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PROSPECTUS
OCTOBER 6, 1998
OFFER TO EXCHANGE
$56,600,000 OF 13 1/8% SERIES B SENIOR DISCOUNT DEBENTURES DUE 2009
IN EXCHANGE FOR 13 1/8% SENIOR DISCOUNT DEBENTURES DUE 2009
GREAT LAKES ACQUISITION CORP.
[LOGO]
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON NOVEMBER 3, 1998, UNLESS EXTENDED.
Great Lakes Acquistion Corp. ("Holdings") hereby offers the holders (the
"Holders") of its issued and outstanding 13 1/8% Senior Discount Debentures due
2009 (the "Old Debentures"), upon the terms and subject to the conditions set
forth in this prospectus (this "Prospectus") and the accompanying Letter of
Transmittal (the "Letter of Transmittal," which together with this Prospectus
constitutes the "Exchange Offer"), to exchange an aggregate principal amount at
maturity of up to $56,600,000 of its 13 1/8% Series B Senior Discount Debentures
due 2009 (the "New Debentures" and, together with the Old Debentures, the
"Debentures"), which have been registered under the Securities Act of 1933, as
amended (the "Securities Act"), for a like principal amount at maturity of its
Old Debentures. The terms of the New Debentures are identical in all material
respects to the Old Debentures except (i) that the New Debentures have been
registered under the Securities Act, (ii) for certain transfer restrictions and
registration rights relating to the Old Debentures and (iii) that the New
Debentures will not contain certain provisions relating to Liquidated Damages
(as defined) to be paid to the Holders of Old Debentures under certain
circumstances relating to the timing of the Exchange Offer and other
registration requirements. Holdings issued $56,600,000 aggregate principal
amount of Old Debentures on May 22, 1998 pursuant to exemptions from, or
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws (the "Offering").
Great Lakes Carbon Corporation (the "Company"), a wholly owned subsidiary of
Holdings, is the surviving corporation of a merger (the "Merger") between the
Company and Great Lakes Merger Sub Corp. ("Merger Sub"), a wholly owned
subsidiary of Holdings, which was formed by American Industrial Partners Capital
Fund II, L.P. ("AIP"). Concurrent with the Exchange Offer, the Company will
offer (the "Company Exchange Offer") the holders of its issued and outstanding
10 1/4% Notes due 2008 (the "Old Notes") upon the terms and subject to the
conditions set forth in a prospectus and the accompanying Letter of Transmittal
to exchange an aggregate principal amount at maturity of up to $175,000,000 of
its 10 1/4% Series B Notes due 2008 (the "New Notes" and, together with the Old
Notes, the "Notes"), which have been registered under the Securities Act, for a
like principal amount at maturity of the Old Notes. All references to the Notes
herein shall include the Additional Notes (as defined).
The Debentures will mature on May 15, 2009. The issue price of the
Debentures represents a yield to maturity of 13 1/8% (computed on a semiannual
bond equivalent basis) calculated from May 22, 1998. The Debentures will accrete
at a rate of 13 1/8%, compounded semiannually, to an aggregate principal amount
at maturity of $56.6 million by May 15, 2003. Cash interest will not accrue on
the Debentures prior to May 15, 2003. Commencing May 15, 2003, cash interest on
the Debentures will be payable at a rate of 13 1/8% per annum semiannually in
arrears on each May 15 and November 15. For each Old Debenture accepted for
exchange, the Holder of such Old Debenture will receive a New Debenture having a
principal amount at maturity equal to that of the surrendered Old Debenture. The
New Debentures will accrete in value from May 22, 1998. Old Debentures accepted
for exchange will cease to accrete in value from and after the date of
consummation of the Exchange Offer. See "Description of the Debentures."
The Old Debentures are and the New Debentures will be redeemable at the
option of Holdings, in whole or in part, at any time on or after May 15, 2003,
in cash at the redemption prices set forth herein, plus accrued and unpaid
interest and Liquidated Damages, if any, to the redemption date. In addition, at
any time prior to May 15, 2001, Holdings may, at its option, on any one or more
occasions, redeem up to 35% of the aggregate principal amount at maturity of the
Debentures at a redemption price equal to 113.125% of the Accreted Value (as
defined herein) thereof and Liquidated Damages, if any, with the net proceeds of
one or more Equity Offerings (as defined herein); PROVIDED that at least 65% of
the aggregate principal amount at maturity of the New Debentures issued
hereunder together with the Old Debentures originally issued and not exchanged
in the Exchange Offer remain outstanding immediately after each such redemption.
Upon the occurrence of a Change of Control (as defined herein), each holder of
Debentures will have the right to require Holdings to repurchase Debentures at a
price in cash equal to 101% of the Accreted Value thereof plus Liquidated
Damages, if any, thereon in the case of any such purchase prior to May 15, 2003,
or 101% of the aggregate principal amount at maturity thereof, plus accrued and
unpaid interest and Liquidated Damages, if any, thereon to the date of
repurchase in the case of any such repurchase on or after May 15, 2003. See
"Risk Factors--Possible Inability to Repurchase Debentures upon Change of
Control," "Description of Debentures--Optional Redemption" and "--Repurchase at
the Option of Holders--Change of Control."
The Old Debentures are and the New Debentures will be senior obligations of
Holdings. The Old Debentures rank and the New Debentures will rank pari passu in
right of payment with all present and future Senior Indebtedness of Holdings and
senior in right of payment to all future subordinated Indebtedness (as defined)
of Holdings. The Old Debentures are and the New Debentures will be effectively
subordinated to all liabilities of Holdings' subsidiaries. As of June 30, 1998,
Holdings and its subsidiaries had outstanding approximately $340.7 million of
Indebtedness (as defined) and Holdings' subsidiaries would have had outstanding
approximately $310.2 million of Indebtedness, including indebtedness under the
Notes and the New Credit Agreement (as defined herein), all of which would
effectively rank senior in right of payment to the Debentures. Holdings
guaranteed (the "Loan Guaranty") the Company's obligations under the New Credit
Agreement. The Loan Guaranty is secured by a pledge of all of the capital stock
of the Company. See "Description of Other Indebtedness--New Credit Agreement."
Holdings does not intend to apply for listing of the Debentures on any
securities exchange or in any automated quotation system. The Debentures are
eligible for trading in the Private Offerings, Resales and Trading through
Automatic Linkages ("PORTAL") market of the National Association of Securities
Dealers, Inc. upon issuance.
SEE "RISK FACTORS," BEGINNING ON PAGE 16, FOR A DISCUSSION OF CERTAIN
MATTERS THAT SHOULD BE CONSIDERED BY HOLDERS PRIOR TO TENDERING THEIR OLD
DEBENTURES IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED BY THE SECURITIES AND EXCHANGE
COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS OCTOBER 6, 1998
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(CONTINUED FROM PREVIOUS PAGE)
The New Debentures are being offered hereunder in order to satisfy certain
obligations of Holdings contained in the Registration Rights Agreement (as
defined). Based on interpretations by the staff of the Division of Corporation
Finance (the "Staff") of the Securities and Exchange Commission (the "SEC"), as
set forth in no-action letters issued to third parties, Holdings believes that
New Debentures issued pursuant to the Exchange Offer in exchange for Old
Debentures may be offered for resale, resold and otherwise transferred by
Holders thereof (other than any Holder which is an "affiliate" of Holdings
within the meaning of Rule 405 under the Securities Act), without compliance
with the registration and prospectus delivery requirements of the Securities
Act, provided that such New Debentures are acquired in the ordinary course of
such Holder's business and such Holder, other than a broker-dealer, has no
arrangement with any person to engage in a distribution of such New Debentures.
Holdings has not sought and does not intend to seek its own no-action letter in
connection with the Exchange Offer and there can be no assurance that the SEC
would make a similar determination with respect to the Exchange Offer. Each
Holder, other than a broker-dealer, must acknowledge that it is not engaged in,
and does not intend to engage in, a distribution of such New Debentures and has
no arrangement or understanding to participate in a distribution of New
Debentures. If any holder is an affiliate of Holdings and is engaged in or
intends to engage in or has any arrangement with any person to participate in
the distribution of the New Debentures to be acquired pursuant to the Exchange
Offer, then such Holder (i) could not rely on the applicable interpretations of
the Staff and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Debentures for its own account pursuant to
the Exchange Offer must acknowledge that such Old Debentures were acquired by
such broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of such New Debentures. The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Debentures received in
exchange for Old Debentures if such Old Debentures were acquired by such
broker-dealer as a result of market-making activities or other trading
activities. Holdings has agreed that, for a period of 90 days after the
Expiration Date (as defined), it will make this prospectus available to any
broker-dealer for use in connection with any such resale. See "Plan of
Distribution."
Holdings will not receive any proceeds from the Exchange Offer. Holdings
will pay all the expenses incident to the Exchange Offer. Tenders of Old
Debentures pursuant to the Exchange Offer may be withdrawn at any time prior to
the Expiration Date. If Holdings terminates the Exchange Offer and does not
accept for exchange any Old Debentures, Holdings will promptly return the Old
Debentures to the Holders thereof. See "The Exchange Offer."
There is no existing trading market for the New Debentures, and there can be
no assurance regarding the future development of a market for the New
Debentures. The Initial Purchaser (as defined) has advised Holdings that it
currently intends to make a market in the New Debentures. The Initial Purchaser
is not obligated to do so, however, and any market-making with respect to the
New Debentures may be discontinued at any time without notice. Holdings does not
intend to apply for listing or quotation of the New Debentures on any securities
exchange or stock market. In addition, to comply with the securities laws of
certain jurisdictions, it may be necessary to qualify, for sale or register,
thereunder the New Debentures prior to offering or selling such New Debentures.
Holdings has agreed, pursuant to the Registration Rights Agreement, subject to
certain limitations specified therein, to register or qualify the New Debentures
for offer or sale under all applicable state securities or Blue Sky laws before
the time the Registration Statement (of which this Prospectus forms a part) is
declared effective by the SEC.
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THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL HOLDINGS ACCEPT TENDERS
FOR EXCHANGE FROM, HOLDERS OF OLD DEBENTURES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
The New Debentures will be available initially only in book-entry form.
Holdings expects that the New Debentures issued pursuant to the Exchange Offer
will be issued in the form of one or more Global Debentures (as defined) that
will be deposited with, or on behalf of, The Depository Trust Company ("DTC" or
the "Depositary") and registered in its name or in the name of Cede & Co., as
its nominee. Beneficial interests in the Global Debenture representing the New
Debentures will be shown on, and transfers thereof will be effected only
through, records maintained by the Depositary and its participants. So long as
DTC or its nominee is the registered owner or holder of the Global Debenture,
DTC or such nominee, as the case may be, will be considered the sole owner or
holder of the Debentures represented by such Global Debenture for all purposes
under the Indenture. Payments of the principal of, premium, if any, interest and
Liquidated Damages, if any, on, the Global Debenture will be made to DTC or its
nominee, as the case may be, as the registered owners thereof. None of Holdings,
the Trustee (as defined) or any Paying Agent (as defined) will have any
responsibility or liability for any aspect of the records relating to or
payments made on account of beneficial ownership interests in the Global
Debenture or for maintaining, supervising or reviewing any records relating to
such beneficial ownership interest. After the initial issuance of such Global
Debenture, New Debentures in certificated form will be issued in exchange for
the Global Debenture only in accordance with the terms and upon the conditions
set forth in the Indenture. See "Description of Debentures--Book Entry; Delivery
and Form."
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AVAILABLE INFORMATION
Holdings has filed with the SEC a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New
Debentures offered hereby. This Prospectus, which forms a part of the
Registration Statement, does not contain all of the information set forth in the
Registration Statement and the exhibits thereto, certain parts of which are
omitted in accordance with the rules and regulations of the SEC. For further
information with respect to Holdings and the New Debentures offered hereby,
reference is made to the Registration Statement. Any statements made in this
Prospectus concerning the provisions of certain documents are not necessarily
complete and, in each instance, reference is made to the copy of such document
filed as an exhibit to the Registration Statement filed with the SEC.
Upon consummation of the Exchange Offer, Holdings will become subject to the
informational requirements of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), and in accordance therewith will file reports and other
information with the SEC. The Registration Statement, and the reports and other
information filed by Holdings with the SEC in accordance with the Exchange Act
may be inspected, without charge, at the Public Reference Section of the SEC
located at 450 Fifth Street, N.W., Room 1024, Washington, D.C. 20549 and at the
following Regional Offices of the SEC: 7 World Trade Center, 13th Floor, New
York, New York 10048; and 500 West Madison Street, Suite 1400, Chicago, Illinois
60661. Copies of all or any portion of the material may be obtained from the
Public Reference Section of the SEC upon payment of the prescribed fees. The SEC
also maintains a site on the World Wide Web that contains reports, proxy and
information statements and other information at HTTP://WWW.SEC.GOV.
In the event that Holdings is not required to be subject to the reporting
requirements of the Exchange Act in the future, as required under the Indenture,
Holdings has agreed that, for so long as any of the Debentures remain
outstanding, it will file with the SEC (unless the SEC will not accept such a
filing) (i) all quarterly and annual financial information that would be
required to be contained in a filing with the SEC on Forms 10-Q and 10-K if
Holdings were required to file such forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by Holding's certified
independent accountants and (ii) all reports that would be required to be filed
with the SEC on Form 8-K if Holdings were required to file such reports. In
addition, for so long as any of the Debentures remain outstanding, Holdings has
agreed to make available to any prospective purchaser of the Debentures or
beneficial owner of the Debentures in connection with any sale thereof the
information required by Rule 144A(d)(4) under the Securities Act.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This Prospectus, including the "Summary," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business"
sections, contains "forward-looking statements" which can be identified by the
use of forward-looking terminology, such as "may," "intend," "will," "expect,"
"anticipate," "estimate" or "continue" or the negative thereof or other
variations thereon or comparable terminology. In particular, any statements,
express or implied, concerning future operating results or the ability to
generate revenues, income or cash flow to service the Debentures, including
information regarding the new La Plata Kiln, are forward-looking statements.
Although Holdings believes that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to have been correct. All forward-looking statements are
expressly qualified by such cautionary statements.
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PROSPECTUS SUMMARY
THE FOLLOWING IS A SUMMARY OF CERTAIN INFORMATION CONTAINED HEREIN AND IS
QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN CONJUNCTION WITH, THE MORE
DETAILED INFORMATION AND CONSOLIDATED FINANCIAL STATEMENTS AND THE RELATED NOTES
THERETO INCLUDED ELSEWHERE IN THIS PROSPECTUS. HOLDINGS IS A NEWLY FORMED
HOLDING COMPANY, FORMED FOR THE PURPOSE OF CONSUMMATING THE ACQUISITION
TRANSACTIONS. FOLLOWING THE CONSUMMATION OF THE ACQUISITION TRANSACTIONS,
HOLDINGS BECAME THE 100% PARENT OF THE COMPANY. UNLESS THE CONTEXT REQUIRES
OTHERWISE, ALL REFERENCES HEREIN TO THE "COMPANY" OR "GLC" MEAN GREAT LAKES
CARBON CORPORATION, ITS WHOLLY OWNED SUBSIDIARIES AND COPETRO, S.A. ("COPETRO"),
WHICH IS 99.8% OWNED BY THE COMPANY, AND ITS AND THEIR PREDECESSORS (TO THE
EXTENT THAT SUCH PREDECESSORS' ACTIVITIES RELATED TO THE BUSINESS OF THE COMPANY
DESCRIBED HEREIN), COLLECTIVELY. UNLESS OTHERWISE INDICATED, ALL REFERENCES TO
"TONS" MEAN SHORT TONS OF 2,000 POUNDS. UNLESS OTHERWISE INDICATED, ALL
REFERENCES TO "WESTERN WORLD" MEANS ALL COUNTRIES EXCEPT CHINA, EASTERN EUROPEAN
COUNTRIES AND THOSE COUNTRIES WHICH FORMERLY COMPRISED THE SOVIET UNION.
THE COMPANY
Based upon 1996 industry statistics, the Company 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, and is used by every producer of primary aluminum in the world. Anode
grade CPC sales represented approximately 81.9% of the Company's total 1997
sales. The Company believes that it has approximately a 23.1% market share of
U.S. anode grade CPC sales and a 15.7% market share of Western World anode grade
CPC 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 at its three facilities located in Port Arthur, Texas,
Enid, Oklahoma and La Plata, Argentina. The Company's annual CPC production
capacity is 1.6 million tons, including a 220,000 ton increase as a result of
its completion of a new kiln at its Argentine facility (the "New La Plata Kiln")
in May 1998. During the twelve months ended June 30, 1998, the Company sold 1.5
million tons of CPC, had net sales of $237.7 million and had Adjusted EBITDA (as
defined) of $63.7 million.
CPC is produced from raw petroleum coke ("RPC") utilizing a
high-temperature, rotary-kiln process developed by the Company in the 1930s. RPC
is a by-product of the petroleum refining process and typically represents an
insignificant portion of overall refinery revenues. The alternative use for RPC,
as a fuel source, generates a significantly lower value to refiners than the
value they receive in selling RPC for use in the production of CPC. As a result,
CPC producers are able to obtain lower purchase prices for RPC in times of
declining CPC prices, enabling CPC producers to earn a relatively stable profit
spread even in periods of CPC price declines.
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 to aluminum
metal. In this electrochemical aluminum smelting process, the carbon anodes, and
hence the CPC, are consumed.
There are no known economic substitutes for anode grade CPC in the
manufacture of carbon anodes, nor have there been since anode grade CPC replaced
coal for this application in the 1930s. The Company believes that approximately
0.4 pounds of anode grade CPC are consumed for every one pound of primary
aluminum produced, and that such consumption ratio has been substantially
constant over the past ten years. Worldwide demand for anode grade CPC is
directly tied to the level of global production of primary aluminum.
Industrial grade CPC is used 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. Demand for industrial grade CPC
has grown largely due to the ongoing replacement by titanium dioxide
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producers of the sulfate manufacturing process that does not utilize CPC with
the environmentally preferable chloride process that does utilize CPC. The
Company's participation in the industrial CPC sector diversifies its product
offerings and reduces its dependence on aluminum customers.
The Company believes that current anode grade CPC market fundamentals are
attractive. Western World primary aluminum production increased approximately
34.7% to 17.8 million tons in 1997 from 13.2 million tons in 1986, while anode
grade CPC production capacity did not increase significantly. Furthermore,
industry sources project continued strong growth in primary aluminum production
over the next several years. As a result, CPC industry operating rates are
currently at historically high levels. The Company has been operating at full
capacity since 1995 and believes that other major U.S. calciners are also
operating at or near full capacity.
The Company believes that the calcining industry will continue to operate at
or near full capacity, as anticipated capacity expansions in the anode grade CPC
market are expected to provide less additional capacity over the next several
years than required to meet aluminum demand projected by industry sources.
Further, the Company believes there are significant barriers to entry to the CPC
production industry. The Company estimates that a greenfield, minimum efficient
scale, stand-alone 200,000 ton calcining facility would, depending on location,
cost in excess of $50 million and take approximately three years to permit and
construct. Further impediments to the creation of new production capacity
include the difficulty in securing consistent sources of RPC supply and the
reluctance of aluminum smelters to change CPC supply sources.
The current high industry operating rates have led to anode grade CPC
pricing becoming less influenced by aluminum pricing than has been the case
historically. Instead, anode grade CPC pricing has become more influenced by the
demand generated from the volume of aluminum production. Accordingly, the
average price per ton realized by the Company for anode grade CPC increased by
over 60% from 1994 to 1997, while aluminum prices as quoted on the London Metal
Exchange increased only 9%.
The Company's management team is among the most experienced in the industry,
with an average tenure with the Company of over 22 years. James D. McKenzie, the
Company's Chief Executive Officer and President, has been with the Company for
over 27 years; A. Frank Baca, Senior Vice President of Operations and
Administration, 31 years; James W. Betts, Vice President of Raw Materials, 30
years; Robert C. Dickie, Vice President of Sales, 9 years; and Adele Robles,
Controller, 17 years. The address of the Company's principal executive offices
is 551 Fifth Avenue, Suite 3600, New York, New York 10176 and the telephone
number is (212) 370-5770.
BUSINESS STRATEGY
The Company's management team plans to sustain and build upon GLC's success
by focusing on the following strategic initiatives:
- MAINTAIN STRONG CUSTOMER RELATIONSHIPS--Over its 60-year history in CPC
production, the Company has forged customer relationships spanning several
decades with many of the world's largest aluminum producers, including
Aluminum Company of America ("Alcoa"), Alusaf Limited ("Alusaf") and
Alusuisse-Lonza Holding Ltd. ("Alusuisse"). Collectively, Alcoa, Alusaf
and Alusuisse contributed 46.7% of the aggregate total sales of the
Company in fiscal year 1997. The Company has developed and expects to
maintain these relationships by virtue of its industry leadership
position, its technical support and customer service and its superior
ability to produce anode grade CPC to customized specifications. Although
CPC represents only 5% to 7% of an aluminum smelter's total costs, the
quality and consistency of CPC are critical to a smelter. Through its
comprehensive "Total Quality Management" program, the Company was the
first domestic calciner to attain ISO 9002 registration for its ability to
meet internationally recognized quality and process standards. All of the
Company's facilities are ISO 9002 registered.
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- MAINTAIN SUPERIOR ACCESS TO RAW MATERIALS--The Company's long history and
leading market position in CPC production has led to strong long-term
relationships with numerous RPC suppliers, including Exxon Corporation
("Exxon"), Conoco Inc. ("Conoco"), Chevron Corporation ("Chevron"), YPF
Sociedad Anonima ("YPF") and Marathon Oil Company ("Marathon"). The
Company's access to RPC supply from 18 refineries worldwide provides it
with a competitive advantage in cost-effectively blending various grades
of RPC to produce CPC to exact customer specifications.
- OPERATE DIVERSE, STATE-OF-THE-ART FACILITIES--The Company strives to
maintain geographically diverse, state-of-the-art production facilities
that provide a maximum level of operating flexibility. The Port Arthur,
Texas plant (680,000 tons per year) provides the Company with access to
RPC received by rail, barge or ship from the U.S. Gulf Coast and
international oil refiners and allows the Company to serve international
CPC markets. The Enid, Oklahoma plant (490,000 tons per year) is
strategically located to serve the domestic CPC markets and to access RPC
from refineries in the mid-continent region. The plant in La Plata,
Argentina (220,000 tons per year) provides the Company with access to high
quality RPC from a nearby oil refinery and also positions the Company well
to serve international CPC markets. The Company completed construction of
the New La Plata Kiln in May 1998, which doubled the facility's previous
production capacity.
- MAINTAIN STRONG PRESENCE IN INDUSTRIAL GRADE CPC--Since 1990, the Company
has pursued a strategy of diversifying its product mix by developing and
expanding its presence in the market for industrial grade CPC. GLC has
increased its net sales of industrial grade CPC by approximately 92.7%
since 1990 by focusing its industrial grade sales effort and investing in
value-added operations at its production facilities. Sales of industrial
grade CPC reduce the Company's dependence on aluminum customers.
- PURSUE SELECTIVE EXPANSION OPPORTUNITIES--The Company may explore
acquisition and expansion opportunities from time to time as warranted by
market conditions. Strong market conditions, together with an excellent
source of RPC supply, prompted the Company to expand its Argentinean
facility. The Company is currently evaluating several additional
opportunities in the petroleum coke industry.
ACQUISITION TRANSACTIONS
Pursuant to an Agreement and Plan of Merger dated as of April 21, 1998 (the
"Merger Agreement"), Holdings acquired all of the issued and outstanding capital
stock of the Company, through the merger of a wholly owned subsidiary of
Holdings into the Company. The aggregate consideration paid by AIP, its
affiliates and certain other individuals associated with AIP pursuant to the
Merger Agreement was approximately $376.9 million (the "Merger Consideration").
The Company was the surviving corporation in the Merger.
In order to finance the Merger, (i) AIP and affiliates of, and certain other
individuals associated with, AIP contributed $65.0 million and $330,000,
respectively to Holdings in exchange for common equity of Holdings (the "AIP
Equity Contribution"), (ii) Holdings contributed $92.4 million (the sum of $62.3
million of the AIP Equity Contribution and the proceeds from the Offering of
Debentures) to the equity of Holdings (the "Holdings Equity Contribution"),
(iii) the Company entered into a syndicated senior secured agreement (the "New
Credit Agreement") providing for term loan borrowings (the "Term Loan
Facilities") in an aggregate principal amount of approximately $111.0 million
and a revolving loan facility (the "Revolving Credit Facility") for borrowings
of up to $25.0 million, and borrowed all term loans available, and (iv) the
Company issued and sold (the "Notes Offering" and together with the Offering,
the "Offerings") $175.0 million aggregate principal amount of its Old Notes
offered pursuant to an Offering Memorandum dated as of May 18, 1998 (the "Notes
Offering Memorandum").
In connection with the Merger, the Company commenced a tender offer (the
"Tender Offer") on April 24, 1998, for any and all of its outstanding $65.0
million aggregate principal amount of 10% Senior
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Secured Notes due 2006 (the "10% Notes"). In addition, in connection with the
Tender Offer, the Company simultaneously solicited consents (the "Solicitation")
from holders of the 10% Notes to certain amendments to and waivers under the
indenture (the "10% Indenture") governing the 10% Notes and certain related
collateral documents. All of the outstanding 10% Notes were purchased by the
Company pursuant to the Tender Offer and Solicitation and such purchase was
consummated concurrently with the closing of the Offering. The aggregate
consideration paid by the Company in the Tender Offer and Solicitation was
approximately $74.1 million (including the amount paid to holders tendering 10%
Notes in excess of the principal amount being tendered (the "Tender Premium") of
approximately $9.1 million, but excluding accrued interest.
As used herein, the term "Acquisition Transactions" means the Merger, the
AIP Equity Contribution, the Holdings Equity Contribution, the Company's
execution of and borrowings under the New Credit Agreement, the Offering, the
Notes Offering, the Tender Offer, the Solicitation and the execution of the
Supplemental Indenture.
AMERICAN INDUSTRIAL PARTNERS
AIP is a private investment fund headquartered in San Francisco and New York
with committed capital of approximately $800.0 million. AIP seeks to invest in
companies which hold either a protected competitive position or proprietary
capability, ideally combined with a leading market share. The firm does not seek
to play a role in daily management; rather, AIP seeks to provide its portfolio
companies with access to the management expertise of its operating partners, all
of whom are former Chief Executive Officers of Fortune 500 corporations, through
active board-level participation as well as on-call advice when desired.
Following the consummation of the Acquisition Transactions, AIP, its
affiliates and certain other individuals associated with AIP, contributed $65.3
million in equity to Holdings, and Theodore C. Rogers, a general partner of AIP
and former Chairman and Chief Executive Officer of NL Industries, Inc., became
the Company's Non-Executive Chairman of the Board. Although no specific
arrangements are in place, AIP intends to offer the Company's executive officers
the opportunity to own up to approximately 5.0% of Holdings' equity through a
combination of direct investments and option programs.
8
<PAGE>
THE EXCHANGE OFFER
On May 22, 1998, Holdings issued $56.6 million aggregate principal amount of
Old Debentures. The Old Debentures were sold pursuant to exemptions from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws, in order to enable the Company to raise
funds on a more expeditious basis than necessarily would have been possible had
the initial sale been pursuant to an offering registered under the Securities
Act. Donaldson, Lufkin & Jenrette Securities Corporation (the "Initial
Purchaser"), as a condition to its purchase of the Old Debentures, requested
that Holdings agree to commence the Exchange Offer following the Offering.
<TABLE>
<S> <C>
Debentures Offered.................. Up to $56,600,000 aggregate principal amount of
Series B 13 1/8% Senior Discount Debentures due 2009.
The Exchange Offer.................. The New Debentures are being offered in exchange for
a like principal amount of the Old Debentures. Old
Debentures may be tendered only in integral multiples
of $1,000. The issuance of the New Debentures is
intended to satisfy the obligations of the Company
contained in the Registration Rights Agreement, dated
as of May 22, 1998 between Holdings and the Initial
Purchaser (the "Registration Rights Agreement"). For
procedures for tendering see--"The Exchange Offer."
Tenders, Expiration Date
Withdrawal........................ The Exchange Offer will expire at 5:00 p.m. New York
City time, on November 3, 1998, or such later date
and time to which it is extended. Each Holder
tendering Old Debentures must acknowledge that such
Holder is not engaging in, nor does such Holder
intend to engage in, a distribution of the New
Debentures. The tender of Old Debentures pursuant to
the Exchange Offer may be withdrawn at any time prior
to the Expiration Date. Any Old Debenture not
accepted for exchange for any reason will be returned
without expense to the tendering Holder thereof as
promptly as practicable after the expiration or
termination of the Exchange Offer.
Conditions to Exchange Offer........ The Exchange Offer is not subject to any condition
other than that the Exchange Offer does not violate
any applicable law or regulation or interpretation of
the Staff.
United States Federal Income Tax
Considerations.................... There will be no United States Federal income tax
consequences to Holders who exchange Old Debentures
for New Debentures pursuant to the Exchange Offer.
See "Certain United States Federal Income Tax
Considerations."
Exchange Agent...................... State Street Bank and Trust Company of California,
N.A. (the "Exchange Agent") is serving as exchange
agent in connection with the Exchange Offer.
Use of Proceeds..................... There will be no proceeds to Holdings from the
exchange pursuant to the Exchange Offer. See "Use of
Proceeds" and "Capitalization."
Shelf Registration Statement........ Under certain circumstances, certain holders of
Debentures (including holders of Old Debentures who
are not permitted to participate in the Exchange
Offer or holders who may not freely resell New
Debentures received in the Exchange Offer) may
require Holdings to file and cause to become
effective, a Shelf Registration Statement (as
defined), which would cover resales of Debentures by
such holders. See "Description of
Debentures--Registration Rights; Liquidated Damages."
</TABLE>
9
<PAGE>
CONSEQUENCES OF EXCHANGING OLD DEBENTURES
Holders of Old Debentures who do not exchange their Old Debentures for New
Debentures pursuant to the Exchange Offer will continue to be subject to the
restrictions on transfer of such Old Debentures as set forth in the legend
thereon as a consequence of the issuance of the Old Debentures pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Debentures may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. Subject
to certain limited exceptions, holders of Old Debentures who do not exchange
their Old Debentures for New Debentures in the Exchange Offer will no longer
have registration rights with respect to their Old Debentures. Holdings does not
currently anticipate that it will register the Old Debentures under the
Securities Act. See "Description of Debentures--Registration Rights; Liquidated
Damages." Based on interpretations by the Staff, as set forth in no-action
letters issued to third parties, Holdings believes that New Debentures issued
pursuant to the Exchange Offer in exchange for Old Debentures may be offered for
resale, resold or otherwise transferred by Holders thereof (other than any
Holder which is an "affiliate" of Holdings within the meaning of Rule 405 under
the Securities Act) without compliance with the registration and prospectus
delivery requirements of the Securities Act, provided that such New Debentures
are acquired in the ordinary course of such Holder's business and such Holder,
other than a broker-dealer, has no arrangement with any person to participate in
the distribution of such New Debentures. Holdings has not sought and does not
intend to seek its own no-action letter in connection with the Exchange Offer
and there can be no assurance that the SEC would make a similar determination
with respect to the Exchange Offer. Each Holder, other than a broker-dealer,
must acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Debentures and has no arrangement or understanding to
participate in a distribution of New Debentures. Each broker-dealer that
receives New Debentures for its own account in exchange for Old Debentures must
acknowledge that such Old Debentures were acquired by such broker-dealer as a
result of market-making activities or other trading activities and that it will
deliver this Prospectus in connection with any resale of such New Debentures.
See "Plan of Distribution." In addition, to comply with the securities laws of
certain jurisdictions, it may be necessary to qualify for sale or register
thereunder the New Debentures prior to offering or selling such New Debentures.
Holdings has agreed, pursuant to the Registration Rights Agreement, subject to
certain limitations specified therein, to register or qualify the New Debentures
for offer or sale under all applicable state securities or Blue Sky laws before
the time the Registration Statement (of which this Prospectus forms a part) is
declared effective by the SEC. See "The Exchange Offer--Consequences of
Exchanging Old Debentures" and "Description of Debentures-- Registration Rights;
Liquidated Damages."
SUMMARY DESCRIPTION OF THE NEW DEBENTURES
The terms of the New Debentures and the Old Debentures are identical in all
material respects, except (i) that the New Debentures have been registered under
the Securities Act, (ii) for certain transfer restrictions and registration
rights relating to the Old Debentures and (iii) that the New Debentures will not
contain certain provisions relating to Liquidated Damages to be paid to Holders
of Old Debentures under certain circumstances relating to the timing of the
Exchange Offer and to other registration requirements. See "Description of
Debentures--Registration Rights; Liquidated Damages." The New Debentures will
accrete in value from May 22, 1998. Old Debentures accepted for exchange will
cease to accrete in value from and after the date of consummation of the
Exchange Offer.
10
<PAGE>
<TABLE>
<S> <C>
Debentures Offered....................... Up to $56.6 million aggregate principal amount
at maturity of 13 1/8% Series B Senior Discount
Debentures due 2009.
Issuer................................... Great Lakes Acquisition Corp.
Maturity Date............................ May 15, 2009.
Yield and Interest....................... 13 1/8% (computed on a semiannual bond
equivalent basis), calculated from May 22, 1998.
The Old Debentures accrete and the New
Debentures will accrete at a rate of 13 1/8%,
compounded semiannually, to an aggregate
principal amount of $56.6 million by May 15,
2003. Cash interest will not accrue on the
Debentures prior to May 15, 2003. Commencing May
15, 2003, cash interest on the Debentures will
accrue and be payable, at a rate of 13 1/8% per
annum, semiannually in arrears on each May 15
and November 15.
Optional Redemption...................... The Old Debentures are and the New Debentures
will be redeemable at the option of Holdings, in
whole or in part, at any time on or after May
15, 2003 in cash at the redemption prices set
forth herein, plus accrued and unpaid interest
and Liquidated Damages, if any, thereon to the
redemption date. In addition, at any time prior
to May 15, 2001, Holdings may, at its option, on
any one or more occasions, redeem up to 35% of
the aggregate principal amount at maturity of
the Debentures originally issued at a redemption
price equal to 113.125% of the Accreted Value
thereof plus Liquidated Damages, if any, thereon
with the net cash proceeds of one or more Equity
Offerings; PROVIDED that at least 65% of the
original aggregate principal amount of the New
Debentures issued hereunder together with the
Old Debentures originally issued and not
exchanged in the Exchange Offer remains
outstanding immediately after each such
redemption.
Ranking.................................. The Old Debentures are and the New Debentures
will be senior obligations of Holdings. The Old
Debentures rank and the New Debentures will rank
pari passu in right of payment with all future
senior indebtedness of Holdings and senior in
right of payment to all future subordinated
indebtedness of Holdings. The Old Debentures are
and the New Debentures will be effectively
subordinated to all liabilities of Holdings'
subsidiaries. As of June 30, 1998, Holdings and
its subsidiaries had approximately $340.7
million of Indebtedness (as defined herein)
outstanding and Holdings' subsidiaries had
approximately $310.2 million of Indebtedness
outstanding, including Indebtedness under the
Notes and the New Credit Agreement. Under the
terms of the New Credit Agreement and other
Senior Indebtedness, Holdings could have
incurred a maximum of $80.0 million of Senior
Indebtedness, including $25.0 million of
availability under the Revolving Credit
Facility.
</TABLE>
11
<PAGE>
<TABLE>
<S> <C>
Change of Control........................ Upon a Change of Control (as defined), Holdings
is required to offer to purchase all of the
Debentures then outstanding at a price in cash
equal to 101% of the Accreted Value thereof,
plus Liquidated Damages, if any, thereon in the
case of any such purchase prior to May 15, 2003,
or 101% of the aggregate principal amount at
maturity thereof, plus accrued and unpaid
interest and Liquidated Damages, if any, thereon
in the case of any such purchase on or after May
15, 2003. If a Change of Control were to occur,
Holdings does not have, and may not in the
future have, any assets other than common stock
of the Company (which is pledged to secure the
Loan Guaranty). As a result, Holdings' ability
to repurchase all or any part of the Debentures
upon the occurrence of a Change of Control will
depend upon the receipt of dividends or other
distributions from its direct and indirect
subsidiaries. The New Credit Agreement and the
Note Indenture restrict the Company from paying
dividends and making any other distributions to
Holdings. If Holdings does not obtain dividends
from the Company sufficient to permit the
repurchase of the Debentures or does not
refinance such Indebtedness, Holdings will
likely not have the financial resources to
purchase Debentures upon the occurrence of a
Change of Control. In any event, there can be no
assurance that Holdings' subsidiaries will have
the resources available to pay such dividend or
make any such distribution. Furthermore, the New
Credit Agreement provides that certain change of
control events will constitute a default
thereunder, and the Note Indenture provides
that, in the event of a Change of Control, the
Company will be required to offer to repurchase
the Notes at the price specified therefor.
Holdings' failure to make a Change of Control
offer when required or to purchase tendered
Debentures when tendered would constitute an
Event of Default under the Indenture. See
"Description of the Debentures--Repurchase at
the Option of Holders-- Change of Control" and
"Risk Factors--Possible Inability to Repurchase
Debentures Upon Change of Control."
Limitation on Access to Subsidiary
Cash Flow.............................. Holdings does not have, and may not in the
future have, any assets other than common stock
of the Company (which will be pledged to secure
the Company's obligations under the New Credit
Agreement). As a result, Holdings' ability to
pay cash interest on the Debentures, and to
purchase Debentures upon the occurrence of a
Change of Control, will depend upon the receipt
of dividends and other distributions from its
direct and indirect subsidiaries. The New Credit
Agreement and the Notes restrict the Company's
ability to pay dividends and make other
distributions to Holdings, and without such
dividends or distributions, Holdings will likely
not have the financial resources to
</TABLE>
12
<PAGE>
<TABLE>
<S> <C>
pay cash interest on the Debentures, or to
purchase Debentures upon a Change of Control. In
addition, there can be no assurance that
Holdings' subsidiaries will have the resources
available to pay any such dividends or
distributions. Holdings' failure to pay cash
interest on the Debentures when due and payable,
or to make a Change of Control Offer when
required or to purchase Debentures when tendered
pursuant thereto, would constitute an Event of
Default (as defined herein) under the Indenture.
See "Description of Debentures--Principal,
Maturity and Interest," and "-- Repurchase at
Option of Holders--Change of Control."
Original Issue Discount.................. The Debentures have been issued with original
issue discount for United States Federal income
tax purposes. Consequently, U.S. Holders will be
required to include amounts in gross income for
United States Federal income tax purposes in
advance of the receipt of cash attributable
thereto. See "Certain United States Federal
Income Tax Considerations" and "Risk Factors--
Original Issue Discount; Limitations on Holder's
Claims."
Certain Covenants........................ The Indenture contains certain covenants that,
among other things, limit the ability of
Holdings and its Subsidiaries to: (i) pay
dividends or make certain other Restricted
Payments (as defined); (ii) incur additional
Indebtedness; (iii) encumber or sell assets;
(iv) enter into certain guarantees of
Indebtedness; (v) enter into transactions with
affiliates; and (vi) merge or consolidate with
any other entity or to transfer or lease all or
substantially all of their assets. In addition,
under certain circumstances, Holdings is
required to offer to purchase Debentures at a
price of 100% of the Accreted Value thereof,
plus Liquidated Damages, if any, thereon in the
case of any such purchase prior to May 15, 2003,
or of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if
any, to the date of purchase, in the case of any
purchase on or after May 15, 2003, with the
proceeds of certain Asset Sales (as defined).
See "Description of Debentures--Certain
Covenants." The term "Subsidiaries" does not
include references to "Unrestricted
Subsidiaries," as defined herein.
</TABLE>
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered by a Holder prior to tendering Old Debentures in the Exchange Offer.
13
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA
The following table presents summary historical consolidated statement of
operations, balance sheet and other data of the Company's predecessor as of and
for the three years ended December 31, 1997, which are derived from the
Predecessor's (the "Predecessor") audited consolidated financial statements
audited by Ernst & Young LLP, which are included elsewhere herein. The summary
historical consolidated statement of operations, balance sheet and other data
for the six-month period ended June 30, 1997 and the period from January 1, 1998
to May 21, 1998 are derived from the unaudited consolidated financial statements
of the Predecessor, and in the opinion of management, include all adjustments
necessary for a fair presentation of the data for such periods. The results for
the period from May 22, 1998 to June 30, 1998 represent the operations of the
Company subsequent to the Acquisition Transactions and, in the opinion of
management, include all adjustments necessary for a fair presentation of the
data for such periods. These results are not necessarily indicative of the
results to be expected for the year ending December 31, 1998 or any future
period. Holdings did not have any substantial operations prior to May 22, 1998.
The financial data set forth below should be read in conjunction with "Use of
Proceeds," "Selected Historical Financial and Other Data," "Unaudited Pro Forma
Condensed Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and the related notes thereto included elsewhere
herein.
<TABLE>
<CAPTION>
PREDECESSOR(1)
--------------------------------------------------------------- HOLDINGS
-------------
YEAR ENDED DECEMBER 31, SIX MONTHS JANUARY 1, 1998 MAY 22, 1998
------------------------------- ENDED TO TO
1995 1996 1997 JUNE 30, 1997 MAY 21, 1998 JUNE 30, 1998
--------- --------- --------- ------------- --------------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER TON)
<S> <C> <C> <C> <C> <C> <C>
STATEMENTS OF OPERATIONS DATA:
Net sales...................... $ 178,628 $ 242,744 $ 231,911 $ 113,610 $ 90,849 $ 28,511
Gross profit................... 36,440 66,373 59,521 27,067 23,681 7,835
Operating income............... 26,753 51,052 41,011 18,080 10,611 6,115
Net income (loss).............. 13,818 27,559 21,984 9,046 (1,589) 631
OTHER DATA:
Adjusted EBITDA(2)............. $ 36,514 $ 66,563 $ 59,182 $ 27,020 $ 23,203 $ 8,311
Adjusted EBITDA margin......... 20.4% 27.4% 25.5% 23.8% 25.5% 29.2%
Capital expenditures(3)........ $ 5,774 $ 6,371 $ 21,391 $ 7,744 $ 9,058 1,848
Quantity of CPC sold (000
tons)........................ 1,484 1,452 1,443 708.18 566.42 177.46
Net sales per ton of CPC
sold......................... $ 120.35 $ 167.21 $ 160.67 $ 160.42 160.39 160.67
Gross profit per ton of CPC
sold......................... 24.55 45.72 41.24 38.22 41.81 44.15
Cash provided (used) by
operating activities......... 17,235 27,722 31,261 9,097 12,738 (29,564)
Cash provided (used) by
investing activities......... (5,774) (6,371) (21,391) (7,744) (9,058) (277,750)
Cash provided (used) by
financing activities......... (6,119) (2,906) 9,629 2,320 4,767 317,271
</TABLE>
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1998
-------------
<S> <C>
BALANCE SHEET DATA:
Working capital.................................................................................... $ 41,142
Total assets....................................................................................... 501,393
Total debt......................................................................................... 340,722
Stockholders' equity............................................................................... 65,961
</TABLE>
14
<PAGE>
- --------------------------
(1) Holdings was formed on March 31, 1998, and, on May 22, 1998, acquired all of
the outstanding stock of Great Lakes Carbon Corporation. References to the
"Predecessor" are to Great Lakes Carbon Corporation prior to the date of the
Acquisition. Prior to May 22, 1998, Holdings had no substantive operations.
