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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, 1998 Commission File Number 333-59541
GREAT LAKES ACQUISITION CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0576974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
551 Fifth Avenue, New York, New York 10176
(Address of principal executive offices) (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:
13 1/8% Senior Discount Debentures due 2009
(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 19, 1999, the registrant had outstanding 65,330 shares of
its Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
None
1
Great Lakes Acquisition Corp.
Annual Report on Form 10-K for the Year Ended December 31, 1998
Table of Contents
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . 6
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 6
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 7
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 8
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 12
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . . . . . 12
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 12
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 14
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . . 15
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 15
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 16
Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . F-1
Schedule I - Parent company-only financial information. . . . . . . . . . S-1
2
PART I
Item 1. Business
Introduction
Great Lakes Acquisition Corp. (the "Company" or "GLAC"), through its
wholly-owned operating subsidiary Great Lakes Carbon Corporation ("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 84% of the
Company's total 1998 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, a by-product of petroleum refining, utilizing a high-temperature,
rotary-kiln process developed by the Company in the 1930's.
The Company operates rotary kilns having a total capacity of 1.6
million tons at 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. In May of 1998 Copetro completed the construction of a 220,000 ton
coke calcining unit at the port of La Plata plant site which doubled the
existing capacity of the facility at a cost of $22 million dollars.
On May 22, 1998, GLAC, a corporation formed by American Industrial
Partners (AIP), a private investment fund, acquired all of the issued and
outstanding capital stock of GLC. The aggregate consideration paid by AIP, its
affiliates and certain other individuals associated with AIP was approximately
$375.2 million.
In order to finance the acquisition, (i) AIP and affiliates of, and
certain other individuals associated with, AIP contributed $65.0 million and
$330,000, respectively to GLAC in exchange for common equity of GLAC (the "AIP
Equity Contribution"), (ii) GLAC contributed $92.4 million (the sum of $65.3
million of the AIP Equity Contribution and the proceeds from the issuance and
sale by GLAC of 13 1/8% Senior Discount Debentures (the "Debentures") to the
equity of GLC, (iii) GLC entered into a syndicated senior secured agreement
pursuant to which term loans in an aggregate principal amount of $111.0 million
were borrowed (the "Term Loans") and which also provides for additional
borrowings of up to $25.0 million under a revolving loan facility (the
"Revolving Credit Facility") which was not drawn upon, and (iv) GLC issued and
sold $175.0 million aggregate principal amount of 10 1/4% Senior Subordinated
Notes due 2008 (the "Notes"). In connection with the acquisition, GLC redeemed
all of its then outstanding 10% Senior Secured Notes due 2006 in an aggregate
principal amount of $65.0 million plus a tender premium of $9.1 million (not
including accrued interest) through a public tender offer consummated
concurrently with the Acquistion.
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
3
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 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. For the fourth year in a row, aluminum
production increased primarily due to the expansion of existing smelting
capacity, although the overall growth rate was lower than in recent years. As
a result of the continued strong demand for CPC, the Company operated at
effective capacity in 1998.
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 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, i.e., carbon additive, 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 raw petroleum coke, the
raw material used to produce CPC. Raw petroleum coke 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 raw petroleum coke.
Because a substantial portion of worldwide petroleum refining capacity is based
domestically, the United States has a majority of worldwide CPC production
capacity. Sales of raw petroleum coke do not constitute a material portion of
oil refiners' revenues.
CPC quality, which is extremely important to aluminum smelters, is
highly dependent upon the quality of the raw petroleum coke utilized in the
calcining process. The raw petroleum coke 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 raw petroleum coke 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 raw petroleum coke 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 raw petroleum cokes 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. Raw petroleum coke 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 1998 the Company purchased approximately 47% of
its raw petroleum coke requirements from three petroleum refiners.
4
Manufacturing Process
The calcining process essentially drives off moisture, impurities and
volatile matter from the raw petroleum coke 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 raw petroleum cokes 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 1998 approximately one-third of the Company's net sales were to
U.S.-based customers and approximately two-thirds were to customers in
international markets. Approximately two-thirds of the Company's 1998 net
sales were made to five customers with Alcoa and Billiton accounting for 29.6%
and 15.4% of the Company's net sales, respectively.
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 five major domestic calciners of anode grade CPC.
Two calciners, GLC and Calciner Industries Inc., are independent. The other
calciners are Atlantic Richfield Company, whose petroleum refining operations
provide its raw material supply, Reynolds Metals Co., which uses some of its
CPC for internal consumption, and Venture Coke Company ("Venco"), which is 50%
owned by Conoco.
Employees
As of December 31, 1998 the Company employed 259 persons. The Company
is a party to collective bargaining agreements at two of its three facilities,
covering approximately one-third of its employees. A collective bargaining
agreement with the International Association of Machinists and Aerospace
5
Workers covers hourly employees at the Enid, Oklahoma facility. Certain
employees at the La Plata, Argentina facility of Copetro are covered by an
annual labor contract which minimum terms are governed by Argentine government
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 $3.5 million on capital expenditures related to pollution control
facilities in 1998 and anticipates spending approximately $1.5 million in both
1999 and 2000. Approximately half of the environmental expenditures in 1998
were in conjunction with the facility expansion at Copetro.
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 or results of operations of
the Company.
Item 2. Properties
The Port Arthur facility has four kilns which have the capacity to
produce 680,000 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. A
waste heat recovery facility, owned by a third party, is located at the plant
site under a sublease arrangement with the Company under which terms the
Company receives revenue from the delivery of flue gas from its kilns to the
facility.
The Enid facility has three kilns which have the capacity to produce
490,000 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 La Plata, Argentina facility operated by Copetro has two kilns
with the capacity to produce 440,000 tons per year of CPC. The Copetro
capacity was recently doubled when a second 220,000 ton kiln was built in 1998.
In conjunction with the expansion the plant also improved its capability to
produce industrial grade CPC. The plant is located on 30 acres of land at the
port of La Plata. The plant has the capability to receive raw petroleum coke
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, TX 77060 under a lease
expiring in January, 2001.
The Company's executive office is located in leased space at 551 Fifth
Avenue, Suite 3600, New York, NY 10176.
6
Item 3. Legal Proceedings
The Company is a party to legal proceedings which 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, 1998.
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 $.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 there were seven holder of
record of the Company's common stock.
(c) During 1998 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.
7
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 of
the predecessor company as of and for the years ended December 31, 1994, 1995,
1996 and 1997, and from January 1, 1998 to May 21, 1998 and for the period
then ended. Adjusted EBITDA represents operating income before depreciation,
amortization, HII fees and payments pursuant to employment and consulting
agreements which were terminated upon consumation of the Acquisition and
on-going AIP fees and expenses. 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
Year Ended December 31, May 21 Dec. 31
1994 1995 1996 1997 1998 1998
--------- --------- --------- --------- --------- ---------
Statement of
Operations Data:
- ------------------
Net sales $130,797 $178,628 $242,744 $231,911 $ 90,849 $146,003
Gross Profit 20,914 36,440 66,373 59,521 23,681 39,255
Operating income 12,688 26,753 51,052 41,011 10,611 27,974
Other income
(expense) (12,633) (5,302) (8,345) (6,336) (2,248) (22,071)
Income before
income tax and
extraordinary item 55 21,451 42,707 34,675 8,363 5,903
Income tax expense 189 7,633 15,148 12,691 2,839 4,893
Extraordinary loss,
net of tax benefit - - - - 7,113 -
--------- --------- --------- --------- --------- ---------
Net income (loss) $ (134) $ 13,818 $ 27,559 $ 21,984 $ (1,589) $ 1,010
========= ========= ========= ========= ========= =========
Adjusted EBITDA:
- ----------------
Operating income $ 12,688 $ 26,753 $ 51,052 $ 41,011 $ 10,611 $ 27,974
Depreciation and
amortization 7,898 8,411 9,295 9,955 3,443 12,013
HII fees & expenses 1,400 1,350 1,696 1,436 8,831 22
Payments pursuant
to agreements
terminated at
Acquisition - - 4,520 6,780 318 -
AIP fees & expenses - - - - - 1,185
--------- --------- --------- --------- --------- ---------
$ 21,986 $ 36,514 $ 66,563 $ 59,182 $ 23,203 $ 41,194
========= ========= ========= ========= ========= =========
Balance sheet data
(at period end):
- ------------------
Total assets $105,390 $113,930 $148,905 $174,911 $182,342 $492,886
Total long-term
debt 11,907 74,291 72,885 84,014 88,781 331,098
8
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Through its wholly-owned operating subsidiary, GLC, the Company is the
world's largest producer 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
raw petroleum coke ("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.
