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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2004
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)
90 East Halsey Road 07054
Parsippany, New Jersey (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (973) 515-3221
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common stock, no par value
(Title of class)
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 if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in the definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act).
Yes [X] No [ ]
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was last sold, or the average bid and asked price of such common equity,
as of the last business day of the registrant's most recently completed second
fiscal quarter: $330,196,120.
Applicable to issuers involved in bankruptcy proceedings during the
preceding five years: Indicate by check mark whether the registrant has filed
all documents and reports required to be filed by Sections 12, 13 or 15(d) of
the Securities Exchange Act of 1934 subsequent to the distribution of securities
under a plan confirmed by a court.
Yes [X] No [ ]
The number of outstanding shares of the Registrant's Common Stock as of
March 10, 2005 was 10,098,570.
Documents Incorporated by Reference:
Portions of the Registrant's definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on May 6, 2005, to be filed within 120 days
after the close of the Registrant's fiscal year, are incorporated by reference
into Part III of this Annual Report on Form 10-K.
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PART I
Item 1. Business.
Overview
GenTek Inc. (the "Company" or "GenTek") is a holding company whose
subsidiaries manufacture industrial components and performance chemicals.
GenTek's subsidiaries operate through two primary business segments:
manufacturing and performance products. The manufacturing segment provides a
broad range of engineered components and services to three principal markets:
automotive, appliance and electronic, and industrial. The performance products
segment provides a broad range of value-added chemical products and services to
four principal markets: environmental services, pharmaceutical and personal
care, technology and chemical processing. The Company's products are frequently
highly engineered and are important components of, or provide critical
attributes to, our customers' end products or operations. The Company operates
over 60 manufacturing and production facilities located primarily in the U.S.,
Canada, Mexico and India with additional operations in Germany and the United
Kingdom. GenTek has no independent operations and, therefore, is dependent upon
cash flow from its subsidiaries to meet its obligations.
Dividends and Recapitalization
On December 27, 2004, the Company paid a special dividend of $7.00 per
common share, totaling approximately $71 million, which was funded primarily
from excess cash generated from the sale of the Company's KRONE communications
business.
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005 to holders of
record on March 10, 2005. Also, on February 28, 2005, GenTek closed on a secured
financing consisting of $370 million of term loans and a $60 million revolving
credit facility. The Company will use approximately $313 million of the
financing proceeds to pay the special dividend and $35 million of the proceeds
to pre-fund certain defined benefit pension obligations. The remainder of the
proceeds will be used to pay transaction fees, to refinance existing debt and
for general corporate purposes. The payment of the two special dividends and the
closing on the financing reflect the completion of the Company's
recapitalization plan. The Company believes these actions provide substantial
value to current holders of common stock and establish a more appropriate
capital structure for the Company.
Acquisition
On June 30, 2004, the Company acquired a wire harness and subassembly
manufacturing operation located in Reynosa, Mexico from Whirlpool Corporation
for $8.4 million. As part of the transaction, the Company entered into a
seven-year supply agreement to supply wire harnesses, panel assemblies, copper
tubing and related components to Whirlpool's North American appliance production
facilities. The results of operations of the facility have been included in the
Company's financial statements beginning July 1, 2004. Revenues from the supply
agreement were approximately $80 million for the six month period ending
December 31, 2004.
Discontinued Operations
On May 18, 2004, the Company sold its KRONE communications business to ADC
Telecommunications, Inc. (ADC). Accordingly, all financial information included
herein has been
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reclassified to reflect the KRONE communications business as discontinued
operations. Net proceeds from the transaction of approximately $291 million were
used to repay amounts outstanding under the Company's senior term loan agreement
in full, as well as make the payment required by the contingent redemption
feature of the Company's tranche A warrants. The payment was made on June 30,
2004 and the tranche A warrants expired.
Emergence From Chapter 11 Reorganization
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 protection afforded by Chapter 11 allowed
the Debtors to continue to serve their customers and preserve the value of their
businesses, while they reorganized and worked to develop and implement a
strategic plan to deleverage the Company's balance sheet and create an improved
long-term capital structure.
The Debtors' plan of reorganization (the "Plan") was confirmed on October
7, 2003 and became effective in accordance with its terms on November 10, 2003
(the "Effective Date"). The Plan provided for the treatment of all pre-petition
claims and liabilities. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Reorganization under Chapter 11 of the US
Bankruptcy Code" for a further discussion of the Plan.
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. In connection with its emergence
from bankruptcy on November 10, 2003, the Company has adopted fresh-start
reporting in accordance with SOP 90-7. Accordingly, the Company's post-emergence
financial statements ("Successor") will not be comparable with its pre-emergence
financial statements ("Predecessor").
Products and Services by Segment
The following table sets forth the Company's sales by segment:
Years Ended December 31,
-------------------------
2004 2003(1) 2002
------ ------- ------
(In millions)
Manufacturing....................................... $514.6 $425.9 $477.1
Performance Products................................ 316.6 335.9 357.4
Corporate and other................................. 12.7 21.3 26.9
------ ------ ------
$843.9 $783.1 $861.4
====== ====== ======
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(1) This data is a non-GAAP financial measure within the meaning of Regulation
G promulgated by the Securities and Exchange Commission. Included in Item
7. Reconciliation of Non-GAAP Financial Measures 2003 is a reconciliation
of statement of operations data for the full year 2003 to the Predecessor
Company and Successor Company statements of operations for the periods
ended November 10, 2003 and December 31, 2003, respectively. Management
believes that this information is the most relevant and useful information
for making comparisons to the periods ended December 31, 2002 and 2004.
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Manufacturing Segment
The manufacturing segment provides a broad range of engineered components,
wiring products and services to three principal markets: automotive, appliance
and electronic, and industrial. The Company's products for these markets are
described below:
Automotive. For the automotive market, the Company provides:
o precision-engineered components for valve-train systems, including
stamped and machined rocker and roller-rocker arms, cam follower
rollers, cam follower roller axles, antifriction bearings, mechanical
roller tappets and other hardened/machined components;
o electronic wire and cable assemblies, such as wire harnesses, ignition
cables, molded parts, electro-mechanical assemblies, engine block
heaters, battery blankets and various electrical switches, used in the
manufacture of automobiles, light and heavy duty trucks and personal
recreation vehicles such as snowmobiles and personal water crafts;
o computer-aided and mechanical vehicle and component testing services
for the transportation industry; and
o fluid transport and handling equipment for automotive service
applications.
The Company's precision-engineered stamped and machined engine components
for valve-train systems improve engine efficiency by reducing engine friction
and component mass. These components are used both in traditional overhead valve
and in the increasingly popular single and double overhead cam engines which
power cars, light trucks and sport utility vehicles. Over the last several
years, the Company has benefited from the design transition of overhead valve
engines to overhead cam engines providing a strong position with which to
participate in the industry's latest efforts to improve fuel efficiency and
power. Increased design use of additional valves per cylinder to improve
fuel/air throughput have resulted in volume growth on specific engine
applications. The majority of the Company's valve-train production is sold to
U.S. automobile manufacturers and their Tier 1 suppliers. The Company has
recently established assembly operations, on a contract basis, in Germany in
order to support its European growth.
The Company's wire and cable assembly products include a variety of
automotive electronic components for use in OEM production and the aftermarket.
The Company is a leading Tier 2 supplier of products such as wire harnesses,
ignition cables, engine block heaters, battery blankets and various electrical
and electro-mechanical switches and assemblies. The Company continues to benefit
from increasing electrical content in vehicles manufactured by OEM's.
Through its automotive testing offerings, the Company provides mechanical
testing services and computer-aided design, engineering and simulation services
for automotive structural and mechanical systems to OEMs and Tier 1 suppliers.
The Company provides a wide range of testing services for automotive components
and systems from single sub-systems, such as chassis, suspension, seats and
seating assemblies, to entire vehicles. The Company's engineering and simulation
services provide customers with finite element modeling, kinematics, and crash
and variation simulation analyses, and allow its customers to test their
automotive products for durability, stress, noise, vibration and environmental
considerations.
Automotive manufacturers generally award business to their suppliers by
individual engine line or model, often for multiple-model years. The loss of any
individual engine line or model contract would
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not be material to the Company. However, an economic downturn in the automotive
industry as a whole or other events (e.g., labor disruptions) resulting in
significantly reduced operations of any of DaimlerChrysler, Ford or General
Motors could have a material adverse impact on the results of the Company's
manufacturing segment. None of these customers accounted for 10 percent or more
of the Company's revenues in 2004.
Appliance and Electronic. The Company produces custom-designed power cord
systems and wire and cable assemblies for a broad range of appliances and
electronic products including:
o household appliances, such as refrigerators, freezers, dishwashers,
washing machines, dryers, ovens, ranges and air conditioners;
o electronic office equipment, including copiers and printers; and
o various electronic products, such as medical equipment, ATM machines
and water treatment equipment.
The Company's specialized wiring expertise and high-quality wire and cable
assemblies are generally provided to larger OEM customers. A highly-competitive
environment has required the Company's customers to improve their productivity
by outsourcing to lower cost suppliers. The Company operates manufacturing
facilities in Canada, Mexico and India and also sources certain finished
products from lower cost third party manufacturers in Asia. Many of these
facilities produce wire and cable assemblies for both the appliance and
electronic market as well as the automotive market. As a result of the
acquisition of the Reynosa Mexico operation in June 2004 and the establishment
of a long-term supply agreement, Whirlpool accounted for approximately 14
percent of the Company's revenues in 2004. The Company believes the addition of
the Reynosa facility and the Company's recently established facility in India
have substantially improved the Company's competitive position in this market.
Industrial. For the industrial market, the Company manufactures:
o custom-designed wire harness and power cord systems for power tools,
motors, pumps and other industrial products; and
o wire and cable for industrial markets, the commercial and residential
construction industries and for a wide variety of end market uses by
OEMs.
The Company produces a broad product line of single and multi conductor
wire and cable, wire harnesses and power cord systems. The Company's wire
jacketing expertise includes the use of polyvinyl chloride (PVC), rubber,
thermoplastic elastomer (TPE) and cross-link compounds.
Performance Products Segment
The Company's performance products segment provides a broad range of
value-added products and services to four principal markets: environmental
services, pharmaceutical and personal care, technology and chemical processing.
The Company's products and services for these markets are described below.
Environmental Services. With a network of 35 water treatment chemical
plants located throughout the United States and Canada, the Company is the
largest North American producer of aluminum sulfate, or "alum", which is used as
a coagulant in potable water and waste water treatment applications, and a
leading supplier of ferric sulfate and other specialty flocculents
(polymer-based
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materials used for settling and/or separating solids from liquids). The
Company's water treatment products and services are designed to address the
important environmental issues confronting its customers. These value-added
products and services provide cleaner drinking water, restore algae-infested
lakes, reduce damaging phosphorus runoff from agricultural operations, and
significantly reduce pollution from industrial waste water.
In the environmental market, the Company also provides sulfuric acid
regeneration services to the refining and chemical industries, and pollution
abatement and sulfur recovery services to selected refinery customers.
Refineries use sulfuric acid as a catalyst in the production of alkylate, a
gasoline blending component with favorable performance and environmental
properties. The alkylation process contaminates and dilutes the sulfuric acid,
thereby creating the need to dispose of or regenerate the contaminated acid. The
Company transports the contaminated acid back to the Company's facilities for
recycling and redelivers the fresh, recycled acid back to customers. This
"closed loop" process offers customers significant savings versus alternative
disposal methods and also benefits the environment by significantly reducing
refineries' waste streams.
Pharmaceutical and Personal Care. The Company is a leading supplier of the
active chemical ingredients used in the manufacture of antiperspirants, and also
supplies active ingredients used in prescription pharmaceuticals, nutritional
supplements, veterinary health products and other personal care products. Our
customer base includes many of the world's leading personal care companies, and
we are favorably positioned with both North American and European sourcing
capabilities.
Technology. The Company provides ultrahigh-purity electronic chemicals for
the semiconductor and disk drive industries. The Company's electronic chemicals
include ultrahigh-purity acids, caustics, solvents, etchants and formulated
photo ancillaries for use in the manufacture of semiconductor processing chips
and computer disk drives.
Chemical Processing. The Company manufactures a broad range of products
that serve as chemical intermediates in the production of such everyday products
as newspapers, tires, paints, dyes and carpets. The Company's products include:
o alum and polymer-based enhanced coagulants used in paper manufacturing
to impart water resistance;
o sodium nitrite, of which the Company is one of only two North American
producers, primarily used as a reactant in the manufacture of dyes,
pigments and rubber processing chemicals;
o sulfuric acid, which is used in the manufacture of titanium pigments,
fertilizers, synthetic fibers, steel, petroleum and paper, as well as
many other products.
Competition
Competition in the manufacturing segment's markets is based upon a number
of factors including design and engineering capabilities, quality, price and the
ability to meet customer delivery requirements. In the automotive market, the
Company competes with, among others, Eaton, INA, Timken, Yazaki and captive
OEMs. In the appliance and electronic and industrial markets, the Company
competes with Copperfield, General Cable, International Wire, Molex, Nexans and
Viasystems, among others.
Although the Company's performance products segment generally has
significant market share positions in the product areas in which it competes,
most of its end markets are highly competitive. In the
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pharmaceuticals and personal care market, the Company's major competitors
include BK Giulini Corp. and Summit Research Labs as well as the captive
production facilities of certain personal care companies. The Company's
competitors in the environmental market include the refineries that perform
their own sulfuric acid regeneration, as well as DuPont, Marsulex, Peak, PVS and
Rhodia, which also have sulfuric acid regeneration facilities that are generally
located near their major customers. In addition, the Company competes with Geo
Specialty Chemicals, Kemiron Companies Inc., U.S. Aluminates and other regional
players in the water treatment market. Competitors in the technology market
include Air Products, Honeywell Electronic Materials and
Tyco/Mallinckrodt-Baker. Competitors in the chemical processing market include
BASF, Norfalco LLC, Rhodia, and U.S. Salt.
