Imprima
 
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, 2005
OR
  TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 OR
  SHELL COMPANY 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
 
 
 
A merican Depositary Shares, each representing one-third of one Ordinary Bearer Share, no par value
  New York Stock Exchange
  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     62,789,251
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes      No  
If this report is an annual or transition report, indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934.
Yes      No 
Note – Checking the box above will not relieve any registrant required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 from their obligations under those Sections.
 
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 whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer     Accelerated filer   Non-accelerated
Indicate by check mark which financial statement item the registrant has elected to follow
Item 17      Item 18 
If this is an annual report, indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes      No 
 

TABLE OF CONTENTS

      Page 
 
CERTAIN DEFINED TERMS 4
FORWARD-LOOKING STATEMENTS 4
PART I 5
  ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS  5
  ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE 5
  ITEM 3. KEY INFORMATION 5
    Selected Financial Data  5
    Capitalization and Indebtedness  9
    Reasons for the Offer and Use of Proceeds  9
    Risk Factors 9
  ITEM 4. INFORMATION ON THE COMPANY 16
    History and Development of the SGL Group  16
    Business Overview  17
    Organizational Structure  27
    Property, Plants and Equipment  28
    Item 4A. Unresolved Staff Comments  30
  ITEM 5. OPERATING AND FINANCIAL REVIEW AND PROSPECTS  31
    Operating Results 37
    Liquidity and Capital Resources 54
    Research and Development, Patents and Licenses, etc. 59
    Trend Information 61
    Global economic growth set to continue 61
    Stable development projected for Carbon and Graphite Business Area 61
    Specialties continue to prosper 62
    SGL Technologies ahead of important strategic steps 62
    Further improvement in Group earnings expected 62
    Procurement and production 62
    Liquidity and capital resources 63
    Increase in capital expenditure in 2006 63
    Costs for research and development and the environment at previous year’s level 63
    No significant changes planned for the headcount or the Group structure 63
    Off- balance sheet arrangements 63
    Tabular disclosure of contractual obligations 64
  ITEM 6. DIRECTORS, SENIOR MANAGEMENT AND EMPLOYEES 65
    Directors and Senior Management 65
    Compensation 71
    Board Practices 79
    Employees 79
    Share Ownership 80
  ITEM 7. MAJOR SHAREHOLDERS AND RELATED PARTY TRANSACTIONS 81
    Major Shareholders 81
    Related Party Transactions 81
    Interest of Experts and Counsel 81
  ITEM 8. FINANCIAL INFORMATION 82
    Consolidated Statements and Other Financial Information 82
    Significant Changes 84
  ITEM 9. THE OFFER AND LISTING 85
    Offer and Listing Details 85
    Plan of Distribution 87
    Markets 87
    Selling Shareholders 87
    Dilution 87
    Expenses of the Issue 87
  ITEM 10. ADDITIONAL INFORMATION 88
    Share Capital 88
    Memorandum and Articles of Association 88
    Material Contracts 92
    Intercreditor Agreement 95
    Polish Facility 98
    Exchange Controls 100
    Taxation 100
    Dividends and Paying Agents 105
    Statements by Experts 105
    Documents on Display 105
    Subsidiary Information 105
  ITEM 11. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 106
  ITEM 12. DESCRIPTION OF SECURITIES OTHER THAN EQUITY SECURITIES 111

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PART II 112
  ITEM 13. DEFAULTS, DIVIDEND ARREARAGES AND DELINQUENCIES 112
  ITEM 14. MATERIAL MODIFICATIONS TO THE RIGHTS OF SECURITY HOLDERS AND USE OF PROCEEDS  112
  ITEM 15. CONTROLS AND PROCEDURES 112
  ITEM 16. [RESERVED]  112
    ITEM 16A. Audit committee financial expert  112
    ITEM 16B. Code of Ethics 112
    ITEM 16C. Principal Accountant Fees and Services. 112
    ITEM 16D. Exemptions from the Listing Standards for Audit Committees 113
    ITEM 16E. Purchase of Equity Securities by the Issuer and Affiliate Purchasers 113
PART III 114
  ITEM 17. FINANCIAL STATEMENTS 114
  ITEM 18. FINANCIAL STATEMENTS 114
  ITEM 19. EXHIBITS 114
SIGNATURES 115
  CERTIFICATION 116
  CERTIFICATION 117

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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, S for the “Specialties” Business Area (formerly GS – Graphite Specialties) 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 transferred to and is included in the results of the Specialties 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 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 Information – Risk Factors” for a discussion of risks that we believe particularly significant to the Group and our business. We do not intend, and do not assume any obligation, to update these forward-looking statements.

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PART I

ITEM 1. IDENTITY OF DIRECTORS, SENIOR MANAGEMENT AND ADVISERS

Not applicable.

ITEM 2. OFFER STATISTICS AND EXPECTED TIMETABLE

Not applicable.

ITEM 3. KEY INFORMATION

Selected Financial Data

We prepare our consolidated financial statements in accordance with International Financial Reporting Standards (IFRS). Since 2002, IFRS is the term for the entire body of accounting standards issued by the International Accounting Standards Board, replacing the earlier IAS, or International Accounting Standards. Individual accounting standards that the IASB issued prior to this change in terminology continue to use the prefix “IAS”. 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, 2005 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 (US-GAAP). IFRS differs in certain significant respects from U.S. GAAP. See Item 5, “Operating and Financial Review and Prospects-Significant Differences Between IFRS and U.S. GAAP” as well as Notes 34 and 35 to the consolidated financial statements contained elsewhere in this annual report for a discussion of these differences.

Until December 31, 2004, 18 subsidiaries and two joint ventures were excluded from consolidation and accounted for at cost. In the consolidated financial statements as of December 31, 2005 we changed our accounting policy, and as a result these subsidiaries have been included in consolidation and the joint ventures have been accounted for using the equity method. In this context, the opening balances of assets, liabilities and equity as of January 1, 2003, as well as the consolidated balance sheet as of December 31, 2004 and the consolidated income statement and cash flow statement for the years presented, have been restated retrospectively.

IFRS 2 “Share-based payment” is effective for annual periods beginning on or after January 1, 2005. The IFRS is to be applied retrospectively on all share-based payments granted since November 7, 2002, that still existed when the standard became effective and requires comparable information to be restated. This also includes a restatement to the opening balances of the retained earnings in the earliest period presented.

The revised IAS 1 “Presentation of financial statements” defines a presentation of current and non-current assets and liabilities as separate groups in the balance sheet. The standard must be used for reporting periods of a fiscal year beginning on January 1, 2005 or later. The company’s consolidated balance sheet was structured accordingly and the previous years’ figures were restated.

As indicated in their reports that appear elsewhere in this annual report, Ernst & Young Aktiengesellschaft, Wirtschaftsprü fungsgesellschaft, independent auditors, have audited our consolidated financial statements for the years ended December 31, 2005 and 2004 and BDO Deutsche Warentreuhand Aktiengesellschaft, Wirtschaftspru¨ fungsgesellschaft, independent auditors, have audited our consolidated financial statements for the year ended December 31, 2003.

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   As of and for the year ended December 31,   
 
 
         2004   2003   2002   2001   
   2005(1)   2005(2)   restated(2)   restated(2)   restated(2)   restated(2)   
   $             
 
 
 
 
 
 
 
       (in millions; except per share and certain other data)       
Statement of Operations Data:            
IFRS            
Sales revenue 1,260.9   1,068.8   944.0   931.5   977.8   1,094.4  
Cost of sales (880.9 ) (746.7 ) (681.3 ) (693.6 ) (759.9 ) (812.9 )
Gross profit 380.9   322.1   262.7   237.9   217.9   281.5  
Selling, research and development, administration expenses and other operating income (net)
(246.8 ) (209.3 ) (203.7 ) (215.6 ) (210.6 ) (298.0 )
Profit/(loss) from operations(14) 133.2   112.8   59.0   22.3   7.3   (16.5 )
Result of investments 0.9   0.8   (0.8 ) (1.1 ) (1.8 ) (1.9 )
Interest expense (net)(3) (61.6 ) (52.2 ) (50.6 ) (49.3 ) (36.7 ) (43.2 )
Other financial result (16.8 ) (14.2 ) (10.5 ) (23.3 ) 8.8   (13.6 )
Income tax benefit(expense) (22.5 ) (19.1 ) (1.6 ) 18.6   (0.8 ) (28.6 )
Minority interests 0.1   0.1   (0.1 ) (0.3 ) 0.0   (0.1 )
Net profit / loss (after minority interests) 33.3   28.2   (4.6 ) (33.1 ) (23.2 ) (103.9 )
Discontinued operations 0.0   0.0   (81.8 ) (23.4 ) (5.0 ) 7.5  
Net profit/loss attributable to shareholders 33.3   28.2   (86.4 ) (56.5 ) (28.2 ) (96.4 )
 
 
 
 
 
 
 
Earnings (Loss) per Share(4) 0.59   0.50   (1.66 ) (2.55 ) (1.29 ) (4.48 )
Earnings (Loss) per ADR(4) 0.20   0.17   (0.55 ) (0.85 ) (0.43 ) (1.49 )
 
 
 
 
 
 
 
             
U.S. GAAP            
Net profit/(loss)(10) 26.9   22.8   (87.9 ) (52.4 ) (26.6 ) (149.3 )
Basic profit/(loss) per Share(4) 0.47   0.40   (1.68 ) (2.36 ) (1.22 ) (6.93 )
Basic profit/(loss) per ADR(4) 0.16   0.13   (0.56 ) (0.79 ) (0.41 ) (2.31 )
Diluted profit/(loss) per Share(4) 0.47   0.40   (1.68 ) (2.36 ) (1.22 ) (6.93 )
Diluted profit/(loss) per ADR(4) 0.16   0.13   (0.56 ) (0.79 ) (0.41 ) (2.31 )
Balance Sheet Data:            
IFRS/IAS            
Working capital (5) 455.7   386.3   346.5   385.4   399.2   558.0  
Total assets 1,396.0   1,183.3   1,315.7   1,246.9   1,282.8   1,503.6  
Financial debt(6) 403.5   342.1   419.6   497.9   453.4   546.5  
Shareholders’ equity 380.0   322.1   267.3   104.4   191.8   254.0  
 
 
 
 
 
 
 
Weighted average shares(13) 56,390,621   56,390,621   52,152,691   22,148,078   21,813,930   21,530,563  
 
 
 
 
 
 
 
U.S. GAAP            
Total assets 1,455.7   1,234.0   1,357.5   1,294.3   1,329.7   1,540.4  
 
 
 
 
 
 
 
Shareholders’ equity 353.6   299.7   273.4   123.1   205.2   262.9  
Other Data:            
IFRS/IAS            
Gross profit margin (%) 30.1   30.1   27.8   25.5   22.3   25.7  
Operating margin (%) 10.6   10.6   6.3   2.4   0.7   (1.5 )
Depreciation and amortization 76.8   65.1   67.6   71.8   75.9   90.4  
Capital expenditures 52.7   44.7   46.3   43.9   51.2   87.1  
Ratio of net debt to shareholders’ equity (%)(7) 82.2   82.2   120.3   432.8   225.2   210.4  
Return on capital employed (%)(8) 13.8   13.8   7.5   2.5   0.7   (1.3 )
Research and development expenses 21.2   18.0   19.2   19.0   24.1   29.0  

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         As of and for the year ended December 31,         
 
 
               2004    2003    2002    2001   
   2005 (1)   2005 (2)   restated(2)    restated(2)    restated(2)    restated(2)   
   $                  
 
 
 
 
 
 
 
         (in millions; except per share and certain other data)         
Quantity of graphite electrodes sold  (thousands of metric tons) 222,000   222,000   209,000   202,000   173,000   175,000  
Number of employees worldwide (end of  year) 5,263   5,263   5,265   5,603   5,982   6,465  
 
 
 
 
 
 
 
Business Area Data:            
Net Sales(9)            
   Carbon and Graphite 759.4   643.7   562.5   564.4   556.2   623.7  
   Specialties(11) 310.7   263.4   246.3   239.1   268.3   323.7  
   SGL Technologies(11) 187.6   159.0   133.5   125.2   150.4   135.0  
 
 
 
 
 
 
 
Profit / (loss) from            
   operations(12) (14)            
   Carbon and Graphite 143.5   121.6   86.4   61.5   51.3   70.6  
   Specialties(11) 23.4   19.8   13.9   12.2   6.6   1.8  
   SGL Technologies(11) 0.2   0.2   (10.6 ) (14.0 ) (11.3 ) (33.3 )

                       
(1) Amounts in this column have been translated solely for the convenience of the reader at an exchange rate of €1.00 = $ 1.1797, the middle rate of exchange on December 31, 2005 as published by the European Central 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, 2002 and 2001 have been adjusted accordingly. As described in the introduction to this section, effective January 1, 2005 we consolidated 18 subsidiaries and two joint ventures, which had previously been accounted for at cost. 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.
 
(3) For 2005, 2004 and 2003, we have included the interest component of additions to the pension provision of €13.5 million, €13.3 million and €14.0 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.
 
(4) We have calculated profit/loss per share for each period based upon net profit or 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 no dilutive effect in 2005 and the net loss in the years 2004 and 2003, the diluted profit or loss per Share for 2005, 2004 and 2003 was identical to the profit or loss per Share.
 
(5) 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, 2005, 2004 and 2003 would have been €304.8 million, €280.0 million and €158.1 million, respectively.
 
(6) Financial debt include refinancing costs of €16.0 million, €20.3 million and €0.0 million in 2005, 2004 and 2003, respectively, which are amortized over the remaining terms.
 
(7) Total financial debt less cash and cash equivalents, divided by shareholders’ equity at year-end.
 
(8) 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.
 
(9) 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 2005, 2004 and 2003 these amounts were €2.7 million €1.7 million and €2.8 million respectively.
 
(10) Net loss under U.S. GAAP is presented before cumulative changes in accounting principles in 2002.
 
(11) As of January 1, 2001, we reorganized our operations into four business areas: Carbon and Graphite, Specialties (formerly Graphite Specialties), Corrosion Protection and SGL Technologies (formerly Fibers and Composites). As of January 1, 2002, we reclassified our expanded graphite business in Europe from 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 Specialties Business Area (S). We have adjusted the corresponding figures for the fiscal years 2003 and 2002 to reflect our current segment reporting structure.
 
(12) Profit (loss) from operations for the years 2005, 2004 and 2003 does not include unallocated corporate costs and consolidation adjustments. See Note 27 to the consolidated financial statements.
 
(13) Weighted average number of shares.

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(14) We present profit/(loss) from operations as a further supplemental measure of our performance. Profit/(loss) from operations is not a uniformly or legally defined financial measure. It generally represents earnings before discontinued operations, financial result and taxes.

The following table shows profit/(loss) from operations as derived from our net profit (loss), on a consolidated level and, with respect to each of our three business areas:

    As of and for the years ended  
    December 31,  
   
 
        2004   2003  
    2005   adjusted   adjusted  
   
 
 
 
    (in millions of €)  
  Consolidated net profit (loss) before minority interests €28.1   €(86.3 ) €(56.2 )
  Discontinued operations 0.0   81.8   23.4  
  Consolidated net financing costs 65.6   61.9   73.7  
  Consolidated income tax expense (benefit) 19.1   1.6   (18.6 )
   
 
 
 
     Carbon and Graphite 121.6   86.4   61.5  
     Specialties 19.8   13.9   12.2  
     SGL Technologies 0.2   (10.6 ) (14.0 )
     Other (28.8 ) (30.7 ) (37.4 )
   
 
 
 
  Consolidated operating profit 112.8   59.0   22.3  

Exchange Rates

The following table shows the high, low, average and period-end euro-dollar exchange rates for the five years ended December 31, 2005 and the high and low euro-dollar exchange rates for the six months ended March 31, 2006. Up to November 30, 2005 these rates are based on the noon buying rates published by Deutsche Bank. Starting December 2005 we use the reference exchange rates published by the European Central Bank (ECB). The reference rates of the ECB are based on the regular daily concertation procedure between central banks within and outside the European System of Central Banks, which normally takes place at 2.15 p.m. ECB time (CET).

             Period    Period   
Period High    Low    Average    End   
 
 
 
 
 
  (in dollars per euro)   
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  
2005 1.3514   1.1655   1.2450   1.1797  
October 2005 1.2150   1.1926   1.2019   1.2042  
November 2005 1.2059   1.1655   1.1787   1.1773  
December 2005 1.2020   1.1699   1.1856   1.1797  
January 2006 1.2312   1.1831   1.2103   1.2118  
February 2006 1.2105   1.1854   1.1938   1.1875  
March 2006 1.2181   1.1900   1.2020   1.2104  

At April 25, 2005 the euro dollar exchange rate, based on the noon buying rate published by Deutsche Bank was $1.2425 = €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

SGL did not declare dividends for the fiscal years 1998-2005.

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

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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. Additional risks not known to us or that we currently consider immaterial may also impair our business operations. The order in which the following risk factors are presented is not an indication of the likelihood of their occurrence.

Our business is affected by the uncertainties of economic and political conditions.

Conditions in domestic and global economies have a strong impact on our business operations. Numerous factors, such as global or regional political conflicts, have a continous impact on macroeconomic parameters and the international capital markets. The uncertainty of economic and political conditions can have a direct impact on the demand for our products and can also influence our planning and forecasting ability. This is particularly the case for our products where we operate under global market conditions, such as graphite electrodes for the steel industry, cathodes for the aluminum industry, carbon electrodes for the silicon-metal industry, graphite specialties supplied to the semiconductor industry and industrial applications including carbon ceramic brake discs supplied to the automotive industry, process equipment for the chemical industry and structural parts and carbon fibers supplied to the aviation industry.

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 process is capital intensive, which results in high fixed costs. The pricing pressure thus has a direct impact on our results. In addition, price decreases can be aggravated by temporary imbalances in supply and demand, with an oversupply in stagnating markets. Graphite electrodes, in particular, are subject to strong price competition. In 2005 the average price of our graphite electrodes increased in local currency 5% in Euro and 13% in US$ versus 2004. Our market share could be adversely affected if we increase prices, or a competitor reduces prices, or if we decide to maintain profit margins rather than market share or pursue other competitive strategies.

Continuing competition could either prevent us from raising prices, as necessary to offset higher production costs, force price reductions, or reduce our sales volumes and revenues. 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 2005, we derived approximately 49% 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

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sold to customers in the EAF industry. The most recent 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. As a result of the structural crisis in the steel industry, a consolidation of the steel and graphite industries occured, with the elimination of several competitors in both industries, and consequently a decline in demand. Accompanying this decline in demand was also the shift in demand from a large number of customers to a smaller number of larger companies, with increased pressure on our product pricing. With the end of the slowdown in the steel industry in mid-2002 the economic conditions for graphite electrodes producers improved with demand and prices increasing.

The market for graphite electrodes, particularly in Europe and North America, is mature and expands in line with overall economic growth and with an increase in the proportion of EAF steel to total 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. 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.

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

Further more, we continue to require significant funds for our operations, financing costs, the payment of the remaining 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. We also 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.

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

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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.

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 programs and cost saving initiatives; and
 
  our ability to realize earnings from new technologies and products.

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.

We are party to several antitrust court 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, the Canadian antitrust authorities and the European Commission for price fixing in the graphite electrode industry, the specialty graphite industry and in the area of electrical and mechanical carbon and graphite products. As of December 31, 2005, all fines raised by the U.S. Department of Justice and the Canadian antitrust authorities have been paid in full.

In July 2001, December 2002 and December 2003 the European Commission fined us for violating antitrust laws with respect to graphite electrodes, specialty graphites and in the area of electrical and mechanical carbon and graphite products, respectively. In April 2004, 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. In June 2005, the European Court of First Instance reduced the fine imposed in 2002 in the specialty graphite proceedings from €27.75 million to €18.45 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 for both proceedings. Regarding the third fine imposed in 2003 we have appealed before the European Court of First Instance. In 2004, the third fine (€23.9 million including interest) was deposited in an interest-bearing escrow account of the antitrust authorities until the closure of the legal proceedings. In April 2006 we further deposited an amount of €88.9 million covering the present level of the first fine including interest in an interest bearing escrow account of the antitrust authorities until the final decisions of the courts are made.

As part of our accounting procedures we continually review our provisions for antitrust fines and adjust them if necessary. Our Board of Management believes that these provisions, which are below the €111.2 million aggregate amount of fines, are sufficient as of December 31, 2005 to cover any potential liabilities that finally could arise from these antitrust proceedings.

In addition, we have made significant payments 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.

Despite intensive internal legal training and establishing compliance policies, 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.

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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. During the period of 2002 to 2004 the value of the U.S. dollar compared to the euro has declined, while during 2005 the U.S. dollar has strengthen against the euro. We cannot predict any trends for the future. We have entered into hedging arrangements for the majority of our U.S. dollar transaction exposure in Europe for 2006 to reduce 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 “Operating and Financial Review and Prospects – Overview – Currency exchange exposure”.

As a result of our issuance of senior notes the average interest rate of our total debt has and will further 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. In order to limit this exposure we have entered into certain interest rate hedging arrangements to reduce our exposure to fluctuations in interest rates. However, these instruments can protect us only to a limited extent against any long-term increase in interest rates.

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 33 major manufacturing facilities, which are located in Europe, North America and Asia (China) and sell our products in approximately 100 countries. In 2005, sales revenue of our products outside Germany accounted for approximately 87% of our total sales revenue. As a result, we are subject to risks associated with operating in foreign countries, including fluctuations in currency exchange rates, declines in regional or global economic activity, limitations, if any, on the conversion of foreign currencies into euro, and the possible imposition of investment and other restrictions by governments. In addition, our business is subject to changes in the public policies of individual countries or states, including potential increases in taxes and tax rates.

