10-Q 1 e10q0209-gla.txt GLAC FORM 10-Q @ 9/30/02 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2002 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 CORP. (Exact name of registrant as specified in its charter) DELAWARE 76-0576974 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 551 Fifth Avenue, Suite 3600, New York, New York 10176 (Address of principal executive office) (Zip Code) (212) 370-5770 (Registrant's telephone number, including area code) Not Applicable (Former name, former address and former fiscal year, if changed since last report) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]. 1 GREAT LAKES ACQUISITION CORP. FORM 10-Q September 30, 2002 CONTENTS

2 PART I - FINANCIAL INFORMATION Item 1. Financial Statements Great Lakes Acquisition Corp. and Subsidiaries Condensed Consolidated Balance Sheets (In thousands, except share and per share data)

3 Great Lakes Acquisition Corp. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

4 Great Lakes Acquisition Corp. and Subsidiaries Condensed Consolidated Statements of Operations (Unaudited)

5 Great Lakes Acquisition Corp. and Subsidiaries Condensed Consolidated Statement of Stockholders' Equity (Unaudited)

6 Great Lakes Acquisition Corp. and Subsidiaries Condensed Consolidated Statements of Cash Flows (Unaudited)

7 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) 1. Organization and Basis of Presentation Great Lakes Acquisition Corp. (the "Company") through its wholly-owned operating subsidiary, Great Lakes Carbon Corporation ("GLC"), is the largest producer of calcined petroleum coke ("CPC") supplying customers principally in the aluminum industry. It is 98.56% owned by American Industrial Capital Fund II, L.P. ("AIP"). Certain prior year amounts have been reclassified to conform to current year presentation. 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 accounting principles generally accepted in the United States of America. 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. These financial statements should be read in conjunction with the financial statements and notes thereto included in the Company's Form 10-K, File No. 333-59541. 2. Accounting Pronouncements Business Combinations In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of-interests method. The adoption of SFAS No. 141 did not have a significant impact on the Company's financial statements. Accounting for Asset Retirement Obligations In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" effective January 2003. SFAS No. 143 establishes accounting standards for the recognition and measurement of a liability for and asset retirement obligation and associated asset retirement cost. The Company does not believe that the adoption of this Statement will have a material impact on its financial statements. Accounting for the Impairment or Disposal of Long-Lived Assets In August 2001, the FASB SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective January 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business (as defined in that Opinion). This statement also amends Account Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. 8 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. Accounting for Costs Associated with Exit or Disposal Activities In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of this Statement will have a material impact on its financial statements. 3. Restricted Cash Funds that are legally restricted as to withdrawal or usage are shown as restricted cash. At December 31, 2001, $10,414,000 were set aside under an escrow agreement with AIP to settle a finders fee claim arising from the acquisition of the Company in 1998. On March 22, 2002, a payment in the amount of approximately $10,300,000 was made to settle the claim. 4. Inventories Inventories are as follows: December 31, September 30, 2001 2002 --------- --------- (In thousands) Raw materials $ 24,696 $ 44,028 Finished goods 14,307 13,393 Supplies and spare parts 7,611 8,083 --------- --------- $ 46,614 $ 65,504 ========= ========= 9 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) 5. Accrued Expenses Accrued expenses included interest payable and employee profit sharing payable of $177,000 and $1,390,000 at December 31, 2001 and $1,119,000 and $903,000 at September 30, 2002, respectively. 6. Long-Term Debt At September 30, 2002, approximately 61% of the outstanding 13 1/8% Senior Discount Debentures have been purchased by GLC with the intention of holding them to maturity. The Company's obligation with respect to the Debentures is shown net of the amount held by GLC. 7. Goodwill In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets", the Company completed the impairment test of the valuation of goodwill as of January 1, 2002 and based upon the results, there was no impairment. The Company intends to perform its annual review of goodwill on December 31, 2002. The carrying value of goodwill was $162,799,000 at December 31, 2001 and September 30, 2002. Net income results reflecting goodwill that is no longer being amortized to selling, general and administrative expense is