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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 September 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 November 1, 2003 was
3,111,910.
The number of shares of Class B Common Stock outstanding at November 1, 2003 was
617,725.
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THE GENERAL CHEMICAL GROUP INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Operations - Three and Nine
Months Ended September 30, 2002 and 2003................ 1
Consolidated Balance Sheets - December 31, 2002 and
September 30, 2003...................................... 2
Consolidated Statements of Cash Flows - Nine Months
Ended September 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............................ 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 Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2003 2002 2003
-------- ------- -------- --------
Net revenues .............................................. $71,327 $66,331 $202,534 $210,766
Cost of revenues .......................................... 58,442 61,652 170,437 195,268
Selling, general and administrative expense ............... 3,893 3,906 11,652 11,604
Reorganization expense .................................... -- 2,293 -- 5,791
------- ------- -------- --------
Operating profit (loss) ................................... 8,992 (1,520) 20,445 (1,897)
Interest expense .......................................... 3,737 3,827 10,956 11,302
Interest income ........................................... (77) (13) (247) (58)
Foreign currency transaction (gains) losses ............... 473 (1,218) 293 (1,165)
Other expense (income), net ............................... 47 (45) 120 92
------- ------- -------- --------
Income (loss) before income taxes and minority interest ... 4,812 (4,071) 9,323 (12,068)
Minority interest ......................................... 4,044 1,273 9,134 4,277
------- ------- -------- --------
Income (loss) before income taxes ......................... 768 (5,344) 189 (16,345)
Income tax provision (benefit) ............................ 2 2 (14) 4
------- ------- -------- --------
Net income (loss) ...................................... $ 766 $(5,346) $ 203 $(16,349)
======= ======= ======== ========
Earnings (loss) per common share:
Basic .................................................. $ 0.20 $ (1.43) $ 0.05 $ (4.37)
======= ======= ======== ========
Diluted ................................................ $ 0.19 $ (1.43) $ 0.05 $ (4.37)
======= ======= ======== ========
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, September 30,
ASSETS 2002 2003
------------ -------------
(unaudited)
Current assets:
Cash and cash equivalents ............................................. $ 13,078 $ 11,047
Receivables, net ...................................................... 49,392 44,010
Inventories ........................................................... 28,248 21,631
Other current assets .................................................. 5,881 4,440
--------- ---------
Total current assets ............................................... 96,599 81,128
Property, plant and equipment, net ....................................... 91,062 91,464
Other assets ............................................................. 16,518 22,277
--------- ---------
Total assets ....................................................... $ 204,179 $ 194,869
========= =========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable ...................................................... $ 22,680 $ 20,192
Accrued liabilities ................................................... 29,266 31,656
Current portion of long-term debt ..................................... -- 155,410
--------- ---------
Total current liabilities .......................................... 51,946 207,258
Long-term debt ........................................................... 144,394 --
Other liabilities ........................................................ 86,522 91,486
--------- ---------
Total liabilities .................................................. 282,862 298,744
--------- ---------
Minority interest ........................................................ 33,147 31,553
--------- ---------
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 3,387,737 and 3,291,293 shares and outstanding
3,208,354 and 3,111,910 shares at December 31, 2002 and
September 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 September 30, 2003, respectively .......... 7 6
Capital deficit ....................................................... (94,748) (94,748)
Accumulated other comprehensive loss .................................. (9,443) (16,689)
Retained earnings ..................................................... 25,572 9,223
Treasury stock, at cost: 179,383 shares at
December 31, 2002 and September 30, 2003, respectively ............. (33,252) (33,252)
--------- ---------
Total equity (deficit) ................................................ (111,830) (135,428)
--------- ---------
Total liabilities and equity (deficit) ............................. $ 204,179 $ 194,869
========= =========
See the accompanying notes to consolidated financial statements.
