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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, 2003
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 [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
The number of outstanding shares of the Registrant's Common Stock and Class B
Common Stock as of July 31, 2003 was 22,830,833 and 2,505,337, respectively.
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GENTEK INC.
FORM 10-Q
QUARTERLY PERIOD ENDED JUNE 30, 2003
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Operations - Three Months and Six Months
Ended June 30, 2003 and 2002....................................... 1
Consolidated Balance Sheets - June 30, 2003 and
December 31, 2002.................................................. 2
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2003 and 2002....................................... 3
Notes to the Consolidated Financial Statements........................ 4-21
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations......................... 22-29
Item 3. Quantitative and Qualitative Disclosures about Market Risk..... 29
Item 4. Controls and Procedures........................................ 29
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings.............................................. 29-30
Item 2. Changes in Securities and Use of Proceeds...................... 30
Item 3. Defaults upon Senior Securities................................ 30
Item 4. Submission of Matters to a Vote of Security Holders............ 30
Item 5. Other Information.............................................. 30
Item 6. Exhibits and Reports on Form 8-K............................... 30-31
SIGNATURES.................................................................. 32
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,
-------------------- --------------------
2003 2002 2003 2002
-------- --------- -------- ---------
Net revenues ............................................... $281,236 $ 302,729 $545,872 $ 579,666
Cost of sales .............................................. 225,028 239,314 442,869 460,943
Selling, general and administrative expense ................ 42,046 48,579 82,193 91,029
Restructuring and impairment charges ....................... -- 23,618 24,661 23,618
-------- --------- -------- ---------
Operating profit (loss) ................................. 14,162 (8,782) (3,851) 4,076
Interest expense (contractual interest for the three and six
month periods ended June 30, 2003 was $17,560 and
$34,840, respectively) .................................. 584 18,869 955 36,585
Interest income ............................................ 293 782 546 1,211
Reorganization items ....................................... 24,832 -- 33,790 --
Other (income) expense, net ................................ (2,904) (1,057) (3,115) (989)
-------- --------- -------- ---------
Loss before income taxes and cumulative effect of a
change in accounting principle ....................... (8,057) (25,812) (34,935) (30,309)
Income tax provision ....................................... 1,737 120,401 3,768 119,052
-------- --------- -------- ---------
Loss before cumulative effect of a change in
accounting principle ................................. (9,794) (146,213) (38,703) (149,361)
Cumulative effect of a change in accounting principle
(net of tax benefit of $39,760) ......................... -- -- -- (161,125)
-------- --------- -------- ---------
Net loss ................................................ $ (9,794) $(146,213) $(38,703) $(310,486)
======== ========= ======== =========
Loss per common share - basic:
Loss before cumulative effect of a change in accounting
principle ............................................... $ (.38) $ (5.73) $ (1.51) $ (5.86)
Cumulative effect of a change in accounting principle ...... -- -- -- (6.32)
-------- --------- -------- ---------
Net loss ................................................ $ (.38) $ (5.73) $ (1.51) $ (12.18)
======== ========= ======== =========
Loss per common share - assuming dilution:
Loss before cumulative effect of a change in accounting
principle ............................................... $ (.38) $ (5.73) $ (1.51) $ (5.86)
Cumulative effect of a change in accounting principle ...... -- -- -- (6.32)
-------- --------- -------- ---------
Net loss ................................................ $ (.38) $ (5.73) $ (1.51) $ (12.18)
======== ========= ======== =========
See the accompanying notes to the consolidated financial statements.
-1-
GENTEK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
June 30, December 31,
2003 2002
----------- ------------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ........................................ $ 105,441 $ 133,030
Receivables, net ................................................. 196,768 185,825
Inventories ...................................................... 107,512 104,718
Deferred income taxes ............................................ 3,511 3,328
Other current assets ............................................. 23,906 24,027
---------- -----------
Total current assets .......................................... 437,138 450,928
Property, plant and equipment, net .................................. 284,755 308,825
Goodwill ............................................................ 127,918 127,724
Deferred income taxes ............................................... 47,592 42,789
Other assets ........................................................ 28,182 26,719
---------- -----------
Total assets .................................................. $ 925,585 $ 956,985
========== ===========
LIABILITIES AND DEFICIT
Current liabilities:
Accounts payable ................................................. $ 48,812 $ 50,852
Accrued liabilities .............................................. 131,438 128,714
Current portion of long-term debt ................................ 15,443 15,091
---------- -----------
Total current liabilities ..................................... 195,693 194,657
Long-term debt ...................................................... 2,340 2,452
Liabilities subject to compromise ................................... 1,134,323 1,143,765
Other liabilities ................................................... 133,546 126,432
---------- -----------
Total liabilities ............................................. 1,465,902 1,467,306
---------- -----------
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: 22,981,146 and 21,589,623 shares at June 30, 2003
and December 31, 2002, respectively ........................... 230 216
Class B Common Stock, $.01 par value; authorized 40,000,000
shares; issued and outstanding: 2,505,337 and 3,896,860
shares at June 30, 2003 and December 31, 2002, respectively ... 25 39
Paid in capital .................................................. 3,308 3,305
Accumulated other comprehensive loss ............................. (22,407) (31,111)
Accumulated deficit .............................................. (520,228) (481,525)
Treasury stock, at cost: 150,313 shares at June 30, 2003 and
December 31, 2002 ............................................. (1,245) (1,245)
---------- -----------
Total deficit ................................................. (540,317) (510,321)
---------- -----------
Total liabilities and deficit ................................. $ 925,585 $ 956,985
========== ===========
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,
--------------------
2003 2002
-------- ---------
Cash flows from operating activities:
Net loss ...................................................... $(38,703) $(310,486)
Adjustments to reconcile net loss to net cash provided by (used
for) operating activities:
Cumulative effect of a change in accounting principle ...... -- 161,125
Depreciation and amortization .............................. 23,106 24,379
Asset impairment charges ................................... 24,661 22,417
Reorganization items ....................................... 33,790 --
Net loss on disposition of long-term assets ................ 96 160
Long-term incentive plan costs, net ........................ 3 (48)
(Increase) decrease in receivables ......................... (3,511) 1,343
Decrease in inventories .................................... 322 5,074
(Increase) decrease in deferred tax assets ................. (644) 125,632
Decrease in accounts payable ............................... (6,013) (18,185)
Decrease in accrued liabilities ............................ (11,133) (29)
Decrease in other liabilities and assets, net .............. (896) (12,162)
-------- ---------
Net cash provided by (used for) operations .............. 21,078 (780)
-------- ---------
Net cash used for reorganization items ........................... (9,957) --
-------- ---------
Cash flows from investing activities:
Capital expenditures .......................................... (17,029) (23,085)
Proceeds from sales or disposals of long-term assets .......... 195 6,088
Acquisition of businesses net of cash acquired* ............... -- (464)
-------- ---------
Net cash used for investing activities .................. (16,834) (17,461)
-------- ---------
Cash flows from financing activities:
Proceeds from long-term debt .................................. 1,863 165,928
Repayment of long-term debt ................................... (25,594) (18,196)
Payment to acquire treasury stock ............................. -- (1)
Debt issuance costs - reorganization .......................... (606) --
-------- ---------
Net cash provided by (used for) financing activities..... (24,337) 147,731
-------- ---------
Effect of exchange rate changes on cash .......................... 2,461 1,278
-------- ---------
Increase (decrease) in cash and cash equivalents ................. (27,589) 130,768
Cash and cash equivalents at beginning of period ................. 133,030 9,205
-------- ---------
Cash and cash equivalents at end of period ....................... $105,441 $ 139,973
======== =========
Supplemental information:
Cash paid (refunded) for income taxes ......................... $ 6,687 $ (9,035)
======== =========
Cash paid for interest ........................................ $ 863 $ 33,815
======== =========
*Acquisition of businesses net of cash acquired:
Working capital, other than cash .............................. $ -- $ 59
Property, plant and equipment ................................. -- (364)
Other assets .................................................. -- (159)
-------- ---------
Cash used to acquire businesses ............................... $ -- $ (464)
======== =========
See the accompanying notes to the consolidated financial statements.
