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, 1999 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 17, 2000, the registrant had outstanding 65,950 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, 1999
Table of Contents
Page
PART I
Item 1. Business. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Item 2. Properties. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 3. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . 6
Item 4. Submission of Matters to Vote of Security Holders . . . . . . . . 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . 7
Item 6. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . 8
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . 9
Item 7A. Quantitative and Qualitative Disclosures About Market Risk . . . .13
Item 8. Financial Statements and Supplementary Data . . . . . . . . . . . 13
Item 9. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure. . . . . . . . . . . . . . 13
PART III
Item 10. Directors and Executive Officers of the Registrant. . . . . . . . 14
Item 11. Executive Compensation. . . . . . . . . . . . . . . . . . . . . . 16
Item 12. Security Ownership of Certain Beneficial Owners
and Management. . . . . . . . . . . . . . . . . . . . . . . . . . 19
Item 13. Certain Relationships and Related Transactions. . . . . . . . . . 19
PART IV
Item 14. Exhibits, Financial Statement Schedules and
Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . 20
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 81% of the
Company's total 1999 sales. The Company also sells industrial grade CPC for
use in the production of titanium dioxide, as a carbon additive in the
manufacture of steel and foundry products and for use in other specialty
materials and chemicals markets. The Company produces CPC from raw petroleum
coke ("RPC"), a by-product of petroleum refining, utilizing a high-temperature,
rotary-kiln process developed by the Company in the 1930's.
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.
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 connection with the transaction, GLC also 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 Acquisition.
The acquisition was financed by, (i) an equity contribution by AIP and
affiliates of, and certain other individuals associated with AIP of $65 million
and $330,000, respectively, in exchange for common equity of GLAC, (ii) a
contribution by GLAC of $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) borrowings by GLC pursuant to a syndicated senior secured agreement in an
aggregate principal amount of $111.0 million (the "Term Loans") and (iv) the
sale by GLC of $175.0 million aggregate principal amount of 10 1/4% Senior
Subordinated Notes due 2008 (the "Notes").
Description of Principal Markets
Anode Grade CPC
Carbon anodes, which are manufactured utilizing anode grade CPC, are
used by every primary aluminum smelter in the world as a key component in
aluminum smelting pot lines. Carbon anodes act as conductors of electricity
and as a source of carbon in the electrolytic cell that reduces alumina into
aluminum metal. In this electrochemical aluminum smelting process, the carbon
anodes, and hence the CPC, are consumed. Carbon anode manufacturers,
predominantly captive operations of aluminum smelting companies, purchase anode
grade CPC, mix it with pitch binders, press the mixture into blocks and then
bake the mixture to form a finished, hardened carbon anode. The quality of
the anode grade CPC, in terms of both its physical and chemical properties, has
an effect on carbon anode life, which is an important economic factor in
aluminum production, and on the amount of impurities in the finished aluminum
metal. Anode grade CPC is approximately 97% pure carbon; however, anode grade
CPC does vary based on the content of sulfur and other trace elements in the
finished product as well as on its physical properties. GLC produces a full
range of anode grade CPC, which is typically sold in bulk shipments, tailored
to the specific needs of its aluminum company customers.
Worldwide demand for anode grade CPC is directly tied to the global
production of primary aluminum. For the fifth year in a row, aluminum
3
production increased primarily due to the expansion of existing smelting
capacity. As a result of the continued strong demand for CPC, the Company
operated at near effective capacity in 1999.
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 RPC, the raw material
used to produce CPC. RPC is a by-product of the oil refining process,
constituting the solid fraction remaining after the refinery has essentially
removed all of the liquid petroleum products from the crude oil. Many, but not
all, oil refineries produce RPC. Sales of RPC do not constitute a material
portion of oil refiners' revenues. Because a substantial portion of worldwide
petroleum refining capacity is based domestically, the United States has a
majority of worldwide CPC production capacity.
CPC quality, which is extremely important to aluminum smelters, is
highly dependent upon the quality of the RPC utilized in the calcining process.
The RPC produced by different oil refineries covers a range of physical and
chemical properties depending upon both the types of crude oils being refined
and the specific process being employed by the refinery. Only a portion of the
RPC produced by the world's oil refineries is of suitable quality for producing
anode grade or industrial grade CPC, with anode grade requirements being
generally more stringent than industrial grade requirements. If the RPC
produced by a refinery is not of sufficient quality for calcining, it is
typically sold for its fuel value at a substantially lower price.
The Company purchases a range of RPC from a number of domestic and
international oil refineries with the objective of blending these cokes to meet
the specific quality requirements of its customers at the lowest raw material
cost. RPC is typically purchased by the Company under contracts with a term of
one or more years, although the Company does make some spot purchases. In 1999
the Company purchased approximately 49% of its RPC requirements from three
petroleum refiners.
Manufacturing Process
The calcining process essentially drives off moisture, impurities and
volatile matter from the RPC at high temperatures, to produce a purer form of
carbon in the resulting CPC. Both anode and industrial grade CPC are
manufactured by the Company to specific customer specifications. The Company
purchases RPC from a number of sources and has the capability to blend these
raw cokes specifically to meet a customer's required chemical and physical
properties. After blending, the raw coke is fed into the higher end of a
rotating kiln, which is up to 12 feet in diameter and up to 220 feet long. The
coke in the kiln is tumbled by rotation and moves down-kiln counter current to
4
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 1999 approximately 38% of the Company's net sales were to U.S.-based
customers and approximately 62% were to customers in international markets.
Approximately 68.2% of the Company's 1999 net sales were made to five customers
with Alcoa and Aluminium Bahrain accounting for 31.2% and 16.7% 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 Co. (ARCO), 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, Inc.
Employees
As of December 31, 1999 the Company employed 257 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
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 basic terms are governed by Argentine federal labor
legislation. The Port Arthur plant is operated with a non-union workforce.
Patents, Trademarks
None of the Company's business is dependent upon any patents or other
intellectual property.
5
Environmental Matters
The Company's facilities and operations are subject to various federal,
state and local and foreign governmental laws and regulations with respect to
the protection of the environment, including regulations relating to air and
water quality. The Company believes that it possesses all of the permits
required for the conduct of its operations and that it is currently in material
compliance with all relevant environmental regulations. The Company spent
approximately $1.5 million on capital expenditures related to pollution control
facilities in 1999 and anticipates spending a similar amount in both 2000 and
2001.
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 and operated 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 operator of the facility has given notice that it will
terminate its purchase of flue gas from the Company due to the loss of its sole
customer for the steam generated by the facility effective November 12, 2000.
The operator is currently evaluating its options, which include the possibility
of attracting new customers. The revenue realized by the Company in connection
with this activity during 1999 was $1.8 million, which was treated as a
reduction to cost of goods sold.
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.
The plant is located on 30 acres of land at the port of La Plata. The plant
has the capability to receive RPC by rail or truck and to ship CPC by truck or
ocean-going vessel.
The Company's principal business office is located at 4 Greenspoint
Plaza, Suite 2200, 16945 Northchase Drive, Houston, 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.
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.
6
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, 1999.
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 thirteen
holders of record of the Company's common stock.
(c) During 1999 no cash dividends were declared by the Board of
Directors. Any future determination as to the payment of dividends will depend
upon the Company's financial condition, results of operations, capital
requirements and such other factors as the Board of Directors deems relevant.
The Company's debt instruments limit the conditions under which the Company may
pay a cash dividend on its outstanding Common Stock.
(d) During 1999, the Company sold 620 shares of its common stock to
certain management employees at price of $1000 per share. The number of shares
purchased by the Company's most highly compensated executive officers was as
follows: Mr. McKenzie, 220 shares at a cost of $220,000; Mr. Baca, 100 shares
at a cost of $100,000; Mr. Dickie 100 shares at a cost of $100,000; and
Mr. Beilharz 100 shares at a cost of $100,000. Exemption from registration of
the shares sold under the Securities Act of 1933 is claimed pursuant to Section
4(2) thereof because said offer and sale was restricted to a limited number of
individuals, all of whom were members of the management of the Company, without
any advertising or other selling efforts commonly associated with a "public
offering".
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 as of
and for the year ended December 31, 1999 and for the predecessor company as of
and for the years ended December 31, 1995, 1996 and 1997, and from January 1,
1998 to May 21, 1998 and for the period then ended. The financial data set
forth below should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" in Item 7 and the
consolidated financial statements of the Company and the related notes thereto
included elsewhere herein.