Suppliers; Availability of Raw Materials
The Company purchases a variety of raw materials for its businesses. The
primary raw materials used by the manufacturing segment are copper and steel.
The Company's performance products segment's competitive cost position is, in
part, attributable to its control of certain raw materials that serve as the
feedstocks for many of its products. Consequently, major raw material purchases
are limited primarily to sulfuric acid where it is uneconomical for the Company
to supply itself due to distribution costs, bauxite and aluminum tri-hydrate
(for the manufacture of alum), zirconium based products (for the manufacture of
antiperspirant active ingredients), sulfur (for the manufacture of sulfuric
acid), and soda ash (for the manufacture of sodium nitrite).
We purchase raw materials from a number of suppliers and, in most cases,
believe that alternative sources are available to fulfill our needs. A number of
the raw materials we purchase are subject to cyclical price movements. Over the
past twelve months, commodity prices, in general, have trended upward, in some
cases significantly. In particular, the continued tight supply in the steel
market has put substantial upward pressure on steel prices, while copper prices
have remained at cyclically high levels. In our performance products segment, we
are able to pass through all or a portion of raw material price increases, but
often on a lagged basis. While the Company has been able to pass through a
significant portion of copper raw material price increases, it has had limited
success in doing so with steel cost increases in its automotive business. The
Company continues its efforts to ensure it has sufficient access to required raw
materials at competitive prices and to pass along raw material price increases
where possible.
Sales and Distribution
The Company's manufacturing segment has approximately 50 sales, marketing
and customer service personnel. Generally, the Company markets its products
directly to its customers, but in certain industrial markets a distribution
network is used. The manufacturing segment's technical and engineering staff is
an integral part of the segment's sales and distribution effort. Since many of
the Company's products are precision-engineered and custom-designed to customer
specifications, the Company's sales force and engineers work closely with its
customers in designing, producing, testing and improving its products.
In the Company's performance products segment, the Company employs
approximately 100 sales, marketing, distribution and customer service personnel.
The sales force is divided into several specialized groups which focus on
specific products, end-users and geographic regions. This targeted approach
provides the Company with insight into emerging industry trends and creates
opportunities for product development.
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Seasonality; Backlogs
The business of the manufacturing segment is generally not seasonal. Within
the performance products segment, the environmental services business has higher
volumes in the second and third quarters of the year, owing to (i) higher spring
and summer demand for sulfuric acid regeneration services from gasoline refinery
customers to meet peak summer driving season demand and (ii) higher spring and
summer demand from water treatment chemical customers to manage seasonally high
and low water conditions. The other markets that the performance products
segment serves are generally not seasonal. Due to the nature of the Company's
businesses, there are no significant backlogs.
Environmental Matters
The Company's various manufacturing operations, which have been conducted
at a number of facilities for many years, are subject to numerous laws and
regulations relating to the protection of human health and the environment in
the U.S., Canada, Mexico, India and other countries. The Company believes that
it is in substantial compliance with such laws and regulations. However, as a
result of its operations, the Company is involved from time to time in
administrative and judicial proceedings and inquiries relating to environmental
matters. Based on information available at this time with respect to potential
liability involving these facilities, the Company believes that any such
liability will not have a material adverse effect on its financial condition,
cash flows or results of operations. However, modifications of existing laws and
regulations or the adoption of new laws and regulations in the future,
particularly with respect to environmental and safety standards, could require
the Company to make expenditures which may be material or otherwise adversely
impact the Company's operations.
The Company maintains a program to manage its facilities' compliance with
environmental laws and regulations. Expenditures for 2004 approximated $14
million (of which approximately $4 million represented capital expenditures and
approximately $10 million related to ongoing operations and the management and
remediation of potential environmental contamination from prior operations).
Expenditures for 2003 approximated $17 million (of which approximately $4
million represented capital expenditures and approximately $13 million related
to ongoing operations and the management and remediation of potential
environmental contamination from prior operations). The Company expects
expenditures similar to 2004 levels in 2005. In addition, if environmental laws
and regulations affecting the Company's operations become more stringent, costs
for environmental compliance may increase above historical levels.
The Comprehensive Environmental Response Compensation and Liability Act of
1980 ("CERCLA") and similar statutes, have been construed as imposing joint and
several liability, under certain circumstances, on present and former owners and
operators of contaminated sites, and transporters and generators of hazardous
substances, regardless of fault. The Company's facilities have been operated for
many years by the Company or its prior owners and operators, and adverse
environmental conditions of which the Company is not aware may exist.
Modifications of existing laws and regulations and discovery of additional or
unknown environmental contamination at any of the Company's current or former
facilities could have a material adverse effect on the Company's financial
condition, cash flows and/or results of operations. In addition, the Company has
received written notice from the Environmental Protection Agency that it has
been identified as a "potentially responsible party" under CERCLA at two
third-party sites. The Company does not believe that its liability, if any, for
these sites will be material to its results of operations, cash flows or
financial condition.
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At any time, the Company may be involved in proceedings with various
regulatory authorities which could require the Company to pay various fines and
penalties due to violations of environmental laws and regulations at its sites,
remediate contamination at some of these sites, comply with applicable standards
or other requirements, or incur capital expenditures to modify certain pollution
control equipment or processes at its sites. Again, although the amount of any
liability that could arise with respect to these matters cannot be accurately
predicted, the Company believes that the ultimate resolution of these matters
will have no material adverse effect on its results of operations, cash flows or
financial condition.
Avtex Site at Front Royal, Virginia. On March 22, 1990, the Environmental
Protection Agency (the "EPA") issued to the Company a Notice of Potential
Liability pursuant to Section 107(a) of CERCLA with respect to a site located in
Front Royal, Virginia, owned at the time by Avtex Fibers Front Royal, Inc.,
("Avtex") which filed for bankruptcy. A sulfuric acid plant adjacent to the main
Avtex site was previously owned and operated by the Company. The Company
reacquired the sulfuric acid plant site through the bankruptcy in order to
control the required investigation and, if necessary, remediation. On September
30, 1998, the EPA issued an administrative order under Section 106 of CERCLA,
which requires the Company, through its predecessor, AlliedSignal Inc. (now
Honeywell Inc.) and Avtex to undertake certain removal actions at the acid
plant. On October 19, 1998, the Company delivered to the EPA written notice of
its intention to comply with that order, subject to numerous defenses. The
Company investigated potential soil and groundwater contamination and
decommissioned the site. As part of the Company's Filing, the Company entered
into an agreement with Honeywell, the previous owner and operator, whereby
Honeywell agreed to take back all environmental liability at the site, past,
present and future, and took back ownership of the site. Although the EPA
refused to formally drop the Company from the administrative order, the EPA
signed a letter acknowledging Honeywell's agreement to be responsible for all
liability at the site and agreed to seek recourse against Honeywell for such
liability and only look to the Company in the event of a default by Honeywell.
The Company believes that there is a strong likelihood that no further costs
will be incurred at this site.
Delaware Valley Facility. On September 7, 2000, the U.S. Environmental
Protection Agency issued to the Company an Initial Administrative Order (an
"IAO") pursuant to Section 3008(h) of the Resource Conservation and Recovery Act
("RCRA"), which requires that the Company conduct an environmental investigation
of the Company's Delaware Valley facility (the "Facility") and, if necessary,
propose and implement corrective measures to address any historical
environmental contamination at the Facility. Over the past four years, the
Company has been working cooperatively with the EPA and Honeywell Inc., a prior
owner of the Facility and current owner of a plant adjacent to the Facility, to
implement the actions required under the IAO. The Company conducted the first
investigatory steps required by the IAO, the evaluation of potential soil and
groundwater contamination, in both the North Plant (the area of the facility
north of US Route 18) and the South Plant (the area south of US Route 18) that
borders the Delaware River. As a result of the Filing, the Company entered into
an agreement with Honeywell dated April 30, 2004 to take back all environmental
liability at the North Plant, past, present and future, as well as future
ownership of the North Plant. In addition, Honeywell took responsibility for the
cost to address groundwater contamination at the South Plant. The Company
remains responsible only for soil contamination at the South Plant. Although the
EPA refused to formally drop the Company from the IAO, the EPA has agreed to
sign a letter acknowledging Honeywell's agreement to be responsible for all
liability at the North Plant and for groundwater contamination at the South
Plant and to seek recourse against Honeywell for those liabilities and only look
to the Company in the event of a default by Honeywell. The remaining
requirements of the IAO will be performed over the course of the next several
years. The Company closed the South Plant operations of its Delaware Valley
facility on November 10, 2003. This closure resulted in an expansion of the
investigation to be performed under the IAO. Depending on the results of that
additional investigation, additional remedial activity may be
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required for soils in the South Plant. The Company has provided for the
estimated costs of $2.3 million for compliance with the IAO in its accrual for
environmental liabilities. As such, the Company believes that compliance with
the IAO will not have a material effect on its results of operations or
financial condition.
Employees/Labor Relations
At December 31, 2004, the Company had approximately 7,000 employees, of
whom approximately 1,075 were full-time salaried employees, approximately 4,010
were full-time hourly employees (represented by 11 different unions) and
approximately 1,915 were hourly employees working in nonunion facilities.
The Company's union contracts have durations which vary from two to four
years. The Company's relationships with its unions are generally good.
Executive Officers and Key Employees
Set forth below is information with respect to each of the Company's
executive officers and/or key employees.
Richard R. Russell, 62, President and Chief Executive Officer and a
Director since April 1999. Mr. Russell has also been the President and Chief
Executive Officer of GenTek Holding LLC (formerly General Chemical Corporation)
since 1986.
Mark J. Connor, 38, Vice President - Corporate Development and Investor
Relations since November 2003. From October 2000 to November 2003, Mr. Connor
served as Assistant Treasurer. From 1998 through October 2000, Mr. Connor served
as Assistant Treasurer of The Warnaco Group, Inc.
John Cowen, 54, Vice President and General Manager - Noma Industrial since
October 2004. From 2001 to 2004, Mr. Cowen was self-employed as a management
consultant. From 1986 to 2001, Mr. Cowen held several executive management
positions with Noma including roles in finance, sales & marketing, and general
management.
George G. Gilbert, 56, Vice President and General Manager - Valve Train
Group since 2001. From 1997 to 2001, Mr. Gilbert held the position of Vice
President Technical Services/Strategic Development, for Simpson Industries.
Matthew R. Friel, 38, Executive Vice President Finance and Corporate
Development since August 2004. Mr. Friel was formerly the Vice President and
Chief Financial Officer since September 2001. Mr. Friel also served as Treasurer
from September 2001 to October 2003. From September 1997 to September 2002, Mr.
Friel served as Managing Director of Latona Associates Inc. ("Latona
Associates"). Latona Associates provided GenTek with certain administrative
functions and corporate support services from 1995 until 2004.
Michael J. Murphy, 54, Vice President and General Manager - Noma Harness
Group since August 2004. From 2001 to 2004 Mr. Murphy served as the Vice
President Sales & Marketing for Noma. Prior to working for Noma, Mr. Murphy
served as the Vice President of Sales (1998-2001) for Dialight Corporation.
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Robert D. Novo, 47, Vice President of Human Resources and Environmental
Health and Safety since August 2004. Mr. Novo served as the Vice President of
Human Resources from July 2003 to August 2004. Prior to July 2003, Mr. Novo held
various senior level human resource positions with Honeywell International since
1995.
Kevin J. O'Connor, 54, Vice President and Controller since April 1999. Mr.
O'Connor has also served as Controller of GenTek Holding LLC (formerly General
Chemical Corporation) since 1986.
Scott Sillars, 50, Vice President and Treasurer since October 2003. Mr.
Sillars served as Acting Treasurer from 2002 to October 2003 . From 1998 through
2002, Mr. Sillars served as an Independent Consultant in general management and
corporate finance.
Thomas B. Testa, 43, Vice President and General Manager - Performance
Products Group since August 2004. From April 2002 to August 2004, Mr. Testa
served as Vice President - Operations for the Performance Products Group. He
previously served as General Manager of the Electronic Chemicals business group
from October 1997 to April 2002.
Matthew M. Walsh, 38, Vice President and Chief Financial Officer since
August 2004. Mr. Walsh was formerly the Vice President and Operations Controller
since December 2000. Mr. Walsh served as Vice President and Treasurer from
January 2000 through December 2000.
Corporate Governance and Internet Address
We emphasize the importance of professional business conduct and ethics
through our corporate governance initiatives. Our board of directors has adopted
a code of business conduct and ethics that applies to all employees, directors
and officers, including the Company's principal executive officer, principal
financial officer and principal accounting officer. Our board of directors
consists of a majority of independent directors.
Our internet address is www.gentek-global.com. We make available, free of
charge through a link on our site, our annual reports on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, and amendments to such
reports, if any, as filed with the SEC as soon as reasonably practicable after
such filing. Our site also contains our code of business conduct and ethics and
the charters of the audit committee, corporate governance and nominating
committee and compensation committee of our board of directors. Our principal
executive offices are located at 90 East Halsey Road, Parsippany, New Jersey
07054, and our telephone number is (973) 515-3221.
Risk Factors
The following is a discussion of certain factors that currently impact or
may impact our business, operating results and/or financial condition. An
investment in our common stock involves a high degree of risk. You should
carefully consider the risks described below before deciding to invest in our
common stock. In assessing these risks, you should also refer to the other
information in this Annual Report on Form 10-K, including our financial
statements and the related notes. Various statements in this Annual Report on
Form 10-K, including some of the following risk factors, constitute
forward-looking statements.
