Prepared and filed by Imprima de bussy

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
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
  THE SECURITIES EXCHANGE ACT OF 1934
  For the fiscal year ended December 31, 2004
  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, each New York Stock Exchange
     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 ............................................................. 56,462,749

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      No   

Indicate by check mark which financial statement item the registrant has elected to follow

Item 17      Item 18   

 

TABLE OF CONTENTS

      Page
     
CERTAIN DEFINED 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 7
    Reasons for the Offer and Use of Proceeds 7
    Risk Factors 7
  ITEM 4. INFORMATION ON THE COMPANY 16
    History and Development of the SGL Group 16
    Business Overview 18
    Organizational Structure 28
    Property, Plants and Equipment 28
  ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS 32
    Operating Results 38
    Liquidity and Capital Resources 57
    Research and Development, Patents and Licenses, etc 63
    Trend Information 64
    Off- balance sheet arrangements 65
    Tabular disclosure of contractual obligations 67
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 68
    Directors and Senior Management 68
    Compensation 74
    Board Practices 83
    Employees 84
    Share Ownership 84
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 85
    Major Shareholders 85
    Related Party Transactions 85
    Interest of Experts and Counsel 86
  ITEM 8. FINANCIAL INFORMATION 87
    Consolidated Statements and Other Financial Information 87
    Significant Changes 90
  ITEM 9. THE OFFER AND LISTING 91
    Offer and Listing Details 91
    Plan of Distribution 95
    Markets 95
    Selling Shareholders 95
    Dilution 95
    Expenses of the Issue 95
  ITEM 10. ADDITIONAL INFORMATION 96
    Share Capital 96
    Memorandum and Articles of Association 96
    Material Contracts 100
    Exchange Controls 111
    Taxation 111
    Dividends and Paying Agents 116
    Statements by Experts 116
    Documents on Display 116
    Subsidiary Information 117

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  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 118
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 122
PART II 123
  ITEM 13 DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 123
  ITEM 14 MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS 123
  ITEM 15 CONTROLS AND PROCEDURES 123
  ITEM 16 [RESERVED] 123
  ITEM 16A. Audit committee financial expert 123
  ITEM 16B. Code of Ethics. 123
  ITEM 16C. Principal Accountant Fees and Services. 123
  ITEM 16D. Exemptions from the Listing Standards for Audit Committees 124
  ITEM 16E. Purchase of Equity Securities by the Issuer and Affiliate Purchasers 124
PART III 125
  ITEM 17. FINANCIAL STATEMENTS 125
  ITEM 18. FINANCIAL STATEMENTS 125
  ITEM 19. EXHIBITS 125
SIGNATURES 126
CERTIFICATION 127
CERTIFICATION 128

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CERTAIN DEFINED 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’’ or the ‘‘Company. 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 and SGL T or T for the ‘‘SGL Technologies’’ Business Area. In January 2005 we sold the surface protection business of the former ‘‘Corrosion Protection’’ Business Area (CP). The remaining business of CP was reclassified to the GS Business Area. The term ‘‘Business Area’’ is used for reporting purposes, whereas the term ‘‘Business Unit’’ is used in business-related discussions within this document and both terms define the above reporting units of SGL Carbon Group.

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 InformationRisk 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’’. The SGL Carbon Group prepared the consolidated financial statements in accordance with German GAAP (HGB) for the years until Dec. 31, 2000. In 2001 the SGL Carbon Group adopted IFRS and has prepared its consolidated financial statements in accordance with IFRS for all years presented.
   
     We derived the following selected financial data for each of the years in the five-year period ended December 31, 2004 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 35 and 36 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, Ernst & Young Aktiengesellschaft, Wirtschaftspruüfungsgesellschaft, independent auditors, have audited our consolidated financial statements for the year ended December 31, 2004 and BDO Deutsche Warentreuhand Aktiengesellschaft, Wirtschaftspruüfungsgesellschaft, independent auditors, have audited our consolidated financial statements for the years ended December 31, 2003 and 2002.

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  As of and for the year ended December 31,  





 
  2004(1)   2004(2)   2003(2)   2002(2)   2001(2)   2000(2)  

 
 
 
 
 
 
  $            
  (in millions; except for per share and certain other data)  
Statement of Operations Data:             
IFRS             
Sales revenue 1,263.3   926.2   915.8   957.3   1,233.3   1,262.5  
Cost of sales (3)  (904.9 ) 663.4   (680.8 ) (744.2 ) (941.8 ) (950.8 )
Gross profit 358.4   262.8   235.0   213.1   291.5   311.7  
Selling, research and            
     development, administration            
     expenses and other operating            
     income (net) (3)  (242.2 ) (177.6 ) (178.6 ) (177.0 ) (232.8 ) (232.5 )
Costs relating to anti-trust            
     proceedings and            
     restructuring(3)  (27.0 ) (19.7 ) (28.9 ) (26.8 ) (76.0 ) 0.0  
Profit/(loss) from operations 89.2   65.5   27.5   9.3   (17.3 ) 79.2  
Result of investments 0.3   0.2   (2.8 ) 0.3   3.2   0.6  
Interest expense (net) (4)  (68.4 ) (50.2 ) (49.2 ) (36.8 ) (38.5 ) (42.6 )
Other financial result (14.3 ) (10.5 ) (23.0 ) 8.9   (13.2 ) (17.2 )
Income tax benefit (expense) (1.6 ) (1.2 ) 18.8   (0.3 ) (29.2 ) (55.7 )
Net profit / loss (including            
     minority interests) (5)  5.2   3.8   (28.8 ) (18.6 ) (95.0 ) (35.7 )
Discontinued operations (116.6 ) (85.5 ) (21.5 ) (5.0 )    
Net loss attributable to            
     shareholders (111.4 ) (81.7 ) (50.3 ) (23.6 ) (95.2 ) (36.0 )
Earnings (Loss) per Share (6)    (1.57 ) (2.27 ) (1.08 ) (4.42 ) (1.68 )
Earnings (Loss) per ADR (6)    (0.52 ) (0.76 ) (0.36 ) (1.47 ) (0.56 )
             
U.S. GAAP             
Net loss (11)  (121.0 ) (88.7 ) (48.4 ) (22.0 ) (148.0 ) (3.3 )
Basic loss per Share (6)  (2.32 ) (1.70 ) (2.18 ) (1.01 ) (6.87 ) (0.15 )
Basic loss per ADR (6)  (0.77 ) (0.57 ) (0.73 ) (0.34 ) (2.29 ) (0.05 )
Diluted loss per Share (6)  (2.32 ) (1.70 ) (2.18 ) (1.01 ) (6.87 ) (0.15 )
Diluted loss per ADR (6)  (0.77 ) (0.57 ) (0.73 ) (0.34 ) (2.29 ) (0.05 )
             
Balance Sheet Data:             
IFRS / IAS             
Working capital (7)  464.4   340.5   380.4   386.0   548.7   565.3  
Total assets 1,793.5   1,314.8   1,246.9   1,286.4   1,495.0   1,547.0  
Financial debt 568.0   416.4   494.5   448.5   538.9   502.4  
Shareholders’ equity 384.3   281.7   116.6   196.3   255.2   337.0  
                         
Weighted average shares(14)  52,152,691   52,152,691   22,148,078   21,813,930   21,530,563   21,376,753  
             
U.S. GAAP             
Total assets 1,850.4   1,356.6   1,294.2   1,333.3   1,531.8   1,629.9  
Shareholders’ equity 386.8   283.6   133.5   209.7   264.1   402.9  
             
Other Data:             
IFRS / IAS            
Gross profit margin (%) (3)  28.4   28.4   25.7   22.3   23.6   24.7  
Operating margin (%) (3)  7.1   7.1   3.0   1.0   (1.4 ) 6.3  
Depreciation and amortization 91.3   66.9   65.8   73.5   95.8   83.0  
Capital expenditures 50.9   37.3   31.0   39.9   90.6   67.2  

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  As of and for the year ended December 31,  





 
  2004(1)   2004(2)   2003(2)   2002(2)   2001(2)   2000(2)  

 
 
 
 
 
 
  $            
  (in millions; except for per share and certain other data)  
Ratio of debt to shareholders’             
     equity (%) (8) 114.0   114.0   384.6   217.5   206.4   146.2  
Return on capital employed (%)(9) 8.5   8.5   3.4   1.0   (1.4 )  6.6  
Research and development             
     expenses  26.2   19.2   19.0   24.1   31.1   29.2  
Quantity of graphite electrodes             
     sold (thousands of metric             
     tons)  209   209   202   173   175   188  
Number of employees worldwide             
     (end of year)  5,109   5,109   5,408   5,674   8,197   8,082  
             
Business Area Data:             
Net Sales (10)             
     Carbon and Graphite  757.7   555.5   558.0   550.7   619.8   619.5  
     Graphite Specialties(12)  321.6   235.8   230.1   253.3   230.7   242.0  
     Corrosion Protection (12)          235.8   247.3  
     SGL Technologies (12)  181.7   133.2   124.9   150.4   135.1   151.8  
Profit / (loss) from operations (15)             
     Carbon and Graphite  133.8   89.7   65.5   54.6   67.4   108.0  
     Graphite Specialties (12)  22.9   15.2   12.4   5.3   (7.2 )  16.9  
     Corrosion Protection (12)          12.6   (1.4 ) 
     SGL Technologies (12)  (11.9 )  (10.1 )  (13.6 )  (11.3 )  (33.7 )  (17.3 ) 
Profit / (loss) from operations             
     before restructuring             
     expenses (13) (15)             
     Carbon and Graphite  122.4   98.1   69.2   54.6   78.9   108.0  
     Graphite Specialties (12)  20.7   16.8   16.1   10.1   22.3   16.9  
     Corrosion Protection (12)          12.6   (1.4 ) 
     SGL Technologies (12)  (13.8 )  (8.7 )  (11.8 )  (11.3 )  (33.7 )  (17.3 ) 

(1) Amounts in this column have been translated solely for the convenience of the reader at an exchange rate of 1.00 = $1.3640, the middle rate of exchange on December 31, 2004 as published by Deutsche Bank.
(2) Effective January 6, 2005, we sold the Surface Protection and Plastics Process Technology businesses and present these activities as discontinued operations for 2004. The fiscal years 2003 and 2002 have been adjusted accordingly. All prior years (2001 and 2000) were not restated, show the SGL Group including the discontinued operations and thus are not directly comparable to the years 2002 to 2004. Effective January 1, 2003 we have consolidated SGL Angraph Sp. Z o.o, Poland, a previously non consolidated company. 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 (renamed to SGL CARBON Polska S.A. in 2003) in our year end balance sheet, although we did not recognize ZEW in our consolidated statement of operations for that year.
(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 2004, 2003 and 2002, we have included the interest component of additions to the pension provision of 13.3 million, 14.0 million and 15.2 million, respectively, as an expense in the financial result (interest expense) in accordance with IFRS. As a Group rule, the interest portion of the allocation to the pension provisions is included in the net financing costs in the United States as well as in Europe. In this matter, we reclassified expenses of 5 million and 6 million from operating expenses to financing costs under IFRS in 2003 and 2002, respectively. Under U.S. GAAP, this interest component is included in operating profit.
(5) Net profit / loss (including minority interests) and shareholders’ equity/minority interests include amounts attributable to minority interests. Net loss attributable to minority interests and minority interests in shareholders’ equity for the years 2004, 2003 and 2002 were 0.0 million, 0.1 million and 0.0 million , respectively, and 0.2 million, 0.3 million and 1.4 million, respectively.

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(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 ADR 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 2004, 2003 and 2002 was identical to the loss per Share.
(7) Working Capital as defined as total net inventories plus total net trade receivables, less trade payables. Under U.S. GAAP, working capital at December 31, 2004, 2003 and 2002 would have been 301.6 million, 155.5 million and 41.3 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. Such sales include sales to employees, R&D services and rental income. For the years 2004, 2003 and 2002 these amounts were 1.7 million, 2.8 million and 2.9 million respectively.
(11) Net loss under U.S. GAAP is presented before cumulative changes in accounting principles in 2002.
(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. Due to the divestiture of the Surface Protection and plastic process technology businesses, the process technology activities from the former Corrosion Protection Business Area (CP) were reorganized and included in the Graphite Specialties Business Area (GS). We have adjusted the corresponding figures for the fiscal years 2003 and 2002 to reflect our current segment reporting structure.
(13) Operating profit (loss) before costs relating to anti-trust proceedings and restructuring for the years 2004, 2003 and 2002 does not include unallocated corporate costs and consolidation adjustments. See Note 28 to the consolidated financial statements.
(14) Weighted average number of shares.
(15) We present Operating Profit (Loss) before cost related to restructuring as a further supplemental measure of our performance. We prepare this figure by adjusting Operating Profit to eliminate the impact of items we do not consider indicative of our ongoing operating performance. You are encouraged to evaluate each adjustment and the reasons we consider it appropriate for supplemental analysis. In addition, in evaluating Operating Profit before cost related to restructuring, you should be aware that in the future we might incur expenses similar to the adjustments in this presentation. Our presentation of Operating Profit before cost related to restructuring should not be construed as an inference that our future results will be unaffected by unusual or non- recurring items. Operating Profit is not a uniformly or legally defined financial measure. It generally represents earnings before financial result and taxes.
Operating Profit (Loss) before cost related to restructuring and antitrust is calculated by adding to Operating Profit certain items of expense that we believe are not indicative of our future operating performance consisting of: (i) restructuring expenses; and (ii) expenses related to antitrust proceedings. We believe these expenses are not indicative of our future operating performance because (i) the restructuring expenses are one-time charges to improve our future performance and (ii) the antitrust expenses are related to one-time fines.
The following table shows Operating Profit (Loss) before cost related to restructuring and antitrust as derived from our net income (loss), on a consolidated level and, with respect to each of our three business areas, as derived from our operating income (loss):

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  As of and for the years ended December 31,  








 
  2004   2003   2002  


 

 

 
  (in millions of )  
Consolidated net income (loss) before minority interests  €  (81.7 )  €  (50.2 )  €  (23.6 ) 
Discontinued operations    85.5     21.5     5.0  
Consolidated net financing costs    60.5     75.0     27.6  
Consolidated income tax expense (benefit)    1.2     (18.8 )    0.3  


 

 

 
     Carbon and Graphite    89.7     65.5     54.6  
     Graphite Specialties    15.2     12.4     5.3  
     SGL Technologies    (10.1 )    (13.6 )    (11.3 ) 
     Other    (29.3 )    (36.8 )    (39.3 ) 


 

 

 
Consolidated operating income (loss)    65.5     27.5     9.3  
plus: Restructuring expenses:             
     Carbon and Graphite    8.4     3.7      
     Graphite Specialties    1.6     3.7     4.8  
     SGL Technologies    1.4     1.8      
     Other    8.3     0.2      
     Consolidated restructuring expenses    19.7     9.4     4.8  
Consolidated expenses related to antitrust proceedings (only             
     related to Other Segment)    0.0     19.5     22.0  
Operating profit before cost related to antitrust and             
     restructuring:             
     Carbon and Graphite    98.1     69.2     54.6  
     Graphite Specialties    16.8     16.1     10.1  
     SGL Technologies    (8.7 )    (11.8 )    (11.3 ) 
     Other    (21.0 )    (17.1 )    (17.3 ) 


 

 

 
Consolidated Operating profit before cost related to antitrust             
     and restructuring  €  85.2   €  56.4   €  36.1  


 

 

 

Exchange Rates

     The following table shows the high, low, average and period-end euro-dollar exchange rates for the five years ended December 31, 2004 and the high and low euro-dollar exchange rates for the six months ended March 31, 2005. 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 DM 1.95583 = 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.

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          Period    Period 
Period  High    Low    Average    End 

 
 
 
     
(in dollars per euro) 
   
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 
2003  1.2610    1.0371    1.1309    1.2610 
2004  1.3640    1.1798    1.2434    1.3640 
               
October 2004  1.2799    1.2278    1.2489    1.2757 
November 2004  1.3301    1.2702    1.2990    1.3301 
December 2004  1.3640    1.3181    1.3404    1.3640 
January 2005  1.3514    1.2938    1.3128    1.3033 
February 2005  1.3263    1.2751    1.3017    1.3254 
March 2005  1.3420    1.2926    1.3207    1.2962 

At April 27, 2004 the euro dollar exchange rate, based on the noon buying rate published by Deutsche Bank was $1.2919 = 1.00. 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 1998, SGL declared and paid a dividend of 1.20 ($1.31) per Share for the 1997 fiscal year. SGL did not declare dividends for the fiscal years 1998-2004.

Except as described herein, holders of ADRs are entitled to receive dividends on the Shares represented by the ADRs 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’’. 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

Potential investors should carefully consider the following specific risk factors along with the other information contained in this annual report before deciding to invest in the SGL Shares. Each of the risks described below could have a material adverse effect on our financial condition and results of operations. In addition, each of these risks could cause our share price to decline, and investors could lose all or part of their investment. The order in which the following risk factors are presented is not an indication of the likelihood of their occurrence.

We face substantial pricing pressure from our competitors.

The industries in which we operate are highly competitive. Competition is based primarily on price, product quality and customer service. Most of our production processes are capital-intensive, which results in high fixed costs. Due to these high fixed costs, a decline in demand or a temporary oversupply generally results in price decreases, rather than in reduced production. The pricing pressure thus has a direct impact on our results. In addition, price decreases can be aggravated by

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temporary imbalances in supply and demand, with an oversupply in stagnating markets. Graphite electrodes, in particular, are subject to strong price competition. In 2004 the average price of our graphite electrodes increased in local currency 1% in Euro and 14% in US$ versus 2003. 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, or could reduce our sales volumes. It could also require us to spend more for sales, marketing and research and development. Any of these developments could substantially harm our financial condition and results of operations.

The industries that use graphite electrodes are cyclical, and declines in demand for graphite electrodes could adversely affect our business.

In 2004, we derived approximately 48% 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. This, in turn, affects the demand for and the price of our graphite electrodes, which are sold to customers in the EAF industry. The economic slowdown in the steel industry, and in particular, the structural crisis in the U.S. steel industry led to an overall drop in the demand for graphite electrodes until mid-2002. This structural crisis in the steel industry led to significant consolidation, with the elimination of several competitors, and consequently to a decline in demand and a shift in demand to larger companies, with increased pricing pressure. With the end of the slowdown in the steel industry in mid-2002 the economic conditions for graphite electrodes producers improved and demand and prices increased again.

The market for graphite electrodes, particularly in Europe and North America, is saturated and continues to grow only in line with overall economic growth and with an increase in the proportion of EAF steel used in general steel production. On the other hand, opportunities for growth do exist in Asian markets, although we have not had a substantial presence in these markets up to now. In addition, demand for our graphite electrodes sold to the EAF steel industries may be adversely affected by technological improvements in those electrodes as well as in the manufacturing operations of our customers, which reduce the rate of consumption or use of our electrodes 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 steelmaking 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. 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 that future improvements in steelmaking 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.

Our financial condition is difficult and we require significant funds for our operations.

In the past seven years, we have had to expense on our income statement approximately 390 million and to spend approximately 290 million on a group level for antitrust proceedings and related civil proceedings for damages (see ‘‘Management Discussion and Analysis of Financial Condition and Results of Operations – Overview – Costs relating to antitrust proceedings’’). During that same time period, we made substantial investments (approximately 210 million) in the context of acquisitions. This has led to a high level of net debt (approximately 321 million as of December 31, 2004). As of December 31, 2004, our debt-to-equity ratio (the ratio between net financial liabilities and equity) was 114% and our equity ratio (the ratio between capital and total assets) was 21.4% .

Compared to December 31, 2001 (255.2 million), our equity decreased to 196.3 million as of December 31, 2002 and further to 116.9 million as of December 31, 2003, primarily due to our net loss (23.6 million in 2002 and 50.3 million in 2003) and the negative effects of currency conversion as of the balance sheet date. We have not hedged these negative currency effects, and there can be no

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assurance that there will be no additional decreases in equity as a result of currency effects. In 2002 and 2003, our profit (loss) from operations, even before inclusion of costs relating to antitrust proceedings and restructuring, was not sufficient to cover our cash net financing costs.

At the beginning of 2004, we concluded our new refinancing program. This program included a capital increase resulting in gross proceeds of 266 million, the issuance of subordinated senior notes in an amount of 270 million and certain credit and guarantee facilities of around 330 million. This refinancing has reduced our net financial debt and improved the maturity profile of our financial liabilities.

As of December 31, 2004 our equity amounted to 281.7 million. In 2004, our profit from operations (continuing operations) was with 65.5 million sufficient to cover our cash net financing costs.

Nevertheless, we continue to require significant funds for the SGL Group’s operations, financing costs, the payment of antitrust liabilities and other obligations. 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.

We have substantial amounts of debt. This debt, along with the obligations and covenants contained in our financing arrangements, substantially limits our financial and operating flexibility.

For a detailed description of our debt, you should read the discussion under the captions ‘‘Capitalization’’ and ‘‘Management Discussion and Analysis of Financial Condition and Results of Operations.’’

The conditions of our new syndicated credit facility, as well as the conditions of the senior notes substantially limit our financial flexibility. In particular, these agreements (see detailed description in Item 10, ‘‘Additional Information – Material Contracts’’) place limits on our ability to incur new debt, grant security to third persons, dispose of material assets, take organizational measures such as mergers, changes of corporate form, joint ventures or similar transactions, or to enter into transactions with related parties. Other limitations generally concern the payment of dividends and the repurchase of own shares. In addition, we must meet a number of financial covenants in the context of our financing agreements. Our substantial debt and our compliance with the covenants contained in our financing agreements could have a material adverse impact on our financial condition and results of operations. They could, for example:

  require us to dedicate a substantial portion of our cash flow from operations to making payments on our debt and other liabilities, which would limit the availability of funds for working capital, acquisitions, joint ventures and other general corporate purposes;
 
  limit our flexibility in reacting adequately to changes in the carbon and graphite industry or in our competitive environment;
 
  limit our ability to make investments necessary to maintain or increase our market share in new and established markets;
 
  place us at a competitive disadvantage compared to those of our competitors who have less debt than we do; and
 
  limit our ability to borrow additional funds and increase the costs of any such additional borrowings.
 

In the worst case, an actual or impending inability to pay our debts as they become due and payable could result in our insolvency.

We cannot assure you that we will not have to incur additional debt in the future. Incurring such additional debt could further increase these risks regarding our debt and financing arrangements.

We require a significant amount of cash to service our debt. Our ability to generate sufficient cash depends on a number of factors, many of which are beyond our control.

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Our ability to make payments on or repay our debt and to fund our working capital requirements depends on the availability of financial resources. Our ability to generate cash will depend on our future operating performance, as well as on general economic, financial, competitive, market and other factors, many of which are beyond our control. In particular, our ability to generate adequate cash will depend at least in part on:

  a price increase in the carbon and graphite electrode industry, as well as our ability to maintain and grow our sales revenues in most of our business segments;
 
  •      our ability to contain costs and implement further cost savings through our restructuring program and cost saving initiatives; and
 
  •     our ability to realize earnings from new technologies and products.

In fiscal years 2002 and 2003, our profit (loss) from operations, even before inclusion of costs relating to antitrust proceedings and restructuring, was not sufficient to cover our net interest expense. For the fiscal year 2004, our net financing cost amounted to 60.5 million. In 2004, our profit from operations (continuing operations) was with 65.5 million sufficient to cover our cash net financing costs.

We cannot assure you that our business will generate sufficient cash flows from operations or that future borrowings will be available to us in an amount sufficient to enable us to pay our debts as they become due or to fund our other liquidity requirements. If our future cash flows from operations and other capital resources are insufficient to pay our obligations as they mature or to fund our liquidity needs, we may be forced to:

  reduce or delay our business activities and capital expenditures;
 
  sell assets;
 
  obtain additional debt or equity capital;
 
  restructure or refinance all or a portion of our debt; or
 
  forego business opportunities such as acquisitions or joint ventures.

We are party to several antitrust proceedings.

In the past several years, we have faced various court actions and investigations in connection with antitrust violations and have been assessed substantial fines by the U.S. Department of Justice and the European Commission for price fixing in the graphite electrode and specialty graphite industries. As a result of a price-fixing investigation by the U.S. Department of Justice, we are required to pay an antitrust fine of US$135 million, of which US$75.25 million has been paid as of December 31, 2004. The remainder of this fine is to be paid in installments until 2007. It has been recorded on our balance sheet as a liability discounted to its present value at an interest rate between 4% and 6%. In addition, we have paid another antitrust fine of US$10 million that was imposed on our CEO. In mid-2000, we agreed with the Canadian antitrust authorities to pay a fine of C$12.5 million for violating antitrust laws, of which C$3.0 million are still payable in one installment of C$3.0 million in 2005. In July 2001, the European Commission fined us 80.2 million for violating antitrust laws with respect to graphite electrodes. In addition, in December 2002, the European Commission fined us 27.75 million for violating antitrust laws with respect to specialty graphites. We have appealed both fines before the European Court of First Instance. Payment of the fine with respect to graphite electrodes has been suspended, against provision of a security, pending a final court decision. In April, the European Court of First Instance reduced the fine imposed in 2001 in the graphite electrode proceedings from 80.2 million to 69.1 million. Since the judgment of the European Court of First Instance failed to address either the censured gross procedural errors or the internationally recognized prohibition against double jeopardy, we have filed an appeal to the European Court of Justice.

In addition, the European Commission fined us 23.6 million on December 3, 2003 for violating antitrust laws with respect to the ‘‘Electrical and Mechanical Carbon and Graphite Products’’ area of our operations. This fine brought the total fines by the European Commission against SGL to 131.6 million. We have appealed the amount of the December 3, 2003 fine before the European

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Court of First Instance. In 2004, the European fine (23.9 million including interest) was deposited on an interest-bearing escrow account of the antitrust authorities until the closure of the legal proceedings.

As part of our accounting as of December 31, 2003, we have reviewed our provisions for antitrust fines and have increased them by 19.5 million in 2003. Our Board of Management believes that the total of these provisions, which are significantly below the 120.5 million aggregate amount of fines, are sufficient as of December 31, 2004 to cover any potential liabilities that could arise from these antitrust proceedings.

In addition, we have spent approximately 140 million in the past several years in defending against and settling a number of civil suits seeking damages as a result of violations of antitrust laws. The majority of these civil suits have been concluded by now; however, there are a number of legal proceedings remaining. See ‘‘Business Description – Legal proceedings – Civil suits resulting from antitrust violations.’’ We cannot predict the ultimate outcome of these proceedings.

Due to the existing competitive situation in many of the markets in which we are active, and due to our prior history of antitrust violations, we cannot assure you that we or certain of our subsidiaries or affiliates will not become subject to antitrust investigations by the relevant authorities and will not be required to pay additional fines or be subject to claims for damages from third parties for violations of applicable antitrust laws. An unfavorable result in any of these future or current proceedings could have a material adverse effect on our financial condition and results of operations.

In addition we will be in default under the credit agreements if any new antitrust proceedings are instituted against any member of the SGL Group or if we receive any antitrust fines in an aggregate amount exceeding 2.5 million. However, before accelerating the Facilities the parties will enter into negotiations in good faith for a period not exceeding thirty days.

We are exposed to currency exchange rate risks and interest rate risks.

We generate a significant portion of our sales revenue in U.S. dollars. As a result, a decline in the value of the U.S. dollar compared to the euro will have a negative impact on our sales revenue, which are recorded in euro. Compared to the sales revenue that we generate in U.S. dollars, we incur a relatively small portion of our cost of sales in U.S. dollars. As a result, a U.S. dollar that is weak compared to the euro will have a negative impact on our gross profit and therefore on our result. A medium- to long-term decline in the value of the U.S. dollar relative to the euro and other currencies could also weaken our competitive position as compared to competitors who incur a relatively larger portion of their cost of sales in U.S. dollars. Over the past three years, the value of the U.S. dollar compared to the euro has declined, and many market participants expect this trend to continue.