Period Period
Jan. 1 May 22 Year
to to Ended
Year Ended December 31, May 21 Dec. 31 Dec. 31
1995 1996 1997 1998 1998 1999
--------- --------- --------- --------- --------- ---------
Statement of
Operations Data:
- ------------------
Net sales $178,628 $242,744 $231,911 $ 90,849 $146,003 $234,544
Gross Profit 36,440 66,373 59,521 23,681 39,255 62,751
Operating income 26,753 51,052 41,011 10,611 27,974 42,500
Other income
(expense) (5,302) (8,345) (6,336) (2,248) (22,071) (33,054)
Income before
income tax and
extraordinary item 21,451 42,707 34,675 8,363 5,903 9,446
Income tax expense 7,633 15,148 12,691 2,839 4,893 4,905
Extraordinary gain
(loss), net of
taxes - - - (7,113) - 322
--------- --------- --------- --------- --------- ---------
Net income (loss) $ 13,818 $ 27,559 $ 21,984 $ (1,589) $ 1,010 4,863
========= ========= ========= ========= ========= =========
Adjusted EBITDA(1):
- -------------------
Operating income $ 26,753 $ 51,052 $ 41,011 $ 10,611 $ 27,974 42,500
Depreciation and
amortization 8,411 9,295 9,955 3,443 12,013 20,410
HII fees & expenses 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 2,305
--------- --------- --------- --------- --------- ---------
$ 36,514 $ 66,563 $ 59,182 $ 23,203 $ 41,194 $ 65,215
========= ========= ========= ========= ========= =========
Balance sheet data
(at period end):
- ------------------
Total assets $113,930 $148,905 $174,911 $182,342 $492,886 $476,274
Total long-term
debt 74,291 72,885 84,014 88,781 331,098 314,992
(1) Adjusted EBITDA represents operating income before depreciation,
amortization, HII fees and payments pursuant to employment and consulting
agreements which were terminated upon consummation of the Acquisition and
on-going AIP fees and expenses. Adjusted EBITDA should not be considered a
substitute for net income, cash flow from operating activities or other
cash flow statement data prepared in accordance with generally accepted
accounting principles or as an alternative to net income as an indicator
of operating performance or cash flows as a measure of liquidity.
Adjusted EBITDA is presented here only to provide additional information
with respect to the Company's ability to satisfy debt service. While
Adjusted EBITDA is frequently used as a measure of operations and the
ability to meet debt service requirements, it is not necessarily
comparable to other similarly titled captions of other companies due to
potential inconsistencies in the method of calculation.
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
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, 1999 Versus Year Ended December 31, 1998
The Company's net sales for the year ended December 31, 1999 decreased
1.0% to $234.5 million from $236.9 million in 1998. Net sales of anode grade
CPC decreased 4.3% to $190.6 million while net sales of industrial grade CPC
increased 12.1% to $40.2 million.
The decrease in anode grade CPC net sales was primarily the result of a
6.8% decrease in average selling prices partially offset by a 2.7% increase in
sales volume to 1,246,616 tons. This decline in average selling price is
attributable to the effects of weak aluminum prices earlier in the year and the
presence of excess CPC in the market. The increase in sales volume of anode
grade CPC, as well as industrial grade CPC referred to below, reflects the
additional production from a second kiln expansion at La Plata, Argentina.
The increase in industrial grade CPC net sales was the result of a
22.1% increase in sales volume to 306,696 tons which was partially offset by an
8.1% decrease in selling price. The increase in sales volume was mainly due to
greater shipments into the relatively lower priced titanium dioxide market in
1999.
During 1999 the Company entered into an arrangement with Repsol/YPF,
the largest oil refiner in Argentina, and its major RPC supplier, whereby the
Company purchased and resold 65,596 tons of RPC production into international
fuel grade markets. Sales of $1.3 million were generated with respect to
these transactions.
The Company's 1999 gross profit remained essentially unchanged compared
to 1998, decreasing only 0.3% to $62.8 million from $62.9 million in the prior
year. The decrease in gross profit was due to the decline in sales discussed
above partially offset by an reduction in cost of goods sold. The reduction
in cost of goods sold was the result of a decrease in average per ton costs,
principally due to lower raw material costs, offset in large part by higher
9
sales volume. The additional Acquisition-related depreciation in 1999 compared
to 1998 amounted to $2.1 million and represented 97.3% of the net change in
cost of goods sold.
Operating income increased by 10.1% to $42.5 million from $38.6 million
in 1998. The improvement in operating income was due a 16.8% decrease in
selling, general and administrative expenses partially offset by the decrease
in gross profit discussed above. The decrease in selling, general and
administrative expenses was primarily the result of the absence in 1999 of
payments made in the prior year for certain non-recurring fees and expenses
under agreements that were terminated upon consummation of the Acquisition,
partially offset by increased amortization expense, related mainly to goodwill
established when the Company was acquired, and higher sales commission and
management fee expenses.
Income before income taxes decreased 33.8% to $9.4 million in 1999
from $14.3 million in 1998. The decrease was primarily attributable to a
$9.3 million increase in net interest expense offset by the improvement in
operating income discussed above. The increase in net interest expense was
due mainly to the greater amount of debt incurred by the Company in order to
finance the Acquisition.
The Company's effective tax rate in 1999 decreased to 51.9% from 54.2%
in 1998 as the tax effects of income from foreign operations present last year
was only partially offset by higher amounts of non-deductible amortization of
goodwill in 1999.
An extraordinary gain on early extinguishment of debt of approximately
$322,000 (net of income tax expense of $173,000) was recognized in 1999. This
gain relates to the purchase by the GLC of $6.9 million of aggregate face value
Debentures issued by the Company for approximately $4.0 million. As a result
of the factors discussed above, net income for the year ended December 31, 1999
increased 940% to a profit of $4.9 million from a loss of $0.6 million in 1998.
Adjusted EBITDA increased by 1.3% to $65.2 million in 1999 from $64.4
million in 1998 for the reasons set forth above.
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
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
10
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.
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 La Plata, Argentina facility.
For purposes of evaluating its cash flow, the Company uses a measure
which it refers to as adjusted net income (or adjusted results) to classify the
income component of cash flow from operating activities. Adjusted net income
(or adjusted results) represents net income (or results) before depreciation,
amortization, deferred taxes and other non-cash items reflected as reconciling
adjustments in the statement of cash flows.
Net cash flow provided by operating activities was $16.5 million, $21.0
million, and $31.3 million in 1999, 1998, and 1997, respectively. The decrease
in operating cash flow from 1998 to 1999 was mainly the result of higher
working capital requirements partially offset by the improvement in adjusted
net income, the earnings components of which are discussed above. The decrease
in operating cash flow from 1997 to 1998 was primarily due to the lower
adjusted results, the earnings components of which are discussed above,
partially offset by a decrease in working capital requirements.
Capital expenditures were $4.3 million, $17.0 million, and $21.4
million for 1999, 1998, and 1997, respectively. The $12.7 million decrease in
capital expenditures in 1999 to was due primarily to amounts spent to complete
the Argentine expansion and the erection of a new ship loader at Port Arthur
in the prior year. 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.
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 in
1998 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 in 1999 reflects a net reduction of long-term debt
of $16.1 million. This is comprised of $20.5 million in debt repayments,
11
including $10.5 million of voluntary prepayments, offset by $4.4 million of
accretion on the Debentures. In addition, the Company sold 620 shares of its
common stock at a price of $1000 per share to certain management employees of
the Company resulting in an aggregate total capital contribution of $620,000
during the year.
Financing activities in 1998 reflect 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
Acquisition. 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 essentially all future domestic
subsidiaries of the Company, if any, to be guarantors of the debt. Interest on
the Notes is payable semiannually each year on May 15 and November 15. The
Notes will mature on May 15, 2008 and are subject to early redemption as set
forth under the terms of the indenture. For interest payments due through
May 15, 2003, the Company may, at its option, make up to four semiannual
payments through the issuance of additional notes in an amount equal to the
interest that would be payable if the rate per annum of the Notes were equal to
11 3/4%.
The Company is a party to a credit agreement that includes Term Loans
comprised of three single tranche loans in an original amount of $50.0 million,
$31.0 million and $30.0 million maturing on May 31, 2004, 2005 and 2006,
respectively, and a Revolving Credit Facility in effect until May 31, 2003
which provides for borrowings of up to $25.0 million (with a $10 million
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 17, 2000 there were no borrowings
under the Revolving Credit Facility and approximately $1.1 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 approximately $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 was 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 have recognized
a year containing "00" as the year 1900 rather than the year 2000 which could
12
have resulted in a system failure or miscalculations causing disruptions of
operations, including a temporary inability to engage in normal business
activities.
The Company, which was Y2K compliant by the close of third quarter
1999, experienced no disturbances related to Y2K, either in its own operations
or in connection with those of its customers and suppliers.