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Risks Related to Our Company
We entered into new credit facilities in 2005 which will significantly increase
GenTek's leverage. The Company's ability to make payments on its debt will be
contingent GenTek's future operating performance which will depend on a number
of factors that are outside of our control.
On February 28, 2005, GenTek closed on a secured financing consisting of
$370 million of term loans and a $60 million revolving credit facility (the
"Credit Facilities"). The term loans include a $235 million first lien loan due
in March 2011 with an interest rate of LIBOR plus 2.75% or base rate plus 1.75%,
subject to a rate reduction of 0.25% if such term loan is rated B1 or better by
Moody's Investor Services, Inc. and a $135 million second lien loan due March
2012 with an interest rate of LIBOR plus 5.75% or base rate plus 4.75%. The $60
million revolving credit facility matures in March 2010 and carries an interest
rate of LIBOR plus 2.75% or base rate plus 1.75%, subject to rate reductions
under a pricing grid if Company's leverage ratio decreases. The Company will use
approximately $313 million of the financing proceeds to pay a special dividend
and $35 million of the proceeds to pre-fund certain defined benefit pension
obligations. The remainder of the proceeds will be used to pay transaction fees,
to refinance existing debt and for general corporate purposes.
Our debt service obligations with respect to the Credit Facilities are
estimated to be approximately $28 million to $32 million in 2005, including
approximately $2 million of principal repayments, if such debt were outstanding
for the entire year. This debt service may have an adverse impact on the
Company's earnings and cash flow, which could in turn negatively impact GenTek's
stock price.
Our ability to make principal and interest payments on our bank debt is
contingent on the our future operating performance, which will depend on a
number of factors, many of which are outside of our control. The degree to which
GenTek is leveraged could have other important negative consequences, including
the following:
o we must dedicate a substantial portion of our cash flows from
operations to the payment of our indebtedness, reducing the funds
available for future working capital requirements, capital
expenditures, acquisitions or other general corporate requirements;
o a significant portion of our borrowings are, and will continue to be,
at variable rates of interest, which may result in higher interest
expense in the event of increases in interest rates;
o we may be more vulnerable to a downturn in the industries in which we
operate or a downturn in the economy in general;
o we may be limited in our flexibility to plan for, or react to, changes
in our businesses and the industries in which we operate;
o we may be placed at a competitive disadvantage compared to our
competitors that have less debt;
o we may be limited in our ability to react to unforeseen increases in
certain costs and obligations arising in our businesses, including
environmental, pension and tax liabilities;
o we may determine it to be necessary to dispose of certain assets or
one or more of our businesses to reduce our debt; and
o our ability to borrow additional funds may be limited.
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We can provide no assurance that our businesses will generate sufficient
cash flow from operations or that future borrowings will be available in amounts
sufficient to enable us to pay our indebtedness or to fund our other liquidity
needs. Moreover, we may need to refinance all or a portion of our indebtedness
on or before maturity. In such a case, we cannot make assurances that we will be
able to refinance any of our indebtedness on commercially reasonable terms or at
all. If we are unable to make scheduled debt payments or comply with the other
provisions of our debt instruments, our various lenders may be permitted under
certain circumstances to accelerate the maturity of the indebtedness owed to
them and exercise other remedies provided for in those instruments and under
applicable law.
We are subject to restrictive debt covenants pursuant to our indebtedness. These
covenants may restrict our ability to finance our business and, if we do not
comply with the covenants or otherwise default under them, we may not have the
funds necessary to pay all amounts that could become due and the lenders could
foreclose on substantially all of our assets.
The Credit Facilities, among other things, significantly restricts and, in
some cases, effectively eliminates our ability and the ability of most of our
subsidiaries to:
o incur additional debt;
o create or incur liens;
o pay dividends or make other equity distributions;
o purchase or redeem share capital;
o make investments;
o sell assets;
o issue or sell share capital of certain subsidiaries;
o engage in transactions with affiliates;
o issue or become liable on a guarantee;
o voluntarily prepay, repurchase or redeem debt;
o create or acquire new subsidiaries; and
o effect a merger or consolidation of, or sell all or substantially all
of our assets.
In addition, under the Credit Facilities, we and our subsidiaries must
comply with certain financial covenants. In the event we were to fail to meet
any of such covenants and were unable to cure such breach or otherwise
renegotiate such covenants, the lenders under those facilities would have
significant rights to deny future access to liquidity and/or seize control of
substantially all of our assets. The material financial covenants with which we
must comply include total leverage, total interest coverage, and maximum capital
expenditures.
The covenants contained in our Credit Facilities and any credit agreement
governing future debt may significantly restrict our future operations.
Furthermore, upon the occurrence of any event of default under our Credit
Facilities or the agreements governing any other debt of our subsidiaries, the
lenders could elect to declare all amounts outstanding under such Credit
Facilities or agreements, together with accrued interest, to be immediately due
and payable. If those lenders were to accelerate the payment of those amounts,
we cannot assure you that our assets and the assets of our subsidiaries would be
sufficient to repay those amounts in full.
We are also subject to interest rate risk due to our indebtedness at
variable interest rates. Our Credit Facilities bear interest at variable rates
based on a base rate or LIBOR plus an applicable margin. We cannot assure you
that shifts in interest rates will not have a material adverse effect on us.
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We may be required to prepay our indebtedness prior to its stated maturity,
which may limit our ability to pursue business opportunities.
Pursuant to the terms of our Credit Facilities, in certain instances we are
required to prepay outstanding indebtedness prior to its stated maturity date,
even if we are otherwise in compliance with the covenants contained in the
Credit Facilities. Specifically, a portion of excess cash flow, as defined in
the Credit Facilities, and certain non-recurring cash inflows such as proceeds
from asset sales, insurance recoveries, and equity offerings must be used to pay
down indebtedness and may not be reborrowed. These prepayment provisions may
limit our ability to utilize this excess cash flow to pursue business
opportunities.
Our business is capital intensive. We cannot assure you that we will have
sufficient liquidity to fund our working capital and capital expenditures and to
meet our obligations under existing debt instruments.
Our business is capital intensive and we cannot be certain that we will
achieve sufficient cash flow in the future. Failure to maintain profitability
and generate sufficient cash flow could diminish our ability to sustain
operations, meet financial covenants, obtain additional required funds and make
required payments on any indebtedness we have incurred or may incur in the
future. If we do not comply with the covenants in our Credit Facilities or
otherwise default under them, we may not have access to borrowings under our $60
million revolving credit facility or the funds necessary to pay amounts that
become due.
Although we believe that our current levels of cash and cash equivalents,
along with available borrowings on our revolving credit facility, will be
sufficient for our cash requirements during the next twelve months, it is
possible that these sources of cash will be insufficient, resulting in our
having to raise additional funds for liquidity. There can be no assurance we
will have access to additional funding should the need arise.
The industries in which we operate are highly competitive. This competition may
prevent us from raising prices at the same pace as our costs increase, making it
difficult for us to maintain existing business and win new business.
We face significant competition in most of our businesses. Certain of our
competitors have large market shares and substantially greater financial and
technical resources than we do. We may be required to reduce prices if our
competitors reduce prices, or as a result of any other downward pressure on
prices for our products and services, which could have an adverse effect on us.
In each of our business segments, we operate in competitive markets. Our
manufacturing segment competes with numerous international and North American
companies, including various captive operations of automotive original equipment
manufacturers (OEMs) and Tier 1 suppliers to automotive manufacturers.
Competition in the manufacturing segment's markets is based on a number of
factors, including design and engineering capabilities, price, quality and the
ability to meet customer delivery requirements. Due to the level of competition,
our customers have regularly requested price decreases and maintaining or
raising prices has been difficult over the past several years and will likely
continue to be so in the near future. Most of the markets in which our
performance products segment does business are highly competitive, with
competitors typically segregated by end market. Competition in the performance
products segment's markets is based on a number of factors, including price,
freight economics, product quality and technical support. Due to the level of
competition faced by our performance products segment, our customers have
regularly requested price decreases and maintaining
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or raising prices has been difficult over the past several years and will likely
continue to be so in the near future. If we are unable to compete successfully,
our financial condition and results of operations could be adversely affected.
We may experience increased costs and production delays if suppliers fail to
deliver materials to us or if prices increase for raw materials and other goods
and services that we purchase from third parties.
We purchase raw materials from a number of domestic and foreign suppliers.
Although we believe that the raw materials we require will be available in
sufficient supply on a competitive basis for the foreseeable future, continued
increases in the cost of raw materials, including energy and other inputs used
to make our products, could affect future sales volumes, prices and margins for
our products. If a supplier should cease to deliver goods or services to us, we
would probably find other sources, however, such a disruption could result in
added cost and manufacturing delays. In addition, political instability, war,
terrorism and other disruptions to international transit routes control could
adversely impact our ability to obtain key raw materials in a timely fashion, or
at all.
Our revenues are dependent on the continued operation of our manufacturing
facilities, and breakdowns or other problems in their operation could adversely
affect our results of operations.
Our revenues are dependent on the continued operation of our various
manufacturing facilities. In particular, the operation of chemical manufacturing
plants involves many risks, including the breakdown, failure or substandard
performance of equipment, natural disasters, acts of terrorism, power outages,
the need to comply with directives of government agencies, and dependence on the
ability of railroads and other shippers to transport raw materials and finished
products in a timely manner. The occurrence of material operational problems,
including but not limited to the foregoing events, at one or more of our
facilities could have a material adverse effect on our results of operations or
financial condition. Certain facilities within each of our business segments
account for a significant share of our profits. Disruption to operations at one
of these facilities could have a material adverse impact on segment financial
performance and our overall financial condition. In addition, in certain
circumstances we could also be materially affected by a disruption or closure of
a customer's plant or facility to which we supply our products.
We are subject to risks relating to our foreign operations.
We have significant manufacturing activities outside of the U.S., primarily
located in Mexico, Canada and India. These international operations subject us
to a number of risks such as: currency exchange rate fluctuations; foreign
economic conditions; trade barriers; exchange controls; national and regional
labor strikes; political instability; risks of increases in duties; taxes;
governmental royalties; war; and changes in laws and policies governing
operations of foreign-based companies. The occurrence of any one or a
combination of these factors may increase our costs or have other negative
effects on us.
Material changes in pension and other post-retirement benefit costs may occur in
the future. In addition, investment returns on pension assets may be lower than
assumed, which could result in larger cash funding requirements for our pension
plans, which could have an adverse impact on us.
We maintain several defined benefit pension plans covering certain
employees in Canada, Ireland and the United States. We record pension and
post-retirement benefit costs in amounts developed from actuarial valuations.
Inherent in these valuations are key assumptions including the discount rate and
expected long-term rate of return on plan assets. Material changes in pension
and other post-retirement benefit costs may occur in the future due to changes
in these assumptions, differences between actual
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experience and the assumptions used, and changes in the benefit plans. Amounts
we pay are also dependent upon interest rates. Due to current interest rates and
investment returns, some of our plans are underfunded. We are required to
rectify this underfunding in accordance with federal guidelines. After giving
effect to the pension pre-funding of $35 million planned in March 2005, we are
expected to be required to make substantial cash contributions beginning in 2008
and continuing beyond such time. Moreover, if investment returns on pension
assets are lower than assumed, we may have substantially larger cash funding
requirements for our pension plans, which may have a material adverse impact on
our liquidity. In addition, changes in federal laws relating to the funding of
pension plans may have a material adverse impact on our liquidity. For a further
discussion of our defined benefit pension plans, see "Management's Discussion
and Analysis - Financial Condition, Liquidity and Capital Resources."
Our principal businesses are subject to government regulation, including
environmental regulation, and changes in current regulations may adversely
affect us.
Our principal business activities are regulated and supervised by various
governmental bodies. Changes in laws, regulations or governmental policy or the
interpretations of those laws or regulations affecting our activities and those
of our competitors could have a material adverse effect on us.
For example, our various manufacturing operations, which have been
conducted at a number of facilities for many years, are subject to numerous laws
and regulations relating to the protection of human health and the environment
in the U.S., Canada, Mexico, India and other countries. We believe that we are
in substantial compliance with such laws and regulations. However, as a result
of our operations, from time to time we are involved in administrative and
judicial proceedings and inquiries relating to environmental matters. Based on
information available to us at this time with respect to potential liability
involving these facilities, we believe that any such liability will not have a
material adverse effect on our financial condition, cash flows or results of
operations. However, modifications to existing laws and regulations or the
adoption of new laws and regulations in the future, particularly with respect to
environmental and safety standards, could require us to make expenditures which
may be material or may otherwise adversely impact our operations.
The production of chemicals is associated with a variety of hazards which could
create significant liabilities or cause our facilities to suspend their
operations.
Our operations are subject to various hazards incident to the production of
chemicals, including the use, handling, processing, storage and transportation
of certain hazardous materials. These hazards, which include the risk of
explosions, fires and chemical spills or releases, can cause personal injury and
loss of life, severe damage to and destruction of property and equipment,
environmental damage, suspension of operations and potentially subject us to
lawsuits relating to personal injury and property damages. Any such event or
circumstance could have a material adverse effect on our results of operations
or financial condition.
Our facilities have been operated for many years by us or prior owners and
operators, and adverse environmental conditions of which we are not aware may
exist. The discovery of additional or unknown environmental contamination at any
of our current or former facilities, could have a material adverse effect on our
financial condition, cash flows and/or results of operations.
Efforts to comply with the Sarbanes-Oxley Act will continue to entail
significant expenditure; non-compliance with the Sarbanes-Oxley Act may
adversely affect us.