2
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
Nine Months Ended
September 30,
-------------------
2002 2003
-------- --------
Cash flows from operating activities:
Net income (loss)...................................................... $ 203 $(16,349)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Depreciation and amortization....................................... 9,111 8,403
Decrease in receivables............................................. 4,902 4,371
(Increase) decrease in inventories.................................. (3,133) 5,249
Increase (decrease) in accounts payable............................. 1,940 (3,456)
Increase in accrued liabilities..................................... 3,767 1,624
(Increase) decrease in other liabilities and assets, net............ (659) 2,537
Decrease in minority interest....................................... (369) (1,594)
-------- --------
Net cash provided by operating activities........................ 15,762 785
-------- --------
Cash flows from investing activities:
Capital expenditures................................................... (5,482) (6,337)
-------- --------
Net cash used by investing activities............................ (5,482) (6,337)
-------- --------
Cash flows from financing activities:
Borrowings under credit facility.................................... 5,106 7,177
Repayment under credit facility..................................... (5,076) (3,653)
Other financing activities.......................................... 1 (3)
-------- --------
Net cash provided by financing activities........................ 31 3,521
-------- --------
Increase (decrease) in cash and cash equivalents.......................... 10,311 (2,031)
Cash and cash equivalents at beginning of period.......................... 16,045 13,078
-------- --------
Cash and cash equivalents at end of period................................ $ 26,356 $ 11,047
======== ========
Supplemental disclosure of cash flow information:
Cash paid (refunded) during the period for:
Interest......................................................... $ 7,642 $ 2,649
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 nine months ended September 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 payments on its Subordinated Notes that
were due on May 1, 2003 and November 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. At September
30, 2003, the Company owed $109.7 million, including accrued and unpaid
interest, in respect of its Subordinated Notes and $55.4 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 the extinguishment of
the Company's existing equity interests and 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. 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,
including a reorganization of the Company, a sale of the Company's assets
pursuant to Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy
Code") or a liquidation pursuant to Chapter 7 of the Bankruptcy Code. See Note 6
- - Long-Term Debt for further discussion.
The accompanying unaudited interim consolidated financial statements as of
September 30, 2003 and for the three and nine months ended September 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 nine
months ended September 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 adopted
the provisions of this statement on its effective date. The adoption of this
statement did not have a material impact to its consolidated financial
statements.
4
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the three and nine months ended September 30, 2003
(Dollars in thousands)
(unaudited)
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 adopted the
provisions of the statement on its effective date. The adoption of this
statement did not have a material impact to its consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities". The Company has no arrangements
that would be subject to this interpretation.
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 three and nine months
ended September 30, 2002 and 2003 was ($8,816) and ($6,361), and ($172) and
($23,595), 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 Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
----- ------- ----- --------
Net income (loss) as reported.................................. $ 766 $(5,346) $ 203 $(16,349)
Deduct: Total stock based employee compensation
expense determined under fair value
based methods for all awards, Net of related tax effects.... (44) (3) (132) (9)
----- ------- ----- --------
Pro forma net income (loss).................................... $ 722 $(5,349) $ 71 $(16,358)
===== ======= ===== ========
Earnings (loss) per share:
Basic - as reported............................................ $0.20 $ (1.43) $0.05 $ (4.37)
Diluted - as reported.......................................... $0.19 $ (1.43) $0.05 $ (4.37)
Basic - pro forma.............................................. $0.18 $ (1.43) $0.02 $ (4.37)
Diluted - pro forma............................................ $0.18 $ (1.43) $0.02 $ (4.37)
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 nine months ended September 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 Nine Months Ended
September 30, September 30,
--------------------- ---------------------
2002 2003 2002 2003
--------- --------- --------- ---------
Basic earnings (loss) per common share:
Weighted average common shares outstanding..... 3,920,691 3,740,724 3,907,387 3,740,724
========= ========= ========= =========
Diluted earnings (loss) per common share:
Weighted average common shares outstanding..... 3,920,691 3,740,724 3,907,387 3,740,724
Options and Restricted Units................... 11,958 -- 3,986 --
--------- --------- --------- ---------
3,932,649 3,740,724 3,911,373 3,740,724
========= ========= ========= =========
At September 30, 2002 and 2003, options to purchase 205,346 shares and
215,796 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
September 30, 2003. At September 30, 2003, 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, September 30,
2002 2003
------------ -------------
Raw materials.................................... $ 1,172 $ 2,278
Work in process.................................. 3,134 1,193
Finished products................................ 16,830 11,450
Supplies and containers.......................... 7,112 6,710
------- -------
$28,248 $21,631
======= =======
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 $1.3 million during the nine months
ended September 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 nine months ended September 30, 2003.
6
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
For the three and nine months ended September 30, 2003
(Dollars in thousands)
(unaudited)
Note 6 - Long-Term Debt
The Company failed to make the interest payments on its Subordinated Notes
that were due on May 1, 2003 and November 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. At September 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 $55.4 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. Such lenders extended the forbearance agreement on July
31, 2003 and October 1, 2003. Currently, the forbearance period expires on
January 15, 2004. 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. The Company is also required under the
Forbearance and Amendment Agreement to meet certain milestones in the progress
of its restructuring efforts.