Costs for the Company's Y2K efforts, which had not been accumulated
separately, were not material.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company has significant amounts outstanding under its credit
agreement which bear interest at variable rates. As a result, the Company's
interest expense is sensitive to changes in the general level of interest
rates. The Company may, from time to time, enter into interest rate swap
arrangements to manage its interest cost and mitigate its exposure to
fluctuating interest rates. There were no such arrangements outstanding at
December 31, 1999 or during the year then ended.
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, 1998 and 1999
Consolidated Statements of Operations for the year ended December 31, 1997,
the period January 1, 1998 to May 21, 1998 (predecessor), the period May 22,
1998 to December 31, 1998 and the year ended December 31, 1999 (Company)
Consolidated Statements of Stockholders' Equity for the year ended
December 31, 1997, the period January 1, 1998 to May 21, 1998 (predecessor),
the period May 22, 1998 to December 31, 1998 and the year ended December 31,
1999 (Company)
Consolidated Statements of Cash Flows for the year ended December 31, 1997,
the period January 1, 1998 to May 21, 1998 (predecessor), the period May 22,
1998 to December 31, 1998 and the year ended December 31, 1999 (Company)
Notes to the Consolidated Financial Statements
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
13
PART III
Item 10. Directors and Executive Officers of the Registrant
The following table sets forth the name, age as of March 17, 2000 and
position of the persons serving as directors or executive officers of the
Company:
- ------------------------------------------------------------------------------
Name Age Position
- ----------------- --- ---------------------------------------------------
James D. McKenzie 55 President and Chief Executive Officer, Director
A. Frank Baca 56 Senior Vice President, Operations and Administration
Robert C. Dickie 51 Vice President, Sales
James W. Betts 62 Vice President, Raw Materials
Craig L. Beilharz 45 Vice President, Commercial Development
Theodore C. Rogers 65 Non-Executive Chairman of the Board, Director
W. Richard Bingham 64 Director
Kim A. Marvin 38 Director
Alfred E. Barry 44 Director
Each of the Company's directors and executive officers are elected
annually and holds office until his or her successor is elected and qualified.
Mr. McKenzie has served as President and Chief Executive Officer of
the Company since June 1995. He served as Executive Vice President of the
Company and President of the Calcined Petroleum Coke business of the Company
and its predecessor company ("Old GLC") from 1989 to June 1995. From 1971 to
1989, he held a number of positions with Old GLC, including Vice President,
General Counsel.
Mr. Baca has been Senior Vice President, Operations and Administration
of the Company since September 1995 and was Vice President, Operations from
1991 to August 1995. Since joining Old GLC in 1967, he has held a number of
operating positions, including Plant Manager of the Port Arthur, Texas
calcining facility.
Mr. Dickie has been Vice President, Sales of the Company since
September 1995 and was Director of Sales from 1992 to August 1995. He held the
position of Plant Manager of Enid, Oklahoma calcining facility for Old GLC from
1989 to 1992. Prior to joining Old GLC in 1989, he spent 15 years with Alumax,
holding various positions in aluminum smelting operations.
Mr. 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
positions in sales and raw materials procurement. Since 1992, he has been a
director of Zoltek Companies, Inc.
Mr. Beilharz has been Vice President, Commercial Development of the
Company since February 1999. From March 1997 until rejoining the Company in
1999 he served as General Manager, Supply and Trading for Koch Carbon, Inc.
Prior to that, he was Manager, Sales and Raw Materials for the Company from
1992 to March 1997. From 1973 to 1992, he held a number of positions in
quality control with Old GLC, including Chemist of the Enid, Oklahoma calcining
facility.
14
Mr. Rogers has served as the Non-Executive Chairman of the Board and
Director of the Company since May 1998. He is the Chairman of the Board, a
Director and the Secretary of American Industrial Partners Corporation. He
co-founded AIP Management Co. and has been a director and an officer of AIP
Management Co. since 1989. Mr. Rogers is also a director of Bucyrus
International, Inc., Derby International, 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 Secretary of
American Industrial Partners Corporation. He co-founded AIP Management Co. and
has been a director and an officer of AIP Management Co. since 1989. Mr.
Bingham is also a director of Bucyrus International, Inc., Dearfield
Associates, RBX Corporation, Stanadyne Automotive Corp. and Sweetheart
Holdings, Inc.
Mr. Marvin has served as Director of the Company since May 1998. He
joined the San Francisco office of American Industrial Partners as a Principal
in 1997. From 1994 to 1997, he was an associate in the Mergers & Acquisitions
Department of Goldman Sachs & Co. Mr. Marvin is also a director of Bucyrus
International, Inc.
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.
15
Item 11. Executive Compensation
The following table sets forth information concerning cash compensation
paid by the Company for the years ended December 31, 1999, 1998 and 1997 to the
Company's Chief Executive Officer and each of the four other most highly
compensated executive officers of the Company.
Long-term
Compensation
Awards
Annual Compensation Securities
------------------- Underlying All Other
Name and Position Year Salary Bonus(1) Options(#) Compensation(2)
- ------------------------ ---- --------- --------- ------------- ---------------
James D. McKenzie 1999 $ 300,000 $ 223,336 1,200 $ 5,000
President and Chief 1998 279,170 300,000 - 5,000
Executive Officer 1997 250,008 300,000 - 4,750
A. Frank Baca 1999 176,250 99,000 400 5,000
Senior Vice President, 1998 165,000 85,050 - 4,950
Operations and 1997 157,500 37,440 - 4,725
Administration
Robert C. Dickie 1999 158,751 84,002 400 4,309
Vice President, Sales 1998 140,004 70,201 - 4,200
1997 130,002 29,952 - 8,783
James W. Betts 1999 131,250 72,000 - 3,769
Vice President, 1998 120,000 60,750 - 3,600
Raw Materials 1997 112,500 26,208 - 37,192
Craig L. Beilharz 1999 128,125 - 400 1,207
Vice President, 1998 - - - -
Commercial Development 1997 - - - -
- -------------------------------------------------------------------------------
(1) Bonuses are reported in the year paid even though earned in the previous
year.
(2) The amounts shown in this column include the following: (a) the Company's
contribution under the 401(k) savings plan to: Mr. McKenzie, $5,000,
$5000, $4,750; Mr. Baca, $5,000, $4,950, $4,725; Mr. Dickie, $4,309,
$4,200, $3,900; Mr. Betts,$3,769, $3,600, $3,375; and Mr. Beilharz, $1,207
for 1999, 1998 and 1997, respectively; (b) the Company's payment of
relocation allowances in 1997 to: Mr. Dickie, $4,883; and Mr. Betts,
$33,817.
- -------------------------------------------------------------------------------
Profit-Sharing Plan
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.
Savings Plans
The Company currently sponsors two Savings Plans for employees; one for
salaried employees and the other for hourly employees covered by the collective
bargaining 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
16
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.
Pension Plans
The Company currently maintains three defined benefit retirement plans.
for the benefit of its employees; one plan is for hourly employees covered by
the collective bargaining 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.
The following table shows the estimated annual straight-life annuity
benefit payable under the Salaried Plan and the SERP to the executives who
participate in such plans, with the specified remuneration and specified years
of service upon retirement at age 65, after giving effect to adjustments for
Social Security benefits, assuming they continue to be actively employed by the
Company until age 65. For those executives who participant in the SERP, the
benefit payable upon retirement at age 65 is determined based upon their full
salary and years of service. Participation in the SERP is extended to
executives at the sole discretion of the Board of Directors. The benefit
payable upon retirement at age 65 to executive officers who do not participate
in the SERP is determined based upon each such executive's salary (subject to
the limitations imposed by Section 401(a)(17) of the Code, currently $170,000),
and years of service.
Years of
Service Annual
Name at Age 65 Benefit
------------------------ --------- --------
James D. McKenzie 38 $185,209
A. Frank Baca 41 110,240
Robert C. Dickie 24 61,521
James W. Betts 34 74,388
Craig L. Beilharz 44 99,931
-----------------------------------------------------
The compensation of participants used to calculate
the retirement benefit consists solely of annual base
salary.
-----------------------------------------------------
Stock Option Plan
On December 13,1999, the Board of Directors adopted the 1999 Management
Stock Option Plan (the "Plan") in order to provide equity-based incentives to
certain officers and other key employees of the Company and its subsidiaries.
The Plan is administered by the President and Chief Executive Officer
of the Company ("CEO"), subject to the review and approval of the Compensation
Committee of the Board of Directors or, if one has not been established, the
Board of Directors or such other committee as the Board of Directors may
designate (any such committee or the Board of Directors, the "Committee"). The
CEO has authority to recommend to the Committee the employees who shall
participate in the Plan and the number of stock options to be granted to each.
