UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended December 31, 2002 Commission File Number 33-98522
GREAT LAKES CARBON CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 13-3637043
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
551 Fifth Avenue, Suite 3600, New York, NY 10176
(Address of principal executive office) (Zip Code)
(212) 370-5770
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
10 1/4% Senior Subordinated Notes due 2008
(Title of Class)
Indicate by check mark whether the registrant (i) 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 regis-
trant was required to file such reports), and (ii) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of regulation S-K is not contained herein and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [X]
There is no public market for registrant's common stock.
As of March 26, 2003, the registrant had outstanding 1,000 shares of
its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
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GREAT LAKES CARBON CORPORATION
Annual Report on Form 10-K for the Year Ended December 31, 2002
Table of Contents
Page
PART I
Item 1. Business.........................................................3
Item 2. Properties.......................................................6
Item 3. Legal Proceedings................................................7
Item 4. Submission of Matters to Vote of Security Holders................7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters..............................................7
Item 6. Selected Financial Data..........................................8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations..............................9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.......15
Item 8. Financial Statements and Supplementary Data......................16
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure...........................16
PART III
Item 10. Directors and Executive Officers of the Registrant...............17
Item 11. Executive Compensation...........................................18
Item 12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters..................................21
Item 13. Certain Relationships and Related Transactions...................21
Item 14. Controls and Procedures..........................................22
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K..23
Index to Financial Statements.............................................F-1
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PART I
Item 1. Business
Introduction
Great Lakes Carbon Corporation (the "Company" or "GLC") is the largest
producer of calcined petroleum coke ("CPC") in the world. Anode grade CPC is
the principal raw material used in the production of carbon anodes for use in
aluminum smelting. Anode grade CPC sales represented 82% of the Company's
total 2002 sales. The Company also sells industrial grade CPC for use in the
production of titanium dioxide, as a carbon additive in the manufacture of
steel and foundry products and for use in other specialty materials and
chemicals markets. The Company produces CPC from raw petroleum coke ("RPC"), a
by-product of petroleum refining, utilizing a high-temperature, rotary-kiln
process developed by the Company in the 1930's.
On May 22, 1998 Great Lakes Acquisition Corp. ("GLAC")., a corporation
formed by American Industrial Capital Fund II, L.P. ("AIP"), a private
investment fund, for the transaction acquired all of the issued and outstanding
capital stock of the Company .
On March 27, 2002, the Company purchased a calcining facility located
in Baton Rouge, Louisiana (the "Baton Rouge Plant") from Alcoa, Inc. ("Alcoa")
for $31.7 million, net of a purchase price adjustment. The transaction was
financed by two $10 million promissory notes bearing interest at 5% per annum
payable to Alcoa in November 2002 and May 2003 and incremental term loan
borrowings under the Company's existing syndicated senior secured credit
facility of $12 million.
The addition of the Baton Rouge Plant, which can produce up to 700,000
tons per year of CPC, increased the Company's total operating capacity to 2.3
million tons from 1.6 million tons. The Company also operates plant sites
in Port Arthur, Texas; Enid, Oklahoma; and through a wholly-owned subsidiary,
Copetro S. A. ("Copetro"), at the port of La Plata, Argentina.
Description of Principal Markets
Anode Grade CPC
Carbon anodes, which are manufactured utilizing anode grade CPC, are
used by every primary aluminum smelter in the world as a key component in
aluminum smelting pot lines. Carbon anodes act as conductors of electricity
and as a source of carbon in the electrolytic cell that reduces alumina into
aluminum metal. In this electrochemical aluminum smelting process, the carbon
anodes, and hence the CPC, are consumed. Carbon anode manufacturers,
predominantly captive operations of aluminum smelting companies, purchase anode
grade CPC, mix it with pitch binders, press the mixture into blocks and then
bake the mixture to form a finished, hardened carbon anode. The quality of the
anode grade CPC, in terms of both its physical and chemical properties, has an
effect on carbon anode life, which is an important economic factor in aluminum
production, and on the amount of impurities in the finished aluminum metal.
Anode grade CPC is approximately 97% pure carbon; however, anode grade CPC does
vary based on the content of sulfur and other trace elements in the finished
product as well as on its physical properties. GLC produces a full range of
anode grade CPC, which is typically sold in bulk shipments, tailored to the
specific needs of its aluminum company customers.
Worldwide demand for anode grade CPC is directly tied to the global
production of primary aluminum. After six years of consecutive growth,
aluminum production decreased in 2001 due to shutdowns of smelting capacity,
principally in the Pacific Northwest, in response to power costs and the world
economic slowdown. In 2002, aluminum production returned to a growth mode,
registering an increase of 3.3%. Despite the cutbacks in 2001, the Company has
operated at near effective capacity during the periods in question.
While there are at present no viable substitutes for CPC in carbon
anodes, in June 2000, Alcoa confirmed a financial analyst report claiming that
it was working on the development of an inert anode, which would eliminate the
use of CPC in aluminum smelting. Alcoa stated that significant operating and
capital investment savings could be obtained with inert anodes together with
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certain environmental benefits in the form of the reduction and elimination of
certain emissions.
Inert anode development has been pursued for decades by several
organizations, including the U.S. Department of Energy ("DOE"). Although
various compositions of inert anodes have been explored, as late as 1999 the
DOE concluded that no fully acceptable inert materials had yet been revealed.
In subsequent statements, Alcoa has indicated that even though their research
to date has been encouraging, there was no assurance that the inert anode they
are developing would be successful in commercial operation.
While the research being conducted by Alcoa (and possibly others) is to
a large extent confidential, the Company believes that there are many technical
barriers to be overcome before this alternative technology becomes commercially
viable.
Industrial Grade CPC
CPC is also used in a number of other (non-aluminum) applications,
which the Company refers to as industrial grade CPC. These include sales of
CPC for use in the production of titanium dioxide, as a recarburizer, i.e.,
carbon additive, in the manufacture of steel and foundry products and for use
in other specialty materials and chemicals markets. Titanium dioxide is a
widely used brilliant white pigment, the primary applications for which are in
paints, plastics and paper. Industrial grade CPC is used as an energy and
carbon source in the production of titanium dioxide from titanium-bearing ores
using the chloride process and is also used as a recarburizer in the production
of steel and foundry products and as a carbon source in certain chemical
processes.
Industrial grade CPC is generally similar to anode grade CPC in its
physical characteristics, but typically has higher chemical impurities. In
addition, industrial grade CPC is usually further processed to meet sizing
specifications and packaged for sale to end users in smaller quantities than
is anode grade CPC.
Raw Materials and Suppliers
CPC is sold in a world market. However, calcining and transportation
economics dictate that producers of CPC are most efficiently located near
petroleum refining operations, which are the source of RPC, the raw material
used to produce CPC. RPC is a by-product of the oil refining process,
constituting the solid fraction remaining after the refinery has essentially
removed all of the liquid petroleum products from the crude oil. Many, but
not all, oil refineries produce RPC. Sales of RPC do not constitute a material
portion of oil refiners' revenues. Because a substantial portion of western
world petroleum refining capacity is based domestically, the United States has
a majority of western world CPC production capacity. CPC quality, which is
extremely important to aluminum smelters, is highly dependent upon the quality
of the RPC utilized in the calcining process. The RPC produced by different
oil refineries covers a range of physical and chemical properties depending
upon both the types of crude oils being refined and the specific process being
employed by the refinery. Only a portion of the RPC produced by the world's
oil refineries is of suitable quality for producing anode grade or industrial
grade CPC, with anode grade requirements being generally more stringent than
industrial grade requirements. If the RPC produced by a refinery is not of
sufficient quality for calcining, it is typically sold for its fuel value at a
substantially lower price.
The Company purchases a range of RPC from a number of domestic and
international oil refineries with the objective of blending these cokes to meet
the specific quality requirements of its customers at the lowest raw material
cost. RPC is typically purchased by the Company under contracts with a term of
one or more years, although the Company does make some spot purchases. In
2002, the Company purchased approximately 56.5% of its RPC requirements from
four petroleum refiners.
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Manufacturing Process
The calcining process essentially drives off moisture, impurities and
volatile matter from the RPC at high temperatures, to produce a purer form of
carbon in the resulting CPC. Both anode and industrial grade CPC are
manufactured by the Company to specific customer specifications. The Company
purchases RPC from a number of sources and has the capability to blend these
raw cokes specifically to meet a customer's required chemical and physical
properties. After blending, the raw coke is fed into the higher end of a
rotating kiln, which is up to 12 feet in diameter and up to 220 feet long. The
coke in the kiln is tumbled by rotation and moves down-kiln counter current to
the heat produced by burning natural gas or oil at the lower, firing end of the
kiln. Kiln temperatures range from 2200 to 2500 degrees Fahrenheit.
Typically, coke is retained in the kiln for approximately one hour, with the
resident time and heating rates critical to the production of the proper
quality CPC. The moisture, impurities and volatile matter in the coke are
driven off in the kiln. As the coke is discharged from the kiln, it drops
into a cooling chamber, where it is quenched with water, treated with dedusting
agents and carried by conveyor to silos to be kept in covered storage until
shipped to customers by truck, rail, barge or ocean-going vessel. In the case
of certain industrial grade products, the CPC is also crushed and screened to
meet proper sizing requirements.
Marketing
The Company sells its CPC to end users through its direct sales staff
and exclusive sales representatives. Substantially all sales are shipped
directly to end-users. GLC's domestic sales activity is handled by the
Company's direct sales staff. Internationally, GLC's direct sales staff is
supplemented by exclusive sales representatives.
The Company typically sells anode grade CPC under contracts with terms
of one or more years, although a small percentage is sold on a spot basis. CPC
is shipped by the Company in bulk quantities to its customers via truck, rail,
barge or ocean-going vessel. Industrial grade CPC is generally sold to
customers under annual contracts or on a purchase order basis and is shipped in
smaller quantities in bulk or packaged to meet customer requirements.
In 2002, approximately 39% of the Company's net sales were to U.S.-
based customers and approximately 61% were to customers in international
markets. Approximately 54.2% of the Company's 2002 net sales were made to four
customers with Alcoa accounting for 29.2% of the total.
Competition
The Company is the largest producer of CPC in the world and competes
with domestic and foreign calciners in a worldwide market with respect to both
anode and industrial grade CPC sales. Marketing of CPC to both anode and
industrial grade customers is based primarily on price and quality. Worldwide
demand for anode grade CPC is tied directly to the global production of primary
aluminum. Sales of industrial grade CPC are dependent on the particular
demands of the titanium dioxide, steel and foundry, and certain chemical
markets. GLC is one of four major domestic calciners of anode grade CPC. Two
calciners, GLC and Calciner Industries, Inc., are independent. The other
calciners are BP Amoco (formerly Atlantic Richfield Co. or Arco), whose
petroleum refining operations provide its raw material supply and Venture Coke
Company (Venco), which is 50% owned by Conoco, Inc.
Employees
As of December 31, 2002, the Company employed 315 persons. The Company
is a party to collective bargaining agreements at three of its four facilities,
covering approximately two-fifths of its employees. A collective bargaining
agreement with the International Association of Machinists and Aerospace
Workers, covering hourly employees at the Enid, Oklahoma facility, expires on
March 1, 2004. A new collective bargaining agreement with the United
Steelworkers of America, that was ratified on October 27, 2002 and covers
hourly employees at the Baton Rouge, Louisiana facility, expires on September
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30, 2005. Certain employees at the La Plata, Argentina facility of Copetro are
covered by an annual labor contract which basic terms are governed by Argentine
federal labor legislation. The Port Arthur plant is operated with a non-union
workforce.
Patents, Trademarks
None of the Company's business is dependent upon any patents or other
intellectual property.
Environmental Matters
The Company's facilities and operations are subject to various federal,
state and local and foreign governmental laws and regulations with respect to
the protection of the environment, including regulations relating to air and
water quality. The Company believes that it possesses all of the permits
required for the conduct of its operations and that it is currently in material
compliance with all relevant environmental regulations. The Company spent
approximately $1.5 million on capital expenditures related to pollution control
facilities in 2002 and anticipates spending approximately $1.6 million and $1.8
million in 2003 and 2004, respectively.
The Clean Air Act was amended in 1990. While the Company believes that
its facilities meet current regulatory standards applicable to air emissions,
some of its facilities may be required to comply with new standards for air
emissions to be adopted by the United States Environmental Protection Agency
and state environmental agencies over the next several years. At this time,
the Company cannot estimate when new standards will be imposed or what control
technologies or changes in processes the Company may be required to install or
undertake. Based on information currently available to it, the Company
believes that attaining compliance with such regulations will not have a
material adverse effect on the financial position, results of operations or
cash flows of the Company.
Item 2. Properties
The Port Arthur facility has four kilns that have the capacity to
produce 700,000 tons per year of CPC. Port Arthur is also the site of the
Company's primary laboratory and testing facility. Port Arthur has substantial
CPC storage capacity and the capability to receive and ship product by truck,
rail, barge or ocean-going vessel. The 115-acre Port Arthur property is leased
by the Company under a long-term lease, which was originally executed in the
1930's and the most recent renewal of which expires at the start of 2010.
Effective October 20, 2000, an agreement covering the receipt of revenue from
the delivery of flue gas to a waste heat recovery facility owned and operated
by a third party at the Company's Port Arthur, Texas plant site terminated.