as follows: Nine Months Ended Three Months Ended September 30, September 30, 2001 2002 2001 2002 --------- --------- --------- --------- (In thousands) Net income as reported $ 6,196 $ 4,524 $ - $ 1,307 Goodwill amortization 3,355 - 1,118 - --------- --------- --------- --------- Pro forma net income $ 9,551 $ 4,524 $ 1,118 $ 1,307 ========= ========= ========= ========= 10 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) 8. Financial Information Relating to Segments The Company has three reportable business segments. Anode Grade CPC-is produced and marketed directly to primary aluminum smelters worldwide for use as the principal raw material in the production of carbon anodes, a key component in the aluminum smelting process. Industrial Grade CPC-is produced and marketed for use in a variety of non- aluminum, industrial applications, including as a raw material in the production of titanium dioxide, as a recarburizer (carbon additive) in the manufacture of steel and foundry products and for use in other specialty materials and chemicals markets. RPC Trading-involves the worldwide marketing of raw petroleum coke ("RPC") for use as the raw material in the production of CPC and as a fuel source in a variety of other industrial applications. The production and distribution of CPC, which is the focus of the first two units, is accomplished utilizing the same process, plant facilities and operating assets. The RPC trading business, as conducted by the Company, generally involves the use of such assets on a limited basis. Accordingly, the Company does not segregate, or otherwise account for, the assets by segments. 11 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) ----------------------------------------------------------------------------- Nine months ended September 30, 2001 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 140,381 $ 38,250 $ 11,866 $ 1,632 $ 192,129 Cost of goods sold (106,867) (28,192) (10,473) (5,108) (150,640) ---------- ---------- ---------- --------- ---------- Segment Profit $ 33,514 $ 10,058 $ 1,393 $ (3,476) 41,489 ========== ========== ========== ========= Selling, general and administrative expenses (14,456) Interest expense, net (22,828) Other income (expense) 1,259 ---------- Income before income taxes and extraordinary item $ 5,464 ========== ----------------------------------------------------------------------------- Nine months ended September 30, 2002 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 181,205 $ 28,227 $ 6,948 $ 898 $ 217,278 Cost of goods sold (145,692) (20,846) (4,221) (5,392) (176,151) ---------- ---------- ---------- --------- ---------- Segment Profit $ 35,513 $ 7,381 $ 2,727 $ (4,494) 41,127 ========== ========== ========== ========= Selling, general and administrative expenses (8,725) Interest expense, net (24,335) Other income (expense) 3,620 ---------- Income before income taxes $ 11,687 ========== 12 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) ----------------------------------------------------------------------------- Quarter ended September 30, 2001 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 46,740 $ 12,840 $ 3,049 $ 370 $ 62,999 Cost of goods sold (36,375) (9,717) (2,470) (1,702) (50,264) ---------- ---------- ---------- --------- ---------- Segment Profit $ 10,365 $ 3,123 $ 579 $ (1,332) 12,735 ========== ========== ========== ========= Selling, general and administrative expenses (4,844) Interest expense, net (7,685) Other income (expense) 274 ---------- Income before income taxes $ 480 ========== ----------------------------------------------------------------------------- Quarter ended September 30, 2002 ----------------------------------------------------------------------------- Anode Industrial Grade Grade RPC CPC CPC Trading Other Total ---------- ---------- ---------- --------- ---------- (In thousands) Net sales $ 72,216 $ 9,908 $ 1,559 $ 110 $ 83,793 Cost of goods sold (57,866) (6,653) (331) (1,320) (66,170) ---------- ---------- ---------- --------- ---------- Segment Profit $ 14,350 $ 3,255 $ 1,228 $ (1,210) 17,623 ========== ========== ========== ========= Selling, general and administrative expenses (3,072) Interest expense, net (8,254) Other income (expense) (3,547) ---------- Income before income taxes $ 2,750 ========== 13 Great Lakes Acquisition Corp. and Subsidiaries Notes to Condensed Consolidated Financial Statements September 30, 2002 (Unaudited) 9. Acquisition On March 27, 2002, the Company purchased a calcining facility located in Baton Rouge, LA (the "Baton Rouge Plant") from Alcoa, Inc. ("Alcoa") for $43 million, subject to a purchase price adjustment based upon a $23 million working capital guarantee. On June 28, 2002, Alcoa paid GLC approximately $11.4 million (including accrued interest of $137,000) to satisfy the working capital guarantee. The transaction was financed by two $10 million promissory notes bearing interest at 5% per annum payable to Alcoa in November 2002 and May 2003, incremental term loan borrowings under the Company's existing syndicated senior secured credit facility of $12 million and