The Plan provides for the grant of stock options to purchase up to an
aggregate of 4,050 shares of the common stock of the Company at a price of
$1000 per share with 2,800 shares being initially granted to employees. At the
time of the grant 16.4% of the options became vested with the remaining options
17
targeted to vest on the last day of plan years 1999 through 2001 at a rate of
27.9% of the aggregate number of shares of common stock subject to the options
per year provided that the Company attains a specified target of Adjusted
EBITDA in each plan year. In the event that the Adjusted EBITDA goal is not
attained in any plan year, the options scheduled to vest at the end of that
plan year will vest on a pro rata basis according to a schedule set forth in
the Plan, provided that if 90% or less of the Adjusted EBITDA goal is achieved,
then no portion of the options shall vest at the end of that plan year. In the
event that the Adjusted EBITDA goal is surpassed in any plan year, the surplus
shall be applied first to offset any Adjusted EBITDA deficit from prior plan
years, and second to accelerate vesting of up to one-quarter of the options
scheduled to vest in 2001 in accordance with a surplus vesting schedule set
forth in the Plan. Notwithstanding the foregoing, all options granted under
the Plan shall vest automatically on April 21, 2007, regardless of the
performance criteria or, in the event of the sale of the Company prior to the
end of the 2001 plan year, immediately prior to such sale.
Granted options may be forfeited or repurchased by the Company as
provided under the term of the Plan in the event of the participating
employee's termination, and if not previously forfeited or exercised, expire
and terminate no later than ten years after the date of grant or, in the event
of the sale of the Company, upon consummation of such sale.
The table below sets forth for the Company's most highly compensated
executive officers information regarding the grant of options under the Plan
during 1999.
Potential Realizable
Percent of Value at Assumed
Number of Total Annual Rates of
Securities Options Exercise Stock Price
Underlying Granted to or Base Appreciation for
Options Employees Price(2) Expiration Ten Year Option Term
Name Granted in 1999(1) ($/share) Date 5% 10%
- ------------- ---------- ----------- --------- ---------- ---------- ----------
J.D. McKenzie 1,200 42.9% $1000.00 12/13/09 $ 754,674 $1,912,491
A.F. Baca 400 14.3% $1000.00 12/13/09 251,558 637,497
R.C. Dickie 400 14.3% $1000.00 12/13/09 251,558 637,497
C.L. Beilharz 400 14.3% $1000.00 12/13/09 251,558 637,497
- -------------------------------------------------------------------------------
(1) A total of 2,800 options were granted to employees under the Plan in 1999.
(2) The exercise price of each option granted was equal to 100% of the fair
value of the Company's common stock on the date of grant. The fair value
was established by the Company's Board of Directors as the price at which
the Company will buy or sell its common stock.
- -------------------------------------------------------------------------------
The following table sets forth information related to the exercise of
stock options during 1999 and the year-end number and value of unexercised
stock options for the Company's most highly compensated executive officers.
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Options at the End of Options at the End of
Shares Calendar Year 1999 Calendar Year 1999(1)
Acquired ---------- ----------- ---------- -----------
on Value Exercis- Unexercis- Exercis- Unexercis-
Name Exercise Realized able able able able
- ------------- -------- ---------- ---------- ----------- ---------- -----------
J.D. McKenzie - $ - 552 648 $ - $ -
A.F. Baca - - 184 216 - -
R.C. Dickie - - 184 216 - -
C.L. Beilharz - - 136 264 - -
- -------------------------------------------------------------------------------
(1) Substantially all of the Company's common stock is held by AIP and there is
no established public trading market therefor. At December 31, 1999, the
fair value of the common stock was determined to be $1000 per share which
is equivalent to the fair value on the date of grant. The fair value was
established by the Company's Board of Directors as the price at which the
Company will buy or sell its common stock.
- -------------------------------------------------------------------------------
18
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth information as of December 31, 1999
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 98.6%
Theodore C. Rogers (1) 65,000 98.6%
W. Richard Bingham (1) 65,000 98.6%
All directors and officers as a group (9 persons) 65,520 99.4%
- -------------------------------------------------------------------------------
(1) Messrs. Rogers and Bingham share investment and voting power with respect
to the securities owned by AIP, which owns 98.6% of the outstanding shares
of 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 substantial on-going financial and management services to
the Company utilizing the extensive operating and financial experience of AIP's
principals. AIP receives an annual fee of $1.9 million for providing general
management, financial and other corporate advisory services to the Company,
payable semiannually 45 days after the scheduled interest payment date of the
Notes (and the Debentures when these begin paying cash interest in November
2003), and is reimbursed for out-of-pocket expenses incurred on behalf of the
Company. The fees are paid to AIP pursuant to a management services agreement
among AIP and the Company and are subordinated in right of payment to the Notes
(and the Debentures when these begin paying cash interest in November 2003).
19
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, 1998 and 1999..................................................F-3
Consolidated Statements of Operations -
For the year ended December 31, 1997, the period January 1, 1998 to
May 21, 1998 (predecessor), the period May 22, 1998 to December 31, 1998
and the year ended December 31, 1999 (Company)..............................F-5
Consolidated Statements of Stockholders' Equity -
For the year ended December 31, 1997, the period January 1, 1998 to
May 21, 1998 (predecessor), the period May 22, 1998 to December 31, 1998
and the year ended December 31, 1999 (Company)..............................F-6
Consolidated Statements of Cash Flows -
For the year ended December 31, 1997, the period January 1, 1998 to
May 21, 1998 (predecessor), the period May 22, 1998 to December 31, 1998
and the year ended December 31, 1999 (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 of and for the year ended December 31, 1999........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).
*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.
10.7a Coke Supply Agreement between GLC and Exxon Company, U.S.A.
(Replaces 10.7 filed previously).
*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
20
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Financial Statements
Years ended December 31, 1998 and 1999
Contents
Report of Independent Auditors..............................................F-2
Consolidated Balance Sheets -
December 31, December 31, 1998 and 1999.....................................F-3
Consolidated Statements of Operations -
For the year ended December 31, 1997, the period January 1, 1998 to
May 21, 1998 (predecessor), the period May 22, 1998 to December 31, 1998
and the year ended December 31, 1999 (Company)..............................F-5
Consolidated Statements of Stockholders' Equity -
For the year ended December 31, 1997, the period January 1, 1998 to
May 21, 1998 (predecessor), the period May 22, 1998 to December 31, 1998
and the year ended December 31, 1999 (Company)..............................F-6
Consolidated Statements of Cash Flows -
For the year ended December 31, 1997, the period January 1, 1998 to
May 21, 1998 (predecessor), the period May 22, 1998 to December 31, 1998
and the year ended December 31, 1999 (Company)..............................F-7
Notes to the Consolidated Financial Statements..............................F-8
21/F-1
Report of Independent Auditors
The Board of Directors
Great Lakes Acquisition Corp.
We have audited the accompanying consolidated balance sheets of Great Lakes
Acquisition Corp. and subsidiaries as of December 31, 1998 and 1999, and
the related consolidated statements of operations, stockholders' equity,
and cash flows for the period May 22, 1998 to December 31, 1998 and the
year ended December 31, 1999. We have also audited the statements of
operations, stockholders' equity and cash flows of the predecessor company
for the year December 31, 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 auditing standards generally
accepted in the United States. 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 1999, and the
consolidated results of their operations and their cash flows for the period
May 22, 1998 to December 31, 1998 and the year ended December 31, 1999, and
those of the predecessor company for the year ended December 31, 1997 and the
period January 1, 1998 to May 21, 1998 in conformity with accounting principles
generally accepted in the United States. 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 4, 2000
22/F-2
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Balance Sheets
December 31,
1998 1999
----------- ------------
(In thousands, except share data)
ASSETS
Current Assets
Cash $ 10,403 $ 7,102
Accounts receivable, net of allowance
for doubtful accounts of $600 in
1998 and 1999 18,961 32,738
Inventories 37,702 35,920
Incomes taxes receivable 1,274 -
Prepaid expenses and other current assets 9,456 5,233
-------- --------
Total Current Assets 77,796 80,993
Property, Plant and Equipment-Net 214,101 202,874
Goodwill 176,220 171,747
Capitalized financing costs 19,587 17,117
Other Assets 5,182 3,543
-------- --------
$492,886 $476,274
======== ========
<FN>
See accompanying notes.