The Company subsequently purchased the heat recovery assets at scrap value
and while it maintains the option of restarting the facility, should another
interested third party be found, there are no plans to do so at the present.
The revenue realized by the Company in connection with this activity, which was
treated as a reduction to cost of goods sold, was $2.2 million in 2000.
The Enid facility has three kilns that have the capacity to produce
500,000 tons per year of CPC. The Enid plant has the capability to receive and
ship material by truck or rail and is located on 320 acres of property that is
owned by the Company.
The Baton Rouge facility has four kilns that have the capacity to
produce 700,000 tons per year of CPC. Situated on 55 acres of owned property,
the facility has the capability to receive and ship material by truck or rail
and has ready access to barge or ocean-going vessel transportation.
The La Plata, Argentina facility operated by Copetro has two kilns with
the capacity to produce 440,000 tons per year of CPC. The plant is located on
30 acres of leased land at the port of La Plata. The plant has the capability
to receive RPC by rail or truck and to ship CPC by truck or ocean-going vessel.
The Company's principal business office is located at 4 Greenspoint
Plaza, Suite 2200, 16945 Northchase Drive, Houston, Texas 77060 under a lease
expiring in January 2006.
The Company's executive office is located in leased space at 551 Fifth
Avenue, Suite 3600, New York, New York 10176.
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Item 3. Legal Proceedings
The Company is a party to legal proceedings that are in various stages
of resolution. Management, after discussion with legal counsel, is of the
opinion that the ultimate resolution of these matters will not have a material
adverse effect on the results of operations or financial position of the
Company.
Item 4. Submission of Matters to Vote of Security Holders
No matters were submitted for vote of security holders of the Company
during the three months ended December 31, 2002.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
(a) There is no established market in which the Company's Common Stock,
par value $0.01 per share (the "Common Stock"), is publicly traded, because all
of such Common Stock is privately held.
(b) As of the date of this annual report, GLAC is the holder of all of
the Company's common stock.
(c) During 2002, no cash dividends were declared by the Board of
Directors. Any future determination as to the payment of dividends will depend
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
The Company's debt instruments limit the conditions under which the Company may
pay a cash dividend on its outstanding Common Stock.
(d) The information required by Item 201(d) of Regulation S-K
(Securities Authorized for Issuance Under Equity Compensation Plans) is
included in Item 12 of this report.
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Item 6. Selected Financial Data
The following table sets forth selected financial data of the Company
from May 22, 1998 to December 31, 1998 and for the period then ended and as of
and for the years ended December 31, 1999, 2000, 2001 and 2002 and for the
predecessor company from January 1, 1998 to May 21, 1998 and for the period
then ended. The financial data set forth below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" in Item 7 and the consolidated financial statements of the
Company and the related notes thereto included elsewhere herein.
Period Period
Jan.1 May 22
to to
May 21 Dec.31 Year Ended December 31,
1998 1998 1999 2000 2001 2002
--------- --------- ---------- --------- --------- ---------
Statement of
operations data
- ------------------
Net sales $ 92,928 $ 149,733 $247,998 $263,601 $270,554 $307,567
Gross Profit 23,681 39,255 62,751 60,883 54,588 54,615
Operating income 10,611 27,974 42,500 41,031 35,895 42,812
Other expense 2,248 19,505 28,423 27,114 28,255 24,375
Income before
income tax and
extraordinary item 8,363 8,469 14,077 13,917 7,640 18,437
Income tax expense 2,839 5,714 6,387 6,473 2,988 9,494
Extraordinary (loss)
gain, net of tax (7,113) - 322 3,804 3,717 -
--------- --------- ---------- --------- --------- ---------
Net income (loss) $ (1,589) $ 2,755 $ 8,012 $ 11,248 $ 8,369 $ 8,943
========= ========= ========== ========= ========= =========
Adjusted EBITDA(1)
- -------------------
Operating income $ 10,611 $ 27,974 $ 42,500 $ 41,031 $ 35,895 $ 42,812
Depreciation and
amortization 3,443 12,013 20,410 21,708 21,973 18,851
AIP fees & expense - 1,185 2,305 2,568 2,179 2,032
Prior ownership:
Fees and expenses 8,831 22 - - - -
Other related
agreements 318 - - - - -
--------- --------- ---------- --------- --------- ---------
Total adjusted
EBITDA $ 23,203 $ 41,194 $ 65,215 $ 65,307 $ 60,047 $ 63,695
========= ========= ========== ========= ========= =========
Balance sheet data
- -------------------
Total assets $182,342 $ 490,753 $478,760 $473,573 $482,147 $523,332
Total long-term
obligations $ 31,206 $ 353,427 $335,883 $311,445 $308,111 $329,220
Statement of cash flow data
- ---------------------------
Cash provided (used) by
Operating
Activities...... $ 21,844 $ 10,681 $ 20,337 $ 30,589 $ 20,930 $ 50,631
Investing
Activities...... $ (9,058) $(285,949) $ (8,284) $ (8,875) $(11,333) $(18,113)
Financing
Activities...... $ 4,767 $ 272,789 $(15,354) $(17,577) $ (8,650) $(21,261)
(1) Adjusted EBITDA represents operating income before depreciation,
amortization, fees and expenses payable to the Company's prior ownership group
under agreements which where terminated at the Company's acquisition by AIP on
May 22, 1998 and on-going AIP fees and expenses. Adjusted EBITDA should not be
considered a substitute for net income, cash flow from operating activities or
other cash flow statement data prepared in accordance with generally accepted
accounting principles or as an alternative to net income as an indicator of
operating performance or cash flows as a measure of liquidity. Adjusted EBITDA
is presented here only to provide additional information with respect to the
Company's ability to satisfy debt service. While Adjusted EBITDA is frequently
used by management as a measure of operations and the ability to meet debt
service requirements, it is not necessarily comparable to other similarly
titled captions of other companies due to potential inconsistencies in the
method of calculation.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
General
This Form 10-K contains certain forward-looking statements, including,
without limitation, statements concerning the Company's future financial
position, business strategy, budgets, projected costs and plans and objectives
of management for future operations. These forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements generally can be identified by
the use of forward-looking terminology such as may, will, expect, intend,
estimate, anticipate, believe, should, plans or continue, or the negative
thereof or variations thereon or similar terminology. Although the Company
believes that the expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such expectations will prove to have
been correct. These forward-looking statements are subject to a number of risks
and uncertainties, including, the factors discussed in the Company's filings
with the Securities and Exchange Commission. Actual results could differ
materially from these forward-looking statements.
The Company is the world's largest producer of CPC. The Company
produces anode grade CPC, which is the principal raw material used in the
production of carbon anodes used in primary aluminum production, and industrial
grade CPC, which is used in a variety of specialty metals and materials
applications. CPC is produced from RPC utilizing a high temperature, rotary
kiln process. RPC is a by-product of petroleum refining process and
constitutes the largest single component of the Company's cost of goods sold.
The Company's principal source of revenues and profits are sales of anode grade
CPC to the aluminum industry. Historically, the Company's profitability has
been primarily a function of its CPC sales volumes, CPC pricing and the cost of
RPC.
Critical Accounting Policies
The Company's significant accounting policies are more fully described
in Note 1 to the consolidated financial statements.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts and disclosures reported in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
The Company recognizes revenue pursuant to sales contracts or purchase
orders when products are shipped, at which point title and risk of loss
typically passes to the customer. Sales are reported net of sales discounts,
returns and allowances.
Foreign currency financial statements have been translated into U.S.
dollars in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency
Translation". SFAS No. 52, as applied to foreign entity financial statements
where the U.S. dollar is determined to be the functional currency, as in the
Company's case, requires that monetary assets and liabilities denominated in
the local or other foreign currency be remeasured to the U.S. dollars at the
exchange rate in affect on the report date. Exchange rate gains and losses
from remeasurement are recognized currently in results.
Inventories are stated at the lower of cost (principally average cost
method) or market.
Long-lived assets, including goodwill, are periodically reviewed for
impairment. Impairment losses are recognized if expected future undiscounted
cash flows of the related assets are less than their carrying values.
The valuation of net periodic pension costs is calculated using
actuarial assumptions, including discount rates to reflect the time value of
money, rates of increase in future compensation levels, demographic assumptions
to determine the probability and timing of benefit payments, and the long-term
rate of return on plan assets. At December 31, 2002, the assumptions for the
discount rate and long-term rate of return on plan assets used to calculate
9 of 51
the Company's pension expense were 6.75% and 9.0%, respectively. The selection
of assumptions is based on historical trends and known economic and market
conditions at the time of valuation and can have a significant impact on
pension expense. For example, a decrease of 1% to the discount rate or to the
long-term rate of return on plan assets, would impact pension expense by
approximately $114,000 or $132,000, respectively. The recognition of pension
assets or liabilities is subject to pension asset performance. At December 31,
2002, the Company increased its pension obligation by $5.3 million, with a
corresponding increase (after provision for deferred tax benefit) in
accumulated other comprehensive net losses. This increase represented a minimum
pension liability adjustment that was required to recognize a liability equal
to the excess of accumulated benefit obligations over the market value of the
pension assets due to continued decline in market performance. The Company's
policy is to make pension contributions for at least the minimum annual amount
required by law, which for calendar 2003 will be $764,000.
The valuation of net periodic postretirement benefit cost is likewise
calculated using actuarial assumptions, including discount rates to reflect
the time value of money, rates of increase in future compensation levels,
demographic assumptions to determine the probability and timing of benefit
payments, and the trend in the rate of increase of future health care costs. At
December 31, 2002, the discount rate assumption used was 6.75% and the
assumption of health care cost trend was 12.5% grading down to 5% by 2008.
These assumptions can have a significant impact on the expense recorded. To
illustrate, a decrease of 1% to the discount rate or an increase of 1% to the
assumed health care cost trend for all years would increase postretirement
expense by approximately $174,000 or $176,000, respectively. The Company does
not fund these benefits, but rather pays these claims, whether as part of its
annual insurance program or as direct reimbursements, as they arise. The total
benefits paid in 2002 were approximately $170,000.
Results of Operations
Year Ended December 31, 2002 Versus Year Ended December 31, 2001
The Company's net sales for the year ended December 31, 2002 increased
13.7% to $307.6 million from $270.6 million in the comparable 2001 period. Net
sales of anode grade CPC increased 30.1% to $253.1 million, net sales of
industrial grade CPC decreased 17.4% to $44.6 million and net sales of RPC
decreased 55.4% to $8.8 million.
The increase in anode grade CPC net sales was primarily the result of
a 38.3% increase in sales volume to 1,654,424 tons partially offset by a 5.9%
decrease in average per ton selling prices. The increase in sales volume was
attributable to shipments, beginning April 2002, from the newly purchased Baton
Rouge Plant, which accounted for 88.9% and 103.8% of the increase in sales
volume and net sales, respectively.
The decrease in industrial grade CPC net sales was the result of a
12.4% decrease in sales volume to 308,715 tons coupled with a 5.7% decrease in
average selling prices. Lower shipments to titanium dioxide customers and
reduced prices across most product lines were the main factors contributing to
the decline.
The decrease in RPC net sales was primarily the result of a 31.2%
decrease in sales volume to 164,236 tons and a 35.2% decrease in average per
ton selling prices. Because the Baton Rouge plant is a large consumer of the
RPC product, the quantity available for resale to third parties decreased in
the periods subsequent to the purchase of the plant. Increased internal
consumption is expected to significantly reduce or eliminate future RPC trading
activites.
The Company's gross profit for the year, at $54.6 million, was
virtually unchanged from the amount achieved in 2001. The 13.7% increase in
sales discussed above was outpaced by a 17.1% increase in cost of goods sold.
The increase in cost of goods sold was the result of the higher sales volume
and higher average per ton costs, due mainly to continued tight anode grade RPC
supply. This cost increase was mitigated slightly by a one-time raw material
price adjustment related to the re-establishment on a dollar basis of an
Argentine contract automatically converted to Peso-based pricing when that
currency was devalued at the end of 2001.
10 of 51
Operating income increased 19.3% to $42.8 million from $35.9 million
in 2001. The increase in operating income was due to a 36.9% decrease in
selling, general and administrative expenses and the slight increase in gross
profit discussed above. The decrease in selling, general and administrative
expenses was primarily the result of the elimination of goodwill amortization
expense (in accordance with Financial Accounting Standards Board ("FASB")
Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and
Other Intangible Assets") and lower commission, travel and employee
compensation expenses partially offset by higher insurance costs. Goodwill
amortization expense totaled $4.5 million in 2001.
Income before income taxes and extraordinary item increased 141.3% to
$18.4 million from $7.6 million in 2001. The increase was due to the
improvement in operating income discussed above and lower other expense. The
decrease in other expense was attributable mainly to the absence of a $5.0
million charge related to the settlement of a finders fee claim dating back to
the acquisition of the Company by AIP included in other expense in 2001 and a
gain on the sale of certain lease rights to a storage shed (which had been sub-
let to the buyer since the 1980's) offset in part by increased interest
expense, the imposition of Argentine export duties and reduced Argentine export
tax refunds. The increase in interest expense related to the additional debt
(at higher base rates) incurred in connection with the acquisition of the Baton
Rouge Plant.
