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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 1-13404
THE GENERAL CHEMICAL GROUP INC.
(Exact name of Registrant as specified in its charter)
Delaware 02-0423437
(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) 929-2606
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [_]
The number of shares of Common Stock outstanding at August 1, 2003 was
3,111,910.
The number of shares of Class B Common Stock outstanding at August 1, 2003 was
617,725.
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THE GENERAL CHEMICAL GROUP 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 and Six Months
Ended June 30, 2002 and 2003................................ 1
Consolidated Balance Sheets - December 31, 2002 and
June 30, 2003............................................... 2
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2003................................ 3
Notes to Consolidated Financial Statements..................... 4-8
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations............................ 9-11
Item 3. Qualitative and Quantitative Disclosures
about Market Risk.............................................. 11
Item 4. Controls and Procedures................................... 11
PART II. OTHER INFORMATION
Item 3. Defaults Upon Senior Securities........................... 11-12
Item 4. Submission of Matters to a Vote of Security Holders....... 12
Item 6. Exhibits and Reports on Form 8-K.......................... 12
SIGNATURES........................................................ 13
CERTIFICATIONS.................................................... 14-17
Part I. Financial Information
Item 1. Financial Statements
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2002 2003 2002 2003
------- ------- -------- --------
Net revenues .............................................. $73,830 $77,029 $131,207 $144,435
Cost of revenues .......................................... 62,875 70,290 111,995 133,616
Selling, general and administrative expense ............... 3,807 6,049 7,759 11,196
------- ------- -------- --------
Operating profit (loss) ................................... 7,148 690 11,453 (377)
Interest expense .......................................... 3,635 3,801 7,219 7,475
Interest income ........................................... 48 21 170 45
Other expense (income), net ............................... (188) 439 (107) 190
------- ------- -------- --------
Income (loss) before income taxes and minority interest ... 3,749 (3,529) 4,511 (7,997)
Minority interest ......................................... 2,547 1,329 5,090 3,004
------- ------- -------- --------
Income (loss) before income taxes ......................... 1,202 (4,858) (579) (11,001)
Income tax provision (benefit) ............................ (22) (3) (16) 2
------- ------- -------- --------
Net income (loss) ...................................... $ 1,224 $(4,855) $ (563) $(11,003)
======= ======= ======== ========
Earnings (loss) per common share:
Basic .................................................. $ 0.31 $ (1.30) $ (0.14) $ (2.94)
======= ======= ======== ========
Diluted ................................................ $ 0.31 $ (1.30) $ (0.14) $ (2.94)
======= ======= ======== ========
See the accompanying notes to consolidated financial statements.
1
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except per share data)
December 31, June 30,
2002 2003
------------ -----------
(unaudited)
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 13,078 $ 7,534
Receivables, net .......................................................... 49,392 57,080
Inventories ............................................................... 28,248 18,762
Other current assets ...................................................... 5,881 3,219
--------- ---------
Total current assets ................................................... 96,599 86,595
Property, plant and equipment, net ........................................... 91,062 93,073
Other assets ................................................................. 16,518 21,155
--------- ---------
Total assets ........................................................... $ 204,179 $ 200,823
========= =========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable .......................................................... $ 22,680 $ 23,276
Accrued liabilities ....................................................... 29,266 27,634
Current portion of long-term debt ......................................... -- 155,715
--------- ---------
Total current liabilities .............................................. 51,946 206,625
Long-term debt ............................................................... 144,394 --
Other liabilities ............................................................ 86,522 91,428
--------- ---------
Total liabilities ...................................................... 282,862 298,053
--------- ---------
Minority interest ............................................................ 33,147 31,837
--------- ---------
Equity (Deficit):
Preferred Stock, $.01 par value; authorized 1,000,000 shares; none issued
or outstanding ......................................................... -- --
Common Stock, $.01 par value; authorized 10,000,000 shares; issued and
outstanding: 3,382,543 and 3,291,293 shares at December 31, 2002 and
June 30, 2003, respectively ............................................ 34 32
Class B Common Stock, $.01 par value; authorized 4,000,000 shares, issued
and outstanding: 700,639 and 617,725 shares at December 31, 2002 and
June 30, 2003, respectively ............................................ 7 6
Capital deficit ........................................................... (94,748) (94,748)
Accumulated other comprehensive loss ...................................... (9,443) (15,674)
Retained earnings ......................................................... 25,572 14,569
Treasury stock, at cost: 179,383 shares at
December 31, 2002 and June 30, 2003, respectively ..................... (33,252) (33,252)
--------- ---------
Total equity (deficit) .................................................... (111,830) (129,067)
--------- ---------
Total liabilities and equity (deficit) ................................. $ 204,179 $ 200,823
========= =========
See the accompanying notes to consolidated financial statements.
