any provision requiring
the disclosure of share ownership in SGL. However, under the German Securities
Trading Act, holders of voting securities of a German corporation listed on a
stock exchange within the European Union must notify SGL of the level of their
holding whenever such holding reaches, exceeds or falls below certain
thresholds, which are currently set at 5%, 10%, 25%, 50% and 75% of a company's
outstanding voting rights. See Item 7, "Major Shareholders and Related Party
Transaction -- Major Shareholders" If a
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shareholder fails to notify the company or the Federal Supervisory Authority
for Securities Trading as required, he or she cannot exercise any rights
associated with the Shares for as long as the default continues.
The German Securities Trading Act also contains rules designed to ensure
the attribution of shares to the person who has effective control over the
exercise of the voting rights attached to those shares.
In addition, on November 30, 2001, the German legislature enacted into law
certain amendments to the German Securities Trading Act, effective January 1,
2002, that extend these reporting requirements to holders of the voting
securities of German corporations admitted to trading in an organized market
(Organisierter Markt) of a stock exchange within the European Union or the
European Economic Area. The amendments also require the holders of 30% or more
of the outstanding voting rights of a covered security to report such holdings
immediately upon, or at the latest within seven days of, acquiring such rights.
MATERIAL CONTRACTS
SYNDICATED CREDIT FACILITIES AGREEMENT
On December 20, 2002, we entered into a credit facilities agreement with a
syndicate of lenders led by Deutsche Bank AG and Dresdner Bank AG in the amount
of [E]495 million*. Deutsche Bank Luxembourg S.A. serves as facility agent for
the syndicate as well as security agent. We have attached the syndicated credit
facilities agreement as an exhibit to this annual report. The facilities under
the credit facilities agreement are Term Facility A, Term Facility B and Term
Facility C, each a term loan, and a revolving credit facility. The credit
facilities agreement is governed by German law.
The following table summarizes the four facilities under the credit
facilities agreement as of April 7, 2003:
MAXIMUM PRINCIPAL
PRINCIPAL AMOUNT
FACILITY BORROWER FINAL MATURITY AMOUNT OUTSTANDING
------------------ ----------------------------------- -------------- -------------- -----------
([E] MILLIONS)
Term Facility A... SGL Carbon AG; various subsidiaries May 31, 2005 335 335
Term Facility B... SGL Carbon AG May 31, 2005 85(1) 85
Term Facility C... SGL Carbon AG Sept. 30, 2007 20 20
Revolving Facility SGL Carbon AG; various subsidiaries May 31, 2005 55 --
-------------- -----------
Term Total:....... 495 440
============== ===========
(1) As of October 24, 2002; includes [E]4.8 million in capitalized interest
accruing at an annual rate of 6.04% from October 24, 2001.
Term Facility A
The Term Facility A loan serves to refinance existing debt to the lenders
under the facility and other lenders as well as to repay intercompany debt owed
by certain Group subsidiaries to the parent company or other subsidiaries. In
most cases, SGL Group companies receiving amounts borrowed under Term Facility
A in repayment of intercompany loans are, in turn, required to use those
amounts to repay existing bank debt. The following table shows the SGL Group
borrowers, the amount of their borrowings under the facility and the loan or
loans the borrower is refinancing through its drawings under Term Facility A:
* In addition our Polish subsidiaries entered into a credit facility
agreement with BNP Paribas Bank Polska S.A. in the amount of [E]15 million.
This facility is governed by Polish Law.
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MAXIMUM
PRINCIPAL
JURISDICTION OF AMOUNT OF
BORROWER INCORPORATION LOAN REPAID BORROWING
--------------------- --------------- ----------------------------------- --------------
([E] MILLIONS)
SGL Carbon AG........ Germany Bank debt 160
SGL Beteiligung GmbH. Germany Loan from SGL Carbon AG1 20
SGL ACOTEC GmbH...... Germany Loan from SGL Carbon AG1 15
SGL Technologies GmbH Germany Bank debt/ Loan from SGL Carbon AG1 25
SGL Brakes GmbH...... Germany Loan from SGL Carbon AG1 20
SGL Carbon S.p.A..... Italy Bank debt 20
SGL Carbon S.A....... Spain Bank debt 5
SGL Carbon LLC....... USA Loan from SGL Carbon AG1 70
--------------
Total:............... 335
==============
(1) SGL Carbon has used funds received in repayment of these intercompany loans
to repay bank debt.
Under Term Facility A, we are required to repay a total of [E]25 million on
each of December 30, 2003, June 30, 2004, and December 30, 2004, with a final
payment of the remaining outstanding amount on May 31, 2005.
Term Facility A permits SGL Carbon LLC to draw upon Term Facility A in U.S.
dollars in an amount up to the dollar equivalent of [E]70 million as of the
date of the drawing. SGL Carbon LLC drew its portion of Term Facility A again
on April 7, 2003 entirely in dollars, in a total amount of $75.8 million.
Term Facility B
Under Term Facility B, the lending banks agreed to issue a letter of credit
in favor of the European Union. This letter of credit replaced earlier letters
of credit issued in connection with our appeal against fines imposed by EU
competition authorities. The letter of credit is in a total amount of [E]85
million, of which [E]4.8 million represents interest under the earlier letters
of credit capitalized at an annual rate of 6.04% from October 24, 2001 through
October 24, 2002.
This letter of credit is to be returned to the lending banks if the EU
waives its requirement that we provide the letter of credit in connection with
the appeal process and, in any event, on May 31, 2005, the facility termination
date. If the EU reduces the amount that we are required to provide in the form
of a letter of credit, the existing letter of credit will be replaced by
another in the reduced amount.
Term Facility C
The Term Facility C loan amounts to [E]20 million. This loan refinances a
loan granted by Kreditanstalt fur Wiederaufbau (KfW). We will apply all amounts
borrowed under Term Facility C towards discharging our payment obligations
under the KfW loan agreement. Under Term Facility C, we are required to repay
[E]2,333,335 on September 30, 2004, [E] 2,333,333 on each of March 31, 2005,
September 30, 2005, March 31, 2006, September 30, 2006 and March 31, 2007, and
[E]6,000,000 on September 30, 2007. After May 31, 2005, repayment obligations
under Term Facility C are governed by the terms of the KfW loan agreement.
Revolving Credit Facility
The revolving line of credit facility may be drawn at any time up to one
month before the facility termination date of May 31, 2005. We may use funds
drawn under the Revolving Credit Facility for general corporate purposes. We
may not, however, use these funds to make or declare any dividend, any return
on capital, or repay capital contributions or any other payment in respect of
share capital, or to refinance the convertible bond due 2005 or to repay other
financial indebtedness incurred after December 20, 2002.
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The maximum principal amount under the Revolving Credit Facility is [E]55
million. We may draw down loans under this facility in a minimum principal
amount of [E]5 million. No more than 12 loans may be outstanding under the
Revolving Credit Facility at any one time. Each loan is to be repaid on the
last date of its interest period.
Drawings under the Revolving Credit Facility may be denominated in euros or
in dollars. As of April 7, 2003, no amounts were outstanding under the
Revolving Credit Facility.
Interest rate and interest periods
Amounts drawn under the credit facilities agreement bear interest at a rate
composed of a variable margin over Euribor (or Libor if drawn in US dollars)
plus mandatory costs to compensate lenders for the costs of compliance with
regulatory requirements, if applicable. Mandatory costs do not, and we believe
that they will not, represent a material component of the interest rate under
these facilities.
The applicable Euribor or Libor rate is that provided by Reuters. If
Reuters is not available, the Euribor or Libor rate will be determined on the
basis of rates provided by Deutsche Bank Luxembourg S.A., Dresdner Bank and
Commerzbank AG, designated as reference banks for the credit facilities
agreement.
The initial margin over Euribor or Libor is 2.75% annually. Every six
months thereafter the margin is reset on the basis of our consolidated net debt
to EBITDA ratio as determined on the basis of quarterly reports for the
previous four quarters. The following table shows the various applicable
margins:
ANNUAL
MARGIN
NET DEBT TO EBITDA RATIO RATE (%)
-------------------------------------------------------------------- ----------
> 4.0.................................................... 2.75
<= 4.0 and > 3.5.................................................... 2.50
<= 3.5 and > 3.0.................................................... 2.25
<= 3.0 and > 2.5.................................................... 1.75
<= 2.5 and > 2.0.................................................... 1.50
<= 2.0 and < 1.0.................................................... 1.00
<= 1.0.................................................... 0.75
If the principal amount outstanding under Term Facility A exceeds [E]200
million on or after December 31, 2003, the applicable margin is increased by an
annual 0.50%. The applicable margin will be further increased by an annual
1.00% if the principal amount outstanding under Term Facility A exceeds [E]175
million on or after June 30, 2004. In addition, in the event of a default under
the credit facilities agreement, the margin is reset to an annual rate of 4.00%
until the default is remedied or waived.
Voluntary and mandatory prepayment
We may prepay part or all of the Term Facility A, without premium or
penalty, on the last date of the availability period relating to that loan. We
may provide cash collateral to reduce the issuing bank's letter of credit
proportion under the letters of credit issued under the Term Facility B. We may
not prepay (without consent of the Term Facility C loan lender) the whole or
any part of the Term Facility C loan. Except with respect to Term Facility C,
we may also cancel all remaining commitments and prepay any amounts owed under
an available commitment in a minimum amount of [E]500,000. We may also cancel
any amount owing to any single lender, fronting bank or issuing bank that makes
a claim for certain additional payments such as those relating to increased
bank regulatory capital costs or tax gross-ups.
The credit facilities agreement requires partial or complete prepayment of
loans under certain circumstances. These include the following:
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* Prepayment out of excess cash flow. Within 30 days after the
availability of consolidated financial statements for a given
fiscal year, we must apply 50% of our excess cash flow for that
year towards payment of amounts outstanding under the credit
facilities agreement. For the purposes of the syndicated credit
facilities, "excess cash flow" means our consolidated cash flow
minus capital expenditures, antitrust or competition fines and
scheduled repayments under Term Facility A.
* Prepayments out of proceeds from securities issuances. We must
apply 100% of the net proceeds from the issuance by SGL or any
subsidiary of debt securities, and 75% of the net proceeds from any
issuance of equity securities, towards payment of amounts
outstanding under the credit facilities agreement.
* Prepayments out of proceeds from asset disposals or insurance. We
must generally apply towards payment of amounts outstanding under
the credit facilities agreement any proceeds from a sale of assets
or any insurance claim payments relating to insured assets (unless
we use these payments to replace the insured assets or to
compensate insured costs within 180 days of receipt) in excess of
[E]250,000, up to an annual maximum of [E]5 million. However, we
are not required to use the proceeds from the sale of our
electrical carbons business unit to prepay debt under the credit
facilities agreement.
* Change of control prepayment. Any lender may, at its option,
require us to cancel its portion of unused commitments under the
credit facilities agreement and to prepay any amounts drawn from
that lender under the facilities upon not less than 30 days' notice
if any person (or group of persons acting in concert) acquires
control of SGL.
Security
In order to secure claims under the credit facilities agreement, SGL and
various subsidiaries have granted a number of security interests for the
benefit of the lenders and the other secured parties. These include:
* Pledges of shares held by SGL in SGL Beteiligung GmbH, SGL Acotec
GmbH, SGL Carbon GmbH, SGL Technologies GmbH, by SGL Acotec GmbH in
KCH Beteiligungs GmbH and by SGL Technologies GmbH in SGL Brakes
GmbH;
* Pledges of bank accounts held by SGL, SGL Carbon GmbH, SGL
Beteiligung GmbH, SGL Acotec GmbH, SGL Technologies GmbH, SGL
Brakes GmbH and KCH Beteiligungs GmbH;
* Security assignments of accounts receivable by SGL, SGL Carbon
GmbH, SGL Beteiligung GmbH, SGL Acotec GmbH, SGL Technologies GmbH,
SGL Brakes GmbH and KCH Beteiligungs GmbH;
* Security transfers of movable fixed assets and inventory held by
SGL Carbon GmbH, SGL Acotec GmbH, SGL Technologies GmbH and SGL
Brakes GmbH;
* Security assignments of intellectual property rights by SGL, SGL
Carbon GmbH, SGL Beteiligung GmbH, SGL Acotec GmbH, SGL
Technologies GmbH, SGL Brakes GmbH and KCH Beteiligungs GmbH; and
* A mortgage over real property by SGL.
The credit facilities agreement originally provided for other security
interests to be granted by and over the Group's material subsidiaries in
various jurisdictions, including Austria, Canada, England, France, Italy,
Poland, Scotland, Spain and the United States by March 20, 2003. This period
has been extended to May 6, 2003.
Restrictive Covenants
The credit facilities agreement includes a number of restrictive covenants
typical for credit facilities of this nature, including:
* Restrictions on disposals of assets;
* Restrictions on changes of the financial year;
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* No changes to the constitutional documents of any member of the
group without the prior written consent of the facility agent;
* Maintenance and protection of intellectual property rights;
* Restrictions on treasury transactions and other foreign exchange
transactions other than as permitted under the credit facilities
agreement or in the ordinary course of business; and
* No acquisitions and joint ventures, unless permitted under the
credit facilities agreement.
The above restrictions do not directly apply to SGL or to its subsidiaries
incorporated in Germany. These companies must notify the facility agent if they
intend to take any of the actions above. The lenders will determine within a
pre-determined time limit whether such actions would constitute an event of
default if implemented. In addition, the credit facilities agreement restricts
the ability of SGL's Executive Committee to propose that the annual general
meeting of shareholders declare a dividend. The agreement does not restrict the
ability of the Supervisory Board to propose a dividend, nor does it restrict
the ability of the shareholders to declare a dividend at their annual general
meeting.
Financial Covenants
The credit facilities agreement provides for a number of financial
covenants typical for credit facilities of this nature, pursuant to which SGL
has to meet certain net worth, interest cover and leverage ratios at all times
during the term of the credit facilities agreement.
Events of Default
The credit facilities agreement contains provisions typical for credit
facilities of this nature specifying that certain actions or omissions by us
will or can constitute a default under the agreement. These events include
breaches of covenants or failure to pay interest or principal on loans under
the credit facilities as they become due. In the event of a default that is not
cured or waived, the agreement provides the lenders with certain remedies that
may be exercised at the election of lenders representing a majority of the then
outstanding principal amount under the facilities. These remedies include
acceleration of all outstanding amounts, cancellation of all remaining
commitments and exercise of security interests that we have granted.
In addition, we will be in default if any new competition law related civil
proceeding is instituted against any member of the SGL Group or if any
competition law-related fines in an aggregate amount exceeding [E]2.5 million
are assessed against any member of the SGL Group by administrative authorities,
or if any of the fines assessed in connection with the existing competition law
proceedings of [E]80.2 million and [E] 27.8 million are increased by an amount
exceeding [E]2.5 million. Should this default occur, however, the lenders may
not immediately accelerate the loans. Rather, the credit facilities agreement
requires them, before accelerating, to negotiate with us in good faith for up
to 30 days with a view to continuing the credit facilities agreement.
EXCHANGE CONTROLS
At the present time, Germany does not restrict the export or import of capital,
except for certain direct investments in areas covered by United Nations
embargoes and certain other countries and individuals subject to embargoes in
accordance with German law. However, for statistical purposes with certain
exceptions, every corporation or individual residing in Germany must report to
the German Central Bank any payment received from or made to a non-resident,
corporation or individual if the payment exceeds [E]12,500 (or the equivalent
in a foreign currency). Additionally, corporations and individuals residing in
Germany must report to the German Central Bank any claims of a resident
corporation or individual against, or liabilities payable to, a non-resident
corporation or individual exceeding an aggregate [E]1.5 million (or the
equivalent in a foreign currency) at the end of any calendar month. There are
no limitations on the right of non-resident or foreign owners to hold or vote
the Shares or the ADSs imposed by German law or the Articles of Association of
SGL.
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TAXATION
GERMAN TAXATION
The following discussion is a summary of the material German tax
consequences for beneficial owners of Shares or American Depositary Shares who
are (i) not German residents for German income tax purposes (i.e., persons
whose residence, habitual abode, statutory seat or place of effective
management and control is not located in Germany) and (ii) whose Shares do not
form part of the business property of a permanent establishment or fixed base
in Germany. Throughout this section we refer to these owners as "non-German
Holders".
This summary is based on German tax laws and typical tax treaties to which
Germany is a party, as they are in effect on the date hereof, and is subject to
changes in German tax laws or such treaties. The following discussion does not
purport to be a comprehensive discussion of all German tax consequences that
may be relevant for non-German Holders. You should consult your tax advisor
regarding the German federal, state and local tax consequences of the purchase,
ownership and disposition of Shares or ADSs and the procedures to follow for
the refund of German taxes withheld from dividends.
Taxation in Germany
For the fiscal year 2003 the corporate income tax rate was increased from
25% to 26.5% plus 5.5% solidarity surcharge thereon, amounting to a total of
27.9575%. From 2004 on, the former rate of 25% plus 5.5% solidarity surcharge
will be applicable again. According to the transition rules applicable in
connection with the German Tax Reform and the change from the corporate income
tax credit system to the new system, a corporate income tax reduction in the
amount of 1/6 of the distributions of earnings that were taxed under the old
credit system applies. This results from the fact that distributed earnings
were taxed under the credit system only at a rate of 30%, while retained
earnings were taxed at a rate of 40%. German corporations are also subject to
profit-related trade tax on income, the exact amount of which depends on the
municipality in which the corporation maintains its business establishment(s).
Trade tax on income is a deductible item in computing the corporation's tax
base for corporate income tax purposes.
Dividends
To avoid multiple levels of taxation in a corporate chain, German corporate
income tax law provides for an exemption comparable to a full dividend-received
deduction for inter-corporate dividends received by a German corporate
shareholder, irrespective of ownership percentage. This exemption applies for
trade tax purposes only if the corporate shareholder holds at least 10% in SGL.
German resident individuals must recognize 50% of the dividends received as
taxable income.
Withholding Tax
The withholding tax rate on dividends is 20%. In addition, the solidarity
surcharge of 5.5% on the withholding tax will be retained, resulting in a total
withholding from dividends of 21.1%. The withholding tax rate may be reduced
for non-German Holders by an applicable double tax treaty. Under most double
tax treaties the withholding tax rate is reduced to 15%. To reduce the
withholding to the applicable treaty rate of 15%, a non-German Holder may apply
for a refund of withholding taxes paid. The refund amounts to 6.1% of the
declared dividend for dividend distributions withheld at the rate of 21.1%. The
application for refund must be filed with the German Federal Tax Office
(Bundesamt fur Finanzen, Friedhofstrasse 1, D-53221 Bonn, Germany). The
relevant forms can be obtained from the German Federal Tax Office or from
German embassies and consulates.
Special Tax Rules for U.S. Holders
Under the United States-German Income Tax Treaty, the withholding tax rate
is reduced to 15% of the gross amount of the dividends for shareholders holding
less than 10% in SGL. Otherwise, the withholding tax rate is reduced to 5%.
Therefore, in most cases eligible U.S. holders will be entitled to receive a
repayment from the German tax authorities equal to 6.1% of the declared
dividend. Accordingly, for a declared dividend of 100, an eligible U.S. holder
initially will receive 78.9 (100 minus the 21.1% withholding tax). The eligible
U.S. holder is then entitled to a refund from the
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German tax authorities of 6.1 and will, as a result, effectively receive a
total of 85 (i.e., 85% of the declared dividend). Thus, the eligible U.S.
holder will be deemed to have received a dividend of 100, subject to German
withholding tax of 15.
Under the Treaty, a U.S. holder will generally not be liable for German tax
on capital gains realized or accrued on the sale or other disposition of Shares
or ADSs. However, under certain circumstances, the Treaty does allow Germany a
limited right to tax former German resident holders of a substantial interest
(at least 25%) in SGL on such capital gains.
Dividend Refund Procedure for U.S. Holders
For Shares and ADSs kept in custody with The Depositary Trust Company in
New York or one of its participating banks, the German tax authorities have
introduced a collective procedure for the refund of German withholding tax and
the solidarity surcharge thereon, on a trial basis. Under this procedure, DTC
may submit claims for refunds payable to U.S. holders under the Treaty
collectively to the German tax authorities on behalf of these eligible U.S.
holders. The German Federal Tax Office will pay the refund amounts on a
preliminary basis to DTC, which will redistribute these amounts to the eligible
United States holders according to the regulations governing the procedure. The
Federal Tax Office may review whether the refund was made in accordance with
the law within four years after making the payment to DTC. Details of this
collective procedure are available from DTC.
Alternatively, a new simplified collective refund procedure has been
introduced, the so-called Datentragerverfahren. Financial institutions which
deal with dividend distributions of SGL (for example, custodian banks or
clearing offices) or SGL itself may apply to participate in this procedure at
the German Federal Tax Office. Upon acceptance, the participant may
electronically file collective refund claims with the German Federal Tax
Office.
Individual claims for refund may be made on a special German form, which
must be filed with the German Federal Tax Office, Friedhofstrasse 1, 53221
Bonn, Germany. Copies of the required form may be obtained from the German
Federal Tax Office at the same address or from the Embassy of the Federal
Republic of Germany, 4645 Reservoir Road, N.W., Washington D.C. 20007-1998.
Alternatively, the form can be downloaded from the following website:
www.bff-online.de/Steuer_Vordrucke/KSt_KapSt/
ClaimRefundWithholdingTaxesDividends_Interests.pdf
Claims must be filed within a four-year period from the end of the calendar
year in which the dividend was received. Holders who are entitled to a refund
in excess of [E]153.39 for the calendar year generally must file their refund
claims on an individual basis. However, the custodian bank may be in a position
to make refund claims on behalf of such holders.
As part of the individual refund claim, an eligible United States holder
must submit to the German tax authorities the original bank voucher (or
certified copy thereof) issued by the paying entity documenting the tax
withheld, and an official certification on IRS form 6166 of its last United
States federal income tax return. IRS Form 6166 may be obtained by filing a
request with the Internal Revenue Service Center in Philadelphia, Pennsylvania,
Foreign Certification Request, P.O. Box 16347, Philadelphia, PA 19114-0447.
Requests for certifications must include the eligible United States holder's
name, Social Security Number or Employer Identification Number, tax return form
number, and tax period for which the certification is requested. Requests for
certification can include a request to the Internal Revenue Service to send the
certification directly to the German tax authorities. If no such request is
made, the Internal Revenue Service will send a certification on IRS Form 6166
to the eligible United States holder, who then must submit this document with
its claim for refund.
Capital Gains
Under German domestic tax law as currently in effect, capital gains derived
by an individual non-German Holder from the sale or other disposition of Shares
or ADSs are subject to tax in Germany only if such non-German Holder has held,
directly or indirectly, Shares or ADSs representing 1% or more of the
registered share capital of SGL at any time during the 5-year period
immediately preceding the disposition.
Corporate non-German Holders will be fully exempt from German tax on
capital gains derived on or after January 1, 2002 from the sale or other
disposition of Shares or ADSs.
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Under most double tax treaties, a non-German Holder will not be liable for
German income tax on capital gains realized or accrued on the sale or other
disposition of Shares or ADSs. This applies also under the United States-German
Income Tax Treaty.
