UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1998
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 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, Suite 3600, New York, New York 10176
(Address of principal executive office) (Zip Code)
(212) 370-5770
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ].
GREAT LAKES ACQUISITION CORPORATION
FORM 10-Q September 30, 1998
CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
September 30, 1998 (Company) and December 31, 1997
(predecessor company). . . . . . . . . . . . . . . . . . . . . . 1
Condensed Consolidated Statements of Operations -
For the period from May 22, 1998 to September 30, 1998 (Company)
and for the nine months ended September 30, 1997 and the period
from January 1, 1998 to May 21, 1998 (predecessor company). . . .2
Condensed Consolidated Statements of Operations -
Three months ended September 30, 1998 (Company)
and 1997 (predecessor company) . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Stockholders' Equity -
For the period from May 22, 1998 to September 30, 1998 (Company)
and the period from January 1, 1998 to May 21, 1998 (predecessor
company). . . . . . . . . . . . . . . . . . . . . . . . . . . . .4
Condensed Consolidated Statements of Cash Flows -
For the period from May 22, 1998 to September 30, 1998 (Company)
and for the nine months ended September 30, 1997 and the period
from January 1, 1998 to May 21, 1998 (predecessor company). . . .5
Notes to Condensed Consolidated Financial Statements . . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . .12
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . .12
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . .12
Item 4. Submission of Matters to a Vote
of Security Holders. . . . . . . . . . . . . . . . . . . . . . . 12
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . .12
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . .12
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
PREDECESSOR COMPANY
December 31, September 30,
1997 1998
----------- ------------
(Audited) (Unaudited)
ASSETS
Current Assets
Cash $ 43,596 $ 16,978
Accounts receivable, net 29,908 28,606
Inventories 32,455 36,605
Prepaid expenses and other current
assets 4,349 8,843
-------- --------
Total Current Assets 110,308 91,032
Property, Plant and Equipment-Net 59,165 215,094
Goodwill - 176,553
Capitalized financing costs 2,111 21,728
Other Assets 3,327 5,652
-------- --------
$174,911 $510,059
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,601 $ 21,307
Accrued expenses 15,853 18,249
Current portion of long-term debt 1,419 7,262
-------- --------
Total Current Liabilities 30,873 46,818
Long-Term Debt, Less Current Portion 82,595 333,590
Other Long-Term Liabilities 4,190 4,545
Deferred Taxes 4,814 57,450
Stockholders' Equity
Common stock, par value $0.01 per
share; 65,330 and 100,000 shares
authorized and outstanding on 9/30/98
and 12/31/97, respectively 1 1
Additional paid-in capital 5,509 65,329
Retained earnings 46,929 2,326
-------- --------
52,439 67,656
$174,911 $510,059
======== ========
<FN>
See notes to consolidated financial statements.
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
PREDECESSOR COMPANY
-------------------------- ------------
For the Nine Period from Period from
Months Ended January 1 May 22 to
September 30, to May 21, September 30,
1997 1998 1998
--------- --------- ---------
Net Sales $ 170,736 $ 90,849 $ 89,801
Cost of Goods Sold 128,728 67,168 65,366
--------- --------- --------
Gross Profit 42,008 23,681 24,435
Selling, general and administrative
expenses 13,421 13,070 6,308
--------- --------- --------
Operating Income 28,587 10,611 18,127
Other income (expense):
Interest, net (4,985) (1,776) (12,593)
Other, net 1 (472) 794
--------- --------- --------
(4,984) (2,248) (11,799)
Income Before Income Taxes
and Extraordinary Item 23,603 8,363 6,328
Income taxes 8,873 2,839 4,002
--------- --------- --------
Income before extraordinary item 14,730 5,524 2,326
Extraordinary loss on early
extinguishment of debt - 7,113 -
--------- --------- --------
Net income (loss) $ 14,730 $ (1,589) $ 2,326
========= ========= ========
<FN>
See notes to consolidated financial statements.
