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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
X QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
----------- OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 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 001-14789
GENTEK INC.
(Exact name of Registrant as specified in its charter)
Delaware 02-0505547
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Liberty Lane
Hampton, New Hampshire 03842
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 929-2264
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
------- --------
The number of outstanding shares of the Registrant's Common Stock and Class B
Common Stock as of July 31, 2002 was 20,586,416 and 4,750,107, respectively.
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GENTEK INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2002
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Operations - Three Months and
Six Months Ended June 30, 2002 and 2001............................................... 1
Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001..................................................................... 2
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001.......................................................... 3
Notes to the Consolidated Financial Statements............................................. 4-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.................................................. 15-19
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................ 19-20
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings..................................................................... 20-21
Item 2. Changes in Securities and Use of Proceeds............................................. 21
Item 3. Defaults upon Senior Securities....................................................... 21
Item 4. Submission of Matters to a Vote of Security Holders................................... 22
Item 5. Other Information..................................................................... 22
Item 6. Exhibits and Reports on Form 8-K...................................................... 22
SIGNATURES..................................................................................... 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
GENTEK INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------- -------------------------
2002 2001 2002 2001
---- ---- ---- ----
Net revenues.................................................... $ 302,729 $ 319,474 $ 579,666 $ 659,436
Cost of sales................................................... 239,314 263,981 460,943 527,548
Selling, general and administrative expense..................... 48,579 80,170 91,029 135,081
Restructuring and impairment charges............................ 23,618 108,018 23,618 108,018
--------- --------- --------- ---------
Operating profit (loss)................................... (8,782) (132,695) 4,076 (111,211)
Interest expense................................................ 18,869 18,631 36,585 37,491
Interest income................................................. 782 262 1,211 458
Other (income) expense, net..................................... (1,057) 79 (989) (1,684)
--------- --------- --------- ---------
Loss before income taxes.................................. (25,812) (151,143) (30,309) (146,560)
Income tax provision (benefit).................................. 75,451 (48,714) 74,102 (46,606)
--------- --------- --------- ---------
Net loss............................................. $(101,263) $(102,429) $(104,411) $ (99,954)
========= ========= ========= =========
Loss per common share - basic:.................................. $ (3.97) $ (4.03) $ (4.10) $ (3.94)
========= ========= ========= =========
Loss per common share - assuming dilution:...................... $ (3.97) $ (4.03) $ (4.10) $ (3.94)
========= ========= ========= =========
See the accompanying notes to the consolidated financial statements.
-1-
GENTEK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
June 30, December 31,
2002 2001
---- ----
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents..................................................... $ 139,973 $ 9,205
Receivables, net.............................................................. 198,824 183,962
Inventories................................................................... 106,253 107,674
Deferred income taxes......................................................... 1,638 39,345
Other current assets.......................................................... 16,286 13,471
---------- ----------
Total current assets...................................................... 462,974 353,657
Property, plant and equipment, net................................................. 346,618 358,526
Goodwill, net of amortization...................................................... 337,600 328,975
Deferred income taxes.............................................................. 30,695 79,447
Other assets....................................................................... 41,667 44,238
---------- ----------
Total assets.............................................................. $1,219,554 $1,164,843
========== ==========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable.............................................................. $ 96,674 $ 107,382
Accrued liabilities........................................................... 137,383 135,094
Current portion of long-term debt............................................. 781,548 32,674
---------- ----------
Total current liabilities................................................. 1,015,605 275,150
Long-term debt..................................................................... 201,306 799,752
Other liabilities.................................................................. 239,089 232,278
---------- ----------
Total liabilities......................................................... 1,456,000 1,307,180
---------- ----------
Equity (deficit):
Preferred Stock, $.01 par value; authorized 10,000,000 shares;
none issued or outstanding.................................................. -- --
Common Stock, $.01 par value; authorized 100,000,000 shares;
issued: 20,736,376 and 20,712,973 shares at June 30, 2002
and December 31, 2001, respectively......................................... 207 207
Class B Common Stock, $.01 par value; authorized
40,000,000 shares; issued and outstanding: 4,750,107 shares
at June 30, 2002 and December 31, 2001...................................... 48 48
Paid in capital............................................................... 3,782 3,830
Accumulated other comprehensive loss.......................................... (13,951) (24,302)
Accumulated deficit........................................................... (225,287) (120,876)
Treasury stock, at cost: 149,889 and 145,570 shares at June 30, 2002
and December 31, 2001, respectively......................................... (1,245) (1,244)
---------- ----------
Total equity (deficit).................................................... (236,446) (142,337)
---------- ----------
Total liabilities and equity (deficit).................................... $1,219,554 $1,164,843
========== ==========
See the accompanying notes to the consolidated financial statements.
-2-
GENTEK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
June 30,
-------------------------------
2002 2001
---- ----
Cash flows from operating activities:
Net loss.................................................................. $(104,411) $(99,954)
Adjustments to reconcile net loss to net cash provided by (used for)
operating activities:
Depreciation and amortization........................................... 24,379 37,108
Asset impairment charges................................................ 22,417 94,245
Net loss on disposition of long-term assets............................. 160 801
Long-term incentive plans............................................... (48) (12)
Decrease in receivables................................................. 1,343 24,746
Decrease in inventories................................................. 5,074 5,797
Decrease in accounts payable............................................ (17,736) (4,237)
Increase (decrease) in accrued liabilities.............................. (478) 10,790
Increase (decrease) in other liabilities and assets, net................ 68,520 (56,692)
--------- --------
Net cash provided by (used for) operating activities................ (780) 12,592
--------- --------
Cash flows from investing activities:
Capital expenditures...................................................... (23,085) (47,816)
Proceeds from sales or disposals of long-term assets...................... 6,088 5,982
Acquisition of product lines/businesses net of cash acquired*............. (464) --
Other investing activities................................................ -- (2,825)
--------- --------
Net cash used for investing activities.............................. (17,461) (44,659)
--------- --------
Cash flows from financing activities:
Proceeds from long-term debt.............................................. 165,928 87,636
Repayment of long-term debt............................................... (18,196) (47,430)
Payment to acquire treasury stock......................................... (1) (210)
Exercise of stock options................................................. -- 206
Dividends................................................................. -- (1,255)
--------- --------
Net cash provided by financing activities........................... 147,731 38,947
--------- --------
Effect of exchange rate changes on cash.......................................... 1,278 (803)
--------- --------
Increase in cash and cash equivalents............................................ 130,768 6,077
Cash and cash equivalents at beginning of period................................. 9,205 4,459
--------- --------
Cash and cash equivalents at end of period....................................... $ 139,973 $ 10,536
========= ========
Supplemental information:
Cash paid (refunded) for income taxes..................................... $ (9,035) $ 6,700
========= ========
Cash paid for interest.................................................... $ 33,815 $ 37,046
========= ========
*Purchase of product lines/businesses net of cash acquired:
Working capital, other than cash.......................................... $ 59 $ --
Property, plant and equipment............................................. (364) --
Other assets.............................................................. (159) --
--------- --------
Net cash used to acquire product lines/businesses......................... $ (464) $ --
========= ========
See the accompanying notes to the consolidated financial statements.