Individuals owning at least 1% of the Shares who gave up residence in
Germany and have become residents of the United States can be liable for German
tax on capital gains under the Treaty if certain prerequisites are met.
Inheritance and Gift Tax
Under German law, German gift or inheritance tax will generally be imposed
on transfers of Shares or ADSs by a gift or on the death in the following
situations:
* The donor or transferor, or the heir, donee or other beneficiary,
was domiciled in Germany at the time of the transfer or, with
respect to German citizens who are not domiciled in Germany, the
donor, transferor or beneficiary has not been continuously outside
of Germany for a period of more than 5 years; or
* The shares or ADSs subject to such transfer form part of a
portfolio that represents 10% or more of the registered share
capital of SGL and that has been held directly or indirectly by the
donor or transferor himself or together with a related party.
The few German estate tax treaties currently in force, including the treaty
with the United States, usually provide that German gift or inheritance tax may
only be imposed in situations falling under the first condition above.
Other Taxes
No German transfer, stamp or other similar taxes apply to the purchase,
sale or other disposition of Shares or ADSs by non-German Holders. As a result
of a judicial decision, the German net worth tax (Vermogensteuer) was
abolished.
Tax Reform
On February 21, 2003, the German Parliament (Bundestag) adopted the Tax
Privilege Reduction Act, which was rejected by the Federal Council (Bundesrat)
on March 14, 2003. Therefore, the Tax Privilege Reduction Act was submitted to
the mediation committee (Vermittlungsausschuss). It is not clear whether any of
the intended amendments will finally come into force as the parliamentary
opposition, which has the majority in the Federal Council, has stated that it
is not willing to accept most of the suggested amendments. The following
proposed provisions, if enacted, could become relevant:
* As described before, "old" profits which were derived under the
German corporate income tax credit system entitle the distributing
corporation to a corporate income tax credit in the amount of 1/6
of the distributions with no further restrictions; that is, all
"old" profits can be distributed at once. It is intended to reduce
the permitted tax credit to a certain amount per year or to have a
moratorium with respect to the tax credits for a certain time
period.
* It is discussed whether corporate shareholders shall become liable
to a capital gains tax upon the sale or other disposition of Shares
or ADSs at a flat rate of 15%. However, this will not become
relevant for non-German Holders as under most double tax treaties a
non-German shareholder will not be liable for German income tax on
those capital gains as long as the shares are not held by a German
permanent establishment. This applies also under the U.S.-German
Income Tax Treaty.
UNITED STATES TAXATION
This section describes the material United States federal income tax
consequences of owning and disposing of Shares or ADSs. It applies to you only
if you are a U.S. holder (as defined below) and holds the Shares or ADSs as
capital assets for tax purposes. This section does not address all material tax
consequences of owning and disposing Shares or ADSs. It does not address
special classes of holders, some of whom may be subject to other rules,
including:
* tax-exempt entities,
* certain insurance companies,
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* broker-dealers,
* traders in securities that elect to mark to market method of
accounting for securities holdings,
* investors liable for alternative minimum tax,
* investors that actually or constructively own 10% or more of our
voting stock,
* investors that hold shares or ADSs as part of a straddle or a
hedging or conversion transaction, or
* investors whose functional currency is not the U.S. dollar.
This section is based on the tax laws of the United States, including the
Internal Revenue Code of 1986, as amended, its legislative history, existing
and proposed regulations, and published rulings and court decisions, as
currently in effect, as well as on the Treaty. These laws are subject to
change, possibly on a retroactive basis.
In addition, this section is based in part upon the representations of
JPMorgan Chase Bank, the depositary for our American Depositary Receipt
program. Assuming that each obligation in the deposit agreement and any related
agreement will be performed in accordance with its terms for United States
federal income tax purposes, if you hold ADRs evidencing ADSs, you will
generally be treated as the owner of the Shares represented by those ADSs.
Exchanges of Shares for ADSs, and ADSs for Shares, generally will not be
subject to United States federal income tax.
You are a "U.S. holder" if you are a beneficial owner of Shares or ADSs and
you are:
* an individual citizen or resident of the United States,
* a corporation organized under the laws of the United States or any
state thereof or the District of Columbia, or
* an estate whose income is subject to United States federal income
tax regardless of its source, or
* a trust if a United States court can exercise primary supervision
over the trust's administration and one or more United States
persons are authorized to control all substantial decisions of the
trust.
This discussion addresses only United States federal income taxation. U.S.
holders should consult their tax advisor regarding the United States federal,
state, local and other tax consequences of owning and disposing of Shares and
ADSs in their particular circumstances. In particular, they should confirm that
they are eligible for the benefits under the Treaty with respect to income and
gain from the Shares or ADSs.
Taxation of Dividends
Under the United States federal income tax laws, if you are a U.S. holder,
you must include in your gross income the gross amount of any dividend paid by
us out of our current or accumulated earnings and profits, as these amounts are
determined for United States federal income tax purposes. You must include any
German tax withheld from the dividend payment in this gross amount even though
you do not in fact receive it. See the paragraph under "--German Taxation --
Special Tax Rules for U.S. Holders" for examples of how to compute the amount
of dividends received. The dividend is ordinary income that you must include in
income when you, in the case of Shares, or JPMorgan Chase Bank, in the case of
ADSs, receive the dividend, actually or constructively. The dividend will not
be eligible for the dividends-received deduction generally allowed to United
States corporations in respect of dividends received from other United States
corporations. The amount of the dividend distribution that you must include in
your income as a U.S. holder will be the U.S. dollar value of the gross
distribution (including German taxes withheld), determined at the spot euro/
U.S. dollar rate on the date the dividend distribution is includable in your
income, regardless of whether the payment is in fact converted into U.S.
dollars. Generally, any gain or loss resulting from currency exchange
fluctuations during the period from the date you include the dividend payment
in
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income to the date you convert the payment into U.S. dollars will be treated as
ordinary income or loss. The gain or loss generally will be income or loss from
sources within the United States for foreign tax credit limitation purposes.
Distributions in excess of current and accumulated earnings and profits, as
determined for United States federal income tax purposes, will be treated as a
nontaxable return of capital to the extent of your basis in the Shares or ADSs
and thereafter as a capital gain.
Subject to certain limitations, the German tax withheld in accordance with
German law and the Treaty and paid over to Germany may be claimed as a foreign
tax credit against your United States federal income tax liability. To the
extent a refund of the tax withheld is available to you under German law or
under the Treaty, the amount of tax withheld that is refundable will not be
eligible for credit against your United States federal income tax liability.
See "--German Taxation -- Dividend Refund Procedure for U.S. Holders" above for
the procedures for obtaining a tax refund.
Dividends distributed by us will generally constitute income from sources
outside the United States and will generally be categorized as "passive income"
or "financial services income", each of which are treated separately from other
types of income for purposes of computing the foreign tax credit allowable to
you.
The United States Treasury has expressed concerns that parties to whom ADSs
are released may be taking actions that are inconsistent with the claiming of
foreign tax credits. Accordingly, the creditability of German withholding tax
on dividends could be affected by future actions that may be taken by the
United States Treasury.
Taxation of Capital Gains
Upon a sale or other disposition of Shares or ADSs, you will recognize
capital gain or loss for U.S. federal income tax purposes in an amount equal to
the difference between the amount realized and your adjusted tax basis in the
Shares or ADSs. This gain or loss generally will be U.S. source gain or loss,
and will be treated as long-term capital gain or loss if your holding period in
the Shares or ADSs exceeds one year. The deductibility of capital losses is
subject to significant limitations. If you are an individual U.S. holder of
Shares or ADSs, any capital gain generally will be subject to tax at
preferential rates, provided certain holding periods are met.
Passive Foreign Investment Company
We believe that SGL is not currently a PFIC for U.S. federal income tax
purposes. However, an actual determination of PFIC status is fundamentally
factual in nature and must be made annually as of the close of each fiscal year
and is therefore is subject to change. We urge you to consult your own tax
advisers regarding possible application of the PFIC rules to your ownership and
disposition of Shares or ADSs.
U.S. Information Reporting and Backup Withholding
Dividend payments on the ADSs or Shares and proceeds from the sale or other
disposition of ADSs or Shares may be subject to information reporting to the
IRS and possible U.S. backup withholding at a current rate of 30%. Backup
withholding will not apply to you, however, if you furnish a correct taxpayer
identification number or certificate of foreign status or if you are otherwise
exempt from backup withholding. U.S. holders who are required to establish
their exempt status generally must provide such certification on IRS Form W-9
(Request for Taxpayer Identification Number and Certification). Non-U.S.
holders generally will not be subject to U.S. information reporting or backup
withholding. However, such holders may be required to provide certification of
non-U.S. status in connection with payments received in the United States or
through certain U.S. related financial intermediaries.
Backup withholding is not an additional tax. Any amounts withheld as backup
withholding may be credited against your U.S. federal income tax liability, and
you may obtain a refund of any excess amounts withheld under the backup
withholding rules by filing the appropriate claim for refund with the IRS and
furnishing any required information.
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DIVIDENDS AND PAYING AGENTS
Not applicable.
STATEMENTS BY EXPERTS
Not applicable.
DOCUMENTS ON DISPLAY
We are subject to the informational requirements of the Securities Exchange
Act of 1934, as amended. In accordance with these requirements, we file reports
and other information with the Securities and Exchange Commission. Members of
the general public may read and copy these materials, including this annual
report and the exhibits thereto, at the SEC's Public Reference Room at 450
Fifth Street, N.W., Washington, D.C. 20549 and at the SEC's regional offices at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and 233
Broadway, New York, New York 10274, and may also obtain copies of the materials
by mail from the Public Reference Room of the SEC at 450 Fifth Street, N.W.,
Washington, D.C. 20549, at prescribed rates. The public may obtain information
on the operation of the SEC's Public Reference Room by calling the SEC in the
United States at 1-800-SEC-0330. The SEC also maintains a website at
www.sec.gov that contains reports, proxy statements and other information
regarding registrants that file electronically with the SEC. You may access our
annual report 2002 and some of the other information we submit to the SEC
through this website. In addition, you may inspect material we file at the
offices of the New York Stock Exchange at 20 Broad Street, New York, New York
10005.
SUBSIDIARY INFORMATION
Not applicable.
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ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The global nature of our business exposes our operations, financial results
and cash flows to a number of risks, including those listed below.
* Interest rate fluctuations. We are exposed to changes in interest
rates. Our primary interest rate exposure is to fluctuations in
short-term European and U.S. interest rates.
* Currency exchange rate fluctuations. We are exposed to fluctuations
between the Euro and other major world currencies. The majority of
our currency fluctuation risk is between the Euro and the U.S.
dollar. In addition, we are exposed to fluctuations between the
euro and the U.K. pound sterling and between the euro and the
Polish zloty.
* Commodity price fluctuations. We are exposed to possible increases
in raw material prices. We may not be able to pass any such
increases on to our customers.
* Credit risk. We are exposed to credit risk with respect to the
counterparties in our transactions.
Any of these risks could harm our operating results and financial
condition. These risks are similar to the risks to which we were exposed in the
prior year.
The tables below present certain information regarding our use of
derivative financial instruments. You should read these tables in conjunction
with Item 3, "Key Information -- Selected Financial Data -- Exchange Rates" and
the notes to our consolidated financial statements. All financial instruments
in the tables below are used to manage market risks to which we are exposed. We
do not purchase or sell derivative financial instruments for trading purposes.
INTEREST RATE RISK MANAGEMENT
We are exposed to interest rate risks through our debt instruments. We
manage this risk exposure through the use of interest rate swaps and interest
rate caps.
The following tables provide information about our derivative financial
instruments and other financial instruments that are sensitive to changes in
interest rates as of December 31, 2002. For our fixed rate and variable rate
debt, the table presents principal amounts at the December 31, 2002 exchange
rate and the related weighted average interest rates by expected maturity date.
Weighted average variable rates are based on implied zero coupon rates in the
yield curve. For interest rate swaps and caps, the table presents notional
amounts and weighted average interest rates or strike rates by expected
maturity date. Weighted average variable rates are based on the implied forward
rates as of December 31, 2002. The information is presented in euro
equivalents, which is our reporting currency.
INTEREST RATE RISK MANAGEMENT
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
FAIR VALUE
DECEMBER 31,
2003 2004 2005 2006 2007 AFTER 2007 TOTAL 2002
----- ----- ----- ----- ----- ---------- ----- ------------
([E] EQUIVALENT IN MILLIONS)
DEBT, INCLUDING CURRENT PORTION
Fixed rate ([E])............... 6.1 5.3 141.4 7.7 21.4 8.0 189.9 170.6
Average interest rate.......... 4.47% 5.44% 3.61% 5.52% 5.77%
Variable rate ([E])............ 152.7 71.6 224.3 225.7
Average interest rate.......... 5.22% 4.07%
Variable rate (U.S. $)......... 6.8 6.8 6.8
Average interest rate.......... 2.80%
Variable rate (GBP............. 7.3 7.3 7.3
Average interest rate.......... 4.32%
Variable rate (PLN............. 19.8 19.8 19.8
Average interest rate.......... 8.13%
Other currencies............... 0.4 0.4 0.4
Other currencies in which we have issued debt are the Canadian dollar and
the Chinese yuan.
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INTEREST RATE RISK MANAGEMENT
PRINCIPAL (NOTIONAL) AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST (SWAP) RATE/OPTION STRIKE PRICE
FAIR VALUE
AFTER DECEMBER 31,
2003 2004 2005 2006 2007 2007 TOTAL 2002
----- ----- ----- ----- ----- ----- ----- ------------
([E] EQUIVALENT IN MILLIONS)
INTEREST RATE SWAPS
EURO
Capped Swap.................................. 50.0 50.0 (0.1)
Average receive rate (variable).............. 3.06%
Average pay rate (variable, capped by 5.185%) 3.06%
EURO
Capped Swap.................................. 50.0 50.0 (0.8)
Average receive rate (variable).............. 3.06%
Average pay rate (variable, capped by 4.67%). 3.16%
EURO
Receiver Swap (fixed to variable)............ 0.64 0.64 0.64 0.64 0.64 3.2 0.2
Average receive rate (fixed)................. 4.75% 4.75% 4.75% 4.75% 4.75% --- ---
Average pay rate (variable................... 2.36% 2.32% 2.89% 3.44% 3.97%
INTEREST RATE OPTIONS
EURO
Caps purchased............................... 15.3 15.3 0.0
Average strike rate.......................... 6.50%
FOREIGN EXCHANGE RISK MANAGEMENT
We are exposed to foreign currency exchange rate risks through sales and
purchasing transactions, intercompany loans and the DOJ liability denominated
in currencies other than our functional currency, the euro. Although the net
impact of foreign currency exposures is partially offset in the aggregate, we
hedge certain significant unmatched foreign currency exposure through the use
of forward currency contracts and currency options.
The tables below provide information about our significant derivative
financial instruments that are sensitive to changes in foreign currency
exchange rates as of December 31, 2002. For forward foreign currency exchange
agreements, which relate to intercompany financing, the table presents the
notional amounts and the weighted average contractual foreign currency exchange
rates. The forward foreign currency contracts entered into by the SGL Group
have a term of less than six months. For foreign currency options, the table
presents the contract amounts and the average foreign currency option strike
prices. The foreign currency options entered into by the SGL Group have a term
of less than five years.
AVERAGE
CONTRACT CONTRACTUAL FAIR VALUE
AMOUNT FORWARD DECEMBER 31,
BUY (SELL) EXCHANGE RATE 2002
---------- ------------- ------------
([E] EQUIVALENT IN MILLIONS, EXCEPT FOR
AVERAGE
CONTRACTUAL EXCHANGE RATE)
FORWARD FOREIGN CURRENCY CONTRACTS
Euro
U.S. Dollar .................................... (170.3) 1.0089 5.834
U.S. Dollar .................................... 3.9 1.0160 (0.134)
British Pound Sterling ......................... (52.0) 0.6400 0.857
British Pound Sterling ......................... 0.6 0,6415 (0.010)
Singapore Dollar ............................... (1.1) 1.7890 0.019
Polish Zloty ................................... 6.3 4.0049 (0.063)
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AVERAGE
CONTRACT CONTRACTUAL FAIR VALUE
AMOUNT FORWARD DECEMBER 31,
BUY (SELL) EXCHANGE RATE 2002
---------- ------------- ------------
([E] EQUIVALENT IN MILLIONS, EXCEPT FOR
AVERAGE
CONTRACTUAL EXCHANGE RATE)
FORWARD FOREIGN CURRENCY CONTRACTS WITH CHANCE
Euro
British Pound Sterling ......................... (0.8) 0.6462 0.007
CONTRACT AVERAGE FAIR VALUE
AMOUNT OPTION DECEMBER 31,
BUY (SELL) STRIKE PRICE 2002
---------- ------------ ------------
([E] EQUIVALENT IN MILLIONS, EXCEPT
FOR AVERAGE OPTION STRIKE PRICE)
CURRENT PAIRS
FOREIGN CURRENCY OPTIONS
U.S Dollar put/euro call*.......... (93.6) 0.900 (11.346)
U.S Dollar call/euro put........... 99.1 0.8504 1.141
* Thefollowing features distinguish these options from standard currency
options. The option may only be exercised if a "knock-in event" has
occurred, based on the following terms: principal amount $84.3 million;
knock-in level between [E]0.96 = $1.00 and [E]1. 1115 = $1.00; strike rate
(exchange rate at which dollars must be purchased if the euro rises above
the knock-in level [E]0.90 = $1.00.
COMMODITY PRICE RISKS
We are exposed to commodity price risks through our dependence on various
raw materials (petroleum coke, coal tar pitch, petroleum pitch, anthracite coal
and natural graphite flake) and energy. We seek to minimize these risks through
our sourcing policies and efficient operating procedures. Some of these
products are derived from petroleum therefore their prices are affected by the
market price of petroleum. Possible increases in the market price of petroleum
in 2003 could adversely affect the gross margins of some of our business
segments.
In order to secure (hedge) the supply of some of our raw materials, in 2001
we were party to commodity forward contracts (futures) in the natural gas
market, which were settled during 2002.
As of December 31, 2001 we had a long forward position of natural gas in
the United States with a negative market value for the SGL Group of [E]0.7
million. These forward contracts were to hedge the natural gas supply in the
United States for the first six months of 2002. In 2002 these contracts were
changed so that they no longer represent commodity future contracts. These
contracts now fall under the definition of normal purchases and serve SGL only
in the normal course of business.
There were no forward contracts as of December 31, 2002.
CREDIT RISK
Credit risk is the possibility that the value of our assets may become
impaired if counterparties cannot meet their obligations in transactions
involving financial instruments. The total of the amounts recognized in assets
represents our maximum exposure to credit risk.
RISK MANAGEMENT SYSTEM
We identify and manage risks through our Group wide Risk Management System.
Certain risks which are beyond our control, for example, the war in Iraq and
its ultimate effects, are not covered by the Risk Management System.
The Risk Management System comprises a series of distinct but interlinked
planning, monitoring and information systems. These cover all areas of the
Group and are continuously adapted to reflect changes in conditions. The Risk
Management System is based on an integrated planning process, value-oriented
key figure systems and control reports. Our operating units and central service
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departments are responsible for identifying the respective key risks for the
entire medium-term planning period, for determining their financial impact and
initial probability of occurrence, and for suggesting measures to be taken. As
part of the target-setting meetings between the Executive Committee and the
operating units and central service departments, key risks are examined and
countermeasures are agreed and introduced. A rolling evaluation of the
likelihood of key risks occurring takes place on a quarterly basis; any new
risks which may have arisen are identified and countermeasures are examined by
the responsible operating units and service departments.
Individual risks are aggregated by Corporate Financial Controlling on a
quarterly basis or ad hoc as required, and discussed at meetings of the
Executive Committee. For its part, the Executive Committee informs the
Supervisory Board about risk development and risk management at regular
intervals. In addition, the Internal Audit department examines all components
of the risk management system at appropriate intervals in its role as a unit
independent of these processes. The areas of responsibility for risk management
are set out in Group guidelines.
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ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES
DEBT SECURITIES
As of December 31, 2002, one major debt security, issued by SGL, was
outstanding: 133,650 bonds with warrants of [E]1,000 each were issued as part
of a convertible bond on September 18, 2000 at 100% of the principal amount.
They bear annual interest at 3.5% on their principal amount. The bonds with
warrants can be converted at any time into fully paid-in Shares in the period
from October 18, 2000 to September 4, 2005. Each bond with warrant in the
principal amount of [E]1,000 can be converted into 11.2233 Shares subject to
adjustment of the conversion price. The bonds with warrants will be repaid on
September 18, 2005 at their principal amount, provided that they have not been
repaid or converted at an earlier date.
Commercial Paper
Of the [E]200 million commercial paper program that SGL launched in 1996,
as of December 31, 2002 and 2001 [E]0.0 million and [E] 37.0 million had been
drawn down respectively.
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PART II
ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES
Not applicable.
ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF
PROCEEDS
Not applicable.
ITEM 15. CONTROLS AND PROCEDURES
The Chief Executive Officer and the Chief Financial Officer, with the
assistance of other members of management, performed an evaluation of our
disclosure controls and procedures, pursuant to Rule 13a-15 under the
Securities Exchange Act of 1934, as amended, within 90 days prior to the date
of this annual report. Based on that evaluation, they concluded that our
disclosure controls and procedures are effective to ensure that information
required to be disclosed in this annual report is recorded, processed,
summarized and reported within the time periods specified in the rules and
forms of the Securities and Exchange Commission.
There were no significant changes in our internal controls or in other
factors that could significantly affect internal controls subsequent to the
date of the evaluation. No significant deficiencies and material weaknesses
were identified that required corrective actions.
ITEM 16. [RESERVED]
[Reserved]
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PART III
ITEM 17. FINANCIAL STATEMENTS
We have responded to Item 18 in lieu of responding to this Item.
ITEM 18. FINANCIAL STATEMENTS
The following financial statements, together with the Reports of BDO
Deutsche Warentreuhand Aktiengesellschaft Wirtschaftprufunsgesellschaft for the
year ended December 31, 2002 and KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft, Wirtschaftprufunsgesellschaft, for the years ended December
31, 2001 and 2000 are filed as part of this annual report.
PAGE
-------
Independent Auditors' Reports........................................................ F-2/F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and
2000............................................................................... F-4
Consolidated Balance Sheets at December 31, 2002 and 2001............................ F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and
2000............................................................................... F-6
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 2002, 2001 and 2000................................................... F-7
Notes to the Consolidated Financial Statements....................................... F-8
ITEM 19. EXHIBITS
EXHIBIT NUMBER
1. Articles of Incorporation (Satzung) of SGL CARBON Aktiengesellschaft, as
amended (incorporated by reference to Exhibit 1 to the annual report on
Form 20-F of SGL CARBON Aktiengesellschaft filed on July 1, 2002).
2. Term facilities and Revolving Credit Agreement dated December 20, 2002
between SGL CARBON Aktiengesellschaft and the banks parties thereto.
3. A list showing the number and a brief identification of each material
foreign patent for an invention not covered by a U.S. patent will be
provided upon the Commission`s request.