23/F-3
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Balance Sheets
December 31,
1998 1999
----------- ------------
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 18,897 $ 12,544
Accrued expenses 13,285 12,768
Income taxes payable - 1,984
Current portion of long-term debt 10,009 12,434
-------- --------
Total Current Liabilities 42,191 39,730
Long-Term Debt, Less Current Portion 321,089 302,558
Other Long-Term Liabilities 4,876 6,804
Deferred Taxes 58,390 55,359
Stockholders' Equity
Common stock, par value $0.01 per share;
authorized, 92,000 shares, issued and
outstanding, 65,330 shares in 1998 and
65,950 shares in 1999 1 1
Additional paid-in capital 65,329 65,949
Retained earnings 1,010 5,873
-------- --------
66,340 71,823
$492,866 $476,274
======== ========
<FN>
See accompanying notes.
24/F-4
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Statements of Operations
PREDECESSOR COMPANY COMPANY
--------------------- ---------------------
Period Period
Jan. 1 May 22
Year Ended to to Year Ended
Dec. 31 May 21 Dec. 31 Dec. 31
1997 1998 1998 1999
---------- ---------- ---------- ----------
(In thousands)
Net Sales $ 231,911 $ 90,849 $ 146,003 $ 234,544
Cost of Goods Sold 172,390 67,168 106,748 171,793
---------- ---------- ---------- ----------
Gross Profit 59,521 23,681 39,255 62,751
Selling, general and administrative
expenses 18,510 13,070 11,281 20,251
---------- ---------- ---------- ----------
Operating Income 41,011 10,611 27,974 42,500
Other income (expense):
Interest, net (6,287) (1,776) (22,973) (34,015)
Other, net (49) (472) 902 961
---------- ---------- ---------- ----------
(6,336) (2,248) (22,071) (33,054)
Income Before Income Taxes
and Extraordinary Item 34,675 8,363 5,903 9,446
Income taxes 12,691 2,839 4,893 4,905
---------- ---------- ---------- ----------
Income before extraordinary item 21,984 5,524 1,010 4,541
Extraordinary gain (loss) on early
extinguishment of debt, net of
tax benefit of $4,001 for the
period from January 1 to May
21, 1998 and tax expense of
$173 for the year ended
December 31, 1999 - (7,113) - 322
---------- ---------- ---------- ----------
Net income (loss) $ 21,984 $ (1,589) $ 1,010 $ 4,863
========== ========== ========== ==========
<FN>
See accompanying notes.
25/F-5
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
Net income - - 4,863 4,863
Capital contribution
at December 14, 1999 - 620 - 620
---------- ---------- ---------- ----------
Balance at December 31, 1999 1 65,949 5,873 71,823
========== ========== ========== ==========
Predecessor Company
Balance at January 1, 1997 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
========== ========== ========== ==========
<FN>
See accompanying notes.
26/F-6
Great Lakes Acquisition Corp.
and Subsidiaries
Consolidated Statements of Cash Flows
PREDECESSOR COMPANY COMPANY
--------------------- ---------------------
Period Period
Jan. 1 May 22
Year Ended to to Year Ended
Dec. 31 May 21 Dec. 31 Dec. 31
1997 1998 1998 1999
---------- ---------- ---------- ----------
(In thousands)
Operating activities
Net income (loss) $ 21,984 $ (1,589) $ 1,010 $ 4,863
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities:
Depreciation and amortization 10,220 3,546 13,554 22,937
Deferred taxes 2,260 - (228) (3,031)
Changes in operating assets
and liabilities:
Accounts receivables (974) 6,886 4,061 (13,777)
Inventories 7,417 (1,938) (3,309) 1,782
Other current assets (1,391) (1,193) (3,914) 4,223
Income taxes payable (2,044) (4,765) 1,695 3,258
Accounts payable and
accrued expenses (6,156) 9,164 (4,640) (6,870)
Other, net (55) 2,627 59 3,080
---------- ---------- ---------- ----------
Net cash provided (used) by
operating activities 31,261 12,738 8,288 16,465
Investing activities
Capital expenditures (21,391) (9,058) (7,910) (4,280)
Acquisition of Great Lakes Carbon
Corporation-net of cash acquired - - (274,263) -
---------- ---------- ---------- ----------
Net cash used by
investing activities (21,391) (9,058) (282,173) (4,280)
Financing Activities
Repayment of long-term debt (1,389) (161) (78,946) (20,489)
Additions to long-term debt 12,518 4,928 321,263 4,383
Deferred financing costs - - (23,359) -
Capital contribution - - 65,330 620
Dividends (1,500) - - -
---------- ---------- ---------- ----------
Net cash provided (used) by
financing activities 9,629 4,767 284,288 (15,486)
Increase (decrease) in cash 19,499 8,447 10,403 (3,301)
Cash at beginning of period 24,097 43,596 - 10,403
---------- ---------- ---------- ----------
Cash at end of period $ 43,596 $ 52,043 $ 10,403 $ 7,102
========== ========== ========== ==========
<FN>
See accompanying notes.
27/F-7
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements
December 31, 1999
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 98.56% owned subsidiary
of American Industrial Capital Fund II, L.P. ("AIP").
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 approximately $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 petroleum 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 1999 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.
28/F-8
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.
Goodwill
Goodwill represents the excess of purchase price over the fair value of the net
tangible assets acquired in the Acquisition. Goodwill is being amortized using
the straight-line method over 40 years.
Impairment of Long-Lived Assets
Long-lived assets are reviewed for impairment whenever events or changes in
business circumstances indicate that the carrying value of the assets may not
be recoverable in accordance with Financial Accounting Standard No. 121,
"Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be
Disposed Of". Impairment losses are recognized if expected future cash flows
of the related assets are less than their carrying values.
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, 2001. The
Statement will require the Company to recognize all derivatives 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 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; 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; and two customers
which represented 31.2% and 16.7% of net sales in 1999.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed by Accounting Principals Board Opinion No. 25, "Accounting
for Stock Issued to Employees" ("APB 25"). Compensation expense is recognized
for stock options granted below the fair market value of the Company's stock on
the date of grant.
29/F-9
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
2. Inventories
Inventories consist of the following:
December 31
1998 1999
--------------------
(In thousands)
Raw materials $18,837 $20,286
Finished goods 12,996 9,334
Supplies and spare parts 5,869 6,300
--------------------
$37,702 $35,920
====================
3. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets included Argentine Value-Added-Tax
("VAT") receivable of approximately $6,247,000 and $1,885,000 at December 31,
1998 and 1999, respectively.
4. Property, Plant and Equipment
Property, plant and equipment consists of the following:
December 31
1998 1999
---------------------
(In thousands)
Land and improvements $ 2,158 $ 2,575
Buildings 10,047 10,236
Machinery, equipment and other 209,132 214,325
Construction in progress 1,893 373
---------------------
223,230 227,509
Accumulated depreciation (9,129) (24,635)
---------------------
$214,101 $202,874
=====================
5. Accrued Expenses
Accrued expenses included interest payable and employee profit sharing payable
of $2,635,000 and $2,437,000 and $2,764,000 and $2,202,000 at December 31, 1998
and 1999, respectively
30/F-10
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
1998 1999
---------------------
(In thousands)
10.25% Senior Subordinated Notes due May 15, 2008 $175,000 $175,000
13.125% Senior Discount Debentures due May 15, 2009 32,481 32,385
Term Loan Credit Facility bearing interest at the
Company's option at LIBOR (5.94% at December 31,
1999) plus a margin ranging from 2.25% to 3.00%
or Prime (8.50% at December 31, 1999) plus a margin
ranging from 1.25% to 2.00% (subject to an interest
reduction discount ranging from 0% to 0.75% based on
the achievement of certain leverage ratios) due in
varying amounts quarterly through May, 2006 98,446 89,450
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 3,749 2,663
Facility expansion credit line bearing interest at
LIBOR plus 4% (9.94% at December 31, 1999) due in
varying amounts semiannually through March, 2002 15,850 12,680
Capital lease obligation, bearing interest of 9.3% 1,328 961
Other 4,244 1,853
---------------------
331,098 314,992
Current portion (10,009) (12,434)
---------------------
$321,089 $302,558
=====================
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 approximately $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
31/F-11
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.
During 1999, approximately 12% of the Debentures outstanding were purchased by
GLC with the intention of holding them to maturity. The Company's obligation
with respect to the Debentures at December 31, 1999 is shown net of the amount
held by GLC.
The term loan credit facility is comprised of three single tranche term loans
in the amount of $39,260,000, $25,506,000 and $24,684,000 at December 31, 1999
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 $10,000,000 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, 1999 there were no borrowings under the
revolving credit portion of the facility and outstanding letters of credit
were $3,333,000.
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 was established 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.
Certain covenants present in the Company's credit agreements make reference to
a measure denominated as Adjusted EBITDA. Adjusted EBITDA is defined as
operating income before depreciation, amortization and management fees and
related expenses.
The fair market value of the Company's long-term debt obligations approximated
$335,000,000 and $300,000,000 at December 31, 1998 and 1999, respectively.