Basis of Presentation
The Company acquired GLC on May 22, 1998. The following discussion
provides an assessment of the consolidated results of operations and liquidity
and capital resources for the Company and the Predecessor. Unless otherwise
indicated, 1998 historical results represent the combined operating results of
the Predecessor from January 1, 1998 to May 21, 1998 and the Company from the
date of the Acquisition through December 31, 1998. The Company had no
substantive operations prior to the Acquisition.
As further discussed in Note 1 to the Condensed Consolidated Financial
Statements the Acquisition was accounted for as a purchase. Accordingly, the
operating results for the periods subsequent to May 21, 1998 reflect the
results of operations of the Company subsequent to the Acquisition and include
the impact of adjustments required under the purchase method of accounting.
Results of Operations
Year Ended December 31, 1998 Versus Year Ended December 31, 1997
The Company's net sales for the year ended December 31, 1998 increased
2.1% to $236.9 million from $231.9 million in 1997. Net sales of anode grade
CPC increased 4.9% to $199.1 million while net sales of industrial grade CPC
decreased 10.9% to $35.8 million.
The increase in anode grade CPC net sales was primarily the result of
an 8.6% increase in sales volume to 1,214,078 tons attributable primarily to
the startup of a second kiln expansion at La Plata, Argentina and continued
strong demand from aluminum smelters. This increase in sales volume was
partially offset by a decline of 3.4% in average selling price. This reduction
represents a price accommodation to the aluminum market in light of weak
aluminum prices.
The decrease in industrial grade CPC net sales was the result of a
16.1% decrease in sales volume to 251,286 tons which was partially offset by a
6.2% increase in selling price. The decrease in sales volume was primarily the
result of the scheduling of greater anode grade CPC shipments in 1998.
The Company's 1998 gross profit increased by 5.7% to $62.9 million from
$59.5 million in 1997. The increase in gross profit was due to the increase
in sales discussed above partially offset by an increase in cost of goods sold.
The higher cost of goods sold was mainly the result of higher sales volume
offset in part by a decrease in the average cost per ton primarily due to lower
raw material costs. Additional depreciation related to the Acquisition in the
period subsequent to May 21, 1998 amounted to $3.2 million and represented
210.5% of the total increase in cost of goods sold.
Operating income decreased by 5.9% to $38.6 million from $41.0 million
in 1997. The decline in operating income was due a 31.6% increase in selling,
general and administrative expenses partially offset by the increase in gross
profit discussed above. The increase in selling, general and administrative
9
expenses was primarily the result of the payment of certain non-recurring fees
and expenses under agreements that were terminated at the date of the
Acquisition, increased amortization expense related mainly to goodwill
established when the Company was acquired and AIP management fee expense
incurred subsequent to the Acquisition.
Income before income tax and extraordinary item decreased 58.9% to
$14.3 million in 1998 from $34.7 million in 1997. The decrease was primarily
attributable to an $18.5 million increase in net interest expense and the
decline in operating income discussed above. The increase in net interest
expense is due mainly to the greater amount of debt incurred by the Company
in order to finance the Acquisition.
The Company's effective tax rate increased to 54.2% in 1998 from 36.6%
in 1997 primarily as a result of the tax effects of income from foreign
operations and non-deductible amortization of goodwill in the period subsequent
to the Acquisition.
An extraordinary loss on early extinguishment of debt of $7.1 million
(net of income tax benefit of $4.0 million) was recognized during the period
prior to the Acquisition. This loss relates to the premium and unamortized
debt issuance costs associated with the tender offer for and repurchase of the
10% Senior Secured Notes in connection with the Acquisition. As a result of
the factors discussed above, results for the year ended December 31, 1998
decreased 102.6% to a loss of $0.6 million from a profit of $22.0 million in
the 1997.
Adjusted EBITDA increased by 8.8% to $64.4 million in 1998 from $59.2
million in 1997 for the reasons set forth above.
Year Ended December 31, 1997 Versus Year Ended December 31, 1996
The Company's net sales for the year ended December 31, 1997 decreased
4.5% to $231.9 million from $242.7 million in 1996. Net sales of anode grade
CPC decreased 4.8% to $189.9 million while net sales of industrial grade CPC
increased 4.2% to $40.2 million.
The decrease in anode grade CPC net sales was primarily the result of a
6.4% decline in the average selling price per ton in 1997 from 1996. This
decline in average selling price was partially offset by an increase of 1.8% in
sales volume in 1997 to 1,118,393 tons. The 1997 anode grade CPC price decline
was largely the result of a price accomodation given the significant 71.5%
increase in anode grade CPC selling prices from 1994 to 1996. Anode grade CPC
prices began to increase in mid-1995 as aluminum smelters started to operate at
higher production levels when the Memorandum of Understanding, a trade pact
that limited aluminum production, terminated. The increased demand for anode
grade CPC drove prices up dramatically through year-end 1996. Prices for anode
grade CPC decreased slighty in 1997 as the market stabilized at the higher
rates of primary aluminum production. The continuing growth in primary
aluminum smelting through capacity expansions, restarts and capacity creep has
maintained demand for CPC at high levels. As a result the anode grade CPC
market remained firm.
The increase in industrial grade CPC net sales was the result of an
8.3% increase in average selling price which was partially offset by a 3.8%
decrease in sales volume. These changes were primarily the result of increased
market prices across most product application and a slight decrease in titanium
dioxide shipments.
The Company's 1997 gross profit decreased 10.3% to $59.5 million from
$66.4 million in 1996. The decrease in gross profit was due to the reduction
in sales discussed above which was partially offset by the decrease in cost of
goods sold. The lower cost of goods sold was primarily result of lower raw
material costs.
Operating income decreased 19.7% to $41.0 million in 1997 from $51.1
million in 1996. The decline in operating income was due to the decrease in
gross profit discussed above and an increase in selling, general and
administrative expenses. The increase in selling, general and administrative
expenses was primarily the result of increased compensation payments pursuent
to employment and consulting agreements which were terminated upon consumation
of the Acquisition Transactions.
10
Income before income taxes decreased 18.8% to $34.7 million in 1997
from $42.7 million in 1996. The reduction was attributable to the reduced
operating income discussed above, partially offset by a $2.0 million decrease
in other expense. This decrease was primarily a result of greater interest
income from greater cash balances in 1997. As a result of the factors
discussed above, net income for 1997 decreased 20.2% to $22.0 million from
$27.6 million in 1996.
Adjusted EBITDA decreased by 11.1% to $59.2 million in 1997 from $66.6
million in 1997 for the reasons set forth above.
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. During 1997 and 1998 the Company undertook a second kiln expansion at
the Company's LaPlata, Argentina ficility.
Net cash flow provided by operating activities was $21.0 million, $31.3
million and $27.7 million in 1998, 1997 and 1996, respectively. The decrease
in operating cash flow from 1997 to 1998 was primarily due to the lower results
discussed above, partially offset by a decrease in working capital
requirements. The improvement in the Company's operating cash flow in 1997
over 1996 was mainly a result of lower working capital requirements, offset in
part by lower net income.
Capital expenditures were $17.0 million, $21.4 million and $6.4 million
for 1998, 1997 and 1996, respectively. The $4.4 million decrease in capital
expenditures in 1998 as compared to 1997 related mainly to the wind-down of the
expansion of the Argentine facility. Of the increase in capital expenditures
in 1997, $13.4 million and $1.0 million were attributable to the Argentine
expansion and the errection of a new ship loader at Port Arthur, respectively.
The expansion of the Argentine facility was completed during the second
quarter of 1998. The Company financed the expansion through a local Argentine
line of credit that had a maximum availability of $20.0 million, of which a
total of $15.9 million ($4.0 million in 1998) was ultimately borrowed.
Investing activities for the period subsequent to the Acquisition also
includes $274.3 million representing the consideration paid to the former
stockholders (net of cash acquired) on the date the Company was acquired on
May 22, 1998.
Financing activities refect the receipt by the Company of the proceeds
of $175.0 million and $30.1 million from the sale of the Notes and the
Debentures, respectively, borrowings of $111.0 million in Terms Loans and a
cash contribution of $65.3 million from AIP and affiliates of, and certain
other individuals associated with, AIP that were used by the Company to fund
the stock purchase and related transaction costs of approximately $25 million
(of which approximately $23 million were capitalized as deferred financing
costs). As a condition to the transaction, the Company also repurchased all of
its then outstanding 10% Senior Secured Notes in an aggregate principal amount
of $65.0 million plus a tender premium of $9.1 million (not including accrued
interest) through a public tender offer consummated concurrently with the
Acquistion. In addition, the Company repaid $13.9 million of long-term debt,
including a $12.0 million prepayment of the Term Loans, in the period
subsequent to the Acquisition.