4. An explanation of how earnings per share information was calculated is
provided in Notes 10 and 33 to our consolidated financial statements filed
in Item 18, "Financial Statements".
5. A list of our principal subsidiaries is provided in Item 4, "Information on
the Company -- Organizational Structure".
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SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant certifies that it meets all requirements for filing on
Form 20-F and has duly caused this annual report to be signed on its behalf by
the undersigned, thereunto duly authorized.
SGL CARBON Aktiengesellschaft
By: /s/ Robert J. Koehler
---------------------
Robert J. Koehler
Chief Executive Officer
Chairman of the Executive Committee
By: /s/ Dr. Bruno Toniolo
---------------------
Dr. Bruno Toniolo
Chief Financial Officer
Member of the Executive Committee
Date: April 14, 2003
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CERTIFICATION
I, Robert Koehler, certify that:
1. I have reviewed this annual report on Form 20-F of SGL Carbon AG;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 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 annual 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
annual report (the "Evaluation Date"); and
c. presented in this annual 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 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
annual report whether or not there were significant changes in internal
controls or in other factors that could 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: April 14, 2003
/s/ Robert Koehler
------------------
Robert Koehler
Chief Executive Officer
Chairman of the Executive Committee
-93-
CERTIFICATION
I, Dr. Bruno Toniolo, certify that:
1. I have reviewed this annual report on Form 20-F of SGL Carbon AG;
2. Based on my knowledge, this annual 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 annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual 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 annual 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 have:
d. 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 annual report is being
prepared;
e. 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
annual report (the "Evaluation Date"); and
f. presented in this annual 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 registrant's board of directors (or persons performing the
equivalent function):
c. 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
d. 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
annual report whether or not there were significant changes in internal
controls or in other factors that could 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: April 14, 2003
/s/ Dr. Bruno Toniolo
---------------------
Dr. Bruno Toniolo
Chief Financial Officer
Member of the Executive Committee
-94-
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Form 20-F annual report of SGL Carbon AG (the "Company")
for the period ending December 31, 2002 as filed with the Securities and
Exchange Commission on the date hereof (the "annual report"), each of the
undersigned officers of the Company certify pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, to the
best of such officer's knowledge and belief, that:
1. the annual report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
2. the information contained in the annual report fairly presents, in all
material respects, the financial condition and results of operations of the
Company.
/s/ Robert J. Koehler
---------------------
Robert J. Koehler
Chief Executive Officer
Chairman of the Executive Committee
/s/ Dr. Bruno Toniolo
---------------------
Dr. Bruno Toniolo
Chief Financial Officer
Member of the Executive Committee
Date: April 14, 2003
-95-
EXHIBIT INDEX
EXHIBIT NO. SEQUENTIALLY
EXHIBIT NUMBERED PAGE
----------- -------------------------------------------------------------------- -------------
1 Articles of Incorporation (Satzung) of the Registrant, as amended
(incorporated by reference to Exhibit 1 to the annual report on
Form 20-F of SGL CARBON Aktiengesellschaft filed on July 1,
2002)........ 2 Term Facility and Revolving Credit Agreement, dated
20 December, 2002, between SGL CARBON Aktiengesellschaft and the
banks parties thereto............................................
-96-
SGL CARBON AKTIENGESELLSCHAFT
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditors' Reports............................................................. F-2/F-3
Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000 F-4
Consolidated Balance Sheets at December 31, 2002 and 2001................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000 F-6
Consolidated Statements of Changes in Shareholders' Equity for the years ended F-7
December 31, 2002, 2001 and 2000........................................................
Notes to the Consolidated Financial Statements............................................ F-8
F-1
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS
SGL CARBON AKTIENGESELLSCHAFT
We have audited the consolidated balance sheet of SGL CARBON
Aktiengesellschaft and subsidiaries (,,SGL Group") as of December 31, 2002 and
the related consolidated statements of operation, cash flows and changes in
shareholders' equity for the year ended December 31, 2002. These consolidated
financial statements are the responsibility of SGL Group management. Our
responsibility is to express an opinion on these consolidated statements based
on our audit.
We conducted our audit in accordance with International Standards on
Auditing and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the SGL
Group as of December 31, 2002 and the result of their operations and their cash
flows for the year ended December 31, 2002, in conformity with International
Accounting Standards.
International Accounting Standards vary in certain significant respects
from generally accepted accounting principles in the United States. Application
of generally accepted accounting principles in the United States would have
affected the result of operations for the year ended December 31, 2002 and
shareholders' equity as of December 31, 2002 to the extent summarized in notes
34 and 35 to the consolidated financial statements.
Munich, Germany
February 27, 2003 except for notes 34, 35 and 36 as to which the date is April
14, 2003.
BDO Deutsche Warentreuhand
Aktiengesellschaft
Wirtschaftsprufungsgesellschaft
F-2
INDEPENDENT AUDITORS' REPORT
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS SGL CARBON AKTIENGESELLSCHAFT
We have audited the consolidated balance sheets of SGL CARBON
Aktiengesellschaft and subsidiaries (,,SGL Group") as of December 31, 2001 and
the related consolidated statements of operations, cash flows and changes in
shareholders' equity for each of the years in the two-year period ended
December 31, 2001. These consolidated financial statements are the
responsibility of SGL Group management. Our responsibility is to express an
opinion on these consolidated statements based on our audits.
We conducted our audits in accordance with International Standards on
Auditing and auditing standards generally accepted in the United States of
America. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatements. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of the SGL
Group as of December 31, 2001 and the results of their operations and their
cash flows for each of the years in the two-year period ended December 31,
2001, in conformity with International Accounting Standards.
International Accounting standards vary in certain significant respects
from generally accepted accounting principles in the United States. Application
of generally accepted accounting principles in the United States would have
affected the results of operations for each of the years in the three-year
period ended December 31, 2001 and shareholders' equity as of December 31, 2001
to the extent summarized in note 34 to the consolidated financial statements.
Munich, Germany
February 28, 2002.
KPMG Deutsche Treuhand-Gesellschaft
Aktiengesellschaft Wirtschaftsprufungsgesellschaft
F-3
SGL CARBON AKTIENGESELLSCHAFT
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
NOTES 2002 2002 2001 2000
------- ------- ------- -------
US$(1) EURO EURO EURO
Sales revenue.................................... 28 1,158.5 1,112.3 1,233.3 1,262.5
Cost of sales.................................... (923.3) (886.5) (941.8) (950.8)
------- ------- ------- -------
GROSS PROFIT..................................... 235.2 225.8 291.5 311.7
Selling expenses................................. (145.2) (139.4) (154.5) (156.6)
Research costs................................... (26.5) (25.4) (31.1) (29.2)
General and administrative expenses.............. 4 (49.5) (47.5) (57.8) (43.2)
Other operating income (net)..................... 5 15.8 15.1 10.6 (3.5)
------- ------- ------- -------
PROFIT FROM OPERATIONS BEFORE COSTS
RELATING TO ANTITRUST PROCEEDINGS
AND RESTRUCTURING, NET......................... 29.8 28.6 58.7 79.2
Costs relating to antitrust proceedings.......... 6 (22.9) (22.0) (35.0) 0.0
Restructuring expenses........................... 6 (8.7) (8.3) (41.0) 0.0
------- ------- ------- -------
PROFIT (LOSS) FROM OPERATIONS.................... (1.8) (1.7) (17.3) 79.2
Net financing costs.............................. 7 (26.5) (25.5) (48.5) (59.2)
------- ------- ------- -------
PROFIT (LOSS) BEFORE TAX......................... (28.3) (27.2) (65.8) 20.0
Income tax benefit/(expense) 9 3.7 3.6 (29.2) (55.7)
------- ------- ------- -------
NET LOSS FOR THE PERIOD BEFORE MINORITY INTERESTS (24.6) (23.6) (95.0) (35.7)
Minority interests............................... 0.0 0.0 (0.2) (0.3)
------- ------- ------- -------
NET LOSS FOR THE PERIOD.......................... (24.6) (23.6) (95.2) (36.0)
======= ======= ======= =======
Basic earnings per share (EPS) in................ 10 (1.12) (1.08) (4.42) (1.68)
Diluted earnings per share (EPS) in ............. 10 (1.12) (1.08) (4.42) (1.68)
(1) The 2002 financial figures have been translated for the convenience of the
reader at an exchange rate of $ 1.0415 to [E] 1.00, the average rate on
December 31, 2002.
The accompanying notes are an integral part of these Consolidated Financial
Statements.
F-4
SGL CARBON AKTIENGESELLSCHAFT
CONSOLIDATED BALANCE SHEETS
(in millions)
ASSETS NOTE 31.12.02 31.12.02 31.12.01
-------- -------- --------
US$(1) EURO EURO
NONCURRENT ASSETS
Intangible assets................................. 11 108.1 103.8 111.2
Property, plant and equipment..................... 12 497.1 477.3 553.5
Long-term investments............................. 13 34.6 33.2 34.0
-------- -------- --------
639.8 614.3 698.7
CURRENT ASSETS
Inventories....................................... 14 300.4 288.4 394.2
Trade receivables................................. 15 216.7 208.1 262.2
Other receivables and other current assets........ 16 63.2 60.7 47.4
-------- -------- --------
Receivables and other current assets.............. 279.9 268.8 309.6
Cash and cash equivalents......................... 17 22.4 21.5 12.1
-------- -------- --------
602.7 578.7 715.9
DEFERRED TAX ASSETS............................... 18 97.3 93.4 80.4
-------- -------- --------
1,339.8 1,286.4 1,495.0
======== ======== ========
EQUITY AND LIABILITIES
EQUITY/MINORITY INTERESTS
Issued Capital.................................... 58.3 56.0 55.2
Share premium..................................... 115.9 111.3 111.3
Retained earnings................................. 54.8 52.6 183.9
Net loss for the period........................... (24.6) (23.6) (95.2)
Equity............................................ 19 204.4 196.3 255.2
Minority interests................................ 1.5 1.4 1.6
-------- -------- --------
205.9 197.7 256.8
PROVISIONS
Provision for pensions and other employee benefits 20 198.5 190.6 193.1
Other provisions.................................. 21 155.4 149.2 164.6
-------- -------- --------
353.9 339.8 357.7
LIABILITIES....................................... 22
Financial liabilities............................. 467.1 448.5 538.9
Trade payables.................................... 115.1 110.5 107.7
Other liabilities................................. 157.5 151.2 197.2
-------- -------- --------
739.7 710.2 843.8
DEFERRED TAX LIABILITIES 23 40.3 38.7 36.7
-------- -------- --------
1,339.8 1,286.4 1,495.0
======== ======== ========
(1) The 2002 financial figures have been translated for the convenience of the
reader at an exchange rate of $ 1.0415 to [E] 1.00, the average rate on
December 31, 2002.
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-5
SGL CARBON AKTIENGESELLSCHAFT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
2002 2002 2001 2000
----- ----- ----- -----
US$(1)EURO EURO EURO
CASH FLOWS FROM OPERATING ACTIVITIES
Net profit (loss) before taxes......................... (28.3) (27.2) (65.8) 20.0
Adjustments to reconcile net profit or loss to net cash
provided by operating activities
Loss on sale of property, plant and equipment.......... (2.9) (2.8) 1.0 0.8
Gain/loss on sale of equity investments................ (1.0) (1.0) 0.0 4.8
Depreciation and amortization expense.................. 84.8 81.4 86.8 83.2
Write-downs on noncurrent assets....................... 0.0 0.0 9.8 0.0
Taxes paid............................................. (23.3) (22.3) (13.6) (2.9)
Change in provisions, net.............................. (2.9) (2.8) 16.3 (26.9)
Change in Working capital, net of changes in basis of
consolidation:
Inventories............................................ 86.1 82.7 (26.8) 0.6
Write-downs on inventories............................. 0.0 0.0 15.0 0.0
Trade receivables...................................... 46.6 44.7 33.8 10.5
Trade payables......................................... 7.1 6.8 6.2 2.6
Other operating assets/liabilities..................... (10.9) (10.4) 30.0 (47.1)
----- ----- ----- -----
Cash provided by operating activities before payment of
antitrust fines...................................... 155.3 149.1 92.7 45.6
----- ----- ----- -----
Payments relating to antitrust proceedings............. (10.5) (10.1) (36.9) (89.0)
----- ----- ----- -----
Cash provided /used by operating activities............ 144.8 139.0 55.8 (43.4)
----- ----- ----- -----
CASH FLOWS FROM INVESTING ACTIVITIES
Acquisition of property, plant and equipment, and
intangible assets (excl. Goodwill)................... (55.8) (53.6) (96.1) (69.8)
Proceeds from sale of property, plant and equipment,
and intangible assets................................ 8.1 7.8 3.8 2.0
Cost of aquisitions.................................... (0.7) (0.7) (5.7) (23.3)
Proceeds from sale of equity investments............... 5.8 5.6 5.5 2.1
----- ----- ----- -----
Cash used in investing activities...................... (42.6) (40.9) (92.5) (89.0)
----- ----- ----- -----
CASH FLOWS FROM FINANCING ACTIVITIES
Net change in financial liabilities.................... (91.2) (87.6) 36.5 97.8
Dividends paid......................................... (0.2) (0.2) (0.1) (0.4)
Net proceeds from capital increase..................... 0.8 0.8 2.2 5.5
----- ----- ----- -----
Cash provided by financing activities.................. (90.6) (87.0) 38.6 102.9
----- ----- ----- -----
Cash received from first-time consolidation............ 8.6
----- ----- ----- -----
Effect of foreign exchange rate changes................ 0.1 (1.7) 0.4 2.1
----- ----- ----- -----
Net increase/decrease in cash and cash equivalents..... 11.7 9.4 2.3 (18.8)
Cash and cash equivalents at beginning of year......... 10.7 12.1 9.8 28.6
----- ----- ----- -----
CASH AND CASH EQUIVALENTS AT END OF YEAR............... 22.4 21.5 12.1 9.8
===== ===== ===== =====
(1) The 2002 financial figures have been translated for the convenience of the
reader at an exchange rate of $ 1.0415 to [E] 1.00, the average rate on
December 31, 2002.
Cash flow was adjusted for currency impacts, see Note 24 for additional
cash flow information.
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-6
SGL CARBON AKTIENGESELLSCHAFT
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(in Euro millions)
UNAPPROPRIATE
THEREOF FROM SURPLUS/
ISSUED SHARE RETAINED CURRENCY ACCUMULATED MINORITY
CAPITAL PREMIUM EARNINGS TRANSLATION DEFIZIT EQUITY INTERESTS TOTAL
Balance at Jan. 1, 2000...... 54.3 104.4 175.3 15.9 349.9 0.9 350.8
Appropriation of net loss for
2000....................... 15.9 (51.9) (36.0) 0.3 (35.7)
Other recognized gains and
losses..................... 2.0 2.0 0.9 2.9
Capital increase............. 0.5 5.1 5.6 5.6
Exchange differences......... 15.5 15.5 15.5 15.5
------- ------- -------- ------------ ------------- ------ --------- -----
Balance at Dec. 31, 2000..... 54.8 109.5 208.7 15.5 (36.0) 337.0 2.1 339.1
======= ======= ======== ============ ============= ====== ========= =====
Balance at Jan. 1, 2001...... 54.8 109.5 208.7 15.5 (36.0) 337.0 2.1 339.1
Appropriation of net loss for
2001....................... (36.0) (59.2) (95.2) 0.2 (95.0)
Other recognized gains and
losses..................... (0.6) (0.6) (0.7) (1.3)
Capital increase............. 0.4 1.8 2.2 2.2
Exchange differences......... 11.8 11.8 11.8 11.8
------- ------- -------- ------------ ------------- ------ --------- -----
Balance at Dec. 31, 2001..... 55.2 111.3 183.9 27.3 (95.2) 255.2 1.6 256.8
======= ======= ======== ============ ============= ====== ========= =====
Balance at Jan. 1, 2002...... 55.2 111.3 183.9 27.3 (95.2) 255.2 1.6 256.8
Appropriation of net loss for
2002....................... (95.2) 71.6 (23.6) 0.0 (23.6)
Other recognized gains and
losses..................... 0.0 (0.2) (0.2)
Capital increase............. 0.8 0.8 0.8
Exchange differences......... (36.1) (36.1) (36.1) (36.1)
------- ------- -------- ------------ ------------- ------ --------- -----
Balance at Dec. 31, 2002..... 56.0 111.3 52.6 (8.8) (23.6) 196.3 1.4 197.7
======= ======= ======== ============ ============= ====== ========= =====
The accompanying notes are an integral part of these Consolidated Financial
Statements
F-7
SGL CARBON AKTIENGESELLSCHAFT
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(in millions)
1. SUMMARY OF ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
SGL Carbon Aktiengesellschaft (SGL Carbon) together with its subsidiaries
(the "SGL Carbon Group") is a global manufacturer of carbon and graphite
products. See note 28 for further information on business activities.
BASIS OF PRESENTATION
The consolidated financial statements of the SGL Carbon Group have been
prepared in accordance with the International Financial Reporting Standards
(IFRSs) -- formerly known as the International Accounting Standards (IASs) --
issued by the International Accounting Standards Board (IASB), incorporating
the interpretations issued by the International Financial Reporting
Interpretations Committee (IFRIC). All standards to be applied for fiscal year
2002 have been complied with. References to IFRSs/IASs relate to the IFRSs/IASs
in force, as amended. Application of the IFRSs/IASs was possible because
consolidated financial statements prepared in accordance with internationally
accepted accounting standards such as the IFRSs/IASs qualify as exempting
consolidated financial statements as defined by section 292a of the HGB (German
Commercial Code) introduced in 1998.
As in the previous year, the 2002 consolidated financial statements were
prepared in euros ([E]) and are presented in millions of euros ([E]m), rounded
to the nearest 0.1 million. Conversion from Deutsche Mark to euros was based on
the official DM:[E] conversion rate of 1.95583 fixed on January 1, 1999.
CONSOLIDATION METHODS
The annual financial statements of the companies consolidated were prepared
in accordance with uniform accounting policies. Interim financial statements
are used for subsidiaries with differing balance sheet dates. Except for two
subholding companies and three smaller companies, all financial statements have
been audited and certified by independent auditors.
Companies are consolidated using the purchase method of accounting, under
which the acquisition cost of the interests in the subsidiaries is eliminated
against the equity of the subsidiaries attributable to the parent company at
the date of acquisition. Fair values are recognized, and any remaining excess
of cost of acquisition over net assets acquired is recognized as goodwill from
capital consolidation and reduced by straight-line amortization over its
expected useful life. In accordance with IAS 22, any negative goodwill is
deducted from goodwill on the face of the balance sheet and recognized in
income under other operating income over the useful life of the asset. Goodwill
arising prior to 1994 has been charged directly to reserves.
Companies or joint ventures representing an interest of between 20% and 50%
and additionally the parent company has a significant influence are measured at
equity.
Intercompany receivables and liabilities, intercompany profits and losses,
as well as intragroup sales revenue, expenses and income are eliminated. In
accordance with IAS 12, deferred tax assets and liabilities are recognized for
temporary differences arising from consolidation.
FOREIGN CURRENCY TRANSLATION
Foreign currency receivables and liabilities in the single-entity financial
statements are translated at the middle rates at the balance sheet date. Hedged
items and related derivatives are measured separately at their fair values at
the balance sheet date in accordance with IAS 39.103.
F-8
The annual financial statements of companies domiciled outside the euro
zone are translated into euros in accordance with IAS 21. For all SGL Carbon
Group companies, translation is effected on the basis of the local currency, as
the companies are economically independent. Balance sheet items of annual
financial statements that are not prepared in euros are translated at the
middle rates prevailing at the balance sheet date; income statement items are
translated at average rates for the year.
Exchange differences resulting from the application of different exchange
rates in the income statements and the balance sheets, as well as differences
from the translation of net assets at rates differing from those applied in the
prior-year period, are taken directly to retained earnings.
Changes in the exchange rates of currencies that are material to the
consolidated financial statements are presented below:
FOREIGN CURRENCY
[E] MIDDLE RATES AT THE AVERAGE RATE
BALANCE SHEET DATE [E]
-------------------------- --------------
ISO CODE DEC 31. 2002 DEC 31. 2001 2002 2001
-------- ------------ ------------ ------ ------
US dollar...... USD 1.0415 0.8820 0.9448 0.8957
Sterling....... GBP 0.6502 0.6088 0.6288 0.6219
Canadian dollar CAD 1.6385 1.4102 1.4826 1.3866
Polish zloty... PLN 4.0202 3.5068 3.8894 3.6815
FINANCIAL INSTRUMENTS
The SGL Carbon Group uses all standard financial instruments such as
interest rate swaps, interest rate options, currency forwards and options
purely for hedging purposes and to reduce risk.
Derivatives are measured at cost when the transaction is executed. They are
subsequently remeasured at their fair values at the balance sheet date.
Presentation in the income statement is based on the underlying transaction.
INTANGIBLE ASSETS
Purchased intangible assets are carried at cost and amortized over an
expected useful life of three years. Purchased goodwill is generally
capitalized and amortized over its expected useful life of 20 years. Internally
generated intangible assets are capitalized at cost and amortized over their
expected useful life where future economic benefits are expected to flow to the
Company. Research and development costs are not capitalized, but are expensed
directly when incurred.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment is capitalized at cost and reduced by
straight-line depreciation. Borrowing costs are not capitalized. Repair costs
are expensed directly when incurred. Contracts in which the lessee bears all
significant opportunities and risks from the use of the leased asset, and which
are hence classified as finance leases, are carried at their fair valuesor, if
lower, at the net present value of the minimum lease payments. All other leases
are treated as operating leases and, as a result, the lease payments are
expensed when incurred. The range of the standard useful lives are as follows:
buildings 10 to 41 years, technical equipment and machinery 4 to 25 years,
other equipment, operating and office equipment 3 to 15 years.
Additions to items of movable plant and equipment in the first half of the
year are depreciated at the full-year rate; additions in the second half of the
year are depreciated at half the full-year rate. Low-value assets are written
off in full in the year of acquisition and reported as disposals in the
statement of changes in noncurrent assets. The resulting effects on net assets,
financial position and results of operations are insignificant.
F-9
NONCURRENT FINANCIAL ASSETS
Noncurrent financial assets are carried at cost, net of any write-downs
incurred. Interest-free and low-interest long-term receivables are discounted
at a standard market rate for risk-free instruments.
INVENTORIES
Inventories are carried at cost using the weighted average cost method are
written down to the lower net realizable value where required. Net realizable
value is the estimated selling price less the estimated costs of completion and
the estimated costs necessary to make the sale. Specific valuation allowances
are also charged for inventory risks. In addition to directly attributable
costs, production costs also include appropriate shares of materials and
production overheads, as well as depreciation and write-downs. Directly
attributable costs include labor costs, including pensions, amortization and
directly attributable material costs. Borrowing costs are not capitalized.
Construction contracts whose outcome can be reliably estimated and which have a
material effect are valued using the percentage of completion method.
CUSTOMER-RELATED EXPENSES
Advertising and sales promotion expenses as well as other customer-related
expenses are expensed directly when incurred. Provisions are recognized for the
estimated cost of warranties after the date of sale of the product concerned.
