UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1999
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission File Number: 333-59541
GREAT LAKES ACQUISITION CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 76-0576974
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
551 Fifth Avenue, Suite 3600, New York, New York 10176
(Address of principal executive office) (Zip Code)
(212) 370-5770
(Registrant's telephone number, including area code)
Not Applicable
(Former name, former address and former
fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes [X] No [ ].
<PAGE> 1
<TABLE>
GREAT LAKES ACQUISITION CORPORATION
FORM 10-Q March 31, 1999
CONTENTS
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Page No.
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets -
December 31, 1998 and March 31, 1999. . . . . . . . . . . . . . 2
Condensed Consolidated Statements of Operations -
For the three months ended March 31, 1998 (predecessor)
and 1999 (Company). . . . . . . . . . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Stockholders' Equity -
For the three months ended March 31, 1999 . . . . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
For the three months ended March 31, 1998 (predecessor)
and 1999 (Company). . . . . . . . . . . . . . . . . . . . . . . 5
Notes to Condensed Consolidated Financial Statements. . . . . . 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . . . . . . . 8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . 11
Item 2. Changes in Securities . . . . . . . . . . . . . . . . . . . . . 11
Item 3. Defaults Upon Senior Securities . . . . . . . . . . . . . . . . 11
Item 4. Submission of Matters to a Vote of Security Holders . . . . . . 11
Item 5. Other Information . . . . . . . . . . . . . . . . . . . . . . . 11
Item 6. Exhibits and Reports on Form 8-K. . . . . . . . . . . . . . . . 11
</TABLE>
<PAGE> 2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
<CAPTION>
December 31, March 31,
1998 1999
--------- ---------
(Audited) (Unaudited)
<S> <C> <C>
ASSETS
Current Assets
Cash $ 10,403 $ 15,590
Accounts receivable, net 18,961 21,494
Inventories 37,702 40,089
Income taxes receivable 1,274 -
Prepaid expenses and other current assets 9,456 9,500
--------- ---------
Total Current Assets 77,796 86,673
Property, plant and equipment, net 214,101 211,198
Goodwill 176,220 175,102
Capitalized financing costs 19,587 18,957
Other assets 5,182 4,578
--------- ---------
$492,886 $496,508
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 18,897 $ 13,867
Accrued expenses 13,285 19,052
Income taxes payable - 1,844
Current portion of long-term debt 10,009 13,055
--------- ---------
Total Current Liabilities 42,191 47,818
Long-term debt, less current portion 321,089 318,286
Other long-term liabilities 4,876 4,876
Deferred taxes 58,390 57,610
Stockholders' Equity
Common stock, par value $0.01 per share,
65,330 shares authorized and outstanding 1 1
Additional paid-in capital 65,329 65,329
Retained earnings 1,010 2,588
--------- ---------
66,340 67,918
--------- ---------
$492,886 $496,508
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE> 3
<TABLE>
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands)
<CAPTION>
PREDECESSOR COMPANY
-------------- --------------
Three Months Ended March 31,
1998 1999
--------- ---------
<S> <C> <C>
Net Sales $ 62,070 $ 60,363
Cost of Goods Sold 45,683 44,524
--------- ---------
Gross Profit 16,387 15,839
Selling, general and administrative expenses 2,684 4,805
--------- ---------
Operating Income 13,703 11,034
Other income (expense):
Interest, net (1,157) (8,615)
Other, net (72) 287
--------- ---------
(1,229) (8,328)
Income Before Income Taxes 12,474 2,706
Income taxes 4,407 1,128
--------- ---------
Net Income $ 8,067 $ 1,578
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE> 4
<TABLE>
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
(Unaudited)
(In thousands)
<CAPTION>
Additional Total
Common Paid-In Retained Stockholders'
Stock Capital Earnings Equity
---------- ---------- ---------- ----------
<S > <C> <C> <C> <C>
Balance at December 31, 1998 $ 1 $ 65,329 $ 1,010 $ 66,340
Net Income - - 1,578 1,578
---------- ---------- ---------- ----------
Balance at March 31, 1999 $ 1 $ 65,329 $ 2,588 $ 67,918
========== ========== ========== ==========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE> 5
<TABLE>
GREAT LAKES ACQUISITION CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<CAPTION>
PREDECESSOR COMPANY