The Company's effective tax rate increased to 51.5% in 2002 from 39.1%
in 2001 mainly as a result of the tax effect of foreign currency gains in the
tax provision for foreign operations.
In addition, 2001 included the recognition of an extraordinary gain on
the repurchase of debt of approximately $3,717,000 (net of income tax expense
of $2,073,000) for which there was no comparable item in 2002.
As a result of the factors discussed above, net income for the year
ended December 31, 2002 increased 6.9% to $8.9 million from $8.4 million in
2001.
Adjusted EBITDA for the year increased by 6.1% to $63.7 million from
$60.0 million in 2001 due to the increase in operating income discussed above
offset by a decrease to the add-back adjustment for depreciation/amortization
of $3.1 million (mainly due to the elimination of goodwill amortization as
previously noted).
Year Ended December 31, 2001 Versus Year Ended December 31, 2000
The Company's net sales for the year ended December 31, 2001 increased
2.6% to $270.6 million from $263.6 million in the comparable 2000 period. Net
sales of anode grade CPC increased 0.2% to $194.5 million, net sales of
industrial grade CPC decreased 2.2% to $54.0 million and net sales of RPC
increased 67.8% to $19.8 million.
The increase in anode grade CPC net sales was primarily the result of
a 4.8% increase in average per ton selling prices almost completely offset by a
4.4% decrease in sales volume to 1,196,685 tons. The increase in selling
prices was attributable to market recognition of increased CPC supply costs
discussed below. The decrease in sales volume was primarily a function of
period-to-period scheduling fluctuations.
The decrease in industrial grade CPC net sales was the result of an
8.5% decrease in sales volume to 352,424 tons partially offset by a 6.9%
increase in average selling prices. Volume declines in chemical and recarb
accounts out-paced greater shipments to titanium dioxide customers and higher
prices across most product lines.
The increase in RPC net sales was primarily the result of a 89.4%
increase in the average per ton selling price offset partially by an 11.4%
decrease in sales volume to 238,674 tons. The shipment of higher-priced anode
grade RPC, despite lower total volume levels, was the primary reason for the
change.
The Company's gross profit for the year decreased by 10.3% to $54.6
million from $60.9 million in the prior year. The decrease in gross profit
was due to higher cost of goods sold that was only partially offset by the
increase in sales discussed above. The increase in cost of goods sold was due
mainly to higher average per ton raw material costs which were only partially
offset by the decline in volume. Tight anode grade RPC supply, particularly in
11 of 51
the United States Gulf Coast, was the major factor impacting raw material
costs.
Operating income decreased 12.5% to $35.9 million from $41.0 million in
2000. The decrease in operating income was due to the decrease in gross profit
discussed above offset in part by a 5.8% decrease in selling, general and
administrative expenses. The decrease in selling, general and administrative
expenses was primarily the result of lower sales commissions, management fees
and travel and entertainment expenses.
Income before income taxes and extraordinary item decreased 45.1% to
$7.6 million from $13.9 million in 2000. The decrease was attributable to the
decline in operating income discussed above and a $5.0 million charge related
to the settlement of a finders fee claim dating back to the acquistion of the
Company by AIP included in other expenses offset in part by a $3.3 million
decrease in net interest expense. The effects of lower general interest rates
and continued debt reduction, which more than offset the additional interest
expense incurred in connection with the 10 1/4% Senior Subordinated Notes (the
"Notes") payment-in-kind election, were the most significant factors
contributing to the lower net interest expense.
The Company's effective tax rate decreased to 39.1% from 46.5% in 2000
mainly as a result of the impact of exchange rate movements on the taxes
provided at the Company's foreign operations.
An extraordinary gain on the repurchase of debt of approximately
$3,717,000 (net of income tax expense of $2,073,000) was recognized during 2001
as compared to approximately $3,804,000 (net of income tax expense of
$2,048,000) in 2000.
As a result of the factors discussed above, net income for the year
ended December 31, 2001 decreased 25.6% to $8.4 million from $11.2 million in
2000.
Adjusted EBITDA for the year decreased by 8.1% to $60.0 million from
$65.3 million in 2000 due to the decrease in operating income discussed above
as add-back adjustments for depreciation/amortization and AIP management fee
expenses remained basically unchanged.
Liquidity and Capital Resources
The Company's liquidity requirements are primarily for debt service,
capital expenditures and general working capital needs. The timing of
inventory receipts and product shipments, all of which transactions are
entirely U.S. dollar denominated, can have a substantial impact on the
Company's working capital requirements. Capital investments generally relate
to facility maintenance and projects to improve plant throughput and product
quality.
For purposes of evaluating its cash flow, the Company uses a measure,
which it refers to as adjusted net income to classify the income component of
cash flow from operating activities. Adjusted net income represents net income
before depreciation, amortization, deferred taxes and other non-cash items,
including acrretions of long-term debt, reflected as reconciling adjustments
in the statement of cash flows.
Net cash provided by operating activities was $50.6 million, $20.9
million and $30.6 million in 2002, 2001 and 2000, respectively. The $29.7
million increase in 2002 was due mainly to a decrease in working capital
requirements of $16.3 million attributable primarily to lower levels of
restricted cash and inventories and higher taxes payable offset partially by an
increase in accounts receivable and the $14.6 million improvement in adjusted
net income. The $9.7 million decrease in 2001 was due mainly to an increase
in working capital requirements of $16.6 million, of which an increase in
inventory of $10.3 million, in response to anticipated continued tightness of
anode grade RPC supply in the U.S. Gulf Coast, was the most significant
component, offset by the $8.0 million increase in adjusted net income.
Capital expenditures were $5.5 million, $4.2 million and $4.3 million
in 2002, 2001 and 2000, respectively. The increase in 2002 is primarily
attributable to capital spending at the Baton Rouge Plant in the period
subsequent to the acquisition of the facility.
Investing activities for 2002 also includes $11.7 million (excluding
notes payable in an aggregate principal amount of $20.0 million issued by the
Company) paid in connection with the purchase of the Baton Rouge Plant and
12 of 51
accretions of the 13 1/8% Senior Discount Debenture Notes (the "Debentures")
issued by GLAC, purchased by the Company with the intention of holding them to
maturity. Reflected in 2001 and 2000 are purchases of the Debentures totalling
approximately $4.0 million in each year and subsequent accretions thereof.
Financing activities for 2002 reflect a net increase in indebtedness
for borrowed money of $22.1 million (after taking into account $20.0 million of
notes payable shown as a non-cash supplemental item and $22.7 million of
accretion on the Notes reflected as a non-cash reconciling adjustment to net
income on the statement of cash flows). This $22.1 million net increase was
made up of a $58.5 million increase to debt obligations, of which approximately
$46.6 million was incurred in connection with the acquisition of the Baton Rouge
Plant, offset by $36.4 million of debt repayments, including $5.0 million of
voluntary prepayments.
Financing activities in 2001 reflect a net increase in indebtedness for
borrowed money of $0.9 million (after taking into account $13.0 million of
accretion on the Notes reflected as a non-cash reconciling adjustment to net
income on the statement of cash flows). This $0.9 million net increase was
made up of a $20.9 million increase to debt obligations, including $7.8
million of short-term working capital borrowings in Argentina, offset by $19.2
million of debt repayments.
Financing activities in 2000 reflect a net reduction of indebtedness
for borrowed money of $19.5 million, which was comprised of $19.6 million of
debt repayments, including $7.1 million of voluntary prepayments, offset by a
additional borrowings of $0.1 million.
The Notes were issued by the Company in May 1998 to finance the
acquisition of the Company by AIP. The Notes are unsecured general obligations
of the Company and, although not currently guaranteed, require essentially all
future domestic subsidiaries of the Company, if any, to be guarantors of the
debt. Interest on the Notes is payable semiannually each year on May 15 and
November 15. The Notes will mature on May 15, 2008 and are subject to early
redemption as set forth under the terms of the indenture. For interest
payments due through May 15, 2003, the Company may, at its option, make up to
four semiannual payments through the issuance of additional notes in an amount
equal to the interest that would be payable if the rate per annum of the Notes
were equal to 11 3/4%. The Company has elected to exercise its pay-in-kind
option with respect to the four consecutive payments ending on May 15, 2003,
the last two of which were required as a condition to obtaining incremental
term loan financing under its existing credit agreement for the acquisition of
the Baton Rouge Plant as discussed below.
The Company is a party to a credit agreement that includes term loans
comprised of three initial single tranche loans in an original amount of $50.0
million, $31.0 million and $30.0 million maturing on May 31, 2004, 2005 and
2006, respectively, and a Revolving Credit Facility in effect until May 31,
2003 which provides for borrowings of up to $25.0 million (with a $10 million
sub-limit for letters of credit). On March 27, 2002, the Company secured
incremental term loans under each existing tranche in the amount of $9.0
million, $1.5 million and $1.5 million, respectively, in order to finance the
acquisition of the Baton Rouge Plant. The incremental loans amortize and
mature in conformity with the existing term loan tranches to which they were
added. At December 31, 2002, the amount payable under each such tranche was
$19.1 million, $23.3 million and $22.6 million, respectively. In consideration
for the issuance of the incremental term loans credit facility interest rate
margins were increased between 1.25% to 1.50%. The credit agreement is secured
by substantially all the assets of the Company and requires that the Company
satisfy certain financial ratios. At March 26, 2003 there were no borrowings
under the Revolving Credit Facility and approximately $0.9 million of letters
of credit were outstanding.
The Company is currently reviewing its options with respect to a
renewal or an extension of the Revolving Credit Facility.
13 of 51
Information regarding the Company's contractual obligations at
December 31, 2002 is set forth in the table below:
Less than More than
(In thousands) Total 1 year 1-3 Years 3-5 Years 5 Years
---------- ---------- ---------- ---------- ----------
Long-term debt $ 286,207 $ 23,677 $ 40,744 $ 11,017 $ 210,769
Capital Leases 25 23 2 - -
Operating Leases 10,878 1,779 3,355 2,691 3,053
---------- ---------- ---------- ---------- ----------
Total $ 297,110 $ 25,479 $ 44,101 $ 13,708 $ 213,822
========== ========== ========== ========== ==========
The Company expects to meet its liquidity needs, including debt
service, through cash from operations, its revolving credit facility and other
financing sources provided in its debt agreements. The Company's ability to
generate cash from operations is highly dependent on revenues and profits from
sales of anode grade CPC to the aluminum industry. Changes in anode grade CPC
selling prices and sales volumes as well as changes in RPC costs can have a
material impact on operating cash flows.
The Company or its affiliates may, from time to time, depending on
liquidity, and market and economic conditions, purchase in open-market
transactions its Notes or the Debentures issued by GLAC.
The Company is actively considering an offering of its securities (the
"New Securities"). Although the contemplated offering would require the
retirement of substantially all of Notes and the Debentures, given current
market conditions, the Company does not anticipate that the proceeds from such
an offering and related transactions would be sufficient to repay all of the
Notes and the Debentures. The Company believes that in order to complete these
transactions it could offer cash and newly issued junior securities of the
Company or its affiliates (the "Junior Securities") in exchange for the Notes,
and Junior Securities in exchange for the Debentures. It is anticipated that,
as part of the transactions, the Company's existing stockholders would recieve
Junior Securities in exchange for their equity interests in the Company, and
that the Junior Securities would be exchangeable for New Securities, subject to
certain conditions. If the Company pursues these transactions, the New
Securities and the Junior Securities will not be registered under the
Securities Act of 1933 (the "Act"), and may not be offered or sold in the
United States absent registration under the Act or an applicable exemption from
the registration requirements of the Act. The Company has discussed, and
intends to continue to discuss, possible alternatives with holders of the Notes
and the Debentures before further pursuing the transactions.
New Accounting Pronouncements
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations" effective January 2003. SFAS No. 143 establishes
accounting standards for the recognition and measurement of a liability for
asset retirement obligations and associated asset retirement costs. The
adoption of this Statement will not have a material impact on the Company's
financial statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets" which is effective for fiscal
years beginning after December 15, 2001. SFAS No. 144 addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
This statement supersedes SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the
accounting and reporting provisions of Accounting Principals Board Opinion
No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal
of a Segment of a Business, and Extraordinary, Unusual and Infrequently
Occurring Events and Transactions," for the disposal of a business (as defined
in that Opinion). This statement also amends Account Research Bulletin
No. 51, "Consolidated Financial Statements," to eliminate the exception to
consolidation for a subsidiary for which control is likely to be temporary.
The adoption of SFAS No. 144 did not have a material impact on the Company's
financial statements.
14 of 51
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB
Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that Statement,
FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The
Company will adopt the provisions of this Statement upon its effective date and
reclassify gains and losses on extinguishment of debt currently treated as
extraordinary items to other income or expense.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial
accounting and reporting for costs associated with exit or disposal activities
and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
believe that the adoption of this Statement will have a material impact on its
financial statements.
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-
Based Compensation-Transition and Disclosure." SFAS No. 148 provides
alternative methods of transition for a voluntary change to the fair value
method of accounting for stock-based employee compensation. In addition, SFAS
No. 148 amends the disclosure requirements of SFAS No. 123, "Accounting for
Stock-Based Compensation," to require disclosure in both interim and annual
financial statements about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results. SFAS No.
148 is effective for the year ended December 31, 2002. The Company has elected
not to adopt the fair value method to account for stock-based compensation.