RECEIVABLES AND OTHER CURRENT ASSETS
Trade and other receivables are carried at their principal amount, net of
any bad debt allowances calculated on the basis of the probable default risk.
Bills receivable and other long-term receivables are discounted at standard
market rates.
The carrying amounts of assets are reviewed where there are indications
that the carrying amount of an asset exceeds its value in use or net selling
price (impairment test). The carrying amount is written down if it is higher
than the recoverable amount.
PROVISIONS FOR PENSIONS AND OTHER EMPLOYEE BENEFITS
For the SGL Carbon defined benefit plans, provisions for pensions and other
employee benefits from defined benefit plans are measured by independent
actuaries using the projected unit credit method and reflect future salary and
pension increases in accordance with IAS 19. The interest component of the
addition to pension provisions is carried under net financing costs. Payments
under defined contribution plans are recognized as expenses at the time of
payment.
OTHER PROVISIONS
Other provisions are recognized in accordance with IAS 37 for obligations
to third parties that will probably be required to be settled, and where the
amount of the obligation can be reliably estimated. Long-term other provisions
are only discounted in individual cases. Restructuring provisions are
recognized where a formal restructuring plan has been adopted and publicly
announced in sufficient detail. The accounting for our stock option plans and
recognition of the appropriate provisions are described in note 31.
PROVISIONS FOR ENVIRONMENTAL PROTECTION OBLIGATIONS
The SGL Carbon Group recognizes provisions for environmental protection
obligations where it is probable that such an obligation exists and its amount
can be reasonably estimated. Any possible insurance compensation payments are
not deducted when estimating such liabilities.
LIABILITIES
Liabilities are carried at their notional amount or at the higher
redemption amount at the balance sheet date. Interestfree or low-interest
liabilities due after more than one year are discounted to the balance sheet
date. One-time fees for long-term loan agreements are amortized over the term
of the loan agreement.
F-10
DEFERRED INCOME
Government grants are recognized only if the grants have been received and
it is likely that the Company will comply with the conditions attaching to
them. The amounts are carried in deferred income and recognized as income as
the associated expenses are incurred.
INCOME AND EXPENSES
Income and expenses of the fiscal year are recognized upon realization.
Sales revenue is recognized at the time of transfer of risk, generally after
delivery of the products or rendering of the services, net of any discounts and
rebates granted. The percentage of completion method in accordance with IAS 11
is applied to significant construction contracts.
Operating expenses are recognized when the service is utilized or at the
time when they are incurred. Interest income and expenses are accrued.
Dividends are generally recognized at the time of distribution. To enhance the
quality of presentation of earnings power, costs relating to antitrust
proceedings and restructuring are presented separately on the income statement.
DEFERRED TAX ASSETS AND LIABILITIES
Income taxes are calculated using the balance sheet liability method.
Deferred tax assets and liabilities are presented separately on the balance
sheet to reflect the future tax effect of temporary differences between the
carrying amounts of assets and liabilities in the financial accounts and in the
tax accounts. Deferred tax assets and liabilities are calculated on the basis
of the tax rates expected to be enacted when the items reverse. The effects of
changes in tax rates are recognized at the time new tax rules come into force.
Deferred tax assets are only recognized for tax loss carryforwards where future
utilization is probable.
ESTIMATES AND ASSUMPTIONS
Preparation of financial statements requires management in certain cases to
make estimates and assumptions regarding the amounts of receivables,
liabilities and provisions, the disclosure of contingent liabilities and
reported amounts of income and expenses. Actual amounts may differ from those
estimates.
2. EXPLANATION OF SIGNIFICANT DIFFERENCES BETWEEN GERMAN ACCOUNTING PRINCIPLES
AND THE INTERNATIONAL ACCOUNTING STANDARDS IN THE SGL CARBON GROUP
The significant differences between the IFRSs/IASs and the German
Commercial Code (HGB) that are relevant to the SGL Carbon Group are as follows:
* Under the HGB, goodwill may be capitalized and amortized over
generally 15 years or eliminated directly against the reserves (as
was the case in the SGL Carbon Group until 1994). The IFRSs/IASs
require goodwill to be capitalized and amortized over a maximum of
20 years. The cost of integrating the company acquired is not a
component of the cost of acquisition in accordance with the IFRSs/
IASs. The resulting goodwill and goodwill amortization charges are
correspondingly lower.
* Under the IFRSs/IASs, internally generated intangible assets are
capitalized if future economic benefits are expected to flow to the
enterprise.
* Depreciation of movable items of plant and equipment was
retrospectively changed from the declining balance to the straight-
line method of depreciation.
* Leased items of property, plant and equipment that are attributable
to the SGL Carbon Group as the beneficial owner in accordance with
the criteria set out in IAS 17 must be capitalized and depreciated.
The associated liabilities are reduced as lease payments are made
and apportioned between interest expense and reduction of the
capitalized lease obligations.
* The IFRSs/IASs do not permit general valuation allowances on
inventories and receivables.
F-11
* Foreign currency translation under the HGB is based on the imparity
principle: foreign currency receivables must be translated at the
rate prevailing at the transaction date or at the lower rate at the
balance sheet date. Foreign currency liabilities must be translated
at the rate prevailing at the transaction date or at the higher
rate at the balance sheet date. The IFRSs/IASs require all foreign
currency receivables and liabilities to be translated at the middle
rate at the balance sheet date. Any resulting gains and losses are
recognized in income.
* Deferred taxes are recognized and measured using the balance sheet
liability method in accordance with IAS 12, in contrast to the HGB.
Under IAS, assets and liabilities from amounts of future income
taxes recoverable or payable must be recognized using the future
enacted tax rates. This also includes the recognition of deferred
tax assets from tax loss carryforwards if it is probable that
taxable profits will be available against which the deferred tax
asset can be utilized.
* Under the IFRSs/IASs, pension provisions are calculated to reflect
future salary and pension increases (projected unit credit method).
Under German law, the provision is calculated using the net present
value method in accordance with section 6a of the EStG (German
Income Tax Act). IFRS/IAS pension provisions are generally higher
than HGB pension provisions.
* 55 Recognition of provisions under the IFRSs/IASs requires that
future utilization of the provision is probable. Under the HGB,
provisions may also be recognized for possible obligations.
* Under the IFRSs/IASs, long-term provisions and liabilities must be
discounted, producing a lower carrying amount. The accrued interest
on the liability relating to the North American antitrust
proceedings calculated each quarter reduces net profit or increases
net loss before tax compared with the HGB result.
3. ACQUISITIONS AND BASIS OF CONSOLIDATION
The 19.6% interest in ZEW Zaklady Elektrod Weglowych S.A., Ratibor
(Poland), acquired by SGL Carbon in 1999 was increased in several steps in 2000
to 97.2%. The total acquisition cost amounted to [E]25.9 million. This company
was fully consolidated effective December 31, 2000, although it was not
recognized in the income statement for fiscal year 2000.
As of January 1, 2001, all shares in SGL Acotec Ltda., Sao Paulo (Brazil),
-- formerly KCH-ANCOBRAS Ltda. -- were acquired in exchange for of a 38%
interest in Larrondo Inversiones S.L. at a purchase price of [E]1.8 million. In
addition, the interest in SGL Acotec (Wuhan) Co. Ltd., Wuhan (China), was
increased from 70% to 90%. [E]0.9 million was paid for the acquisition of the
20% interest to the partner continuing to hold the 10% interest. Both companies
are fully consolidated.
Tokai Carbon Co. Ltd., Tokyo (Japan), a third-party enterprise, acquired a
49% interest in the joint venture which has been operating under the name SGL
Tokai Carbon Ltd., Shanghai (China), since July 2002. The 51% interest
remaining in the hands of SGL Carbon is carried at cost and is not
consolidated, because it is not material.
All shares in SGL PanTrac Gesellschaft fur elektrische Kontakte mbH, Berlin
(PanTrac), were sold to E-Carbon S.A., Brussels, a third-party enterprise, and
were transferred in January 2003. PanTrac was still fully consolidated in the
consolidated financial statements for fiscal year 2002.
BASIS OF CONSOLIDATION
All significant subsidiaries under the legal or constructive control of SGL
Carbon have been consolidated. At December 31, 2002, eight (2001: seven) German
and forty three (2001:43) foreign subsidiaries were consolidated in addition to
SGL Carbon AG. Compared with 2001, one German and one foreign subsidiary were
consolidated for the first time, and one foreign company was no longer
consolidated because it was deemed to be insignificant. The two companies
consolidated for the first time are companies that were previously
unconsolidated. 25 companies were not consolidated
F-12
because they are insignificant overall for the presentation of net assets,
financial position and results of operations. One joint venture was carried at
equity. The significant consolidated companies are listed on page 82.
CONSOLIDATED INCOME STATEMENT AND CONSOLIDATED BALANCE SHEET DISCLOSURES
Note 28 presents a breakdown of sales revenue by Business Area.
4. GENERAL AND ADMINISTRATIVE EXPENSES
During the year under review, general and administrative expenses were
reduced significantly compared with the previous year. These savings are
primarily due, in particular, to the restructuring program implemented in North
America, as well as to a reduction in variable compensation.
5. OTHER OPERATING INCOME/EXPENSES, NET
Other operating income is primarily composed of income from the reversal of
provisions ([E]10.4 million), in particular staff cost and warranty provisions,
insurance compensation ([E]4.9 million), income from the disposal of noncurrent
assets ([E]4.5 million), income from changes in bad debt allowances on
receivables ([E]2.8 million), the amortization of negative goodwill ([E]2.3
million) and exchange rate gains ([E]1.8 million).
The major items of other operating expenses are amortization of goodwill
([E]7.4 million), additions to provisions, exchange rate losses ([E]1.6
million) and losses on the disposal of noncurrent assets ([E]0.6 million).
6. COSTS RELATING TO ANTITRUST PROCEEDINGS AND RESTRUCTURING EXPENSES
2002 2001 2000
---- ---- ----
[E]M [E]M [E]M
Cost relating to antitrust proceedings........................ 22.0 35.0 0.0
Restructuring expenses........................................ 8.3 41.0 0.0
---- ---- ----
30.3 76.0 0.0
==== ==== ====
The costs relating to antitrust proceedings relate primarily to an increase
in the provisions for fines imposed by the European Commission in fiscal years
2001 and 2002. The restructuring expenses in fiscal year 2002 relate to the GS
and CP businesses and are linked to the acceleration of the restructuring
program and to the fact that measures originally planned for 2003 were brought
forward to 2002, resulting in a significant increase in job cuts. The
restructuring expenses for the previous year contain closure costs for three
plants in the US, the resulting expenses for reducing the workforce and for
impairment losses of noncurrent and current assets in the US, as well as
workforce resizing costs in Europe (see also notes 21 and 25).
7. NET FINANCING COSTS
2002 2001 2000
------------------------- ----- -----
[E]M [E]M [E]M
Net investment income/(loss).............................. (1.8) 3.2 0.6
------------------------- ----- -----
Interest on other securities and long-term loans.......... 0.1 0.5 0.1
Other interest and similar income......................... 2.1 2.0 2.3
(thereof from subsidiaries)............................... (0.0)
Interest on borrowings and other interest................. (27.4) (28.4) (31.5)
Accrued interest on liabilities from antitrust proceedings 3.4 (2.7) (4.3)
Interest component of appropriation to pension provisions. (10.4) (9.9) (9.2)
------------------------- ----- -----
Interest expense, net..................................... (32.2) (38.5) (42.6)
========================= ===== =====
F-13
2002 2001 2000
------------------------- ----- -----
[E]M [E]M [E]M
Other net financing costs 8.5 (13.2) (17.2)
------------------------- ----- -----
(25.5) (48.5) (59.2)
========================= ===== =====
Net financing costs include non-cash expenses amounting to [E]3.9 million.
Other net financial income/net financing costs relate to net exchange rate
gains and losses on financial transactions and to write-downs of current
financial instruments. The fair value of options issued to a third party (see
note 26) recognized in the previous year was reversed in fiscal year 2002. The
result is reported under other net financing costs. We have reclassified the
interest component of foreign currency hedging costs of [E]1.0 million in 2001
from interest on borrowings and other interest expense to other net financial
income/net financing costs.
8. OTHER DISCLOSURES
COSTS OF MATERIAL
2002 2001 2000
----- ----- -----
[E]M [E]M [E]M
Cost of raw materials and consumables used and of good purchased
and held for resale............................................... 242.1 297.1 290.4
Cost of purchased services.......................................... 61.3 78.2 93.4
----- ----- -----
303.5 375.3 383.8
===== ===== =====
STAFF COSTS
2002 2001 2000
----- ----- -----
[E]M [E]M [E]M
Wages and salaries.................................................. 298.1 326.0 341.6
Social security contributions, retirement and other benefit costs 70.1 77.2 74.3
(thereof for pensions).............................................. (18.7) (17.3) (17.7)
----- ----- -----
368.2 403.2 415.9
===== ===== =====
OTHER TAXES
Other taxes are reported in the appropriate functional expense. The total
expense was [E]9.8 million in 2002 and [E]9.7 million in 2001.
BREAKDOWN OF EMPLOYEES
Annual average number of employees 2002 2001 2000
-------------------------------------------------------------------- ----- ----- -----
Production and auxiliary plants..................................... 5,465 6,103 5,837
Sales and marketing................................................. 638 655 717
Research............................................................ 307 487 475
Administration, other functions..................................... 1,294 1,246 1,264
----- ----- -----
7,704 8,491 8,293
===== ===== =====
F-14
The reduction in the average number of employees is a result of the
headcount reduction implemented under the previous year's restructuring program
and the fact that measures planned for 2003 were brought forward.
9. INCOME TAX BENEFIT/EXPENSE
The tax expense is composed as follows:
2002 2001 2000
---- ----- ----
[E]M [E]M [E]M
CURRENT INCOME TAX EXPENSE
Germany....................................................... (2.1) (5.6) 0.9
Rest of World................................................. (5.7) (16.8) 28.0
DEFERRED TAXES
Germany....................................................... 11.1 (1.6) (1.3)
Rest of World................................................. 0.3 (5.2) 28.1
---- ----- ----
Income tax expense (income)................................... 3.6 (29.2) 55.7
==== ===== ====
Deferred tax assets from tax loss carryforwards are generally recognized in
the IFRS/IAS consolidated financial statements on the basis of five-year
projected earnings before taxes of the individual consolidated companies. The
projections reflect uncertainties about certain assumptions and other general
conditions and, in exceptional cases, deferred tax assets from tax loss
carryforwards have not been recognized.
Deferred tax assets from tax loss carryforwards were not recognized in the
US and the UK in the period under review. Deferred tax assets from tax loss
carryforwards in the US were written down in full in the 2001 consolidated
financial statements as a consequence of the economic situation in the US steel
industry.
Since the Tax Reduction Act became effective in January 2001, the net
profit of German companies has been subject to a standard 25% rate of
corporation tax. In September 2002, the rate of German corporation tax for
fiscal 2003 was increased to 26.5%. The impact of this tax increase, which is
limited to one year, is not of material importance and has therefore not been
included in the calculation of deferred taxes. A solidarity surcharge of 5.5%
is added to the corporation tax rate resulting in an aggregate corporation tax
rate for 2001 and 2002 of 26.4%. Together with the trade tax burden of 12%, the
German income tax rate amounts to a total of 38.4%.
RECONCILIATION
2002 2001 2000
----- ----- -----
[E]M [E]M [E]M
Net profit (loss) before tax................................ (27.2) (65.8) 20.0
----- ----- -----
Expected tax income/expense at 38.4%........................ 10.4 25.3 (7.7)
----- ----- -----
Change in expected tax expense due to:
-- non-deductable expenses
(incl. goodwill amortization) and tax-exempt income:..... (7.6) (16.4) (2.9)
-- Taxation differences at foreign companies................ 3.3 (0.5) 4.6
-- Prior-period taxes....................................... 4.0 (5.2) 0.0
-- Effects of change in tax rate............................ 0.0 (0.7) (5.9)
-- Change in valuation allowance against deferred tax assets (11.4) (31.6) (46.0)
-- Other.................................................... 4.9 (0.1) 2.2
----- ----- -----
= Effective tax benefit (+)/expense(-)...................... 3.6 (29.2) (55.7)
===== ===== =====
F-15
Since the income tax burden differs from country to country, these taxation
differences are disclosed separately in the above reconciliation. The prior-
period taxes are the result of refunds for taxes paid in the past due to
successful appeals to the tax authorities. The valuation allowance charged on
deferred tax assets relates primarily to the non-recognition of deferred tax
assets in the US and the UK.
10. EARNINGS PER SHARE (EPS)
Basic earnings per share are calculated by dividing the net profit or loss
attributable to SGL Carbon shareholders (2002: [E]-23.6 million; 2001: [E]-95.2
million) by the weighted average number of shares outstanding (2002:
21,813,930; 2001: 21,530,563). The weighted average number of shares
outstanding is calculated from the number of shares outstanding at January 1
plus the new shares issued in February 2002 (see note 17).
Because of the net loss for the year and the resulting lack of any dilutive
effect, the diluted earnings per share in accordance with IAS 33.40 for both
fiscal years were identical to the basic earnings per share.
11. INTANGIBLE ASSETS
DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31, DEC. 31,
2002 2002 2002 2002 2001 2001 2001 2001
---------- -------- -------- -------- ---------- -------- -------- --------
INDUSTRIAL INDUSTRIAL
RIGHTS, RIGHTS,
SOFTWARE SOFTWARE
AND AND
SIMILAR NEGATIVE SIMILAR NEGATIVE
RIGHTS GOODWILL GOODWILL TOTAL RIGHTS GOODWILL GOODWILL TOTAL
---------- -------- -------- -------- ---------- -------- -------- --------
[E]M [E]M [E]M [E]M [E]M [E]M [E]M [E]M
HISTORICAL COST:
Balance at Jan. 1....... 24.0 140.6 (8.3) 156.3 24.3 138.2 (8.3) 154.2
Change in basis of
consolidation......... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Currency translation.... (1.0) (8.5) (3.1) (12.8) 0.9 3.8 0.0 4.7
Additions............... 12.0 0.1 0.0 12.1 1.1 4.4 0.0 5.5
Disposals............... (0.6) 0.0 0.0 (0.6) (2.3) (5.8) 0.0 (8.1)
---------- -------- -------- -------- ---------- -------- -------- --------
Balance at Dec. 31...... 34.4 132.2 (11.4) 155.2 24.0 140.6 (8.3) 156.3
---------- -------- -------- -------- ---------- -------- -------- --------
CUMULATIVE AMORTIZATION:
Balance at Jan. 1....... 18.5 31.3 (4.7) 45.1 15.7 22.7 (0.7) 37.7
Change in basis of
consolidation......... 0.0 0.0 0.0 0.0 0.0 0.0 0.0 0.0
Currency translation.... (1.2) (1.8) 0.0 (3.0) 1.0 0.3 0.0 1.3
Additions............... 4.8 7.4 (2.3) 9.9 3.5 8.4 (4.0) 7.9
Disposals............... (0.6) 0.0 0.0 (0.6) (1.7) (0.1) 0.0 (1.8)
---------- -------- -------- -------- ---------- -------- -------- --------
Balance at Dec. 31...... 21.5 36.9 (7.0) 51.4 18.5 31.3 (4.7) 45.1
---------- -------- -------- -------- ---------- -------- -------- --------
CARRYING AMOUNTS AT
DEC. 31............... 12.9 95.3 (4.4) 103.8 5.5 109.3 (3.6) 111.2
========== ======== ======== ======== ========== ======== ======== ========
Industrial rights, software and similar rights mainly comprise purchased
and internally developed software. Additions in the year under review relate
mainly to the first phase in the creation of a standardized Group-wide SAP
system (SGL ONE). The aim of the SAP project is to replace a multitude of
legacy systems with a single, fully integrated global SAP system. A total of
[E]4.9 million has been capitalized to date for the SGL ONE project. Negative
goodwill is reversed to the income statement across the remaining useful life
of the asset. Goodwill amortization is contained in other operating expenses.
There was no requirement for write-downs from impairment testing.
F-16
12. PROPERTY, PLANT AND EQUIPMENT
OTHER ADVANCE
TECHNICAL EQUIPMENT, PAYMENTS
LAND, LAND EQUIPMENT OPERATING AND ASSETS
RIGHTS AND AND AND OFFICE UNDER
[E]M BUILDINGS MACHINERY EQUIPMENT DEVELOPMENT TOTAL
---------- --------- ---------- ----------- -------
Historical cost:
Balance at Jan. 1, 2002.... 395.8 1.106.6 142.5 52.9 1,697.0
Change in basis of
consolidation............ (10.9) (36.4) (8.5) 0.0 (55.8)
Currency translation....... (19.3) (61.4) (3.2) (2.2) (86.1)
Reclassifications.......... 10.1 0.0 0.0 (10.1) 0.0
Additions.................. 2.6 43.7 6.1 (10.9)* 41.5
Disposals.................. (6.3) (28.6) (5.5) (0.1) (40.5)
---------- --------- ---------- ----------- -------
Balance at Dec. 31, 2002... 372.0 1.023.9 131.4 29.6 1,556.9
---------- --------- ---------- ----------- -------
CUMULATIVE DEPRECIATION
Balance at Jan. 1, 2002.... 214.5 811.3 118.3 0.2 1,144.3
Change in basis of
consolidation............ (10.0) (34.3) (8.5) 0.0 (52.8)
Currency translation....... (7.1) (38.1) (2.2) 0.0 (47.4)
Reclassifications.......... 0.0 0.0 0.0 0.0 0.0
Additions.................. 10.3 52.4 8.6 0.0 71.3
Disposals.................. (4.0) (26.5) (5.3) 0.0 (35.8)
---------- --------- ---------- ----------- -------
Balance at Dec. 31, 2002... 203.7 764.8 110.9 0.2 1,079.6
---------- --------- ---------- ----------- -------
Carrying amount at Dec. 31,
2002..................... 168.3 259.1 20.5 29.4 477.3
========== ========= ========== =========== =======
HISTORICAL COST:
Balance at Jan. 1, 2001.... 377.3 1.049.8 145.2 35.4 1,607.7
Change is basis of
consolidation............ 2.4 0.6 0.5 0.0 3.5
Currency translation....... 6.7 19.1 0.4 (1.1) 25.1
Reclassifications.......... 1.6 2.7 0.0 (4.3) 0.0
Additions.................. 8.7 49.3 9.7 22.9 90.6
Disposals.................. (0.9) (14.9) (13.3) 0.0 (29.1)
---------- --------- ---------- ----------- -------
Balance at Dec. 31, 2001 395.8 1,106.6 142.5 52.9 1,697.8
---------- --------- ---------- ----------- -------
CUMULATIVE DEPRECIATION
Balance at Jan. 1, 2001.... 202.1 751.7 119.5 0.0 1,073.3
Change in basis of
consolidation............ 0.7 0.4 0.4 0.0 1.5
Currency translation....... (1.8) 8.2 0.0 0.0 6.4
Reclassifications.......... 0.0 0.1 (0.1) 0.0 0.0
Additions.................. 14.3 62.6 10.8 0.2 87.9
Disposals.................. (0.8) (11.7) (12.3) 0.0 (24.8)
---------- --------- ---------- ----------- -------
Balance at Dec. 2001....... 214.5 811.3 118.3 0.2 1,144.3
---------- --------- ---------- ----------- -------
CARRYING AMOUNT AT DEC. 31,
2001..................... 181.3 295.3 24.2 52.7 553.5
========== ========= ========== =========== =======
* Balance of additions of [E]28.9 million and reclassifications to operational
equipment of [E]39.8 million
F-17
Additions in property, plant and equipment fell by [E]49.1 million in the
year under review, from [E]90.6 million to [E]41.5 million. In fiscal year
2002, [E]5.5 million was invested in the new carbon-ceramic brake disc
production plant, which was completed in 2002. Other material additions relate
primarily to the replacement of capital assets for our plants in Germany, the
US and Italy. Capitalized leased assets relate to land and buildings and to
technical equipment, and amount to [E]1.4 million at December 31, 2002.