We must comply with a broad range of regulatory controls on the testing, manufacture and marketing of our products. In some countries, including the United States and member states of the European Union, regulatory controls have become increasingly demanding. We expect that this trend will continue. A proposed new European Union chemicals policy could mandate a significant increase in the testing and assessment of basic chemicals and chemical intermediates, leading to increased costs and reduced operating margins for these products.

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

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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 net operating losses until 2004 followed by a break-even result in 2005. 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. 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.

Our pension and retirement obligations could significantly exceed the existing provisions and funding status of 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 and medical insurance. These benefit plans consist of both defined contribution and defined benefit plans and vary from country to country in which we maintain such plans.

Changes and movements in the equity, fixed income, real estate and other markets could significantly change the valuation of the assets of our plans. A change in the yield assumptions used also has an impact on the calculation of the discounted present value of our pension obligations. In addition, changes in pension and postretirement benefit plan assumptions, such as rates for compensation increase, retirement rates, mortality rates, health care cost trends and other factors can lead to significant increases or decreases in our pension or postretirement benefit obligations. This would affect the reported funded status of our plans and therefore could also negatively affect net periodic pension cost, future cash contributions and equity. For further details on the funding status of pensions and other post-retirement benefit obligations, see Note 20 to our consolidated financial statements appearing elsewhere in this annual report.

We cannot assure you that any future expenses or cash contributions that become necessary under our pension or postretirement benefit plans will not have a material adverse effect on our financial condition and results of operations.

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

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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.

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 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.

Existing insurance coverage 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,

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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

SGL’s corporate origins lie in the second half of the 19th century. Two of the earliest industrial manufacturers of carbon products, Gebrüder Siemens & Co. (founded 1872) and the Plania Werke (founded 1896) merged in 1928 forming Siemens Plania Werke AG fu¨ r Kohlefabrikate. This newly created company and its successors underwent a series of international mergers and acquisitions over the years and in 1992 became Sigri Great Lakes Carbon GmbH, SGL’s immediate predecessor company, in 1992. At that time, Hoechst AG (Hoechst) was the majority shareholder of Sigri Great Lakes Carbon GmbH.

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, where approximately 25% of its shares were sold to the public. SGL became a 100% publicly traded company during June of 1996 when Hoechst divested its remaining ownership in SGL in a global placement of approximately 10.5 million shares. Approximately 40% of those shares were placed in North America in the form of American Depositary Receipts (ADR’s) listed on the New York Stock Exchange under the symbol “SGG”.

Since 1992, the SGL GROUP has completed several acquisitions and divestitures as part of its strategy to enhance its position as the world’s largest producer of carbon and graphite products and to concentrate its business on areas where we see growth were identified opportunities. The following are the significant acquisitions, divestitures and corporate changes that the SGL Carbon Group has made over the past three years :

  SGL CARBON Luxembourg S.A., Luxembourg, was founded in January 2004; this company issued the senior subordinated notes in the refinancing of the SGL Group. In connection with the sale of the Surface Protection and Plastics Process Technology businesses, SGL CARBON Technic LLC (U.S.A.) was established in the U.S. for the purpose of acquiring graphite process technology operations in that country.
 
  In Poland, at fiscal year-end 2004, SGL ANGRAPH Sp.z o.o was merged with SGL CARBON POLSKA S.A; in Italy, SGL CARBON Specialties S.p.A. was merged with SGL CARBON S.p.A.; and in the U.S., SGL Information- Services LLC was merged with SGL CARBON LLC. Radion Finanziaria S.p.A., Milan, Italy, and SGL CARBONFinance Ltd., Dublin, Ireland, were dissolved in 2004. 
 
  The Surface Technology and Plastics Process Technology operations, which were divested in January 2005, are carried in the consolidated financial statements as assets held for sale (respectively, liabilities held for sale and discontinued operations – see above explanations).
 
  SGL Information Services GmbH, Augsburg changed its fiscal year to March 31 and is being liquidated.
 
  In November and December 2005, two holding companies were created in Spain and Germany. The Spanish holding SGL CARBON Holding S.L., La Coruña (Spain) acquired legal entities of SGL in Spain, Italy and South America. We also intensified our activities in India in 2005 with the creation of the subsidiary SGL CARBON INDIA Pvt. Ltd., in Pune.
     
  During 2005, other than as noted above, there were no significant acquisition or divestiture activities for the SGL Carbon Group. Capital expenditures incurred during 2005 were related to normal maintenance and efficiency improvements of the SGL Group’s operating facilities.

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Business Overview

In 2005, we had sales in more than 100 countries; sales outside Germany accounted for approximately 87% of our sales revenue. The SGL Group operates 33 major manufacturing facilities of which 17 are located in the European Union, 12 in North America and 4 in Asia (China). Our customers are located throughout the industrialized world. Our sales revenue in 2005 amounted to €1,068.8 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, 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 2005, sales revenue for the Carbon and Graphite business area amounted to €643.7 million and EBITDA amounted to €160.2 million.

Specialties (“S”) manufactures and markets graphite products with a wide variety of applications and for a large number of industrial sectors, including semiconductors, energy management, tool manufacturing, ferrous and non-ferrous metallurgy, high-temperature processes, chemicals, automotive, glass and ceramics. In 2005, sales revenue for the Specialties business area amounted to €263.4 million and EBITDA amounted to €32.4 million.

SGL Technologies (“ST”) 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 2005 , sales revenue for the SGL Technologies business area amounted to €159.0 million and EBITDA amounted to €12.6 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 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 2005.

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 and to reduce 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. Insolvencies of graphite manufacturers in both Germany and the USA started another consolidation phase of the industry, including site closures. Due to this consolidation and reduction of capacity as well as the growing demand of the booming steel industry in the time from 2003 until 2005, the graphite electrode industry has begun to return to profitability.

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 2005. 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 2005. 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 360 million tons in 2005 (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 2005.

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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 1,060,000   347,000   32  
2005 1,130,000   360,000   32  

* Source: International Iron and Steel Institute for years up to 2004, 2005 figure is a 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 30% in 2005.

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 2005 was approximately 18%.

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, which is recently experiencing modest growth, typically account for a modest portion of our business (for example, approximately 3% of our sales revenue in 2005).

Specialties

The Specialties business area produces custom made products for specific applications. We serve a wide range of industries such as energy, semiconductor, tool manufacturing, ferrous/non ferrous metallurgy, chemical, automotive, mechanical engineering, high temperature processes.

The main strategic focus of our Specialties business is to strengthen our global position with an emphasis on expanding our presence in Asia. With new products and innovations (e.g. for solar or

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nuclear industry) we aim to grow globally. Over the last years, as a result of our SGL Excellence initiative, we have been able to improve our cost position through site specialization, simplification of production and product portfolio, headcount reduction and continuous improvement programs.

Our specialties activities are aligned in five major segments as follows:

Electronic Applications: We have a leading position in graphite products for the semiconductor and solar markets in both Europe and North America. Demand in the semiconductor market is highly cyclical. After a downturn during 2001 and 2002, the semiconductor market has recovered over the last two years. In contrast strong demand and growth being observed in the solar and battery markets, especially in Asia. We estimate our market share at approximately 20% globally.

Industrial Applications: The Industrial Applications market is fragmented into many applications, such as tool manufacturing, glass and ceramics markets, ferrous and non-ferrous metallurgy, refractory manufacturing, electrochemistry, nuclear industry medical technology. In Europe market growth is low and in America, after a period of declining demand from 1998 to 2002, the market is now recovering. Still the Industrial Applications market is by far the largest Specialties market with approximately €500 million in sales annually. We estimate our market share at approximately 15% globally.

High Temperature Applications: We believe that we are the only company, being able to produce and supply the full range of graphite products (isostatic and extruded graphites, carbon fiber reinforced carbon (CFC) and felt) to furnace manufacturers. We estimate our market share at approximately 10% globally, with a strong presence in Europe but with relatively low share in North America and Asia.

Automotive and Mechanical Applications: This market is separated into large volume serial business (such as parts for pumps used in automobiles) and small series business for mechanical engineering applications. The automotive markets are growing only moderately in Europe, North America and Japan but strongly in China. Historically our focus was on the serial business and our traditional home markets in Europe, whereas we are now looking for expansion into other regions as well. We estimate our market share at approximately 10% globally.

Process Technology: After a decline in demand in 2004, we have experienced an upturn in 2005. We estimate the worldwide market for Process Technology to be approximately €0.1 to 0.2 billion, of which we have a share of approximately 37%.

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 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. In the long run, 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

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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 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.

Specialties

We supply a wide variety of materials customized to serve the following industries and applications:

Electronic Applications: For the Electronic Applications market we offer a wide range of components made of high purity graphite, felt and CFC for semiconductor industry, power generation and thermal and power management.

Industrial Applications: Our product range for Industrial Applications consists of mold stock and precision machined parts made of extruded, isostatically, die and vibration molded graphite, high purity graphite, soft and rigid felt and CFC for tool manufacturing, glass and ceramics industry, ferrous and non-ferrous metallurgy, refractory manufacturing, electrochemistry, the nuclear industry and medical technology.

High Temperature Applications: For High-Temperature Applications we supply mold stock and machined graphite parts, CFC, soft and rigid felt, graphite foils and sheets for heat treatment applications, aerospace and chemical process technology.

Automotive and Mechanical Applications: For Automotive and Mechanical Applications we supply mold stock and mechanical components made of carbon graphite, graphite and graphite-filled high performance plastics for the automotive industry, household appliances, mechanical engineering as well as powder and granules for compounding.

Process Technology for Corrosive Media: Our Process Technology products comprise heat exchangers, columns, pumps, quenchers, bursting discs and HCl (Hydrogen Chlorine) synthesis units

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made of DIABON* process equipment graphite as well as pumps made of exotic metals and LICUFLON* PTFE (PolyTetraFluorEthylen = Teflon)-lined vessels and columns for corrosive applications in the chemical, environmental, mining, pulp, energy, pharmaceutical and agricultural industries. Furthermore we offer complete engineered Systems made from DIABON and LICUFLON.

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.

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. Our carbon ceramic automotive brakes (carbon ceramic discs) are made from a ceramic composite material, composed of carbon fiber within a silicon carbide matrix and are called carbon fiber reinforced silicon carbide or C/SiC. The main advantages of the carbon ceramic discs are a very high and consistent friction performance and significant lower weight compared to traditional automotive brake discs. Carbon-Ceramic discs are designed to last much longer than ordinary brake discs. SGL Technologies began serial production of carbon ceramic brake discs in a newly constructed plant in 2002 to serve the increasing demand from Porsche. Since mid 2005 we are also supplying discs for high-end automobiles produced by Audi.

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

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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. Using procurement agreements with key suppliers, SGL secures the necessary raw materials for production, especially for needle coke. These agreements normally last for one year and contain minimum quantities to be purchased by SGL. The prices for the deliveries are settled on a base price, which is adjusted by variable components (e.g. defined parameters of the needle coke producer’s raw material price).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 large European and North American regional 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. During these times, 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 Carbon and Graphite 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. The SGL Group’s local sales organizations or local independent sales agents service export customers with the assistance of our direct sales force. Most of these independent sales agents have worked with the SGL Group for many years.

In the 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 independent exclusive sales agents in certain locations. From time to time, the Carbon and Graphite sales organization also assists in sales of 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 three 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.

To our key accounts, 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. We manufacture and manage electrode inventory levels on the basis of rolling sales forecasts. Other products, particularly in the 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.

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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, 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.

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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.

Competitive Position of the SGL Group

The carbon and graphite industry is highly competitive with competition based primarily on price, product quality and customer service. There are approximately 10 to 15 major manufacturers of carbon and graphite products worldwide, of which the SGL Group is the largest, based on its 2005 sales revenue.

Carbon and Graphite

For graphite electrodes, our principal product, there are approximately 10 to 15 major manufacturers worldwide. The SGL Group and GrafTech International Ltd. (formerly UCAR International Inc.) are the largest of these manufacturers on the basis of metric tons produced. In addition to the SGL Group and GrafTech International Ltd (GrafTech), there are graphite electrode manufacturers in the United States (2), Japan (4) and several in India and China. We estimate that our share of the global market for graphite electrodes was approximately 21% at the end of 2005.

We believe that we are the largest manufacturer of carbon electrodes worldwide. According to our estimates, we supplied approximately 30% of the worldwide market for carbon electrodes in 2005.

Approximately ten manufacturers compete in the global market for cathodes used in the aluminum industry. We estimate that our share of the global market was approximately 18% of this market at the end of 2005. Other major manufacturers include GrafTech, Nippon Carbon, SEC Corporation the Vesuvius Group and a few Chinese manufacturers.

Specialties

The Specialties market is served by many competitors with different product ranges and value added segments. We believe that globally-oriented international companies, including the SGL Group, Le Carbone Lorraine, GrafTech, Tokai Carbon, Morgan Crucible and the Schunk Gruppe account for about two thirds of the total market volume worldwide. 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 for electronic and industrial applications in Europe and North America. We estimate that the worldwide market for Process Technology is approximately €0.1 to 0.2 billion, of which we have an approximately 37% market share. The Process Technology market is highly fragmented with many locally-oriented, often family-owned smaller companies. Our main 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, Toho and Formosa. 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

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that we are currently in material compliance with applicable laws, regulations and permits, our operations, like those of our competitors, involve certain environmental risks.

We seek to minimize environmental risk by developing, implementing and improving material resources, production and abatement techniques. Using advanced techniques, we aim to improve working conditions and reduce the environmental impact of our own operations and those of our customers’ businesses. Our goal is to comply with the European Union’s Integrated Pollution Prevention and Control (IPPC) directive while at the same time creating economically and technically viable conditions to assure long-term competitiveness. We augment the efforts of our internal auditors, research and development team and operations supervisors with periodic, active cooperation with national and international state agencies and organizations. We have adjusted 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 is to achieve internal standards according to ISO 14001, generally recognized as the highest standard in this field. We use our Internal Management and Audit System for 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 either the SGL Group or others currently or previously owned or operated.

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We believe that the extent of contamination and our liability, if any, arising from such claims will not have a material adverse effect on our financial condition or results of operations.

We have established and continue to establish accruals for environmental liabilities where it is probable that a liability has been incurred and the amount of the liability can be reasonably estimated. We adjust accruals on a periodic basis as we make new remediation commitments or receive information indicating that previous estimates should be changed. We believe that, taking into account our environmental accruals, our current environmental liabilities will not have a material adverse effect on our financial condition or results of operations.

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 group coordination 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 Areas. At the beginning of 2002, we combined the former regional business units of Carbon and Graphite and Specialties into global Business Areas 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 Areas –Carbon and 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 Area (or, in the case of multi-business area sites, by a management committee). The boards of directors of individual Group companies have responsibility for those companies’ legal and financial affairs. Centralized corporate functions support the SGL Board of Management and provide services to all businesses and to individual legal entities within the Group. In 2005, we merged the previously decentralized research and development activities into the newly created central function “Technology & Innovation”, for details see ITEM 5.

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Principal subsidiaries

The following table lists SGL Carbon’s principal consolidated subsidiaries as December 31, 2005 and its ownership interest in each:

Company Name   Location   Business Area   Ownership Interest%  
   
 
 
 
North America              
SGL Carbon LLC   Charlotte, NC, USA   CG, S, SGL T   100.0  
HITCO Carbon Composites, Inc   Gardena, CA, USA   SGL T   100.0  
SGL Technic Inc   Valencia, CA, USA   S, SGL T   100.0  
M.G.P. LLC   Sinking Spring, PA, USA   S   100.0  
SGL Carbon Technic LLC.   Strongsville, OH, USA   S   100.0  
SGL Canada Inc.   Lachute, Canada   CG   100.0  
Europe              
SGL Carbon GmbH   Meitingen, Germany   CG, S   100.0  
SGL Technologies GmbH   Meitingen, Germany   SGL T   100.0  
SGL Brakes GmbH   Meitingen, Germany   SGLT   100.0  
SGL Carbon Beteiligung GmbH *   Wiesbaden, Germany   Corporate   100.0  
SGL Carbon Holding GmbH *   Wiesbaden, Germany   Corporate   100.0  
SGL Carbon Technic SAS   Grenoble, France   S   100.0  
SGL Carbon SpA   Milan, Italy   CG, S   99.7  
SGL Carbon Holdings S.L.   La Coruña, Spain   Corporate   100.0  
SGL Carbon S.A   La Coruña, Spain   CG   99.9  
Gelter Ringsdorff S.A.   Madrid, Spain   S   64.0  
SGL Carbon GmbH & Co   Steeg, Austria   CG   100.0  
SGL Carbon Polska S.A   Ratibor, Poland   CG, S   100.0  
SGL Carbon SAS   Chedde, France   S   100.0  
SGL Technic Ltd.   Muir of Ord, Scotland   SGL T   100.0  
SGL Carbon Ltd   Alcester, UK   S   100.0  
Asia              
SGL Carbon Japan Ltd.   Tokio, Japan   S   100.0  
SGL Carbon Far East Ltd   Shanghai , China   S   100.0  

             
* SGL Carbon Beteiligung GmbH, SGL CARBON Holdings GmbH and SGL CARBON Holdings S.L. are 100% direct or indirect subsidiaries of SGL Carbon AG that serve as a holding companies for various other holding companies and operating subsidiaries within the SGL Group.

Property, Plants and Equipment

As of December 31, 2005, we operated 33 major manufacturing facilities worldwide of which are all located in Europe, North America and Asia. As part of the restructuring program announced in 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 United States, Germany, Poland, France, Italy and Austria. The size of land we own is approximately 1,913 thousand square meter in the US (473 acres), 804 thousand square meters (199 acres) in Germany, 727 thousand square meters (180 acres) in Poland, 619 thousand square meters (153 acres) in Italy, 341 thousand square meters (84 acres) in Canada, 174 thousand square meters (43 acres) in France, 168 thousand square meters (42 acres) in Austria and 114 thousand square meters (28 acres) in Spain. 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 Poland 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

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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 Specialties). This capacity includes approximately 225,000 metric tons of graphite electrodes. In 2005 , we sold approximately 222,000 metric tons of graphite electrodes compared with 209,000 metric tons in 2004.

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As of December 31, 2005 we operated the following major facilities

     Primary Use   
   
 
Location   Manufacturing   Sales   Administration   Business Area   Owned/Leased  
   
 
 
 
 
 
Europe                           
Wiesbaden, Germany1             x   Corporate   Leased  
Meitingen, Germany   x   x   x   CG, S, SGL T   Owned  
Griesheim, Germany3   x             CG   Owned  
Bonn, Germany   x   x   x   S   Owned  
Steeg, Austria   x        x   CG   Owned  
Milan, Italy2        x   x   CG, S   Leased  
Verdello, Italy   x   x   x   S   Leased  
Narni, Italy   x             CG   Owned  
Ascoli Piceno, Italy   x             CG   Owned  
Chedde, France   x   x   x   S   Owned  
Grenoble, France   x   x   x   S   Owned  
La Coruna, Spain   x   x   x   CG   Owned  
Madrid, Spain   x   x   x   S   Owned  
Ratibor, Poland   x        x   CG   Owned  
Nowy Sacz, Poland3   x   x   x   CG, S   Owned  
Inverness, Scotland   x        x   SGL T   Owned  
Engis, Belgium   x             CG   Owned  
Alcester, England        x        S   Leased  
North America                           
Charlotte, North Carolina4        x   x   CG, S,SGL T   Owned  
Morganton, North Carolina   x             CG, S   Owned  
Hickman, Kentucky   x             CG   Owned  
Ozark, Arkansas   x             CG   Owned  
Valencia, California   x   x   x   SGL T, S   Owned  
Lachute, Quebec, Canada   x   x   x   CG   Owned  
Kitchener, Ontario, Canada   x   x   x   S   Leased  
St. Marys, Pennsylvania   x   x   x   S   Owned  
Strongsville, Ohio   x   x   x   S   Owned  
Arkadelphia, Arkansas   x             SGL T   Leased  
Sinking Spring, Pennsylvania   x   x        S   Leased  
Gardena, California   x   x   x   SGL T, S   Owned  
Cheshire, Connecticut   x   x        S   Leased  
Asia                           
Nantong, China   x   x   x   S   Owned  
Shanghai, China   x   x   x   S   Leased  
Daegu City, Korea   x   x   x   S   Owned  
Pune, India   x   x   x   S   Owned  

                     
1) Corporate Headquarters.
2) Head Office, Italy.
3) Right to construct buildings on land owned by a third party in Germany (Erbbaurecht) under German law, comparable to a long- term ground lease.
4) Head Office, North America.

As of December 31, 2005 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 million and USD 168.4 million. Inventories and movable plant and equipment of €252.5 million were assigned as collateral. Trade receivables and receivables due from subsidiaries in the total amount of €147.5 million were assigned as collateral. In addition, intercompany receivables of €1,096.7 million and bank balances totaling €88.1 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.

Item 4A.  Unresolved Staff Comments

None.

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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 34 and 35 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 2005, we sold products in approximately 100 countries, with sales outside Germany accounting for approximately 87% of our sales revenue.

Until December 31, 2004, 18 subsidiaries and two joint ventures were excluded from consolidation and accounted for at cost. In the consolidated financial statements as of December 31, 2005, these subsidiaries have been included in consolidation and the joint ventures have been accounted for using the equity method. In this context, the opening balances of assets, liabilities and equity as of January 1, 2004, as well as the consolidated balance sheet as of December 31, 2004 and the consolidated income statement and cash flow statement for the year then ended, have been restated retrospectively.