Accordingly, except for modification to certain disclosures, the adoption of
SFAF No. 148 did not have a material impact on the Company's financial
statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has significant amounts outstanding under its credit
agreement that bear interest at variable rates. As a result, the Company's
interest expense is sensitive to changes in the general level of interest
rates. To illustrate, a 10% increase or decrease in the rates in effect for
the year ended December 31, 2002 would have resulted in a corresponding
increase or decrease in interest expense for the period of $376,000.
The Company may, from time to time, enter into interest rate swap
arrangements to manage its interest cost and mitigate its exposure to
fluctuating interest rates. There were no such arrangements outstanding at
December 31, 2002 or during the year then ended.
As a result of the continued decline in the Argentine economy and the
decision of the government to default on its foreign debt, all foreign currency
trading was suspended on December 22, 2001. The government subsequently
announced the devaluation of the Argentine peso, effective January 7, 2002,
thus bringing to an end that currency's ten year one-to-one peg to the U.S.
dollar. Convertibility to the U.S. dollar is now determined on a free-floating
basis in the foreign exchange market.
While some of its local costs are in Argentine pesos, the Company's
Argentine subsidiary, Copetro, essentially purchases all its RPC and sells all
of its CPC in U.S. dollars. As a result, the Company has not experienced and
does not foresee any material impact on the performance of Copetro due to the
devaluation. Although the Argentine authorities have not imposed any measures
that have had a significant adverse effect on the Company to date, there can
be no assurance that future government actions will not have a negative impact
the Company's operations in Argentina.
15 of 51
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Company and its
subsidiaries, together with the reports of independent auditors thereon, are
filed as part of this report:
Consolidated Financial Statements:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 2001 and 2002
Consolidated Statements of Operations for the years ended
December 31, 2000, 2001 and 2002
Consolidated Statements of Stockholder's Equity for the years ended
December 31, 2000, 2001 and 2002
Consolidated Statements of Cash Flows for the years ended
December 31, 2000, 2001 and 2002
Notes to the Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the name, age as of March 26, 2002 and
position of the persons serving as directors or executive officers of the
Company:
- ------------------------------------------------------------------------------
Name Age Position
- ------------------ ---- ----------------------------------------------------
James D. McKenzie 58 President and Chief Executive Officer, Director
A. Frank Baca 59 Senior Vice President, Operations and Administration
Robert C. Dickie 54 Vice President, Sales
Craig L. Beilharz 48 Vice President, Raw Materials
Adela I. Robles 46 Controller, Assistant Secretary and Chief Financial
Officer
Theodore C. Rogers 68 Non-Executive Chairman of the Board, Director
W. Richard Bingham 67 Director
Kim A. Marvin 41 Director
- ------------------------------------------------------------------------------
Each of the Company's directors and executive officers are elected
annually and holds office until his or her successor is elected and qualified.
Mr. McKenzie has served as President and Chief Executive Officer of the
Company since June 1995. He served as Executive Vice President of the Company
and President of the Calcined Petroleum Coke business of the Company and its
predecessor company ("Old GLC") from 1989 to June 1995. From 1971 to 1989, he
held a number of positions with Old GLC, including Vice President, General
Counsel.
Mr. Baca has been Senior Vice President, Operations and Administration
of the Company since September 1995 and was Vice President, Operations from
1991 to August 1995. Since joining Old GLC in 1967, he has held a number of
operating positions, including Plant Manager of the Port Arthur, Texas
calcining facility.
Mr. Dickie has been Vice President, Sales of the Company since
September 1995 and was Director of Sales from 1992 to August 1995. He held the
position of Plant Manager of Enid, Oklahoma calcining facility for Old GLC from
1989 to 1992. Prior to joining Old GLC in 1989, he spent 15 years with Alumax,
holding various positions in aluminum smelting operations.
Mr. Beilharz has been Vice President, Raw Materials of the Company
since April 2000 and was Vice President, Commercial Development of the Company
from February 1999 to March 2000. From March 1997 until rejoining the Company
in 1999, he served as General Manager, Supply and Trading for Koch Carbon, Inc.
Prior to that, he was Manager, Sales and Raw Materials for the Company from
1992 to March 1997. From 1973 to 1992, he held a number of positions in
quality control with Old GLC, including Chemist of the Enid, Oklahoma calcining
facility.
Ms. Robles has been Chief Financial Officer since September 2002 and
has served as Controller of the Company and of the Calcined Petroleum Coke
business of the Company and Old GLC since 1990. From 1981 to 1990, she held
numerous positions in accounting and finance with Old GLC.
Mr. Rogers has served as the Non-Executive Chairman of the Board and
Director of the Company since May 1998. He is the Chairman of the Board, a
Director and the Secretary of American Industrial Partners Corporation. He
co-founded AIP Management Co. and has been a director and an officer of AIP
Management Co. since 1989. Mr. Rogers is also a director of Bucyrus
International, Inc., Stanadyne Automotive Corp. and Consoltex Group, Inc.
Mr. Bingham has served as Director of the Company since May 1998. He
is a Director, the President, the Treasurer and the Assistant Secretary of
American Industrial Partners Corporation. He co-founded AIP Management Co. and
has been a director and an officer of AIP Management Co. since 1989. Mr.
Bingham is also a director of Bucyrus International, Inc., Stanadyne Automotive
Corp., MBA Polymers, Inc., Fundimak y Subsidiaries S.A. de C.V. (Sanluis) and
Williams Controls, Inc.
17 of 51
Mr. Marvin has served as Director of the Company since May 1998. He
joined the San Francisco office of American Industrial Partners as a Principal
in 1997. From 1994 to 1997, he was an associate in the Mergers & Acquisitions
Department of Goldman Sachs & Co. Mr. Marvin is also a director of Bucyrus
International, Inc., Stanadyne Automotive Corp. and Consoltex Group, Inc.
Directors do not receive compensation for their services as directors.
Item 11. Executive Compensation
The following table sets forth information concerning cash compensation
paid by the Company for the years ended December 31, 2002, 2001 and 2000 to the
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company.
Long-term
Compensation
Awards
Annual Compensation Securities
------------------- Underlying All Other
Name and Position Year Salary Bonus(1) Options(#) Compensation(2)
- ------------------------ ---- --------- --------- ------------- ---------------
James D. McKenzie 2002 $ 379,168 $ 205,000 - $ 5,500
President and Chief 2001 375,000 206,250 - 5,250
Executive Officer 2000 343,750 180,000 - 5,250
A. Frank Baca 2002 212,500 88,000 - 5,500
Senior Vice President, 2001 210,000 84,375 - 5,250
Operations and Admin. 2000 187,500 79,313 - 5,250
Robert C. Dickie 2002 192,340 82,002 - 4,748
Vice President, Sales 2001 190,008 77,063 - 4,513
2000 171,252 71,438 - 4,512
Craig L. Beilharz 2002 172,180 76,005 - 5,130
Vice President, 2001 170,016 69,752 - 5,100
Raw Materials 2000 155,004 57,656 - 4,525
Adela I. Robles
Controller, Assistant 2002 118,500 35,300 - 3,555
Secretary and Chief 2001 114,000 30,150 - 3,420
Financial Officer 2000 100,500 28,201 - 3,015
- -------------------------------------------------------------------------------
(1) Bonuses are reported in the year paid even though earned in the previous
year.
(2) Amounts shown in this column represent Company contributions under the
401(k) savings plan.
- -------------------------------------------------------------------------------
Profit-Sharing Plan
The Company's practice has been to maintain a profit-sharing plan that
is established annually. Under the present plan, each eligible employee
receives profit-sharing distributions determined as a percentage of base salary
based on the Company's achievement of profitability targets established each
year by the Board of Directors.
Savings Plans
The Company currently sponsors two Savings Plans for employees: one for
salaried employees and the other for hourly employees covered by the collective
bargaining agreements at the Enid, Oklahoma and Baton Rouge, Louisiana plants.
Each of the Savings Plans is qualified under section 401(k) of the Internal
Revenue Code of 1986, as amended (the "Code") and provides that employees may
contribute up to $12,000 of base wages to an account in the employee's name.
The Company makes contributions to each such employee account of up to 50% of
the employee's contributions, subject to a cap of 3% of said employee's base
salary.
18 of 51
Pension Plans
The Company currently maintains three defined benefit retirement plans
for the benefit of its employees; one plan is for hourly employees covered by
the collective bargaining agreements at the Enid, Oklahoma and Baton Rouge,
Louisiana plants, one is for salaried employees (the "Salaried Plan") and one
is a non-qualified supplemental plan for the benefit of key executives (the
"SERP"). Each of the plans provides eligible employees with certain benefits
at retirement based upon the participant's years of service and, in the case of
the Salaried Plan and the SERP, such employee's average salary, which for
purposes of the foregoing is equal to the average of the highest salary earned
in three out of the previous ten years or the average of all years of service,
if less than three.
The following table shows the estimated annual straight-life annuity
benefit payable under the Salaried Plan and the SERP to the executives who
participate in such plans, with the specified remuneration and specified years
of service upon retirement at age 65, after giving effect to adjustments for
Social Security benefits, assuming they continue to be actively employed by the
Company until age 65. For those executives who are participants in the SERP,
the benefit payable upon retirement at age 65 is determined based upon their
full salary and years of service. Participation in the SERP is extended to
executives at the sole discretion of the Board of Directors. The benefit
payable upon retirement at age 65 to executive officers who do not participate
in the SERP is determined based upon each such executive's salary (subject to
the limitations imposed by Section 401(a)(17) of the Code, currently $200,000),
and years of service.
Years of
Service Annual
Name at Age 65 Benefit
------------------------ --------- --------
James D. McKenzie 38 $231,400
A. Frank Baca 41 130,669
Robert C. Dickie 24 74,898
Craig L. Beilharz 44 114,003
Adela I. Robles 41 77,804
-----------------------------------------------------
The compensation of participants used to calculate
the retirement benefit consists solely of annual base
salary.
-----------------------------------------------------
Stock Option Plan
On December 13, 1999, the Board of Directors of GLAC adopted the 1999
Management Stock Option Plan (the "Plan") in order to provide equity-based
incentives to certain officers and other key employees of the Company and its
subsidiaries.
The Plan is administered by the President and Chief Executive Officer
of the Company ("CEO"), subject to the review and approval of the Compensation
Committee of the Board of Directors of GLAC or, if one has not been
established, the Board of Directors of GLAC or such other committee as the
Board of Directors of GLAC may designate (any such committee or the Board of
Directors, the "Committee"). The CEO has authority to recommend to the
Committee the employees who shall participate in the Plan and the number of
stock options to be granted to each.
The Plan provides for the grant of stock options to purchase up to an
aggregate of 4,050 shares of the common stock of GLAC at a price of $1,000 per
share with 2,800 shares being initially granted to employees. At the time of
the grant, 16.4% of the options became vested with the remaining options
targeted to vest on the last day of plan years 1999 through 2001 at a rate of
27.9% of the aggregate number of shares of common stock subject to the options
per year provided that the Company attains a specified target of Adjusted
EBITDA, as defined, in each plan year. In the event that the Adjusted EBITDA
goal is not attained in any plan year, the options scheduled to vest at the end
of that plan year will vest on a pro rata basis according to a schedule set
forth in the Plan, provided that if 90% or less of the Adjusted EBITDA goal is
19 of 51
achieved, then no portion of the options shall vest at the end of that plan
year. In the event that the Adjusted EBITDA goal is surpassed in any plan
year, the surplus shall be applied first to offset any Adjusted EBITDA deficit
from prior plan years, and second to accelerate vesting of up to one-quarter of
the options scheduled to vest in 2001 in accordance with a surplus vesting
schedule set forth in the Plan. In addition, the Plan was amended effective
December 11, 2002 to provide for the immediate accelerated vesting of an
additional 618 options. Notwithstanding the foregoing, all options granted
under the Plan shall vest automatically on April 21, 2007, regardless of the
performance criteria.
Granted options may be forfeited or repurchased by the Company as
provided under the term of the Plan in the event of the participating
employee's termination, and if not previously forfeited or exercised, expire
and terminate no later than ten years after the date of grant or, in the event
of the sale of the Company, upon consummation of such sale.
The table below sets forth for the Company's most highly compensated
executive officers information regarding the grant of options under the Plan
during 1999.
Potential Realizable
Value at Assumed
Number of Percent of Annual Rates of
Securities Total Exercise Stock Price
Underlying Options or Base Appreciation for
Granted Granted to Price(2) Expiration Ten Year Option Term
Name Options Employees(1) ($/share) Date 5% 10%
- ------------- ---------- ----------- --------- ---------- ---------- ----------
J.D. McKenzie 1,200 42.9% $1000.00 12/13/09 $ 754,674 $1,912,491
A.F. Baca 400 14.3% $1000.00 12/13/09 251,558 637,497
R.C. Dickie 400 14.3% $1000.00 12/13/09 251,558 637,497
C.L. Beilharz 400 14.3% $1000.00 12/13/09 251,558 637,497
A.I. Robles 200 7.1% $1000.00 12/31/09 125,779 318,748
- -------------------------------------------------------------------------------
(1) A total of 2,800 options were granted to employees under the Plan in 1999.
(2) The exercise price of each option granted was equal to 100% of the fair
value of GLAC's common stock on the date of grant. The fair value was
established by the GLAC's Board of Directors as the price at which GLAC
will buy or sell its common stock.