13. NONCURRENT FINANCIAL ASSETS
INVESTMENTS OTHER
IN NOT NONCURRENT NONCURRENT
CONSOLIDATED FINANCIAL FINANCIAL
SUBSIDIARIES INSTRUMENTS ASSETS TOTAL
[E]M [E]M [E]M [E]M
------------ ----------- ---------- -----
HISTORICAL COST:
Balance at Jan.1, 2002.......... 27.3 2.7 5.2 35.2
Change in basis of consolidation 11.0 0.0 0.0 11.0
Currency translation............ (1.7) 0.0 0.1 (1.6)
Reclassifications............... 0.0 (0.3) 0.3 0.0
Additions....................... 0.6 0.1 0.0 0.7
Disposals....................... (4.4) 0.0 (0.2) (4.6)
------------ ----------- ---------- -----
Balance at Dec.31, 2002......... 32.8 2.5 5.4 40.7
------------ ----------- ---------- -----
CUMULATIVE WRITE-DOWNS:
Balance at Jan.1, 2002.......... 1.2 0.0 0.0 1.2
Change in basis of consolidation 6.0 0.0 0.0 6.0
Currency translation............ 0.0 0.0 0.1 0.1
Additions....................... 0.0 0.0 0.2 0.2
Disposals....................... 0.0 0.0 0.0 0.0
------------ ----------- ---------- -----
Balance at Dec.31, 2002......... 7.2 0.0 0.3 7.5
------------ ----------- ---------- -----
CARRYING AMOUNT AT DEC.31, 2002. 25.6 2.5 5.1 33.2
============ =========== ========== =====
HISTORICAL COST:
Balance at Jan.1, 2001.......... 30.1 2.5 4.2 36.8
Change in basis of consolidation 0.0 0.0 0.1 0.1
Currency translation............ 0.7 0.0 0.1 0.8
Reclassifications............... (1.0) 0.5 0.5 0.0
Additions....................... 2.2 0.5 0.9 3.6
Disposals....................... (4.7) (0.8) (0.6) (6.1)
------------ ----------- ---------- -----
Balance at Dec.31, 2001......... 27.3 2.7 5.2 35.2
------------ ----------- ---------- -----
CUMULATIVE WRITE-DOWNS:
Balance at Jan.1, 2001.......... 0.9 0.0 0.0 0.9
Change in basis of consolidation 0.0 0.0 0.0 0.0
Currency translation............ 0.0 0.0 0.0 0.0
Additions....................... 0.8 0.0 0.0 0.8
Disposals....................... (0.5) 0.0 0.0 (0.5)
Balance at Dec.31, 2001......... 1.2 0.0 0.0 1.2
------------ ----------- ---------- -----
CARRYING AMOUNT AT DEC.31, 2001. 26.1 2.7 5.2 34.0
============ =========== ========== =====
F-18
Other noncurrent financial assets relate primarily to the capitalized
surrender value of reinsurance policies. The change in the basis of
consolidation in the year under review relates to the carrying amount of a
company which is no longer consolidated due to immateriality. There are no
longer any advance payments on noncurrent financial assets.
14. INVENTORIES
DEC. 31, DEC. 31,
2002 2001
-------- --------
[E]M [E]M
Raw materials and supplies............................ 83.1 109.1
Work in progress...................................... 147.9 200.9
Finished goods and goods purchased and held for resale 54.5 71.0
Cost in excess of billings............................ 9.3 12.6
Advance payments/minus payments received.............. (6.4) 0.6
-------- --------
288.4 394.2
======== ========
Cost in excess of billings relates to customer-specific production
contracts measured at cost. The total amount of inventories carried at net
realizable value amounts to [E]5.8 million. Advances received amounting to
[E]7.5 million were netted against inventories for the first time in 2002.
Write-downs were only reversed to a limited extent.
15. TRADE RECEIVABLES
DEC. 31, DEC. 31,
2002 2001
-------- --------
[E]M [E]M
Customers ............................................ 198.1 256.0
thereof with more than one year to maturity
(2002: [E]0.3 million, 2001: [E]0.4 million)
Subsidiaries ......................................... 10.0 6.2
-------- --------
208.1 262.2
======== ========
Trade receivables are reported net of specific allowances for doubtful
accounts amounting to [E]9.6 million as of December 31, 2002 and [E]15.0
million as of December 31, 2001. No general valuation allowances were
recognized in 2002. There were no trade receivables from associates. As of
December 31, 2002 and 2001, sales of receivables, as reported during the year,
amounted to [E]41.2 million and [E]11.4 million, respectively.
16. OTHER RECEIVABLES AND OTHER CURRENT ASSETS
DEC. 31, DEC. 31,
2002 2001
-------- --------
[E]M [E]M
Other receivables from subsidiaries .................. 2.9 0.2
Other current assets ................................. 57.8 47.2
thereof with more than one year to maturity
(2002: [E]0.0 million, 2001: [E]0.0 million)
-------- --------
60.7 47.4
======== ========
F-19
Other current assets relate primarily to recoverable taxes amounting to
[E]19.8 million, positive fair values of financial derivatives totaling [E]8.7
million, prepaid expenses of [E]7.0 million, insurance claims, short-term
loans, purchase price receivables for noncurrent assets sold, and miscellaneous
receivables.
17. CASH AND CASH EQUIVALENTS
DEC. 31, DEC. 31,
2002 2001
-------- --------
[E]M [E]M
Cash and bank balances................................ 21.4 11.6
Financial instruments................................. 0.1 0.5
-------- --------
21.5 12.1
======== ========
The increase in bank balances as compared to the prior year is mainly due
to reporting date effects at subsidiary in Poland.
On February 28, 2002 the Company purchased 300,000 own shares at [E] 2.56
each. These shares resulted from the capital increase approved on January 23,
2002 and were for use by employees. In March 2002, a total of 276,707 shares
(notional [E] 708,370 = 1.3% of the share capital) were issued to employees of
SGL Carbon AG and its affiliates as part of the bonus program. In November
2002, the Company purchased a total of 63,455 own shares at [E] 7.17 each (a
total of [E] 455,251). Using the initial portfolio of 2,027 shares, 88,775
shares (notional [E] 227,264 = 0.4% of the share capital) were issued as
employee shares to employees of SGL Carbon AG and its affiliates in November
2002. 79,825 shares were purchased by the participants at a price of [E] 4.42
each and 8,950 shares at a price of [E] 5.50 each. As a result, no further
shares were held at the balance sheet date.
The financial instruments are classified as "available for sale". The fair
values of the financial instruments correspond to their carrying amounts. There
was no requirement to charge impairment losses.
18. DEFERRED TAX ASSETS
Tax loss carryforwards are recorded primarily in the US and in Germany. As
the law currently stands, the tax loss carryforwards in Germany can be utilized
without limitation of time. In the US, the tax loss carryforwards expire
between 2018 and 2021. These tax loss carryforwards are measured at the
expected enacted future tax rates. Valuation allowances are charged on the
gross amounts calculated in this way to obtain the amounts likely to be
utilized in the future.
Deferred tax assets from loss carryforwards in the US and the UK were not
recognized during preparation of the IFRS/IAS consolidated financial
statements.
Deferred tax assets were also recognized for timing differences in profit
and loss resulting from consolidation adjustments, and for temporary
differences in carrying amounts at the Group companies resulting from
provisions for onerous contracts not allowable for tax purposes and for other
measurement differences under the IFRSs/IASs. In the event of doubts about the
tax-deductibility of expenses, an equivalent valuation allowance is charged
against the calculated deferred tax assets. Most deferred tax assets have more
than one year to maturity.
19. EQUITY
The classification of items of equity is presented in the consolidated
statement of changes in shareholders equity on page F-7.
The share capital of SGL Carbon as of December 31, 2002 amounted to
[E]55,972,992 and is composed of 21,864,450 no-par value bearer shares.
F-20
The share capital of SGL Carbon may be increased against cash or non-cash
contributions by a resolution adopted by an Annual General Meeting by a simple
majority, or if the subscription rights of the shareholders are to be excluded,
by a majority of at least three-quarters of the share capital present (in
person or by proxy) at the adoption of the resolution. Any decrease in the
share capital of SGL Carbon requires a resolution adopted by a three-quarters
majority.
The Annual General Meeting of a German corporation may empower the
Executive Committee to issue, subject to the consent of the Supervisory Board,
shares up to a certain aggregate notional amount not exceeding 50% of the
issued share capital at the time of the adoption of the resolution during a
period not exceeding five years.
For reasons of transparency, various amounts of authorized capital in
existence at the time of different Annual General Meetings were aggregated in a
single provision of the Articles of Association by resolution of the Annual
General Meeting on April 30, 2002. To do this, the following authorizations
were revoked: (i) the authorization of the Executive Committee in accordance
with Article 3 (6) of the Articles of Association to increase the share capital
by a total of up to [E]376,192 on one or more occasions up to April 15, 2004,
with the consent of the Supervisory Board, by issuing 146,950 new no-par value
shares for cash contributions, and (ii) the authorization of the Executive
Committee in accordance with Article 3 (8) of the Articles of Association to
increase the share capital by a total of up to [E]5,400,000 on one or more
occasions up to April 26, 2005, with the consent of the Supervisory Board, by
issuing new no-par value shares for cash and/or non-cash contributions. The
Annual General Meeting resolved to create new authorized capital I and to
revise Article 3 (6) of the Articles of Association. As a result, the Executive
Committee is authorized to increase the Company's share capital by a total of
up to [E]6,928,192.00 on one or more occasions up to April 29, 2007, with the
consent of the Supervisory Board, by issuing new shares against cash and/or
non-cash contributions (authorized capital I). Shareholders must be granted
subscription rights. With the consent of the Supervisory Board, the Executive
Committee is authorized to exclude fractions from the shareholders'
subscription rights. Furthermore, the Executive Committee may exclude
shareholders' subscription rights with the consent of the Supervisory Board,
* insofar as it is necessary to grant a right to subscribe for shares
to the holders of warrants or the creditors of convertible bonds
issued by SGL Carbon Aktiengesellschaft or its wholly owned direct
or indirect subsidiaries to the extent that they are entitled to
this right after exercising their options or conversion rights or
after fulfilling their conversion obligations,
* if the new shares are issued to employees of SGL Carbon
Aktiengesellschaft or companies affiliated with SGL Carbon
Aktiengesellschaft as defined by sections 15 ff. of the AktG
(German Stock Corporation Act). For this purpose, however, the
share capital may only be increased on one or more occasions by a
total of up to [E]2,432,000.00 through the issue of up to a total
of 950,000 new no-par value shares,
* if the new shares are issued to the employees of SGL Carbon
Aktiengesellschaft or affiliates of SGL Carbon Aktiengesellschaft
as defined by sections 15 ff. of the AktG who are participating in
SGL Carbon Aktiengesellschaft's stock option plan. For this
purpose, however, the share capital may only be increased on one or
more occasions by a total of up to [E]640,000.00 through the issue
of a total of up to 250,000 new no-par value shares,
* if the new shares are issued as part of a capital increase for non-
cash contributions for the purpose of acquiring companies, parts of
companies, or equity interests,
* by a total of up to [E]5,597,299.20, if the new shares are issued
during a capital increase for cash contributions at a price that is
not significantly lower than the market price.
The Executive Committee was also authorized by the Annual General Meeting
on May 3, 2001 to increase the Company's share capital by up to [E]21,058,304,
with the consent of the Supervisory Board, on one or more occasions up to May
2, 2006 by issuing 8,225,900 new no-par value shares for cash and/or non-cash
contributions (authorized capital Ia). Shareholders must be granted
subscription rights. However, the Executive Committee is authorized to exclude
fractions from the shareholders' subscription rights with the consent of the
Supervisory Board. The Executive Committee is also
F-21
authorized to exclude all shareholders' subscription rights with the consent of
the Supervisory Board in order to issue the new shares for non-cash
contributions for the purpose of acquiring companies or equity interests.
The share capital of the Company has been contingently increased by an
additional [E]3,840,000, composed of 1,500,000 no-par value bearer shares with
a notional value of [E]2.56 each. The contingent capital increase will be
implemented only insofar as the holders of conversion rights attached to
convertible bonds issued in September 2000 in the amount of [E]133,650,000
exercise their conversion rights, or insofar as holders of convertible bonds
who are obliged to convert such bonds issued by SGL Carbon or a wholly owned
direct or indirect subsidiary of SGL Carbon on the basis of the authorization
approved by the Annual General Meeting on April 27, 2000 fulfill their
conversion obligation. The new shares carry dividend rights from the beginning
of the fiscal year in which they are created due to the exercise of conversion
or option rights or through fulfillment of the conversion obligation.
The share capital has been contingently increased by an additional notional
[E]4,096,000. The contingent capital increase will be implemented only by
issuing up to 1,600,000 new no-par value shares carrying dividend rights from
the beginning of the fiscal year in which they were issued and will only be
implemented insofar as the owners of subscription rights issued under the terms
of the Company's stock option plan on the basis of the authorization approved
on April 27, 2000 exercise their subscription rights.
The Annual General Meeting on May 3, 2001 approved to contingent increase
in the share capital by up to [E]5,520,499.20 by issuing up to 2,156,445 bearer
shares. The contingent capital increase serves to grant option rights under the
terms and conditions of the options to the holders of warrants from bonds with
warrants or of conversion rights under the terms and conditions of the bonds to
the holders of convertible bonds which, in accordance with the authorization of
the Annual General Meeting on May 3, 2001, are issued up to May 2, 2006 by SGL
Carbon Aktiengesellschaft or a wholly owned direct or indirect subsidiary of
SGL Carbon Aktiengesellschaft. The new shares will be issued at the exercise or
conversion price to be determined in accordance with the aforementioned
resolution. The contingent capital increase will be implemented only to the
extent that the holders of the bonds with warrants or convertible bonds
exercise their option or conversion rights, or that bond holders obliged to
convert meet their obligation to do so. The new shares carry dividend rights
from the beginning of the fiscal year in which they are created through the
exercise of conversion or option rights or through the fulfillment of
conversion obligations. The Executive Committee is authorized to determine the
further details of the implementation of the contingent capital increase with
the consent of the Supervisory Board.
[E]45,911 was withdrawn from the reserve for treasury shares and
appropriated to other retained earnings. The accumulated deficit of SGL Carbon
AG of [E]9,600,000 will be carried forward to new account.
On January 31, 2003, the Executive Committee approved, with the consent of
the Supervisory Board on February 11, 2003, to use part of the authorized
capital (authorized capital I) to increase the share capital by [E]820,500.48
by issuing 320,508 new shares. The new shares carry dividend rights starting in
fiscal year 2002.
20. PROVISIONS FOR PENSIONS AND OTHER EMPLOYEE BENEFITS
DEC. 31, DEC. 31,
2002 2001
-------- --------
[E]M [E]M
Pension provision for direct commitments.................. 158.8 154.3
Pension provision for indirect commitments................ 16.4 16.4
Other..................................................... 15.4 22.4
-------- --------
190.6 193.1
======== ========
F-22
There are various arrangements worldwide in the SGL Carbon Group for
retirement benefit and surviving spouses' pensions for its employees. Some of
the arrangements are tied to the remuneration level of the employees, others
involve fixed amounts that depend on the classification of the employees (in
terms of both salary class and level in the corporate hierarchy). Certain
arrangements also provide for future increases based on indexed inflation.
The differing pension plans for the employees of SGL Carbon AG, SGL Carbon
GmbH and the former SGL Technik GmbH were standardized as of April 1, 2000.
Claims by employees from pension plans that arose prior to April 1, 2000 are
not affected, and the financial obligations arising under these pension plans
remain in the SGL Carbon Group, where they are covered by provisions. The basis
of the new pension plan is the legally independent pension fund for employees
of the Hoechst Group, which is funded by employee and employer contributions.
The contributions of the SGL Carbon Group to this pension fund are linked by a
certain formula to the contributions paid into this pension fund by the
employees. The payments by companies to such defined contribution pension funds
are expensed as incurred in the period concerned.
In the case of defined contribution pension plans, the company pays
contributions to pension insurance funds on the basis of statutory or
contractual provisions. The company has no obligations other than to pay the
contributions. Current contribution payments are recognized as operating
expenses in the period concerned.
The provisions for defined benefit plans are calculated using the projected
unit credit method. Measurement is based on the legal, economic and tax
circumstances in the country concerned. Most of the obligations from current
pensions and entitlements under pension plans in the European companies are
covered by the provisions carried on the balance sheet. The North American
subsidiaries have country-specific pension plans, most of which are covered by
pension funds. At certain companies in the SGL Carbon Group, the provisions
also cover amounts for post-employment medical care as well as severance
payments. The future obligations are calculated using actuarial methods based
on conservative estimates of the relevant parameters. Recognition of actuarial
gains and losses uses the 10% corridor rule. Personnel turnover is determined
on a company-by-company basis. The actuarial measurements are based on country-
specific mortality tables. Pension provisions amounting to [E]12 million have a
term of less than one year.
The following parameters are applied to the most significant countries:
Germany and the US.
Calculation basis and parameters for pension provisions
GERMAN
PLANS US-PLANS
----------- ------------
2002 2001 2002 2001
---- ----- ----- -----
Discount Rate....................................... 6.0% 6.0% 6.75% 7.5%
Salary growth....................................... 3.0% 2.75% 3.0% 4.0%
Expected rate of return on plan assets.............. --- --- 9.0% 10.0%
F-23
Changes in the present value of funded obligations and in plan assets for
pension provisions for direct commitments are presented below:
CHANGES IN PRESENT VALUE OF FUNDED OBLIGATIONS 2002 2001
----- -----
Present value at Jan. 1......................................... 234.8 217.7
Current service cost............................................ 5.5 5.1
Interest cost................................................... 14.2 14.2
Acturarial gains/losses......................................... 6.6 6.0
Benefits paid................................................... (12.1) (11.5)
Changes in basis of consolidation............................... 0.0 0.1
Exchange differences............................................ (4.2) 3.2
----- -----
Projected benefit obligations at Dec. 31........................ 244.8 234.8
===== =====
CHANGES IN PLAN ASSETS
Plan assets at Jan. 1........................................... 51.6 58.9
Return on plan assets........................................... (5.7) (9.1)
Contributions paid.............................................. 2.9 1.9
Benefits paid................................................... (3.7) (3.4)
Exchange differences............................................ 0.2 3.3
----- -----
Plan assets at Dec. 31.......................................... 45.3 51.6
===== =====
Funding Status.................................................. 199.5 183.2
Unrecognized actuarial gains/losses............................. (40.7) (28.9)
----- -----
Provision at Dec. 31............................................ 158.8 154.3
===== =====
F-24
Pension expenses are composed as follows:
[E]M 2002 2001 2000
---- ---- ----
Current service costs........................................ 5.5 5.1 5.5
Interest cost................................................ 14.2 14.2 14.2
Expected return on plan assets............................... (4.5) (5.8) (5.4)
Amortization of actuarial gains/losses....................... 0.7 0.2 0.2
---- ---- ----
PENSION EXPENSES FROM DEFINED BENEFIT PLANS.................. 15.9 13.7 14.5
---- ---- ----
Pension expenses from defined contribution plans............. 2.8 3.6 3.2
---- ---- ----
PENSION EXPENSES............................................. 18.7 17.3 17.7
==== ==== ====
21. OTHER PROVISIONS
RESTRUCTURING
AND ANTITRUST
[E]M TAXES STAFF COSTS RISKS MISCELLANEOUS TOTAL
----- ----------- ------------- ------------- -----
Balance at Jan. 1, 2002..... 10.5 45.4 71.1 37.6 164.6
Changes in basis of
consolidation............. 0.0 (0.2) 0.0 (0.1) (0.3)
Utilized.................... (9.6) (12.3) (15.0) (12.1) (49.0)
Released.................... (0.1) (6.5) (0.8) (13.0) (20.4)
Additions................... 1.8 19.3 22.0 15.6 58.7
Other changes............... (0.3) (2.4) (1.5) (0.2) (4.4)
----- ----------- ------------- ------------- -----
Balance at Dec. 31, 2002.... 2.3 43.3 75.8 27.8 149.2
----- ----------- ------------- ------------- -----
(thereof with a term of less
than one year) 0.3 36.2 75.7 23.1 135.3
===== =========== ============= ============= =====
The provisions for taxes contain amounts for tax risks of fiscal years not
yet finally assessed by the tax authorities. The sharp drop in provisions for
taxes in the current fiscal year is due to the fact that several tax audits
were finalized in Germany. Provisions for staff costs relate in particular to
provisions for annual bonuses, jubilee benefits, partial retirement and
outstanding vacation.
Although we intend to file an appeal with the European Court in relation to
the antitrust fine on our Graphite Specialties activities levied by the EU in
December 2002, we have increased the provisions for antitrust risks by [E]22
million. The addition to provisions for restructuring and antitrust risks in
the prior year was made to cover the costs of closing three plants in the US
and restructuring of remaining units, as well as other restructuring expenses
of [E]0.9 million. In addition to the amounts transferred to the restructuring
provisions, the amount expensed in the prior year included write-downs of
inventories amounting to [E]15 million and write-downs of property, plant and
equipment amounting to [E]9.8 million.
Miscellaneous other provisions relate to provisions for various risks,
including provisions for bonuses, rebates and onerous contracts amounting to
[E]7.2 million (2001: [E]11.9 million), provisions for warranties amounting to
[E]2.0 million (2001: [E]2.9 million), provisions for environmental protection
costs amounting to [E]3.4 million (2001: [E]4.2 million) and provisions for
other risks.