The Sarbanes-Oxley Act of 2002, as well as the rules subsequently
implemented by the
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Securities and Exchange Commission, have required, and may require in the
future, changes to certain of our accounting and corporate governance practices,
including the requirement that we issue a report on our internal controls as
required by Section 404 of the Sarbanes-Oxley Act. We expect these new rules and
regulations to continue to increase our accounting, legal, insurance and other
costs, and to make certain business activities more difficult, time consuming
and/or costly. In the event that we are unable to achieve and/or maintain
compliance with the Sarbanes-Oxley Act and related rules, this may have a
material adverse effect on us. These rules and regulations could also make it
more difficult for us to attract and retain qualified members of our board of
directors, particularly to serve on our audit committee, as well as qualified
executive officers.
The seasonal nature of the environmental services business could increase our
costs or have other negative effects.
Within our performance products segment, the environmental services
business has higher volumes in the second and third quarters of the year, owing
to higher spring and summer demand for sulfuric acid regeneration services from
gasoline refinery customers to meet peak summer driving season demand and higher
spring and summer demand from water treatment chemical customers to manage
seasonally high and low water conditions. The degree of seasonal peaks and
declines in the volumes of our environmental services business could increase
our costs, negatively impact our manufacturing efficiency, or have other
negative effects on our operations or financial performance.
We may not be able to obtain insurance at our historical rates and our insurance
coverage may not cover all claims and losses.
We maintain insurance coverage on our properties, machines, supplies and
other elements integral to our business and against certain third party
litigation, environmental matters and similar events. Due to recent changes in
market conditions in the insurance industry and other factors, we may not be
able to secure insurance at a similar cost to what we have previously paid, if
at all. In addition, there are certain types of losses, generally of a
catastrophic nature, such as earthquakes, floods, hurricanes, terrorism or acts
of war, that may be uninsurable or not economically insurable. Inflation,
changes in building codes and ordinances, environmental considerations, and
other factors, including terrorism or acts of war, also may make insurance
proceeds insufficient to repair or replace a property if it is damaged or
destroyed.
We are dependent upon many critical systems and processes, many of which are
dependent upon hardware that is concentrated in a limited number of locations.
If a catastrophe were to occur at one or more of those locations, it could have
a material adverse effect on our business.
Our business is dependent on certain critical systems, which support
various aspects of our operations, from our computer network to our billing and
customer service systems. The hardware supporting a large number of such systems
is housed in a small number of locations. If one or more of these locations were
to be subject to fire, natural disaster, terrorism, power loss, or other
catastrophe, it could have a material adverse effect on our business. While we
believe that we maintain reasonable disaster recovery programs, there can be no
assurance that, despite these efforts, any disaster recovery, security and
service continuity protection measures we have or may take in the future will be
sufficient.
In addition, computer viruses, electronic break-ins or other similar
disruptive technological problems could also adversely affect our operations.
Our insurance policies may not adequately compensate us for any losses that may
occur due to any failures or interruptions in our computer systems.
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We are a holding company that is dependent upon cash flow from our subsidiaries
to meet our financial obligations; our ability to access that cash flow may be
limited in some circumstances.
We are a holding company with no independent operations or significant
operating assets other than our investments in, and advances to, our
subsidiaries. We depend upon the receipt of sufficient funds from our
subsidiaries through our centralized cash management system from our domestic
subsidiaries and through dividends, loans or other distributions from our
foreign subsidiaries to meet our financial obligations. In addition, the terms
of our and our subsidiaries' existing indebtedness under the Credit Facilities,
and the laws of the jurisdictions under which we and our subsidiaries are
organized, limit the payment of dividends, loan repayments and other
distributions by our subsidiaries to us under some circumstances. Any
indebtedness that we, or our subsidiaries, may incur in the future may contain
similar restrictions. Further, certain of our subsidiaries have their own
indebtedness for which they are responsible which may limit their ability to
distribute cash to us.
Risks Related to Our Common Stock
The market price of our common stock is subject to volatility as well as trends
in our industries.
The market price of our common stock could be subject to wide fluctuations
in response to numerous factors, many of which are beyond our control. These
factors include, among other things, actual or anticipated variations in our
operating results and cash flow, the nature and content of our earnings releases
and our competitors' earnings releases, announcements of technological
innovations that impact our products, customers, competitors or markets, changes
in financial estimates by securities analysts, business conditions in our
markets and the general state of the securities markets and the market for
similar stocks, changes in capital markets that affect the perceived
availability of capital to companies in our industries, governmental legislation
or regulation, as well as general economic and market conditions, such as
recessions. Since the issuance of our common stock on the Effective Date, the
price of our common stock has been somewhat volatile and remains subject to
volatility. In addition, after giving effect to payment of the $31.00 per share
special dividend payable on March 16, 2005, the market capitalization and share
price of our common stock is expected to be reduced by the value of the
dividend, and the reduced market capitalization and lower share price may
subject our common stock to further volatility.
Trends in the industries in which we compete are likely to have a
corresponding impact on the price of our common stock. Specifically, an economic
downturn in the automotive industry as a whole or other events (e.g., labor
disruptions) resulting in significantly reduced operations at any of
DaimlerChrysler, Ford or General Motors, or at certain of our manufacturing
plants, could have a material adverse impact on the results of our manufacturing
segment. In addition, in the appliance and electronic and industrial markets,
risks include softening of appliance demand, loss of market share by our major
customers, continued price pressure from major customers and continued
competition from lower-cost Asian sources. For our performance products
business, continued weakness in the pulp and paper, electronics or chemical
processing industries could have an adverse effect on our results of operations.
Sales of large amounts of our common stock, or the perception that large sales
could occur, may cause volatility in our stock price.
On the Effective Date, we issued an aggregate of 10,000,000 shares of our
common stock to former holders of our debt securities and other claimants. These
shares represented all of our outstanding common stock as of the Effective Date
and may be sold at any time, subject to compliance with
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applicable law, including the Securities Act, and certain provisions of our
certificate of incorporation, bylaws and the Registration Rights Agreement. This
relatively small float of shares available for purchase/sale may result in share
price volatility in cases where an investor seeks, or is perceived to be
seeking, to acquire or divest a large block of shares in the public market.
We may not be able to maintain our listing on the NASDAQ National Market.
Since November 23, 2004, our common stock has traded on the NASDAQ National
Market, which requires that we maintain compliance with certain listing
requirements. These requirements include maintaining a minimum level of market
value of our common stock, minimum number of shareholders and minimum level of
stockholders' equity. There is no guarantee that we will remain in compliance
with such requirements in the future. A failure to do so may result in our
de-listing from the NASDAQ National Market, which could adversely effect the
price, liquidity and market for our common stock.
We may in the future seek to raise funds through equity offerings, the exercise
of our Tranche B and Tranche C warrants could create substantial dilution, or
there may be other events which would have a dilutive effect on our common
stock.
In the future we may determine to raise capital through offerings of our
common stock, securities convertible into our common stock, or rights to acquire
such securities or our common stock. In any such case, the result would
ultimately be dilutive to our common stock by increasing the number of shares
outstanding.
In addition, if options or warrants to purchase our common stock are
exercised, or other equity interests are granted under our management and
directors incentive plan or under other plans adopted in the future, such equity
interests will also have a dilutive effect on our common stock. Additional
shares of our common stock and additional warrants may be issued pursuant to the
Plan to certain claimants, subject to the resolution of certain claims.
In accordance with the terms of our Tranche B and Tranche C warrant
agreements, the $7.00 per share dividend paid to holders of common stock on
December 27, 2004 resulted in an increase of the number of common shares for
which the warrants are exercisable and a reduction of the exercise price of each
tranche of warrants. The $31.00 per share dividend declared on February 28, 2005
and payable on March 16, 2005, is expected to result in a further, substantial
increase of the number of common shares for which the warrants are exercisable
and a substantial reduction in the exercise price of each tranche of warrants.
In addition, similar equitable adjustments have been and will be made to options
granted under our management and directors incentive plan. These adjustments to
the warrants and options may have a material dilutive effect on our common
stock.
In the event that the holders of California Tort Claims (as defined in the
Plan) prevail on their asserted claims against us and our insurance does not
cover such claims, stock and warrants would be issued to holders of such claims
and dilution of any outstanding shares of our common stock would occur. Although
we believe we have meritorious defenses to the California Tort Claims and, if
our insurance covers this liability, that we have sufficient insurance coverage
to satisfy any liquidated amounts relating to such claims, there can be no
assurance this will be the case. Under the Plan, holders of California Tort
Claims, to the extent they are determined to hold allowable claims not covered
by insurance, will receive additional shares of our common stock and warrants
beyond those reserved for general unsecured creditors, in an amount that will
provide the same percentage recovery as received by general unsecured creditors.
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We cannot predict the effect any such dilution may have on the price of our
common stock.
Certain transfer restrictions on our common stock imposed by our charter may
inhibit market activity in our common stock.
Our common stock is subject to certain transfer restrictions imposed by our
charter. These restrictions generally prohibit the following transfers of our
equity securities without the prior written consent of our board of directors,
which consent can be withheld only if our board of directors, in its sole
discretion, determines that the transfer creates a material risk of limiting
certain tax benefits: (i) transfers to a person (including any group of persons
making a coordinated acquisition) who beneficially owns, or would beneficially
own after the transfer, more than 4.75 percent of the total value of our
outstanding equity securities, to the extent that the transfer would increase
such person's beneficial ownership above 4.75 percent of the total value of our
outstanding equity securities and (ii) transfers by a person (or group of
persons having made a coordinated acquisition) who beneficially owns more than
4.75 percent of the total value of our outstanding equity securities. The
restrictions are not applicable to transfers pursuant to a tender offer to
purchase 100 percent of our common stock for cash or marketable securities so
long as such tender offer results in the tender of at least 50 percent of our
common stock then outstanding. While all transactions described above require
that prior notice be given to our board of directors, the restrictions begin
only at such time that 25 percent of the our common stock has been transferred,
for tax purposes (which generally takes into consideration only transfers to or
from shareholders who beneficially own 5 percent of the value of our common
stock), and will remain in effect until the earlier of: (i) November 11, 2005 or
(ii) such date as the board of directors determines, in its sole discretion,
that such restrictions are no longer necessary to protect tax benefits. These
transfer restrictions may inhibit market activity in our common stock.
Item 2. Properties.
The Company operates over 60 manufacturing and production facilities
located in the United States, Canada, Mexico and India. The Company's
headquarters are located in Parsippany, New Jersey.
Set forth below are the locations and uses of the Company's major
properties:
Location Use
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Manufacturing Segment
Southfield, Michigan(1)........... Offices
Troy, Michigan(1)................. Production Facility and Offices
Westland, Michigan(1)............. Production Facility and R&D Center
Weaverville, North Carolina(2).... Production Facility
Upper Sandusky, Ohio(1)........... Production Facility
Toledo, Ohio...................... Production Facility
Defiance, Ohio(2)................. Production Facility
Perrysburg, Ohio(2)............... Production Facility and Offices
Mineral Wells, Texas.............. Production Facility
Imuris, Mexico.................... Production Facility
Juarez, Mexico(1)................. Production Facility
Reynosa, Mexico(1)................ Production Facility
Concord, Ontario.................. Production Facility
Guelph, Ontario(1)................ Production Facility
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Scarborough, Ontario.............. Production Facility
Stouffville, Ontario.............. Production Facility
Tillsonburg, Ontario(1)........... Production Facility
Waterdown, Ontario................ Production Facility
Gandhinagar, India................ Production Facility
Performance Products Segment
Hollister, California(2).......... Production Facility and Offices
Pittsburg, California(2).......... Production Facility
Richmond, California(2)........... Production Facility
Augusta, Georgia.................. Production Facility
East St. Louis, Illinois.......... Production Facility
Berkeley Heights, New Jersey(2)... Production Facility, Offices and Warehouse
Newark, New Jersey(2)............. Production Facility
Solvay, New York.................. Production Facility
Celina, Texas..................... Production Facility
Midlothian, Texas................. Production Facility
Anacortes, Washington............. Production Facility
Thorold, Ontario.................. Production Facility
Valleyfield, Quebec............... Production Facility
Offices
Parsippany, New Jersey(1)......... Headquarters
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(1) Leased.
(2) Mortgaged as security under the Company's debt facilities.
Item 3. Legal Proceedings.
The Company is involved in claims, litigation, administrative proceedings
and investigations of various types, including the Richmond litigation discussed
below, and certain environmental proceedings previously discussed. See "Item 1.
Business - Environmental Matters" above. Although the amount of any liability
that could arise with respect to these actions cannot be accurately predicted,
the opinion of management based upon currently-available information is that any
such liability not covered by insurance will have no material adverse effect on
the Company's results of operations, cash flows or financial condition.
Richmond Litigation. Prior to October 2002, lawyers claiming to represent
more than 47,000 persons filed approximately 24 lawsuits in several counties in
California state court (Alameda, Contra Costa, San Francisco superior courts),
making claims against General Chemical Corporation and, in some cases, a third
party arising out of May 1, 2001 and/or November 29, 2001 releases of sulfur
dioxide and/or sulfur trioxide from the Company's Richmond, California sulfuric
acid facility. These claims were addressed in the Plan as California Tort
Claims.
The first case was filed in 2001 and subsequent cases were filed from March
through July 2002. On May 1, 2002, a class action lawsuit arising out of the
same facts was also filed. The lawsuits claim various damages for alleged
injuries, including, without limitation, claims for personal injury, emotional
distress, medical monitoring, nuisance, loss of consortium and punitive damages.