Maturities of long-term debt, for the succeeding five years and thereafter are
as follows:
Long-Term Capital
Debt Leases Total
-------------------------------
(In thousands)
2000 $ 12,031 $ 403 $ 12,434
2001 15,326 442 15,768
2002 15,007 116 15,123
2003 11,118 - 11,118
2004 17,563 - 17,563
Thereafter 242,986 - 242,986
-------------------------------
$314,031 $ 961 $314,992
===============================
Interest paid amounted to $7,773,000 for the year ended December 31, 1997,
$3,705,000 for the period from January 1, 1998 to May 21, 1998, $18,258,000 for
the period from May 22, 1998 to December 31, 1998 and $27,353,000 for the year
ended December 31, 1999.
32/F-12
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
6. Long-Term Debt (continued)
The Company capitalized interest on 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, 1999, 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)
2000 $ 615 $ 1,633
2001 615 1,382
2002 154 1,329
2003 - 1,316
2004 - 1,294
Thereafter - 6,881
--------------------
Total minimum lease payments 1,384 $13,835
Amounts representing interest (423) ========
------
Present value of net minimum lease payments $ 961
======
Rental expense for all operating leases was $2,770,000 for the year ended
December 31, 1997, $1,062,000 for the period from January 1, 1998 to May 21,
1998, $1,709,000 for the period from May 22, 1998 to December 31, 1998 and
$2,012,000 for the year ended December 31, 1999.
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, 1999 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.
33/F-13
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
1997 1998 1998 1999
------- ------- ------- -------
(In thousands)
Service cost $ 501 $ 232 $ 351 $ 624
Interest cost 571 265 397 797
Expected return on assets (595) (294) (526) (968)
Amortization of prior service cost 10 4 - -
Recognized net actuarial loss - - - 36
------- ------- ------- -------
Net periodic pension cost $ 487 $ 207 $ 222 $ 489
======= ======= ======= =======
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
1998 1998 1999
-------- -------- --------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 8,538 $ 9,156 $11,264
Service cost 232 351 624
Interest cost 265 397 797
Amendments - 324 -
Actuarial (gain)/loss 219 1,210 (767)
Benefits paid (98) (174) (302)
-------- -------- --------
Benefit obligation at end of period $ 9,156 $11,264 $11,616
======== ======== ========
Change in plan assets:
Fair value of plan assets at beginning of period $ 9,004 $ 9,980 $11,096
Actual return on plan assets 755 922 1,403
Company contribution 319 368 184
Benefits paid (98) (174) (302)
-------- -------- --------
Fair value of plan assets at end of period $ 9,980 $11,096 $12,381
======== ======== ========
Funded status $ 824 $ (168) $ 765
Unrecognized net actuarial (gain)/loss (785) 816 (423)
Unrecognized prior service cost 76 - -
-------- -------- --------
Net pension asset recognized in the balance sheets $ 115 $ 648 $ 342
======== ======== ========
34/F-14
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
8. Pension Plans (continued)
The expected long-term rate of return on plan assets was 9% for all the periods
presented. The weighted average discount rate and weighted average rate of
increase in future compensation levels used were 7.5% and 5% for 1997, 7.25%
and 4.25% for the period from January 1, 1998 to May 21, 1998, 7% and 4% for
the period from May 22, 1998 to December 31, 1998 and 8% and 5% for 1999,
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
1997 1998 1998 1999
------- ------- ------- -------
(In thousands)
Service cost $ 204 $ 106 $ 148 $ 327
Interest cost 223 106 153 286
Amortization of net obligation/(asset) 68 28 - -
------- ------- ------- -------
NPPBC $ 495 $ 240 301 $ 613
======= ======= ======= =======
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
1998 1998 1999
-------- -------- --------
(In thousands)
Change in benefit obligation:
Benefit obligation at beginning of period $ 3,377 $ 3,548 $ 4,158
Service cost 106 148 327
Interest cost 106 153 286
Actuarial (gain)/loss (9) 381 (488)
Benefits paid (32) (72) (105)
-------- -------- --------
Benefit obligation at end of period $ 3,548 $ 4,158 $ 4,178
======== ======== ========
35/F-15
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
1998 1998 1999
-------- -------- --------
(In thousands)
Change in plan assets:
Fair value of plan assets at beginning of period $ - $ - $ -
Actual return on plan assets - - -
Company contribution 32 72 105
Benefits paid (32) (72) (105)
-------- -------- --------
Fair value of plan assets at end of period $ - $ - $ -
======== ======== ========
Funded status $(3,548) $(4,158) $(4,178)
Unrecognized net actuarial (gain)/loss 258 381 (107)
Unrecognized net obligation 991 - -
-------- -------- --------
Postretirement liability recognized
in the balance sheets $(2,299) $(3,777) $(4,285)
======== ======== ========
The health care cost trend used in determining the accumulated postretirement
benefit obligation ("APBO") was 7.29% grading down to 5.0% in six 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 for the year ended
December 31, 1999 by $108,000 (or 17.6%) and the APBO for the year then ended
by $540,000 (or 12.9%). Conversely, decreasing the assumed trend by 1% for all
years would decrease the aggregate service and interest component of NPPBC for
the year ended December 31, 1999 by $90,000 (or 14.7%) and the APBO for the
year then ended by $456,000 (or 10.9%).
Assumptions used to develop NPPBC and the actuarial present value APBO included
the weighted average rate of increase in future compensation levels and the
weighted average discount rate of 5% and 7.5% for 1997, 5% and 7.5% for the
period from January 1, 1998 to May 21, 1998, 5% and 7% for the period from
May 22, 1998 to December 31, 1998 and 5% and 8% for 1999, respectively.
36/F-16
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Stockholders' Equity
On May 18, 1998, the Company canceled its previously issued shares of common
stock and issued 65,000 shares of its common stock for $65 million. On May 22,
1998, the Company issued 330 shares of its common stock for $330,000.
In 1999, certain members of management of the Company purchased 620 shares of
the Company's common stock for $620,000 which increased the number of issued
and outstanding common shares to 65,950 shares at December 31, 1999.
On December 13,1999, the Board of Directors adopted the 1999 Management Stock
Option Plan (the "1999 Option Plan") which provides for the grant of stock
options to purchase up to an aggregate of 4,050 shares of the common stock of
the Company at a price of $1,000 per share with 2,800 shares being initially
granted to employees. At the time of the grant, 16.4% of the options became
vested with the remaining options targeted to vest on the last day of plan
years 1999 through 2001 at a rate of 27.9% of the aggregate number of shares of
common stock subject to the options per year, provided that the Company attains
specified Adjusted EBITDA targets. If the Adjusted EBITDA goal is not attained
in any plan year, the options scheduled to vest in that year will vest on a pro
rata basis as prescribed in the 1999 Option Plan, except that unless more than
90% of the Adjusted EBITDA goal is achieved, no portion of the options shall
vest for the year. Conversely, the 1999 Option Plan provides of make-up vesting
and accelerated vesting (of up to 25% of the options scheduled to vest in
2001), in that order, in the event that the Adjusted EBITDA goal is surpassed
in any plan year. Notwithstanding the foregoing, all options granted under the
1999 Option Plan vest automatically on April 21, 2007, regardless of
performance criteria, or upon of the sale of the Company should the sales occur
prior to the end of 2001, and expire on the earlier of the tenth anniversary of
the date of grant or the sale of the Company.
The following table sets forth the activity and outstanding balances of options
exercisable for shares of common stock under the 1999 Option Plan:
Available
Options For Future
Outstanding Grants
------------ ------------
At plan inception on December 13, 1999 - 4,050
Granted on December 13, 1999 ($1,000 per share) 2,800 (2,800)
------------ ------------
Balance at December 31, 1999 2,800 1,250
At December 31, 1999, the number of options outstanding that were vested
totaled 1,240 at an exercise price of $1,000 per share with a weighted average
remaining contractual life of 10 years.
The Company has elected to follow APB 25 and related interpretations in
accounting for its employee stock options because, as discussed below, the
alternative fair value accounting provided for under Financial Accounting
Standards Board Statement No. 123, "Accounting for Stock-Based Compensation,"
requires use of option valuation models that were not developed for use in
valuing employee stock options. Under APB 25, no compensation expense is
recognized if the exercise price of the Company's employee stock options equals
or exceeds the market price of the underlying stock on the date of grant.
37/F-17
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
10. Stockholders' Equity (continued)
Statement No. 123 requires disclosure by the Company of the pro forma effect on
net income if it continues to account for stock options under the provisions
of APB 25. The Company used the minimum value method to develop the pro forma
information set forth below which has been determined as if the Company had
accounted for its stock options under the fair value method of Statement
No. 123.