IFRS 2 “Share-based payment” is effective for annual periods beginning on or after January 1, 2005. The IFRS is to be applied retrospectively on all share-based payments granted since November 7, 2002, that still existed when the standard became effective and requires comparable information to be restated. This also includes a restatement to the opening balances of the retained earnings in the earliest period presented.

The revised IAS 1 “Presentation of financial statements” defines a presentation of current and non-current assets and liabilities as separate groups in the balance sheet. The standard must be used for reporting periods of a fiscal year beginning on January 1, 2005 or later. The company’s consolidated balance sheet was structured accordingly and the previous years’ figures were restated. In prior years, we presented costs related to antitrust proceedings and restructuring expenses separately in our statement of operations. Beginning with the year ended December 31, 2005, we have stopped reporting these itmes separately and the prior years statements have been adjusted to reflect his change.

Business realignment

Since the beginning of 2005, we manage our operations in three business areas that reflect the products that we produce and market – Carbon and 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 Specialties. The segment reporting for all previous years 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

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operations. As part of this restructuring program, we significantly reduced our total number of employees. 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. Total cost savings attributable to these and other initiatives amounted to approximately €21 million, approximately €36 million, and approximately €24 million in 2005, 2004 and 2003, respectively. 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
 
  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 costs incurred in connection with the implementation of our cost reduction measures and our ability to achieve targeted operating efficiencies with a leaner production base.

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 U.S. dollar and the euro, can influence our operating and financial results. Through early 2001, the value of the U.S. 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 during 2004 and reached a low-point at the end of 2004. In 2005 the U.S. dollar strengthened against the euro. Currency fluctuations 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. 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 €2.3 million during 2004. In the 2005 fiscal year our equity increased by €20.5 million due to a stronger U.S. dollar. 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

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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 2003 to 2005. After the divesture of the Surface Protection and Plastic Process Technologies businesses in beginning of 2005 we reclassified the remaining Process Technology business into the 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  
  2005       restated       restated  
 
 
 
 
 
 
  (€ in   (%   (€ in       (€ in  
  millions)   change)   millions)   (% change)   millions)  
                     
SGL Group consolidated total 1,068.8   13.2   944.0   1.3   931.5  
By business area:                    
   Carbon & Graphite 643.7   14.4   562.5   -0.3   564.4  
   Specialties * 263.4   6.9   246.3   3.0   239.1  
   SGL Technologies 159.0   19.1   133.5   6.6   125.2  
   Other 2.7   58.8   1.7   -39.3   2.8  
By geographical region:                    
   Germany 142.7   1.9   140.0   1.7   137.6  
   Rest of Europe 380.4   18.8   320.2   1.8   314.4  
   North America 283.8   13.5   250.0   -0.3   250.7  
   Rest of World 261.9   12.0   233.8   2.2   228.8  

* After the sale of the surface protection business, we reclassified the Process Technology business from Corrosion Protection to 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.
 
Sales revenue is recognized at the time of transfer of risk, following delivery of a product or rendering of the services, net of any discounts and rebates granted. We grant discount to our customers for early payment of amounts outstanding. We also provide volume discounts to our customers based on their total purchases during a specified term. Such discounts are recorded as a reduction of revenue based on our estimate of the number of customers that will ultimately earn these discounts. 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.

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, the first consolidation of our Polish subsidiary SGL CARBON Polska S.A (formerly Zaklady Elektrod

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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 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 Specialties business area’s large number of target industries is more strongly diversified, thereby reducing to some degree the 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. Using procurement agreements with key suppliers, SGL secures the necessary raw materials for production, especially for needle coke. These agreements normally last for one year and contain minimum quantities to be purchased by SGL. The prices for the deliveries are settled on a base price, which is adjusted by variable components. We incur substantial energy costs, primarily for electricity, in connection with the production of our graphite electrode and other graphite and carbon products. Energy costs over the last several years have been highly volatile and trending upwards. 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. This expense decreased in the 2003 fiscal year increased in the 2004 fiscal year and decreased again in the 2005 fiscal year.

In 2005, we merged the previously decentralized research and development activities into the newly created central function “Technology & Innovation”. The development focus is on the future growth markets of energy, electronics, automotive, environment and safety. Combining our almost 100 employees in the central R&D function leads to synergies in the acceleration of developments, promotes the constant exchange of knowledge and focuses activities. As well as further developing the technology of our existing products as a service for all Business Areas, new market potential is analyzed as part of our Company portfolio and supported from the project stage through to product launch. By stringently applying a newly defined selection process in the forefront of the real project phase, project selection considering key commercial and technical feasibility data is optimized. With the newly created Technology and Innovation organization, we are securing our market position today and for the future through targeted work on projects to improve customer benefit, using methods from the SGL Excellence Initiative to increase efficiency and effectiveness.

We have invested considerable amounts in carbon ceramics technology and commenced production of carbon-ceramic brake discs at our plant in Meitingen, Germany. 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

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and development costs in the 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. Beginning in 2005 general and administrative expenses include expenses related to the implementation of the requirements of the Sarbanes-Oxley Act.

Other operating income (expense) (net)

The major components of other operating income (expense) include costs relating to antitrust proceedings, restructuring expenses, 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 in Note 1 to the financial statements]”.

Starting in 2005 restructuring expenses for and expenses in connection with antitrust proceedings are included in other operating expenses. This also affects the previous year’s presentation. Expenses related to the continuing restructuring programs (initiated in prior years) and other measures to improve efficiency and optimize costs resulted in a total expense of €20.8 million during 2005 (€19.7 million in 2004 and €12.1 million in 2003). This also relates to the increase of our antitrust provision in 2005 by €1.9 million and by €19.5 million in the 2003 fiscal year, primarily to increase our reserve for legal expenses and for EU fines. 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% . The interest portion of the increase in EU antitrust fines are presented in net financing costs.

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, which was paid in full in 2005.

Because the antitrust liability was denominated in U.S. dollars, changes in the Euro/U.S. 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 retained exposure to non-cash adjustments in the amount of the remaining antitrust liability. We recorded these non-cash adjustments under other financial results at the end of each reporting period. As of December 31, 2005, the DOJ antitrust liability was paid in full. 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

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expense has increased significantly in recent years. We expect that our net interest expense has reached its highest level in 2005 due to the new financing completed in February 2004. We successfully managed throughout 2005 and 2004 to reduce our financial debt and expect to lower financial debt also in 2006 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 in other consolidated group companies. 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 2005 and 2004 deferred tax assets from tax loss carry-forwards were uniformly recognized in the consolidated financial statements on the basis of a rolling projection of the estimated earnings to be taxed at the level of individual subsidiaries or on the level of tax groups. Uncertainties about certain planning assumptions and other underlying conditions are taken into account. Based on the restructuring measures taken, the disposal of the loss generating Surface Protection business, the significant reduction of the net debt and the improved economic market environment for our business segments, we assume that the capitalized deferred tax assets on loss carry-forwards can be utilized in the future.

German corporations are subject to a uniform 25% corporate income tax on both distributed and retained earnings. Furthermore, a solidarity surcharge of 5.5% is added to the corporation tax rate, resulting in an overall corporation income tax rate of 26.4% for 2005 and 2004. German corporations are also subject to the trade tax. The amount of the trade tax depends on the municipality in which a company maintains its operations. The trade tax generally amounts to between approximately 15% and 20% of taxable earnings, depending on the municipality’s tax assessment rate. Trade tax is deductible as an operating expense in the calculation of the company’s income that is subject to corporation tax. With an average trade tax burden of 12%, the overall German income tax rate amounts to 38.4% . Due to changes in German legislation in 2004, generally only 60% of tax loss carry-forwards may be offset from current annual income. Losses up to an amount of €1 million can be completely deducted from corporation income tax as well as from trade tax.

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Operating Results

The following table shows our consolidated statements of operations for the 2005, 2004 and 2003 fiscal years.

  Year ended December 31,  
 








 
          2004       2003  
  2005       (restated)       (restated)  
 
     
     
 
  (€ in       (€ in       (€ in  
  millions)   % change   millions)   % change   millions)  
Sales revenue  1,068.8   13.2   944.0   1.3   931.5  
Cost of sales  (746.7 )  9.6   (681.3 )  (1.8 )  (693.6 ) 
Gross profit  322.1   22.6   262.7   10.4   237.9  
Selling expenses  (126.8 )  6.5   (119.1 )  (5.3 )  (125.8 ) 
Research costs  (18.0 )  (6.3 )  (19.2 )  1.1   (19.0 ) 
General and administrative expenses  (48.1 )  10.3   (43.6 )  14.1   (38.2 ) 
Other operating income (net)  (16.4 )  (24.8 )  (21.8 )  (33.1 )  (32.6 ) 
Profit from operations  112.8   91.2   59.0   164.6   22.3  
Net financing costs  (65.6 )  6.0   (61.9 )  (16.0 )  (73.7 ) 
Profit / loss before tax  47.2     (2.9 )  (94.4 )  (51.4 ) 
Income tax benefit (expense)  (19.1 )    (1.6 )    18.6  
Net profit (loss) before minority interests  28.1     (4.5 )  (86.3 )  (32.8 ) 
Minority interests  0.1     (0.1 )  (66.7 )  (0.3 ) 
Discontinued operations  0.0   (100.0 )  (81.8 )  249.6   (23.4 ) 
Net profit (loss)  28.2   (132.6 )  (86.4 )  52.9   (56.5 ) 

The following table shows selected consolidated statement of operations data expressed as a percentage of total sales revenue for the years 2005, 2004 and 2003:

  Year ended December 31,  
 




 
      2004   2003  
      restated   restated  
  2005 (%)   (%)   (%)  
 
 
 
 
Sales revenue  100.0   100.0   100.0  
Cost of sales  (69.9 )  (72.2 )  (74.5 ) 
 
 
 
 
Gross profit  30.1   27.8   25.5  
Selling, research and development, general administration and other operating expenses, net  (19.5 )  (21.5 )  (23.1 ) 
 
 
 
 
Profit from operations  10.6   6.3   2.4  
Net financing costs  (6.2 )  (6.6 )  (7.9 ) 
Income taxes  (1.8 )  (0.2 )  1.9  
 
 
 
 
Net Profit (loss) (includes minority interests)  2.6   (0.5 )  (3.6 ) 
 
 
 
 
Discontinued operations  0.0   (8.7 )  (2.5 ) 
 
 
 
 
Net Profit (loss) attributable to shareholders  2.6   (9.2 )  (6.1 ) 
 
 
 
 

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2005 Compared to 2004

Overview

  The fiscal year 2005 was characterized by the following major topics:
     
  Overall sales growth of 13% with contributions from all business areas;
 
  Favorable development in most of our customer industries;
 
  Profit from operations considerably improved by 91% from €59.0 million in 2004 to €112.8 million in 2005;
 
  Net debt substantially reduced to €264.7 million at the end of 2005;
 
  Equity ratio increased from 20.3% as of December 31, 2004 to 27.2% as of December 31, 2005;
 
  Cooperation with Audi for further development of carbon-ceramic brake discs with the aim of serial production; and
 
  Early payment of the North American antitrust liabilities and refinancing and reduction of the U.S. dollar credit line.

The further growth in the world economy in 2005 resulted in a favorable development in most of our customer industries. Our Carbon and Graphite business area benefited in particular from the continuing positive development in the steel industry, which enjoyed another very good year in 2005. In the Specialties business area, there was a significant increase in demand for high-temperature applications in the energy and semiconductor industries. For the Process Technology business there was an above average rise in project invoicing. The significant sales revenue increases in the Technologies (T) business area were mainly attributable to our increased sales of carbon-ceramic brake discs, carbon fibers and composite materials for the automotive and aerospace industries and for industrial applications.

Profit from operations increased considerably by 91% from €59.0 million in 2004 to €112.8 million in 2005. All three business areas of the SGL Group 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, SGL Ten, were contributing to the growth in earnings.

Sales revenue

Consolidated sales revenue increased by 13.2% from €944.0 million in 2004 to €1,068.8 million in 2005. Currency exchange rate fluctuations had no impact on the consolidated sales revenues in 2005 compared to 2004.

Based on the positive development in all three Business Areas, the respective shares in sales revenues remained virtually unchanged. Sales revenue of Carbon and Graphite totaling €643.7 million increased by 14.4% compared to the previous year’s level of €562.5 million. Specialties (including business of process technology) increased its sales revenue from €246.3 million to €263.4 million. Technologies generated an increase in sales from €133.5 million to €159.0 million.

The regional sales revenue structure during fiscal year 2005 remained largely unchanged from 2004: Germany 13%, other European countries 36%, North America 27%, rest of the world 24%.

The Carbon and Graphite (CG) business area sales revenue totaled €643.7 million in 2005, an increase of 14.4% compared to the previous year’s level of €562.5 million. During 2005, volume and price effects impacted the reported sales revenues with 7% and 8%, respectively. Shipments of the core product graphite electrodes increased to a record level of 222,000 metric tons (2004: 209,000 metric tons). Year on year, the increase can be attributed mainly to the economic upswing in Europe as well as to market and customer-specific developments. In the other regions the good sales level of the previous year was maintained. Significant price increases could be achieved in both the euro and the USD zones. Based on local currency, average prices for graphite electrodes increased by approximately 13% in the USD zone and approximately 5% in the euro zone in 2005. The sustained positive trend in the steel economy continued to have a positive impact on our order backlog at year-end. Sales of cathodes at around 27,000 tons were slightly lower than in the previous year. By contrast, there was a slight increase in the proportion of graphitized cathodes an indication of recovery in the aluminum industry. This was also apparent in a clear upturn in demand for our

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products, which began in the second half of 2005. The significant price increases set for 2006 reflect both the rise in raw materials and energy costs and the improved market situation. As in the previous year, our production capacities for furnace linings for the crude steel industry were fully utilized in 2005. We were able to record another slight increase in sales revenues. The market for carbon electrodes for the production of silicon and phosphorous, which accounted for approximately 4% of CG sales revenue in 2005, was characterized by widespread stagnation of global demand. Moreover, this market is shaped by excess capacities among suppliers and strong cost competition from low-wage countries, which negatively impacts the price development.

Sales revenue in the Specialties (S) business area was up by 6.9% from €246.3 million in 2004 to €263.4 million in 2005. Due to increased demand, sales revenue grew in all activities during 2005. While there was a significant rise in demand for high temperature applications and in the energy sector, the automotive business slowed down slightly. The semiconductor business also developed favorably. Project invoicing in the Process Technology business increased above average. Asia and North America, in particular, provided positive growth impetus. There was a marked increase in business volume in Europe as result of the strong export activity. Outside Europe, we were able to gain market shares in regions with rising demand. In Europe, we were able to maintain our market share despite the difficult market environment.

In the Technologies (T) business area sales revenue increased by 19.1% from €133.5 million in 2004 to €159.0 million in 2005. The growth was mainly attributable to increased sales of carbon-ceramic brake discs, carbon fibers for niche markets (such as medical equipment) and yarns for the automotive industry.

Cost of sales and gross profit

Consolidated cost of sales increased by 9.6% from €681.3 million in 2004 to €746.7 million in 2005. Compared to the consolidated sales revenue growth of 13.2%, the increase in cost of sales could be limited despite higher raw material and energy costs in 2005 as a result of disproportionately lower increases in personnel expenses. We mainly use petroleum coke and energy in our manufacturing processes. Total cost of raw materials and consumables used increased from €192.8 million in 2004 to €242.0 million in 2005. In addition to higher product volumes, this is partly related to the result of exchange rate changes, as we pay for petroleum coke exclusively in U.S. dollars and the U.S. dollar strengthened slightly relative to the euro in 2005. Total cost of materials, which also includes the cost of purchased services, increased from €271.9 million in 2004 to €331.6 million in 2005, mainly due to costs for additional services in connection with the maintenance of our buildings, machinery and equipment. Overall staff costs also increased from €289.5 million in 2004 to €309.5 million in 2005. While direct wages and salaries (including bonuses) increased by €26.1 million year-on-year, mainly due to the higher level of bonus provisions in 2005 compared to 2004, costs for social security contributions, retirement and other benefits decreased by €6.1 million.

The gross profit increased by €59.4 million or 22.6% from €262.7 million in 2004 to €322.1 million in 2005. The gross return on sales revenue, representing gross profit as a percentage of sales revenue, increased from 27.8% to 30.1% . Contributing substantially to this were the favorable price and volume developments in all business areas. We managed to more than recuperate the significant increases in energy (electricity, gas) and raw material prices by adhering to our cost reduction programs and by implementing price adjustments.

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

In spite of increased sales revenues, we succeeded in limiting the increase in selling expenses including freight costs, to around €7.7 million; selling expenses amounted to €126.8 million in 2005 (previous year: €119.1 million). At €18.0 million, research and development costs (R&D costs) were slightly lower than in 2004. Part of the development costs were capitalized in 2005 in accordance with IAS 38. Due to the early product life-cycle of our T businesses, significant cost components related to our research and development activities are also included into the current operating costs of the T business area. As a result of the higher build-up in bonus provisions than in the prior year and due to increased costs for Sarbanes Oxley Act compliance, general administrative costs totaled €48.1 million, around €4.5 million more than in 2004. Net other operating expenses improved to €16.4 million in 2005 from €21.8 million in 2004. This also includes the income related proceeds from

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the cooperation agreement with Audi. The expenses mainly related to the continuation of our various optimization programs.

Profit (loss) from operations

Profit from operations increased by 91.2% to €112.8 million in comparison with €59.0 million in 2004. Contributions came from all business areas. The return on sales for the Group (based on profit from operations) rose from 6.3% in 2004 to 10.6% in 2005. A significant contribution was made by the results of our SGL Excellence Initiative, which led to savings of €21 million on the basis of the SIX SIGMA method as well as other programs continued during the reporting year. The continuation of our cost and production site optimization programs resulted in expenses which were included in the segment results.

Profit from operations in the Carbon and Graphite business area improved more than proportionately by 40.7% from €86.4 million in 2004 to €121.6 million in 2005. The return on sales rose from 15.4% in 2004 to 18.9% in 2005. Major contributing factors to this positive development were price and volume effects as well as cost reductions from our SGL Excellence efficiency enhancing programs. Adjusting costs to eliminate the impact of the 10% increase in raw materials and energy costs the unit costs of graphite electrodes decreased by 7% in comparison with 2004. We expect that the relocation of carbon electrode production from Ascoli, Italy to Nowy Sacz, Poland, which began in 2005, will be completed by the end of 2006. At the end of 2005, an agreement on redundancy payments was reached with 112 employees in Ascoli. The appropriate fixed asset write downs are fully reflected in the 2005 earnings. Moreover, additional flexible early retirement agreements were concluded at the Griesheim site in Germany to improve our competitiveness and allow us to compensate for business-cycle-related decreases in demand.

In the Specialties business area (including the process technologies business) the profit from operations increased by 42.4% from €13.9 million in 2004 to €19.8 million in 2005. In addition to volume and price effects, site-specific product streamlining and the expansion of production in Poland contributed to the improved margin. The return on sales increased from 5.6% in 2004 to 7.5% in 2005. In comparison with 2004, further savings of €5 million were made, which roughly compensated for material cost increases. The ongoing efforts to lower the personnel cost portion of the total production costs also led to expenses during the reporting year which are included in the earnings. The measures concentrated primarily on the facilities in Bonn, Germany and Chedde, France.

Profit from operations in the Technologies business area was €0.2 million (2004: (€10.6) million) and contributed significantly to the general improvement in earnings year on year. In addition to the volume growth in almost all Business Lines, price increases were also implemented, which partially offset factor cost increases. Significant milestones were reached in 2005. One was a cooperation agreement with Audi for further development of our carbon-ceramic brake disc. The objective of this cooperation is the use of our brake discs in new models produced by the Volkswagen/Audi Group and the further development of product characteristics and technical production processes with the goal of industrial serial production. In connection with the cooperation agreement, Audi made a significant cash contribution. The payment covers past and future developments performed by SGL Carbon and contributed to the business area’s positive earnings. Due to this, T reported a positive profit from operations for 2005 under IFRS. In the carbon-fiber business, we entered into a strategic alliance with Mitsubishi Rayon Co. Ltd., Japan at the beginning of 2005, concerning the supply of raw materials to our plant in Scotland in exchange for fiber production capacities. This cooperation is expected to bear fruit beginning in the second quarter 2006 and strengthen the value chain within the T business area. T will therefore be able to enter new markets with high-quality fibers and improve the supply for captive use of composites.

Corporate costs decreased by around €1.9 million to €28.8 million in 2005 (2004: €30.7 million). In addition to the costs of the management holding and the assigned central service areas, costs related to the compliance with the US Sarbanes Oxley Act in 2005 were reported centrally. Section 404 of the Sarbanes Oxley Act and the implementing rules and regulations, which will apply to us for the first time when we report on our 2006 fiscal year, require our auditors to certify the functionality of our internal control systems. In this context, all processes which affect financial reporting must be systematically analyzed and documented to provide evidence of a functioning internal control system. During the review sessions, control processes are modified or changed, where appropriate. If

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necessary, the business procedures on which they are based have to be completely realigned. In order to cope with this task, we have established a project team, which is supported by external consultants. Around 15,000 man-hours were spent internally on this project in 2005. Corporate costs in 2005 were also affected by higher share-based remuneration programs and higher provisions for performance-related bonus payments.