The Company filed a petition for coordination to consolidate the state court
cases before a single judge. The petition for coordination has now been granted
and follow-on petitions to add additional cases to the coordinated proceedings
have been granted. The state court cases were stayed as a result of the Filing.
Approximately
-20-
73,000 proofs of claim were submitted in the bankruptcy proceedings on behalf of
the Richmond claimants, seeking damages for the May 1, 2001 and/or November 29,
2001 releases. A preliminary review of the claimant list indicated that the
claimants included most of the plaintiffs in the state court cases, plus several
thousand duplicates and some additional claimants. In addition, one class proof
of claim was submitted. A motion for class certification was filed but the
motion was later withdrawn subject to being re-filed in state court. The Company
filed a motion to lift the automatic stay and discharge injunction to allow
liquidation of the claims to proceed in California State Court. That motion was
granted upon stipulation of the parties, and the action is proceeding in
California State Court.
In June, 2004, the plaintiffs filed a Master Complaint that is intended to
supersede the prior pleadings on behalf of individual plaintiffs. The Master
Complaint seeks damages and other remedies arising out of the May 1, 2001 and
November 29, 2001 releases based upon causes of action, among others, for
negligence, Business and Professions Code Section 17200, nuisance and trespass.
The Master Complaint also names Latona Associates Inc., Matthew Friel (GenTek's
Chief Financial Officer at the time) and Paul Montrone (a former director and
shareholder of GenTek) as defendants. The class action complaint was also
amended in June 2004 to add these additional defendants. The Company has
answered the complaints. Since that time, plaintiffs have agreed to dismiss Mr.
Friel from the litigation without prejudice. Pursuant to the provisions of its
management agreements with Latona and other applicable provisions, the Company
is also providing a defense for Latona Associates Inc., Paul Montrone and
Matthew Friel in connection with the master complaint and amended class action
complaint.
The state court has entered several case management orders for the first
phase of the cases, including the requirement that plaintiffs complete
questionnaires regarding their claims by October 25, 2004 or their claims are
subject to dismissal upon motion by the Company. The Company recently filed a
motion to dismiss approximately 41,000 of the 73,000 proofs of claim for failure
to submit questionnaires. Hearings on the motion will be held on March 18, 2005,
and April 20, 2005. The parties are in active written and document discovery.
Depositions are expected to commence in the Spring of 2005 and a mediation has
been scheduled for April 26, 2005. No trial date has been set.
Any recovery by the plaintiffs in these lawsuits against GenTek will be
limited as provided in the Plan. Pursuant to the terms of the Plan, GenTek could
be required to issue new shares of common stock, cash in-lieu-of Tranche A
Warrants, and Tranche B and C Warrants in accordance with the terms of the Plan
to the extent insurance is not available to cover any allowed amount of such
claim.
Other Claims. The Company is subject to various other claims and legal
actions that arise in the ordinary course of business. Claims and legal actions
against the Debtors that existed as of the date of the Filing are subject to the
automatic stay and/or discharge injunction, and recoveries sought thereon from
assets of the Debtors were dealt with in the Chapter 11 cases pursuant to the
terms of the Plan or, where applicable, orders of the Bankruptcy Court.
Item 4. Submission of Matters to a Vote of Security Holders.
No items were submitted to a vote of security holders of the Company,
through the solicitation of proxies or otherwise, during the fourth quarter of
fiscal 2004.
-21-
PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and
Issuer Purchases of Equity Securities.
Market Information
On November 10, 2003, both classes of our previously existing common stock
were cancelled in connection with our emergence from Chapter 11 protection, and
we issued new common stock. Our existing common stock has been quoted on the
NASDAQ National Market since November 23, 2004, the Over the Counter Bulletin
Board (OTCBB) from November 11, 2003 until November 22, 2004, in both cases
under the symbol "GETI".
The following table sets forth, for the period indicated, the high and low
sale prices in dollars as quoted on the NASDAQ National Market and the OTCBB, as
applicable, for our existing common stock.
High Low
------ ------
2004
First Quarter................................................. $42.00 $35.00
Second Quarter................................................ $40.95 $37.40
Third Quarter................................................. $44.00 $37.05
Fourth Quarter................................................ $51.87 $40.05
2003
November 11, 2003 through December 31, 2003................... $37.00 $34.75
The Company's previously existing common stock was traded on the Over The
Counter Bulletin Board under the symbol "GNKIQ" until November 10, 2003. There
was no established public trading market for the Company's previously existing
Class B Common Stock. The table below shows the high and low recorded sales
prices of the Company's previously existing common stock.
High Low
------ ------
2003
First Quarter................................................. $0.022 $0.010
Second Quarter................................................ $0.036 $0.008
Third Quarter................................................. $0.008 $0.003
October 1 through November 10, 2003........................... $0.007 $0.003
As of March 10, 2005, there were 2,209 stockholders of record of the
Company's common stock.
Dividends
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005. The Company paid
a special dividend of $7.00 per share on December 27, 2004. No dividends were
paid in 2003. We currently intend to retain our earnings for use in the
operation and expansion of our business and for debt service and, therefore, we
do not anticipate paying regular cash dividends in the foreseeable future.
Additionally, the Company's new credit facilities directly limit the ability of
the Company to pay cash dividends.
-22-
Equity Compensation Plan Information
The following table gives information about our existing Common Stock that
may be issued upon the exercise of options, warrants and rights under our 2003
Management and Directors Incentive Plan as of December 31, 2004.
- -------------------------------------------------------------------------------------------------------
Equity Compensation Plan Information
- -------------------------------------------------------------------------------------------------------
Number of Securities
Number of Securities remaining available for
to be issued upon Weighted average future issuance under
exercise of outstanding exercise price of equity compensation plans
options, warrants and outstanding options, (excluding securities
rights warrants and rights reflected in column (a))
Plan Category (a) (b) (c)
- -------------------------------------------------------------------------------------------------------
Equity compensation plans
approved by security
holders 0 N/A 0
- -------------------------------------------------------------------------------------------------------
Equity compensation plans
not approved by security
holders 152,568 $31.14 748,860(1)
- -------------------------------------------------------------------------------------------------------
Total 152,568 $31.14 748,860
- -------------------------------------------------------------------------------------------------------
- ----------
(1) Available for issuance under the 2003 Management and Directors Incentive
Plan. This plan was approved by the bankruptcy court and became effective
on November 10, 2003 concurrent with the effective date of the Plan of
Reorganization.
2003 Management and Directors Incentive Plan
Pursuant to the Company's 2003 Management and Directors Incentive Plan,
employees and directors of the Company and its subsidiaries may be granted stock
options, restricted stock, stock appreciation rights, performance share awards,
dividend equivalent rights or any other stock-based awards. The compensation
committee of the Board has the authority to select participants and determine
grants of awards. The maximum number of shares with respect to which any awards
may be granted during a calendar year to any participant is 100,000. Upon a
"change in control" of the company, unless otherwise determined by the
compensation committee, each outstanding award shall automatically become fully
exercisable. The Board may, at any time, amend or discontinue the plan and the
compensation committee may, at any time, amend or cancel any outstanding award
or provide substitute awards in accordance with the plan, provided that such
action does not adversely affect the participant. The term of the Plan is 10
years.
-23-
Item 6. Selected Financial Data.
The following selected consolidated financial data of the Company have been
derived from and should be read in conjunction with the Company's Consolidated
Financial Statements. In connection with its emergence from bankruptcy on
November 10, 2003, the Company has adopted fresh-start reporting in accordance
with SOP 90-7. Accordingly, the Company's post-emergence financial statements
("Successor") will not be comparable with its pre-emergence financial statements
("Predecessor").
Successor Company Predecessor Company
--------------------------- ----------------------------------------------------
Years Ended December 31,
Year Ended Period Ended Period Ended --------------------------------------
December 31, December 31, November 10,
2004 2003 2003 2002 2001 2000
------------ ------------ ------------ --------- ---------- ----------
(In thousands, except per share data)
Statement of Operations Data:
Net revenues................................ $843,919 $ 95,420 $687,629 $ 861,465 $ 870,215 $ 939,595
Restructuring and impairment charges........ 10,848 293 24,480 -- 108,953 --
Operating profit (loss)..................... 36,297 4,856 19,704 63,536 (51,432) 105,295
Interest expense............................ 8,557 2,453 900 59,342 73,544 69,339
Income (loss) from continuing
operations(1)(2)......................... 5,611 1,936 466,090 (100,318) (89,622) 19,382
Income (loss) from discontinued operations.. 189,707 (844) 28,302 (99,206) (81,222) 30,859
Net income (loss)(1)(2)..................... $195,318 $ 1,092 $494,392 $(360,649)(3) $ (170,844) $ 50,241
Per Share:
Income (loss) from continuing operations--
basic(1)(2).............................. $ 0.56 $ 0.19 $ 18.23 $ (3.93) $ (3.52) $ 0.79
Income (loss) from continuing operations--
diluted(1)(2)............................ 0.56 0.19 18.23 (3.93) (3.52) 0.77
Net income (loss)--basic(1)(2).............. 19.53 0.11 19.34 (14.13)(3) (6.72) 2.04
Net income (loss)--diluted(1)(2)............ 19.48 0.11 19.34 (14.13)(3) (6.72) 1.99
Dividends(4)................................ 7.00 -- -- -- 0.15 0.20
Balance Sheet Data (at end of period):
Total assets................................ $753,626 $1,066,809 $ 956,985 $1,164,843 $1,350,722
Long-term debt (including current portion).. 12,536 251,188 922,683 815,557 796,676
Total equity (deficit)...................... 400,427 278,787 (510,321) (142,337) 47,658
- ----------
(1) Includes a decrease to the deferred tax asset valuation allowance of $98.5
million ($3.85 per share) in 2003, and an increase to the deferred tax
asset valuation allowance of $97.7 million ($3.83 per share) in 2002 to
record a valuation allowance for the Company's net domestic deferred tax
assets.
(2) Includes reorganization items of $416.1 million ($16.28 per share) of
income for the period ended November 10, 2003 and $11.6 million ($0.46 per
share) of expense in 2002.
(3) Includes the cumulative effect of a change in accounting principle of
$161.1 million ($6.31 per share).
(4) During 2004, the Company paid a special dividend of $7.00 per share. During
the fourth quarter of 2001, the Company suspended the payment of regular
quarterly dividends.
-24-
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following section should be read in conjunction with the consolidated
financial statements and the notes indicated elsewhere in this Annual Report.
This Annual Report on Form 10-K includes forward-looking statements within the
meaning of the Private Securities Litigation Reform Act of 1995. Certain
statements, other than statements of historical facts, included in this Annual
Report may constitute forward-looking statements. Forward-looking statements are
generally identifiable by use of forward-looking terminology such as "may,"
"will," "should," "potential," "intend," "expect," "endeavor," "seek,"
"anticipate," "estimate," "overestimate," "underestimate," "believe," "could,"
"project," "predict," "continue" or other similar words or expressions. The
Company has based these forward-looking statements on its current expectations
and projections about future events. Although the Company believes that its
assumptions made in connection with the forward-looking statements are
reasonable, there can be no assurances that these assumptions and expectations
will prove to have been correct. Important factors that could cause actual
results to differ from these expectations are disclosed in this Annual Report
and include various risks, uncertainties and assumptions. Such factors include,
but are not limited to, those set forth in the section of this annual report
captioned "Business - Risk Factors".
Management's Discussion and Analysis of Financial Condition and Results of
operations contains non-GAAP financial measures within the meaning of Regulation
G promulgated by the Securities and Exchange Commission. Included in Item 7.
Reconciliation of Non-GAAP Financial Measures 2003 is a reconciliation statement
of operations data for the full year 2003 to the Predecessor Company and
Successor Company statements of operations for the periods ended November 10,
2003 and December 31, 2003, respectively. Management believes that this
information is the most relevant and useful formation for making comparisons to
the periods ended December 31, 2002 and 2004. References to the full year 2003
throughout this Discussion refer to the above-mentioned information.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report might not occur.
Dividends and Recapitalization
On December 27, 2004, the Company paid a special dividend of $7.00 per
common share, totaling approximately $71 million, which was funded primarily
from excess cash generated from the sale of the Company's KRONE communications
business.
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005 to holders of
record on March 10, 2005. Also, on February 28, 2005, GenTek closed on a secured
financing consisting of $370 million of term loans and a $60 million revolving
credit facility. The Company will use approximately $313 million of the
financing proceeds to pay the special dividend and $35 million of the proceeds
to pre-fund certain defined benefit pension obligations. The remainder of the
proceeds will be used to pay transaction fees, to refinance existing debt and
for general corporate purposes. In connection with the closing of the new
financing, the Company will record a charge of approximately $3 million to
write-off deferred financing costs of its existing debt facility during the
first quarter of 2005. The payment of the two special dividends and the closing
on the financing reflect the completion of the Company's recapitalization plan.
The Company believes these actions provide substantial value to current holders
of common stock and establish a more appropriate capital structure for the
Company.
-25-
Acquisition
On June 30, 2004, the Company acquired a wire harness and subassembly
manufacturing operation located in Reynosa, Mexico from Whirlpool Corporation
for $8.4 million. As part of the transaction, the Company entered into a seven
year supply agreement to supply wire harnesses, panel assemblies, copper tubing
and related components to Whirlpool's North American appliance production
facilities. The results of operations of the facility have been included in the
financial statements beginning July 1, 2004. The pro forma impact of the
acquisition on financial position, net income and earnings per share is not
material. Revenues from the supply agreement were approximately $80 million for
the six month period ending December 31, 2004.
Honeywell Settlement Agreement
On April 30, 2004, the Company and Honeywell International Inc.
