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, 1999
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 [ ].
1
GREAT LAKES ACQUISITION CORPORATION
FORM 10-Q September 30, 1999
CONTENTS
Page No.
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and September 30, 1999. . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations -
For the period January 1, 1998 to May 21, 1998 (predecessor),
the period May 22, 1998 to September 30, 1998 and the nine
months ended September 30,1999 (Company). . . . . . . . . . . . 3
Condensed Consolidated Statements of Operations -
For the three months ended September 30, 1998 and 1999. . . . . 4
Condensed Consolidated Statements of Stockholders' Equity -
For the nine months ended September 30, 1999. . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows -
For the period January 1, 1998 to May 21, 1998 (predecessor),
the period May 22, 1998 to September 30, 1998 and the nine
months ended September 30,1999 (Company). . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements. . . . . . 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 9
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 11
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
December 31, September 30,
1998 1999
--------- ---------
(Audited) (Unaudited)
ASSETS
Current Assets
Cash $ 10,403 $ 15,558
Accounts receivable, net 18,961 29,543
Inventories 37,702 36,307
Income taxes receivable 1,274 -
Prepaid expenses and other current assets 9,456 6,587
--------- ---------
Total Current Assets 77,796 87,995
Property, plant and equipment, net 214,101 206,011
Goodwill 176,220 172,865
Capitalized financing costs 19,587 17,753
Other assets 5,182 3,810
--------- ---------
$492,886 $488,434
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 18,897 $ 10,299
Accrued expenses 13,285 18,489
Income taxes payable - 1,900
Current portion of long-term debt 10,009 12,238
--------- ---------
Total Current Liabilities 42,191 42,926
Long-term debt, less current portion 321,089 313,820
Other long-term liabilities 4,876 5,976
Deferred taxes 58,390 55,829
Stockholders' Equity
Common stock, par value $0.01 per share,
65,330 shares authorized and outstanding 1 1
Additional paid-in capital 65,329 65,329
Retained earnings 1,010 4,553
--------- ---------
66,340 69,883
--------- ---------
$492,886 $488,434
========= =========
<FN>
See notes to condensed consolidated financial statements.
3
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
PREDECESSOR COMPANY
----------- ----------------------------
Period from Period from For the Nine
January 1 May 22 to Months Ended
to May 21, September 30, September 30,
1998 1998 1999
--------- --------- ---------
Net Sales $ 90,849 $ 89,801 $ 176,180
Cost of Goods Sold 67,168 65,366 130,277
--------- --------- ---------
Gross Profit 23,681 24,435 45,903
Selling, general and administrative
expenses 13,070 6,308 14,630
--------- --------- ---------
Operating Income 10,611 18,127 31,273
Other income (expense):
Interest, net (1,776) (12,593) (25,618)
Other, net (472) 794 949
--------- --------- --------
(2,248) (11,799) (24,669)
Income Before Income Taxes
and Extraordinary Item 8,363 6,328 6,604
Income taxes 2,839 4,002 3,061
--------- --------- --------
Income before extraordinary item 5,524 2,326 3,543
Extraordinary loss on early
extinguishment of debt 7,113 - -
--------- --------- --------
Net income (loss) $ (1,589) $ 2,326 $ 3,543
========= ========= ========
<FN>
See notes to condensed consolidated financial statements.
4
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
For the Three Months
Ended September 30,
1998 1999
--------- ---------
Net Sales $ 61,290 $ 53,814
Cost of Goods Sold 44,690 39,316
--------- ---------
Gross Profit 16,600 14,498
Selling, general and administrative expenses 4,588 4,919
--------- ---------
Operating Income 12,012 9,579
Other income (expense):
Interest, net (8,816) (8,431)
Other, net 303 252
--------- ---------
(8,513) (8,179)
Income Before Income Taxes 3,499 1,400
Income taxes 1,804 771
--------- ---------
Net income $ 1,695 $ 629
========= =========
<FN>
See notes to condensed consolidated financial statements.
5
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 >
Balance at December 31, 1998 $ 1 $ 65,329 $ 1,010 $ 66,340
Net Income - - 3,543 3,543
---------- ---------- ---------- ----------
Balance at September 30, 1999 $ 1 $ 65,329 $ 4,553 $ 69,883
========== ========== ========== ==========
<FN>
See notes to condensed consolidated financial statements.