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
PREDECESSOR COMPANY
-------------- --------------
Three Months Ended September 30,
1997 1998
--------- ---------
Net Sales $ 57,126 $ 61,290
Cost of Goods Sold 42,185 44,690
--------- ---------
Gross Profit 14,941 16,600
Selling, general and administrative
expenses 4,434 4,588
--------- ---------
Operating Income 10,507 12,012
Other income (expense):
Interest, net (1,378) (8,816)
Other, net (116) 303
--------- ---------
(1,494) (8,513)
Income Before Income Taxes 9,013 3,499
Income taxes 3,329 1,804
--------- ---------
Net Income $ 5,684 $ 1,695
========= =========
<FN>
See notes to consolidated financial statements.
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
---------- ---------- ---------- ----------
<S >
Predecessor 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
========== ========== ========== ==========
Balance at May 22, 1998 $ 1 $ 65,329 $ - $ 65,330
Net income for period
May 22, 1998 through
September 30, 1998 - - 2,326 2,326
---------- ---------- ---------- ----------
Balance at September 30, 1998 $ 1 $ 65,329 $ 2,326 $ 67,656
========== ========== ========== ==========
<FN>
See notes to consolidated financial statements.
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
PREDECESSOR COMPANY
-------------------------- ------------
For the Nine Period from Period from
Months Ended January 1 May 22 to
September 30, to May 21, September 30,
1997 1998 1998
--------- --------- ---------
Net cash provided (used) by
operating activities $ 22,731 $ 12,738 $ (19,447)
Investing activities:
Capital expenditures (13,575) (9,058) (5,074)
Acquisition of Great Lakes Carbon
Corporation-net of cash acquired - - (275,902)
--------- --------- ---------
Net cash used by investing activities (13,575) (9,058) (280,976)
Financing Activities:
Repayment of long-term debt (1,044) (161) (66,216)
Additions to long-term debt 7,250 4,928 318,287
Capital contribution - - 65,330
Dividends (1,125) - -
--------- --------- ---------
Net cash provided by
financing activities 5,081 4,767 317,401
Increase (decrease) in cash 14,237 8,447 16,978
Cash at beginning of period 24,097 43,596 -
--------- --------- ---------
Cash at end of period $ 38,334 $ 52,043 $ 16,978
========= ========= =========
<FN>
See notes to consolidated financial statements.
GREAT LAKES ACQUISITION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
Note 1: Organization and Basis of Presentation
Great Lakes Acquisition Corp. (the "Company") was incorporated under the
laws of Delaware on March 31, 1998. The Company is a 99.49% owned subsidiary
of American Industrial Capital Fund II, L.P. ("AIP"). On May 18, 1998, the
Company canceled its previously issued shares of common stock and issued
65,000 shares of its common stock for approximately $65 million. On May 22,
1998, the Company issued 330 shares of its common stock for $330,000.
On May 22, 1998, the Company acquired all of the issued and outstanding stock
of Great Lakes Carbon Corporation ("GLC") in a transaction accounted for as a
purchase (the "Acquisition"). Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on estimates of
the respective fair values at the Acquisition date.
The accompanying financial statements as of September 30, 1998 and for the
period from May 22, 1998 to September 30, 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.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X and, therefore, do
not include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. The information furnished reflects
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the results of
operations.
Note 2: Acquisition
As consideration for the Acquisition of GLC described above, the Company paid
the former shareholders of GLC approximately $331 million and incurred
transaction costs of approximately $25 million. The total purchase price was
funded through an equity contribution from AIP of approximately $65 million;
available cash at GLC of approximately $50 million; borrowings by GLC under a
new credit facility of approximately $111 million; proceeds of approximately
$30 million from the sale of 13 1/8% Senior Discount Debentures by the Company;
and the sale of approximately $175 million of 10 1/4% Senior Subordinated Notes
by GLC. In addition, concurrent with the Acquisition, GLC retired its then
outstanding 10% Senior Secured Notes for total consideration of approximately
$76 million.