("Honeywell") entered into a settlement agreement relating to the Company's
proposed rejection in the Company's bankruptcy proceeding of certain executory
contracts dealing with environmental issues at sites formerly owned by
Honeywell's predecessor, along with certain other claims made by Honeywell. The
settlement agreement provides, among other things, that the Company will
transfer ownership of two sites to Honeywell in exchange for Honeywell assuming
all environmental liabilities at these sites, along with any groundwater
contamination at another site. In addition, Honeywell agreed to share with the
Company the costs of certain environmental remediation at two other sites that
will continue to be owned by GenTek. The impact of the settlement agreement was
to record a receivable of $6 million, record a recovery asset of approximately
$3 million offset by the approximately $2 million book value of sites to be
transferred to Honeywell, resulting in a net credit to income of $7 million. In
addition, the Company recorded employee termination and facility exit costs of
$3 million relating to one of the sites to be transferred to Honeywell.
Discontinued Operations
On May 18, 2004, the Company sold its KRONE communications business to ADC
Telecommunications, Inc. (ADC). Accordingly, all financial information included
herein has been reclassified to reflect the KRONE communications business as
discontinued operations. Net proceeds from the transaction of approximately $291
million were used to repay the Company's then-outstanding Senior Term Loan
Agreement in full, and the related loan agreement was terminated. Consummation
of this transaction triggered the contingent redemption feature of the Company's
tranche A warrants. The Company made the required payment of $8.4 million ($7.13
per warrant) on June 30, 2004, and the tranche A warrants expired.
Reorganization under Chapter 11 of the U.S. Bankruptcy Code
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 in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). The Debtors' cases were jointly
administered as Case No. 02-12986 (MFW).
The Debtors filed for relief under Chapter 11 as a result of the Company's
inability to obtain an amendment to its pre-petition senior credit facility. The
protection afforded by Chapter 11 allowed the Debtors to continue to serve their
customers and preserve the value of their businesses, while they
-26-
reorganized and worked to develop and implement a strategic plan to deleverage
the Company's balance sheet and create an improved long-term capital structure.
On October 7, 2003, the Bankruptcy Court entered an order confirming the
Debtor's plan of reorganization (the "Plan"). The Plan became effective in
accordance with its terms on November 10, 2003 (the "Effective Date").
Pursuant to the provisions of the Plan, in full satisfaction of their
allowable claims: (i) the holders of existing secured claims under the Company's
pre-petition credit facility (excluding the tranche in which Noma Company is a
borrower to the extent such holders were secured by Noma) initially received
approximately 81 percent of the common stock of the reorganized Company (the
"Reorganized Company"), $60 million in cash (reduced by certain payments) and
$216.5 million principal amount of senior term notes issued by the Reorganized
Company; (ii) holders of existing secured claims under the term loan facility to
Noma Company under the Company's pre-petition credit facility received
approximately 13 percent of the common stock of the Reorganized Company and
$33.5 million principal amount of Senior Term Loan Agreement issued by the
Reorganized Company; (iii) holders of general unsecured claims and trade vendor
claims who elected to receive equity in the Reorganized Company on account of
their claims received a pro rata distribution of up to approximately 2 percent,
in the aggregate, of the common stock of the Reorganized Company and warrants to
purchase additional shares of the common stock of the Reorganized Company; (iv)
holders of general unsecured claims and trade vendor claims that elected not to
receive equity of the Reorganized Company received an amount in cash equal to
the lesser of (A) 6 percent of each such holder's allowed claim or (B) each such
holder's pro rata share of $5 million; (v) holders of unsecured claims relating
to the Company's existing bonds received approximately 4 percent of the common
stock of the Reorganized Company and warrants to purchase additional shares of
the common stock of the Reorganized Company; (vi) upon the liquidation of their
disputed claims, holders of California Tort Claims (as defined in the Plan), to
the extent they are determined to hold allowable claims, will receive the same
treatment of any uninsured portion of their claims (excluding any portion of
such claims attributable to noncompensatory damages) as they would have received
had such claims been classified as general unsecured claims (except that such
holders will not be entitled to elect cash instead of equity); (vii) holders of
Pennsylvania Tort Claims (as defined in the Plan) received, through their class
representative, an aggregate distribution of $120,000 in cash, a note in the
principal amount of $675,000, and a payment from the Debtors' insurer; and
(viii) holders of claims described in subsections (i), (iii), (iv), (v) and
(vi) above will be entitled to receive a portion of any amounts recovered by a
preference claim litigation trust created pursuant to the Plan. In addition to
the foregoing, pursuant to the Plan administrative expense claims, priority
claims, convenience claims, a secured claim of the Company against Noma Company
in the amount of approximately $5.7 million and certain other secured claims,
were paid in full. Furthermore, the Plan provided for the cancellation of all
then outstanding shares of common stock of the Company without any distribution
to be made to the holders of such shares.
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. In connection with its emergence
from bankruptcy on November 10, 2003, the Company has adopted fresh-start
reporting in accordance
-27-
with SOP 90-7. Accordingly, the Company's post-emergence financial statements
("Successor") will not be comparable with its pre-emergence financial statements
("Predecessor").
Overview
We are a holding company whose subsidiaries manufacture industrial
components and performance chemicals. We operate through two primary business
segments: manufacturing and performance products. Our products are frequently
highly engineered and are important components of, or provide critical
attributes to, our customers' end products or operations. We operate over 60
manufacturing and production facilities located primarily in the U.S., Canada,
Mexico and India. GenTek has no independent operations and, therefore, is
dependent upon cash flow from its subsidiaries to meet its obligations.
Manufacturing
The manufacturing segment provides a broad range of engineered components
and services to three principal markets: automotive, appliance and electronic,
and industrial. During the last two years the Company's sales and operating
profits have been adversely impacted by our major customers' efforts to reduce
their costs. Pricing pressure by the "Big Three" (Ford, Chrysler and General
Motors) North American auto manufacturers and Tier 1 suppliers has resulted in
lower selling prices and lower volumes as our major customers have resourced
business to competitors in the Far East or to their own in house facilities.
Sales to the automotive market, which accounted for approximately 50 percent of
the manufacturing segment's revenue in 2004, have declined approximately 13
percent over the last two years, due in large part to the pricing and resourcing
issues discussed above. The Company expects that sales in this market will
remain essentially unchanged in 2005. Sales related to the appliance and
electronics market have also been negatively impacted by similar pricing
pressures and lower volumes. Sales to the appliance and electronics market,
which accounted for approximately 30 percent of the manufacturing segment's
revenues in 2004, however, have increased by approximately 50 percent over the
last two years primarily due to the impact of the acquisition of a wire harness
sub assembly manufacturing facility in Reynosa, Mexico from Whirlpool
Corporation on June 30, 2004. As part of this transaction, the Company entered
into a seven-year supply agreement to supply wire harnesses, panel assemblies,
copper tubing and related components to Whirlpool's North American appliance
production facilities. The gross profit margins generated on the revenues from
this supply agreement are significantly lower than the gross profit margins
generated on the other revenues in this market. Over the next several years the
Company intends to improve gross profit margins on this incremental revenue and
on other products as well by moving the production of the related products to
its new manufacturing facility in India and by consolidating a portion of its
production from other manufacturing facilities to the facility in Reynosa. The
Company anticipates that sales in the appliance and electronics market will
increase by approximately 50 percent in 2005 due to the full year impact of the
acquisition made in 2004. In response to these competitive pressures from
offshore suppliers in the automotive and appliance and electronics markets, the
manufacturing segment has taken aggressive action to improve its cost position.
We have closed certain facilities, reduced headcount and other operating
expenses, and outsourced production of certain less complex components to lower
cost, third party manufacturers in Asia. In addition, as part of our continuing
efforts to improve our competitive cost position, we have established our own
wire harnesss production facility in India, which commenced production of
prototypes during the fourth quarter of 2004 and commercial quantities during
the first quarter of 2005. Sales to the industrial market, which account for
approximately 20 percent of the manufacturing segment's revenues, have increased
28 percent over the two year period principally due to the impact of the pass
through of
-28-
higher raw material prices for copper as well as the favorable impact of
exchange rate fluctuations. The Company expects that sales in this market will
remain essentially unchanged in 2005.
Due to our dependence on the North American automotive market, production
levels of the automotive OEMs, especially the Big Three, influence the
manufacturing segment's sales and profitability. The North American automobile
and light truck "build rate" is one commonly used indicator of such production
levels. More specifically, though, the production levels of the individual
engine programs that we supply impact our sales and profitability in the
automotive market. Our revenues in this market are also influenced, to a lesser
degree, by the North American "class 8" heavy truck build rate. In the appliance
and electronic market, shipments of household appliances are one indicator of
overall industry production levels.
Profitability in our manufacturing segment can be influenced by a number of
factors, including: production levels at our individual manufacturing
facilities, as well as the volume and consistency of production levels at our
customers' manufacturing facilities; demands from our customers to reduce the
prices of our products; the prices we pay for key raw materials such as steel;
and transportation costs.
Performance Products
The performance products segment provides a broad range of value-added
chemical products and services to four principal markets: environmental
services, pharmaceutical and personal care, technology and chemical processing.
Sales to the environmental services and chemical processing markets, which
account for approximately 65 percent of the performance products segment's
revenues, have declined approximately 13 percent over the last two years. This
decrease is principally due to the shutdown of the South Plant of the Company's
Delaware Valley Works and restructuring of the North American sulfur derivatives
business. The Company anticipates that sales to the environmental services and
chemical processing markets will improve modestly in 2005. Sales to the
pharmaceutical and personal care market, which account for approximately 20
percent of the performance products segment's revenue, declined by approximately
10 percent over the last two years. The sales decline for 2003 was 13 percent as
a result of the Company's sale of its antacid product line. Sales for 2004 were
up 4 percent over the 2003 level. The Company anticipates sales to this market
in the year 2005 will be approximately 5 percent lower than the 2004 level.
Sales to the technology market, which account for approximately 13 percent of
the performance products segment's revenues, have declined by approximately 4
percent during the two year period. The Company anticipates that sales into this
market will grow by approximately 10 percent in 2005 due mainly to the emerging
recovery in the North American microelectronics industry. The profitability of
our performance products segment has also been negatively impacted in recent
years by cyclically high raw material prices. While we believe that some of this
price pressure will subside in future periods, we cannot be certain of the
timing or magnitude of any such price decreases.
In the environmental services market, our revenues are derived principally
from the sale of sulfuric acid regeneration services to large oil refineries on
the West Coast of the United States and from the sale of water treatment
chemicals to municipalities. In the chemical processing market, our revenues are
principally derived from the sale of water treatment chemicals, sulfuric acid
and sodium nitrite which are used in the manufacture of paper, dyes, pigments,
fertilizers as well as many other products. In the pharmaceutical and personal
care market, GenTek's revenues and profitability are driven by sales of active
ingredients to manufacturers of antiperspirants, with such manufacturers'
production levels influenced by antiperspirant market share trends and new
product introductions. Our sales in the technology market are influenced by
North American production levels of semiconductor devices.
-29-
Profitability in our performance products segment can be influenced by a
number of factors, including: competitive market conditions; production levels
at our individual manufacturing facilities; energy costs, including the prices
of natural gas and electricity; the prices we pay for our key raw materials,
including sulfur, bauxite, aluminum tri-hydrate and zirconium-based products;
and transportation costs.
Corporate and Other
As a result of the reclassification of the KRONE communications business to
discontinued operations, the communications segment is no longer a reportable
segment. Accordingly, included in corporate and other is the results of the
Company's printing plate product lines along with corporate administrative
expenses. As a result of the increased leverage, we anticipate that interest
expense will substantially increase in 2005.
Results of Operations
The following table sets forth certain line items from our Consolidated
Statements of Operations for the three years ended December 31, 2004 and the
corresponding percentage of net revenues for the relevant periods presented as a
percentage of revenue for the periods indicated. As previously discussed, the
Company emerged from Chapter 11 and adopted fresh start accounting on November
10, 2003. As a result of the application of fresh start accounting, the
Successor Company's financial statements are not comparable with the Predecessor
Company's financial statements.
Years Ended December 31,
---------------------------------------------
2004 2003 2002
------------ ------------- --------------
(In millions)
Net revenues .................................. $843.9 100% $ 783.1 100% $ 861.5 100%
Cost of sales ................................. 726.9 85 644.9 83 701.1 82
Selling, general and administrative expense ... 84.7 10 88.8 11 96.9 11
Restructuring and impairment charges .......... 10.8 2 24.8 3 -- --
Pension curtailment gain ...................... 14.8 2 -- -- -- --
------ --- ------- --- ------- ---
Operating profit (loss) ..................... 36.3 5 24.6 3 63.5 7
Interest expense .............................. 8.6 1 3.4 -- 59.3 7
Interest income ............................... 0.8 -- 0.4 -- 1.4 --
Reorganization items .......................... -- -- (416.1) (53) 11.6 1
Other (income), net ........................... 8.9 1 (7.1) (1) (1.5) --
Income tax provision (benefit) ................ 14.0 2 (23.2) (3) 95.8 11
------ --- ------- --- ------- ---
Income (loss) from continuing operations
before cumulative effect of a change
in accounting principle .................. $ 5.6 1% $ 468.0 60% $(100.3) (12)%
====== === ======= === ======= ===
2004 Compared with 2003
Net revenues were $844 million for the year 2004 compared with $783 million
for the prior year. This increase was due to higher sales in the manufacturing
segment of $89 million, partially offset by lower sales in the performance
products segment and corporate and other of $19 million and $9 million,
-30-
respectively. The increase in the manufacturing segment is principally the
result of higher sales to the appliance and electronic and industrial markets of
$71 million and $18 million, respectively. The increase in revenues in the
appliance and electronics market is principally due to the acquisition of a wire
harness and subassembly manufacturing facility from Whirlpool Corporation on
June 30, 2004, partially offset by lower sales to a major customer as a result
of them resourcing their supply to a Far East competitor. As part of this
acquistion, the Company entered into a seven-year supply agreement to supply
wire harnesses, panel assemblies, copper tubing and related components to
Whirlpool's North American appliance production facilities. Revenues related to
this supply agreement were approximately $80 million for the six-month period
ended December 31, 2004. The increase in revenues in the industrial market is
primarily due to the impact of the pass through of higher raw material prices
for copper as well as the favorable impact of exchange rate fluctuations. The
decrease in the performance products segment is due to lower sales in the
Company's sulfuric acid and fine chemical product lines of $17 million and $15
million, respectively, reflecting the shutdown of the South Plant of the
Company's Delaware Valley Works and restructuring of the North American sulfur
derivatives business. This decrease was partially offset by higher sales of $7
million for the Company's water chemical product line, due principally to the
impact of the pass through of higher raw material prices and higher sales of the
Company's electronic chemical and personal care product lines of $3 million and
$2 million, respectively. The decrease in corporate and other is principally due
to lower volumes for the Company's printing plate product lines. The Company has
announced it will close its printing plate production facility during the first
half of 2005.