6
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
PREDECESSOR COMPANY
----------- ----------------------------
Period from Period from For the Nine
January 1 May 22 to Months Ended
to May 21, September 30, September 30,
1998 1998 1999
--------- --------- ---------
Net income $ (1,589) $ 2,326 $ 3,543
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation and amortization 3,546 7,725 17,211
Deferred taxes - (300) (2,561)
Changes in operating assets and
liabilities:
Accounts receivables 6,886 (5,584) (10,582)
Inventories (1,938) (2,212) 1,395
Other current assets (1,193) (3,301) 2,869
Income taxes payable (4,765) 2,384 3,174
Accounts payable and accrued
expenses 9,164 3,319 (3,394)
Other, net 2,627 1,196 2,093
--------- --------- ---------
Net cash provided (used) by
operating activities $ 12,738 $ 5,553 $ 13,748
Investing activities:
Capital expenditures (9,058) (5,074) (3,553)
Acquisition of Great Lakes Carbon
Corporation-net of cash acquired - (275,902) -
--------- --------- ---------
Net cash used by investing activities (9,058) (280,976) (3,553)
Financing Activities:
Repayment of long-term debt (161) (66,216) (9,523)
Additions to long-term debt 4,928 318,287 4,483
Deferred financing costs - (25,000) -
Capital contribution - 65,330 -
--------- --------- ---------
Net cash provided by
financing activities 4,767 292,401 (5,040)
--------- --------- ---------
Increase (decrease) in cash 8,447 16,978 5,155
Cash at beginning of period 43,596 - 10,403
--------- --------- ---------
Cash at end of period $ 52,043 $ 16,978 $ 15,558
========= ========= =========
<FN>
See notes to condensed consolidated financial statements.
7
GREAT LAKES ACQUISITION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
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 an additional 330 shares of 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, 1999 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 the period 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.
2. Acquisition
As consideration for the acquisition of GLC described above, the Company paid
the former shareholders of GLC aproximately $323,000,000 and incurred
transaction costs of approximately $25,000,000. The total purchase price was
funded by a cash contribution from AIP and affiliates of, and certain other
individuals associated with, AIP of $65,330,000; available cash at GLC of
approximately $52,000,000; proceeds of $175,000,000 from the sale by GLC of
10 1/4% Senior Subordinated Notes; borrowings by GLC of $111,000,000 pursuant
to a new credit facility; and proceeds of $30,050,072 from the sale by the
Company of 13 1/8% Senior Discount Debentures. In addition, as a condition to
the transaction, GLC repurchased its then outstanding 10% Senior Secured Notes
through a public tender offer for total consideration of $74,106,500 (excluding
accrued interest).
8
GREAT LAKES ACQUISITION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1999
(Unaudited)
3. Inventories
Inventories are as follows:
December 31, September 30,
1998 1999
--------- ---------
(In thousands)
Raw materials $ 18,837 $ 22,724
Finished goods 12,996 7,262
Supplies and spare parts 5,869 6,321
--------- ---------
$ 37,702 $ 36,307
========= =========
4. Accrued Expenses
Accrued expenses included interest payable and employee profit sharing payable
of $2,635,000 and $2,437,000, respectively, at December 31, 1998 and interest
payable of $7,482,000 at September 30, 1999.
9
Item 2. 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 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 the 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
Three Months Ended September 30, 1999 Versus Three Months Ended September 30,
1998.
The Company's net sales for the quarter ended September 30, 1999
decreased 12.2% to $53.8 million from $61.3 million in the comparable 1998
period. Net sales of anode grade CPC decreased 10.0% to $45.1 million and
net sales of industrial grade CPC decreased 24.6% to $8.0 million.
The decrease in anode grade CPC net sales was primarily the result
of a 7.0% decline in the average per ton selling price coupled with a 3.2%
decrease in sales volume to 298,657 tons. The decline in average selling
price was attributable to the presence of excess CPC in the market and the
effects of weak aluminum prices earlier in the year. The decrease in sales
volume was a function of less shipments in the current year quarter due to
timing.
The decrease in industrial grade CPC net sales was the result of a
19.0% decrease in sales volume to 61,739 tons and a 6.8% decline in selling
price. The decrease in sales volume was due mainly to lower shipments into the
chemicals market due to competition from alternative materials. The decline
in selling price was mainly due to softening in the titanium dioxide market.
The Company's gross profit for the third quarter decreased by 12.7% to
$14.5 million from $16.6 million in 1998. The decrease in gross profit was
due to the decrease in sales discussed above partially offset by a decrease
in cost of goods sold. The decrease in cost of goods sold was the result of
both lower average per ton costs and lower sales volume. The average per ton
cost decrease was principally due to lower raw material prices.