-3-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
For the six months ended June 30, 2003
(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, 2003 are not necessarily indicative of the results that may be expected for
the year ending December 31, 2003. 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/A for the year ended December 31, 2002.
On October 11, 2002, GenTek and 31 of its direct and indirect subsidiaries,
including its Noma Company subsidiary (collectively, the "Debtors"), filed
voluntary petitions for reorganization relief (the "Filing") under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
Debtors' cases are being jointly administered as Case No. 02-12986 (MFW). As a
result of the Filing, an automatic stay was imposed against efforts by claimants
to collect amounts due or to proceed against property of the Debtors. The
Debtors have been operating, and will continue to operate, their respective
businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and orders of the Bankruptcy Court. As such, they are permitted to engage in
ordinary course of business transactions without prior approval of the
Bankruptcy Court. Transactions outside of the ordinary course of business,
including certain sales of assets and certain requests for additional
financings, will require approval by the Bankruptcy Court. There is no assurance
that such approvals will be granted if requested.
On December 10, 2002, Noma Company sought and obtained from the Ontario
Superior Court of Justice, Canada (the "Ontario Court"), an initial order
pursuant to section 18.6 of the Companies' Creditors Arrangement Act, R.S.C.
1985, c. C-36, as amended ("CCAA"), recognizing the Filing and granting Noma
Company, among other things, a stay against claims, proceedings and the exercise
of any contractual rights against it or its property in Canada, and recognizing
various orders granted by the Bankruptcy Court.
The Debtors filed for relief under Chapter 11 as a result of the Company's
inability to obtain an amendment to its senior credit facility. The Company
believes that the protection afforded by Chapter 11 best preserves the Debtors'
ability to continue to serve their customers and preserve the value of their
businesses, while it reorganizes, and develops and implements a new strategic
plan to deleverage the Company's balance sheet and create an improved long-term
capital structure.
Since the Filing, the Company's available cash and continued cash flow from
operations have been adequate to fund ongoing operations and meet anticipated
obligations to customers, vendors and employees in the ordinary course of
business during the Chapter 11 process, and management believes it will continue
to remain adequate. Further, in order to augment its financial flexibility
during the Chapter 11 process, the Company negotiated with certain members of
its pre-petition bank syndicate, and received approval from the Bankruptcy Court
on March 6, 2003, and approval from the Ontario Court on March
-4-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
13, 2003, to enter into a debtor-in-possession credit facility. This facility
enables the Company to issue up to $50,000 of letters of credit, including
approximately $30,000 of letters of credit issued under the pre-petition credit
facility, to support the Company and its subsidiaries' undertakings (other than
ordinary trade credit) and provides the Company's Noma Company subsidiary with a
$10,000 revolving credit facility for working capital and other general
corporate purposes of Noma Company. The facility matures on September 30, 2003,
but may be extended to December 31, 2003 by the holders of a majority of the
commitments. The Company intends to seek such extension. To support the payment
obligations under the new facility, the Bankruptcy Court awarded super-priority
administrative expense status to such obligations and granted the lenders senior
priming liens (with certain exceptions) on the Debtors' assets.
At hearings held on October 17, 2002 and November 7, 2002, the Bankruptcy
Court granted the Debtors' "first day" motions for various relief designed to
stabilize their operations and business relationships with their customers,
vendors, employees and other entities, and entered orders granting authority to
the Debtors to, among other things: (1) pay certain pre-petition and
post-petition employee wages, benefits and other employee obligations; (2) honor
customer programs; (3) pay certain pre-petition taxes and fees; (4) pay certain
pre-petition obligations to foreign vendors; (5) pay certain pre-petition
shipping charges; and (6) pay certain pre-petition claims of critical vendors.
The Bankruptcy Court also entered orders authorizing the Debtors to use cash
collateral of their senior lenders, and Noma Company to use GenTek's cash
collateral, on terms specified in such orders. All such orders were also
recognized by the Ontario Court.
As a result of the Filing, pending pre-petition litigation and claims
against the Debtors have been stayed automatically in accordance with Section
362 of the Bankruptcy Code and no party may take any action to seek payment on
its pre-petition claims or to proceed against property of the Debtors' estates
except pursuant to further order of the Bankruptcy Court. The Filing resulted in
an immediate acceleration of the Company's senior credit facility and 11% Senior
Subordinated Notes, subject to the automatic stay.
As a general rule, all of the Debtors' contracts and leases continue in
effect in accordance with their terms notwithstanding the Filing, unless
otherwise ordered by the Bankruptcy Court. The Bankruptcy Court provides the
Debtors with the opportunity to reject any contracts or leases that are
burdensome or assume any contracts or leases that are favorable or otherwise
necessary to their business operations. In the event of a rejection of a
contract or lease by the Debtors, the affected parties may file rejection damage
claims, which are considered to be pre-petition claims. As a condition to
assumption of a contract or lease, the Debtors are required to cure breaches
under such agreements, including, without limitation, payment of any amounts due
and owing.
GenTek and the other Debtors have incurred, and will continue to incur,
significant administrative and reorganization expenses resulting from the Filing
and the continuing Chapter 11 proceedings. The amount of these expenses, which
are being expensed as incurred and reported as reorganization items, are
expected to have a material effect on the Company's results of operations. See
Note 3.
The potential adverse publicity associated with the Filing and the
continuing Chapter 11 proceedings, and the resulting uncertainty regarding the
Company's future prospects may hinder the
-5-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Company's ongoing business activities and its ability to operate, fund and
execute its business plan by: impairing relations with existing and potential
customers; limiting the Company's ability to obtain trade credit; impairing
present and future relationships with vendors; and negatively impacting the
ability of the Company to attract, retain and compensate key employees and to
retain employees generally.
The Company anticipates that most liabilities of the Debtors as of the date
of the Filing will be treated in accordance with one or more Chapter 11 plans of
reorganization which will be proposed to be voted on by interested parties and
approved by the Bankruptcy Court in accordance with the provisions of the
Bankruptcy Code. On June 30, 2003, the Debtors filed a proposed disclosure
statement and plan of reorganization with the Bankruptcy Court. On August 25,
2003 the Bankruptcy Court is scheduled to hold a hearing to determine if the
proposed disclosure statement contains "adequate information" in accordance with
Section 1125 of the Bankruptcy Code, to enable a hypothetical, reasonable
investor typical of holders of claims against, or interests in, the Debtors to
make an informed judgement as to whether to accept or reject the plan of
reorganization. The hearing may be adjourned from time to time. There can be no
assurance that the disclosure statement will be approved by the Bankruptcy
Court, or that the plan will be accepted by the holders of claims entitled to
vote or confirmed by the Bankruptcy Court, or that any such plan will be
consummated. At this time, it is not possible for the Company to predict the
effect of the Chapter 11 reorganization process on the Company's businesses,
various creditors and security holders, or when it may be possible for the
Debtors to emerge from Chapter 11.
The ultimate treatment of and recovery, if any, by creditors and security
holders will not be determined until confirmation of a plan or plans of
reorganization. GenTek and the other Debtors are unable to predict at this time
what the treatment of creditors and equity holders of the respective Debtors
will ultimately be under any plan or plans of reorganization finally confirmed.
Although until a plan is approved there is substantial uncertainty as to the
treatment of creditors and equity holders, the Debtors' proposed reorganization
plan provides for the cancellation of existing equity interests and for limited
recoveries by holders of debt securities. Accordingly, the Company urges that
appropriate caution be exercised with respect to existing and future investments
in any of these securities.
The consolidated financial statements have been prepared in accordance with
Statement of Position 90-7 ("SOP 90-7"), "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code," and on a going concern basis, which
contemplates continuity of operations, realization of assets and liquidation of
liabilities in the ordinary course of business. However, as a result of the
Filing, such realization of assets and liquidation of liabilities are subject to
uncertainty. While operating as debtors-in-possession under the protection of
Chapter 11 of the Bankruptcy Code and subject to Bankruptcy Court approval or
otherwise as permitted in the normal course of business, the Debtors may sell or
otherwise dispose of assets and liquidate or settle liabilities for amounts
other than those reflected in the consolidated financial statements. Further, a
plan of reorganization could materially change the amounts and classifications
reported in the consolidated financial statements, which do not give effect to
any adjustments to the carrying value of assets or amount of liabilities that
might be necessary as a consequence of a plan of reorganization. Liabilities and
obligations whose treatment and satisfaction are dependent on the outcome of the
Chapter 11 cases have been segregated and classified as liabilities subject to
compromise in the consolidated balance sheets.