Gross profit was $117 million for the year 2004 as compared with $138
million for 2003. This decrease reflects lower gross profit in performance
products, manufacturing and corporate and other of $11 million, $6 million, and
$4 million, respectively. The decrease in gross profit in the performance
products segment is principally due to higher environmental costs of $5 million,
higher depreciation and amortization expense of $8 million as a result of fresh
start accounting and the impact of the above-mentioned lower sales in the
sulfuric acid and fine chemical product lines, partially offset by the favorable
impact of the Honeywell settlement of $7 million. The charge for environmental
matters is related to incremental costs associated with the receipt of sampling
results related to a corrective action program at one of the Company's
performance products manufacturing facilities and incremental costs associated
with the regulatory requirements of closing an impoundment unit at another one
of the Company's performance products manufacturing facilities. The decrease in
gross profit in the manufacturing segment is principally due to higher
depreciation and amortization expense of $9 million as a result of fresh start
accounting partially offset by the above-mentioned higher sales in the
industrial market. The increase in revenue due to the Whirlpool supply agreement
discussed above did not have a significant impact on gross profit. The lower
gross profit in corporate and other reflects the impact of the above-mentioned
lower sales volume of the Company's printing plate product line.
Selling, general and administrative expense was $85 million for the year
2004, as compared with $89 million for 2003. This decrease is principally due to
lower management agreement expense, lower salaries and lower pension expense,
partially offset by higher consulting and audit expense. The higher consulting
and audit expense is principally related to efforts to comply with Section 404
of the Sarbanes-Oxley Act of 2002.
Restructuring and impairment charges were $11 million for the year 2004 as
compared with charges of $25 million for 2003. The charges recorded during 2004
are associated with the closure of four production facilities. The charge for
2003 was recorded to reduce the carrying value of the fixed assets at the South
Plant of the Company's Delaware Valley Works to estimated fair value, which was
determined based upon a number of factors including an analysis of market
transactions for similar
-31-
assets. The Company will continue to review its operations, and may record
additional restructuring charges to tailor its cost structure to current
economic conditions.
During the first quarter of 2004, the Company notified its employees that
benefit accruals in defined benefit pension plans covering domestic salaried and
certain hourly employees would be frozen effective April 1, 2004. As a result, a
curtailment gain of approximately $15 million was recognized during the first
quarter of 2004.
Operating income was $36 million for the year 2004 as compared with $25
million for the prior year. This increase is principally due to the higher level
of restructuring and impairment charges recorded during 2003, the
above-mentioned pension curtailment gain and lower selling, general and
administrative expense, partially offset by the above-mentioned lower gross
profit.
Interest expense was $9 million for the year 2004 as compared to $3 million
for the prior year. Interest expense for the year 2004 consisted principally of
interest expense on the Company's $250 million senior term loan agreement due
November 2008 ("Senior Term Loan Agreement") and $125 million revolving credit
facility due November 2008 ("Revolving Credit Facility"). During 2003 no
interest expense was recorded on the Company's pre-petition senior credit
facility and 11% Senior Subordinated Notes. The Company made adequate protection
payments to its senior creditors prior to its emergence from bankruptcy which
have been treated for accounting purposes as reductions in principal. Interest
expense for the Company's Senior Term Loan Agreement and its Revolving Credit
Facility was $2 million for the period from emergence on November 11, 2003
through December 31, 2003. As of December 31, 2004 the Company has repaid its
Senior Term Loan Agreement in full.
There were no reorganization items for the year 2004 as compared with $416
million of income for 2003. Reorganization items for 2003 include income from
the discharge of indebtedness of $377 million and fresh start accounting
adjustments of $112 million, partially offset by expenses associated with the
Company's reorganization under Chapter 11 of $73 million. Expenses associated
with the Company's reorganization include professional fees, employee retention
costs and write off of unamortized debt issuance costs.
On September 30, 2004, certain subsidiaries of the Company entered into a
share purchase and transfer agreement under which the Company agreed to sell its
50 percent interest in the PrettlNoma Systems joint venture to Prettl Industrie
Beteiligungs GmbH. The agreement effectively terminates the joint venture which
supplies panel systems for the appliance industry. As a result, the Company
recorded an impairment to the carrying value of its investment in the joint
venture in other (income) expense of approximately $13 million, reflecting an
other than temporary decline in value in accordance with the provisions of
Accounting Principles Board Opinion No. 18.
Income tax expense for the year 2004 was $14 million as compared to an
income tax benefit of $23 million for the year 2003. The principal reason that
income tax expense for the year 2004 was significantly higher than the U.S.
federal statutory rate is due to the impact of the Company's foreign operations,
primarily related to the Company's inability to utilize foreign tax credits and
the sale of an equity investment. For the year 2003 the Company recorded income
of $377 million related to the discharge of indebtedness. The Company recorded
tax expense of $57 million on this income, which represented a non-cash charge
related to a reduction in the value of the Company's tax basis in its assets as
required by the Internal Revenue Code. Based upon projections of the Company's
future domestic taxable income, the Company concluded during the fourth quarter
of 2003 that it was more likely than not it would be able to realize its
domestic net deferred tax assets. Accordingly the Company recorded a
-32-
decrease in its valuation allowance of $99 million effectively restoring the
carrying value of its domestic net deferred tax asset.
2003 Compared with 2002
Net revenues were $783 million for the year 2003 compared with $861 million
for the prior year. This decrease was due to lower sales in the manufacturing
and performance products segments of $51 million and $21 million, respectively,
and lower corporate and other of $6 million. Lower volumes with certain major
customers as a result of lower North American automotive build rates accounted
for approximately $26 million of the decrease in the manufacturing segment. In
addition, manufacturing segment revenues were negatively impacted by
approximately $26 million as a result of certain customers resourcing business
away from the Company to competitors in the Far East or to their own production
facilities. The decrease in revenues in the performance products segment is
principally due to lower sales in the pharmaceutical and personal care market,
the technology market, and water chemical product lines of $9 million, $5
million, and $4 million, respectively. The sale of the Company's antacid product
line accounted for $7 million of the decrease in the pharmaceutical and personal
care market with the remainder of the decrease being principally related to
lower price reflecting competitive pressures in the Company's antiperspirant
actives product line. The decrease in corporate and other is principally due to
lower volumes for the Company's printing plate product lines.
Gross profit was $138 million for the year 2003 as compared with $160
million for 2002. Gross profit in the manufacturing and performance products
segments decreased $13 million and $5 million, respectively, and corporate and
other decreased by $4 million. The decrease in gross profit in the performance
products segment can be attributed to higher energy and raw material pricing
totaling $5 million, and the unfavorable impact of the previously mentioned
decreases in sales and unfavorable pricing in antiperspirant actives of $8
million and $2 million, respectively. Additionally, the aforementioned sale of
finished goods inventory carried at fair value negatively impacted gross profit
by $1 million. These decreases were partially offset by higher spending during
the first six months of 2002 related to the extensive repair of two boilers and
other production equipment and a loss of production at one of the Company's
facilities totaling $8 million. The above-mentioned lower sales volume in the
manufacturing segment accounted for approximately $7 million of the decrease in
gross profit in this segment. In addition, gross profit in the manufacturing
segment was negatively impacted by $8 million of unfavorable pricing, $3 million
of manufacturing inefficiencies in the company's industrial wire and cable
business and $1 million due to the aforementioned sale of finished goods
inventory carried at fair value, partially offset by the favorable impact of the
Company's cost reduction program. The decrease in corporate and other is
principally due to the impact of the above-mentioned lower sales volume of the
Company's printing plate product line.
Selling, general and administrative expense was $89 million for the year
2003 as compared with $97 million for 2002. This decrease is principally
attributable to lower spending in both segments.
Restructuring and impairment charges were $25 million for 2003 as compared
with no charges being recorded during 2002. During 2003, the Company announced a
plan to wind down and close operations at the South Plant of the Delaware Valley
Works 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 estimated fair value, which was determined based upon a number of
factors, including an analysis of market transactions for similar assets.
-33-
The Company's restructuring actions during 2003 consist principally of two
plant closures in its performance products segment. During 2003, the Company
recorded restructuring charges of $1 million principally related to employee
termination costs. The Company expects to substantially complete implementation
of its 2003 restructuring actions by the second quarter of 2004. The reduction
in costs from the closure of the South Plant of the Delaware Valley Works will
be offset approximately by the resulting reduction in revenues and related gross
profit. Over the past three years, sales of the affected products averaged
approximately $50 million annually. GenTek expects restructuring actions other
than those related to the South Plant will result in an estimated annual
reduction in employee and facility related expense and cash flows of
approximately $4 million. The Company began to realize these reductions in the
fourth quarter of fiscal year 2003.
Operating income was $25 million for 2003 as compared with $64 million for
the prior year. This decrease was principally due to the above-mentioned
restructuring and impairment charges recorded during 2003 and lower gross
profit, partially offset by lower selling, general and administrative expense.
Interest expense for the year 2003 was $56 million lower than the prior
year level. This decrease was due to the fact that no interest expense was
recorded during 2003 on the Company's pre-petition senior credit facility and
11% Senior Subordinated Notes. The Company made adequate protection payments to
its senior creditors prior to its emergence from bankruptcy which have been
treated for accounting purposes as reductions in principal. As such, the 2003
results include no interest expense in those facilities for the period from
January 1, 2003 through November 10, 2003. Interest expense for the Company's
Senior Term Loan Agreement and its Revolving Credit Facility was $2 million for
the period from emergence on November 10, 2003 through December 31, 2003.
Reorganization items for the year 2003 totaled $416 million of income as
compared to $12 million of expense for 2002. Reorganization items for 2003
include income from the discharge of indebtedness of $377 million and fresh
start accounting adjustments of $112 million, partially offset by expenses
associated with the Company's reorganization under Chapter 11 of $73 million.
Expenses associated with the Company's reorganization include professional fees,
employee retention costs, and write off of unamortized debt issuance costs.
Income tax benefit for the year 2003 was $23 million versus income tax
expense for 2002 of $96 million. During the second quarter of 2002, the Company
revised its projection of domestic taxable income. These estimates projected
significantly lower domestic taxable income than previous projections,
principally due to the downturn in the global communications market. As a result
of lower projected domestic taxable income and the Company's evaluation of
potential tax planning strategies, the Company concluded that it was more likely
than not that it would not be able to realize its domestic net deferred tax
assets. Accordingly, during 2002 the Company recorded an increase to its
valuation allowance of $98 million effectively reducing the carrying value of
its domestic net deferred tax assets to zero. On November 10, 2003, the Company
emerged from Chapter 11 and recorded income of $377 million related to the
discharge of indebtedness. The Company recorded tax expense of $57 million on
this income, which represents a non-cash charge related to a reduction in the
value of the Company's tax basis in its assets as required by the Internal
Revenue Code which will effectively increase the Company's taxable income over
the next several years. As a result of this discharge of indebtedness the
Company will have significantly lower interest expense in future periods, and
based upon projections of the Company's future domestic taxable income, the
Company concluded that it is more likely than not it now will be able to realize
its domestic net deferred tax assets. Accordingly, during the fourth quarter of
-34-
2003 the Company recorded a decrease in its valuation allowance of $99 million
effectively restoring the carrying value of its domestic net deferred tax asset.