In the past, we have engaged in hedging transactions only to a limited extent. We have, however, set up hedging arrangements for the majority of our U.S. Dollar transaction exposure in Europe for 2005 to protect ourselves against the risk of fluctuations in currency exchange rates. However, these hedging arrangements can protect us only to a limited extent against a long-term decline of the U.S. dollar. See ‘‘Management Discussion and Analysis of Financial Condition and Results of Operations – Overview – Currency exchange exposure’’. As a result of our issuance of senior notes the average interest rate of our total debt will increase. Under both our current and our new syndicated credit facility the interest rate consists of a combination of a variable basic interest rate and a margin that can be adjusted according to our ability to meet certain fixed financial ratios. Any change in the basic interest rate or in the margin will either increase or decrease our interest rate burden.

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 25 major manufacturing facilities in 9 countries on two continents and sell our products in approximately 100 countries. In 2004, sales revenue of our products outside Germany accounted for approximately 86% 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.

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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.

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.

We have made substantial investments in new business areas in the past several years in order to diversify our product portfolio. The success of this strategy depends on the successful development and commercialization of new products, in particular in the SGL Technologies business area.

Our strategy of product portfolio diversification, which we have pursued through our investments into new business areas, requires the successful development of new products, as well as the setting up of a new distribution and marketing network in order for us to be able to tap into new, non-established markets. We are entering into new business areas – in particular with our high technology segment SGL Technologies – in which we have little experience and which are subject to rapid product developments and changes.

In the past years, we have made substantial investments into our business area SGL Technologies. For the past three years, the sales revenue for this business area have fluctuated, and we have incurred a net operating loss in each reporting period. Any growth in sales and any increase in profitability in this business area will depend largely on whether and how fast our newly developed products will be able to prevail in the market.

We may encounter supply shortages and increases in the cost of raw materials and energy.

     The largest portion of our cost of sales, next to personnel costs, is accounted for by 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 material and energy from a variety of sources and generally 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. The market for petroleum coke, in particular needle coke, is marked by a small number of large suppliers with substantial market influence and the possibility of further consolidations. 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. The new German environmental tax (‘‘Ökosteuer) has further increased the cost of energy in Germany. 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 substantially harm our financial condition and results of operations.

We may not realize expected benefits from our continuing restructuring and cost savings programs.

From 2002 on we reorganized our operating structure and continued our restructuring program, which was announced in December 2001, to manage and integrate all our operations within the three global business units. In the context of this restructuring program and the subsequent initiatives, we have expensed substantial restructuring funds to reduce our work force, idled or closed selected production sites, rationalized and specialized our remaining sites, and undertaken other cost reduction initiatives. In addition, we continually strive to reduce costs and increase efficiencies (through our SGL Excellence initiative, our SGL One information systems and other initiatives). These efforts

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could lead to substantial additional restructuring costs in the future. We cannot assure you, however, that we will be able to realize the expected benefits from our restructuring and cost savings programs.

Environmental matters could result in significant increases in costs.

Our operations are subject to various 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 (see ‘‘Business Description – Government regulation’’). Environmental and health laws and regulations could lead to the possibility of substantial fines, revocation of applicable permits or orders for environmental cleanup. Any violations of these laws or regulations, or any adjustments to comply with changing laws or regulations, could result in significant expenditures. Environmental laws in particular have continuously been tightened in the past several years. We also expect a potential tightening of environmental laws in those countries that are joined the European Union in 2004 in which we have facilities. As a result, we cannot assure you, that a known, previously unknown or future contamination event, or any new, more stringent regulations or their enforcement by the relevant authorities will not increase our environmental costs in the future. A significant increase in environmental liabilities or costs could materially harm our 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 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 material harm.

Disruptions of the business operations, strikes or similar measures at our customers’ or suppliers’ sites could also have a material adverse effect on our financial condition and results of operations.

The fluctuations of our business over the course of the year could adversely affect our reported results of operations.

Our sales revenue fluctuates from quarter to quarter due to such factors as changes in customer purchasing patterns, shifts in inventory and production plans, plant shutdowns, fluctuations in energy costs, strikes and work stoppages, and general economic fluctuations in the steel industry. Generally, these factors tend to affect our results of operations adversely. Following 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. As a result, our reported results for each quarter may not be indicative of our results for the entire year.

We may not be able to protect the intellectual property critical for the development of SGL Technologies’ business.

We own over 300 patents registered in the United States, Europe and in other major world markets, and have over 350 patent applications pending for new technologies and processes. In addition, we have obtained licenses to various domestic and foreign patents.

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, know-how, patents, trademarks or other proprietary information. However, in the future, competitors may obtain patents for technologies whose use by our competitors could adversely affect our business and financial condition.

The new product lines that we are developing in our SGL Technologies business do 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

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we assure you that our confidentiality covenants and agreements will adequately protect our trade secrets, know-how 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. If we fail to obtain the necessary intellectual property rights or 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.

Our pension and retirement obligations could significantly exceed the provisions we have made for these obligations.

We have obligations toward our employees with regard to benefits for the time after the employment relationship has terminated, such as retirement payments, life insurance, medical insurance etc. These benefit plans consist of both defined contribution and defined benefit plans and vary from country to country in which we maintain such plans.

Under the defined contribution plans, the Company makes a fixed payment to a 3rd party service provider who administers the payment of the benefits to the retired employees. After paying these contributions, the Company generally has no further obligations to pay benefits. In the event of a default of the 3rd party administrator, the Company is subject to a secondary liability due to the employment relationship. Defined contributions to such plans are recorded as expense in the financial statement in the year in which the payments were made.

Under our defined benefit pension plans the benefit payments are calculated according to the projected unit credit method under IAS 19. The pension obligations are calculated by a 3rd party independent actuary using assumptions such as interest rates, compensation increases and expected return on plan assets. The basis for these valuations is the legal, economic and tax situation in each country. Actual results may vary from our assumptions and may have an impact on our pension expense and cash flow in future years.

Changes in actuarial assumptions and/or negative developments in the value of the pension funds can have negative impacts on our consolidated financial statements and statement of operations. IAS 19 permits fluctuations between the value of expected pension obligations and the value of the pension funds to be shown only in the notes to the financial statements rather than in the balance sheet. If the cumulative difference in expectations exceeds either plus or minus 10% of the calculated defined benefit pension obligation (‘‘10% corridor), the excess amount over 10% must be amortized over the average remaining service time (10 to 15 years) of employees participating in the plan. The Company estimates that with regards to the plans effected in the United States, this amount totals approximately €25 million and will result in an annual expense of approximately €2 million. In addition any shortfall between pension obligation in Germany and the amounts provided on the balance sheet are also subject to the 10% corridor. The Company estimates that such shortfall in Germany totals approximately €11 million and will result in an annual expense of approximately €1 million.

In 2004, 2003 and 2002 the difference between expected and actual return on pension fund assets was 1.7 million, €0.0 million and €(10.2) million, respectively. In 2004 we estimated an expected return on plan assets of €3.4 million, based on an average return of 8.5% . The actual return amounted to €5,1 million. If the return on pension fund assets falls short of expectations, the Company will need to adjust the actuarial assumptions and record the resulting impact in the statement of operations. In addition, based upon revised calculations, the Company may be required to make additional cash contributions to its funded defined benefit plans and/or record a non-cash adjustment to the financial statements.

An obligation to make significantly higher supplementary payments and to record amortization in subsequent years as an expense could have a material adverse effect on our financial condition and results of operations.

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Existing insurance coverage, in particular credit insurance, may prove 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 SGL Group is exposed. For certain risks, adequate insurance coverage may not be available on the market or at reasonable conditions. Our sales revenues are exposed to credit default risks. For this reason and insofar as possible, we cover this risk through insurance to a certain extent (which is limited, for example, in the United States). We use a variety of instruments for this purpose, such as pre-payment, payment guarantees, confirmed letters of credit and credit insurance. We cannot assure you that payment shortfalls from customers (particularly in the steel industry) will not occur in the future.

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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 and Development of the SGL Group
     Our corporate origins lie in the second half of the 19th century. Two of the earliest industrial manufacturers of carbon products, Gebruüder Siemens & Co. (founded 1872) and the Plania Werke (founded 1896) merged in 1928 into the Siemens Plania Werke AG für 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 Carbon GmbH became SGL CARBON Aktiengesellschaft through a change in corporate form (Umwandlung). In April 1995, SGL’s initial public offering took place 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 Receipts (ADR’s) listed on the New York Stock Exchange under the symbol ‘‘SGG’’.

     We have 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 2001:

  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., 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.
     
  * All shares in SGL PanTrac Gesellschaft fuür elektrische Kontakte mbH, Berlin (PanTrac), were sold to E-CARBON S.A., Brussels (Belgium), a third-party enterprise in January 2003. PanTrac was fully consolidated for fiscal year 2002.
     
  The Electrical Contacts (EC) business of SGL Risomesa S.p.A., Milan (Italy), was sold to the Schunk Group in March 2003. The business activities retained by SGL had been previously transferred to SGL CARBON Specialties S.p.A., Milan (Italy) and continue to be consolidated.
     
  SGL ANGRAPH Sp. z o.o, Nowy Sacz (Poland), has been consolidated since the beginning of the fiscal year 2003. Four small Acotec companies are no longer consolidated as they are insignificant in overall for the presentation of net assets, financial position and results of operations of the SGL Carbon Group.
     
  The remaining interests in ZEW Zaklady Elektrod Weglowych S.A., Racibórz (Poland), were acquired in 2003 and the company was then renamed SGL CARBON POLSKA S.A. At the end of fiscal year 2003, SGL CARBON S.A., Nowy Sacz (Poland), was merged into SGL CARBON POLSKA S.A., Racibórz (Poland).
     
     
     

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  As of January 6, 2005 we concluded the sale of the Surface Protection and Plastics Process Technology businesses ‘‘Surface Protection business, a major part of our business area Corrosion Protection (CP). Certain Process Technology activities, which were also part of CP and which were not part of the sale, are now reported in the business area Graphite Specialties (GS).

Our strategy
      Our principal objective is to expand on our competitive strengths to further improve profits and cash flow. To achieve this objective, we have implemented the following strategy:

     Increase profitability
     We intend to continue the implementation of measures to reduce fixed and variable costs across all of our business areas in order to increase our operating margins and cash flows. To this end, we introduced restructuring programs for our Carbon and Graphite and Graphite Specialties business areas in late 2001, which are to be implemented over a period of six and three years, respectively. The focus of this restructuring is on:

  consolidation and specialization of our production plants;
     
  optimization of our production and administration processes;
     
  streamlining of our organizational structure; and
     
  •    headcount reduction.

     We are also taking analogous measures in order to achieve cost reductions in our other business areas.

     Increase efficiency
     We launched the SGL Excellence initiative in early 2002 with the aim of improving our core operational and commercial processes. The key objectives of this initiative are the streamlining of production processes, the improvement and alignment of our sales and logistics processes with our customers’ requirements, as well as the further training and motivation of our workforce. Through this initiative, we seek to achieve continuous and sustained improvements in competitiveness and customer satisfaction.

     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.

     In the beginning of 2004 we concluded a comprehensive refinancing package consisting of a capital increase with gross proceeds of 266 million, senior subordinated notes amounting to 270 million and new syndicated loans and guarantees amounting to 330 million. See Item 10, ‘‘Additional Information – Material Contracts’’ for a description of the refinancing. These measures have substantially improved our equity, the net financial debt and the maturity profile of our financial liabilities. Nevertheless, we further intend to continue to reduce our working capital and net financial debt levels over the next years.

     Optimize our product portfolio:
     To improve our portfolio, we are focusing on further consolidating our strong market position in our established businesses, reducing our sensitivity to general economic conditions and improving our cash flow. As part of this strategy, we aim to strengthen both our technology position and our global presence by entering into joint ventures and strategic alliances. We will also continue to seek to streamline our operations through divestitures of non-core businesses. In this respect we sold our Electrical Contacts business in the course of 2003, and we sold in January 2005 the Surface Protection segment of our Corrosion Protection business. Our SGL Technologies business area will focus primarily on products and markets in which we see significant potential for profitable growth.

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Business Overview
      In 2004, we had sales in more than 100 countries; sales outside Germany accounted for approximately 86% of our sales revenue. We currently operate 25 major manufacturing facilities in 9 countries. Our customers are located throughout the industrialized world. Our sales revenue in 2004 amounted to 926.2 million. We organize the business operations of the group into three business areas that reflect the products that we produce and market: Carbon and Graphite, Graphite Specialties and SGL Technologies.

     Carbon and Graphite (‘‘CG’’) manufactures and markets graphite electrodes and certain carbon and graphite products (carbon electrodes, cathodes and furnace linings). In 2004, sales revenue for the Carbon and Graphite business area amounted to 555.5 million and EBITDA amounted to 123.0 million.

     Graphite Specialties (‘‘GS’’) manufactures and markets graphite 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. In 2004, sales revenue for the Graphite Specialties business area (including Process Technology) amounted to 235.8 million and EBITDA amounted to 30.0 million.

     SGL Technologies (‘‘SGLT’’) 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 such a broad product portfolio. In 2004, sales revenue for the SGL Technologies business area amounted to133.2 million and EBITDA amounted to 3.1 million.

Industry and Market Overview
     We are active in a broad range of markets for carbon-based industrial products. Many of the industries served by our established Carbon and Graphite and Graphite Specialties 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 with specific industry developments. Our SGL Technologies business area, by contrast, focuses on emerging technologies that we believe have significant potential for growth.

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 cathode blocks and carbon electrodes play an important role in the production of aluminum and other nonferrous metals. We also produce carbon-based furnace linings that help furnaces withstand the extreme temperatures needed in metals production. According to our estimates, the worldwide market for products made by our Carbon and Graphite business area was approximately 3 billion in 2004.

     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. We believe that it is unlikely that there will be significant new entrants into the market for 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.’’ EAF steelmaking consumes graphite electrodes, for which we believe 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

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experiences significant fluctuations based on numerous factors. In general, the EAF steel industry, however, has been less cyclical than the blast furnace/basic oxygen furnace production (‘‘BF/BOF’’ production) 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. During 2002, the percentage of EAF steel production to total steel production declined slightly, despite a significant increase in volume, 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 ‘‘Operating and Financial Review and Prospects.’’

Beginning in the 1970s, technological improvements reduced ‘‘specific consumption,’’ or the quantity 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 adversely 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, one graphite electrode producer in Germany became insolvent and one producer in the United States filed for protection under Chapter 11 of the U.S. Bankruptcy Code and eventually went into liquidation.

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 2.2 kilograms per ton in 2004. 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.

According to our estimates, our share of the worldwide market for graphite electrodes was approximately 21% in 2004. 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 BF/BOF 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. 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 and technological advances.

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 341 million tons in 2004 (approximately 32% of total steel production), according to the estimates of market studies. The following table shows worldwide crude and EAF steel production in 1972, in 1980 and from 1990 through 2004.

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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    903,800   304,600   34
2003    968,300   315,000   33
2004    1,054,000   341,000   32

* Source: International Iron and Steel Institute, 2004 SGL estimate.
(1) ‘‘Crude’’ steel production 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 in 2002. 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 2004.

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. We sell cathodes to all major aluminum smelters worldwide. According to our estimates, our share of the worldwide market for cathodes in 2004 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, Asia and North America. Furnace linings typically account for a modest portion of our business (for example, approximately 3% of our sales revenue in 2004).

Graphite Specialties

The worldwide market for graphite specialties was approximately 1,7 billion in 2004, according to our estimates (excluding China and the Commonwealth of Independent States (‘‘CIS’’), for which no data are available). We estimate that, in 2004, our share of this market was approximately 14%. Many of our customer industries, including the chemicals industry and most areas of the electronics

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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 have a leading position in graphite products for the semiconductor industry in both Europe and North America. Our revenues of graphite products used in such electronic applications are estimated to have a 20% share of the worldwide market (excluding China and CIS). 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. Our revenues of graphite products used in such industrial applications are estimated to have a 15% share of the worldwide market (excluding China and CIS). The market growth rate for mechanical carbons during the last ten years has also been in the range of his general industrial growth rate. Our revenues of graphite products used in high temperature, automotive and mechanical applications are estimated to have a 10% share of the worldwide market (excluding China and CIS). Process Technology experienced in 2004 a general decline in demand. The decline is mainly caused by an accelerated transfer of base production processes to low wage countries and a cyclical downturn leading to reduced investments in new projects as well as low maintenance spending. We estimate the worldwide market for Process Technology to be approximately 0.1 billion, of which we have a share of approximately 39%.

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 products. We estimate the worldwide market for carbon fibers to be approximately 1 billion. 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 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 component industry in general, is dependent on the achievement of significant reductions in fuel cell production and distribution costs.

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 noncorrosive 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° 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

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    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’s products. 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. 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.
 
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
 
  feederstock for electrical carbons; as well as
 
  process technology products, including heat exchanger, columns, pumps and synthesis units

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. Because we no longer regard machined electrical carbon products as part of our core businesses, we have divested substantially all of these operations, and concentrate on feederstock for electrical carbons.

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, and able to conduct heat and electricity, 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 as well as for specialty flame-retardant insulation applications. Carbonized fibers are used primarily in chopped form as reinforcement in thermoplastic housings, such as mobile telephone and printer and laptop computer housings.

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Carbon composites includes carbon fiber reinforced plastics, or CFRP. CFRP are used in medical equipment, the textile and wire making industries. The composite materials and components we produce range from relatively standard carbon or fiberglass reinforced plastics, used for x-ray tables and secondary aircraft structures, to high performance, high temperature composites used for rocket motor nozzles.

Expanded graphite consists primarily of foils that are based on natural graphite and can withstand extremely high temperatures and aggressive corrosion. These foils are used in sealing applications as an alternative to asbestos, as well as in sealing technology in the automobile construction industry and the chemical industry. In addition, milled exfoliated products based on natural graphite can be used for the growing market of fillers, for example in high-performance batteries, as well as in a variety of other areas of application in which electrical and thermal conductivity is important.

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 from other potential customers in the car industry.

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.

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 most important petroleum coke suppliers and purchase from most vendors on an ongoing basis, with annual price negotiations, to satisfy our needs in our three business segments. 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 two major petroleum companies. With one of these suppliers we have a long-term contract for the delivery of petroleum coke. 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 supraregional linked supply systems or from local suppliers. 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 both volatility and stability, while energy prices are rising again. During this time,

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we have mitigated the effect of price increases by improving operating efficiency and by implementing cost-cutting measures.

Marketing Channels and Customer Service

We sell our products in our local markets primarily through our direct Sales force, which operates from our 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 and SGL Technologies business area, we make the majority of our sales through our specialized sales organizations specifically dedicated to each such business area. We also use exclusive sales agents in certain locations. From time to time, the Carbon and Graphite sales organization also assists in sales of Graphite Specialties 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.

For many years, we have been strongly committed to supporting our sales activity by providing a high level of customer service. As 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 also 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 our products. Since 1992 we have established long-term cooperative arrangements with several key customers to focus on technical improvements and product development.

We generally sell our products on the basis of annual sales agreements. In these agreements, we usually fix a negotiated price with the customer for one year. During that year, the customers then place their orders in accordance with the terms of the agreement. Our customers in the Carbon and Graphite business area generally place orders for electrodes three to six months prior to the specified delivery date, as well as pursuant to 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 Graphite Specialties and SGL Technologies Business, are generally manufactured to order. Finished products are generally stored at our manufacturing facilities. We ship products to customers primarily overland and by sea, using ‘‘just in time’’ techniques where practicable.

Our three business segments are serving – amongst others- the following key customers:

CG: Alcoa, Arcelor, ICDAS, Imidro, Lion Group, Mittal Steel, Nucor, QIT, Riva

GS: BASF, Bayer, British Nuclear Fuels, Degussa, Helwig Carbon, Hitachi, MEMC, Motorola, Robert Bosch, Wacker Siltronic

SGL T: Alliant Systems (ATK), Airbus, Boeing, Cytec Fiberite, Dana Corp., Porsche

Dependence on Patents or Licenses, Industrial, Commercial or Financial Contracts

We own over 300 patents registered in the United States, Europe and in other major world markets, and have over 350 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,

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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 weight between 20 pounds and 4,800 pounds (2.2 metric tons). Carbon electrodes, cathodes and 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.

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° 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 3,000 ° 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 a process similar to that used for graphite electrodes, 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. Our high temperature technology expertise is essential for the manufacture of graphite fibers and composites.

We use statistical process controls in all manufacturing processes and have implemented a 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 less than 1% of our sales revenue. In the SGL Technologies business area, we expect a higher rate of defects for some products due to the greater number of newly developed products.

We conduct major maintenance of our facilities on an ongoing basis. We currently have capacity to manufacture approximately 280,000 metric tons of carbon and graphite products per year (excluding graphite specialties). This capacity includes approximately 215,000 metric tons of graphite electrodes. In 2004, we sold approximately 209,000 metric tons of graphite electrodes, compared with

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202,000 metric tons in 2003. We also sold approximately 21,000 metric tons of carbon electrodes in 2004 (2003: 20,000 metric tons).

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, based on 2004 sales revenue.

Carbon and Graphite

For graphite electrodes, our principal product, there are approximately 10 to 15 major manufacturers worldwide. SGL and GrafTech International Ltd. (formerly UCAR International Inc.) are the largest of these manufacturers on the basis of metric tons produced. Other producers -next to SGL- include two producers in the United States, four Japanese manufacturers and several manufacturers in India and China. We estimate that our share of the global market for graphite electrodes was approximately 21% in 2004.

We believe that we are the largest manufacturer of carbon electrodes worldwide. According to our estimates, we supplied approximately 31% of the worldwide market for carbon electrodes in 2004.

Approximately ten manufacturers compete in the global market for cathodes for the aluminum industry. We estimate that we supplied approximately 17% of this market in 2004. Other major manufacturers include GrafTech, Erft Carbon, Nippon Carbon, SEC Corporation and Vesuvius Group.

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 SGL, Morgan Crucible, Le Carbone Lorraine, Schunk Gruppe, GrafTech and Toyo Tanso, account for 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. We estimate that the worldwide market for Process Technology is approximately €0.1 billion, of which we have an approximately 39% 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).

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

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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, 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

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account our environmental accruals, our current environmental liabilities will not have a material adverse effect on our financial condition or results of operations.

     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 Board of Management, however, provides overall strategic direction and monitors the operations of the Group. Individual members of the Board of Management have a tutorship function for specific business units and functional as well as regional responsibilities. See Item 6, ‘‘Directors, Senior Management and Employees — Directors and Senior Management — Board of Management’’.

     Our operational business is managed by business units. At the beginning of 2002, we combined the former regional business units of Carbon and Graphite and Graphite Specialties into global business units to improve efficiency and respond to the increasing globalization of our key customers. With this change and the divestiture of the surface protection business, all three of our business units – Carbon and Graphite, Graphite Specialties and SGL Technologies – are now organized on a global basis. Our organizational structure is thus identical with our segment reporting.

     Our production sites and Group companies are managed by the relevant business unit (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 Board of Management and provide services to all businesses and to individual legal entities within the Group.

Principal subsidiaries

     The following table lists the principal direct and indirect subsidiaries of the SGL Group at December 31, 2004:

            Ownership
Company Name   Location   Business Area   Interest %

 
 
 
SGL Carbon, LLC   Charlotte, NC   CG, GS, SGL T   100.0
HITCO Carbon Composites, Inc   Gardena, CA   SGL T   100.0
SGL Technic Inc.   Valencia, CA   SGL T   100.0
SGL Carbon GmbH   Meitingen, Germany   CG, GS   100.0
SGL Carbon Technic SAS   Grenoble, France   GS   100.0
SGL Canada Inc   Lachute, Canada   CG   100.0
SGL Carbon SpA   Milan, Italy   CG, GS   99.7
SGL Carbon SA   La Coruña, Spain   CG   99.9
SGL Carbon GmbH & Co   Steeg, Austria   CG   100.0
SGL Carbon Polska S.A.   Ratibor, Poland   CG, GS   100.0
SGL Carbon SAS   Chedde, France   GS   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, 2004, we operated 25 major manufacturing facilities worldwide of which are all located in Europe and North America. As part of the restructuring program announced in

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December 2001, we closed or idled three plants during 2002. Effective January 2003, we sold our Berlin, Germany manufacturing facility. Effective January 2005, we sold the surface protection and plastic application business with manufacturing facilities in Germany, USA, China, France and 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 graphite 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 our process technology products in Germany, with additional production facilities in France and the United States. 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 2004, we sold approximately 209,000 metric tons of graphite electrodes compared with 202,000 metric tons in 2003. We also sold 21,000 metric tons of carbon electrodes in 2004, a small increase from the 20,000 metric tons we sold in 2003.

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     As of December 31, 2004 we operated the following major facilities

  Primary Use    
   

 
   
                    Owned/
Location   Manufacturing   Sales   Administration   Business Area   Leased

 
 
 
 
 
Europe                    
Wiesbaden, Germany1            x   Corporate   Leased
Meitingen, Germany   x   x   x   CG, GS, SGL T   Owned
Griesheim, Germany3    x           CG   Owned
Bonn, Germany   x   x   x   GS   Owned
Steeg, Austria   x       x   CG   Owned
Milan, Italy2        x   x   CG,GS   Leased
Verdello, Italy   x   x   x   GS   Leased
Narni, Italy   x           CG   Owned
Ascoli Piceno, Italy   x           CG   Owned
Chedde, France   x   x   x   GS   Owned
Grenoble, France   x   x   x   GS   Owned
La Coruna, Spain   x   x   x   CG   Owned
Ratibor, Poland   x   x       CG   Owned
Nowy Sacz, Poland3    x   x   x   CG,GS   Owned
Inverness, Scotland   x       x   SGL T   Owned
Alcester, England       x       GS   Leased
North America                    
Charlotte, North                    
     Carolina4        x   x   CG, GS,SGL T   Owned
Morganton, North                    
     Carolina   x           ACG,GS   Owned
Hickman, Kentucky   x           CG   Owned
Ozark, Arkansas   x           CG   Owned
Valencia, California   x   x   x   SGL T   Owned
Lachute, Quebec,                    
     Canada   x   x   x   CG   Owned
Kitchener, Ontario,                    
     Canada   x   x   x   GS   Leased
St. Marys, Pennsylvania .   x   x   x   GS   Owned
Strongsville, Ohio   x   x   x   GS   Owned
Arkadelphia, Arkansas   x           SGL T   Leased
Sinking Spring,                    
     Pennsylvania   x   x       GS   Leased
Gardena, California   x   x   x   SGL T   Owned
Cheshire, Connecticut   x           GS   Leased
 
 
 
 
 

1) Corporate Headquarters
2) Head Office, Italy
3) Hereditary building right (Erbbaurecht) under German law, comparable to a long-term ground lease
4) Head Office, North America

     As of December 31, 2004 we had material encumbrances on our property under the syndicated loans. These agreements entailed the pledging of equity interests of most Group companies. The rights of use of intangible assets have been assigned for all German members of the Group, for two U.S. subsidiaries, and for SGL Carbon SpA in Italy. Real estate liens were taken out against SGL Carbon AG and two U.S. companies in the amount of 320.0 million and U.S.$163.4 million. Inventories and movable plant and equipment of 245.7 million were assigned as collateral. Trade receivables and receivables due from non-consolidated subsidiaries in the total amount of 139.4 million were assigned as collateral. In addition, receivables from consolidated subsidiaries of

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€547.5 million and bank balances totaling 185.0 million were pledged as collateral by individual companies.