(2) Adjusted EBITDA is defined as operating income before depreciation,
amortization, fees and expenses paid to Horsehead Industries, Inc. ("HII")
($1.4 million, $1.7 million and $1.4 million in 1995, 1996 and 1997,
respectively, and $0.7 million for the six months ended June 30, 1997 and
$8.8 million for the period from January 1, 1998 to May 21, 1998) and
payments pursuant to employment and consulting agreements which were
terminated upon consummation of the Acquisition Transactions ($4.5 million
and $6.8 million in 1996 and 1997, respectively, and $3.4 million for six
months ended June 30, 1997 and $0.3 million the period from January 1, 1998
to May 21, 1998) and AIP management fees ($0.2 million for the period from
May 22, 1998 to June 30, 1998). EBITDA is not defined in the same manner as
"Consolidated EBITDA" in the Indenture or in the "Description of Debentures"
herein. See "Description of Debentures--Certain Definitions." Adjusted
EBITDA is not intended to represent cash flow from operations as defined by
GAAP (as defined) and should not be used as an alternative to net income as
an indicator of operating performance or to cash flows as a measure of
liquidity. Adjusted EBITDA is included in the Offering Memorandum as it is a
basis upon which the Company assesses its financial performance, and certain
covenants in the Company's borrowing arrangements will be tied to similar
measures. Adjusted EBITDA, as presented, represents a useful measure of
assessing the Company's ongoing operating activities without the impact of
financing activity and nonrecurring charges. 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.
(3) Capital expenditures include expenditures in connection with the New La
Plata Kiln of $13.4 million and $3.6 million for the year ended December 31,
1997 and the six months ended June 30, 1997, respectively, and $6.6 million
and $1.0 million for the period from January 1, 1998 to May 21, 1998 and the
period from May 22, 1998 to June 30, 1998, respectively.
15
<PAGE>
RISK FACTORS
IN ADDITION TO THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, HOLDERS
OF OLD DEBENTURES SHOULD CONSIDER CAREFULLY THE FOLLOWING FACTORS BEFORE
TENDERING THEIR OLD DEBENTURES IN THE EXCHANGE OFFER. THIS PROSPECTUS, INCLUDING
THE "SUMMARY," "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS," AND "BUSINESS" SECTIONS, CONTAINS "FORWARD-LOOKING
STATEMENTS" WHICH CAN BE IDENTIFIED BY THE USE OF FORWARD-LOOKING TERMINOLOGY,
SUCH AS "MAY," "INTEND," "WILL," "EXPECT," "ANTICIPATE," "ESTIMATE" OR
"CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR COMPARABLE
TERMINOLOGY. IN PARTICULAR, ANY STATEMENTS, EXPRESS OR IMPLIED, CONCERNING
FUTURE OPERATING RESULTS OR THE ABILITY TO GENERATE REVENUES, INCOME OR CASH
FLOW TO SERVICE THE DEBENTURES, INCLUDING THE ADJUSTED CREDIT DATA PRESENTED
UNDER "SUMMARY CONSOLIDATED FINANCIAL AND OTHER DATA," AND INFORMATION REGARDING
THE NEW LA PLATA KILN PRESENTED ELSEWHERE HEREIN, ARE FORWARD-LOOKING
STATEMENTS. THE MATTERS SET FORTH BELOW CONSTITUTE CAUTIONARY STATEMENTS
IDENTIFYING IMPORTANT FACTORS WITH RESPECT TO SUCH FORWARD-LOOKING STATEMENTS,
INCLUDING CERTAIN RISKS AND UNCERTAINTIES, THAT COULD CAUSE ACTUAL RESULTS TO
DIFFER MATERIALLY FROM THOSE IN SUCH FORWARD-LOOKING STATEMENTS.
LIMITATION ON ACCESS TO SUBSIDIARIES' CASH FLOW; HOLDING COMPANY STRUCTURE
Holdings is a holding company, and its ability to pay interest on the
Debentures is dependent upon the receipt of dividends from its direct and
indirect subsidiaries. Holdings does not have, and may not have in the future
any assets other than the common stock of the Company. The Company and its
subsidiaries are parties to the New Credit Agreement and an indenture governing
the Notes (the "Note Indenture"), each of which imposes substantial restrictions
on the Company's ability to pay dividends to Holdings, and any dividend payment
will be subject to the satisfaction of certain financial conditions set forth
therein. The ability of the Company and its subsidiaries to comply with such
conditions may be affected by events that are beyond its or Holdings' control.
The breach of any such condition could result in a default under the Note
Indenture and/or the New Credit Agreement, and in the event of any such default,
the holders of the Notes or the lenders under the New Credit Agreement could
elect to accelerate the maturity of all the Notes or the loans under the New
Credit Agreement. If the maturity of the Notes or the loans under the New Credit
Agreement were accelerated, all such outstanding debt would have to be paid in
full before the Company or its subsidiaries could distribute any assets or cash
to Holdings. There can be no assurance that the assets of Holdings would be
sufficient to meet its obligations under the Indenture. Future borrowings by the
Company can be expected to contain restrictions or prohibitions on the payment
of dividends by the Company and its subsidiaries to Holdings.
In addition, under Delaware law, a subsidiary of a company is permitted to
pay dividends on its capital stock only out of its surplus or, if it has no
surplus, out of its net profits for the year in which a dividend is declared or
for the immediately preceding fiscal year. Surplus is defined as the excess of a
company's total assets over the sum of its total liabilities plus the par value
of its outstanding capital stock. In order to pay a cash dividend, the Company
must have surplus or net profits equal to the full amount of the dividend at the
time the dividend is declared. In determining the Company's ability to pay
dividends, Delaware law permits the board of directors of the Company to revalue
its assets and liabilities from time to time to their fair market values in
order to create surplus.
Holdings cannot predict what the value of its subsidiaries' assets or the
amounts of their liabilities will be in the future. Accordingly, there can be no
assurance that Holdings' subsidiaries will be able to dividend any amounts to
Holdings in the future and, therefore that it will be able to pay its debt
service obligations on the Debentures.
Because Holdings is a holding company, the holders of the Debentures will be
structurally junior to all creditors of Holdings' subsidiaries. In the event of
insolvency, liquidation, reorganization, dissolution or other winding-up of
Holdings' subsidiaries, Holdings will not receive any funds required to pay to
creditors of the subsidiaries. As of June 30, 1998 the aggregate amount of
indebtedness of Holdings' subsidiaries was $310.2 million.
16
<PAGE>
SUBSTANTIAL LEVERAGE
Holdings and the Company are highly leveraged. On June 30, 1998, Holdings
and its subsidiaries had total indebtedness of approximately $340.7 million and
the Company had total indebtedness of approximately $310.2 million. Holdings,
the Company and the Company's Subsidiaries will be permitted to incur
substantial additional Indebtedness in the future. As of August 31, 1998, no
funds had been drawn down on the Company's existing lines of credit and
approximately $3.6 million in letters of credit under the New Credit Agreement
were outstanding. The amount of the Company's annual debt service will be
approximately $17 million for the period from May 22, 1998 through December 31,
1998 and average approximately $41 million annually over the subsequent five
year period. See "Capitalization" and "Description of Debentures--Certain
Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock."
Holdings' and the Company's ability to make scheduled payments of principal
of, or to pay the interest or Liquidated Damages, if any, on, or to refinance,
its indebtedness, or to fund planned capital expenditures will depend on their
future performance, which, to a certain extent, will be subject to general
economic, financial, competitive, legislative, regulatory and other factors that
are beyond their control. Based upon the current level of operations and
anticipated cost savings and revenue growth, management believes that cash flow
from operations and available cash, together with available borrowings under the
New Credit Agreement, will be adequate to meet Holdings' and the Company's
future liquidity needs for at least the next several years. Holdings and the
Company may, however, need to refinance all or a portion of their indebtedness.
There can be no assurance that the Company's business will generate sufficient
cash flow from operations, or that anticipated revenue growth and operating
improvements will be realized in an amount sufficient to enable Holdings or the
Company to service their indebtedness or to fund their other liquidity needs.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources."
The degree to which Holdings and the Company are leveraged could have
important consequences to holders of the Debentures, including, but not limited
to: (i) making it more difficult for Holdings to satisfy its obligations with
respect to the Debentures, (ii) increasing Holdings' and the Company's
vulnerability to general adverse economic and industry conditions, (iii)
limiting Holdings' and the Company's ability to obtain additional financing to
fund future working capital, capital expenditures and other general corporate
requirements, (iv) requiring the dedication of a substantial portion of
Holdings' and the Company's cash flow from operations to the payment of
principal of, interest on, and Liquidated Damages, if any, on their
indebtedness, thereby reducing the availability of such cash flow to fund
working capital, capital expenditures, research and development or other general
corporate purposes, (v) limiting Holdings' and the Company's flexibility in
planning for, or reacting to, changes in its business and the industry, (vi)
placing Holdings and the Company at a competitive disadvantage relative to less
leveraged competitors and (vii) restricting the Company's ability to pay
dividends to Holdings so that Holdings can pay its debt service obligations on
the Debentures (which payments are scheduled to begin in 2003), the failure of
which may create an event of default under the Debentures, which, if not cured
or waived, could have a material adverse effect on Holdings and the Company.
ORIGINAL ISSUE DISCOUNT; LIMITATIONS ON HOLDERS' CLAIMS
The Debentures have been issued with original issue discount for United
States Federal income tax purposes. Consequently, U.S. Holders will be required
to include amounts in gross income for United States Federal income tax purposes
in advance of the receipt of cash attributable thereto. See "Certain United
States Federal Income Tax Considerations" for a more detailed discussion of the
United States Federal income tax consequences to the Holders of the Debentures
resulting from the ownership and disposition thereof.
Under the Indenture, in the event of an acceleration of the maturity of the
Debentures upon the occurrence of an Event of Default (as defined herein), the
holders of the Debentures may be entitled to
17
<PAGE>
recover only the amount which may be declared due and payable pursuant to the
Indenture, which will be less than the principal amount at maturity of the
Debentures. See "Description of Debentures -- Events of Default and Remedies."
If a bankruptcy case is commenced by or against Holdings under the
Bankruptcy Code (as defined herein), the claim of a holder of Debentures with
respect to the principal amount thereof may be limited to an amount equal to the
sum of (i) the issue price of the Debentures as set forth on the cover page
hereof and (ii) that portion of the original issue discount (as determined on
the basis of such issue price) which is not deemed to constitute "unmatured
interest" for purposes of the Bankruptcy Code. Accordingly, holders of the
Debentures under such circumstances may, even if sufficient funds are available,
receive a lesser amount than they would be entitled to under the express terms
of the Indenture. In addition, the same rules are used for the calculation of
original issue discount under federal income tax law and, accordingly, a holder
of Debentures might be required to recognize gain or loss in the event of a
distribution related to such a bankruptcy case.
RESTRICTIVE DEBT COVENANTS
The Indenture, the Note Indenture and the New Credit Agreement contain a
number of significant covenants that, among other things, restrict the ability
of Holdings and the Company and their subsidiaries to dispose of assets, incur
additional Indebtedness, prepay other Indebtedness (including the Debentures),
amend certain debt instruments (including the Indenture and the Note Indenture),
pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, make capital expenditures, change the business
conducted by Holdings or its subsidiaries, or engage in certain transactions
with affiliates and certain other corporate activities. In addition, under the
New Credit Agreement, the Company is required to maintain specified financial
ratios and satisfy specified financial tests. See "Description of Debentures"
and "Description of Other Indebtedness--New Credit Agreement."
In addition, the Copetro Credit Agreement contains a number of covenants
which, among other things, require Copetro to maintain specified financial
ratios, and restricts the ability of Copetro to pay dividends to the Company,
dispose of assets, engage in mergers or consolidations and create liens on
assets. See "Description of Other Indebtedness--Copetro Credit Agreement."
Holdings' and the Company's ability to comply with such agreements may be
affected by events beyond its control, including prevailing economic, financial
and industry conditions. The breach of any of such covenants or restrictions
could result in a default under the Indenture, the New Credit Agreement or the
Note Indenture, which would permit the senior lenders, the holders of the Notes,
or the holders of the Debentures, or any of them, as the case may be, to declare
all amounts borrowed thereunder to be due and payable, together with accrued and
unpaid interest and, in the case of the Notes or the Debentures, Liquidated
Damages, if any, and the commitments of the senior lenders to make further
extensions of credit under the New Credit Agreement could be terminated. If the
Company were unable to repay its indebtedness to its senior lenders, such
lenders could proceed against the collateral securing such indebtedness, and
against Holdings under the Loan Guaranty as described under "Description of
Other Indebtedness--New Credit Agreement."
POSSIBLE INABILITY TO REPURCHASE DEBENTURES UPON CHANGE OF CONTROL
In the event of a Change of Control, Holdings is required to purchase all of
the Debentures then outstanding at the offer price specified therefor in the
Indenture. Holdings does not have, and may not in the future have, any assets
other than common stock of the Company (which is pledged to secure the Loan
Guaranty). As a result, Holdings' ability to repurchase all or any part of the
Debentures upon the occurrence of a Change of Control will depend upon the
receipt of dividends or other distributions from its direct and indirect
subsidiaries. The New Credit Agreement and the Note Indenture restrict the
Company
18
<PAGE>
from paying dividends and making any other distributions to Holdings. If
Holdings does not obtain dividends from the Company sufficient to permit the
repurchase of the Debentures or does not refinance such Indebtedness, Holdings
will likely not have the financial resources to purchase Debentures upon the
occurrence of a Change of Control. In any event, there can be no assurance that
Holdings' subsidiaries will have the resources available to pay such dividend or
make any such distribution. Furthermore, the New Credit Agreement provides that
certain change of control events will constitute a default thereunder, and the
Note Indenture provides that, in the event of a Change of Control, the Company
will be required to offer to repurchase the Notes at the price specified
therefor. Holdings' failure to make a Change of Control offer when required or
to purchase tendered Debentures when tendered would constitute an Event of
Default under the Indenture. See "Description of Debentures" and "Description of
Other Indebtedness."
RELIANCE ON THE ALUMINUM INDUSTRY
The Company's products are sold primarily to the worldwide aluminum
industry. The aluminum industry generally is cyclical in nature and experiences
fluctuations in production levels and significant fluctuations in profits based
on numerous factors. Historically, sales of the Company's products have been
adversely affected by weakness in the aluminum industry. Although the aluminum
industry has experienced growth on a long-term basis, there can be no assurance
that growth will continue or that conditions will remain favorable in the
aluminum industry as a whole, or for the Company's customers in particular. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business."
DEPENDENCE ON CERTAIN CUSTOMERS
For the year ended December 31, 1997, the Company's top five customers
represented approximately 62.2% of the Company's net sales. During such period,
the Company's two largest customers, Alcoa and Alusaf, which have been customers
for over 50 years and 20 years, respectively, accounted for 23.7% and 15.5%,
respectively, of the Company's net sales. In June 1998, Alcoa acquired Alumax
Inc., ("Alumax"), another long-standing customer of the Company, which accounted
for 6.4% of the net sales of the Company in 1997. The permanent loss of one or
more major customers could adversely affect the Company's operating results.
Although the Company expects to maintain its current relationships with its
major customers, there can be no assurance that a change will not occur.
DEPENDENCE ON RAW MATERIAL SUPPLY
The raw material used by the Company in the production of CPC is RPC, which
is a by-product of the petroleum refining industry. The Company purchases
approximately 46.1% of its RPC requirements from three petroleum refiners. The
Company believes that, under current conditions, RPC is available in sufficient
quantities and of adequate quality at current market prices. A substantial
increase in raw material prices or a substantial decrease in raw material supply
of sufficient quality could have a material adverse effect on the Company's
financial condition and results of operations. Historically, the price of anode
grade RPC has moved in relation to the price of anode grade CPC; however, there
can be no assurance that the Company will be in a position to pass any future
raw material price increases on to its customers. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Business."
COMPETITION
The CPC industry is highly competitive. Competition is based primarily on
price, product quality and access to raw material sources. Although the Company
believes that it is the world's largest supplier of CPC, several of the
Company's competitors are part of much larger companies and as such may have
19
<PAGE>
greater resources than the Company. One of the Company's major competitors has
had access to RPC from its own petroleum refining operations for many years,
which could give such competitor a cost advantage. Although CPC industry
operating rates are currently at historically high levels, there can be no
assurance that the Company's current or future competitors will not increase
their operating capacity. Competitive factors could require price reductions or
increased spending that could materially adversely affect the Company's
financial condition and results of operations. See "Business."
ENVIRONMENTAL MATTERS
The Company's operations are subject to various federal, state, local and
foreign laws and regulations relating to the emission, release or discharge of
certain substances. While the Company believes that it is currently in material
compliance with all applicable laws and regulations, the Company has had
occasional exceedances of opacity emissions limitations at its Port Arthur,
Texas facility. In addition, some of the Company's facilities may be required to
obtain permits and comply with new standards applicable to air emissions to be
adopted by the United States Environmental Protection Agency (the "EPA") and
state environmental agencies over the next several years. There can be no
assurance that the Company will not incur significant costs to comply with
changes in existing laws and regulations. See "Business--Environmental Matters."
LABOR RELATIONS
Approximately one-third of the Company's employees are covered by collective
bargaining or similar agreements. The agreement covering 54 employees at the
Enid, Oklahoma facility expires in 2001. The agreement covering 28 employees of
Copetro may be subject to revision by the Argentine government. The Company has
not had any material work stoppages or strikes at Enid in more than 18 years and
has never had a work stoppage at Copetro. The Port Arthur plant is operated with
a nonunion workforce. The Company believes that it has satisfactory relations
with its employees. There can be no assurance, however, that new labor
agreements will be reached without work stoppage or strike or will be reached on
terms satisfactory to the Company. See "Business--Employees."
FRAUDULENT TRANSFER CONSIDERATIONS
Holdings' obligations under the Debentures may be subject to review under
state or federal fraudulent transfer laws in the event of the bankruptcy or the
financial difficulty of Holdings.
Under those laws, if a court, in a lawsuit by an unpaid creditor or
representative of creditors of Holdings, such as a trustee in bankruptcy or
Holdings as a chapter 11 debtor in possession, were to find that when Holdings
issued the Debentures, it (a) received less than fair consideration or
reasonably equivalent value therefor and (b) either (i) was or was rendered
insolvent, (ii) was engaged in a business or transaction for which its remaining
unencumbered assets constituted unreasonably small capital or (iii) intended to
incur or believed (or reasonably should have believed) that it would incur debts
beyond its ability to pay as such debts matured, the court could avoid the
Debentures and Holdings' obligations thereunder, or subordinate the Debentures
to all of Holdings' other obligations, and in either case direct the return of
any amounts paid thereunder to Holdings or to a fund for the benefit of its
creditors. It should be noted that a court could avoid the Debentures and
Holdings' obligations thereunder without regard to factors (a) and (b) above if
it found that Holdings issued the Debentures with actual intent to hinder,
delay, or defraud its creditors.
The measure of insolvency for purposes of the foregoing will vary depending
on the law of the jurisdiction being applied. Generally, however, an entity
would be considered insolvent if the sum of its debts (including contingent or
unliquidated debts) is greater than all of its property at a fair valuation or
if
20
<PAGE>
the present fair salable value of its assets is less than the amount that will
be required to pay its probable liability on its existing debts as they become
absolute and matured.
Holdings believes that the equity interest in the Company that it will
acquire in the Merger constitutes fair consideration and reasonably equivalent
value for its obligations under the Debentures. There can be no assurance,
however, as to what standard a court would apply in making such determinations
or that a court would agree with Holdings' conclusions in this regard.
INTERNATIONAL RISKS
The Company has invested significant resources in Argentina and intends to
continue to make investments in Argentina and other foreign countries in the
future. Accordingly, Holdings and the Company may be subject to economic,
political or social instability or other developments not typical of investments
made in the United States. International operations are subject to risks in
addition to those discussed below, including the impact of foreign governmental
regulations, currency fluctuations, political uncertainties and differences in
business practices. There can be no assurance that Argentina or any other
country in which Holdings or the Company may acquire operations or conduct
business will not adopt regulations or take other actions that would have a
direct or indirect adverse impact on the business or market opportunities of
Holdings or the Company within such countries. While Argentina has been
relatively stable during the last several years, in the past Argentina has been
characterized by varying degrees of inflation, uneven growth rates, declining
investment rates, significant devaluations of Argentine currency, impositions of
exchange controls and political uncertainty. The Company currently does not have
political risk insurance with respect to its operations in Argentina and the
value of the Company's investment in its Argentine subsidiary could be adversely
affected by changes in government policy, such as the imposition of limitations
on foreign ownership of investment assets or the imposition of exchange
controls. In addition, there can be no assurance that future economic
developments in Argentina, over which neither Holdings nor the Company has
control, will not impair Holdings' financial condition, results of operations
and business prospects.
CONSEQUENCES OF FAILURE TO EXCHANGE OLD DEBENTURES
The Old Debentures have not been registered under the Securities Act or any
other securities laws of any jurisdiction and, therefore, may not be offered,
sold or otherwise transferred except in compliance with the registration
requirements of the Securities Act and any other applicable securities laws or
pursuant to exemptions from, or in transactions not subject to, those
requirements and, in each case, in compliance with certain other conditions and
restrictions. Holders of Old Debentures who do not exchange their Old Debentures
for New Debentures pursuant to the Exchange Offer will continue to be subject to
such restrictions on transfer of such Old Debentures as set forth in the legend
thereon. In addition, upon consummation of the Exchange Offer, Holders of Old
Debentures which remain outstanding will not be entitled to any rights to have
such Old Debentures registered under the Securities Act or to any similar rights
under the Registration Rights Agreement (subject to certain limited exceptions).
Holdings does not currently anticipate that it will register or qualify any Old
Debentures which remain outstanding after consummation of the Exchange Offer for
offer or sale in any jurisdiction (subject to limited exceptions, if
applicable). As a result of these factors, to the extent that Old Debentures are
not tendered and accepted in the Exchange Offer, a holder's ability to sell such
Old Debentures could be adversely affected.
The New Debentures and any Old Debentures which remain outstanding after
consummation of the Exchange Offer will vote together as a single class for
purposes of determining whether holders of the requisite percentage thereof have
taken certain actions or exercised certain rights under the Indenture.
Upon consummation of the Exchange Offer, holders of Old Debentures will not
be entitled to any Liquidated Damages or any further registration rights under
the Registration Rights Agreement, except
21
<PAGE>
under limited circumstances. See "Description of Debentures--Registration
Rights; Liquidated Damages."
ABSENCE OF PUBLIC MARKET
The Old Debentures were issued to, and Holdings believes such securities are
currently owned by, a relatively small number of beneficial owners. The Old
Debentures have not been registered under the Securities Act and will be subject
to restrictions on transferability if they are not exchanged for the New
Debentures. Although the New Debentures may be resold or otherwise transferred
by the holders (who are not affiliates of Holdings) without compliance with the
registration requirements under the Securities Act, they will constitute a new
issue of securities with no established trading market. There can be no
assurance that such a market will develop. In addition, the New Debentures will
not be listed on any national securities exchange. The New Debentures may trade
at a discount from the initial offering price of the Old Debentures, depending
upon prevailing interest rates, the market for similar securities, Holdings'
operating results and other factors. Holdings has been advised by the Initial
Purchaser that it currently intends to make a market in the New Debentures, as
permitted by applicable laws and regulations; however, the Initial Purchaser is
not obligated to do so, and any such market-making activities may be
discontinued at any time without notice. In addition, such market-making
activity may be limited during the pendency of the Shelf Registration Statement
(as defined). Therefore, there can be no assurance that an active market for any
of the New Debentures will develop, either prior to or after Holdings'
performance of its obligations under the Registration Rights Agreement. If an
active public market does not develop, the market price and liquidity of the New
Debentures may be adversely affected.
If a public trading market develops for the New Debentures, future trading
prices will depend on many factors, including, among other things, prevailing
interest rates, the financial condition of Holdings, and the market for similar
securities. Depending on these and other factors, the New Debentures may trade
at a discount.
Historically, the market for non-investment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Debentures
will not be subject to similar disruptions. Any such disruptions may have an
adverse effect on holders of the New Debentures.
Notwithstanding the registration of the New Debentures in the Exchange
Offer, holders who are "affiliates" (as defined under Rule 405 of the Securities
Act) of Holdings may publicly offer for sale or resell the New Debentures only
in compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives New Debentures for its own account in
exchange for Old Debentures, where such Old Debentures were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Debentures. See "Plan of Distribution."
EXCHANGE OFFER PROCEDURES
Subject to the conditions set forth under "The Exchange Offer--Conditions to
the Exchange Offer," delivery of New Debentures in exchange for Old Debentures
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) certificates for Old
Debentures or a book-entry confirmation of a book-entry transfer of Old
Debentures into the Exchange Agent's account at the DTC, including an Agent's
Message (as defined) if the tendering holder does not deliver a Letter of
Transmittal, (ii) a completed and signed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees, or, in the case of a
book-entry transfer, an Agent's Message in lieu of the Letter of Transmittal,
and (iii) any other documents required by the Letter of
22
<PAGE>
Transmittal. Therefore, Holders of Old Debentures desiring to tender such Old
Debentures in exchange for New Debentures should allow sufficient time to ensure
timely delivery. Holdings is under a duty to give notification of defects or
irregularities with respect to the tenders of Old Debentures for exchange. Old
Debentures that are not tendered or that are tendered but not accepted by
Holdings for exchange will, following consummation of the Exchange Offer,
continue to be subject to the existing restrictions upon transfer thereof under
the Securities Act and, upon consummation of the Exchange Offer, certain
registration and other rights under the Registration Rights Agreement will
terminate.
Each broker-dealer that receives New Debentures for its own account in
exchange for Old Debentures, where such Old Debentures were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such New Debentures. See "Plan of Distribution."
PRINCIPAL STOCKHOLDER
Since the consummation of the Acquisition Transactions, AIP, its affiliates
and certain other individuals associated with AIP have been the only
stockholders of Holdings, which is the 100% parent of the Company, and AIP has
the ability to designate all of the directors of Holdings and the Company. See
"Management," "Acquisition Transactions" and "Description of Holdings Capital
Stock." AIP is therefore in a position to direct the management and affairs of
Holdings and the Company and may cause Holdings and the Company to enter into
transactions that could ultimately enhance stockholder value but may involve
risks to holders of the Debentures.
ACQUISITION TRANSACTIONS
Pursuant to the Merger Agreement, Holdings, a corporation formed by AIP,
acquired all of the issued and outstanding capital stock of the Company, through
the Merger of Merger Sub, a wholly owned subsidiary of Holdings, into the
Company. The aggregate consideration paid by AIP pursuant to the Merger
Agreement was approximately $376.9 million. The Company was the surviving
corporation in the Merger.
In order to finance the Merger, (i) AIP and affiliates of, and certain other
individuals associated with, AIP contributed the AIP Equity Contribution to
Holdings, (ii) Holdings issued and sold the Old Debentures and contributed the
Holdings Equity Contribution to the Company (iii) the Company entered into the
Term Loan Facilities providing for term loan borrowings in the aggregate
principal amount of approximately $111.0 million and the Revolving Credit
Facility for borrowings of up to $25.0 million under the New Credit Agreement,
and borrowed all term loans available, and (iv) the Company issued and sold
$175.0 million aggregate principal amount of the Notes pursuant to the Notes
Offering Memorandum.
In connection with the Merger, the Company commenced the Tender Offer on
April 24, 1998, for any and all of the 10% Notes and simultaneously conducted
the Solicitation of consents from holders of the 10% Notes to certain amendments
to and waivers under the 10% Indenture and certain related collateral documents.
All of the outstanding 10% Notes were purchased by the Company pursuant to the
Tender Offer and such purchase was consummated concurrently with the closing of
the Notes Offering. The aggregate consideration paid by the Company in the
Tender Offer and Solicitation was approximately $74.1 million (including the
amount paid to holders tendering 10% Notes in excess of the principal amount
being tendered (the "Tender Premium") of approximately $9.1 million but
excluding accrued interest).
Following consummation of the Tender Offer and Solicitation, the Company
submitted the 10% Notes for cancellation. Since such cancellation, the 10%
Indenture, as supplemented by the Supplemental Indenture, is of no further force
or effect.
23
<PAGE>
Consummation of the Merger was conditioned upon the consummation of the
Tender Offer and Solicitation, the execution of and borrowings by the Company
under the New Credit Facility, the consummation of the Notes Offering or
alternative financing and the Holdings Equity Contribution.
AMERICAN INDUSTRIAL PARTNERS
AIP is a private investment fund headquartered in San Francisco and New York
with committed capital of approximately $800.0 million. AIP seeks to invest in
companies which hold either a protected competitive position or proprietary
capability, ideally combined with a leading market share. The firm does not seek
to play a role in daily management; rather, AIP seeks to provide its portfolio
companies with access to the management expertise of its operating partners, all
of whom are former Chief Executive Officers of Fortune 500 corporations, through
active board-level participation as well as on-call advice when desired.
Following the consummation of the Acquisition Transactions, AIP and
affiliates of, and certain other individuals associated with, AIP contributed
$65.0 million and $330,000, respectively, in equity to Holdings, and Theodore C.
Rogers, a general partner of AIP and former Chairman and Chief Executive Officer
of NL Industries, Inc., became the Company's Non-Executive Chairman of the
Board. Although no specific arrangements are in place, AIP intends to offer the
Company's executive officers the opportunity to own up to approximately 5.0% of
Holdings' equity through a combination of direct investments and option
programs.
USE OF PROCEEDS
Holdings will not receive any proceeds from the Exchange Offer.
24
<PAGE>
CAPITALIZATION
The following table sets forth the consolidated capitalization of Holdings
at June 30, 1998. The following table should be read in conjunction with the
Unaudited Condensed Consolidated Financial Statements and the related notes
thereto included elsewhere herein and the "Selected Historical Financial and
Other Data" and the related notes thereto included elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE
30, 1998
-------------
(DOLLARS IN
THOUSANDS)
<S> <C>
Long-term debt (includes current portion):
Copetro Credit Agreement......................................................................... $ 15,850
Other existing indebtedness(a)................................................................... 8,384
Revolving Credit Facility(b)..................................................................... --
Term Loan Facilities............................................................................. 111,000
10.25% Senior Subordinated Notes................................................................. 175,000
13.125% Senior Discount Debentures............................................................... 30,488
-------------
Total debt....................................................................................... 340,722
Stockholder's equity:
Total stockholders' equity....................................................................... 65,961
-------------
Total capitalization............................................................................. $ 406,683
-------------
-------------
</TABLE>
- ------------------------
(a) Includes various outstanding industrial revenue bonds, capitalized leases
and certain other miscellaneous indebtedness. In addition, as of June 30,
1998, approximately $3.4 million of letters of credit were outstanding under
the New Credit Agreement.
(b) The Revolving Credit Facility under the New Credit Agreement provides for up
to $25.0 million of borrowing availability. As of August 31, 1998, no funds
had been drawn down on the Company's existing lines of credit and
approximately $3.6 million in letters of credit under the New Credit
Agreement were outstanding. See "Description of Other Indebtedness--New
Credit Agreement."
25
<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The following Unaudited Pro Forma Condensed Consolidated Financial Data have
been derived by the application of pro forma adjustments to the historical
financial data of Holdings and the Predecessor Company included elsewhere
herein. The pro forma condensed consolidated statements of operations of
Holdings for the year ended December 31, 1997 and the six months ended June 30,
1998 give effect to the Acquisition Transactions as if the Acquisition
Transactions had been consummated as of January 1, 1997 and 1998, respectively.
The adjustments are described in the accompanying notes. The Unaudited Pro Forma
Condensed Consolidated Financial Data do not purport to represent what Holdings'
results of operations or financial position actually would have been if the
Acquisition Transactions had been consummated on the dates indicated, or what
such results of operations or financial position will be for any future period
or date. The Unaudited Pro Forma Condensed Consolidated Financial Data should be
read in conjunction with the "Selected Historical Financial and Other Data" and
the related notes thereto and the Consolidated Financial Statements and related
notes thereto included elsewhere herein.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS DATA
YEAR ENDED DECEMBER 31, 1997
<TABLE>
<CAPTION>
PREDECESSOR PRO FORMA ADJUSTMENTS
COMPANY ------------------------
HISTORICAL COMPANY HOLDINGS PRO FORMA
----------- -------- --------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net sales................................................... $ 231,911 $ 231,911
Cost of goods sold.......................................... 172,390 4,378(a) 176,768
----------- ---------
Gross profit................................................ 59,521 55,143
Selling, general and administrative expenses................ 18,510 4,945(b) 23,455
----------- ---------
Operating income...................................... 41,011 31,688
Other income (expense):
Interest expense, net....................................... (6,287) (24,056)(c) (4,346)(c) (34,689)
Other, net.................................................. (49) (49)
----------- ---------
Income before income taxes.................................. 34,675 (3,050)
Income tax expense.......................................... 12,691 (10,407)(d) (1,591)(d) 693
----------- ---------
Net income................................................ $ 21,984 $ (3,743)
----------- ---------
----------- ---------
</TABLE>
26
<PAGE>
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
HISTORICAL
-----------------------------
PREDECESSOR
------------- HOLDINGS
PERIOD FROM -------------
JANUARY 1, PERIOD FROM PRO FORMA ADJUSTMENTS
1998 MAY 22, 1998
TO MAY 21, TO JUNE 30, -----------------------
1998 1998 COMPANY HOLDINGS PRO FORMA
------------- ------------- -------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Net sales......................................... $ 90,849 $ 28,511 $ 119,360
Cost of goods sold................................ 67,168 20,676 2,300(e) 90,144
------------- ------------- ----------
Gross profit...................................... 23,681 7,835 29,216
Selling, general and administrative............... 13,070 1,720 1,927(f) 16,717
------------- ------------- -------- ----------
Operating income............................ 10,611 6,115 12,499
Other income (expense):
Interest expense, net............................. (1,776) (3,777) (9,977)(g) (1,640)(g) (17,170)
Other, net........................................ (472) 491 19
------------- ------------- ----------
Income before income taxes and extraordinary
item............................................ 8,363 2,829 (4,652)
Income tax expense................................ 2,839 2,198 (5,304)(d) (959)(d) (1,226)
------------- ------------- ----------
Income before extraordinary item.................. $ 5,524 $ 631 $ (3,426)
------------- ------------- ----------
------------- ------------- ----------
</TABLE>
27
<PAGE>
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENT OF OPERATIONS DATA
(a) The increase in cost of goods sold relates to increased depreciation expense
of approximately $4.6 million resulting from the increase in fixed asset
value reflecting the allocation of a portion of the purchase price to the
write-up of fixed assets and an approximate $0.2 million decrease in
amortization expense resulting from the write-off of certain intangibles.
(b) Adjustments to selling, general and administrative expenses include an
increase in amortization expense for goodwill of approximately $4.5 million
and for the non-compete agreement of $0.4 million (assumes 40-year and
7-year amortization periods, respectively).
(c) Adjustments to interest expense include the following: (i) the reduction of
approximately $0.3 million of existing financing fee amortization, (ii)
reduction of approximately $1.2 million of interest income, (iii) reduction
of approximately $0.1 million of expenses associated with the previous
credit agreement for letters of credit and commitment fees, (iv) the
elimination of $6.5 million related to the 10% Notes, (v) the addition of
approximately $27.4 million related to the Notes and the New Credit
Agreement, (vi) approximately $0.2 million of incremental maintenance and
commitment fees and expenses on the New Credit Agreement, (vii) the increase
of approximately $2.4 million in amortization relating to financing fees and
other transaction costs (amortized over 6-10 years), and (viii) the increase
of approximately $4.1 million (compounded semiannually) related to the
Debentures offered hereby. See Note (g) for a pro forma schedule of interest
expense and cash payments during the term of the Debentures.
(d) Reflects the tax effect of the pro forma adjustments and the
non-deductibility of certain intangible asset amortization.
(e) The increase in cost of goods sold relates to increased depreciation expense
of approximately $2.3 million (after taking into consideration $1.4 million
of depreciation expense included in the historical period from May 22, 1998
to June 30, 1998) resulting from the increase in fixed asset value
reflecting the allocation of a portion of the purchase price to the write-up
of fixed assets and a decrease in amortization expense resulting from the
write-off of certain intangibles.
(f) Adjustments to selling, general and administrative expenses include an
increase in amortization expense for goodwill of approximately $1.8 million
and for the non-compete agreement of $0.2 million, after taking into
consideration amortization expense for goodwill of $0.5 million and for the
non-compete agreement of $0.05 million in the historical period from May 22,
1998 to June 30, 1998 (assumes 40-year and 7-year amortization period,
respectively).
(g) Adjustments to interest expense include the following: (i) the reduction of
approximately $0.1 million of existing financing fee amortization, (ii)
reduction of approximately $1.1 million of interest income, (iii) reduction
of expenses associated with the previous credit agreement for letters of
credit and commitment fees, (iv) the elimination of $2.5 million related to
the 10% Notes, (v) the addition of approximately 10.7 million related to the
Notes and the New Credit Agreement, (vi) approximately $0.1 million of
incremental maintenance and commitment fees and expenses on the New Credit
Agreement, (vii) the increase of approximately $0.9 million in amortization
relating to financing fees and other transaction costs (amortized over 6 to
10 years), and (viii) the increase of approximately $1.5 million related to
the Debentures. The annual interest expense that will be recorded and the
cash debt service payments that are required to be made during the term of
the Debentures are set forth
28
<PAGE>
(in millions) on a pro forma basis, assuming the sale of the Debentures on
January 1, 1998, in the following table.
<TABLE>
<CAPTION>
INTEREST CASH
EXPENSE PAYMENTS
----------- -----------
<S> <C> <C>
1998.............................................. $ 4.1 $ --
1999.............................................. 4.6 --
2000.............................................. 5.3 --
2001.............................................. 6.0 --
2002.............................................. 6.8 --
2003.............................................. 7.4 3.7
2004.............................................. 7.4 7.4
2005.............................................. 7.4 7.4
2006.............................................. 7.4 7.4
2007.............................................. 7.4 7.4
2008.............................................. 7.4 7.4
2009.............................................. -- 60.5
</TABLE>
(h) The Company paid approximately $8.2 million and $9.4 million during the year
ended December 31, 1997 and the period from January 1, 1998 to May 21, 1998,
respectively, in management and other fees to HII and compensation payments
pursuant to certain employment and consulting agreements. These arrangements
and agreements were terminated upon consummation of the Acquisition
Transactions. Subsequent to the consummation of the Acquisition
Transactions, the Company will pay approximately $1.8 million per year in
management fees to AIP. The anticipated savings associated with the
termination of the HII arrangements and the employment and consulting
agreements and the establishment of a new management agreement with AIP have
not been reflected in the pro forma condensed consolidated statement of
operations data.
29
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OTHER DATA
The following table presents selected historical consolidated statement of
operations, balance sheet and other data of the Company's Predecessor as of and
for the five years ended December 31, 1997 which are derived from the
Predecessor's audited consolidated financial statements. The selected historical
consolidated statement of operations, balance sheet and other data for the
six-month period ended June 30, 1997 and for the period from January 1, 1998 to
May 21, 1998 are derived from the unaudited consolidated financial statements of
the Predecessor and, in the opinion of management, include all adjustments
necessary for a fair presentation of the data for such periods. The results for
the period from May 22, 1998 through June 30, 1998 represent the operations of
Holdings subsequent to the Acquisition and, in the opinion of management,
include all adjustments necessary for a fair presentation of the data for such
period. The interim results are not necessarily indicative of the results to be
expected for the year ended December 31, 1998 or any future period. Holdings did
not have any substantive operations prior to May 22, 1998. The data set forth
below should be read in conjunction with "Management's Discussion and Analysis
of Financial Condition and Results of Operations" and the consolidated financial
statements of the Company and its predecessor and the related notes thereto
included elsewhere herein.
<TABLE>
<CAPTION>
PREDECESSOR(1)
--------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS
----------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JUNE 30, 1997
--------- --------- --------- --------- --------- -------------
(DOLLARS IN THOUSANDS, EXCEPT PER TON)
<S> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 149,225 $ 130,797 $ 178,628 $ 242,744 $ 231,911 $ 113,610
Cost of goods sold............................ 124,760 109,883 142,188 176,371 172,390 86,543
--------- --------- --------- --------- --------- -------------
Gross profit.................................. 24,465 20,914 36,440 66,373 59,521 27,067
Selling, general and administrative
expenses.................................... 9,901 8,226 9,687 15,321 18,510 8,987
--------- --------- --------- --------- --------- -------------
Operating income.............................. 14,564 12,688 26,753 51,052 41,011 18,080
Other income (expense):
Interest expense, net....................... (1,440) (1,358) (1,127) (7,573) (6,287) (3,607)
Asset utilization fee to parent............. (6,440) (6,133) (6,286) -- -- --
Other....................................... (1,806) (5,142) 2,111 (772) (49) 117
--------- --------- --------- --------- --------- -------------
(9,686) (12,633) (5,302) (8,345) (6,336) (3,490)
Income before income taxes and extraordinary
item........................................ 4,878 55 21,451 42,707 34,675 14,590
Income tax expense............................ 2,008 189 7,633 15,148 12,691 5,544
Extraordinary loss on early extinguishment of
debt (net of tax benefit of $4001)..........