-3-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Note 1 - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared by the Company pursuant to the rules and regulations of the Securities
and Exchange Commission. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) considered necessary for a fair
presentation have been included. Operating results for the six months ended June
30, 2002 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2002. These statements should be read in
conjunction with the financial statements and the notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
The Company's recent operating results have been negatively impacted by
the weaker economic environment. Due to the Company's failure to meet certain
covenant requirements of its senior credit facility, borrowing's under the
facility and a $25 million (Canadian) facility are now subject to acceleration
by the Company's lenders. On July 29, 2002, the Company received a payment
blockage notice from its senior lenders preventing the Company from making its
scheduled August 1, 2002 interest payment on its 11% Senior Subordinated Notes.
If the Company does not make the scheduled interest payment on or before August
31, 2002, the 11% Senior Subordinated Notes would become subject to acceleration
as well. Although the Company has been engaged in discussions with its senior
lenders as to the terms of an amendment to the Company's senior credit facility,
no agreement has been reached as to such terms and the Company is currently
considering various alternatives, including restructuring its debt, the sale or
other disposition of certain of its businesses or assets and possible filing for
protection under Chapter 11 of the United States Bankruptcy Code. Filing for
protection under the United States Bankruptcy Code would result in acceleration
of the 11% Senior Subordinated Notes. In addition, a group of holders
representing a significant portion of the outstanding 11% Senior Subordinated
Notes has organized an Ad hoc committee of noteholders for the purpose of
engaging in discussions with the Company regarding potential restructuring plans
and the Company has agreed to pay the reasonable financial and legal advisory
fees incurred by the Ad hoc committee. No assurances can be given that the
Company will be able to consummate any amendment to the credit facility, any
restructuring, recapitalization or reorganization or that it will be able to
pay the scheduled interest payments on the 11% Senior Subordinated Notes. The
consolidated financial statements have been prepared assuming the Company will
continue as a going concern and do not include any adjustments that might result
from the outcome of this uncertainty.
Note 2 - Summary of Significant Accounting Policies
During the second quarter of 2002, the Company revised its projection
of domestic taxable income. These estimates projected significantly lower
domestic taxable income than previous projections, principally due to the
downturn in the global communications market. As a result of lower projected
domestic taxable income and the Company's evaluation of potential
tax-planning strategies, the Company has concluded that it is more likely
then not that it will not be able to realize its domestic net deferred tax
assets. Accordingly, the Company recorded a valuation allowance of $96 million
effectively reducing the carrying value of its domestic net deferred tax assets
to zero. The Company will continue to monitor the likelihood of realizing its
net deferred tax assets and future adjustments to the deferred tax asset
valuation allowances will be recorded as necessary.
-4-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill.
SFAS No. 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization approach,
goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain intangibles is more than its fair value. The provisions
of each statement which apply to goodwill and intangible assets acquired prior
to June 30, 2001 were adopted by the Company on January 1, 2002, accordingly,
the Company ceased amortizing goodwill. The following illustrates what net loss
and loss per share would have been had these provisions been adopted for all
periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Reported net loss .......................... $(101,263) $(102,429) $(104,411) $(99,954)
Add back: goodwill amortization ..... -- 2,756 -- 5,683
--------- --------- --------- --------
Adjusted net loss ................... $(101,263) $ (99,673) $(104,411) $(94,271)
========= ========= ========= ========
Loss per share, basic and assuming dilution:
Reported net loss ................... $ (3.97) $ (4.03) $ (4.10) $ (3.94)
Add back: goodwill amortization ..... -- .11 -- .22
--------- --------- --------- --------
Adjusted net loss ................... $ (3.97) $ (3.92) $ (4.10) $ (3.72)
========= ========= ========= ========
During the second quarter, the Company completed the first step of the
transitional goodwill impairment test, which indicated that an impairment loss
may have to be recognized in the communications, manufacturing and performance
products segments. As of December 31, 2001, the total amount of goodwill
recorded in the reporting units that may be affected is $109,036, $136,245, and
$44,027, respectively. The Company will complete measurement of any potential
impairment loss during the third quarter.
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred and the associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 is effective for years
beginning after June 15, 2002. The Company is currently evaluating the impact
that adoption of this standard will have on its consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets," which requires all long-lived
assets classified as held for sale to be valued at the lower of their carrying
amount or fair value less cost to sell and which broadens the presentation of
discontinued operations to include more disposal transactions. The Company
adopted this standard on January 1, 2002. There was no effect upon adoption on
the Company's consolidated financial statements.
-5-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities," which requires that a liability
for costs associated with an exit or disposal activity be recognized when the
liability is incurred. This differs from prior guidance, which required the
liability to be recognized when a commitment plan was put into place. SFAS No.
146 also establishes that fair value is the objective for initial measurement of
the liability. This statement is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect that the
adoption of this standard will have a material impact on its financial position,
results of operations or cash flow.
Note 3 - Comprehensive Loss
Total comprehensive loss is comprised of net loss, foreign currency
translation adjustments and the change in unrealized gains and losses on
marketable securities and derivative financial instruments. Total
comprehensive loss for the three months ended June 30, 2002 and 2001 was
$(91,822) and $(106,822), respectively. Total comprehensive loss for the six
months ended June 30, 2002 and 2001 was $(94,060) and $(117,255), respectively.
Note 4 - Earnings Per Share
The computation of basic earnings per share is based on the weighted
average number of common shares outstanding during the period. The computation
of diluted earnings per share assumes the foregoing and, in addition, the
exercise of all stock options and restricted units, using the treasury stock
method.
The shares outstanding used for basic and diluted earnings per common
share are reconciled as follows:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Basic earnings per common share:
Weighted average common shares
outstanding................................ 25,510,048 25,420,750 25,491,247 25,379,936
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average common shares
outstanding................................ 25,510,048 25,420,750 25,491,247 25,379,936
Options and restricted units................ -- -- -- --
---------- ---------- ---------- ----------
Total................................. 25,510,048 25,420,750 25,491,247 25,379,936
========== ========== ========== ==========
For the six months ended June 30, 2002 and 2001, options to purchase
2,912,500 and 1,223,450 shares of common stock, respectively, were not included
in the computation of diluted earnings per common share because the exercise
price was greater than the average market price of the common shares. For the
six months ended June 30, 2002 and 2001, 75,250 and 1,226,950 options and
restricted units, respectively, were not included in the computation of diluted
earnings per common share due to their antidilutive effect.