F-25
22. LIABILITIES
[E]M DEC. 31, 2002 DEC. 31, 2001
------------- -------------
FINANCIAL LIABILITIES
Bank loans and overdrafts...................................... 313.5 359.5
Commercial paper............................................... 0.0 37.0
Convertible and exchangeable bonds............................. 135.0 135.0
Other financial liabilities.................................... 0.0 7.4
------------- -------------
448.5 538.9
TRADE PAYABLES
thereof due within one year 110.5 million (2001: 107.7 million) 110.5 107.7
OTHER LIABILITIES
Customer advances received
thereof due within one year 0.8 million (2001: 7.3 million).... 0.8 7.3
Payable to subsidiaries
thereof due within one year 6.0 million (2001: 3.8 million).... 6.0 3.8
Miscellaneous other liabilities................................ 144.4 186.1
------------- -------------
151.2 197.2
------------- -------------
TOTAL.......................................................... 710.2 843.8
============= =============
133,650 bonds with warrants of [E]1,000 each were issued as part of a
convertible bond on September 18, 2000 at 100% of the principal amount. They
bear interest of 3.5% p.a. on their principal amount. The bonds with warrants
can be converted at any time into fully paid-up, no-par value bearer shares of
SGL Carbon AG in the period from October 18, 2000 to September 4, 2005. Each
bond with warrants in the principal amount of [E]1,000 can be converted into
11.2233 shares subject to adjustment of the conversion price. The bonds with
warrants will be repaid on September 18, 2005 at their principal amount,
provided that they have not been repaid or converted at an earlier date.
The weighted average rate of interest on financial liabilities was 4.4% for
2002 (previous year: 4.8%). Bank loans and overdrafts amounting to [E]189.6
million as of December 31, 2002 and [E]26.0 million as of December 31, 2001
bore interest at fixed rates of up to 5.9%. The remaining bank loans relate
mainly to short-term [E] and USD loans at rates of interest of between 3.8% and
5.9%.
A [E]200.0 million commercial paper program launched by SGL Carbon in 1996
was no longer drawn as of December 31, 2002 (2001: [E]37.0 million).
In December 2002, SGL Carbon and various German and foreign Group companies
entered a syndicated loan agreement totaling [E]510 million with a term of two
and a half years. This amount includes the bank guarantee to the European
Commission and a working capital facility. The loan was granted subject to the
condition that the Group complies with standard bank covenants, such as the
ratio of net debt to EBITDA and EBITDA to interest expense. Non-compliance with
the covenants or other obligations in the loan agreement may result in
additional expenses and, if repeated, the lenders could demand repayment of the
loan ahead of schedule. Various assets, in particular property, plant and
equipment, inventories and receivables were pledged as security for the loan.
Based on the total credit lines under the new syndicated loan and the
credit lines used as of December 31, 2002, the SGL Carbon Group had credit
lines of [E]111 million available.
In fiscal year 2002, the advance payments received totaling [E]7.5 million
were offset against the corresponding inventories for each individual project.
The other liabilities relate primarily to discounted liabilities for North
American antitrust proceedings amounting to [E]80.9 million (2001: [E]109.2
million), wages and salaries amounting to [E]16.3 million (2001: [E]16.1
million), negative fair values for financial derivatives of [E]12.2 million
(2001: [E]4.6 million), and taxes amounting to [E]6.4 million (2001: [E]12.5
million). Social security liabilities amounted to [E]6.7 million (2001: [E]5.2
million).
F-26
The maturity structure of the total amounts of financial and other liabilities
due in each of the next five years and the remainder thereafter is presented
below:
WITH MORE
THAN FIVE
YEARS TO
MATURITY
[E]M 2003 2004 2005 2006 2007 [E]M
----- ---- ----- ---- ---- ---------
Financial liabilities............... 193.1 5.3 213.0 7.7 21.4 8.0
Other liabilities................... 70.7 17.4 24.8 24.1 7.4 0.0
Deferred grants from third parties as defined by IAS 20 amounted to [E]1.6
million as of December 31, 2002 (2001: [E]2.0 million). [E]0.2 million was
recognized in income during the year under review. There are no deferred gains
on sale and leaseback transactions.
23. DEFERRED TAX LIABILITIES
Deferred tax liabilities result from differing depreciation and
amortization methods applied in the tax accounts and in the IFRS/IAS financial
statements, from capitalized finance leases, and from measurement differences
in the carrying amounts of inventories between the tax accounts and the
IFRS/IAS consolidated financial statements. Most deferred tax liabilities have
more than one year to maturity.
CONSOLIDATED CASH FLOW DISCLOSURES
24. DISCLOSURES ON THE CONSOLIDATED CASH FLOW STATEMENT
The consolidated cash flow statement presents changes in the cash and cash
equivalents of the SGL Carbon Group through inflows and outflows of cash and
cash equivalents over the course of a reporting period. Cash flows are
classified by operating, investing and financing activities. The effects of
first-time consolidation and deconsolidation were eliminated. The prior year
figures were adjusted for currency changes in fiscal year 2001. The
presentation is supplemented by a reconciliation to cash and cash equivalents
as reported in the balance sheet. The amounts of foreign subsidiaries have
generally been translated at average rates for the year in the cash flow
statement. By contrast, cash and cash equivalents are translated at the closing
rate, as in the balance sheet.
Cash provided by operating activities includes interest received in the
amount of [E]1.0 million and interest paid in the amount of [E]28.0 million.
Net taxes paid after refunds amounted to [E]22.3 million. Bank loans and
overdrafts were reduced by [E]46.0 million to cut financing requirements. Group
debt also fell by [E]37 million due to the repayment of commercial paper.
Cash used includes payments for the acquisition of noncurrent financial
assets. Details on these payments are contained in note 3. A total of [E]0.7
million was paid for the acquisition of noncurrent financial assets.
F-27
OTHER DISCLOSURES
25. COMMITMENTS AND CONTINGENCIES
There were no liabilities on bills as of December 31, 2002 or in the
previous year. There were guarantee obligations of [E]45.0 million and [E]39.4
million at December 31, 2002 and 2001, respectively. Other financial
obligations from orders relating to approved capital projects amounted to
[E]21.1 million and [E]31.2 million at December 31, 2002 and 2001. Certain of
these capital projects involve expenses to be incurred after more than one
year. There were also rental and lease obligations for land and buildings, IT
equipment, motor vehicles and other items of property, plant and equipment with
terms up to 2006 amounting to [E]12.3 million and [E]12.5 million at December
31, 2002 and 2001. For fiscal year 2002, they are distributed over the
following years as shown below:
2007 AND
[E] M 2003 2004 2005 2006 THEREAFTER
----- ---- ---- ---- ----------
Operating leases................. 3.2 1.8 0.7 0.6 4.8
Finance leases................... 0.3 0.3 0.2 0.2 0.2
- discounts included............. (0.1)
= Present value of finance leases 1.1
There were no payments from subleases in the two fiscal years. The finance
leases relate solely to leased items of property, plant and equipment that are
entered into under standard leasing arrangements without special purchase
options. There were provisions for environmental protection obligations at a
number of the SGL Carbon Group's production sites, principally in North
America, in the amount of [E]3.4 million and [E]4.2 million at December 31,
2002 and 2001.
A number of legal actions, court proceedings and law suits are pending or
may be instituted or asserted in the future, including those arising from
alleged defects in the products of the SGL Carbon Group, from product
warranties and environmental protection matters.
Litigation is subject to many uncertainties, and the outcome of individual
cases cannot be predicted with any certainty. There are reasonable indications
to suggest that the SGL Carbon Group may be adversely affected by rulings in
certain cases. Identifiable risks are adequately covered by the recognition of
corresponding provisions.
PENDING ANTITRUST PROCEEDINGS AND CLAIMS
The antitrust proceedings in the US and in Canada have been concluded.
Following negotiations with the US antitrust authorities, we obtained a payment
extension in 2002 for our remaining obligations. According to the original
repayment schedule, we had to pay a total of $65 million in 2002 and 2003.
Under the new plan, a total of $15 million must be repaid in these two years.
The postponement of payments totaling $50 million to the period 2004 -2007 will
further improve the Company's financial position. In July 2001, the European
Commission imposed a fine for anti-competitive practices in the graphite
electrodes market. We have appealed against the [E]80.2 million fine, which we
believe is unacceptable because of unlawful double jeopardy. After we deposited
a bank guarantee, payment has been suspended until a final decision has been
made. In December 2002, the European Commission imposed a fine of [E]27.75
million on SGL Carbon AG for anti-competitive practices in the graphite
specialties market. We will file an appeal with the European Court, citing in
particular double jeopardy and gross unreasonableness. Additional provisions of
[E]22 million have been recognized to cover these antitrust risks.
26. RELATED PARTY DISCLOSURES
During the course of its business activities, the SGL Carbon Group renders
services for related companies and persons. In turn, these persons and
companies deliver goods or render services to the SGL Carbon Group as part of
their business purpose. All these transactions are settled on an arm's length
basis. Receivables from unconsolidated subsidiaries and associates amount to
[E]12.9 million, and the corresponding liabilities amount to [E]6.4 million.
Details are presented in the notes to the relevant balance sheet and income
statement items.
F-28
In August 2001, Paul W. Pendorf was appointed Chief Executive Officer of
HITCO Carbon Composites Inc. (HITCO). Mr. Pendorf has acquired a 6% minority
interest in this company. The SGL Carbon Group has granted a loan to Mr.
Pendorf, secured by the proceeds from the sale of his shares, to finance the
purchase price. The shareholders agreement also provides for options that can
be exercised by both sides at a variable price after no later than four years.
Mr. Pendorf is also a shareholder in a company (AMT II) that has entered
into two service and option agreements with HITCO. Under the terms of the
option agreement, AMT II has an option to buy up to 43% of the shares of HITCO
on the basis of a defined calculation formula. This option expires after no
later than three years or after exercise of the put or call option from the
shareholders' agreement (see above). SGL Carbon can prolong the option by a
further year.
At December 31, 2002 and 2001, there were also call-in obligations of $3.6
million and $36.2 million, respectively, for shares in an unconsolidated
subsidiary. The contribution of the company to a joint venture in fiscal year
2002 and the resulting reduction of the commitment has significantly reduced
this amount.
27. INFORMATION ON FINANCIAL INSTRUMENTS
Financial instruments are contracts that give rise to both a financial
asset of one enterprise and a financial liability or equity instrument of
another enterprise. According to IAS 32, these include primary financial
instruments, such as trade receivables, trade payables, financial assets and
financial liabilities. They also include derivatives used to hedge interest
rate or foreign currency risks.
PRIMARY FINANCIAL INSTRUMENTS
Primary financial instruments are carried on the balance sheet. Financial
instruments carried as assets are reported at cost, net of any valuation
allowances required. Financial instruments carried as liabilities are reported
at their notional amount or at the higher redemption amount.
The credit or default risk results from the risk that a counterparty is
unable to meet its obligations. As we do not generally enter into set-off
agreements with our customers, the amounts reported on the balance sheet
represent the maximum default risk.
Foreign currency risks arise where receivables or liabilities are
denominated in a currency other than the company's local currency. Hedging
occurs firstly as a result of naturally closed positions, where a foreign
currency receivable in the SGL Carbon Group is matched by one or more
liabilities in the same currency with equivalent maturities and amounts.
Derivatives are used only for hedging purposes for foreign currency risks that
cannot be covered by natural hedges.
DERIVATIVES
The SGL Carbon Group may be exposed to risks from changes in interest rates
and exchange rates during the course of its business activities. Derivatives
are used purely for hedging purposes and to reduce such risks. No financial
instruments are held for trading purposes. The use of such instruments is
governed by internal instructions. Risk is estimated and monitored
continuously.
The SGL Carbon Group is exposed to a credit risk that arises if
counterparties are unable to perform their contractual obligations. Derivative
contracts are entered into exclusively with internationally recognized
financial institutions to reduce the credit risk. In addition, all transactions
are monitored by SGL Carbon's central finance department. The Executive
Committee does not believe that involvement in such transactions materially
adversely affects the Group's financial position.
NOTIONAL AMOUNTS
The notional amounts are the aggregate of all underlying purchase and sale
amounts involving non-Group third parties. The amounts presented in the
following table therefore do not represent the amounts exchanged by the
parties, and are therefore no indication of the liabilities arising to the SGL
Carbon Group from these financial instruments.
F-29
The notional amounts and fair values of the financial instruments as of
December 31, 2002 and 2001 were as follows:
NOTIONAL AMOUNTS FAIR VALUES
BOUGHT SOLD TOTAL TOTAL TOTAL TOTAL
DEC. 31, 2002 DEC. 31, 2002 DEC. 31, 2002 DEC. 31, 2001 DEC. 31, 2001
[E]M [E]M [E]M [E]M DEC. 31, 2002 [E]M
------------- ------------- ------------- ------------- ------------- -------------
Foreign currency contracts:
USD currency forward....... 3.9 170.3 174.2 242.6 5.7 (4.1)
GBP........................ 0.6 52.0 52.6 50.6 0.8 (1.0)
Other currency forward..... 6.3 1.1 7.4 2.2 0.2 0.2
Currency option............ 99.1 93.6 192.7 201.0 (10.2) 1.6
Participating forward
contracts................ 0.0 0.8 0.8 2.4 0.0 (0.1)
Interest rate contracts:
Interest rate swaps........ 0.0 103.2 103.2 3.8 (0.7) 0.1
Interest rate options...... 15.3 0.0 15.3 15.3 0.0 0.0
Currency forwards and options are used primarily to hedge existing and
future foreign currency receivables and liabilities. The objective of hedging
transactions in the SGL Carbon Group is to reduce the risks inherent in its
receivables and liabilities denominated in foreign currencies from exchange
rate fluctuations. The underlying transactions in the individual foreign
currencies are almost fully hedged on the basis of the net position per
currency. The maturities are based on the maturity of the underlying
transaction, and range from several days to several months.
The fair value of derivatives is the price at which one party would assume
the rights and/or obligations from another party. Fair values are measured as
follows on the basis of the market information available at the balance sheet
date, using standard market valuation methods:
* Currency hedges are measured on the basis of reference rates and
reflect forward premiums and discounts. Currency options are
measured using recognized option pricing models.
* Interest rate contracts are measured on the basis of discounted
expected future cash flows, with market rates of interest applied
for the remaining maturity of the instruments.
* Interest rate options are measured using recognized option pricing
models (incl. Black-Scholes).
The fair values are determined by independent financial service providers.
In the case of derivatives, there is a credit risk in the amount of the
positive fair values of the derivatives.
A zero cost option was entered into to hedge the USD liability from the
antitrust fine. The premium to be paid for buying the option matches the
premium resulting from the sale of the option.
The SGL Carbon Group conducts interest rate option and swap transactions to
optimize its financing costs. In fiscal years 2002 and 2001, the SGL Carbon
Group used interest rate swaps to convert part of its financial liabilities
from fixed-interest liabilities into floating rate liabilities.
Foreign currency hedges in binding contracts or future transactions are
accounted for as fair value hedges in accordance with IAS 39.103. The hedge is
measured at cost at inception. Changes in the fair values of derivatives from
subsequent remeasurement are recognized immediately in net profit or loss and
the carrying amount of the hedged item is adjusted. Gains or losses from the
remeasurement of interest rate hedges designated as fair value hedges of
floating rate bank loans are also recognized in profit or loss.
F-30
28. SEGMENT REPORTING
The SGL Carbon Group operates in the following areas:
* CARBON AND GRAPHITE [CG]
Graphite electrodes and carbon products (electrodes, cathodes, furnace
linings)
* GRAPHITE SPECIALTIES [GS]
Products for industrial applications, mechanical carbons and electrical
contacts, carbon fibers/composites
* CORROSION PROTECTION [CP]
Process technology and surface protection
and
* SGL TECHNOLOGIES [SGL T]
Graphite foils, carbon fibers, expanded graphite and fabrics,
composites, carbon-ceramic brake discs and fuel cell components.
External sales revenue relates almost exclusively to revenue from the
supply of products. Trading revenues or other revenues are insignificant.
Intersegment revenue is generally based on market-driven transfer prices, less
selling and administrative expenses. In exceptional cases, cost-based transfer
prices may be used. The Other segment relates to companies that primarily
render services to the other Business Areas, and includes SGL Carbon AG.
Consolidation adjustments relate to the elimination of intersegment
transactions. Non-cash expenses resulted primarily from the increase in
antitrust provisions in the amount of [E]22 million in the Other segment. The
European foils business was moved from the GS segment to the T segment as of
January 1, 2002. The comparative figures for the businesses in fiscal year 2001
were adjusted. Certain information on the businesses of the SGL Carbon Group is
presented below (primary segment reporting format in accordance with IAS 14.50
ff.).
F-31
SGL
CONSOLIDATION CARBON
[E]M CG GS CP SGLT OTHER ADJUSTMENTS GROUP
------------------------------------------------------------------------------------------------
2002
Net sales revenue.................... 550.7 195.9 212.4 150.4 2.9 0.0 1,112.3
INTER-SEGMENT REVENUE................ 396.5 44.5 16.3 4.4 44.4 (506.1) 0.0
----- ----- ----- ----- ----- ------------- -------
Total net sales revenue.............. 947.2 240.4 228.7 154.8 47.3 (506.1) 1,112.3
Profit/loss from operation*.......... 51.9 1.9 4.8 (11.7) (18.3) 0.0 28.6
Investment in property, plant
and equipment...................... 22.6 6.3 2.5 9.3 0.8 0.0 41.5
Depreciation and amortization expense 38.5 15.6 9.8 17.2 0.1 0.0 81.2
Capital employed..................... 462 199 135 202 31 0 967
Debt................................. 103.3 44.5 30.1 45.1 225.5 0.0 448.5
2001
Net sales revenue.................... 619.8 230.7 235.8 135.1 11.9 0.0 1,233.3
Inter-segment revenue................ 364.6 50.9 19.1 3.6 30.3 (468.5) 0.0
----- ----- ----- ----- ----- ------------- -------
Total net sales revenue.............. 984.4 281.6 254.9 138.7 42.2 (468.5) 1,233.3
Profit/loss from operations*)........ 78.9 22.3 12.6 (33.7) (21.4) 0.0 58.7
Investment in property, plant
and equipment...................... 45.1 12.6 5.0 26.3 1.6 0.0 90.6
Depreciation and
amortization expense*)............. 38.4 19.2 10.3 17.7 0.3 0.0 85.9
Capital employed..................... 569 274 162 203 5 0 1,213
Debt................................. 152.3 73.4 43.4 54.4 215.4 0.0 538.9
2000
Net sales revenue.................... 619.5 242.0 247.3 151.8 1.9 0.0 1,265.5
Inter-segment revenue................ 373.1 49.1 15.4 2.0 30.0 (469.9) 0.0
----- ----- ----- ----- ----- ------------- -------
Total net sales revenue.............. 992.6 305.6 262.7 139.3 32.2 (469.9) 1,262.5
Profit/loss from operations*)........ 108.0 16.9 (1.4) (17.3) (27.0) 0.0 79.2
Investment in property, plant
and equipment...................... 33.1 9.2 4.7 19.9 0.3 0.0 67.2
Depreciation and
amortization expense*)............. 34.1 23.5 12.0 13.0 0.3 0.0 82.9
Capital employed..................... 529 272 155 192 68 0 1,216
Debt................................. 149.3 76.7 43.7 54.2 178.5 0.0 502.4
*)before cost of antitrust risks and restructuring expense.
F-32
CENTRAL AND SGL
EUROPE EXCL. SOUTH CONSOLIDATION CARBON
DM GERMANY GERMANY NORTH AMERICA AMERICA OTHER ADJUSTMENTS GROUP
------- ------------ ------------- ----------- ----- ------------- -------
2002
Net sales revenue (by destination).......... 216.6 373.8 281.6 63.4 176.9 0.0 1,112.3
Net sales revenue (by company)
Third-party customers ..................... 409.5 422.9 267.8 5.1 7.0 0.0 1,112.3
Intercompany sales revenue ................ 179.4 269.5 56.8 0.0 9.4 (506.1) 0.0
------- ------------ ------------- ----------- ----- ------------- -------
Total net sales revenue..................... 588.9 692.4 324.6 5.1 7.4 (506.1) 1,112.3
Export sales from Germany................... 369.3 0.0 0.0 0.0 0.0 0.0 369.3
Capital employed............................ 304 338 312 4 9 0 967
Investments in property, plant and equipment 17.1 12.1 11.8 4 9 0 41.5
2001
Net sales revenue (by destination).......... 246.0 409.2 315.8 63.1 199.2 0.0 1,233.3
Net sales revenue (by company)
Third-party customers ..................... 457.8 439.7 319.1 8.0 8.7 0.0 1,233.3
Intercompany sales revenue ................ 178.3 237.1 53.1 0.0 0.0 (468.5) 0.0
------- ------------ ------------- ----------- ----- ------------- -------
Total net sales revenue..................... 636.1 676.8 372.2 8.0 8.7 (468.5) 1,233.3
Export sales from Germany................... 360.7 0.0 0.0 0.0 0.0 0.0 360.7
Capital employed............................ 404 386 410 4 9 0 1.213
Investments in property, plant
and equipment............................... 40.0 23.3 26.6 0.0 0.7 0.0 90.6
2000
Net sales revenue (by destination).......... 241.0 359.6 390.6 79.9 191.4 0.0 1,262.5
Net sales revenue (by company)
Third party customers ..................... 468.1 42.4 370.8 1.9 9.3 0.0 1,262.5
Intercompany sales revenue ................ 169.8 236.6 62.8 0.0 0.7 (469.9) 0.0
------- ------------ ------------- ----------- ----- ------------- -------
Total net sales revenue..................... 637.9 649.0 433.6 1.9 10.0 (469.9) 1,262.5
Export Sales from Germany................... 377.7 0.0 0.0 0.0 0.0 0.0 377.7
Capital employed............................ 379 367 457 1 12 1.216
Investment in property, plant and
equipment................................... 19.6 29.6 18.0 0.0 0.0 0.0 67.2
29. LIST OF SHAREHOLDINGS
The list of shareholdings is filed with the Wiesbaden commercial register.
It will also be available for inspection at the Annual General Meeting of SGL
Carbon Aktiengesellschaft on April 30, 2003.
30. REMUNERATION OF THE SUPERVISORY BOARD AND EXECUTIVE COMMITTEE OF SGL CARBON
AG
The total remuneration of the Supervisory Board amounts to [E]0.3 million.
The remuneration of the Executive Committee amounts to [E]1.6 million plus
participation in the management incentive plans (see note 31). Based on the
remuneration paid to the Executive Committee in the year under review the
variable component amounts to 60%.
The total remuneration of former members of management and their surviving
dependents amounts to [E]0.1 million. [E]1.1 million has been provided for
pension obligations to former members of management and their surviving
dependents.
The active members of the Executive Committee hold shares in SGL Carbon AG
privately. At December 31, 2002, these totaled 55,055 shares and 3,093 ADRs.
The names of the members of the Supervisory Board and the Executive
Committee are listed in Item 6.
F-33
31. MANAGEMENT INCENTIVE PLANS
In 1996, the Company introduced management incentive plans in order to link
management compensation to enterprise value.
STOCK APPRECIATION RIGHTS PLAN (SAR)
By means of the SAR Plan of April 1996/January 1997, SGL enabled members of
the Executive Committee and management to participate in the development of the
market price of the Company's shares by allocating stock options. The plan
covers a total of 840,500 options, of which 797,300 (637,350 already exercised)
were allocated to 74 members of the Executive Committee and senior management
as of December 31, 2002.
The options allocated to each participant were vested in installments of
20% per annum each on January 1 for the previous fiscal year (vesting period
1997 until 2001). Each issued option can be exercised between March 1 and March
15 of each year, and on March 15, 2006 at the latest.