Net financing costs

The net financing costs amounted to €65.6 million during the 2005 fiscal year (2004: €61.9 million). Interest on borrowings increased by €3.4 million to €38.5 million in comparison with the previous year. Reasons for higher interest expenses were the interest expenses for our 8.5% interest-bearing corporate bond issue, which were not included until mid-February in 2004 as well as interest rate derivates, which had been settled in cash. These factors were partially offset by a decrease in our other financial debt over the year (in particular the repayment of our U.S. senior facility and our convertible bonds reducing our interest payments accordingly). Since we paid the North American antitrust liabilities in full ahead of time in 2005, the net financing costs included imputed interest expense for the last time in 2005. The foreign currency valuation and foreign currency hedging costs for the North American antitrust liabilities also led to expenditures in the net financing costs for the last time. As part of the amortization of our capitalized financing costs, the refinancing of our U.S. senior facility in 2005 had a non-cash impact of approximately €1.2 million. The increase in other financial expenses from €0.8 million in 2004 to €5.4 million in 2005 mainly results from the mark-to-market valuations of our interest and currency derivatives as of December 31, 2005.

Income taxes

The income tax expense for fiscal year 2005 of €19.1 million reflects an overall tax rate of 40%, which is a normal average tax rate level for the Group. A significant portion of our overall tax expense is attributable to tax expenses of foreign subsidiaries.

Net income from continuing operations

Net income from continuing operations increased by €32.6 million to €28.1 million in 2005 (2004: loss of €4.5 million).

Net income/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 €86.4 million. During 2005 no more losses occurred in connection with the divestment of the surface protection business.

Net income/loss

Overall, our consolidated net income for the year 2005 reached €28.1 million after a net loss of €86.3 million in 2004. Earnings per share therefore reached €0.50 (2004: loss of €1.66).

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 continuing operations considerably improved by 165% from €22.3 million in 2003 to €59.0 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 8.3% at the end of 2003 to 20.3% as of December 31, 2004. Our net financial liabilities were considerably reduced from €451.8 million at 2003 year-end to €321.6

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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, specialized 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. 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 €21.0 million in 2004 (2003: €23.4 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 €60.8 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 within the fiscal years under review. Previous years have been reclassified accordingly. The remaining profitable process technology business of our former Corrosion Protection business area will be integrated within the Specialties business area. In view of this, the figures reported for the Specialties business area have been adjusted accordingly.

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 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 saving 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 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 increased considerably by 165% from €22.3 million in 2003 to €59.0 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 1.3% from €931.5 million to €944.0 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.

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The sales revenue structure of our Business Areas correspondingly changed. Sales revenue of CG totaling €562.5 million was at around the previous years level of €564.4 million. S (including business of process technology) raised its sales revenue from €239.1 million to €246.3 million. SGL T generated an increase in sales from €125.2 million to €133.5 million.

The regional sales revenue structure during fiscal year 2004 remained largly unchanged from 2003: Germany 15%, other European countries 34%, North America 26%, rest of the world 25%.

The Carbon and Graphite business area sales revenue totaled €562.5 million, nearly unchanged from previous year sales revenue of €564.4 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 the structural changes in the graphite industry as a result from the insolvency of two smaller competitors in 2003 contributed to this volume 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. In contrast, sales revenue from furnace linings increased.

The Specialties business area (including process technology business) sales revenue increased by 3.0% from €239.1 million in 2003 to €246.3 million in 2004. The traditional S 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 in 2004.

The SGL Technologies sales revenue increased by 7% – despite considerable negative exchange rate flucturations – from €125.2 million in 2003 to €133.5 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 area 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 2% from €693.6 million in 2003 to €681.3 million in 2004. Despite higher sales our raw material costs, mainly petroleum coke and energy remained almost unchanged in 2004 compared to 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 due to additional services rendered in connection with the maintenance of our buildings, machinery and equipment. Overall staff costs also slightly increased mainly due to higher accrued bonus provisions in 2004 compared to 2003.

Gross profit increased by €24.8 million or 10.4% from €237.9 million in 2003 to €262.7 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 25.5% to 27.8% . 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 €125.8 million in 2003 to €119.1 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 increased from €38.2 million in 2003 to €43.6 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.

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Net other operating expense was €21.8 million in 2004 compared to €32.6 million in 2003. The difference is mainly made up by reduced expenses for antitrust of €19.5 million, 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 €2.6 million in 2003. Offsetting the missing 2003 effects were increased restructuring expenses of €7.6 million, 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. Other operating expenses include antitrust proceedings and restructuring costs which were reported as a separate item in the prior years.

In 2004 no further expenses relating to antitrust proceedings had to be recorded. The expenses in 2003 of €19.5 million 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 €12.1 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 338 by 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: €6.4 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 increased by 165% from €22.3 million in 2003 to €59.0 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 in the Carbon and Graphite business area increased by 40% from €61.5 million in 2003 to €86.4 million in 2004. This increase was attributable largely not only to price and volume effects, but also to cost reductions within the SGL Excellence efficiency enhancing program. Restructuring expenses for headcount reductions and depreciation of fixed assets 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. In the Specialties business area (including the process technologies business) the profit from operations increased from €12.2 million in 2003 to €13.9 million in 2004 due to marked volume growth, significant cost reductions, and structural changes. 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

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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. In the SGL Technologies business area, the loss from operations decreased by 24.3% from €14.0 million in 2003 to €10.6 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.

Net financing costs

The net financing costs of our continuing operations decreased from €73.7 million in 2003 to €61.9 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 costs 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 €8.2 million to €35.1 million in 2004 (2003: €26.8 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 mainly from tax expenses of foreign 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 group 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(loss) from continuing operations

Net loss from continuing operations decreased by €28.3 million to €4.5 million in 2004 (2003: €32.8 million).

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 €81.8 million. This loss was comprised by a loss from the sale of this business (mainly to a write-down of assets) and the accumulated loss for the year of €21.0 million (2003: €23.4 million).

 

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Net loss

Overall, our consolidated net loss for the year increased to €86.4 million (2003: €56.5 million). Loss per share reached €(1.66) (2003: €(2.55)) .

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 business combinations, pensions and other post-employment benefits, deferred tax assets, impairment of assets, allowance for doubtful accounts, inventory valuation and obsolescence, litigation and contingencies, restructuring of operations, and tax contingencies. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical 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 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 2005, 2004, and 2003 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.

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Pension and post-retirement 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, we included €13.5, €13.3 million and €14.0 million of interest costs associated with our provision for pension and similar obligations in interest expense in 2005, 2004 and 2003, respectively.

Deferred Tax Assets

Deferred income taxes are recognized for the tax consequences in future years for 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.

Deferred tax assets from tax loss carry-forwards are uniformly recognized in the IFRS consolidated financial statements on the basis of a rolling projection of the estimated earnings to be taxed at the level of individual subsidiaries or on the level of tax groups. Uncertainties about certain planning assumptions and other underlying conditions are taken into account. Based on the restructuring measures taken, the disposal of the lossgenerating Surface Protection business, the significant reduction of the net debt and the improved economic market environment for our business segments, we assume that the capitalized deferred tax assets on loss carry-forwards can be utilized in the future. Out of the loss carry-forwards in the U.S. and Germany, we have capitalized deferred tax assets according to our estimate of their expected future utilization. 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 €87.6 million as of December 31, 2005. 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.

Impairment of assets

We review the carrying values of property, plant and equipment and intangible assets with finite useful lives for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. An impairment loss is recognized when the fair value of an asset is less than its carrying value. 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 additional expense or income (but only up to the original cost of the asset less depreciation that should have been recorded had no impairment been recognized).

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Allowance for doubtful accounts

Each quarter we review the balances of or accounts and other receivables and determine the necessary bad debt reserve 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 valuation and 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, 2005, we reported inventory of €280.6 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.
 

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.

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, 2005. Computing our future 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 the probable outcome of pending appeals with our legal counsel. If the actual cost of settlements and final judgments differs from our estimates, our reserves for open claims may not be sufficient. Any such 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, 2005, 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 estimates 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 results may be adversely affected.

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Restructuring of operations

When required, we record restructuring charges incurred in connection with consolidation or relocation of operations, discontinued businesses, or shutdowns of specific sites. These restructuring charges, which reflect management’s commitment to a termination or exit plan 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.

Given the complexity of estimates, actual expenses could differ from management’s estimates. If actual results are different from original estimates, we will record additional expense or income in the statement of operations.

For years ended December 31, 2004 and prior years, we had presented expenditures for restructuring costs separately in the statement of operations. Beginning in 2005, we discontinued this presentation and began including restructuring expenses as part of other operating expenses. For comparability, amounts for prior years were adjusted to conform to the 2005 presentation. Expenses associated with the divestiture of the Surface Protection business, in fiscal year 2004 are a component of discontinued operations.

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.

Significant Differences Between IFRS and U.S. GAAP

This section describes the significant differences between IFRS and U.S. GAAP as they relate to the SGL Group. See also Notes 34 and 35 to our consolidated financial statements.

Business Combinations

Prior to the adoption of IAS 22 (revised 1993) on January 1, 1995, 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,

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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 Carbon Group capitalized software costs in the amount of €2.9 million and €4.2 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 at the end of 2004. In connection with the cooperation agreement with Audi we expensed the capitalized development costs under IFRS, whereas under US-GAAP the amount was already expensed in 2004 and accordingly an additional reconciliation difference 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, 2005, 2004 and 2003 the SGL Carbon Group did not capitalize interest under U.S. GAAP. The years 2005, 2004 and 2003 include amortization of previous capitalized interest of €0.3 million, €0.3 million and €0.8 million respectively.

Inventory

IAS 2 “Inventories” identifies two alternatives as valuation methods, the first in, first out (FIFO) method and the weighted-average cost method. In valuing inventories for IFRS reporting, we have elected to apply the weighted average cost method.

Certain pre-production expenses incurred by one of our U.S. subsidiaries did not meet the requirements as specified under EITF 99-5 (Accounting for Pre-Production Costs Related to Long-Term Supply Arrangements). Under EITF 99-5 costs to perform certain services related to the design and development of the products it will sell under long-term supply arrangements and costs to design and develop molds, dies, and other tools that will be used in producing those products should be expensed as incurred, unless they are reimbursed. Accordingly we recorded an U.S. GAAP adjustment of €0.3 million in 2003, that remained unchanged in 2004 and 2005.

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 is 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.

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Incentive Plans

As of January 1, 2005 the SGL Group adopted IFRS 2 “Share-based payment”. IFRS 2 deals with accounting for share-based payment transactions, including grants of share options to employees and specifies the financial reporting by an entity when it undertakes a share-based payment transaction and requires an entity to reflect in its profit or loss and financial position the effects of share-based payment transactions, including expenses associated with transactions in which share options are granted to employees. The IFRS was applied retrospectively on all share-based payments granted since November 7, 2002, that still existed when the standard became effective and required comparable information to be restated. This also includes a restatement to the opening balances of the retained earnings in the earliest period presented. IFRS 2 is similar to the accounting under FAS 123(R). All prior years under IFRS as well as the U.S. GAAP adjustments had to be restated, because the retrospective implementation of IFRS 2 also impact the US-GAAP adjustments for all prior years. Because of the application of IFRS 2 in 2004, the equity had to be restated by €1.8 million as of January 1, 2004.

The SGL Carbon Group provides a bonus compensation for certain employees meeting specified performance targets. The bonus is satisfied in form of cash for management and in form of SGL Carbon stock for all other employees. The numbers of shares given to the employees is calculated by dividing the bonus amount by the market price of the shares. Previously the expense in the income statement was recognized using the nominal value (€2.56) of the shares. After adoption of IFRS 2 we expense the bonus compensation for all employees using the current market price of the shares. This was adjusted restrospectively for all periods presented.U.S. GAAP matches the cost of the bonus with the period in which the services are rendered.

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 €0.7 million exists as of December 31, 2005.

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Revenue Recognition

Audi and SGL entered into a cooperation agreement in the third quarter of 2005, which targets to develop SGL's existing carbon ceramic brakes technology for mass production. Under IFRS the components of these cooperation agreement were accounted for as separate agreements in order to reflect the economic substance of the transaction as SGL transferred the significant risk and rewards of ownership. Pursuant to paragraph 9 of EITF 00-21, a delivered item is accounted for as a separate unit if 1) the delivered item has value on a standalone basis, 2) there is an objective and reliable evidence of the fair value of the undelivered items, and 3) the customer has a general right of return relative to the delivered item, delivery or performance of the undelivered item is considered probable and substantially in the control of the vendor. After testing for these conditions two items were seen as one unit for revenue recognition purposes and a determinable period of performance existed from July 2005 to December 2006 and therefore revenue is recognized per ``Proportional-Performance Method'' (SAB 104) ratably over that period of performance. Accordingly the profit of such parts was recognized immediately under IFRS and was deferred under U.S. GAAP.

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

€ (in millions) 2005   2004
restated
  2003
restated
 
 
 
 
 
Net profit/ (loss) per IFRS 28.2   (86.4 ) (56.5 )
 
 
 
 
Goodwill amortization (0.0 ) (0.0 ) 3.4  
Intangible/tangible fixed assets 3.2   (1.5 ) (3.6 )
Inventory (0.7 ) (0.0 ) (0.4 )
Pension provisions 0.3   0.9   1.3  
Incentive plans 0.0   1.3   0.7  
Restructuring /Early retirement 0.7   (1.2 ) 1.7  
Revenue Recognition (8.9 )    
Deferred tax on U.S. GAAP adjustments 0.0   (1.0 ) 1.0  
 
 
 
 
Net profit/loss per U.S. GAAP 22.8   (87.9 ) (52.4 )
 
 
 
 
             
Under U.S. GAAP our operating profit (loss) for the years ended December 31, 2005, 2004 and 2003 was €94.0 million, €45.4 million and €(2.8) million, respectively, compared to an operating profit (loss) under IFRS for the same periods of €112.8 million, €59.0 million and €22.3 million, respectively. Our U.S. GAAP operating profit in 2005, 2004 and 2003 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 additions to provisions for pensions. Furthermore, we reclassified the interest component associated with our annual pension provision of €13.5 million in 2005 (2004: €13.3 million; 2003: €14.0 million) as interest expense under IFRS. See Note 34 to our consolidated financial statements for a description of the differences between our IFRS accounting policies and those that would be required under U.S. GAAP.

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Basic profit (loss) per Share in accordance with U.S. GAAP in 2005 was €0.40, compared to €(1.68) in 2004 and to €(2.36) in 2003. Basic loss per ADR in accordance with U.S. GAAP in 2005 was €0.13, compared to €(0.56) in 2004 and to €(0.79) in 2003. Because there was no dilutive effect in 2005 and a net loss in the years 2004 and 2003, the diluted profit or loss per Share for 2005, 2004 and 2003 was identical to the respective profit or loss per Share.

Recent Accounting Pronouncements

U.S. Statement of Financial Accounting Standards (SFAS)

In June 2005, the FASB ratified Emerging Issues Task Force (EITF) Issue 05-5, Accounting for Early Retirement or Post-employment Programs with Specific Features (such as Terms Specified in Altersteilzeit Early Retirement Arrangements). Altersteilzeit (AZT) in Germany is an incentive and benefit program for early retirement. Under this plan, employers are required to recognize a participant’s salary ratably over their remaining employment period. Employer granted bonuses would be accrued ratably over the period commencing with the employee’s entry into the AZT program to the end of their employment period. At the time the criteria to receive them is met, any related government subsidies are accounted for separately from the ATZ benefits. The adoption of EITF 05-5 is not expected to have a material impact on our consolidated financial statements.

In May 2005, FASB issued SFAS 154, Accounting for Changes and Error Corrections – a replacement of APB No. 20 and FASB Statement No. 3 (SFAS 154). This statement changes the requirements for the accounting for and reporting of a change in accounting principle. It applies to all voluntary changes in accounting principle, error corrections and required changes due to new accounting pronouncements, which do not specify a certain transition method. Unless it is impracticable to determine either the period-specific effects or the cumulative effect of a change in accounting principles, SFAS 154 generally requires retrospective application to the prior periods’ financial statements. SFAS 154 also requires that any retrospective application of a change in accounting principle be limited to the direct effects of the change. It also requires that a change in depreciation, amortization or deletion method for long-lived, non-financial assets be accounted for on a prospective basis. In accordance with the effective date for fiscal years ending after June 15, 2005, SGL Carbon has adopted SFAS 154 effective January 1,2005 and it did not have a material impact on our consolidated financial statements.

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International Financial Reporting Standards (IFRS)

IFRS 7, Financial Instruments: Disclosures, requires more extensive disclosure regarding financial instruments. International Accounting Standards (IAS) 32, Financial Instruments: Disclosure and Presentation disclosure requirements were incorporated in IFRS 7 and expanded. In addition to the existing disclosure requirements, information regarding the type and extent of risks stemming from financial instruments in financial statements prepared under IFRS is now required. IFRS 7 is to be adopted for reporting years beginning on or after January 1, 2007. Management does not expect the adoption to have a material impact on our consolidated financial statements.

IFRIC 8, Scope of IFRS 2, clarifies that IFRS 2, Share-based Payment, also includes agreements whereby an entity makes payments for which it does not receive any goods or services or inadequate consideration. If the identifiable consideration is or appears to be less than the fair value of the equity instruments granted or liability incurred, IFRIC 8 interprets this circumstance to indicate that other consideration (i.e. goods or services) has or will be received. Therefore, IFRS 2 is to be applied in such cases. IFRIC 8 is to be adopted for reporting years beginning on or after May 1, 2006 and is not expected to have a material impact on our consolidated financial statements.

We did not consider any other IFRS pronouncements that are scheduled for adoption after December 31, 2005 to be applicable to the activities of SGL covered by this annual report.

Liquidity and Capital Resources

The following is a presentation of our capital resources for the fiscal years ending December 31, 2005 and 2004. On March 16 and 17, 2006 SGL Carbon announced and completed a capital increase of 5,583,529 shares at a price of €15.00 per share, resulting in gross proceeds totaling €83.7 million. The shares were placed with German and international institutional investors. The application of the proceeds from the capital increase is not reflected in the table below.

Overview of Bank Debt And Cash Flows

  Year ended December 31,  
 
 
(millions of Euros) 2005   2004
restated
 
 
 
 
Short term debt and current maturities 9.2   66.3  
Long term debt 348.9   373.6  
 
 
 
Total financial debt 358.1   439.9  
 
 
 
Cash and cash equivalents (93.4 ) (67.5 )
Restricted cash in “Convert Deposit Account” (0.0 ) (50.1 )
Restricted cash for debt repayment from sale of assets (0.0 ) (0.7 )
 
 
 
Net financial debt 264.7   321.6  
 
 
 
Restricted cash in “Antitrust Deposit Account” (0.0 ) (77.2 )

As of December 31, 2005 we had an aggregate amount of €358.1 million financial debt outstanding, consisting of €270 million 8.5% senior notes due 2012 (the “notes”) and €85.4 million outstanding under our syndicated credit facilities (the “Senior Facilities”) and €2.7 million other bank debt.

The notes bear annual interest at 8.5% on their principal amount, with interest payable semi-annually, and mature on February 01, 2012. As of December 31, 2005 the notes traded at 108.5% of their principal amount. At any time prior to February 1, 2007, we may redeem up to 35% of the aggregate principal amount of the notes at a redemption price of 108.5% of the principal amount, plus accrued and unpaid interest, with the proceeds of certain equity offerings. We may make that redemption only if, after the redemption, at least 65% of the aggregated principal amount of the notes remain outstanding following each such redemption. On or after February 1, 2008, we may

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redeem the notes at our option, in whole or in part, at a redemption price equal to the principal amount plus a redemption premium, which will be 4.25% as of February 1, 2008 and decline to zero over the remaining term of the notes, plus accrued interest. See also “Additional Information – Material Contracts – 8.5% Senior Notes.”

Our Senior Facilities, which we entered into on February 3, 2004, originally consisted of a German Senior Facility (consisting of Term Loans A, B and C and a multicurrency revolving credit facility) and a U.S. Senior Facility. On September 1, 2005 we repaid our U.S. Senior Facility in the amount of US$111.1 million in full and replaced it in part with an additional USD Tranche in the amount of US$80.0 million under the German Senior Facility. As of December 31, 2005, the German facilities without Term B for the EU funding consisted of an aggregate amount of €127.4 million, of which €85.4 million were outstanding and €42 million were still available for drawings. The €85.4 million outstanding under the syndicated credit facilities as of December 31, 2005 were subject to interest rates of up to 7.4% €13.8 million carried fixed interest rates of up to 7.4% and €74.3 million carried variable interest rates of up to 6.3% . See also “Additional Information – Material Contracts – The Senior Facilities – German Senior Facilities.”

In addition, as of December 31, 2005, we had PLN60 million available under our Polish facility with BNP Paribas Polska S.A. See “Additional Information – Material Contracts – Polish Facility.”

On December 31, 2005 we drew €109.4 million under our Term B facility of €117.7 million.

On September 18, 2005, upon maturity, we repaid in full the remaining €50.0 million of our €133.7 million 3.5% convertible bond due 2005 out of an escrow account entitled “Convert Deposit Account” (in 2004 we had repurchased an aggregate principal amount of €83.7 million of the convertible bond in a voluntarily tender offer at 100.5% of the principal amount, plus accrued interest).

In February 2004 an aggregate amount of €125.3 million was deposited in an escrow account entitled “Antitrust Deposit Account” for the payment of obligations from the North American antitrust penalties and from civil law settlements as well as the fine imposed in 2003 by the European antitrust commission. In 2004, the European fine (€23.9 million) was deposited on an interest bearing escrow account of the antitrust authorities until the closure of the legal proceedings using the funds from the “Antitrust Deposit Account. A total of €24.2 million was paid to the North American antitrust authorities in 2004. In addition to the scheduled payments in March and June 2005 of €7.5 million each, the outstanding liability in the amount of €54.2 million, including currency-hedging costs, was paid in full in August 2005. The residual credit balance on the Antitrust Deposit Account of €8.7 million was used for debt repayment. The restricted cash for debt service in 2004 represents the remaining amount of the proceeds from the Hillsboro sale in the U.S., which was used in 2005 for early debt repayment. The restricted cash was presented separately in the consolidated balance sheet in 2004.