For more details to the encumbered 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.

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ITEM 5.

OPERATING AND FINANCIAL REVIEW AND PROSPECTS

You should read this operating and financial review together with the description of our business, the general information about SGL and the consolidated financial statements, including the notes thereto contained elsewhere in this annual report. We prepared our consolidated financial information in accordance with IFRS or, where indicated, in accordance with U.S. GAAP. IFRS differs in certain significant respects from U.S. GAAP. See ‘‘–U.S. GAAP reconciliation’’ and ‘‘–Significant differences between IFRS and U.S. GAAP’’ as well as notes 35 and 36 to our consolidated financial statements contained elsewhere in this annual report. 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 forwardlooking statements. See ‘‘Forward-looking statements’’ and ‘‘Risk Factors.’’

Overview

We are one of the largest producers worldwide of carbon and graphite products, used primarily in electric arc furnace 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 worldwide. Our customers are located in industrialized countries throughout the world. In 2004, we sold products in approximately 100 countries, with sales outside Germany accounting for approximately 86% of our sales revenue. We operate major manufacturing facilities in 9 countries.

Business realignment

Since the beginning of 2005, we have managed our operations in three business areas that reflect the products that we produce and market – Carbon and Graphite, Graphite Specialties, and SGL Technologies. Prior to 2005, we operated a fourth business area, Corrosion Protection. We discontinued the Corrosion Protection business area in January 2005 due to the sale of our Surface Protection and Plastic Process Technologies businesses, which represented more than 70% of the sales of this business area. The remaining process technology business was reclassified from Corrosion Protection to Graphite Specialties. The segment reporting for all previous years in the following discussion has been adjusted to reflect this reorganization. The divested surface protection business is shown separately as a discontinued operation for the years discussed in this report. All other descriptions and discussions refer to the continuing operations.

Cost reduction program SGL Excellence

In 2001, we initiated a continuing cost reduction and restructuring program that includes cost containment measures and other steps to improve our financial results and cash flows from operations. As part of this restructuring program, we reduced our total number of employees by 266, from 5,674 at the end of 2002 to 5,408 at the end of 2003 and to 5,109 at the end of 2004. In addition, we plan to achieve further cost savings through our SGL Excellence initiative, through which SGL managers are trained in Six Sigma methods to identify further cost reduction measures on an ongoing basis. In the third year of SGL Excellence, we continued to make progress with our initiative. With a large number of cost reduction, productivity-enhancing projects, our activity focused on the area of ‘Operational Excellence’. However, additional activity also addressed administrative processes – for example, the SGL-Ten project, a worldwide cost reduction program that focuses on IT, accounting, and personnel administration, which was approved in October 2004. By continuously enhancing the efficiency of administrative functions, beginning in 2006 we intend to achieve annual savings of approximately 11 million. The necessary expenses to achieve this will total approximately 5 – 6 million in 2005.

Total cost savings attributable to these and other initiatives amounted to 36 million in 2004 and 24 million in 2003. We are targeting further cost reductions in the future . Our planned measures include:

  concentrating operations in lower-cost facilities;
 
  reduction of maintenance costs;
 
  outsourcing and/or streamlining of non-core functions;
 
  further headcount reductions; and
 

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  continuous improvements in raw materials and energy utilization.

Our ability to achieve cost savings will depend on a number of factors. These factors include our ability to accurately estimate the magnitude of the one-time costs of our cost-reduction measures and our ability to achieve targeted operating efficiencies with a leaner production base. See ‘‘Risk Factors – Risks relating to our business – We may not realize expected benefits from our continuing restructuring and cost savings programs.’’

Currency exchange exposure

We generate revenue primarily in U.S. dollars and in euro. The remainder of our revenue is denominated principally in other European currencies (primarily British Pounds and Polish Zloty). Purchases of our principal raw material, petroleum coke, which on average comprise approximately 25% of the total production costs of the Carbon and Graphite business area, are denominated in U.S. dollars. Other principal production costs, such as 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 operating and 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 of the dollar began to decline relative to the euro. This decline continues and reached a low-point at the end of 2004. This will have several effects on our results, some of which could offset others. A weak dollar tends to have a negative effect on revenue and results. See ‘‘Risk Factors – Risks relating to our business – We are exposed to currency exchange rate risks and interest rate risks.’’ In addition, we have major assets, debts and other liabilities in the United States or denominated in U.S. dollars, including antitrust liabilities and other dollar-denominated liabilities. Fluctuations in the euro-U.S. dollar exchange rate can cause currency translation effects in our consolidated balance sheet. A continued increase in the value of the euro relative to the dollar would reduce our dollar denominated liabilities. 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, and a weaker dollar to decrease, our non-current and current assets as well as equity and liabilities. In the 2003 fiscal year, the translation effect of all exchange rate fluctuations reduced our equity by 33.1 million and by a further 2.8 million during 2004. The ultimate impact of currency exchange rate fluctuations on our net income will depend on the circumstances at any given time.

Fluctuations over the course of the year

Our sales revenue for a number of our products, in particular graphite electrodes, fluctuates from quarter to quarter due to such factors as customer inventory levels, scheduled customer plant shutdowns, changes in customer production schedules in response to seasonal changes in energy costs, weather conditions, and 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 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 from project related businesses, such as for process technology and furnace linings, are normally lowest in the first quarter and highest in the fourth quarter.

Sales revenue

We generate revenue primarily through the manufacture and sale of carbon and graphite products to customers from several industries, including steelmaking, aluminum production, chemicals, mechanical and systems engineering, automotive 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 the sales revenue of the SGL Group and its year-on-year change on a consolidated basis as well as by business area and geographical region from

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2002 to 2004. After the divesture of the Surface Protection and Plastic Process Technologies businesses we reclassified the remaining Process Technology business into the Graphite Specialties business area and no longer present a Corrosion Protection business area. All prior periods have been adjusted accordingly.

  Year ended December 31   









 
  2004    2003    2002   



 


 
 
  (€ in millions ) (% change)   (in millions ) (% change ) ( in millions )
SGL Group consolidated total 926.2   1.1   915.8   (4.3 )  957.3  
 
 
 
 
 
 
By business area:                    
     Carbon & Graphite  555.5   (0.4 )  558.0   1.3   550.7  
     Graphite Specialties *  235.8   2.5   230.1   (9.2 )  253.3  
     SGL Technologies 133.2   6.6   124.9   (17.0 )  150.4  
     Other 1.7   (39.3 )  2.8   (3.4 )  2.9  
 
 
 
 
 
 
By geographical region:                     
     Germany  133.1   (3.3 )  137.6   (3.3 )  142.3  
     Rest of Europe  320.2   4.3   306.9   (6.6 )  328.7  
     North America  250.0   (0.3 )  250.7   (7.9 )  272.3  
     Rest of World  222.9   1.0   220.6   3.1   214.0  

 
* After the sale of the surface protection business , we reclassified the Process Technology business from Corrosion Protection to Graphite Specialties and no longer present the Corrosion Protection business area. All Sales revenue numbers for the years presented have been adjusted to reflect this reclassification.

We recognize revenue at the time of transfer of risk, generally after delivery of the products or the rendering of the services and net of any discounts and rebates. We record most of our revenue 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 major sales under the ‘‘percentage of completion’’ method.

Our sales revenue from graphite electrodes is subject to fluctuations resulting from changing customer behavior, changes in inventory and production plans, plant closings, fluctuating energy costs, strikes, business interruptions and economic fluctuations in the steel industry. As a result of the long production cycles for graphite electrodes and changes in purchasing patterns and inventory policy in our customer industries, it may take a long time for changes in demand to have an effect on our business.

Over the last decade, we have significantly broadened the geographical range of our sales. Although a decline in North American steel production has reduced revenue in that market, consolidation of our Polish subsidiary SGL CARBON Polska S.A (formerly Zaklady Elektrod Weglowych S.A. (ZEW)) in 2001 increased European sales revenue. In 2001 we also increased our revenue in Asia, a trend that we expect will continue over the next five years with the ongoing industrialization of eastern and southeastern 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 single region or customer industry. In particular, the Graphite Specialties business area’s large number of target industries is more strongly diversified, thereby reducing to some degree exposure to economic slow-down in any one key industry.

Cost of sales

Major components of cost of sales include personnel expenses and the cost of raw materials and energy. Personnel expenses, including wages, salaries, social security and pension expenses, are the most significant items in our cost of sales. Raw materials costs in the Carbon and Graphite business area consist 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. We incur substantial energy costs, primarily for electricity, in connection with the production of our graphite

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electrode and other graphite and carbon products. Energy costs over the last several years have been highly volatile and trending upwards. 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 gross profit margin (calculated as sales revenue less cost of sales, divided by sales revenue).

Selling expenses

Selling expenses consist primarily of the expenses of our sales organization 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.

Research costs

We incur research costs in connection with the development of new materials and compounds for high technology applications, particularly for development of products in the SGL Technologies business area, such as carbon ceramics for the automotive and aviation industries and components for fuel cells. In recent years this expense increased as a percentage of sales revenue through 2001, but decreased in the 2002 and 2003 fiscal years and remained mainly stable in the 2004 fiscal year. We have invested considerable amounts in carbon ceramics technology and commenced production of carbon-ceramic brake discs at our plant in Meitingen, Germany. In 2004 2.9 million of such costs were capitalized as development expenses. Another principal area of research expense has been the development of a fuel cell components business, which is currently in the research phase. The further development of large-diameter graphite electrodes has contributed significantly to research and development costs in the Carbon and Graphite business area. Research and development costs in the Graphite Specialties business area have been concentrated on the development of highly refined graphite powder for lithium batteries, which are used in notebook computers, mobile telephones and other mobile communication devices.

General and administrative expenses

Our general and administrative expenses comprise personnel and non-personnel costs attributable to the SGL Group’s parent holding company and other administrative centers. These costs include accounting and legal expenses, the cost of professional advisors and pension expense related to personnel in general administration. We also incurred general and administrative expenses in connection with the development of a common management information system and external advisory expenses related to acquisitions, divestments and other corporate projects.

Other operating income (expense) (net)

The major components of other operating income (expense) include 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 additions to and releases of provisions. In addition, until 2003, other operating income (expense) included amortization of goodwill from acquisitions until 2003. Since that time, such goodwill is no longer amortized; see ‘‘–[General Accounting Principles]’’.

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 entered into a plea agreement with the U.S. Department of Justice (DOJ) to conclude the antitrust investigation initiated against us. As a result, we are obligated to pay a fine of US$135 million. As of December 31, 2004, we had paid a total of US$75.25 million. The originally agreed payment schedule for the fine has been extended in agreement with the DOJ, most recently in April 2002; the remaining amount of the fine is scheduled to be paid in installments through March 2007 and bears interest at the federal judgment interest rate from June 2004, which is currently approximately 2% per annum. See ‘‘–Liquidity and capital resources.’’ SGL assumed payment of the fine of US$10 million levied by the DOJ against Robert J. Koehler, the chairman of

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our Board of Management; this fine has been paid in full. We have been able to settle most of the civil cases alleging damages from the pricing agreements upon which the DOJ’s investigation was based. See ‘‘Business Description – Legal proceedings – Civil lawsuits resulting from antitrust violations.’’ We believe that we will also be able to reach economically reasonable settlements in the civil lawsuits still pending. On July 18, 2000 we entered into a plea agreement with the Canadian competition authorities to conclude the antitrust investigation initiated against us and agreed to pay a fine of C$12.5 million. We have paid C$9.5 million of this amount; the remaining C$3.0 million is scheduled to be paid in October 2005.

In mid-July 2001, the European Commission imposed a fine on SGL of 80.2 million for violation of competition laws 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 the relevant violations. We have filed an appeal against the European Commission’s decision before the European Court of First Instance. Payment of the fine has been suspended pending final judgment. In April, the European Court of First Instance reduced the fine imposed in 2001 in the graphite electrode proceedings from 80.2 million to 69.1 million. Since the judgment of the European Court of First Instance failed to address either the censured gross procedural errors or the internationally recognized prohibition against double jeopardy, we have filed an appeal to the European Court of Second Instance. We posted a security for payment of the contested amount of the fine.

In December 2002 the European Commission imposed a fine of 27.75 million against SGL in connection with the Commission’s investigation of anticompetitive activities by companies in the graphite industry in the graphite specialties market during the 1990s. We believe this fine is unjustified and have filed an appeal before the European Court of First Instance.

On December 3, 2003 the European Commission imposed a fine of 23.6 million against SGL in a further competition proceeding in the area ‘‘electrical and mechanical carbon and graphite products.’’ We have appealed the amount of this fine before the European Court of First Instance. See ‘‘Business Description – Legal proceedings – Antitrust proceedings.’’ We increased provisions by 35.0 million in the 2001 fiscal year, by 22.0 million in the 2002 fiscal year and by a further 19.5 million in the 2003 fiscal year, primarily to increase our reserve for fines imposed by the European competition authorities. Until such date as they may be paid, the amounts of these fines bear interest at an annual rate of 3.50% to 6.04% . Our Board of Management believes that the total of these provisions, which are significantly below the 120.5 million aggregate amount of fines, are sufficient as of December 31, 2004 to cover any potential liabilities that could arise from these antitrust proceedings.

See ‘‘Business Description – Legal Proceedings,’’ ‘‘Liquidity and Capital Resources – Overview of Bank Debt and Cash Flows’’ and ‘‘Risk Factors – We are party to several antitrust proceedings.’’

Restructuring expenses

We present restructuring expenses separately in our statement of operations. These expenses include plant closure costs, expenses for workforce reduction and extraordinary amortization and depreciation of plant, equipment and inventory.

Net financing costs

Our financial result comprises interest expense and interest income as well as other financing costs, including the non-cash currency impact of antitrust liabilities and other non-cash financing costs. 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. When the DOJ imposed a fine on SGL in connection with an antitrust investigation in 1999, we discounted the resulting antitrust fine to its present value and recorded this amount as a liability on our balance sheet using an interest rate of 4%. In each succeeding reporting period, we have recalculated the present value of this liability, which has resulted in a regular interest expense from the discounting of the liability. 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 present value of the outstanding antitrust liability.

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Because the antitrust liability is denominated in dollars, changes in the euro/dollar exchange rate from period to period may give rise to translation effects on our balance sheet. To reduce the resulting exposure to currency exchange rates, we hedged the antitrust liability. However, we retain exposure to non-cash adjustments in the amount of the remaining antitrust liability. We record these non-cash adjustments under other financial results at the end of each reporting period. We also included an accrued interest portion for the EU fines starting in 2003. This is reflected in a separate line within the net interest result. As a result of the financing of payments related to antitrust proceedings, the funding of our brake disc and fuel cell component businesses and the acquisition of the KCH group (a major part of the former SGL Acotec Group) and ZEW (now SGL CARBON Polska S.A.), our interest expense has increased significantly in recent years. We expect that our net interest expense has reached its highest level in 2004 due to the new financing completed in February 2004. We successfully managed throughout 2004 to reduce our financial debt and expect to lower financial debt also in 2005 and following years, which will lower the interest burden. Increasing interest rates may increase our interest expense since part of our financial debt is subject to variable interest rates.

Income tax benefit (expense)

Tax expenses include current and deferred income tax expenses. Our income tax expense reflects income tax liabilities in respect of pre-tax earnings from our consolidated group companies, which cannot offset these earnings against existing tax loss carryforwards or other tax credits. Deferred tax benefits and expense result from the capitalization of deferred taxes or the revaluation of capitalized deferred tax assets that arose from tax loss carry-forwards as well as from temporary differences between the carrying amounts of assets and liabilities in financial statements prepared under IFRS as compared to the amounts prepared under local tax accounting rules (calculated by the balance sheet liability method). In 2004 and 2003 deferred tax assets from tax loss carry-forwards were uniformly recognized on the basis of a four-year and five-year, respectively, operational rolling projection at the level of individual consolidated subsidiaries or on the level of tax groups. These projections take into account uncertainties about certain planning assumptions and other underlying conditions.

Based on the improvements of our businesses and taxable results in our business in the United States for 2004 and 2003, we recognized a portion of the existing loss carry-forwards and capitalized deferred tax assets amounting to 20.1 and 10.0 million, respectively.

During 2004, we were only able to capitalize part of the tax loss carry-forwards that arose in Germany in 2004 due to our refinancing and the sale of our surface protection business. This development was primarily attributable to the amount of our tax loss carry-forwards exceeding, the expected taxable income in the German tax group for the next four years and the recent regulations concerning minimum taxation, which came into effect in 2004. A comprehensive tax optimization program has been agreed upon and will be implemented shortly.

Until fiscal year 2000, the German Corporation Tax Act provided for an imputation system with split tax rates for German corporations. At the time a German corporation distributed a dividend, the corporation tax payable by the distributing company with respect to such dividend was generally reduced. German-domiciled shareholders entitled to offset corporation tax were generally able to claim a tax credit relating to the corporation tax originally paid by the distributing company. Since the 2001 fiscal year, German corporations are generally subject to German corporation tax at a single rate of 25% for distributed and retained profits together with a solidarity surcharge of 5.5% on the corporation tax, for a total rate 26.38% . For the 2003 assessment period only, the single corporation tax rate is 26.5% together with a solidarity surcharge of 5.5% on the corporation tax, for a total rate of 27.96% .

German corporations are also subject to a trade tax. The amount of trade tax due depends on the municipalities in which the corporation does business. Currently, the trade tax generally amounts to approximately 15%-20% of the taxable earnings, depending on the rate charged by the municipality. In calculating the corporation’s income subject to the corporation tax, the amount of the trade tax is currently deductible.

Since January 1, 2004, German tax law imposes a so-called minimum taxation (Mindestbesteuerung) in case of existing tax losses carried forward, a tax of 5% of the domestic

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dividend income and gains on disposition of corporations for purposes of corporate and trade tax as well as a tightening of debt financing in cases where guarantees are provided by major shareholders. Due to changes in the German tax legislation, generally only 60% of tax loss carry-forwards may offset current year annual income. Losses up to an amount of 1 million can be completely deducted from corporation income tax as well as from trade tax. The newly enacted legislation is applicable beginning with the tax assessment year 2004. These changes as well as potential future changes with respect to tax loss carry-forwards, or a denial of the deductibility of certain expenses, could lead to material tax payments for SGL Group companies in Germany from 2004 onwards and significantly impair our deferred tax assets. In addition, deferred tax assets related to German tax loss carryforwards could be impaired if the German tax group companies, generating these loss carry-forwards, fail to generate sufficient taxable income in the future.

Operating Results

The following table shows our consolidated statements of operations for the 2002, 2003 and 2004 fiscal years.

  Year ended December 31  









 
  2004   2003   2002  



 


 
 
  (in millions)   (% change)   (in millions)   (% change)   ( in millions)  
Sales revenue  926.2   1.1   915.8   (4.3 )  957.3  
Cost of sales  (663.4 )  (2.6 )  (680.8 )  (8.5 )  (744.2 ) 

 
 
 
Gross profit  262.8   11.8   235.0   10.3   213.1  
Selling expenses  (113.9 )  (6.5 )  (121.8 )  3.1   (118.1 ) 
Research costs  (19.2 )  1.1   (19.0 )  (21.2 )  (24.1 ) 
General and administrative expenses  (42.3 )  14.9   (36.8 )  (4.7 )  (38.6 ) 
Other operating income (net)  (2.2 )  120.0   (1.0 )  (126.3 )  3.8  

 
 
 
Profit from operations before costs relating to           
     antitrust proceedings and restructuring, net .  85.2   51.1   56.4   56.2   36.1  
Costs relating to antitrust proceedings  0.0     (19.5 )  (11.4 )  (22.0 ) 
Restructuring expenses  (19.7 )  109.6   (9.4 )  95.8   (4.8 ) 

 
 
 
Profit from operations  65.5   138.2   27.5   195.7   9.3  
Net financing costs  (60.5 )  (19.3 )  (75.0 )  171.7   (27.6 ) 

 
 
 
Profit / loss before tax  5.0   (110.5 )  (47.5 )  159.6   (18.3 ) 
Income tax benefit (expense)  (1.2 )  (106.4 )  18.8     (0.3 ) 

 
 
 
Net loss before minority interests  3.8   (113.2 )  (28.7 )  54.3   (18.6 ) 
Minority interests  0.0     (0.1 )    0.0  

 
 
 
Discontinued operations  (85.5 )  297.7   (21.5 )  330.0   (5.0 ) 

 
 
 
Net loss  (81.7 )  62.4   (50.3 )  113.1   (23.6 ) 


 
 

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The following table shows selected consolidated statement of operations data for expressed as a percentage of total sales revenue:

 
Year ended December 31,
 





 
  2004 (%)   2003 (%)   2002 (%)  

 
 
 
Sales revenue  100.0   100.0   100.0  
Cost of sales  (71.6 )  (74.3 )  (77.7 ) 

 
 
 
Gross profit  28.4   25.7   22.3  
Selling, research and development, general administration and       
     other operating expenses, net  (19.2 )  (19.5 )  (18.5 ) 
Costs relating to antitrust proceedings and restructuring       
     expenses  (2.1 )  (3.2 )  (2.8 ) 

 
 
 
Profit from operations  7.1   3.0   1.0  
Result of investments and other financial result  (1.1 )  (2.8 )  0.9  
Net financing costs  (5.4 )  (5.4 )  (3.8 ) 
Income taxes  (0.1 )  2.1   0.0  

 
 
 
Net Profit / loss (includes minority interests)  0.4   (3.1 )  (1.9 ) 

 
 
 
Discontinued operations  (9.2 )  (2.4 )  (0.6 ) 

 
 
 
Net loss attributable to shareholders  (8.8 )  (5.5 )  (2.5 ) 


 
 


2004 Compared to 2003

Overview

The fiscal year 2004 report is characterized by the following major topics: The successful completion of our refinancing in February 2004, the divestiture of our surface protection business in January 2005, favorable development in most of our customer industries and the ongoing efforts to restructure and streamline our cost base. Profit from operations after restructuring considerably improved by 39% from 47.0 million in 2003 to 65.5 million in 2004.

In February 2004, we successfully concluded arrangements for the refinancing package for the Group in the total amount of 866 million. The three pillars of this refinancing package – a capital increase resulting in gross proceeds of 266 million, senior subordinated notes amounting to 270 million and syndicated loans including credit lines and guarantees totaling 330 million – fundamentally improved our balance sheet structure and secured the Company‘s long term liquidity. As a result, the equity ratio rose from 9.4 % at the end of 2003 to 21.4 % as of December 31, 2004. Our net financial liabilities were considerably reduced from 448.4 million at 2003 year-end to 321.2 million as of December 31, 2004. Further on our debt maturity profile has been substantially extended into medium- and long-term financial liabilities.

On January 6, 2005, we completed the sale of our interest in SGL Acotec GmbH, which had conducted our Surface Protection and Plastic Process Technology Business, to the Munich/Germany-based ADCURAM Industriekapital AG. This financial investor, specializing in the acquisition of medium-sized companies, took over approximately 1,400 employees as well as assets and liabilities – including pension obligations totaling approximately 30 million (including non-consolidated companies). No assurances were made to ADCURAM within the framework of the sale that could become a material burden to the SGL CARBON Group in the future. Since the surface protection business generated a net loss of (20.9) million in 2004 (2003: (21.5) million), this portfolio restructuring will have a favorable impact on the future development of income and cash flow for the continuing operations. Besides the period loss, the divestiture resulted in a (64.6) million non-cash write down of the carrying amount in the consolidated financial statements presented here. The surface protection business is shown as a discontinued operation for the fiscal year under review.

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Previous years have been reclassified accordingly. The remaining profitable process technology business of our former Corrosion Protection business area will be integrated within the Graphite Specialties business area. In view of this, the figures reported for the Graphite Specialties business area for the reporting year as well as for the previous fiscal years have been accordingly restated.

     The improvement of the world economic situation resulted in a favorable development in most of our customer industries. Our Carbon and Graphite business area benefited in particular from the upswing in the steel industry, which enjoyed an exceptionally good year in 2004. The Graphite Specialties and SGL Technologies business areas participated in the growth of the engineering, electrical engineering, and aviation industries. Investment activity in the chemical industry continued to be restrained in the first half of 2004, but gained momentum at year-end. The market environment in the semiconductor sector improved considerably, although the favorable trend weakened towards the end of 2004.

     In 2004, our ongoing efforts to restructure and streamline our cost base resulted in total restructuring expenses for our continiuing operations of 19.7 million (2003: 9.4 million) and generated gross savings of 36 million. The half of the incurred restructuring expenses are related to our established and planned savings programs. Our restructuring and cost saving activities focused on additional steps to increase efficiency and productivity at our locations in Italy, Poland and the U.K. The number of our employees in continuing operations decreased by 299 to 5,109 at the year-end 2004. These measures also included the expenses for the newly established cost reduction program in our administrative functions, which is expected to generate overall annual savings of approximately 11 million starting fiscal year 2006. Non-recurring expenditures are scheduled to amount to approximately 5 to 6 million during fiscal year 2005. The remaining second half of our 2004 restructuring expenses primarily relate to non-cash write-downs with regard to the planned or completed sale of the already closed-down locations in Hillsboro, Oregon and Niagara Falls, New York, in the U.S.. These restructuring expenses also included the expenses recorded at fiscal year-end, for the resignation by mutual agreement of Dr. Klaus Warning from his Board of Management mandate.

     Profit from operations after restructuring increased considerably by 39% from 47.0 million in 2003 to 65.5 million in 2004. All three business areas of the continuing operations contributed to this improvement. Beside favorable developments of prices and volume, mainly the savings generated by the Group-wide improvement initiative SGL Excellence and the newly established improvement program within administrative functions named SGL Ten were contributing to the growth in earnings. The Carbon and Graphite as well as the Graphite Specialties business areas generated remarkable profit increases. Due to additional preparatory work for new projects, contrary to our original projection, the loss of SGL Technologies was reduced only by approximately 25%.

Continuing operations
Sales revenue

     Consolidated sales revenue increased by 1.1% from 915.8 million to 926.2 million in 2004. Currency exchange rate fluctuations had a negative impact of approximately 5%. Adjusting for these currency effects sales revenue increased by 6% in 2004 compared to 2003. Major driver for this development was the turnaround of the steel and semiconductor industries, where we were able to increase both volume and prices.

     The sales revenue structure of our Business Areas correspondingly changed. Sales revenue of CG totaling 555.5 million was at around the previous years level of 558.0 million. GS (including business of process technology) raised its sales revenue from 230.1 million to 235.8 million. SGL T generated an increase in sales from 124.9 million to 133.2 million.

     The regional sales revenue structure during fiscal year 2004 remained largly unchanged from 2003: Germany 14%, other European countries 35%, North America 27%, rest of the world 24%.

     The Carbon and Graphite business area sales revenue totaled 555.5 million, nearly unchanged from previous year sales revenue of 558.0 million. For the core product graphite electrodes negative exchange rate effects were more than compensated for by volume and price increases. Sales volume of graphite electrodes further rose by 3% over the previous year to 209,000 tons (2003: 202,000 tons). Besides the economic upswing in the steel industry, especially in East Asia and North America, also

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the structural changes in the graphite industry as a result from the insolvency of two smaller competitors in 2003 contributed to this demand development. During 2004 our production capacities were almost fully utilized throughout the year. The average prices in euros for graphite electrodes remained at the previous years level due to the impact of the strong euro exchange rate. In local currencies, in 2004 the respective average prices rose by 14% in U.S. dollar regions and by 1% in the euro region. The ongoing lack of new projects in the aluminum industry, the decline in demand in the silicon metal industry and US dollar translation effects negatively impacted sales revenue from cathodes and carbon electrodes, which further declined by 21% to 86.4 million in 2004 (2003: 109.1 million). Sales revenue from furnace linings increased to 24.3 million (2003: 20.1 million).