2
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Six Months Ended
June 30,
------------------
2002 2003
------- --------
Cash flows from operating activities:
Net loss ............................................. $ (563) $(11,003)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization ..................... 6,138 5,462
Increase in receivables ........................... (7,084) (6,485)
Decrease in inventories ........................... 57 10,848
Decrease in accounts payable ...................... (1,188) (439)
Decrease in accrued liabilities ................... (1,767) (2,425)
Decrease in other liabilities and assets, net ..... 619 1,394
Decrease in minority interest ..................... (1,305) (1,310)
------- --------
Net cash used by operating activities .......... (5,093) (3,958)
------- --------
Cash flows from investing activities:
Capital expenditures ................................. (3,853) (5,107)
------- --------
Net cash used by investing activities .......... (3,853) (5,107)
------- --------
Cash flows from financing activities:
Borrowings under credit facility ..................... 5,106 7,177
Repayment under credit facility ...................... -- (3,653)
Other financing activities ........................... 1 (3)
------- --------
Net cash provided by financing activities ...... 5,107 3,521
------- --------
Decrease in cash and cash equivalents ................... (3,839) (5,544)
Cash and cash equivalents at beginning of period ........ 16,045 13,078
------- --------
Cash and cash equivalents at end of period .............. $12,206 $ 7,534
======= ========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest .......................................... $ 6,529 $ 1,678
Taxes ............................................. (1,219) (3,647)
See the accompanying notes to consolidated financial statements.
3
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the three and six months ended June 30, 2003
(Dollars in thousands)
(unaudited)
Note 1 - Basis of Presentation
The General Chemical Group Inc. ("GCG" together with its subsidiaries, the
"Company") is a leading North American supplier of soda ash and calcium chloride
to a broad range of industrial and municipal customers. The primary end markets
for soda ash include glass production, sodium-based chemicals, powdered
detergents, water treatment and other industrial end uses. Calcium chloride is
mainly used for dust control and roadbed stabilization during the summer and
melting ice during the winter.
The Company's recent financial performance has been negatively impacted by
lower soda ash prices, rising energy costs and the weaker economic environment.
The Company failed to make the interest payment on its Subordinated Notes that
was due on May 1, 2003. In addition, since April 1, 2003 the Company has not
been in compliance with certain financial and other covenants contained in its
Credit Agreement, dated as of April 30, 1999 (the "Senior Credit Agreement"),
among General Chemical Industrial Products, Inc., as Borrower, the banks and
other financial institutions designated as lenders, JPMorgan Chase (formerly The
Chase Manhattan Bank), as Administrative Agent, JPMorgan Chase of Canada
(formerly The Chase Manhattan Bank of Canada), as Canadian Administrative Agent,
the Bank of Nova Scotia, as Syndication Agent, and The First National Bank of
Chicago, as Documentation Agent. As of June 30, 2003, the Company owed $107.2
million, including accrued and unpaid interest, in respect of its Subordinated
Notes and $55.7 million under its Senior Credit Agreement, all of which
obligations are classified as current. The Company has commenced discussions
with its creditors with respect to the restructuring of the Company's
indebtedness. The Company expects that such restructuring, if successfully
concluded, will result in a reduction in the amount of the Company's
indebtedness to a level that the Company believes that it can service out of its
existing operations, and substantial dilution to the Company's existing equity
interests. However, there can be no assurance that the Company will be able to
reach agreement with its creditors on the terms of any restructuring; if no such
agreement is reached, the Company would be unable to repay its outstanding
indebtedness and would have to explore other alternatives. See Note 6 -
Long-Term Debt for further discussion.