The Notes are unsecured general obligations of the Company and,
although not currently guaranteed, will require essentally all future domestic
subsidiaries of the Company, if any, to be guarantors of the debt. Interest on
the Notes is payble 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
11 3/4%.
The Company is a party to a credit agreement that includes Term Loans
comprised of three single tranche loans in an origianl 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 $7.5 million
sublimit for letters of credit). The credit agreement is secured by
substantially all the assets of the Company and requires that the Company
satisfy certain financial ratios. At March 19, 1999 there were no borrowings
under the Revolving Credit Facility and approximately $3.3 million of letters
of credit were outstanding.
The Debentures are unsecured general obligations of the Company,
subordinated in right of payment to essentially all subsidiary liabilities. No
cash interest will be payable on the Debentures until November 15, 2003 but the
accreted value will increase (representing amortization of original issue
discount) to approximately $56,600,000 through May 15, 2003. The Debentures
require the Company to make cash interest payments semiannually commencing in
November 2003 of approximatley $7,432,000 per year ($3,716,000 in 2003) and a
principal payment of approximately $56,600,000 at maturity in May 2009. The
Debentures are subject to early redemption as set forth under the terms of the
indenture. The Company is a holding company and its ability to pay its debt
service obligations is dependent upon the receipts of dividends and other
distributions from its direct and indirect subsidiaries. The Company does not
have, and may not in the future have, any assets other than the common stock of
GLC. GLC, in turn is a party to the Notes indenture and the credit agreement
each of which imposes substantial restrictions on GLC's ability to pay
dividends to the Company.
The Company expects to meet its liquidity needs, including debt
service, through cash from operations and its revolving credit facility.
Year 2000
The Year 2000 ("Y2K") issue is the result of date-sensitive devices,
systems and computer programs that were developed using two digits rather than
four to define the applicable year. Any such technologies may recognize a
year containing "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including a temporary inability to engage in normal business
activities.
The Company has completed its Y2K compliance assessment and expects to
complete any required remediation efforts in order to be Y2K compliant by the
second quarter of 1999. Costs for Y2K efforts are not being accumulated
separately. The Company believes that the costs to the Company for historical
and future remediation of Y2K issues will not have a material adverse effect on
the Company.
The Company, like most companies, will also be subject to Y2K risk
from its reliance on third parties for a wide variety of goods and servies,
such as raw materials and electricity. The extent to which such reliance could
have a material adverse effect on the Company is indiscernible.
Based on preliminary communications with customers and suppliers to
determine the extent of their Y2K efforts the Company believes its exposure to
Y2K risk from material third party relationships is not material. The Company
believes that appropriate actions have been taken to minimize the risk to its
operations and financial condition.
Contingency plans that address a reasonably likely worst case scenario
are currently being developed. These plans will address the key systems and
third parties that present potential significant risk. The plans will analyze
the strategies and resources necessary to restore operations in the unlikely
event that an interruption does occur. The plans will also outline a recovery
program detailing the necessary participants, processes and equipment needed
to restore operations. Contingency plans are expected to be finalized in the
second quarter of 1999.
12
Item 8. Financial Statements and Supplementary Data
The following consolidated financial statements of the Company and its
subsidiaries, together with the report of independent auditors thereon, are
filed as part of this report:
Consolidated Financial Statements:
Report of Independent Auditors
Consolidated Balance Sheets as of December 31, 1997 (predecessor) and
December 31, 1998 (Company)
Consolidated Statements of Operations for the years ended December 31, 1996
and 1997, the period January 1, 1998 to May 21, 1998 (predecessor) and the
period May 22, 1998 to December 31, 1998 (Company)
Consolidated Statements of Stockholders' Equity for the years ended
December 31, 1996 and 1997, the period January 1, 1998 to May 21, 1998
(predecessor) and the period May 22, 1998 to December 31, 1998 (Company)
Consolidated Statements of Cash Flows for the years ended December 31, 1996
and 1997, the period January 1, 1998 to May 21, 1998 (predecessor) and the
period May 22, 1998 to December 31, 1998 (Company)
Notes to the Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the name, age as of March 19, 1999 and
position of the persons serving as directors or executive officers of the
Company:
- ------------------------------------------------------------------------------
Name Age Position
- ----------------- --- ---------------------------------------------------
James D. McKenzie 54 President and Chief Executive Officer, Director
A. Frank Baca 55 Senior Vice President, Operations and Administration
Robert C. Dickie 50 Vice President, Sales
James W. Betts 61 Vice President, Raw Materials
Theodore C. Rogers 64 Non-Executive Chairman of the Board, Director
Richard W. Bingham 63 Director
Kim A. Marvin 37 Director
Alfred E. Barry 43 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.
13
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 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. Betts has been Vice President, Raw Materials of the Company and
Old GLC since 1986. Since joining Old GLC in 1968, he has held a number of
poitions in sales and raw materials procurement. Since 1992, he has been a
director of Zoltek Companies, Inc.
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 Sectretary 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., Derby International, Easco Corporation, RBX Corporation,
Stanadyne Automotive Corp., Steel Heddle Group, Inc., Sunshine Materials, Inc.
and Sweetheart Holdings, Inc.
Mr. Bingham has served as Director of the Company since May 1998. He
is a Director, the President, the Treasurer and the Assistant Sectretary 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., Dearfield
Associates, RBX Corporation, Stanadyne Automotive Corp., SF Holdings Inc. and
Sweetheart Holdings, Inc.
Mr. Marvin has served as Director of the Company since May 1998. He
joined the San Francisco office of American Indurtrial 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 Easco
Corporation and Bucyrus International, Inc.
Mr. Barry has served as Director of the Company since February 1999.
He joined the New York office of American Industrial Partners as a Principal in
1996. From 1991 to 1996, Mr. Barry was a Senior Manager in the manufacturing
practice at Deloitte and Touche Consulting Group.
Directors do not receive compensation for their services as directors.
14
Item 11. Executive Compensation
The following table sets forth information concerning cash compensation
paid by the Company for the years ended December 31, 1998, 1997 and 1996 to the
Company's Chief Executive Officer and each of the three other most highly
compensated executive officers of the Company. The Company does not have any
non-cash compensation or stock appreciation rights plans.
Annual Compensation
-------------------
All Other
Name and Position Year Salary Bonus Other (1) Compensation(2)
- ------------------------ ---- -------- -------- -------- --------------
James D. McKenzie 1998 $279,170 $300,000 $ -- $5,000
President and Chief 1997 250,008 300,000 -- 4,750
Executive Officer 1996 250,008 150,000 -- --
A. Frank Baca 1998 165,000 85,050 -- 4,950
Senior Vice President, 1997 157,500 37,440 -- 4,725
Operations and 1996 150,000 17,524 7,134 --
Administration
Robert C. Dickie 1998 140,004 70,201 -- 4,200
Vice President, Sales 1997 130,002 29,952 4,883 3,900
1996 120,000 15,361 34,736 --
James W. Betts 1998 120,000 60,750 -- 3,600
Vice President, 1997 112,500 26,208 33,817 3,375
Raw Materials 1996 105,000 13,910 67,000 --
- -------------------------------------------------------------------------------
(1) The amounts shown in this column reflect the Company's payment of reloca-
tion allowances.
(2) The amounts shown in this column reflect the Company's contribution to the
named executive officer's 401(k) account.
- -------------------------------------------------------------------------------
The Company's practice has been to maintain a profit-sharing plan which
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.
The Company currently sponsors two Savings Plans for employees; one for
salaried employees and the other for hourly employees covered by the collective
bargaining agreement at the Enid, Oklahoma plant. 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 make contributions to an account
in the employee's name of up to 15% of base wages. 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 salary.
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 agreement at the Enid, Oklahoma plant, 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.
15
The following table shows the estimated annual straight-life annuity
benefit payable under the Salaried Plan and the SERP to the executives who
parcipate 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. Mr. McKenzie is, at present, the only participant in the
SERP and the benefit payable to him upon retirement at age 65 is determined
based upon his full salary and years of service. The benefit payable upon
retirement at age 65 to each of the other named executive officers is
determined based upon each such executives's salary (subject to the limitations
imposed by Section 401(a)(17) of the Code, currently $160,000), and years of
service.