     The Graphite Specialties business area (including process technology business) sales revenue increased by 2.5% from 230.1 million in 2003 to 235.8 million in 2004. The traditional GS businesses gained from the economic upswing in the key markets semiconductors, engineering, and plant engineering. Heavy demand for high performance batteries and products for the solar power industry contributed to the increase in sales from 174.3 million in 2003 to 189.3 million in 2004, an increase of almost 9%. Combined sales for GS rose by 3%, whereas the growth after adjusting for currency changes reached 5%. The process technology business, which focus primarily on the manufacture of heat exchangers, contributed 46.5 million in 2004 a decline of (9.2) million compared to record sales revenues of this business of 55.8 million in 2003. High sales revenues in 2003 were primarily attributable to the business cyclical nature of large multi-year orders.

     The SGL Technologies business sales revenue increased by 6% – despite considerable negative exchange rate flucturations – from 124.9 million in 2003 to 133.2 million in 2004. Major drivers for this development resulted from the increasing demand for fibers and carbon-ceramic brake discs. After adjusting for currency changes, 13% growth in sales revenues would have been realized. Approximately 60% of the business areas revenues are invoiced in U.S. dollars, which in 2004 again declined significantly in value against the euro.

Cost of sales and gross profit

     Consolidated costs of sales decreased by 3% from 680.8 million in 2003 to 663.4 million in 2004. Despite higher sales our raw material costs, mainly petroleum coke and energy remained almost unchanged at 192.8 million in 2004 compared to 192.3 million in 2003. This is primarily the result of exchange rate changes, as we pay for petroleum coke exclusively in U.S. dollars. Total cost of materials, which also includes the cost of purchased services, increased from 245.8 million in 2003 to 271.9 million in 2004. This is mainly related to additional services rendered in connection with the maintenance of our buildings, machinery and equipment. Overall staff costs also slightly increased from 279.7 million in 2003 to 281.4 million in 2004. While direct wages and salaries cecreased by 5.8 million year-on-year due to the restructuring efforts, costs for social contribution, retirement and other benefits increased by 7.5 million mainly due to higher accrued bonus provisions in 2004 compared to 2003.

     Gross profit increased by 27.8 million or 12% from 235.0 million in 2003 to 262.8 million in 2004. Our gross profit margin on sales, which we define as sales revenue less cost of sales divided by sales revenue increased from 25.7% to 28.4% . Besides positive price and volume developments in all three business areas, also the ongoing optimization and restructuring efforts contributed to this improvement.

Selling expenses, research costs, general and administrative expenses, other operating expense (net)

     Our selling expenses decreased by more than 6% from 121.8 million in 2003 to 113.9 million in 2004. This decrease is mainly due to reductions in the sales staff expenses, lower commission expenses and the continuous improvements in our supply chain management. In addition we recorded valuation allowances for receivables from Canada, Switzerland and other countries in an amount of 4.6 million as selling expenses in 2003. Research and development costs remained stable at 19.2 million in 2004 compared to 19.0 million in 2003. General and administrative expenses rose from 36.8 million in 2003 to 42.3 million in 2004. This increase was mainly the result of higher provisions for variable remuneration components as well as the first-time amortization of the capitalized cost incurred for the implementation of our newly established Group-wide IT platform. Net other operating income and expense was (2.2) million in 2004 compared to (1.0) million in

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2003. The difference is mainly made up by the missing income from the sale of our former electrical contact business, sale of other non-current assets of 4.0 million and the amortization of negative goodwill of 2.7 million in 2003. Offsetting the missing 2003 effects was the amortization of positive goodwill, in the amount of 5.4 million, not being recorded in 2004 as we adopted IFRS 3 as of January 1, 2004.

Costs relating to antitrust proceedings and restructuring expenses

     In 2004 no further expenses relating to antitrust proceedings had to be recorded. The expenses in 2003 were primarily attributable to an increase in provisions resulting from the 23.6 million fine imposed by the European antitrust authority in fiscal year 2003.

     Total restructuring expenses increased from 9.4 million in 2003 to 19.7 million in 2004 and generated gross savings of 36 million. Half of our incurred restructuring expenses are related to our established and planned savings programs. Activity focused on additional steps to increase efficiency and productivity at our locations in Italy, Poland and the U.K. The number of our employees in continuing operations decreased by 299 to 5,109 at the year-end 2004. These cost-cutting measures also included the expenses for the newly established cost reduction program in our administrative functions, which is expected to generate overall annual savings of approximately 11 million starting fiscal year 2006. Non-recurring expenditures are scheduled to amount to approximately 5 to 6 million during fiscal year 2005. The remaining second half of our 2004 restructuring expenses primarily relates to non-cash write-downs with regard to the planned or completed sale of the already closed-down locations in Hillsboro, Oregon and Niagara Falls, New York, in the U.S., These restructuring expenses also included the expenses, which were recorded at fiscal year-end, for the resignation by mutual agreement of Dr. Klaus Warning from his Board of Management mandate.

     We incurred the following restructuring expenses by business area : CG business area with 8.4 million (2003: 3.7 million) attributable to expenses for headcount reduction and asset write downs in Poland, Italy, Germany and Spain; GS business area with 1.6 million (2003: 3.7 million) largely the result of the partial closure of a plant in the U.K.; SGL Technologies business area with 1.4 million (2003: 1.8 million) in relation to write-down of assets in the U.S.; and other expenses recorded within corporate costs totaling 8.3 million (2003: 0.2 million) mainly in connection with the planned or completed sale of two U.S. locations (4.9 million) and expenses in connection with the resignation of a member of the Board of Management (1.7 million).

Profit (loss) from operations

     Profit from operations after restructuring increased by 39% from 47.0 million in 2003 to 65.5 million in 2004. All three business areas of the continuing operations contributed to this improvement. In addition to favorable developments of prices and volume, mainly the savings generated by the Group-wide improvement initiative SGL Excellence and the newly established improvement program for administrative functions named SGL Ten were the main factors contributing to the growth in earnings. Total gross savings of approximately 36 million were realized during 2004. After deducting the restructuring expenses of 19.7 million net savings totaled 16 million.

     Profit from operations before restructuring expenses in the Carbon and Graphite business area increased by 42% from 69.2 million in 2003 to 98.1 million in 2004, with the return on sales increasing from 12% to nearly 18%. This increase was attributable largely not only to price and volume effects, but also to cost reductions within the SGL Excellence efficiency-enhancing program as well. Restructuring expenses for headcount reductions within the framework of our ongoing optimization as well as depreciation of installations in Italy and Poland of 8.4 million contrasted with savings of approximately 25 million during fiscal year 2004. On balance, the net cost reductions thereby amounted to approximately 17 million. The cost per metric ton of graphite electrodes produced was cut by approximately 9% in 2004. The operating profit after restructuring expenses of this Business Area improved by 37% to 89.7 million (2003: 65.5 million).

     In the Graphite Specialties business area (including the process technologies business) the profit from operations before restructuring expenses increased from 16.1 million in 2003 to 16.8 million in 2004 due to marked volume growth, significant cost reductions, and structural changes. Calculated on a comparable basis (adjusted for special impacts in 2003), profit from operations more than doubled,

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rising from €7.3 million in 2003 to €16.8 million in 2004. Special effects on the 2003 profit are attributable to the invoicing of one large process technology project that had generated an additional €6 million profit contribution in 2003 and the sale of the electrical contact business that had generated additional income of around €2.8 million in fiscal year 2003. Beside the cost reduction measures initiated under the SGL Excellence program, further restructuring initiatives generated overall savings of approximately €8 million in 2004. These savings were partially offset by expenses of €1.6 million resulting from the shutdown of machining capacities in the U.K. and the transfer of these activities to locations in Poland and Germany. Profit from operations after restructuring expenses increased by 22.6% from €12.4 million in 2003 to €15.2 million in 2004.

In the SGL Technologies business area, the loss from operations before restructuring expenses decreased by 26.3% from €(11.8) million in 2003 to €(8.7) million in 2004. In 2004 most areas of SGL T – with the exception of the brake discs segment – realized improved earnings in line with original projections. The primary reason for the business area’s continued losses was the expenses incurred in connection with customary preparatory work for new projects in the civilian and military aerospace industries, which will not generate income before 2005 or 2006. One example of such projects is a large order for the Airbus 380. We also incurred additional start-up costs for our carbon-ceramic brake discs, primarily in connection with the expected accelerated transformation of the pilot plant for carbon-ceramic brake discs at our Meitingen location to large-scale production. These costs include expenses for process and quality development and for production plant planning and design, with a total amount of €3 million in development costs being capitalized. As part of the SGL Excellence program, we reduced costs by approximately €3 million in 2004. Expenses for restructuring measures resulted from non-cash corrections in carrying amounts in the United States totaling €1.4 million. After restructuring expenses, the loss from operations in the SGL T business area was €(10.1) million in 2004, compared to €(13.6) million in 2003.

Net financing costs

The net financing costs of our continuing operations decreased from €(75.0) million in 2003 to €(60.5) million in 2004. The improvement in the net financing costs is primarily attributable to the costs of the former refinancing package totaling €16.1 million, which had been recorded entirely to expenses in fiscal year 2003. A total of €3.8 million was expensed during the fiscal year for the successfully completed new refinancing in 2004. IFRS provisions require that we expense the 2004 cash costs of our corporate bond issue as well as of the new syndicated credit and guarantee lines, in line with the individual terms of the instruments. Interest on borrowings and other interest expenses increased by €8.1 million to €34.8 million in 2004 (2003: €26.7 million). This development was primarily attributable to the rise in the average interest rate from 4.7% in 2003 to 6.3% in 2004 in connection with the corporate bond component of the refinancing package, which pays 8.5% interest. Foreign currency valuation and foreign currency exchange rate hedging of liabilities arising from antitrust proceedings entailed non-cash expenses of €2.7 million in 2004 (previous year: non-cash income of €0.2 million). The expenses resulted from updated market forecasts affecting the measurement of hedging instruments.

Income taxes

The income tax expense for fiscal year 2004 resulted from tax expenses of foreign subsidiaries which could not utilize the tax loss carry-forwards of other subsidiaries. The partial capitalization of deferred tax assets for loss carry-forwards in the United States and in Germany could only partly compensate the current income tax expense. During 2004, the group only recognized in part the high, tax-deductible losses that resulted in Germany from the refinancing measures as well as the sale of the surface protection business. This was largely attributable to the amount of our tax loss carry-forwards, which are usable without restriction, exceeding the expected income resulting from the tax pooling of interests agreement in Germany over the next four years, and to the recently enacted tax legislation concerning minimum taxation rules. A comprehensive tax optimization program has been agreed and will be implemented during 2005.

Net income from continuing operations

Net income from continuing operations increased by €32.6 million to €3.8 million in 2004 (2003: €(28.8) million).

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Net loss from discontinued operations

In the consolidated statements of operations, we reclassified the surface protection business as a discontinued operation for 2004 and for the previous years. For the fiscal year 2004, surface protection posted a net loss of €(85.5) million. This loss was comprised by a write-down of assets of €(58.5) million, the cumulated loss for the year of €(20.9) million (2003: €(21.5) million) and booked cost accruals and provisions in connection with the saleof the surface protection activities amounting to €(6.1) million by the end of 2004.

Net loss

Overall, our consolidated net loss for the year increased to €(81.7) million (2003: €(50.3) million). Earnings per share reached €(1.57) (previous year: €(2.27)) .

2003 Compared to 2002

Overview

Fiscal year 2003 was driven by a weak economic environment, a substantial decrease in value of the U.S. dollar against the euro, substantially improved profit from operations compared to 2002, a third fine imposed on us from the European antitrust authorities and a nearly tripling of financing costs due to one-time effects.

For the following discussion we also differentiate between continuing and discontinued operations. We reclassified the divested surface protection and plastic process technology business into discontinued operations and show the aggregate results at the end of this comparison.

The weak economic environment mainly affected our customer industries in the Graphite Specialties and SGL Technologies business areas. One result was a further drop in capital spending in key sectors such as the chemical industry and mechanical and plant engineering. Demand in the electronics and aviation industries and in semiconductors remained at its previous low levels. In contrast, global steel production continued to recover compared to 2002, with electro-steel accounting for an estimated 33% of production. This was primarily due to continued strong demand for and production of steel in China, as well as to the ongoing recovery of the U.S. steel industry. Our Carbon and Graphite business benefited by the insolvencies of one of our German competitors and of a smaller competitor in the US. We were able to gain more than many of our competitors from this reduction in supply, increasing our market share year-to-year in the US in particular. Nevertheless sales revenue fell by 4% from €957.3 million in 2002 to €915.8 million in 2003.

The U.S. dollar’s substantial decrease in value against the euro of nearly 20% (annual average rate: $1.131/ €in 2003 compared to $0.945/ €in 2002) negatively impacted consolidated sales revenue by around €83 million; after adjusting for currency exchange rate effects, however, our sales revenue rose by 4%.

Profit from operations before costs relating to antitrust proceedings and restructuring expenses increased from €36.1 million in 2002 to €56.4 million in 2003, an increase of 56%. The primary reasons for this increase were the systematic cost-cutting programs that are part of our restructuring measures and our Group-wide improvement initiative, SGL Excellence, that accounted for savings of more than €24 million. The sale of our electrical contacts business also had a positive effect. However, the sharp rise of the euro against the U.S. dollar, the Polish zloty and British pound sterling negatively impacted our profit from operations by around €18 million. Special factors such as additional certification costs for the carbon fibers we produce in-house as part of our brake disc production activities as well as higher-than-expected program costs for new projects for the U.S. aerospace industry negatively impacted profit from operations by €4 million.

As part of its investigation into anti-competitive behavior in the graphite industry, which has been running since 1997, the European Commission imposed a third fine of €23.6 million on SGL Carbon AG in December 2003. This relates to ‘‘electrical and mechanical carbon and graphite products’’. We do not believe that this fine is justified and have appealed against the decision with the European Court. In this context, we have increased the existing antitrust provisions by €19.5 million as a precautionary measure. This figure also includes appropriate provisions for legal costs.

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Net financing costs in 2003 amounted to €75.0 million, compared to €27.6 million in 2002. Higher net financing costs were primarily due to the costs of the refinancing measures implemented at the end of 2002. These were fully expensed in 2003 with a total amount of €16.1 million, as the new refinancing package put in place by beginning of February 2004 had already been successfully implemented at the time the consolidated financial statements for 2003 were being prepared. The non-cash accrued interest on liabilities from the North American antitrust proceedings increased costs by an additional €6 million. In 2002 the rescheduling of the payment plan had led to a positive one-time contribution of €3 million. At the end of 2003, we accrued the interest potentially payable in connection with the European antitrust fines for the first time. Exchange rate effects relating to our North American antitrust liabilities and associated hedging activities resulted in income of €0.2 million during 2003 (2002: €4.5 million). The increase in other net financing costs is mainly due to the one-time gain in 2002 from the release of the fair value of an option in that year. In contrast, the interest on borrowings remained at the prior-year level of around €27 million. Higher average annual financial liabilities and a slightly higher average interest rate of 4.7% in 2003(2002: 4.4%) were offset by the non-recurrence of interest charges on receivables sold in 2002.

Continuing operations

Sales revenue

Our consolidated sales revenue fell by €41.5 million or more than 4% year-on-year to €915.8 million. The U.S. dollar’s dramatic slide against the euro of nearly 20% (annual average rate: $1.131/1 €in 2003 compared to $0.945/1 €in 2002) negatively impacted consolidated sales revenue across all business areas by around €83 million or approximately (9%). Adjusting for currency effects and structural changes (sale of electrical contact business and first time consolidation of our Polish subsidiary SGL Angraph Sp. Z.o.o.), revenue on a comparable basis grew by 4%. This was primarily the result of significant increases in volume of graphite electrodes sold in our Carbon and Graphite business area. In contrary, weak demand at SGL Technologies business area was hitting sales revenue by roughly €10 million.

The Carbon and Graphite business area sales revenue totaled €558.0 million in 2003, up 1% from 2002. The positive volume effects for graphite electrodes more than made up for lower revenues resulting from unfavorable exchange rates. The volume of graphite electrodes sales increased by 17% to 202,000 tons (2002: 173,000 tons), which resulted in a full capacity utilization in 2003. The higher sales volume of graphite electrodes was in particular the result of the insolvency of two smaller competitors in 2003 representing approx. 5% of annual global capacity. The average price in euros for graphite electrodes continued to fall due to the exchange rate effects. However, we were able to increase our average prices in local currencies for 2003 by 2% in the euro region and 7% in U.S. dollar region as against their low in the fourth quarter of 2002. The lack of new projects in the aluminum industry, the decline in demand in the silicon metal industry and U.S. dollar translation effects negatively impacted sales revenue from cathodes and carbon electrodes, which declined by 18% to €109.1 million in 2003. In contrast, our sales revenue from furnace linings reached €20.1 million for the first time (2002: €13.8 million).

The Graphite Specialties business area (including the process technology business) accounted for approximately 25% of our total sales revenue from continuing operations in 2003. It declined by 9% year-on-year to €230.1 million in 2003 due to the ongoing economic weakness in our customer industries (semiconductor technology, metals, chemicals, and mechanical and plant engineering), the sale of our electrical contacts business and the weakness of the U.S. dollar.

In 2003, SGL Technologies’ sales revenue fell by 17% to €124.9 million. The primary reason for this decrease apart from lower demand in the fiber area caused by cyclical effects was the weak U.S. dollar: SGL Technologies generates and invoices around 60% of its sales revenue in the dollar zone. The drop in orders from the civil aviation sector due to economic uncertainties also impacted sales revenue in 2003.

Cost of sales and gross profit

Consolidated costs of sales decreased by 9% from €744.2 million in 2002 to €680.8 million in 2003. Raw material costs, mainly petroleum coke and energy decreased by 8% from €208.9 million in 2002 to €192.3 million in 2003, primarily as a result of exchange rate changes, as we pay for

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petroleum coke exclusively in US dollars. Total material expenses decreased by 2% from 252.0 million in 2002 to 245.8 million in 2003. Personnel expenses decreased by 4% during 2003 to 279.7 million primarily due to our reduction in headcount. Gross profit increased by 21.9 million to 235.0 million, 10% above 2002 figure of 213.1 million, and the gross profit margin on sales, which we define as sales revenue less cost of sales divided by sales revenue increased from 22.3% in 2002 to 25.7% in 2003. The main driver behind the increase in gross profit was the continued success of our cost-cutting programs. In addition volume developments in the CG Business Area also had a positive effect. However, the rise of the euro and continuing weak demand in main customer industries had a negative impact.

Selling expenses, research costs, general and administrative expenses, other operating income (net)

     Our selling expenses increased by 3% from 118.1 million in 2002 to 121.8 million in 2003. This increase was due to the substantial increase in shipments of graphite electrodes. The cost of transporting graphite electrodes, which is determined in weight, exceeded the decrease in freight costs in the other business areas. In addition we recorded adjustments for receivables from Canada, Switzerland and other countries in an amount of 4.6 million as selling expenses. In contrast, we reduced our research and development costs as planned by 21% from 24.1 million in 2002 to 19.0 million in 2003 following the completion of the development of our carbon-ceramic brake discs and the start of operations at our new brake disc production facility in Meitingen. General and administrative expenses were also down 1.8 million (5%) from 38.6 million to 36.8 million. The savings in 2003 are primarily related to a reduction in variable remuneration components and lower costs at Group companies in the United Kingdom and North America resulting from exchange rate effects. Net other operating income and expense was (1.0) million in 2003 compared to 3.8 million in 2002. This difference was mainly due to the drop in income from the release of provisions and insurance payments received in 2002. Included in the net operating income in 2003 is the income from the sale of electrical contact business in Europe and other non-current assets of 4.0 million in total and the amortization of negative goodwill of 2.7 million.

Restructuring expenses and costs relating to antitrust proceedings

     Restructuring expenses increased from 4.8 million in 2002 to 9.4 million in 2003 due to our ongoing restructuring efforts. Our main focus was on measures for improving efficiency and productivity at our sites in France, Italy, Poland and Germany. In the course of these activities, we had to reduce our total headcount by 266 to 5,408. In addition to this, we entered into 44 new partial early retirement contracts in Germany. While these increased provisions in the year under review, they will reduce our costs going forward.

     Our costs relating to antitrust proceedings decreased by 11%, from 22.0 million in 2002 to 19.5 million in 2003. As part of its investigation into anti-competitive behavior in the graphite industry, which has been running since 1997, the European Commission imposed a fine of 23.6 million on SGL Carbon AG in December 2003. This relates to ‘‘electrical and mechanical carbon and graphite products’’. We do not believe that this fine is justified and have appealed against the decision with the European Court of First Instance. In this context, we have increased the existing antitrust provisions by 19.5 million as a precautionary measure in 2003. This figure also includes appropriate provisions for legal costs. In 2002, these costs related primarily to an increase in the provision for a fine imposed by the European Commission in December 2002.

Profit (loss) from operations

     Our consolidated profit from continuing operations increased from 9.3 million in 2002 to 27.5 million in 2003. The systematic cost-cutting programs being continued as part of our restructuring measures and our Group-wide improvement initiative, SGL Excellence, made a substantial contribution to this improved income situation, accounting for savings of around 24 million. The sale of our electrical contacts business and the first time consolidation of our Polish graphite specialty subsidiary Angraph also had a positive effect. However, the sharp rise of the euro against the US dollar, the Polish zloty and British pound sterling negatively impacted profit from operations by around A18 million. Special factors such as additional certification costs for the carbon fibers we produce in-house as part of our brake disc production activities as well as

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higher-than-expected program costs for new projects for the U.S. aerospace and defense industry negatively impacted profit from operations by 4 million.

     Profit from operations before restructuring expenses for the Carbon and Graphite Business area increased by almost 27% from 54.6 million in 2002 to 69.2 million in 2003, primarily due to our cost-cutting measures and the substantial increase in the volume of graphite electrodes sold. These factors more than compensated for the effects of the rise of the euro, which reduced earnings by around 18 million, for valuation allowances on customer receivables amounting to 4.6 million and a decline in the volumes of cathodes and carbon electrodes sold. After restructuring expenses, profit from operations amounted to 65.5 million. The restructuring expenses were related to headcount reductions in Poland and Italy, as well as to the conclusion of partial early retirement contracts with employees at our German sites.

     Before restructuring expenses, Graphite Specialties’ profit from operations (including process technologies) increased from 10.1 million in 2002 to 16.1 million in 2003. The proceeds from the sale of our electrical contacts business and the first-time consolidation of our Polish company SGL ANGRAPH were the main reasons for this increase. Adjusted for these effects, profit from operations would have been 1.5 million lower than in the previous year, since cost savings only partially compensated the impact of the decline in demand. After restructuring expenses, profit from operations amounted to 12.4 million (2002: profit from operations of 5.3 million). Restructuring measures in the year under review focused on the partial closure of our production capacities in Grenoble, France and the conclusion of partial early retirement contracts with employees at our German sites.

     Our loss from operations before restructuring expenses in 2003 of (11.8) million at SGL Technologies’ remained at 2002 level and we were therefore yet unable to achieve our original target of almost breaking even in 2003. This was mainly due to additional start-up costs for new orders from the U.S. aerospace and defense industry, and higher-than-expected certification costs for the carbon fibers produced by our fiber plant and used in brake disc manufacture. Taken as a whole, these factors impacted earnings by about 4 million during 2003. Restructuring expenses in 2003 amounted to 1.8 million and related almost exclusively to our US subsidiary HITCO CARBON Composites, Inc. The main measures taken related to the streamlining of administrative functions at the Gardena facility. In addition, non-cash write–downs of inventories were charged for old programs. After restructuring expenses, loss from operations was (13.6) million (2002: loss from operations of (11.3) million).

Net financing costs

     Our net financing costs increased from (27.6) million in 2002 to (75.0) million in 2003. Higher net financing costs were primarily due to the full amortization of costs in connection with the refinancing measures implemented at the beginning of 2003. These capitalized costs amounting to 16.1 million were fully expensed during 2003, as the new refinancing package successfully finalized in beginning of February 2004 had already been implemented at the time the consolidated financial statements for 2003 were being prepared. On February 9, 2004, we successfully completed our new refinancing package totaling A866 million. The new refinancing concept was based on three pillars: a capital increase with gross proceeds of around 266 million (33.3 million shares), a corporate bond of 270 million due in 2012, and syndicated credit lines and guarantees of up to 330 million with a term of five to six years.

     Other impacts that increased net financing cost by an additional 6.2 million in 2003 were the non-cash accrued imputed interest on liabilities from the North American antitrust proceedings. In 2002, the rescheduling of the payment plan had led to a positive one-time contribution of 3.4 million.

     At the end of 2003, for the first time we also accrued 5.6 million regarding the interest potentially payable in connection with the European antitrust fines (2002: 0.0 million). Exchange rate effects relating to our North American antitrust liabilities and associated hedging activities resulted in income of 0.2 million during 2003, which was also substantially lower than in 2002 (4.5 million).

     The increase in other net financing costs is mainly due to the one-time gain in 2002 from the release of the fair value of a certain option in that year. In contrast, interest on pensions (14.0 million) and interest on borrowings (26.7 million) remained at prior-year levels. Higher

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average annual financial liabilities and a slightly higher average interest rate of 4.7% (2002: 4.4%) were offset by the non-recurrence of interest charges on receivables sold in 2002.

Income taxes

     The tax benefit for fiscal year 2003 resulted from the recognition of deferred tax assets on tax loss carry-forwards. These exceeded the tax liabilities resulting from positive earnings contributions by foreign companies which could not be offset against loss carry-forwards from other companies. Due to the clear turnaround in our business in the United States, we recognized a portion of the tax loss carry-forwards and capitalized deferred tax assets amounting to 10.0 million on the basis of a cautious estimate. As in the past, we did not recognize deferred tax assets on the losses we incurred in Scotland. The addition to the provision for antitrust risks was treated as a non-tax-deductible expense for consolidated reporting purposes. During the year under review, we lodged an appeal with the German financial authorities against the tax treatment of the fine imposed by the US antitrust authorities, and recognized deferred tax assets on this item for the first time. When calculating the latter, however, we only recognized a partial amount on the basis of external tax opinions and of our best estimate of the probability of their realization.

Net loss from continuing operations

     The net loss of the continuing operations for the year widened to (28.8) million (2002: (18.6) million).

Net loss from discontinued operations

     In our consolidated statements of operations, the surface protection business was reclassified as a discontinued operation for 2003 and 2002. For the fiscal year 2003, surface protection posted a net loss of (21.5) million in total compared to a net loss of (5.0) million in 2002. This development characterizes the ongoing slump in demand and the unfavourable cost base related to a majority of manufacturing in Western Europe whereas remaining market demand tends to transfer to Asia and Eastern Europe.

Net loss

     Our consolidated net loss for the year thereby increased to (50.3) million in 2003 (2002 (23.6) million). Earnings per share reached (2.27) (2002: (1.08)) .

Inflation

     During the past three years, the effects of inflation on our operations in Germany and other countries have generally been immaterial.

Critical Accounting Policies

     The Securities and Exchange Commission 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 postemployment benefits, goodwill and intangible assets, deferred tax 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.