The accompanying unaudited interim consolidated financial statements as of
June 30, 2003 and for the three and six months ended June 30, 2003 reflect the
operations of GCG and its subsidiaries. These unaudited interim financial
statements have been prepared by the Company pursuant to Article 10 of the
Securities and Exchange Commission's Regulation S-X. The financial statements do
not include certain information and footnotes required by generally accepted
accounting principles. 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. The Company's financial statements should be read in
conjunction with the financial statements and the notes thereto for the year
ended December 31, 2002 included in the Company's Annual Report on Form 10-K.
In April 2003, the FASB issued Statement of Financial Accounting Standards
("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and
Hedging Activities." This Statement is effective for contracts entered into or
modified after June 30, 2003, with certain exceptions. This statement amends
SFAS 133 to clarify the financial accounting and reporting of derivative
instruments and hedging activities and requires contracts with similar
characteristics to be accounted for on a comparable basis. The Company will
adopt the provisions of the statement on its effective date and does not
anticipate a material impact to its consolidated financial statements.
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which aims to eliminate diversity in practice by requiring that the
"freestanding" financial instruments be reported as liabilities by their
issuers.
4
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the three and six months ended June 30, 2003
(Dollars in thousands)
(unaudited)
The provisions of SFAS 150, which also include a number of new disclosure
requirements, are effective for instruments entered into or modified after May
31, 2003 and for pre-existing instruments as of the beginning of the first
interim period that commences after June 15, 2003. The Company will adopt the
provisions of the statement on its effective date and does not anticipate a
material impact to its consolidated financial statements.
Note 2 - Comprehensive Loss
Total comprehensive loss is comprised of net loss, foreign currency
translation adjustments and the change in unrealized gains and losses on
derivative instruments. Total comprehensive loss for the six months ended June
30, 2002 and 2003 was ($2,790) and ($17,234), respectively.
Note 3 - Stock Compensation and Earnings (Loss) Per Common Share
Statement of Financial Accounting Standards, No. 123, "Accounting for
Stock-Based Compensation", as amended by Statement of Financial Standards No.
148, "Accounting for Stock-Based Compensation - Transition and Disclosure",
permits an entity to continue to account for employee stock-based compensation
under APB Opinion No. 25, "Accounting for Stock Issued to Employees", or adopt a
fair value based method of accounting for such compensation. The Company has
elected to continue to account for stock-based compensation under Opinion No.
25. Accordingly no compensation expense has been recognized in connection with
options granted. Had compensation expense for options granted been determined
based on the fair value at the date of grant in accordance with Statement No.
123, the Company's net income (loss) and earnings (loss) per share would have
been as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -----------------
2002 2003 2002 2003
------- ------- ------ --------
Net income (loss) as reported ................................. $1,224 $(4,855) $ (563) $(11,003)
Deduct: Total stock based employee compensation expense
Determined under fair value based methods for all awards,
net of related tax effects .............................. (44) (3) (88) (6)
------ ------- ------ --------
Pro forma net income (loss) ................................... $1,180 $(4,858) $ (651) $(11,009)
====== ======= ====== ========
Earnings (loss) per share:
Basic and diluted - as reported................................ $ 0.31 $ (1.30) $(0.14) $ (2.94)
Basic and diluted - pro forma.................................. $ 0.30 $ (1.30) $(0.17) $ (2.94)
The computation of basic earnings (loss) per common share is based on the
weighted average number of common shares and contingently issuable shares
outstanding during the period. The computation of diluted earnings (loss) per
common share assumes the foregoing and, in addition, the exercise of all stock
options and restricted units, using the treasury stock method.