The significant reduction of financial liabilities, the strong cash flow generation and the resulting improvement of the balance sheet structure were rewarded in 2005 by both Moody’s and Standard & Poor’s (S&P) rating agencies. S&P raised its credit rating for SGL Carbon AG from “B” to “B+” with the outlook “Stable”. At the same time, S&P raised its rating of the notes issued by SGL Carbon Luxemburg S.A. from “CCC+” to “B-”. During the reporting year, Moody’s upgraded the rating of the notes from “Caa1” to “B3”.

In March 2006, following the capital increase described in the introductory paragraph above, Moody´s rating of the SGL Carbon Group was raised by one notch from “B1” to “Ba3” with a stable outlook. The rating on secured facilities was increased from “B1” to “Ba3”, and the rating on senior notes of SGL Carbon Luxembourg from “B3” to “B2”.

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The following table summarizes our debt and significant obligations as of December 31, 2005 :

        Maturing in:     
 














      Less than                       After
Obligations Total   one year   2007   2008   2009   2010   2011   2011
 
 
 
 
 
 
 
 
  (millions   (millions   (millions   (millions   (millions   (millions   (millions   (millions
  of Euro)   of Euro)   of Euro)   of Euro)   of Euro)   of Euro)   of Euro)   of Euro)
Term Facility A 4.6   2.5   2.1                    
Term Facility C 13.0   4.7   8.3                    
Term Facility D 67.8   0.0   0.0   67.8                
Senior notes 270.0   0.0   0.0   0.0   0.0   0.0   0.0   270.0
Other bank debt 2.7   2.0   0.1   0.1   0.1   0.1   0.1   0.2
 
 
 
 
 
 
 
 
Total bank debt*** 358.1   9.2   10.5   67.9   0.1   0.1   0.1   270.2
 
 
 
 
 
 
 
 
Acotec guarantees** 9.5   0.0   0.0   0.0   0.0   0.0   0.0   9.5
Letter of Credit Facilities** 109.4   0.0   0.0   109.4   0.0   0.0   0.0   0.0
Purchase obligations** 2.2   2.2                        
Operating leases** 8.1   1.8   1.5   1.1   1.0   0.9   0.8   1.0
Capital leases ** 1.4   0.3   0.3   0.3   0.2   0.2   0.1    
Liabilities from tax payments 16.1   16.1   0   0                
Other obligations 54.4   54.2   0.2                    
 
 
 
 
 
 
 
 
Total 559.2   83.8   12.5   178.7   1.3   1.2   1.0   280.7
 
 
 
 
 
 
 
 

* $80.0 million converted into Euro at prevailing exchange rate of 1.1797 at balance sheet date.
** contingent liability –
*** Total bank debt does not include €(16.0) million debt financing costs that were substracted from this amount in the IFRS financial statements
 
In 2005 we used €69.2 million of the “Antitrust Deposit Account” to pay fines in connection with antitrust proceedings and related costs. We settled all current claims of the U.S. Department of Justice as well as the Canadian antitrust authorities (see “Legal Proceedings”).

In connection with the EU proceedings (see “Legal Proceedings”), the European Commission imposed a fine of €23.64 million on December 3, 2003. We have provided security of €23.6 million plus interest of €0.3 million as cash deposit from the “Antitrust Deposit Account”. In April 2006 we further deposited an amount of €88.9 million, covering the present level of the first fine including interest, in an interest bearing escrow account of the EU antitrust authorities until the final decisions of the courts are made. The other EU fine is secured by a bank guarantee.

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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, 2005:

      2004   2003  
  2005   restated   restated  
 
 
 
 
  (€ in millions)  
Cash flows from operating activities:      
Net profit (loss) before taxes 47.2   (2.9 ) (51.5 )
(Gain)/loss on sale of property, plant and equipment (9.7 ) (0.6 ) 0.2  
(Gain)/loss on sale of equity investments     (3.6 )
Depreciation and amortization expense 65.1   67.6   71.8  
Amortization of refinancing costs*) 5.3   3.8   15.9  
Taxes paid (22.6 ) (14.2 ) (4.4 )
Changes in provisions, net 13.0   16.3   25.1  
Change in working capital, net of changes in basis of consolidation:      
   Inventories (10.1 ) (4.0 ) 0.3  
   Trade receivables (8.2 ) 0.9   (31.2 )
   Trade payables (4.8 ) 3.5   (4.1 )
Other operating assets/liabilities 12.5   27.0   13.3  
 
 
 
 
Cash provided by operating activities before payment of antitrust fines 87.7   97.4   31.8  
Payments relating to antitrust proceedings (70.2 ) (52.0 ) (14.9 )
Thereof from Cash escrow accounts (69.2 ) (49.6 ) 0.0  
 
 
 
 
Cash provided by (used in) operating activities 17.5   45.4   16.9  
 
 
 
 
Cash flows from investing activities:      
Acquisition of property, plant and equipment and intangible assets, excluding goodwill (44.7 ) (46.3 ) (43.9 )
Proceeds from sale of property, plant and equipment and intangible assets 16.1   4.5   1.5  
Cost of acquisitions (2.3 ) (0.8 ) (1.7 )
Proceeds from sale of non current financial assets 0.3   2.0   5.7  
 
 
 
 
Cash used in investing activities (30.6 ) (40.6 ) (38.4 )
 
 
 
 
Cash flows from financing activities:      
Repayment of fincancial liabilities from cash escrow accounts (58.9 ) (89.3 )
 
Net change in financial liabilities (33.8 ) 38.6   60.5  
Payments in connection with refinancing*) (0.8 ) (23.9 ) (15.9 )
Dividends paid      
Net proceeds from capital increase 2.5   244.1   1.0  
 
 
 
 
Cash provided by financing activities (91.0 ) 169.5   45.6  
 
 
 
 
Cash used/provided from discontinued operations 0.0   (24.6 ) 0.7  
 
 
 
 
Effect of foreign exchange rate changes 2.0   (0.3 ) (0.3 )
 
 
 
 
Net increase (decrease) in cash and cash equivalents (102.1 ) 149.4   24.5  
Cash and cash equivalents at beginning of year 195.5   46.1   21.6  
(thereof Cash escrow accounts ) (128.0 ) (0.0 ) (0.0 )
 
 
 
 
Cash and cash equivalents at end of year 93.4   195.5   46.1  
 
 
 
 
(thereof Cash escrow accounts ) (0.0 ) (128.0 ) (0.0 )

* 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.

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Operating cash flows

Our cash provided (used) by operating activities from continuing businesses) before payments of antitrust fines and adjusted for currency effects totaled €87.7 million in 2005, compared to €97.4 million in 2004, a net decrease of €9.7 million. This is due primarily to the fact that in 2005 we had two interest payment dates for our notes, which resulted in payments of around €23.0 million, compared to only one payment date with interest payments of approximately €11.5 million in 2004. Furthermore, our tax payments of €22.6 million were significantly higher than in the previous year (€14.2 million) due to higher pre-tax income in 2005. In addition, at €23.1 million in 2005, the increase in our working capital after adjusting for foreign currency changes was more than the previous year’s value of €0.4 million as a result of the considerable increase in business activity. The working capital development in 2003 was influenced by the termination of sale of accounts receivables. In 2005 we repaid all outstanding fines to settle the DOJ and Canadian antitrust liabilities, including accrued interest thereon, earlier than scheduled. In 2004 we paid the DOJ and Canadian antitrust liabilities as scheduled and provided security of €23.6 million plus interest of €0.3 million as cash deposit from the “Antitrust Deposit Account” to the European Commission for the fine imposed in 2003.

Non-cash expenses for depreciation and amortization of non-current assets decreased slightly from €67.6 million in 2004 to €65.1 million in 2005. The depreciation and amortization of €71.8 million in 2003 includes goodwill amortization of €2.3 million, which was discontinued in 2004 due to the first time application of new IFRS rules. Expenses related to restructuring programs (initiated in prior years) and other measures to improve efficiency and optimize costs resulted in a total expense of €20.8 million during 2005. Included in this amount was the gradual relocation of our carbon electrode production of the CG Business Area from Italy to Poland, the related personnel measures (a headcount reduction of 112 employees) and the write down of the remaining fixed asset book value at the Ascoli, facility in Italy. By the end of 2005, the announcement of this measure along with the written agreements were completed. An additional focus of these measures during 2005 was the conclusion of further partial retirement agreements and direct gratuity payments in Germany. Restructuring expenses in 2004 amounted to €19.7 million, consisting mainly of personnel redundancies and the write-down of residual book values in Poland, Italy and Germany. In addition, a small plant in the UK was closed and non-cash write-downs were made in the USA. The non cash expense for restructuring expenses in 2005 and 2004 were €11.6 million and €9.1 million, respectively.

Investing cash flows

Cash used for investing activities amounted €30.6 million in 2005, compared to €40.6 million in 2004 and €38.4 million in 2003. 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 slightly from €37.7 million in 2004 to €39.4 million in 2005. Significant additions related to capital expenditures for replacements in our plants in Germany, the United States, Poland and Spain. Compared to the 2005 depreciation expense of €60.7 million, capital expenditures for the year, at €39.4, were lower by €21.3 million. Capital expenditures relating to intangible assets decreased by €3.5 million to €5.3 million in 2005, primarily due to the finalization and implementation of our new Group-wide common IT platform based on SAP (SGL ONE). For the years ending December 31, 2004 and 2003, we spent approximately €5.9 million and €9.3 million, respectively for the implementation of the IT platform. The new system was successfully implemented in our companies in Italy and Poland in 2005. For financial assets we spent €2.3 million in 2005 compared to €0.8 million in 2004.

Proceeds from the sale of property, plant and equipment and intangible assets increased to €16.1 million (2004: €4.5 million), which includes the cash provided by the cooperation agreement with Audi and the sale of non-operational real estate.

Financing cash flows

Our liabilities to banks and bondholders decreased significantly in 2005 by €92.7 million from €439.9 million at the end of 2004 to €358.1 million excluding the netting of capitalized debt financing costs of €16.0 million and currency impacts of €10.9 million. We used the funds in the “Convert Deposit Account” and “Antitrust Deposit Account” of €58.9 million and cash at hand of

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€33.8 million to repay the debt of €92.7 million. As scheduled, we repaid €10.0 million of our Term loan A, €4.7 million Term loan C and repaid one installment under our old U.S. Senior Facility in the amount of €0.5 million. In September 2005 we used €27.5 million to replace the U.S. Senior Facility with an additional USD Tranche under our German Senior Facility with a reduced commitment of USD 80.0 million.

We made payments in connection with our refinancing in the beginning of 2004 of €0.8 million in 2005 and €23.9 million in 2004.

We also received approximately €2.5 million in 2005 and €1.0 million in 2004 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.

SGL Carbon AG has not distributed dividends since 1999. 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 for 2004 are shown in the cash flow statement as a net cash outflow 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.

Faced with the need to achieve a better return on our R&D investments and to further improve the alignments of R&D activities with the business strategies, we optimised our R&D organization and activities in 2005. The former de-centralized business unit development activities were combined into one centralized R&D operation to ensure improved communication, better knowledge sharing and the potential to create innovations that a centralized organization can provide. The new center of Technology & Innovation (T&I Group) is located at our facility in Meitingen, Germany. Furthermore specific research and development activities are carried out at the US sites in Gardena and Valencia/California as necessary. We conduct research and development activities, both independently and in conjunction with suppliers to explore new market potentials and prepare business cases for Business unit approval. In addition, we prepare commercial projects with high profit growth potential, transfer new business proposals for new project generations and support all business directions in technical market discussions.

Supported by the development department of the business areas and the well educated technical staff in our manufacturing facilities, development activities are a full integrated part of the SGL Group’s organization. As a consequence 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.

Our recently developed large diameter graphite electrodes, for use in ultra high power (UHP) furnaces which contribute to a more efficient and cost effective steel process, are the standard in the steel producing industry. We have meanwhile implemented the second generation of these electrodes, applying specific raw materials for customer’s furnace requirements. Moreover the 32-inch (800 mm) diameter electrode, for use in direct current mills is recognized as break-through in the industry, resulting in the world leading market position. In the automotive application arena we succeeded in extending our leading position as ceramic brake disc supplier by applying improved process technologies and material developments. In addition the effort to co-operate closely and continuously with key customers during the improvement process, the use of Six Sigma methodologies ensures a superior level of product and service quality. We sponsor educational and informal programs for our customers and create problem solving teams to improve customer’s value creation.

Our activities in the new product development area concentrate on high-tech innovations with substantial growth potential fitting with the SGL portfolio. Time to market and early profitability are

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important criteria for project selection. Our search for new product development focuses on the growth markets such as the energy, semiconductor, automotive and environmental markets. Our primary focus in the automotive market is currently the ceramic brake discs for cars, carbon components for lithium batteries and fuel cells supporting latest developments of hybrid car concepts. We are also increasing efforts to market non-sealing application for our expanded graphite materials and implement carbon fibre “prepregs” for composite applications in the alternative energy generation markets.

Further R&D projects in 2005:

CG: Cost reduction and value creation for customers

The further optimization of processes to reduce our manufacturing costs and the continuation of our SGL Excellence program had an important impact on the fiscal year 2005. We assisted our customers and suppliers to improve their value added production, based on the utilization of our products and their raw materials. The use of enhanced modeling supported the energy consumption optimization, especially in the area of thermal processing. In a series of extensive tests with our customers, we investigated the potential of latest raw material developments for specific applications with our customers and transferred the field results to product improvements. Our focus here was on product performance consistency, secure suppliers and efficient raw material utilization.

Using our application model for electric steel processing, developed especially for our customer’s processes optimization, we supported them in achieving higher productivities with the application of larger graphite electrodes. We supported the market implementation of a new graphitized cathode with lower consumption, thus impacting our customers’ return on their aluminium smelter investments.

We further thermally optimized the microporous stone for the most heavily used part of the blast furnaces and supported its market launch. This product will significantly extend the lifetime of current blast furnaces, resulting in improved return on investments for our customers.

S: New and improved materials for engineering solutions

We explored and tested new isotropic cokes, as a second source of raw materials, for various mechanical applications to ensure the efficient and consistent production of our products. We made these materials available to our customers during the fiscal year. An example of this progress is the sale of shut off valves for vacuum pumps with improved abraison resistance, which ensures prolonged lifetimes in our customer’s application. In the area of composites, we developed monolithic heating elements with higher purity as well as tailored carbon-fibre re-enforced heating elements with highest purities, enabling the semiconductor industries to produce the highest purity silicon. We also developed specific pure graphite materials to accommodate the construction needs of pebble bed reactor supporting the nuclear energy industry with safe generation technology. Our in-house development of rigid graphite felt, as a substitute for our former felt product, used as an insulating material in the construction of high-temperature furnaces was widely accepted by our customers as a substitute for our former felt product.

SGL T: Innovative solutions for energy, automotive and enviromental applications

Energy storage systems to control air-conditioning

Air-conditioning systems using latent heat storage, developed in prior years, were further improved and prepared for the market. Energy storage modules were optimized using highly-treat-conductive graphite structures ensuring the storage and release of cold on a daily specific cycle.

Innovative wet frictions for automotive application

Increasing torque in modern cars results in an increasing demand on friction linings for clutches and syncro-mesh rings. With our latest material improvements based on carbon-fibre reinforced linings, we set new standards for market requirements, such asconstant friction at low abraison level and superior oil resistance.

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Improved graphite foil meeting leakage criterias of the Association of German Engineers (VDI)

Graphite foils are used for various sealing applications. With our latest developments and improvements, we were able to reduce the gas diffusion significantly meeting the high criterias of VDI. This improvement will contribute to our position as the market leader.

Trend Information

Global economic growth set to continue

Economists forecast that the global economy will continue to expand in 2006 and 2007 and that, the pace of growth will be comparable to the 2005 level. The International Monetary Fund (IMF) forecasts global growth of 4.3% in 2006. In 2006, the economic growth centers are expected to remain in the countries of Asia and Central and Eastern Europe. In China, for instance, the State Planning and Development Commission anticipates a GDP growth of between 8.5% and 9.0% . For Russia, experts at the Organization for Economic Cooperation and Development (OECD) expect growth of 5.7% . The high price of raw materials is expected to have a dampening effect on growth rates in the USA (+3.5%) and Japan (+2.0%) . OECD experts are, however, more optimistic about the euro zone, forecasting growth of 2.1% . The key factor in the positive development of the euro zone are the expected improvements in the German economy. The Ifo Institute forecasts a growth potential of 1.7% for 2006, based on the continued strength of the export economy and, for the first time in years, positive signs for domestic demand.

The OECD also forecasts excellent opportunities for further economic growth in 2007, estimating a potential of 2.9% for all the industrialized member countries. While the USA anticipates growth of 3.3%, the forecasts for Japan (+2.0%) and the EU (+2.2%) are more conservative. Growth for Germany is expected to be 1.7% . The dynamism of the Chinese economy should remain high with a growth rate of +9.5% . Due to the anticipated increase in output, Russia can also look forward to growth of 5.3% .

According to the IMF and OECD, their forecasts could be affected mainly by a further sharp increase in raw material prices, a significant deterioration in the trade balance situation, especially in the USA, and strong sudden fluctuations in the most important exchange rates. High increases in long-term interest rates and a reversal of the current positive price performance on the capital and property markets would also lead to adverse international conditions.

Driven by encouraging expert opinions on the global economy, the key customer industries for SGL Carbon should also enjoy continued growth in 2006 and 2007. The outlook for the steel industry remains favorable. IISI, the international steel association, expects that the global demand for steel will rise by 4% to 5% in 2006. In the long term the experts are also optimistic; for instance, Deutsche Bank predicts that global production of crude steel will increase by 5% per year until 2015. In the automotive industry, the consistently high backlog demand in Asia and the stable demand in the Western industrialized nations should deliver a growth of around 4% to 68 million vehicles. The outlook for 2006 is also positive for the chemical industry, with the German Chemical Association (Verband der Chemischen Industrie, VCI) anticipating expansion of the industry by 2.5 %. According to Deutsche Bank, global chemical sales should increase to €2,380 billion by 2010 (2005: €1,865 billion). Aircraft manufacturers are expecting 2006 to be a good year, albeit below the record levels of 2005. According to a study by the investment bank CSFB, the carbon fiber market will enjoy double-digit growth in the next few years, driven mainly by the demand from the aviation industry. Due to increasing cost sensitivity in the USA, the high defense spending is expected to decrease in 2006 and 2007. However, the energy sector should benefit from continued rises in global energy consumption due to the economic situation.

Stable development projected for Carbon and Graphite Business Area

The economic tailwind expected by industry experts for the steel sector in 2006 should also have a limited effect on the Carbon and Graphite Business Area, given that production for graphite electrodes was already at good capacity levels in February 2006. Our priority in 2006 is to implement price increases, which might be taken in precedence over volume in individual cases. This could result in the total volume of graphite electrodes sold being slightly below the record level of 2005. Based on the development so far, we expect the sales and price situation of cathodes to develop favorably,

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owing to the anticipated improvement in the development of the aluminum industry. Volumes and prices of carbon electrodes are expected to stabilize at a low level in 2006. For furnace linings, we expect another excellent year, with a high utilization of our capacities. Where costs are concerned, we expect that CG will continue to be adversely affected on the raw materials and energy side in 2006, although this has been reflected in our price adjustments. Due to the efficiency-enhancing programs of recent years, we expect to see further cost savings in 2006, barring any unforeseen price developments. We largely hedged our European plants’ expected net USD position from invoiced deliveries and raw material purchases. In view of this situation, we anticipate a stable sales development and continued growth in earnings for CG in the fiscal year 2006.

Specialties continue to prosper

The positive trend in our key customer industries should produce a further increase in demand in the Specialties Business Area. In Asia in particular, where we have considerably increased our presence in recent years, above-average growth rates are possible. Also, the first sales revenues are expected from the major order with the South African nuclear technology firm PBMR. In contrast, business in the euro zone is expected to stagnate in 2006. Due to the acquisition of a number of major projects, we anticipate an increase in business activity for Process Technology. The expansion of our production activities in Shanghai (China) and Pune (India) are also expected to have a positive result. We intend to offset the expected cost increases for raw materials and energy by selective price increases. Further cost improvements also favorably influence earnings, so that on the whole, we anticipate moderately rising sales figures and a more than proportional growth in earnings for the Specialties Business Area.

SGL Technologies ahead of important strategic steps

For the SGL Technologies (SGL T) segment, 2006 will be a year of further important strategic decisions. We intend to intensify our focus in areas where we can achieve the highest growth rates and profitability in the medium term. In carbon fibers, the markedly improved capacity utilization as a result of the partnership with Mitsubishi Rayon, concluded in 2005, is expected tohave a positive effect. Furthermore, industry experts anticipate strong growth in the carbon fiber market, principally due to a surge in demand from the aviation industry. In carbon-ceramic brake discs, our partnership with Audi should deliver further increases in sales revenues, although the associated expenses for the planned serial production are set to continue in 2006. New applications and significant increases in demand from Asia should support revenues in our expanded graphites and industrial composites. As a result of a full order books, the structural and component business in the aviation and aerospace technology industry is also starting on a sound basis. Subject to strategic and structural changes, we expect a further increase in sales revenues for the SGL T Business Area combined with a positive contribution to operating earnings.