- -------------------------------------------------------------------------------
No options were granted under the Plan during 2002. The number of
shares of stock underlying options that vested to the benefit of the Company's
most highly compensated executive officers was 1,148, 439 and 573 in 1999, 2000
and 2002, respectively.
The following table sets forth information related to the exercise of
stock options during 2002 and the year-end number and value of unexercised
stock options for the Company's most highly compensated executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at the End of Options at the End of
Shares Calendar Year 2002 Calendar Year 2002(1)
Acquired ---------- ----------- ---------- -----------
on Value Exercis- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
- ------------- -------- ---------- ---------- ----------- ---------- -----------
J.D. McKenzie - $ - 1,000 200 $ - $ -
A.F. Baca - - 340 60 - -
R.C. Dickie - - 340 60 - -
C.L. Beilharz - - 310 90 - -
A.I. Robles - - 170 30 - -
- -------------------------------------------------------------------------------
(1) Substantially all of GLAC's common stock is held by AIP and there is no
established public trading market therefor. At December 31, 2002, the fair
value of the common stock was determined to be $1,000 per share which is
equivalent to the fair value on the date of grant as established by GLAC's
Board of Directors as the price at which GLAC will buy or sell its common
stock.
- -------------------------------------------------------------------------------
20 of 51
Item 12. Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
The following table sets forth information as of December 31, 2002
relating to the beneficial ownership of the common stock of the Company by the
directors and named executive officers of the Company, directors and officers
of the Company as a group and each owner of more than 5% of the common stock of
the Company.
Number of
Name Shares Percent
- -------------------------------------------------- --------- -------
GLAC 1,000 100.0%
American Industrial Partners Capital Fund II, L.P. 1,000 100.0%
Theodore C. Rogers (1) 1,000 100.0%
W. Richard Bingham (1) 1,000 100.0%
All directors and officers as a group (8 persons) 1,000 100.0%
- -------------------------------------------------------------------------------
(1) Messrs. Rogers and Bingham share investment and voting power with respect
to the securities owned by AIP, which owns 98.6% of the outstanding shares
of GLAC, which owns all the outstanding shares of the Company Common Stock,
but each disclaims beneficial ownership of any shares of Company Common
Stock
- -------------------------------------------------------------------------------
The following table provies information as of December 31, 2002 related
to the Company's equity compensation plans.
Number of Number of
Securities Securities
to be Issued Weighted-Average Available for
Upon Exercise Exercise Price Future Issuance
of Outstanding of Outstanding Under Equity
Plan Category Options Options Compensation Plans
- --------------------- ----------------- ----------------- ------------------
Equity Compensation
Plans Approved by
Security Holders - - -
- --------------------- ----------------- ----------------- ------------------
Equity Compensation
Plans Not Approved
by Security Holders 2,330 $1,000.00 1,720
- --------------------- ----------------- ----------------- ------------------
Total 2,330 $1,000.00 1,720
- -------------------------------------------------------------------------------
The material features of the plan under which equity securities are authorized
for issuance that was adopted without the approval of security holders are
outlined above.
- -------------------------------------------------------------------------------
Item 13. Certain Relationships and Related Transactions
Financial and Management Services
AIP provides substantial on-going financial and management services to
the Company utilizing the extensive operating and financial experience of AIP's
principals. AIP receives an annual fee of $1.9 million for providing general
management, financial and other corporate advisory services to the Company,
payable semiannually 45 days after the scheduled interest payment date of the
Notes (and the Debentures when these begin paying cash interest in November
2003), and is reimbursed for out-of-pocket expenses incurred on behalf of the
Company. The fees are paid to AIP pursuant to a management services agreement
among AIP and the Company and are subordinated in right of payment to the Notes
(and the Debentures when these begin paying cash interest in November 2003).
21 of 51
Item 14. Controls and Procedures
Within the 90 days prior to the date of this report, the Company
carried out an evaluation, under the supervision and with the participation of
the Company's management, including the Company's Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of
the Company's disclosure controls and procedures pursuant to Exchange Act Rule
13a-14. Based upon that evaluation, the Chief Executive Officer and Chief
Financial Officer concluded that the Company's disclosure controls and
procedures are effective. There were no significant changes in the Company's
internal controls or in other factors that could significantly affect these
controls subsequent to the date of their evaluation.
22 of 51
PART IV
Item 15. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) List of Financial Statements:
Index to Financial Statements.............................................F-1
Independent Auditors' Report..............................................F-2
Consolidated Balance Sheets -
December 31, 2001 and 2002................................................F-3
Consolidated Statements of Operations -
For the years ended December 31, 2000, 2001 and 2002......................F-5
Consolidated Statements of Stockholder's Equity -
For the years ended December 31, 2000, 2001 and 2002......................F-6
Consolidated Statements of Cash Flows -
For the years ended December 31, 2000, 2001 and 2002......................F-7
Notes to the Consolidated Financial Statements............................F-8
(a)(2) List of Financial Statement Schedules:
All schedules for which provision is made in the applicable accounting
regulations of the Commission are not required under the related instructions
or are not applicable and, therefore, have been omitted.
23 of 51
(a)(3) List of Exhibits:
Exhibit
Number Description
*3.1 Certificate of Incorporation of the Company, as amended to date.
*3.2 By-Laws of the Company, as amended to date.
*4.1 Indenture, dated as of May 22, 1998, among the Company, the
Subsidiary Guarantors (as defined therein) and State Street Bank
and Trust Company of California, N.A. (formerly First Trust
National Association), as Trustee, relating to the 10 1/4% Series B
Senior Subordinated Notes due 2008 of the Company (the "New Notes")
and the 10 1/4% Series A Senior Subordinated Notes due 2008 of the
Company (the "Old Notes").
*4.2 Form of New Debenture (included in Exhibit 4.1).
*4.3 Registration Rights Agreement, dated as of May 22, 1998, by and
among the Company and Donaldson, Lufkin & Jenrette Securities
Corporation, BT Alex. Brown Incorporated and BancAmerica Robertson
Stephens.
*10.1 Credit Agreement among the Company, GLAC, various banks, Bank of
America NT&SA as co-agent, DLJ Capital Funding, Inc. as
Documentation Agent and Bankers Trust Company, as Syndication Agent
and as Administrative Agent dated as of May 22, 1998.
10.2 Lease Agreement between the Company and Rice-Carden Corporation
(as successor to Kansas City Southern Industries, Inc.), as amended
(Incorporated herein by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 (File No. 33-98522)).
10.3a Calcined Coke Supply Agreement between the Company and Aluminum
Company of America. (Replaces 10.3 filed previously) (Incorporated
herein by reference to Exhibit 10 to the Company's 3/31/02
Quarterly Report on Form 10-Q (File No. 33-98522)).
10.4a Green Anode Coke Sales Agreement between the Company and Conoco
Inc. (Replaces 10.4 filed previously) (Included herewith as
Exhibit 10)
10.5 Petroleum Coke Sales Agreement between Copetro S.A. and YPF S.A.
(Incorporated herein by reference to Exhibit 10.7 to Company's
Registration Statement on Form S-1 (File No. 33-98522)).
*10.6 Amendment No. 1 to the Petroleum Coke Sales Agreement between
Copetro S.A. and YPF S.A.
10.7a Coke Supply Agreement between GLC and Exxon Company, U.S.A.
(Replaces 10.7 filed previously) (Incorporated herein by reference
to Exhibit 10 to the Company's 12/31/99 Annual Report on Form 10-K
(File No. 33-98522)).
10.8 Asset Purchase Agreement between the Company and Reynolds Metals
Company dated March 27, 2002 (Incorporated herein by reference to
Exhibit 10 to the Company's 3/31/02 Quarterly Report on Form 10-Q
(File No. 33-98522)).
*21.1 Subsidiaries of the Company.
24.1 Power of Attorney (included in signature page).
* Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-59545).
(b) Reports on Form 8-K
None
24 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 2000, 2001 and 2002
Contents
Independent Auditors' Report.............................................F-2
Consolidated Balance Sheets -
December 31, 2001 and 2002...............................................F-3
Consolidated Statements of Operations -
For the years ended December 31, 2000, 2001 and 2002.....................F-5
Consolidated Statements of Stockholder's Equity -
For the years ended December 31, 2000, 2001 and 2002.....................F-6
Consolidated Statements of Cash Flows -
For the years ended December 31, 2000, 2001 and 2002.....................F-7
Notes to the Consolidated Financial Statements...........................F-8
F-1 / 25 of 51
Independent Auditors' Report
The Board of Directors
Great Lakes Carbon Corporation
We have audited the accompanying consolidated balance sheets of Great Lakes
Carbon Corporation and subsidiaries as of December 31, 2002 and 2001, and the
related consolidated statements of operations, stockholder's equity, and cash
flows for each of the years in the periods then ended. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of Great
Lakes Carbon Corporation and subsidiaries at December 31, 2002 and 2001, and
the consolidated results of its operations and its cash flows for each of the
three years then ended in conformity with accounting principles generally
accepted in the United States of America.
As discussed in Note 1 and Note 8 to the consolidated financial statements, in
2002, the Company changed its method of accounting for goodwill amortization to
conform to Statement of Financial Accounting Standards No. 142, "Goodwill and
Other Intangible Assets."
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
March 26, 2003
F-2 / 26 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
2001 2002
---------- ----------
ASSETS
Current Assets
Cash and cash equivalents $ 12,186 $ 23,443
Restricted cash 10,414 27
Accounts receivable, net of allowance for doubtful
accounts of $600 in 2001 and 2002 27,452 46,555
Inventories 46,614 55,233
Prepaid expenses and other current assets 3,767 6,164
---------- ----------
Total Current Assets 100,433 131,422
Property, Plant and Equipment-Net 177,467 184,262
Goodwill 162,799 162,799
Capitalized financing costs, net of accumulated
amortization of $8,326 and $11,028 in 2001 and 2002 10,544 9,061
Investment in GLAC Debentures 28,933 32,855
Other Assets 1,971 2,933
---------- ----------
Total Assets $ 482,147 $ 523,332
========== ==========
See accompanying notes.
F-3 / 27 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Consolidated Balance Sheets
(In thousands, except share and per share data)
December 31,
2001 2002
---------- ----------
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Accounts payable $ 12,818 $ 26,803
Accrued expenses 18,835 8,999
Income taxes payable 809 5,703
Current portion of long-term debt 19,578 23,700
---------- ----------
Total Current Liabilities 52,040 65,205
Long-term debt, less current portion 244,506 262,532
Other long-term liabilities 9,764 13,292
Deferred taxes 46,660 45,686
Due to parent 7,181 7,710
Stockholder's Equity
Common stock, par value $0.01 per share;
1,000 authorized, outstanding - -
Additional paid-in capital 93,000 93,000
Retained earnings 30,384 39,327
Accumulated other comprehensive loss
Minimum pension liability adjustment, net of tax
benefit $748 and $1,841 in 2001 and 2002 (1,388) (3,420)
---------- ----------
Total Stockholder's Equity 121,996 128,907
---------- ----------
Total Liabilities and Stockholder's Equity $ 482,147 $ 523,332
========== ==========
See accompanying notes.
F-4 / 28 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Consolidated Statements of Operations
Year Ended December 31,
2000 2001 2002
---------- ---------- ----------
(In thousands)
Net Sales $ 263,601 $ 270,554 $ 307,567
Cost of Goods Sold 202,718 215,966 252,952
---------- ---------- ----------
Gross Profit 60,883 54,588 54,615
Selling, general and administrative expenses 19,852 18,693 11,803
---------- ---------- ----------
Operating Income 41,031 35,895 42,812
---------- ---------- ----------
Other income (expense):
Interest, net (28,162) (24,822) (26,432)
Other, net 1,048 (3,433) 2,057
---------- ---------- ----------
(27,114) (28,255) (24,375)
Income Before Income Taxes
and Extraordinary Item 13,917 7,640 18,437
Income taxes 6,473 2,988 9,494
---------- ---------- ----------
Income before extraordinary item 7,444 4,652 8,943
Extraordinary gain on early extinguishment
of debt, net of tax expense of $2,048 and
$2,073 for the years ended December 31,
2000 and 2001 3,804 3,717 -
---------- ---------- ----------
Net income $ 11,248 $ 8,369 $ 8,943
========== ========== ==========
See accompanying notes.
F-5 / 29 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Consolidated Statements of Stockholder's Equity
Accumulated
Other Total
Add'l Compre- Stock-
Common Paid-in Retained hensive holder's
Stock Capital Earnings Loss Equity
--------- --------- --------- --------- ---------
(In thousands)
Balance at December 31, 1999 $ - $ 92,380 $ 10,767 $ - $103,147
Net income - - 11,248 - 11,248
Capital contribution - 620 - - 620
--------- --------- --------- --------- ---------
Balance at December 31, 2000 - 93,000 22,015 - 115,015
Net income - - 8,369 - 8,369
Minimum pension liability
adjustment - - - (1,388) (1,388)
---------
Comprehensive income 6,981
--------- --------- --------- --------- ---------
Balance at December 31, 2001 - 93,000 30,384 (1,388) 121,996
Net income - - 8,943 - 8,943
Minimum pension liability
adjustment - - - (2,032) (2,032)
---------
Comprehensive income 6,911
--------- --------- --------- --------- ---------
Balance at December 31, 2002 $ - $ 93,000 $ 39,327 $ (3,420) $128,907
========= ========= ========= ========= =========
See accompanying notes.