-------------- --------------
Three Months Ended March 31,
1998 1999
--------- ---------
<S> <C> <C>
Operating activities
Net income $ 8,067 $ 1,578
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 2,337 5,725
Deferred taxes - (780)
Changes in operating assets and liabilities:
Accounts receivables (3,658) (2,533)
Inventories 1,550 (2,387)
Other current assets (778) (44)
Income taxes payable 3,490 3,118
Accounts payable and accrued expenses (390) 737
Other, net 170 497
--------- ---------
Net cash provided by operating activities $ 10,788 $ 5,911
Investing activities
Capital expenditures (4,942) (967)
--------- ---------
Net cash used by investing activities (4,942) (967)
Financing Activities
Repayment of long-term debt (97) (2,039)
Additions to long-term debt 4,520 2,282
--------- ---------
Net cash provided by financing activities 4,423 243
Increase (decrease) in cash 10,269 5,187
Cash at beginning of period 43,596 10,403
--------- ---------
Cash at end of period $ 53,865 $ 15,590
========= =========
<FN>
See notes to consolidated financial statements.
</TABLE>
<PAGE> 6
GREAT LAKES ACQUISITION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
1. Organization and Basis of Presentation
Great Lakes Acquisition Corp. (the "Company") was incorporated under the
laws of Delaware on March 31, 1998. The Company is a 99.49% owned subsidiary
of American Industrial Capital Fund II, L.P. ("AIP"). On May 18, 1998, the
Company canceled its previously issued shares of common stock and issued
65,000 shares of its common stock for approximately $65 million. On May 22,
1998, the Company issued an additional 330 shares of common stock for $330,000.
On May 22, 1998, the Company acquired all of the issued and outstanding stock
of Great Lakes Carbon Corporation ("GLC") in a transaction accounted for as a
purchase (the "Acquisition"). Accordingly, the purchase price has been
allocated to the assets acquired and liabilities assumed based on estimates of
the respective fair values at the Acquisition date.
The accompanying financial statements as of March 31, 1999 reflect the
consolidated financial position, results of operations, and cash flow of the
Company subsequent to the date of Acquisition. The accompanying predecessor
financial statements for the period prior to the date of Acquisition are
presented under the historical basis of accounting of GLC and do not reflect
any adjustments that would be required as a result of the Acquisition by the
Company. The Company had no substantive operations prior to May 22, 1998.
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Article 10 of Regulation S-X and, therefore, do
not include all information and footnotes necessary for a fair presentation of
financial position, results of operations, and cash flows in conformity with
generally accepted accounting principles. The information furnished reflects
all adjustments (consisting of normal recurring adjustments) which are, in the
opinion of management, necessary for a fair summary of the results of
operations.
2. Acquisition
As consideration for the acquisition of GLC described above, the Company paid
the former shareholders of GLC aproximately $323,000,000 and incurred
transaction costs of approximately $25,000,000. The total purchase price was
funded by a cash contribution from AIP and affiliates of, and certain other
individuals associated with, AIP of $65,330,000; available cash at GLC of
approximately $52,000,000; proceeds of $175,000,000 from the sale by GLC of
10 1/4% Senior Subordinated Notes; borrowings by GLC of $111,000,000 pursuant
to a new credit facility; and proceeds of $30,050,072 from the sale by the
Company of 13 1/8% Senior Discount Debentures. In addition, as a condition to
the transaction, GLC repurchased its then outstanding 10% Senior Secured Notes
through a public tender offer for total consideration of $74,106,500 (excluding
accrued interest).
<PAGE> 7
GREAT LAKES ACQUISITION CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1999
(Unaudited)
3. Inventories
Inventories are as follows:
December 31, March 31,
1998 1999
--------- ---------
(In thousands)
Raw materials $ 18,837 $ 23,150
Finished goods 12,996 10,336
Supplies and spare parts 5,869 6,603
--------- ---------
$ 37,702 $ 40,089
========= =========
4. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets included Argentine Value-Added-Tax
("VAT") receivable of aproximately $6,247,000 and $6,140,000 at December 31,
1998 and March 31, 1999, respectively.