The Company continues to have discussions with its creditors with respect
to the restructuring of the Company's indebtedness. In connection with such
activities, the Company has recorded reorganization expense of $2.3 million and
$5.8 million, respectively for the three and nine months ended September 30,
2003. The Company expects that such restructuring, if successfully concluded,
will result in the extinguishment of the Company's existing equity interests and
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. 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, including a reorganization of the
Company, a sale of the Company's assets pursuant to Chapter 11 of the Bankruptcy
Code or a liquidation pursuant to Chapter 7 of the Bankruptcy Code.
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 $1,251 and $1,284 for the
nine months ended September 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 nine months ended September
30, 2002 and 2003, the Company paid GenTek $1,034 and $1,056, respectively,
related to these services and office space.
7
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
For the three and nine months ended September 30, 2003
(Dollars in thousands)
(unaudited)
Other Transactions
GCG supplies soda ash to GenTek. For the nine months ended September 30,
2002 and 2003, sales to GenTek amounted to $1,994 and $1,813, respectively.
Note 8 - Geographic Information
Net Revenues Income (Loss) Before Income Taxes
September 30, September 30,
-------------------- ---------------------------------
2002 2003 2002 2003
--------- -------- -------- --------
United States............................... $ 167,871 $167,055 $ 3,399 $(11,079)
Foreign..................................... 69,493 67,391 (3,210) (5,266)
Elimination................................. (34,830) (23,680) -- --
--------- -------- -------- --------
$ 202,534 $210,766 $ 189 $(16,345)
========= ======== ======== ========
Note 9 - Segment Information
Industry segment information is summarized as follows:
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -------------------
2002 2003 2002 2003
------- ------- -------- --------
Net revenues:
Soda Ash................................. $55,746 $55,136 $160,202 $166,208
Calcium Chloride......................... 15,581 11,195 42,332 44,558
------- ------- -------- --------
$71,327 $66,331 $202,534 $210,766
======= ======= ======== ========
Income (loss) before income taxes:
Soda Ash................................. $ 4,690 $ 1,625 $ 10,935 $ 5,437
Calcium Chloride ........................ 383 (1,831) 537 (5,488)
------- ------- -------- --------
Subtotal.............................. 5,073 (206) 11,472 (51)
Elimination and other corporate expenses ... (4,305) (5,138) (11,283) (16,294)
------- ------- -------- --------
$ 768 $(5,344) $ 189 $(16,345)
======= ======= ======== ========
Income (loss) before income taxes for elimination and other corporate expenses
includes financial reorganization expenses of $2,293 and $5,791 recorded in the
three and nine months ended September 30, 2003, respectively.
Three Months Ended Nine Months Ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
------ ------ ------ ------
Capital Expenditures:
Soda Ash................................. $ 449 $ 753 $2,316 $3,626
Calcium Chloride......................... 1,174 476 3,129 2,688
Elimination and other corporate expenses ... 6 1 37 23
------ ------ ------ ------
$1,629 $1,230 $5,482 $6,337
====== ====== ====== ======
Depreciation & Amortization:
Soda Ash................................. $2,296 $2,394 $7,195 $6,826
Calcium Chloride......................... 456 333 1,256 934
Elimination and other corporate expenses.... 221 214 660 643
------ ------ ------ ------
$2,973 $2,941 $9,111 $8,403
====== ====== ====== ======
8
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Financial Condition
September 30, 2003 Compared with December 31, 2002
Cash and cash equivalents were $11.0 million at September 30, 2003 compared
with $13.1 million at December 31, 2002. During the first nine months of 2003,
the Company provided cash flow from operating activities of $0.8 million, used
cash of $6.3 million for capital expenditures and provided net cash from
borrowings of $3.5 million.
The Company had working capital of $(126.1) million at September 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 cash balances,
receivables, inventories, other current assets and higher accrued liabilities,
partially offset by lower accounts payable.
The Company failed to make the interest payments on its Subordinated Notes
that were due on May 1, 2003 and November 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 September 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 $55.4 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. Such lenders extended the forbearance agreement on July
31, 2003 and October 1, 2003. Currently, the forbearance period expires on
January 15, 2004. 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. The Company is also required under the
Forbearance and Amendment Agreement to meet certain milestones in the progress
of its restructuring efforts.
The Company continues to have 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 the extinguishment
of the Company's existing equity interests and 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. 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,
including a reorganization of the Company, a sale of the Company's assets
pursuant to Chapter 11 of the Bankruptcy Code or a liquidation pursuant to
Chapter 7 of the Bankruptcy Code.