-6-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Note 5 - Inventories
The components of inventories were as follows:
June 30, December 31,
2002 2001
---- ----
Raw materials................................ $ 37,997 $ 47,112
Work in process.............................. 18,179 15,156
Finished products............................ 44,799 40,795
Supplies and containers...................... 5,278 4,611
-------- --------
$106,253 $107,674
======== ========
Note 6 - Long-Term Debt
Long-term debt consists of the following:
June 30, December 31,
Maturities 2002 2001
---------- ---- ----
Bank term loans - floating rates................... 2002-2007 $479,523 $486,250
Revolving credit facility - floating rate.......... 2005 269,234 115,000
Senior Subordinated Notes - 11%.................... 2009 200,000 200,000
Other debt - floating rates........................ 2002-2018 34,097 31,176
-------- --------
Total debt................................... 982,854 832,426
Less: current portion....................... 781,548 32,674
-------- --------
Net long-term debt........................... $201,306 $799,752
======== ========
The Company is not in compliance with certain covenants contained in
its senior credit facility. The Company's failure to meet such covenant
requirements gives the lenders under the senior credit facility and a
$25 million (Canadian) facility the right to accelerate the loans. Accordingly,
amounts outstanding under these facilities have been classified as current
liabilities. In addition, as a result of such noncompliance, counterparties to
the Company's interest rate swap agreements have the right to require the
Company to cash settle these agreements by paying fair value (approximately
$9,578 at June 30, 2002) to the counterparties. On May 1, 2002, the Company
received notice from the counterparty to one of the Company's interest rate swap
agreements that it was exercising its right to terminate the agreement, and
demanded an early termination payment of $1,414, which has not been paid yet.
On July 29, 2002, the Company received a payment blockage notice from its senior
lenders preventing the Company from making its scheduled August 1, 2002 interest
payment on its 11% Senior Subordinated Notes. The Company's senior lenders may
issue one payment blockage notice in any 12-month period while the Company is in
default of its senior credit facility. If the Company does not make the
scheduled interest payment on or before August 31, 2002, the $200,000 of 11%
Senior Subordinated Notes outstanding will be reclassified as a current
liability and acceleration of the principal amount and all accrued interest on
all outstanding 11% Senior Subordinated Notes may result. In addition, should
$25 million or more of the Company's senior credit facilities and interest
rate swap agreements become accelerated, the 11% Senior Subordinated Notes would
become subject to acceleration as well. Although the Company has been engaged in
discussions with its senior lenders as to the terms of an amendment to the
Company's senior credit facility, no agreement has been reached as to such terms
and the Company is currently considering various alternatives, including
restructuring its debt, the sale or other disposition of certain of its
businesses or assets and possible filing
-7-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
for protection under Chapter 11 of the United States Bankruptcy Code. Filing for
protection under the United States Bankruptcy Code would result in acceleration
of the 11% Senior Subordinated Notes. In addition, a group of holders
representing a significant portion of the outstanding 11% Senior Subordinated
Notes has organized an Ad hoc committee of noteholders for the purpose of
engaging in discussions with the Company regarding potential restructuring plans
and the Company has agreed to pay the reasonable financial and legal advisory
fees incurred by the Ad hoc committee. No assurances can be given that the
Company will be able to consummate any amendment to the credit facility, any
restructuring, recapitalization or reorganization or that it will be able to
pay the scheduled interest payments on the 11% Senior Subordinated Notes.
Note 7 - Segment Information
Industry segment information is summarized as follows:
Net Revenues Operating Profit (Loss)
Six Months Ended Six Months Ended
June 30, June 30,
2002 2001 2002 2001
---- ---- ---- ----
Performance Products...................................... $ 178,477 $ 181,792 $ 12,803 $ (44,062)
Manufacturing............................................. 254,960 249,005 25,370 (8,722)
Communications ........................................... 146,229 228,639 (28,640) (50,994)
------------- ------------- ----------- -----------
Total segments................................... 579,666 659,436 9,533 (103,778)
Eliminations and other corporate expenses................. -- -- (5,457) (7,433)
------------- ------------- ----------- -----------
Consolidated.............................................. $ 579,666 $ 659,436 4,076 (111,211)
============= ============= ----------- -----------
Interest expense.......................................... 36,585 37,491
Other income, net......................................... 2,200 2,142
----------- -----------
Loss before income taxes.................................. $ (30,309) $ (146,560)
=========== ===========
Identifiable Assets
June 30, December 31,
2002 2001
---- ----
Performance Products...................................... $ 282,014 $ 303,788
Manufacturing (1)......................................... 389,430 409,006
Communications ........................................... 404,662 426,767
Corporate................................................. 143,448 25,282
------------- -------------
Consolidated.............................................. $ 1,219,554 $ 1,164,843
============= =============
(1) Includes equity method investments of $18,546 and $21,608, respectively.
Note 8 - Restructuring and Impairment Charges
The Company initiated the 2002 restructuring program during the quarter
ended June 30, 2002 and recorded restructuring charges of $1,201 related to
employee termination costs for 86 employees. The employee terminations impacted
the Company's communications segment. As of June 30, 2002, 58 employees have
been terminated pursuant to the 2002 restructuring program.
-8-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
The Company's 2001 restructuring program consists of a workforce
reduction, several plant closings and the discontinuation of certain product
lines. During the year ended December 31, 2001, the Company recorded
restructuring charges of $37,384 consisting of: $20,160 related to employee
termination costs for approximately 2,000 employees; $11,920 associated with the
write-down of assets resulting from plant closings and product line
discontinuance; and $5,304 related primarily to lease obligations and other
closure costs at facilities that will no longer be used. The Company expects to
substantially complete implementation of the 2001 restructuring program by the
end of 2002. Management does not expect that the 2001 restructuring program will
have a material impact on the Company's revenues. The employee terminations
impacted all of the Company's business segments, with the majority in the
manufacturing and communications segments. As of June 30, 2002, approximately
1,350 employees had been terminated pursuant to the 2001 restructuring program.
The following tables summarize the Company's accruals for restructuring
costs:
Employee Facility
Termination Costs Exit Costs
----------------- ----------
Provisions................................... $20,160 $5,304
Amounts utilized............................. 8,539 676
------- -------
Balance at December 31, 2001................. 11,621 4,628
Provisions................................... 1,201 -------
Amounts utilized............................. 5,510 883
------- -------
Balance at June 30, 2002..................... $ 7,312 $ 3,745
======= =======
The Company has continued to experience significant declines in its
communications businesses resulting in operating losses for several business
units in 2002. The Company's revised forecast for these businesses indicated
that, based upon continuing diminished prospects in the market served by these
operations, the cash flow to be generated by these businesses would not be
sufficient to recover the carrying value of the long-lived assets at these
operations. In the second quarter, the Company recorded non-cash impairment
charges totaling $22,417 primarily related to fixed assets at two manufacturing
facilities in the communications segment. The charge was due to changes in the
principal markets served by these operations. The fair values of the assets were
determined based upon a calculation of the present value of the expected future
cash flows.
Note 9 - Summarized Financial Information
The Company's 11% Senior Subordinated Notes due 2009 are fully and
unconditionally guaranteed, on a joint and several basis, by all of the
Company's wholly owned, domestic subsidiaries ("Subsidiary Guarantors"). The
non-guarantor subsidiaries are foreign.
The following condensed consolidating financial information illustrates
the composition of the combined Subsidiary Guarantors. The Company believes that
the separate complete financial statements of the respective guarantors would
not provide additional material information which would be useful in assessing
the financial composition of the Subsidiary Guarantors.