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We believe the following critical 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. 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. IFRS requires that goodwill be tested for impairment at the cash generating unit level. The fair value of the cash generating unit is compared to the book value including goodwill. In order to determine the fair value of the cash generating unit, significant management judgment is applied in order to estimate the underlying discounted future free cash flows. In the case, that the fair value of the cash generating unit is less than its book value, the difference is recorded as an impairment. In 2004, 2003 and 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 based on individually reviews of risk accounts 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

The cost of all inventories is determined by the weighted average cost method. 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, 2004, we reported inventory of 248.0 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:

  a) return or rotation privileges with vendors,
 
  b) expected usage during the next twenty-four months,
 
  c) whether or not a customer is obligated by contract to purchase the inventory,
 
  d) current market pricing, and
 
  e) risk of obsolescence.
 

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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.

Impairment of assets

We review the carrying values of long-lived assets and amortizable intangibles (including goodwills) 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 pre tax rates of 8% to 11%. 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 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 41.0 million restructuring and asset impairment charge in connection with our 2001 repositioning efforts, of which 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 16.2 million of restructuring charges included 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 8.3 million in 2002.

During 2003, the Group expensed a total of 10.4 million on restructuring efforts. Our main focus was on measures aiming at improving efficiency and productivity at our sites in France, Italy, Poland and Germany. In addition to headcount reductions, we concluded 44 new partial early retirement contracts in Germany. While these increased provisions in the year under review, they will reduce our costs going forward.

Consolidated outlays for the continuation of our restructuring measures totaled 19.7 million in 2004. These restructuring expenses comprised the following measures:

  Our cost reduction program generated planned savings of 36 million. Non-recurring costs amounted to 10 million. Activity focused on additional steps to increase efficiency and productivity at our locations in Italy, Poland, and the U.K. The number of our employees in continuing operations fell by 299 to 5,109 at the year-end 2004. These measures also included the expenses for the cost reduction program for administrative functions, which was approved during the fiscal year. This program is expected to generate overall annual savings of 11 million, with nonrecurring expenditures amounting to approximately 5 – 6 million during fiscal year 2005.
 
  The remaining 10 million restructuring costs were primarily a result of the planned or completed sale of the already closed-down locations in Hillsboro, Oregon, and Niagara Falls, New York, in the United States, for which non-cash write-downs in carrying
 

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amounts were taken. These outlays also included the expenses recorded at fiscal yearend for the resignation by mutual agreement of Dr. Klaus Warning from his Board of Management mandate.

Restructuring expenses for the Surface Protection business for fiscal year 2004 are a component of the separately reported result from discontinued operations.

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 2004 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.

We capitalized deferred tax assets in the United States of 20.1 million in 2004 and 10.0 million in 2003. Out of the losses in the German tax group we have capitalized deferred tax assets of 6.1 million in 2004 and 22.0 million in 2003. As in the past, we did not recognize deferred tax assets on the losses we incurred in the United Kingdom. In total we have capitalized tax loss carryforward as deferred tax assets amounting to 85.8 million as of December 31, 2004. The amounts capitalized are based on estimates and assumptions about the impact of tax planning strategies and future earnings. The actual results may differ significantly, thereby requiring a valuation allowance in later periods.

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.

Pension and postretirement benefit accounting

Our pension benefit costs and credits are determined in accordance with actuarial valuations, which rely on key assumptions, including discount rates and expected returns on plan assets. We determine the market-related value of plan assets for the SGL Pension Funds based on the fair value of plan assets in each fund at their measurement dates. Due to the underfunded status of certain pension plans at their respective measurement dates, an additional minimum liability is recorded in other comprehensive income. Our postretirement benefit costs and credits are determined in accordance with actuarial valuations, which rely on key assumptions, including discount rates, and increase or decrease in health care trend rates. The discount rate assumptions reflect the rates available on high-quality fixed-income investments of appropriate duration at the measurement dates of each plan. The expected return on plan assets assumption is determined on a uniform basis, considering long-term historical returns, asset allocation, and future estimates of long-term investment returns. Other key assumptions for our pension and postretirement benefit costs and credits are based in part on current market conditions. Pension and related postretirement benefit costs or credits could change due to variations in these underlying key assumptions. Under IFRS, the Company included 13.3 million, 14.0 million and 15.2 in 2004, 2003 and 2002, respectively, of interest costs associated with the Company’s provision for pension and similar obligations in interest expense.

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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, 2004. Computing our liability for pending antitrust actions requires us to make judgments as to the probable outcome of litigation, future settlements and judgments to be paid for 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, 2004, 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.

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 35 and 36 to our consolidated financial statements.

Business Combinations

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 IFRS 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 its related amortization before January 1, 1995 and for the amortization of goodwill after January 1, 2002 and until December 31, 2003. 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 (‘‘Goodwill and other Intangible Assets’’) must be performed. Starting January 1, 2004 in accordance with IFRS 3 goodwill is no longer amortized under IFRS also.

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 is 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 (‘‘negative goodwill’’) 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 under U.S. GAAP any negative goodwill arising from a business combination is recognized as income immediately.

Internal Use Software, Intangible Assets and Interest Capitalization on Tangible Fixed Assets

Statement of Position (SOP) 98-1 (‘‘Accounting for the Costs of Computer Software developed or obtained for internal use’’) provides U.S. GAAP guidance on accounting for the costs of computer software developed or obtained for internal use. Under U.S. GAAP overhead costs should not be capitalized as costs of internally developed software while under IFRS directly allocated overhead costs are allowed to be capitalized. During the year ended December 31, 2004 and 2003 the SGL

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Carbon Group capitalized software costs in the amount of 6.8 million and 6.5 million, respectively under U.S. GAAP.

Under IFRS development expenses can be capitalized if future economic benefits will flow to the company. In 2004 SGL capitalized development cost of 2.9 million for its ceramic disc brake. U.S. GAAP does not allow the capitalization of such costs. Accordingly a reconciliation difference of 2.9 million exists.

U.S. GAAP requires the capitalization of interest costs as part of the historical cost of fixed assets requiring a period of time to construct. Per IFRS benchmark treatment, interest cost (‘‘Borrowing Costs’’) should be recognized as an expense in the period in which they occur. The company has elected to use the IFRS benchmark treatment, which results in a reconciliation difference to U.S. GAAP for the capitalization of borrowing costs. During the years ended December 31, 2004, 2003 and 2002 the SGL Carbon Group did not capitalize interest under U.S. GAAP. The years 2004, 2003 and 2002 include amortization of previous capitalized interest A0.3 million, A0.8 million and A0.8 million respectively.

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, 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. As of December 31, 2003 and 2004 the company has no inventory valued on a LIFO basis for U.S. GAAP.

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.

The SGL Carbon Group provides incentive compensation for employees meeting specified performance targets. This incentive compensation is satisfied in the form of cash and SGL Carbon SGL stock. Under IFRS, incentive compensation is recognized as an expense and corresponding increase in capital upon issuance of its 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.

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Restructuring / Early retirement

One of the significant differences between the restructuring guidance under IAS 37, ‘‘Commitments and Contingencies’’ and the relevant U.S. GAAP standards, is found in the criteria for the initial recognition of a restructuring provision. The applicable U.S. GAAP standard is SFAS No. 146 ‘‘Accounting for Costs Associated with Exit or Disposal Activities’’ for the year ended 2003, which supersedes 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)’’ used for all years presented prior to 2003. For employee termination benefits, SFAS 146 and EITF 94-3 require 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 so detailed 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 SFAS 146 / EITF 94-3.

Included in the restructuring expenses are early retirement contracts in Germany, in which only incremental costs under IFRS are recognized once a binding contractual agreement has been entered into. The early retirement contracts in the SGL Group are generally set up according to the block model. During the employment phase the employee works full time although in this period he or she is only paid according to the part-time agreement. By this means, during the employment phase, the employer builds up arrears amounting to the as yet unpaid output that must be accounted for by accruing a provision. Under U.S. GAAP the complete compensation that the employee receives during the released phase are accrued over the employees’ remaining service period. The addition to provisions begins with the commencement of the part-time retiree relationship. Until the employment phase ends or the employee enters the released phase, the total compensation and the total accrued amount that the employee will receive during the released phase must be set aside. Accordingly a U.S. GAAP reconciliation difference of A1.2 million exists as of December 31, 2004.

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.

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 35 and 36 to our consolidated financial statements for a discussion of these differences.

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      2004       2003       2002      

 
 
  € (in millions)  
Net loss per IFRS  (81.7 )  (50.3 )  (23.6 ) 

 
 
 
Goodwill amortization  (0.0 )  3.4   5.1  
Intangible/tangible fixed assets  (1.5 )  (3.6 )  (3.0 ) 
Inventory  (0.0 )  (0.4 )  5.8  
Pension provisions  0.9   1.3   (2.1 ) 
Incentive plans  (4.2 )  (1.5 )  (2.2 ) 
Restructuring /Early retirement  (1.2 )  1.7   (7.1 ) 
First time implementation of IFRS       
Deferred tax on U.S. GAAP adjustments  (1.0 )  1.0   5.1  

 
 
 
Net loss per U.S. GAAP  (88.7 )  (48.4 )  (22.0 ) 

 
 
 
Cumulative Change in Accounting Principles  0.0   0.0   9.4  

 
 
 
Net loss per U.S. GAAP after Cumulative Change in       
     Accounting Principles  (88.7 )  (48.4 )  (12.6 ) 
 
 
 
 

     Under U.S. GAAP our operating profit (loss) for the years ended December 31, 2004, 2003 and 2002 was 46.4 million, €0.1 million and (5.1) million, respectively, compared to an operating profit (loss) under IFRS for the same periods of 65.5 million, 27.5 million and €9.3 million, respectively. Our U.S. GAAP operating profit in 2004, 2003 and 2002 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 13.3 million in 2004 (2003: 14.0 million; 2002: 15.2 million) as interest expense under IFRS. See Note 35 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 2004 was (1.70), compared to (2.18) in 2003 and to (1.01) in 2002. Basic loss per ADR in accordance with U.S. GAAP in 2004 was (0.57), compared to (0.73) in 2003 and to (0.34) in 2002. Due to the net loss in each year, the diluted loss per Share was the same as the basic loss.

Recent Accounting Pronouncements

     In December 2003 the FASB issued FAS No 132 (Revised) (‘‘FAS 132-R’’), Employer’s Disclosure about Pensions and Other Postretirement Benefits. FAS 132-R retains disclosure requirements of the original FAS 132 and requires additional disclosures relating to assets, obligations, cash flows, and net periodic pension cost. FAS 132-R was effective for fiscal years ending after December 15, 2003 except that certain disclosures were effective for fiscal years ending after June 15, 2004. The disclosures are included in this annual report in notes to the financial statements.

     In December 2003, the FASB issued a revised version of FIN 46, FASB Interpretation No. 46 (revised December 2003), Consolidation of Variable Interest Entities (FIN 46R), which requires public companies that did not apply FIN 46 prior to the issuance of FIN 46R to apply FIN 46R (or FIN 46) to those VIE’s commonly referred to as special-purpose entities for periods ending after December 15, 2003, and to apply FIN 46R to all other VIE’s for periods ending after March 15, 2004. Differences between FIN 46R and FIN 46 include new scope exceptions, revised requirements on how to evaluate sufficiency of equity at risk, and quantification and allocation of an entity’s economic risks and rewards. Additionally, requirements on evaluating a controlling financial interest, reconsidering whether an entity is a VIE and whether to consolidate were clarified. In accordance with the effective date provisions of FIN 46R, the Company applied FIN 46R as of March 31, 2004. The adoption of FIN 46R did not have a material impact.

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     In December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act) was signed into law in the U.S. The Act introduces a prescription drug benefit under Medicare (Medicare Part D), as well as a federal subsidy to sponsors of retiree health care benefit plans that provide a benefit that is at least actuarially equivalent to Medicare Part D. In accordance with FASB Staff Position (FSP) FAS 106-1, management elected to defer any accounting for the effects of the Act on the plan in interim periods preceding the fourth quarter. In May 2004, FSP FAS 106-2 was issued being effective for interim periods beginning after June 15, 2004. FSP FAS 106-2 supersedes FSP FAS 106-1 and provides authoritative guidance on accounting for the federal subsidy prescribed by the Act. Pursuant to FSP FAS 106-2 and the issuance of further guidance from the Center of Medicare and Medicaid in July 2004, management has concluded that the companies U.S. health care plans are at least actuarially equivalent to Medicare Part D. The company did not have a major effect of the Act on the foreign net periodic benefit costs as of December 31, 2004. For more information, see ‘‘Notes to Consolidated Financial Statements.’’

     In December 2003, the IASB released revised IAS 32, ‘‘Financial Instrument: Disclosure and Presentation’’ and IAS 39, ‘‘Financial Instruments: Recognition and Measurement’’. These statements replace IAS 32 (revised 2000), and supersede IAS 39 (revised 2000), and should be applied for annual periods beginning on or after January 1, 2005. The amendments are not expected to have a material impact on the Company’s consolidated financial statements.

     In December 2003, as part of the IASB’s project to improve International Accounting Standards, the IASB released revisions to the following standards that supersede the previously released version of those standards: IAS 1, ‘‘Presentation of Financial Statements’’, IAS 2, ‘‘Inventory’’, IAS 8, ‘‘Accounting Policy, Changes in Accounting Estimates and Errors’’, IAS 10, ‘‘Events after Balance Sheet Date’’, IAS 16, ‘‘Property, Plant and Equipment’’, IAS 17, ‘‘Leases’’, IAS 21, ‘‘The Effects of Changes in Foreign Exchange Rates’’, IAS 24, ‘‘Related Party Disclosures’’, IAS 27, ‘‘Consolidation and Separate Financial Statements’’, IAS 28, ‘‘Investments in Associates’’, IAS 31, ‘‘Interests in Joint Ventures’’, IAS 33, ‘‘Earnings per Share’’ and IAS 40, ‘‘Investment Property’’. The revised standards should be applied for annual periods beginning on or after January 1, 2005. The amendments are not expected to have a significant impact on the Company’s consolidated financial statements.

     On February 19th 2004 the International Accounting Standards Board (IASB) issued International Financial Reporting Standard 2 Share-based Payment (IFRS 2) on accounting for share-based payment transactions, including grants of share options to employees. The accounting under IFRS 2 is similar to Financial Accounting Standards 123 ‘‘Accounting for Stock-Based Compensation’’ and 148 ,, Accounting for Stock-Based Compensation-Transition and Disclosure’’ an amendment of FASB Statement No. 123. The objective of IFRS 2 is to provide guidance for the financial reporting by an entity when it undertakes a share-based payment transaction. In particular, the IFRS requires an entity to reflect in its statements of profit and loss and of financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees. IFRS 2 is effective for annual reporting periods beginning on or after January 1, 2005. All equity settled share based payment transactions that were granted by the Company on or after November 7, 2002 and have not yet vested as of January 1, 2005 (effective date) must be included in any financial statements issued after that date. The management of the Company is currently evaluating the impact of IFRS 2 on the IFRS Financial statements.

     On March 31, 2004 the IASB issued International Financial Reporting Standard 3 ‘‘Business Combinations’’ (IFRS 3), and revised Standards IAS 36 ‘‘Impairment of Assets’’ and IAS 38 ‘‘Intangible Assets’’. Under the new and revised standards all business combinations within the scope of IFRS 3 must be accounted for using the purchase method. The pooling of interests method is prohibited. Costs expected to be incurred to restructure an acquired entity’s (or the acquirer’s) activities must be treated as post-combination expenses, unless the acquired entity has a pre-existing liability for restructuring its activities. Intangible items acquired in a business combination must be recognized as assets separately from goodwill if they meet the definition of an asset, are either separable or arise from contractual or other legal rights, and their fair value can be measure reliably. Identifiable assets acquired, and liabilities and contingent liabilities incurred or assumed, must be initially measured at fair value. The amortization of goodwill and intangible assets with indefinite

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useful lives is prohibited. Instead they must be tested for impairment annually, or more frequently if events or changes in circumstances indicate a possible impairment. IFRS is similar to the SFAS 141 and 142. We are currently evaluating the impact of IFRS 3 on our consolidated financial statements.

     On March 31, 2004 the IASB issued requirements relating to asset disposals and discontinued operations. The requirements are set out in International Financial Reporting Standard (IFRS) 5 ‘‘Non-current Assets Held for Sale and Discontinued Operations’’. IFRS 5 requires assets that are expected to be sold and meet specific criteria to be measured at the lower of carrying amount and fair value less costs to sell. Such assets should not be depreciated and should be presented separately in the balance sheet. It also requires operations that form a major line of business or area of geographical operations to be classified as discontinued when the assets in the operations are classified as held for sale. These requirements relating to assets held for sale and the timing of the classification of discontinued operations are substantially the same as the equivalent requirements in SFAS 144 ‘‘Accounting for the Impairment or Disposal of Long-Lived Assets’’, which was issued in 2001. The type of operation that can be classified as discontinued under IFRS is narrower than under U.S. GAAP. We are currently evaluating the impact of IFRS 5 on our consolidated financial statements.

     On March 31, 2004 the IASB issued an Amendment to IAS 39 Financial Instruments: Recognition and Measurement on Fair Value Hedge Accounting for a Portfolio Hedge of Interest Rate Risk. The amendments simplify the implementation of IAS 39 by enabling fair value hedge accounting to be used more readily for a portfolio hedge of interest rate risk (sometimes referred to as a macro hedge) than under previous versions of IAS 39. We are currently evaluating the impact of the amendments on our consolidated financial statements.

     We did not consider any other IAS/IFRS pronouncements that are scheduled for adoption after December 31, 2004 to be applicable to the activities of SGL covered by this annual report.

Liquidity and Capital Resources

Overview Of Bank Debt And Cash Flows

          Year ended December 31,          

2004     2003


(millions of Euros)
Short term debt and current maturities  63.1   83.9  
Long term debt  373.6   410.6  

 
 
Total debt  436.7   494.5  

 
 
Cash and cash equivalents  (64.7 )  (46.1 ) 

 
 
‘‘Convert Deposit Account’’ for repayment of convertible bond  (50.1 )  0.0  
Restricted cash for debt repayment from sale of assets  (0.7 )  0.0  

 
 
Net bank debt  321.2   448.4  

 
 
Restricted cash in Antitrust Deposit Account  (77.2 )  0.0  


 

     Our net bank debt (which we define as long term debt plus short term debt, less cash and cash equivalents) decreased by 99.3 million in 2002, increased in 2003 by 21.4 million and decreased in 2004 by 127.2 million to 321.2 million.

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In connection with the refinancing entered into on December 20, 2002 and the funds provided at the beginning of 2003, the incurred deferred financing costs were capitalized on the balance sheet. On October 20, 2003 we informed the banks that we might be in a breach of one covenant under the syndicated loan facility and asked for a waiver regarding the non compliance on this test. After finalizing the quarterly consolidation in November 2003 and actually performing the test in detail, SGL informed the syndicated banks about the failure to pass the covenant test according to clause 22.4 ‘‘Total net debt to Consolidated EBITDA’’ for the last twelve months. The lenders under the syndicated credit facilities agreement have agreed to waive the exercise of their rights resulting from this default until December 30, 2003 in a first waiver letter and in a second waiver letter, until February 29, 2004. In addition, the lenders under the syndicated credit facility have waived their potential termination rights in connection with the antitrust fine of 23.6 million imposed by the European Commission on December 3, 2003 (see ‘‘Business Description – Legal proceedings – Antitrust proceedings’’) in a waiver letter until February 29, 2004.

On February 9, 2004, we successfully completed our refinancing package totaling 866 million. The refinancing concept is based on three pillars: a gross capital increase of around 266 million before related costs (33.3 million shares), a corporate bond consisting of subordinated senior notes (‘‘the notes’’) of 270 million due in 2012, and a syndicated loan including credit lines and guarantees of up to 330 million with a term of five to six years. The new refinancing facilities replaced the existing ones which consisted at December 31, 2003 primarily of short and long-term bank debt with a number of financial institutions (329.8 million), a convertible bond (133.7 million), and a syndicated revolving credit facility (31.0 million).

The core element of the transaction was the capital increase approved by a large majority of our shareholders at the Extraordinary General Meeting on January 15, 2004. We were able to set the subscription price per share at 8.0 instead of 6.0 as originally planned, thus generating 266 million from the capital increase. This resulted in much higher gross proceeds than initially expected and allowed us to reduce the principal of the notes from the originally scheduled 300 million to 270 million. The placement was a resounding success even though the notes received what we consider to be an unsatisfactory rating (Moody’s: Caa1, Standard&Poor’s: CCC+). Due to strong demand, we were able to place all the notes earlier than expected, and at an interest rate of 8.5% . The third pillar of our financing concept consists of syndicated loans of 330 million with a term of five to six years, which include credit lines and guarantees. These lines are granted to us by an underwriting syndicate. The existing syndicated loan of 495 million was now fully repaid. The loans provide full coverage for the maximum amount of all antitrust fines, along with any related interest payments and currency hedging costs.

Upon closing of the new loan agreement we deposited 143 million into an escrow account ‘‘Covert Deposit Account’’ to satisfy interest and principal obligations on our existing convertible bonds through to maturity. For our convertible bond due in 2005 we started in February 2004 a voluntarily tender offering with an acceptance period until April 5, 2004. During an acceptance period ending at midnight (CET) on April 5, 2004, the holders of an aggregate 83,687 convertible bearer bonds 2000/2005 (securities identification number (WKN) 723 531; ISIN DE0007235319) with a nominal value of 1,000.00 each accepted the offer by SGL Carbon Aktiengesellschaft to repurchase such bonds. This number represents approximately 62,605% of the total 133,650 bearer bonds with a nominal value of 1,000.00 each then outstanding. The purchase price for the bond was contractually fixed at 100.5% including accrued interest on the nominal outstanding amount. On June 28, 2004 we draw 5.6 million from the ‘‘Covert Deposit Account’’ to repay Senior Indebtedness. The funds reserved in the Convert Deposit Account to repay the convertible bond on September 27, 2005 amounted to 50.1million on December 31, 2004. A further portion of the proceeds from the new loan agreement (in the amount of 125.3 million) is deposited into a separate escrow account ‘‘Antitrust Deposit Account’’to be used exclusively for the purpose of paying fines in connection with antitrust proceedings and related costs. We will classify the amounts in both escrow accounts as ‘‘restricted cash’’ on our balance sheet. Both escrow accounts will increase our consolidated balance sheet total unless the amounts are used to pay the obligations. The loans provide full coverage for the maximum amount of all antitrust fines, along with any related interest payments and currency hedging costs. Our refinancing package therefore covers all known financial risks, creates a balanced

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maturity structure for our liabilities extending up to 2012 and substantially improves our equity base. It enables us to concentrate on our operating activities in the long term. See Item 10, ‘‘Additional Information – Material Contracts’’. On February 9, 2004 we used the new facilities to repay the existing bank debt.

The following table summarizes our debt and significant obligations as of December 31, 2004:

         
Maturing in: 
   
      Less than   








  After 
Obligations  Total    one year    2006    2007    2008    2009    2010    2010 
 
 
 
 
 
 
 
 
 
(millions of Euro) 
Term Facility A  14.6    10.0    2.5    2.1                 
Term Facility C  17.7    4.7    4.7    8.3                 
U.S: Senior Facility*  82.4    0.8    0.8    0.8    0.8    79.2         
Convertible Bond  50.0    50.0                         
Senior notes  270.0    0.0    0.0    0.0    0.0    0.0    0.0    270.0 
Other bank debt  2.0    1.3    0.1    0.1    0.1    0.1    0.1    0.2 

 
 
 
 
 
 
 
Total bank debt ***  436.7    66.8    8.1    11.3    0.9    79.3    0.1    270.2 

 
 
 
 
 
 
 
Acotec guarantees**  16.0    0.0    0.0    0.0    0.0    0.0    0.0    16.0 
Letter of Credit Facilities**  128.3    0.0    0.0    0.0    0.0    0.0    0.0    128.3 
Purchase obligations**  5.2    5.2                         
Operating leases**  7.7    1.7    1.1    1.0    0.8    0.8    0.6    1.7 
Capital leases  0.9    0.3    0.3    0.3                 
DOJ and Canadian settlements                               
    and payments 
67.7    31.0    28.2    8.5                 
Other obligations  46.7    46.7                         

 
 
 
 
 
 
 
Total  709.2    151.7    37.7    21.1    1.7    81.1    0.7    416.2 

 
 
 
 
 
 
 


* $ 112,4 million converted into Euro at prevailing exchange rate of 1.364 at balance sheet date.
** contingent liability
*** Total bank debt do not include A(20.3) million debt financing costs that were substracted from this amount in the IFRS financial statements
 

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 Board of Management 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 (see ‘‘Legal Proceedings’’ elsewhere in this document). 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. The full outstanding amount including interest charges starting June 2004 and the related future cash outflow for our hedging are fully deposited in a cash escrow account ‘‘Antitrust Deposit Account’’ after the refinancing was completed on February 9, 2004.

On July 18, 2001, two years after the plea agreement in the United States, the European Commission imposed an 80.2 million fine on SGL with respect to graphite electrodes, bearing interest at 6.04% annually, which was secured by a bank guarantee. We lodged an appeal against the total amount of this fine before the European Court of First Instance (‘‘CFI’’) in Luxembourg. Our appeal contends primarily that the fine includes amounts penalizing the same actions more than once (ne bis in idem-principle), material procedural defects and that the total amount of the fine is disproportionate. On April 29, 2004, the CFI reduced the fine to 69.1 million, primarily for procedural defects. The reduced amount is again secured by a bank guarantee. We have filed a further appeal against the decision of the CFI with the European Court of Justice (‘‘ECJ’’) in Luxembourg, seeking a decision in principle regarding the application of the ne bis in idem-principle. We are expecting a decision of the ECJ at earliest in 2006.

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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 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 maximum amount including interest to be paid is already included in the letter of credit facility of the new financing package.

In connection with the proceedings described above, the European Commission continued its investigations into other carbon and graphite products (for acts during the period through the late 1990s) and, in May 2003, the European Commission filed complaints against SGL and other specialty graphites manufacturers regarding allegations related to the ‘‘Electrical and Mechanical Carbon and Graphite Products’’ area of our business. In this proceeding, the Commission imposed a fine of 23.64 million on December 3, 2003. As a result of this situation, in 2003 provisions for antitrust proceedings, including legal and lawyers’ fees, were increased by 19.5 million. We have provided security of 23.6 million plus interest of 0.3 million as cash deposit from the ‘‘Antitrust Deposit Account’’. We do not believe this fine to be justified and filed an appeal against the decision with the European Court in February 2004.