--------- --------- --------- --------- --------- -------------
Net income (loss)............................. $ 2,870 $ (134) $ 13,818 $ 27,559 $ 21,984 $ 9,046
--------- --------- --------- --------- --------- -------------
--------- --------- --------- --------- --------- -------------
OTHER DATA:
EBITDA(1)..................................... $ 23,958 $ 21,986 $ 36,514 $ 66,563 $ 59,182 $ 27,020
EBITDA margin................................. 16.1% 16.8% 20.4% 27.4% 25.5% 23.8%
Capital expenditures.......................... $ 6,973 $ 5,986 $ 5,774 $ 6,371 $ 21,391 $ 7,744
Cash interest expense(2)...................... 1,796 1,572 1,310 7,964 8,172 4,267
Ratio of earnings to fixed charges(3)......... 2.7x 1.0x 10.2x 5.6x 4.6x 3.9x
Quantity of CPC sold (in thousands of tons)... 1,286 1,229 1,484 1,452 1,443 708.18
Net sales per ton of CPC sold................. $ 116.01 $ 106.40 $ 120.35 $ 167.21 $ 160.67 $ 160.42
Gross profit per ton of CPC sold.............. 19.02 17.01 24.55 45.72 41.24 38.22
Cash provided (used) by operating
activities.................................. 19,530 17,338 17,235 27,722 31,261 9,097
Cash provided (used) by investing
activities.................................. (22,482) (5,987) (5,774) (6,371) (21,391) (7,744)
Cash provided (used) by financing
activities.................................. (7,150) (11,123) (6,119) (2,906) 9,629 2,320
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................... $ 19,366 $ 15,828 $ 27,011 $ 56,818 $ 79,435
Total assets.................................. 106,483 105,390 113,930 148,905 174,911
Total debt.................................... 17,986 11,907 74,291 72,885 84,014
Stockholders' equity.......................... 68,791 68,657 5,896 31,955 52,439
<CAPTION>
HOLDINGS
-------------
JANUARY 1, 1998 MAY 22, 1998
TO TO
MAY 21, 1998 JUNE 30, 1998
--------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Net sales..................................... $ 90,849 $ 28,511
Cost of goods sold............................ 67,168 20,676
------- -------------
Gross profit.................................. 23,681 7,835
Selling, general and administrative
expenses.................................... 13,070 1,720
------- -------------
Operating income.............................. 10,611 6,115
Other income (expense):
Interest expense, net....................... (1,776) (3,777)
Asset utilization fee to parent............. -- --
Other....................................... (472) 491
------- -------------
(2,248) (3,286)
Income before income taxes and extraordinary
item........................................ 8,363 2,829
Income tax expense............................ 2,839 2,198
Extraordinary loss on early extinguishment of
debt (net of tax benefit of $4001).......... 7,113
------- -------------
Net income (loss)............................. $ (1,589) $ 631
------- -------------
------- -------------
OTHER DATA:
EBITDA(1)..................................... $ 23,203 $ 8,311
EBITDA margin................................. 25.5% 29.2%
Capital expenditures.......................... $ 9,058 $ 1,848
Cash interest expense(2)...................... 3,327 3,738
Ratio of earnings to fixed charges(3)......... 3.1x 1.6x
Quantity of CPC sold (in thousands of tons)... 566.42 177.46
Net sales per ton of CPC sold................. $ 160.39 $ 160.67
Gross profit per ton of CPC sold.............. 41.81 44.15
Cash provided (used) by operating
activities.................................. 12,738 (29,564)
Cash provided (used) by investing
activities.................................. (9,058) (277,750)
Cash provided (used) by financing
activities.................................. 4,767 317,271
BALANCE SHEET DATA (AT PERIOD END):
Working capital............................... $ 41,142
Total assets.................................. 501,393
Total debt.................................... 340,722
Stockholders' equity.......................... 65,961
</TABLE>
30
<PAGE>
- ----------------------------------
(1) Holdings was formed on March 31, 1998 and, on May 22, 1998, acquired all of
the outstanding stock of Great Lakes Carbon Corporation. References to the
Predecessor are to Great Lakes Carbon Corporation prior to the date of the
Acquisition. Prior to May 22, 1998, Holdings had no substantive operations.
(2) Adjusted EBITDA is defined as operating income before depreciation,
amortization, fees and expenses paid to HII ($1.4 million, $1.7 million and
$1.4 million in 1995, 1996 and 1997 respectively, and $0.7 million for six
months ended June 30, 1997 and $8.8 million for the period from January 1,
1998 to May 21, 1998), and payments pursuant to employment and consulting
agreements which were terminated upon consummation of the Acquisition
Transactions ($4.5 million and $6.8 million in 1996 and 1997, respectively,
and $3.4 million for the six months ended June 30, 1997 and $0.3 million for
the period from January 1, 1998 to May 21, 1998) and AIP management fees
($0.2 million for period from May 22, 1998 to June 30, 1998). Adjusted
EBITDA is not defined in the same manner as "Consolidated Adjusted EBITDA"
in the Indenture or in "Description of Debentures" herein. See "Description
of Debentures--Certain Definitions." Adjusted EBITDA is not intended to
represent cash flow from operations as defined by GAAP and should not be
used as an alternative to net income as an indicator of operating
performance or to cash flows as a measure of liquidity. Adjusted EBITDA is
included in the Prospectus as it is a basis upon which Holdings and the
Company assess their financial performance, and certain covenants in
Holdings' and the Company's borrowing arrangements will be tied to similar
measures. Adjusted EBITDA, as presented, represents a useful measure of
assessing Holdings' and the Company's ongoing operating activities without
the impact of financing activity and nonrecurring charges. 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.
(3) Cash interest expense excludes the amounts of interest charged to earnings
relating to a capitalized lease which has been sublet for a term coterminous
with the primary lease and for a rental amount in excess of the rent payable
on the primary lease and the amortization of debt issuance costs under the
10% Notes the Notes and the New Credit Agreement and the Holdings
Debentures.
(4) Earnings used in computing the ratio of earnings to fixed charges consist of
earnings before income taxes and extraordinary items plus fixed charges.
Fixed charges consist of interest expense plus that portion of operating
lease rental expense which is representative of an interest factor.
31
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
"Selected Historical Financial Data" and the Consolidated Financial Statements
and related notes thereto included elsewhere herein.
GENERAL
The Company is the world's largest producer of CPC. The Company produces
anode grade CPC, which is an essential raw material for primary aluminum
production, and industrial grade CPC, which is used in a variety of specialty
metals and materials applications. Historically, the Company's profitability has
been primarily a function of its sales volumes of CPC, CPC pricing and the cost
of RPC, which constitutes the largest single component of the Company's cost of
goods sold.
The Company has benefitted from the consistent growth in primary aluminum
production since 1995. The growth in primary aluminum production, which is
projected by a variety of industry sources to continue through the next several
years, has led to increased demand for CPC which has substantially outpaced the
growth in CPC production capacity. As a result, the calcining industry is
operating at historically high operating rates; the Company has operated at full
capacity since 1995. The selling price per ton realized by the Company has
increased 33.5% from 1995 to 1997. Consequently, the Company's net sales have
increased by 29.8% from $178.6 million to $231.9 million over the same period.
The Company produces CPC from RPC, which is a by-product of the petroleum
refining process. RPC generally represents an immaterial proportion of total
refinery sales. Petroleum refiners can either sell the RPC for its fuel value at
a relatively low price or sell the RPC at a significantly higher price for use
in the calcining industry. As a result of these factors, the price of RPC has
not increased as rapidly as the price of CPC since 1995. Consequently, the
Company has been able to increase its gross profit per ton of CPC sold from
$24.55 in 1995 to $41.24 in 1997.
The Company's principal source of revenues and profits are sales of anode
grade CPC to the aluminum industry. The increase in the Company's sales and
profitablity since 1995 has been primarily attributable to the increase in anode
grade CPC prices, while sales volumes remained relatively constant. Future
profitability will largely be dependent on how well the Company is able to
manage the spread between the selling price of CPC and the cost of RPC.
Historically the Company has been able to obtain lower purchase prices for RPC
in times of declining CPC prices, enabling the Company to earn a relatively
stable profit spread even in periods of CPC price declines.
The following table sets forth for the periods shown, the Company's sales
volumes in tons, the average selling price per ton, and gross profit per ton
sold:
<TABLE>
<CAPTION>
PREDECESSOR
--------------------------------------------------------------- HOLDINGS COMBINED
------------- ---------------
YEAR ENDED DECEMBER 31, SIX MONTHS JANUARY 1, 1998 MAY 22, 1998 JANUARY 1, 1998
------------------------------- ENDED TO TO TO
1995 1996 1997 JUNE 30, 1997 MAY 21, 1998 JUNE 30, 1998 JUNE 30, 1998
--------- --------- --------- ------------- --------------- ------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
Sales (thousands of
tons)............. 1,484 1,452 1,443 708 566 177 744
Average selling
price per ton..... $ 120.35 $ 167.21 $ 160.67 $ 160.42 $ 160.39 $ 160.67 $ 160.46
Gross profit per ton
sold.............. 24.55 45.72 41.24 $ 38.22 $ 41.81 $ 44.15 $ 42.37
</TABLE>
32
<PAGE>
BASIS OF PRESENTATION
The following table sets forth for the periods shown, net sales, cost of
goods sold, gross profit, selling general and administrative expense ("SG&A")
and EBITDA in million of dollars and as a percentage of net sales:
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------------------------------------------------------------------------------------
YEAR ENDED DECEMBER 31, SIX MONTHS JANUARY 1, 1998
---------------------------------------------------------------- ENDED TO
1995 1996 1997 JUNE 30, 1997 MAY 21, 1998
-------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales............ $ 178.6 100.0% $ 242.7 100.0% $ 231.9 100.0% $ 113.6 100.0% $ 90.8 100.0%
Cost of goods sold... 142.2 79.6 176.4 72.7 172.4 74.3 86.5 76.2 67.2 73.9
Gross profit......... 36.4 20.4 66.4 27.3 59.5 25.7 27.1 23.8 23.7 26.1
SG&A................. 9.7 5.4 15.3 6.3 18.5 8.0 9.0 7.9 13.1 14.4
Adjusted EBITDA...... 36.5 20.4 66.6 27.4 59.2 25.5 27.0 23.8 23.2 25.5
<CAPTION>
HOLDINGS COMBINED
-------------------- --------------------
MAY 22, 1998 JANUARY 1, 1998
TO TO
JUNE 30, 1998 JUNE 30, 1998
-------------------- --------------------
<S> <C> <C> <C> <C>
Net sales............ $ 28.5 100.0% $ 119.4 100.0%
Cost of goods sold... 20.7 72.5 87.8 73.6
Gross profit......... 7.8 27.5 31.5 26.4
SG&A................. 1.7 6.0 14.8 12.4
Adjusted EBITDA...... 8.3 29.2 31.5 26.4
</TABLE>
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 Holdings from the date of the Merger on May 22, 1998 through June 30,
1998.
As further discussed in Note 2 to the Condensed Consolidated Financial
Statements, the Acquisition was accounted for as a purchase. Accordingly, the
operating results for periods subsequent to May 21, 1998 reflect the results of
operations of Holdings subsequent to the Acquisition and include the impact of
adjustments required under the purchase method of accounting.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1998 COMPARED TO SIX MONTHS ENDED JUNE 30, 1997
The Company's net sales of the six months ended June 30, 1998 increased 5.1%
to $119.4 million from $113.6 million for the comparable 1997 period. Net sales
of anode grade CPC increased 7.1% to $100.7 million while net sales of
industrial grade CPC decreased 4.5% to $17.7 million.
The increase in anode grade CPC net sales was primarily the result of a
10.7% increase in sales volume to 610,087 tons attributable to continued strong
demand consistent with existing levels of aluminum production. This increase in
sales volume was partially offset by a decline of 3.2% in average selling price.
This decrease reflects a modest price accommodation in light of both weak
aluminum prices and the significant 60.5% increase in anode grade CPC selling
prices from 1994 to 1997. Anode grade CPC prices began to climb in mid-1995 as
aluminum smelters started to operate at higher production levels when the MOU
terminated. The increased demand for anode grade CPC drove prices up
dramatically through year-end 1996. Prices decreased slightly starting in 1997
to their current levels as the market stabilized at the higher rates of primary
aluminum production. The continuing growth in primary aluminum smelting
production through capacity expansions, restarts and capacity creep has led to
strong demand for CPC and as a result the anode grade CPC market remains strong.
The decrease in industrial grade CPC net sales was the result of a 13.6%
decrease in sales volume to 123,306 tons which was partially offset by a 10.5%
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 six months ended June 30, 1998 increased
by 16.4% to $31.5 million from $27.1 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. The higher cost of sales
was mainly the result of higher sales volume as the average cost per ton
decreased due mainly to lower raw material costs. Additional depreciation
related to the Acquisition in the period subsequent to May 21, 1998 amounted to
$0.5 million and represented 38.3% of the total unfavorable changes in cost of
goods sold.
33
<PAGE>
Operating income for the six months ended June, 1998 decreased 7.5% to $16.7
million from $18.1 million in the comparable 1997 period. The decline in
operating income was due to the 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 and increased
amortization expense related mainly to goodwill established when the Company was
acquired.
Income before income taxes for the six months ended June 30, 1998 decreased
23.3% to $11.2 million from $14.6 million for the comparable 1997 period. The
decrease was attributable to the decline in operating income discussed above and
a $1.9 million increase in net interest expense primarily due to the greater
amount of debt incurred by the Company as a consequence of the acquisition.
The Company's effective tax rate for the six months ended June 30, 1998
increased to 45.0% from 38.0% 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 tender premium and unamortized debt
issuance costs associated with the 10% Senior Secured Notes that were
repurchased in connection with the Acquisition. As a result of the factors
discussed above, results for the six months ended June 30, 1998 decreased 110.6%
to a loss of $1.0 million from a profit of $9.1 million in the 1997 period.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
The Company's net sales for the year ended December 31, 1997 decreased 4.5%
to $231.9 million from $242.7 million in 1996. Net sales of anode grade CPC
decreased 4.8% to $189.9 million while net sales of industrial grade CPC
increased 4.2% to $40.2 million.
The decrease in anode grade CPC net sales was primarily the result of a 6.4%
decline in the average selling price per ton in 1997 from 1996. This decline in
average selling price was partially offset by an increase of 1.8% in sales
volume in 1997 to approximately 1.1 million tons. The moderate 1997 anode grade
CPC price decline was largely the result of a modest price accommodation given
the significant 71.5% increased in anode grade CPC selling prices from 1994 to
1996. Anode grade CPC prices began to climb in mid-1995 as aluminum smelters
started to operate at higher production levels when the MOU terminated. The
increased demand for anode grade CPC drove prices up dramatically through
year-end 1996. Prices for anode grade CPC decreased slightly in 1997 as the
market stabilized at the higher rates of primary aluminum production. The
continuing growth in primary aluminum smelting production through capacity
expansions, restarts and capacity creep has maintained demand for CPC strong. As
a result the anode grade CPC market remains firm.
The increase in industrial grade CPC net sales was the result of an 8.3%
increase in the average selling price which was partially offset by a 3.8%
decrease in sales volume. These changes were primarily the result of increased
market prices across most product applications and a slight decrease in titanium
dioxide shipments.
The Company's 1997 gross profit decreased 10.3% to $59.5 million, from $66.4
million in 1996. The decrease in gross profit was due to the reduction in sales
discussed above which was partially offset by a decrease in cost of goods sold.
The lower cost of goods sold was primarily the result of lower raw material
costs.
Operating income decreased 19.7% to $41.0 million in 1997 from $51.1 million
in 1996. The decline in operating income was due to the decrease in gross profit
discussed above and an increase in selling, general and administrative expenses.
The increase in selling, general and administrative expenses was
34
<PAGE>
primarily the result of increased compensation payments pursuant to employment
and consulting agreements which were terminated upon consummation of the
Acquisition Transactions.
Income before income taxes decreased 18.8% to $34.7 million in 1997 from
$42.7 million in 1996. The reduction was attributable to the reduced operating
income discussed above, partially offset by a $2.0 million decrease in other
expense. This decrease was primarily a result of greater interest income from
greater cash balances in 1997. As a result of the factors discussed above, net
income for 1997 decreased 20.2% to $22.0 million from $27.6 million in 1996.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
The Company's net sales for the year ended December 31, 1996 increased 35.9%
to $242.7 million from $178.6 million in 1995. Net sales of anode grade CPC
increased 34.8% to $199.4 million in 1996, while net sales of industrial grade
CPC increased 40.0% to $38.6 million.
The increase in anode grade CPC net sales was primarily the result of higher
average selling prices which grew approximately 45.8% in 1996. The increase in
the average selling price for anode grade CPC was partially offset by a decrease
in selling volume of 7.5% to approximately 1.1 million tons. The higher prices
were the result of the attractive industry fundamentals experienced in 1996. The
lower sales volume of anode grade CPC was primarily attributable to the
unavailability of third-party produced CPC, which the Company had been able to
purchase for resale in 1995.
The increase in industrial grade CPC net sales was the result of a 22.5%
average price increase and a 14.4% increase in sales volume in 1996 compared to
1995. The increase in both industrial grade CPC selling prices and sales volume
was due to strong market conditions.
The Company's 1996 gross profit increased 82.1% to $66.4 million from $36.4
million in 1995. This increase in gross profit was due to the increase in sales
discussed above, partially offset by an increase in cost of sales. The higher
cost of goods sold was mainly the result of higher raw material costs.
Operating income increased 90.8% to $51.1 million in 1996 from $26.8 million
in 1995. The increase in operating income was due to the increase in gross
profit discussed above which was partially offset by an increase in selling,
general and administrative expenses. The increase in selling, general and
administrative expenses was primarily the result of increased compensation
payments pursuant to employment and consulting agreements which were terminated
upon consummation of the Acquisition Transactions.
Income before income taxes increased 99.1% to $42.7 million in 1996 from
$21.5 million in 1995 as a result of the improvement in operating income that
was partially offset by a $3.0 million increase in other expense. This increase
primarily resulted from a non-recurring income item in 1995. The increase in net
interest expense arising from the issuance of the 10% Notes in December 1995 was
offset by the reduction in the asset utilization fee to HII, under an agreement
which was terminated in December 1995. As a result of the factors discussed
above, net income for 1996 increased 99.4% to $27.6 million from $13.8 million
in 1995.
LIQUIDITY AND CAPITAL RESOURCES
HISTORICAL
Historically, the Company's principal source of liquidity has been cash flow
from operations. In addition, since 1997 the Company's has supplemented its cash
flow with borrowings under the Copetro Credit Agreement to finance construction
of the New La Plata Kiln at the Company's La Plata, Argentina facility.
Net cash flow provided (used) by operating activities was $(16.8) million
and $9.1 million for the six months ended June 30, 1998 and 1997, respectively.
The decrease in operating cash flow was a result of an increase in other assets
related to the capitalization of debt issuance costs arising from the
Acquisition and the lower results discussed above. Net cash flow provided by
operating activities was $31.3 million, $27.7 million and $17.2 million in 1997,
1996 and 1995, respectively. The Company's operating cash flow
35
<PAGE>
improved in 1997 over 1996 primarily as a result of lower working capital
requirements offset in part by lower net income. The improvement in operating
cash flow in 1996 compared to 1995 was primarily the result of the increase in
net income experienced during 1996 which reflected the Company's substantially
improved financial performance in that period. This increase was partially
offset by higher working capital requirements which were necessary to support
the Company's higher sales volumes.
Capital expenditures were $10.9 million and $7.7 million for the six months
ended June 30, 1998 and 1997, respectively. The higher capital expenditures in
the 1998 period reflect $7.6 million related to the continued construction of
the New La Plata Kiln, compared to $3.6 million in the prior year period.
Amounts to complete a new ship loader facility at the Company's Port Arthur,
Texas plant of approximately $1.4 million also contributed to the increase.
Capital expenditures were $21.4 million, $6.4 million, and $5.8 million in 1997,
1996 and 1995, respectively. Of the increase in capital expenditures in 1997,
$13.4 million is attributable to the construction of the New La Plata Kiln and
$1.0 million was related to the construction of a new ship loader facility at
the Company's Port Arthur, Texas plant. Other capital expenditures in the period
1995 to 1997 were relatively constant, ranging from approximately $5.8 to $7.0
million. These expenditures generally related to the maintenance of the
Company's operating facilities, including kilns, increases in the Company's CPC
storage capability, and the expansion of the Company's crushing and screening
facilities used in the production of industrial grade CPC. The Company has
budgeted $15.0 million of capital expenditures in 1998 including 9.0 million to
complete the New La Plata Kiln.
The Company spent approximately $3.5 million on capital expenditures related
to pollution control facilities in 1997 and anticipates spending approximately
$3.5 million and $1.9 million for such facilities in 1998 and 1999,
respectively. Approximately half of the environmental expenditures in 1997 and
1998 will be in conjunction with the construction of the New La Plata Kiln.
The Company financed the expansion of the Argentine facility with a
revolving credit facility (the "Copetro Credit Agreement") provided by Banca
Nazionale del Lavoro S.A. ("BNL"). The Copetro Credit Agreement is nonrecourse
to the Company, matures on March 31, 2002, and provides for a variable interest
rate of 9.78% at June 30, 1998. The Copetro Credit Agreement had a maximum
availability of $20.0 million of which a total of $15.9 million was borrowed and
remained in place after the Acquisition. The Copetro Credit Agreement is secured
by the property, plant and equipment of Copetro, including the New La Plata
Kiln. The Copetro Credit Agreement contains certain covenants that require
Copetro to maintain certain financial ratios and imposes certain limitations on
the payment of dividends to the Company. See "Description of Other
Indebtedness--Copetro Credit Agreement."
The Company was acquired on May 22, 1998 and as a result $275.9 million
representing the purchase price (net of cash acquired) is reflected in inventing
activities for the period subsequent to the acquisition.
In December 1995, the Company issued $65.0 million of the 10% Notes. The
$62.5 million of net proceeds from such offering were used to pay a cash
dividend to HII in connection with the distribution of 100% of the Company's
common stock on a pro rata basis to the holders of the common stock of HII. The
10% Notes are secured by first priority liens on all material property and
equipment of the Company's not otherwise pledged and certain other assets of the
Company.
In connection with the Merger, the Company commenced a Tender Offer on April
24, 1998, for any and all of the 10% Notes and simultaneously conducted the
Solicitation from holders of the 10% Notes to certain amendments to and waivers
under the 10% Indenture and certain related collateral documents. All of the
outstanding 10% Notes were purchased by the Company pursuant to the Tender Offer
and Solicitation and such purchase was consummated concurrently with the closing
of the Notes Offering. The aggregate consideration paid by Holdings in the
Tender Offer and Solicitation was approximately $74.1 million (including the
Tender Premium of approximately $9.1 million but excluding accrued interest).
Following consummation of the Tender Offer and Solicitation, the 10%
Indenture and the 10% Notes were terminated.
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The previous credit agreement provided for borrowings of up to $15.0
million, including a $10 million sublimit for letters of credit, which are
subject to borrowing base limitations. On May 22, 1998, the Company had no
borrowings under the facility and had outstanding letters of credit of $3.4
million. The credit agreement was terminated concurrently with the Acquisition
and the $3.4 million in letters of credit were transferred to the New Credit
Agreement.
POST-MERGER
The Company's principal sources of liquidity are cash flow from operations,
and borrowings under the Revolving Credit Facility.
In connection with the Merger, the Company issued the Old Notes in an
aggregate principal amount of $175.0 million, Holdings offered the Old
Debentures in an aggregate principal amount at maturity of $56.6 million and
Holdings and the Company entered into the Term Loan Facilities and the Revolving
Credit Facility under the New Credit Agreement. Each of the Term Loan Facilities
is a single tranche term facility. The Term A Loan Facility, the Term B Loan
Facility, and the Term C Loan Facility are in principal amounts of $50.0
million, $31.0 million and $30.0 million, respectively. The Revolving Credit
Facility will provide revolving loans in an aggregate amount of up to $25.0
million. Upon consummation of the Acquisition, the Company borrowed the full
amount available under each of the Term Loan Facilities and did not draw under
the Revolving Credit Facility. Proceeds from the issuance of the Old Notes and
the Old Debentures, initial borrowings under the New Credit Agreement and the
AIP Equity Contribution were used to finance the Acquisition Transactions, and
fees and expenses in connection therewith and including the Tender Offer.
Borrowings under the New Credit Agreement bear interest at a rate per annum
equal (at the Company's option) to a margin over either a base rate or LIBOR.
The Revolving Credit Facility, the Term A Loan Facility, the Term B Loan
Facility and the Term C Loan Facility will mature in five, six, seven and eight
years respectively. The Company's obligations under the New Credit Agreement are
guaranteed by Holdings and any future Subsidiaries of the Company other than
Foreign Subsidiaries, Finance Subsidiaries and Receivables Subsidiaries. The
guarantee of the New Credit Agreement by Holdings is secured by a pledge of all
of the capital stock of the Company. The New Credit Agreement and the guarantees
thereof are secured by a perfected first priority security interest in
substantially all assets of the Company and its future direct and indirect
subsidiaries except Foreign Subsidiaries and Receivables Subsidiaries. The New
Credit Agreement contains covenants and events of default customary for
facilities of this nature including substantial restrictions on the Company's
ability to make dividends or distributions or incur additional indebtedness. As
of August 31, 1998, no funds had been drawn down on the Company's existing lines
of credit and approximately $3.6 million in letters of credit under the New
Credit Agreement were outstanding. See "Description of Other Indebtedness--New
Credit Agreement."
The Old Notes were and the New Notes will be issued by the Company and
guaranteed by any future Subsidiaries other than Foreign Subsidiaries, Finance
Subsidiaries and Receivables Subsidiaries. The Notes will mature on May 15,
2008. Interest on the Old Notes is and on the New Notes will be payable in cash
semiannually, in arrears, on May 15 and November 15 of each year, commencing on
November 15, 1998. 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 aggregate principal amount equal to the amount of the
interest that would be payable as if the rate per annum were equal to 11 3/4%.
The Old Notes contain and the New Notes will contain customary covenants and
events of default, including covenants that limit the ability of the Company and
its Subsidiaries to incur debt, pay dividends and make certain investments. See
"Description of Other Indebtedness--Notes."
The Debentures will mature on May 15, 2009. Cash interest will not accrue on
the Debentures prior to May 15, 2003. Thereafter, interest on the Debentures
will be payable in cash semiannually, in arrears, commencing on November 15,
2003. The Company is restricted in its ability to pay dividends to Holdings so
that Holdings can pay its debt service obligations on the Debentures, the
failure of which may create an
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event of default under the Holdings Debentures, which, if not cured or waived,
could have a material adverse effect on the Company. See "Description of
Debentures."
Holdings is a holding company, and its ability to pay interest on the
Debentures is dependent upon the receipt of dividends and other distributions
from its direct and indirect subsidiaries. Holdings does not have, and may not
in the future have, any assets other than the common stock of the Company (which
will be pledged to secure Holdings' obligations under the Loan Guaranty). The
Company and its Subsidiaries (other than Foreign Subsidiaries, Finance
Subsidiaries or Receivables Subsidiaries (as defined herein)) are parties to the
New Credit Agreement and the Note Indenture, each of which imposes substantial
restrictions on the Company's ability to pay dividends to Holdings. See "Risk
Factors -- Limitation on Access to Subsidiaries' Cash Flow; Holding Company
Structure" and "--Restrictive Debt Covenants."
Management believes that cash flow from operations and availability under
the Revolving Credit Facility will provide adequate funds for the Company's
foreseeable working capital needs, planned capital expenditures and debt service
obligations. The Company's ability to fund its operations and make planned
capital expenditures, to make scheduled debt payments, to refinance indebtedness
and to remain in compliance with all of the financial covenants under its debt
agreements depends on its future operating performance and cash flow, which in
turn, are subject to prevailing economic conditions and to financial, business
and other factors, some of which are beyond its control. See "Risk Factors."
YEAR 2000
The Company has completed its Year 2000 compliance assessment and expects to
complete any required remediation efforts in order to be Year 2000 compliant by
the first quarter of 1999. The Company believes that the cost to the Company for
historical and future remediation of Year 2000 issues will not have a material
adverse effect on the Company.
THE EXCHANGE OFFER
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING OLD DEBENTURES
Upon the terms and conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal (which together constitute the Exchange
Offer), Holdings will accept for exchange Old Debentures which are properly
tendered on or prior to the Expiration Date and not withdrawn as permitted
below. As used herein, the term "Expiration Date" means 5:00 p.m., New York City
time, on November 3, 1998.
As of the date of this Prospectus, $56,600,000 aggregate principal amount of
the Old Debentures is outstanding. This Prospectus, together with the Letter of
Transmittal, is first being sent on or about the date hereof, to all Holders of
the Old Debentures known to Holdings. Holdings' obligation to accept Old
Debentures for exchange pursuant to the Exchange Offer is subject to certain
conditions as set forth under "--Certain Conditions to the Exchange Offer"
below. Any Old Debentures not accepted for exchange for any reason will be
returned without expense to the tendering Holder thereof as promptly as
practicable after the expiration or termination of the Exchange Offer.
Old Debentures tendered in the Exchange Offer must be in denominations of
principal amount of $1,000 and any integral multiple thereof.
Holdings expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Old Debentures not theretofore
accepted for exchange, upon the failure of satisfaction of any of the conditions
of the Exchange Offer specified below under "--Certain Conditions to the
Exchange Offer." Holdings will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Debentures as
promptly as practicable, such notice in the case of any extension to be issued
by means of a press release or other public announcement no later than 9:00
a.m., New York City time, on the next business day after the previously
scheduled Expiration Date.
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PROCEDURES FOR TENDERING OLD DEBENTURES
The tender to Holdings of Old Debentures by a Holder thereof as set forth
below and the acceptance thereof by Holdings will constitute a binding agreement
between the tendering Holder and Holdings upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal. Except as set forth below, a Holder who wishes to tender Old
Debentures for exchange pursuant to the Exchange Offer must transmit a properly
completed and duly executed Letter of Transmittal, including all other documents
required by such Letter of Transmittal or (in the case of a book-entry transfer)
an Agent's Message in lieu of such Letter of Transmittal, to the Exchange Agent
at the address set forth below under "Exchange Agent" on or prior to the
Expiration Date. In addition, either (i) certificates for such Old Debentures
must be received by the Exchange Agent along with the Letter of Transmittal, or
(ii) a timely confirmation of a book-entry transfer (a "Book-Entry
Confirmation") of such Old Debentures, if such procedure is available, into the
Exchange Agent's account at DTC (the "Book-Entry Transfer Facility") pursuant to
the procedure for book-entry transfer described below, must be received by the
Exchange Agent prior to the Expiration Date with the Letter of Transmittal or an
Agent's Message in lieu of such Letter of Transmittal, or (iii) the Holder must
comply with the guaranteed delivery procedures described below. The term
"Agent's Message" means a message, transmitted by the Book-Entry Transfer
Facility to and received by the Exchange Agent and forming a part of a
Book-Entry Confirmation, which states that the Book-Entry Transfer Facility has
received an express acknowledgment from the tendering participant, which
acknowledgment states that such participant has received and agrees to be bound
by the Letter of Transmittal and that Holdings may enforce such Letter of
Transmittal against such participant. THE METHOD OF DELIVERY OF OLD DEBENTURES,
LETTERS OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS IS AT THE ELECTION AND
RISK OF THE HOLDERS. IF SUCH DELIVERY IS BY MAIL, IT IS RECOMMENDED THAT
REGISTERED MAIL, PROPERLY INSURED, WITH RETURN RECEIPT REQUESTED, BE USED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ASSURE TIMELY DELIVERY. NO
LETTERS OF TRANSMITTAL OR OLD DEBENTURES SHOULD BE SENT TO THE COMPANY.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the case
may be, must be guaranteed unless the Old Debentures surrendered for exchange
pursuant thereto are tendered (i) by a Holder of the Old Debentures who has not
completed the box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal or (ii) for the account of an
Eligible Institution (as defined below). In the event that signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, are
required to be guaranteed, such guarantees must be by a firm which is a member
of a registered national securities exchange or a member of the National
Association of Securities Dealers, Inc. or by a commercial bank or trust company
having an office or correspondent in the United States (collectively, "Eligible
Institutions"). If Old Debentures are registered in the name of a person other
than a signer of the Letter of Transmittal, the Old Debentures surrendered for
exchange must be endorsed by, or be accompanied by a written instrument or
instruments of transfer or exchange, in satisfactory form as determined by
Holdings in its sole discretion, duly executed by the registered owner with the
signature thereon guaranteed by an Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Old Debentures tendered for exchange will be
determined by Holdings in its sole discretion, which determination shall be
final and binding. Holdings reserves the absolute right to reject any and all
tenders of any particular Old Debentures not properly tendered or to not accept
any particular Old Debentures which acceptance might, in the judgment of
Holdings or their counsel, be unlawful. Holdings also reserves the absolute
right to waive any defects or irregularities or conditions of the Exchange Offer
as to any particular Old Debentures either before or after the Expiration Date
(including the right to waive the ineligibility of any Holder who seeks to
tender Old Debentures in the Exchange Offer). The interpretation of the terms
and conditions of the Exchange Offer as to any particular Old Debenture either
before or after the Expiration Date (including the Letter of Transmittal and the
instructions thereto) by Holdings shall be final and binding on all parties.
Unless waived, any defects or irregularities in connection with tenders of
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Old Debentures for exchange must be cured within such reasonable period of time
as Holdings shall determine. Neither Holdings, the Exchange Agent nor any other
person shall be under any duty to give notification of any defect or
irregularity with respect to any tender of Old Debentures for exchange, nor
shall any of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than the
registered Holder or Holders of Old Debentures, such Old Debentures must be
endorsed or accompanied by powers of attorney, in either case signed exactly as
the name or names of the registered Holder or Holders that appear on the Old
Debentures.
If the Letter of Transmittal or any Old Debentures or powers of attorneys
are signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
Holdings, proper evidence satisfactory to Holdings of their authority to so act
must be submitted with the Letter of Transmittal.
By tendering, each Holder will represent to Holdings that, among other
things, the New Debentures acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such New
Debentures, whether or not such person is the Holder and that neither the Holder
nor such other person has any arrangement or understanding with any person to
participate in the distribution of the New Debentures. If any Holder or any such
other person is an "affiliate", as defined under Rule 405 of the Securities Act,
of Holdings and is engaged in or intends to engage in or has an arrangement or
understanding with any person to participate in a distribution of such New
Debentures to be acquired pursuant to the Exchange Offer, then such Holder or
any such other person (i) could not rely on the applicable interpretations of
the Staff and (ii) must comply with the registration and prospectus delivery
requirements of the Securities Act in connection with any resale transaction.
Each broker-dealer that receives New Debentures for its own account in exchange
for Old Debentures, where such Old Debentures were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver this Prospectus in connection
with any resale of such New Debentures. See "Plan of Distribution." The Letter
of Transmittal states that by so acknowledging and by delivering this
Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
ACCEPTANCE OF OLD DEBENTURES FOR EXCHANGE; DELIVERY OF NEW DEBENTURES
Upon satisfaction of all of the conditions to the Exchange Offer, Holdings
will accept, promptly after the Expiration Date, all Old Debentures properly
tendered and will issue the New Debentures promptly after acceptance of the Old
Debentures. See "--Certain Conditions to the Exchange Offer" below. For purposes
of the Exchange Offer, Holdings shall be deemed to have accepted properly
tendered Old Debentures for exchange when, as and if Holdings has given oral
(promptly confirmed in writing) or written notice thereof to the Exchange Agent.
For each Old Debenture accepted for exchange, the Holder of such Old
Debenture will receive a New Debenture having a principal amount equal to that
of the surrendered Old Debenture. The New Debentures will accrete in value from
May 22, 1998. Old Debentures accepted for exchange will cease to accrete in
value from and after the date of consummation of the Exchange Offer. Pursuant to
the Registration Rights Agreement, certain Liquidated Damages are required to be
paid to Holders of Old Debentures under certain circumstances relating to the
timing of the Exchange Offer and to other registration requirements contained
therein. Holders of Old Debentures, who tender such Old Debentures in the
Exchange Offer agree to waive any accrued but unpaid Liquidated Damages on such
Old Debentures. An amount equal to the amount of accrued and unpaid Liquidated
Damages on Old Debentures tendered in the Exchange Offer shall be payable, on
such first interest payment date, to registered holders of New Debentures, on
the record date for the first interest payment following the consummation of the
Exchange Offer.
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In all cases, issuance of New Debentures for Old Debentures that are
accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of (i) certificates for such Old Debentures
or a timely Book-Entry Confirmation of such Old Debentures into the Exchange
Agent's account at the Book-Entry Transfer Facility, (ii) a properly completed
and duly executed Letter of Transmittal or an Agent's Message in lieu thereof
and (iii) all other required documents. If any tendered Old Debentures are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Old Debentures are submitted for a greater principal amount than the
Holder desires to exchange, such unaccepted or non-exchanged Old Debentures will
be returned without expense to the tendering Holder thereof (or, in the case of
Old Debentures tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry procedures
described below, such non-exchanged Old Debentures will be credited to an
account maintained with such Book-Entry Transfer Facility) as promptly as
practicable after the expiration or termination of the Exchange Offer.
BOOK-ENTRY TRANSFERS
The Exchange Agent will make a request to establish an account with respect
to the Old Debentures at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer Facility
systems must make book-entry delivery of Old Debentures by causing the
Book-Entry Transfer Facility to transfer such Old Debentures into the Exchange
Agent's accounts at the Book-Entry Transfer Facility in accordance with such
Book-Entry Transfer Facility's Automated Tender Offer Program ("ATOP")
procedures for transfer. Such participant using ATOP should transmit its
acceptance to the Book-Entry Transfer Facility on or prior to the Expiration
Date or comply with the guaranteed delivery procedures described below. The
Book-Entry Transfer Facility will verify such acceptance, execute a book-entry
transfer of the tendered Old Debentures into the Exchange Agent's account at the
Book-Entry Transfer Facility and then send to the Exchange Agent confirmation of
such book-entry transfer, including an Agent's Message confirming that the
Book-Entry Transfer Facility has received an express acknowledgment from such
participant that such participant has received and agrees to be bound by the
Letter of Transmittal and that Holdings may enforce the Letter of Transmittal
against such participant. However, although delivery of Old Debentures may be
effected through book-entry transfer at the Book-Entry Transfer Facility, an
Agent's Message and any other required documents, must, in any case, be
transmitted to and received by the Exchange Agent at the address set forth below
under "--Exchange Agent" on or prior to the Expiration Date or the guaranteed
delivery procedures described below must be complied with.
GUARANTEED DELIVERY PROCEDURES
If a Holder of the Old Debentures desires to tender such Old Debentures and
the Old Debentures are not immediately available, or time will not permit such
Holders' Old Debentures or other required documents to reach the Exchange Agent
before the Expiration Date, or the procedure for book-entry transfer cannot be
completed on a timely basis, a tender may be effected if (i) the tender is made
through an Eligible Institution, (ii) prior to the Expiration Date, the Exchange
Agent received from such Eligible Institution a Notice of Guaranteed Delivery,
substantially in the form provided by Holdings (by telegram, telex, facsimile
transmission, mail or hand delivery), setting forth the name and address of the
Holder of the Old Debentures and the amount of Old Debentures tendered, stating
that the tender is being made thereby and guaranteeing that within five New York
Stock Exchange ("NYSE") trading days after the date of execution of the Notice
of Guaranteed Delivery, the certificates for all physically tendered Old
Debentures, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, together with a properly completed and duly executed appropriate
Letter of Transmittal (or facsimile thereof or Agent's Message in lieu thereof)
with any required signature guarantees and any other documents required by the
Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, and (iii) the certificates for all physically tendered Old
Debentures, in proper form for transfer, or a Book-Entry Confirmation, as the
case may be, together with a properly completed and duly executed appropriate
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Letter of Transmittal (or facsimile thereof or Agent's Message in lieu thereof)
with any required signature guarantees and all other documents required by the
Letter of Transmittal, are received by the Exchange Agent within five NYSE
trading days after the date of execution of the Notice of Guaranteed Delivery.
WITHDRAWAL RIGHTS
Tenders of Old Debentures may be withdrawn at any time prior to 5:00 p.m.,
New York City time, on the Expiration Date. For a withdrawal to be effective, a
written notice of withdrawal must be received by the Exchange Agent at one of
the addresses set forth below under "--Exchange Agent." Any such notice of
withdrawal must (i) specify the name of the person having tendered the Old
Debentures to be withdrawn (ii) identify the Old Debentures to be withdrawn
(including the principal amount of such Old Debentures), and (iii) if
certificates for Old Debentures have been transmitted, specify the name in which
such Old Debentures are registered, if different from that of the withdrawing
Holder. If certificates for Old Debentures have been delivered or otherwise
identified to the Exchange Agent, then, prior to the release of such
certificates the withdrawing Holder must also submit the serial numbers of the
particular certificates to be withdrawn and a signed notice of withdrawal with
signatures guaranteed by an Eligible Institution unless such Holder is an
Eligible Institution. If Old Debentures have been tendered pursuant to the
procedure for book-entry transfer described above, any notice of withdrawal must
specify the name and number of the account at the Book-Entry Transfer Facility
to be credited with the withdrawn Old Debentures and otherwise comply with the
procedures of such facility. All questions as to the validity, form and
eligibility (including time of receipt) of such notices will be determined by
Holdings, whose determination shall be final and binding on all parties. Any Old
Debentures so withdrawn will be deemed not to have been validly tendered for
exchange for purposes of the Exchange Offer. Any Old Debentures which have been
tendered for exchange but which are not exchanged for any reason will be
returned to the Holder thereof without cost to such Holder (or, in the case of
Old Debentures tendered by book-entry transfer into the Exchange Agent's account
at the Book-Entry Transfer Facility pursuant to the book-entry transfer
procedures described above, such Old Debentures will be credited to an account
maintained with such Book-Entry Transfer Facility for the Old Debentures), as
soon as practicable after withdrawal, rejection of tender or termination of the
Exchange Offer. Properly withdrawn Old Debentures may be retendered by following
one of the procedures described under "--Procedures for Tendering Old
Debentures" above at any time on or prior to 5:00 p.m., New York City time, on
the Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, Holdings shall
not be required to accept for exchange, or to issue New Debentures in exchange
for, any Old Debentures and may terminate or amend the Exchange Offer, if at any
time before the acceptance of such Old Debentures, the Exchange Offer violates
any applicable law or regulation or interpretation of the Staff.
The foregoing conditions are for the sole benefit of Holdings and may be
asserted by Holdings regardless of the circumstances giving rise to any such
condition or may be waived by Holdings in whole or in part at any time and from
time to time in its reasonable discretion. The failure by Holdings at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, Holdings will not accept for exchange any Old Debentures
tendered, and no New Debentures will be issued in exchange for any such Old
Debentures, if at such time any stop order shall be threatened or in effect with
respect to the Registration Statement of which this Prospectus constitutes a
part or the qualification of the Indenture under the Trust Indenture Act of
1939, as amended.
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EXCHANGE AGENT
State Street Bank and Trust Company of California, N.A. has been appointed
as the Exchange Agent for the Exchange Offer. All executed Letters of
Transmittal should be directed to the Exchange Agent at the address set forth
below. Questions and requests for assistance, requests for additional copies of
this Prospectus or of the Letter of Transmittal and requests for Notices of
Guaranteed Delivery should be directed to the Exchange Agent addressed as
follows:
Delivery to: State Street Bank and Trust Company of California, N.A.,
As Exchange Agent
c/o State Street Bank and Trust Company
<TABLE>
<CAPTION>
BY HAND: BY MAIL:
<S> <C>
2 International Place 2 International Place
Boston, MA 02110 Boston, MA 02110
Attn: Kellie Mullen Attn: Kellie Mullen
BY OVERNIGHT COURIER: BY FACSIMILE:
2 International Place (617) 664-5290
Boston, MA 02110 Attn: Kellie Mullen
Attn: Kellie Mullen Telephone: (617) 664-5587
</TABLE>
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF SUCH LETTER OF TRANSMITTAL VIA FACSIMILE OTHER THAN AS
SET FORTH ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF
TRANSMITTAL.
FEES AND EXPENSES
Holdings will not make any payment to brokers, dealers, or others soliciting
acceptances of the Exchange Offer except for reimbursement of mailing expenses.
The estimated cash expenses to be incurred in connection with the Exchange
Offer will be paid by Holdings and are estimated in the aggregate to be
approximately $300,000.
TRANSFER TAXES
Holders who tender their Old Debentures for exchange will be obligated to
pay any transfer taxes in connection with such exchange, as well as any other
sale or disposition of the Old Debentures. Holders who instruct Holdings to
register New Debentures in the name of, or request that Old Debentures not
tendered or not accepted in the Exchange Offer be returned to, a person other
than the registered tendering Holder will be responsible for the payment of any
applicable transfer tax thereon.