GREAT LAKES ACQUISITION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1998
(Unaudited)
Note 3: Inventories
Inventories are as follows:
September 30, December 31,
1998 1997
--------- ---------
(In thousands)
Raw materials $ 21,129 $ 18,483
Finished goods 8,723 7,821
Supplies and spare parts 6,753 6,151
--------- ---------
$ 36,605 $ 32,455
========= =========
Note 4: Accrued Expenses
Accrued expenses included interest payable of $6,792,000 and $3,467,000 at
September 30, 1998 and December 31, 1997, respectively.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
General
Based upon 1996 industry statistics, the Company is the world's largest
producer of calcined petroleum coke (CPC). The Company produces anode grade
CPC, which is the principal raw material used in the production of carbon
anodes used in primary aluminum production, and industrial grade CPC, which is
used in a variety of specialty metals and materials applications. CPC is
produced from raw petroleum coke (RPC) utilizing a high temperature, rotary
kiln process. RPC is a by-product of petroleum refining process and
constitutes the largest single component of the Company's cost of goods sold.
The Company's principal source of revenues and profits are sales of anode
grade CPC to the aluminum industry. Historically, the Company's profitability
has been primarily a function of its CPC sales volumes, CPC pricing and the
cost of RPC.
Basis of Presentation
The Company, which had essentially no prior operations, acquired Great
Lakes Carbon Corporation 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 September 30, 1998.
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
Three Months Ended September 30, 1998 Compared to
Three Months Ended September 30, 1997.
The Company's net sales for the third quarter of 1998 increased 7.3% to
$61.3 million from $57.1 million for the comparable 1997 period. Net sales of
anode grade CPC increased 9.0% to $50.1 million while net sales of industrial
grade CPC decreased 0.6% to $10.6 million.
The increase in anode grade CPC net sales was primarily the result of a
13.3% increase in sales volume to 308,597 tons attributable 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 3.9% 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 4.6%
decrease in sales volume to 76,251 tons which was partially offset by a 4.1%
increase in selling price. The decrease in sales volume was primarily the
result of the scheduling of greater anode grade CPC shipments in the 1998
period.
The Company's gross profit for the third quarter increased by 11.1% to
$16.6 million from $14.9 million for the comparable 1997 period. The increase
in gross profit was due to the increase in sales discussed above which was
partially offset by an increase in cost of goods sold. The higher cost of
goods sold was mainly the result of higher sales volume as the average cost
per ton decreased primarily due to lower raw material costs. Additional
depreciation related to the Acquisition in the period amounted to $1.1 million
and represented 44.7% of the total unfavorable change in cost of goods sold.
Operating income for the third quarter increased 14.3% to $12.0 million
from $10.5 million in the comparable 1997 period. The improved operating
income was due to the increase in gross profit discussed above offset by a
3.5% increase in selling, general and administrative expenses. The increase
in selling, general and administrative expenses was primarily the result of
increased amortization expense related mainly to goodwill established when the
Company was acquired and AIP management fee expense incurred subsequent to the
Acquisition offset by the elimination of certain fees and expenses under
agreements that were terminated at the date of the Acquisition.
Income before income taxes for the third quarter decreased 61.2% to $3.5
million from $9.0 million for the comparable 1997 period. The decrease was
attributable to a $7.4 million increase in net interest expense primarily due
to the greater amount of debt incurred by the Company as a consequence of the
Acquisition partially offset by the improved operating income discussed above.
The Company's effective tax rate for the third quarter increased to 51.6%
from 36.9% for the comparable 1997 period primarily as a result of the tax
effects of non-deductible amortization of goodwill in the period subsequent to
the Acquisition.
Nine Months Ended September 30, 1998 Compared to
Nine Months Ended September 30, 1997.
The Company's net sales for the nine months ended September 30, 1998
increased 5.8% to $180.7 million from $170.7 million for the comparable 1997
period. Net sales of anode grade CPC increased 7.7% to $150.9 million while
net sales of industrial grade CPC decreased 3.1% to $28.3 million.