5
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the three and six months ended June 30, 2003
(Dollars in thousands)
(unaudited)
The components of the denominator for basic and diluted earnings (loss) per
common share are reconciled as follows:
Three Months Ended Six Months Ended
June 30, June 30,
--------------------- ---------------------
2002 2003 2002 2003
--------- --------- --------- ---------
Basic earnings (loss) per common share:
Weighted average common shares outstanding .. 3,911,826 3,740,724 3,893,368 3,740,724
========= ========= ========= =========
Diluted earnings (loss) per common share:
Weighted average common shares outstanding .. 3,911,826 3,740,724 3,893,368 3,740,724
Options and Restricted Units ................ 13,174 -- -- --
--------- --------- --------- ---------
3,925,000 3,740,724 3,893,368 3,740,724
========= ========= ========= =========
At June 30, 2002 and 2003, options to purchase 211,796 shares and 217,196
shares of common stock, respectively, were not included in the computation of
diluted earnings (loss) per common share because the exercise price was greater
than the average market price of the common shares. The options, which expire
during 2008, 2009 and 2010, were still outstanding at June 30, 2003. At June 30,
2002 and 2003, 26,089 and 11,089 restricted units and options were not included
in the calculation of diluted earnings (loss) per common share because its
inclusion would have resulted in an antidilutive effect.
Note 4 - Additional Financial Information
The components of inventories were as follows:
December 31, June 30,
------------ --------
2002 2003
------- -------
Raw materials ........................................ $ 1,172 $ 1,014
Work in process ...................................... 3,134 1,635
Finished products .................................... 16,830 9,019
Supplies and containers .............................. 7,112 7,094
------- -------
$28,248 $18,762
======= =======
Note 5 - Restructuring
In the fourth quarter of 2000, the Company recorded a pretax restructuring
charge, including related asset writedowns and workforce reductions, of $59.8
million. In the second quarter of 2001, the Company provided for additional
pretax restructuring charges of $1.7 million for revised actuarial estimates of
employee termination benefits. The restructuring involved the idling of the
Company's synthetic soda ash production capacity in Amherstburg, Ontario,
Canada. The balance of the restructuring reserve at December 31, 2002 was $2.1
million. Spending against this reserve was $0.8 million during the six months
ended June 30, 2003.
In the fourth quarter of 2002, the Company recorded a pretax restructuring
charge, including related asset writedowns and workforce reductions, of $7.7
million. The restructuring involved the closing of the Company's calcium
chloride production capacity in Manistee, Michigan which resulted in the
writedown of long-lived assets and workforce reductions of approximately 40
hourly and salaried employees. The balance of the restructuring reserve at
December 31, 2002 was $1.1 million. Spending against this reserve was $0.5
million during the six months ended June 30, 2003.
6
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the three and six months ended June 30, 2003
(Dollars in thousands)
(unaudited)
Note 6 - Long-Term Debt
The Company failed to make the interest payment on its Subordinated Notes
that was due on May 1, 2003. In addition, since April 1, 2003 the Company has
not been in compliance with certain financial and other covenants contained in
its Senior Credit Agreement. As a result of such defaults, the holders of the
Subordinated Notes and the lenders under the Company's Senior Credit Agreement
may declare all amounts outstanding thereunder, including all accrued and unpaid
interest, immediately due and payable. As of June 30, 2003, the outstanding
principal amount of the Company's Subordinated Notes was $100 million, and the
outstanding amount due under the Company's Senior Credit Agreement was $55.7
million, all of which is classified as current.