CONSEQUENCES OF NOT EXCHANGING OLD DEBENTURES
Holders of Old Debentures who do not exchange their Old Debentures for New
Debentures pursuant to the Exchange Offer will continue to be subject to the
provisions in the Indenture regarding transfer and exchange of the Old
Debentures and the restrictions on transfer of such Old Debentures as set forth
in the legend thereon as a consequence of the issuance of the Old Debentures
pursuant to exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Debentures may not be offered or sold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws.
Holdings does not currently anticipate that it will register any Old Debentures
which remain outstanding after consummation of the Exchange Offer under the
Securities Act (subject to certain limited exceptions, if applicable). To the
extent that Old Debentures are not tendered
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and accepted in the Exchange Offer, a holder's ability to sell such untendered
Old Debentures could be adversely affected.
Holders of the New Debentures and any Old Debentures which remain
outstanding after consummation of the Exchange Offer will vote together as a
single class for purposes of determining whether holders of the requisite
percentage thereof have taken certain actions or exercised certain rights under
the Indenture.
Upon consummation of the Exchange Offer, Holders of Old Debentures will not
be entitled to any Liquidated Damages or any further registration rights under
the Registration Rights Agreement, except under limited circumstances. See
"Description of Debentures--Registration Rights; Liquidated Damages."
CONSEQUENCES OF EXCHANGING OLD DEBENTURES
Based on interpretations by the Staff, as set forth in no-action letters
issued to third parties, Holdings believes that New Debentures issued pursuant
to the Exchange Offer in exchange for Old Debentures may be offered for resale,
resold or otherwise transferred by Holders thereof (other than any such Holder
which is an "affiliate" of Holdings within the meaning of Rule 405 under the
Securities Act) without compliance with the registration and prospectus delivery
requirements of the Securities Act, provided that such New Debentures are
acquired in the ordinary course of such Holder's business and such Holder has no
arrangement or understanding with any person to participate in the distribution
of such New Debentures. However, the SEC has not considered the Exchange Offer
in the context of a no-action letter and there can be no assurance that the
Staff would make a similar determination with respect to the Exchange Offer as
in such other circumstances. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of such New Debentures and has no arrangement or understanding to
participate in a distribution of New Debentures. If any Holder is an affiliate
of Holdings and is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the New Debentures to be
acquired pursuant to the Exchange Offer, such Holder (i) could not rely on the
applicable interpretations of the Staff and (ii) must comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. Each broker-dealer that receives New
Debentures for its own account in exchange for Old Debentures must acknowledge
that such Old Debentures were acquired by such broker-dealer as a result of
market-making activities or other trading activities and that it will deliver
this Prospectus in connection with any resale of such New Debentures. See "Plan
of Distribution." In addition, to comply with the securities laws of certain
jurisdictions (including any jurisdiction outside the United States), the New
Debentures may not be offered or sold unless they have been registered or
qualified for sale in such jurisdiction or an exemption from registration or
qualification is available and is complied with. Holdings has agreed, pursuant
to the Registration Rights Agreement, subject to certain limitations specified
therein, to register or qualify the New Debentures for offer or sale under all
applicable state or Blue Sky securities laws by the time the Registration
Statement (of which this Prospectus forms a part) is declared effective by the
SEC.
44
<PAGE>
BUSINESS
INTRODUCTION AND BACKGROUND
Based upon 1996 industry statistics, the Company is the largest producer of
CPC in the world. Anode grade CPC is the principal raw material used in the
production of carbon anodes for use in aluminum smelting, and is used by every
producer of primary aluminum in the world. Anode grade CPC sales represented
approximately 81.9% of the Company's total 1997 sales. The Company believes that
it has approximately a 23.1% market share of U.S. anode grade CPC sales and a
15.7% market share of Western World anode grade CPC 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 at its
three facilities located in Port Arthur, Texas, Enid, Oklahoma and La Plata,
Argentina. The Company's annual CPC production capacity is 1.6 million tons,
including a 220,000 ton increase as a result of its completion of the New La
Plata Kiln in May 1998. During the twelve months ended June 30, 1998, the
Company sold 1.5 million tons of CPC, had net sales of $237.7 million and had
EBITDA of $63.7 million.
CPC is produced from RPC utilizing a high-temperature, rotary-kiln process
developed by the Company in the 1930s. RPC is a by-product of the petroleum
refining process and typically represents an insignificant portion of overall
refinery revenues. The alternative use for RPC, as a fuel source, generates a
significantly lower value to refiners than the value they receive in selling RPC
for use in the production of CPC. As a result, CPC producers are able to obtain
lower purchase prices for RPC in times of declining CPC prices, enabling CPC
producers to earn a relatively stable profit spread even in periods of CPC price
declines.
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 to aluminum
metal. In this electrochemical aluminum smelting process, the carbon anodes, and
hence the CPC, are consumed.
There are no known economic substitutes for anode grade CPC in the
manufacture of carbon anodes, nor have there been since anode grade CPC replaced
coal for this application in the 1930s. The Company believes that approximately
0.4 pounds of anode grade CPC are consumed for every one pound of primary
aluminum produced, and that such consumption ratio has been substantially
constant over the past ten years. Worldwide demand for anode grade CPC is
directly tied to the level of global production of primary aluminum.
Industrial grade CPC is used 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. Demand for industrial grade CPC
has grown largely due to the ongoing replacement by titanium dioxide producers
of the sulfate manufacturing process that does not utilize CPC with the
environmentally preferable chloride process that does utilize CPC. The Company's
participation in the industrial CPC sector diversifies its product offerings and
reduces its dependence on aluminum customers.
The Company believes that current anode grade CPC market fundamentals are
attractive. Western World primary aluminum production increased approximately
34.7% to 17.8 million tons in 1997 from 13.2 million tons in 1986, while anode
grade CPC production capacity did not increase significantly. Furthermore,
industry sources project continued strong growth in primary aluminum production
over the next several years. As a result, CPC industry operating rates are
currently at historically high levels. The Company has been operating at full
capacity since 1995 and believes that other major U.S. calciners are also
operating at or near full capacity.
45
<PAGE>
The Company believes that the calcining industry will continue to operate at
or near full capacity, as anticipated capacity expansions in the anode grade CPC
market are expected to provide less additional capacity over the next several
years than required to meet aluminum demand projected by industry sources.
Further, the Company believes there are significant barriers to entry to the CPC
production industry. The Company estimates that a greenfield, minimum efficient
scale, stand-alone 200,000 ton calcining facility would, depending on location,
cost in excess of $50 million and take approximately three years to permit and
construct. Further impediments to the creation of new production capacity
include the difficulty in securing consistent sources of RPC supply and the
reluctance of aluminum smelters to change CPC supply sources.
The current high industry operating rates have led to anode grade CPC
pricing becoming less influenced by aluminum pricing than has been the case
historically. Instead, anode grade CPC pricing has become more influenced by the
demand generated from the volume of aluminum production. Accordingly, the
average price per ton realized by the Company for anode grade CPC increased by
over 60% from 1994 to 1997, while aluminum prices as quoted on the London Metal
Exchange increased only 9%.
The Company's management team is among the most experienced in the industry,
with an average tenure with the Company of over 22 years. James D. McKenzie, the
Company's Chief Executive Officer and President, has been with the Company for
over 27 years; A. Frank Baca, Senior Vice President of Operations and
Administration, 31 years; James W. Betts, Vice President of Raw Materials, 30
years; Robert C. Dickie, Vice President of Sales, 9 years; and Adele Robles,
Controller, 17 years.
The Company was established in 1919 as Great Lakes Coal & Coke Co. During
the 1920s and 1930s the Company began to develop markets for RPC and pioneered
the first techniques in calcining petroleum coke for use in the aluminum
industry. In 1936, the Company began operation of the world's first commercial
calcining plant in Port Arthur, Texas. The Company has since maintained its
position as the largest producer of CPC. In 1985, the Company's predecessor,
also known as Great Lakes Carbon Corporation ("Old GLC"), was acquired by HII
from the descendants of Old GLC's founders. In 1992, the CPC operations of Old
GLC were reincorporated as the Company while 100% of the stock of Old GLC,
including its graphite operations, was sold by HII to Sigri GmbH. In 1995, the
net proceeds of the issuance and sale of the 10% Notes were distributed by the
Company as a dividend to HII, all indebtedness of HII owing to the Company was
cancelled and 100% of the common stock of the Company was distributed on a pro
rata basis to the holders of the common stock of HII. On May 22, 1998 the
Company was acquired by AIP in the Acquisition Transactions. The address of the
Company's principal executive office is 551 Fifth Avenue, Suite 3600, New York,
New York 10176 and the telephone number is (212) 370-5770.
BUSINESS STRATEGY
The Company's management team plans to sustain and build upon GLC's success
by focusing on the following strategic initiatives:
- MAINTAIN STRONG CUSTOMER RELATIONSHIPS--Over its 60-year history in CPC
production, the Company has forged customer relationships spanning several
decades with many of the world's largest aluminum producers, including
Alcoa, Alusaf and Alusuisse. Collectively, Alcoa, Alusaf and Alusuisse
contributed 46.7% of the aggregate total sales of the Company in fiscal
year 1997. The Company sells CPC to certain of its customers pursuant to
long term contracts; of the Company's top five customer relationships,
measured by annual net sales, four are subject to long term contracts,
including Alcoa, Alusaf, Alusuisse and Aluminum Bahrain B.S.C. The Company
and Alcoa have entered into a multi-year requirements contract (with a
cap) for sales of CPC, at prices calculated in accordance with a formula
set forth in such agreement. The Company has developed and expects to
maintain these relationships by virtue of its industry leadership
position, its technical support and customer service and its superior
ability to produce anode grade CPC to customized specifications. Although
CPC represents only 5% to 7% of an aluminum smelter's total costs, the
46
<PAGE>
quality and consistency of CPC are critical to a smelter. Through its
comprehensive "Total Quality Management" program, the Company was the
first domestic calciner to attain ISO 9002 registration for its ability to
meet internationally recognized quality and process standards. All of the
Company's facilities are ISO 9002 registered.
- MAINTAIN SUPERIOR ACCESS TO RAW MATERIALS--The Company's long history and
leading market position in CPC production has led to strong long-term
relationships with numerous RPC suppliers, including Exxon, Conoco,
Chevron, YPF and Marathon. The Company has entered into multi-year
contracts with each of Exxon, YPF and Conoco providing for the sale to the
Company of a material portion of its supply of RPC at unspecified prices
or at prices calculated in accordance with a formula set forth in each
such agreement. The Company's access to RPC supply from 18 refineries
worldwide provides it with a competitive advantage in cost-effectively
blending various grades of RPC to produce CPC to exact customer
specifications.
- OPERATE DIVERSE, STATE-OF-THE-ART FACILITIES--The Company strives to
maintain geographically diverse, state-of-the-art production facilities
that provide a maximum level of operating flexibility. The Port Arthur,
Texas plant (680,000 tons per year) provides the Company with access to
RPC received by rail, barge or ship from the U.S. Gulf Coast and
international oil refiners and allows the Company to serve international
CPC markets. The Enid, Oklahoma plant (490,000 tons per year) is
strategically located to serve the domestic CPC markets and to access RPC
from refineries in the mid-continent region. The plant in La Plata,
Argentina (440,000 tons per year) provides the Company with access to high
quality RPC from a nearby oil refinery and also positions the Company well
to serve international CPC markets. The Company recently completed
construction of the New La Plata Kiln in May 1998, which increased the
facility's previous production capacity from 220,000 to 440,000 tons per
year.
- MAINTAIN STRONG PRESENCE IN INDUSTRIAL GRADE CPC--Since 1990, the Company
has pursued a strategy of diversifying its product mix by developing and
expanding its presence in the market for industrial grade CPC. GLC has
increased its net sales of industrial grade CPC by approximately 92.7%
since 1990 by focusing its industrial grade sales effort and investing in
value-added operations at its production facilities. Sales of industrial
grade CPC reduce the Company's dependence on aluminum customers.
- PURSUE SELECTIVE EXPANSION OPPORTUNITIES--The Company may explore
acquisition and expansion opportunities from time to time as warranted by
market conditions. Strong market conditions, together with an excellent
source of RPC supply, prompted the Company to expand its Argentinean
facility. The Company is currently evaluating several additional new
opportunities in the petroleum coke industry.
INDUSTRY OVERVIEW
CPC DEMAND
CPC is sold primarily to the aluminum industry as the principal raw material
used in the manufacture of carbon anodes. Carbon anode manufacturers, which are
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 finished, hardened carbon anodes. The carbon anodes are
consumed in the electrochemical smelting process. Although CPC represents only
5% to 7% of an aluminum smelter's total costs, 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.
47
<PAGE>
Western World production of primary aluminum, the implied demand for anode
grade CPC (calculated based on a constant 0.4 pounds of CPC per pound of
aluminum) and annual growth in production and implied demand are set forth in
the following table:
<TABLE>
<CAPTION>
IMPLIED ANODE GRADE ANNUAL GROWTH IN
CPC DEMAND(2) PRODUCTION AND
--------------------- IMPLIED DEMAND
PRIMARY ALUMINUM -------------------
PRODUCTION(1) (000 TONS)
------------------- (%)
(000 TONS)
<S> <C> <C> <C>
1986.............................. 13,217 5,287 0.0
1987.............................. 13,898 5,559 5.1
1988.............................. 14,882 5,953 7.1
1989.............................. 15,501 6,200 4.2
1990.............................. 15,637 6,255 0.9
1991.............................. 16,290 6,516 4.2
1992.............................. 16,273 6,509 (0.1)
1993.............................. 16,517 6,607 1.5
1994.............................. 15,847 6,339 (4.1)
1995.............................. 16,149 6,459 1.9
1996.............................. 17,035 6,814 5.5
1997.............................. 17,802 7,121 4.5
</TABLE>
- ------------------------
(1) Source: Donaldson, Lufkin & Jenrette Securities Corporation.
(2) Calculated based on a constant 0.4 pounds of CPC per pound of aluminum.
Historically, worldwide production of primary aluminum has increased
commensurately with general economic growth, and demand for anode grade CPC has
increased accordingly. From 1986 to 1997, Western World primary aluminum
production increased by 4.6 million tons, or 34.7%, resulting in a 1.8 million
ton increase in demand for anode grade CPC to approximately 7.1 million tons.
The production of primary aluminum, and the resulting implied demand for anode
grade CPC, is geographically diverse, with less than 25% of Western World
aluminum production occurring in the United States.
The steady growth in primary aluminum production experienced an interruption
during the period from 1991 to 1994. Additions to Western World aluminum smelter
capacity in the early 1990s, slow economic growth in major aluminum consuming
countries during 1992 and 1993 and a significant decline in the consumption of
aluminum in the countries which comprised the former Soviet Union which resulted
in substantial exports of aluminum from such countries after 1990, caused an
oversupply of aluminum and a corresponding increase in primary aluminum
inventories in the Western World.
In early 1994, government officials from the European Union, the United
States, Canada, Norway, Australia and the Russian Federation met in a
multilateral conference to discuss the excess global supply of primary aluminum.
The participants ratified a trade agreement in the form of a Memorandum of
Understanding ("MOU"), which specified reductions in primary aluminum production
in the participating countries. Primarily as a result of these MOU reductions,
1994 Western World annual aluminum production was 15.8 million tons,
approximately 670,000 tons below 1993 production levels. Therefore, during 1994,
demand for anode grade CPC declined to 6.3 million tons. Since that time,
however, anode grade CPC demand has rebounded sharply growing at a compounded
annual rate of 4.0% to 7.1 million tons of demand in 1997.
CPC is also used in a number of other (non-aluminum) industrial
applications. This industrial grade CPC is used 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 Company
estimates that these applications consumed approximately 2.0 million tons of CPC
in 1997.
48
<PAGE>
Titanium dioxide is a widely used brilliant white pigment, the primary
applications for which are in paints, plastics and paper. Demand for titanium
dioxide is dependent upon the construction and automotive markets. CPC is used
as an energy and carbon source in the production of titanium dioxide from
titanium-bearing ores using the chloride process. The primary factor increasing
the usage of CPC by the titanium dioxide industry is the continuing trend of
replacing the sulfate manufacturing process that does not utilize CPC with the
environmentally preferable chloride process that does utilize CPC. As a result
of this trend, the Company believes that demand for industrial grade CPC from
international titanium dioxide markets is growing.
Industrial grade CPC is also used as a recarburizer (carbon additive) in the
production of steel and foundry products. Demand for this use of CPC depends
upon steel production levels and this market is considered to be mature.
Industrial grade CPC is also used as a carbon source in certain chemical
processes and in the production of plastics.
CPC SUPPLY
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. As a by-product of
the oil refining process, RPC constitutes 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.
CPC quality, which is extremely important to aluminum smelters, is 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. Most of the RPC that is not
suitable for calcining is sold at much lower prices strictly for its fuel value.
Because a substantial portion of worldwide petroleum refining capacity is
based domestically, the United States has a majority of worldwide CPC production
capacity. Domestic anode grade CPC production is sufficient to satisfy
approximately 50% of worldwide anode grade CPC demand. GLC, along with most
other domestic CPC producers, supplies CPC to primary aluminum producers both
domestically and internationally (including smelters in the countries which
comprised the former Soviet Union). Growth of Western World CPC production
capacity has been significantly slower than the growth in demand since 1986.
Since 1995, the Company has been operating at full capacity and believes that
its primary domestic competitors have been doing so as well.
Market pricing for anode grade CPC is based on a number of factors. Anode
grade CPC prices have been affected by worldwide aluminum production and
aluminum prices, as well as by the availability of anode grade RPC required to
produce CPC. Historically, anode grade CPC pricing followed aluminum pricing
with an approximate one-year lag. However, as a result of the current, higher
industry operating rates, anode grade CPC pricing has become less tied to
aluminum pricing and more impacted by the growth in volume of aluminum
production relative to CPC production capacity.
49
<PAGE>
MANUFACTURING OPERATIONS
As shown in the chart below, the Company operates rotary kilns to calcine
RPC into both anode grade and industrial grade CPC. The calcining process
essentially drives off moisture, impurities and volatile matter from the RPC at
high temperatures, resulting in a purer form of carbon in the form of CPC.
[LOGO]
Anode grade 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 raw cokes specifically to meet a
customer's required chemical and physical properties. After blending, the RPC 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 countercurrent to the heat produced by burning natural gas or oil at
the lower, firing end of the kiln. Kiln temperatures range from 2,200 to 2,500
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 ship. In the case of certain
industrial grade products, the CPC is crushed and screened to meet proper sizing
requirements and packaged for shipment.
Since CPC quality is very important to end-users, the Company has invested
in laboratory facilities and has instituted Total Quality Management and
statistical process control procedures to ensure that its CPC meets customer
specifications. The Company was the first U.S. producer of calcined coke to
attain ISO 9002 registration, which is a rating determined by the International
Standards Organization with respect to the Company's ability to meet recognized
quality and process standards. All of the Company's facilities are ISO 9002
registered.
FACILITIES
The Company currently has the capacity to produce approximately 1.6 million
tons of CPC per year at its three facilities in Port Arthur, Texas, Enid,
Oklahoma and La Plata, Argentina, including the Company's recent expansion of
its capacity through the construction of the New La Plata Kiln. GLC's facilities
operate continuously, except during periods of downtime as part of the regular
maintenance program to
50
<PAGE>
extend kiln life or periodic upgrades to maintain state-of-the-art technology.
The Company also owns a distribution center in Pond Creek, Oklahoma.
The plant at Port Arthur has the capacity to produce 680,000 tons per year
of anode grade and industrial grade CPC. The Port Arthur plant commenced
operations in 1936, and the newest and largest of Port Arthur's four kilns was
installed in 1979. Automated crushing and screening facilities were added to the
plant in 1993 to enable the Company to serve export markets for industrial grade
CPC. Port Arthur is also the site of the Company's primary laboratory and
testing facility. Located on the U.S. Gulf Coast, the Port Arthur facility is
ideally located to receive raw petroleum coke from Gulf Coast and international
oil refiners and serves international anode and industrial grade CPC markets.
Port Arthur has substantial CPC storage capacity and the capability to both
receive RPC and ship CPC by truck, rail, barge or ship. The Company operates the
Port Arthur plant with a nonunion workforce.
The Company's Port Arthur plant site provides ample room to store a wide
range of RPC for blending to customer specifications. The 115-acre property on
which the plant is located is leased by the Company under a long-term lease,
which was originally executed in the 1930s and the most recent renewal of which
expires in January 2010. Under a waste heat recovery arrangement the Company
receives revenue from its delivery of flue gas from the Port Arthur kilns to a
waste heat recovery facility that is owned by a third party, which is accounted
for as a reduction of cost of goods sold.
The plant at Enid has the capacity to produce 490,000 tons per year of anode
grade and industrial grade CPC. Enid's three kilns were built in the late 1960s
and early 1970s. In 1992, the Company modernized and automated its crushing
facilities at Enid to more effectively serve the domestic industrial grade CPC
market. The Enid plant acquires its RPC primarily from mid-continent oil
refineries and essentially serves the domestic anode grade and industrial grade
CPC markets. The Enid plant has the capability to receive and ship material by
truck or rail and operates with a union workforce. The Enid plant is located on
320 acres of property owned by the Company.
The Company's La Plata facility, which is owned by Copetro, was constructed
in 1982 and had a single kiln with the capacity to produce 220,000 tons per year
of anode grade CPC. Copetro recently completed construction of the New La Plata
Kiln, with an annual capacity of 220,000 tons of anode grade CPC, at an
estimated cost of approximately $22 million. The Company anticipates that the
New La Plata Kiln, which was completed in May 1998, will double the capacity of
the La Plata facility. The plant is located on 30 acres of land at the port of
La Plata, which provides the capability to serve South American and
international anode grade CPC markets via truck or ship. The La Plata location
is less than two miles from an oil refinery operated by YPF, which produces a
high-quality RPC. Certain employees of Copetro are members of a
government-sponsored union.
PRODUCTS AND MARKETS
GLC manufactures and markets two basic grades of CPC products: anode grade
and industrial grade. In 1997, for the third year in a row, aluminum production
increased primarily due to restarts of capacity that was idled in 1993 and 1994
and also due to expansion of existing smelting capacity. As a result of the
strong demand for CPC, the Company operated at effective capacity in 1997.
51
<PAGE>
The Company's sales volume and net sales in millions by product grade for
the three years ended December 31, 1997 are set forth in the following table.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------------------- --------------------
1995 1996 1997 1997
-------------------- -------------------- -------------------- --------------------
NET SALES TONS NET SALES TONS NET SALES TONS NET SALES TONS
--------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(IN MILLIONS)
Anode grade CPC........................ $ 147.9 1.19 $ 199.4 1.10 $ 189.9 1.12 $ 94.1 0.55
Industrial grade CPC................... 27.6 0.27 38.6 0.31 40.2 0.30 18.5 0.14
Non-CPC revenue........................ 3.2 0.02 4.7 0.04 1.8 0.02 1.0 0.01
<CAPTION>
1998
--------------------
NET SALES TONS
--------- ---------
<S> <C> <C>
Anode grade CPC........................ $ 100.7 0.61
Industrial grade CPC................... 17.7 0.12
Non-CPC revenue........................ 1.0 0.01
</TABLE>
ANODE GRADE CPC
GLC produces anode grade CPC for the worldwide primary aluminum industry by
calcining suitable anode grade RPC. Anode grade CPC is the raw material for
carbon anodes required for aluminum smelting. Anode grade CPC is approximately
97% pure carbon; however, anode grade CPC varies based on the content of sulfur
and other trace elements in the finished product as well as on its physical
properties. GLC produces a full range of anode grade CPC tailored to the
specific needs of its aluminum company customers and believes that it has the
capability to produce anode grade CPC to meet the specifications of any of the
aluminum smelters in the world.
INDUSTRIAL GRADE CPC
GLC produces industrial grade CPC for sale both domestically and
internationally to the titanium dioxide, ferrous metals (steel and foundry),
specialty materials and chemical industries. Industrial grade CPC is used by
titanium dioxide producers as an energy and carbon source. It is used by the
ferrous metals industry as a recarburizer, which is an additive used to increase
the carbon content of steel mill and foundry products. Industrial grade CPC also
is used as a carbon source in a variety of chemical processes, including as an
additive in the production of plastic. 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.
The Company has increased its net sales of industrial grade CPC by
approximately 92.7% since 1990. The Company has increased its market share by
focusing its sales efforts, increasing its sales staff and investing in
additional equipment at its production facilities.
FOREIGN OPERATIONS
The Company conducts significant foreign operations, primarily in South
America and particularly in Argentina. See Note 11 to the Consolidated Financial
Statements herein. Such operations are subject to certain risks. See "Risk
Factors--International Risks."
RAW MATERIALS AND SUPPLIERS
The Company purchases a range of RPC from a number of refineries with the
objective of using its blending capabilities to meet the specific quality
requirements of its customers at the lowest raw material cost. The Company
believes that there is sufficient supply of anode grade RPC available in the
world market to meet the needs of its operations.
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. Contracts
specify annual purchase quantities and quality specifications, and typically
provide for quarterly or semiannual price resetting based on either a previously
determined formula or a renegotiation. Generally, oil refineries supply RPC to
more than one calciner. The Company's La Plata facility has a long-term RPC
supply contract with YPF expiring in 2007.
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<PAGE>
This contract currently provides the Company with up to 550,000 tons per year of
RPC, which amount includes a recent increase of 250,000 upon the commencement of
the operation of the New La Plata Kiln.
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 organized by product grade, I.E.,
anode and industrial, with all selling activities handled by the Company's
direct sales staff. Internationally, GLC's direct sales staff is supplemented by
exclusive sales representatives based in the United Kingdom, Brazil, Australia
and Mexico. These representatives are involved in both anode grade and
industrial grade CPC sales.
The Company typically sells anode grade CPC under contracts with a term of
one or more years, although a small percentage is sold on a spot basis. Under a
typical sales contract, which specifies overall annual quantity as well as
detailed quality specifications, prices are reset either quarterly or
semiannually based on either a previously determined formula or a renegotiation.
CPC is shipped by the Company in bulk quantities to its customers via truck,
railcar, barge or ship. Export shipments are often in large quantities and can
range up to 25,000 tons. 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 1997, approximately 36.6% of the Company's net sales were to U.S.-based
customers and approximately 63.4% were to customers in international markets.
The Company's top five customers, each of which is a major worldwide aluminum
producer, represented approximately 62.2% of the Company's 1997 net sales.
During 1997, Alcoa and Alusaf accounted for 23.7% and 15.5%, respectively, of
the Company's net sales. Such producers have been significant customers of
Holdings for over 50 years and 20 years, respectively. The Company sells CPC to
certain of its customers pursuant to long term contracts. The Company and Alcoa
have entered into a multi-year requirements contract (with a cap) for sales of
CPC, at prices calculated in accordance with a formula set forth in such
agreement. In June 1998, Alcoa acquired Alumax, another long-standing customer
of the Company, which accounted for 6.4% of the net sales of the Company in
1997.
COMPETITION
The Company is the largest producer of CPC in the world and competes with
domestic and foreign calciners in a worldwide market with respect to both anode
and industrial grade CPC sales. Marketing of CPC to both anode and industrial
grade customers is based primarily on price and quality. Worldwide demand for
anode grade CPC is tied directly to the global production of primary aluminum.
Sales of industrial grade CPC are dependent on the particular demands of the
titanium dioxide, steel and foundry, and certain chemical markets.
GLC is one of five major domestic calciners of anode grade CPC. Two
calciners, GLC and Calciner Industries Inc., are independent. The other
calciners are Atlantic Richfield Company, whose petroleum refining operations
provide its raw material supply, Reynolds Metals Co., which uses some of its CPC
for internal consumption, and Venture Coke Company ("Venco"), which is 50% owned
by Conoco. GLC believes that its domestic calcining capacity is the largest of
these five companies, and GLC is the only one of the five to have an
international production facility. Currently, GLC's U.S. operations sell
approximately 23.1% of the anode grade CPC sold in the United States.
The Company believes that it is among the largest domestic producers of
industrial grade CPC. The Company competes primarily with Venco (which through
Conoco is an affiliate of E.I. duPont de Nemours & Company, the world's largest
producer of titanium dioxide) for sales to the titanium dioxide market and with
Unocal, Inc. (which sells primarily through third parties) for sales to the
recarburizer market. GLC produces and markets CPC directly to the recarburizer
market, competing primarily with resellers of CPC.
53
<PAGE>
EMPLOYEES
As of December 31, 1997, the Company employed 254 persons. The Company is a
party to collective bargaining agreements at two of its three facilities,
covering approximately one-third of its employees. The Company's collective
bargaining agreement with the International Association of Machinists and
Aerospace Workers covers hourly employees at the Enid, Oklahoma facility and
expires in 2001. Certain employees at the La Plata, Argentina facility are
covered by an annual labor contract with an Argentine government union. The Port
Arthur plant is operated with a nonunion workforce. Overall, the Company
believes that its relationship with its employees is satisfactory. However,
there can be no assurance that new labor agreements will be reached without a
strike.
ENVIRONMENTAL MATTERS
The Company's facilities and operations are subject to various federal,
state, local and foreign governmental laws and regulations with respect to the
protection of the environment, including regulations relating to air and water
quality. The Company believes that it possesses all of the permits required for
the conduct of its operations and that it is currently in material compliance
with all relevant environmental regulations. The Company spent approximately
$3.5 million on capital expenditures related to pollution control facilities in
1997 and anticipates spending approximately $3.5 million and $1.9 million for
such facilities in 1998 and 1999, respectively. Approximately half of the
environmental expenditures in 1997 and 1998 will be in conjunction with the
facility expansion at Copetro.
The Company's Port Arthur facility is currently operating under an Agreed
Final Judgment (the "Judgment") entered into on April 19, 1989 (as amended on
July 16, 1990, January 2, 1996 and October 1, 1996) between the Company and the
State of Texas. The Judgment specifies that the Company shall undertake certain
measures to enable the Company to comply with applicable particulate emission
limitations and enable the Company to monitor the opacity of its emissions. The
Judgment specifies stipulated penalties in the event that the Port Arthur
facility fails to meet the specified emission or opacity limits. The Company
believes that it is in material compliance with the Judgment. The Company has
had occasional exceedances of opacity limitations at the Port Arthur facility
and is reviewing its alternatives to maintain continuous compliance with such
limitations, the costs of which are not expected to have a material adverse
effect on the financial condition of the Company.
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 will be required to comply with new standards for air
emissions to be adopted by the EPA and state environmental agencies over the
next several years. In addition, the amendments to the Clean Air Act will result
in revisions to state implementation plans, which may necessitate the
installation of additional controls for certain of the Company's emission
sources. At this time, the Company cannot estimate when new standards will be
imposed by the EPA or relevant state agencies or what control technologies or
changes in processes the Company may be required to install or undertake in
order to achieve compliance with any new requirements. Based on information
currently available to it, the Company believes that compliance with such
regulations will not have a material adverse effect on the financial position or
results of operations of the Company.
See also "--Legal Proceedings."
LEGAL PROCEEDINGS
Copetro is a party to a number of legal proceedings arising from alleged
emissions from its La Plata facility. The claims in these proceedings include
damages for personal injury, emotional distress and property damage. In two
proceedings, four plaintiffs obtained judgments for emotional distress and
property damages totaling $118,000 and applicable interest of approximately
$190,000, plus court costs. Although these two judgments have been affirmed by
the provincial appellate courts, Copetro has sought an appeal in Argentine
federal Supreme Court for these matters. In another case involving one plaintiff
54
<PAGE>
arising out of the same general circumstances, a different court awarded
property damages of $5,000 plus applicable interest of approximately $6,000 plus
court costs. Two additional proceedings, involving 154 plaintiffs from 55
families and arising out of the same general circumstances, are in the early
stages of discovery. Copetro believes, on advice of its counsel Carderas,
Cassagne & Asociados, that it has substantial defenses to the allegations raised
by the plaintiffs and is conducting vigorous defenses in these proceedings. The
Company's management after discussion with its counsel Carderas, Cassagne &
Asociados, is of the opinion that the final disposition of these proceedings
will not have a material adverse effect on the financial condition of the
Company.
The Company is a party to other legal proceedings which are in various
stages of resolution. Management is of the opinion that the ultimate resolution
of these matters will not have a material adverse effect on the financial
condition of the Company.
55
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age as of July 15, 1998 and
position of each person who is expected to serve as director or executive
officer of Holdings following the Acquisition Transactions.
<TABLE>
<CAPTION>
NAME AGE POSITION
- -------------------------------------- --- --------------------------------------------------------------------
<S> <C> <C>
James D. McKenzie..................... 53 President and Chief Executive Officer, Director
A. Frank Baca......................... 54 Senior Vice President, Operations and Administration
Robert C. Dickie...................... 49 Vice President, Sales
James W. Betts........................ 60 Vice President, Raw Materials
Theodore C. Rogers.................... 63 Non-Executive Chairman of the Board, Director
W. Richard Bingham.................... 62 Director
Lawrence W. Ward, Jr.................. 45 Director
Kim A. Marvin......................... 36 Director
</TABLE>
Each of Holdings' directors and executive officers is 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 Holdings
since the Acquisition and 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 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
Holdings since the Acquisition and 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 Holdings since the Acquisition
and of the Company since September 1995 and was Director of Sales from 1992 to
August 1995. He held the position of Plant Manager of the 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 Holdings since the
Acquisition and of the Company since 1996. Since joining GLC in 1968, he has
held a variety of positions in the areas of sales and raw materials procurement.
Since 1992, he has been a director of Zoltek Companies, Inc.
Mr. Rogers is a Director, the Chairman of the Board and the Secretary of
American Industrial Partners Corporation. He co-founded AIP Management Co. and
has been a director and officer of AIP Management Co. since 1989. Mr. Rogers is
currently a director of Bucyrus International, Inc., Derby International, Easco
Corporation, RBX Corporation, Stanadyne Automotive Corp. and Sweetheart
Holdings, Inc.
Mr. Bingham 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 officer of AIP Management Co. since
1989. Mr. Bingham is also a director of Bucyrus International, Inc., Stanadyne
Automotive Corp., RBX Corporation, SF Holdings Inc. and Sweetheart Holdings,
Inc.
56
<PAGE>
Mr. Ward has been employed as a Principal by American Industrial Partners
Corporation since 1992. From 1989 to 1992, he was Vice President and Chief
Financial Officer of Plantronics, Inc., a telecommunications equipment company.
Mr. Ward is currently a director of Bucyrus International, Inc., Easco
Corporation, RBX Corporation, Stanadyne Automotive Corp. and Sweetheart
Holdings, Inc.
Mr. Marvin joined the San Francisco office of American Industrial Partners
as a Principal in 1997. From 1994 to 1997, Mr. Marvin was an associate in the
Mergers & Acquisitions Department of Goldman, Sachs & Co., where he was employed
since 1994. Mr. Marvin is a director of Bucyrus International Inc.
COMPENSATION OF DIRECTORS
Directors are not expected to receive compensation for their services as
directors.
COMPENSATION OF EXECUTIVE OFFICERS AND OTHER INFORMATION
The following table sets forth information concerning cash compensation paid
by the Company for each of the three years ended December 31, 1997 to the
Company's Chief Executive Officer and each of the three most highly compensated
executive officers of the Company. The Company does not have any noncash
compensation or stock appreciation rights plans.
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
--------------------------------- ALL OTHER
NAME AND POSITION YEAR SALARY BONUS(1) OTHER(2) COMPENSATION(3)
- ----------------------------------------------------- --------- ---------- ---------- --------- -----------------
<S> <C> <C> <C> <C> <C>
James D. McKenzie.................................... 1997 $ 250,008 $ 300,000 $ -- $ 4,750
President and Chief 1996 250,008 150,000 -- --
Executive Officer 1995 210,000 -- -- --
A. Frank Baca........................................ 1997 157,500 37,440 -- 4,725
Senior Vice President, 1996 150,000 17,524 7,134 --
Operations and 1995 120,936 8,686 320 --
Administration
Robert C. Dickie..................................... 1997 130,002 29,952 4,883 3,900
Vice President, Sales 1996 120,000 15,361 34,736 --
1995 106,008 7,893 25,263 --
James W. Betts....................................... 1997 112,500 26,208 33,817 3,375
Vice President, 1996 105,000 13,910 67,000 --
Raw Materials 1995 96,000 7,392 5,000 --
</TABLE>
- ------------------------
(1) The amounts shown in this column reflect payments under the Profit Sharing
Plan.
(2) The amounts shown in this column reflect the Company's payment of relocation
allowances and income tax reimbursement with respect to such relocation
allowances.
(3) The amounts shown in this column reflect the Company's contribution to the
named executive officer's 401(k) account.
PROFIT SHARING PLAN. The Company's practice has been to maintain a
profit-sharing plan which is established annually. Under the current plan, each
eligible employee receives profit-sharing distributions 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 Savings Plan is for salaried employees and one Savings Plan is
for employees covered by the collective bargaining agreement at the Enid 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 gross
base wages. The Company makes contributions to both of the Savings Plans of up
to 50% of each employee's contribution, but not greater than 3% of such
employee's salary.
57
<PAGE>
RETIREMENT PLANS. The Company currently maintains three retirement plans
for the benefit of its employees. One plan is for the benefit of hourly
employees, one is for the benefit of salaried employees (the "Salaried Plan")
and one is a nonqualified supplemental plan for the benefit of Mr. McKenzie (the
"SERP"). Each of the plans provides eligible employees with certain benefits at
retirement based on the employee's years of service and, in the case of the
Salaried Plan and the SERP, such employee's average salary. For purposes of the
foregoing, an employee's average salary is equal to 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. Mr. McKenzie is the only participant in the SERP and the
benefit payable to him upon retirement at age 65 is determined based upon his
full salary and years of service. The benefit payable upon retirement at age 65
to each of the other named executive officers is determined based upon each such
executive's salary (limited by the limitations imposed by Section 401(a)(17) of
the Code, currently $160,000) and years of service.
<TABLE>
<CAPTION>
YEARS OF SERVICE
-----------------------------------------------------
REMUNERATION 15 20 25 30 35
- ----------------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
$100,000........................... $ 23,229 $ 30,972 $ 38,715 $ 48,458 $ 54,201
$150,000........................... 36,354 48,472 60,590 72,708 84,826
$200,000........................... 49,479 65,972 82,465 98,958 115,451
$250,000........................... 62,604 83,472 104,304 125,208 146,076
</TABLE>
The compensation of participants used to calculate the retirement benefit
consists solely of annual base salary as disclosed in the Summary Compensation
Table. For the four individuals named above, the 1997 compensation used to
calculate the remuneration and the number of years of credited service are as
follows: Mr. McKenzie, $250,000, 26 years; Mr. Baca, $157,500, 26 years; Mr.
Dickie, $130,000, 8.5 years; and Mr. Betts, $112,500, 26 years.
LIMITATION ON DIRECTOR'S LIABILITY
Holdings has adopted provisions in its Certificate of Incorporation and
Bylaws which limit the liability of its directors and provide for
indemnification of its officers and directors to the fullest extent permitted
under Delaware law. Under Holdings' Certificate of Incorporation, and as
permitted under the Delaware General Corporation Law, directors are not liable
to Holdings or its stockholders for monetary damages arising from a breach of
their fiduciary duty of care as directors. Such provision does not, however,
affect liability for any breach of a director's duty of loyalty to Holdings or
its stockholders for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, under Section 174 of
the Delaware General Corporation Law or for any transaction from which a
director derives an improper personal benefit. Such provision would have no
effect on the availability of equitable remedies, such as an injunction, for
breach of fiduciary duty. Further, it is the position of the SEC that such
limitation of liability in no way limits the liability of Holdings or its
directors for violations of, or otherwise relieves the Holdings or the directors
from the necessity of complying with, the federal securities laws.
58
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
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 terms of the New Credit Agreement and the arrangement and negotiation of the
terms of the Old Notes and the Old Debentures, and for other financial advisory
and management consulting services. In connection with the Acquisition
Transactions, affiliates of, and certain other individuals associated with, AIP
contributed $330,000 to Holdings in exchange for common equity of Holdings.
AIP expects to provide substantial ongoing financial and management services
to the Company utilizing the extensive operating and financial experience of
AIP's principals. AIP will receive 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
for the Debentures, and will be reimbursed for out-of-pocket expenses. The fees
will be paid to AIP pursuant to a management services agreement among AIP and
the Company and will be subordinated in right of payment to the Debentures.
SECURITY OWNERSHIP
Immediately following the consummation of the Acquisition Transactions, AIP,
its affiliates and certain other individuals associated with AIP were the only
holders of record of the common stock of Holdings, par value $.01 per share
("Holdings Common Stock"). The following table sets forth certain information
regarding beneficial ownership of Holdings Common Stock immediately following
the closing of the Acquisition Transactions by (i) each person who is known by
Holdings to be the beneficial owner of more than 5% of Holdings Common Stock,
(ii) each of Holdings' directors and the named executive officers set forth in
the table under "Management--Compensation of Executive Officers and Other
Information" and (iii) all directors and executive officers as a group. Except
as indicated below, the address for each person listed below is One Maritime
Plaza, Suite 2525, San Francisco, CA 94111.
<TABLE>
<CAPTION>
NAME NUMBER(1) PERCENTAGE(2)
- --------------------------------------------------------------------------------------- ----------- ---------------
<S> <C> <C>
American Industrial Partners Capital Fund II, L.P.(3).................................. 65,000 99.5%
W. Richard Bingham(3).................................................................. 65,000 99.5%
Theodore C. Rogers(3).................................................................. 65,000 99.5%
All directors and executive officers as a group (8 persons)............................ 65,000 99.5%
</TABLE>
- ------------------------
(1) Beneficial ownership is determined in accordance with Rule 13d-3 under the
Exchange Act. No options to purchase Holdings Common Stock are currently
outstanding. The persons named in this table have sole voting and investment
power with respect to all shares of Holdings Common Stock shown as
beneficially owned by them, subject to community property laws where
applicable and except as indicated in the other footnotes to this table.
(2) Based upon 65,330 shares of Holdings Common Stock outstanding following
consummation of the Acquisition Transactions.
(3) Messrs. Bingham and Rogers share investment and voting power with respect to
the securities owned by AIP, but each disclaims beneficial ownership of any
shares of Holdings Common Stock. The business address of Mr. Rogers is 551
Fifth Avenue, Suite 3800, New York, NY 10176.
59
<PAGE>
DESCRIPTION OF HOLDINGS CAPITAL STOCK
Holdings' authorized capital stock consists of 92,000 shares of common
stock, par value $.01 per share. All of the issued and outstanding shares of
Holdings' capital stock are fully paid and nonassessable. There are no
outstanding options, warrants or other rights to purchase any of the Holdings'
capital stock. Holders of shares of Holdings' capital stock are entitled to one
vote per share on all matters to be voted on by stockholders. The holders of
shares of Holdings' capital stock are entitled to receive such dividends, if
any, as may be declared from time to time by the Board of Directors in its
discretion from funds legally available therefor, and upon liquidation or
dissolution are entitled to receive all assets available for distribution to the
stockholders. Since consummation of the Acquisition Transactions, AIP, its
affiliates and certain other individuals associated with AIP are the only
stockholders of Holdings and AIP has the ability to designate all of the
directors of Holdings.