Consolidated cash flows

The following table shows our consolidated cash flows for the continuing businesses (adjusted for currency fluctuations) for the three years ending December 31, 2004:

  2004   2003   2002  

 
 
 
 
(in millions)
 
Cash flows from operating activities:       
Net profit (loss) before taxes  5.0   (47.5 )  (18.2 ) 
(Gain) /loss on sale of property, plant and equipment  (0.6 )  0.2   (2.9 ) 
(Gain) / loss on sale of equity investments    (3.6 )  (1.0 ) 
Depreciation and amortization expense  66.9   69.5   73.6  
Amortization of refinancing costs *)  3.8   15.9    
Taxes paid  (14.0 )  (4.2 )  (20.2 ) 
Changes in provisions, net  14.0   24.2   (3.8 ) 
Change in working capital, net of changes in basis of       
   consolidation:       
   Inventories  (4.6 )  0.3   71.6  
   Trade receivables  0.9   (31.2 )  36.9  
   Trade payables  3.5   (4.1 )  8.4  
   Other operating assets/liabilities  24.3   11.9   (0.4 ) 

 
 
 
Cash provided by operating activities before payment of       
   antitrust fines  99.2   31.4   144.0  

 
 
 
Payments relating to antitrust proceedings  (52.0 )  (14.9 )  (10.1 ) 

 
 
 
Cash provided by (used in) operating activities  47.2   16.5   133.9  

 
 
 
Cash flows from investing activities:       
Acquisition of property, plant and equipment and intangible       
     assets, excluding goodwill  (46.1 )  (43.4 )  (50.7 ) 
Proceeds from sale of property, plant and equipment and       
     intangible assets  4.5   1.5   7.1  
Cost of acquisitions  (5.8 )  (1.7 )  (0.7 ) 
Proceeds from sale of non current financial assets  2.0   5.7   5.5  

 
 
 
Cash used in investing activities  (45.4 )  (37.9 )  (38.8 ) 

 
 
 

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  2004   2003   2002  

 
 
 
  (in millions)  
Cash flows from financing activities:       
Net change in financial liabilities  (50.4 )  60.5   (84.1 ) 
Payments in connection with refinancing*  (23.9 )  (15.9 )   
Dividends paid      (0.2 ) 
Net proceeds from capital increase  244.1   1.0   0.8  

 
 
 
Cash provided by financing activities  169.8   45.6   (83.5 ) 

 
 
 
Cash used/provided from discontinued operations  (24.6 )  0.7   (0.7 ) 

 
 
 
Effect of foreign exchange rate changes  (0.4 )  (0.3 )  (1.5 ) 

 
 
 
Net increase (decrease) in cash and cash equivalents  146.6   24.6   9.4  

 
 
 
Cash and cash equivalents at beginning of year  46.1   21.5   12.1  

 
 
 
Cash and cash equivalents at end of year  192.7   46.1   21.5  


 
 

*)      we reclassified the payments for refinancing costs for 2003, which were fully amortized in 2003, to the Cash Flow from Financing activities to be comparable with 2004.

Operating cash flows

Our cash provided (used) by operating activities from continuing businesses (adjusted for currency effects) totaled 47.2 million in 2004 compared to 16.5 million in 2003, a net increase of 30.7 million. Key issues for the improved cash provided by operating activities were the higher profitability resulting in a net profit before taxes of 5.0 million compared to a loss of (47.5) million in 2003. Working capital remained almost unchanged in 2004 despite higher turnover. The working capital development in 2003 was influenced by the termination of sale of accounts receivables. As of December 31, 2002 we had sold trade receivables amounting to 41.2 million to a financial services company. Inventories decreased substantially in 2002 by 82.7 million net of currency impacts due to a company wide initiative to reduce working capital.

The profit before taxes in 2003 was negatively impacted by 16.1 million expensed for refinancing costs on the syndicated loan received in January 2003. All costs related to this refinancing were capitalized (paid in 2003: 15.9 million) and written off at year-end 2003. We reclassified the payments for the refinancing packages of 2003 and 2004 as cash flow from financing activities. Non-cash expenses for depreciation and amortization of non-current assets decreased from 69.5 million in 2003 to 66.9 million in 2004. Payments relating to antitrust proceedings increased by 37.1 million to 52.0 million in 2004 mainly from funds reserved as restricted cash in the ‘‘Antitrust Deposit Account’’.

Restructuring expenses were as follows during 2004: in the CG Business Area, 8.4 million (2003: 3.7 million) attributable to expenses for headcount reductions and the write-downs of assets in Poland, Italy, Germany and Spain; in the GS Business Area, 1.6 million (2003: 3.7 million) largely due to the partial closure of a plant in the U.K.; in the SGLT Business Area, 1.4 million (2003: 1.8 million) attributable to write-downs of assets in the U.S.; and other expenses totaling 8.3 million (2003: 0.2 million) largely comprised non-cash write-downs of 4.9 million for land in the Unites States and expenses in connection with the resignation of a member of the Board of Management amounting to 1.7 million. The cash outlays for restructuring expenses in 2004 and 2003 were 7.7 million and 6.3 million respectively.

Research and development expenses are almost unchanged at 19.2 million (2003: 19.0 million), representing 2.1% (2003: 2.1%) 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. We also invested in research related to

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the aerospace industry as well as to high performance carbon-ceramic disc brakes used in sports cars. 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.

Investing cash flows

Cash used for investing activities amounted 45.4 million in 2004, compared to 37.9 million in 2003 and 38.8 million in 2002. Following the completion of SGL T’s major capital expenditure programs, we continued to streamline capital expenditures in property, plant and equipment as planned. Capital expenditures for property, plant and equipment increased compared from 31.0 million in 2003 (32.8 million including discontinued operations) by 6.3 million to 37.3 million in 2004. Significant additions related to capital expenditures for replacements in our plants in Germany, the United States, Poland and Italy. Compared to the depreciation of 62.3 million the capital expenditures were lower by 25.0 million. 71% of these capital expenditures were attributable to CG, 10% to GS; 15% to SGL T and 4% for other activities.

Capital expenditures relating to intangible assets decreased by 4.1 million to 8.8 million in 2004 primarily due to the finalization and implementation of our new Group-wide common IT platform based on SAP (SGL ONE) on which we spent around 9.3 million in 2003. The new system went successfully live in our companies in Spain and North America on January 1, 2004. For financial assets we spent 5.8 million in 2004 compared to 1.7 million in 2003. The main portion was related to a capital increase in the non-consolidated subsidiary SGL Belgium.

Already in 2002, we began to reduce capital expenditures as part of our strategic priority to increase cash flow and to reduce net debt. We intend to keep capital expenditures in 2004 to a level significantly below depreciation. We expect these expenditures to be limited primarily to replacement and maintenance. Certain covenants on our new financing agreements entered into on February 3, 2004 limit the capital expenditure for fixed assets excluding goodwill to 53.0 million in 2004 and 55.0 million in 2005.

Financing cash flows

Our liabilities decreased by 109.2 to 622.7 million in 2004 compared to the increase by 21.7 to 731.9 million in 2003. The decrease in financial liabilities in 2004 resulted primarily from the net proceeds of the capital increase of 244.1 million. Our corporate debt decreased by 78.1 million to 416.4 million at December 31, 2004 from 494.5 million at December 31, 2003 including the netting of capitalized refinancing costs, non-cash effects from exchange rate changes and the effects from discontinued operations. Excluding the netting of capitalized refinancing costs of 20.3 million, the non-cash effect from exchange rate changes of 7,0 million and the effects from discontinued operations of 0.4 million the decrease was 50.4 million. Our corporate debt carried an average interest rate of 6.3% during 2004, compared to an average rate of 4.7% in 2003.

We made payments in connection with refinancing of 23.9 million in 2004 and 15.9 million in 2003.

We also received approximately 1.0 million in 2003 and 0.8 million in 2002 in connection with the issuance of Shares to current and former employees and managers who elected to exercise stock options during those years or who were included into the German share bonus plan for tariff employees.

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 2004 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, sale 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 2004, SGL Carbon AG 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’’

Discontinued operations

Discontinued operations are shown in the cash flow statement in the net amount of (24.6) million. For the discontinued operations, cash used in operating activities amount to 23.9 million, cash used in investing activities to 0.4 million, and cash used in financing activities to 0.3 million.

Research and Development, Patents and Licenses, etc.

Our activities in new product development concentrate on high-tech innovations with substantial growth potential. Our primary focus is currently on ceramic brake discs 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 31 million in 2001 and following the completion of the development of our ceramic brake disc and the start of operations at our new brake disc production facility in Meitingen decreased to 24 million in 2002, 19 million in 2003 and 19 million in 2004. 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.

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 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 (800 mm) 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.

Further R&D projects in 2004:

CG: Cost reduction and customer benefits

     The optimization of processes designed to reduce our manufacturing costs and the launch of the second phase of our SGL Excellence program had an important impact on fiscal year 2004. We assist our customers and suppliers improve their value added based on the utilization of our products and raw materials. The use of optimized modelling technologies made it possible to optimize energy consumption in baking and graphitization, especially in thermal processes. In extensive test series with our customers, we investigated the potential of new raw materials for specific customer applications. Our focus here was on product quality, secure supplies, and efficient raw material utilization.

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Using our application model, which has been accepted worldwide, we helped our customers enhance their productivity in electric steel production by means of larger format graphite electrodes. We developed a new graphitized cathode with low consumption and therefore longer useful life for aluminium production. This product makes it possible in particular for technically more demanding modern smelters to further lower their aluminium production costs.

In blast furnace technology for steel production, we developed an improved microporous stone for the thermally most heavily used part of the furnace. This product, which we will launch in the market in 2005, will significantly extend the useful life of blast furnaces.

GS: New products and materials for mechanical applications

We developed new materials for mechanical applications and made them available to our customers during the fiscal year. Significant examples include products for shutoff valves as well as high-strength slide rings for gaskets that are pressed to final size, including the increased use of this technology for applications using slide bearings. In the area of composites, we developed large coiled monolithic and carbonfiber-reinforced heating elements. Our in-house development of rigid graphites for use as an insulating material in the construction of high-temperature furnaces eliminates our previous dependence on one outside supplier.

SGL T: Innovations in the energy and automotive sectors

Innovative wet friction linings in automotive technology developed

The significantly greater torque generated by modern diesel and gasoline engines puts high demands on the friction linings of clutches and synchro-mesh rings. In 2004, together with partners in the automotive industry, we succeeded in developing low-cost carbon-fiber-reinforced wet friction linings that meet the greater demands in this segment. These friction linings are characterized by constant friction properties, a high level of abrasion resistance, and an outstanding oil resistance.

More efficient porous burners with silicon-carbide-ceramic foams

Porous burners are clean-air and compact surface heaters with a very high power density, which are required by many industrial applications such as drying processes. The combustion is without an open flame in a porous structure that is exposed to high thermal and mechanical stress. Both the useful life and the power density of this type of environmentally-friendly burner system can be further enhanced by using newly developed silicon carbide foams.

Energy saving room air-conditioning control using latent heat storage

The air-conditioning for buildings is becoming an increasingly important issue. Latent heat storage represents an energy-saving alternative to conventional energy-intensive technologies. This process is based on the use of a special material for phase rotation to absorb and store cold during the night, which can then be used for room cooling during the day. Highly heat-conductive graphite structures are necessary to make it possible to store and release the cold on the basis of a daily cycle. Storage modules were developed and optimized together with room air-conditioning specialists in 2004; these products will be ready for series production in 2005.

Trend Information

Slow Global economy expected in 2005

Despite considerably higher raw material prices and growing skepticism regarding the continuing economic boom in East Asia, many experts expect the global economy to continue growing in 2005 as well. The economists of the International Monetary Fund (IMF) are projecting global growth of 4.3% . While OECD forecasts call for the U.S. economy to grow by 3.3% in 2005, the greatest strength is again expected to come from East Asia. In China, according to the OECD, the economy should again grow by a considerable 8.0% despite higher raw material prices. Due to the slower increase in exports, economic growth in Japan is expected to be a considerably lower 2.1% . Based on this scenario, according to the fall expert opinion of the leading German economic research institutes, growth in Europe could stabilize at 2.3% . As was the case in 2004, SGL Carbon’s most important customer industries are expected to show a varying development in 2005, as well. The global steel market’s boom is expected continue – but on a slightly moderate level.

CG: Growth trend expected to continue

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     The Carbon and Graphite Business Area (CG) is expected to benefit from the confident forecasts for the steel sector in 2005. Following the close-to-full utilization of production capacities for graphite electrodes for a large part of the year as of February 2005, the fiscal year 2005 is also characterized by high capacity utilization. Similar to 2004, sales of cathodes and carbon electrodes are expected to develop on a slightly restrained level. Due to the insolvency-related supply shortage in the graphite electrode industry in the years 2002 and 2003, the already announced price increases for the principal sales product of SGL Carbon appear to be attainable. We largely hedged our European plants’ expected net position from invoiced deliveries and raw material deliveries denominated in U.S. dollars. The cost reduction initiatives SGL Excellence and SGL Ten are expected to generate considerable savings in 2005/2006. The further consolidation of the production of cathodes and blast furnace linings in Poland should also have a favorable impact. In view of this situation, in the current fiscal year we expect a modest increase in sales revenue, a further marked rise in earnings, and consequently an improved return on sales.

GS: Confidence despite uncertain forecasts

The forecasts for the Graphite Specialties Business Area (GS) involve a considerable degree of uncertainty. For example, a restrained upswing in demand in most customer industries contrasts with a potential weakening in electronics applications. Incoming orders and the order backlog both point to a moderate increase in sales revenue. Due to efforts to improve the profitability of the North American business, slight price increases and additional cost reductions, we expect operating profit of the GS Business Area to experience a double-digit growth and the return on sales to increase slightly.

SGL T: Impetuses to growth anticipated from all areas of business

We expect marked sales revenue and performance improvements in all areas of business of the SGL Technologies Business Area (SGL T) for 2005. The goal is to reach the break-even point as quickly as possible. In the Carbon Fiber business, the cooperation agreement with the Japanese precursor producer Mitsubishi Rayon is expected to ensure a greater range of products. The contract calls for long-term cooperation in technology and raw materials. The development of the brake disc business largely depends on the accelerated transfer of the pilot plant to large-scale production as well as the success of the discussions being held in this context with an automotive group. The structural and component business in the aviation and aerospace technology sector should benefit from the solid order backlog and newly acquired projects. New applications for batteries, heat storage, climate control and thermal management should generate marked impetuses to growth for our expanded graphites and industrial composites in 2005.

Marked improvement in consolidated earnings expected

Assuming that exchange rates remain stable and that no unpredictable events occur, we are forecasting a medium single-digit percentage increase in the sales revenue of the SGL Carbon Group in 2005. EBIT should rise at a clearly disproportionately high rate. This would also have a favorable impact on the Company’s cash flow, which will result in a further decline in consolidated debt. In this case, the equity ratio should improve further.

Liquidity and capital resources

The financial framework provided by our new refinancing package ensures us sufficient funds to cover peak financial requirements during the year.

Off-balance sheet arrangements

At this time we do not use ‘‘off-balance sheet financing arrangements’’, related to the securization of receivables or access to assets through special purpose entities or variable interest entities. At the end of 2002 we sold receivables to a third party finance company of €41.2 million, without any recourse. This reduced SGL Carbon’s net financial debt by about the same amount. These sales of receivables were eliminated completely by the end of 2003.

SGL Group companies provide standby letters of credit to support associated and related Group companies. Performance bonds and guarantees of advanced payments received guarantee the fulfillment of contractual commitments of partners in a consortium where SGL may be a partner. In the event of non-performance under the contract by the consortium partner(s), the Company will be required to pay up to an agreed upon maximum amount.

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Furthermore, the Company has provided indemnifications in connection with divestments of business entities, which protect the buyer from tax, legal, and other risks related to the purchased business entity. Provisions have been provided for in the financial statements in the event that the Company is required to make a payment under these indemnifications. In addition, provisions have also been established for the non-contingent component of the outstanding guarantees. Most of the guarantees of the Company have fixed or scheduled expiration dates, and in the Management of the Company’s experience, such guarantees are rarely drawn upon. For additional information with respect to the Company’s outstanding guarantees, see Note 25 to the Consolidated Financial Statements.

SGL has set up credit lines for guarantees in connection with the financing of project-related business in the Surface Technology and Plastics Process Technology businesses. Due to the sale of these operations as of January 6, 2005, SGL will continue to carry the credit lines existing at that date in the amount of approximately €15.6 million (December 31, 2004: €16.0 million) until each individual guarantee will expire. Furthermore, SGL made available an additional temporary credit line for guarantees through June 2005 up to a maximum amount of €5.0 million in support of new projects. The average utilization of such guarantees in the past has been less than 1%. After careful assessment of possible future utilization, we established an appropriate provision at year-end.

Rental and lease obligation relating to land and buildings, IT equipment, motor vehicles and other items of property, plant and equipment amounted to €8.6 million and €9.1 million at December 31, 2004 and 2003, respectively.

SGL has provided a guarantee to the European Commission regarding the antitrust fine imposed on graphite electrodes of €80.2 million. In April, the European Court of First Instance reduced the fine imposed in 2001 in the graphite electrode proceedings from €80.2 million to €69.1 million. The guarantee was reduced accordingly. A provision was accrued on the balance sheet to provide for the estimated payment. The major part of the guarantee obligation of €59.4 million at December 31, 2004 (December 31, 2003: €35.5 million) represent the difference between the guarantee and the accrued provision.

At December 31, 2004 and 2003 there were also call-in obligations of USD 3.8 million and USD 3.8 million for shares in an unconsolidated subsidiary.

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Tabular disclosure of contractual obligations

Obligations  Total    Less than    Maturing in:    After  2010 









2006    2007    2008    2009    2010 
one year 

 

 
 
 
 
 
        (millions of Euro)   
Term Facility A  14.6    10.0    2.5    2.1                 
Term Facility C  17.7    4.7    4.7    8.3                 
U.S: Senior Facility*  82.4    0.8    0.8    0.8    0.8    79.2         
Convertible Bond  50.0    50.0                         
Senior notes  270.0    0.0    0.0    0.0    0.0    0.0    0.0    270.0 
Other bank debt  2.0    1.3    0.1    0.1    0.1    0.1    0.1    0.2 

 
 
 
 
 
 
 
Total bank debt ***  436.7    66.8    8.1    11.3    0.9    79.3    0.1    270.2 

 
 
 
 
 
 
 
Acotec guarantees**  16.0    0.0    0.0    0.0    0.0    0.0    0.0    16.0 
Letter of Credit Facilities**  128.3    0.0    0.0    0.0    0.0    0.0    0.0    128.3 
Purchase obligations**  5.2    5.2                         
Operating leases**  7.7    1.7    1.1    1.0    0.8    0.8    0.6    1.7 
Capital leases **  0.9    0.3    0.3    0.3                 
DOJ and Canadian settlements  and payments  67.7    31.0    28.2    8.5                 
Other obligations  46.7    46.7                         

 
 
 
 
 
 
 
Total  709.2    151.7    37.7    21.1    1.7    81.1    0.7    416.2 
 
 
 
 
 
 
 
 

                             
*  $ 112,4 million converted into Euro at prevailing exchange rate of 1.364 at balance sheet date.    
** contingent liability –    
*** Total bank debt do not include (20.3) million debt financing costs that were substracted from this amount in the IFRS financial statements    
       

For details and a description see ITEM 5 ‘‘Liquidity and capital resources’’ and the Note 25 to the financial statements.

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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 separate boards of directors. These are the Vorstand, or Board of Management, which we refer to as our Executive Committee or Board of Management, and the Aufsichtsrat or Supervisory Board. The two boards are separate; no individual may be a member of both boards.

The Board of Management is responsible for managing our business in accordance with applicable laws and with our articles of association (Satzung).

The principal function of the Supervisory Board is to supervise the Board of Management. It is also responsible for appointing and removing the members of the Board of Management. Certain transactions, such as purchases and sales of real estate, commencement or discontinuance of business lines, the granting of guarantees, or the purchase or sale of equity interests, require the prior consent of the Supervisory Board if the transaction goes beyond our ordinary course of business. To ensure that these functions are carried out properly, the Board of Management 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.

The members of the Board of Management and the members of the Supervisory Board are solely responsible for and manage their own areas of competency (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, of employees and of creditors.

As a general rule under German law, a shareholder has no direct recourse against the members of the Board of Management or the Supervisory Board in the event that they are believed to have breached a duty toward 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.

Board of Management

Since January 1, 2005 our Board of Management consists of four 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. Effective January 1, 2005 Sten Daugaard was appointed to the Board of Management as the successor of the Chief Financial Officer Dr. Bruno Toniolo, who retired as of the end of 2004. By mutual agreement, at the end of December 2004, Dr. Klaus Warning resigned as member of the Board of Management in order to pursue other business interests. Due to the company’s strategic reorientation, Mr. Warning will not be replaced on the Board of Management.

Pursuant to our articles of association, any two members of the Board of Management or one member of the Board of Management together with the holder of a general power of attorney (Prokura) may bind SGL.

The Board of Management must report regularly to the Supervisory Board, in particular, on proposed business policy and strategy, profitability and on the current business of the SGL Group as well as on any exceptional matters that may arise from time to time.

The members of the Board of Management are appointed by the Supervisory Board for a maximum term of five years. They may be reappointed and 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 Board of Management may be removed by the Supervisory Board prior to the expiration of his or her term. A member of the Board

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of Management may not attend to, or vote on, matters relating to proposals, arrangements or contracts between himself and the SGL Group.

According to our articles of association, board decisions are made by a simple majority of the votes, as long as a larger majority is not required by law. In the event of a tie, the vote of the chairman of the Board of Management is decisive. In practice, our Board of Management reaches its decisions by consensus.

The following table shows the members of our Board of Management, including the year in which they were appointed and the end of their term:

    Year             
Name    Appointed    End of Term    Title    Other activities 

 
 
 
 
Robert J. Koehler    1994    December 2006    Chairman of the Board of    Member of the Supervisory Board 
            Management    of Benteler AG(1), Paderborn; 
                Wacker-Chemie GmbH, Munich; 
                Pfleiderer AG, Neumarkt; AXA 
                Lebensversicherungs AG, Cologne; 
                Heidelberger Druckmaschinen AG, 
                Heidelberg
                 
Sten Daugaard    2005    December 2007    Chief Financial Officer    SGL Carbon Luxemburg S.A.(1), 
                Luxembourg SGL Carbon GmbH 
                (1), Meitingen 
                 
Theodore H. Breyer    1999    June 2008    Member of the Board of    Member of the Supervisory Board 
            Management    (within SGL Group) of HITCO 
                CARBON COMPOSITES Inc., 
                Gardena, USA; SGL CARBON 
                S.p.A., Milan, Italy, SGL 
                CARBON S:A:, La Coruña, Spain, 
                SGL CARBON LLC, Charlotte, 
                USA 
                 
Dr. Hariolf Kottmann    2001    March 2007    Member of the Board of    Member of the Supervisory Board 
            Management    or other Control Bodies (within 
                SGL Group) of; SGL CARBON 
                ASIA PACIFIC Sdn Bhd(1), 
                Malaysia; SGL CARBON Japan 
                Ltd.(1), Tokyo, Japan; SGL 
                TOKAI CARBON Ltd.(1), 
                Shanghai, China; SGL CARBON 
                Far East Ltd.(1), Shanghai, China 
                 
Dr. Bruno Toniolo    1996    December 2004    Member of the Board of    Member of the Supervisory Board 
            Management    or Committee other control bodies 
                (within SGL Group) of SGL 
                Carbon Luxemburg S.A., 
                Luxembourg; SGL CARBON S.A., 
                La Coruna, Spain; SGL CARBON 
                S.p.A., Milan, Italy; SGL 
                CARBON Polska S.A.(1), Ratibor, 
                Poland; 
                 
Dr. Klaus Warning    1997    December 2004    Member of Board of    Member of the Advisory Board of 
            Management    the Committee University of 
                Ilmenau; Member of the Board of 
                Management of the European 
                Carbon and Graphite Association 
                (ECGA), Brussels, Belgium; 
                Member of the Advisory Board of 
                Commerzbank in the State Hessen, 
                Frankfurt am Main 

(1) Chairman of the Supervisory Board.             
The members of the Board of Management may be contacted at SGL’s business address.     

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Robert J. Koehler has served as Chairman of the Board of Management 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 serving as Director of the 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. In addition to his activities at SGL, he also serves as a member of the supervisory boards of Benteler AG, Paderborn (Chairman); Wacker-Chemie GmbH, Munich; Pfleiderer AG, Neumarkt; Heidelberger Druckmaschinen AG, Heidelberg, AXA Lebensversicherungs AG, Cologne.

Sten Daugaard was appointed to the Board of Management as Chief Financial Officer effective January 1, 2005. He joined SGL as Executive Vice President Finance at January 1, 2004. Prior to joining the SGL Group he has served as Chief Financial Officer and Chief Executive Officer of LTU Group Holding and LTU International Airways from the year 2000 to 2003. In 1977, Mr. Daugaard joined the Den Danske Bank Kopenhagen and held various positions in Kopenhagen and in the USA until 1986, last as Head of Foreign Currency Financing Department and Treasury. From 1986 to 1988 he was Head of the Foreign Department at Nykredit and from 1989 to 1992 Management Board Member of Frankfurter Bodenkreditbank. Between 1992 and 1997, Mr. Daugaard has served as Finance Director and European Treasurer at ITT Corporation, ITT Industry Europe and ITT Automotive before he joined the SAirGroup as Corporate Treasurer from 1997 to 2000. In addition to his activities at SGL, he also serves, within the SGL Group, as Chairman of the SGL Carbon Luxemburg S.A., Luxembourg and the SGL Carbon GmbH , Meitingen.

Theodore H. Breyer was appointed to the Board of Management 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 1995, Mr. Breyer held various positions at Hoechst Celanese, most recently as Vice President and General Manager for Bulk Pharmaceuticals Products of the Specialty Chemicals Group. In 1995, Mr. Breyer joined the SGL Group. From 1997 to 1999, Mr. Breyer served as Chairman of our Carbon and Graphite North America business unit. In addition to his activities at SGL, he also serves, within the SGL Group, as a member of the supervisory boards of HITCO CARBON Composites Inc., Gardena, USA and SGL CARBON LLC, Charlotte, USA.

Hariolf Kottmann was appointed as a member of the Board of Management in 2001. In addition to this appointment, he took over the responsibility for our 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. In addition to his activities at SGL, he also serves, within the SGL Group, as chairman of the supervisory boards of SGL ACOTEC GmbH, Siershahn, SGL CARBON ASIA PACIFIC Sdn. Bhd., Malaysia, SGL CARBON Japan Ltd., Tokyo, Japan, SGL TOKAI CARBON Ltd., Shanghai, China, and SGL CARBON Far East Ltd., Shanghai, China.

     Bruno Toniolo was appointed as a member of the Board of Management in 1996 and has been responsible for finance and accounting until his retirement at December 31, 2004. Between 1992 and 1995, he served as Chairman of our 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. In addition to his activities at SGL, he also serves, within the SGL Group, as a member of the supervisory boards of SGL CARBON S.A., La Coruna, Spain, SGL CARBON S.p.A., Milan, Italy, SGL Carbon Luxembourg S.A., Luxembourg as well as Chairman of the Supervisory Board of SGL CARBON Polska S.A., Ratibor, Poland.

Klaus Warning was appointed as a member of the Board of Management in 1997 and has been responsible for our SGL Technologies business area. 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

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United States. Mr. Warning has also held several management positions, including in research and development, with Hoechst AG. In addition to his activities at SGL, he also serves, within the SGL Group, as a member of the advisory board of the University of Illmenau, as member of the Board of Management of the European Carbon and Graphite Association (ECGA), Brussels, Belgium and as a member of the advisory board of Commerzbank in the State of Hessen, Frankfurt am Main. By mutual agreement, at the end of December 2004, Mr. Warning resigned as member of the Board of Management in order to pursue other business interests. Due to the company’s strategic reorientation, Mr. Warning will not be replaced on the Board of Management.