On March 25, 2003, the Company entered into a Forbearance and Amendment
Agreement with the lenders under its Senior Credit Agreement, pursuant to which
such lenders agreed not to exercise any remedies for the existing defaults
through July 30, 2003 to allow the Company time to pursue a restructuring of its
existing indebtedness. On July 31, 2003, such lenders extended the
forbearance agreement through September 30, 2003. During the forbearance period
the Company has agreed to restrict its ability to incur additional liens, make
payments on account of indebtedness other than indebtedness under the Senior
Credit Agreement or currently scheduled payments, make any direct or indirect
payment on or in respect of the Subordinated Notes, or request loans or
advances. In addition, the Company has agreed to permanently reduce the total
commitments available under its Senior Credit Agreement to $70 million and to
reduce the total commitments during the forbearance period to the lesser of
(i) $60 million or (ii) 115% of the projected usage under the Senior Credit
Agreement for such day according to a fixed schedule. We are also required
under the Forbearance and Amendment Agreement to meet certain milestones in
the progress of our restructuring efforts.
The Company has commenced discussions with its creditors with respect to
the restructuring of the Company's indebtedness. The Company expects that such
restructuring, if successfully concluded, will result in a reduction in the
amount of the Company's indebtedness to a level that the Company believes that
it can service out of its existing operations, and substantial dilution to the
Company's existing equity interests. However, there can be no assurance that the
Company will be able to reach agreement with its creditors on the terms of any
restructuring; if no such agreement is reached, the Company would be unable to
repay its outstanding indebtedness and would have to explore other
alternatives.
Note 7 - Related Party Transactions
Management Agreement
The Company is party to a management agreement with Latona Associates Inc.
(which is controlled by a stockholder of the Company) under which the Company
receives corporate supervisory and administrative services and strategic
guidance for a quarterly fee. This management fee was $830 and $843 for the six
months ended June 30, 2002 and 2003, respectively.
Transition Support Agreement
In connection with the spinoff of GenTek, Inc. ("GenTek") in April 1999,
GenTek agreed to provide the Company with certain management information
services and to sublease to the Company the office space in Parsippany, New
Jersey used as its operations headquarters. For the six months ended June 30,
2002 and 2003, the Company paid GenTek $690 and $697, respectively, related to
these services and office space.
7
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
For the three and six months ended June 30, 2003
(Dollars in thousands)
(unaudited)
Other Transactions
GCG supplies soda ash to GenTek. For the six months ended June 30, 2002 and
2003, sales to GenTek amounted to $1,341 and $1,394, respectively.
Note 8 - Geographic Information
Total Revenues Income (Loss) Before Income Taxes
June 30, June 30,
------------------- ---------------------------------
2002 2003 2002 2003
-------- -------- -------- ---------
United States ........ $111,137 $113,301 $ 1,157 $ (8,845)
Foreign .............. 43,054 48,146 (1,736) (2,156)
Elimination .......... (22,984) (17,012) -- --
-------- -------- ------- --------
$131,207 $144,435 $ (579) $(11,001)
======== ======== ======= ========
Note 9 - Segment Information
Industry segment information is summarized as follows:
Three Months Ended Six Months Ended
June 30, June 30,
------------------ -------------------
2002 2003 2002 2003
------- ------- -------- --------
Net revenues:
Soda Ash ................................. $54,018 $58,087 $104,456 $111,072
Calcium Chloride ......................... 19,812 18,942 26,751 33,363
------- ------- -------- --------
$73,830 $77,029 $131,207 $144,435
======= ======= ======== ========
Income (loss) before income taxes:
Soda Ash ................................. $ 2,953 $ 1,562 $ 6,245 $ 3,812
Calcium Chloride ......................... 1,640 (127) 154 (3,657)
------- ------- -------- --------
Subtotal .............................. 4,593 1,435 6,399 155
Eliminations and other corporate expenses... (3,391) (6,293) (6,978) (11,156)
------- ------- -------- --------
$ 1,202 $(4,858) $ (579) $(11,001)
======= ======= ======== ========
Income (loss) before income taxes for elimination and other corporate
expenses includes financial reorganization expenses of $2,104 and $3,498
recorded in the three and six months ended June 30, 2003, respectively.