cash on-hand of $11 million. The addition of the Baton Rouge Plant, which can produce up to 700,000 tons per year of CPC, will increase the Company's total operating capacity from 1.6 million tons to 2.3 million tons, thereby solidifying its position as CPC industry leader. Results for the Baton Rouge Plant were included in the statement of operations commencing on April 1, 2002. The purchase price, net of the working capital adjustment, was allocated based on the estimated fair values of the assets acquired and liabilities assumed. The Company is in the process of obtaining an independent appraisal of the fair values in question, therefore, the allocation of the purchase price is subject to refinement. No goodwill was established in connection with this acquisition since the estimated fair value of the assets acquired exceeded the purchase price. The unaudited pro forma information set forth below, developed as though the acquisition had been completed as of the beginning of the years shown, reflects adjustments to interest expense (for borrowings required to finance the acquisition and certain changes to the terms of existing debt arrangements), depreciation and amortization expense (set to reflect the new accounting base of the assets recorded) and income tax effect based upon the Company's historical effective rates. Nine Months Ended Three Months Ended September 30, September 30, 2001 2002 2001 2002 --------- --------- --------- --------- (In thousands) Net sales $ 257,960 $ 243,025 $ 80,860 $ 83,793 Income before income taxes and extraordinary item 8,902 11,272 1,947 2,750 Net income 7,977 4,357 836 1,307 The pro forma information, as presented here, is not indicative of the results that would have been obtained had the transaction occurred on January 1, 2001 or 2002, nor should it be considered indicative of future results. It gives effect only to the adjustments noted above, and does not reflect management's estimate of potential cost savings or other benefits arising from the acquisition. 10. Extraordinary Item The nine month period ended September 30, 2001 reflects an extraordinary gain related to the repurchase of the Company's debt of approximately $3,850,000 (net of income tax expenses of $2,073,000). 14 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations General This Form 10-Q contains certain forward-looking statements, including, without limitation, statements concerning the Company's future financial position, business strategy, budgets, projected costs and plans and objectives of management for future operations. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements generally can be identified by the use of forward-looking terminology such as may, will, expect, intend, estimate, anticipate, believe, should, plans or continue, or the negative thereof or variations thereon or similar terminology. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. These forward-looking statements are subject to a number of risks and uncertainties, including, the factors discussed in the Company's filings with the Securities and Exchange Commission. Actual results could differ materially from these forward-looking statements. Through its wholly-owned operating subsidiary, Great Lakes Carbon Corporation ("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 developed by the Company in the 1930's. 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. On March 27, 2002, the Company purchased a calcining facility located in Baton Rouge, LA (the "Baton Rouge Plant") from Alcoa, Inc. ("Alcoa") for $43 million, subject to a purchase price adjustment based upon a $23 million working capital guarantee. On June 28, 2002, Alcoa paid GLC approximately $11.4 million (including accrued interest of $137,000) to satisfy the working capital guarantee. The transaction was financed by two $10 million promissory notes bearing interest at 5% per annum payable to Alcoa in November 2002 and May 2003, incremental term loan borrowings under the Company's existing syndicated senior secured credit facility of $12 million and cash on-hand of $11 million. The addition of the Baton Rouge Plant, which can produce up to 700,000 tons per year of CPC, will increase the Company's total operating capacity from 1.6 million tons to 2.3 million tons. The Baton Rouge Plant, situated on 55 acres of owned property, has four kilns and can receive and ship material by truck or rail and has ready access to barge or ocean-going vessel transportation. It is operated by a workforce numbering 62 at September 30, 2002, including 42 hourly employees covered by new collective bargaining agreement with the United Steelworkers of America that was ratified on October 27, 2002 and expires on September 30, 2005. As used in this document, Adjusted EBITDA represents operating income before depreciation and AIP fees and expenses. Adjusted EBITDA should not be considered a substitute for net income, cash flow from operating activities or other cash flow statement data prepared in accordance with accounting principles generally accepted in the United States of America or as an alternative to net income as an indicator of operating performance or cash flows as a measure of liquidity. Adjusted EBITDA is presented here only to provide additional information with respect to the Company's ability to satisfy debt service. While Adjusted EBITDA is frequently used by management 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. 