F-6 / 30 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Consolidated Statements of Cash Flows
Year Ended December 31,
2000 2001 2002
---------- ---------- ----------
(In thousands)
Operating activities
Net income $ 11,248 $ 8,369 $ 8,943
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 24,030 24,295 21,551
Accretions of long-term debt - 13,048 22,721
Gain on disposal of fixed asset (30) - (2,734)
Deferred taxes (3,489) (6,039) 119
Extraordinary gain on extinguishment of debt (3,804) (3,717) -
Changes in operating assets and liabilities:
Restricted cash - (10,414) 10,387
Accounts receivable (860) 6,146 (19,103)
Inventories (217) (10,477) 7,058
Prepaid expenses and other current assets 39 807 (2,397)
Accounts payable and accrued expenses 4,240 2,101 180
Income taxes payable (1,861) (3,435) 4,894
Other, net 1,293 246 (988)
---------- ---------- ----------
Net cash provided by operating activities 30,589 20,930 50,631
---------- ---------- ----------
Investing activities
Capital expenditures (4,297) (4,183) (5,484)
Proceeds from disposal of fixed asset 42 - 3,001
Acquisition of Baton Rouge plant - - (11,708)
Investment in GLAC Debentures (4,620) (7,150) (3,922)
---------- ---------- ----------
Net cash used by investing activities (8,875) (11,333) (18,113)
---------- ---------- ----------
Financing Activities
Repayment of long-term debt (19,604) (19,920) (36,355)
Additions to long-term debt 135 7,818 15,782
Capitalized financing costs - - (1,217)
Due to (from) parent 1,272 3,452 529
Capital contribution 620 - -
---------- ---------- ----------
Net cash used by financing activities (17,577) (8,650) (21,261)
---------- ---------- ----------
Increase in cash and cash equivalents 4,137 947 11,257
Cash and cash equivalents at
beginning of period 7,102 11,239 12,186
---------- ---------- ----------
Cash and cash equivalents at end of period $ 11,239 $ 12,186 23,443
========== ========== ==========
Supplemental disclosure of non-cash investing and financing activities:
In connection with the acquisition of the Baton Rouge plant, the Company
issued notes payable in an aggregate principal amount of $20,000,000 on
March 27, 2002 which are not reflected in investing or financing activities
for the year ended December 31, 2002.
See accompanying notes.
F-7 / 31 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2002
1. Significant Accounting Policies
Organization
Great Lakes Carbon Corporation (the "Company") is a producer of calcined
petroleum coke ("CPC") principally for customers in the aluminum industry.
The Company is a wholly-owned operating subsidiary of Great Lakes Acquisition
Corp. ("GLAC"), a holding company formed by American Industrial Capital
Fund II, L.P. ("AIP"), a private investment fund, which acquired all of the
issued and outstanding capital stock of the Company on May 22, 1998.
The consolidated financial statements include the accounts of the Company and
its subsidiaries. Significant intercompany accounts have been eliminated in
consolidation.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the amounts and disclosures reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Foreign Currency Translation
Foreign currency financial statements have been translated into U.S. dollars in
accordance with Financial Accounting Standards Board ("FASB") Statement of
Financial Accounting Standards ("SFAS") No. 52, "Foreign Currency Translation".
SFAS No. 52, as applied to foreign entity financial statements where the U.S.
dollar is determined to be the functional currency, as in the Company's case,
requires that monetary assets and liabilities denominated in the local or other
foreign currency be remeasured to the U.S. dollar at the exchange rate in
effect on the report date. Exchange rate gains and losses from remeasurement
are recognized currently in results.
Cash Equivalents
Investments with maturities of less than 90 days when purchased are considered
the equivalent of cash.
Inventories
Inventories are stated at the lower of cost (principally average cost method)
or market.
Property, Plant and Equipment
Property, plant and equipment are stated on the basis of cost. Enhancements
are capitalized and depreciated over the period benefited. The provision for
depreciation is determined by the straight-line method over the estimated
useful lives of the related assets.
Impairment of Long-Lived Assets
Long-lived assets are periodically reviewed for impairment. Impairment losses
are recognized if expected future undiscounted cash flows of the related assets
are less than their carrying values.
F-8 / 32 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Goodwill
Through December 31, 2001, goodwill was amortized using the straight-line
method over a 40 year period. On January 1, 2002, the Company implemented SFAS
No. 142, "Goodwill and Other Intangible Assets," which ceased the amortization
method of accounting for goodwill and requires an impairment-only approach.
Accordingly, goodwill is no longer amortized and is tested for impairment at
least once annually.
Accounting for Asset Retirement Obligations
In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations" effective January 2003. SFAS No. 143 establishes accounting
standards for the recognition and measurement of a liability for asset
retirement obligations and associated asset retirement costs. The adoption of
this Statement will not have a material impact on the Company's financial
statements.
Accounting for the Impairment or Disposal of Long-Lived Assets
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" which is effective for fiscal years beginning
after December 15, 2001. SFAS No. 144 addresses financial accounting and
reporting for the impairment or disposal of long-lived assets. This statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of Accounting Principals Board Opinion No. 30, "Reporting the
Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions," for the disposal of a business (as defined in that Opinion).
This statement also amends Account Research Bulletin No. 51, "Consolidated
Financial Statements," to eliminate the exception to consolidation for a
subsidiary for which control is likely to be temporary. The adoption of SFAS
No. 144 did not have a material impact on the Company's financial statements.
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains
and Losses from Extinguishment of Debt," and an amendment of that Statement,
FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund
Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting
for Intangible Assets of Motor Carriers." This Statement also amends other
existing authoritative pronouncements to make various technical corrections,
clarify meanings or describe their applicability under changed conditions.
SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The
Company will adopt the provisions of this Statement upon its effective date and
reclassify gains and losses on extinguishment of debt currently treated as
extraordinary items to other income or expense.
F-9 / 33 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Accounting for Costs Associated with Exit or Disposal Activities
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit
an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No.
146 requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. This statement also
established that fair value is the objective for initial measurement of the
liability. The provisions of SFAS No. 146 are effective for exit or disposal
activities that are initiated after December 31, 2002. The Company does not
believe that the adoption of this Statement will have a material impact on its
financial statements.
Revenue Recognition
The Company recognizes revenue pursuant to sales contracts or purchase orders
when products are shipped, at which point title and risk of loss typically
passes to the customer. Sales are reported net of sales discounts, returns
and allowances.
Significant Customers
The Company had two customers which represented 24.1% and 15.6% of net sales
in 2000, 24.5% and 16.7% of net sales in 2001 and one customer that represented
29.2% of net sales in 2002.
Stock-Based Compensation
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation-Transition and Disclosure." SFAS No. 148 provides alternative
methods of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. In addition, SFAS No. 148
amends the disclosure requirements of SFAS No. 123, "Accounting for Stock-Based
Compensation," to require disclosure in both interim and annual financial
statements about the method of accounting for stock-based employee compensation
and the effect of the method used on reported results. SFAS No. 148 is
effective for the year ended December 31, 2002. The Company has elected not
to adopt the fair value method to account for stock-based compensation and
instead will continue to account for stock-based compensation using the
intrinsic value method prescribed by Accounting Principals Board Opinion
No. 25, "Accounting for Stock Issued to Employees" ("APB 25"). Compensation
expense is recognized for stock options granted below the fair market value of
the Company's stock on the date of grant.
SFAS No. 123, as modified by SFAS No. 148, requires disclosure by the Company
of the pro forma effect on net income if it continues to account for stock
options under the provisions of APB 25. The Company used the minimum value
method to develop the pro forma information set forth below which has been
determined as if the Company had accounted for its stock options under the fair
value method of SFAS No. 123.
2000 2001 2002
---------- ---------- ----------
(In thousands)
Net earnings:
As reported $ 11,248 $ 8,369 $ 8,943
Fair value method stock-based
compensation expense 67 16 70
---------- ---------- ----------
Pro forma $ 11,181 $ 8,353 $ 8,873
========== ========== ==========
F-10 / 34 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The exercise price of these stock options was equal to the fair value of the
underlying common stock on the date of grant, which was established by the
Company's Board of Directors as the price at which the Company will buy or sell
its common stock. The grant date fair value for the stock options was
estimated at $177.40 per option and was determined using an option pricing
model with the following weighted average assumptions: risk-free interest rate
of 6.51%; dividend yield of 0.1%; volatility factor of the expected market
price of the Company's common stock of 0.0; and expected option life of 3
years.
Option valuation models were developed for use in estimating the fair value of
traded options, which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the value of its employee stock options.
Income Taxes
The Company follows SFAS No. 109, "Accounting for Income Taxes." Under the
asset and liability method of SFAS No. 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases.
Reclassifications
Certain prior year amounts have been reclassified to conform to current year
presentation.
2. Acquisition
On March 27, 2002, the Company purchased a calcining facility located in Baton
Rouge, LA (the "Baton Rouge Plant") from Alcoa, Inc. ("Alcoa") for $31.7
million, net of a purchase price adjustment. The transaction was financed by
two $10 million promissory notes bearing interest at 5% per annum payable to
Alcoa in November 2002 and May 2003 and incremental term loan borrowings under
the Company's existing syndicated senior secured credit facility of $12 million.
The addition of the Baton Rouge Plant, which can produce up to 700,000 tons per
year of CPC, increased the Company's total operating capacity to 2.3 million
tons from 1.6 million tons.
Results for the Baton Rouge Plant were included in the statement of operations
commencing on April 1, 2002. The purchase price, net of the working capital
adjustment, was allocated based on the fair values of the assets acquired and
liabilities assumed as follows:
(In thousands)
Inventories $ 15,677
Property, plant and equipment 20,000
Accounts payable (3,024)
Accrued expenses (945)
--------------
$ 31,708
==============
No goodwill was established in connection with this acquisition since the fair
value of the assets acquired exceeded the purchase price.
F-11 / 35 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The unaudited pro forma information set forth below, developed as though the
acquisition had been completed as of the beginning of each of the years shown,
reflects adjustments to interest expense (for borrowings required to finance
the acquisition and certain changes to the terms of existing debt
arrangements), depreciation and amortization expense (set to reflect the new
accounting base of the assets recorded) and income tax effect based upon the
Company's historical effective rates.
December 31,
2001 2002
---------- ----------
(In thousands)
Net sales $ 359,421 $ 333,314
Income before income taxes
and extraordinary item 13,008 18,021
Net income 10,880 8,752
The pro forma information, as presented here, is not indicative of the results
that would have been obtained had the transaction occurred on January 1, 2001
or 2002, nor should it be considered indicative of future results. It gives
effect only to the adjustments noted above, and does not reflect management's
estimate of potential cost savings or other benefits arising from the
acquisition.
3. Restricted Cash
Funds that are legally restricted as to withdrawal or usage are shown as
restricted cash and consisted of $10,414,000 and $27,000 at December 31, 2001
and 2002, respectively. The 2001 balance related to funds set aside under an
escrow agreement with AIP to settle a finders fee claim arising from the
acquisition of the Company in 1998. On March 22, 2002, a payment in the amount
of $10,300,000 was made to settle the claim and the remainder was closed to
income. In October 2002, an escrow for the latter sum was established in
connection with certain reclamation costs in connection with a waste water
settling pond located at a newly purchased Baton Rouge Plant as prescribed by
state law.
4. Inventories
Inventories consist of the following:
December 31,
2001 2002
---------- ----------
(In thousands)
Raw materials $ 24,696 $ 34,195
Finished goods 14,307 13,965
Supplies and spare parts 7,611 7,073
---------- ----------
$ 46,614 $ 55,233
========== ==========
5. Property, Plant and Equipment
Property, plant and equipment consists of the following:
Range of December 31,
Useful Lives 2001 2002
------------------ ---------- ----------
(In thousands)
Land and improvements 3-15 Years $ 2,932 $ 4,353
Buildings 3-40 Years 10,618 11,709
Machinery, equipment and other 3-20 Years 220,867 244,031
Construction in progress 1,442 983
---------- ----------
235,859 261,076
Accumulated depreciation (58,392) (76,814)
---------- ----------
$ 177,467 $ 184,262
========== ==========
Depreciation expense was $16,805,000, $17,070,000 and $18,422,000 for the years
ended December 31, 2000, 2001 and 2002, respectively.
6. Investment in GLAC Debentures
The Company purchased several lots of the 13 1/8% Senior Discount Debenture
Notes issued by GLAC at a discount in open market transactions. The accreted
value of the notes, which the Company intends to hold to maturity, was
$28,933,000 and $32,855,000 and represented approximately 61% of the total
issue oustanding at December 31, 2001 and 2002, respectively.
F-12 / 36 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
7. Accrued Expenses
Accrued expenses included a finders fee claim payable (arising from the
acquisition of the Company in 1998) of $10,414,000 at December 31,
2001 as discussed in Note 3 above.
8. Goodwill
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company completed the impairment test of the valuation of goodwill as of
December 31, 2002 and based upon the results, there was no impairment. The
carrying value of goodwill was $162,799,000 at December 31, 2001 and 2002.