Years of
Service Annual
Name at Age 65 Benefit
------------------------ --------- --------
James D. McKenzie 38 $163,940
A. Frank Baca 41 90,142
Robert C. Dickie 24 53,808
James W. Betts 34 65,468
-----------------------------------------------------
The compensation of participants used to calculate the retirement
benefit consists soley of annual base salary.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1998
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
- -------------------------------------------------- --------- -------
American Industrial Partners Capital Fund II, L.P. 65,000 99.5%
Theodore C. Rogers (1) 65,000 99.5%
W. Richard Bingham (1) 65,000 99.5%
All directors and officers as a group (8 persons) 65,000 99.5%
- ------------------------
(1) Messrs. Rogers and Bingham share investment and voting power with respect
to the securities owned by AIP, which owns 99.5% of the outstanding shares
of the Company, but each disclaims beneficial ownership of any shares of
Company Common Stock.
Item 13. Certain Relationships and Related Transactions
Financial and Management Services
At the close of the Acquisition transactions, AIP was paid a fee of
$5.0 million and reimbursed for out-of-pocket expenses in connection with the
negotiation of the Acquisition transactions and for providing certain
investment banking services to the Company, including the arrangement and
negotiation of the Notes, the credit agreement and the GLAC Debentures, and for
other financial advisory and management consulting services.
AIP provides substatial 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,
16
payable semiannually 45 days after the scheduled interest payament 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).
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a)(1) List of Financial Statements:
Index to Financial Statements...............................................F-1
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets -
December 31, 1997 (predecessor) and December 31, 1998 (Company).............F-3
Consolidated Statements of Operations -
For the years ended December 31, 1996 and 1997, the period
January 1, 1998 to May 21, 1998 (predecessor) and the period
May 22, 1998 to December 31, 1998 (Company). . . . . . . . . . . . . .. . .F-5
Consolidated Statements of Stockholders' Equity -
For the years ended December 31, 1996 and 1997, the period
January 1, 1998 to May 21, 1998 (predecessor) and the period
May 22, 1998 to December 31, 1998 (Company). . . . . . . . . . . . . .. . .F-6
Consolidated Statements of Cash Flows -
For the years ended December 31, 1996 and 1997, the period
January 1, 1998 to May 21, 1998 (predecessor) and the period
May 22, 1998 to December 31, 1998 (Company). . . . . . . . . . . . . .. . .F-7
Notes to the Consolidated Financial Statements..............................F-8
(a)(2) List of Financial Statement Schedules:
Schedule I-Great Lakes Acquisition Corp. parent company-only condensed
financial information as to financial position as of December 31, 1998 and
results of operations and cash flows for the period May 22, 1998 to
December 31, 1998...........................................................S-1
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.
(a)(3) List of Exhibits:
Exhibit
Number Description
*3.1 Certificate of Incorporation of the Company.
*3.2 By-Laws of the Company.
*4.1 Indenture, dated as of May 22, 1998, between the Company and
State Street Bank and Trust Company of California, N.A.
(formerly First Trust National Association), as Trustee,
relating to the 13 1/8% Series B Senior Discount Debentures due
2009 of the Company (the "New Debentures") and the 13 1/8%
Senior Discount Debentures due 2009 of the Company (the "Old
Debentures").
*4.2 Form of New Debenture (included in Exhibit 4.1).
17
*4.3 Registration Rights Agreement, dated as of May 22, 1998,
between the Company and Donaldson, Lufkin & Jenrette Securities
Corporation.
*10.1 Credit Agreement among the Company, GLC, 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 GLC and Rice-Carden Corporation (as
successor to Kansas City Southern Industries, Inc.), as amended
(Incorporated herein by reference to Exhibit 10.3 to GLC's
Registration Statement on Form S-1 (File No. 33-98522)).
*10.3 Calcined Coke Supply Agreement between GLC and Aluminum Company
of America.
*10.4 Green Anode Coke Sales Agreement between GLC and Conoco Inc.
10.5 Petroleum Coke Sales Agreement between Copetro S.A. and YPF
S.A. (Incorporated herein by reference to Exhibit 10.7 to GLC'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.
*10.7 Coke Supply Agreement between GLC and Exxon Company, U.S.A.
*21.1 Subsidiaries of the Company.
24.1 Power of Attorney (included in signature page).
27.1 Financial Data Schedule.
* Incorporated herein by reference to the Company's Registration Statement on
Form S-4 (File No. 333-59541).
(b) Reports on Form 8-K
None
18 / F-1
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1997 and 1998
Contents
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets -
December 31, December 31, 1997 (predecessor) and 1998 (Company).............F-3
Consolidated Statements of Operations -
For the years ended December 31, 1996 and 1997, the period
January 1, 1998 to May 21, 1998 (predecessor) and the period
May 22, 1998 to December 31, 1998 (Company). . . . . . . . . . . . . .. . .F-5
Consolidated Statements of Stockholders' Equity -
For the years ended December 31, 1996 and 1997, the period
January 1, 1998 to May 21, 1998 (predecessor) and the period
May 22, 1998 to December 31, 1998 (Company). . . . . . . . . . . . . .. . .F-6
Consolidated Statements of Cash Flows -
For the years ended December 31, 1996 and 1997, the period
January 1, 1998 to May 21, 1998 (predecessor) and the period
May 22, 1998 to December 31, 1998 (Company). . . . . . . . . . . . . .. . .F-7
Notes to the Consolidated Financial Statements..............................F-8
19 / F-2
Report of Independent Auditors
The Board of Directors
Great Lakes Acquisition Corp.
We have audited the accompanying consolidated balance sheet of Great Lakes
Acquisition Corp. and subsidiaries as of December 31, 1998, and the related
consolidated statements of operations, stockholders' equity, and cash
flows for the period May 22, 1998 to December 31, 1998. We have also audited
the consolidated balance sheet as of December 31, 1997 and the related
statements of operations, stockholders' equity and cash flows of the
predecessor company for the years ended December 31, 1996 and 1997 and the
period January 1, 1998 to May 21, 1998. Our audits also included the financial
statement schedule listed in the Index as Item 14(a)(2). These financial
statements and the schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Great Lakes
Acquisition Corp. and subsidiaries at December 31, 1998, and the consolidated
results of their operations and their cash flows for the period May 22, 1998 to
December 31, 1998, and the consolidated financial position of the predecessor
company at December 31, 1997 and the consolidated results of its operations and
its cash flows for the years ended December 31, 1996 and 1997 and the period
January 1, 1998 to May 21, 1998 in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedule, when considered in relation to the basic financial statements taken
as a whole, presents fairly in all material respects the information set forth
therein.
ERNST & YOUNG LLP
New York, NY
February 5, 1999
20 / F-3
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Balance Sheets
PREDECESSOR
COMPANY COMPANY
December 31,
1997 1998
----------- ------------
(In thousands, except share data)
ASSETS
Current Assets
Cash $ 43,596 $ 10,403
Accounts receivable, net of allowance
for doubtful accounts of $600 in
1997 and 1998 29,908 18,961
Inventories 32,455 37,702
Incomes taxes receivable - 1,274
Prepaid expenses and other current assets 4,349 9,456
-------- --------
Total Current Assets 110,308 77,796
Property, Plant and Equipment-Net 59,165 214,101
Goodwill - 176,220
Capitalized financing costs 2,111 19,587
Other Assets 3,327 5,182
-------- --------
$174,911 $492,886
======== ========
See accompanying notes.
21 / F-4
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Balance Sheets
PREDECESSOR
COMPANY COMPANY
December 31,
1997 1998
----------- ------------
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,601 $ 18,897
Accrued expenses 14,057 13,285
Income taxes payable 1,796 -
Current portion of long-term debt 1,419 10,009
-------- --------
Total Current Liabilities 30,873 42,191
Long-Term Debt, Less Current Portion 82,595 321,089
Other Long-Term Liabilities 4,190 4,876
Deferred Taxes 4,814 58,390
Stockholders' Equity
Common stock, par value $0.01 per
share; 100,000 and 65,330 shares
authorized and outstanding on 12/31/97
and 12/31/98, respectively 1 1
Additional paid-in capital 5,509 65,329
Retained earnings 46,929 1,010
-------- --------
52,439 66,340
$174,911 $492,866
======== ========
See accompanying notes.