-6-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors
with the Bankruptcy Court setting forth the assets and liabilities of the
Debtors as of the date of Filing. A bar date of April 14, 2003 was set for the
filing of proofs of claim against the Debtors. Differences between amounts
recorded by the Debtors and claims filed by creditors are being investigated and
will be resolved as part of the proceedings in the Chapter 11 cases.
Accordingly, the ultimate number and allowed amount of such claims are not
presently known and, because the settlement terms of each such allowed claim is
subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.
Note 2 - Summary of Significant Accounting Policies
Compensation cost for stock-based employee compensation plans is recognized
using the intrinsic value method. The following table illustrates the effect on
net loss and loss per share if the Company had applied the fair value based
method to recognize stock-based employee compensation.
Three Months Ended Six Months Ended
June 30, June 30,
------------------- --------------------
2003 2002 2003 2002
------- --------- -------- ---------
Net loss as reported...................................................... $(9,794) $(146,213) $(38,703) $(310,486)
Deduct: Total stock-based employee compensation income (expense)
determined under fair value based method for all awards, net of
related tax effects.................................................... 627 (736) 994 (1,314)
------- --------- -------- ---------
Pro forma net loss........................................................ $(9,167) $(146,949) $(37,709) $(311,800)
======= ========= ======== =========
Loss per share:
Basic - as reported.................................................... $ (.38) $ (5.73) $ (1.51) $ (12.18)
======= ========= ======== =========
Basic - pro forma...................................................... $ (.36) $ (5.76) $ (1.48) $ (12.23)
======= ========= ======== =========
Diluted - as reported.................................................. $ (.38) $ (5.73) $ (1.51) $ (12.18)
======= ========= ======== =========
Diluted - pro forma.................................................... $ (.36) $ (5.76) $ (1.48) $ (12.23)
======= ========= ======== =========
For purposes of this calculation, the fair value of each option grant was
estimated on the grant date using the Black-Scholes option-pricing model. There
were no grants made in 2002 or 2003.
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, and
-7-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
accordingly, the Company ceased amortizing goodwill. Upon adoption of SFAS No.
142, the Company recorded a charge of $161,125 (net of a tax benefit of $39,760)
as a cumulative effect of a change in accounting principle.
Carrying amount of goodwill by segment is as follows:
Performance
Products Manufacturing Consolidated
----------- ------------- ------------
Balance at December 31, 2002........ $21,738 $105,986 $127,724
Foreign currency translation........ -- 194 194
------- -------- --------
Balance at June 30, 2003............ $21,738 $106,180 $127,918
======= ======== ========
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. The Company adopted this standard on January 1,
2003. There was no effect upon adoption 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 adopted this standard on January
1, 2003. There was no effect upon adoption on the Company's consolidated
financial statements.
Note 3 - Debtor Financial Information
The condensed combined financial statements of the Debtors are presented
below. These statements reflect the financial position, results of operations
and cash flows of the Debtors on a combined basis, including certain amounts and
transactions between Debtors and non-debtor subsidiaries of the Company which
are eliminated in the consolidated financial statements.
-8-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Combined Statements of Operations
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
------------- -------------
Net revenues................................................. $211,037 $413,340
Cost of sales................................................ 176,868 351,180
Selling, general and administrative expense.................. 25,063 49,104
Restructuring and impairment charges......................... -- 24,661
-------- --------
Operating income (loss)................................... 9,106 (11,605)
Interest expense (contractual interest for the three and six
month periods ended June 30, 2003 was $17,139 and $34,117,
respectively)............................................. 163 232
Reorganization items......................................... 24,832 33,790
Other income, net............................................ (3,320) (5,153)
-------- --------
Loss before income taxes.................................. (12,569) (40,474)
Income tax provision......................................... 1,025 3,467
Equity in income from subsidiaries........................... 3,800 5,238
-------- --------
Net loss.................................................. $ (9,794) $(38,703)
======== ========
-9-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Combined Balance Sheets
June 30, December 31,
2003 2002
---------- ------------
Current assets:
Cash and cash equivalents ....................... $ 65,713 $ 94,708
Receivables, net ................................ 140,445 132,089
Inventories ..................................... 67,428 66,395
Other current assets ............................ 20,841 21,754
---------- ----------
Total current assets ......................... 294,427 314,946
Property, plant and equipment, net ................. 204,556 231,505
Goodwill ........................................... 126,563 126,563
Intercompany receivable (payable) .................. 15,275 12,653
Investment in subsidiaries ......................... 97,404 96,481
Other assets ....................................... 22,602 21,848
---------- ----------
Total assets ................................. $ 760,827 $ 803,996
========== ==========
Current liabilities:
Accounts payable ................................ $ 28,634 $ 31,978
Accrued liabilities ............................. 97,902 98,147
Current portion of long-term debt ............... 101 101
---------- ----------
Total current liabilities .................... 126,637 130,226
Long-term debt ..................................... 546 596
Liabilities subject to compromise .................. 1,134,323 1,143,765
Other liabilities .................................. 39,638 39,730
---------- ----------
Total liabilities ............................ 1,301,144 1,314,317
Deficit ............................................ (540,317) (510,321)
---------- ----------
Total liabilities and deficit ................ $ 760,827 $ 803,996
========== ==========
-10-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Combined Statement of Cash Flows
Six Months
Ended
June 30, 2003
-------------
Net cash provided by operating activities...................... $ 18,083
Net cash used for reorganization items......................... (9,957)
Net cash used for investing activities......................... (14,005)
Net cash used for financing activities......................... (23,116)
--------
Decrease in cash and cash equivalents.......................... (28,995)
Cash and cash equivalents at beginning of period............... 94,708
--------
Cash and cash equivalents at end of period..................... $ 65,713
========
Liabilities subject to compromise in the Consolidated and
Debtor-in-Possession balance sheets consist of the following items:
June 30, December 31,
2003 2002
---------- ------------
Accounts payable.................................... $ 42,154 $ 44,331
Accrued interest payable............................ 17,795 17,795
Accrued liabilities................................. 13,433 12,644
Long-term debt...................................... 911,258 921,986
Long-term liabilities............................... 149,683 147,009
---------- ----------
$1,134,323 $1,143,765
========== ==========
Reorganization items in the Consolidated and Debtor-in-Possession statement
of operations consist of the following:
Three Months Six Months
Ended Ended
June 30, 2003 June 30, 2003
------------- -------------
Professional fees................................... $ 6,087 $12,096
Employee costs...................................... 4,504 7,032
Interest income..................................... (155) (449)
Settlement of pre-petition liabilities.............. (591) (1,503)
Write off of unamortized debt issuance costs........ 11,730 11,730
Other............................................... 3,257 4,884
------- -------
$24,832 $33,790
======= =======
-11-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Note 4 - 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, 2003 and 2002 was $(4,128) and
$(140,572), respectively. Total comprehensive loss for the six months ended June
30, 2003 and 2002 was $(29,999) and $(303,714), respectively.
Note 5 - 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,
----------------------- -----------------------
2003 2002 2003 2002
---------- ---------- ---------- ----------
Basic earnings per common share:
Weighted average common shares
outstanding............................. 25,564,310 25,510,048 25,564,310 25,491,247
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average common shares
outstanding............................. 25,564,310 25,510,048 25,564,310 25,491,247
Options and restricted units............... -- -- -- --
---------- ---------- ---------- ----------
Total...................................... 25,564,310 25,510,048 25,564,310 25,491,247
========== ========== ========== ==========
For the six months ended June 30, 2003 and 2002, 2,737,250 and 2,987,750
options and restricted units, respectively, were not included in the computation
of diluted earnings per common share due to their antidilutive effect.