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<PAGE>
DESCRIPTION OF DEBENTURES
GENERAL
The New Debentures will be issued pursuant to the Indenture (the
"Indenture") between Holdings and State Street Bank and Trust Company of
California, N.A., as trustee (the "Trustee"), dated as of May 22, 1998, a copy
of which has been filed as an exhibit to the Registration Statement of which
this Prospectus forms a part. The terms of the Debentures include those stated
in the Indenture and those made part of the Indenture by reference to the Trust
Indenture Act of 1939 (the "TIA"). The Debentures are subject to all such terms,
and Holders of Debentures are referred to the Indenture and the TIA for a
statement thereof. While the following description sets forth the material terms
of the Indenture, the following summary does not purport to be complete and is
subject to, and qualified in its entirety by reference to the Indenture,
including the definitions therein of certain terms used below. Copies of the
Indenture and the Registration Rights Agreement are available as set forth below
under "--Additional Information." The definitions of certain terms used in the
following summary are set forth below under "--Certain Definitions."
FOR PURPOSES OF THIS SUMMARY, THE TERMS "HOLDINGS" AND "COMPANY" REFER ONLY
TO GREAT LAKES ACQUISITION CORP. AND NOT TO ANY OF ITS SUBSIDIARIES.
The New Debentures are identical in all material respects to the terms of
the Old Debentures except (i) that the New Debentures have been registered under
the Securities Act, (ii) for certain transfer restrictions and registration
rights relating to the Old Debentures and (iii) that the New Debentures will not
contain certain provisions relating to Liquidated Damages to be paid to the
Holders of Old Debentures under certain circumstances relating to the timing of
the Exchange Offer and to other registration requirements described below under
"--Registration Rights; Liquidated Damages." The Trustee will authenticate and
deliver New Debentures for original issue only in exchange for a like principal
amount of Old Debentures. Any Old Debentures that remain outstanding after the
consummation of the Exchange Offer, together with the New Debentures, will be
treated as a single class of securities under the Indenture.
The Old Debentures are and the New Debentures will be general unsecured
obligations of the Company and pari passu in right of payment to all current and
future unsubordinated Indebtedness of the Company and senior in right of payment
to all subordinated Indebtedness of the Company. The operations of the Company
are conducted entirely through its Subsidiaries and, therefore, the Company is
entirely dependent upon the cash flow of its Subsidiaries to meet its
obligations, including its obligations under the Debentures. See "Risk
Factors--Limitation on Access to Cash Flow of Subsidiaries; Holding Company
Structure." The New Credit Agreement and the Notes restrict GLC from paying any
dividends or making any other distributions to the Company. The Old Debentures
are and the New Debentures will be effectively subordinated to all Indebtedness
and other liabilities of GLC and its Subsidiaries (including, without
limitation, to GLC's obligations under the New Credit Agreement and the Notes).
Any right of the Company to receive assets of any of its Subsidiaries upon such
Subsidiary's liquidation or reorganization (and the consequent right of holders
of the Debentures to participate in those assets) will be effectively
subordinated to the claims of that Subsidiary's creditors except to the extent
that the Company itself is recognized as a creditor of such Subsidiary, in which
case the claims of the Company would still be subordinate to the claims of such
creditors who hold security in the assets of such Subsidiary and to the claims
of such creditors who hold Indebtedness of such Subsidiary senior to that held
by the Company. As of June 30, 1998, the Company and its Subsidiaries would have
had Indebtedness of approximately $340.7 million and the Company's Subsidiaries
would have had outstanding approximately $310.2 million of Indebtedness,
including Indebtedness under the Notes, the New Credit Agreement and the Copetro
Credit Agreement. The Indenture permits the incurrence of certain additional
Indebtedness of the Company and the Company's Subsidiaries in the future. See
"--Certain Covenants--Incurrence of Indebtedness and Issuance of Disqualified
Stock."
61
<PAGE>
As of the Issue Date, none of the Company Subsidiaries will be Unrestricted
Subsidiaries. However, under certain circumstances, the Company will be able to
designate current or future Subsidiaries as Unrestricted Subsidiaries.
Unrestricted Subsidiaries will not be subject to many of the restrictive
covenants set forth in the Indenture.
PRINCIPAL, MATURITY AND INTEREST
Old Debentures in an aggregate principal amount at maturity of $56.6 million
were issued in the Offering generating gross proceeds to Holdings of
approximately $30.1 million. The Debentures will mature on May 15, 2009. The Old
Debentures were and the New Debentures will be issued at a substantial discount
from their aggregate principal amount at maturity. Until May 15, 2003, no cash
interest will accrue or be payable on the Debentures, but the Accreted Value
will increase (representing amortization of original issue discount) between the
date of original issuance and May 15, 2003, on a semi-annual bond equivalent
basis using a 360-day year comprised of twelve 30-day months, such that the
Accreted Value shall be equal to the full principal amount at maturity of the
Debentures on May 15, 2003. The Accreted Value shall cease to increase as of May
15, 2003. Beginning on May 15, 2003, interest on the Debentures will accrue at
the rate of 13 1/8% per annum and will be payable semiannually in arrears on May
15 and November 15, commencing on November 15, 2003, to holders of record on the
immediately preceding May 1 and November 1, respectively. Interest on the
Debentures will accrue from the most recent date to which interest has been paid
or, if no interest has been paid, from May 15, 2003. Interest will be computed
on the basis of a 360-day year comprised of twelve 30-day months. Principal,
premium, if any, and interest and Liquidated Damages, if any, on the Debentures
will be payable at the office or agency of the Company maintained for such
purpose within the City and State of New York or, at the option of the Company,
payment of principal, premium, interest, and Liquidated Damages may be made by
check mailed to the Holders of Debentures at their respective addresses set
forth in the register of Holders of Debentures; provided that all payments of
principal, premium, interest and Liquidated Damages with respect to Debentures
represented by one or more permanent Global Debentures will be required to be
made by wire transfer of immediately available funds to the accounts of DTC or
any successor thereto. Until otherwise designated by the Company, the Company's
office or agency in New York will be the office of the Trustee maintained for
such purpose. The Debentures will be issued in denominations of $1,000 and
integral multiples thereof. Old Debentures accepted for exchange will cease to
accrete in value from and after the date of consummation of the Exchange Offer.
OPTIONAL REDEMPTION
The Old Debentures are and the New Debentures will be subject to redemption
at any time on or after May 15, 2003 at the option of the Company, in whole or
in part, upon not less than 30 nor more than 60 days' notice, at the redemption
prices (expressed as percentages of principal amount) set forth below plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the
applicable redemption date, if redeemed during the 12-month period commencing
May 15th of the years set forth below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
- ---------------------------------------------------------------------------------- -----------
<S> <C>
2003.............................................................................. 106.563%
2004.............................................................................. 104.375%
2005.............................................................................. 102.188%
2006 and thereafter............................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time or from time to time on or prior
to May 15, 2001, the Company may redeem up to 35% of the aggregate principal
amount of Debentures originally issued under the Indenture at a redemption price
of 113.125% of the Accreted Value thereof, and Liquidated Damages thereon, if
any, to the redemption date, with the Net Cash Proceeds of one or more Equity
Offerings; PROVIDED that at least 65% of the aggregate principal amount at
maturity of New Debentures issued
62
<PAGE>
hereunder together with the Old Debentures originally issued and not exchanged
in the Exchange Offer remain outstanding immediately after the occurrence of
such redemption; and PROVIDED, FURTHER, that such redemption shall occur within
90 days of the date of the closing of such Equity Offering.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Debentures.
SELECTION AND NOTICE
If less than all of the Debentures are to be redeemed at any time, selection
of Debentures for redemption will be made by the Trustee in compliance with the
requirements of the principal national securities exchange, if any, on which the
Debentures are listed, or, if the Debentures are not so listed, on a pro rata
basis, by lot or by such method as the Trustee will deem fair and appropriate;
PROVIDED that no Debentures of $1,000 or less will be redeemed in part. Notices
of redemption will be mailed by first class mail at least 30 but not more than
60 days before the redemption date to each Holder of Debentures to be redeemed
at its registered address. If any Debenture is to be redeemed in part only, the
notice of redemption that relates to such Debenture will state the portion of
the principal amount thereof to be redeemed. A new Debenture in principal amount
equal to the unredeemed portion thereof will be issued in the name of the Holder
thereof upon cancellation of the original Debenture. Debentures called for
redemption become due on the date fixed for redemption. On and after the
redemption date the Accreted Value ceases to increase and the interest ceases to
accrue on Debentures or portions of them called for redemption.
CERTAIN COVENANTS
CHANGE OF CONTROL
The Indenture provides that upon the occurrence of a Change of Control, the
Company is required to offer to purchase all Debentures then outstanding
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount thereof plus
accrued and unpaid interest and Liquidated Damages, if any, thereon to the date
of purchase, or in the case of repurchases of Debentures prior to May 15, 2003,
at a purchase price equal to 101% of the Accreted Value thereof as of the date
of repurchase (the "Change of Control Payment"). Within 35 days following any
Change of Control, the Company will mail a notice to each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Debentures pursuant to the procedures required by the Indenture
and described in such notice. The Company will comply with the requirements of
Rule 14e-1 under the Exchange Act and any other securities laws and regulations
thereunder to the extent such laws and regulations are applicable in connection
with the repurchase of the Debentures as a result of a Change of Control. To the
extent the provisions of any such securities laws or regulations conflict with
the provisions of this covenant, compliance by the Company with such laws, rules
and regulations shall not in and of itself cause a breach of its obligations
under this covenant.
The Change of Control Offer will remain open for a period not to exceed 60
days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Change of Control Offer
Period"). No later than five Business Days after the termination of the Change
of Control Offer Period (the "Change of Control Purchase Date"), the Company
will purchase all Debentures tendered in response to the Change of Control
Offer. Payment for any Debentures so purchased will be made in the same manner
as interest payments are made.
If the Change of Control Purchase Date is on or after an interest record
date and on or before the related interest payment date, any accrued and unpaid
interest will be paid to the Person in whose name a Debenture is registered at
the close of business on such record date, and no additional interest will be
payable to Holders who tender Debentures pursuant to the Change of Control
Offer.
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On the Change of Control Purchase Date, the Company will, to the extent
lawful, (1) accept for payment all Debentures or portions thereof properly
tendered pursuant to the Change of Control Offer, (2) deposit with the Paying
Agent an amount equal to the Change of Control Payment in respect of all
Debentures or portions thereof so tendered and (3) deliver or cause to be
delivered to the Trustee the Debentures so accepted together with an Officers'
Certificate stating the aggregate principal amount of Debentures or portions
thereof being purchased by the Company. The Paying Agent will promptly mail to
each Holder of Debentures so tendered the Change of Control Payment for such
Debentures, and the Trustee will promptly authenticate and mail (or cause to be
transferred by book entry) to each Holder a new Debenture equal in principal
amount to any unpurchased portion of the Debentures surrendered, if any;
PROVIDED that each such new Debenture will be in a principal amount of $1,000 or
an integral multiple thereof.
The Change of Control provisions described above will be applicable whether
or not any other provisions of the Indenture are applicable. Except as described
above with respect to a Change of Control, the Indenture does not contain
provisions that permit the Holders of the Debentures to require that the Company
repurchase or redeem the Debentures in the event of a takeover, recapitalization
or similar transaction.
The Change of Control purchase feature of the Debentures may make more
difficult or discourage a takeover of the Company and, thus, the removal of
incumbent management.
The phrase "all or substantially all" of the assets of the Company will
likely be interpreted under applicable state law and will be dependent upon
particular facts and circumstances. As a result, there may be a degree of
uncertainty in ascertaining whether a sale or transfer of "all or substantially
all" of the assets of the Company has occurred. In addition, no assurances can
be given that the Company will be able to acquire Debentures tendered upon the
occurrence of a Change of Control.
The New Credit Agreement and the Notes restrict the Company's Subsidiaries
from paying any dividends or making any other distributions to the Company. If
the Company is unable to obtain dividends from its Subsidiaries sufficient to
permit the repurchase of the Debentures or does not refinance such Indebtedness,
the Company will likely not have the financial resources to purchase Debentures.
In any event, there can be no assurance that the Company's Subsidiaries will
have the resources available to pay any such dividend or make any such
distribution. The Company's failure to make a Change of Control Offer when
required or to purchase tendered Debentures when tendered would constitute an
Event of Default under the Indenture. See "Risk Factors--Substantial Leverage;
Liquidity; Stockholders' Deficit" and "--Limitation on Access to Cash Flow of
Subsidiaries; Holding Company Structure."
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes a Change of Control Offer in the
manner, at the times and otherwise in compliance with the requirements set for
forth in the Indenture applicable to a Change of Control Offer made by the
Company and purchases all Debentures validly tendered and not withdrawn under
such Change of Control Offer.
ASSET SALES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, engage in an Asset Sale in excess of $1.0 million unless
(i) the Company (or the Subsidiary, as the case may be) receives consideration
at the time of such Asset Sale at least equal to the fair market value of the
assets or Equity Interests sold or otherwise disposed of, and in the case of a
lease of assets, a lease providing for rent and other conditions which are no
less favorable to the Company (or the Subsidiary, as the case may be) in any
material respect than the then prevailing market conditions (in each case as set
forth in an Officers' Certificate delivered to the Trustee), (ii) at least 75%
of the consideration therefor received by the Company or such Subsidiary is in
the form of cash or Cash Equivalents; PROVIDED that the amount of (x) any
liabilities (as shown on the Company or such Subsidiary's most recent balance
sheet or in the notes thereto, excluding contingent liabilities and trade
payables) of the Company or any Subsidiary (other than
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liabilities that are by their terms subordinated to, or PARI PASSU with, the
Debentures) that are assumed by the transferee of any such assets and (y) any
notes or other obligations received by the Company or any such Subsidiary from
such transferee that are promptly, but in no event more than 30 days after
receipt, converted by the Company or such Subsidiary into cash (to the extent of
the cash received), will be deemed to be cash for purposes of this provision and
the receipt of such cash shall be treated as cash received from an Asset Sale
for which such Debentures or obligations were received.
The Company or any of its Subsidiaries may apply the Net Proceeds from each
Asset Sale, at its option, within 415 days after the consummation of such Asset
Sale, (a) to permanently reduce any Indebtedness (and in the case of any
revolving indebtedness to correspondingly permanently reduce commitments with
respect thereto) of the Company or a Subsidiary of the Company, or (b) for the
acquisition of another business or the acquisition of other property or assets,
in each case, in the same or a Related Business or (c) for any combination of
the foregoing. Pending the final application of any such Net Proceeds, the
Company may temporarily reduce Indebtedness of a Subsidiary of the Company or
otherwise invest such Net Proceeds in any manner that is not prohibited by the
Indenture. Any Net Proceeds from Asset Sales that are not applied or invested as
provided in the first sentence of this paragraph will be deemed to constitute
"Excess Proceeds." When the aggregate amount of Excess Proceeds exceeds $5.0
million, the Company will be required to make an offer to all Holders of
Debentures (an "Asset Sale Offer") and to holders of other Indebtedness of the
Company outstanding ranking on a PARI PASSU basis with the Debentures with
provisions requiring the Company to make an offer (or otherwise redeem or
prepay) with proceeds from the asset sales, pro rata in proportion to the
respective principal amounts (or accreted values in the case of Indebtedness
issued with an original issue discount) of the Debentures and such other
Indebtedness then outstanding, to purchase (or otherwise redeem or prepay) the
maximum principal amount (or Accreted Value, as applicable) of Debentures and
such other Indebtedness, if any, that may be purchased (or redeemed or prepaid)
out of the Excess Proceeds, at an offer price in cash in an amount equal to 100%
of the principal amount (or Accreted Value, if the date of repurchase is prior
to May 15, 2003) thereof plus accrued and unpaid interest and Liquidated
Damages, if any, thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture. If the aggregate principal amount (or
Accreted Value, as applicable) of Debentures and such Indebtedness surrendered
by Holders thereof exceeds the amount of Excess Proceeds, the Trustee shall
select the Debentures and such Indebtedness to be purchased on a pro rata basis.
Upon completion of such offer to purchase, the amount of Excess Proceeds shall
be reset at zero.
The term "Asset Sale," as defined in the Indenture, excludes certain sales
and other dispositions of assets. See "--Certain Definitions." As a result, the
Company and its Subsidiaries will be permitted to sell certain assets without
compliance with the foregoing covenant.
The Asset Sale Offer will remain open for a period not to exceed 30 Business
Days following its commencement and no longer, except to the extent that a
longer period is required by applicable law (the "Asset Sale Offer Period"). No
later than five Business Days after the termination of the Asset Sale Offer
Period (the "Asset Sale Purchase Date"), the Company will purchase the principal
amount of Debentures required to be purchased pursuant to this covenant (the
"Asset Sale Offer Amount") or, if less than the Asset Sale Offer Amount has been
tendered, all Debentures tendered in response to the Asset Sale Offer. Payment
for any Debentures so purchased will be made in the same manner as interest
payments are made. The Company will comply with the requirements of Rule 14e-1
under the Exchange Act and any other securities laws and regulations thereunder
to the extent such laws and regulations were applicable in connection with the
repurchase of the Debentures as a result of an Asset Sale Offer. To the extent
the provisions of any such securities laws or regulations conflict with the
provisions of this covenant, compliance by the Company with such laws, rules and
regulations shall not in and of itself cause a breach of its obligations under
this covenant.
If the Asset Sale Purchase Date is on or after an interest record date and
on or before the related interest payment date, any accrued and unpaid interest
will be paid to the Person in whose name a
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Debenture is registered at the close of business on such record date, and no
additional interest will be payable to Holders who tender Debentures pursuant to
the Asset Sale Offer.
On or before the Asset Sale Purchase Date, the Company will, to the extent
lawful, accept for payment, on a PRO RATA basis to the extent necessary, the
Asset Sale Offer Amount of Debentures or portions thereof tendered pursuant to
the Asset Sale Offer, or if less than the Asset Sale Offer Amount has been
tendered, all Debentures tendered, and will deliver to the Trustee an Officers'
Certificate stating that such Debentures or portions thereof were accepted for
payment by the Company in accordance with the terms of this covenant. The
Company, the Depositary or the Paying Agent, as the case may be, will promptly
(but in any case not later than five Business Days after the Asset Sale Purchase
Date) mail or deliver to each tendering Holder an amount equal to the purchase
price of the Debentures tendered by such Holder and accepted by the Company for
purchase, and the Company will promptly issue a new Debenture, and the Trustee,
upon delivery of an Officers' Certificate from the Company, will authenticate
and mail or deliver such new Debenture to such Holder, in a principal amount at
maturity equal to any unpurchased portion of the Debenture surrendered. Any
Debenture not so accepted will be promptly mailed or delivered by the Company to
the Holder thereof.
The New Credit Agreement and the Notes restrict the ability of GLC to pay
dividends or make other distributions to the Company. If the Company is unable
to obtain dividends from GLC sufficient to permit the repurchase of the
Debentures or does not refinance such Indebtedness, the Company will likely not
have the financial resources to purchase Debentures. In any event, there can be
no assurance that the Company's Subsidiaries will have the resources available
to pay any such dividend or make any such distribution. The Company's failure to
make an Asset Sale Offer when required or to purchase tendered Debentures when
tendered would constitute an Event of Default under the Indenture. See "Risk
Factors--Substantial Leverage" and "--Limitation on Access to Subsidiaries' Cash
Flow; Holding Company Structure."
RESTRICTED PAYMENTS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly: (i) declare or pay any dividend or
make any distribution on account of the Company's or any of its Subsidiaries'
Equity Interests (other than dividends or distributions payable in Equity
Interests (other than Disqualified Stock) of the Company or GLC or dividends or
distributions payable to the Company or any Subsidiary); (ii) purchase, redeem
or otherwise acquire or retire for value any Equity Interests of the Company or
its Subsidiaries or any direct or indirect parent of the Company (other than any
such Equity Interests owned by the Company or any Subsidiary of the Company and
other than pursuant to the Acquisition Transactions); (iii) make any principal
payment on, or purchase, redeem, defease or otherwise acquire or retire for
value any Indebtedness that is contractually subordinated to the Debentures (and
other than Debentures), except for any scheduled repayment (including any
sinking fund or similar payment) or at final maturity thereof; or (iv) make any
Restricted Investment (all such payments and other actions set forth in clauses
(i) through (iv) above, unless a Permitted Investment, being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default will have occurred and be continuing
or would occur as a consequence thereof;
(b) the Company would, at the time of such Restricted Payment and after
giving PRO FORMA effect thereto as if such Restricted Payment had been made
at the beginning of the applicable four-quarter period, have been permitted
to incur at least $1.00 of additional Indebtedness pursuant to the Fixed
Charge Coverage Ratio test set forth in the first paragraph of the covenant
entitled "Incurrence of Indebtedness and Issuance of Disqualified Stock";
and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Subsidiaries after the Issue
Date (excluding Restricted Payments permitted by
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clauses (ii), (iii), (iv), (v) and (vi) of the next succeeding paragraph),
is less than the sum of (i) $7.5 million, plus (ii) 50% of the Consolidated
Net Income (adjusted to exclude any amounts that are otherwise included in
this clause (c) to the extent there would be, and to avoid, any duplication
in the crediting of any such amounts) of the Company for the period (taken
as one accounting period) from the beginning of the first fiscal quarter
commencing after the Issue Date to the end of the Company's most recently
ended fiscal quarter for which internal financial statements are available
at the time of such Restricted Payment (or, if such Consolidated Net Income
for such period is a deficit, less 100% of such deficit), plus (iii) to the
extent not included in the amount described in clause (ii) above, 100% of
the aggregate Net Cash Proceeds received after the Issue Date by the Company
from the issue or sale of, or from capital contributions in respect of,
Equity Interests of the Company or of debt securities of the Company or any
Subsidiary that have been converted into, or cancelled in exchange for,
Equity Interests of the Company (other than Equity Interests (or convertible
debt securities) sold to a Subsidiary of the Company and other than
Disqualified Stock or debt securities that have been converted into
Disqualified Stock), plus (iv) 100% of any dividends or other distributions
received by the Company or a Subsidiary of the Company after the Issue Date
from an Unrestricted Subsidiary of the Company, plus (v) 100% of the cash
proceeds (or Cash Equivalents) realized upon the sale of any Unrestricted
Subsidiary (less the amount of any reserve established for purchase price
adjustments and less the maximum amount of any indemnification or similar
contingent obligation for the benefit of the purchaser, any of its
Affiliates or any other third party in such sale, in each case as adjusted
for any permanent reduction in any such amount on or after the date of such
sale, other than by virtue of a payment made to such Person) following the
Issue Date, plus (vi) to the extent that any Restricted Investment that was
made after the Issue Date is sold for cash (or Cash Equivalents) or
otherwise liquidated or repaid for cash (or Cash Equivalents), the amount of
cash proceeds (or Cash Equivalents) received with respect to such Restricted
Investment plus (vii) upon the redesignation of an Unrestricted Subsidiary
as a Subsidiary, the lesser of (x) the fair market value of such Subsidiary
or (y) the aggregate amount of all Investments made in such Subsidiary
subsequent to the Issue Date by the Company and its Subsidiaries.
The foregoing provisions do not prohibit, if and to the extent any of the
following would otherwise constitute a Restricted Payment, (i) the payment of
any dividend within 60 days after the date of declaration thereof, if at said
date of declaration such payment would have complied with the provisions of the
Indenture; (ii) if no Default or Event of Default shall have occurred and be
continuing (and shall not have been waived) or shall occur as a consequence
thereof, the payment by the Company of a management fee to AIP in an amount not
to exceed $1.85 million in any fiscal year and the reimbursement by the Company
of AIP's reasonable out-of-pocket expenses incurred in connection with the
rendering of management services to or on behalf of the Company; PROVIDED,
HOWEVER, that no such fees may be paid, and no such expenses may be reimbursed,
unless the obligation of the Company to pay such management fee has been
subordinated to the payment of all Obligations with respect to the Debentures;
(iii) the making of any Restricted Investment in exchange for, or out of the
proceeds of, the substantially concurrent sale (other than to a Subsidiary of
the Company) of, or from substantially concurrent additional capital
contributions in respect of, Equity Interests of the Company (other than
Disqualified Stock); PROVIDED, that any Net Cash Proceeds that are utilized for
any such Restricted Investment will be excluded from clause (c)(iii) of the
preceding paragraph; (iv) the redemption, repurchase, retirement or other
acquisition of any Equity Interests of the Company in exchange for, or out of
the proceeds of, the substantially concurrent sale (other than to a Subsidiary
of the Company) of, or from substantially concurrent capital contributions in
respect of, other Equity Interests of the Company (other than any Disqualified
Stock); PROVIDED that any Net Cash Proceeds that are utilized for any such
redemption, repurchase, retirement or other acquisition, will be excluded from
clause (c)(iii) of the preceding paragraph; (v) the defeasance, redemption or
repurchase of, or the making of a principal payment on, or the acquisition or
retirement for value of, subordinated Indebtedness in exchange for or with the
net cash proceeds from an incurrence of Permitted Refinancing Indebtedness or
the substantially concurrent sale (other than to a Subsidiary of the Company)
of, or from substantially concurrent capital contributions in
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respect of, Equity Interests of the Company (other than Disqualified Stock);
PROVIDED, that any net cash proceeds that are utilized for any such defeasance,
redemption or repurchase will be excluded from clause (c)(iii) of the preceding
paragraph; (vi) the repurchase, redemption or other acquisition or retirement
for value of any Equity Interests of the Company or any Subsidiary of the
Company held by any member of the Company's (or any of its Subsidiaries')
management pursuant to any management agreement or stock option agreement or
upon the death, disability or termination of employment of such member; PROVIDED
that the aggregate price paid for all such repurchased, redeemed, acquired or
retired Equity Interests will not exceed $5.0 million in the aggregate (net of
the Net Cash Proceeds received by the Company or its Subsidiaries from
subsequent reissuances of such Equity Interests to new members of such
management), and no Default or Event of Default will have occurred and be
continuing immediately after such transaction; (vii) the acquisition by a
Receivables Subsidiary in connection with a Qualified Receivables Transaction of
Equity Interests of a trust or other Person established by such Receivables
Subsidiary to effect such Qualified Receivables Transaction; (viii) pro rata
dividends and other distributions on the Equity Interests of any Subsidiary of
the Company by such Subsidiary; and (ix) payments in lieu of fractional shares
in an amount not to exceed $50,000 in the aggregate.
The Board of Directors may designate any Subsidiary to be an Unrestricted
Subsidiary if such designation would not cause a Default or Event of Default.
For purposes of making such determination, all outstanding Investments by the
Company and its Subsidiaries (except to the extent repaid in cash or Cash
Equivalents) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under the first paragraph of this covenant. All such
outstanding Investments will be deemed to constitute Investments in an amount
equal to the greatest of (x) the net book value of such Investments at the time
of such designation, (y) the fair market value of such Investments at the time
of such designation and (z) the original fair market value of such Investments
at the time they were made. Such designation will only be permitted if such
Restricted Payment would be permitted at such time and if such Subsidiary
otherwise meets the definition of an Unrestricted Subsidiary.
The amount of all Restricted Payments (other than cash or Cash Equivalents)
will be the fair market value (as and to the extent set forth in an Officers'
Certificate delivered to the Trustee pursuant to the next sentence) on the date
of the Restricted Payment of the asset(s) proposed to be transferred by the
Company or such Subsidiary, as the case may be, pursuant to the Restricted
Payment. Not later than five Business Days' following the date of making any
Restricted Payment in excess of $1,000,000, the Company will deliver to the
Trustee an Officers' Certificate stating that such Restricted Payment is
permitted and setting forth the basis upon which the calculations required by
this covenant were computed, which calculations may be based upon the Company's
latest available financial statements.
INCURRENCE OF INDEBTEDNESS AND ISSUANCE OF DISQUALIFIED STOCK
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, issue, assume,
guarantee or otherwise become directly or indirectly liable, contingently or
otherwise, with respect to (collectively, "incur") any Indebtedness (including
Acquired Indebtedness) and the Company will not issue or otherwise incur any
Disqualified Stock and will not permit any of its Subsidiaries to issue or
otherwise incur any shares of Disqualified Stock; PROVIDED, HOWEVER, that the
Company and its Subsidiaries may incur Indebtedness (including Acquired
Indebtedness) or issue or otherwise incur shares of Disqualified Stock and
Foreign Subsidiaries may incur Indebtedness (including Acquired Indebtedness)
if: (i) the Fixed Charge Coverage Ratio for the Company's most recently ended
four full fiscal quarters for which internal financial statements are available
immediately preceding the date on which such additional Indebtedness is incurred
or such Disqualified Stock is issued or incurred would have been at least 1.75
to 1, determined on a PRO FORMA basis (including a PRO FORMA application of the
net proceeds therefrom), as if the additional Indebtedness had been incurred, or
the Disqualified Stock had been issued or incurred, as the case may be, at the
beginning of such four-quarter period; and (ii) no Default or Event of Default
will have occurred and be continuing or would occur as a
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consequence thereof; PROVIDED, that no Guarantee may be incurred pursuant to
this paragraph unless the guaranteed Indebtedness is incurred by the Company or
a Subsidiary pursuant to this paragraph; and PROVIDED FURTHER, that all
Indebtedness incurred by Foreign Subsidiaries pursuant to this paragraph must be
secured and must not be subordinated in right of payment to any other
Indebtedness.
The foregoing provisions will not apply to:
(i) the incurrence by GLC or any Subsidiaries thereof of Senior Term
Debt (and Guarantees thereof by the Company or its Subsidiaries); PROVIDED
that the aggregate principal amount of all Senior Term Debt outstanding
under this clause (i) after giving effect to such incurrence does not exceed
$120.0 million less the aggregate amount of all Net Proceeds of Asset Sales
applied to repay Senior Term Debt pursuant to the covenant described above
under the caption "--Asset Sales";
(ii) the incurrence by GLC or any Subsidiaries thereof of Senior
Revolving Debt (and Guarantees thereof by the Company or its Subsidiaries)
and reimbursement obligations in respect of letters of credit in an
aggregate principal amount at any time outstanding under this clause (ii)
(with letters of credit obligations being deemed to have a principal amount
equal to the maximum potential liability of GLC and its Subsidiaries (and
Guarantees thereof by the Company or its Subsidiaries) not to exceed an
amount equal to the greater of (a) $25.0 million, less the aggregate amount
of all Net Proceeds of Asset Sales applied to permanently reduce the
outstanding amount or, as applicable, the commitments with respect to such
Indebtedness pursuant to the covenant described above under the caption
"--Asset Sales," and (b) an amount equal to the Borrowing Base;
(iii) the incurrence by the Company and its Subsidiaries of the Existing
Indebtedness (including any Permitted Refinancing Indebtedness incurred to
refinance, retire, renew, defease, refund or otherwise replace such
Indebtedness);
(iv) the incurrence by (a) the Company of Indebtedness represented by
(x) the Debentures issued as of the Issue Date and (y) the Exchange
Debentures; and (b) GLC and its Subsidiaries of Indebtedness represented by
the Notes and any Guarantee thereof and by Additional Notes (and any
Guarantees thereof) issued in lieu of interest for up to four seminannual
interest payments on the Notes as set forth in the Note Indenture.
(v) the incurrence by the Company or any of its Subsidiaries of
Indebtedness represented by Capital Lease Obligations, Mortgage Financings
or Purchase Money Obligations, in each case incurred for the purpose of
financing all or any part of the purchase price or cost of construction or
improvement of property used in the business or a Related Business of the
Company or such Subsidiary, in an aggregate principal amount not to exceed
$10.0 million at any time outstanding under this clause (v) (including any
Permitted Refinancing Indebtedness incurred to refinance, retire, renew,
defease, refund or otherwise replace any such Indebtedness);
(vi) the incurrence by the Company or any of its Subsidiaries of
Permitted Refinancing Indebtedness in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund,
Indebtedness that was permitted by the Indenture to be incurred or was
outstanding on the Issue Date, after giving effect to the Acquisition
Transactions;
(vii) the incurrence by the Company or any of its Subsidiaries of
intercompany Indebtedness between or among the Company and any of its
Subsidiaries or between or among any of its Subsidiaries; PROVIDED, HOWEVER,
that (x) any subsequent issuance or transfer of Equity Interests that
results in any such Indebtedness being held by a Person other than the
Company or a Subsidiary of the Company and (y) any sale or other transfer of
any such Indebtedness to a Person that is not either the Company or a
Subsidiary of the Company will be deemed, in each case, to constitute an
incurrence of such Indebtedness by the Company or such Subsidiary, as the
case may be;
(viii) the incurrence by the Company or any of its Subsidiaries of Hedging
Obligations that are incurred for the purpose of fixing or hedging (a)
interest rate risk with respect to any floating rate
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Indebtedness that is permitted by the Indenture to be incurred or (b)
currency risk (to the extent incurred in the ordinary course of business and
not for purposes of speculation);
(ix) the incurrence by the Company or any of its Subsidiaries of
Indebtedness (in addition to Indebtedness permitted by any other clause of
this covenant) in an aggregate principal amount at any time outstanding
under this clause (ix) not to exceed the sum of $30.0 million (including
Permitted Refinancing Indebtedness incurred to refinance, retire, renew,
defease, refund or otherwise replace any such Indebtedness); provided that
such Indebtedness may, but need not, be incurred under the New Credit
Agreement;
(x) Indebtedness incurred by the Company or any of its Subsidiaries
arising from agreements providing for indemnification, adjustment of
purchase price or similar obligations, or from guarantees of letters of
credit, bankers' acceptances, surety bonds or performance bonds securing the
performance of the Company or any of its Subsidiaries to any Person
acquiring all or a portion of such business or assets of the Company or a
Subsidiary of the Company for the purpose of financing such acquisition, in
a principal amount not to exceed 25% of the gross proceeds (with proceeds
other than cash or Cash Equivalents being valued at the fair market value
thereof as determined by the Company in good faith) actually received by the
Company or any of its Subsidiaries in connection with such disposition;
(xi) the incurrence by a Receivables Subsidiary of Indebtedness in a
Qualified Receivables Transaction that is without recourse to the Company or
to any other Subsidiary of the Company or their assets (other than such
Receivables Subsidiary and its assets and, as to the Company or any
Subsidiary of the Company, other than pursuant to representations,
warranties, covenants and indemnities customary for such transactions) and
is not guaranteed by any such Person;
(xii) the incurrence by Foreign Subsidiaries of Indebtedness (in addition
to Indebtedness permitted by any other provision of this covenant) in an
aggregate amount not to exceed $25.0 million at any time outstanding under
this clause (xii) (including any Permitted Refinancing Indebtedness incurred
to refinance, retire, renew, defease, refund or otherwise replace any such
Indebtedness);
(xiii) Indebtedness in respect of performance bonds, bankers' acceptances,
letters of credit and surety or appeal bonds entered into by the Company and
its Subsidiaries in the ordinary course of their business;
(xiv) Indebtedness arising from the honoring by a bank or other financial
institution of a check, draft or similar instrument inadvertently (except in
the case of daylight overdrafts) drawn against insufficient funds in the
ordinary course of business; and
(xv) Finance Subsidiary Indebtedness.
Notwithstanding any other provision of this covenant, a Guarantee of
Indebtedness permitted by the terms of the Indenture at the time such
Indebtedness was incurred or at the time the guarantor thereof became a
Subsidiary of the Company will not constitute a separate incurrence, or amount
outstanding, of Indebtedness. Upon each incurrence of Indebtedness by the
Company or any of its Subsidiaries, the Company may designate pursuant to which
provision of this covenant such Indebtedness is being incurred and such
Indebtedness shall not be deemed to have been incurred or outstanding under any
other provision of this covenant, except as stated otherwise in the foregoing
provision.
Indebtedness or Disqualified Stock of any Person which is outstanding at the
time such Person becomes a Subsidiary of the Company (including upon designation
of any subsidiary or other person as a Subsidiary) or is merged with or into or
consolidated with the Company or a Subsidiary of the Company shall be deemed to
have been incurred at the time such Person becomes a Subsidiary of the Company
or is merged with or consolidated with the Company or a Subsidiary of the
Company, as applicable.
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LIENS
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create, incur, assume or suffer to
exist any Lien on any asset now owned or hereafter acquired, or any income or
profits therefrom or assign or convey any right to receive income therefrom,
except Permitted Liens, unless the Notes or the Debentures are secured by such
Lien on an equal and ratable basis.
DIVIDEND AND OTHER PAYMENT RESTRICTIONS AFFECTING SUBSIDIARIES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, directly or indirectly, create or otherwise cause or suffer
to exist or become effective any consensual encumbrance or restriction on the
ability of any Subsidiary to (i)(a) pay dividends or make any other
distributions to the Company or any of its Subsidiaries (1) on its Capital Stock
or (2) with respect to any other interest or participation in, or measured by,
its profits, or (b) pay any Indebtedness owed to the Company or any of its
Subsidiaries, (ii) make loans or advances to the Company or any of its
Subsidiaries or (iii) transfer any of its properties or assets to the Company or
any of its Subsidiaries, except for such encumbrances or restrictions existing
under or by reason of (a) Existing Indebtedness as in effect on the Issue Date,
and any amendments, modifications, restatements, renewals, increases,
supplements, refundings, replacements or refinancings thereof, PROVIDED that
such amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings are no more restrictive, taken as a
whole, with respect to such dividend and other payment restrictions than those
contained in the applicable Existing Indebtedness as in effect on the Issue
Date, (b) the New Credit Agreement as in effect as of the Issue Date, and any
amendments, modifications, restatements, renewals, increases, supplements,
refundings, replacements or refinancings thereof, PROVIDED that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements or refinancings are no more restrictive, taken as a whole, with
respect to such dividend and other payment restrictions than those contained in
the New Credit Agreement as in effect on the Issue Date, (c) the Note Indenture
as in effect as of the Issue Date, and any amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings thereof, PROVIDED that such amendments, modifications,
restatements, renewals, increases, supplements, refundings, replacements or
refinancings are no more restrictive, taken as a whole, with respect to such
dividend and other payment restrictions than those contained in the Note
Indenture as in effect on the Issue Date, (d) the Indenture and the Debentures
and the Note Indenture and the Notes or any Indebtedness ranking on a PARI PASSU
basis with the Debentures or the Notes as the case may be, PROVIDED such
restrictions are no more restrictive, taken as a whole, than those contained in
the Indenture or the Note Indenture as the case may be, (e) applicable law, (f)
any instrument governing Acquired Indebtedness or Capital Stock of a Person
acquired by the Company or any of its Subsidiaries as in effect at the time of
such acquisition (except to the extent such Acquired Indebtedness was incurred
in connection with or in contemplation of such acquisition), which encumbrance
or restriction is not applicable to any Person, or the properties or assets of
any Person, other than the Person, or the property or assets of the Person, so
acquired, (g) by reason of customary non-assignment provisions in leases and
licenses entered into in the ordinary course of business, (h) Purchase Money
Obligations, Mortgage Financings or Capital Lease Obligations for property
acquired in the ordinary course of business that impose restrictions of the
nature described in clause (iii) above on the property so acquired, (i)
agreements relating to the financing of the acquisition of real or tangible
personal property acquired on or after the Issue Date, PROVIDED, that such
encumbrance or restriction relates only to the property which is acquired and in
the case of any encumbrance or restriction that constitutes a Lien, such Lien
constitutes a Permitted Lien, (j) Indebtedness or other contractual requirements
of a Receivables Subsidiary in connection with a Qualified Receivables
Transaction, PROVIDED that such restrictions apply only to such Receivables
Subsidiary, (k) any restriction or encumbrance contained in contracts for sale
of assets permitted by the Indenture in respect of the assets being sold
pursuant to such contract, (l) Indebtedness permitted to be incurred under the
Indenture and incurred on or after the Issue Date, PROVIDED, that such
encumbrances or
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restrictions in such Indebtedness are no more onerous, taken as a whole, than
the restrictions contained in the New Credit Agreement on the Issue Date, or as
the New Credit Agreement may be amended, modified, restated, renewed, increased,
supplemented, refunded, replaced or refinanced as set forth in clause (b) above,
(m) restrictions contained in Indebtedness of Foreign Subsidiaries incurred
under the covenant entitled "Incurrence of Indebtedness and Issuance of
Disqualified Stock", (n) Permitted Refinancing Indebtedness, PROVIDED that the
restrictions contained in the agreements governing such Permitted Refinancing
Indebtedness are no more restrictive than those contained in the agreements
governing the Indebtedness being refinanced, (o) restrictions with respect to
the Company or a Subsidiary of the Company imposed pursuant to a binding
agreement entered into for the sale or disposition of Equity Interests or assets
of such Person permitted pursuant to the Indenture or (p) agreements relating to
Permitted Liens or Indebtedness related thereto; provided that such encumbrance
or restriction relates only to the property subject to such Permitted Lien.
TRANSACTIONS WITH AFFILIATES
The Indenture provides that the Company will not, and will not permit any of
its Subsidiaries to, sell, lease, transfer or otherwise dispose of any of its
properties or assets to, or purchase any property or assets from, or enter into
or make any contract, agreement, understanding, loan, advance or guarantee with,
or for the benefit of, any Affiliate (each of the foregoing, an "Affiliate
Transaction"), unless (i) such Affiliate Transaction is on terms that are no
less favorable to the Company or the relevant Subsidiary than those that would
have been obtained in a comparable transaction by the Company or such Subsidiary
with an unrelated Person and (ii) the Company delivers to the Trustee (a) with
respect to any Affiliate Transaction entered into after the Issue Date involving
aggregate consideration in excess of $5.0 million, a resolution of the Board of
Directors set forth in an Officers' Certificate certifying that such Affiliate
Transaction complies with clause (i) above and that such Affiliate Transaction
has been approved by a majority of the disinterested members (if any) of the
Board of Directors and (b) with respect to any Affiliate Transaction involving
aggregate consideration in excess of $10.0 million, an opinion as to the
fairness to the Company or such Subsidiary of such Affiliate Transaction from a
financial point of view issued by an investment banking firm of national
standing or, in the event such transaction is of a type that investment bankers
do not generally render fairness opinions, a valuation or appraisal firm of
national reputation; PROVIDED that the following will not be deemed to be
Affiliate Transactions: (w) the provision of administrative or management
services by the Company or GLC or any of their respective officers to any of the
Company's Subsidiaries in the ordinary course of business, (x) any employment
agreement entered into by the Company or any of its Subsidiaries in the ordinary
course of business, (y) transactions between or among the Company and/or its
Subsidiaries or transactions between a Receivables Subsidiary or a Finance
Subsidiary and any Person in which the Receivables Subsidiary or Finance
Subsidiary has an Investment and (z) transactions permitted by the covenant
entitled "Restricted Payments." In addition, none of the Acquisition
Transactions or the transactions contemplated thereby shall be deemed to be
Affiliate Transactions.
LINE OF BUSINESS
The Indenture provides that neither the Company nor any of its Subsidiaries
will directly or indirectly engage to any substantial extent in any line or
lines of business activity other than that which, in the reasonable good faith
judgment of the Board of Directors of the Company, is a Related Business.