22 / F-5
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Statements of Operations
PREDECESSOR COMPANY COMPANY
--------------------------------- ---------
Period Period
January 1 May 22
to to
Year ended December 31 May 21 December 31
1996 1997 1998 1998
---------- ----------- --------- -----------
(In thousands)
Net Sales $ 242,744 $ 231,911 $ 90,849 $ 146,003
Cost of Goods Sold 176,371 172,390 67,168 106,748
---------- ----------- --------- -----------
Gross Profit 66,373 59,521 23,681 39,255
Selling, general and administrative
expenses 15,321 18,510 13,070 11,281
---------- ----------- --------- -----------
Operating Income 51,052 41,011 10,611 27,974
Other income (expense):
Interest, net (7,573) (6,287) (1,776) (22,973)
Other, net (772) (49) (472) 902
---------- ----------- --------- -----------
(8,345) (6,336) (2,248) (22,071)
Income Before Income Taxes
and Extraordinary Item 42,707 34,675 8,363 5,903
Income taxes 15,148 12,691 2,839 4,893
---------- ----------- --------- -----------
Income before extraordinary item 27,559 21,984 5,524 1,010
Extraordinary loss on early
extinguishment of debt, net of
tax benefit of $4,001 - - 7,113 -
---------- ----------- --------- -----------
Net income (loss) $ 27,559 $ 21,984 $ (1,589) $ 1,010
========== =========== ========= ===========
See accompanying notes.
23 / F-6
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Statements of Stockholders' Equity
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
---------- ---------- ---------- ----------
(In thousands)
Capital contribution
at May 22, 1998 $ 1 $ 65,329 $ - $ 65,330
Net income for period May 22,
1998 through December 31, 1998 - 1,010 1,010
---------- ---------- ---------- ----------
Balance at December 31, 1998 $ 1 $ 65,329 $ 1,010 $ 66,340
========== ========== ========== ==========
Predecessor Company
Balance at January 1, 1996 $ 1 $ 5,509 $ 386 $ 5,896
Net income - - 27,559 27,559
Dividends - - (1,500) (1,500)
---------- ---------- ---------- ----------
Balance at December 31, 1996 1 5,509 26,445 31,955
Net income - - 21,984 21,984
Dividends - - (1,500) (1,500)
---------- ---------- ---------- ----------
Balance at December 31, 1997 1 5,509 46,929 52,439
Net loss through May 21, 1998 - - (1,589) (1,589)
---------- ---------- ---------- ----------
Predecessor balance at
May 21, 1998 $ 1 $ 5,509 $ 45,340 $ 50,850
========== ========== ========== ==========
See accompanying notes.
24 / F-7
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Statements of Cash Flows
PREDECESSOR COMPANY COMPANY
--------------------------------- ---------
Period Period
January 1 May 22
to to
Year ended December 31 May 21 December 31
1996 1997 1998 1998
---------- ----------- --------- -----------
(In thousands)
Operating activities
Net income (loss) $ 27,559 $ 21,984 $ (1,589) $ 1,010
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 9,551 10,220 3,546 13,554
Deferred taxes 462 2,260 - (228)
Changes in operating assets
and liabilities:
Accounts receivables (6,851) (974) 6,886 4,061
Inventories (13,701) 7,417 (1,938) (3,309)
Other current assets 306 (1,391) (1,193) (3,914)
Income taxes payable 743 (2,044) (4,765) 1,695
Accounts payable and
accrued expenses 8,158 (6,156) 9,164 (4,640)
Other, net 1,495 (55) 2,627 59
---------- ----------- --------- -----------
Net cash provided (used) by
operating activities 27,722 31,261 12,738 8,288
Investing activities
Capital expenditures (6,371) (21,391) (9,058) (7,910)
Acquisition of Great Lakes Carbon
Corporation-net of cash acquired - - - (274,263)
---------- ----------- --------- -----------
Net cash used by
investing activities (6,371) (21,391) (9,058) (282,173)
Financing Activities
Repayment of long-term debt (1,406) (1,389) (161) (78,946)
Additions to long-term debt - 12,518 4,928 321,263
Deferred financing costs - - - (23,359)
Capital contribution - - - 65,330
Dividends (1,500) (1,500) - -
---------- ----------- --------- -----------
Net cash provided (used) by
financing activities (2,906) 9,629 4,767 284,288
Increase (decrease) in cash 18,445 19,499 8,447 10,403
Cash at beginning of period 5,652 24,097 43,596 -
---------- ----------- --------- -----------
Cash at end of period $ 24,097 $ 43,596 $ 52,043 $ 10,403
========== =========== ========= ===========
See accompanying notes.
25 / F-8
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1998
1. Significant Accounting Policies
Organization
Great Lakes Acquisition Corp. (the "Company") was incorporated under the
laws of Delaware on March 31, 1998. The Company is a 99.49% owned subsidiary
of American Industrial Capital Fund II, L.P. ("AIP"). On May 18, 1998, the
Company canceled its previously issued shares of common stock and issued
65,000 shares of its common stock for approximately $65 million. On May 22,
1998, the Company issued 330 shares of its common stock for $330,000.
On May 22, 1998, the Company acquired all of the issued and outstanding stock
of Great Lakes Carbon Corporation ("GLC") in a transaction accounted for as a
purchase (the "Acquisition"). Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on estimates of
the respective fair values at the Acquisition date.
As consideration for the acquisition of GLC described above, the Company paid
the former shareholders of GLC aproximately $323,000,000 and incurred
transaction costs of approximately $25,000,000. The total purchase price was
funded by a cash contribution from AIP and affiliates of, and ertain other
individuals associated with, AIP of $65,330,000; available cash at GLC of
approximately $52,000,000; proceeds of $175,000,000 from the sale by GLC of
10 1/4% Senior Subordinated Notes; borrowings by GLC of $111,000,000 pursuant
to a new credit facility; and proceeds of $30,050,072 from the sale by the
Company of 13 1/8% Senior Discount Debentures. In addition, as a condition to
the transaction, GLC repurchased its then outstanding 10% Senior Secured Notes
through a public tender offer for total consideration of $74,106,500 (excluding
accrued interest).
Through its wholly-owned operating subsidiary, GLC, the Company is the largest
producer of calcined pretroleum coke ("CPC") supplying customers principally
in the aluminum industry. The consolidated financial statements include the
accounts of the Company and its subsidiaries. Significant intercompany
accounts have been eliminated in consolidation.
Basis of Presentation
The accompanying financial statements as of December 31, 1998 and for the
period from May 22, 1998 to December 31, 1998 reflect the consolidated
financial position, results of operations, and cash flow of the Company
subsequent to the date of Acquisition. The accompanying predecessor financial
statements for periods prior to the date of Acquisition are presented under
the historical basis of accounting of GLC and do not reflect any adjustments
that would be required as a result of the Acquisition by the Company. The
Company had no substantive operations prior to May 22, 1998.
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.
Cash Equivalents
Investments with maturities of less than 90 days when purchased are considered
the equivalent of cash.
26 / F-9
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
1. Significant Accounting Policies (continued)
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.
Derivative Investments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Investments and Hedging Activities." The
Company is required to adopt the new Statement effective January 1, 2000. The
Statement will require the Company to recognize all derivaties on the balance
sheet at fair value. The Company does not believe the adoption of Statement
No. 133 will have a significant effect on its results of operations or
financial position.
Significant Customers
The Company had two customers which represented 22.0% and 15.3% of net sales in
1996, 23.7% and 15.5% of net sales in 1997 and 33.3% and 17.3% of net sales in
the period from January 1, 1998 to May 21, 1998. The Company had three
customers which represented 27.3%, 14.2% and 10.8% of net sales in the period
from May 22, 1998 to December 31, 1998.
2. Inventories
Inventories consist of the following:
December 31
1997 1998
--------------------
(In thousands)
Raw materials $18,483 $18,837
Finished goods 7,821 12,996
Supplies and spare parts 6,151 5,869
--------------------
$32,455 $37,702
====================
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets included Argentine Value-Added-Tax
("VAT") receivable of aproximately $6,247,000 at December 31, 1998.
27 / F-10
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
1997 1998
---------------------
(In thousands)
Land and improvements $ 2,718 $ 2,158
Buildings 9,193 10,047
Machinery, equipment and other 116,786 209,132
Construction in progress 16,866 1,893
---------------------
145,563 223,230
Accumulated depreciation (86,398) ( 9,129)
---------------------
$ 59,165 $214,101
=====================
In connection with the Acquisition the property, plant and equipment of the
Company at May 22, 1998 was restated to its appraised fair market value. The
excess of fair market value over net book value recorded was approximately
$150,366,000.
5. Accrued Expenses
Accrued expenses included interest payable of $3,467,000 at December 31, 1997
and interest payable and employee profit sharing payable of $2,635,000 and
$2,437,000, respectively, at December 31, 1998.