Options attributable to participants who are not members of the Executive
Committee are exercised by buying ordinary shares of SGL Carbon AG in exchange
for payment of the exercise price. This portion of the SAR is recognized
directly in equity in the Group. The exercise of options by members of the
Executive Committee results in the members receiving a cash amount representing
the difference between the exercise price and the official average price of the
Company's shares fixed by the Frankfurt Stock Exchange on March 16 of the year
the option is exercised. A provision is recognized for the options of the
Executive Committee in the amount of the difference between the option price
and the price at the balance sheet date. The payment is eliminated against the
provision when the option is exercised.
LONG-TERM CASH INCENTIVE PLAN (LTCI)
The Long-Term Cash Incentive Plan (the LTCI Plan), established in 2002,
enables the Executive Committee and selected members of management to receive
cash bonuses for the years 2002 to 2004, provided that certain performance
targets defined by the Supervisory Board are met in the period 2002 to 2004
inclusive. The maximum total bonus amounts to [E]7.8 million. Of the net
proceeds from the LTCI premium, an amount equal to 15% of the gross proceeds
must be used by the participants to buy shares of SGL Carbon AG. The shares
must be locked up for 12 months. A provision is recognized ratably to match the
performance targets met at the reporting date. The corresponding expense is
carried under other operating expenses as with the SAR plans. The additions to
provisions for the Executive Committee in fiscal year 2002 amount to [E]275
thousand.
SHARE OWNERSHIP PLAN
Under the Share Ownership Plan, all employees of the Company in Germany and
Austria were offered 25, 50, or 60 shares at a price of [E]4.42 per share for
the first 25 or 50 shares (basic offer) and at a price of [E]5.50 per share for
the additional 10 shares (additional offer). 1,631 employees participated in
this Plan and purchased a total of 88,775 shares. These shares were issued on
the basis of the capital increase from authorized capital in 2002 (see note
17). The shares of the basic offer are subject to a two-year internal lock-up
until November 30, 2004, and those of the additional offer to a one-year lock-
up until November 30, 2003.
STOCK PURCHASE PLAN
The Company's Stock Purchase Plan was approved by the Ordinary Annual
General Meeting on April 27, 2000. There are plans to issue up to 250,000 new
shares from authorized capital to service the Stock Purchase Plan. No shares
have been issued to date under the Stock Purchase Plan.
Under the Stock Purchase Plan, the Supervisory Board is authorized to grant
shares of the Company to members of the Executive Committee, and the Executive
Committee is authorized to issue shares to senior executives of the Company and
to members of management and senior executives of Group companies. Shares for
participants in the plan who are not members of the
F-34
Executive Committee are created from a capital increase for non-cash
contributions from bonus claims. A share buy-back is planned for members of the
Executive Committee. Such stock bonuses will be granted to participants under
the Stock Purchase Plan.
To participate in the Stock Purchase Plan, the selected employees and
Executive Committee members must purchase shares of the Company on the stock
exchange. The purchase price must not exceed 50% of their bonus in accordance
with the annual bonus plan. The purchased shares are held for participants in
safe custody in a blocked securities account for two years (the lock-up
period). During the lock-up period, participants may not dispose of the shares
in order not to forfeit their right to subscribe for matching shares (as
defined below) at the end of the Stock Purchase Plan.
After the lock-up period, each non-Executive Committee participant receives
new shares from authorized capital and members of the Executive Committee
receive new shares from the share buy-back (the "matching shares"). The number
of new shares and shares from the share buy-back for members of the Executive
Committee corresponds to the number of shares held for participants in safe
custody in the blocked securities account. Participants who are not members of
the Executive Committee contribute their bonus claims as non-cash contributions
and receive the released shares and the matching shares.
A provision is recognized at the balance sheet date for all participants
who are entitled to bonuses. The bonus is measured at the market value of the
shares to which the employees are entitled in addition to their own shares. If
employees contribute their bonus entitlements to SGL Carbon AG, the provision
is reclassified to issued capital or the share premium.
STOCK OPTION PLAN
The Company's Stock Option Plan was approved by the Ordinary Annual General
Meeting on April 27, 2000. There are plans to issue up to 1.6 million shares
from contingent capital to service the Stock Option Plan. The options will be
granted up until the end of 2004. 507,000 options were granted under the terms
of the Stock Option Plan in fiscal year 2002, bringing the total number of
options granted to date to 998,500. Under the Stock Option Plan, the
Supervisory Board is authorized to grant stock options on shares of the Company
to members of the Executive Committee. The Stock Option Plan authorizes the
Executive Committee to grant stock options to senior executives of the Company
designated by the Executive Committee and to members of the management and
remaining senior executives of majority owned subsidiaries.
The stock options are distributed as follows:
* Executive Committee: up to 30%;
* senior executives of the Company: up to 20%;
* members of management of Group companies: up to 20%; and
* remaining senior executives of Group companies: up to 30%.
The term of the options is ten years and begins on the date of grant. The
options expire without the holders having a claim for compensation if they are
not exercised before the end of the ten-year term.
The options may not be exercised before the end of a two-year period which
begins on the day following the date of grant. This period is followed by an
eight-year exercise period. Within this period, the options may only be
exercised on trading days during defined periods (the "exercise window"). In
each calendar year, there are two exercise windows, each comprising ten trading
days following publication of the interim report and the annual report.
The options can only be exercised if the Company has reached its
performance target at the time of exercise. The performance target is to
increase the total return on the shares of the Company. The total return is
composed of the share price and the reinvested dividends. The total return must
exceed the exercise price for an option by at least 15%.
F-35
The exercise price is calculated on the basis of the average closing price
of SGL Carbon AG shares in the Frankfurt Stock Exchange's XETRA trading system
on the 20 trading days prior to issuance of the options. Incidental costs of
purchase are not taken into account. The minimum exercise price to be paid is
the notional value of each share.
After exercising the options, participants must retain a minimum number of
SGL Carbon AG shares amounting to 15% of the gross proceeds for a further
twelve months. When the options are exercised, the portion of the subscription
price exceeding the notional value is credited directly to the share premium.
Changes in the equity compensation plans in accordance with IAS 19.147 are
as follows:
NUMBER OF SHARES/OPTIONS SAR STOCK STOCK
PURCHASE OPTION
PLAN PLAN
--------- -------- -------
Balance at Jan. 1, 2002.......................... 163,550 31,316 491,500
Additions........................................ 43,123 507,000
Expired/Returned................................. (3,600)
Exercised........................................
--------- -------- -------
Balance at Dec. 31, 2002......................... 159,950 74,439 998,500
--------- -------- -------
Average exerise price ( )........................ 33.03 --- 42.77
Expiration dates................................. 3/15/2006 2010/2011/2012
Fair value Dec, 2002/m........................... 0.0 0.0 0.0
--------- -------- -------
The SAR and Stock Option Plans are "out of the money". This means that the
fair value is zero, because the exercise price is higher than the current
market price. The various equity compensation programs resulted in a net
expense of [E]0.3 million in fiscal year 2002.
32. EXEMPTION IN ACCORDANCE WITH SECTION 264 (3) OF THE HGB
The following companies, which are included in the consolidated financial
statements of SGL Carbon AG, made use of the provision in section 264 (3) of
the HGB: SGL Carbon GmbH, Meitingen; SGL Carbon Beteiligung GmbH, Meitingen;
SGL Technologies GmbH, Meitingen; SGL Brakes GmbH, Meitingen; SGL Information-
Services GmbH, Augsburg.
33. DECLARATION OF CONFORMITY WITH THE GERMAN CORPORATE GOVERNANCE PRINCIPLES IN
ACCORDANCE WITH SECTION 285 (16) OF THE HGB
The Executive Committee and the Supervisory Board have decided to implement
the recommendations of the Government Commission on the German Corporate
Governance Code with the exceptions listed below and have issued the following
declaration of compliance in accordance with section 161 of the Aktiengesetz
(AktG -- German Stock Corporation Act):
SGL Carbon AG complies with the recommendations of the Government Commission
on the German Corporate Governance Code with the following exceptions:
* SGL Carbon AG's Articles of Association provide solely for fixed
compensation for members of the Supervisory Board as well as additional
compensation for committee work.
* The D&O insurance policy contracted by the Company for the Executive
Committee and the Supervisory Board does not include a deductible.
The declaration of compliance is published on the Internet at
www.sglcarbon.com.
F-36
34. SIGNIFICANT DIFFERENCES BETWEEN INTERNATIONAL ACCOUNTING STANDARDS ("IAS")
AND UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (U.S. GAAP)
SGL AG prepared the consolidated financial statements in accordance with
German GAAP (HGB) for the years until Dec, 31 2000. In 2001 the company adopted
IAS and has prepared the consolidated financial statements in accordance with
IAS for all years presented. International Accounting Standards (IAS) differ in
certain significant respects from U.S. GAAP. The significant differences that
affect the consolidated net income (loss) and shareholders' equity of the SGL
CARBON Group are set out below:
a) Business Acquisitions and Goodwill
Prior to the adoption of IAS 22 (revised 1993) on January 1, 1995, the
Group wrote-off all goodwill directly to equity in accordance with IAS existing
at that time. The adoption of IAS 22 (revised 1993) did not require prior
period restatement. Accordingly, a U.S. GAAP difference exists with respect to
the recognition of goodwill and amortization before January 1, 1995 and for the
amortization of goodwill after January 1, 2002. For the purpose of the
reconciliation to U.S. GAAP, the pre-1995 goodwill was amortized through the
statement of operations over the estimated useful lives between five and 20
years. Since January 1, 2002 under U.S. GAAP goodwill is no longer being
amortized over the estimated useful live but an annual impairment test per SFAS
142 must be performed. Under IAS positive and negative goodwill in total of [E]
5.1 million were still amortized in 2002 and accordingly a reconciliation
difference exists.
The SGL CARBON Group's U.S. GAAP unamortized positive goodwill at December
31, 2002 and 2001 was [E] 136.1 and [E] 145.6 million, respectively ([E] 95.3
and [E] 109.3 million, respectively, capitalized under IAS). The Group's
unamortized negative goodwill as of December 31, 2002 and 2001 was [E] 0.0 and
[E] 13.8 million, respectively ([E] 4.4 and [E] 3.6 million, respectively,
capitalized under IAS). The remaining balance of negative Goodwill as of
January 1, 2002 was written off and recognized as the effect of a change in
accounting principle. The Company estimates that such net goodwill would, at
December 31, 2002 and 2001, be allocated among its industry segments as
follows: Carbon and Graphite: 47.5 [E] and [E] 38.2 million, respectively,
Graphite Specialties: 25.4 [E] and [E] 20.8 million , respectively, Corrosion
Protection: 22.4 [E] and [E] 22.1 million, respectively, and SGL Technologies:
40.8 [E] and [E] 50.7 million, respectively.
For U.S. GAAP purposes, in accordance with SFAS 142, starting January 1,
2002 goodwill is no longer being amortized but tested annually for impairment
at the level of reporting units. Goodwill is tested for impairment using a two
step process that begins with an determination of the fair value of the
reporting unit. The first step is a screen for potential impairment, and the
second step measures the amount of impairment, if any.
If SFAS 142 had been applied already in 2001 and 2000, net profit and
earnings per share would have been as follows:
2002 2001 2000
----------- ---- ----- ------ -----
Net loss *)................... As reported [E]m (22.0) (148.0) (3.3)
Goodwill amortization......... [E]m 0.0 7.1 7.9
Net (loss)/profit *).......... adjusted [E]m (22.0) (140.9) 4.6
Earnings per share basic (EPS) As reported [E] (1.01) (6.87) (0.15)
Goodwill amortization......... [E] 0.0 0.33 0.36
Earnings per share basic (EPS) adjusted [E] (1.01) (6.54) 0.21
*)before Cumulative Changes in Accounting Principles
b) Internal Use Software and Interest Capitalization on Tangible Fixed
Assets
Statement of Position (SOP) 98-1 provides guidance on accounting for the
costs of computer software developed or obtained for internal use under U.S.
GAAP. Under U.S. GAAP overhead costs should not be capitalized as costs of
internal-use software while under IAS directly allocated overhead costs are
included. During the year ended December 31, 2002 the SGL Group capitalized
software costs of [E] 2.7 million under U.S. GAAP.
F-37
U.S. GAAP requires the capitalization of interest costs as part of the
historical cost of assets requiring a period of time to construct. Per IAS
benchmark treatment interest cost ("Borrowing Costs") should be recognized as an
expense in the period which they occur. The company has elected to use the IAS
benchmark treatment, which results in differences to U.S. GAAP for the
accounting of borrowing costs. During the years ended December 31, 2002, 2001
and 2000 the SGL Group capitalized interest under U.S. GAAP of [E] 0.0,[E] 0.0
and [E] 2.8 million, respectively.
c) Inventory Valuation
IAS 2 "Inventories" identifies two alternatives as benchmark valuation
methods, the FIFO method and the weighted-average cost method. The LIFO method
is permitted as an allowed alternative. In valuing inventories for IAS
reporting, the Company has elected to apply the benchmark method using the
weighted average cost method.. For certain inventories held in the United
States of America, for U.S. GAAP reconciliation purposes we have elected to
continue recording their inventories on the LIFO method, consistent with
historical accounting practices. This is due, in part, to U.S. income tax laws,
regulations, and rulings, which require that an entity using LIFO for income
tax purposes must use LIFO in its financial statements (the LIFO Conformity
Rule).
d) Pension Provisions
Under IAS, pension costs and similar obligations are accounted for in
accordance with IAS 19, "Employee Benefits". For purposes of U.S. GAAP, pension
costs for defined benefit plans are accounted for in accordance with SFAS No.
87 "Employers' Accounting for Pensions" and the disclosure is presented in
accordance with SFAS No. 132 "Employers' Disclosures about Pensions and Other
Post-retirement Benefits". SFAS 87 requires that companies located outside the
United States adopt the provisions of SFAS 87 for fiscal years beginning after
December 15, 1988. Due to the significant period of time which elapsed between
the date when SFAS 87 would have been required to be adopted and the time when
the SGL Group first determined to prepare U.S. GAAP financial information,
adoption of the provisions of SFAS 87 as of January 1, 1989 was not feasible.
Accordingly, SFAS 87 has been adopted from January 1, 1993. As of the date of
adoption, the SGL Group's total transition obligation was [E] 16.1 million.
Such transition obligation is being amortized over a 15 year period.
Accordingly, as of December 31, 1993, [E] 5.4 million, representing 5/15 (the
elapsed five year period between the required adoption date of January 1, 1989
and December 31, 1993) of the total transition obligation, was recorded
directly against U.S. GAAP shareholders' equity.
IAS 19 ("Employee Benefits") as applied by the Group is substantially
similar to the methodology required under SFAS No. 87. The transition
provisions in IAS 19 permit the cumulative effect of an accounting change to be
either recognized immediately or delayed and recognized on a straight-line
basis over a period of up to five years from the date of adoption of IAS 19's
requirements (its transition period ends in 2004 for enterprises adopting IAS
19 as of its effective date). SFAS 87 permitted only delayed recognition of the
transition amount on a straight-line basis over the average remaining service
period of plan participants or over 15 years if the average remaining service
period is less than 15 years (its transition period ends in 2001 for most
enterprises).
Upon adoption of IAS 19, the company elected to recognize the cumulative
effect of an accounting change immediately. Consequently, the amortization of
the transition obligation in accordance with SFAS 87, creates a difference in
the pension liability valuation and corresponding annual pension charge trough
December 31, 2003. Under IAS changes in the market value of plan assets are
recognized in the calculation immediately, while they are deferred over 5 years
under U.S. GAAP.
The interest component of additions to the pension provision has been shown
as an expense in the financial result per IAS, which is below operating profit.
Under U.S. GAAP, the interest component of additions to the pension provision
is included in operating profit.
e) Incentive Plans
IAS provides that in the absence of a specific International Accounting
Standard or an Interpretation of the Standing Interpretations Committee,
management should use its judgement in developing an accounting policy that
provides the most useful information to users of the enterprise's financial
statements. In making this judgement, management should consider, among others,
F-38
pronouncements of other standard setting bodies and accepted industry
practices. We have elected, for purposes of IAS reporting, to continue the
accounting treatment for the incentive plans discussed below, consistent with
prior practices under the German Commercial Code ("German GAAP").
We provide incentive compensation for employees meeting specified
performance targets. This incentive compensation is satisfied in the form of
SGL stock. Under IAS, the incentive compensation is recognized as an expense
and corresponding increase in capital upon issuance of the stock, which
historically occurs in the period subsequent to the year to which the
performance relates. U.S. GAAP matches the cost of the bonus with the period in
which the services are rendered.
IAS U.S. GAAP
Leveraged Executive In 1996, total cost of the plan of [E] Annually, one fifth of the total
Asset Plan (LEAP) 36.6 million was accounted for as expenditure is accounted for as
extraordinary expenses. The personnel expenditure. In 1996,
contribution of Hoechst AG of [E] the contribution of Hoechst AG
25.6 million was accounted for as was treated as additional paid -in
extraordinary ncome in 1996. icapital without effect on income.
Stock Appreciation Rights Plan With respect to the SAR rights Compensation expense is
(SAR) exercisable annually by the recognized for all participants
members of the Executive vested during the year in an
Committee, pro rata provisions amount equal to the difference
are made. The exercise of SAR between the ordinary share price
rights by the remaining and exercise price.
beneficiaries has no effect on net
income as they receive new shares
to be issued out of authorized
capital.
The LEAP plan expired in June 2001. Under IAS and U.S. GAAP the Long-Term
Cash Incentive Plan (LTCI) is accounted for using the same accounting
principles.
f) Restructuring
One of the significant differences between the restructuring guidance in
IAS 37, "Commitments and Contingencies" and the guidance in Emerging Issues
Task Force (EITF) Issue 94-3 "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)" is found in the criteria for the initial
recognition of a restructuring provision. For employee termination benefits,
EITF 94-3 requires that prior to the date of the financial statements, the
benefit arrangement be communicated to employees, including sufficient detail
to enable employees to determine the type and amount of benefits they will
receive when they are terminated. IAS 37 does not require that the
communication to employees be such detail, rather that the communication simply
include the main features of the plan. As a result, there may be situations in
which an enterprise following IAS 37 could recognize a restructuring provision
before it would be permitted to do so if it were following EITF 94-3.
The development of restructuring provisions per IAS and U.S. GAAP is as
follows:
(IN [E] MILLION) IAS U.S. GAAP
Balance at January 1, 2002 17.1 9.2
Utilized -14.5 -8.2
Released -0.8 0.0
Balance at December 31, 2002 1.8 1.0
The major difference between IAS and U.S. GAAP at the beginning of 2002 was
related to provisions established in Europe under IAS, which had not fulfilled
all the recognition requirements under U.S. GAAP.
F-39
g) First Time Adoption of IAS
IAS 12 "Income Taxes" requires recognition of a deffered tax asset if a
future realization of a tax benefit is probable. Although the term probable is
not defined for purposes of applying IAS 12, SGL has interpreted the term to
indicate a higher level of likelihood than "more likely than not". More likely
than not is the criterion for recognition of a deferred tax asset under U.S.
GAAP, a level of likelihood defined as more than 50%. Thus, the recognition of
a valuation allowance under IAS has preceeded the recognition under U.S. GAAP.
Deferred tax assets on tax loss carryforwards have been recognized in the
IAS consolidated financial statements on the basis of five-year projected
earnings before taxes of the individual companies consolidated. The projections
reflect uncertainties about certain assumptions and other general conditions
and, in certain cases, deferred tax assets on tax loss carryforwards have not
been recognized.
At first-time preparation of IAS annual financial statements, the
recognition of deferred tax assets on tax loss carryforwards in the U.S. was
adjusted retrospectively for the reporting periods; these adjustments also
resulted in changes compared with the IAS amounts previously reported in the
published quarterly reports. Deferred tax assets on tax loss carryforwards in
the U.S. was written down in full in the 2001 consolidated financial statements
as a consequence of the recession in the USA and the economic situation in the
US steel industry. To ensure a comparable basis for the projection prepared at
end-2000 as regards uncertainties surrounding the U.S. economy and the U.S.
steel industry, the analysis horizon used as the basis for recognizing U.S.
deferred taxes at the end of fiscal year 2000 had to be truncated to three
years. This valuation allowance, in the amount of [E] 37.6 million, was
retroactively reflected in the 2000 year for IAS application, in contrast to the
recognition in 2001 for U.S. GAAP reporting. The remaining portion in 2001 of
the reconciling item, "First time adoption of IAS" in the amount of [E] 11.7
million represents items which are not related to income taxes.
h) Deferred Taxes -- IAS to U.S. GAAP Reconciliation
The items discussed above create differences between the book (according to
U.S. GAAP) and tax basis of the assets and liabilities, requiring the
recognition of associated deferred tax assets and liabilities. With some
exceptions deferred tax assets and liabilities are recognized for all
differences between the book and tax basis of the assets and liabilities using
future statutory tax rates. In addition, a valuation allowance is established
when it is more likely than not that deferred tax assets will not be realized.
F-40
RECONCILIATION TO U.S. GAAP
The following is a summary of the significant adjustments to net income and
shareholders' equity which would be required if U.S. GAAP had been applied
instead of IAS. Earnings per share have been presented before Cumulative Change
in Accounting Principles. The translation of the 2002 amounts from Euro into
U.S. dollars has been made using the middle rate of exchange on December 31,
2002 (1.0415 USD = 1 [E] ):
ALL NUMBERS IN MILLION EXCEPT PER 2002 2002 2001 2000
SHARE DATA NOTE US-$ EURO EURO EURO
----- ----- ------ -----
Net loss per IAS as reported in the
consolidated income statement..................... (24.6) (23.6) (95.2) (36.0)
Adjustments to conform with US-GAAP:
Business acquisition and goodwill................. (a) 5.3 5.1 (2.7) (1.6)
Internal Use Software and Interest capitalization. (b) (3.1) (3.0) (0.9) 2.2
Inventory......................................... (c) (6.0) (5.8) (3.9) 2.1
Pension provision................................. (d) (2.2) (2.1) (1.1) (1.1)
Incentive plans................................... (e) (2.3) (2.2) (4.9) (9.3)
Restructuring..................................... (f) (7.4) (7.1) (7.9) (0.0)
First time adoption of IAS........................ (g) 0.0 0.0 (49.3) 37.6
Deferred Taxes --- IAS to U.S. GAAP reconciliation (h) 5.3 5.1 (5.7) 2.8
----- ----- ------ -----
Net loss in accordance with US-GAAP ................ (23.0) (22.0) (148.0) (3.3)
Cumulative Change in Accounting Principles........ 9.8 9.4 0.0 0.0
Net loss after Cumulative Change in
Accounting Principals............................. (13.2) (12.6) (148.0) (3.3)
Basic earnings per share in accordance with US-GAAP (1.05) (1.01) (6.87) (0.15)
Diluted earnings per share in
accordance with US-GAAP........................... (1.05) (1.01) (6.87) (0.15)
Equity per IAS as reported in the
consolidated balance sheet........................ 204.4 196.3 255.2
Adjustments to conform with US-
GAAP:
Business acquisition and goodwill................. (a) 47.1 45.2 26.9
Internal Use Software and Interest capitalization. (b) 1.1 1.1 4.3
Inventory......................................... (c) (0.7) (0.7) (7.1)
Pension provision................................. (d) (27.4) (26.3) (11.5)
Incentive plans................................... (e) (7.0) (6.7) (10.0)
Restructuring..................................... (f) 0.8 0.8 7.9
First time adoption of IAS........................ (g) 0.0 0.0 0.0
Deferred Taxes --- IAS to U.S.