REPORTS
The Indenture provides that, whether or not required by the rules and
regulations of the SEC, so long as any Debentures are outstanding beginning with
the year ended December 31, 1998, the Company will furnish to the Trustee and
all Holders of Debentures (i) all quarterly and annual financial information
that would be required to be contained in a filing with the SEC on Forms 10-Q
and 10-K, as applicable, if the
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Company were required to file such Forms, including a "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and, with respect
to the annual information only, a report thereon by the Company's certified
independent accountants and (ii) all current reports that would be required to
be filed with the SEC on Form 8-K if the Company were required to file such
reports, in each case within the time periods specified in the SEC's rules and
regulations; PROVIDED that the foregoing shall not require the Company to
furnish separate financial results of its Subsidiaries. In addition, whether or
not required by the rules and regulations of the SEC, the Company will file a
copy of all such information and reports with the SEC for public availability
within the time periods specified in the SEC's rules and regulations (unless the
SEC will not accept such a filing) and make such information available to
securities analysts and prospective investors upon request. In addition, the
Company has agreed that, for so long as any Debentures remain outstanding, it
will furnish to the Trustee, Holders and to securities analysts and prospective
investors, upon their request, the information required to be delivered pursuant
to Rule 144A(d)(4) under the Securities Act.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture provides that the Company will not, in a single transaction or
series of related transactions, consolidate or merge with or into (whether or
not the Company is the surviving corporation), or sell, assign, transfer, lease,
convey or otherwise dispose of all or substantially all of its properties or
assets in one or more related transactions, to another corporation, Person or
entity unless (i) the Company is the surviving corporation or the entity or the
Person formed by or surviving any such consolidation or merger (if other than
the Company) or to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made (such surviving corporation or transferee
Person, the "Surviving Entity") is a corporation organized or existing under the
laws of the United States, any state thereof or the District of Columbia; (ii)
the Surviving Entity assumes all the obligations of the Company under the
Debentures and the Indenture pursuant to a supplemental indenture in a form
reasonably satisfactory to the Trustee; (iii) immediately after such transaction
no Default or Event of Default exists; (iv) the Company or the entity or Person
formed by or surviving any such consolidation or merger (if other than the
Company), or to which such sale, assignment, transfer, lease, conveyance or
other disposition will have been made will, at the time of such transaction and
after giving pro forma effect thereto as if such transaction had occurred at the
beginning of the applicable four-quarter period, be permitted to incur at least
$1.00 of additional Indebtedness pursuant to the Fixed Charge Coverage Ratio
test set forth in the first paragraph of the covenant entitled "Limitation on
Indebtedness and Issuance of Disqualified Stock"; and (v) the Company will have
delivered to the Trustee an Officers' Certificate stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or
disposition and such supplemental indenture, if any, comply with this Indenture
and that such supplemental indenture is enforceable.
Upon the occurrence of any transaction described in the immediately
preceding paragraph in which the Company is not the continuing corporation, the
successor corporation formed by such a consolidation or into which the Company
is merged or to which such transfer is made will succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Debentures with the same effect as if such successor corporation had
been named as the Company therein.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) default for 30 days in the payment when due of interest on, or
Liquidated Damages with respect to, the Debentures; (ii) default in payment when
due, upon redemption or otherwise, of the principal of or premium, if any, on
the Debentures; (iii) failure by the Company to make or consummate a Change of
Control Offer or Asset Sale Offer in accordance with the provisions described
under the captions "--Change of Control" and "--Asset Sales"; (iv) the failure
by the Company or any of its Subsidiaries for 30 days after notice to comply
with the provisions described under the captions "--Restricted Payments" and
"--Incurrence of
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Indebtedness and Issuance of Disqualified Stock"; (v) failure by the Company or
any of its Subsidiaries for 60 days after notice to comply with any of its other
agreements in the Indenture or the Debentures; (vi) default under any mortgage,
indenture or instrument under which there may be issued or by which there may be
secured or evidenced any Indebtedness for money borrowed by the Company or any
of its Subsidiaries or the payment of which is guaranteed by the Company or any
of its Subsidiaries whether such Indebtedness or guarantee now exists, or is
created after the Issue Date, which default (a) is caused by a failure to pay
principal upon final stated maturity of such Indebtedness following the
expiration of any grace period provided in such Indebtedness or (b) results in
the acceleration of such Indebtedness prior to its final stated maturity and, in
each case, the principal amount of any such Indebtedness, together with the
principal amount of any other such Indebtedness under which there has been a
default in the payment of principal upon final stated maturity which has not
been cured and is continuing following the expiration of any applicable grace
period or the maturity of which has been so accelerated and has not been
satisfied, aggregates $7.5 million or more; (vii) failure by the Company or any
of its Significant Subsidiaries to pay final judgments aggregating in excess of
$7.5 million, which judgments are not paid, discharged or stayed for a period of
60 days; and (viii) certain events of bankruptcy or insolvency with respect to
the Company or any of its Significant Subsidiaries.
If any Event of Default occurs and is continuing, the Trustee or the Holders
of at least 25% in aggregate principal amount of the then outstanding Debentures
may declare all the Debentures to be due and payable immediately by notice in
writing to the Company (an "Acceleration Notice"). Notwithstanding the
foregoing, in the case of an Event of Default arising from certain events of
bankruptcy or insolvency with respect to the Company, all outstanding Debentures
will become due and payable without further action or notice. Upon any
acceleration of maturity of the Debentures, all principal of and accrued
interest and Liquidated Damages, if any, on (if on or after May 15, 2003) or
Accreted Value of and Liquidated Damages, if any, on (if prior to May 15, 2003)
the Debentures shall be due and payable immediately. Subject to certain
limitations, Holders of a majority in principal amount of the then outstanding
Debentures may direct the Trustee in its exercise of any trust or power. The
Trustee may withhold from Holders of the Debentures notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest. In the event of a declaration of acceleration because an
Event of Default set forth in clause (vi) above has occurred and is continuing,
such declaration of acceleration shall be automatically rescinded and annulled
if the default triggering such Event of Default shall be remedied or cured by
the Company or relevant Subsidiary or waived by the holders of the relevant
Indebtedness within 60 days after the declaration of acceleration with respect
thereto.
The Holders of a majority in aggregate principal amount of the Debentures
then outstanding by notice to the Trustee may on behalf of the Holders of all of
the Debentures waive any existing Default or Event of Default and its
consequences under the Indenture or the Debentures, except a continuing Default
or Event of Default in the payment of interest on, or the principal of, the
Debentures.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required upon
becoming aware of any Default or Event of Default, to deliver to the Trustee a
statement specifying such Default or Event of Default.
NO PERSONAL LIABILITY OF DIRECTORS, OFFICERS, EMPLOYEES AND STOCKHOLDERS
No past, present or future director, officer, employee, incorporator or
stockholder of the Company or its Subsidiaries, as such, will have any liability
for any obligations of the Company under the Debentures, the Indenture and the
Registration Rights Agreement or for any claim based on, in respect of, or by
reason of, such obligations or their creation. Each Holder of Debentures by
accepting a Debenture waives and releases all such liability. The waiver and
release are part of the consideration for issuance of the Debentures. Such
waiver may not be effective to waive liabilities under the federal securities
laws and it is the view of the SEC that such a waiver is against public policy.
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LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
obligations discharged with respect to the outstanding Debentures ("Legal
Defeasance"), except for (i) the rights of Holders of outstanding Debentures to
receive payments in respect of the principal of, premium, if any, and interest
and Liquidated Damages, if any, on such Debentures when such payments are due
from the trust referred to below, (ii) the Company's obligations with respect to
the Debentures concerning issuing temporary Debentures, registration of
Debentures, mutilated, destroyed, lost or stolen Debentures and the maintenance
of an office or agency for payment and money for security payments held in
trust, (iii) the rights, powers, trusts, duties and immunities of the Trustee,
and the Company's obligations in connection therewith and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company released
with respect to certain covenants in the Indenture ("Covenant Defeasance") and
thereafter any omission to comply with such obligations will not constitute a
Default or Event of Default with respect to the Debentures. In the event
Covenant Defeasance occurs, certain events (not including non-payment, and,
solely for a period of 91 days following the deposit referred to in clause (i)
of the next paragraph, bankruptcy, receivership, rehabilitation and insolvency
events) described under "Events of Default" will no longer constitute an Event
of Default with respect to the Debentures.
Legal Defeasance and Covenant Defeasance will be deemed to occur on the date
of the deposit referred to in clause (i) of this paragraph, so long as the other
conditions thereto referred to in this paragraph are satisfied as of such date.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company must irrevocably deposit with the Trustee, in trust, for the benefit of
the Holders of the Debentures, cash in U.S. dollars, non-callable Government
Securities, or a combination thereof, in such amounts as will be sufficient, in
the opinion of a nationally recognized firm of independent public accountants,
to pay the principal amount at maturity of or Accreted Value (as applicable) of,
premium, if any, and interest and Liquidated Damages on the outstanding
Debentures on the stated maturity or on the applicable redemption date, as the
case may be, and the Company must specify whether the Debentures are being
defeased to maturity or to a particular redemption date; (ii) in the case of
Legal Defeasance, the Company will have delivered to the Trustee an opinion of
counsel in the United States reasonably acceptable to the Trustee confirming
that (A) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling or (B) since the Issue Date, there has been a
change in the applicable federal income tax law, in either case to the effect
that, and based thereon such opinion of counsel will confirm that, the Holders
of the outstanding Debentures will not recognize income, gain or loss for
federal income tax purposes as a result of such Legal Defeasance and will be
subject to federal income tax on the same amounts, in the same manner and at the
same times as would have been the case if such Legal Defeasance had not
occurred; (iii) in the case of Covenant Defeasance, the Company will have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that the Holders of the outstanding
Debentures will not recognize income, gain or loss for federal income tax
purposes as a result of such Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Covenant Defeasance had not occurred; (iv) no
Default or Event of Default will have occurred and be continuing on the date of
such deposit (other than a Default or Event of Default resulting from the
borrowing of funds to be applied to such deposit); (v) such Legal Defeasance or
Covenant Defeasance will not result in a breach or violation of, or constitute a
default under any material agreement or instrument (other than the Indenture) to
which the Company or any of its Subsidiaries is a party or by which the Company
or any of its Subsidiaries is bound; (vi) the Company must deliver to the
Trustee an Officers' Certificate stating that the deposit was not made by the
Company with the intent of preferring the Holders of Debentures over the other
creditors of the Company with the intent of defeating, hindering, delaying or
defrauding creditors of the Company or others; and (vii) the Company must
deliver to the Trustee an Officers' Certificate stating that all conditions
precedent provided for relating to the Legal Defeasance or the Covenant
Defeasance have been complied with.
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TRANSFER AND EXCHANGE
A Holder may transfer or exchange Debentures in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Debenture selected for redemption. Also, the Company is not required to
transfer or exchange any Debenture for a period of 15 days before a selection of
Debentures to be redeemed.
The registered Holder of a Debenture will be treated as the owner of it for
all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Debentures may be amended or supplemented with the consent of the Holders of
a majority in principal amount at maturity of the Debentures then outstanding
(including, without limitation, consents obtained in connection with a purchase
of, or tender offer or exchange offer for, Debentures), and any existing default
or compliance with any provision of the Indenture or the Debentures may be
waived with the consent of the Holders of a majority in principal amount at
maturity of the then outstanding Debentures (including, without limitation,
consents obtained in connection with a purchase of, or tender offer or exchange
offer for, Debentures). In connection with any amendment, supplement or waiver
under the Indenture, the Company may, but shall not be obligated to, offer to
any Holder who consents to such amendment, supplement or waiver, or to all
Holders, consideration for such Holder's consent to such amendment, supplement
or waiver.
Without the consent of each Holder affected (it being understood that the
covenants described above under the captions "--Change of Control" or "--Asset
Sales" may be amended as provided in the immediately preceding paragraph), an
amendment or waiver may not (with respect to any Notes held by a nonconsenting
Holder): (i) reduce the principal amount of Debentures whose Holders must
consent to an amendment, supplement or waiver of the Indenture or Debentures,
(ii) reduce the principal of or change the fixed final stated maturity of any
Debenture or alter the provisions with respect to the redemption of the
Debentures at the option of the Company or amend or modify the calculation of
the Accreted Value so as to reduce the amount of the Accreted Value of the
Debentures, (iii) reduce the rate of or change the time for payment of interest
on any Debenture, (iv) waive a past Default or past Event of Default in the
payment of principal of or premium, if any, or interest on the Debentures
(except a rescission of acceleration of the Debentures by the Holders of a
majority in aggregate principal amount at maturity of the Debentures and a
waiver of the payment default that resulted from such acceleration), (v) make
any Debenture payable in money other than that stated in the Debentures, (vi)
except as otherwise provided in this paragraph, make any change in the
provisions of the Indenture or Debentures relating to waivers of past Defaults
or Events of Defaults or the rights of Holders of Debentures to receive payments
of principal of or premium, if any, or interest on the Debentures or (vii) make
any change in the foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of
Debentures, the Company and the Trustee may amend or supplement the Indenture or
the Debentures to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Debentures in addition to or in place of certificated Debentures,
to provide for the assumption of the Company's obligations to Holders of
Debentures in the case of a merger or consolidation or sale of all or
substantially all of the Company's assets, to make any change that would provide
any additional rights or benefits to the Holders of Debentures or that does not
adversely affect the legal rights under the Indenture of any such Holder, to
comply with the procedures of the Depositary, Euroclear or Cedel or the Trustee
with respect to the provisions of the Indenture and the Debentures relating to
transfers and exchanges of Debentures or beneficial interests therein or to
comply with requirements of the SEC in order to effect or maintain the
qualification of the Indenture under the TIA.
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CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest it must eliminate
such conflict within 90 days, apply to the SEC for permission to continue or
resign.
The Holders of a majority in principal amount at maturity of the then
outstanding Debentures will have the right to direct the time, method and place
of conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that in case an Event of
Default will occur (which will not be cured), the Trustee will be required, in
the exercise of its power, to use the degree of care of a prudent man in the
conduct of his own affairs. Subject to such provisions, the Trustee will be
under no obligation to exercise any of its rights or powers under the Indenture
at the request of any Holder of Debentures, unless such Holder will have offered
to the Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
ADDITIONAL INFORMATION
Anyone who receives this Prospectus may obtain a copy of the Indenture and
the Registration Rights Agreement without charge by writing to the Company at
551 Fifth Avenue, Suite 3600, New York, New York 10176, Attention: Corporate
Secretary.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACCRETED VALUE" means, as of any date of determination prior to May 15,
2003, with respect to any Debenture, the sum of (a) the initial offering price
(which shall be calculated by discounting the aggregate principal amount at
maturity of such Debenture at a rate of 13 1/8% per annum, compounded
semi-annually on each May 15 and November 15, from May 15, 2003 to the date of
issuance) of such Debenture and (b) the portion of the excess of the principal
amount at maturity of such Debenture over such initial offering price which
shall have been accreted thereon through such date, such amount to be so
accreted on a daily basis at a rate of 13 1/8% per annum of the initial offering
price of such Debenture, compounded semi-annually on each May 15 and November
15, from the date of issuance of the Debentures through the date of
determination, computed on the basis of a 360-day year of twelve 30-day months.
The Accreted Value on and after May 15, 2003 shall cease to accrue and shall
constitute 100% of the principal amount at maturity thereof.
"ACQUIRED INDEBTEDNESS" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or became a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
"AFFILIATE" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For purposes of this definition,
"control" (including, with correlative meanings, the terms "controlling,"
"controlled by" and "under common control with"), as used with respect to any
Person, will mean the possession, directly or indirectly, of the power to direct
or cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise; PROVIDED
that beneficial ownership of 10% or more of the voting securities of a Person
will be deemed to be
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control. Notwithstanding the foregoing, (a) the limited partners of AIP Capital
Funds will not be deemed to be Affiliates of AIP Capital Funds or AIP solely by
reason of their investment in AIP Capital Funds and (b) no Person (other than
the Company or any Subsidiary of the Company) in whom a Receivables Subsidiary
makes an Investment in connection with a Qualified Receivables Transaction will
be deemed to be an Affiliate of the Company or any of its Subsidiaries solely by
reason of such Investment.
"AIP" means American Industrial Partners, a Delaware general partnership.
"AIP CAPITAL FUNDS" means American Industrial Partners Capital Fund, L.P., a
Delaware limited partnership, and American Industrial Partners Capital Fund II,
L.P., a Delaware limited partnership.
"ASSET SALE" means (i) the sale, lease, conveyance or other disposition that
does not constitute a Restricted Payment or an Investment by such Person of any
of its non-cash assets (including, without limitation, by way of a sale and
leaseback and including the issuance, sale or other transfer of any of the
Capital Stock of any Subsidiary of such Person) other than to the Company or to
any of its Subsidiaries; and (ii) the issuance of Equity Interests in any
Subsidiaries or the sale of any Equity Interests in any Subsidiaries, in each
case, in one or a series of related transactions, PROVIDED, that notwithstanding
the foregoing, the term "Asset Sale" will not include: (a) the sale, lease,
conveyance, disposition or other transfer of all or substantially all of the
assets of the Company, as permitted pursuant to the covenant entitled "Merger,
Consolidation or Sale of Assets"; (b) the sale or lease of equipment, inventory,
accounts receivable or other assets in the ordinary course of business and to
the extent that such sales or leases are not part of the a sale of the business
(unless such sale of such business would not be an Asset Sale) in which such
equipment was used or in which such inventory or accounts receivable arose; (c)
a transfer of assets by the Company to a Subsidiary of the Company or by a
Subsidiary of the Company to the Company or another Subsidiary of the Company;
(d) an issuance of Equity Interests by a Subsidiary of the Company to the
Company or to another Subsidiary of the Company; (e) the surrender or waiver of
contract rights or the settlement, release or surrender of contract, tort or
other claims of any kind; (f) the grant in the ordinary course of business of
any license of patents, trademarks, registrations therefor and other similar
intellectual property; (g) Permitted Investments or Permitted Liens; (h) sales
of accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" to a Receivables Subsidiary
for the fair market value thereof, including cash in an amount at least equal to
75% of the book value thereof as determined in accordance with GAAP; (i)
transfers of accounts receivable and related assets of the type specified in the
definition of "Qualified Receivables Transaction" (or a fractional undivided
interest therein) by a Receivables Subsidiary in a Qualified Receivables
Transaction; and (j) the sale or disposal of damaged, worn out or other obsolete
personal property, inventory or equipment in the ordinary course of business so
long as such property is no longer necessary for the proper conduct of the
business of the Company or such Subsidiary, as applicable. For the purposes of
clause (h), notes received in exchange for the transfer of accounts receivable
and related assets will be deemed cash if the Receivables Subsidiary or other
payor is required to repay said notes as soon as practicable from available cash
collections less amounts required to be established as reserves pursuant to
contractual agreements with entities that are not Affiliates of the Company
entered into as part of a Qualified Receivables Transaction.
"BOARD OF DIRECTORS" means the Board of Directors of the Company, or any
authorized committee of the Board of Directors.
"BORROWING BASE" means, as of any date, an amount equal to the sum of (a)
75% of the face amount of all accounts receivable owned by the Company and its
Subsidiaries as of such date that are not more than 90 days past due, and (b)
50% of the book value of all inventory owned by the Company and its Subsidiaries
as of such date, minus (c) the aggregate amount of trade payables of the Company
and its Subsidiaries outstanding as of such date, all calculated on a
consolidated basis and in accordance with GAAP. To the extent that information
is not available as to the amount of accounts receivable or inventory
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or trade payables as of a specific date, the Company may utilize the most recent
available information for purposes of calculating the Borrowing Base.
"BUSINESS DAY" means any day other than a Legal Holiday.
"CAPITAL LEASE OBLIGATION" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"CAPITAL STOCK" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited) and (iv) any other interest or participation that
confers on a Person the right to receive a share of the profits and losses of,
or distributions of assets of, the issuing Person.
"CASH EQUIVALENTS" means (a) securities issued or directly and fully
guaranteed or insured by the United States of America or any agency or
instrumentality thereof (PROVIDED that the full faith and credit of the United
States is pledged in support thereof) having maturities not more than twelve
months from the date of acquisition, (b) U.S. dollar denominated (or foreign
currency fully hedged) time deposits, certificates of deposit, Eurodollar time
deposits or Eurodollar certificates of deposit of (i) any domestic commercial
bank of recognized standing having capital and surplus in excess of $100.0
million or (ii) any bank whose short-term commercial paper rating from S&P is at
least A-1 or the equivalent thereof or from Moody's is at least P-1 or the
equivalent thereof (any such bank being an "Approved Lender"), in each case with
maturities of not more than twelve months from the date of acquisition, (c)
commercial paper and variable or fixed rate notes issued by any Approved Lender
(or by the parent company thereof) or any variable rate notes issued by, or
guaranteed by, any domestic corporation rated A-2 (or the equivalent thereof) or
better by S&P or P-2 (or the equivalent thereof) or better by Moody's and
maturing within twelve months of the date of acquisition, (d) repurchase
agreements with a bank or trust company or recognized securities dealer having
capital and surplus in excess of $100.0 million for direct obligations issued by
or fully guaranteed by the United States of America in which the Company will
have a perfected first priority security interest (subject to no other Liens)
and having, on the date of purchase thereof, a fair market value of at least
100% of the amount of repurchase obligations, (e) interests in money market
mutual funds which invest solely in assets or securities of the type described
in subparagraphs (a), (b), (c) or (d) hereof and (f) in the case of any Foreign
Subsidiary: (i) direct obligations of the sovereign nation (or any agency
thereof) in which such Foreign Subsidiary is organized and is conducting
business or in obligations fully and unconditionally guaranteed by such
sovereign nation (or any agency thereof), (ii) investments of the type and
maturity described in clauses (a) through (e) above of foreign obligors, which
investments or obligors (or the direct or indirect parents of such obligors)
have ratings described in such clauses or equivalent ratings from comparable
foreign rating agencies or (iii) investments of the type and maturity described
in clauses (a) through (e) above of foreign obligors (or the direct or indirect
parents of such obligors), which investments or obligors (or the direct or
indirect parents of such obligors) are not rated as provided in such clauses or
in clause (ii) above but which are, in the reasonable judgment of the Company,
comparable in investment quality to such investments and obligors (or the direct
or indirect parent of such obligors).
"CHANGE OF CONTROL" means such time as (i) prior to the initial public
offering by the Company or any direct or indirect parent of the Company of its
common stock (other than a public offering pursuant to a registration statement
on Form S-8), AIP, AIP Capital Funds or any of their respective Affiliates
(collectively, the "Initial Investors") cease to be, directly or indirectly, the
beneficial owners, in the aggregate, of a majority of the voting power of the
voting Capital Stock of the Company or (ii) after the initial public offering by
the Company or any direct or indirect parent of the Company of its common stock
(other than a public offering pursuant to a registration statement on Form S-8),
(A) any Schedule 13D, Form 13F or Schedule 13G under the Exchange Act, or any
amendment to such Schedule or Form, is
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received by the Company which indicates that, or the Company otherwise becomes
aware that, a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) other than the Initial Investors or their Related
Parties (as defined below) has become, directly or indirectly, the "beneficial
owner," by way of merger, consolidation or otherwise, of 35% or more of the
voting power of the voting Capital Stock of the Company and (B) such person or
group has become, directly or indirectly, the beneficial owner of a greater
percentage of the voting Capital Stock of the Company than beneficially owned by
the Initial Investors or their Related Parties, or (iii) the sale, lease or
transfer of all or substantially all of the assets of the Company to any person
or group (other than to GLC or a Subsidiary of GLC or to the Initial Investors
or their Related Parties), or (iv) during any period of two consecutive calendar
years, individuals who at the beginning of such period constituted the Board of
Directors of the Company (together with any new directors whose election by the
Board of Directors of the Company or whose nomination for election by the
stockholders of the Company was approved by a vote of a majority of the
directors then still in office who either were directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the directors of the
Company, then in office. "Related Party" with respect to any Initial Investor
means (A) any controlling stockholder, 80% (or more) owned Subsidiary, or
spouse, or immediate family member (in the case of any individual) of such
Initial Investor or (B) any trust, corporation, partnership or other entity, the
beneficiaries, stockholders, partners, owners or persons beneficially holding an
80% or more controlling interest of which consist of such Initial Investor
and/or such other persons referred to in the immediately preceding clause (A).
"CONSOLIDATED EBITDA" means, with respect to the Company and its
Subsidiaries for any period, the sum of, without duplication, (i) the
Consolidated Net Income for such period, plus (ii) the Fixed Charges for such
period, plus (iii) provision for taxes based on income or profits for such
period (to the extent such income or profits were included in computing
Consolidated Net Income for such period), plus (iv) consolidated depreciation,
amortization and other non-cash charges of the Company and its Subsidiaries
required to be reflected as expenses on the books and records of the Company,
minus (v) cash payments with respect to any non-recurring, non-cash charges
previously added back pursuant to clause (iv), and (vi) excluding the impact of
foreign currency translations. Notwithstanding the foregoing, the provision for
taxes based on the income or profits of, and the depreciation and amortization
and other non-cash charges of, a Subsidiary of a Person will be added to
Consolidated Net Income to compute Consolidated EBITDA only to the extent (and
in the same proportion) that the Net Income of such Subsidiary was included in
calculating the Consolidated Net Income of such Person.
"CONSOLIDATED NET INCOME" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Subsidiaries for such
period, on a consolidated basis, determined in accordance with GAAP; PROVIDED
that (i) the Net Income (but not loss) of any Person that is not a Subsidiary or
that is accounted for by the equity method of accounting will be included only
to the extent of the amount of dividends or distributions paid in cash to the
referent Person or a Subsidiary, (ii) the Net Income of any Person acquired in a
pooling of interests transaction for any period prior to the date of such
acquisition will be excluded, (iii) the cumulative effect of a change in
accounting principles will be excluded, (iv) the Net Income of, or any dividends
or other distributions from, any Unrestricted Subsidiary, to the extent
otherwise included, shall be excluded, except to the extent cash or Cash
Equivalents are distributed to the Company or one of its Subsidiaries in a
transaction that does not relate to the liquidation of such Unrestricted
Subsidiary and (v) all other extraordinary gains and extraordinary losses will
be excluded.
"COPETRO CREDIT AGREEMENT" means the credit agreement, dated as of February
4, 1997, between Copetro S.A., Banca Nazionale del Lavoro S.A. and the other
lenders party thereto, as amended, restated, supplemented or otherwise modified
from time to time.
"DEFAULT" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
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"DEPOSITARY" means, with respect to the Debentures issuable or issued in
whole or in part in global form, the Person specified in the Indenture as the
Depositary with respect to the Debentures, until a successor will have been
appointed and become such Depositary pursuant to the applicable provision of the
Indenture, and, thereafter, "Depositary" will mean or include such successor.
"DISQUALIFIED STOCK" means any Capital Stock that, by its terms (or by the
terms of any security into which it is convertible or for which it is
exchangeable), or upon the happening of any event (other than customary change
of control or asset sale provisions), matures or is mandatorily redeemable,
pursuant to a sinking fund obligation or otherwise, or is redeemable at the
option of the Holder thereof, in whole or in part, prior to the final stated
maturity of the Debentures.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"EQUITY OFFERING" means an underwritten public offering pursuant to a
registration statement filed with the SEC in accordance with the Securities Act
of (i) Equity Interests (other than Disqualified Stock) of the Company or (ii)
Equity Interests (other than Disqualified Stock) of the Company's parent or
indirect parent to the extent that the cash proceeds therefrom are contributed
to the equity capital of the Company or are used to purchase Equity Interests
(other than Disqualified Stock) of the Company.
"EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended.
"EXCHANGE DEBENTURES" means the securities substantially similar to the
Debentures, issued pursuant to an Exchange Offer.
"EXCHANGE OFFER" means an offer that may be made by the Company pursuant to
the Registration Rights Agreement to exchange Debentures for Exchange
Debentures.
"EXISTING INDEBTEDNESS" means the Indebtedness of the Company and its
Subsidiaries (other than Indebtedness under the New Credit Agreement) in
existence on the Issue Date or incurred subsequent to the Issue Date pursuant to
commitments under the Copetro Credit Agreement as in effect on the Issue Date,
until such amounts are repaid.
"FINANCE SUBSIDIARY" means any Subsidiary of the Company (other than a
Subsidiary Guarantor or a Foreign Subsidiary) organized for the sole purpose of
issuing Capital Stock or other securities and loaning the proceeds thereof to
the Company or a Subsidiary and which engages in no other transactions except
those incidental thereto.
"FINANCE SUBSIDIARY INDEBTEDNESS" means Indebtedness of or Disqualified
Stock issued by a Finance Subsidiary which Indebtedness or Disqualified Stock
does not have a final stated maturity and is not mandatorily redeemable or
redeemable at the option of the holder thereof (other than pursuant to customary
change of control or asset sale provisions), in whole or in part, prior to the
final stated maturity of the Notes.
"FIXED CHARGES" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Subsidiaries for such period, whether paid or accrued (including, without
limitation, amortization of original issue discount, non-cash interest payments,
the interest component of any deferred payment obligations, the interest
component of all payments associated with Capital Lease Obligations,
commissions, discounts and other fees and charges incurred in respect of letter
of credit or bankers' acceptance financings, and net payments (if any) pursuant
to Hedging Obligations), and (ii) the consolidated interest expense of such
Person and its Subsidiaries that was capitalized during such period, and (iii)
any interest expense on Indebtedness of another Person that is Guaranteed by
such Person or one of its Subsidiaries or secured by a Lien on assets of such
Person or one of its Subsidiaries (whether or not such Guarantee or Lien is
called upon), and (iv) all cash dividend payments on any series of preferred
stock of such Person payable to a party other than the Company or a Subsidiary
of the Company.
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"FIXED CHARGE COVERAGE RATIO" means with respect to any Person for any
period, the ratio of the Consolidated EBITDA of such Person and its Subsidiaries
for such period to the Fixed Charges of such Person and its Subsidiaries for
such period. In the event that the Company or any of its Subsidiaries incurs,
issues, assumes, retires, Guarantees, defeases or redeems any Indebtedness
(other than revolving credit borrowings) or preferred stock subsequent to the
commencement of the four-quarter reference period for which the Fixed Charge
Coverage Ratio is being calculated but on or prior to the date on which the
event for which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio will be calculated
giving pro forma effect to such incurrence, issuance, assumption, retirement,
Guarantee, defeasance or redemption of Indebtedness or preferred stock, as if
the same had occurred at the beginning of the applicable four-quarter reference
period. For purposes of making the computation referred to above, (i)
acquisitions that have been made by the Company or any of its Subsidiaries,
including through mergers or consolidations and including any related financing
transactions, during the four-quarter reference period or subsequent to such
reference period and on or prior to the Calculation Date will be deemed to have
occurred on the first day of the four-quarter reference period, and (ii) the
Consolidated EBITDA attributable to discontinued operations, as determined in
accordance with GAAP, and operations or businesses disposed of on or prior to
the Calculation Date, will be excluded, and (iii) the Fixed Charges attributable
to discontinued operations, as determined in accordance with GAAP, and
operations or businesses disposed of on or prior to the Calculation Date, will
be excluded, but only to the extent that the obligations giving rise to such
Fixed Charges will not be obligations of the referent Person or any of its
Subsidiaries following the Calculation Date.
"FOREIGN SUBSIDIARIES" means (i) Copetro S.A., an Argentine corporation, and
Great Lakes International Sales Corp., a Barbados corporation, and (ii) any
Subsidiary organized and incorporated in a jurisdiction outside of the United
States.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issue Date. All ratios and computations
based on GAAP contained in the Indenture shall be computed in conformity with
GAAP applied on a consistent basis, except that calculations made for purposes
of determining compliance with the terms of the covenants and with other
provisions of the Indenture shall be made without giving effect to depreciation,
amortization or other expenses recorded as a result of the application of
purchase accounting in accordance with Accounting Principles Board Opinion Nos.
16 and 17.
"GLC" means Great Lakes Carbon Corporation, a Delaware corporation.
"GOVERNMENT SECURITIES" means direct obligations of, or obligations
guaranteed by, the United States of America for the payment of which guarantee
or obligations the full faith and credit of the United States is pledged.
"GUARANTEE" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"HEDGING OBLIGATIONS" means, with respect to any Person, the obligations of
such Person under (i) interest rate swap agreements, interest rate cap
agreements and interest rate collar agreements and other agreements or
arrangements designed to protect such Person against fluctuations in interest
rates and (ii) currency swap or protection agreements and other agreements or
arrangements designed to protect such Person against fluctuations in currency
exchange rates.
"HOLDER" means a Person in whose name a Debenture is registered on the
Registrar's books.
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"INDEBTEDNESS" means, with respect to any Person, any indebtedness of such
Person, whether or not contingent, in respect of borrowed money or evidenced by
bonds, notes, debentures or similar instruments or letters of credit (or
reimbursement agreements in respect thereof) or bankers' acceptances or
representing Capital Lease Obligations or the balance deferred and unpaid of the
purchase price of any property or representing any Hedging Obligations, except
any such balance that constitutes an accrued expense or trade payable, if and to
the extent any of the foregoing indebtedness (other than letters of credit and
Hedging Obligations) would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP, as well as all indebtedness of others
secured by a Lien on any asset of such Person (whether or not such indebtedness
is assumed by such Person) and, to the extent not otherwise included, the
Guarantee by such Person of any such Indebtedness of any other Person; provided
that any indebtedness which has been defeased in accordance with GAAP or
defeased pursuant to the deposit of cash or Government Securities (in an amount
sufficient to satisfy all such indebtedness obligations at maturity or
redemption, as applicable, and all payments of interest and premium, if any) in
a trust or account created or pledged for the sole benefit of the holders of
such indebtedness, and subject to no other Liens, and the other applicable terms
of the instrument governing such indebtedness, shall not constitute
"Indebtedness."
"INVESTMENTS" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the form of direct or indirect
loans (including guarantees of Indebtedness or other obligations but excluding
guarantees of Indebtedness of the Company or any of its Subsidiaries), advances
or capital contributions (excluding commission, travel and similar advances to
officers and employees made in the ordinary course of business), purchases or
other acquisitions for consideration of Indebtedness, Equity Interests or other
securities and all other items that are or would be classified as investments on
a balance sheet prepared in accordance with GAAP; PROVIDED that an acquisition
of assets, Equity Interests or other securities by the Company or GLC for
consideration consisting of common equity securities of the Company or GLC or
any direct or indirect parent of the Company will not be deemed to be an
Investment.
"ISSUE DATE" means the date of first issuance of the Debentures under the
Indenture.
"JOINT VENTURES" means joint ventures entered into by the Company or any of
its Subsidiaries for the primary purpose of operating a Related Business.
"LEGAL HOLIDAY" means a Saturday, a Sunday or a day on which banking
institutions in the City of New York or at a place of payment are authorized by
law, regulation or executive order to remain closed. If a payment date is a
Legal Holiday at a place of payment, payment may be made at that place on the
next succeeding day that is not a Legal Holiday, and no interest will accrue for
the intervening period.
"LIEN" means, with respect to any asset, any mortgage, lien, pledge, charge,
security interest or encumbrance of any kind in respect of such asset, whether
or not filed, recorded or otherwise perfected under applicable law (including
any conditional sale or other title retention agreement, any lease in the nature
of a security agreement, any option or other agreement to grant or give a
security interest in and, except in connection with any Qualified Receivables
Transaction, any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"LIQUIDATED DAMAGES" means all liquidated damages then owing pursuant to the
Registration Rights Agreement.
"MOODY'S" means Moody's Investors Service, Inc.
"MORTGAGE FINANCINGS" means any mortgage, deed of trust or other instrument
creating a lien on an estate in fee simple or a leasehold estate in a property,
secured by a note or other evidence of an obligor's indebtedness under such
mortgage, deed of trust or other instrument.
"NET CASH PROCEEDS" means the aggregate amount of cash and Cash Equivalents
received by the Company or GLC or any direct or indirect parent of the Company
in the case of a sale or equity contribution in respect of Equity Interests
(other than Disqualified Stock) plus, in the case of an issuance
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of Equity Interests (other than Disqualified Stock) upon any exercise, exchange
or conversion of securities (including options, warrants, rights and convertible
or exchangeable debt) of the Company or GLC or any direct or indirect parent of
the Company that were issued for cash after the Issue Date, the amount of cash
originally received by the Company or GLC or any direct or indirect parent of
the Company upon the issuance of such securities (including options, warrants,
rights and convertible or exchangeable debt) less the sum of all payments, fees,
commissions, and customary and reasonable expenses (including, without
limitation, the fees and expenses of legal counsel and investment banking fees
and expenses) incurred in connection with such sale or equity contribution in
respect of Equity Interests (other than Disqualified Stock).
"NET INCOME" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain (but not
loss), together with any related provision for taxes on such gain (but not
loss), realized in connection with (a) any Asset Sale (including, without
limitation, dispositions pursuant to sale and leaseback transactions) or (b) the
disposition of any securities by such Person or any of its Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Subsidiaries and
(ii) any extraordinary or nonrecurring gain (but not loss), together with any
related provision for taxes on such extraordinary or nonrecurring gain (but not
loss).
"NET PROCEEDS" means the aggregate cash proceeds and Cash Equivalents
received by the Company or any of its Subsidiaries in respect of any Asset Sale
(including, without limitation, any cash received upon the sale or other
disposition of any non-cash consideration received in any Asset Sale), net of
the direct costs relating to such Asset Sale (including, without limitation,
legal, accounting and investment banking fees, and sales commissions) and any
relocation expenses incurred as a result thereof, taxes paid or payable as a
result thereof (after taking into account any available tax credits or
deductions and any tax sharing arrangements), amounts required to be applied to
the repayment of Indebtedness (other than the Debentures or Indebtedness under
the New Credit Agreement) secured by a Lien on the asset or assets that were the
subject of such Asset Sale, any reserve for adjustment in respect of the sale
price of such asset or assets or liabilities associated with such Asset Sale and
retained by the Company or such Subsidiary established in accordance with GAAP,
all distributions and other payments required to be made to minority interest
holders in Subsidiaries or other parties to any Joint Ventures as a result of
such Asset Sale and all Purchase Money Obligations (and Permitted Refinancing
Indebtedness thereof) assumed by the purchaser in connection with such Asset
Sale.
"NEW CREDIT AGREEMENT" means that certain Credit Agreement, dated as of the
Issue Date, by and among the Company, GLC, Bankers Trust Company, as syndication
and administrative agent, DLJ Capital Funding, Inc., as documentation agent,
Bank of America National Trust and Savings Association, as co-agent, and the
lenders parties thereto, including any related notes, guarantees, collateral
documents, instruments and agreements (including, without limitation, agreements
with respect to Hedging Obligations with lenders party to the New Credit
Agreement or their Affiliates) executed in connection therewith, and in each
case as amended, supplemented, modified, renewed, refunded, replaced, restated
or refinanced from time to time, including any agreement restructuring or adding
the Company or Subsidiaries of GLC as additional borrowers or guarantors
thereunder and whether by the same or any other agent, lender or group of
lenders.
"NON-RECOURSE INDEBTEDNESS" means Indebtedness (i) as to which neither the
Company nor any of its Subsidiaries (a) provides credit support of any kind
(including any undertaking, agreement or instrument that would constitute
Indebtedness), (b) is directly or indirectly liable (as a guarantor or
otherwise), or (c) constitutes the lender; and (ii) no default with respect to
which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time or both) any holder of any other Indebtedness of the
Company or any of its Subsidiaries to declare a default on such other
Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity.
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"OBLIGATIONS" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"OFFERING" means the Offering of the Debentures by the Company.
"OFFICER" means, with respect to any Person, the Chairman of the Board, the
Chief Executive Officer, the President, the Chief Operating Officer, the Chief
Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the
Secretary, any Assistant Secretary or any Vice-President of such Person.
"PERMITTED INVESTMENTS" means (a) any Investments in the Company or in a
Subsidiary of the Company that is engaged in one or more Related Businesses; (b)
any Investment by the Company or a Subsidiary of the Company in a Receivables
Subsidiary or any Investment by a Receivables Subsidiary in any other Person in
connection with a Qualified Receivables Transaction PROVIDED, that the foregoing
Investment is in the form of a note or other instrument that the Receivables
Subsidiary or other Person is required to repay as soon as practicable from
available cash collections less amounts required to be established as reserves
pursuant to contractual agreements with entities that are not Affiliates of the
Company entered into as part of a Qualified Receivables Transaction; (c) any
Investments in Cash Equivalents; (d) Investments by the Company or any
Subsidiary of the Company in a Person if as a result of such Investment (i) such
Person becomes a Subsidiary of the Company that is engaged in one or more
Related Businesses or (ii) such Person is merged, consolidated or amalgamated
with or into, or transfers or conveys substantially all of its assets to, or is
liquidated into, the Company or a Subsidiary of the Company that is engaged in
one or more Related Businesses; (e) Investments made as a result of the receipt
of non-cash consideration from an Asset Sale that was made pursuant to and in
compliance with the covenant entitled "Limitation on Asset Sales"; (f)
Investments outstanding as of the Issue Date; (g) Investments in the form of
promissory notes of members of the Company's management in consideration of the
purchase by such members of Equity Interests (other than Disqualified Stock) in
the Company or GLC; (h) Investments which constitute Existing Indebtedness of
the Company of any of its Subsidiaries; (i) accounts receivable, endorsements
for collection or deposits arising in the ordinary course of business; (j) other
Investments in any Person that do not exceed $10.0 million at any time
outstanding under and pursuant to this clause (j), without giving effect to
changes in the value of such Investment occurring after the date of such
Investment, but giving effect to all dividends, distributions, principal,
interest and other payments received in respect of such Investments in cash or
Cash Equivalents; (k) Investments in Foreign Subsidiaries or Joint Ventures that
do not exceed $35.0 million at any time outstanding under and pursuant to this
clause (k) without giving effect to changes in the value of such Investment
occurring after the date of such Investment, but giving effect to all dividends,
distributions, principal, interest and other payments received in respect of
such Investments in cash or Cash Equivalents; (l) Investments constituting
Indebtedness owed by one Foreign Subsidiary to one or more other Foreign
Subsidiaries or Investments by a Foreign Subsidiary in one or more other Foreign
Subsidiaries; (m) Investments constituting Indebtedness permitted under clause
(vii) of the covenant described above under the caption "--Incurrence of
Indebtedness and Issuance of Disqualified Stock"; and (n) capital stock,
obligations or other securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any of its Subsidiaries.