28 / F-11
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt
Long-term debt and capital lease obligations consist of the following:
December 31
1997 1998
---------------------
(In thousands)
10.25% Senior Subordinated Notes due May 15, 2008 $ - $175,000
13.125% Senior Discount Debentures due May 15, 2009 - 32,481
10% Senior Secured Notes due January 1, 2006 65,000 -
Term Loan Credit Facility bearing interest at the
Company's option at LIBOR (5.31% at December 31,
1998) plus a margin ranging from 2.25% to 3.00%
or Prime (7.75% at December 31, 1998) 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 acheivement of certain leverage ratios) due in
varying amounts quarterly from August, 1998 through
May, 2006 - 98,446
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 4,834 3,749
Facility expansion credit line bearing interest at
LIBOR plus 4% (9.17% at December 31, 1998) due in
varying amounts semiannually from March, 1999
through March, 2002 11,850 15,850
Capital lease obligation, bearing interest of 9.3% 1,662 1,328
Other 668 4,244
---------------------
84,014 331,098
Current portion (1,419) (10,009)
---------------------
$ 82,595 $221,089
=====================
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. At any time prior to May 15, 2001,
the Company may redeem up to 35% of the Senior Subordinated Notes at a price
of 110.25% with the net cash proceeds of one or more equity offerings, provided
that at least $100.0 million in principal remain outstanding. 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
Senior Subordinated Notes indenture imposes, among other things, limitations on
certain payments, including dividends.
The Senior Discount Debentures are general unsecured obligations of the
Company, subordinated in right of payment to essentially all subsidiary
liabilities. No cash interest will be payable on the Debentures until
November 15, 2003 but the accreted value will increase (representing
amortization of original issue discount) to approximately $56,600,000 through
May 15, 2003. The Debentures require the Company to make cash interest
payments semiannually commencing in November 2003 of approximatley $7,432,000
per year and a principal payment of approximately $56,600,000 in May 2009. At
the Company's option, the Debentures may be redeemed, in whole or in part,
commencing May 15, 2003 at various prices ranging from 106.6% in 2003 to par in
29 / F-12
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt (continued)
2006 and beyond. At any time prior to May 15, 2001, the Company may redeem up
to 35% of the Debentures at a price of 113.125% of the accreted value thereof
with net cash proceeds of one or more equity offerings, provided that at least
65% of the amount at maturity of the Debentures remain outstanding. The Senior
Discount Debentures indenture imposes limitations on certain payments,
including dividends. The outstanding common stock of GLC has been pledged as
collateral for this obligation.
The term loan credit facility is comprised of three single tranche term loans
in the amount of $44,345,000, $27,494,000 and $26,607,000 at December 31, 1998
maturing on May 31, 2004, 2005 and 2006, respectively. 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 $7,500,000 sublimit 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, 1998 there were no borrowings under the
revolving credit portion of the facility and outstanding letters of credit
were $5,130,000.
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. The Company has the option of redeeming the bonds in whole
or in part at par at any time.
The facility expansion credit line provided for credit of up to $20,000,000
($15,850,000 was borrowed) for use in connection with a major facility
expansion at the Company's La Plata, Argentina plant operated by its
wholly-owned subsidiary, Copetro S.A. (Copetro). The loan is secured by
the property, plant and equipment of Copetro, including the assets constructed
with the funds financed. The agreement requires that Copetro satisfy certain
financial ratios and imposes limitations on the payment of dividends.
The fair market value of the Company's long-term debt obligations approximated
$89,000,000 and $335,000,000 at December 31, 1997 and 1998, respectively.
Maturities of long-term debt, for the succeeding five years and thereafter are
as follows:
Long-Term Capital
Debt Leases Total
-------------------------------
(In thousands)
1999 $ 9,642 $ 367 $ 10,009
2000 12,416 403 12,819
2001 15,921 442 16,363
2002 15,741 116 15,857
2003 11,839 - 11,839
Thereafter 264,211 - 264,211
-------------------------------
$329,770 $ 1,328 $331,098
===============================
Interest paid amounted to $4,989,000 and $7,773,000 for the years ended
December 31, 1996 and 1997, respectively, and $3,705,000 for the period from
30 / F-13
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt (continued)
January 1, 1998 to May 21, 1998 and $18,258,000 for the period from May 22,
1998 to December 31, 1998.
The Company capitalized interest in construction in progress of $808,000 for
the year ended December 31, 1997, $562,000 for the period from January 1, 1998
to May 21, 1998 and $329,000 for the period from May 22, 1998 to December 31,
1998.
7. 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, 1998, by year and in the aggregate,
under capital leases and noncancelable operating leases with initial or
remaining terms of one year or more consist of the following:
Capital Operating
Leases Leases
--------------------
(In thousands)
1999 $ 615 $ 1,525
2000 615 1,496
2001 615 1,286
2002 154 1,262
2003 - 1,261
Thereafter - 6,437
--------------------
Total minimum lease payments 1,999 $13,267
Amounts representing interest (671) ========
------
Present value of net minimum lease payments $1,328
======
Rental expense for all operating leases was $2,685,000 and $2,770,000 for the
years ended December 31, 1996 and 1997, respectively, and $1,062,000 for the
period from January 1, 1998 to May 21, 1998 and $1,709,000 for the period from
May 22, 1998 to December 31, 1998.
8. 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, 1998 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.
31 / F-14
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
The components of net pension expense for the plans were as follows:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1996 1997 1998 1998
------- ------- ------- -------
(In thousands)
Service cost $ 545 $ 501 $ 232 $ 351
Interest cost 483 571 265 397
Expected return on assets (increase)/decrease (449) (595) (294) (526)
Amortization of prior service cost 1 10 4 -
Recognized net actuarial (gain)/loss 57 - - -
------- ------- ------- -------
Net periodic pension cost $ 637 $ 487 $ 207 222
======= ======= ======= =======
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:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998
-------- -------- --------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 7,041 $ 8,538 $ 9,156
Service cost 501 232 351
Interest cost 571 265 397
Amendments 98 - 324
Actuarial (gain)/loss 503 219 1,210
Benefits paid (176) (98) (174)
-------- -------- --------
Benefit obligation at end of period $ 8,538 $ 9,156 $11,264
======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of period $ 6,763 $ 9,004 $ 9,980
Actual return on plan assets 1,595 755 922
Company contribution 822 319 368
Benefits paid (176) (98) (174)
-------- -------- --------
Fair value of plan assets at end of period $ 9,004 $ 9,980 $11,096
======== ======== ========
Funded status $ 466 $ 824 $ (168)
Unrecognized net actuarial (gain)/loss (542) (785) 816
Unrecognized prior service cost 79 76 -
-------- -------- --------
Net pension asset recognized in the balance sheets $ 3 $ 115 $ 648
======== ======== ========
The expected long-term rate of return on plan assets was 9% for 1996, 1997 and
32 / F-15
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
for the periods from January 1, 1998 to May 21, 1998 and May 22, 1998 to
December 31, 1998. The weighted average discount rate and weighted average
rate of increase in future compensation levels used were 8% and 5% for 1996,
7.5% and 5% for 1997, 7.25% and 4.25% for the period from January 1, 1998 to
May 21, 1998 and 7% and 4% for the period from May 22, 1998 to December 31,
1998, respectively.
9. 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:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1996 1997 1998 1998
------- ------- ------- -------
(In thousands)
Service cost $ 198 $ 204 $ 106 $ 148
Interest cost 184 223 106 153
Amortization of net obligation/(asset) 68 68 28 -
------- ------- ------- -------
Net NPPBC $ 450 $ 495 $ 240 301
======= ======= ======= =======
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:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998
-------- -------- --------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 2,795 $ 3,377 $ 3,548
Service cost 204 106 148
Interest cost 223 106 153
Actuarial (gain)/loss 218 (9) 381
Benefits paid (63) (32) (72)
-------- -------- --------
Benefit obligation at end of period $ 3,377 $ 3,548 $ 4,158
======== ======== ========
33 / F-16
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
9. Postretirement Obligations (continued)
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998
-------- -------- --------
(In thousands)
Change in plan assets:
Fair value of plan assets at beginning of period $ - $ - $ -
Actual return on plan assets - - -
Company contribution 63 32 72
Benefits paid (63) (32) (72)
-------- -------- --------
Fair value of plan assets at end of period $ - $ - $ -
======== ======== ========
Funded status $(3,377) $(3,548) $(4,158)
Unrecognized net actuarial (gain)/loss 267 258 381
Unrecognized net obligation 1,020 991 -
-------- -------- --------
Postretirement liability recognized
in the balance sheets $(2,090) $(2,299) $(3,777)
======== ======== ========
The health care cost trend used in determining the accumulated postretirement
benefit obligation ("APBO") was 8.43% grading down to 5.0% in seven years.