-9-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2002
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues...................................... $ -- $ 196,376 $ 118,378 $ (12,025) $ 302,729
Cost of sales..................................... -- 160,118 91,221 (12,025) 239,314
Selling, general and administrative expense....... 649 29,341 18,589 -- 48,579
Restructuring and impairment charges.............. -- 23,183 435 -- 23,618
---------- ----------- ----------- ---------- -----------
Operating profit (loss)....................... (649) (16,266) 8,133 -- (8,782)
Interest expense.................................. 15,315 17,658 4,075 (18,179) 18,869
Other (income) expense, net....................... (13,676) (2,199) (4,143) 18,179 (1,839)
---------- ----------- ----------- ---------- -----------
Income (loss) before income taxes............. (2,288) (31,725) 8,201 -- (25,812)
Income tax provision.............................. 5,277 69,666 508 -- 75,451
Equity in income (loss) from subsidiaries......... (93,698) 7,693 -- 86,005 --
---------- ----------- ----------- ---------- -----------
Net income (loss)............................. $ (101,263) $ (93,698) $ 7,693 $ 86,005 $ (101,263)
========== =========== =========== ========== ===========
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2001
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues........................................ $ -- $ 197,526 $ 134,765 $ (12,817) $ 319,474
Cost of sales....................................... -- 173,866 102,932 (12,817) 263,981
Selling, general and administrative expense......... 704 52,848 26,618 -- 80,170
Restructuring and impairment charges................ -- 95,268 12,750 -- 108,018
----------- ----------- ----------- ---------- -----------
Operating profit (loss)......................... (704) (124,456) (7,535) -- (132,695)
Interest expense .................................. 14,915 14,206 3,749 (14,239) 18,631
Other (income) expense, net......................... (14,329) (5,647) 5,554 14,239 (183)
----------- ----------- ----------- ---------- -----------
Income (loss) before income taxes............... (1,290) (133,015) (16,838) -- (151,143)
Income tax provision (benefit)...................... (413) (42,913) (5,388) -- (48,714)
Equity in income (loss) from subsidiaries........... (101,552) (11,450) -- 113,002 --
----------- ----------- ----------- ---------- -----------
Net income (loss)............................... $ (102,429) $ (101,552) $ (11,450) $ 113,002 $ (102,429)
=========== =========== =========== ========== ===========
-10-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2002
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues......................................... $ -- $380,494 $222,545 $(23,373) $ 579,666
Cost of sales........................................ -- 311,438 172,878 (23,373) 460,943
Selling, general and administrative expense.......... 1,282 53,794 35,953 -- 91,029
Restructuring and impairment charges................. -- 23,183 435 -- 23,618
--------- -------- -------- -------- ---------
Operating profit (loss).......................... (1,282) (7,921) 13,279 -- 4,076
Interest expense ................................... 29,597 34,242 7,861 (35,115) 36,585
Other (income) expense, net.......................... (26,174) (3,191) (7,950) 35,115 (2,200)
--------- -------- -------- -------- ---------
Income (loss) before income taxes................ (4,705) (38,972) 13,368 -- (30,309)
Income tax provision................................. 4,552 67,492 2,058 -- 74,102
Equity in income (loss) from subsidiaries............ (95,154) 11,310 -- 83,844 --
--------- -------- -------- -------- ---------
Net income (loss)................................ $(104,411) $(95,154) $ 11,310 $ 83,844 $(104,411)
========= ======== ======== ======== =========
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2001
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Net revenues....................................... $ -- $ 410,187 $270,493 $(21,244) $ 659,436
Cost of sales...................................... -- 348,184 200,608 (21,244) 527,548
Selling, general and administrative expense........ 1,143 84,335 49,603 -- 135,081
Restructuring and impairment charges............... -- 95,268 12,750 -- 108,018
-------- --------- -------- -------- ---------
Operating profit (loss)........................ (1,143) (117,600) 7,532 -- (111,211)
Interest expense ................................. 30,311 29,535 7,224 (29,579) 37,491
Other (income) expense, net........................ (29,432) (8,318) 6,029 29,579 (2,142)
-------- --------- -------- -------- ---------
Income (loss) before income taxes.............. (2,022) (138,817) (5,721) -- (146,560)
Income tax provision (benefit)..................... (647) (44,129) (1,830) -- (46,606)
Equity in income (loss) from subsidiaries.......... (98,579) (3,891) -- 102,470 --
-------- --------- -------- -------- ---------
Net income (loss).............................. $(99,954) $ (98,579) $ (3,891) $102,470 $ (99,954)
======== ========= ======== ======== =========
-11-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Balance Sheet
June 30, 2002
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents.................... $ -- $ 117,894 $ 22,079 $ -- $ 139,973
Receivables, net............................. -- 112,921 85,903 -- 198,824
Inventories.................................. -- 48,040 58,213 -- 106,253
Other current assets......................... 443 10,032 7,449 -- 17,924
---------- ----------- ----------- -------- -----------
Total current assets...................... 443 288,887 173,644 -- 462,974
Property, plant and equipment, net............... -- 254,904 91,714 -- 346,618
Goodwill, net.................................... -- 167,542 170,058 -- 337,600
Intercompany receivable (payable)................ 788,578 (864,468) 75,890 -- --
Investment in subsidiaries....................... (172,607) 203,843 -- (31,236) --
Other assets..................................... -- 67,383 4,979 -- 72,362
---------- ----------- ----------- -------- -----------
Total assets.............................. $ 616,414 $ 118,091 $ 516,285 $(31,236) $ 1,219,554
========== =========== =========== ======== ===========
Current liabilities:
Accounts payable............................. $ 127 $ 61,215 $ 35,332 $ -- $ 96,674
Accrued liabilities.......................... 39,187 53,063 45,133 -- 137,383
Current portion of long-term debt............ 603,628 110 177,810 -- 781,548
---------- ----------- ----------- -------- -----------
Total current liabilities................. 642,942 114,388 258,275 -- 1,015,605
Long-term debt................................... 200,000 644 662 -- 201,306
Other liabilities................................ 9,918 175,666 53,505 -- 239,089
---------- ----------- ----------- -------- -----------
Total liabilities......................... 852,860 290,698 312,442 -- 1,456,000
Equity (deficit)................................. (236,446) (172,607) 203,843 (31,236) (236,446)
---------- ----------- ----------- -------- -----------
Total liabilities and equity (deficit).... $ 616,414 $ 118,091 $ 516,285 $(31,236) $ 1,219,554
========== =========== =========== ======== ===========
-12-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Balance Sheet
December 31, 2001
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------ ---------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents.................... $ -- $ 443 $ 8,762 $ -- $ 9,205
Receivables, net............................. -- 105,246 78,716 -- 183,962
Inventories.................................. -- 55,205 52,469 -- 107,674
Other current assets......................... 1,488 43,633 7,695 -- 52,816
---------- --------- -------- --------- -----------
Total current assets...................... 1,488 204,527 147,642 -- 353,657
Property, plant and equipment, net............... -- 270,780 87,746 -- 358,526
Goodwill, net.................................... -- 161,664 167,311 -- 328,975
Intercompany receivable (payable)................ 643,909 (742,123) 98,214 -- --
Investment in subsidiaries....................... (88,541) 203,931 -- (115,390) --
Other assets..................................... 3,995 110,242 9,448 -- 123,685
---------- --------- -------- --------- -----------
Total assets.............................. $ 560,851 $ 209,021 $510,361 $(115,390) $ 1,164,843
========== ========= ======== ========= ===========
Current liabilities:
Accounts payable............................. $ 274 $ 73,292 $ 33,816 $ -- $ 107,382