Further improvement in Group earnings expected

In view of the encouraging economic conditions and the confidence in the majority of our customer industries, and assuming that exchange rates remain stable and that no unpredictable events occur, SGL Carbon is by all means optimistic for 2006. Once again, we expect consolidated sales revenue to slightly exceed the 2005 level. EBIT should rise at a disproportionately higher rate compared to the growth in sales revenue, albeit not as high as in 2005. In view of the moderate improvement in the net financing costs and currently not visible significant restructuring expenses, profit before and after taxes should reach a higher rate of increase than EBIT. The same applies to the earnings per share. This development would have a positive impact on cash flow, which we intend to use to further reduce net debt. The equity ratio is expected to increase further in 2006, subject to uncertainties regarding the payments of the outstanding antitrust proceedings in Europe.

Procurement and production

In 2006, consistently high raw material and energy prices will again burden the cost structure, increasing once more by double digits over 2005. However, we have already considered this factor in the price negotiations with our customers. In view of the long-term supplier relationships, we do not anticipate bottlenecks on the procurement side in 2006, despite the high demand.

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Liquidity and capital resources

Thanks to the current financial framework and the anticipated positive development in cash flow and net debt, we currently expect to have sufficient funds to cover peak financial requirements in the course of the year.

Increase in capital expenditure in 2006

At up to €60 million, capital expenditure in the 2006 fiscal year is expected to exceed the previous year’s figure and thus slightly surpass depreciation for the first time in years. This development affects all three Business Areas and is the result of new projects along with the major alignment of our business to Asia, especially China.

Costs for research and development and the environment at previous year’s level

Research and development costs in 2006 should reach similar levels to 2005. Expenses that we will require for the current environmental protection measures plus those planned in the new fiscal year will be approximately the same as last year’s amount.

No significant changes planned for the headcount or the Group structure

The Group headcount in 2006 is expected to remain at roughly the same level. While the relocation of production within Europe, initiated in 2005, is expected to reduce the number of employees in this region by the end of the fiscal year, the high demand from the Far East and the expansion of locations there to establish a local presence is expected to increase the total headcount. There are currently no changes planned to the Group structure, organization or administration in 2006.

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.

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.

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’s experience, such guarantees are rarely drawn upon. For additional information with respect to the Company’s outstanding guarantees, see Note 24 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 €9.5 million at the end of 2005 (December 31, 2004: €16.0 million) until each individual guarantee will expire. 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 obligations relating to land and buildings, IT equipment, motor vehicles and other items of property, plant and equipment amounted to €9.2 million and €8.6 million at December 31, 2005 and 2004, respectively. Payment obligations of €32.2 million for a contract regarding a right to construct buildings on land owned by a third party in Germany are outstanding for the next 61 years.

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SGL has provided guarantees to the European Commission regarding the imposed antitrust fines. A provision was established on the balance sheet to provide for the estimated payment. The major part of the guarantee obligation of €34.5 million at December 31, 2005 (December 31, 2004: €55.1 million) represents the difference between the guarantee and the accrued provision.

Tabular disclosure of contractual obligations

  Maturing in:  
 
 
                              After  
Obligations Total   2006   2007   2008   2009   2010   2011   2011  
 
 
 
 
 
 
 
 
 
  (millions   (millions   (millions   (millions   (millions   (millions   (millions   (millions  
  of Euro)   of Euro)   of Euro)   of Euro)   of Euro)   of Euro)   of Euro)   of Euro)  
Term Facility A 4.6   2.5   2.1                      
Term Facility C 13.0   4.7   8.3                      
Term Facility D 67.8   0.0   0.0   67.8                  
Senior notes 270.0   0.0   0.0   0.0   0.0   0.0   0.0   270.0  
Other bank debt 2.7   2.0   0.1   0.1   0.1   0.1   0.1   0.2  
 
 
 
 
 
 
 
 
 
Total bank debt*** 358.1   9.2   10.5   67.9   0.1   0.1   0.1   270.2  
 
 
 
 
 
 
 
 
 
Acotec guarantees** 9.5   0.0   0.0   0.0   0.0   0.0   0.0   9.5  
Letter of Credit Facilities** 109.4   0.0   0.0   0.0   0.0   0.0   0.0   109.4  
Purchase obligations** 2.2   2.2                          
Operating leases** 8.1   1.8   1.5   1.1   1.0   0.9   0.8   1.0  
Capital leases ** 1.4   0.3   0.3   0.3   0.2   0.2   0.1      
Liabilities from tax payments 16.1   16.1   0   0                  
Other obligations 54.4   54.2   0.2                      
 
 
 
 
 
 
 
 
 
Total 559.2   83.8   12.5   69.3   1.3   1.2   1.0   390.1  
 
 
 
 
 
 
 
 
 

* $80.0 million converted into Euro at prevailing exchange rate of 1.1797 at balance sheet date.
** Contingent liability.
*** Total bank debt does not include €(16.0) 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 22 and 24 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 Board of Management, which we refer to as our Executive Committee (Vorstand) and the Supervisory Board (Aufsichtsrat). The two boards are separate and 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, including appointing and removing the members of the Board of Management. Certain transactions beyond our ordinary course of business, 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. 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 monitors the activities of the SGL Group’s management and 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 their fiduciary duty toward SGL. Apart from insolvency or other special circumstances, only SGL has the right to claim damages from members of either board. SGL may only waive these damages or settlements of claims if at least three years have passed and if the shareholders approve the waiver or settlement at the annual 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. These Board of Management members are appointed for a maximum term of up to of five years and may be reappointed for one or more terms of up to five years. Under certain circumstances, such as a serious breach of fiduciary duty or a bona fide vote of no confidence by the shareholders’ at the annual general meeting, the Supervisory Board prior to the expiration of his or her term may remove a member of the Board of Management. A member of the Board of Management may not attend or vote on matters relating to proposals, arrangements or contracts between himself and the SGL Group.

Effective January 1, 2005 Sten Daugaard replaced Dr. Bruno Toniolo , who retired as of the end of 2004, as the Chief Financial Officer and member of the Board of Management.

Pursuant to our articles of association, Board of Management decisions are made by a simple majority vote of the board members, as long as law does not require a larger majority. In the event of a tie, the Chairman of the Board of Management has the decisive vote. In practice, our Board of Management reaches its decisions by consensus. In addition, 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.

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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 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   Chairman of the   Member of the Supervisory
        2011   Board of   Board of AXA
            Management   Lebensversicherungs AG,
            (CEO)   Cologne, Benteler AG(1),
                Paderborn; Heidelberger
                Druckmaschinen AG,
                Heidelberg , Lanxess AG,
                Leverkusen (since 07/2005),
                Pfleiderer AG, Neumarkt ,
                Wacker-Chemie GmbH,
                Munich (until 08/2005)
                 
Sten Daugaard   2005   December   Member of the   SGL Carbon Luxemburg
        2007   Board of   S.A.(1), Luxembourg SGL
            Management   Carbon GmbH (1),
            (CFO)   Meitingen; SGL CARBON
                S.p.A., Milan, Italy, SGL
                CARBON S:A:, La
                Coruña, Spain;
                 
Theodore H. Breyer   1999   June 2008   Member of the   Member of the Supervisory
            Board of   Board (within SGL Group)
            Management   of HITCO CARBON
                COMPOSITES Inc.,
                Gardena, USA;, SGL
                CARBON LLC, Charlotte,
                USA
                 
Dr. Hariolf Kottmann .   2001   March 2007   Member of the   Member of the Supervisory
            Board of   Board of SF Chem, Basel,
            Management   Switzerland, Member of the
                Supervisory Board 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

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

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

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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 Axa Lebensversicherungs AG, Ko¨ ln, Benteler AG, Paderborn (Chairman); Heidelberger Druckmaschinen AG, Heidelberg, Lanxess AG, Leverkusen (since July 2005), Pfleiderer AG, Neumarkt and Wacker-Chemie GmbH, Munich (until August 2005).

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. 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. From 1986 to 1988 he was Head of the Foreign Department at Nykredit and from 1989 to 1992 Management Board Member of Frankfurter Bodenkreditbank. 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. 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.p.A. Milan, Italy, SGL CARBON S.A., La Coruña, Spain and as Chairman of the supervisory boards of SGL Carbon Luxemburg S.A., Luxembourg and 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 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 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. IIn 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 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 as a member of the supervisory board of SF Chem, Basel, Switzerland, and, within the SGL Group, as chairman of the supervisory boards of 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.

 

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Other Senior Management

The table below sets forth the SGL Group’s senior executive officers, the year they were appointed and their positions within the SGL Group:

    Year      
Name   Appointed   Management Position  

 
 
 
Armin Bruch   2005   Carbon and Graphite business area  
Britta Döttger   2004   Group Coordination  Treasury  
Wilhelm Hauf   2001   Group Coordination  Accounting  
Dr. Joachim Heins-Bunde   1992   Group Coordination  Corporate Planning  
Helmut Mühlbradt   1989   Group Coordination  Human Resources and Legal  
Christian Pagel   2004   Corporate Business Systems  
Dr. Jan Verdenhalven   2001   Managing Director  –  SGL Technologies  
Dr. Gerd Wingefeld   2005   Specialties business area  

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

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.

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. 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 effective October 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 an Information Technology (IT) strategy and management consultant at Deloitte & Touche, Berentzen Group AG and CCE AG. Most recently he was the Managing Director of 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 within Hoechst AG and a consulting company.

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

Supervisory Board

Our Supervisory Board currently consists of twelve members, six of whom were elected by the shareholders at the annual general meeting in accordance with the provisions of the Stock Corporation Act and six of whom were elected by the employees in accordance with the Co-Determination Act (Mitbestimmungsgesetz).

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A member of the Supervisory Board elected by the shareholders may be removed by a 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 the decisive vote.

The members of the Supervisory Board are each elected for a term of approximately five years (the year in which the member’s term begins is not counted towards the term calculation and therefore, a Supervisory Board member’s term expires at the end of the annual general meeting of shareholders the fourth fiscal year after the beginning of the member’s term). The remuneration of the Supervisory Board members 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 (Chairman)   2004   2008   Former Member of the Board of Management of BASF AG, Ludwigshafen; Chairman of Börsensachverständigenkommission (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 (until November 28, 2005); Infineon Technologies AG (2) , Munich; Schott AG, Mainz; Heidelberg Cement AG, Heidelberg; UniCredit S.p.A., Milan, Italy (as of January 11, 2006)  
           
Heinz Schroth (3)   1988   2005   Industrial sales manager, SGL Carbon GmbH  
(until April 27, 2005)          
               
Josef Scherer (3)   2005   2008   Chemical laboratory worker, SGL CARBON  
(since April 27, 2005)       GmbH  
(Deputy Chairman)          
               
Prof. Dr. rer. nat. Utz- Hellmuth Felcht   1992   2008   Chairman of the Board of Management of Degussa AG Düsseldorf; Member of the Management Board of RAG AG Essen; Internal board membership: Goldschmidt AG (2) , Essen (until 14.01.2005); SKW Metallurgie AG (2) , Trostberg (until 14.01.2005); Ru¨tgers AG (2) , Essen (until 30.06.2005), RAG Coal International, Essen, Degussa (China) Co. Ltd.(2) ; External board memberships: Gerling-Konzern Vesicherungs-Beteiligungs AG, Cologne  
               
Peter Fischer(3)   1993   2008   Attorney, SGL CARBON Aktiengesellschaft  

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


 
 
Dr.-Ing. Claus Hendricks   1996   2008   Former Member of the Management Board of Thyssen Krupp Stahl AG Duisburg; External board memberships: Pro Lean Consulting AG, Deputy (2) , Düsseldorf; Schumag AG (2) , Aachen; TSTG GmbH, Duisburg
             
Juergen Kerner(3)   2002 (4)   2008   First Authorized representative of IG Metall, Administrative Center Augsburg; External board memberships: Member of the Supervisory Board IWKA Aktiengesellschaft Karlsruhe; MAN B&W Diesel AG, Augsburg; MAN Roland AG, Offenbach
             
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 (Board of Directors)
       
Jacques Loppion   1993   2008   Former President du Conseil d’Administration Groupe SNPE S.A., France ; External board memberships : GroupeGascogne, Saint-Paul-les-Dax, France (until 06/2005), S.A.I. Golf, Saint- Nom-la Bretèche, France ; KME AG, Osnabrück
       
Edelbert Schilling (3)    2003   2008   Technical Assistant, SGL ACOTEC GmbH, Siershahn (until December 31, 2005); General Manager, K &W GmbH NL Europe, Montabaur (since January 01, 2006)
       
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 Associated British Ports plc., London, United Kingdom; Brake Bros, Ltd., Ashford, United Kingdom, Dalkia UK plc, London, United Kingdom; Kaffee Partner Holding GmbH (2); Osnabrück (until 12/2005); Finning International Inc., Vancouver, Canada
       
Heinz Will(3)    2005   2008   Electrician, SGL CARBON GmbH, Frankfurt
Electrician, SGL      
CARBON GmbH,      
Frankfurt      
(since April 27, 2005)      
             
Hans-Werner Zorn(3)    2003(5)   2008   Mechanical engineering 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

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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, its composition and to state whether the new committee shall be entitled to pass resolutions.

The Supervisory Board has established an Audit Committee. The core tasks of the Audit Committee encompass the following areas: annual consolidated financial statements, risk management, independence of the auditor, preparation for issuing the audit mandate, determining the areas of emphasis of the audit and proposing the audit fees to the Supervisory Board. Tasks and procedures of the Audit Committee are incorporated into the SGL Carbon AG Corporate Governance Policy. Individual tasks of the Audit Committee cover the following areas:

  Preparation of the Supervisory Boards recommendation to the General Meeting of shareholders on the election of the auditor, which includes a thorough review of the auditors independence.
 
  Preparation of the audit mandate, including discussing the areas of emphasis of the audit and the auditors remuneration. Approval of additional non-audited related services of the auditor.
 
  Review and discussion of the annual financial statements of SGL Carbon AG and of the consolidated financial statements, management report and Group management report and the proposal for the appropriation of the net profit. Preparation of Supervisory Board resolutions regarding the approval of the annual financial statements and the consolidated financial statements.

Other responsibilities of the Audit Committee include, but are not limited to, the risk management and the internal control system of the Company, the handling of complaints on accounting matters addressed to the Audit Committee and the preparation and discussion of the Board of Management’s report on allocation of charitable donations that exceed €10,000. The Supervisory Board, upon proposal of its chairman, may delegate the approval of the increase in share capital from authorized capital (pursuant to article 3, para. 6 and 7 of the Articles of Incorporation) to the Audit Committee. The members of the Audit Committee are Andrew Simon (chairman and financial expert), Max Dietrich Kley, Ju¨ rgen Kerner, Heinz Schroth (until April 2005) and Josef Scherer (since April 2005).

The Personnel Committee must approve all compensation paid by SGL to members of the Board of Management. The Personnel Committee is comprised of 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 of the committee is a Supervisory Board member 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 Max Dietrich Kley (chairman), Utz-Hellmuth Felcht, Heinz Schroth (until April 2005) and Josef Scherer (since April 2005).

Compensation

We have entered into service agreements with all current members of the Board of Management. These agreements generally provide for a base salary, associated fringe benefits, an annual bonus plan, and a pension plan.

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 following table shows the remuneration components of those

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individual members of our Board of Management who were active on the Board as of December 31, 2005.

Remuneration of the Members of the Board of Management

              Stock          
          SGL   Options          
          shares   Granted   Stock   SARs  
          owned in   (2000–   Options   Granted(1)  
  Base salary   Bonus   total   2004)   Exercised   (2005)  
  T€   T€   no.   no.   no.   no.  
 
 
 
 
 
 
 
R. J. Koehler 424   424   79,389   120,000   20,000   50,000  
T. H. Breyer 294   294   31,296   72,000   0   30,000  
S. Daugaard 294   200   1,152   6,000   0   30,000  
Dr. H. Kottmann 294   294   27,861   57,000   0   30,000  
 
 
 
 
 
 
 
Total 1,306   1,212   139,698   255,000   20,000   140,000  
 
 
 
 
 
 
 

(1) Stock Appreciation Rights

In addition, the members of the Board of Management also receive a variable compensation component in the form of management incentive plans (see also Note 30). The Board of Management’s stock options include option rights from the Stock Option Plan, granted from 2000 to 2004 and not yet expired. In addition, stock appreciation rights (SARs) were granted in 2005. The settlement of the Matching Shares Plan of 2003 resulted in a grant of 12,648 SGL shares as well as a €60.000 payment to the members of the Board of Management in 2005. Total expense for the active members of the Board of Management under the Matching Shares Plan was €212 thousand in 2005, and for the LTCI Plans, lasting over several years the expense was €1,256 thousand. For fiscal year 2005 , the expensed remuneration of the Board of Management amounted to a total of €3.2 million including payments in kind and bonuses, which are to be paid in 2006.

To cover the pension obligations to members of the Board of Management the Company entered into reinsurance policies with two large insurance companies. As of December 31, 2005, the asset value included in the pension provisions amounted to €5.7 million. Claims under these reinsurance policies were pledged to the respective Board of Management members. The total remuneration of former members of the Board of Management and executive management and their surviving dependents amounts to €0.4 million. Provisions of €3.4 million have been recognized to cover pension obligations to former members of executive management and their surviving dependents.

The active members of the Board of Management hold shares and American Depository Receipts (ADRs) in SGL CARBON AG as part of their private assets. At December 31, 2005, members of the Board of Management held 119,110 shares and 61,764 ADRs, corresponding to a total of 139,698 shares.

The aggregate amount of compensation paid by SGL to its senior executive officers who held office in 2005 (excluding members of the Board of Management) was €2.3 million.

The members of the Board of Management also receive a variable compensation component in the form of rights under management incentive plans. From 2000 to 2005, the members of the Board of Management were granted option rights under SGL’s Stock Option and SAR Plans, which have not yet expired. The members of the Board of Management were granted a total of 68,000 options in an aggregate value of €418 thousand in 2004 (€6.15 per option) and in 2005 a total of 140,000 SARs in an aggregate value of €616 thousand (€4.40 per SAR). The actual values of these stock options and SARs upon exercise will likely differ from the estimated values at issuance and may be either higher or lower (see “Management Incentive Plans” below). The total remuneration of the Supervisory Board totaled €339 thousand. The following amounts were paid in 2005:

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Remuneration of the Supervisory Board

  Base   Additional      
in T€ remuneration   remuneration   Total  
 
 
 
 
Max Dietrich Kley 40.0   12.6   52.6  
Chairman            
Heinz Schroth* 9.6   4.2   13.8  
Deputy Chairman (until April 27, 2005)            
Josef Scherer* (since April 27, 2005) 26.8   10.6   37.4  
Prof. Dr. rer. nat. Utz-Hellmuth Felcht 20.0   6.6   26.6  
Peter Fischer* 20.0   0.6   20.6  
Dr.-Ing. Claus Hendricks 20.0   6.6   26.6  
Jürgen Kerner* 20.0   2.5   22.5  
Dr.-Ing. Hubert Lienhard 20.0   6.6   26.6  
Jacques Loppion 20.0   2.6   22.6  
Bert Schilling* 20.0   2.6   22.6  
Andrew H. Simon 20.0   6.6   26.6  
Heinz Will (since April 27, 2005)* 13.6   0.3   13.9  
Hans-Werner Zorn* 20.0   6.6   26.6  
 
 
 
 
Total 270.0   69.0   339.0  
 
 
 
 

An asterisk * identifies employee representatives, who receive salaries from us unrelated to their work on the Supervisory Board. Supervisory board members receive additional remuneration from meeting attendance as well as for their participation as active committee members. 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, 2005, the employee representative members of our Supervisory Board held an aggregate number of 422 shares of SGL CARBON AG, 5,000 stock options and 2,500 SARs (the stock options and SARs concern only the employee representative members of the Supervisory Board, who participate in the management and employee share incentive plans of SGL).

Annual Bonus Plan.

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 area 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

SGL currently has five different management and employee incentive plans. The Long-Term Incentive Plan, which was approved in 1996, originally comprised the Stock Appreciation Rights Plan (“SAR Plan 1996”) and the Long-Term Cash Incentive Plan (“LTCI Plan”). Whereas the exercise period of the SAR Plan runs through 2006, the term to maturity of the LTCI Plan was limited to three years and has already expired on December 31, 1998. The current Long Term Cash Incentive Plan is valid for the period from 2005 through 2007 (the LTCI Plan 2005 – 2007) and replaced the expired LTCI Plan 2002 – 2004 at the end of 2004. Furthermore, on April 27, 2000, the Company’s Annual General Meeting approved the introduction of a Share Plan or Matching Shares Plan (“Share Plan”) as well as a Stock Option Plan (“Stock Option Plan”). The Share Plan was launched in

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March 2001. The Stock Option Plan, which was implemented in July 2000, superseded the SAR Plan 1996, whose eligibility 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 of April 30, 2004, approved 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 over a period of five years, whose increase in value provides their holders with the right to subscribe to shares of SGL.

Beginning in fiscal year 2005 stock options and Stock Appreciation Rights (SAR’s) granted since fiscal year 2003 must be treated as an expense in accordance with IFRS 2. For details see Note 30 to the consolidated financial statements.

Stock Appreciation Rights Plan 1996 (SAR–Plan)

Under the SAR Plan, the members of the Board of Management and certain members of senior management of the SGL Group have been granted stock appreciation rights (“SARs”). Each SAR represents (i) with respect to members of the Board of Management, the right to receive an amount equal to the difference, on the one hand, between the average SGL’s middle share price officially quoted on the Frankfurt Stock Exchange on March 16 of the year in which the option is exercised, and on the other hand, the respective exercise price, which, prior to adjustment for dilution, ranges from €33.03 to €102.26; and (ii) with regard to employees of the SGL Group, the right to purchase one share at the respective exercise price.