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
September 30, 2003 Compared with September 30, 2002
Net revenues for the three and nine month periods ended September 30, 2003
decreased 7.0 percent and increased 4.1 percent to $66.3 million and $210.8
million, respectively, from $71.3 million and $202.5 million for the comparable
prior year periods. Net revenues for the three month period ended September 30,
2003 were negatively affected by lower domestic soda ash prices as well as lower
calcium chloride volumes, partially offset by a stronger Canadian dollar. Net
revenues for the nine month period ended September 30, 2003 were positively
affected by higher soda ash volumes and a stronger Canadian dollar, partially
offset by lower domestic soda ash prices and calcium chloride volumes.
Gross profit for the three month period ended September 30, 2003 decreased
$8.2 million to $4.7 million from $12.9 million for the comparable prior year
period. Gross profit as a percentage of net revenues for the three month period
ended September 30, 2003 decreased to 7.0 percent from 18.1 percent for the same
period in 2002. Gross profit for the nine month period ended September 30, 2003
decreased $16.6 million to $15.5 million from $32.1 million for the comparable
prior year period. Gross profit as a percentage of net revenues for the nine
month period ended September 30, 2003 decreased to 7.4 percent from 15.9 percent
for the same period in 2002. These decreases were primarily due to higher energy
costs, lower domestic soda ash prices, higher calcium chloride feedstock costs
and a stronger Canadian dollar.
Selling, general and administrative expense was $3.9 million and $11.6
million for the three and nine month periods ended September 30, 2003,
respectively, versus $3.9 million and $11.7 million for the comparable prior
year periods.
Reorganization expense for the three and nine month periods ended September
30, 2003 was $2.3 million and $5.8 million, respectively.
Interest expense for the three and nine month periods ended September 30,
2003 was $3.8 million and $11.3 million, which was $0.1 million and $0.3 million
higher, respectively, than the comparable prior period.
Minority interest for the three and nine month periods ended September 30,
2003 was $1.3 million and $4.3 million, respectively, versus $4.0 million and
$9.1 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 $(5.3) million and $(16.3) million for the three and
nine month periods ended September 30, 2003, respectively, versus $0.8 million
and $0.2 million for the comparable prior year periods, for the foregoing
reasons.
10
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 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
adopted the provisions of the statement on its effective date. The adoption of
this statement did not have 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.
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 adopted the
provisions of the statement on its effective date. The adoption of this
statement did not have a material impact to its consolidated financial
statements.
In January 2003, the FASB issued Interpretation No. ("FIN") 46,
"Consolidation of Variable Interest Entities". The Company has no arrangements
that would be subject to this interpretation.
Information Concerning Forward-Looking Statements
Certain of the statements contained in this report (other than the
Company's consolidated financial statements and other statements of historical
fact) are forward-looking statements, including, without limitation, (i) the
statement in "--Financial Condition" concerning the Company's expectation that
such restructuting, if successfully concluded, will result in the extinguishment
of the Company's existing equity interests and 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 (ii) other statements as to management's or
the Company's expectations or beliefs presented in this "Managements's
Discussion and Analysis of Financial Condition and Results of Operations."
Forward-looking statements are made based upon management's current
expectations and beliefs concerning future developments and their potential
effects upon the Company. There can be no assurance that future developments
will be in accordance with management's expectations or that the effect of
future developments on the Company will be those anticipated by management.
The important factors described in this report (including, without limitation,
those discussed in "--Financial Condition"), in the Company's Annual report on
Form 10-K for the year ended December 31, 2002, or in other Securities and
Exchange Commission filings (which factors are incorporated herein by
reference), could affect (and in some cases have affected) the Company's actual
results and could cause such results to differ materially from estimates or
expectations reflected in such forward-looking statements.
While the Company periodically reassesses material trends and uncertainties
affecting the Company's results of operations and financial condition in
connection with its preparation of management's discussion and analysis of
results of operations and financial condition contained in its quarterly and
annual reports, the Company does not intend to review or revise any particular
forward-looking statement referenced in this report in light of future events.
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 September 30, 2003 that has materially affected, or is
reasonably likely to materially affect, the registrant's internal control over
financial reporting.
11
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
the Company was not permitted to make interest payments of $10.6 million on its
Subordinated Notes, and failure to pay within the grace period constituted an
event of 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 continues to have 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 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 November 14, 2003 /s/ John M. Kehoe, Jr.
------------------------------------------------
John M. Kehoe, Jr.
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date November 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'