Accrued liabilities.......................... 37,211 53,013 44,870 -- 135,094
Current portion of long-term debt............ 15,125 110 17,439 -- 32,674
---------- --------- -------- --------- -----------
Total current liabilities................. 52,610 126,415 96,125 -- 275,150
Long-term debt................................... 639,875 678 159,199 -- 799,752
Other liabilities................................ 10,703 170,469 51,106 -- 232,278
---------- --------- -------- --------- -----------
Total liabilities......................... 703,188 297,562 306,430 -- 1,307,180
Equity (deficit)................................. (142,337) (88,541) 203,931 (115,390) (142,337)
---------- --------- -------- --------- -----------
Total liabilities and equity (deficit).... $ 560,851 $ 209,021 $510,361 $(115,390) $ 1,164,843
========== ========= ======== ========= ===========
-13-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
For the three and six months ended June 30, 2002
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Six Months ended June 30, 2002
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Consolidated
------ ---------- ------------ ------------
Net cash provided by (used for) operating
activities........................................ $ (1,793) $(16,442) $17,455 $ (780)
--------- -------- ------- --------
Net cash used for investing activities............. -- (10,171) (7,290) (17,461)
--------- -------- ------- --------
Cash flows from financing activities:
Intercompany cash transfers.................... (146,835) 144,478 2,357 --
Other.......................................... 148,628 (414) (483) 147,731
--------- -------- ------- --------
Net cash provided by financing activities.......... 1,793 144,064 1,874 147,731
--------- -------- ------- --------
Effect of exchange rates on cash................... -- -- 1,278 1,278
--------- -------- ------- --------
Increase in cash and cash equivalents.............. -- 117,451 13,317 130,768
Cash and cash equivalents at beginning
of period......................................... -- 443 8,762 9,205
--------- -------- ------- --------
Cash and cash equivalents at end of period......... $ -- $117,894 $22,079 $139,973
========= ======== ======= ========
Condensed Consolidating Statement of Cash Flows
Six Months ended June 30, 2001
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Consolidated
------ ---------- ------------ ------------
Net cash provided by (used for) operating
activities........................................ $ 7,271 $(14,203) $ 19,524 $ 12,592
-------- -------- -------- --------
Net cash used for investing activities............. -- (34,763) (9,896) (44,659)
-------- -------- -------- --------
Cash flows from financing activities:
Intercompany cash transfers.................... (35,137) 51,751 (16,614) --
Other.......................................... 27,866 7,757 3,324 38,947
-------- -------- -------- --------
Net cash provided by (used for) financing
activities........................................ (7,271) 59,508 (13,290) 38,947
-------- -------- -------- --------
Effect of exchange rates on cash................... -- -- (803) (803)
-------- -------- -------- --------
Increase (decrease) in cash and cash
equivalents....................................... -- 10,542 (4,465) 6,077
Cash and cash equivalents at beginning
of period......................................... -- (4,889) 9,348 4,459
-------- -------- -------- --------
Cash and cash equivalents at end of period......... $ -- $ 5,653 $ 4,883 $ 10,536
======== ======== ======== ========
-14-
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
This Form 10-Q contains forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934. The Company's actual results could differ materially from
those set forth in the forward-looking statements. Certain factors that might
cause such a difference include those discussed in the section entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Forward-Looking Statements" contained in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.
Results of Operations
The following table sets forth the Company's net revenues and operating
profit (loss) by segment for the three and six month periods ended June 30, 2002
and 2001 (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
Net Revenues: 2002 2001 2002 2001
- ------------ ---- ---- ---- ----
Performance Products........................ $ 93.6 $ 92.8 $ 178.5 $ 181.8
Manufacturing............................... 131.9 124.1 255.0 249.0
Communications.............................. 77.2 102.6 146.2 228.6
------------ ------------ ------------ ------------
Total................................ $ 302.7 $ 319.5 $ 579.7 $ 659.4
============ ============ ============ ============
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
Operating Profit (Loss): 2002 2001 2002 2001
- ---------------------- ---- ---- ---- ----
Performance Products........................ $ 6.4 $ (51.4) $ 12.8 $ (44.1)
Manufacturing............................... 13.6 (15.8) 25.4 (8.7)
Communications.............................. (25.2)(1) (58.7) (28.6)(1) (51.0)
Eliminations/Other Corporate................ (3.6) (6.8) (5.5) (7.4)
------------ ------------ ------------ ------------
Total................................ $ (8.8) $ (132.7)(2) $ 4.1 $ (111.2)(2)
============ ============ ============ ============
(1) Includes restructuring and impairment charges of $23.3 million.
(2) Includes restructuring, impairment and other charges of $62.3 million in
the performance products segment, $26.2 million in the manufacturing
segment, $56.5 million in the communications segment and $5.7 million in
other corporate.
Net consolidated revenues for the three and six month periods ended
June 30, 2002 decreased by 5.2 percent and 12.1 percent from the comparable
prior year periods to $303 million and $580 million, respectively. For the three
and six month periods ended June 30, 2002, sales in the performance products
segment increased $1 million and decreased $3 million, respectively, versus the
comparable prior year periods. The decrease for the six month period reflects
lower sales in the environmental services and chemical processing markets
partially offset by higher sales in the pharmaceutical and personal care market
and the technology market. In the manufacturing segment, sales increased 6.3
percent from prior year levels to $132 million for the three month period ended
June 30, 2002. For the six month period ended June 30, 2002, manufacturing
segment sales grew 2.4 percent versus prior year levels. The growth in both
periods is primarily attributable to higher volumes in the Company's
industrial market. For the three and six month periods ended June 30, 2002,
sales in the communications segment decreased to $77 million and $146 million,
respectively, representing decreases of 24.7 percent and 36.0 percent versus
prior year levels. These decreases are the result of lower volumes and pricing
pressures, principally driven by a continuing weakness in demand for the
Company's public and premise network products and services in the North
American and European Markets.
Gross profit for the three months ended June 30, 2002, increased $8
million to $63 million from the comparable prior year period. Gross profit for
the six months ended June 30, 2002 decreased $13 million to $119 million versus
the prior year. Excluding the impact of a $16 million charge to cost of sales
recorded in the second quarter of 2001 principally due to obsolete and excess
inventory,
-15-
discontinued products and fixed asset write offs, gross profit for the three and
six month periods ended June 30, 2002 decreased $9 million and $30 million from
the comparable prior year periods, respectively. These decreases are principally
due to lower sales volumes in the communications segment and costs associated
with the expedited repair of two boilers and a loss of production at one of the
Company's performance products facilities, partially offset by lower goodwill
amortization and depreciation expense and higher sales volumes in the
manufacturing segment.
Selling, general and administrative expense decreased $5 million and
$18 million for the three and six month periods ended June 30, 2002,
respectively, as compared to prior year levels, excluding the impact of a
$26 million loss provision for accounts receivable recorded in the second
quarter of 2001. These decreases resulted from lower expenses in the
communications segment reflecting the impact of the Company's restructuring
program, which includes the closure of two non-core research and development
facilities in 2001.