Note 6 - Inventories
June 30, December 31,
2003 2002
-------- ------------
Raw materials................................. $ 39,220 $ 41,003
Work in process............................... 20,286 16,363
Finished products............................. 42,403 42,077
Supplies and containers....................... 5,603 5,275
-------- --------
$107,512 $104,718
======== ========
-12-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Note 7 - Long-Term Debt
June 30, December 31,
Maturities 2003 2002
---------- -------- ------------
Bank term loans - floating rates ............ 2003-2007 $452,917 $463,401
Revolving credit facility - floating rate ... 2005 258,341 264,718
Senior Subordinated Notes - 11% ............. 2009 200,000 193,867
Other debt - floating rates ................. 2003-2018 17,783 17,543
-------- --------
Total debt ............................... 929,041 939,529
Less: Current portion .................... 15,443 15,091
Liabilities subject to compromise... 911,258 921,986
-------- --------
Net long-term debt ....................... $ 2,340 $ 2,452
======== ========
On October 11, 2002, the Company and 31 of its direct and indirect
subsidiaries filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code. The filing of a bankruptcy petition resulted in an immediate
acceleration of the principal amount and accrued and unpaid interest on the
Company's senior credit facility and 11% Senior Subordinated Notes. Outstanding
balances for the senior credit facility and the 11% Senior Subordinated Notes
have been reclassified to liabilities subject to compromise. In connection with
its use of cash collateral under the credit facility, the Company is currently
making adequate protection payments to its senior creditors, based upon interest
rates ranging from 5.8 to 6.5 percent for its credit facility, which are being
recorded as reductions in principal for accounting purposes. See Note 1 for
further discussion of the Company's bankruptcy.
The Company entered into a debtor-in-possession credit facility with
certain members of its pre-petition bank syndicate, and received approval of
such facility from the Bankruptcy Court on March 6, 2003, and approval from the
Ontario Court on March 13, 2003. This facility provides for up to $50,000 of
letters of credit, including approximately $30,000 of letters of credit issued
under the pre-petition credit facility, to support the Company and its
subsidiaries' undertakings (other then ordinary trade credit) and provides the
Company's Noma Company subsidiary with a $10,000 revolving credit facility for
working capital and other general corporate purposes of Noma Company. Borrowings
under the revolving credit facility bear interest at variable rates based on
prime plus 2.3 percent or LIBOR plus 3.5 percent. The facility matures on
September 30, 2003, but may be extended to December 31, 2003 by the holders of a
majority of the commitments. The Company intends to seek such extension. To
support the payment obligations under the new facility, the Bankruptcy Court
awarded super-priority administrative expense status to such obligations and
granted the lenders senior priming liens (with certain exceptions) on the
Debtors' assets. At June 30, 2003, the unused letter of credit balance was
$16,491 and there were no borrowings outstanding under the revolving credit
facility.
-13-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Note 8 - Segment Information
Industry segment information is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Net Revenues:
Performance products .................... $ 89,376 $ 93,571 $171,254 $178,477
Manufacturing ........................... 109,779 131,897 218,826 254,960
Communications .......................... 82,081 77,261 155,792 146,229
-------- -------- -------- --------
Total segments ....................... $281,236 $302,729 $545,872 $579,666
======== ======== ======== ========
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
2003 2002 2003 2002
-------- -------- -------- --------
Operating Profit (Loss):
Performance products .................... $ 6,378 $ 6,454 $(18,831) $ 12,803
Manufacturing ........................... 8,634 13,553 17,537 25,370
Communications .......................... 1,364 (25,168) 1,334 (28,640)
------- -------- -------- --------
Total segments ....................... 16,376 (5,161) 40 9,533
Eliminations and other corporate
expenses.............................. (2,214) (3,621) (3,891) (5,457)
------- -------- -------- --------
Consolidated ............................ 14,162 (8,782) (3,851) 4,076
Interest expense ........................ 584 18,869 955 36,585
Other (income) expense, net ............. 21,635 (1,839) 30,129 (2,200)
------- -------- -------- --------
Consolidated loss before income taxes
and cumulative effect of a change in
accounting principle ................. $(8,057) $(25,812) $(34,935) $(30,309)
======= ======== ======== ========
Identifiable Assets
-----------------------
June 30, December 31,
2003 2002
-------- ------------
Performance products..................... $225,871 $249,326
Manufacturing (1)........................ 366,228 369,415
Communications........................... 269,146 258,595
Corporate................................ 64,340 79,649
-------- --------
Consolidated............................. $925,585 $956,985
======== ========
(1) Includes equity method investments of $19,101 and $18,274, respectively.
-14-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Note 9 - Restructuring and Impairment Charges
The Company's 2002 restructuring program consisted of a workforce reduction
in its communications segment. During the year ended December 31, 2002, the
Company recorded charges of $13,152 related to employee termination costs for
430 employees and $267 for lease obligations and other closure costs at three
facilities that will no longer be used.
The Company's 2001 restructuring program consisted 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 employee
terminations impacted all of the Company's business segments, with the majority
of the terminations occurring in the manufacturing and communications segments.
As of June 30, 2003, approximately 2,100 employees have been terminated
pursuant to the restructuring programs. The Company expects to substantially
complete implementation of its restructuring programs by the end of 2003.
Management does not expect that its restructuring programs will have a material
impact on the Company's revenues.
The following tables summarize the Company's accruals for restructuring
costs:
Employee
Termination Facility
Costs Exit Costs
----------- ----------
Balance at December 31, 2001 ........................ $ 11,621 $ 4,628
Provisions .......................................... 13,152 267
Reclassified to liabilities subject to compromise ... (1,338) (2,196)
Amounts paid ........................................ (9,542) (1,547)
-------- -------
Balance at December 31, 2002 ........................ 13,893 1,152
Amounts paid ........................................ (6,812) (140)
-------- -------
Balance at June 30, 2003 ............................ $ 7,081 $ 1,012
======== =======
On February 28, 2003, the Company announced a plan to wind down and close
operations at its facility in Claymont, Delaware, which is included in the
performance products segment. Accordingly, the Company assessed the long-lived
assets at this facility for impairment. Based on the results of this assessment,
the Company recorded a non-cash impairment charge of $24,661 to reduce the
carrying value of the fixed assets at this facility to fair value, which was
determined based upon an independent appraisal.
-15-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Note 10 - Commitments and Contingencies
On February 28, 2003, the Company announced a plan to wind down and close
operations in Claymont, Delaware at the South Plant of the Delaware Valley Works
complex, an industrial facility owned and operated by the Company. The plan was
approved by the Bankruptcy Court on July 24, 2003. The South Plant is expected
to cease production on or before November 11, 2003. Upon closure of the plant,
the Company will record a charge for the costs of decommissioning the facility.
In addition, the Company intends to comply fully with all of its environmental
obligations in connection with the decommissioning of the facility including,
without limitation, those relating to any investigation and remediation of the
facility required by law. Depending on the scope of any investigation and any
remedial activity required as a result, additional costs above those currently
estimated could be incurred over a period of the next several years. The Company
is currently unable to estimate the nature and extent of these additional
costs. As such, it is possible that the final outcome could have a material
adverse effect on the Company's results of operations, cash flows and financial
condition. Operations at the Delaware Valley Works' other manufacturing areas
located in the North Plant of the facility, including the production of sulfur,
fluorine, potassium and ammonia-based compounds and warehousing, distribution
and transportation operations, will continue.
Note 11 - Summarized Financial Information
The Company's 11% Senior Subordinated Notes due 2009 are fully and
unconditionally guaranteed, on a joint and several basis, by substantially all
of the Company's wholly owned, domestic subsidiaries ("Subsidiary Guarantors").
The non-guarantor subsidiaries are the Company's foreign subsidiaries.
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.