Three Months Ended Six Months Ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
------ ------ ------ ------
Capital Expenditures:
Soda Ash ................................ $ 631 $1,351 $1,867 $2,873
Calcium Chloride ........................ 815 872 1,956 2,212
Elimination and other corporate expenses ... 6 2 30 22
------ ------ ------ ------
$1,452 $2,225 $3,853 $5,107
====== ====== ====== ======
Depreciation & Amortization:
Soda Ash ................................ $2,211 $2,140 $4,899 $4,432
Calcium Chloride ........................ 394 330 800 601
Elimination and other corporate expenses ... 219 214 439 429
------ ------ ------ ------
$2,824 $2,684 $6,138 $5,462
====== ====== ====== ======
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
June 30, 2003 Compared with December 31, 2002
Cash and cash equivalents were $7.5 million at June 30, 2003 compared with
$13.1 million at December 31, 2002. During the first six months of 2003, the
Company used cash flow from operating activities of $4.0 million, and used cash
of $5.1 million for capital expenditures.
The Company had working capital of $(120.0) million at June 30, 2003 as
compared with $44.7 million at December 31, 2002. This decrease in working
capital principally reflects the reclassification of amounts due under the
Senior Credit Agreement and Subordinated Notes to current, lower inventories and
other current assets partially offset by higher receivables and lower accrued
liabilities.
The Company failed to make the interest payment on its Subordinated Notes
that was due on May 1, 2003. In addition, since April 1, 2003 the Company has
not been in compliance with certain financial and other covenants contained in
its Senior Credit Agreement. As a result of such defaults, the holders of the
Subordinated Notes and the lenders under the Company's Senior Credit Agreement
may declare all amounts outstanding thereunder, including all accrued and unpaid
interest, immediately due and payable. As of June 30, 2003, the outstanding
principal amount of the Company's Subordinated Notes was $100 million, and the
outstanding amount due under the Company's Senior Credit Agreement was $55.7
million, all of which is classified as current.
On March 25, 2003, the Company entered into a Forbearance and Amendment
Agreement with the lenders under its Senior Credit Agreement, pursuant to which
such lenders agreed not to exercise any remedies for the existing defaults
through July 30, 2003 to allow the Company time to pursue a restructuring of its
existing indebtedness. On July 31, 2003, such lenders extended the
forbearance agreement through September 30, 2003. During the forbearance period
the Company has agreed to restrict its ability to incur additional liens, make
payments on account of indebtedness other than indebtedness under the Senior
Credit Agreement or currently scheduled payments, make any direct or indirect
payment on or in respect of the Subordinated Notes, or request loans or
advances. In addition, the Company has agreed to permanently reduce the total
commitments available under our Senior Credit Agreement to $70 million and to
reduce the total commitments during the forbearance period to the lesser of
(i) $60 million or (ii) 115% of the projected usage under the Senior Credit
Agreement for such day according to a fixed schedule. We are also required
under the Forbearance and Amendment Agreement to meet certain milestones in
the progress of our restructuring efforts.
The Company has commenced discussions with its creditors with respect to
the restructuring of the Company's indebtedness. The Company expects that such
restructuring, if successfully concluded, will result in a reduction in the
amount of the Company's indebtedness to a level that the Company believes that
it can service out of its existing operations, and substantial dilution to the
Company's existing equity interests. However, there can be no assurance that the
Company will be able to reach agreement with its creditors on the terms of any
restructuring; if no such agreement is reached, the Company would be unable to
repay its outstanding indebtedness and would have to explore other
alternatives.