Net income results excluding goodwill that is no longer being amortized to
selling, general and administrative expense is as follows:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Net income as reported $ 11,248 $ 8,369 $ 8,943
Goodwill amortization 4,474 4,474 -
---------- ---------- ----------
Pro forma net income $ 15,722 $ 12,843 $ 8,943
========== ========== ==========
9. Long-Term Debt
Long-term debt and capital lease obligations consist of the following:
December 31,
2001 2002
---------- ----------
(In thousands)
10.25% Senior Subordinated Notes due May 15, 2008 $ 188,048 $ 210,769
Term Loan Credit Facility bearing interest at the
Company's option at LIBOR (1.4% at December 31,
2002) plus a margin ranging from 2.25% to 3.00%
or Prime (4.25% at December 31, 2002) plus a margin
ranging from 1.25% to 2.00% (subject to an interest
reduction discount ranging from 0% to 0.75% based
on the achievement of certain leverage ratios) due
in varying amounts quarterly through May, 2006 70,825 65,061
5% Alcoa Seller Note Payable due May 31, 2003 - 10,000
Various pollution control and industrial revenue bonds
bearing interest at rates from 6.75% to 7.125% due
in varying amounts at various dates through 2002 355 -
Capital lease obligations bearing interest at rates
ranging from 9.3% to 10% due in varying amounts at
various dates through February 2004 132 25
Other 4,724 377
---------- ----------
264,084 286,232
Current portion (19,578) (23,700)
---------- ----------
$ 244,506 $ 262,532
========== ==========
F-13 / 37 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The Senior Subordinated Notes are unsecured general obligations of the Company.
At the option of the Company, the Senior Subordinated Notes may be redeemed,
in whole or in part, commencing May 15, 2003 at various prices ranging from
105% in 2003 to par in 2006 and beyond. Up to May 15, 2003, the Company may,
at its option, make up to four semiannual interest payments through the
issuance of additional notes for an amount equal to the amount of interest that
would be payable if the interest rate were 11.75%. The Company has elected to
exercise its pay-in-kind option with respect to the four consecutive payments
ending on May 15, 2003, the last two of which were required as a condition to
obtaining incremental term loan financing for the acquisition of the Baton
Rouge Plant. The Senior Subordinated Notes indenture imposes, among other
things, limitations on certain payments, including dividends.
The Company or its affiliates may, from time to time, depending on liquidity,
and market and economic conditions, purchase in open-market transactions GLAC
13 1/8% Senior Discount Debentures or its Senior Subordinated Notes.
The term loan credit facility is comprised of three single tranche term loans
in the amount of $19,099,000, $23,336,000 and $22,626,000 at December 31, 2002
maturing on May 31, 2004, 2005 and 2006, respectively. On March 27, 2002, the
Company secured incremental term loans under each of its three existing tranche
loans in the amount of $9.0 million, $1.5 million and $1.5 million,
respectively, in order to finance the acquisition of the Baton Rouge Plant.
The incremental loans amortize and mature in conformity with the terms of the
tranches to which they were added. In consideration for the issuance of the
incremental term loans, credit facility interest rate margins were increased
between 1.25% to 1.50%. The facility also includes a revolving credit
agreement in effect until May 31, 2003, which provides for borrowings of up to
$25,000,000 (with a $10,000,000 sub-limit for letters of credit). The facility
is secured by substantially all the assets of the Company and requires that the
Company, among other things, satisfy certain financial ratios. At December 31,
2002, there were no borrowings under the revolving credit portion of the
facility and outstanding letters of credit were $874,000.
The pollution control and industrial development revenue bonds were issued by
various state and local governmental authorities. Under agreements with these
authorities, the Company has either leased (with nominal value purchase
options) or purchased on an installment basis the facilities constructed with
the funds financed.
Certain covenants present in the Company's credit agreements make reference to
a measure denominated as Adjusted EBITDA. Adjusted EBITDA is defined as
operating income before depreciation, amortization and management fees and
related expenses. Adjusted EBITDA is not a measure of performance defined by
accounting principles generally accepted in the United States of America.
The fair market value of the Company's long-term debt obligations approximated
$187,000,000 and $225,000,000 at December 31, 2001 and 2002, respectively.
Maturities of long-term debt, for the succeeding five years and thereafter are
as follows:
Long-Term Capital
Debt Leases Total
---------- ---------- ----------
(In thousands)
2003 $ 23,677 $ 23 $ 23,700
2004 18,124 2 18,126
2005 22,620 - 22,620
2006 11,017 - 11,017
2007 - - -
Thereafter 210,769 - 210,769
---------- ---------- ----------
$ 286,207 $ 25 $ 286,232
========== ========== ==========
F-14 / 38 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Interest paid amounted to $27,167,000, $14,783,000 and $4,541,000 for the years
ended December 31, 2000, 2001 and 2002, respectively.
The Company has significant amounts outstanding under its credit agreement that
bear interest at variable rates. As a result, the Company's interest expense
is sensitive to changes in the general level of interest rates. To illustrate,
a 10% increase or decrease in the rates in effect for the year ended
December 31, 2002 would have resulted in a corresponding increase or decrease
in interest expense for the period of $376,000.
10. Leases
The Company leases various production equipment under capital leases, some of
which contain renewal options and/or options to purchase. Amortization under
capital leases is included in depreciation expense.
Future minimum payments as of December 31, 2002, by year and in the aggregate,
under capital leases and non-cancelable operating leases with initial or
remaining terms of one year or more consist of the following:
Capital Operating
Leases Leases
---------- ----------
(In thousands)
2003 $ 25 $ 1,779
2004 2 1,706
2005 - 1,649
2006 - 1,398
2007 - 1,293
Thereafter - 3,053
---------- ----------
Total minimum lease payments 27 $ 10,878
Amounts representing interest ( 2) ==========
----------
Present value of net minimum lease payments $ 25
==========
Rental expense for all operating leases was $2,006,000, $2,012,000 and
$2,037,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
11. Savings and Profit-Sharing Plans
The Company sponsors savings plans, which are qualified under section 401(k) of
the Internal Revenue Code and provide that participating employees may make
contributions of up to 15% of base wages, subject to statutory limitations.
The Company makes contributions for the benefit to each such employee equal to
50% of the employee's contributions, up to a maximum of 3% of the employee's
salary. Matching contributions under the plans were $192,000, $198,000 and
$247,000 for the years ended December 31, 2000, 2001 and 2002, respectively.
The Company's practice has been to maintain a profit-sharing plan whereby
eligible employees receive profit-sharing distributions determined as a
percentage of base salary based on the Company's achievement of profitability
targets established annually. Profit-sharing expense was $1,891,000,
$1,356,000 and $1,389,000 for the years ended December 31, 2000, 2001 and 2002,
respectively.
F-15 / 39 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Pension Plans
The Company has various defined benefit retirement plans, which cover
substantially all employees. Benefits are based upon the number of years of
service and the employee's compensation under varying formulas. The funding
policy is generally to contribute at least the minimum amount that is
acceptable under federal law for tax purposes. Contributions are intended to
provide not only for benefits attributed to service to date, but also for those
expected to be earned in the future. As of December 31, 2002, the assets of
the plan were invested principally in listed stocks, bonds, money market
certificates and cash.
The Company also maintains a supplemental defined benefit retirement plan for
key executives. This plan is not presently funded nor qualified under Section
401(a) of the Internal Revenue Code.
The components of net pension expense for the plans were as follows:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Service cost $ 391 $ 425 $ 537
Interest cost 917 1,061 1,140
Expected return on assets (1,057) (1,140) (1,196)
Amortization of prior service cost 17 40 40
Recognized net actuarial loss 3 77 123
---------- ---------- ----------
Net periodic pension cost $ 271 $ 463 $ 644
========== ========== ==========
The following tables set forth the change in benefit obligation and plan
assets, the funded status and amounts recognized in the Company's balance
sheets for the plans:
2001 2002
---------- ----------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 13,412 $ 15,820
Service cost 425 537
Interest cost 1,061 1,140
Amendments 229 -
Actuarial loss 1,112 876
Benefits paid (419) (465)
---------- ----------
Benefit obligation at end of period $ 15,820 $ 17,908
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of period $ 12,612 $ 11,630
Actual return on plan assets (622) (894)
Company contribution 142 751
Expenses (83) 127
Benefits paid (419) (465)
---------- ----------
Fair value of plan assets at end of period $ 11,630 $ 11,149
========== ==========
Funded status $ (4,190) $ (6,759)
Unrecognized net actuarial loss 4,125 6,840
Unrecognized prior service cost 273 234
---------- ----------
Net pension asset recognized in the balance sheets $ 208 $ 315
========== ==========
Amount recognized in balance sheet consists of:
Prepaid benefit cost (accrued benefit liability) $ (2,202) (5,129)
Intangible asset 274 183
Accumulated other comprehensive loss 2,136 5,261
---------- ----------
Net pension asset recognized in the balance sheets $ 208 $ 315
========== ==========
F-16 / 40 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The expected long-term rate of return on plan assets was 9% for the periods
presented. The weighted average discount rate and weighted average rate of
increase in future compensation levels used were 7.5% and 4.5% for 2000, 7.25%
and 4.25% for 2001 and 6.75% and 3.75% for 2002, respectively.
13. Postretirement Obligations
The Company provides certain health care and life insurance benefits to all
full time employees who satisfy certain eligibility requirements and reach
retirement age while employed by the Company. The Company does not fund these
benefits and accrues for the related cost generally over the employees' service
period.
The components of net periodic postretirement benefit cost ("NPPBC") were as
follows:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Service cost $ 270 336 $ 401
Interest cost 319 385 404
---------- ---------- ----------
NPPBC $ 589 $ 721 $ 805
========== ========== ==========
The following tables set forth the change in benefit obligation and plan
assets, the funded status and amounts recognized in the Company's balance
sheets:
2001 2002
---------- ----------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 4,794 $ 5,954
Service cost 336 401
Interest cost 385 404
Actuarial loss 603 1,258
Benefits paid (164) (170)
---------- ----------
Benefit obligation at end of period $ 5,954 $ 7,847
========== ==========
Change in plan assets:
Fair value of plan assets at beginning of period $ - $ -
Company contribution 164 170
Benefits paid (164) (170)
---------- ----------
Fair value of plan assets at end of period $ - $ -
========== ==========
Funded status $ (5,954) $ (7,847)
Unrecognized net actuarial loss 668 1,927
---------- ----------
Postretirement liability recognized
in the balance sheets $ (5,286) $ (5,920)
========== ==========
F-17 / 41 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
The health care cost trend used in determining the accumulated postretirement
benefit obligation ("APBO") was 12.5% grading down to 5.0% by 2008. That
assumption may have a significant effect on the amounts reported. To
illustrate, increasing the assumed trend by 1% for all years would increase the
aggregate service and interest component of NPPBC for the year ended December
31, 2002 by $138,000 (or 17.2%) and the APBO for the year then ended by
$1,175,000 (or 15.0%). Conversely, decreasing the assumed trend by 1% for all
years would decrease the aggregate service and interest component of NPPBC for
the year ended December 31, 2002 by $125,000 (or 15.5%) and the APBO for the
year then ended by $972,000 (or 12.4%).
Assumptions used to develop NPPBC and the actuarial present value APBO included
the weighted average rate of increase in future compensation levels and the
weighted average discount rate of 5% and 7.5% for 2000, 5% and 7.25% for 2001
and 5% and 6.75% for 2002, respectively.
14. Stockholder's Equity
On December 13,1999, the Board of Directors of GLAC adopted the 1999 Management
Stock Option Plan (the "1999 Option Plan") which provides for the grant of
stock options to purchase up to an aggregate of 4,050 shares of the common
stock of GLAC a price of $1,000 per share with 2,800 shares being initially
granted to employees. At the time of the grant, 16.4% of the options became
vested with the remaining options targeted to vest on the last day of plan
years 1999 through 2001 at a rate of 27.9% of the aggregate number of shares of
common stock subject to the options per year, provided that the Company attains
specified targets of Adjusted EBITDA, as defined. If the Adjusted EBITDA goal
is not attained in any plan year, the options scheduled to vest in that year
will vest on a pro rata basis as prescribed in the 1999 Option Plan, except
that unless more than 90% of the Adjusted EBITDA goal is achieved, no portion
of the options shall vest for the year. Conversely, the 1999 Option Plan
provides for make-up vesting and accelerated vesting (of up to 25% of the
options scheduled to vest in 2001), in that order, in the event that the
Adjusted EBITDA goal is surpassed in any plan year. In addition, the Plan was
amended effective December 11, 2002 to provide for the immediate accelerated
vesting of an additional 618 options. Notwithstanding the foregoing, all
options granted under the 1999 Option Plan vest automatically on April 21,
2007, regardless of performance criteria and expire on the earlier of the tenth
anniversary of the date of grant or the sale of the Company.
The following table sets forth the activity and outstanding balances of options
exercisable for shares of common stock under the 1999 Option Plan:
Available
Options For Future
Outstanding Grants
---------- ----------
At plan inception on December 13, 1999 - 4,050
Granted on December 13, 1999 ($1,000 per share) 2,800 (2,800)
---------- ----------
Balance at December 31, 1999 2,800 1,250
Options granted - -
---------- ----------
Balance at December 31, 2000 2,800 1,250
Options granted - -
---------- ----------
Balance at December 31, 2001 2,800 1,250
Options granted - -
---------- ----------
Balance at December 31, 2002 2,800 1,250
========== ==========
F-18 / 42 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
At December 31, 2002, the number of options outstanding that were vested
totaled 2,330 at an exercise price of $1,000 per share with a weighted average
remaining contractual life of 7 years. Information regarding the method used
by the Company to account for stock-based compensation and expense reported is
duscussed further in Note 1.