5. Accrued Expenses
Accrued expenses included interest payable and employee profit sharing payable
of $2,635,000 and $2,437,000, respectively, at December 31, 1998 and interest
payable of $6,886,000 at March 31, 1999.
<PAGE> 8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
Through its wholly-owned operating subsidiary, GLC, the Company is
the world's largest producer of calcined petroleum coke ("CPC"). The Company
produces anode grade CPC, which is the principal raw material used in the
production of carbon anodes used in primary aluminum production, and industrial
grade CPC, which is used in a variety of specialty metals and materials
applications. CPC is produced from raw petroleum coke ("RPC") utilizing a high
temperature, rotary kiln process. RPC is a by-product of the petroleum
refining process and constitutes the largest single component of the Company's
cost of goods sold. The Company's principal source of revenues and profits are
sales of anode grade CPC to the aluminum industry. Historically, the Company's
profitability has been primarily a function of its CPC sales volumes, CPC
pricing and the cost of RPC.
Basis of Presentation
The Company acquired GLC on May 22, 1998. The following discussion
provides an assessment of the consolidated results of operations and liquidity
and capital resources for the Company and the Predecessor. Unless otherwise
indicated, 1998 historical results represent the combined operating results of
the Predecessor from January 1, 1998 to May 21, 1998 and the Company from the
date of the Acquisition through December 31, 1998. The Company had no
substantive operations prior to the Acquisition.
As further discussed in Note 1 to the Condensed Consolidated Financial
Statements, the Acquisition was accounted for as a purchase. Accordingly, the
operating results for the periods subsequent to May 21, 1998 reflect the
results of operations of the Company subsequent to the Acquisition and include
the impact of adjustments required under the purchase method of accounting.
Results of Operations
Three Months Ended March 31, 1999 Versus Three Months Ended March 31, 1998.
The Company's net sales for the quarter ended March 31, 1999 decreased
2.8% to $60.4 million from $62.1 million in the comparable 1998 period. Net
sales of anode grade CPC decreased 6.8% to $49.0 million while net sales of
industrial grade CPC increased 19.3% to $10.8 million.
The decrease in anode grade CPC net sales was primarily the result of
a 5.4% decline in the average per ton selling price attributable to continued
pressure from weak aluminum prices. Sales volume remained essentially
unchanged.
The increase in industrial grade CPC net sales was the result of a
27.8% increase in sales volume to 83,040 tons which was partially offset by a
6.6% decrease in selling price. The increase in sales volume was due mainly
to the scheduling of greater shipments into the titanium dioxide market during
the 1999 quarter.
The Company's gross profit for the first quarter decreased by 3.3% to
$15.8 million from $16.4 million in 1998. The decrease in gross profit was
due to the decrease in sales discussed above partially offset by a decrease in
cost of goods sold. The lower cost of goods sold was mainly the result of a
decrease in the average cost per ton primarily due to lower raw material costs
offset in part by higher sales volume. Additional depreciation related to the
Acquisition in the 1999 quarter amounted to $1.3 million and offset over 53% of
the gross decrease in cost of goods sold.
Operating income decreased by 19.5% to $11.0 million from $13.7 million
in the 1998 period. The decline in operating income was due a 79% increase in
<PAGE> 9
selling, general and administrative expenses coupled with the decrease in gross
profit discussed above. The increase in selling, general and administrative
expenses was primarily the result of increased amortization expense related
mainly to goodwill established when the Company was acquired and greater sales
commissions expense.
Income before income taxes decreased 78.3% to $2.7 million from $12.5
million in the comparable 1998 period. The decrease was primarily attributable
to a $7.5 million increase in net interest expense and the decline in operating
income discussed above. The increase in net interest expense is due mainly to
the greater amount of debt incurred by the Company in order to finance the
Acquisition.