"PERMITTED LIENS" means (i) Liens securing the New Credit Agreement and
other Indebtedness of GLC or its Subsidiaries and Permitted Refinancing
Indebtedness related thereto; (ii) Liens in favor of the Company or any
Subsidiary of the Company; (iii) Liens on property of a Person existing at the
time such Person is merged into or consolidated with or acquired by the Company
or any Subsidiary of the Company in accordance with the provisions of the
Indenture; PROVIDED that such Liens were in existence prior to the contemplation
of such merger or consolidation and do not extend to any assets other than those
of the Person merged into or consolidated with the Company; (iv) Liens on
property existing at the time of acquisition thereof by the Company or any
Subsidiary of the Company, PROVIDED that such Liens were in existence prior to
the contemplation of such acquisition; (v) Liens to secure the performance of
statutory obligations, surety or appeal bonds, performance bonds or other
obligations of a like nature incurred in the ordinary course of business; (vi)
Liens existing on the Issue Date and Liens securing any Permitted
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Refinancing Indebtedness incurred to refinance any Indebtedness secured by such
Liens; (vii) Liens for taxes, assessments or governmental charges or claims that
are not yet delinquent or that are being contested in good faith by appropriate
proceedings promptly instituted and diligently concluded, PROVIDED that any
reserve or other appropriate provision as will be required in conformity with
GAAP will have been made therefor; (viii) Liens incurred in the ordinary course
of business of the Company or any Subsidiary of the Company with respect to
obligations that do not exceed $5.0 million at any one time outstanding and that
(a) are not incurred in connection with the borrowing of money or the obtaining
of advances or credit (other than trade credit in the ordinary course of
business) and (b) do not in the aggregate materially detract from the value of
the property or materially impair the use thereof in the operation of business
by the Company or such Subsidiary; (ix) Liens incurred or deposits made in the
ordinary course of business in connection with workers' compensation,
unemployment insurance and other types of social security; (x) easements,
rights-of-way, restrictions, minor defects or irregularities in title and other
similar charges or encumbrances not interfering in any material respect with the
business of the Company or any of its Subsidiaries; (xi) Purchase Money Liens
(including extensions and renewals thereof and Liens securing any Permitted
Refinancing Indebtedness incurred in respect of the applicable Purchase Money
Obligations); (xii) Liens securing reimbursement obligations with respect to
letters of credit and banker's acceptances which encumber only documents and
other property relating to such letters of credit and the products and proceeds
thereof; (xiii) judgment and attachment Liens not giving rise to an Event of
Default; (xiv) Liens encumbering deposits made to secure obligations arising
from statutory, regulatory, contractual or warranty requirements; (xv) Liens
arising out of consignment or similar arrangements for the sale of goods; (xvi)
any interest or title of a lessor in property subject to any Capital Lease
Obligation or operating lease; (xvii) Liens arising from filing Uniform
Commercial Code financing statements regarding leases; (xviii) Liens on assets
of the Company or its Subsidiaries with respect to Acquired Indebtedness (and
Permitted Refinancing Indebtedness with respect thereto) provided that such
Liens were not created in contemplation of or in connection with such
acquisition; (xix) Liens on assets of the Company or a Receivables Subsidiary
incurred in connection with a Qualified Receivables Transaction; (xx) Liens
securing Indebtedness of any Foreign Subsidiary; (xxi) Liens securing the Notes,
the Debentures and any other obligations ranking PARI PASSU with the Notes or
the Debentures, as the case may be; and (xxii) Liens securing Permitted
Refinancing Indebtedness incurred to refinance any Indebtedness that was
previously subject to a Lien secured in a manner no more adverse, taken as a
whole, to the Holders of the Debentures than the Liens securing such refinanced
Indebtedness.
"PERMITTED REFINANCING INDEBTEDNESS" means any Indebtedness of the Company
or any of its Subsidiaries issued in exchange for, or the net proceeds of which
are used to extend, refinance, renew, replace, defease or refund, other
Indebtedness of the Company or any of its Subsidiaries; PROVIDED that: (i) the
principal amount (or accreted value, if issued with an original issue discount)
of such Permitted Refinancing Indebtedness does not exceed the principal amount
(or accreted value, if issued with an original issue discount) of the
Indebtedness so extended, refinanced, renewed, replaced, defeased or refunded
(plus the amount of reasonable expenses incurred in connection therewith, the
accrued or unpaid interest thereon and any premium owed in connection
therewith); (ii) such Permitted Refinancing Indebtedness has a Weighted Average
Life to Maturity equal to or greater than the Weighted Average Life to Maturity
of the Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded; (iii) if the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded is subordinated in right of payment to the
Debentures, such Permitted Refinancing Indebtedness is subordinated in right of
payment to, the Debentures on terms at least as favorable, taken as a whole, to
the Holders of Debentures as those contained in the documentation governing the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
and the final maturity date of such Permitted Refinancing Indebtedness is later
than the final maturity date of the Indebtedness being extended, refinanced,
renewed, replaced, defeased or refunded; and (iv) such Indebtedness is incurred
either by the Company or by the Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
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"PERSON" means any individual, corporation, partnership, limited liability
company, joint venture, association, joint-stock company, trust, unincorporated
organization or government or agency or political subdivision thereof (including
any subdivision or ongoing business of any such entity or substantially all of
the assets of any such entity, subdivision or business).
"PURCHASE MONEY LIEN" means a Lien granted on an asset or property to secure
a Purchase Money Obligation permitted to be incurred under the Indenture and
incurred solely to finance the purchase (or lease), or the cost of construction
or improvement, of such asset or property; PROVIDED, HOWEVER, that such Lien
encumbers only such asset or property and is granted within 180 days of such
acquisition.
"PURCHASE MONEY OBLIGATIONS" of any Person means any obligations of such
Person to any seller or any other Person incurred or assumed to finance the
purchase (or lease), or the cost of construction or improvement, of real or
personal property to be used in the business of such Person or any of its
Subsidiaries in an amount that is not more than 100% of the cost, or fair market
value, as appropriate, of such property, and incurred within 180 days after the
date of such acquisition (excluding accounts payable to trade creditors incurred
in the ordinary course of business).
"QUALIFIED RECEIVABLES TRANSACTION" means any transaction or series of
transactions that may be entered into by the Company or any of its Subsidiaries
pursuant to which the Company or any of its Subsidiaries may sell, convey or
otherwise transfer to (i) a Receivables Subsidiary (in the case of a transfer by
the Company or any of its Subsidiaries) and (ii) any other Person (in the case
of a transfer by a Receivables Subsidiary), or may grant a security interest in,
any accounts receivable (whether now existing or arising in the future) of the
Company or any of its Subsidiaries, and any assets related thereto including,
without limitation, all collateral securing such accounts receivable, all
contracts and all guarantees or other obligations in respect of such accounts
receivable, proceeds of such accounts receivable and other assets which are
customarily transferred or in respect of which security interests are
customarily granted in connection with asset securitization transactions
involving accounts receivable.
"RECEIVABLES SUBSIDIARY" means a Subsidiary of the Company which engages in
no activities other than in connection with the financing of accounts receivable
and which is designated by the Board of Directors of the Company (as provided
below) as a Receivables Subsidiary (a) no portion of the Indebtedness or any
other Obligations (contingent or otherwise) of which (i) is guaranteed by the
Company or any Subsidiary of the Company (excluding guarantees of Obligations
(other than the principal of, and interest on, Indebtedness) pursuant to
representations, warranties, covenants and indemnities entered into in the
ordinary course of business in connection with a Qualified Receivables
Transaction), (ii) is recourse to or obligates the Company or any Subsidiary of
the Company in any way other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction or (iii) subjects any
property or asset of the Company or any Subsidiary of the Company (other than
accounts receivable), directly or indirectly, contingently or otherwise, to the
satisfaction thereof, other than pursuant to representations, warranties,
covenants and indemnities entered into in the ordinary course of business in
connection with a Qualified Receivables Transaction, (b) with which neither the
Company nor any Subsidiary of the Company has any material contract, agreement,
arrangement or understanding other than on terms no less favorable to the
Company or such Subsidiary than those that might be obtained at the time from
Persons who are not Affiliates of the Company, other than fees payable in the
ordinary course of business in connection with servicing accounts receivable and
(c) with which neither the Company nor any Subsidiary of the Company has any
obligation to maintain or preserve such Subsidiary's financial condition or
cause such Subsidiary to achieve certain levels of operating results. Any such
designation by the Board of Directors of the Company will be evidenced to the
Trustee by filing with the Trustee a certified copy of the resolution of the
Board of Directors of the Company giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions.
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"REGISTRATION RIGHTS AGREEMENT" means the Registration Rights Agreement,
dated as of the Issue Date, by and among the Company and the other parties named
on the signature pages thereof, as such agreement may be amended, modified or
supplemented from time to time.
"RELATED BUSINESS" means the business conducted by the Company and its
Subsidiaries as of the Issue Date and any and all businesses that in the good
faith judgment of the Board of Directors of the Company are related businesses,
including reasonable extensions or expansions thereof.
"RESTRICTED INVESTMENT" means an Investment other than a Permitted
Investment.
"SEC" means the Securities and Exchange Commission.
"SECURITIES ACT" means the Securities Act of 1933, as amended.
"SENIOR REVOLVING DEBT" means revolving Indebtedness under the New Credit
Agreement as such agreement may be restated, further amended, supplemented or
otherwise modified, renewed, refunded, replaced or refinanced, in whole or in
part, from time to time.
"SENIOR TERM DEBT" means term Indebtedness under the New Credit Agreement as
such agreement may be restated, further amended, supplemented or otherwise
modified, renewed, refunded, replaced or refinanced, in whole or in part, from
time to time.
"SIGNIFICANT SUBSIDIARY" means any Subsidiary that would be a "significant
subsidiary" as defined in Article 1, Rule 1-02 of Regulation S-X, promulgated
pursuant to the Exchange Act, as such Regulation is in effect on the date
hereof.
"SUBSIDIARY" means, with respect to any Person, any corporation, association
or other business entity of which more than 50% of the total voting power of
shares of Capital Stock entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by such Person or
one or more of the other Subsidiaries of that Person (or a combination thereof).
Unrestricted Subsidiaries will not be included in the definition of Subsidiary
for any purposes of the Indenture (except, as the context may otherwise require,
for purposes of the definition of "Unrestricted Subsidiary.")
"S&P" means Standard & Poor's Financial Information Services.
"TIA" means the Trust Indenture Act of 1939 (15 U.S.C. SectionSection
77aaa-77bbbb) as in effect on the date on which the Indenture is qualified under
the TIA.
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary that is designated by the
Board of Directors as an Unrestricted Subsidiary pursuant to a Board Resolution;
but only to the extent that such Subsidiary: (a) has no Indebtedness other than
Non-Recourse Indebtedness; (b) is not party to any agreement, contract,
arrangement or understanding with the Company or any Subsidiary of the Company
unless the terms of any such agreement, contract, arrangement or understanding
are no less favorable to the Company or such Subsidiary than those that might be
obtained at the time from Persons who are not Affiliates of the Company; (c) is
a Person with respect to which neither the Company nor any of its Subsidiaries
has any obligation (x) to subscribe for additional Equity Interests or (y) to
maintain or preserve such Person's financial condition or to cause such Person
to achieve any specified levels of operating results; and (d) has not guaranteed
or otherwise directly or indirectly provided credit support for any Indebtedness
of the Company or any of its Subsidiaries. Any such designation by the Board of
Directors will be evidenced to the Trustee by filing with the Trustee a
certified copy of the Board Resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing conditions and was permitted by the covenant entitled "Restricted
Payments" hereof. If, at any time, any Unrestricted Subsidiary would fail to
meet the foregoing requirements as an Unrestricted Subsidiary, it will
thereafter cease to be an Unrestricted Subsidiary for purposes of the Indenture
and any Indebtedness of such Subsidiary will be deemed to be incurred by a
Subsidiary of the
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Company as of such date (and, if such Indebtedness is not permitted to be
incurred as of such date under the covenant entitled "Incurrence of Indebtedness
and Issuance of Disqualified Stock" hereof, the Company will be in default of
such covenant). The Board of Directors of the Company may at any time designate
any Unrestricted Subsidiary to be a Subsidiary; PROVIDED that such designation
will be deemed to be an incurrence of Indebtedness by a Subsidiary of the
Company of any outstanding Indebtedness of such Unrestricted Subsidiary and such
designation will only be permitted if (i) such Indebtedness is permitted under
the covenant entitled "Limitation on Indebtedness and Issuance of Disqualified
Stock" hereof, and (ii) no Default or Event of Default would be in existence
following such designation.
"WEIGHTED AVERAGE LIFE TO MATURITY" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
REGISTRATION RIGHTS; LIQUIDATED DAMAGES
While the following description sets forth the material terms of the
Registration Rights Agreement, the following summary does not purport to be
complete and is subject to, and is qualified in its entirety by reference to,
all provisions of the Registration Rights Agreement, a copy of which is filed as
an exhibit to the Registration Statement of which this Prospectus forms a part.
Holdings and the Initial Purchaser entered into the Registration Rights
Agreement on May 22, 1998 (the "Closing Date"). Pursuant to the Registration
Rights Agreement, Holdings agreed to file with the SEC this Exchange Offer
Registration Statement with respect to the Exchange Debentures. Upon the
effectiveness of the Exchange Offer Registration Statement, Holdings will offer
to the Holders of Transfer Restricted Securities (as defined below) pursuant to
the Exchange Offer who are able to make certain representations the opportunity
to exchange their Transfer Restricted Securities for Exchange Debentures. If (i)
Holdings is not required to file the Exchange Offer Registration Statement or
permitted to consummate the Exchange Offer because the Exchange Offer is not
permitted by applicable law or SEC policy or (ii) any Holder of Transfer
Restricted Securities notifies Holdings prior to the 20th day following
consummation of the Exchange Offer that (a) it is prohibited by law or SEC
policy from participating in the Exchange Offer or (b) that it may not resell
the New Debentures acquired by it in the Exchange Offer to the public without
delivering a prospectus and the Prospectus contained in the Exchange Offer
Registration Statement is not appropriate or available for such resales or (c)
that it is a broker-dealer and owns Old Debentures acquired directly from
Holdings or an affiliate of Holdings, Holdings will file with the SEC a Shelf
Registration Statement to cover resales of the Old Debentures by the Holders
thereof who satisfy certain conditions relating to the provision of information
in connection with the Shelf Registration Statement. Holdings will use its
reasonable best efforts to cause the Registration Statement of which this
Prospectus forms a part to be declared effective as promptly as reasonably
practicable by the SEC. For purposes of the foregoing, "Transfer Restricted
Securities" means each Old Debenture until the earliest to occur of (i) the date
on which such Old Debenture is exchanged in the Exchange Offer for a New
Debenture which is entitled to be resold to the public by the Holder thereof
without complying with the prospectus delivery requirements of the Securities
Act (other than as a result of the Holder's Status as an Affiliate of the
Company), (ii) the date on which such Old Debenture has been disposed of in
accordance with a Shelf Registration Statement (and the purchasers thereof have
been issued Debentures that do not bear the Private Placement legend set forth
in the Indenture), or (iv) the date on which such Old Debenture is distributed
to the public pursuant to Rule 144 under the Securities Act or may be sold under
Rule 144(k) under the Securities Act (and purchasers thereof have been issued
Debentures that do not bear the Private Placement Legend set forth in the
Indenture and each New Debenture until the date on which such New Debenture is
disposed of by a Broker-Dealer pursuant to the "Plan of Distribution"
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contemplated by the Registration Statement of which this Prospectus forms a part
(including the delivery of this Prospectus).
The Registration Rights Agreement provides that (i) Holdings will file this
Exchange Offer Registration Statement with the SEC on or prior to 60 days after
the Closing Date, (ii) Holdings will use its reasonable best efforts to have
this Exchange Offer Registration Statement declared effective by the SEC on or
prior to 135 days after the Closing Date, (iii) unless the Exchange Offer would
not be permitted by applicable law or SEC policy, Holdings will commence the
Exchange Offer and use its reasonable best efforts to issue, on or prior to 30
Business Days after the date on which the Exchange Offer Registration Statement
was declared effective by the SEC, New Debentures in exchange for all Old
Debentures tendered prior thereto in the Exchange Offer and (iv) if obligated to
file the Shelf Registration Statement, Holdings will use its reasonable best
efforts to file the Shelf Registration Statement with the SEC on or prior to 30
days after such filing obligation arises and to cause the Shelf Registration to
be declared effective by the SEC on or prior to 90 days after such obligation
arises. If (a) Holdings fails to file any of the Registration Statements
required by the Registration Rights Agreement on or before the date specified
for such filing, (b) any of such Registration Statements is not declared
effective by the SEC on or prior to the date specified for such effectiveness
(the "Effectiveness Deadline"), (c) Holdings fails to consummate the Exchange
Offer within 30 business days of the Effectiveness Deadline with respect to the
Exchange Offer Registration Statement or (d) the Shelf Registration Statement or
the Exchange Offer Registration Statement is declared effective but thereafter
ceases to be effective or usable in connection with resales of Transfer
Restricted Securities during the periods specified in the Registration Rights
Agreement (each such event referred to in clauses (a) through (d) above a
"Registration Default"), then Holdings will pay Liquidated Damages to each
Holder of Transfer Restricted Securities affected thereby, with respect to the
first 90-day period immediately following the occurrence of the first
Registration Default, in an amount equal to $.05 per week per $1,000 in
principal amount of Transfer Restricted Securities held by such Holder for each
week that the Registration Default continues. The amount of the Liquidated
Damages will increase by an additional $.05 per week per $1,000 principal amount
of Transfer Restricted Securities with respect to each subsequent 90-day period
until all Registration Defaults have been cured, up to a maximum amount of
Liquidated Damages of $.25 per week per $1,000 in principal amount of Transfer
Restricted Securities. All accrued Liquidated Damages will be paid by Holdings
to the Global Debenture Holder by wire transfer of immediately available funds
or by federal funds check and to Holders of Certificated Debentures by wire
transfer to the accounts specified by them or by mailing checks to their
registered addresses if no such accounts have been specified. Holdings shall not
be required to pay Liquidated Damages for more than one Registration Default at
any given time. Following the cure of all Registration Defaults, the accrual of
Liquidated Damages will cease.
Holders of Old Debentures are required to make certain representations to
Holdings (as described in the Registration Rights Agreement) in order to
participate in the Exchange Offer and are required to deliver information to be
used in connection with the Shelf Registration Statement within the time periods
set forth in the Registration Rights Agreement in order to have their Old
Debentures included in the Shelf Registration Statement and benefit from the
provisions regarding Liquidated Damages set forth above.
BOOK-ENTRY, DELIVERY AND FORM
The New Debentures initially will be in the form of one or more registered,
global notes without interest coupons (collectively, the "Global Debentures").
The Global Debentures will be deposited on the date on which the Exchange Offer
is consummated with the Trustee, as custodian for DTC, in New York, New York.
Except as set forth below, the Global Debentures may be transferred, in
whole and not in part, only to another nominee of DTC or to a successor of DTC
or its nominee. Beneficial interests in the Global
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Debentures may not be exchanged for Debentures in certificated form except in
the limited circumstances described below. See "--Exchange of Book-Entry
Debentures for Certificated Debentures."
Initially, the Trustee will act as Paying Agent and Registrar. The
Debentures may be presented for registration of transfer and exchange at the
offices of the Registrar.
DEPOSITARY PROCEDURES
The following description of the operations and procedures of DTC, Euroclear
and Cedel are provided solely as a matter of convenience. These operations and
procedures are solely within the control of the respective settlement systems
and are subject to changes by them from time to time. Holdings takes no
responsibility for these operations and procedures and urges investors to
contact the system or their participants directly to discuss these matters.
DTC has advised Holdings that DTC is a limited-purpose trust company created
to hold securities for its participating organizations (collectively, the
"Participants") and to facilitate the clearance and settlement of transactions
in those securities between Participants through electronic book-entry changes
in accounts of its Participants. The Participants include securities brokers and
dealers (including the Initial Purchaser), banks, trust companies, clearing
corporations and certain other organizations. Access to DTC's system is also
available to other entities such as banks, brokers, dealers and trust companies
that clear through or maintain a custodial relationship with a Participant,
either directly or indirectly (collectively, the "Indirect Participants").
Persons who are not Participants may beneficially own securities held by or on
behalf of DTC only through the Participants or the Indirect Participants. The
ownership interests in, and transfers of ownership interests in, each security
held by or on behalf of DTC are recorded on the records of the Participants and
Indirect Participants.
DTC has also advised Holdings that, pursuant to procedures established by
it, (i) upon deposit of the Global Debentures, DTC will credit the accounts of
Participants designated by the Initial Purchasers with portions of the principal
amount of the Global Debentures and (ii) ownership of such interests in the
Global Debentures will be shown on, and the transfer of ownership thereof will
be effected only through, records maintained by DTC (with respect to the
Participants) or by the Participants and the Indirect Participants (with respect
to other owners of beneficial interest in the Global Debentures).
Investors in the Global Debentures may hold their interests therein directly
through DTC, if they are Participants in such system, or indirectly through
organizations (including Euroclear and Cedel) which are Participants in such
system. All interests in a Global Debenture, including those held through
Euroclear or Cedel, may be subject to the procedures and requirements of DTC.
Those interests held through Euroclear or Cedel may also be subject to the
procedures and requirements of such systems. The laws of some states require
that certain persons take physical delivery in definitive form of securities
that they own. Consequently, the ability to transfer beneficial interests in a
Global Debenture to such persons will be limited to that extent. Because DTC can
act only on behalf of Participants, which in turn act on behalf of Indirect
Participants and certain banks, the ability of a person having beneficial
interests in a Global Debenture to pledge such interests to persons or entities
that do not participate in the DTC system, or otherwise take actions in respect
of such interests, may be affected by the lack of a physical certificate
evidencing such interests.
EXCEPT AS DESCRIBED BELOW, OWNERS OF INTEREST IN THE GLOBAL DEBENTURES WILL
NOT HAVE DEBENTURES REGISTERED IN THEIR NAMES, WILL NOT RECEIVE PHYSICAL
DELIVERY OF DEBENTURES IN CERTIFICATED FORM AND WILL NOT BE CONSIDERED THE
REGISTERED OWNERS OR "HOLDERS" THEREOF UNDER THE INDENTURE FOR ANY PURPOSE.
Payments in respect of the principal of, and premium, if any, Liquidated
Damages, if any, and interest on a Global Debenture registered in the name of
DTC or its nominee will be payable to DTC in its capacity as the registered
Holder under the Indenture. Under the terms of the Indenture, Holdings and the
Trustee will treat the persons in whose names the Debentures, including the
Global Debentures, are
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registered as the owners thereof for the purpose of receiving such payments and
for any and all other purposes whatsoever. Consequently, neither Holdings, the
Trustee nor any agent of Holdings or the Trustee has or will have any
responsibility or liability for (i) any aspect of DTC's records or any
Participant's or Indirect Participant's records relating to or payments made on
account of beneficial ownership interest in the Global Debentures, or for
maintaining, supervising or reviewing any of DTC's records or any Participant's
or Indirect Participant's records relating to the beneficial ownership interests
in the Global Debentures or (ii) any other matter relating to the actions and
practices of DTC or any of its Participants or Indirect Participants. DTC has
advised Holdings that its current practice, upon receipt of any payment in
respect of securities such as the Debentures (including principal and interest),
is to credit the accounts of the relevant Participants with the payment on the
payment date, in amounts proportionate to their respective holdings in the
principal amount of beneficial interest in the relevant security as shown on the
records of DTC unless DTC has reason to believe it will not receive payment on
such payment date. Payments by the Participants and the Indirect Participants to
the beneficial owners of Debentures will be governed by standing instructions
and customary practices and will be the responsibility of the Participants or
the Indirect Participants and will not be the responsibility of DTC, the Trustee
or Holdings. Neither Holdings nor the Trustee will be liable for any delay by
DTC or any of its Participants in identifying the beneficial owners of the
Debentures, and Holdings and the Trustee may conclusively rely on and will be
protected in relying on instructions from DTC or its nominee for all purposes.
Except for trades involving only Euroclear and Cedel participants, interest
in the Global Debentures are expected to be eligible to trade in DTC's Same-Day
Funds Settlement System and secondary market trading activity in such interests
will, therefore, settle in immediately available funds, subject in all cases to
the rules and procedures of DTC and its Participants. See "--Same Day Settlement
and Payment."
Subject to the transfer restrictions set forth under "Notice to Investors,"
transfers between Participants in DTC will be effected in accordance with DTC's
procedures, and will be settled in same day funds, and transfers between
participants in Euroclear and Cedel will be effected in the ordinary way in
accordance with their respective rules and operating procedures.
Subject to compliance with the transfer restrictions applicable to the
Debentures described herein, cross-market transfers between the Participants in
DTC, on the one hand, and Euroclear or Cedel participants, on the other hand,
will be effected through DTC in accordance with DTC's rules on behalf of
Euroclear or Cedel, as the case may be, by its respective depositary; however,
such cross-market transactions will require delivery of instructions to
Euroclear or Cedel, as the case may be, by the counterparty in such system in
accordance with the rules and procedures and within the established deadlines
(Brussels time) of such system. Euroclear or Cedel, as the case may be, will, if
the transaction meets its settlement requirements, deliver instructions to its
respective depositary to take action to effect final settlement on its behalf by
delivering or receiving interests in the relevant Global Debenture in DTC, and
making or receiving payment in accordance with normal procedures for same-day
funds settlement applicable to DTC. Euroclear participants and Cedel
participants may not deliver instructions directly to the depositories for
Euroclear or Cedel.
DTC has advised Holdings that it will take any action permitted to be taken
by a Holder of Debentures only at the direction of one or more Participants to
whose account DTC has credited the interests in the Global Debentures and only
in respect of such portion of the aggregate principal amount of the Debentures
as to which such Participant or Participants has or have given such direction.
However, if there is an Event of Default under the Debentures, DTC reserves the
right to exchange the Global Debentures for Debentures in certificated form, and
to distribute such Debentures to its Participants.
Although DTC, Euroclear and Cedel have agreed to the foregoing procedures to
facilitate transfers of interests in the Global Debentures and in the Rule 144A
Global Debentures among Participants in DTC, Euroclear and Cedel, they are under
no obligation to perform or to continue to perform such procedures, and such
procedures may be discontinued at any time. Neither Holdings nor the Trustee nor
any of their
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respective agents will have any responsibility for the performance by DTC,
Euroclear or Cedel or their respective participants or indirect participants of
their respective obligations under the rules and procedures governing their
operations.
EXCHANGE OF BOOK-ENTRY DEBENTURES FOR CERTIFICATED DEBENTURES
A Global Debenture is exchangeable for definitive New Debentures in
certificated form ("Certificated Debentures") if (i) DTC (x) notifies Holdings
that it is unwilling or unable to continue as depositary for the Global
Debentures and Holdings thereupon fails to appoint a successor depositary within
120 days thereafter or (y) has ceased to be a clearing agency registered under
the Exchange Act, (ii) Holdings, at its option, notifies the Trustee in writing
that it elects to cause the issuance of the Certificated Debentures or (iii)
upon the request of the Trustee or holders of a majority of the aggregate
principal amount of outstanding Debentures if there shall have occurred and be
continuing a Default or Event of Default with respect to the Debentures. In
addition, beneficial interests in a Global Debenture may be exchanged for
Certificated Debentures upon request but only in accordance with the procedures
specified in the Indenture. In all cases, Certificated Debentures delivered in
exchange for any Global Debenture or beneficial interests therein will be
registered with the Company in the names, and issued in any approved
denominations, requested by or on behalf of the depositary (in accordance with
its customary procedures).
SAME DAY SETTLEMENT AND PAYMENT The Indenture requires that payments in
respect of the Debentures represented by the Global Debentures (including
principal, premium, if any, interest and Liquidated Damages, if any) be made by
wire transfer of immediately available funds to the accounts specified by the
Global Debenture Holder. With respect to Certificated Debentures, Holdings will
make all payments of principal, premium, if any, interest and Liquidated
Damages, if any, by wire transfer of immediately available funds to the accounts
specified by the Holders thereof or, if no such account is specified, by mailing
a check to each such Holder's registered address. The Debentures represented by
the Global Debentures are expected to be eligible to trade in the PORTAL market
and to trade in the Depositary's Same-Day Funds Settlement System, and any
permitted secondary market trading activity in such Debentures will, therefore,
be required by the Depositary to be settled in immediately available funds.
Holdings expects that secondary trading in any Certificated Debentures will also
be settled in immediately available funds.
Because of time zone differences, the securities account of a Euroclear or
Cedel participant purchasing an interest in a Global Debenture from a
Participant in DTC will be credited, and any such crediting will be reported to
the relevant Euroclear or Cedel participant, during the securities settlement
processing day (which must be a business day for Euroclear and Cedel)
immediately following the settlement date of DTC. DTC has advised Holdings that
cash received in Euroclear or Cedel as a result of sales of interests in a
Global Debenture by or through a Euroclear or Cedel participant to a Participant
in DTC will be received with value on the settlement date of DTC but will be
available in the relevant Euroclear or Cedel cash account only as of the
business day for Euroclear or Cedel following DTC's settlement date.
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DESCRIPTION OF OTHER INDEBTEDNESS
NEW CREDIT AGREEMENT
On May 22, 1998, as a part of the consummation of the Acquisition
Transactions, the Company entered into the New Credit Agreement among Holdings,
the several lenders from time to time parties thereto (collectively, the
"Lenders"), Bankers Trust Company, as syndication agent and as administrative
agent (the "Administrative Agent"), DLJ Capital Funding, Inc., as documentation
agent, and Bank of America National Trust and Savings Association ("Bank of
America NT&SA"), as co-agent. The following is a summary description of the
principal terms of the New Credit Agreement and the other loan documents related
thereto. While the material terms are set forth below, the following summary
does not purport to be complete and is qualified in its entirety by reference to
certain agreements setting forth the principal terms and conditions of the New
Credit Agreement, a copy of which is filed as an exhibit to the Registration
Statement of which this Prospctus forms a part. The Company obligations under
the New Credit Agreement constitute Senior Indebtedness and Designated Senior
Indebtedness with respect to the Debentures.
The Company borrowed $111.0 million of Term Loan Facilities on the Closing
Date to partially finance the Acquisition Transactions and to pay certain fees
and expenses related thereto. The New Credit Agreement also provides for a
Revolving Credit Facility that may be utilized to fund the Company's working
capital requirements, including issuance of stand-by and trade letters of
credit, and for other general corporate purposes.
The Term A Loan Facility is a single tranche term facility of approximately
$50.0 million that has a maturity of May 31, 2004, and is expected to amortize
over a six-year period, with annual principal payments ranging from $0.5 million
to $12.5 million. The Term B Loan Facility is a single tranche term facility of
approximately $31.0 million that has a maturity of May 31, 2005. The Term C Loan
Facility is a single tranche term facility of approximately $30.0 million that
has a maturity of May 31, 2006. The Term B and C Loan Facilities are each
expected to amortize at a rate of approximately $0.3 million per year, with the
remainder due in the final year of each such facility. Loans and letters of
credit under the Revolving Credit Facility will be available at any time during
its five-year term (which expires on May 31, 2003) subject to the fulfillment of
customary conditions precedent, including the absence of a default under the New
Credit Agreement. The full amount under each of the Term Loan Facilities is
currently outstanding. As of August 31, 1998, no funds had been drawn down on
the Company's existing lines of credit and approximately $3.6 million in letters
of credit under the New Credit Agreement were outstanding.
SECURITY; GUARANTY. The Company's obligations under the New Credit
Agreement are guaranteed by Holdings. The New Credit Agreement is secured by a
perfected first priority security interest in substantially all of the assets of
the Company including: (i) all real property owned by the Company; (ii) all
accounts receivable, inventory and intangibles; and (iii) 65% of the capital
stock of the Foreign Subsidiaries. The guaranty by Holdings is secured by a
pledge of all of the capital stock of the Company.
INTEREST, MATURITY. Borrowings under the New Credit Agreement bear interest
at a rate per annum equal (at the Company's option) to: (i) the Administrative
Agent's reserve-adjusted LIBO rate ("LIBOR") or (ii) an alternate base rate
equal to the highest of the Administrative Agent's prime rate, plus an
applicable margin. Initially, the applicable margin for the Term A Loan Facility
and the Revolving Credit Facility is 2.25% per annum for LIBOR loans and 1.25%
per annum for alternate base rate loans; the applicable margin for the Term B
Loan Facility is 2.75% per annum for LIBOR loans and 1.75% per annum for
alternate base rate loans; and the applicable margin for the Term C Loan
Facility is 3.00% per annum for LIBOR loans and 2.00% per annum for alternate
base rate loans. After the first six months following the closing date, such
margins will be subject to reduction based on the Company's leverage ratio.
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FEES. The Company is required to pay the Lenders, on a quarterly basis, a
commitment fee on the undrawn portion of the Revolving Credit Facility at a rate
equal to 0.50% per annum. The Company is also obligated to pay (i) a per annum
letter of credit fee on the aggregate amount of outstanding letters of credit;
(ii) a fronting bank fee for the letter of credit issuing bank; and (iii)
customary agent, arrangement and other similar fees.
COVENANTS. The New Credit Agreement contains a number of covenants that,
among other things, restrict the ability of Holdings, the Company and its
subsidiaries to dispose of assets, incur additional indebtedness, prepay other
indebtedness or amend certain debt instruments (including the Indenture), pay
dividends, create liens on assets, enter into sale and leaseback transactions,
make investments, loans or advances, make acquisitions, engage in mergers or
consolidations, make capital expenditures, change the business conducted by the
Company or its subsidiaries or engage in certain transactions with affiliates
and otherwise restrict certain corporate activities. In addition, under the New
Credit Agreement, the Company is required to maintain (a) the ratio of
Consolidated Indebtedness (as defined in the New Credit Agreement, which
excludes the Debentures) to the sum of Consolidated EBITDA (as defined in the
New Credit Agreement) and the principal amount of any outstanding Additional
Notes, above certain levels, ranging from 5.75:1 to 5.00:1 (decreasing over
time) and (b) the ratio of Consolidated EBITDA to Consolidated Net Cash Interest
Expense (as defined in the New Credit Agreement), below certain levels, ranging
from 1.75:1 to 2.00:1 (increasing over time), in each case, as set forth in the
New Credit Agreement. The New Credit Agreement permits the Company to make
dividends to Holdings for the purposes of paying interest owed on the Debentures
(after the fifth anniversary of the Issue Date) so long as (i) no default or
event of default under the New Credit Agreement has occurred and is continuing
and (ii) before and after giving effect to such payment, the Consolidated Fixed
Charge Coverage Ratio (as defined in the New Credit Agreement) shall be equal to
or greater than 1.0:1.0. See "Risk Factors-- Restrictive Debt Covenants."
EVENTS OF DEFAULT. The New Credit Agreement contains customary events of
default, including nonpayment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-default to certain other indebtedness, certain events of bankruptcy and
insolvency, material judgments against the Company and its subsidiaries,
invalidity of any guarantee or security interest and a change of control of the
Company in certain circumstances as set forth therein.
COPETRO CREDIT AGREEMENT
The Copetro Credit Agreement, dated as of February 4, 1997, among Copetro,
the financial institutions parties thereto and BNL, as agent, provided for
borrowings by Copetro, prior to June 30, 1998 of up to $20.0 million, $16.0
million of such funds to be used by Copetro in order to finance the expansion of
plant facilities and $4.0 million to be used for working capital. Approximately
$15.9 million is currently outstanding under the Copetro Credit Agreement and
the remaining $4.1 million available prior to June 30, 1998 will not be
borrowed. The Copetro Credit Agreement, which is nonrecourse to the Company,
will remain in effect after the consummation of the Acquisition Transactions.
The following is a summary description of the principal terms of the Copetro
Credit Agreement and other loan documents related thereto. The description set
forth below does not purport to be complete and is qualified in its entirety by
reference to certain agreements setting forth the principal terms and conditions
of the Copetro Credit Agreement, which are available upon request from the
Company. Copetro's obligations under the Copetro Credit Agreement will
constitute Senior Indebtedness of Copetro. Borrowings under the Copetro Credit
Agreement will be repaid in seven consecutive semiannual installments beginning
on June 30, 1999. The Copetro Credit Agreement imposes a prepayment penalty
equal to 1.0% per annum of the amount prepaid, calculated from the date of the
prepayment until the maturity date of the loan.
SECURITY. Copetro's obligations under the Copetro Credit Agreement are
secured by a first priority pledge in favor of BNL of Copetro's fixed assets.
Until September 30, 1998, Copetro must maintain a ratio
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of the assessed value of pledged assets to the unpaid loan amount of at least
82%.Thereafter, such ratio must be maintained at 120%. The Copetro Credit
Agreement provides for the release of pledged assets or the pledging of new
property or other guarantees, as the case may be, in order to maintain such
ratio.
INTEREST, MATURITY. Borrowings under the Copetro Credit Agreement bear
interest at a rate per annum equal to LIBOR plus 4.0%, payable semiannually. The
final maturity date of the Copetro Credit Agreement is June 30, 2002.
COVENANTS. Under the Copetro Credit Agreement, (i) any change in control of
the ownership of Copetro requires prior written approval of BNL; (ii) any
payment of cash dividends from Copetro is prohibited if Copetro is in default as
a result of non-compliance with specified financial ratios as set forth below,
or if such declaration or payment could result in future noncompliance with the
financial ratios; and (iii) the Company will not collect any fee or other
royalty payments from Copetro in connection with technical and commercial
assistance, if a payment default thereunder has occurred and is continuing.
Copetro is required to maintain the following financial ratios: (i) the
ratio of current assets over current liabilities must be greater than 1.5 to 1;
(ii) the ratio of long-term liabilities over net worth cannot exceed 1 to 1; and
(iii) the ratio of total liabilities to net worth cannot exceed 1.2 to 1. The
Copetro Credit Agreement contains covenants which, among other things, limit
Copetro's ability to dispose of assets, engage in mergers or consolidations and
create liens on assets.
EVENTS OF DEFAULT. The Copetro Credit Agreement contains customary events
of default, including nonpayment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-acceleration to other obligations of Copetro, certain events of bankruptcy
and insolvency, material judgments against Copetro and a change of control of
Copetro in certain circumstances as set forth therein. Following an event of
default, interest (and interest on interest) accrues at a penalty rate 50% in
excess of the rate otherwise applicable.
NOTES
The Old Notes generated gross proceeds to the Company of approximately
$175.0 million (before deducting discounts and commissions). The Company is
currently conducting the Notes Exchange Offer to exchange New Notes for the Old
Notes from the holders thereof. The Old Notes were and the New Notes will be
issued under an Indenture dated as of May 22, 1998 (the "Note Indenture")
between the Company and the Trustee. The Old Notes are and the New Notes will be
senior subordinated unsecured general obligations of the Company will bear
interest at a rate of 10 1/4% per annum and payable in arrears on May 15 and
November 15 of each year, commencing November 15, 1998. For interest payments
due through May 15, 2003, the Company may, at its option, make up to four
semiannual interest payments through the issuance of Additional Notes (as
defined in the Note Indenture) in an aggregate principal amount equal to the
amount of the interest that would be payable if the rate per annum were equal to
11 3/4% (provided, that incremental amounts of less than $1,000 shall be payable
in cash). The maximum aggregate principal amount of Additional Notes that the
Company may issue is $50.0 million, plus the principal amount of Additional
Notes required to make the interest payments described in the preceding
sentence.
In the future, the Notes will be unconditionally guaranteed on a senior
subordinated basis by the Subsidiary Guarantors, which will consist of all
future Subsidiaries of the Company other than Foreign Subsidiaries, Finance
Subsidiaries and Receivables Subsidiaries (as defined in the Note Indenture).
The Subsidiary Guarantees may be released under certain circumstances.
The Old Notes are and the New Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after May 15, 2003, in cash at
the redemption prices set forth below, plus accrued
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and unpaid interest and Liquidated Damages, if any, thereon to the date of
redemption if redeemed during the 12-month period commencing on May 15th of the
years set forth below.
<TABLE>
<CAPTION>
YEAR REDEMPTION PRICE
- ---------------------------------------------------------------------------- ----------------
<S> <C>
2003........................................................................ 105.125%
2004........................................................................ 103.417%
2005........................................................................ 101.708%
2006 and thereafter......................................................... 100.000%
</TABLE>
Notwithstanding the foregoing, at any time on or prior to May 15, 2001, the
Company may use the net proceeds of one or more Equity Offerings (as defined
therein) to redeem up to 35% of the Notes issued under the Note Indenture at a
redemption price equal to 110.250% of the aggregate principal amount thereof
plus accrued and unpaid interest and Liquidated Damages if any, thereon to the
redemption date; PROVIDED that at least $100.0 million aggregate principal
amount at maturity of the New Notes together with the Old Notes originally
issued and not exchanged in the Exchange Offer remains outstanding immediately
after each such redemption.
In the event of a Change of Control (as defined in the Note Indenture), each
holder of Notes has the right to require the repurchase of such holder's Notes
at a purchase price equal to 101% of the principal amount thereof, plus accrued
and unpaid interest and Liquidated Damages, if any, thereon to the purchase
date.
The Note Indenture contains covenants that, among other things, limit the
ability of the Company to enter into certain mergers or consolidations or incur
certain liens and of the Company and its subsidiaries to incur additional
indebtedness, pay dividends, redeem capital stock or make certain other
restricted payments and engage in certain transactions with affiliates. Under
the Note Indenture, the Company may not make dividends to Holdings to pay
interest owed on the Debentures at any time that a default or event of default
under the Note Indenture has occurred and is continuing. Under certain
circumstances, the Company will be required to make an offer to purchase the
Notes at a price equal to 100% of the principal amount thereof, plus accrued
interest to the date of purchase with the proceeds of certain asset sales. The
Note Indenture will contain certain events of defaults customary for securities
of this nature, which will include the failure to pay interest and principal,
the failure to comply with certain covenants in the Notes or the Note Indenture,
an acceleration under certain indebtedness, the imposition of certain final
judgments or warrants of attachment and certain events occurring under
bankruptcy laws. See "Risk Factors--Limitation on Access to Subsidiaries' Cash
Flow; Holding Company Structure.
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CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States Federal income tax
considerations associated with the exchange of Old Debentures for New Debentures
and the ownership and disposition of Debentures. This discussion is based upon
existing United States Federal income tax law, which is subject to change,
possibly retroactively. This discussion does not describe all relevant aspects
of United States Federal income taxation that may be important to particular
Holders in light of their individual investment circumstances or certain types
of Holders subject to special tax rules (E.G., financial institutions, insurance
companies, broker-dealers, tax-exempt organizations or, except to the extent
discussed below, Non-U.S. Holders (as defined below)) or to persons that hold or
will hold the Debentures as part of a straddle, hedging, or synthetic security
transaction, all of whom may be subject to tax rules that differ significantly
from those described below. In addition, this discussion does not describe any
foreign, state or local tax considerations. This summary addresses tax
consequences only to current Holders of the Debentures and assumes that such
Holders hold their Debentures as "capital assets" (generally, property held for
investment) for United States Federal income tax purposes. Current Holders of
the Debentures are urged to consult their tax advisors concerning the particular
tax consequences of the exchange of Old Debentures for New Debentures and the
ownership and disposition of the Debentures, including the applicability and
effect of any United States Federal, state, local and foreign income and other
tax laws.
For purposes of this discussion, a "U.S. Holder" is a beneficial owner of a
Debenture who is (i) an individual citizen or resident of the United States,
(ii) a corporation, partnership or other entity created or organized in or under
the laws of the United States or of any political subdivision thereof, (iii) an
estate that is subject to United States Federal income taxation without regard
to the source of its income, or (iv) a trust whose administration is subject to
the primary supervision of a United States court and which has one or more
United States persons who have the authority to control all substantial
decisions of the trust. For purposes of this discussion, a "Non-U.S. Holder" is
any holder who is not a U.S. Holder.
U.S. HOLDERS AND NON-U.S. HOLDERS
There will be no United States Federal income tax consequences to a U.S.
Holder or Non-U.S. Holder exchanging an Old Debenture for a New Debenture
pursuant to the Exchange Offer and such Holder will have the same adjusted basis
and holding period in the New Debenture as it had in the Old Debenture
immediately before the exchange.