15. Other Income (Expense)
Other income (expense) consists of the following:
2000 2001 2002
---------- ---------- ----------
(In thousands)
1998 acquisition fee settlement $ - $ (5,000) $ 114
Gain on sale of lease right/assets - - 2,734
Export tax refund 1,112 1,286 685
Export duties - - (1,127)
Foreign exchange gain - 461 653
Other (64) (180) (1,002)
---------- ---------- ----------
$ 1,048 $ (3,433) $ 2,057
========== ========== ==========
16. Income Taxes
Components of the Company's deferred tax liabilities and assets are as follows:
2001 2002
---------- ----------
(In thousands)
Deferred tax liabilities:
Book over tax depreciable basis $ 50,973 $ 50,080
Other - net 3,584 3,386
---------- ----------
Total deferred tax liabilities 54,557 53,466
---------- ----------
Deferred tax assets:
Accrued liabilities 5,424 3,202
Valuation allowance (475) (1,166)
Minimum pension liability adjustment 748 1,841
Other - net 2,200 3,903
---------- ----------
Total deferred tax assets 7,897 7,780
---------- ----------
Net deferred tax liability $ 46,660 $ 45,686
========== ==========
The differences between tax expense computed at the statutory federal income
tax rate and actual tax expense are as follows:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Tax expense at statutory rates applied
to pretax earnings $ 4,874 $ 2,674 $ 6,453
State income tax, net of federal tax effect 9 3 (17)
Tax exempt earnings (327) (289) (529)
Effects of foreign operations 233 (1,483) 3,105
Amortization of goodwill 1,566 1,566 -
Change in valuation allowance 475 - 691
Other (357) 517 (210)
---------- ---------- ----------
Income tax expense $ 6,473 $ 2,988 $ 9,494
========== ========== ==========
F-19 / 43 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Income taxes consist of the following:
2000 2001 2002
---------- ---------- ----------
(In thousands)
Current:
Federal $ 4,731 $ 3,778 $ 876
State 323 366 77
Foreign 4,907 4,883 8,422
---------- ---------- ----------
9,962 9,027 9,375
---------- ---------- ----------
Deferred:
Federal (2,787) (4,197) 1,159
State (309) (361) (103)
Foreign (392) (1,481) (937)
---------- ---------- ----------
(3,489) (6,039) 119
---------- ---------- ----------
Total $ 6,473 $ 2,988 $ 9,494
========== ========== ==========
Income taxes paid were approximately $10,551,000, $8,557,000 and $4,051,000 for
the years ended December 31, 2000, 2001 and 2002, respectively.
U.S. income taxes have not been provided on the undistributed earnings of
Copetro S.A. ($34,437,000 as of December 31, 2002) because such earnings are
expected to be reinvested. Upon distribution of those earnings, the Company
would be subject to U.S. income taxes (subject to an adjustment for foreign tax
credits and withholding taxes, if any).
Income (loss) before income taxes and extraordinary item attributable to
domestic operations (which included results from export sales) was
$997,000, $(5,429,000) and $6,256,000 for the years ended December 31,
2000, 2001 and 2002, respectively.
17. Financial Information Relating to Segments
The Company has three reportable business segments.
Anode Grade CPC-is produced and marketed directly to primary aluminum
smelters world-wide for use as the principal raw material in the production
of carbon anodes, a key component in the aluminum smelting process.
Industrial Grade CPC-is produced and marketed for use in a variety of non-
aluminum, industrial applications, including as a raw material in the
production of titanium dioxide, as a recarburizer (carbon additive) in the
manufacture of steel and foundry products and for use in other specialty
materials and chemicals markets.
RPC Trading-involves the world-wide marketing of raw petroleum coke ("RPC")
for use as the raw material in the production of CPC and as a fuel source in
a variety of other industrial applications.
The production and distribution of CPC, which is the focus of the first two
units, is accomplished utilizing the same process, plant facilities and
operating assets. The RPC trading business, as conducted by the Company,
generally involves the use of such assets on a limited basis. Accordingly,
the Company does not segregate, or otherwise account for, the assets by
segments.
F-20 / 44 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
Anode Industrial
Grade Grade RPC
CPC CPC Trading Other Total
---------- ---------- ---------- ---------- ----------
(In thousands)
---------2000----------
Net sales $ 194,066 $ 55,224 $ 11,792 $ 2,519 $ 263,601
Cost of goods sold (144,409) (40,882) (9,932) (7,495) (202,718)
---------- ---------- ---------- ---------- ----------
Segment Profit $ 49,657 $ 14,342 $ 1,860 $ (4,976) 60,883
========== ========== ========== ==========
Selling, general and
administrative expenses (19,852)
Interest expense, net (28,162)
Other income (expense) 1,048
----------
Income before income taxes and extraordinary item $ 13,917
==========
Anode Industrial
Grade Grade RPC
CPC CPC Trading Other Total
---------- ---------- ---------- ---------- ----------
(In thousands)
---------2001----------
Net sales $ 194,464 $ 54,024 $ 19,786 $ 2,280 $ 270,554
Cost of goods sold (149,000) (41,723) (18,300) (6,943) (215,966)
---------- ---------- ---------- ---------- ----------
Segment Profit $ 45,464 $ 12,301 $ 1,486 $ (4,663) 54,588
========== ========== ========== ==========
Selling, general and
administrative expenses (18,693)
Interest expense, net (24,822)
Other income (expense) (3,433)
----------
Income before income taxes and extraordinary item $ 7,640
==========
Anode Industrial
Grade Grade RPC
CPC CPC Trading Other Total
---------- ---------- ---------- ---------- ----------
(In thousands)
---------2002----------
Net sales $ 253,085 $ 44,605 $ 8,817 $ 1,060 $ 307,567
Cost of goods sold (207,494) (34,350) (5,115) (5,993) (252,952)
---------- ---------- ---------- ---------- ----------
Segment Profit $ 45,591 $ 10,255 $ 3,702 $ (4,933) 54,615
========== ========== ========== ==========
Selling, general and
administrative expenses (11,803)
Interest expense, net (26,432)
Other income (expense) 2,057
----------
Income before income taxes $ 18,437
==========
F-21 / 45 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
18. Operations by Geographic Area
The following is a summary of the Company's operations by geographic area:
Year Ended December 31,
2000 2001 2002
---------- ---------- ----------
(In thousands)
Net Sales
United States $ 192,580 $ 208,224 $ 268,110
Foreign 71,021 62,330 39,457
---------- ---------- ----------
$ 263,601 $ 270,554 $ 307,567
========== ========== ==========
Operating income
United States $ 28,705 $ 24,657 $ 30,880
Foreign 12,326 11,238 11,932
---------- ---------- ----------
$ 41,031 $ 35,895 $ 42,812
========== ========== ==========
Assets
United States $ 393,445 $ 411,714 $ 452,915
Foreign 80,128 70,433 70,417
---------- ---------- ----------
$ 473,573 $ 482,147 $ 523,332
========== ========== ==========
Exports from U.S. operations were approximately $97,023,000, $117,334,000 and
$151,798,000 for the years ended December 31, 2000, 2001 and 2002,
respectively. Export sales to Western Europe as a percentage of United States
net sales were 26.7%, 23.0% and 25.4% for the years ended December 31, 2000,
2001 and 2002, respectively. Export sales to the Mideast as a percentage of
United States net sales were 18.9% for the year ended December 31, 2001.
Export sales to North America (exclusive of the U.S.) as a percentage of United
States net sales were 12.9% for the year ended December 31, 2002. The
Company's foreign operations are conducted principally in South America.
F-22 / 46 of 51
Great Lakes Carbon Corporation
and Subsidiaries
Notes to Consolidated Financial Statements (continued)
19. Quarterly Financial Data (unaudited)
The following is a summary of Company's quarterly results of operations:
2001 Quarterly Data
3/31 6/30 9/30 12/31
---------- ---------- ---------- ----------
(In thousands)
Net sales $ 72,042 $ 69,517 $ 68,194 $ 60,801
Gross profit 14,401 14,353 12,735 13,099
Operating income 9,841 9,301 7,891 8,862
Other expense 5,965 5,349 5,946 10,995
Income before income tax and
extraordinary expense 3,876 3,952 1,945 (2,133)
Income tax expense (benefit) 1,823 1,737 877 (1,449)
Extraordinary gain, net of tax 3,850 - - (133)
Net income 5,903 2,215 1,068 (817)
Adjusted EBITDA (1) 15,839 15,421 13,958 14,829
2002 Quarterly Data
3/31 6/30 9/30 12/31
---------- ---------- ---------- ----------
(In thousands)
Net sales $ 55,346 $ 83,220 $ 87,178 $ 81,823
Gross profit 10,363 13,141 17,623 13,488
Operating income 7,419 10,432 14,551 10,410
Other expense 495 5,235 10,146 8,499
Income before income tax and
extraordinary expense 6,924 5,197 4,405 1,911
Income tax expense (benefit) 3,737 3,057 2,004 696
Net income 3,187 2,140 2,401 1,215
Adjusted EBITDA (1) 12,484 15,832 19,862 15,517
(1) Adjusted EBITDA should not be considered a substitute for net income,
cash flow from operating activities or other cash flow statement data
prepared in accordance with generally accepted accounting principles or as
an alternative to net income as an indicator of operating performance or
cash flows as a measure of liquidity. Adjusted EBITDA is presented here
only to provide additional information with respect to the Company's ability
to satisfy debt service. While Adjusted EBITDA is frequently used as a
measure of operations and the ability to meet debt service requirements, it
is not necessarily comparable to other similarly titled captions of other
companies due to potential inconsistencies in the method of calculation.
20. Extraordinary Item
Extraordinary gains related to the repurchase of the Company's debt of
approximately $3,804,000 and $3,717,000 (net of income tax expenses of
$2,048,000 and $2,073,000) were recognized in 2000 and 2001, respectively.
21. Litigation and Contingencies
The Company is a party to several proceedings, which are in various stages of
resolution. Management of the Company, after discussion with legal counsel, is
of the opinion that the ultimate resolution of these matters will not have a
material effect upon the financial condition of the Company.
F-23 / 47 of 51
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this annual report to be
signed on its behalf by the undersigned thereunto duly authorized on the 26th
day of March 2003.
Great Lakes Carbon Corporation
By: /s/JAMES D. MCKENZIE
-----------------------------
James D. McKenzie, President
and Chief Executive Officer
Power of Attorney
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed by the following persons in the capacities and on
the dates indicated.
Signature Title Date
- --------------------------- ----------------------------- ------------------
/s/JAMES D. MCKENZIE President, Chief Executive
- --------------------- Officer and Director March 26, 2003
James D. McKenzie (Principal Executive Officer)
* Senior Vice President, March 26, 2003
- --------------------- Operations and Administration
A. Frank Baca
* Vice President, Sales March 26, 2003
- ---------------------
Robert C. Dickie
* Vice President, Raw Materials March 26, 2003
- ---------------------
Craig L. Beilharz
* Controller, Assistant March 26, 2003
- --------------------- Secretary and Chief
Adela I. Robles Financial Officer
* Non-Executive Chairman of March 26, 2003
- --------------------- the Board, Director
Theodore C. Rogers
* Director March 26, 2003
- ---------------------
W. Richard Bingham
* Director March 26, 2003
- ---------------------
Kim A. Marvin
By: /s/JAMES D. MCKENZIE
- --------------------------
James D. McKenzie
Attorney-in-Fact
48 of 51
CERTIFICATION
Each of the undersigned hereby certifies in their capacity as an officer of
Great Lakes Carbon Corporation (the "Company") that the Annual Report of the
Company on Form 10-K for the year ended December 31, 2002 fully complies with
the requirements of Section 13(a) of the Securities Exchange Act of 1934 and
that the information contained in such report fairly presents, in all material
respects, the financial condition of the Company at December 31, 2002 and 2001
and the results of operations of the Company for the three years then ended.
Date: 3/26/03 /s/JAMES D. MCKENZIE
-------------------------------
President and Chief Executive
Officer
Date: 3/26/03 /s/ADELA I. ROBLES
-------------------------------
Controller, Assistant Secretary
and Chief Financial Officer
49 of 51
CERTIFICATION
I, James D. McKenzie, certify that:
1. I have reviewed this annual report on Form 10-K of Great Lakes Carbon
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evalua-
tion as of the Evaluation Date;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer(s) and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 3/26/03 /s/JAMES D. MCKENZIE
-------------------------------
President and Chief Executive
Officer
50 of 51
CERTIFICATION
I, Adela I. Robles, certify that:
1. I have reviewed this annual report on Form 10-K of Great Lakes Carbon
Corporation;
2. Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;
3. Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;
4. The registrant's other certifying officer(s) and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
annual report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the effective-
ness of the disclosure controls and procedures based on our evalua-
tion as of the Evaluation Date;
5. The registrant's other certifying officer(s) and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors:
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer(s) and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.
Date: 3/26/03 /s/ADELA I. ROBLES
-------------------------------
Controller, Assistant Secretary
and Chief Financial Officer
51 of 51