15 Results of Operations Three Months Ended September 30, 2002 vs. Three Months Ended September 30, 2001 The Company's net sales for the quarter ended September 30, 2002 increased 33.0% to $83.8 million from $63.0 million in the comparable 2001 period. Net sales of anode grade CPC increased 54.5% to $72.2 million, net sales of industrial grade CPC decreased 22.8% to $9.9 million and net sales of RPC decreased 48.9% to $1.6 million. The increase in anode grade CPC net sales was primarily the result of a 60.1% increase in sales volume to 483,558 tons slightly offset by a 3.5% decrease in average per ton selling prices. The increase in sales volume was attributable to continued strong demand from aluminum producers and shipments from the newly purchased Baton Rouge Plant. The decrease in industrial grade CPC net sales was the result of a 16.3% decrease in sales volume to 82,536 coupled with a 7.8% decline in average per ton selling prices. Lower shipments to the titanium dioxide market and reduced prices across most product lines were the main factors contributing to the decline. The decrease in RPC net sales was primarily the result of a 40.7% decrease in average per ton selling prices and a 13.8% decrease in sales volume to 29,909 tons. Because the Baton Rouge plant is a large consumer of the RPC product, the quantity available for resale to third parties decreased. This increased internal consumption is expected to significantly reduce the level of future RPC trading. The Company's gross profit for the third quarter increased by 38.4% to $17.6 million from $12.7 million in 2001. The increase in gross profit was due to the 33.0% increase in sales discussed above only partially offset by a 31.6% increase in cost of goods sold. The increase in cost of goods sold was the result of the higher sales volume offset by lower average per ton costs. The per ton cost decrease was principally attributable to a one-time raw material price concession related to the renegotiation on a dollar basis of an Argentine contract converted to Peso-based pricing when that currency was devalued at the end of 2001. Operating income increased 84.4% to $14.6 million from $7.9 million in the prior year quarter. The increase in operating income was due to the increase in gross profit discussed above coupled with a 36.6% decrease in selling, general and administrative expenses. The decrease in selling, general and administrative expenses was primarily the result of the elimination of goodwill amortization expense (in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets") and lower commission and travel expenses. Income before income taxes increased 472.9% to $2.8 million from $0.5 million in the comparable 2001 period. The improvement was due to the increase in operating income discussed above partially offset by an increase in other expense. The increase in other expense was due mainly to foreign currency exchange losses related to the Argentine peso and an increase in interest expense related to the additional debt (at higher base rates) incurred in connection with the acquisition of the Baton Rouge Plant. The Company's effective tax rate was 52.5% for the current year period. As a result of the minimal income before income taxes in the prior year quarter, the 2001 effective tax rate was 100%. As a result of the factors discussed above, net income for the quarter ended September 30, 2002 increased to $1.3 million from nil in 2001. Adjusted EBITDA for the third quarter increased 42.3% to $19.9 million from $14.0 million in 2001 due to the increase in operating income discussed above offset by a decrease to the add-back adjustment for depreciation/ amortization of $0.7 million (mainly due to the elimination of goodwill amortization as previously noted). 16 Nine Months Ended September 30, 2002 vs. Nine Months Ended September 30, 2001 The Company's net sales for the nine months ended September 30, 2002 increased 13.1% to $217.3 million from $192.1 million in the comparable 2001 period. Net sales of anode grade CPC increased 29.1% to $181.2 million, net sales of industrial grade CPC decreased 26.2% to $28.2 million and net sales of RPC decreased 41.4% to $6.9 million. The increase in anode grade CPC net sales was primarily the result of a 30.9% increase in sales volume to 1,205,863 tons barely offset by a 1.4% decrease in average per ton selling prices. The increase in sales volume was attributable to shipments, beginning April 2002, from the newly purchased Baton Rouge Plant and otherwise heavy shipments in the 2002 quarter. The decrease in industrial grade CPC net sales was the result of a 22.4% decrease in sales volume to 223,575 tons coupled with a 4.9% decrease in average selling prices. Lower shipments to the titanium