-16-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Statement of Operations
Three Months Ended June 30, 2003
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
------- ---------- ------------ ------------ ------------
Net revenues.................................. $ -- $172,518 $117,876 $(9,158) $281,236
Cost of sales................................. -- 141,171 93,015 (9,158) 225,028
Selling, general and administrative expense... 2,186 20,473 19,387 -- 42,046
------- -------- -------- ------- --------
Operating profit (loss)................. (2,186) 10,874 5,474 -- 14,162
Interest expense.............................. 260 56 551 (283) 584
Other (income) expense, net................... 340 22,258 (1,246) 283 21,635
------- -------- -------- ------- --------
Income (loss) before income taxes....... (2,786) (11,440) 6,169 -- (8,057)
Income tax provision (benefit)................ 5,517 (4,445) 665 -- 1,737
Equity in income (loss) from subsidiaries..... (1,491) 5,504 -- (4,013) --
------- -------- -------- ------- --------
Net income (loss)....................... $(9,794) $ (1,491) $ 5,504 $(4,013) $ (9,794)
======= ======== ======== ======= ========
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, 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 72,009 43,115 -- 120,401
Equity in loss from subsidiaries.............. (138,648) (34,914) -- 173,562 --
--------- --------- -------- -------- ---------
Net loss................................ $(146,213) $(138,648) $(34,914) $173,562 $(146,213)
========= ========= ======== ======== =========
-17-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Statement of Operations
Six Months Ended June 30, 2003
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
-------- ---------- ------------ ------------ ------------
Net revenues.................................. $ -- $338,534 $225,021 $(17,683) $545,872
Cost of sales................................. -- 284,198 176,354 (17,683) 442,869
Selling, general and administrative expense... 3,728 41,179 37,286 -- 82,193
Restructuring and impairment charges.......... -- 24,661 -- -- 24,661
-------- -------- -------- -------- --------
Operating profit (loss)................. (3,728) (11,504) 11,381 -- (3,851)
Interest expense.............................. 286 98 1,093 (522) 955
Other (income) expense, net................... (869) 31,701 (1,225) 522 30,129
-------- -------- -------- -------- --------
Income (loss) before income taxes....... (3,145) (43,303) 11,513 -- (34,935)
Income tax provision (benefit)................ 19,451 (16,863) 1,180 -- 3,768
Equity in income (loss) from subsidiaries..... (16,107) 10,333 -- 5,774 --
-------- -------- -------- -------- --------
Net income (loss)....................... $(38,703) $(16,107) $ 10,333 $ 5,774 $(38,703)
======== ======== ======== ======== ========
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, net............................. (26,174) (3,191) (7,950) 35,115 (2,200)
--------- --------- --------- -------- ---------
Income (loss) before income taxes and
cumulative effect of a change in
accounting principle................. (4,705) (38,972) 13,368 -- (30,309)
Income tax provision.......................... 4,552 69,835 44,665 -- 119,052
Cumulative effect of a change in
accounting principle....................... -- (65,359) (95,766) -- (161,125)
Equity in loss from subsidiaries.............. (301,229) (127,063) -- 428,292 --
--------- --------- --------- -------- ---------
Net loss................................ $(310,486) $(301,229) $(127,063) $428,292 $(310,486)
========= ========= ========= ======== =========
-18-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Balance Sheet
June 30, 2003
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents ................... $ 43,465 $ 11,230 $ 50,746 $ -- $ 105,441
Receivables, net ............................ 8,674 102,295 85,799 -- 196,768
Inventories ................................. -- 50,930 56,582 -- 107,512
Other current assets ........................ (29,431) 46,776 10,072 -- 27,417
--------- --------- -------- -------- ----------
Total current assets ..................... 22,708 211,231 203,199 -- 437,138
Property, plant and equipment, net ............. -- 185,144 99,611 -- 284,755
Goodwill, net .................................. -- 45,005 82,913 -- 127,918
Intercompany receivable (payable) .............. 716,332 (683,721) (32,611) -- --
Investment in subsidiaries ..................... (347,235) 89,893 -- 257,342 --
Other assets ................................... (81,012) 87,942 68,844 -- 75,774
--------- --------- -------- -------- ----------
Total assets ............................. $ 310,793 $ (64,506) $421,956 $257,342 $ 925,585
========= ========= ======== ======== ==========
Current liabilities:
Accounts payable ............................ $ 1 $ 21,837 $ 26,974 $ -- $ 48,812
Accrued liabilities ......................... 45,359 41,222 44,857 -- 131,438
Current portion of long-term debt ........... -- 100 15,343 -- 15,443
--------- --------- -------- -------- ----------
Total current liabilities ................ 45,360 63,159 87,174 -- 195,693
Long-term debt ................................. -- 546 1,794 -- 2,340
Liabilities subject to compromise .............. 803,686 183,096 147,541 -- 1,134,323
Other liabilities .............................. 2,064 35,928 95,554 -- 133,546
--------- --------- -------- -------- ----------
Total liabilities ........................ 851,110 282,729 332,063 -- 1,465,902
Equity (deficit) ............................... (540,317) (347,235) 89,893 257,342 (540,317)
--------- --------- -------- -------- ----------
Total liabilities and equity (deficit) ... $ 310,793 $ (64,506) $421,956 $257,342 $ 925,585
========= ========= ======== ======== ==========
-19-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Balance Sheet
December 31, 2002
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Eliminations Consolidated
--------- ---------- ------------ ------------ ------------
Current assets:
Cash and cash equivalents ................... $ 64,046 $ 22,230 $ 46,754 $ -- $ 133,030
Receivables, net ............................ 8,674 95,978 81,173 -- 185,825
Inventories ................................. -- 51,776 52,942 -- 104,718
Other current assets ........................ (29,129) 46,215 10,269 -- 27,355
--------- --------- -------- -------- ----------
Total current assets ..................... 43,591 216,199 191,138 -- 450,928
Property, plant and equipment, net ............. -- 211,525 97,300 -- 308,825
Goodwill, net .................................. -- 45,005 82,719 -- 127,724
Intercompany receivable (payable) .............. 714,357 (696,631) (17,726) -- --
Investment in subsidiaries ..................... (335,365) 83,305 -- 252,060 --
Other assets ................................... (83,903) 90,104 63,307 -- 69,508
--------- --------- -------- -------- ----------
Total assets ............................. $ 338,680 $ (50,493) $416,738 $252,060 $ 956,985
========= ========= ======== ======== ==========
Current liabilities:
Accounts payable ............................ $ 6 $ 24,445 $ 26,401 $ -- $ 50,852
Accrued liabilities ......................... 25,036 53,071 50,607 -- 128,714
Current portion of long-term debt ........... -- 101 14,990 -- 15,091
--------- --------- -------- -------- ----------
Total current liabilities ................ 25,042 77,617 91,998 -- 194,657
Long-term debt ................................. -- 596 1,856 -- 2,452
Liabilities subject to compromise .............. 821,895 169,960 151,910 -- 1,143,765
Other liabilities .............................. 2,064 36,699 87,669 -- 126,432
--------- --------- -------- -------- ----------
Total liabilities ........................ 849,001 284,872 333,433 -- 1,467,306
Equity (deficit) ............................... (510,321) (335,365) 83,305 252,060 (510,321)
--------- --------- -------- -------- ----------
Total liabilities and equity (deficit) ... $ 338,680 $ (50,493) $416,738 $252,060 $ 956,985
========= ========= ======== ======== ==========
-20-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (Concluded)
For the six months ended June 30, 2003
(Dollars in thousands, except per share data)
(unaudited)
Condensed Consolidating Statement of Cash Flows
Six Months Ended June 30, 2003
Non-
Subsidiary Guarantor
Parent Guarantors Subsidiaries Consolidated
-------- ---------- ------------ ------------
Net cash provided by (used for) operating
activities .................................. $ (4,728) $ 4,551 $11,298 $ 11,121
-------- -------- ------- --------
Net cash used for investing activities ......... -- (13,004) (3,830) (16,834)
-------- -------- ------- --------
Cash flows from financing activities:
Intercompany cash transfers ................. 2,495 (2,495) -- --
Other ....................................... (18,348) (52) (5,937) (24,337)
-------- -------- -------- --------
Net cash used for financing activities ......... (15,853) (2,547) (5,937) (24,337)
-------- -------- ------- --------
Effect of exchange rates on cash ............... -- -- 2,461 2,461
-------- -------- ------- --------
Increase (decrease) in cash and cash
equivalents ................................. (20,581) (11,000) 3,992 (27,589)
Cash and cash equivalents at beginning of
period ...................................... 64,046 22,230 46,754 133,030
-------- -------- ------- --------
Cash and cash equivalents at end of period ..... $ 43,465 $ 11,230 $50,746 $105,441
======== ======== ======= ========
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
========= ======== ======= ========
-21-
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/A for the year ended December 31, 2002.