10
Operating income decreased by 20.3% to $9.6 million from $12.0 million
in the 1998 period. The decline in operating income was due to the decrease in
gross profit discussed above and a 7.2% increase in selling, general and
administrative expenses. The increase in selling, general and administrative
expenses was primarily the result of higher sales commission expense.
Income before income taxes decreased 60.0% to $1.4 million from $3.5
million in the comparable 1998 period. The decrease was primarily attributable
to the decline in operating income discussed above offset by a $0.4 million
decrease in net interest expense. The decrease in net interest expense is due
to lower debt as principal is repaid.
The Company's effective tax rate increased to 55.1% in the 1999 period
from 51.6% in the 1998 period primarily as a result greater amounts of non-
deductable amortization of goodwill in 1999.
Adjusted EBITDA for the third quarter decreased by 12.3% to $15.2
million in 1999 from $17.3 million in 1998 for the reasons set forth above.
Nine Months Ended September 30, 1999 Versus Nine Months Ended September 30,
1998.
The Company's net sales for the nine months ended September 30, 1999
decreased 2.5% to $176.2 million from $180.7 million in the comparable 1998
period. Net sales of anode grade CPC decreased 4.7% to $143.7 million and net
sales of industrial grade CPC increased 4.8% to $29.7 million.
The decrease in anode grade CPC net sales was primarily the result of
a 6.2% decline in the average per ton selling price partially offset by a 1.6%
increase in sales volume to 933,268 tons. The decline in average selling
price was attributable to the effects of weak aluminum prices earlier in the
year and the presence of some excess CPC in the market. The increase in sales
volume reflects the impact of the startup of a second kiln expansion at La
Plata, Argentina.
The increase in industrial grade CPC net sales was the result of a
13.2% increase in sales volume to 225,868 tons which was partially offset by an
7.4% decrease in selling price. The increase in sales volume was due mainly to
greater shipments into the titanium dioxide market during 1999, while the
decline in selling price was mainly due to strong competitive pressures in that
market.
The Company's gross profit for the nine months ended September 30, 1999
decreased by 4.6% to $45.9 million from $48.1 million in 1998. The decrease in
gross profit was due to the decrease in sales discussed above partially offset
by lower cost of goods sold. The decrease in cost of goods sold was the result
of a decrease in average per ton costs, principally due to lower raw material
prices, offset in large measure by higher sales volume and increased deprecia-
tion expense related to the Acquisition. The additional Acquisition-related
11
depreciation in 1999 compared to 1998 amounted to $2.3 million and represented
103.1% of the net change in cost of goods sold.
Operating income increased by 8.8% to $31.3 million from $28.7 million
in 1998. The improvement in operating income was due to a 24.5% decrease in
selling, general and administrative expenses offset by the decrease in gross
profit discussed above. The decrease in selling, general and administrative
expenses was primarily the result of the absense in 1999 of payments made in
the prior year for certain non-recurring fees and expenses under agreements
that were terminated upon consumation 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 55.0% to $6.6 million from $14.7
million in 1998. The decrease was primarily attributable to an $11.2 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 remained essentially unchanged at
46% as higher amounts of non-deductable amortization of goodwill in 1999
compensated for the tax effects of income from foreign operations present in
the prior year period.
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 in 1998. 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, income for the nine months ended
September 30, 1999 increased 380.7% to $3.5 million from $.07 million in 1998.
Adjusted EBITDA for the nine month period decreased by 1.0% to $48.3
million in 1999 from $48.8 million in 1998 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 are entirely U.S.
dollar-denominated transactions, 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 1999 will be
approximately $5.0 million.
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 5,
1999, no funds had been drawn down on this line of credit and approximately
$3.2 million in letters of credit were outstanding.
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
12
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 believes
that as of the close of the third quarter of 1999 all remediation of critical
systems has been accomplished. Costs for Y2K efforts are not being accumulated
separately. It is the Company's opinion that the costs for all historical and
any future remediation of remaining 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. While the extent to which such reliance could
have a material adverse effect on the Company is indiscernible, based upon
communications with its major customers and suppliers to determine the extent
of their Y2K efforts, the Company believes its exposure to Y2K risk from these
significant 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
have been finalized as of September 30, 1999. These plans address the key
systems and third parties that present potential significant risk. The plans
analyze the strategies and resources necessary to restore operations in the
unlikely event that an interruption does occur. The plans also outline a
recovery program detailing the necessary participants, processes and equipment
needed to restore operations.
13
GREAT LAKES ACQUISITION CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to the Company's annual report on form 10K dated
March 31, 1999.
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, 1999.
14
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: 11/5/99 /s/James D. Mckenzie
James D. McKenzie
President and Chief Executive Officer