dioxide and reduced prices across most product lines were the main factors contributing to the decline. The decrease in RPC net sales was primarily the result of a 27.6% decrease in sales volume to 127,436 tons and an 19.1% decrease in average per ton selling prices. Because the Baton Rouge plant is a large consumer of the RPC product, the quantity available for resale to third parties decreased in the periods subsequent to the purchase of the plant. Increased internal consumption is expected to significantly reduce the level of future RPC trading. The Company's gross profit for the year-to-date period, at $41.1 million, was virtually unchanged from the $41.5 million achieved in 2001. The 13.1% increase in sales discussed above was outpaced by a 16.9% increase in cost of goods sold. The increase in cost of goods sold was the result of the higher sales volume and higher average per ton costs, due to continued tight anode grade RPC supply, particularly on the United States Gulf coast. This cost increase was mitigated somewhat by a one-time raw material price concession related to the renegotiation on a dollar basis of an Argentine contract converted to Peso-based pricing when that currency was devalued at the end of 2001. Operating income increased 19.9% to $32.4 million from $27.0 million in the prior year period. The increase in operating income was due to a 39.6% decrease in selling, general and administrative expenses offset by the slight decrease in gross profit discussed above. The decrease in selling, general and administrative expenses was primarily the result of the elimination of goodwill amortization expense (in accordance with Financial Accounting Standards Board ("FASB") Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets") and lower commission and travel expenses. Income before income taxes and extraordinary item increased 113.9% to $11.7 million from $5.5 million in the comparable 2001 period. The increase was due to the improvement in operating income discussed above and higher other income. The increase in other income was due mainly to a gain on the sale of certain lease rights to a storage shed (which had been sub-let to the buyer since the 1980's) and foreign currency exchange gains related to the devaluation of the Argentine peso, offset by lower Argentine export tax refunds and an increase in interest expense related to the additional debt (at higher base rates) incurred in connection with the acquisition of the Baton Rouge Plant. The Company's effective tax rate increased to 61.3% in 2002 from 57.1% in the corresponding 2001 mainly as a result of the tax effect of foreign currency gains in the tax provision for foreign operations. An extraordinary gain related to the repurchase of debt of approximately $3,850,000 (net of income tax expense of $2,073,000) was recognized in the prior year period. As a result of the factors discussed above, net income for the nine months ended September 30, 2002 decreased 27.0% to $4.5 million from $6.2 million in 2001. Adjusted EBITDA for the year-to-date period increased by 6.5% to $48.2 million from $45.2 million in 2001 due to the increase in operating income discussed above offset by a decrease to the add-back adjustment for depreciation/amortization of $2.3 million (mainly due to the elimination of goodwill amortization as previously noted). 17 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 essentially 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 2002 will be approximately $5.5 million. Pursuant to the terms of the 10 1/4% Senior Subordinated Notes Indenture the Company may, at its option, through May 15, 2003, make up to four semiannual interest payments through the issuance of additional notes in an amount equal to the interest that would be payable if the rate per annum of the Notes were equal to 11 3/4%. The Company has exercised its pay-in-kind option with respect to payments starting from November 15, 2001 through May 15, 2003, the last one of which was a condition to obtaining incremental term loan financing for the Baton Rouge Plant acquisition under its existing credit agreement, further discussed below. On March 27, 2002, the Company secured incremental term loans under each of its three existing single tranche loans maturing on May 31, 2004, 2005 and 2006 in the amount of $9.0 million, $1.5 million and $1.5 million, respectively, in order to finance the acquisition of the Baton Rouge Plant. The incremental loans amortize and mature in conformity with the terms of the tranches to which they were added. In consideration for the issuance of the incremental term loans, credit facility interest rate margins were increased between 1.25% to 1.50%. The Company expects to meet its liquidity needs, including debt service, through cash from operations, its revolving credit facility and the issuance of additional pay-in-kind notes. The revolving credit facility provides for borrowings of up to $25.0 million, including a $10.0 million sub- limit for letters of credit. As of November 8, 2002, no funds had been drawn down, and approximately $0.9 million in