On October 11, 2002, GenTek and 31 of its direct and indirect subsidiaries,
including its Noma Company subsidiary (collectively, the "Debtors"), filed
voluntary petitions for reorganization relief (the "Filing") under Chapter 11 of
the United States Bankruptcy Code (the "Bankruptcy Code") in the United States
Bankruptcy Court for the District of Delaware (the "Bankruptcy Court"). The
Debtors' cases are being jointly administered as Case No. 02-12986 (MFW). As a
result of the Filing, an automatic stay was imposed against efforts by claimants
to collect amounts due or to proceed against property of the Debtors. The
Debtors have been operating, and will continue to operate, their respective
businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and orders of the Bankruptcy Court. As such, they are permitted to engage in
ordinary course of business transactions without prior approval of the
Bankruptcy Court. Transactions outside of the ordinary course of business,
including certain sales of assets and certain requests for additional
financings, will require approval by the Bankruptcy Court. There is no assurance
that such approvals will be granted when requested.
On December 10, 2002, Noma Company sought and obtained from the Ontario
Superior Court of Justice, Canada (the "Ontario Court"), an initial order
pursuant to section 18.6 of the Companies' Creditors Arrangement Act, R.S.C.
1985, c. C-36, as amended ("CCAA"), recognizing the Filing and granting Noma
Company, among other things, a stay against claims, proceedings and the exercise
of any contractual rights against it or its property in Canada, and recognizing
various orders granted by the Bankruptcy Court.
The Debtors filed for relief under Chapter 11 as a result of the Company's
inability to obtain an amendment to its senior credit facility. The Company
believes that the protection afforded by Chapter 11 best preserves its ability
to continue to serve its customers and preserve the value of its businesses,
while it reorganizes, and develops and implements a new strategic plan to
deleverage the Company's balance sheet and create an improved long-term capital
structure.
Since the Filing, the Company's available cash and continued cash flow from
operations have been adequate to fund ongoing operations and meet anticipated
obligations to customers, vendors and employees in the ordinary course of
business during the Chapter 11 process, and management believes it will continue
to remain adequate. Further, in order to augment its financial flexibility
during the Chapter 11 process, the Company negotiated with certain members of
its pre-petition bank syndicate, and received approval from the Bankruptcy Court
on March 6, 2003, and approval from the Ontario Court on March 13, 2003, to
enter into a debtor-in-possession credit facility. This facility enables the
Company to issue up to $50 million of letters of credit, including approximately
$30 million of letters of credit issued under the pre-petition credit facility,
to support the Company and its subsidiaries' undertakings (other
-22-
than ordinary trade credit) and provides the Company's Noma Company subsidiary
with a $10 million revolving credit facility for working capital and other
general corporate purposes of Noma Company. The facility matures on September
30, 2003, but may be extended to December 31, 2003 by the holders of a majority
of the commitments. The Company intends to seek such extension. To support the
payment obligations under the new facility, the Bankruptcy Court awarded
super-priority administrative expense status to such obligations and granted the
lenders senior priming liens (with certain exceptions) on the Debtors' assets.
At hearings held on October 17, 2002 and November 7, 2002, the Bankruptcy
Court granted the Debtors' "first day" motions for various relief designed to
stabilize their operations and business relationships with their customers,
vendors, employees and other entities, and entered orders granting authority to
the Debtors to, among other things: (1) pay certain pre-petition and
post-petition employee wages, benefits and other employee obligations; (2) honor
customer programs; (3) pay certain pre-petition taxes and fees; (4) pay certain
pre-petition obligations to foreign vendors; (5) pay certain pre-petition
shipping charges; and (6) pay certain pre-petition claims of critical vendors.
The Bankruptcy Court also entered orders authorizing the Debtors to use cash
collateral of their senior lenders, and Noma Company to use GenTek's cash
collateral, on terms specified in such orders. All such orders were also
recognized by the Ontario Court.
As previously mentioned, as a result of the Filing, pending pre-petition
litigation and claims against the Debtors have been stayed automatically in
accordance with Section 362 of the Bankruptcy Code and no party may take any
action to seek payment on its pre-petition claims or to proceed against property
of the Debtors' estates except pursuant to further order of the Bankruptcy
Court. The Filing resulted in an immediate acceleration of the Company's senior
credit facility and 11% Senior Subordinated Notes, subject to the automatic
stay.
GenTek and the other Debtors have incurred, and will continue to incur,
significant administrative and reorganization expenses resulting from the Filing
and the continuing Chapter 11 proceedings. The amount of these expenses, which
are being expensed as incurred and reported as reorganization items, are
expected to have a material effect on the Company's results of operations.
The potential adverse publicity associated with the Filing and the
continuing Chapter 11 proceedings, and the resulting uncertainty regarding the
Company's future prospects may hinder the Company's ongoing business activities
and its ability to operate, fund and execute its business plan by: impairing
relations with existing and potential customers; limiting the Company's ability
to obtain trade credit; impairing present and future relationships with vendors;
and negatively impacting the ability of the Company to attract, retain and
compensate key employees and to retain employees generally.
The Company anticipates that most liabilities of the Debtors as of the date
of the Filing will be treated in accordance with one or more Chapter 11 plans of
reorganization which will be proposed to be voted on by interested parties and
approved by the Bankruptcy Court in accordance with the provisions of the
Bankruptcy Code. On June 30, 2003, the Debtors filed a proposed disclosure
statement and plan of reorganization with the Bankruptcy Court. On August 25,
2003 the Bankruptcy Court is scheduled to hold a hearing to determine if the
proposed disclosure statement contains "adequate information" in accordance with
Section 1125 of the Bankruptcy Code, to enable a hypothetical, reasonable
investor typical of holders of claims against, or interests in, the Debtors to
make an informed judgement as to whether to accept or reject the plan of
reorganization. The hearing may be adjourned from time to time. There can be no
assurance that the disclosure statement will be approved by the Bankruptcy Court
or that the plan will be accepted by the holders of claims entitled to vote or
confirmed by the Bankruptcy Court, or that any such plan will be consummated. At
this time, it is not possible for the Company to predict the
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effect of the Chapter 11 reorganization process on the Company's businesses,
various creditors and security holders, or when it may be possible for the
Debtors to emerge from Chapter 11.
On February 28, 2003, the Company and Esseco S.p.A. announced plans to form
a joint venture, Esseco General Chemical LLC, to supply various sodium and
sulfur-based chemistries to the North American market. Initially, the joint
venture will focus on the supply and distribution of all grades of sodium
metabisulfite, sodium sulfite and sodium thiosulfate. The joint venture became
operational early in the second quarter of 2003. The implementation of the joint
venture was subject to certain conditions, including approval of the Bankruptcy
Court in Delaware, which was granted by order entered on April 4, 2003.
On February 28, 2003, the Company announced a plan to wind down and close
operations in Claymont, Delaware at the South Plant of the Delaware Valley Works
complex, an industrial facility owned and operated by the Company. The plan was
approved by the Bankruptcy Court on July 24, 2003. The South Plant is expected
to cease production on or before November 11, 2003. Upon closure of the plant,
the Company will record a charge for the costs of decommissioning the facility.
In addition, the Company intends to comply fully with all of its environmental
obligations in connection with the decommissioning of the facility including,
without limitation, those relating to any investigation and remediation of the
facility required by law. Depending on the scope of any investigation and any
remedial activity required as a result, additional costs above those currently
estimated could be incurred over a period of the next several years. The
Company is currently unable to estimate the nature and extent of these
additional costs. As such, it is possible that the final outcome could have a
material adverse effect on the Company's results of operations, cash flows and
financial condition. Operations at the Delaware Valley Works' other
manufacturing areas located in the North Plant of the facility, including the
production of sulfur, fluorine potassium and ammonia-based compounds and
warehousing, distribution and transportation operations, will continue.