One SAR is associated with one share. A total of 840,500 shares are linked to the SAR Plan, representing approximately 3.79% of all shares outstanding at the time. Until December 21, 2004, SARs representing a total of 746,800 shares had been granted to members of the Board of Management and to 60 members of senior management. Of these SARs, 637,350 had been exercised as of December 31, 2005.

Under the SAR Plan, an option representing a specific number of SARs (a “SAR Option”), as determined by the Board of Management, or, if the beneficiary was a member of the Board of Management, by the Supervisory Board, was granted to each beneficiary at the beginning of the SAR acquisition period (January 1, 1996 – January 1, 2000). The SARs allotted via this SAR Option during the eligibility period (January 1, 1997 – January 1, 2001) are vested on January 1 for the preceding fiscal year in five equal annual tranches of 20% each. Each vested SAR may be exercised during the period March 1 to March 15 each year, on March 15, 2006, at the latest or upon termination of service (as described below). Board of Management members exercising SAR Options must utilize a portion of the net proceeds corresponding to 15% of the gross proceeds to purchase shares of the Company in the stock market. For this purpose, the Company instructs 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 subsidiary provides the financial means to effect the purchase directly to the bank and deduct the amounts from the funds due to the beneficiary from exercising the SAR. The bank retains these shares in safekeeping on behalf of the member of the Board of Management for the successive twelve months. The remaining net proceeds are paid out to the member of the Board of Management.

All the shares earned by an employee of the SGL Group upon exercise of the SARs must immediately be resold. An exception is made for 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 blocked for a period of twelve months. As the exercise price of these SARs from 1996 is considerably higher than the current share price, the fair value of these options is zero euros.

Long–Term Cash Incentive Plan (LTCI Plan)

LTCI Plan 2002-2004

Under the LTCI Plan 2002-2004, the members of the Board of Management and 36 senior managers were granted cash awards by SGL subject to the achievement of certain performance targets over a three-year period. The plan period was 2002 through 2004. The maximum aggregate award was €7.8 million.

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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. At the end of the three-year plan period the performance target under the plan was achieved to an extent of 45.7% . Members of the Board of Management and Senior Managers received an aggregate award of €3.4 million. According to the plan, all active plan participants have re-invested 15% of their gross proceeds to purchase in total 42,700 SGL shares, which were locked-up until March 31, 2006.

LTCI-Plan 2005 – 2007

Under the LTCI Plan 2005 – 2007, over a three-year period SGL can grant the members of the Board of Management and 40 members of senior management a cash bonus payment that is linked to certain performance targets. The current planning period runs from 2005 through 2007. Bonuses totaling a maximum of €7.4 million may be paid out. The performance target that the SGL Group must reach in order for participating members of senior management and Board of Management members to qualify for the maximum bonus under the LCTI Plan 2005 – 2007 was set at a ratio of net debt to EBITDA of 3.4 to 1 as per December 31, 2005, 2.7 to 1 as per December 31, 2006 and 2.3 to 1 as per December 31, 2007. The Plan also stipulates that 20% of the maximum bonus can be paid if the performance target is reached by December 31, 2005, 30% if the performance target is reached by December 31, 2006 and 50% if the performance target is reached by December 31, 2007.

Beneficiaries of the LTCI Plan 2005 – 2007 must use a portion of the net proceeds of the LTCI premiums corresponding to 15% of the gross proceeds to buy shares of SGL on the stock market. For this purpose, the Company instructs a financial institution to acquire the shares for the account and in the name of the respective beneficiary and transfers the funds out of withheld bonus payments directly to the bank for the purchase of the shares. These shares are subsequently held by the financial institution in safekeeping on behalf of the beneficiary for the successive 12 months. The remaining proceeds are payable on April 30, 2008.

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As per December 31, 2005, the performance target of net debt to EBITDA of 3.4 : 1 was achieved. The participants in the Plan thus acquired a claim to 20% of the maximum bonus. A total of €2.6 million has been reserved for these bonus accrual that have already been earned as well as further possible bonus payments to members of the Board of Management and members of senior management.

Share Plan/Matching Shares Plan

In March 2001, SGL launched the Matching Shares Plan for the members of the Board of Management as well as the first three management levels below the Board of Management. Under the plan, participants may invest up to 50% of their annual bonuses in shares of the Company. If they hold these shares for at least two years, they receive the same number of shares (matching shares) against payment of a special bonus in a corresponding amount.

The Company’s Share Plan was adopted by SGL’s shareholders at the Annual General Meeting of April 27, 2000, and went into effect on March 31, 2001. Originally, a maximum of 250,000 new shares was reserved out of authorized capital for implementation of the Matching Shares Plan. At the end of March 2005, 36,025 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 2003; a total of 12,648 outstanding shares, acquired on the stock market, were granted to members of the Board of Management. The value of the matching shares amounted to €9.96 per share on the reporting date of March 29, 2005, which was regarded as compensation on which the individual plan participants paid taxes. The net amount corresponding to the 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 invested from 2003, whose two-year lock-up period expired on March 31, 2005.

Following the refinancing package of the SGL Carbon Group, which was implemented in 2004, and corresponding adjustment of authorized capital by the ordinary Annual General Meeting on April 30, 2004, a total of 350,000 new shares were available to service future share plans. In 2005, a total of 36,025 shares were used to process the Matching Shares Plan 2003. During the fiscal year, members of the Board of Management and 74 members of senior management took part in the Matching Shares Plan 2005 – 2007, acquiring a total of 113,343 SGL shares from their taxed income at a price of €10.10 per share on the stock market.

Stock Option Plan

The Stock Option Plan is administered by the Supervisory Board for the members of the Company’s 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 administered the Stock Option Plan for approximately 150 members of senior management as well as the executive staff of the Company and its subsidiaries.

The options have a term to maturity of ten years from their date of grant; they expire without compensation if they are not exercised during this period. The options may only be exercised after expiration of a two-year waiting period. This period begins the day after an option is granted, thereby resulting in an exercise period of eight years. During the exercise period, options may only be exercised on trading days during predetermined days when trading windows are open. Following publication of the Company’s operating results, two trading windows of ten days each are made available for each options tranche, during which time options may be exercised. The times these trading windows are open is determined by the Supervisory Board for options granted to members of the Board of Management 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 targets at the time the options are exercised. The performance target is the increase in the total shareholder return of the SGL share. The Stock Option Plan defines this as the sum of the share price plus retained dividends plus the value of the options. For options to be eligible for exercising, total shareholder return must be at least 15% higher than the exercise price.

Calculation of the exercise price to be paid by beneficiaries under the Stock Option Plan is based on the average closing price of the shares in the XETRA securities trading system of the

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Frankfurt Stock Exchange for the last 20 trading days before the relevant options are granted, excluding transaction costs.

The options are subject to certain terms and conditions of sale. Thus, for an additional twelve months, beneficiaries must retain Company’s shares in a minimum value of 15% of the gross proceeds (amounting to the difference between the subscription price and the exercise price of all options exercised by the participants) generated by the sale of the subscribed shares.

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, through the issue of new shares with the granting of subscription rights 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 right to which shareholders 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 within the framework of SGL ´s stock option plan, of which 289,500 options expired without compensation as a result of the termination of the employment relationship of plan participants due to employee turnover. Options that had been granted in 2003 were exercised for the first time in 2005. As a result, the participants exercised a total of 128,500 options from 2003 during the exercise window defined in accordance with the plan conditions at a subscription price of €3.61. This means that a total of 1,094,000 options are still available for exercise.

Stock Appreciation Rights Plan 2005 (SAR Plan 2005)

The SGL shareholders approved the SAR Plan 2005 at the ordinary Annual 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 contingent capital 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.

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 be issued 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

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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 (‘‘strike 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 – however, to a maximum of one SGL share.

The strike price is calculated based on the average closing prices of SGL shares for the last 20 stock market trading days in the XETRA 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 strike 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 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 after 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 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 Börse), 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.

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

In 2005, a total of 605,500 SARs were granted to members of the Board of Management and to members of senior management at a striking price of €9.74. The issue date was January 14, 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 initial term of the agreement ran until December 31, 2004, and the agreement is renewed automatically for one-year terms unless it is terminated 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 Committee by the other members of the Supervisory Board. 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 2005, we employed in our consolidated and non-consolidated operations a global workforce of 5,263 employees, 2 less than in the previous year (5,264 at the end of 2004 including all non-consolidated companies). In our core business, Carbon Graphite, the further restructuring measures resulted in a decline in the number of employees by 100 from 2,550 to 2,450. The Specialties Business Area recorded an increase of 28 employees, from 1,788 to 1,816, which increase was accounted for by the Business Area´ s Asian operations. The number of employees in SGL Technologies increased by 74 from 875 to 949. This resulted largely from the increased demand of

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our products of SGL Brakes in Germany as well as of Hitco Carbon Composites in the USA. At the end of 2005 approximately 37% of all employees were working in Germany (2004: 37%) and 38% were active in other European countries (2004: 38%) , 22% in North America (2004: 23%) and 3% in Asia (2004: 2%).

Average Employees by Activity *

  Average   Change   Average   Change   Average  
  2003   in%   2004   in%   2005  
 
 
 
 
 
 
Production 4,090   –4%   3,910   –2%   3,849  
Sales and Marketing 453   –5%   432   –3%   420  
Research & Development 220   –25%   164   3%   169  
Administrative 1,031   –13%   893   –8%   819  
 
 
 
 
 
 
Total 5,794   –7%   5,399   –3%   5,257  
 
 
 
 
 
 
                     

* Adjusted for the sale of the Corrosion Protection Business.

Employees by Region at year-end *

  Year-end   Change   Year-end   Change   Year-end  
  2003   in%   2004        in%   2005  
 
 
 
 
 
 
Germany 2,000   –2%   1,953   1%   1,968  
Rest of Europe 2,317   –13%   2,025   –2%   1,979  
North America 1,154   3%   1,189   –1%   1,177  
Asia / Africa 132   –26%   98   42%   139  
 
 
 
 
 
 
Total 5,603   –6%   5,265   0%   5,263  
 
 
 
 
 
 
                     

* Adjusted for the sale of the Corrosion Protection Business

A number of SGL’s non-management employees are members of different labor unions in different countries. In Germany, collective bargaining agreements for employees below management level are generally negotiated between the association of employers within a particular industry and the respective unions. In addition, under German law, employees elect a works council (Betriebsrat) that participates in determining company site policy, especially with regard to certain voluntary compensation matters and benefits.

SGL considers its labor relations to be positive and anticipates reaching future agreements with its labor unions on terms satisfactory to all parties. There can be no assurances, however, that new agreements will be reached without a work stoppage or strike or on terms satisfactory to SGL.

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 end of April 2006 , SGL had 62,789,251 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 2006 , there were 380 registered holders of American Depositary Receipts (“ADRs”) 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.

From its latest Survey SGL has received the following information about major shareholders:

          beneficial  
          ownership in  
      number of   % of voting  
Company date   shares   rights  
 
 
 
 
Hermes Investment Management Limited (BT Pension Scheme) April, 2006   4,245,681   6.8 %
Marshall Wace Asset Management Limited** April, 2006   3,819,134   6.1 %
Fidelity Management & Research Co.*) April, 2006   2,665,042   4.2 %
Nordea Investment Management (Denmark) A/S*) April, 2006   1,851,926   3.0 %
Merrill Lynch Investment Managers, Inc./Mercury Advisors*) April, 2006   1,591,200   2.5 %
             

*) based on the number of shares at that date
**) holdings are invested solely on behalf of its Eureka (Euro) Fund

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 associated companies amount to €3.7 million. Details are presented in the notes to the relevant balance sheet and income statement items. Sales with associated companies in 2005 totaled €7.0 million, and the interest income and expense of associated companies in the same year amounted to €0.1 million.

An outstanding capital contribution to an associated company amounting to USD 3.8 million was fulfilled.

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 2005 approximately 75% of all products produced by the SGL Group in Germany, having an estimated total value of €384.5 million, and approximately 11% of all products produced by the SGL Group in the United States, having an estimated total value of €26.1 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 Court Proceedings (Europe/Korea)

SGL has been subject to investigations by the competition directorate of the European Commission. This investigations refer to acts occurring in the 1990s.

On July 18, 2001, 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 amount of €69.1 million plus accrued interest thereon was paid to an escrow account, without waiving the right of appeal, on April 11, 2006. 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 ECJ Advocate General has issued his pleadings on January 19, 2006, suggesting to reject SGL’s appeal and to partially follow the Commission’s appeal.

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. Upon our appeal, the CFI reduced the fine imposed to €18.45 million in its judgment of June 15, 2005. We have filed an appeal against this judgment to seek annulment of the decision altogether, substantially on the same grounds as in the graphite electrodes case. We are expecting a CFI decision during 2006 or 2007.

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 and are expecting a decision at earliest during 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

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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. On August 18, 2004 we paid the fine but filed an appeal against this decision with the Korean Supreme Court. This appeal was dismissed on March 23, 2006.

Civil suits resulting from antitrust violations

Three lawsuits alleging violations of Section 1 of the Sherman Act have been filed in the United States 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. The defendants’ motions to dismiss have been submitted to the District Court.

On December 27, 2002 (and thereafter), seven purchasers of bulk (extruded) graphite products filed putative class actions against, among others, SGL, SGL Carbon GmbH, SGL Carbon, LLC, SGL Carbon Corp. and Robert Koehler, our chief executive officer. These cases, which have been consolidated in the United States 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 from January 1, 1993 to December 31, 1998. The SGL defendants filed their answers to the consolidated complaint on December 22, 2004. The case is currently in the discovery stage.

SGL Carbon, LLC recently agreed to settle for $225,000 a federal class action on behalf of direct purchasers of electrical carbon products in the United States during the period from January 1, 1990 through December 31, 2001. The settlement, which will result in the release of all SGL entities, will also include certain purchasers that had initially filed a separate complaint but subsequently elected to join the class action settlement. The hearing on final approval of the settlement is scheduled for May 12, 2006.

Two additional complaints, both filed on behalf of indirect purchasers of electrical carbon products in California (and covering, in the aggregate, the period from 1989 to the present) remain pending in California Superior Court against SGL Carbon, LLC, SGL Carbon Corp., SGL Technic Ltd. and (in one case) SGL. These complaints, like the federal action, allege a conspiracy to fix the price of electrical carbon products and seek damages in an unspecified amount.

Other proceedings

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 Board of Management and the Supervisory Board. They are approved for payment with respect to the prior financial year by the shareholders at the annual general meeting in the following year. Dividends approved at the annual general meeting are payable on or after the business day following the annual general meeting. Since all Shares are in bearer form, dividends are either remitted to the depositary bank (Depotbank) on behalf of the shareholder, or, in the case of shareholders holding physical certificates, are paid through the paying agents appointed by SGL against presentation of the relevant dividend coupon. Details of the paying agents are published in the German Federal Gazette (Bundesanzeiger).

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

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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  
  $ per ADR(1)(2)   Trading Volume (3) 
 
 
 
Year Ended High   Low      
 
 
     
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  
December 31, 2005 5.86   3.61   14,900  
             
      Average Daily  
  $ per ADR(1)(2)   Trading Volume (3) 
 
 
 
Quarter Ended High   Low      
 
 
     
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  
June 30, 2005 4.55   3.61   5,900  
September 30, 2005 5.10   4.10   21,800  
December 31, 2005 5.86   4.50   20,600  
March 31, 2006 6.70   5.05   40,908  

           
(1) Source: JP Morgan/Bloomberg.
(2) Each ADR represents one third of one share.
(3) Rounded to the nearest 100.
      Average Daily  
  $ per ADR(1)(2)   Trading Volume (3)
 
 
 
Month Ended High   Low      
 
 
     
October 31, 2005 5.08   4.50   19,300  
November 30, 2005 5.66   4.88   21,200  
December 31, 2005 5.86   5.27   21,300  
January 31, 2006 6.64   5.73   58,065  
February 28, 2006 6.17   5.41   24,842  
March 31, 2006 6.70   5.05   39,261  

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

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

          Average Daily  
  Euro per Share(1)    Trading Volume (2) 
 
 
 
Year Ended High   Low      
 
 
     
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  
December  31, 2005 14.70   8.37   233,500  
             
          Average Daily  
  Euro per Share(1)    Trading Volume  (2)
 
 
 
Quarter Ended High   Low      
 
 
     
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  
June 30, 2005 11.43   8.37   224,900  
September 30, 2005 12.54   10.05   231,100  
December 31, 2005 14.70   11.33   222,200  
March 31, 2006 16.39   13.25   401,622  

(1) Source: JP Morgan/Bloomberg.
(2) Rounded to the nearest 100.
 
          Average Daily  
  Euro per Share(1)   Trading Volume (2)
 
 
 
Month Ended High   Low      
 
 
     
October 31, 2005 12.60   11.33   261,900  
November 30, 2005 14.39   12.08   235,500  
December 31, 2005 14.70   13.75   168,500  
January 31, 2006 15.98   13.91   279,075  
February 28, 2006 15.25   13.25   425,027  
March 31, 2006 16.39   13.52   498,489  

(1) Source: JP Morgan/Bloomberg.
(2) Rounded to the nearest 100.

On January 15, 2004 our shareholders approved a capital increase in the form of the issue of 33,277,437 new shares as proposed by our management. 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. From January 22, 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).

On March 16, 2005, the capital increase approved on January 27, 2005, by the Board of Management and with the consent of the Supervisory Board on February 10, 2005 of 591,434 shares was implemented. These shares were purchased at €2.56 and used to fulfill bonus claims of the Company’s employees. Furthermore, in March 2005 a total of 36,025 new shares were also issued to employees of SGL Carbon AG and its affiliates as contribution in kind within the framework of the Matching Shares Plan 2003. Employees participating in the Matching Shares Plan 2003 contributed bonus claims totaling €358,809 to the Company as a contribution in kind. Of this amount, €92,224

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refer to the share capital, with the remaining €266,585 referring to the share premium. In the 2005 fiscal year, 128,500 options were exercised under the Stock Option Plans. The total number of shares increased in 2005 by 755,959 from 55,835,290 to 56,591,249 at December 31, 2005.

On March 16 and 17, 2006 SGL Carbon announced and completed an capital increase of 5,583,529 shares, that was successfully placed in an accelerated bookbuilding. The shares have been placed at a price of €15.00 per share resulting in gross proceeds totalling €83.7 million. The shares were placed with German and international institutional investors and further improve the Capital Resources of the SGL Group. Including the capital increase for employee plans the shares outstanding increase to 62,724,778.

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 identical ISIN-Code (DE0007235301). The shares are listed in Germany on the Frankfurt, Berlin/ Bremen, Du¨ sseldorf, 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 31, 2006 we had 2,455,518 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 kind of carbon products, especially industrial products of natural and artificial carbon and graphite,
 
  materials and products on the base of carbon or graphite, such as fibers, composite materials, foils and process equipment including industrial facilities,
 
  other ceramic materials and products,
 
  corrosion resistant materials, and
 
  other substances and products that can be produced or extracted in connection with these fields of activities.

SGL may also itself engage in activities described above and may make resources and funds available to companies in which it holds an interest. In addition, SGL may establish, acquire, take holdings in or consolidate other companies, and is authorized to take shares in any kind of company, especially for the purpose of investing Group funds.

Corporate Governance

A foreign private issuer, as SGL Carbon Aktiengesellschaft (SGL Carbon AG) is, in principle, permitted to follow home country corporate governance practice in lieu of the NYSE Corporate Governance Standards as set forth set forth in Section 303 A of the NYSE Listed Company Manual (the “NYSE Standards”), provided, among others, that it discloses the significant differences between such home country governance practices and the NYSE Standards applicable to domestic companies listed on the NYSE.

German corporate governance standards generally derive from the provisions of the German Stock Corporation Act (Aktiengesetz the “Stock Corporation Act”), the German Codetermination Act (Mitbestimmungsgesetz, the “Codetermination Act”) and the German Corporate Governance Code (Deutscher Corporate Governance Kodex, the “Code”). These standards differ from the corporate governance listing standards applicable to U.S. domestic NYSE issuers. A brief, general summary of the significant differences follows.

Dual board system

SGL Carbon AG is a German Stock Corporation organized under the Stock Corporation Act. German stock corporations have a dual board system with a management board (Vorstand) and a supervisory board (Aufsichtsrat). The German Stock Corporation Act requires a clear separation of management and oversight functions and therefore strictly prohibits simultaneous membership on both boards. Members of the management board and the supervisory board must exercise the standard of care of a prudent and diligent business person when carrying out their duties. In complying with this standard of care, members must not only take into account the interests of shareholders, as would typically be the case with a U.S. board of directors, but also the interests of other constituents, such as the company’s employees and creditors, and, to some extent, the public interest.

The management board of SGL Carbon AG is responsible for managing the company and representing it in its dealings with third parties. The management board is also required to ensure an appropriate risk management within the company and to establish an internal monitoring system. The members of the management board of a German stock corporation, including its chairman or

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speaker, are by law regarded as peers and share a collective responsibility for all management decisions.

The supervisory board oversees the company’s management board and appoints and removes its members. Members of the supervisory board cannot be involved in the day-to-day management of the company. However, the company’s articles of association or its supervisory board must specify matters of fundamental importance which will require the approval of the supervisory board. Matters requiring such approval include decisions or actions, which would substantially change the company’s assets, financial position or results of operations. The supervisory board is also required to review and approve the company’s annual financial statements, before they are presented to the general meeting of shareholders. To ensure that the supervisory board may properly carry out its oversight functions, the management board must regularly report to the supervisory board with regard to current business operations, planning and business policies including any deviation of actual developments from targets previously presented to the supervisory board, particularly on the companies return on equity, on the risk exposure and the risk management.