The Company's effective tax rate increased to 41.7% in the 1999 period
from 35.3% in the 1998 period primarily as a result of the tax effects of non-
deductible amortization of goodwill in the former period. As a result of the
factors discussed above, net income for the three months ended March 31, 1999
decreased 80.46% to $1.6 million from $8.1 million in the 1998 period.
Adjusted EBITDA for the first quarter increased by 1.9% to $16.8
million in 1999 from $16.5 million in 1998 for the reasons set forth above.
Liquidity and Capital Resources
The Company's liquidity requirements are primarily for debt service,
capital expenditures and general working capital needs. The timing of
inventory receipts and product shipments, all of which are entirely U.S.
dollar-denominated transactions, can have a substantial impact on the
Company's working capital requirements. Capital investments generally relate
to facility maintenance and projects to improve plant throughput and product
quality. It is anticipated that capital investments for 1999 will be
approximately $5.5 million.
The Company expects to meet its liquidity needs, including debt
service, through cash from operations and its revolving credit facility. The
revolving credit facility provides for borrowings of up to $25.0 million,
including a $7.5 million sub-limit for letters of credit. As of May 10, 1999,
no funds had been drawn down on this line of credit and approximately $1.6
million in letters of credit were outstanding under this credit agreement.
Year 2000
The Year 2000 ("Y2K") issue is the result of date-sensitive devices,
systems and computer programs that were developed using two digits rather than
four to define the applicable year. Any such technologies may recognize a
year containing "00" as the year 1900 rather than the year 2000. This could
result in a system failure or miscalculations causing disruptions of
operations, including a temporary inability to engage in normal business
activities.
The Company has completed its Y2K compliance assessment and expects to
complete any required remediation efforts in order to be Y2K compliant by the
third quarter of 1999. Costs for Y2K efforts are not being accumulated
separately. The Company believes that the costs to the Company for historical
and future remediation of Y2K issues will not have a material adverse effect on
the Company.
The Company, like most companies, will also be subject to Y2K risk
from its reliance on third parties for a wide variety of goods and servies,
such as raw materials and electricity. The extent to which such reliance could
have a material adverse effect on the Company is indiscernible.
Based on preliminary communications with customers and suppliers to
determine the extent of their Y2K efforts, the Company believes its exposure to
Y2K risk from material third party relationships is not material. The Company
believes that appropriate actions have been taken to minimize the risk to its
operations and financial condition.
<PAGE> 10
Contingency plans that address a reasonably likely worst-case scenario
are currently being developed. These plans will address the key systems and
third parties that present potential significant risk. The plans will analyze
the strategies and resources necessary to restore operations in the unlikely
event that an interruption does occur. The plans will also outline a recovery
program detailing the necessary participants, processes and equipment needed
to restore operations. Contingency plans are expected to be finalized in the
third quarter of 1999.
<PAGE> 11
GREAT LAKES ACQUISITION CORPORATION
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Refer to the Company's annual report on form 10K dated
March 31, 1999.
Item 2. Change in Securities
Not applicable.
Item 3. Defaults Upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits:
Not applicable.
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K with the Commission during
the three months ended March 31, 1999.
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
GREAT LAKES ACQUISITION CORPORATION
Date: 5/10/99 /s/James D. Mckenzie
James D. McKenzie
President and Chief Executive Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1999
<CASH> 15,590
<SECURITIES> 0
<RECEIVABLES> 22,585
<ALLOWANCES> 1,091
<INVENTORY> 40,089
<CURRENT-ASSETS> 86,673
<PP&E> 224,197
<DEPRECIATION> 12,999
<TOTAL-ASSETS> 496,508
<CURRENT-LIABILITIES> 47,818
<BONDS> 318,286
0
0
<COMMON> 1
<OTHER-SE> 67,917
<TOTAL-LIABILITY-AND-EQUITY> 496,508
<SALES> 60,363
<TOTAL-REVENUES> 60,363
<CGS> 44,524
<TOTAL-COSTS> 44,524
<OTHER-EXPENSES> 69
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 8,615
<INCOME-PRETAX> 2,706
<INCOME-TAX> 1,128
<INCOME-CONTINUING> 1,578
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,578
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