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 

 
 
Armin Bruch    2005    Carbon and Graphite business unit 
Dr. Hans-Joachim Bühler    2004    Managing Director – SGL Acotec Corrosion 
        Protection business unit (until 01/05) 
Reinhard Damerow    1992    Group Coordination – Treasury (until 04/04) 
Sten Daugaard    2004    Executive Vice President – Finance (until 12/04) 
Britta Döttger    2004    Group Coordination – Treasury (since 10/04) 
Wilhelm Hauf    2001    Group Coordination – Accounting 
Dr. Joachim Heins-Bunde    1992    Group Coordination Corporate Planning 
Dr. Konstantin Krämer    2004    Managing Director – SGL Acotec Corrosion 
        Protection business unit (until 01/05) 
Gernot Hochegger    1997    Graphite Specialties Europe business unit 
    2002    Managing Director – SGL Technologies (until 12/04) 
Helmut Mühlbradt    1989    Group Coordination – Human Resources and Legal 
Christian Pagel    2004    Corporate Business Systmens (since 12/04) 
Dr. Jan Verdenhalven    2001    Managing Director – SGL Technologies 
Thomas Werner    2000    Group Coordination – Information Services 
        (until 11/04) 
Dr. Gerd Wingefeld    2005    Graphite Specialties business unit 

Mr. Bruch was appointed Chairman of the Carbon Graphite business unit at January 1, 2005. He has joined SGL as Head of Commercial of Carbon Graphite business unit in 2001. Prior to joining the SGL Group he has held various positions in marketing, sales and general management at Celanese and in the Hoechst Group.

Mr. Bühler joined SGL as Managing Director of SGL Acotec and Head of Business Line Surface Protection of the Corrosion Protection business unit in January 2004. He resigned from this position on January 6, 2005. Prior to joining the SGL Group he held various managing positions in the construction as well as in the chemicals industry.

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 until April 2004. Prior to joining the SGL Group, he held the position of Head of the Securities Department of Hoechst AG.

Mr. Daugaard joined SGL as Executive Vice President Finance at January 1, 2004. He held this position until his appointment as Chief Financial Officer at January 1, 2005 Prior to joining the SGL Group he has worked in different treasury and general manager positions in general banks and in the manufacturing industry, as well as in the automotive and airline industry in Europe and the United States.

Ms. Döttger joined SGL as Head of Group Treasury on October 1, 2004. Prior to joining the SGL Group she held the position as Head of Finance at Fraport AG and has served several years in various positions at Deutsche Bank AG, e.g. as credit analyst and account manager.

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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. He held this position until his retirement at the end of 2004.

Mr. Krämer was appointed Managing Director of SGL Acotec at the beginning of January 2004 and resigned from this position on January 6, 2005. He joined the SGL Group in 2001 as Head of Corporate Development. Prior to joining the SGL Group, Mr. Krämer held positions as project manager and practice group leader in the consulting company McKinsey.

Mr. Mühlbradt 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. Pagel was appointed Head of Corporate Business Systems at December 1, 2004. He joined SGL as Head of Information Technology at SGL Acotec in October 2003. Prior to joining the SGL Group he held various positions as IT strategy and IT management consultant at Deloitte & Touch, Berentzen Group AG and CCE AG. Most recently he was the Managing Director at Edding Informationstechnologie GmbH.

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 and held this position until November 2004. Prior to joining the SGL Group, he held similar positions including operations research with other international companies.

Mr. Wingefeld was appointed Chairman of the Graphite Specialties Business Unit at January 1, 2005. He joined SGL as Head of Global Business Line Feedstock within the Graphite Specialties business area in 2001. Prior to joining the SGL Group he held various positions in research & development, production, operation and manufacturing at Celanese and in the Hoechst Group.

Supervisory Board

Our Supervisory Board currently 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).

A member of the Supervisory Board elected by the shareholders may be removed by a simple majority vote at a general meeting of the 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 tied vote, another vote is held. In the event of a second tied vote, the chairman has a tie-breaking vote.

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The members of the Supervisory Board are each elected for a term of approximately five years (the term expires at the end of the general meeting of shareholders in which the shareholders discharge the Supervisory Board for the fourth fiscal year after the beginning of the member’s term. The year in which the member’s term begins is not counted in this calculation). The remuneration of the members of the Supervisory Board is fixed by our articles of association.

The following table shows the current members of our Supervisory Board, the years in which they were first elected to the Supervisory Board of SGL or its predecessor companies, and their principal occupations:

    Year first   End of    
Name   appointed   term (1)   Other activities 

 
 
 
Max Dietrich Kley    2004   2008   Former Member of the Board of Management of BASF 
(Chairman since September 17, 2004)         AG, Ludwigshafen; Chairman of Börsensachver-
          ständigenkommission (BSK); President of 
          Deutsches Aktieninstitut e.V., Frankfurt/Main (DAI); 
          Member of the Board of Trustees of the International 
          Accounting Standards Committee Foundation (IASCF); 
          Supervisory board memberships: BASF AG, Ludwigshafen; 
          Bayerische Hypo- und Vereinsbank AG, Munich; 
          InfineonTechnologies AG (2) , Munich; Schott AG, Mainz; 
          Heidelberg Cement AG, Heidelberg) 
Prof. Dr. rer. nat. Utz-Hellmuth    1992   2008   Chairman of the Board of Management of Degussa AG 
     Felcht
        Düsseldorf; Member of the Management Board of RAG 
(Chairman until September 17, 2004)          AG Essen; Internal board memberships: Goldschmidt AG(2) 
          Essen (until December 31, 2004) ; SKW Metallurgie AG(2) 
          Torstberg (until December 31, 2004) ; RÜTGERS AG 
          Essen(2) (until December 31, 2004); RAG Coal International,
          Essen; STEAG AG, Essen ; Degussa Corporation USA(2) ; 
          Degussa (China) Co. Ltd.(2) ; External board memberships: 
          Gerling-Konzern Vesicherungs-Beteiligungs AG, Cologne 
Heinz Schroth(3)    1988   2005   Industrial sales manager, SGL Carbon GmbH 
(until April 27, 2005)            
Peter Fischer(3)    1993   2008   Attorney, SGL CARBON Aktiengesellschaft 
Dr.-Ing. Claus Hendricks    1996   2008   Former Member of the Management Board of Thyssen 
          Krupp Stahl AG Duisburg; Internal board memberships: 
          Edelstahlwerke Witten-Krefeld GmbH, Witten; External 
          board memberships: Pro Lean Consulting AG Düsseldorf; 
          Schumag AG(2) , Aachen; TSTG GmbH, Duisburg 
Hansgeorg B. Hofmann    1996   2004   Banker, self-employed entrepreneur; Great Britain ; 
(until April 30, 2004)          Equinet AG Frankfurt/Main(2) 
Juergen Kerner(3)    2002(4)    2008   Authorized representative of IG Metall, administrative 
          center Augsburg; External board memberships: Member of 
          the Supervisory Board of Fujitsu-Siemens Computers 
          GmbH (until October 2004); IWKA Aktiengesellschaft 
          Karlsruhe; MAN B&W Diesel AG, Augsburg 
Dr.-Ing. Hubert H. Lienhard    1996   2008   Member of the Management Board of Voith AG, 
          Heidenheim; Internal Board memberships: Voith Turbo 
          Beteiligungs GmbH Heidenheim; Voith Paper Holding 
          Verwaltungs GmbH, Heidenheim; Voith Siemens 
          Hydro Power Generation Ltda., São Paulo, Brasil; Voith 
          Siemens Hydro Power Generation Shanghai Ltd.; Shanghai, 
          China; Voith Siemens Hydro Power Generation Inc., York, 
          PA/USA; External board memberships: Sulzer AG, 
          Winterthur, Switzerland 
Jacques Loppion    1993   2008   Former President du Conseil d’Administration Groupe 
          SNPE S.A., France (retirement since end of May 2004) ; 
          External board memberships: Algeco S.A., Paris, France 
          (until September 2004) ; Groupe Gascogne, Saint-Paul-les- 
          Dax, France, S.A.I. Golf, Saint-Nom-la Bretèche, France ; 
          KME AG, Osnabrück 
Josef Scherer(3)    2003   2008   Chemical laboratory worker, SGL CARBON GmbH 

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    Year first   End of    
Name    appointed   term(1)   Other activities 

 
 
 
Edelbert Schilling(3)    2003   2008   Technician, SGL ACOTEC GmbH 
Andrew H. Simon(6)    1998   2008   Advisor and Member of the Supervisory Board of several 
          companies; External board memberships: Member of the 
          Supervisory Board of Kaffee Partner Holding GmbH(2))
          Osnabrück; Associated British Ports plc., London, United 
          Kingdom; Brake Bros, Ltd., United Kingdom; Ashford 
          Dalkia UK plc, London, United Kingdom; Finning 
          International Inc., Vancouver, Canada 
Heinz Will,(3) (since April 27, 2005) Electrician SGL Carbon GmbH
Hans-Werner Zorn(3)    2003(5)    2008   Mechanical technician, SGL CARBON GmbH 

(1) Terms end upon the adjournment of the annual shareholders’ meeting held in the year indicated.
(2) Chairman
(3) Employee representatives.
(4) Appointed on September 13, 2002.
(5) Appointed on February 27, 2003.
(6) Financial Expert of Audit Committee

The members of the Supervisory Board may be contacted at the Company’s business address.

Committees

For the purpose of handling complex issues, the Supervisory Board establishes various committees in line with and on the basis of our articles of association. The Supervisory Board has established a Codetermination Committee, a Personnel Committee, an Ad-hoc Committee, an Audit Committee, a Strategy Committee, a Refinancing Committee and a Technology Committee. The Supervisory Board may, at its own discretion, establish, permanently or temporarily, other committees. In its resolutions regarding the establishment of other committees, the Supervisory Board is required to expressly outline the tasks of the new committee and its composition and to state whether the new committee shall be entitled to pass resolutions.

The Supervisory Board has established an Audit Committee that has primarily an advisory function. The Audit Committee deliberates on the annual financial statements and proposes the financial statements to the entire Supervisory Board. In addition, the Supervisory Board, upon proposal of its chairman, may resolve that the Audit Committee in its stead give the necessary approval (pursuant to article 3 para. 6 and 7 of the articles of association) for an increase of authorized capital. After discussion with senior management the Audit Committee also prepares the selection of the auditors, who is approved by decision of the annual meeting of the shareholders. In addition to these other tasks, the Audit Committee also determines additional points of emphasis in connection with the audit of financial statements that can expand the scope and object of the audit prescribed by law. The committee also makes certain arrangements with the auditors, makes proposals pertaining to the auditing mandate and to the fee for the preparation of the consolidated and statutory financial statements, deals with questions of risk management, and prepares the discussion of the Board of Management’s report on allocation of charitable donations that exceed 10,000. The members of the Audit Committee are Andrew Simon (chairman), Utz-Hellmuth Felcht (until September 2004), Max Dietrich Kley (since September 2004) Juürgen Kerner and Heinz Schroth. Mr. Andrew Simon is the financial expert of the Audit Committee.

All compensation paid by SGL to members of the Board of Management must be approved by the Personnel Committee. The Personnel Committee comprises three members who meet four times per year or as and when required. The chairman and the vice-chairman of the Supervisory Board are permanent members of the committee. The third member is a member of the Supervisory Board who represents the shareholders and who is elected into the committee by the other members of the Supervisory Board. The members of the Personnel Committee are Utz-Hellmuth Felcht , Max Dietrich Kley (since April 30, 2004), Hansgeorg Hofmann (until April 30, 2004) and Heinz Schroth.

Compensation

We have entered into service agreements with all current members of the Board of Management. These agreements generally provide for a 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

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the SGL Group participates, see ‘‘- Management and employee incentive plans.’’ We believe that the service agreements between SGL and the members of the Board of Management provide for payments and benefits upon termination of employment that are in line with customary market practices. The remuneration of the Board of Management and the number of shares held are as follows:

  Base salary    Bonus    SGL shares    Stock Options 
         
held 
  2000 to 2004 
  T€    T€    no.    no. 

 
 
 
R. J. Koehler  424    0    30,220    120,000 
T. H. Breyer  294    0    17,304    72,000 
Dr. H. Kottmann  294    0    15,522    57,000 
Dr. B. Toniolo  294    0    10,763    72,000 
Dr. K. Warning  294    0    7,782    72,000 

 
 
 
Total  1,600    0    81,591    393,000 

 
 
 

For fiscal year 2004, the expensed remuneration of the Board of Management amount to a total of 2.9 million including payments in kind and bonuses, which are to be paid in 2005. Moreover, the premature termination of the Board of Management contract of Dr. Warning resulted in non-recurring expenses of 1.6 million. A deferred compensation plan was paid to Dr. Toniolo in connection with his scheduled retirement. In addition, we paid 0.1 million to retired members of the Board of Management or their surviving dependents. Pension provisions for these persons were 1.1 million as of December 31, 2004. The active members of the Board of Management hold shares in SGL CARBON AG as part of their private assets. At December 31, 2004, these totaled 68,179 shares and 40,238 ADRs, corresponding to a total of 81,591 shares.

The aggregate amount of compensation paid by SGL to its senior executive officers who held office in 2004 (excluding members of the Board of Management;) was 1.9 million.

The members of the Board of Management also receive a variable compensation component in the form of rights under management incentive plans (see also Note 31). The Board of Management’s stock options include option rights from the Stock Option Plan, granted from 2000 to 2004 and not yet expired. Beginning in fiscal year 2005, stock options granted since fiscal year 2003 must be treated as an expense in accordance with IFRS 2. The corresponding measurement of the stock options is based on a binominal model using SGL Carbon-specific measurement parameters. The members of the Board of Management were granted a total of 68,000 options in an aggregate value of 273,000 in 2003 (4.01 per option) and in 2004 a total of 68,000 options in an aggregate value of 418,000 (6.15 per option). The values of these stock options will differ from these theoretical option values at the time they are exercised and may be either higher or lower.

The settlement of the Matching Shares Plan of 2002 resulted in a payment to the members of the Board of Management of 198,000 in 2004. For the Matching Shares Plan of 2003, which will be exercised in 2005, a provision was established for a total of 156,000 for the members of the Board of Management. The established provisions in connection with the Long-Term Cash Incentive Plan (LTCI) for 2004 amount to 426,000 for the members of the Board of Management.

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The total remuneration paid to the members of our Supervisory Board amounted to 0.4 million. In 2004, the following amounts were payable:

  Base    Additional     
in T  remuneration    remuneration    Total 

 
 
Prof. Dr. rer. nat. Utz-Hellmuth Felcht Chairman ( until           
     Sep. 17, 2004), Member (since Sep. 17, 2004)  40.0   14.8   54.8
Max Dietrich Kley Chairman (since Sep. 17, 2004)           
     Member (since April 30, 2004)  0.0   4.3   4.3
Heinz Schroth Deputy Chairman  26.7   14.7   41.4
Franz Schaffer (until April 30, 2003)  10.0   0.0   10.0
Peter Fischer  20.0   0.8   20.8
Dr.-Ing. Claus Hendricks  20.0   6.8   26.8
Hansgeorg B. Hofmann (until April 30, 2004)  20.0   4.3   24.3
Jürgen Kerner  20.0   6.8   26.8
Dr.-Ing. Hubert Lienhard  20.0   4.6   24.6
Jacques Loppion  20.0   2.6   22.6
Lutz Mühring (until April 30, 2003)  6.7   0.0   6.7
Josef Scherer (since April 30, 2003)  13.3   4.8   18.1
Bert Schilling (since April 30, 2003)  13.3   2.8   16.1
Andrew H. Simon  20.0   8,8   28.8
Hans-Werner Zorn (since Feb. 27, 2003)  16.9   6.7   23.6

 
 
Total  266.9   82.8   349.7
 
 
 

Additional remuneration results from attendance compensation as well as compensation for committee activities. The basic remuneration of Supervisory Board members appointed for the first time in 2004 will be paid in 2005.

In addition, as of December 31, 2004, the members of our Supervisory Board held an aggregate number of 6,255 shares of SGL CARBON AG and 6,400 options to purchase shares of SGL CARBON AG (this concerns only the employee representative members of the Supervisory Board, who participate in the management and employee share incentive plans of SGL).

Approximately 500 key managers are eligible for participation in our annual bonus program. This program provides for annual bonus payments subject to the following factors: (i) the SGL Group’s income before taxes, (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 up to 20% of an employee’s yearly base salary and is distributed in form of shares (30% of which are subject to a lock-up of one year). A similar bonus plan for exempt employees generally provides that 50% of the bonus payment be distributed in the form of shares.

Management Incentive Plans

At present, we maintain a total of six different management and employee incentive plans. The Long- Term Incentive Plan, which was introduced in 1996, originally consisted of the Stock Appreciation Rights Plan (the ‘‘SAR Plan 1996’’) and the Long Term Cash Incentive Plan (the ‘‘LTCI Plan’’). While the exercise period of the SAR Plan will not end before 2006, the LTCI Plan with a maturity of three years already expired on December 31, 1998. The last LTCI Plan was valid for the period 2002-2004 (the ‘‘LTCI Plan 2002-2004’’). Since 1996, a Share Ownership Plan has been set up each year for all non-exempt employees of SGL Group in Germany and Austria. This plan was suspended in the fiscal year 2003 in connection with the capital increase implemented at the beginning of 2004. Furthermore, our annual general meeting on April 27, 2000 resolved on the introduction of a Share Plan (also called Matching Shares Plan) and a Stock Option Plan. The Share

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Plan was introduced in March 2001. The Stock Option Plan, implemented in July 2000, replaced the SAR Plan as its successor, whose vesting period ended in 2001, and has a maturity of five years. As a successor plan for the stock option plan that expired at the end of 2004, the Annual General Meeting appoved on April 30, 2004 the introduction of a Stock Appreciation Rights Plan (‘‘SAR Plan 2005’’) for Board of Management and the top three management levels. The plan provides for the issue of SARs beginning on January 1, 2005 whose increase in value provides their holders with the right to subscribe to shares of SGL.

Stock Appreciation Rights Plan 1996 (SAR-Plan)

Under the SAR Plan, the members of the Board of Management and 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 Board of Management, the right to receive an amount equal to the difference between the average share price as officially quoted on the Frankfurt Stock Exchange on March 16 of the year in which the option is exercised and the respective exercise price, which, ranges from 28.29 to 97.52 (after dilution-related adjustments due to the capital increase implemented at the beginning of 2004) and (ii) with respect to a participant who is an employee of the SGL Group, the right to purchase one share at the respective 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 3.79% of all shares outstanding. SARs representing a total of 781,200 shares have been allocated to the members of the Board of Management and 60 senior managers as of January 1, 2004. Of these SARs, 637,350 had been exercised as of December 31, 2004.

Under the SAR Plan, an option representing a specific number of SARs, as determined by the Board of Management, or by the Supervisory Board if the participant was a member of the Board of Management, was allocated to each participant at the beginning of the SAR performance cycle (January 1, 1996 – December 31, 2000) (an ‘‘SAR Option’’). The SARs allocated via this SAR Option vested within the vesting period (January 1, 1997 – January 1, 2001) in 5 equal annual installments of 20% each year on January 1 for the preceding financial year. Each vested SAR can be exercised during the period from March 1 to March 15 of each year, but no later than March 15, 2006, or upon termination of service (as described below).

From the net proceeds derived from the exercise of an SAR Option by a member of the Board of Management, an amount that equals 15% of the gross profit must be applied by the participant for the purchase of the shares in the stock market. For this purpose, we will instruct a financial institution to acquire the shares for the account and in the name of the member of the Board of Management. SGL or the relevant consolidated 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 SAR. The financial institution will retain these shares on behalf of the member of the Board of Management for the next twelve months. The remaining net proceeds will be paid to the member of the Board of Management.

     All of the shares purchased by a participant who is an employee of the SGL Group upon exercise of an SAR must immediately be resold by this employee. Exempted from this is 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 the employment of a participant in the SAR Plan with the SGL Group terminates due to disability, death or termination without cause within one year of a change in control, any vested or non-vested SAR will be deemed exercised as of the date of separation from company. In the case of termination for cause, the participant’s right to exercise any SAR lapses. The Supervisory Board, at its own discretion and in accordance with the applicable law, may decide that the participant can exercise the vested SARs insofar as they part could have been exercised on the date of termination and were not exercised previously. In the case of retirement, termination without cause, or voluntary termination of employment, the participant’s right to exercise any non-vested SAR terminates and the SAR lapses. Vested SARs are deemed exercised on the date of separation from the company to the extent that they were exercisable at the date of termination of employment and were not exercised

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previously. If the employment of a participant who is a member of the Board of Management terminates voluntarily without dispute within one year of a change in control, all SARs will be deemed exercised on the date of separation from company.

Long-Term Cash Incentive Plan (LTCI Plan) 2002-2004

Under the LTCI Plan 2002-2004, the members of the Board of Management and 36 senior managers are 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 A7.8 million.

The performance target that the SGL Group must reach in order for participating senior managers and Board of Management members to be entitled to the maximum award under the LTCI Plan was set at a 2.3 to 1 ratio of net debt to EBITDA. The minimum requirement for the payment of any bonus is a ration of 3.6 to 1. The committee that is responsible for the administration of the LTCI Plan 2002-2004 may change these performance targets at the beginning of any year. The minimum requirement for a bonus payment was a ratio of 3.6 to 1.

Participants in the LTCI Plan 2002-2004 must use a certain amount of the net proceeds of the plan that equals 15% of the gross proceeds to buy shares of SGL. For this purpose, SGL will instruct a financial institution to acquire the shares for the account and in the name of the relevant participant. The Company will provide the financial means to effect the purchase of the shares directly to the financial institution from the participant’s non-disbursed bonus payments. These shares will subsequently be deposited with the financial institution on behalf of the participant. The remaining proceeds will become due for payment on April 30, 2005.

If the employment of a participant in the LTCI Plan 2002-2004 with the SGL Group terminates due to retirement, disability, death 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 2002-2004 until the date of termination of service. If the employment of a participant with the SGL Group terminates with reference to a change of control and without cause, the participant will keep his right to obtain the full award as if he had remained with the company until the end of the performance cycle of the LTCI Plan. If a participant terminates employment with the SGL Group due to a voluntary termination for good cause, the participant will have the right to receive a prorated amount proportional to the participant’s tenure in the LTCI Plan 2002-2004 until the date of termination of service. In all of these cases, the participant is not required to obtain shares of SGL, but will be paid the full net proceeds. 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.

In relation to the means of calculation, the Supervisory Board meeting on December 5, 2003 specified that any capital increase implemented is to be neutralized in the calculation of the performance target. The meeting of the Board of Management on December 22, 2003 also approved the same measure for senior management. Overall, a total of 1.2 million was deferred for possible bonus payments to the members of the Board of Management and senior management during the fiscal year.

Share Ownership Plan

Under the terms of the Share Ownership Plan, in November all of SGL’s employees in Germany and Austria were granted the right to acquire 23, 45 or 57 shares at a price of 7.24 per share for the first 23 or 45 shares (basic offer) as well as at a price of 8.24 for the remaining 12 shares (supplementary offer). A total of 770 employees, representing 24% of those authorized under the plan, participated, acquiring a total of 36,434 shares. These shares are issued out of authorized capital following a capital increase, which for technical reasons can only be implemented in March 2005. Shares issued under the basic offer are subject to an internal company two-year lock-up period up to November 30, 2006; shares issued under the supplementary offer are subject to a one year lockup period up to November 30, 2005.

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Share Plan/Matching Shares Plan

In March 2001, we implemented a share plan (the ‘‘Share Plan’’) for the members of our Board of Management and the top three levels of management below the Board of Management. Under the plan, participants may invest up to 50% of their annual bonus in shares of SGL. If they hold these shares for at least two years, they will receive the same number of shares (the matching shares) in return for payment of a special bonus in a corresponding amount.

Our Share Plan was adopted by our shareholders at the annual general meeting of shareholders held on April 27, 2000 and went into effect on March 31, 2001. Originally, a maximum number of 250,000 new shares was reserved out of authorized capital for implementation of the Matching Shares Plan. At the end of March 2004, 22,895 new shares were granted from authorized capital out of the capital increase to those members of senior management and executive staff participating in the Share Plan during 2002; a total of 18,260 outstanding shares, acquired in the stock market, were granted to members of the Board of Management. The value of the matching shares amounted to €8,72 per share on the reporting date of March 25, 2004, which was regarded as compensation on which the individual plan participants paid taxes. The net amount corresponding to number of matching shares was transferred to the individual securities accounts of the participants. Participants could subsequently freely dispose of these net matching shares as well as shares vested from 2002, whose two-year lock-up period expired on March 31, 2004.

Of the authorized capital made available by the Ordinary Annual General Meeting in 2000 of 250,000 new shares, 43,403 new shares were issued in connection with settlement of the Share Plan 2001 in 2003 and of the Share Plan 2002 in 2004.

Following the refinancing package of the SGL Carbon Group, which was implemented in 2004, and corresponding adjustment of authorized capital by the Ordinary General Meeting on April 30, 2004, a total of 350,000 new shares are now available to service future share plans.

However, during fiscal year no new share plan was offered, since due to the relinquishment by the members of the Board of Management and by the top three senior management levels below the Board of Management to their annual bonus for 2003, which otherwise would have been paid out in March 2004, the basis for the purchase of shares under the Share Plan 2004 was not applicable.

The Supervisory Board administers the plan for the members of the Board of Management. Under the Share Plan, the Supervisory Board is authorized to grant shares in SGL to members of our Board of Management. The Board of Management administers the Share Plan for our senior managers and for the senior managers and officers of consolidated companies. Furthermore, under the Share Plan, the Board of Management is authorized to select, in it own discretion, those senior managers of the Company as well as those members of the management and senior managers of consolidated companies who shall participate in the Share Plan. Level 1, 2 and 3 senior managers of SGL and its consolidated companies selected by the Board of Management and members of the Board of Management 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 Board of Management must acquire shares in the stock market in an amount not exceeding 50% of their bonuses under our 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 authorized capital (or, for the members of the Board of Management, from a repurchase of shares) 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 lockup period. After the end of the lock-up period, the participants receive the released shares and the matching shares.

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In the event of a change of control, a merger or a change in corporate form, the shares that are blocked in the custody account are immediately released and the payment of the special bonus becomes immediately payable. In the event of a sale of an SGL Group company, the special bonus becomes immediately payable for those participants who will no longer be part of the SGL Group after the sale.

In case of a termination of the employment relationship between the Company and a participant, the blocked shares in the custody account will be immediately released. In case of termination due to retirement, disability, death or termination without cause, the affected participant will receive a cash payment in an amount equal to the pro rata portion of the special bonus that is proportional to the participant’s right to receive matching shares at the time of termination. In all other cases of termination, the participant will not receive any cash payment of the special bonus.

Stock Option Plan

SGL’s shareholders adopted the Stock Option Plan at their annual general 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 shares from conditional capital. The options may be granted until the end of the year 2004. The Stock Option Plan was implemented effective July 2000.

The Supervisory Board will administer the plan for the members of our Board of Management. Under the Stock Option Plan, the Supervisory Board is authorized to grant options on shares to members of the Board of Management. The Board of Management will administer the Stock Option Plan for approximately 150 senior managers and officers of SGL and its consolidated companies. For this purpose, under the Stock Option Plan, the Board of Management is authorized to grant options to those senior managers as it determines, and to members of the management and senior managers of its consolidated companies. In each case, the Supervisory Board or the Board of Management, will offer and transfer new shares upon exercise of the options out of the conditional capital created for that purpose.

  The stock options will be allocated as follows:
     
  Board of Management up to 30%;
 
  senior managers of the Company up to 20%;
 
  members of management of consolidated companies up to 20%; and
 
  *      remaining senior managers of consolidated companies 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 Board of Management or, to the extent that members of the Board of Management 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 Board of Management.

The options have a term of ten 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 ten days in which options may be exercised following our public reporting dates. These trading windows will be determined by the Supervisory Board if members of the Board of Management are granted options, and by the Board of Management 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 Stock Option Plan defines total shareholder return as the share price plus reinvested

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dividends plus the value of the options. Total shareholder return must increase by at least 15% against the exercise price for options to be exercisable.

     The strike price to be paid by participants under the Stock Option 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 of SGL equal to 15% of the gross proceeds (equals the difference between the strike price and the exercise price of all options exercised by the participants) for an additional twelve months. The conditions of the Stock Option Plan provide for protection against dilution.