The supervisory board of German stock corporations is subject to the principle of employee codetermination as laid down in the Codetermination Act. Accordingly, the supervisory board of SGL Carbon AG consists of a total of 12 members, one half elected by the shareholders and the other half elected by the employees. Typically, the chairman of the supervisory board is a shareholder representative. In case of a tie vote, the supervisory board chairman may cast the decisive tie-breaking vote.

Committees

With one exception, German corporate law does not mandate the creation of specific supervisory board committees. German corporations are only required to establish a mediation committee with a charter to resolve any disputes among the members of the supervisory board that may arise in connection with the appointment or dismissal of members of the management board. In addition, the Corporate Governance Code recommends that the supervisory board establish an audit committee, which would handle the formal engagement of the company’s independent auditors once they have been approved by the general meeting of shareholders. The audit committee would also address issues of accounting, risk management and auditor independence. In practice, most supervisory boards have also constituted other committees to facilitate the work of the supervisory board. In addition to the mediation committee and audit committee, the Supervisory Board of SGL Carbon AG has constituted a personnel and compensation committee, an ad-hoc-committee, a strategy committee and a technology committee. Members of the supervisory board elected by the employees may serve on any committee established by the supervisory board.

Independence requirements

The NYSE corporate governance standards contain certain independence requirements for the members of the board of directors and certain committees of the board. These requirements are closely linked with the specific risks of the composition of the board of directors as single executive body of U.S. companies. The dual board system with its strict separation of management board and supervisory board creates a different system of checks and balances and cannot be directly compared with the one board system. German law has its own rules applicable to supervisory board members addressing certain aspects of independence. In addition to prohibiting members of the management board from simultaneously serving on the supervisory board, members of the supervisory board shall act in the best interest of the company and may not serve other interest while performing its functions as a supervisory member. Any service, consulting or similar agreements between the company and any of its supervisory board members must be approved by the supervisory board.

In February 2002, a German government commission promulgated a Corporate Governance Code, last update in June 2005, containing additional corporate governance rules applicable to German stock corporations. While these rules are not legally binding, companies failing to comply with the Code’s recommendations must disclose publicly how their practices differ from those recommended by the Code. Some of the Code’s recommendations are also directed at ensuring independence of supervisory board members. Specifically, the Corporate Governance Code recommends that the supervisory board should take into account potential conflicts of interest when

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nominating candidates for election to the supervisory board. Similarly, if a material conflict of interest arises during the term of a member of the supervisory board, the Corporate Governance Code recommends that the term of that member be terminated. The Corporate Governance Code further recommends that at any given time not more than two former members of the management board should serve on the supervisory board. For nominations for the election of members of the Supervisory Board, care shall be taken that the Supervisory Board, at all times, is composed of members who have the required knowledge, abilities and expert experience to properly complete their tasks. However, neither German law nor the Corporate Governance Code require an affirmative independence determination, meaning that the supervisory board need not make affirmative findings whether the members of the supervisory board or the audit committee are independent.

Matters Regarding the Powers of Directors

Under German law, the members of the Supervisory Board and of the Board of Management of a stock corporation, such as SGL, have a duty of loyalty and care toward the company itself. They must act in the best interest of the company, its employees and, to a certain extent, the general public, and must exercise the standard of care expected from a prudent and diligent businessman in their actions. If an action of a member of the Supervisory Board or the Board of Management is challenged, such member bears the burden of proving compliance with the applicable standard of care. Board members who violate their duties may be held jointly and severally liable for any damages, unless their actions were approved by the shareholders’ meeting.

A member of either the Supervisory Board or the Board of Management may not participate in the adoption of any resolution that involves a transaction or settlement of a dispute between the company and the member, nor may a board member who is also a shareholder vote his or her Shares on any matter that concerns ratification of his or her own acts or the release of his or her obligations. The compensation of the Board of Management is set by the Personnel Committee of the Supervisory Board and the compensation of the Supervisory Board is set in SGL’s Articles of Association as determined by the shareholders. Therefore, no member of any board may participate in the adoption of a resolution affecting his or her own compensation. Pursuant to our corporate governance guidelines we have not granted and do not intend to grant loans to any member of the Supervisory Board or the Board of Management.

Pursuant to Article 10 of the Articles of Association of SGL, the Board of Management must have the approval of the Supervisory Board in order to enter into the following transactions if they exceed SGL’s ordinary course of business:

  acquisition, disposal or encumbrance of real estate, rights equivalent to real property and rights to real estate;
 
  commencement of new or discontinuance of existing lines of production or business;
 
  issuing of debt and long-term borrowing;
 
  acceptance of guarantees, sureties and similar liabilities;
 
  granting loans and other credits;
 
  opening and closing branch offices; or
 
  purchasing or disposing of interests in other companies.

The Articles of Association of SGL do not specify age limits at which the members of the Supervisory Board or Board of Management of SGL must resign their office. However, it is customary for the service contracts between SGL and the members of its Board of Management to provide for retirement at age 65. Neither the members of the Supervisory Board nor those of the Board of Management are required to own Shares in order to hold their offices. For further discussion of the Supervisory Board and Board of Management of SGL, see Item 6, “Directors, Senior Management and Employees”.

Matters Regarding the Rights Attaching to Shares

The capital stock of SGL consists of the Shares, which are ordinary bearer shares without par value (Stückaktien). The Shares grant each shareholder an equal right to receive dividends and participate in any surplus in the event of liquidation in proportion to his or her shareholding.

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Pursuant to German law, dividends may only be paid out of distributable profits as they are shown in the German statutory annual financial statements of SGL, and the decision to pay dividends is made by the annual shareholders’ meeting. If a valid resolution to pay out dividends has been made, a shareholder’s right to make a claim to receive such dividends would generally be time barred after expiration of the applicable period of limitation. Each Share carries one vote, and gives its owner the right to attend, pose questions and speak at the shareholders’ meeting, as well as to file a judicial challenge to any resolution adopted. Cumulative voting is not permitted. Although staggered terms are not explicitly provided for in German law and are not foreseen by SGL’s Articles of Association, it would be possible to create such terms.

The Shares grant each shareholder a preemptive right to subscribe, in proportion to his or her shareholding, to any new issues of Shares. However, pursuant to German law, such preemptive rights may be excluded for individual issues of shares (including in connection with conditional and authorized capital) by a vote of 75% of the share capital in attendance at a shareholders’ meeting. SGL has excluded preemptive rights on certain new issues of Shares in connection with its equity-based compensation plans. See “Item 6 Directors, Senior Management and Employees Management Incentive Plans”.

German stock corporations may, in certain circumstances, repurchase their own shares. The German Stock Corporation Act generally limits share repurchases to 10% of our share capital. The Articles of Association of SGL do not prohibit such repurchases. The annual general meeting decided in April 2005 to allow SGL to repurchase up to 10% of the stock available at that time. The shares of a German stock corporation are generally non-assessable, and no provision has been made in the Articles of Association of SGL for further capital calls. Neither German law nor SGL’s Articles of Association contain any provision discriminating against any existing or prospective holder of Shares as a result of such shareholder owning a substantial number of Shares.

Changes to the Rights of Shareholders

In principle, all changes to the rights of shareholders require an amendment of the Articles of Association by a resolution of the majority of the share capital in attendance at the relevant shareholders’ meeting. In addition, changes to most rights attaching to shares require the explicit consent of all those shareholders who are negatively affected by the change. There are also certain shareholder rights, such as the right to attend a shareholders’ meeting, that may not be changed under German law, even with the shareholder’s consent. SGL’s Articles of Association do not provide for any conditions that extend beyond the requirements of law.

Convening and Participating in Shareholders’ Meetings

Pursuant to German law, the Supervisory Board and the Board of Management may call a shareholders’ meeting. In addition, shareholders who together own at least 5% of the outstanding Shares may request the Board of Management to call a shareholders’ meeting. The call to meeting must be published in the electronic federal gazette at least one month before the meeting, and must contain the items of the agenda to be addressed at the meeting. There is no minimum quorum requirement for shareholder meetings.

As provided in the Act on Corporate Integrity and the Modernization of the Right of Avoidance (Gesetz zur Unternehmensintegrita¨ t und Modernisierung des Anfechtungsrechts [UMAG]) which has entered into force as of November 1, 2005, and according to the amended Articles of Association of SGL shareholders intending to attend the Annual General Meeting or to exercise their right to vote shall register prior to the meeting. Shareholders are required to prove their right for attending the Annual General Meeting. A document in text form issued by the deposit bank or other financial institution and identifying them as the owners of a certain number of shares will suffice. This document shall be in German or in English, and shall reach the Company no later than on day seven (7) before the Meeting. In the event that share certificates are not deposited with a bank or other financial institution, for attending the Annual General Meeting the shareholders must, in order to attend and vote at a shareholders’ meeting, deposit their Shares at a designated location at least seven days before the shareholders’ meeting and keep them deposited until after the close of the meeting.

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Limitations on Rights to Own Shares

No limitations, in particular no limitations on ownership by non-residents, exist on the rights to own or to vote the Shares of SGL.

Liquidation Rights

In accordance with the German Stock Corporation Act, if we were liquidated, any liquidation proceeds remaining after all our liabilities have been paid off would be distributed among our shareholders in proportion to the number of Shares they hold.

Change of Control

The Articles of Association of SGL contain no provision that would have an effect of delaying, deferring or preventing a change in control of SGL in the context of a merger, acquisition or corporate restructuring. See also ITEM 6 “Change in Control” for an agreement with certain senior managers.

Disclosure of Shareholdings

The Articles of Association of SGL do not contain any provision requiring the disclosure of share ownership in SGL. However, under the German Securities Trading Act, holders of voting securities of a German corporation listed on a stock exchange within the European Union must notify SGL of the level of their holding whenever such holding reaches, exceeds or falls below certain thresholds, which are currently set at 5%, 10%, 25%, 50% and 75% of a company’s outstanding voting rights. See Item 7, “Major Shareholders and Related Party Transaction – Major Shareholders” If a shareholder fails to notify the company or the Federal Supervisory Authority for Securities Trading as required, he or she cannot exercise any rights associated with the Shares for as long as the default continues.

The German Securities Trading Act also contains rules designed to ensure the attribution of shares to the person who has effective control over the exercise of the voting rights attached to those shares.

In addition, on November 30, 2001, the German legislature enacted into law certain amendments to the German Securities Trading Act, effective January 1, 2002, that extend these reporting requirements to holders of the voting securities of German corporations admitted to trading in an organized market (Organisierter Markt) of a stock exchange within the European Union or the European Economic Area. The amendments also require the holders of 30% or more of the outstanding voting rights of a covered security to report such holdings immediately upon, or at the latest within seven days of, acquiring such rights.

Material Contracts

The following is a summary of the material terms of certain financing arrangements to which we are or will be a party. The following summaries are not complete and are subject to the full text of the documents as attached in Exhibit 2, 3 and 4 to the Annual Report of 2003.

The Senior Facilities

On September 1, 2005 we replaced our U.S. Senior Facility and amended the Term Facility and revolving credit agreement dated February 3, 2004 by adding an additional USD Tranche (collectively referred to as the “Senior Facilities”) ..

German Senior Facility

The German Senior Facility was signed on February 3, 2004 and amended on September 1, 2005 , with the Company and certain of its subsidiaries party thereto (initially including SGL CARBON S.p.A. (Italy), SGL CARBON S.A. (Spain) and SGL CARBON LLC (USA)), as the original borrowers, certain subsidiaries of SGL (including all of the Subsidiary Guarantors), as guarantors, Bayerische Landesbank, Credit Suisse First Boston International, Deutsche Bank AG, and Dresdner Kleinwort Wasserstein, as mandated lead arrangers, and certain other financial institutions party thereto, as the original lenders, Deutsche Bank Luxembourg S.A., as facility agent and security agent, and Credit Suisse First Boston International, as documentation agent.

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The German Senior Facility provides for senior term loans consisting of a maximum aggregate amount of €195.2 million, consisting of one €9.6 million facility, known as Term Loan A, one €128.3 million letter of credit facility, known as Term Loan B, one €15.3 million facility, known as Term Loan C, a multicurrency revolving credit facility of €42.0 million known as the Revolving Facility and an additional USD 80.0 million facility, know as Term Loan D. The German Senior Facility is governed by German law.

Interest rates and fees

Advances under Term Loan A, the Term Loan B and the Revolving Facility bear interest for each interest period at a rate per annum equal to EURIBOR or, in relation to any loan made in U.S. Dollars, LIBOR, plus mandatory costs to compensate lenders for the costs of compliance with regulatory requirements, if applicable, and a variable margin. The initial interest margin for Term Loan A, Term Loan B and the Revolving Facility is 2.75% and for Term Loan D is 3.0%.

The margin on Term Loan A, Term Loan B, Term Loan D and the Revolving Facility are subject to a margin ratchet. The margin will be adjusted downwards at specified increments to reflect any changes in the ratio of net debt to consolidated EBITDA as determined on the basis of quarterly reports for the previous four quarters, to a minimum margin of 1.25% per annum, except for Term Loan D where the minimum is 1.5% per annum.

In addition, during any period of default under the German Senior Facility, the margin on Term Loans A, B, D and the Revolving Facility will be 1.25% above the otherwise applicable margin until either the default is cured or the lenders waive the enforcement of their rights arising from this default.

Advances under Term Loan C bear interest at a rate per annum equal to 7.36%.

We paid customary fees to the lenders under the German Senior Facility for making the term loans available under the German Senior Facility.

Security

In order to secure claims under the German Senior Facility, the Company and various subsidiaries have granted a number of security interests for the benefit of the lenders and the other secured parties, including:

  pledges of shares held by the Company in SGL CARBON Beteiligung GmbH, SGL CARBON GmbH, SGL TECHNOLOGIES GmbH, SGL Carbon LLC; and by SGL TECHNOLOGIES GmbH in SGL BRAKES GmbH;
 
  pledges of bank accounts held by SGL CARBON Aktiengesellschaft, SGL CARBON GmbH, SGL Carbon LLC, SGL CARBON Beteiligung GmbH, SGL TECHNOLOGIES GmbH, and SGL BRAKES GmbH;
 
  security assignments of accounts receivable by SGL CARBON Aktiengesellschaft, SGL CARBON GmbH, SGL Carbon LLC, SGL CARBON Beteiligung GmbH, SGL TECHNOLOGIES GmbH, and SGL BRAKES GmbH;
 
  security transfers of movable fixed assets and inventory held by SGL CARBON GmbH, SGL Carbon LLC, SGL TECHNOLOGIES GmbH and SGL BRAKES GmbH;
 
  security assignments of intellectual property rights by SGL CARBON Aktiengesellschaft, SGL CARBON GmbH, SGL Carbon LLC, SGL CARBON Beteiligung GmbH, SGL TECHNOLOGIES GmbH and SGL BRAKES GmbH and
 
  mortgages over real property belonging to SGL CARBON Aktiengesellschaft and SGL Carbon LLC.
 
In addition, various security interests were be granted in those jurisdictions in which our material subsidiaries are located, including Austria, Canada, England, France, Italy, Poland, Scotland, and Spain.

SGL ACOTEC GmbH and KCH Beteiligungs GmbH were released from granting securities effective January 6, 2005 due to the sale of the Surface Technology and Plastics Process Technology operations as part of the Corrosion Protection Business (CP).

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On December 31, 2005 the funds in the bank accounts to fund potential antitrust fines and to fund the repurchase of the 3.5% convertible bond including accrued interest thereon were fully used to serve the described obligations.

Furthermore, the German Senior Facility provides that all subsidiaries that contribute at least 5% of the EBITDA or the sales revenues of the SGL Group shall become party to the agreement, and that they shall give guarantees and grant security over their assets, and that their shares shall be pledged.

Use of proceeds and maturity

Term Loan A was used to fund, in part, the Transactions. The amortization schedule for Term Loan A provides for semi-annual payments and a final maturity on December 30, 2008.

Term Loan B is a letter of credit facility that shall serve to refinance earlier letters of credit granted in favour of the European Union in connection with fines imposed by EU competition authorities. On September 7, 2005 the Company cancelled €10.6 million of the amended Term Loan B facility of €128.3 million. These letters of credit may be issued in a total amount of €117.7 million. They are to be returned to the lending banks if the EU waives its requirement that we provide the letters of credit. The Term Loan B terminates on December 30, 2008. To the extent the letters of credit have not been returned at that point, they shall be secured with a corresponding cash account. If the EU reduces the fines, any existing letter of credit will be replaced by another in the reduced amount.

Term Loan C serves to refinance a loan granted by KfW (Kreditanstalt für Wiederaufbau). The amortization schedule for Term Loan C provides for semi-annual repayments and a final maturity on September 30, 2007.

The Revolving Facility may be drawn at any time up to one month before December 31, 2008, the termination date for the Revolving Facility, for general corporate purposes except payment of antitrust fines, to make or declare any dividend or repay capital contributions or any other payment in respect of share capital, or to refinance the convertible bond due 2005 or to repay other financial indebtedness incurred after the signing of the German Senior Facility.

Term Loan D serves to fund the capital requirements in the US and requires a bullet repayment on December 30, 2008.

Voluntary and mandatory prepayment

Except with respect to Term Loan C, we may cancel all remaining commitments and prepay any amounts owed under an available commitment in a minimum amount of €500,000, which represents one integral multiple of €250,000. We may provide cash collateral to reduce the issuing bank’s letter of credit proportion under the letters of credit issued under Term Loan B. We may prepay the whole or any part of Term Loan C in a minimum amount of €5.0 million. We may also cancel any amount owing to any single lender that makes a claim for additional payments relating to increased bank regulatory capital costs or tax gross-ups.

We are required to repay the loans under the German Senior Facility in full or in part in certain circumstances, including:

  the disposal of assets other than in the ordinary course of business or specific exceptions as defined in the German Senior Facility;
 
  the receipt of insurance proceeds in excess of €1.0 million or, when aggregated with the insurance proceeds of the SGL Group from claims made in the immediately preceding twelve months, €7.5 million, to the extent that they are not applied in the towards the replacement, reinstatement, repair, or satisfaction of business interruption losses within six months of receipt;
 
  50% of excess cash flow, to the extent it exceeds €7.5 million as calculated under the provisions of the German Senior Facility, for each financial year, and
 
  100% of the net proceeds from the issuance of any debt securities issuance and 75% of the net proceeds arising from any equity securities issuance.

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Undertakings and restrictive covenants

The German Senior Facility includes a number of undertakings and restrictive covenants typical for credit facilities of this nature, including:

  restrictions on disposals of assets, unless permitted under the German Senior Facility;
 
  restrictions on changes of the financial year;
 
  requirement to maintain and protect intellectual property rights; and
 
  prohibition of acquisitions, mergers, joint ventures or similar transactions, unless permitted under the German Senior Facility.

Above a certain leverage ratio, the German Senior Facility requires the Company, to the extent permissible by German law, to recommend not to make and not to propose to make any dividend, return on capital, repayment of capital contributions or certain other distributions. In addition, in the event the Company distributes a dividend, it will repay to the lenders a part of the principal of the credit in the same amount as the dividend payment within 30 days after payment of the dividend.

Financial covenants

The German Senior Facility provides for a number of financial covenants typical for credit facilities of this nature, pursuant to which SGL has to meet certain conditions regarding net worth, interest cover, leverage ratios and other financial ratios at all times during the term of the German Senior Facility.

Events of default

The German Senior Facility contains provisions typical for credit facilities of this nature, specifying the extent to which certain actions or omissions by us will or can constitute a default under the agreement including breaches of covenants or failure to pay interest or principal on loans under the credit facilities as they become due.

In the event of a default that is not cured or waived by the banks, the agreement provides the lenders with certain remedies that may be exercised at the election of lenders representing a majority of 66 2/3% of the then outstanding principal amount under the facilities. In particular, these remedies include acceleration of all outstanding amounts, cancellation of all remaining commitments and enforcement of security interests that we have granted.

In addition, we will be in default if any new antitrust proceedings are instituted against any member of the SGL Group or if any antitrust fines in an aggregate amount exceeding €2.5 million are assessed against any member of the SGL Group by administrative authorities, or if any existing fines are increased by that amount. Should this default occur, however, the lenders may not immediately accelerate the loans. Rather, the German Senior Facility requires them, before accelerating, to negotiate with us in good faith for up to 30 days with a view to continuing the German Senior Facility.

Intercreditor Agreement
General

To establish the relative rights of certain of the creditors under our financing arrangements, certain members of the SGL Group, including the Issuer, the Company and the Subsidiary Guarantors, entered into an Intercreditor Agreement with the lenders under the Senior Facilities, the senior agent, the senior security agent, the security agent or agents and trustee for the holders of the notes and a trustee for the holders of the convertible bonds, among others. Since the convertible bonds were repaid in full on September 18, 2005, the trustee for the holders of the convertible bonds is no longer party to the Intercreditor Agreement.

Order of priority

The Intercreditor Agreement provides that outstanding debt of members of the SGL Group will have the following priority:

  first, Senior Indebtedness and

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  second, Indebtedness under the Guarantees.

Payments under the Guarantees of the notes and the Funding Loan

Payment by the Guarantors under their Guarantees will be permitted except as set forth under “– Suspension of Payments” below.

Suspension of Payments

Payments under the Guarantees will be subject to suspension as follows:

&nb