The ultimate treatment of and recovery, if any, by creditors and security
holders will not be determined until confirmation of a plan or plans of
reorganization. GenTek and other Debtors are unable to predict at this time what
the treatment of creditors and equity holders of the respective Debtors will
ultimately be under any plan or plans of reorganization finally confirmed.
Although until a plan is approved there is substantial uncertainty as to the
treatment of creditors and equity holders, the Debtors' proposed reorganization
plan provides for the cancellation of existing equity interests and for limited
recoveries by holders of debt securities. Accordingly, the Company urges that
appropriate caution be exercised with respect to existing and future investments
in any of these securities.
The consolidated financial statements included elsewhere in this report
have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"),
"Financial Reporting by Entities in Reorganization Under the Bankruptcy Code,"
and on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Filing, such realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code
and subject to Bankruptcy Court approval or otherwise as permitted in the normal
course of business, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in the consolidated
financial statements, which do not give effect to any adjustments to the
carrying value of assets or amount of liabilities that might be necessary as a
consequence of a plan of reorganization. Liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11 cases
have been segregated and classified as liabilities subject to compromise in the
consolidated balance sheets.
-24-
Pursuant to the Bankruptcy Code, schedules have been filed by the Debtors
with the Bankruptcy Court setting forth the assets and liabilities of the
Debtors as of the date of Filing. A bar date of April 14, 2003 was set for the
filing of proofs of claim against the Debtors. Differences between amounts
recorded by the Debtors and claims filed by creditors are being investigated and
will be resolved as part of the proceedings in the Chapter 11 cases.
Accordingly, the ultimate number and allowed amount of such claims are not
presently known and, because the settlement terms of each such allowed claim is
subject to a confirmed plan of reorganization, the ultimate distribution with
respect to allowed claims is not presently ascertainable.
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, 2003
and 2002 (in millions):
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2003 2002 2003 2002
------ ------ ------ ------
Net Revenues:
Performance products.............. $ 89.3 $ 93.6 $171.3 $178.5
Manufacturing..................... 109.8 131.9 218.8 255.0
Communications.................... 82.1 77.2 155.8 146.2
------ ------ ------ ------
Total.......................... $281.2 $302.7 $545.9 $579.7
====== ====== ====== ======
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ------------------
2003 2002 2003 2002
----- ------ ------ ------
Operating Profit (Loss):
Performance products.............. $ 6.4 $ 6.4 $(18.8)(2) $ 12.8
Manufacturing..................... 8.6 13.6 17.5 25.4
Communications.................... 1.4 (25.2)(1) 1.3 (28.6)(1)
Eliminations/other corporate...... (2.2) (3.6) (3.9) (5.5)
----- ------ ------ ------
Total.......................... $14.2 $ (8.8) $ (3.9) $ 4.1
===== ====== ====== ======
(1) Includes restructuring and impairment charges of $23.3 million.
(2) Includes an impairment charge of $24.7 million.
Net revenues for the three and six month periods ended June 30, 2003
decreased 7% and 6% from the comparable prior year periods to $281 million and
$546 million, respectively. The decrease for both periods reflects lower sales
in the manufacturing and performance products segments, partially offset by
higher sales in the communications segment. The decreases in manufacturing
segment revenues for both periods are due principally to lower volumes with
certain major customers as a result of lower automotive build rates, and certain
customers resourcing to competitors in the Far East or utilizing their own
in-house production capabilities. The decreases in revenues in the performance
products segment for both periods are principally the result of lower sales in
the pharmaceutical and personal care markets, due primarily to the sale of the
antacid product line and competitive pressures in the environmental and
technology markets. The increase in revenues in the communications segment is
principally due to the impact of exchange rate fluctuations on the reported
results of the Company's European subsidiaries, partially offset by lower sales
volumes.
-25-
Gross profit for the three and six month periods ended June 30, 2003
decreased by $7 million and $16 million from the comparable prior year periods
to $56 million and $103 million, respectively. The decrease in gross profit for
the second quarter is principally due to lower gross profit in the manufacturing
and performance products segments, partially offset by higher gross profit in
the communications segment. The decrease in gross profit in the manufacturing
segment is due to the lower volumes discussed above and unfavorable product mix
in the industrial market. The decrease in gross profit in the performance
products segment is the result of the above mentioned sales decreases, increases
in energy and key raw material costs and a $1 million charge for estimated
losses to be incurred to fulfill contractual commitments at the South Plant of
the Delaware Valley Works Complex through its estimated closure date, partially
offset by higher spending during the second quarter of 2002 related to the
repair of two boilers at one of the Company's facilities. The increase in gross
profit in the communications segment is related to the impact of exchange rate
fluctuations on the reported gross profit of the Company's European subsidiaries
and the favorable impact of the restructuring programs, partially offset by
lower sales volumes. The decrease in gross profit for the six month period ended
June 30, 2003 is due to lower gross profit in the manufacturing and performance
products segments, partially offset by higher gross profit in the communications
segment. The decrease in gross profit in the manufacturing segment is due to the
lower volumes discussed above and product mix in the industrial market. The
decrease in gross profit in the performance products segment is the result of
the above mentioned sales decreases, increases in energy and key raw material
costs and $4 million charge for the estimated losses to be incurred to fulfill
contractual commitments at the South Plant of the Delaware Valley Works Complex
through its estimated closure date, partially offset by higher spending during
the first six months of 2002 related to the repairs of two boilers at one of the
Company's facilities. The increase in gross profit in the communications segment
is related to the impact of exchange rate fluctuations on the reported gross
profit of the Company's European subsidiaries and the favorable impact of the
restructuring programs, partially offset by lower sales volumes.
Selling, general and administrative expense decreased $7 million and $9
million for the three and six month periods ended June 30, 2003, respectively,
as compared to the prior year levels. The decrease in spending for the six month
period reflects lower spending in all segments, partially offset by the
above-mentioned impact of exchange rate fluctuations.
Operating profit for the three months ended June 30, 2003 was $14 million
as compared to a $9 million loss for the prior year period. This increase was
principally due to an impairment charge of $24 million recorded in the second
quarter of 2002 and the above-mentioned decrease in selling, general and
administrative expense, partially offset by the above-mentioned decrease in
gross profit.
Interest expense for the three and six month periods ended June 30, 2003
was $18 million and $36 million lower than the prior year levels. These
decreases are due to the fact that no interest expense has been recorded on the
Company's senior credit facility and 11% Senior Subordinated Notes subsequent to
the Company's Chapter 11 filing on October 11, 2002. The Company is currently
making adequate protection payments to its senior creditors, which are being
treated for accounting purposes as reductions in principal.
Reorganization items for the three and six month periods ended June 30,
2003 were $25 million and $34 million, respectively. Included in these amounts
is a charge of $12 million to write off unamortized debt issuance costs, along
with professional fees, employee retention costs and other items associated with
the Company's reorganization under Chapter 11.
Income tax expense for the three and six month periods ended June 30, 2003
was $2 million and $4 million, respectively, which represents a decrease of $119
million and $115 million from the
-26-
comparable prior year periods. These decreases are principally due to a
valuation allowance of $141 million recorded in the second quarter of 2002,
which reduced the carrying value of the Company's domestic net deferred tax
assets to zero. Accordingly, income tax expense for the three and six month
periods ended June 30, 2003 does not include a provision for federal income tax
benefit on domestic losses. 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.
Impairment Charges
During the first quarter, the Company announced a plan to wind down and
close operations at its facility in Claymont, Delaware which is included in the
performance products segment. Accordingly, the Company assessed the long-lived
assets at this facility for impairment. Based on the results of this assessment,
the Company recorded a non-cash impairment charge of $25 million to reduce the
carrying value of the fixed assets at this facility to fair value, which was
determined based upon an independent appraisal. The Company will continue to
evaluate the recoverability of its assets, which may result in additional
charges.