     Granted options will lapse if the participant’s employment is terminated before the end of the two-year lock-up period. If the employment is terminated after the end of the two-year lock-up period, granted options will not lapse, but they must be exercised as soon as possible. In the event of termination due to a change of control before the end of the lock-up period, the participant will receive a cash payment for the granted options; in the event of such termination after the end of the lock-up period, the options will not lapse and may be exercised immediately.

     The conditions of the Stock Option Plan provide protection against dilution. Accordingly, the exercise price of the options is reduced if prior to maturity of the options the share capital of SGL Carbon AG, though the issue of new shares with the granting of subscription right to the shareholders, is increased by an amount that is calculated based on the average price on the Frankfurt Stock Exchange on all trading days of the subscription rights to which shareholder are entitled. The average price of the subscription rights to new shares during the subscription period for the capital increase approved by the Extraordinary General Meeting on January 15, 2004 was €4,74.

     The number of options granted, and their respective strike prices before and after dilution-related adjustments due to the capital increase implemented at the beginning of 2004, are as follows:

  *      as of July 3, 2000, 234,500 options were granted to the members of the Board of Management and 151 senior managers at a strike price of €72.45, after adjustment for dilution the exercise price is now €67.71;
     
  *      as of January 16, 2001, 257,000 options were granted to the members of the Board of Management and 155 senior managers at a strike price of €57.82, now €53.08;
     
  *      as of January 16, 2002, 261,000 options were granted to the members of the Board of Management and 170 senior managers at a strike price of €25.00, now €20.26;
     
  *      as of August 12, 2002, 247,000 options were granted to the members of the Board of Management and 154 senior managers at a strike price of €17.65, now €12.91; and
     
  *      as of January 16, 2003, 258,500 options were granted to the members of the Board of Management and 168 senior managers at a strike price of €8.35, now €3.61.
     
  *      as of January 16, 2004, 254,000 options were granted to the members of the Board of Management and 161 senior managers at a strike price of €13.43, now €8.69.

     Overall, a total of 1,512,000 options were granted to participants under the Stock Option Plan, of which 186,000 options expired without compensation as a result of the termination of the employment relation ship of plan participants due to employee turnover. The 1,326,000 options outstanding have therefore not yet been exercised.

Stock Appreciation Rights Plan 2005 (SAR Plan 2005)

     The SGL shareholders approved the SAR Plan 2005 at the Ordinary General Meeting of April 30, 2004. This plan provides for the granting of stock appreciation rights (SARs), whose appreciation of value entitles those entitled to participate to subscribe to the Company’s shares. A maximum of up to 1,600,000 new shares from a contingent capital increase against contribution in kind has been provided to service the SAR Plan 2005. The SARs may be issued through the end of 2009. The SAR Plan 2005 went into effect on January 1, 2005.

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The Supervisory Board administers the plan for the members of the Company’s Board of Management. In accordance with the SAR Plan, the Supervisory Board is authorized to grant SARs to the members of the Board of Management. The Board of Management administers the SAR Plan for approximately 150 members of senior management, the executive staff of the Company and of members of its consolidated subsidiaries and is authorized to grant these SARs.

Of the total of 1,600,000 subscription rights that can be granted to those entitled to receive SARs, a maximum of 30% may be to members of the Board of Management of SGL CARBON Aktiengesellschaft, with a maximum of 20% to those participating in the SAR Plan who are members of the senior management of affiliated companies. Other members of senior management of SGL CARBON Aktiengesellschaft and of affiliated companies participating in the SAR Plan have access to the remaining 50% of the subscription rights. To the extent that the subscription rights of the members of the Board of Management of the Company or of the senior management of the affiliated company who participate in the SAR Plan do not fully use up the above-mentioned shares, these subscription rights may be granted to the other members of senior management of the Group. Those entitled to participate who belong to more than one of the above-mentioned groups may only receive subscription rights as a member of one of the groups and from the share of the subscription rights that is provided for that particular group.

Those entitled to SARs may participate in a rise in the price of SGL shares during the period between the granting of the SARs and their exercise. A SAR entitles the participant to require from the company the grant of a variable remuneration amounting to the difference (‘‘appreciation of value’’) between the price of the SGL shares at the time the SAR is granted (‘‘striking price’’) and at the time the SAR is exercised (‘‘exercise price’’) plus dividends paid during this period by the Company and the value of subscription rights, and to subscribe to the number of SGL shares at the exercise price whose market price corresponds to the appreciation of value. One SAR grants those entitled to participate the right to subscribe to a fraction of a new SGL share that results from dividing the appreciation of value by the exercise price, but only up to a maximum of one SGL share.

The striking price is calculated based on the average closing prices of SGL shares for the last 20 stock market trading days in the XETRA securities trading system or in a successor system before the day on which the SAR is granted. The exercise price is calculated in the same manner as the striking price, however with reference to the last 20 stock market trading days before the day the SAR is exercised rather than to the last 20 stock market trading days before the day the SAR is granted.

The SAR has a term to maturity of up to ten years, beginning at the grant date. The SAR expires without compensation if it is not exercised during its term.

The granting of the SAR to those entitled to participate may only occur within defined annual periods – the so-called ‘‘reference windows.’’ A reference window may be a period of up to ten stock market trading days following, respectively, the fiscal year-end or the disclosure of the SGL Carbon Aktiengesellschaft for its first, second or third quarter results.

A SAR that has been granted may be exercised at the earliest after expiration of a waiting period of two years calculated beginning at the time the SAR is granted (‘‘waiting period’’) and only during defined periods (‘‘exercise window’’). Exercise windows are open for a period of up to ten stock market trading days, beginning on the day following the Company’s disclosure of its financial results for the first, second and the third quarters.

Furthermore, a SAR may only be exercised, if after the expiry of the waiting period at the beginning of the exercise window, the targets set out in the SAR conditions have been met. For 75% of the SARs granted to each of those entitled to participate, the target is the increase in total shareholder return (‘‘TSR’’) of a SGL share (‘‘absolute performance target’’). Only a relative target is applicable for the remaining 25% of the SARs. This portion of the SAR may only be exercised if the development of the SGL share corresponds at least to the development of the MDax.

The TSR is defined as the absolute rise of the SGL share price between the time the SAR is granted and the time it is exercised plus the dividends paid by the Company during this period and

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the value of the subscription rights. The target is met if the TSR has reached at least 15% of the striking price.

The relative performance target is defined as the relative rise of the SGL share price between the period when the SAR is granted and is exercised plus dividends paid by the Company during this period and the value of subscription rights compared with the development of the benchmark index during the same period. The benchmark index is the MDax of the German Stock Exchange (Deutsche Boürse), or a substitute index representing mid-cap values. For the target to be met, the development of the relative rise of the SGL share price must be at least equivalent to the benchmark index.

If one of the two performance targets in an exercise window is not met, only those SARs may be exercised whose target is met; the SARs whose target is not met during the exercise window, may be exercised during a later exercise window of the exercise period if the target is then met.

Finally, in exercising their SARs-related shares, those entitled to participate must hold at least that number of shares of SGL Carbon Aktiengesellschaft, that corresponds in value to 15% of gross proceeds for an additional twelve months.

The SARs are being granted to members of the Board of Management and to members of senior management for the first time in 2005.

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 Board of Management, and the Board of Management resolved to enter such an agreement with certain senior managers. For the purposes of this agreement with senior management (Board of Management members and other selected senior managers), 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 SGL; 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 consolidated company in which the senior managers are employed leaves the SGL Group.

If, following a change in control, SGL or a consolidated company intends to terminate without cause the employment of a manager 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 be offered a separation agreement terminating employment with a notice period of three 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 SGL Group company.

The settlement under the separation agreement will include payment of three times annual salary for the chairman of the Board of Management and two times annual salary (in each case including bonuses) for other members of the Board of Management and senior managers. The term of the agreement runs until December 31, 2004, and the agreement may thereafter be terminated annually at the end of the year. Senior managers may assert a claim 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 Board of Management. 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 Board of Management 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 Board of Management 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

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Committee by the other members of the Supervisory Board. The current members of SGL’s Personnel Committee are Utz-Hellmuth Felcht, Hansgeorg Hofmann and Heinz Schroth.

For a discussion of the terms of office of the current members of the Supervisory Board and the Board of Management of SGL, see ‘‘-Directors and Senior Management’’.

Employees

At the end of 2004, we employed in our continuing operations a global workforce of 5,109 people, 299 less than at the end of the previous year (5,408 at the end of 2003 excluding discontinued operations), an additional 1,518 employees were employed in our discontinued operations. The decrease by 299 employees is attributable to the restructuring measures in the Carbon and Graphite Business Area in Poland and Italy. Already during the fiscal year we split off the Process Technology business from the Corrosion Protection Business Area, incorporating the Process Technoogies business within the Graphite Specialties Business Area.

In our core business – Carbon and Graphite – the restructuring measures in Poland and Italy resulted in a decline in the number of employees by 307, from 2,826 to 2,519. The Graphite Specialties Business Area as well recorded a decline in the number of employees by 59, from 1,723 to1,664. The number of employees in SGL Technologies increased by 69, from 805 to 874. This resulted largely from additional research and development activities in connection with the accelerated transfer of our pilot plant for carbon-ceramic brake discs to large-scale production.

The sale of the Surface Protection Business caused a significant shift in the number of employees in the various Business Aereas. At the end of 2004, 50% of all employees were working in the Carbon and Graphite Business Aerea (previous year 41%), 33% in the Graphite Specialties Business Area (2003: 20%) and 17% in the SGL Technologies Business Area (2003: 12%). The staff in the Corrosion Protection Business Area had accounted for 27% of all employees in the group at the end of the previous year.

Excluding the Surface Protection business, at the end of 2004 some 38% of all employees were working in Germany (2003: 43%), 39% were active in other European countries (2003: 36%) and 23% in North America (2003: 17%).

Share Ownership

Neither the members of the Supervisory Board and Board of Management 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 2005, SGL had 56,462,749 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 2005, there were 402 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 fuer 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 received following notifications from major shareholders under Section 21 of the German Securities Trading Act during the last 12 months:

           
beneficial ownership in 

Company  date of notification    number of shares    % of voting rights 


 
 
Eureka (Euro) Fund Limited    March 2, 2004    3,794,663    6.84 
BT Pension Scheme Limited    February 15, 2005    2,853,420    5.11 
BT Pension Scheme Limited    November 4, 2004    2,766,862    4.96 
BT Pension Scheme Limited    September 6, 2004    2,795,763    5.01 
Cominvest Asset Management GmbH    October 18, 2004    n.a.    4.98 
Jana Partners LLC    June 25, 2004    n.a.    5.30 
K Capital Partners LLC    June 6, 2004    n.a.    5.22 
Morgan Stanley & Co.             
International Limited    February 9, 2004    n.a.    4.22 

based on 55,462,395 shares until March 2004
based on 55,835,290 shares since March 2004

Related Party Transactions

    In the course of its business activities, the SGL Carbon Group provides services to related companies and individuals. In turn, these individuals and companies act as suppliers and service providers for the SGL Carbon Group within the framework of their business activities. All these transactions are settled on an arm’s length basis. Receivables from non-consolidated subsidiaries and associated companies amount to 17.7 million, and corresponding liabilities totaling 3.3 million. Details are presented in the notes to the relevant balance sheet and income statement items.

     Since August 2001, Mr. Paul W. Pendorf had served as President of HITCO CARBON Composites, Inc. (‘‘HITCO’’) and he also owned a 6% interest in that company. To finance his purchase of the shares of HITCO constituting his 6% interest, SGL Carbon LLC had granted a loan to Mr. Pendorf in 2001. In September 2004, he tendered those shares to SGL Carbon LLC in full satisfaction of the loan and he is no longer affiliated with HITCO in any way.

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     Mr. Pendorf is also a shareholder in AMT II Corp. (‘‘AMT II’’), a company that entered into a management services agreement with HITCO in 2001. This agreement covering management services, which had been amended in 2003, was terminated on July 31, 2004.

     In the course of its business activities, the SGL Carbon Group renders services to 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. All these transactions are settled on an arm’s length basis. Receivables from unconsolidated subsidiaries and associates amount to 17.7 million, and the corresponding liabilities amount to 3.3 million. Details are presented in the notes to the relevant balance sheet and income statement items.

Interest of Experts and Counsel
     Not applicable.

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ITEM 8. FINANCIAL INFORMATION

Consolidated Statements and Other Financial Information
     
 See Item 18.

Export Sales

     In 2004 approximately 64% of all products produced by the SGL Group in Germany, having an estimated total value of 328.9 million, and approximately 8% of all products produced by the SGL Group in the United States, having an estimated total value of 21.5 million, were exported to other countries.

Legal Proceedings

     We cannot predict the ultimate outcome of the legal proceedings described below 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 antitrust suits, liabilities arising from these proceedings could substantially exceed the provisions we have established for this purpose and, as a result, could have a material adverse effect on our business, results of operations and financial condition. See ‘‘Risk Factors – Risks relating to our business – We are party to several antitrust proceedings.’’

Antitrust Proceedings

     SGL was subject to an investigation by the U.S. 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 U.S. 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 our Board of Management, Mr. Robert J. Koehler. SGL has now paid Mr. Koehler’s fine in its entirety. SGL has made payments of its fine in the aggregate amount of $75.25 million through December 31, 2004. 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. In connection with an investigation by Canadian antitrust authorities, SGL was fined C$12.5 million on July 18, 2000 after entering into a plea agreement. To date, C$ 9.5 million has been paid, and the remaining amount of C$ 3 million is payable in 2005.

     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 primarily to acts occurring in the 1990s. Unlike the investigations by the DOJ and the Canadian authorities, each of which concluded in a single plea agreement covering all carbon and graphite products, the European Commission is investigating individual groups of carbon and graphite products separately. On July 18, 2001, two years after the plea agreement in the United States, the European Commission imposed an 80.2 million fine on SGL with respect to graphite electrodes, bearing interest at 6.04% annually, which was secured by a bank guarantee. We lodged an appeal against the total amount of this fine before the European Court of First Instance (‘‘CFI’’) in Luxembourg. Our appeal contends primarily that the fine includes amounts penalizing the same actions more than once (ne bis in idem-principle), material procedural defects and that the total amount of the fine is disproportionate. On April 29, 2004, the CFI reduced the fine to 69.1 million, primarily for procedural defects. The reduced amount is again secured by a bank guarantee. We have filed a further appeal against the decision of the CFI with the European Court of Justice (‘‘ECJ’’) in Luxembourg, seeking a decision in principle regarding the application of the ne bis in idem-principle. We are expecting a decision of the ECJ at earliest in 2006.

     The European 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. We cooperated fully with the Commission and were assessed a fine of 27.75 million on December 17, 2002, which currently bears interest at 4.75%, and is secured by a bank guarantee. We are also appealing the total amount of this second fine, on substantially the same grounds as in the graphite electrodes case. We are expecting a decision on this appeal in the second half of 2005.

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     In connection with the proceedings described above, the European Commission continued its investigations into other carbon and graphite products (for acts during the period through the late 1990s) and, in May 2003, filed complaints against SGL and other specialty graphites manufacturers regarding allegations related to the ‘‘Electrical and Mechanical Carbon and Graphite Products’’ area of our business. In this proceeding, the European Commission imposed a fine of €23.6 million on us on December 3, 2003. This amount was paid to an escrow account – without waiving the right to appeal - as part of the Company’s refinancing in February 2004. We are currently appealing the amount of this fine before the CFI. We are expecting a decision of the CFI at the earliest mid 2006. .

     On March 20, 2002, the Korean Fair Trade Commission decided to impose a fine of 963 million Korean won (approximately €0.7 million) against SGL for alleged cartel activities in violation of Korean antitrust laws. We filed an appeal to the KFTC in May 2002. After the KFTC confirmed its original ruling, we appealed this decision to the Seoul High Court in September 2002. This appeal was rejected on September 3, 2003. We filed an appeal against this decision with the Korean Supreme Court on September 16, 2003, which is still pending.

Civil suits resulting from antitrust violations
     In addition to various lawsuits filed by U.S. customers (all of which have long been settled), four complaints were filed in the U.S. District Court for the Eastern District of Pennsylvania 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. (“BHP”), an Australian company, and three of its subsidiaries. In a single opinion covering both cases, on June 13, 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 20 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 13 other plaintiffs to proceed. The 20 plaintiffs appealed the portion of the order dismissing their complaints; the defendants appealed the portion of the order denying their motion to dismiss the claims of the remaining 13 plaintiffs.. Following the U.S. Supreme Court’s June 2004 decision in F. Hoffmann-La Roche Ltd. et al. vs. Empagran et al., the Court of Appeals vacated the District Court’s decision dismissal order and remanded the case to the District Court for consideration in light of the Empagran decision. The defendants’ renewed motions to dismiss in light of Empagran have now been submitted to the District Court. 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. All of these suits make allegations similar to those in the consolidated action before the District Court and seek similar relief. 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 was dismissed with prejudice in a decision handed out on August 13, 2003, although the plaintiffs’ time to appeal that decision will not expire until after judgment is entered with respect to the other defendants.

     In the period between April 10, 2000, and October 2, 2002, five purchasers of isostatic graphite- Industrial Graphite Products, Inc., Ceradyne, Inc., Schutte & Koerting, Inc., Graphite Machining Inc. and Graphite Sales & Machine, Inc.- filed a series of class actions in the District Court for the Eastern District of Pennsylvania against defendants including SGL and SGL CARBON Corp. These complaints were consolidated into a single action, which 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. This case has now been settled and by Order of the District Court dated July 22, 2004, the settlement has been approved and a final judgment has been entered..

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     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. The District Court granted SGL’s motion to dismiss this suit for lack of personal jurisdiction.. SGL CARBON subsequently settled the remainder of this case.

On December 27, 2002 (and thereafter), seven purchaser of bulk (extruded) graphite products filed putative class actions against defendants including SGL, SGL CARBON GmbH, SGL CARBON LLC, SGL CARBON Corp. and Robert Koehler. These cases, which have now been consolidated in the U.S. District Court for the District of New Jersey, seek 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 January 1, 1993 to December 31, 1998. SGL, SGL CARBON GmbH and SGL CARBON LLC filed their answers December 22, 2004. The case is currently in the trial discovery.

     SGL CARBON LLC, SGL Carbon Corp., and SGL Technic Ltd. (among others) have been named as defendants in an action brought in California Superior Court by the City and County of San Francisco on behalf of a putative class of indirect purchasers of electrical carbon products from January 1, 1990 to the present. The same entities, together with SGL (and others), were also named as defendants in another action brought in California Superior Court by other plaintiffs on behalf of the same putative class (except that, in the latter case, the class period dates back to 1989). Both complaints allege that the manufacturers sued in the action violated California’s Cartwright Act and Unfair Competition Act by conspiring to fix the price of electrical carbon products. The plaintiffs in both cases seek damages in an unspecified amount and other relief. SGL CARBON LLC filed a demurrer seeking dismissal of each complaint on various grounds, including the statute of limitations and the failure to state a claim, but the court denied both motions, SGL CARBON LLC then filed an answer to both complaints. SGL has not yet been served with the complaint. SGL and SGL CARBON LLC, have also been named as defendants in an action brought in the United States District Court for the District of New Jersey on behalf of a putative class of direct purchasers of electrical carbon products during the period January 1, 1990 through December 31, 2001..We have entered into an agreement settling all of these claims, the settlement remains subject final court approval. In addition, the Toronto Transit Commission, Canada, filed a complaint against SGL and other manufacturers alleging price-fixing of electrical carbon products. SGL was served with the complaint in February 2005.

Other proceedings
     The case American Insurance against the defendant Keramchemie GmbH (SGL ACOTEC GmbH) remained with SGL ACOTEC GmbH which was divested in January 2005.

     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 had 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 provisions in the amount of €1.2 million.

     In addition, from time to time, SGL and its subsidiaries are parties to or targets of lawsuits, claims, investigations and other 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 or 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

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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 ADRs 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’’.

     The payment of future dividends will be dependent on SGL’s earnings, the terms of our syndicated credit facility agreement and the terms and conditions of the senior notes, its financial condition and cash requirements, general business conditions in the markets in which it operates, legal, tax and regulatory considerations and other factors. 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 37 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 
Year Ended    $ per ADR(1)(2)   Trading Volume (3) 


 
  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
December  31, 2003 6.95   2.78   10,400
December  31, 2004 7.57   2.90   18.400

 

          Average Daily 
Quarter Ended $ per ADR(1)(2)      Trading Volume (3) 


 
  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 28, 2003  5.30   2.78   7,300
June 30, 2003  5.5   5.00   2,700
September 30, 2003  6.98   5.69   19,200
December 31, 2003  6.70   5.65   10,600
March 31, 2004  8.00   3.71   39,300
June 30, 2004  3.88   2.90   17,800
September 30, 2004  3.80   3.05   8,100
December 31, 2004  4.45   3.80   8.800
March 31, 2005  5.24   4.11   11,000


(1) Source: JP Morgan/Bloomberg.
   
(2) Each ADR represents one third of one share.
   
(3) Rounded to the nearest 100.

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          Average Daily 
Month Ended $ per ADR(1)(2)   Trading Volume(3) 




 
  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  5.34   4.26   16,000 
April 30, 2003  4.98   4.26   2,500 
May 31, 2003  5.50   4.36   4,300 
June 30, 2003  5.15   4.08   1,400 
July 31, 2003  6.42   4.95   33,300 
August 31, 2003  6.98   5.87   13,100 
September 30, 2003  6.92   5.50   10,400 
October 31, 2003  6.70   5.69   7,000 
November 30, 2003  6.30   4.31   20,300 
December 31, 2003  6.00   4.80   10,700 
January 31, 2004  8.00   5.52   18,100 
February 29, 2004  6.78   4.25   33,400 
March 31, 2004  4.44   3.40   62,600 
April 30, 2004  3.88   3.52   21,100 
May 31, 2004  3.60   3.00   23,800 
June 30, 2004  3.31   2.90   8,100 
July 31, 2004  3.46   3.05   7,400 
August 31, 2004  3.62   3.13   7,500 
September 30, 2004  3.80   3.25   9,300 
October 31, 2004  4.36   3.80   7,700 
November 30, 2004  4.43   4.03   10,100 
December 31, 2004  4.45   4.19   8,600 
January 31, 2005  4.74   4.11   9,700 
February 28, 2005  5.13   4.51   7,200 
March 31, 2005  5.24   4.23   15,500 


(1) Source: JP Morgan/Bloomberg.
   
(2) Each ADR represents one third of one share.
   
(3) Rounded to the nearest 100.
   
ADR prices after February 12, 2004, present the ADR price after payment of net proceeds due to the capital increase of shares in January 2004

The table below shows the high and low sales prices in euro of SGL’s shares on the Frankfurt Stock Exchange/XETRA for the periods indicated.

          Average Daily 
Year Ended  Euro per Share(1)    Trading Volume(2) 




 
  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 
December  31, 2003 13.76    5.51    242,400 
December  31, 2004 12.05    7.20    313,400 

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            Average Daily   
Quarter Ended 
Euro per Share(1) 
  Trading Volume(2)   

 
 
 
    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    5.50    93,900   
December 31, 2002    9.60    5.10    192,000   
March 31, 2003    13.8    7.80    173,000   
June 30, 2003    10.99    7.46    187,600   
September 30, 2003    13.76    9.27    193,700   
December 31, 2003    12.81    8.26    358,400   
March 31, 2004    12.45    8.10    672,700   
June 30, 2004    9.48    7.20    279,500   
September 30, 2004    9.40    7.61    196,200   
December 31, 2004    10.35    9.21    193,900   
March 31, 2005    11.71    9.43    256,700   

(1) Source: JP Morgan/Bloomberg.
(2) Rounded to the nearest 100.
Share prices after January 22, 2004, present the share price after our capital increase in January 2004
Share prices before January 1999 reported in Deutsche Mark were converted into Euro at the official fixed conversion rate of DM 1.95583 per 1.00.

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            Average Daily   
Month Ended  Euro per Share(1)    Trading Volume(2)   

 
 
 
    High    Low       
 
 
October 31, 2002    9.67    5.10    175.200   
November 30, 2002    8.26    6.30    229,500   
December 31, 2002    9.50    7.50    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   
April 30, 2003    9.97    8.34    191,300   
May 31, 2003    10.99    7.72    199,300   
June 30, 2003    9.83    7.46    172,500   
July 31, 2003    11.50    9.27    221,100   
August 31, 2003    13.76    10,96    189,300   
September 30, 2003    13.47    10.45    169,400   
October 31, 2003    12.81    10.24    158,000   
November 30, 2003    12.17    8.26    440,500   
December 31, 2003    10.85    8.32    514,400   
January 31, 2004    12.45    9.39    632,200   
February 29, 2004    12.25    10.05    623,400   
March 31, 2004    10.71    8.10    756,300   
April 30, 2004    9.48    8.70    324,500   
May 31, 2004    9.00    7.66    187,300   
June 30, 2004    8.10    7.20    312,300   
July 31, 2004    8.76    7.61    257,700   
August 31, 2004    9.00    7.76    180,800   
September 30, 2004    9.40    8.11    155,900   
October 31, 2004    10.35    9.21    282,800   
November 30, 2004    10.24    9.48    191,900   
December 31, 2004    10.06    9.38    100,400   
January 31, 2005    10.91    9.43    244,700   
February 28, 2005    11.66    10.55    200,400   
March 31, 2005    11.71    9.77    308,600   

(1) Source: JP Morgan/Bloomberg.
(2) Rounded to the nearest 100.
Share prices after January 22, 2004, present the share price after our capital increase in January 2004.

     On January 15, 2004, an extraordinary general meeting took place in Wiesbaden. Our shareholders approved a capital increase (approval of 99.6%) in the form of the issue of 33,277,437 new shares as proposed by our management. This resolution opened the way for a comprehensive three-part financing package (capital increase, senior notes and syndicated loans) worth 866 million (for further information, see Item 5, ‘‘Operating and Financial Review and ProspectsLiquidity and Capital Resources’’ and Note 19 of the financial statements). The subscription offer was published on January 21, 2004 (record date). In this context, existing shareholders could subscribe three new shares for two existing shares of SGL Carbon at the price of 8.00 per share. The subscription period, including the beginning of subscription rights trading, started on January 22, 2004. From that date, the shares were traded without their previously related subscription rights. This led to a decrease in the share price from this date. The end of trading of subscription rights was on February 3, 2004. The new shares were added to the existing listing of SGL Carbon shares on February 6, 2004. As of that date, the number of our outstanding shares amounted to 55,462,395 (compared to 22,184,958 before the capital increase). Due to two capital increases for our employee benefit programs on March 2004 and March 2005, the number of shares outstanding increased to 56,462,749.

     The entire share capital of SGL consists of a single class of shares. All shares are in bearer form and freely transferable. All shares are listed under the trading symbol ‘‘SGL’’ and have an

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identical ISIN-Code (DE0007235301). The shares are listed in Germany on the Frankfurt, Berlin/ Bremen, Duüsseldorf, 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 remained in the MDAX, which now consists of 50 companies.

     On February 19, 2004, we paid net proceeds of $1.57294 per ADR to holders of our ADRs under our ADR program on the record date of February 12, 2004 (ratio: 3 ADRs:1 ordinary bearer share). We did not conduct a public offering of subscription rights in the United States. Instead, our depositary bank, JP Morgan Chase, sold the rights outside the United States on behalf of ADR holders and paid the net proceeds from the sale to the ADR holders as described above.

     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 March 9, 2005, we had 1,874,274 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.

     Markets
     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