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 by $37,000 (or 17.5%) and
$53,000 (or 17.6%) for the periods January 1, 1998 to May 21, 1998 and May 22,
1998 to December 31, 1998, respectively, and the APBO as of the year ended
December 31, 1998 by $584,000 (or 14.0%). Conversely, decreasing the assumed
trend by 1% for all years would decrease the aggregate service and interest
component of NPPBC by $29,000 (or 13.5%) and $41,000 (or 13.5%) for the periods
January 1, 1998 to May 21, 1998 and May 22, 1998 to December 31, 1998,
respectively, and the APBO as of the year ended December 31, 1998 by $488,000
(or 11.7%).
Assumptions used to develop NPPBC cost 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 8% for 1996, 5% and 7.5% for
1997, 5% and 7.5% for the period from January 1, 1998 to May 21, 1998 and 5%
and 7% for the period from May 22, 1998 to December 31, 1998, respectively.
34 / F-17
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Other Income (Expense)
Other income (expense) consists of the following:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1996 1997 1998 1998
------- ------- ------- -------
(In thousands)
Export tax refund $ 246 $ 536 $ 77 $ 660
Other (1,018) (487) (549) 242
------- ------- ------- -------
$ (772)$ (49) $ (472) $ 902
======= ======= ======= =======
11. Income Taxes
Components of the Company's deferred tax liabilities and assets are as follows:
1997 1998
--------------------
(In thousands)
Deferred tax liabilities:
Book over tax depreciable basis $4,460 $57,574
Other - net 2,315 4,617
--------------------
Total deferred tax liabilities 6,775 62,191
Deferred tax assets:
Accrued liabilities 1,571 2,541
Other - net 390 1,260
--------------------
Total deferred tax assets 1,961 3,801
--------------------
Net deferred tax liability $4,814 $58,390
====================
The differences between tax expense computed at the statutory federal income
tax rate and actual tax expense are as follows:
35 / F-18
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
11. Income Taxes (continued)
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1996 1997 1998 1998
------- ------- ------- -------
(In thousands)
Tax expense at statutory rates applied
to pretax earnings $14,947 $12,143 $ 2,927 $ 2,066
State income tax, net of federal tax effects 1,029 1,020 (131) 86
Tax exempt earnings (480) (938) (20) (315)
Effects of foreign operations (657) (91) (135) 1,764
Amortization of goodwill - - - 957
Other 309 557 198 335
------- ------- ------- -------
$15,148 $12,691 $ 2,839 4,893
======= ======= ======= =======
Income taxes consist of the following:
Jan. 1 May 22
to to
May 21 Dec. 31
1996 1997 1998 1998
------- ------- ------- -------
(In thousands)
Current:
Federal $ 9,252 $ 7,229 $ 1,801 $ 3,564
State 1,465 1,481 (202) (634)
Foreign 3,969 2,852 1,240 2,191
------- ------- ------- -------
14,686 11,562 2,839 5,121
Deferred:
Federal 564 1,001 - (1,049)
State 118 88 - 766
Foreign (220) 40 - 55
------- ------- ------- -------
462 1,129 - (228)
------- ------- ------- -------
Total $15,148 $12,691 $ 2,839 $ 4,893
======= ======= ======= =======
Income taxes paid were approximately $13,723,0000, $12,485,000,$4,994,000 and
$2,081,000 for the years ended December 31, 1996 and 1997, the period from
January 1, 1998 to May 21, 1998, and the period from May 22, 1998 to
December 31, 1998, repectively.
U.S. income taxes have not been provided on the undistributed earnings of
Copetro ($17,711,000 as of December 31, 1998) 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 before income taxes and extraordinary item attributable to domestic
operations (which included results from export sales) was $30,601,000 and
$25,723,000 for the years ended December 31, 1996 and 1997, respectively, and
$4,606,000 for the period from January 1, 1998 to May 21, 1998 and $38,000
for the period from May 22, 1998 to December 31, 1998.
36 / F-19
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Financial Information Relating to Segements
The Company has two reportable business segements.
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 in the manufacture of steel
and foundry products and for use in other specialty materials and chemicals
markets.
The production and distribution of CPC, which is the focus of both units, is
accomplished utilizing the same process, plant facilities and operating assets.
Accordingly, the Company does not segregate, or otherwise account for, assets
by segments.
Anode Industrial
Grade Grade
CPC CPC Other Total
---------- ---------- --------- ----------
(In thousands)
------------- 1996 -------------
Net sales $ 199,443 $ 38,584 $ 4,717 $ 242,744
Cost of goods sold (141,780) (29,410) (5,181) (176,371)
---------- ---------- --------- ----------
Segment Profit $ 57,663 $ 9,174 $ (464) 66,373
========== ========== =========
Selling, general and
administrative expenses (15,321)
Interest expense, net (7,573)
Other income (expense) (772)
----------
Income before income taxes and
extraordinary item $ 42,707
==========
------------- 1997 -------------
Net sales $ 189,878 $ 40,216 $ 1,817 $ 231,911
Cost of goods sold (138,080) (31,660) (2,650) (172,390)
---------- ---------- --------- ----------
Segment Profit $ 51,798 $ 8,556 $ (833) 59,521
========== ========== =========
Selling, general and
administrative expenses (18,510)
Interest expense, net (6,287)
Other income (expense) (49)
----------
Income before income taxes and
extraordinary item $ 34,675
==========
37 / F-20
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Financial Information Relating to Segements (continued)
Anode Industrial
Grade Grade
CPC CPC Other Total
---------- ---------- --------- ----------
(In thousands)
--Period from January 1, 1998---
to May 21, 1998
Net sales $ 76,330 $ 13,862 $ 657 $ 90,849
Cost of goods sold (55,840) (10,429) (899) (67,168)
---------- ---------- --------- ----------
Segment Profit $ 20,490 $ 3,433 $ (242) 23,681
========== ========== =========
Selling, general and
administrative expenses (13,070)
Interest expense, net (1,776)
Other income (expense) (472)
----------
Income before income taxes and
extraordinary item $ 8,363
==========
---Period from May 22, 1998-----
to December 31, 1998
Net sales $ 122,813 $ 21,959 $ 1,231 $ 146,003
Cost of goods sold (86,861) (15,897) (3,990) (106,748)
---------- ---------- --------- ----------
Segment Profit $ 35,952 $ 6,062 $ (2,926) 39,255
========== ========== =========
Selling, general and
administrative expenses (11,281)
Interest expense, net (22,973)
Other income (expense) 902
----------
Income before income taxes and
extraordinary item $ 5,903
==========
38 / F-21
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Operations by Geographic Area
The following is a summary of the Company's operations by geographic area:
Period Period
January 1 May 22
to to
Year ended December 31 May 21 December 31
1996 1997 1998 1998
---------- ----------- --------- -----------
(In thousands)
Net Sales
United States $ 197,296 $ 189,730 $ 75,823 $ 116,011
Foreign 45,448 42,181 15,026 29,992
---------- ----------- --------- -----------
$ 242,744 $ 231,911 $ 90,849 $ 146,003
========== =========== ========= ===========
Operating income
United States $ 38,266 $ 32,358 $ 7,098 $ 22,466
Foreign 12,786 8,653 3,513 5,508
---------- ----------- --------- -----------
$ 51,052 $ 41,011 $ 10,611 $ 27,974
========== =========== ========= ===========
Adjusted EBITDA
United States $ 50,969 $ 47,436 $ 19,078 $ 33,295
Foreign 15,594 11,746 4,125 7,899
---------- ----------- --------- -----------
$ 66,563 $ 59,182 $ 23,203 $ 41,194
========== =========== ========= ===========
Assets
United States $ 114,864 $ 125,448 $ 138,011 $ 410,635
Foreign 34,041 49,463 44,331 82,251
---------- ----------- --------- -----------
$ 148,905 $ 174,911 $ 182,342 $ 492,886
========== =========== ========= ===========
Exports of U.S. produced products were approximately $111,482,000 and
$104,826,000, $43,260,000 and $68,291,000 for the years ended December 31,
1996 and 1997, the period from January 1, 1998 to May 21, 1998 and the period
from May 22, 1998 to December 31, 1998, respectively. Export sales as a
percentage of United States net sales represented 23.0%, 22.9%, 26.4% and 27.1%
to Western Europe for the years ended December 31, 1996 and 1997, the period
from January 1, 1998 to May 21, 1998 and the period from May 22, 1998 to
December 31, 1998, respectively, and 18.8%, 18.9%, 22.6% and 17.9 % to Africa
for the years ended December 31, 1996 and 1997, the period from January 1, 1998
to May 21, 1998 and the period from May 22, 1998 to December 31, 1998,
respectively. The Company's foreign operations are conducted principally in
South America.