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998 1999
---------- ---------- ---------- ----------
(In thousands)
Net earnings (loss):
As reported $ 21,984 $ (1,589) $ 1,010 $ 4,541
Pro forma $ 21,984 $ (1,589) $ 1,010 $ 4,407
The exercise price of these stock options was equal to the fair value of the
underlying common stock on the date of grant which was established by the
Company's Board of Directors as the price at which the Company will buy or sell
its common stock. The grant date fair value for these stock options was
estimated at $177.40 per option and was determined using an option pricing
model with the following weighted-average assumptions for 1999: risk-free
interest rate of 6.51%; dividend yield of 0.0%; volatility factor of the
expected market price of the Company's common stock of 0.0; and an expected
option life of 3 years.
Option valuation models were developed for use in estimating the fair value of
traded options which have no vesting restrictions and are fully transferable.
In addition, option valuation models require the input of highly subjective
assumptions including the expected stock price volatility. Because the
Company's employee stock options have characteristics significantly different
from those of traded options, and because changes in the subjective input
assumptions can materially affect the fair value estimate, in the opinion of
management, the existing models do not necessarily provide a reliable single
measure of the value of its employee stock options.
11. Other Income (Expense)
Other income (expense) consists of the following:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998 1999
------- ------- ------- -------
(In thousands)
Export tax refund $ 536 $ 77 $ 660 $1,261
Other (487) (549) 242 (300)
------- ------- ------- -------
$ (49) $ (472) $ 902 961
======= ======= ======= =======
38/F-18
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Income Taxes
Components of the Company's deferred tax liabilities and assets are as follows:
1998 1999
---------------------
(In thousands)
Deferred tax liabilities:
Book over tax depreciable basis $57,574 $56,427
Other - net 4,617 5,075
---------------------
Total deferred tax liabilities 62,191 61,502
---------------------
Deferred tax assets:
Accrued liabilities 2,541 4,375
Other - net 1,260 1,768
---------------------
Total deferred tax assets 3,801 6,143
---------------------
Net deferred tax liability $58,390 $55,359
=====================
The differences between tax expense computed at the statutory federal income
tax rate and actual tax expense are as follows:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998 1999
------- ------- ------- -------
(In thousands)
Tax expense at statutory rates applied
to pretax earnings $12,143 $ 2,927 $ 2,066 $ 3,307
State income tax, net of federal tax effects 1,020 (131) 86 28
Tax exempt earnings (938) (20) (315) (332)
Effects of foreign operations (91) (135) 1,764 (171)
Amortization of goodwill - - 957 1,566
Other 557 198 335 507
------- ------- ------- -------
$12,691 $ 2,839 $ 4,893 $ 4,905
======= ======= ======= =======
Income taxes consist of the following:
Period Period
Jan. 1 May 22
to to
May 21 Dec. 31
1997 1998 1998 1999
------- ------- ------- -------
(In thousands)
Current:
Federal $ 7,229 $ 1,801 $ 3,564 $ 2,602
State 1,481 (202) (634) 604
Foreign 2,852 1,240 2,191 4,730
------- ------- ------- -------
11,562 2,839 5,121 7,936
------- ------- ------- -------
Deferred:
Federal 1,001 - (1,049) (2,208)
State 88 - 766 (561)
Foreign 40 - 55 (262)
------- ------- ------- -------
1,129 - (228) (3,031)
------- ------- ------- -------
Total $12,691 $ 2,839 $ 4,893 $ 4,905
======= ======= ======= =======
39/F-19
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
12. Income Taxes (continued)
Income taxes paid were approximately $12,485,000,$4,994,000,$2,081,000 and
$4,851,000 for the year ended December 31, 1997, the period from January 1,
1998 to May 21, 1998, the period from May 22, 1998 to December 31, 1998, and
the year ended December 31, 1999, respectively.
U.S. income taxes have not been provided on the undistributed earnings of
Copetro ($26,071,000 as of December 31, 1999) because such earnings are
expected to be reinvested. Upon distribution of those earnings, the Company
would be subject to U.S. income taxes (subject to an adjustment for foreign
tax credits and withholding taxes, if any).
Income (loss) before income taxes and extraordinary item attributable to
domestic operations (which included results from export sales) was $25,723,000
for the year ended December 31, 1997, $4,606,000 for the period from January 1,
1998 to May 21, 1998, $38,000 for the period from May 22, 1998 to December 31,
1998 and $(3,152,000) for the year ended December 31, 1999.
13. Financial Information Relating to Segments
The Company has two reportable business segments.
Anode Grade CPC-is produced and marketed directly to primary aluminum
smelters world-wide for use as the principal raw material in the production
of carbon anodes, a key component in the aluminum smelting process.
Industrial Grade CPC-is produced and marketed for use in a variety of non-
aluminum, industrial applications, including as a raw material in the
production of titanium dioxide, as a recarburizer 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, the
assets by segments.
Anode Industrial
Grade Grade
CPC CPC Other Total
---------- ---------- --------- ----------
(In thousands)
------------- 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 $ 34,675
==========
40/F-20
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
13. Financial Information Relating to Segments (continued)
--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
==========
Anode Industrial
Grade Grade
CPC CPC Other Total
---------- ---------- --------- ----------
(In thousands)
---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 $ 5,903
==========
------------- 1999 -------------
Net sales $ 190,648 $ 40,167 $ 3,729 $ 234,544
Cost of goods sold (138,002) (26,501) (7,290) (171,793)
---------- ---------- --------- ----------
Segment Profit $ 52,646 $ 13,666 $ (3,561) 62,751
========== ========== =========
Selling, general and
administrative expenses (20,251)
Interest expense, net (34,015)
Other income (expense) 961
----------
Income before income taxes $ 9,446
==========
41/F-21
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
14. Operations by Geographic Area
The following is a summary of the Company's operations by geographic area:
Period Period
Jan. 1 May 22
Year Ended to to Year Ended
Dec. 31 May 21 Dec. 31 Dec. 31
1997 1998 1998 1999
---------- ---------- ---------- ----------
(In thousands)
Net Sales
United States $ 189,730 $ 75,823 $ 116,011 $ 168,815
Foreign 42,181 15,026 29,992 65,729
---------- ---------- ---------- ----------
$ 231,911 $ 90,849 $ 146,003 $ 234,544
========== ========== ========== ==========
Operating income
United States $ 32,358 $ 7,098 $ 22,466 $ 29,414
Foreign 8,653 3,513 5,508 13,086
---------- ---------- ---------- ----------
$ 41,011 $ 10,611 $ 27,974 $ 42,500
========== ========== ========== ==========
Adjusted EBITDA (1)
United States $ 47,436 $ 19,078 $ 33,295 $ 47,826
Foreign 11,746 4,125 7,899 17,389
---------- ---------- ---------- ----------
$ 59,182 $ 23,203 $ 41,194 $ 65,215
========== ========== ========== ==========
Assets
United States $ 125,448 $ 138,011 $ 410,635 $ 391,762
Foreign 49,463 44,331 82,251 84,512
---------- ---------- ---------- ----------
$ 174,911 $ 182,342 $ 492,886 $ 476,274
========== ========== ========== ==========
(1) Adjusted EBITDA should not be considered a substitute for net income,
cash flow from operating activities or other cash flow statement data
prepared in accordance with generally accepted accounting principles
or as an alternative to net income as an indicator of operating
performance or cash flows as a measure of liquidity. Adjusted EBITDA
is presented here only to provide additional information with respect
to the Company's ability to satisfy debt service. While Adjusted
EBITDA is frequently used as a measure of operations and the ability
to meet debt service requirements, it is not necessarily comparable
to other similarly titled captions of other companies due to potential
inconsistencies in the method of calculation.
---------------------------------------------------------------------------
Exports of U.S. produced products were approximately $104,826,000, $43,260,000,
$68,291,000 and $83,525,000 for the year ended December 31, 1997, the period
from January 1, 1998 to May 21, 1998, the period from May 22, 1998 to December
31, 1998 and for the year ended December 31, 1999, respectively. Export sales
as a percentage of United States net sales represented 22.9%, 26.4%, 27.1% and
29.4% to Western Europe for the year ended December 31, 1997, the period from
January 1, 1998 to May 21, 1998, the period from May 22, 1998 to December 31,
1998 and the year ended December 31, 1999, respectively, and 18.9%, 22.6% and
17.9% to Africa for the year ended December 31, 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.
42/F-22
Great Lakes Acquisition Corp. and Subsidiaries
Notes to Consolidated Financial Statements (continued)
15. 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 approximately
$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.