Operating loss for the three months ended June 30, 2002 was $9 million
as compared to $133 million for the prior year period. Operating profit for the
six months ended June 30, 2002 was $4 million as compared to an operating loss
of $111 million for the comparable prior year period. The improvement in
operating profit for both periods was principally due to: restructuring,
impairment and other charges totalling $151 million recorded in the second
quarter of 2001 related to asset impairments, severance, plant closures,
discontinuation of certain product lines and receivable and inventory
write-downs; operating costs related to two non-core research and development
facilities in the communications segment which were closed during the fourth
quarter of 2001; and, during 2002, lower depreciation and amortization expense
and favorable performance in the manufacturing segment. The decrease in
depreciation expense and amortization expense is the result of asset impairment
charges recorded in 2001 and an accounting change related to SFAS No. 142,
respectively. The favorable performance in the manufacturing segment reflects a
more stable automotive production environment, and the impact of the Company's
restructuring program implemented in 2001, offset partially by lower prices.
Offsetting the abovementioned positive factors were: unfavorable performance in
the communications segment due to restructuring and impairment charges totaling
$23 million recorded during the second quarter of 2002 and lower sales volume;
unfavorable performance in the performance product segment due to costs
associated with the expedited repair of two boilers and a loss of production at
one of the Company's facilities; and expenses incurred as a result of the
Company's ongoing bank negotiations.
Interest expense for the three months ended June 30, 2002 was $19
million, which was up slightly from the prior year level due to higher average
outstanding debt balances partially offset by lower average borrowing rates. The
Company's average effective interest rate for the second quarter was 7.7 percent
as compared to 8.6 percent for the second quarter of last year. Interest expense
for the six months ended June 30, 2002 was $1 million lower than the prior year
level due to lower average borrowing rates partially offset by higher average
debt balances. The Company's average effective interest rate for the six months
ended June 30, 2002 was 7.8 percent as compared to 8.8 percent for the prior
year.
The Company recorded income tax expense of $74 million for the six
months ended June 30, 2002. During the second quarter of 2002, the Company
revised its projection of domestic taxable income for the year 2002 and the
year 2003. These estimates projected significantly lower domestic taxable income
than previous projections, principally due to the downturn in the global
communications market. As a result of lower projected domestic taxable income
and the Company's evaluation of potential tax-planning strategies, the
Company has concluded that it is more likely than not that it will not be
able to realize its domestic net deferred tax assets. Accordingly, the Company
recorded a valuation allowance of $96 million effectively reducing the carrying
value of its domestic net deferred tax assets to zero. The Company will continue
to monitor the likelihood of realizing its net deferred tax assets and future
adjustments to the deferred tax asset valuation allowances will be recorded as
necessary.
-16-
Restructuring and Impairment Charges
The Company initiated the 2002 restructuring program during the quarter
ended June 30, 2002 and recorded restructuring charges of $1,201 related to
employee termination costs for 86 employees in the Company's North American
communications business. As of June 30, 2002, 58 employees have been terminated
pursuant to the 2002 restructuring program.
Cash payments charged against the restructuring liability for the 2002
and 2001 restructuring programs combined totaled $6 million and $9 million for
employee termination costs and $1 million and $1 million for facility exit costs
in the six months ended June 30, 2002 and the twelve months ended December 31,
2001, respectively. While management expects that cash outlays related to the
restructuring programs will be substantially completed by the end of 2002,
certain severance and facility exit costs, primarily lease obligations, have
payment terms extending beyond 2002. Management intends to fund these cash
outlays from existing cash balances and cash flow generated by operations.
Management expects that the 2001 and 2002 restructuring programs will result
in an estimated annual reduction in employee and facility related expense and
cash flows of approximately $33-$38 million. The Company began to realize these
reductions in the third quarter of fiscal 2001.
The Company has continued to experience significant declines in its
communications businesses resulting in operating losses for several business
units in 2002. The Company's revised forecast for these businesses indicated
that, based upon continuing diminished prospects in the market served by these
operations, the cash flow to be generated by these businesses would not be
sufficient to recover the carrying value of the long-lived assets at these
operations. In the second quarter, the Company recorded non-cash impairment
charges totaling $22,417 primarily related to fixed assets at two manufacturing
facilities in the communications segment. The charge was due to changes in the
principal markets served by these operations. The fair values of the assets were
determined based upon a calculation of the present value of the expected future
cash flows.
The Company will continue to review its operations, and may record
additional restructuring charges to tailor its cost structure to current
economic conditions. In addition, the Company will continue to evaluate the
recoverability of its assets, which may result in additional charges.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents were $140 million at June 30, 2002 compared
with $9 million at December 31, 2001. During the first six months of 2002 the
Company had proceeds from asset sales of $6 million and had net borrowings of
$148 million from its revolving credit facility, a portion of which was used to
make capital expenditures of $23 million.
During the six month period ended June 30, 2002, the Company incurred
approximately $6-8 million of one time costs associated with the expedited
repair of two boilers and other related costs at one of the manufacturing
facilities in the Company's performance products segment. While the boiler
repairs have been completed and the facility is now operational, it is possible
that significant additional spending may be required to improve reliability.
The Company is currently reviewing a range of alternatives designed to address
the facility's reliability and operating issues.
The Company had negative working capital of $553 million at June 30,
2002 as compared with working capital of $79 million at December 31, 2001. This
decrease reflects the reclassification of $736 million of the Company's
long-term debt to current liabilities as a result of the Company's failure to
meet certain covenant requirements contained in its senior credit facility and
lower deferred tax assets due to a valuation allowance recorded during the
second quarter of 2002, partially offset by higher cash and accounts receivable
balances and lower accounts payable. Due to the Company's failure to meet
certain covenant requirements contained in its senior credit facility,
borrowings under the facility and a $25 million (Canadian) facility are now
subject to acceleration by the Company's lenders. In addition, as a result of
such noncompliance, counterparties to the Company's interest rate swap
agreements have the right to require the Company to cash settle these agreements
by paying fair value (approximately $10 million at June 30, 2002) to the
counterparties. On May 1, 2002, the Company received notice from the
counterparty to one of the Company's interest rate swap agreements that it was
exercising its right to terminate the agreement, and demanded an early
termination payment of approximately $1 million, which
-17-
has not been paid yet. On July 29, 2002, the Company received a payment blockage
notice from its senior lenders preventing the Company from making its scheduled
August 1, 2002 interest payment on its 11% Senior Subordinated Notes. The
Company's senior lenders may issue one payment blockage notice in any 12-month
period while the Company is in default of its senior credit facility. If the
Company does not make the scheduled interest payment on or before August 31,
2002, the $200 million of 11% Senior Subordinated Notes outstanding will be
reclassified as a current liability and acceleration of the principal amount and
all accrued interest on all outstanding 11% Senior Subordinated Notes may
result. In addition, should $25 million or more of the Company's senior credit
facilities and interest rate swap agreements become accelerated, the 11% Senior
Subordinated Notes would become subject to acceleration as well.
As a result of the defaults and pursuant to the terms of the senior
credit facility, on May 1, 2002 the Company received notice from its lenders
that it will no longer be allowed to utilize LIBOR as the base rate for
borrowings under the senior credit facility. As interest reset dates occur, the
Company anticipates that the switch to Prime rate based borrowings will result
in increased borrowing costs, depending on the levels of the Prime and LIBOR
rates at the reset dates. Based on current market rates, the Company estimates
that the switch from LIBOR based to Prime based rates will increase the
Company's average effective rate on its senior credit facility by approximately
140 basis points, once all of the loans have been converted. Based on scheduled
reset dates, all loans should be converted to prime-rate based loans by October,
2002.