The increase in anode grade CPC net sales was primarily the result of an
11.5% increase in sales volume to 918,684 tons attributable 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 10.3%
decrease in sales volume to 199,557 tons which was partially offset by a 8.1%
increase in selling price. The decrease in sales volume was primarily the
result of the scheduling of greater anode grade CPC shipments in the 1998
period.
The Company's gross profit for the nine months ended September 30, 1998
increased by 14.5% to $48.1 million from $42.0 million for the comparable 1997
period. The increase in gross profit was due to the increase in sales
discussed above which was partially offset by an increase in cost of goods
sold. The higher cost of goods sold was mainly the result of higher sales
volume as the average cost per ton decreased primarily due to lower raw
material costs. Additional depreciation related to the Acquisition in the
period subsequent to May 21, 1998 amounted to $1.6 million and represented
42.5% of the total increase in cost of goods sold.
Operating income for the nine months ended September, 1998 increased 0.5%
to $28.7 million from $28.6 million in the comparable 1997 period. The
improved operating income was due to the increase in gross profit discussed
above which was almost completely offset by a 44.4% increase in selling,
general and administrative expenses. 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 established when the Company was acquired and AIP management fee
expense incurred subsequent to the Acquisition.
Income before income taxes for the nine months ended September 30, 1998
decreased 37.8% to $14.7 million from $23.6 million for the comparable 1997
period. The decrease was primarily attributable to a $9.4 million increase in
net interest expense primarily due to the greater amount of debt incurred by
the Company as a consequence of the Acquisition and the improved operating
income discussed above.
The Company's effective tax rate for the nine months ended September 30,
1998 increased to 46.6% from 37.6% for the comparable 1997 period 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, earnings for the nine months ended September 30, 1998
decreased 95.0% to $0.7 million from $14.7 million in the 1997 period.
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. It is anticipated that capital investments for 1998 will be
approximately $15 million of which approximately $8 million will be expended
in connection with the second kiln expansion at the Company's LaPlata,
Argentina 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 was ultimately borrowed.
The Company expects to meet its liquidity needs, including debt service,
through cash from operations and its revolving credit facility. The revolving
credit facility provides for borrowings of up to $25.0 million, including a
$7.5 million sub-limit for letters of credit. As of November 6, 1998, no
funds had been drawn down on this line of credit and approximately $3.4
million in letters of credit were outstanding under this credit agreement.
Year 2000
The Year 2000 ("Y2K") issue is the result of date-sensitive devices,
systems and computer programs that were developed using two digits rather than
four to define the applicable year. Any such technologies may recognize a
year containing "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including a temporary inability to engage in normal business
activities.
The Company has completed its Y2K compliance assessment and expects to
complete any required remediation efforts in order to be Y2K compliant by the
first quarter of 1999. Costs for Y2K efforts are not being accumulated
separately. The Company believes that the costs to the Company for historical
and future remediation of Y2K issues will not have a material adverse effect
on the Company.
The Company, like most companies, will also be subject to Y2K risk from its
reliance on third parties for a wide variety of goods and servies, such as raw
materials and electricity. The extent to which such reliance could have a
material adverse effect on the Company is indiscernible.
Based on preliminary communications with customers and suppliers to
determine the extent of their Y2K efforts the Company believes its exposure to
Y2K risk from material third party relationships is not material. The Company
believes that appropriate actions have been taken to minimize the risk to its
operations and financial condition.
Contingency plans that address a reasonably likely worst case scenario are
currently being developed. These plans will address the key systems and third
parties that present potential significant risk. The plans will analyze the
strategies and resources necessary to restore operations in the unlikely event
that an interruption does occur. The plans will also outline a recovery
program detailing the necessary participants, processes and equipment needed
to restore operations. Contingency plans are expected to be finalized in the
first quarter of 1999.
GREAT LAKES ACQUISITION CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to the Company's registration statement on form S-4 dated
October 2, 1998.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
Not applicable.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Commission during
the three months ended September 30, 1998.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREAT LAKES ACQUISITION CORPORATION
Date: 11/13/98 /s/James D. Mckenzie
James D. McKenzie
President and Chief Executive Officer