The Company's leverage and debt service requirements (1) increase its
vulnerability to economic downturns, (2) potentially limit the Company's ability
to respond to competitive pressures, and (3) may limit the Company's ability to
obtain additional financing in the future for working capital, capital
expenditures, acquisitions, strategic
9
investments or general corporate purposes. The Company's Subordinated Notes
Indenture and Senior Credit Agreement impose operating and financial
restrictions on the Company. These covenants affect, and in certain cases, limit
the Company's ability to incur additional indebtedness, make capital
expenditures, make investments and acquisitions and sell assets, pay dividends
and make other distributions to shareholders, and consolidate, merge or sell all
or substantially all assets.
In addition, pursuant to the Forbearance and Amendment Agreement, the
Company agreed to restrict its ability to incur additional liens, make payments
on account of indebtedness other than indebtedness under the Senior Credit
Agreement or currently scheduled payments, make any direct or indirect payment
on or in respect of the Subordinated Notes, or request Eurodollar loans with an
interest period of longer than two months.
Results of Operations
June 30, 2003 Compared with June 30, 2002
Net revenues for the three and six month periods ended June 30, 2003
increased 4.3 percent and 10.0 percent to $77.0 million and $144.4 million,
respectively, from $73.8 million and $131.2 million for the comparable prior
year periods. Net revenues were positively effected by higher calcium chloride
volumes due to colder winter weather and a stronger Canadian dollar, partially
offset by lower domestic soda ash prices.
Gross profit for the three month period ended June 30, 2003 decreased $4.3
million to $6.7 million from $11.0 million for the comparable prior year period.
Gross profit as a percentage of net revenues for the three month period ended
June 30, 2003 decreased to 8.7 percent from 14.8 percent for the same period in
2002. Gross profit for the six month period ended June 30, 2003 decreased $8.4
million to $10.8 million from $19.2 million for the comparable prior year
period. Gross profit as a percentage of net revenues for the six month period
ended June 30, 2003 decreased to 7.5 percent from 14.6 percent for the same
period in 2002. These decreases were primarily due to higher energy costs, lower
domestic soda ash prices, and higher calcium chloride feedstock costs.
Selling, general and administrative expense as a percentage of net revenues
for the three and six month period ended June 30, 2003 and 2002 increased to 7.9
percent from 5.2 percent and to 7.8 percent from 5.9 percent. This increase was
primarily due to costs incurred during negotiations with our various lenders on
a financial reorganization plan.
Interest expense for the three and six month periods ended June 30, 2003
was $3.8 million and $7.5 million, which was $0.2 million and $0.3 million
higher, respectively, than the comparable prior period.
Minority interest for the three and six month periods ended June 30, 2003
was $1.3 million and $3.0 million, respectively, versus $2.5 million and $5.1
million for the same period in 2002. The decreases in both periods reflect lower
earnings at General Chemical (Soda Ash) Partners primarily due to lower domestic
soda ash prices and higher energy costs.
Net income (loss) was $(4.9) million and $(11.0) million for the three and
six month periods ended June 30, 2003, respectively, versus $1.2 million and
($0.6) million for the comparable prior year periods, for the foregoing reasons.
Recent Accounting Pronouncements
In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on
Derivative Instruments and Hedging Activities." This Statement is effective for
contracts entered into or modified after June 30, 2003, with certain exceptions.
This statements amends SFAS 133 to clarify the financial accounting and
reporting of derivative instruments and hedging activities and requires
contracts with similar characteristics to be accounted for on a comparable
basis. The Company will adopt the provisions of the statement on its effective
date and does not anticipate a material impact to its consolidated financial
statements.
10
On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity",
which aims to eliminate diversity in practice by requiring that the
"freestanding" financial instruments be reported as liabilities by their
issuers.
The provisions of SFAS 150, which also include a number of new disclosure
requirements, are effective for instruments entered into or modified after May
31, 2003 and for pre-existing instruments as of the beginning of the first
interim period that commences after June 15, 2003. The Company will adopt the
provisions of the statement on its effective date and does not anticipate a
material impact to its consolidated financial statements.
Item 3. Qualitative and Quantitative 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.