During the first quarter of 2002, the Company borrowed all of its
remaining availability on its revolving credit facility which approximated $155
million. As of August 9, 2002, the Company had approximately $140 million in
cash on hand which management believes will provide sufficient liquidity to
maintain existing payment terms with vendors while it explores its restructuring
alternatives. The Company's ongoing liquidity will depend on a number of
factors, including available cash resources, cash flows from operations, the
impact of the restructuring programs, proceeds from the sale of assets, if any,
amending its senior credit facility to eliminate its defaults and obtaining
modifications to restrictive covenants contained in the Company's financing
agreements.
Although the Company has been engaged in discussions with its senior
lenders as to the terms of an amendment to the Company's senior credit facility,
no agreement has been reached as to such terms and the Company is currently
considering various alternatives, including restructuring its debt, the sale or
other disposition of certain of its businesses or assets and possible filing for
protection under Chapter 11 of the United States Bankruptcy Code. Filing for
protection under the United States Bankruptcy Code would result in acceleration
of the 11% Senior Subordinated Notes. In addition, a group of holders
representing a significant portion of the outstanding 11% Senior Subordinated
Notes has organized an Ad hoc committee of noteholders for the purpose of
engaging in discussions with the Company regarding potential restructuring plans
and the Company has agreed to pay the reasonable financial and legal advisory
fees incurred by the Ad hoc committee. No assurances can be given that the
Company will be able to consummate any amendment to the credit facility, any
restructuring, recapitalization or reorganization or that it will be able to
pay the scheduled interest payments on the 11% Senior Subordinated Notes.
Recent Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB") issued
SFAS No. 141 "Business Combinations" and SFAS No. 142 "Goodwill and Other
Intangible Assets." SFAS No. 141 requires business combinations initiated after
June 30, 2001 to be accounted for using the purchase method of accounting, and
broadens the criteria for recording intangible assets separate from goodwill.
SFAS No. 142 requires the use of a nonamortization approach to account for
purchased goodwill and certain intangibles. Under a nonamortization approach,
goodwill and certain intangibles will not be amortized into results of
operations, but instead would be reviewed for impairment and written down and
charged to results of operations only in the periods in which the recorded value
of goodwill and certain
-18-
intangibles is more than its fair value. The provisions of each statement which
apply to goodwill and intangible assets acquired prior to June 30, 2001 were
adopted by the Company on January 1, 2002. Accordingly, the Company ceased
amortizing goodwill. The following illustrates what net loss and loss per share
would have been had these provisions been adopted for all periods presented:
Three Months Ended Six Months Ended
June 30, June 30,
-------- --------
2002 2001 2002 2001
---- ---- ---- ----
Reported net loss........................................ $ (101,263) $ (102,429) $ (104,411) $ (99,954)
Add back: goodwill amortization...................... -- 2,756 -- 5,683
----------- ----------- ----------- ------------
Adjusted net loss.................................... $ (101,263) $ (99,673) $ (104,411) $ (94,271)
=========== =========== =========== ===========
Loss per share, basic and assuming dilution:
Reported net loss.................................... $ (3.97) $ (4.03) $ (4.10) $ (3.94)
Add back: goodwill amortization...................... -- .11 -- .22
----------- ----------- ----------- ------------
Adjusted net loss.................................... $ (3.97) $ (3.92) $ (4.10) $ (3.72)
=========== =========== =========== ===========
During the second quarter, the Company completed the first step of the
transitional goodwill impairment test, which indicated that an impairment loss
may have to be recognized in the communications, manufacturing and performance
products segments. As of December 31, 2001, the total amount of goodwill
recorded in the reporting units that may be affected is $109,036, $136,245 and
$44,027, respectively. The Company will complete measurement of any potential
impairment loss during the third quarter.
In July 2001, the FASB issued SFAS No. 143 "Accounting for Asset
Retirement Obligations", which requires that the fair value of a liability for
an asset retirement obligation be recognized in the period in which it is
incurred and the associated asset retirement costs are capitalized as part of
the carrying amount of the long-lived asset. SFAS No. 143 is effective for years
beginning after June 15, 2002. The Company is currently evaluating the impact
that adoption of this standard will have on its consolidated financial
statements.
In August 2001, the FASB issued SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets", which requires all long-lived
assets classified as held for sale to be valued at the lower of their carrying
amount or fair value less cost to sell and which broadens the presentation of
discontinued operations to include more disposal transactions. The Company
adopted this standard on January 1, 2002. There was no effect on the Company's
consolidated financial statements.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which requires that a liability
for costs associated with an exit or disposal activity be recognized when the
liability is incurred. This differs from prior guidance, which required the
liability to be recognized when a commitment plan was put into place. SFAS No.
146 also establishes that fair value is the objective for initial measurement of
the liability. This statement is effective for exit or disposal activities that
are initiated after December 31, 2002. The Company does not expect that the
adoption of this standard will have a material impact on its financial position,
results of operations or cash flow.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
The Company's cash flows and earnings are subject to fluctuations
resulting from changes in interest rates and changes in foreign currency
exchange rates and the Company selectively uses financial instruments to manage
these risks. The Company's objective in managing its exposure to changes in
foreign currency exchange rates and interest rates is to reduce volatility on
earnings and cash flow associated with such changes. The Company has not
entered, and does not intend to enter, into financial instruments for
speculation or trading purposes.
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The Company measures the market risk related to its holding of
financial instruments based on changes in interest rates and foreign currency
rates using a sensitivity analysis. The sensitivity analysis measures the
potential loss in fair values, cash flows and earnings based on a hypothetical
10 percent change in interest and currency exchange rates. The Company used
current market rates on its debt and derivative portfolio to perform the
sensitivity analysis. Such analysis indicates that a hypothetical 10 percent
change in interest rates or foreign currency exchange rates would not have a
material impact on the fair values, cash flows or earnings of the Company.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
Sunoco Employee Litigation. In April 1998, approximately 40 employees
(and their respective spouses) of the Sunoco refinery in Marcus Hook,
Pennsylvania, filed lawsuits in the Court of Common Pleas, Delaware County,
Pennsylvania, against The General Chemical Group Inc. (whose obligations have
been assumed by the Company pursuant to the terms of the Spinoff), alleging that
sulfur dioxide and sulfur trioxide releases from the Company's Delaware Valley
facility caused various respiratory and pulmonary injuries. Unspecified damages
in excess of $50,000 for each plaintiff are sought. As a result of pretrial
proceedings, there are presently only 36 employees who are pursuing individual
personal injury claims and 29 spouses claiming loss of consortium. There is a
trial date of March 2003. The Company has denied all material allegations of the
complaints and will continue to defend itself vigorously in this matter.
Management further believes that current accruals and available insurance should
provide adequate coverage in the event of an adverse result in this matter and
that, based on currently available information, this matter will not have a
material adverse effect on the Company's results of operations or financial
condition.