An extraordinary gain on early extinguishment of debt of approximately
$322,000, net of income tax expense of $173,000, was recognized in 1999. This
gain relates to the purchase by GLC of $6.9 million of aggregate face value
Debentures issued by the Company for approximately $4.0 million.
16. 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.
43/F-23
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp.
Condensed Balance Sheets
December 31,
1998 1999
----------- ------------
(In thousands, except share data)
Assets
Other current assets $ - $ 620
Investments in and amounts due from
wholly owned subsidiaries 95,914 104,582
Capitalized financing costs 2,133 1,928
Deferred Taxes 774 1,577
----------- ------------
$ 98,821 $ 108,707
=========== ============
Liabilities and Stockholders' Equity
Long-Term Debt $ 32,481 $ 36,884
Stockholders' Equity
Common stock, par value $0.01 per share;
authorized, 92,000 shares, issued and
outstanding, 65,330 shares in 1998 and
65,950 shares in 1999 1 1
Additional paid-in capital 65,329 65,949
Retained earnings 1,010 5,873
----------- ------------
66,340 71,823
$ 98,821 $ 108,707
=========== ============
<FN>
See accompanying notes.
44/S-1
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Condensed Statements of Operations
December 31,
1998 1999
---------- ----------
(In thousands)
Interest expense $ (2,566) $ (4,631)
---------- ----------
Loss Before Income Taxes and Equity
in Net Income of Subsidiaries (2,566) (4,631)
Income tax benefit 821 1,482
---------- ----------
(1,745) (3,149)
Equity in net income of subsidiaries 2,755 8,012
---------- ----------
Net income $ 1,010 $ 4,863
========== ==========
<FN>
See accompanying notes.
45/S-2
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Condensed Statements 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
Net income - - 4,863 4,863
Capital contribution
at December 14, 1999 - 620 - 620
---------- ---------- ---------- ----------
Balance at December 31, 1999 $ 1 $ 65,949 $ 5,873 $ 71,823
========== ========== ========== ==========
<FN>
See accompanying notes.
46/S-3
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Condensed Statements of Cash Flows
December 31,
1998 1999
---------- ----------
(In thousands)
Operating activities
Net income 1,010 4,863
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation and amortization 126 205
Deferred taxes (774) (803)
Undistributed earnings of affiliates (2,755) (8,012)
Other current assets - (620)
Other, net (779) (656)
---------- ----------
Cash used by operating activities (3,172) (5,023)
Investing Activities
Acquisition of GLC (92,380) -
---------- ----------
Net cash used by investing activities (92,380) -
Financing Activities
Additions to long-term debt 32,481 4,403
Deferred financing costs (2,259) -
Capital contributions 65,330 620
---------- ----------
Net cash provided by financing activities 95,552 5,023
Increase (decrease) in cash - -
Cash at beginning of period - -
---------- ----------
Cash at end of period $ - $ -
========== ==========
<FN>
See accompanying notes.
47/S-4
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 98.56% owned subsidiary
of American Industrial Capital Fund II, L.P. ("AIP").
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 approximately $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 financial 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, 2001. The
Statement will require the Company to recognize all derivatives 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.
48/S-5
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 1999
---------------------
(In thousands)
13.125% Senior Discount Debentures due May 15, 2009 $ 32,481 $ 36,884
Less current portion - -
---------------------
$ 32,481 $ 36,884
=====================
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 approximately $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 maturities of long-term debt until May 2009 when the Senior
Discount Debentures become payable in full.
During 1999, approximately 12% of the Debenture notes outstanding were
purchased by GLC with the intention of holding them to maturity. Although the
Company's obligation with respect to the Debentures at December 31, 1999 is
shown net of the amount held by GLC on the Company's consolidated financial
statements, no affect has been given to this investment for purposes of these
parent company-only financial statements.
The fair market value of the Company's long-term debt obligation approximated
$32,000,000 and $30,000,000 at December 31, 1998 and 1999, respectively.
3. Stockholders' Equity
On May 18, 1998, the Company canceled its previously issued shares of common
stock and issued 65,000 shares of its common stock for $65 million. On May 22,
1998, the Company issued 330 shares of its common stock for $330,000.
In 1999, certain members of management of the Company purchased 620 shares of
the Company's common stock for $620,000 which increased the number of issued
and outstanding common shares to 65,950 shares at December 31, 1999.
On December 13,1999, the Board of Directors adopted the 1999 Management Stock
Option Plan (the "1999 Option Plan") which provides for the grant of stock
49/S-6
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Notes to Condensed Financial Statements (continued)
3. Stockholders' Equity (continued)
options to purchase up to an aggregate of 4,050 shares of the common stock of
the Company at a price of $1,000 per share with 2,800 shares being initially
granted to employees. At the time of the grant 16.4% of the options became
vested with the remaining options targeted to vest on the last day of plan
years 1999 through 2001 at a rate of 27.9% of the aggregate number of shares of
common stock subject to the options per year, provided that the Company attains
specified EBITDA targets. If the EBITDA goal is not attained in any plan year,
the options scheduled to vest in that year will vest on a pro rata basis as
prescribed in the 1999 Option Plan, except that unless more than 90% of the
EBITDA goal is achieved, no portion of the options shall vest for the year.
Conversely, the 1999 Option Plan provides of make-up vesting and accelerated
vesting (of up to 25% of the options scheduled to vest in 2001), in that order,
in the event that the EBITDA goal is surpassed in any plan year.
Notwithstanding the foregoing, all options granted under the 1999 Option Plan
vest automatically on April 21, 2007, regardless of performance criteria, or
upon of the sale of the Company, should one occur prior to the end of 2001, and
expire on the earlier of the tenth anniversary of the date of grant or the sale
of the Company.
The following table sets forth the activity and outstanding balances of options
exercisable for shares of common stock under the 1999 Option Plan:
Available
Options For Future
Outstanding Grants
------------ ------------
At plan inception on December 13, 1999 - 4,050
Granted on December 13, 1999 ($1,000 per share) 2,800 (2,800)
------------ ------------
Balance at December 31, 1999 2,800 1,250
At December 31, 1999, the number of options outstanding that were vested
totaled 1,240 at an exercise price of $1,000 per share with a weighted average
remaining contractual life of 10 years.
All of the participants in the 1999 Option Plan are subsidiary-company
personnel since the Company does not itself currently have any employees.
Accordingly, all compensation related accounting in connection with the stock
options as provided for under Financial Accounting Standards Board Statement
No. 123, "Accounting for Stock-Based Compensation," is pertinent only to the
Company's consolidated financial statements and, consequently, is not discussed
further in the context of these parent company-only financial statements.
4. Income Taxes
Components of the Company's deferred tax asset are as follows:
December 31
1998 1999
---------------------
(In thousands)
Deferred tax asset:
Accrued liabilities $ 774 $ 1,577
---------------------
Total deferred tax asset $ 774 $ 1,577
=====================
50/S-7
Schedule I-Condensed Financial Information of Registrant-
Great Lakes Acquisition Corp. (continued)
Notes to Condensed Financial Statements (continued)
4. Income Taxes (continued)
The Company considers that a valuation allowance is not necessary in connection
with the temporary differences giving rise to its deferred tax asset.
The differences between tax expense computed at the statutory federal income
tax rate and actual tax expense are as follows:
December 31
1998 1999
---------------------
(In thousands)
Tax expense at statutory rates applied
to pretax earnings $ (898) $(1,621)
Other 77 139
---------------------
$ (821) $(1,482)
=====================
Income taxes consist of the following:
December 31
1998 1999
---------------------
(In thousands)
Current:
Federal $ (47) $ (679)
State - -
Foreign - -
---------------------
(47) (679)
---------------------
Deferred:
Federal (774) (803)
State - -
Foreign - -
---------------------
(774) (803)
---------------------
Total $ (821) $(1,482)
=====================
No income taxes were paid for the year ended December 31, 1998 and 1999.
51/S-8
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 17th
day of March 2000.
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 17, 2000
James D. McKenzie (Principal Executive Officer)
* Senior Vice President, March 17, 2000
- --------------------- Operations and Administration
A. Frank Baca
* Vice President, Sales March 17, 2000
- ---------------------
Robert C. Dickie
* Vice President, Raw Materials March 17, 2000
- ---------------------
James W. Betts
* Vice President, Commercial March 17, 2000
- --------------------- Development
Craig L. Beilharz
* Non-Executive Chairman of March 17, 2000
- --------------------- the Board, Director
Theodore C. Rogers
* Director March 17, 2000
- ---------------------
Richard W. Bingham
* Director March 17, 2000
- ---------------------
Kim A. Marvin
* Director March 17, 2000
- ---------------------
Alfred E. Barry
By: /s/JAMES D. MCKENZIE
- --------------------------
James D. McKenzie
Attorney-in-Fact