GAAP reconciliation............................... (h) 0.0 0.0 (1.6)
----- ----- ------ -----
Equity in accordance with US-
GAAP.............................................. 218.3 209.7 264.1
35. ADDITIONAL DISCLOSURE INFORMATION REQUIRED BY U.S. GAAP
The disclosures discussed in this footnote are based on the entities
consolidated for IAS.
F-41
A. OTHER POSTRETIREMENT BENEFITS
For purposes of disclosure in accordance with U.S. GAAP, the following
information for the SGL Group's material other postretirement benefit plans is
provided in accordance with the requirements of SFAS No. 106 "Employers'
Accounting for Postretirement Benefits Other Than Pensions."
Certain of the SGL Group's U.S. operations provide health care and other
benefits to most of their retired employees and their eligible dependents.
Minimum service under the plan has been defined as ten years.
Net postretirement benefit expense for the postretirement benefit plan for
the years ended December 31, 2002, 2001 and 2000 included the following
components:
2002 2001 2000
EURO EURO EURO
---- ---- ----
Service cost-benefits attributed to service during the period. 0.2 0.2 0.2
Interest cost on accumulated postretirement benefit obligation 2.0 2.3 1.9
Amortization and deferral..................................... 0.0 0.4 0.1
---- ---- ----
Net periodic postretirement benefit cost...................... 2.2 2.9 2.2
==== ==== ====
Following is a summary of the changes in the accumulated benefit obligation
for postretirement benefits during 2002 and 2001:
2002 2001
EURO EURO
Benefit obligation at the beginning of the year.................... 30.5 24.9
Foreign currency translation....................................... (4.7) 1.4
Service cost....................................................... 0.2 0.2
Interest cost...................................................... 2.0 2.3
Curtailment/settlement and Change in Plan provision................ (3.0) 0.0
Plan participant contributions..................................... 0.5 0.5
Actuarial loss..................................................... 5.5 5.5
Benefits paid...................................................... (4.0) (4.3)
----- ----
Benefit obligation at the end of the year.......................... 27.0 30.5
Unrecognized net loss.............................................. (11.4) (9.4)
Unrecognized prior service cost.................................... 1.0 0.0
----- ----
Net amount recognized.............................................. 14.6 21.1
===== ====
The health care cost trends used in determining the accumulated
postretirement benefit obligation for 2002 and 2001 were 0.0% and 6.0%. The
health care cost trend rate is expected to remain at 0.0%. This assumption has
a significant effect on the amounts reported. For example, increasing the
assumed trend by 1% would increase the accumulated postretirement benefit
obligation and the service and interest cost components of net periodic
postretirement benefit cost for the years ended December 31, 2002 and 2001 by
approximately [E] 0.0 million and [E] 0.6 million and [E] 0.2 million and [E]
0.0 million, respectively. Decreasing the assumed trend by 1% would decrease
the accumulated postretirement benefit obligation and the service and interest
cost components of net periodic postretirement benefit cost for the year ended
December 31, 2002 by approximately [E] 0.0 and [E] 0.2, respectively. In
determining the accumulated postretirement benefit obligation, the weighted
average discount rate used was 6.75% and 7.5% for the years ended December 31,
2002 and 2001, respectively.
F-42
Under IAS, the Company included [E] 10.4 million in 2002, [E] 9.9 in 2001
and [E] 9.2 million in 2000 of interest costs associated with the Company's
provision for pension and similar obligations in interest expense. U.S. GAAP
does not allow the interest cost associated with the provision for pension and
similar obligations to be recorded as a component of interest expense.
B. INCOME TAXES
In 2000, the German government enacted new tax Legislation which, among
other changes, reduced the Group's statutory corporate tax rate for German
companies from 40% on retained earnings to 30% on distributed earnings to a
uniform 25%, effective for the Group's year beginning January 1, 2001. Since
the Tax Reduction Act became effective in January 2001, the net profit of
German companies has been subject to a standard 25% rate of corporation tax. In
September 2002, the rate of German corporation tax for fiscal 2003 was
increased to 26.5%. The impact of this tax increase, which is limited to one
year, is not of material importance and Notes to the Consolidated Financial
Statements has therefore not been included in the calculation of deferred
taxes. A solidarity surcharge of 5.5% is added to the corporation tax rate
resulting in an aggregate corporation tax rate for 2001 and 2002 of 26.4%.
Together with the trade tax burden of 12%, the German income tax rate amounts
to a total of 38.4%. The effects of the reductions in the tax rate and other
tax law changes on the deferred tax assets and liabilities of the Group's
German companies were recognized in the year of enactment and resulted in
deferred tax expense for 2000 of [E] 16.0 million .
Under U.S. GAAP, the effective income tax rate would approximate 17.3% in
2002, 96.6 % in 2001 and 120.2% in 2000.
At December 31, 2002 and 2001, the SGL Group had tax loss carryforwards
amounting to approximately [E] 315.4 million and [E] 322.6 million
respectively. Some of the tax credit carryforwards have an unlimited
carryforward period under local tax laws. For U.S. GAAP purposes, a deferred
tax valuation allowance on tax loss carryfowards in 2002 of [E] 79.3 million
(2001: [E] 114.8) has been established against deferred tax assets. The
reductions in 2002 are due to the deconsolidation of a subsidiary.
The valuation allowances at December 31, 2002 and 2001 are derived
principally from tax loss carryforwards in the United States and the United
Kingdom, the realization of which is unlikely, based on projected tax earnings
in the next five year period. Tax benefits relating to the valuation allowance
for deferred tax assets at December 31, 2002 that are subsequently recognized
will be reflected in the consolidated statement of operations of the period in
which the event occurs.
Under U.S. GAAP, the SGL Group would have recorded net deferred tax assets
at December 31, 2002 and 2001 of [E] 54.7 and [E] 42.1 million consisting of
deferred tax assets relating to tax loss carryforwards at December 31, 2002 and
2001 of [E] 39.7 and [E] 31.2 million, respectively, and other deferred tax
assets of [E] 53.7 and [E] 52.7 million, respectively, and deferred tax
liabilities of [E] 38.7and [E] 41.8 million, respectively.
In assessing the realizability of deferred tax assets, management considers
whether it is more likely than not that some portion of the deferred tax assets
will not be realized. The evidence considered in determining the valuation
allowance includes the scheduled reversal of deferred tax liabilities,
projected future taxable income and tax planning strategies. The ultimate
realization of deferred tax assets is dependent upon the generation of future
taxable income during the periods in which those temporary differences become
deductible.
Deferred taxes have not been provided on undistributed earnings of foreign
subsidiaries as these amounts are deemed to be permanently reinvested.
C. SFAS NO. 130 "REPORTING COMPREHENSIVE INCOME"
SFAS No. 130 requires disclosures regarding comprehensive income. These
include all changes in equity not transacted with owners of the business.
Comprehensive income is comprised as follows:
F-43
[E] MILLION 2002 2001
----- ------
Consolidated net loss US GAAP after Cumulative Change in Accounting
Principles.................................................................. (12.6) (148.0)
Other comprehensive income, net of tax
Change in cumulative translation adjustment................................. (23.7) 13.0
Minimum pension liability adjustment........................................ (18.1) (8.4)
Other comprehensive income.................................................... (41.8) (4.6)
Comprehensive income/loss..................................................... (54.4) (143.4)
The other comprehensive income relates exclusively to the cumulative
translation adjustment and an additional minimum pension liability.
D. STOCK COMPENSATION PLANS
The costs of the stock compensation plan (for purposes of the calculation
of the reconciliation from IAS to US GAAP) have been calculated pursuant to the
provisions of APB Opinion No. 25. SFAS 123 "Accounting for Stock Based
Compensation" amended by SFAS 148 requires additional disclosure of the pro-
forma income statement impact of the effect of the accounting treatment.
At December 31, 2002, there were a total of 998,500 shares (in 2002:
507,000) available for grant under the stock option plan. The per share
weighted-average fair value of stock options granted during 2002 were [E]10.3
and [E]14.5 and during 2001 [E]28.7 at the date of grant using the Black
Scholes option-pricing model (excluding a dividend yield assumption) with the
following assumptions: 2002 -- volatility 40%, risk-free interest rate of 5.0%,
and an expected life of 6 years; 2001 -- volatility 30%, risk-free interest
rate of 5.0% and an expected life of 6 years.
Had the Company determined compensation cost based on the fair value at the
grant date for its stock options under SFAS No. 123 amended by SFAS 148, the
Company's net loss would have been increased to the pro forma amounts indicated
below:
2002 2001
----- ------
Net loss *)...................... As reported [E]m (22.0) (148.0)
Add: ............................ APB 25 result [E]m (0.2) (1.5)
Deduct:.......................... SFAS 123 expense [E]m (3.7) (2.6)
Net loss *)...................... Pro forma [E]m (25.9) (152.3)
Earnings per share basic (EPS)... As reported [E] (1.01) (6.87)
Earnings per share basic (EPS)... Pro forma [E] (1.18) (7.07)
*) before Cumulative Changes in Accounting Principles
E. NON-CURRENT ASSETS
Accounts receivable trade due after one year at December 31, 2002 and 2001
amounting to [E] 0.3 million and [E] 0.4 million would be classified as non-
current assets under U.S. GAAP. There were no other receivables and other
assets due after one year at December 31, 2002 and 2001 that would be
classified as non-current assets under U.S. GAAP.
F. IMPLEMENTATION OF NEW U.S. ACCOUNTING PRONOUNCEMENTS
In July 2001, the FASB issued Statement No. 141, Business Combinations, and
Statement No. 142, Goodwill and Other Intangible Assets. Statement 141 requires
that the purchase method of accounting be used for all business combinations
initiated after June 30, 2001 as well as all purchase method business
combinations completed after June 30, 2001. Statement 141 also specifies
criteria for intangible assets acquired in a purchase method business
combination must meet to be recognized and reported apart from goodwill, noting
that any purchase price allocable to an assembled workforce may not be
accounted for separately. Statement 142 requires that goodwill and intangible
assets with indefinite useful lives no longer be amortized, but instead tested
for impairment at least annually in accordance with the provisions of Statement
142. Statement 142 also requires that intangible assets
F-44
with estimable useful lives be amortized over their respective estimated useful
lives to their estimated residual values, and reviewed for impairment in
accordance with FAS Statement No. 121, Accounting for the Impairment of Long-
Lived Assets and for Long-Lived Assets to be Disposed of.
The Company adopted the provisions of SFAS 141 and SFAS 142 as of July 1,
2001, and January 1, 2002, respectively. These Statements require that goodwill
acquired in a business combination completed after June 30, 2001, and any
intangible asset determined to have an indefinite useful life acquired after
June 30, 2001, should not be amortized. Goodwill acquired in business
combinations completed before July 1, 2001, and any intangible assets with
indefinite useful lives acquired before July 1, 2001, were amortized until
December 31, 2001.
SFAS 142 required the Group to evaluate its existing intangible assets and
goodwill and to make any necessary reclassifications in order to conform with
the new separation requirements at the date of adoption. The Group reassessed
the estimated useful lives and residual values of all intangible assets other
than goodwill and determined that no adjustments regarding amortization periods
were necessary.
In connection with the transitional impairment evaluation, SFAS 142
required SGL to perform an assessment of whether there is an indication that
goodwill is impaired as of January 1, 2002. To accomplish this, SGL (1)
identified its reporting units, (2) determined the carrying value of each
reporting unit by assigning the assets and liabilities, including the existing
goodwill and intangible assets, to those reporting units, and (3) determined
the fair value of each reporting unit. SGL completed this first step of the
transitional assessment for all of the Group's reporting units by June 30,
2002, and determined there was no indication that goodwill had been impaired as
of January 1, 2002. Accordingly, no transitional goodwill impairment charge was
necessary.
And finally, any unamortized negative goodwill existing at the date
Statement 142 was adopted was written off as the cumulative effect of a change
in accounting principle.
As of December 31, 2002, the Company had under U.S. GAAP unamortized
goodwill in the amount of [E] 136.1 million, no unamortizable identifiable
intangible assets and no unamortized negative goodwill, all of which were
subject to the transition provisions of Statements 141 and 142. Amortization
expense related to goodwill and negative goodwill was [E] 0.0, [E] 7.0 and [E]
7.9 million for the years ended December 31, 2002, 2001, and 2000.
In June 2001, the Financial Accounting Standards Board issued Statement No.
143, Accounting for Asset Retirement Obligations, which addresses financial
accounting and reporting for obligations associated with the retirement of
tangible long-lived assets and the associated asset retirement costs. The
standard applies to legal obligations associated with the retirement of long-
lived assets that result from the acquisition, construction, development and
(or) normal use of the asset.
Statement 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. The fair value of the liability
is added to the carrying amount of the associated asset and this additional
carrying amount is depreciated over the life of the asset. The liability is
accreted at the end of each period through charges to operating expense. If the
obligation is settled for other than the carrying amount of the liability, the
Company will recognize a gain or loss on settlement. The SGL Group does not
expect any material impact regarding the adoption of SFAS 143 effective January
1, 2003.
In August 2001, the FASB issued SFAS 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS 144 retains the current requirement to
recognize an impairment loss only if the carrying amounts of long-lived assets
to be held and used are not recoverable from their expected undiscounted future
cash flows. However, goodwill is no longer required to be allocated to these
long-lived assets when determining their carrying amounts. SFAS 144 requires
that a long-lived asset to be abandoned, exchanged for a similar productive
asset, or distributed to owners in a spin-off be considered held and used until
it is disposed. However, SFAS 144 requires the depreciable life of an asset to
be abandoned be revised. SFAS 144 requires all long-lived assets to be disposed
of by sale be recorded at the lower of its carrying amount or fair value less
cost to sell and to cease depreciation (amortization). Therefore, discontinued
operations are no longer measured on a net realizable value
F-45
basis, and future operating losses are no longer recognized before they occur.
The Company has adopted SFAS 144 effective January 1, 2002. The adoption of
SFAS 144 did not have a material impact on the Group's financial statements.
In April 2002, the FASB issued SFAS 145, "Rescission of FASB Statements No.
4, 44 and 64, Amendment of FASB Statement 13 and Technical Corrections." SFAS
145 requires gains and losses on extinguishments of debt to be classified as
gains or losses from continuing operations rather than as extraordinary items
as previously required under SFAS 4, unless the gains and losses meet the
criteria to be classified as extraordinary pursuant to APB 30. SFAS 145 also
amends SFAS 13, "Accounting for Leases," to eliminate an inconsistency between
the required accounting for sale-lease back transactions and the required
accounting for certain lease modifications that have economic effects that are
similar to sale-lease back transactions. The rescission of SFAS 4 is effective
for fiscal years beginning after May 15, 2002. The provisions of SFAS 145
related to SFAS 13 are effective for transactions occurring after May 15, 2002.
We do not expect to have a material impact regarding the adoption of SFAS 145
on the Group's consolidated financial statements.
In July 2002, the FASB issued SFAS 146, "Accounting for Costs Associated
with Exit or Disposal Activities." The Statement requires that a liability for
costs associated with exit or disposal activities be recognized in the period
in which the costs are incurred if a reasonable estimate of fair value can be
made. Under current accounting guidance, a liability can be recognized when
management has committed to an exit plan. The requirements under SFAS 146 are
effective prospectively for exit or disposal activities initiated after
December 31, 2002. Restatement of previously issued financial statements is not
permitted. The adoption of this Statement will affect the Group's accounting
for exit and disposal activities initiated after December 31, 2002.
On December 31, 2002 the Financial Accounting Standards Board issued SFAS
No. 148 "Accounting for Stock-Based Compensation -- Transition and Disclosure",
which amends the disclosure requirements relating to stock-based employee
compensation previously contained in SFAS No. 123. The amendments in SFAS No.
148 relevant to the SGL Group are effective for all fiscal years ending after
December 15, 2002. The disclosure requirements have been included in the
additional information provided on U.S. GAAP, see Note 35d to our Consolidated
Financial Statements.
In November 2002, FASB Interpretation No. 45 (FIN 45), "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness of Others" was issued. FIN 45 elaborates on the
disclosures to be made by a guarantor in its interim and annual financial
statements about its obligations under certain guarantees that it has issued.
It also clarifies that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation undertaken in
issuing the guarantee. The initial recognition and initial measurement
provisions of this Interpretation are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002. The required disclosures
and a roll-forward of product warranty liabilities are effective for financial
statements of interim or annual periods ending after December 15, 2002. At this
time, we do not believe that the adoption of this interpretation will have a
material effect on our financial statements.
In January 2003, the FASB issued Interpretation No. 46 ("FIN 46"),
Consolidation of Variable Interest Entities, an interpretation of ARB 51. The
primary objectives of FIN 46 are to provide guidance on the identification of
entities for which control is achieved through means other than through voting
rights ("variable interest entities" or "VIEs") and how to determine when and
which business enterprise should consolidate the VIE (the "primary
beneficiary"). This new model for consolidation applies to an entity in which
either (1) the equity investors (if any) do not have a controlling financial
interest or (2) the equity investment at risk is insufficient to finance that
entity's activities without receiving additional subordinated financial support
from other parties. In addition, FIN 46 requires that both the primary
beneficiary and all other enterprises with a significant variable interest in a
VIE make additional disclosures. We are currently evaluating the impact of FIN
46 on our financial statements, but do not expect that there will be any
material impact.
F-46
G. COMMITMENTS AND CONTINGENCIES
The SGL Group is involved in various claims and legal actions arising in
the ordinary course of business. Litigation is subject to many uncertainties,
and the outcome of individual matters is not predictable with assurance. It is
reasonably possible that the final resolution of some of these matters may
require the SGL Group to make expenditures, in excess of established reserves,
over an extended period of time and in a range of amounts that cannot be
reasonably estimated. Although the final resolution of any such matters could
have a material effect on the Company's consolidated operating results for a
particular reporting period in which an adjustment of the estimated reserve is
recorded, management believes that any resulting adjustment should not
materially affect its consolidated financial position. See Item 8 for details
to legal proceedings.
It is not possible to predict with certainty the ultimate outcome of such
actions however management believes that while any settlements could be
significant to the Company's results of operations or liquidity in a year of
settlement such amount would not have a material adverse effect on the
Company's financial position.
H. EARNINGS (LOSS) PER SHARE
Under U.S. GAAP, earnings per share are calculated and presented in
accordance with the provisions of Statement of Financial Accounting Standards
No. 128, "Earnings per Share", which requires the presentation of both basic
and diluted earnings per share information for all periods presented. Basic net
profit/(loss) per share is computed by dividing net income/(loss), as
calculated in accordance with U.S. GAAP, by the weighted average number of
shares outstanding of 21,813,930 in 2002, 21,530,563 in 2001 and 21,376,753 in
2000. Diluted net profit /(loss) per share includes the effect of incremental
shares, if any, that would have been outstanding under the share option plans
or other obligations to issue such shares. Due to the fact that there was a
loss in all reported periods there was no difference between basic and diluted
(loss) per share.
I. CASH FLOW STATEMENTS -- CHANGES IN CORPORATE DEBT
YEAR ENDED DECEMBER 31,
2002 2001 2000
EURO EURO EURO
------ ------ ------
Proceeds from corporate debt.................... 166.1 276.5 431.8
Repayment of corporate debt..................... (256.5) (240.0) (334.0)
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(90.4) 36.5 97.8
J. DERIVATIVE FINANCIAL INSTRUMENTS AND FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company is a limited user of derivative financial instruments. It
primarily utilize interest rate swap and cap agreements and forward exchange
contracts to manage exposures to interest rate and foreign currency
fluctuations. The Company is not party to leveraged derivatives and does not
hold or issue derivative instruments for speculative purposes.
The notional/contract amount of derivatives do not represent the amount
exchanged by the parties and thus are not a measure of the exposure of the
Company through its use of derivatives. The amounts exchanged during the term
of the derivatives are calculated on the basis of the notional/contract amounts
and the other contractual conditions of the derivatives.
Management actively evaluates the credit worthiness of the financial
institutions which are counter parties to derivative instruments, and it does
not expect any counter parties to fail to meet their obligations. The credit
exposure of derivative instruments is represented by the unrealized gain in the
underlying instrument.
The estimated fair value of on-balance sheet financial instruments (cash,
receivables, payables, accrued expenses, other liabilities and long-term debt)
are considered to approximate their carrying value because such instruments,
except for long-term debt, have short maturity. In the case of long-term debt,
interest may be revised periodically to current market rates. At December 31,
2002 and 2001 the estimated fair value of derivative financial instruments has
been disclosed in note 27.
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The SGL Group adopted SFAS 133 effective January 1, 2001. The SGL Group has
elected not to adopt hedge accounting provisions in accordance with SFAS 133
for its hedging derivatives.
K. CONCENTRATION OF CREDIT RISKS
Financial instruments which potentially subject the SGL Group to
concentrations of credit risk consist principally of cash and accounts
receivable. Management believes, however, that the loss due to credit risk to
be incurred by the Company if parties to these financial instruments fail
completely to perform according to the terms of the contracts is not material.
Due to the refinancing of the company encumbrances have been installed, please
refer to Item 10 (Material Contracts).The Company estimates an allowance for
doubtful accounts based on the credit worthiness of its customers as well as
general economic conditions. Consequently, an adverse change in those factors
could affect estimates of bad debts.
L. WARRANTY OBLIGATIONS
The Company warrants to the purchasers of its line of products that the
product will be free of defects in material and workmanship. The Company
records the estimated cost that may be incurred under its warranties at the
time the product revenue is recognized based upon the relationship between
historical and anticipated warranty costs and sales volumes. The Company
periodically assesses the adequacy of its recorded warranty liability and
adjusts the amounts as necessary. While the Company believes that its estimated
liability for product warranties is adequate and that the judgment applied is
appropriate, the estimated liability for product warranties could differ
materially from actual future warranty costs.
M. OTHER
No loans to executive or supervisory board members were granted as of
December 31, 2002.
36. SUBSEQUENT EVENTS
On January 7, 2003 SGL received the cash proceeds out of the refinancing
agreement signed on December 20, 2002 and used the proceeds to refinance a
substantial part of the old financial debt. Details to this refinancing
agreement are explained in Item 10, "Additional Information -- Material
Contracts" and in the exhibit 2 of this annual report.
All shares in SGL PanTrac Gesellschaft fur elektrische Kontakte mbH, Berlin
(PanTrac), were sold to E-Carbon S.A., Brussels, a third-party enterprise, and
were transferred in January 2003. PanTrac was still fully consolidated in the
consolidated financial statements for fiscal year 2002.
As of April 8, 2003 SGL sold all shares in Risomesa S.p.A., Milan (the
Italian operation for machined electrical carbon products) to the Schunk Group,
Germany. Risomesa was still fully consolidated in the consolidated financial
statements for fiscal year 2002.
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