letters of credit were outstanding under this facility. The Company or its affiliates may, from time to time, depending on liquidity and market and economic conditions, purchase in open-market transactions its 13 1/8% Senior Discount Debentures or the 10 1/4% Senior Subordinated Notes issued by GLC. 18 New Accounting Pronouncements In July 2001, the FASB issued SFAS No. 141, "Business Combinations." SFAS No. 141 requires the purchase method of accounting for business combinations initiated after June 30, 2001 and eliminates the pooling-of- interests method. The adoption of SFAS No. 141 did not have a significant impact on the Company's financial statements. In August 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations" effective January 2003. SFAS No. 143 establishes accounting standards for the recognition and measurement of a liability for and asset retirement obligation and associated asset retirement cost. The Company does not believe that the adoption of this Statement will have a material impact on its financial statements. In August 2001, the FASB SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" effective January 2002. SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of", and the accounting and reporting provisions of Accounting Principals Board Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions", for the disposal of a business (as defined in that Opinion). This statement also amends Account Research Bulletin No. 51, "Consolidated Financial Statements", to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The adoption of SFAS No. 144 did not have a material impact on the Company's financial statements. In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections." This Statement rescinds FASB Statement No. 4, "Reporting Gains and Losses from Extinguishment of Debt", and an amendment of that Statement, FASB Statement No. 64, "Extinguishment of Debt Made to Satisfy Sinking-Fund Requirements." This Statement also rescinds FASB Statement No. 44, "Accounting for Intangible Assets of Motor Carriers." This Statement amends FASB Statement No. 13, "Accounting for Leases", to eliminate an inconsistency between the required accounting for sale-leaseback transactions and the required accounting for certain lease modifications that have economic effects that are similar to sale-leaseback transactions. This Statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and supersedes Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. This statement also established that fair value is the objective for initial measurement of the liability. The provisions of SFAS No. 146 are effective for exit or disposal activities that are initiated after December 31, 2002. The Company does not believe that the adoption of this Statement will have a material impact on its financial statements. 19 Item 3. Quantitative and Qualitative Disclosures About Market Risk Refer to the Company's annual report on Form 10-K dated April 1, 2002. Item 4. Procedures and Controls Within the 90 days prior to the date of this report, the Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-14. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective. There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the date of their evaluation. 20 PART II - OTHER INFORMATION Item 1. Legal Proceedings Refer to the Company's annual report on Form 10-K dated April 1, 2002. Item 2. Change in Securities Not applicable. Item 3. Defaults Upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information Not applicable. Item 6. Exhibits and Reports on Form 8-K (a) List of Exhibits: Not applicable. (b) Reports on Form 8-K The Company filed no reports on Form 8-K with the Commission during the three months ended September 30, 2002. 21 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 Corp. Date: 11/8/02 By: /s/JAMES D. MCKENZIE ------------------------------- James D. McKenzie, President and Chief Executive Officer CERTIFICATION Each of the undersigned hereby certifies in their capacity as an officer of Great Lakes Acquisition Corp. (the "Company") that the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period. Date: 11/8/02 /s/JAMES D. MCKENZIE ------------------------------- President and Chief Executive Officer Date: 11/8/02 /s/ADELA I. ROBLES ------------------------------- Controller, Assistant Secretary and Chief Financial Officer 22 CERTIFICATION I, James D. McKenzie, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Great Lakes Acquisition Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/8/02 /s/JAMES D. MCKENZIE ------------------------------- President and Chief Executive Officer 23 CERTIFICATION I, Adela I. Robles, certify that: 1. I have reviewed this quarterly report on Form 10-Q of Great Lakes Acquisition Corp.; 2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report; 3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors: a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: 11/8/02 /s/ADELA I. ROBLES ------------------------------- Controller, Assistant Secretary and Chief Financial Officer 24

GREAT LAKES ACQUISITION CORP 10-Q