In October 2002, the Company entered into an interest rate swap agreement
with a total notional amount of $8.8 million that qualifies and is designated as
a cash flow hedge in accordance with SFAS 133, "Accounting for Derivative
Instruments and Hedging Activities." The swap agreement matures in April 2004
and was executed in order to convert a portion of the Senior Credit Agreement
floating-rate debt into fixed-rate debt, maintain a capital structure containing
appropriate amounts of fixed and floating-rate debt; and reduce net interest
payments and expense in the near-term. The Company has recorded the change in
fair value of this interest rate swap as a component of comprehensive income.
Item 4. Controls and Procedures
The Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's Chief
Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures
pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by
this report. Based upon that evaluation, the Company's Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective in timely alerting them to material information
relating to the Company required to be included in this report. There has been
no significant change in the Company's internal controls or procedures during
the fiscal quarter ended June 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
Part II - Other Information
Item 3. Defaults Upon Senior Securities
The Company was not in compliance with the financial and other covenants
contained in the Senior Credit Agreement, which constitutes an event of default
under the Senior Credit Agreement. The Company's failure to meet such covenant
requirements resulted in the Senior Credit Agreement becoming callable by the
lenders. In addition, in accordance with the Forbearance and Amendment Agreement
we are not permitted to make payments on our Subordinated Notes, and failure to
pay within the grace period for the next payment date would constitute an event
of
11
default causing the Subordinated Notes to be callable as well. As a result of
the Company's failure to be in compliance with its financial and other covenants
under the Senior Credit Agreement, counterparties to the Company's interest rate
swap agreement have the right to require the Company to cash settle this
agreement by paying fair value to the counterparties.
The Company has commenced discussions with its lenders towards amending its
Senior Credit Agreement and restructuring its obligations under the Subordinated
Notes. If these discussions do not result in an acceptable amendment or
restructuring of our existing indebtedness, or if our expectations regarding any
of the other factors enumerated above are not realized, the Company may be
required to reduce capital expenditures, sell additional assets, restructure all
or a portion of our existing debt or obtain alternative sources of financing.
However, there can be no assurance that alternative sources of financing will be
available or at terms which are favorable to the Company.
Item 4. Submission of Matters to a Vote of Security Holders
On May 12, 2003, the Company held its Annual Meeting of Stockholders. At
the meeting, Paul M. Montrone, Paul M. Meister, Philip E. Beekman, John M.
Kehoe, Jr., Gerald J. Lewis and Steven Shulman were each elected as a director
of the Company to serve a one-year term which will expire at the 2004 Annual
Meeting of Stockholders and until a successor has been duly elected and
qualified. For Paul M. Montrone, 7,655,767 votes were cast in favor and none
were voted against. For Paul M. Meister, 7,655,767 votes were cast in favor and
none were voted against. For Philip E. Beekman, 7,655,767 votes were cast in
favor and none were voted against. For John M. Kehoe, Jr., 7,655,767 votes were
cast in favor and none were voted against. For Gerald J. Lewis, 7,655,767 votes
were cast in favor and none were voted against. For Steven Shulman, 7,655,767
votes were cast in favor and none were voted against. There were no abstentions
in connection with the election of directors.
The stockholders also approved the selection of Deloitte & Touche LLP as
the Company's independent auditors. 7,655,767 votes were cast in favor. No
stockholders voted against and no stockholders abstained from voting.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1 Certification furnished pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2 Certification furnished pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) No reports were filed on Form 8-K.
12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE GENERAL CHEMICAL GROUP INC.
Registrant
Date August 14, 2003 /s/ John M. Kehoe, Jr.
--------------- -------------------------------------------
John M. Kehoe, Jr.
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date August 14, 2003 /s/ David S. Graziosi
--------------- --------------------------------------------
David S. Graziosi
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer)
13
STATEMENT OF DIFFERENCES
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The section symbol shall be expressed as............................... 'SS'