In addition, on September 24, 1999 the same attorneys that filed the
April 1998 individual actions against the Company also filed a purported class
action complaint against the Company, titled Whisnant vs. General Chemical
Corporation, (in the Court of Common Pleas, Delaware County, Pennsylvania), on
behalf of more than 1,000 current and former employees of the Sunoco Marcus
Hook, Pennsylvania refinery located immediately adjacent to the Company's
Delaware Valley facility. The complaint alleges that unspecified releases of
sulfur dioxide and sulfur trioxide over unspecified timeframes caused injuries
to the plaintiffs, and seeks, among other things, to establish a "trust fund"
for medical monitoring for the plaintiffs. In May 2002, the trial court denied
plaintiffs' motion to certify the case to proceed as a class action. Plaintiffs
have appealed that decision. The Company believes this claim is without merit
and will vigorously defend itself in this matter. Management further believes
that the Company's current accruals and available insurance should provide
adequate coverage in the event of an adverse result in this matter, and that,
based on currently available information, this matter will not have a material
adverse effect on the Company's results of operations or financial condition.
May 1, 2001 Incident Ligitation. Starting on or about April 29, 2002,
lawyers claiming to represent approximately 18,000 persons filed approximately
18 lawsuits in Contra Costa, San Francisco and Alameda counties in California
state court, making claims against the Company and a third party arising out of
a May 1, 2001 release of sulfur dioxide and sulfur trioxide from the Company's
Richmond, California sulfuric acid facility. A class action lawsuit arising out
of the same facts has also been filed. The release was caused when the third
party's truck hit a power pole and damaged an electrical substation owned by the
local utility, thereby knocking out electrical power to a number of users,
including the Company. This resulted in a loss of vacuum pressure at the
Company's facility, which led to the release. The Company, which has also filed
suit against the third party in California State Court in Contra Costa County in
connection with the May 1, 2001 incident, has been served with some of the
lawsuits. The lawsuits claim various damages for alleged injuries, including,
without limitation, claims for personal injury, emotional distress, medical
monitoring, nuisance, loss of consortium and punitive
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damages, but the amount of damages sought is not known. The Company has filed a
petition for coordination asking that all of the lawsuits be coordinated before
a single judge. That petition is pending. The Company will vigorously defend
itself against these suits. The Company believes it has sufficient insurance
coverage in the event of an adverse result in these lawsuits and does not
believe that this matter will have a material adverse effect on its financial
condition or results of operations.
Delaware Valley Settlement. On July 2, 2002, the Company's Delaware
Valley facility experienced a release of fluosulfonic acid while loading a
railcar for delivery to a customer. In connection with this accident and certain
other recent incidents at the Delaware Valley facility, the Company and
representatives of the Delaware Department of Natural Resources and
Environmental Control ("DNREC") have reached agreement to resolve all alleged
violations relating to the July 2 accident and all prior incidents. Without
admitting liability, the Company agreed to pay a $475,000 civil penalty, plus
DNREC's out-of-pocket costs in investigating the July 2, 2002 incident. In
addition, the Company also agreed, among other things, to make certain
improvements to its process safety and risk management programs at
the facility.
Item 2. Changes in Securities and Use of Proceeds.
NONE
Item 3. Defaults Upon Senior Securities.
The Company is not in compliance with certain financial covenants
contained in its senior credit facility. The Company's failure to meet such
covenant requirements gives the lenders under the senior credit facility and a
$25 million (Canadian) facility the right to accelerate the loans. Accordingly,
amounts outstanding under these facilities have been classified as current
liabilities. In addition, as a result of such noncompliance, counterparties to
the Company's interest rate swap agreements have the right to require the
Company to cash settle these agreements by paying fair value (approximately $10
million at June 30, 2002) to the counterparties. On May 1, 2002, the Company
received notice from the counterparty to one of the Company's interest rate swap
agreements that it was exercising its right to terminate the agreement, and
demanded an early termination payment of approximately $1 million, which has
not been paid yet. On July 29, 2002, the Company received a payment blockage
notice from its senior lenders preventing the Company from making its scheduled
August 1, 2002 interest payment on its 11% Senior Subordinated Notes. The
Company's senior credit facility permits the Company's senior lenders to issue
one payment blockage notice in any 12-month period while the Company is in
default of its senior credit facility. If the Company does not make the
scheduled interest payment on or before August 31, 2002, acceleration of the
principal amount and all accrued interest on all outstanding 11% Senior
Subordinated Notes may result. In addition, should $25 million or more of the
Company's senior credit facilities and interest rate swap agreements become
accelerated, the 11% Senior Subordinated Notes would become subject to
acceleration as well. Although the Company has been engaged in discussions with
its senior lenders as to the terms of an amendment to the Company's senior
credit facility, no agreement has been reached as to such terms and the Company
is currently considering various alternatives including restructuring its debt,
the sale or other disposition of certain of its businesses or assets and
possible filing for protection under Chapter 11 of the United States Bankruptcy
Code. Filing for protection under the United States Bankruptcy Code would
result in acceleration of the 11% Senior Subordinated Notes. In addition, a
group of holders representing a significant portion of the outstanding 11%
Senior Subordinated Notes has organized an Ad hoc committee of noteholders for
the purpose of engaging in discussions with the Company regarding potential
restructuring plans and the Company has agreed to pay the reasonable financial
and legal advisory fees incurred by the Ad hoc committee. No assurances can be
given that the Company will be able to consummate any amendment to the credit
facility, any restructuring, recapitalization or reorganization or that it
will be able to pay the scheduled interest payments on the 11% Senior
Subordinated Notes.
-21-
Item 4. Submission of Matters to a Vote of Security Holders.
On May 8, 2002, the Company held its Annual Meeting of Stockholders. At
the meeting, Paul M. Montrone, Paul M. Meister, Bruce L. Koepfgen, Richard R.
Russell, Scott M. Sperling and Ira Stepanian were each elected as a director of
the Company to serve a one year term which will expire at the 2003 Annual
Meeting of Stockholders and until a successor has been duly elected and
qualified. For Paul M. Montrone, 62,738,882 votes were cast in favor and
2,590,479 votes were cast against. For Paul M. Meister, 65,143,781 votes were
cast in favor and 185,580 votes were cast against. For Bruce L. Koepfgen,
65,145,588 votes were cast in favor and 183,773 votes were cast against. For
Richard R. Russell, 62,738,519 votes were cast in favor and 2,590,842 were cast
against. For Scott M. Sperling, 65,144,588 votes were cast in favor and 184,773
votes were cast against. For Ira Stepanian, 65,144,587 votes were cast in favor
and 184,774 votes were cast against.
The stockholders also ratified the appointment of Deloitte & Touche LLP
as the Company's independent auditors; 65,261,276 votes were cast in favor of
the ratification, 61,548 were votes against and 6,537 abstained.
Item 5. Other Information.
NONE
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits; NONE
(b) Form 8-K filed with the Securities and Exchange Commission dated
July 30, 2002 with respect to receipt of a payment blockage notice
from the Registrants' senior lenders.
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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.
GENTEK INC.
-----------------------------------------
Registrant
Date August 14, 2002 /s/Richard R. Russell
------------------ -------------------------------------
Richard R. Russell
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date August 14, 2002 /s/ Matthew R. Friel
------------------- -------------------------------------
Matthew R. Friel
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
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STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................. 'SS'