Restructuring Charges
The Company expects to substantially complete implementation of its prior
restructuring programs by the end of 2003. Management does not expect that the
restructuring programs will have a material impact on the Company's revenues.
Cash payments charged against the restructuring liability totaled $6.8 million
for employee termination costs and $0.1 million for facility exit costs in the
six months ended June 30, 2003. While management expects that cash outlays
related to the restructuring programs will be substantially completed by the end
of the 2003, certain facility exit costs, primarily lease obligations, have
payment terms extending beyond 2003. 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 $40-$45 million. The Company began to realize these
reductions in the third quarter of fiscal 2001. The Company will continue to
review its operations, and may record additional restructuring charges to tailor
its cost structure to current economic conditions.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents were $105 million at June 30, 2003 compared with
$133 million at December 31, 2002. The decrease in cash is the result of the
repayment of $26 million of long-term debt, capital expenditures of $17 million,
reorganization expenditures of $10 million, offset by cash provided by
operations of $21 million.
The Company had working capital of $241 million at June 30, 2003 as
compared with working capital of $256 million at December 31, 2002. This
decrease in working capital principally reflects lower cash partially offset by
higher accounts receivable balances.
As of June 30, 2003, the Company had approximately $105 million in cash on
hand, which management believes will provide sufficient liquidity to fund
ongoing operations and meet anticipated obligations to customers, vendors and
employees in the ordinary course of business during the Chapter 11 process. At
hearings held on October 17, 2002 and November 7, 2002, the Bankruptcy Court
entered orders authorizing the Debtors' to use cash collateral of their senior
lenders, and Noma Company to use GenTek's cash collateral, on terms specified in
such orders. In order to augment its financial flexibility during the Chapter 11
process, the Company negotiated with certain members of its pre-petition bank
-27-
syndicate, and received approval from the Bankruptcy Court on March 6, 2003, and
approval from the Ontario Court on March 13, 2003, to enter into a
debtor-in-possession credit facility. This facility enables the Company to issue
up to $50 million of letters of credit, including approximately $30 million of
letters of credit issued under the pre-petition credit facility, to support the
Company and its subsidiaries' undertakings (other than ordinary trade credit)
and provides the Company's Noma Company subsidiary with a $10 million revolving
credit facility for working capital and other general corporate purposes of Noma
Company. The facility matures on September 30, 2003, but may be extended to
December 31, 2003 by the holders of a majority of the commitments. The Company
intends to seek such extension. To support the payment obligations under the new
facility, the Bankruptcy Court awarded super-priority administrative expense
status to such obligations and granted the lenders senior priming liens (with
certain exceptions) on the Debtors' assets.
The Filing resulted in an immediate acceleration of the principal amount
and accrued and unpaid interest on the Company's senior credit facility and 11%
Senior Subordinated Notes. Outstanding balances for the senior credit facility
and the 11% Senior Subordinated Notes have been reclassified to liabilities
subject to compromise. In connection with its use of cash collateral under the
credit facility, the Company is currently making adequate protection payments to
its senior creditors, which are being recorded as reductions in principal for
accounting purposes.
In connection with its proposed plan of reorganization, the Company is
seeking up to $125 million of a secured exit facility to refinance the
above-referenced facility, fund working capital and general corporate purposes,
pay administration and priority claims, provide cash payments to certain
prepetition creditors and pay transaction costs.
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 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. Upon adoption of SFAS No. 142, the Company
recorded a charge of $161 million (net of a tax benefit of $40 million) as a
cumulative effect of a change in accounting principle.
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. The Company adopted this standard on January 1,
2003. There was no effect upon adoption 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
-28-
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 adopted this standard on January 1, 2003. There was no
effect upon adoption on the Company's consolidated financial statements.
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.
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.
Item 4. Controls and Procedures.
(a) Disclosure Controls and Procedures. The Company's management, with the
participation of the Company's Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of the Company's disclosure controls
and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended (the "Exchange Act")) as of the
end of the period covered by this report. Based on such evaluation, the
Company's Chief Executive Officer and Chief Financial Officer have concluded
that, as of the end of such period, the Company's disclosure controls and
procedures are effective at the reasonable assurance level in recording,
processing, summarizing and reporting, on a timely basis, information required
to be disclosed by the Company in the reports that it files or submits under the
Exchange Act.
(b) Internal Control Over Financial Reporting. There have not been any
changes in the Company's internal control over financial reporting (as such term
is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the
fiscal quarter to which this report relates that have materially affected, or
are reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
On October 11, 2002, GenTek Inc. and 31 of its direct and indirect
subsidiaries, including Noma Company, a Canadian subsidiary, (collectively,
including the Company, the "Debtors") filed voluntary petitions for
reorganization relief (the "Filing") under Chapter 11 of the United States
Bankruptcy Code (the "Bankruptcy Code") in the United States Bankruptcy Court
for the District of Delaware (the "Bankruptcy Court"). The Debtors' cases (the
"Chapter 11 cases") are being jointly administered as Case No. 02-12986 (MFW).
GenTek and the other Debtors will continue to operate their respective
businesses as "debtors-in-possession" under the jurisdiction of the Bankruptcy
Court and in accordance with the applicable provisions of the Bankruptcy Code
and orders of the Bankruptcy Court.
-29-
The prosecution against the Debtors of claims and efforts to recover from
the Debtors payments related to litigation existing on October 11, 2002, the
date of filing for protection under Chapter 11 of the Bankruptcy Code, are
automatically stayed in accordance with section 362 of the Bankruptcy Code and
no party may take action to realize its pre-petition claims, except pursuant to
an order of the Bankruptcy Court.
Item 2. Changes in Securities and Use of Proceeds.
NONE
Item 3. Defaults Upon Senior Securities.
On October 11, 2002, the Company and 31 of its direct and indirect
subsidiaries filed voluntary petitions for relief under Chapter 11 of the
Bankruptcy Code. The filing of a bankruptcy petition resulted in an immediate
acceleration of the principal amount and accrued and unpaid interest on the
Company's senior credit facility and 11% Senior Subordinated Notes, which
totaled $961 million as of October 11, 2002. In addition, the Company received
termination payment demands from counterparties to the Company's interest rate
swap agreements totaling $13 million, which have not been paid. In connection
with its use of cash collateral under the senior credit facility, the Company is
currently making adequate protection payments to its senior creditors which are
being recorded as reductions in principle for accounting purposes. At this time,
it is not possible for the Company to predict the effect of the Chapter 11
reorganization process on the Company's business, various creditors and security
holders, or when it may be possible to emerge from Chapter 11. The future
results of the Company are dependent upon confirming and implementing, on a
timely basis, a plan of reorganization. The ultimate treatment of and recovery,
if any, by creditors, security holders and/or common shareholders will not be
determined until confirmation of a plan or plans of reorganization. GenTek and
the other Debtors are unable to predict at this time what the treatment of
creditors and equity holders of the respective Debtors will ultimately be under
any plan or plans of reorganization finally confirmed. Although until a plan is
approved there is substantial uncertainty as to the treatment of creditors and
equity holders, the Debtors' proposed reorganization plan provides for the
cancellation of existing equity interests and for limited recoveries by holders
of debt securities.
Item 4. Submission of Matters to a Vote of Security Holders.
NONE
Item 5. Other Information.
NONE
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits;
31.1 Certification of Chief Executive Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
31.2 Certification of Chief Financial Officer pursuant to Rule
13a-14(a)/15d-14(a) as adopted pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002.
-30-
32 Certification of Chief Executive Officer and Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K;
Form 8-K filed with the Securities and Exchange Commission dated July
1, 2003, with respect to the Registrant filing its Plan of
Reorganization and Disclosure Statement with the United States
Bankruptcy Court in the District of Delaware.
-31-
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 there unto duly authorized.
GENTEK INC.
---------------------------------------------
Registrant
Date August 14, 2003 /s/ Richard R. Russell
--------------- ---------------------------------------------
Richard R. Russell
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date August 14, 2003 /s/ Matthew R. Friel
--------------- ---------------------------------------------
Matthew R. Friel
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
-32-
STATEMENT OF DIFFERENCES
------------------------
The section symbol shall be expressed as .......................'SS'