14. Extraordinary Item
In connection with the repurchase of the 10% Senior Secured Notes described in
Note 1, an extraordinary loss on early extinguishment of debt of appoximately
$7,113,000, net of taxes of approximately $4,001,000, has been reflected in
the predecessor Statement of Operations for the period from January 1, 1998 to
May 21, 1998.
39 / F-22
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. 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.
40 / S-1
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp.
Condensed Balance Sheet
(In thousands, except share data)
December 31,
1998
------------
Assets
Investments in and amounts due from
wholly owned subsidiaries $ 95,914
Capitalized financing costs 2,133
Deferred Taxes 774
------------
$ 98,821
============
Liabilities and Stockholders' Equity
Long-Term Debt 32,481
Stockholders' Equity
Common stock, par value $0.01 per
share 65,330 shares authorized
and outstanding on 12/31/98, 1
Additional paid-in capital 65,329
Retained earnings 1,010
------------
66,340
$ 98,821
============
See accompanying notes.
41 / S-2
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Condensed Statement of Operations
December 31,
1998
------------
(In thousands)
Interest expense $ 2,566
-------------
Loss Before Income Taxes and Equity
in Net Income of Subsidiaries (2,566)
Income taxes 821
-------------
(1,745)
Equity in net income of subsidiaries 2,755
------------
Net income $ 1,010
============
See accompanying notes.
42 / S-3
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Condensed Statement of Stockholders' Equity
Additional Total
Common Paid-in Retained Stockholders'
Stock Capital Earnings Equity
---------- ---------- ---------- ----------
(In thousands)
Balance at May 22, 1998 $ 1 $ 65,329 $ - $ 65,330
Net income for period May 22,
1998 through December 31, 1998 - 1,010 1,010
---------- ---------- ---------- ----------
Balance at December 31, 1998 $ 1 $ 65,329 $ 1,010 $ 66,340
========== ========== ========== ==========
See accompanying notes.
43 / S-4
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Condensed Statement of Cash Flows
December 31,
1998
------------
(In thousands)
Cash used by operating activities $ (3,172)
Investing Activities
Acquisition of GLC (92,380)
------------
Net cash used by investing activities (92,380)
Financing Activities
Additions to long-term debt 32,481
Deferred financing costs (2,259)
Captial contribution 65,330
------------
Net cash provided by financing activities 95,552
Increase (decrease) in cash -
Cash at beginning of period -
------------
Cash at end of period -
============
See accompanying notes.
44 / S-5
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Notes to Condensed Financial Statements
1. Significant Accounting Policies
Organization
Great Lakes Acquisition Corp. (the "Company") was incorporated under the
laws of Delaware on March 31, 1998. The Company is a 99.49% owned subsidiary
of American Industrial Capital Fund II, L.P. ("AIP"). On May 18, 1998, the
Company canceled its previously issued shares of common stock and issued
65,000 shares of its common stock for approximately $65 million. On May 22,
1998, the Company issued 330 shares of its common stock for $330,000.
On May 22, 1998, the Company acquired all of the issued and outstanding stock
of Great Lakes Carbon Corporation ("GLC") in a transaction accounted for as a
purchase (the "Acquisition"). Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on estimates of
the respective fair values at the Acquisition date on the financial statements
of GLC.
As consideration for the acquisition of GLC described above, the Company paid
the former shareholders of GLC aproximately $323,000,000 and incurred
transaction costs of approximately $25,000,000. The total purchase price was
funded by a cash contribution from AIP and affiliates of, and certain other
individuals associated with, AIP of $65,330,000; available cash at GLC of
approximately $52,000,000; proceeds of $175,000,000 from the sale by GLC of
10 1/4% Senior Subordinated Notes; borrowings by GLC of $111,000,000 pursuant
to a new credit facility; and proceeds of $30,050,072 from the sale by the
Company of 13 1/8% Senior Discount Debentures. In addition, as a condition to
the transaction, GLC repurchased its then outstanding 10% Senior Secured Notes
through a public tender offer for total consideration of $74,106,500 (excluding
accrued interest).
Through its wholly-owned operating subsidiary, GLC, the Company is the largest
producer of calcined coke supplying customers principally in the aluminum
industry.
Basis of Presentation
In the parent company-only finamcial statements, the Company's investment
is subsidiaries is stated at cost plus equity in undistributed earnings of
subsidiaries since the date of the Acquisition. The parent company-only
financial statements should be read in conjunction with the Company's
consolidated financial statements.
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.
Derivative Investments and Hedging Activities
In June 1998, the Financial Accounting Standards Board issued Statement No.
133, "Accounting for Derivative Investments and Hedging Activities." The
Company is required to adopt the new Statement effective January 1, 2000. The
Statement will require the Company to recognize all derivaties on the balance
sheet at fair value. The Company does not believe the adoption of Statement
No. 133 will have a significant effect on its results of operations or
financial position.
45 / S-6
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Notes to Condensed Financial Statements (continued)
2. Long-Term Debt
Long-term debt consists of the following:
December 31,
1998
------------
(In thousands)
13.125% Senior Discount Debentures due May 15, 2009 $ 32,481
Less current portion -
------------
$ 32,481
============
The Senior Discount Debentures are general unsecured obligations of the
Company, subordinated in right of payment to essentially all subsidiary
liabilities. No cash interest will be payable on the Debentures until
November 15, 2003 but the accreted value will increase (representing
amortization of original issue discount) to approximately $56,600,000 through
May 15, 2003. The Debentures require the Company to make cash interest
payments semiannually commencing in November 2003 of approximatley $7,432,000
per year and a principal payment of approximately $56,600,000 in May 2009. At
the Company's option, the Debentures may be redeemed, in whole or in part,
commencing May 15, 2003 at various prices ranging from 106.6% in 2003 to par in
2006 and beyond. At any time prior to May 15, 2001, the Company may redeem up
to 35% of the Debentures at a price of 113.125% of the accreted value thereof
with net cash proceeds of one or more equity offerings, provided that at least
65% of the amount at maturity of the Debentures remain outstanding. The Senior
Discount Debentures indenture imposes limitations on certain payments,
including dividends. The outstanding common stock of GLC has been pledged as
collateral for this obligation.
There are no maturies of long-term debt until May 2009 when the Senior Discount
Debentures become payable in full.
The fair market value of the Company's long-term debt obligation approximated
$32,000,000 at December 31, 1998.
3. Income Taxes
Components of the Company's deferred tax asset are as follows:
December 31,
1998
------------
(In thousands)
Deferred tax asset:
Accrued liabilities $ 774
-------------
Total deferred tax asset $ 774
=============
The Company considers that a valuation allowance is not necessary in connection
with the temporary differences giving rise to its deferred tax asset.
46 / S-7
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Notes to Condensed Financial Statements (continued)
3. Income Taxes (continued)
The differences between tax expense computed at the statutory federal income
tax rate and actual tax expense are as follows:
December 31,
1998
------------
(In thousands)
Tax expense at statutory rates applied
to pretax earnings $ (898)
Other 77
------------
$ (821)
============
Income taxes consist of the following:
December 31,
1998
------------
(In thousands)
Current:
Federal $ (47)
State -
Foreign -
------------
(47)
Deferred:
Federal (774)
State -
Foreign -
------------
(774)
------------
Total $ (821)
============
No income taxes were paid for the year ended December 31, 1998.
47
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 19th
day of March 1999.
Great Lakes Acquisition Corp.
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 19, 1999
James D. McKenzie (Principal Executive Officer)
* Senior Vice President, March 19, 1999
- --------------------- Operations and Administration
A. Frank Baca
* Vice President, Sales March 19, 1999
- ---------------------
Robert C. Dickie
* Vice President, Raw Materials March 19, 1999
- ---------------------
James W. Betts
* Non-Executive Chairman of March 19, 1999
- --------------------- the Board, Director
Theodore C. Rogers
* Director March 19, 1999
- ---------------------
Richard W. Bingham
* Director March 19, 1999
- ---------------------
Kim A. Marvin
* Director March 19, 1999
- ---------------------
Alfred E. Barry
By: /s/JAMES D. MCKENZIE
- --------------------------
James D. McKenzie
Attorney-in-Fact