U.S. HOLDERS
ORIGINAL ISSUE DISCOUNT
Because the Debentures do not provide for the payment of interest in cash
until May 15, 2003, the Debentures have been issued with original issue discount
for United States Federal income tax purposes. Consequently, subject to
adjustment under the acquisition premium rules discussed below, U.S. Holders
will be required to include original issue discount in ordinary income over the
period that they hold the Debentures on the basis of a constant yield method
described below. In general, under the original issue discount rules, U.S.
Holders will be required to include original issue discount in ordinary income
during the intial five year period during which the Debentures are outstanding
in advance of the receipt of cash attributable thereto. Thereafter, the amount
of original issue discount required to be included in income during a complete
taxable year by U.S. Holders should be equal to the amount of scheduled interest
payments made during such year.
The initial amount of original issue discount on the Debentures is equal to
the excess of (i) the sum of the principal amount due at maturity plus all
scheduled interest payments over (ii) the issue price of the Debentures. The
amount of original issue discount to be included in income will be determined
using a constant yield method, which will result in a greater portion of such
discount being included in income in the later part of the term of the
Debentures. Any amount of discount included in income will increase a Holder's
tax basis in the Debentures and any payments of interest in cash will decrease
such Holder's tax basis in the Debentures.
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Holdings will report annually to the Internal Revenue Service and to record
U.S. Holders information with respect to the amount of original issue discount
accruing during the calendar year.
REDEMPTION, SALE OR EXCHANGE OF DEBENTURES
A U.S. Holder will recognize capital gain or loss upon the sale, redemption
or other disposition of a Debenture in an amount equal to the difference between
the amount realized from such disposition and his adjusted tax basis in the
Debenture. Under recently enacted amendments to the Code, net capital gain
(I.E., generally, capital gain in excess of capital loss) recognized by an
individual upon the disposition of a Debenture that has been held for more than
12 months will generally be subject to a maximum tax rate of 20% or, in the case
of a Debenture been held for 12 months or less, will be subject to tax at
ordinary income tax rates. In addition, any net capital gain recognized by a
corporation upon the disposition of a Debenture will be subject to tax at
ordinary income tax rates.
MARKET DISCOUNT AND ACQUISITION PREMIUM
U.S. Holders, other than original purchasers of the Old Debentures in the
original offering, should be aware that the sale of the New Debentures may be
affected by the market discount and acquisition premium provisions of the Code.
MARKET DISCOUNT RULES. The market discount rules generally provide that if
a U.S. Holder of a Debenture purchased the Debenture, subsequent to the original
offering, at a "market discount" (I.E., at an amount less than the adjusted
issue price of the Debenture as determined on the date of such purchase) in
excess of a statutorily-defined DE MINIMIS amount, and thereafter recognizes
gain upon a disposition (including a partial redemption) of the New Debenture
received in exchange for an Old Debenture, the lesser of such gain or the
portion of the market discount that accrued while the Old Debenture and New
Debenture were held by such U.S. Holder will be treated as ordinary interest
income at the time of disposition. The rules also provide that a U.S. Holder who
acquires a Debenture at a market discount may be required to defer a portion of
any interest expense that may otherwise be deductible on any indebtedness
incurred or maintained to purchase or carry such Debenture until the U.S. Holder
disposes of such Debenture in a taxable transaction. If a holder of such a
Debenture elects to include market discount in income currently, both of the
foregoing rules would not apply.
ACQUISITION PREMIUM RULES. The acquisition premium rules generally provide
that if a U.S. Holder of a Debenture purchased the Debenture, subsequent to the
original offering, at an acquisition premium (I.E., at an amount greater than
the adjusted issue price of the Debenture as determined on the date of such
purchase), the amount of original issue discount that the U.S. Holder includes
in gross income is reduced to reflect such acquisition premium. Acquisition
premium is allocated on a pro rata basis to each accrual of original issue
discount reducing original issue discount by a constant fraction, the numerator
of which is the excess of the adjusted basis of the Debenture over its adjusted
issue price and the denominator of which is the excess of the sum of all amounts
payable on the Debenture after the purchase date over its adjusted issue price.
APPLICATION OF AHYDO RULES
The Debentures will constitute "applicable high yield discount obligations"
("AHYDOs"), for United States Federal income tax purposes, if the yield to
maturity of such Debentures exceeds the sum of the "applicable Federal rate" in
effect at the time of their issuance (the "AFR") plus five percentage points. If
the Debentures are AHYDOs, Holdings will not be entitled to claim a deduction
for original issue discount that accrues with respect to such Debentures for
United States Federal income tax purposes, until amounts attributable to such
original issue discount are paid in cash. In addition, to the extent that the
yield to maturity of the Debentures exceeds the sum of the AFR plus six
percentage points (the "Excess Yield"), any deduction claimed by Holdings that
is attributable to such Excess Yield will be disallowed. Subject to otherwise
applicable limitations, U.S. Holders that are corporations will be entitled to a
dividends received deduction (generally at a 70% rate) with respect to any
disqualified portion of the accrued original issue
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discount to the extent that Holdings has sufficient current or accumulated
earnings and profits. If the disqualified portion exceeds Holdings' current and
accumulated earnings and profits, the excess will continue to be subject to tax
as ordinary original issue discount income in accordance with the original issue
discount rules described above.
NON-U.S. HOLDERS
Under present United States Federal income and estate tax law, assuming
certain certification requirements are satisfied (which include identification
of the beneficial owner of the instrument), and subject to the discussion of
backup withholding below:
(a) payments of interest on the Debentures to any Non-U.S. Holder generally
will not be subject to United States Federal income or withholding tax,
provided that (1) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of all
classes of stock of Holdings entitled to vote, (2) the Non-U.S. Holder
is not a controlled foreign corporation that is related to Holdings
through stock ownership, and (3) such interest payments are not
effectively connected with the conduct of a United States trade or
business of the Non-U.S. Holder;
(b) a Non-U.S. Holder generally will not be subject to the United States
Federal income tax on gain realized on the sale, exchange or other
disposition of the Debenture, unless (1) such Non-U.S. Holder is an
individual who is present in the United States for 183 days or more
during the taxable year and certain other requirements are met or (2)
the gain is effectively connected with the conduct of a United States
trade or business of the Non-U.S. Holder; and
(c) if interest on the Debentures is exempt from withholding of United
States Federal income tax under the rules described above, the
Debentures will not be included in the estate of a deceased Non-U.S.
Holder for United States Federal estate tax purposes.
The certification referred to above may be made on an Internal Revenue
Service Form W-8 or substantially similar substitute form.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In general, information reporting requirements will apply to payments of
principal and interest on a Debenture, and the proceeds of the sale of a
Debenture before maturity within the United States (and, under certain
circumstances, outside of the United States) to, and to the accrual of original
issue discount with respect to, non-corporate Holders. A Holder of a Debenture
may be subject to backup withholding at the rate of 31% with respect to interest
paid on the Debenture and proceeds from the sale, exchange, redemption or
retirement of the Debenture, unless such Holder (a) is a corporation or comes
within certain other exempt categories, and, when required, demonstrates such
fact, (b) provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules or (c) in the case of a Non-U.S.
Holder, such Holder certifies as to its status as a Non-U.S. Holder on an
Internal Revenue Service Form W-8 or substantially similar substitute form. A
U.S. Holder who does not provide Holdings with the Holder's correct taxpayer
identification number may be subject to penalties imposed by the Internal
Revenue Service.
Amounts withheld under the backup withholding rules may be credited against
a Holder's tax liability, and a Holder may obtain a refund or any excess amounts
withheld under the backup withholding rules by filing the appropriate claim for
refund with the Internal Revenue Service.
100
<PAGE>
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Debentures for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver this Prospectus in
connection with any resale of such New Debentures. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Debentures received in exchange for Old
Debentures where such Old Debentures were acquired as a result of market-making
activities or other trading activities. Until January 6, 1999, all dealers
effecting transactions in the New Debentures may be required to deliver this
Prospectus. Holdings has agreed that, for a period of 90 days after the
Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale.
Holdings will not receive any proceeds from any sale of New Debentures by
broker-dealers. New Debentures received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Debentures or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchaser of any such New Debentures. Any broker-dealer
that resells New Debentures that were received by it for its own account
pursuant to the Exchange Offer and any broker or dealer that participates in a
distribution of such New Debentures may be deemed to be an "underwriter" within
the meaning of the Securities Act and any profit on any such resale of New
Debentures and any commission or concessions received by any such person may be
deemed to be underwriting compensation under the Securities Act. The Letter of
Transmittal states that, by acknowledging that it will deliver and by delivering
this Prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 90 days after the Expiration Date, Holdings will promptly
send additional copies of this Prospectus and any amendment or supplement to
this Prospectus to any broker-dealer that requests such documents in the Letter
of Transmittal. Holdings has agreed to pay all expenses in connection with the
Exchange Offer and to reimburse the Initial Purchasers for the reasonable fees
and expenses of counsel for the Holders of the Debentures. Each Holder will pay
all expenses of its counsel other than as described in the preceding sentence,
transfer taxes, if any, and any commissions or concessions of any brokers or
dealers. Holdings has agreed in the Registration Rights Agreement to indemnify
the Holders of the Debentures (including any broker-dealer) against certain
liabilities, including liabilities under the Securities Act.
In addition, to comply with the securities laws of certain jurisdictions,
the New Debentures may not be offered or sold unless they have been registered
or qualified for offer and sale in such jurisdiction or an exemption from
registration or qualification is available and is complied with. Holdings has
agreed, pursuant to the Registration Rights Agreement, subject to certain
limitations specified therein, to register or qualify the New Debentures for
offer or sale under all applicable state securities or Blue Sky laws by the time
the Registration Statement (of which this Prospectus forms a part) is declared
effective by the SEC.
101
<PAGE>
LEGAL MATTERS
Certain legal matters with respect to the New Debentures offered hereby will
be passed upon for Holdings by Skadden, Arps, Slate, Meagher & Flom LLP, Los
Angeles, California.
EXPERTS
The consolidated financial statements of the Company at December 31, 1996
and 1997, and for each of the three years in the period ended December 31, 1997,
appearing in this Prospectus have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon appearing elsewhere herein, and
are included in reliance upon such reports given upon the authority of such firm
as experts in accounting and auditing.
102
<PAGE>
INDEX TO FINANCIAL STATEMENTS
GREAT LAKES ACQUISITION CORPORATION
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-2
Balance Sheet as of March 31, 1998................................................... F-3
Notes to Balance Sheet............................................................... F-4
Condensed Consolidated Balance Sheet as of June 30, 1998 (unaudited)................. F-5
Condensed Consolidated Statement of Operations of the Company for the period from May
22, 1998 to June 30, 1998 and for the six months ended June 30, 1997 (predecessor
company) and the period from January 1, 1998 to May 21, 1998 (predecessor company)
(unaudited)........................................................................ F-6
Condensed Consolidated Statements of Stockholders' Equity of the Company for the
period from May 22, 1998 to June 30, 1998 and the period from January 1, 1998 to
May 21, 1998 (predecessor company) (unaudited)..................................... F-7
Condensed Consolidated Statements of Cash Flows of the Company for the period from
May 22, 1998 to June 30, 1998 and for the six months ended June 30, 1997
(predecessor company) and the period from January 1, 1998 to May 21, 1998
(predecessor company) (unaudited).................................................. F-8
Notes to Condensed Consolidated Financial Statements (unaudited)..................... F-9
</TABLE>
INDEX TO PREDECESSOR COMPANY FINANCIAL STATEMENTS
GREAT LAKES CARBON CORPORATION AND SUBSIDIARIES
<TABLE>
<S> <C>
Report of Independent Auditors....................................................... F-12
Consolidated Balance Sheets as of December 31, 1996 and 1997......................... F-13
Consolidated Statements of Operations for the years ended December 31, 1995, 1996,
1997............................................................................... F-14
Consolidated Statements of Stockholders' Equity for the years ended December 31,
1995, 1996 and 1997................................................................ F-15
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1996 and
1997............................................................................... F-16
Notes to Consolidated Financial Statements........................................... F-17
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Great Lakes Acquisition Corp.
We have audited the accompanying balance sheet of Great Lakes Acquisition
Corp. (the "Company") as of March 31, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express an
opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement. 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 audit provides a reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Great Lakes Acquisition Corp. at
March 31, 1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
July 20, 1998
F-2
<PAGE>
GREAT LAKES ACQUISITION CORP.
BALANCE SHEET
MARCH 31, 1998
<TABLE>
<S> <C>
ASSETS
Subscription receivable............................................................. $ 10
---
---
STOCKHOLDERS' EQUITY
Common stock, par value $.01; authorized--92,000 shares; issued and outstanding--100
shares............................................................................ $ 1
Additional paid-in capital.......................................................... 9
---
$ 10
---
---
</TABLE>
See accompanying notes.
F-3
<PAGE>
GREAT LAKES ACQUISITION CORP.
NOTE TO BALANCE SHEET
MARCH 31, 1998
1. ORGANIZATION
Great Lakes Acquisition Corp., (the "Company") was incorporated under the
laws of the State of Delaware on March 31, 1998. The Company is a 99.49% owned
subsidiary of American Industrial Capital Fund II, L.P.
2. SUBSEQUENT EVENTS
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
$65,000,000. On May 22, 1998, the Company issued 330 shares of its common stock
for approximately $330,000.
On May 22, 1998, the Company acquired all of the issued and outstanding
common stock of Great Lakes Carbon Corporation ("GLC"). As consideration for the
acquisition of GLC, 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.
The 13 1/8% Senior Discount Debentures are unsecured general obligations of
the Company, subordinated in right of payment to essentially all subsidiary
obligations. Cash interest is payable commencing November 15, 2003; prior to
that date, the fair value of the Debentures will accrete (representing
amortization of original issue discount) to approximately $56.6 million. The
Debentures are redeemable prior to their maturity date in 2009, at the Company's
option, at various prices. Among other matters, the Debentures impose certain
restrictions on the Company, including on the payment of dividends.
The 10 1/4% Senior Subordinated Notes issued by GLC may be redeemed, at the
Company's option, at various times and at various prices prior to their maturity
date on 2008. Interest is payable semi-annually. The Notes Indenture imposes
certain restrictions on GLC, including on the payment of dividends.
F-4
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET (UNAUDITED)
(IN THOUSANDS, EXCEPT SHARE DATA)
JUNE 30, 1998
<TABLE>
<S> <C>
ASSETS
Current assets:
Cash............................................................................ $ 9,957
Accounts receivable, net........................................................ 27,318
Inventories..................................................................... 34,845
Prepaid expenses and other current assets....................................... 5,873
---------
Total current assets.............................................................. 77,993
Property, plant and equipment, net................................................ 215,432
Goodwill.......................................................................... 179,315
Capitalized financing costs....................................................... 22,298
Other assets...................................................................... 6,355
---------
501,393
---------
---------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................................................................ $ 20,879
Accrued expenses................................................................ 11,466
Current portion of long-term debt............................................... 4,506
---------
Total current liabilities......................................................... 36,851
Long-term debt, less current portion.............................................. 336,216
Other long-term liabilities....................................................... 4,615
Deferred taxes.................................................................... 57,750
Stockholders' equity:
Common stock, par value; $0.01 per share, 65,330 shares authorized and
outstanding................................................................... 1
Additional paid-in capital...................................................... 65,329
Retained earnings............................................................... 631
---------
65,961
---------
501,393
---------
---------
</TABLE>
See notes to condensed consolidated financial statements.
F-5
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
----------------------------------
PERIOD FROM
JANUARY 1, PERIOD FROM
FOR THE SIX MONTHS 1998 MAY 22, 1998
ENDED JUNE 30, TO MAY 21, TO JUNE 30,
1997 1998 1998
------------------ -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales................................................... $ 113,610 $ 90,849 $ 28,511
Cost of goods sold.......................................... 86,543 67,168 20,676
-------- ------- -------
Gross profit................................................ 27,067 23,681 7,835
Selling, general and administrative expenses................ 8,987 13,070 1,720
-------- ------- -------
Operating income............................................ 18,080 10,611 6,115
Other income (expense):
Interest, net............................................. (3,601) (1,776) (3,777)
Other, net................................................ 111 (472) 491
-------- ------- -------
(3,490) (2,248) (3,286)
-------- ------- -------
Income before income taxes and extraordinary item........... 14,590 8,363 2,829
Income taxes................................................ 5,544 2,839 2,198
-------- ------- -------
Income before extraordinary item............................ 9,046 5,524 $ 631
Extraordinary loss on early extinguishment of debt.......... -- 7,113 --
-------- ------- -------
Net income (loss)........................................... $ 9,046 $ (1,589) $ 631
-------- ------- -------
-------- ------- -------
</TABLE>
See notes to condensed consolidated financial statements.
F-6
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON PAID-IN RETAINED STOCKHOLDERS'
STOCK CAPITAL EARNINGS EQUITY
------------- ----------- --------- ------------
<S> <C> <C> <C> <C>
(IN THOUSANDS)
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 the period from May 22, 1998 through June 30,
1998....................................................... 631 631
--- ----------- --------- ------------
Balance at June 30, 1998..................................... $ 1 $ 65,329 $ 631 $ 65,961
--- ----------- --------- ------------
--- ----------- --------- ------------
</TABLE>
See notes to condensed consolidated financial statements.
F-7
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR
------------------------------ PERIOD FROM
SIX MONTHS PERIOD FROM MAY 22, 1998
ENDED JANUARY 1, 1998 TO JUNE 30,
JUNE 30, 1997 TO MAY 21, 1998 1998
------------- --------------- ---------------
<S> <C> <C> <C>
Net cash provided by (used in) operating activities.............. $ 9,097 $ 12,738 $ (29,564)
Inventory activities
Capital expenditures........................................... (7,744) (9,058) (1,848)
Acquisition of Great Lakes Carbon Corporation,
net of cash acquired......................................... -- -- (275,902)
------------- --------------- ---------------
Net cash provided by (used in) investing activities.............. (7,744) (9,058) (277,750)
------------- --------------- ---------------
Financing activities
Repayments of long-term debt................................... (180) (161) (65,035)
Additions to long-term debt.................................... 3,250 4,928 316,976
Capital contribution........................................... -- -- 65,330
Dividends...................................................... (750) -- --
------------- --------------- ---------------
Net cash provided by (used in) investing activities.............. 2,320 4,767 317,271
------------- --------------- ---------------
Net increase (decrease) in cash.................................. 3,673 8,447 9,957
Cash at beginning of period...................................... 24,097 43,596 --
------------- --------------- ---------------
Cash at end of period............................................ $ 27,770 $ 52,043 $ 9,957
------------- --------------- ---------------
------------- --------------- ---------------
</TABLE>
See notes to condensed consolidated financial statements.
F-8
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1998
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 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. 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 June 30, 1998 and for the period
from May 22, 1998 to June 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.
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 combination 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.
F-9
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
3. INVENTORIES
Inventories are as follows:
<TABLE>
<CAPTION>
JUNE 30,
1998
--------------
<S> <C>
(IN THOUSANDS)
Raw materials................................................................. $ 21,969
Finished goods................................................................ 6,737
Supplies and spare parts...................................................... 6,139
-------
$ 34,845
-------
-------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses included interest payable of $3,345,000 at June 30, 1998.
5. LONG-TERM DEBT
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
JUNE 30,
1998
--------------
<S> <C>
(IN THOUSANDS)
10.25% Senior Subordinated Notes due May 15, 2008....................................... $ 175,000
13.125% Senior Discount Debentures due May 15, 2009..................................... 30,488
Term Loan Credit Facility bearing interest at the Company's option at LIBOR (5.78% at
June 30, 1998) plus a margin ranging from 2.25% to 3.00% or Prime 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 from September, 1998 through June, 2006..................................... 111,000
Various pollution control and industrial revenue bonds bearing interest at rates from
6.75% to 7.125% due in varying amounts at various dates through 2002.................. 4,801
Facility expansion credit line bearing interest at LIBOR (5.78% at June 30, 1998) plus
4% due in varying amounts semi-annually from March, 1999 through March, 2002.......... 15,850
Capital lease obligation bearing interest of 93%........................................ 1,499
Other................................................................................... 2,084
--------------
340,722
Current portion......................................................................... (4,506)
--------------
$ 336,216
--------------
--------------
</TABLE>
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,
F-10
<PAGE>
GREAT LAKES ACQUISITION CORPORATION
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED)
JUNE 30, 1998
5. LONG-TERM DEBT (CONTINUED)
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 principal remain outstanding. For interest
payments through 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 limitations on
certain payments, including dividends.
The Senior Discount Debentures are 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 $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 the 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 Great Lakes Carbon Corporation is pledged as collateral for the 13 1/8%
Senior Discount Debentures.
The term loan credit facility is comprised of three single tranche term
loans in the amount of $50,000,000, $31,000,000 and $30,000,000 maturing on May
31, 2004, 2005 and 2006, respectively, and a revolving credit agreement in
effect until May 31, 2003 which provides for borrowings of up to $25,000,000
(with a $7,500,000 sublimit for letters of credit). The agreement is secured by
substantially all the assets of the Company and requires that the Company
satisfy certain financial ratios. At June 30, 1998, there were no borrowings
under the revolving credit portion of the facility and outstanding letters of
credit were $3,420,000.
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.
The facility expansion credit line provided for credit of up to $20,000,000
($15,850,000 was borrowed) for use in connection with a major facility expansion
at the Company's La Plata, Argentina plant operated by its wholly-owned
subsidiary, Copetro S.A. (Copetro). The loan is secured by the property, plant
and equipment of Copetro, including, the assets constructed with the funds
financed. The agreement requires that Copetro satisfy certain financial ratios
and imposes limitations on the payment of dividends.
6. EXTRAORDINARY ITEM
In connection with the repurchase of the 10% Senior Secured Notes described
in Note 1, an extraordinary loss 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.
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors
Great Lakes Carbon Corporation
We have audited the accompanying consolidated balance sheets of Great Lakes
Carbon Corporation and subsidiaries as of December 31, 1996 and 1997, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Great Lakes
Carbon Corporation and subsidiaries at December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997, in conformity with generally
accepted accounting principles.
ERNST & YOUNG LLP
New York, New York
February 13, 1998
F-12
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------
1996 1997
---------- ----------
(IN THOUSANDS, EXCEPT
SHARE DATA)
<S> <C> <C>
Current assets:
Cash and cash equivalents............................................................... $ 24,097 $ 43,596
Accounts receivable--net of allowance for doubtful accounts of $600 in 1996 and 1997.... 28,934 29,908
Inventories............................................................................. 39,872 32,455
Other current assets.................................................................... 2,958 4,349
---------- ----------
Total current assets...................................................................... 95,861 110,308
Property, plant and equipment, net........................................................ 47,530 59,165
Other assets.............................................................................. 5,514 5,438
---------- ----------
Total assets.............................................................................. $ 148,905 $ 174,911
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................................................ $ 22,222 $ 13,601
Accrued expenses........................................................................ 11,592 14,057
Income taxes payable.................................................................... 3,840 1,796
Current portion of long-term debt....................................................... 1,389 1,419
---------- ----------
Total current liabilities................................................................. 39,043 30,873
Long-term debt, less current portion...................................................... 71,496 82,595
Other long-term liabilities............................................................... 3,857 4,190
Deferred taxes............................................................................ 2,554 4,814
Stockholders' equity:
Common Stock, par value $0.01 per share, 100,000 shares authorized and outstanding...... 1 1
Additional paid-in capital.............................................................. 5,509 5,509
Retained earnings....................................................................... 26,445 46,929
---------- ----------
Total stockholders' equity................................................................ 31,955 52,439
---------- ----------
Total liabilities and stockholders' equity................................................ $ 148,905 $ 174,911
---------- ----------
---------- ----------
</TABLE>
See accompanying notes.
F-13
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales.................................................................... $ 178,628 $ 242,744 $ 231,911
Cost of goods sold........................................................... 142,188 176,371 172,390
---------- ---------- ----------
Gross profit................................................................. 36,440 66,373 59,521
Selling, general and administrative expenses................................. 9,687 15,321 18,510
---------- ---------- ----------
Operating income............................................................. 26,753 51,052 41,011
Other income (expense):
Interest expense, net........................................................ (1,127) (7,573) (6,287)
Asset utilization fee to parent.............................................. (6,286) -- --
Other, net................................................................... 2,111 (772) (49)
---------- ---------- ----------
(5,302) (8,345) (6,336)
---------- ---------- ----------
Income before income taxes................................................... 21,451 42,707 34,675
Income tax expense........................................................... 7,633 15,148 12,691
---------- ---------- ----------
Net income................................................................... $ 13,818 $ 27,559 $ 21,984
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-14
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
PAID-IN RETAINED STOCKHOLDERS'
COMMON STOCK CAPITAL EARNINGS EQUITY
------------- ----------- ---------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Balance at January 1, 1995....................................... $ 1 $ 53,637 $ 15,019 $ 68,657
Net income..................................................... -- -- 13,818 13,818
Distributions.................................................. -- (48,128) (28,451) (76,579)
--
----------- ---------- ------------
Balance at December 31, 1995..................................... $ 1 $ 5,509 $ 386 $ 5,896
Net income..................................................... -- -- 27,559 27,559
Dividends...................................................... -- -- (1,500) (1,500)
--
----------- ---------- ------------
Balance at December 31, 1996..................................... $ 1 $ 5,509 $ 26,445 $ 31,955
Net income..................................................... -- -- $ 21,984 $ 21,984
Dividends...................................................... -- -- (1,500) (1,500)
--
----------- ---------- ------------
Balance at December 31, 1997..................................... $ 1 $ 5,509 $ 46,929 $ 52,439
--
--
----------- ---------- ------------
----------- ---------- ------------
</TABLE>
See accompanying notes.
F-15
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income.................................................................... $ 13,818 $ 27,559 $ 21,984
Adjustments to reconcile net income to net cash provided by operating
activities:
Depreciation and amortization........................................... 8,420 9,551 10,220
Deferred taxes.......................................................... 4,181 462 2,260
Changes in operating assets and liabilities:
Accounts receivable................................................... (8,418) (6,851) (974)
Inventories........................................................... (7,167) (13,701) 7,417
Other current assets.................................................. 621 306 (1,391)
Income taxes payable.................................................. 3,523 743 (2,044)
Accounts payable and accrued expenses................................. 4,103 8,158 (6,156)
Other, net............................................................ (1,846) 1,495 (55)
---------- ---------- ----------
Net cash provided by operating activities..................................... 17,235 27,722 31,261
INVESTING ACTIVITIES
Capital expenditures.......................................................... (5,774) (6,371) (21,391)
---------- ---------- ----------
Net cash used in investing activities......................................... (5,774) (6,371) (21,391)
FINANCING ACTIVITIES
Repayments of long-term debt................................................ (2,616) (1,406) (1,389)
Additions to long-term debt................................................. 65,000 -- 12,518
Transfers to parent......................................................... (68,503) -- --
Dividends................................................................... -- (1,500) (1,500)
---------- ---------- ----------
Net cash provided by (used in) financing activities........................... (6,119) (2,906) 9,629
Increase in cash and cash equivalents......................................... 5,342 18,445 19,499
Cash and cash equivalents at beginning of year................................ 310 5,652 24,097
---------- ---------- ----------
Cash and cash equivalents at end of year...................................... $ 5,652 $ 24,097 $ 43,596
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
F-16
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
Great Lakes Carbon Corporation (the "Company") is a producer of calcined
coke principally for customers 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.
On December 20, 1995, the Company, formerly a wholly-owned subsidiary of
Horsehead Industries, Inc. ("Horsehead"), sold $65,000,000 of 10% Senior Secured
Notes due 2006. Immediately upon the completion of the sale, the net proceeds
therefrom were distributed by the Company as a cash dividend to Horsehead, all
indebtedness of Horsehead owing to the Company was canceled and 100% of the
common stock of the Company was distributed by Horsehead on a pro rata basis to
the holders of the common stock of Horsehead.
Through December 20, 1995 a monthly asset utilization fee was charged by
Horsehead equal to 1% of the Company's net assets, adjusted for intercompany
balances and tax assets and liabilities. A portion of this fee ($1,400,000 in
1995) is included in selling, general and administrative expenses, as it
represents estimates of various ongoing management services provided to the
Company by Horsehead. The balance is included in other income (expense).
Management believes that the allocation method is reasonable and that, after
giving affect to such allocation, selling, general and administrative expenses
in 1995 approximate what the costs would have been for the Company if it had
operated as an unaffiliated entity.
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.
INVENTORIES
Inventories are stated at the lower of cost (principally average cost
method) or market.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated on the basis of cost. Enhancements
are capitalized and depreciated over the period benefited. The provision for
depreciation is determined by the straight-line method over the estimated useful
lives of the related assets.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted Statement of Financial Accounting Standards ("SFAS") No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of" effective January 1, 1996, which requires impairment
losses to be recorded on long-lived assets used in operations
F-17
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
when indicators of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets' carrying
amount. The adoption did not have an effect on the financial condition of the
Company.
SIGNIFICANT CUSTOMERS
The Company had one customer which represented 15.1% of net sales in 1995,
two customers which represented 22% and 15.3% of net sales in 1996 and 23.7% and
15.5% of net sales in 1997.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Raw materials.......................................................... $ 26,377 $ 18,483
Finished goods......................................................... 8,534 7,821
Supplies and spare parts............................................... 4,961 6,151
--------- ----------
$ 39,872 $ 32,455
--------- ----------
--------- ----------
</TABLE>
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consists of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ----------
(IN THOUSANDS)
<S> <C> <C>
Land and improvements.................................................. $ 2,449 $ 2,718
Buildings.............................................................. 8,835 9,193
Machinery, equipment and other......................................... 110,955 116,786
Construction in progress............................................... 2,175 16,866
--------- ----------
124,414 145,563
Accumulated depreciation............................................... (76,884) (86,398)
--------- ----------
$ 47,530 $ 59,165
--------- ----------
--------- ----------
</TABLE>
4. ACCRUED EXPENSES
Accrued expenses included interest payable of $3,370,000 and $3,467,000 at
December 31, 1996 and 1997, respectively.
F-18
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. LONG-TERM DEBT
Long-term debt and capital lease obligations consist of the following:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
10% Senior Secured Notes due January 1, 2006............................ $ 65,000 $ 65,000
Various pollution control and industrial revenue bonds bearing interest
at rates from 6.75% to 7.125% due in varying amounts at various dates
through 2002.......................................................... 5,919 4,834
Facility expansion credit line bearing interest at LIBOR plus 4% (9.9%
at December 31, 1997) due in varying amounts semi-annually from June
1999 through June 2002................................................ -- 11,850
Capital lease obligations, bearing interest of 9.3%..................... 1,966 1,662
Other................................................................... -- 668
--------- ---------
72,885 84,014
Current portion......................................................... (1,389) (1,419)
--------- ---------
$ 71,496 $ 82,595
--------- ---------
--------- ---------
</TABLE>
The Senior Secured Notes are secured by essentially all property, plant and
equipment not otherwise pledged and certain other assets of the Company. At the
option of the Company, the Senior Secured Notes may be redeemed, in whole or in
part, commencing January 1, 2001 at various redemption prices ranging from 105%
in 2001 to par in 2004 and beyond. The Senior Secured Notes indenture imposes
limitations on restricted payments, including dividends.
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.
The facility expansion credit line provides for credit of up to $20,000,000
for use in connection with a major facility expansion at the Company's La Plata,
Argentina plant operated by its wholly-owned subsidiary, Copetro S.A.
("Copetro"). The loan is secured by the property, plant and equipment of Copetro
including, upon completion, the assets constructed with funds financed. The
agreement requires that Copetro satisfy certain financial ratios and imposes
limitations on the payment of dividends.
The Company's revolving credit agreement, which is in effect until December
1998, provides for borrowings, subject to borrowing base limitations, of up to
$15,000,000 (with a $10,000,000 sublimit for letters of credit). The agreement
is secured by substantially all domestic accounts receivable and inventory of
the Company and requires that the Company satisfy certain financial ratios. At
December 31, 1996 and 1997, there were no borrowings under this credit agreement
and outstanding letters of credit were $6,153,000 and $3,420,000, respectively.
The fair market value of the Company's long-term debt obligations
approximated $77,400,000 and $89,000,000 at December 31, 1996 and 1997,
respectively.
F-19
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
5. LONG-TERM DEBT (CONTINUED)
Maturities of long-term debt for the succeeding five years and thereafter
are as follows:
<TABLE>
<CAPTION>
LONG-TERM CAPITAL
DEBT LEASES TOTAL
----------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
1998......................................................... $ 1,085 $ 334 $ 1,419
1999......................................................... 3,568 367 3,935
2000......................................................... 4,768 403 5,171
2001......................................................... 4,906 442 5,348
2002......................................................... 2,869 116 2,985
Thereafter................................................... 65,156 -- 65,156
----------- --------- ---------
$ 82,352 $ 1,662 $ 84,014
----------- --------- ---------
----------- --------- ---------
</TABLE>
Interest paid amounted to $1,223,000, $4,989,000 and $7,773,000 for the
years ended December 31, 1995, 1996 and 1997 respectively.
The Company capitalized interest on construction in progress of $808,000 for
the year ended December 31, 1997.
6. LEASES
The Company's 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, 1997, 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:
<TABLE>
<CAPTION>
CAPITAL OPERATING
LEASES LEASES
--------- -----------
(IN THOUSANDS)
<S> <C> <C>
1998..................................................................... $ 615 $ 1,622
1999..................................................................... 615 892
2000..................................................................... 615 857
2001..................................................................... 615 648
2002..................................................................... 154 633
Thereafter............................................................... -- 2,085
--------- -----------
Total minimum lease payments............................................. 2,614 $ 6,737
-----------
-----------
Amounts representing interest............................................ (952)
---------
Present value of net minimum lease payments.............................. $ 1,662
---------
---------
</TABLE>
Rental expense for all operating leases was $2,691,000, $2,685,000, and
$2,770,000 for the years ended December 31, 1995, 1996 and 1997, respectively.
F-20
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
7. PENSION PLAN
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. 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, 1997, the assets of the plan were invested
principally in listed stocks, bonds, money market certificates and cash.
Pension expense for the plans related to the Company included the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost...................................................... $ 481 $ 545 $ 501
Interest cost..................................................... 411 483 571
Actual return on assets........................................... (905) (889) (1,595)
Net amortization and deferral..................................... 541 498 1,010
--------- --------- ---------
$ 528 $ 637 $ 487
--------- --------- ---------
--------- --------- ---------
</TABLE>
The following table sets forth the plans' funded status and amounts
recognized in the Company's balance sheets:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Actuarial present value of benefit obligations:
Vested benefit obligation.............................................. $ (5,310) $ (6,781)
--------- ---------
--------- ---------
Accumulated benefit obligation......................................... $ (5,673) $ (7,146)
--------- ---------
--------- ---------
Projected benefit obligation........................................... $ (7,041) $ (8,538)
Plan assets, at fair value............................................... 6,763 9,003
--------- ---------
Projected benefit obligation less than (in excess of) plan assets........ (278) 465
Unrecognized net gain.................................................... (45) (542)
Prior service cost....................................................... (9) 80
--------- ---------
Pension asset (liability) recognized in the balance sheet................ $ (332) $ 3
--------- ---------
--------- ---------
</TABLE>
The expected long-term rate of return on plan assets was 9% for 1995, 1996
and 1997. The weighted average discount rate and weighted average rate of
increase in future compensation levels used were 7.25% and 4.25% for 1995, 8%
and 5% for 1996, and 7.5% and 5% for 1997.
8. 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.
F-21
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
8. POSTRETIREMENT OBLIGATIONS (CONTINUED)
Net periodic postretirement benefit cost includes the following components:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Service cost.......................................................... $ 196 $ 198 $ 204
Interest cost......................................................... 175 184 223
Amortization of transition obligation................................. 68 68 68
--------- --------- ---------
Net periodic postretirement benefit liability......................... $ 439 $ 450 $ 495
--------- --------- ---------
--------- --------- ---------
</TABLE>
Postretirement benefit obligations at December 31, 1996 and 1997 were as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Accumulated Postretirement Benefit Obligation (APBO):
Retirees............................................................... $ (544) $ (653)
Active fully-eligible.................................................. (1,106) (1,459)
Other active........................................................... (1,145) (1,265)
--------- ---------
Total APBO............................................................... (2,795) (3,377)
Unrecognized net loss.................................................... 50 267
Unrecognized transition obligation....................................... 1,088 1,020
--------- ---------
Accrued postretirement benefit liability................................. $ (1,657) $ (2,090)
--------- ---------
--------- ---------
</TABLE>
The health care cost trend used in determining the APBO was 6.31% grading
down to 5.0% in three 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 APBO as of December 31, 1997 by $478,000 and the
service and interest cost components of net periodic postretirement benefit cost
for the year then ended by $71,000.
Assumptions used to develop net periodic postretirement benefit cost and the
actuarial present value of accumulated benefit obligations include the weighted
average rate of increase in future compensation levels and the weighted average
discount rate of 5% and 7.25% for 1995, 5% and 8% for 1996, and 5% and 7.5% for
1997.
9. OTHER INCOME (EXPENSE)
Other income (expense) consists of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Department of Energy refund........................................ $ 2,390 $ -- $ --
Other.............................................................. (279) (772) (49)
--------- --------- ---------
$ 2,111 $ (772) $ (49)
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-22
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. INCOME TAXES
The Company was included in the consolidated federal income tax return of
Horsehead through December 20, 1995. Income taxes have been provided in the
Company's 1995 statements of operations as if the Company was a separate taxable
entity. Components of the Company's deferred tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
1996 1997
--------- ---------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Book over tax depreciable basis.......................................... $ 3,601 $ 4,460
Other--net............................................................... 605 2,315
--------- ---------
Total deferred tax liabilities............................................. 4,206 6,775
Deferred tax assets:
Accrued liabilities...................................................... 1,333 1,571
Other--net............................................................... 319 390
--------- ---------
Total deferred tax assets.................................................. 1,652 1,961
--------- ---------
Net deferred tax liability................................................. $ 2,554 $ 4,814
--------- ---------
--------- ---------
</TABLE>
The differences between tax expense computed at the statutory federal income
tax rate and actual tax expense are as follows:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Tax expense at statutory rates applied to pretax earnings..... $ 7,508 $ 14,947 $ 12,143
State income tax, net of federal tax effects.................. 428 1,029 1,020
Tax exempt earnings........................................... (371) (480) (938)
Effects of foreign operations................................. 45 (657) (91)
Other......................................................... 23 309 557
--------- --------- ---------
$ 7,633 $ 15,148 $ 12,691
--------- --------- ---------
--------- --------- ---------
</TABLE>
F-23
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
10. INCOME TAXES (CONTINUED)
Income taxes consist of the following:
<TABLE>
<CAPTION>
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal..................................................... $ 1,934 $ 9,252 $ 7,229
State....................................................... 240 1,465 1,481
Foreign..................................................... 1,278 3,969 2,852
--------- --------- ---------
3,452 14,686 11,562
Deferred:
Federal..................................................... 3,763 564 1,001
State....................................................... 418 118 88
Foreign..................................................... -- (220) 40
--------- --------- ---------
4,181 462 1,129
--------- --------- ---------
Total......................................................... $ 7,633 $ 15,148 $ 12,691
--------- --------- ---------
--------- --------- ---------
</TABLE>
Income taxes paid were approximately $161,000, $13,723,000 and $12,485,000
in 1995, 1996 and 1997, respectively.
U.S. income taxes have not been provided on the undistributed earnings of
Copetro ($23,415,000 as of December 31, 1997) because such earnings are expected
to be reinvested. Upon distribution of those earnings, the Company would be
subject to U.S. income taxes (subject to an adjustment for foreign tax credits
and withholding taxes, if any).
Income before income taxes attributable to domestic operations (which
included results from export sales) was $16,356,000, $30,601,000 and $25,723,000
for the years ended December 31, 1995, 1996 and 1997, respectively, while income
before income taxes attributable to foreign operations was $5,095,000,
$12,106,000, $8,952,000 for the years ended December 31, 1995, 1996 and 1997,
respectively.
F-24
<PAGE>
GREAT LAKES CARBON CORPORATION
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1997
11. OPERATIONS BY GEOGRAPHIC AREA
The following is a summary of the Company's operations by geographic area:
<TABLE>
<CAPTION>
1995 1996 1997
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Net sales:
United States.......................................... $ 146,819 $ 197,296 $ 189,730
Foreign................................................ 31,809 45,448 42,181
---------- ---------- ----------
$ 178,628 $ 242,744 $ 231,911
---------- ---------- ----------
---------- ---------- ----------
Operating income:
United States.......................................... $ 21,841 $ 38,266 $ 32,358
Foreign................................................ 4,912 12,786 8,653
---------- ---------- ----------
$ 26,753 $ 51,052 $ 41,011
---------- ---------- ----------
---------- ---------- ----------
Assets:
United States.......................................... $ 90,153 $ 114,864 $ 125,448
Foreign................................................ 23,777 34,041 49,463
---------- ---------- ----------
$ 113,930 $ 148,905 $ 174,911
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
Exports of U.S. produced products were approximately $87,287,000,
$111,482,000 and $104,826,000 for the years ended December 31, 1995, 1996 and
1997, respectively. Export sales as a percentage of United States net sales
represented 25.6%, 23.0% and 22.9% to Western Europe in 1995, 1996 and 1997,
respectively, 11.1%, 18.8% and 18.9% to Africa in 1995, 1996 and 1997,
respectively. The Company's foreign operations are conducted principally in
South America.
12. LITIGATION AND CONTINGENCIES
The Company is a party to several proceedings which are in various stages of
resolution. Management of the Company, after discussion with legal counsel, is
of the opinion that the ultimate resolution of these matters will not have a
material effect upon the financial condition of the Company.
F-25
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
NO DEALER, SALESMAN OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND,
IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY HOLDINGS OR THE INITIAL PURCHASER. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER TO SELL, OR A SOLICITATION OF AN OFFER TO BUY ANY
OF THE DEBENTURES OFFERED HEREBY, TO ANY PERSON OR BY ANYONE IN ANY JURISDICTION
IN WHICH IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES,
CREATE ANY IMPLICATION THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF
ANY TIME SUBSEQUENT TO THE DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF HOLDINGS OR THE COMPANY SINCE SUCH DATE.
------------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 16
Acquisition Transactions.................................................. 23
Use of Proceeds........................................................... 24
Unaudited Pro Forma Condensed Consolidated Financial Data................. 26
Selected Historical Financial and Other Data.............................. 30
Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................. 32
The Exchange Offer........................................................ 38
Business.................................................................. 45
Management................................................................ 56
Certain Relationships and Related Transactions............................ 59
Security Ownership........................................................ 59
Description of Holdings Capital Stock..................................... 60
Description of Debentures................................................. 61
Description of Other Indebtedness......................................... 94
Certain United States Federal Income Tax Considerations................... 98
Plan of Distribution...................................................... 101
Legal Matters............................................................. 102
Experts................................................................... 102
Index to Financial Statements............................................. F-1
</TABLE>
$56,600,000
[LOGO]
GREAT LAKES ACQUISITION CORP.
13 1/8% SERIES B SENIOR DISCOUNT
DEBENTURES DUE 2009
---------------------
PROSPECTUS
---------------------
OCTOBER 6, 1998
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