Results of Operations by Segment
2004 Compared with 2003
Years Ended December 31,
------------------------
2004 2003 Change
------ ------ ------
(In millions)
Net Revenues:
Manufacturing........... $514.6 $425.9 $ 88.7
Performance Products.... 316.6 335.9 (19.3)
Corporate and other..... 12.7 21.3 (8.6)
------ ------ ------
Total................ $843.9 $783.1 $ 60.8
====== ====== ======
Operating Profit (Loss):
Manufacturing........... $ 25.2 $ 37.1 $(11.9)
Performance Products.... 21.2 0.7 20.5
Corporate and other..... (10.1) (13.2) 3.1
------ ------ ------
Total................ $ 36.3 $ 24.6 $ 11.7
====== ====== ======
Manufacturing Segment
Net revenues for the manufacturing segment were $515 million for the year
2004 as compared to $426 million for 2003. This increase is the result of higher
sales to the appliance and electronic and industrial markets of $71 million and
$18 million, respectively. The increase in revenues in the appliance and
electronics market is due to the acquisition of a wire and harness subassembly
manufacturing facility from Whirlpool Corporation on June 30, 2004, partially
offset by lower sales to a major customer as a result of them resourcing their
supply to a Far East competitor. As part of this acquisition, the Company
entered into a seven-year supply agreement to supply wire harnesses, panel
assemblies, copper tubing and related components to Whirlpool's North American
appliance production facilities. Revenues related to this supply agreement were
approximately $80 million for the six-month period ended December 31, 2004. The
increase in the revenues in the industrial market is primarily due to the impact
of the pass through of higher raw material prices for copper as well as the
favorable impact of exchange rate fluctuations. Gross profit was $68 million for
the year 2004 as compared to $75 million for 2003. This decrease is principally
due to increased depreciation and amortization expense of $9 million as a result
of fresh start accounting, partially offset by the above-mentioned higher sales
in the industrial market. The increase in revenue due to the Whirlpool supply
agreement did not have a significant impact on gross profit. Selling, general
and administrative expense was $43 million for 2004 as compared with $38 million
for 2003. This increase was principally due to higher allocated corporate
expense as a result of the sale of the communication business and the
above-mentioned purchase of a wire and harness subassembly manufacturing
facility, as well as lower cost recoveries related to a management services
agreement. Restructuring and impairment charges were $2 million for the year
2004 which was $3 million higher than the prior year amount. Operating income
for 2004 was $25 million as compared with $37 million for 2003. This decrease is
the result of the above-mentioned lower gross profit, higher selling, general
and administrative expense and higher restructuring and impairment charges,
partially offset by a $2 million pension curtailment gain recorded in 2004.
-35-
Performance Products Segment
Net revenues were $317 million for the year 2004 as compared with $336
million for the prior year. This decrease was principally the result of lower
sales in the Company's sulfuric acid and fine chemical product lines of $17
million and $15 million respectively, reflecting the shutdown of the South Plant
of the Company's Delaware Valley Works and restructuring of the North American
sulfur derivatives business. This decrease was partially offset by higher sales
of $7 million for the Company's water chemical product line due principally to
the impact of the pass through of higher raw material prices and higher sales of
the Company's electronic chemical and personal care products lines of $3 million
and $2 million, respectively. Gross profit for 2004 was $50 million as compared
with $61 million for the prior year. This decrease was principally due to higher
environmental costs of $5 million, higher depreciation and amortization expense
of $8 million and the impact of the above-mentioned lower sales of the sulfuric
acid and fine chemical product lines, partially offset by the favorable impact
of the above-mentioned Honeywell settlement of $7 million. The charge for
environmental matters is related to increased costs associated with the receipt
of sampling results related to a corrective action program at one of the
Company's manufacturing facilities and incremental costs associated with the
regulatory requirements of closing an impoundment unit at another one of the
Company's manufacturing facilities. Selling, general and administrative expense
was $31 million for the year 2004 as compared with $34 million for 2003. The
decrease was principally due to lower pension expense and lower salaries
partially offset by higher allocated corporate expenses principally due to the
sale of the communications business. Restructuring and impairment charges were
$9 million for the year 2004 as a result of the closure of three manufacturing
facilities as compared with a $26 million charge recorded during 2003. The
charge for 2003 was principally due to a $25 million charge to reduce the
carrying value of the fixed assets at the South Plant of the Company's Delaware
Valley Works to estimated fair value, which was determined based upon a number
of factors including an analysis of market transactions for similar assets.
Operating income for 2004 was $21 million as compared with $1 million for 2003.
This increase is principally due to the lower level of restructuring and
impairment charges, a $12 million pension curtailment gain recorded in 2004 and
lower selling general and administrative expense, partially offset by the
above-mentioned lower gross profit.
2003 Compared with 2002
Years Ended December 31,
------------------------
2003 2002 Change
------ ------ ------
(In millions)
Net Revenues:
Manufacturing........... $425.9 $477.1 $(51.2)
Performance Products.... 335.9 357.4 (21.5)
Corporate and other..... 21.3 27.0 (5.7)
------ ------ ------
Total................ $783.1 $861.5 $(78.4)
====== ====== ======
Operating Profit (Loss):
Manufacturing........... $ 37.1 $ 44.8 $ (7.7)
Performance Products.... 0.7 28.6 (27.9)
Corporate and other..... (13.2) (9.9) (3.3)
------ ------ ------
Total................ $ 24.6 $ 63.5 $(38.9)
====== ====== ======
-36-
Manufacturing Segment
Net revenues for the manufacturing segment were $426 million for the year
2003 as compared to $477 million for 2002. Lower volumes with certain major
customers as a result of lower North American automotive build rates accounted
for approximately $26 million of this decrease. In addition, net revenues were
negatively impacted by approximately $26 million as a result of certain
customers resourcing business away from the Company to competitors in the Far
East or to their own in house production facilities. Gross profit for 2003 was
$75 million as compared to $88 million for 2002. The above-mentioned lower sales
volume accounted for approximately $7 million of this decrease. In addition,
gross profits were negatively impacted by $8 million of unfavorable price, $3
million of manufacturing inefficiencies in the Company's industrial wire and
cable business and $1 million due to the aforementioned sale of finished goods
inventory carried at fair value partially offset by the favorable impact of the
Company's cost reduction program. Selling, general and administrative expense
was $38 million for 2003 compared with $43 million for 2002, principally due to
lower spending and the termination of a pre-petition employee retention program.
Operating income for 2003 was $37 million as compared with $45 million for 2002,
principally due to the above-mentioned decreases in gross profit, partially
offset by the lower selling, general and administrative expenses.
Performance Products Segment
Net revenues for the performance products segment were $336 million for the
year 2003 as compared to $357 million for 2002. This decrease was principally
due to lower sales in the pharmaceutical and personal care market, technology
market and water chemical product line of $9 million, $5 million and $4 million,
respectively. The sale of the Company's antacid product line accounted for $7
million of the decrease in the pharmaceutical and personal care market with the
remainder of the decrease being principally related to lower price reflecting
competitive pressures in the Company's antiperspirant actives product line. The
decrease in the technology market was driven by the depressed semiconductor
industry. Lower sales in the water chemical product line was principally due to
lower volume and sales mix. Gross profit for 2003 was $61 million as compared
with $66 million for 2002. This decrease was principally due to increases in the
prices of energy and key raw materials, the impact of the above-mentioned sales
decreases and unfavorable pricing in antiperspirant actives of $5 million, $8
million and $2 million, respectively. Additionally, the aforementioned sale of
finished goods inventory carried at fair value negatively impacted gross profit
by $1 million. These decreases were partially offset by higher spending during
the first six months of 2002 related to the extensive repair of two boilers and
other production equipment and a loss of production at one of the Company's
facilities totaling $8 million. Selling, general and administrative expenses
were $34 million for 2003 as compared with $38 million for 2002. Restructuring
and impairment charges for 2003 were $26 million as compared with no
restructuring and impairment charges for the year 2002. During the first quarter
of 2003, the Company announced a plan to wind down and close operations at the
South Plant of Delaware Valley Works. 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 the estimated
fair value, which was determined based upon a number of factors, including an
analysis of market transactions for similar assets. The Company's restructuring
actions during 2003 consisted of two plant closures. During 2003, the Company
recorded restructuring charges of $1 million principally related to employee
termination costs. The reduction in costs from the closure of the South Plant of
the Delaware Valley Works will be offset approximately by the resulting
reduction in revenues and related gross margin. Over the prior three years,
sales of the affected products averaged approximately $50 million annually.
Operating income for 2003 was $1 million as compared with $29 million for 2002.
This decrease was principally
-37-
due to the above-mentioned restructuring and impairment charges and lower gross
profit partially offset by the lower selling, general and administrative
expense.
Financial Condition, Liquidity and Capital Resources
Cash and cash equivalents were $10 million at December 31, 2004 compared
with $27 million at December 31, 2003. The decrease in cash was the result of
the net repayment of debt of $244 million, a dividend payment of $71 million,
capital expenditures of $31 million, payments to the Tranche A warrant holders
of $8 million and the acquisition of businesses of $5 million, partially offset
by the net proceeds from the sale of assets of $308 million and cash flow from
operating activities of $35 million.
The Company had working capital of $97 million at December 31, 2004 as
compared with working capital of $92 million at December 31, 2003. This increase
in working capital is the result of higher accounts receivable balances and
inventories and lower accrued liabilities, partially offset by higher accounts
payable and lower cash, other current assets and deferred income taxes. The
increase in accounts receivable, inventory and accounts payable is principally
related to the above-mentioned supply agreement with Whirlpool Corporation. The
lower accrued liabilities is primarily the result of lower accrued balances for
pension and bankruptcy obligations.
Cash payments for employee termination costs and facility exit costs
totaled $16 million in 2004, $20 million in 2003 and $12 million in 2002.
Management expects that cash outlays related to these actions will be
substantially completed by the end of 2005. Management intends to fund these
cash outlays from existing cash balances and cash flow generated by operations.
At December 31, 2004, the Company's domestic pension plans were underfunded
(based on certain assumptions used by the Company which are subject to change)
by approximately $69 million. In an effort to reduce certain administrative
costs associated with the domestic pension plans, the Company has elected to
make cash contributions to its domestic pension plans that are in excess of
required contribution amounts. During 2004, the Company contributed $22 million
to its domestic pension plan trusts. The Company expects to contribute $35
million to its domestic pension plan trusts during March, 2005. In addition,
effective April 1, 2004, a new defined contribution plan covering domestic
salaried and certain hourly employees was established to replace the existing
defined benefit plans. Benefit accruals in these defined benefit plans were
frozen effective April 1, 2004, and this action resulted in a curtailment gain
of approximately $15 million, which was recorded during the first quarter of
2004.
On November 10, 2003, GenTek, substantially all of GenTek's domestic
subsidiaries, and Noma Company entered into a $125 million Revolving Credit
Facility. In conjunction with the recapitalization described below, all amounts
outstanding were repaid on February 28, 2005, and the agreement was terminated.
In addition, on November 10, 2003, pursuant to the Plan, the Company issued
$250 million under the Senior Term Loan Agreement. In conjunction with the sale
of the KRONE communications business, all amounts outstanding were repaid and
the agreement was terminated.
Capital expenditures are expected to be approximately $35-40 million in
2005.
Management believes that the Company's cash flow from operations and
availability under its revolving credit facility will be sufficient to cover
future debt service requirements, capital expenditures, and working capital
requirements during 2005.
-38-
Dividends and Recapitalization
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005 to holders of
record on March 10, 2005. Also, on February 28, 2005, GenTek closed on a secured
financing consisting of $370 million of term loans and a $60 million revolving
credit facility (the "Credit Facilities"). The term loans include a $235 million
first lien loan due in March 2011 with an interest rate of LIBOR plus 2.75% or
base rate plus 1.75%, subject to a rate reduction of 0.25% if such term loan is
rated B1 or better by Moody's Investor Services, Inc. and a $135 million second
lien loan due March 2012 with an interest rate of LIBOR plus 5.75% or base rate
plus 4.75%. The $60 million revolving credit facility matures in March 2010 and
carries an interest rate of LIBOR plus 2.75% or base rate plus 1.75%, subject to
rate reductions under a pricing grid if Company's leverage ratio decreases. The
first lien term loan is subject to amortization of $2.35 million per year for
five years, with the remainder payable over the sixth year. There is no
amortization over the term of the second lien loan. The Company will use
approximately $313 million of the financing proceeds to pay a special dividend
and $35 million of the proceeds to pre-fund certain defined benefit pension
obligations. The remainder of the proceeds will be used to pay transaction fees,
to refinance existing debt and for general corporate purposes. The Credit
Facilities are secured by liens on substantially all of the personal property
and certain real property of the Company and its domestic subsidiaries. The
Credit Facilities contain covenants which impose certain restrictions on the
Company's ability to, among other things, incur additional debt, pay dividends,
make investments or sell assets. Additionally, a portion of excess cash flow, as
defined in the Credit Facilities, and certain non-recurring cash inflows such as
proceeds from asset sales, insurance recoveries, and equity offerings must be
used to pay down indebtedness and may not be reborrowed. In addition, the Credit
Facilities contain certain financial covenants which include total leverage,
total interest coverage and maximum capital expenditures.
Off-Balance Sheet Financing Agreements
The Company has not entered into any off-balance sheet financing
arrangements.
Contractual Obligations
Payments Due by Period
------------------------------------------------------
(In thousands)
Less than After
1 Year 1-3 Years 4-5 Years 5 Years Total
--------- --------- --------- ------- --------
Long-term debt................... $ 1,489 $ 4,061 $ 6,776 $ 210 $ 12,536
Operating leases................. 6,650 10,684 8,631 2,889 28,854
Purchase obligations............. 38,820 21,910 1,179 -- 61,909
------- ------- ------- ------ --------
Total contractual obligations.... $46,959 $36,655 $16,586 $3,099 $103,299
======= ======= ======= ====== ========
Environmental Matters
The Company's various manufacturing operations, which have been conducted
at a number of facilities for many years, are subject to numerous laws and
regulations relating to the protection of human health and the environment in
the U.S., Canada, Mexico, India and other countries. The Company believes that
it is in substantial compliance with such laws and regulations. However, as a
result of its operations, the Company is involved from time to time in
administrative and judicial proceedings and inquiries relating to environmental
matters. Based on information available at this time with respect to
-39-
potential liability involving these facilities, the Company believes that any
such liability will not have a material adverse effect on its financial
condition, cash flows or results of operations. However, modifications of
existing laws and regulations or the adoption of new laws and regulations in the
future, particularly with respect to environmental and safety standards, could
require the Company to make expenditures which may be material or otherwise
adversely impact the Company's operations. See also Item 1. "Business -
Environmental Matters."
The Company's accruals for environmental liabilities are recorded based on
current interpretation of environmental laws and regulations when it is probable
that a liability has been incurred and the amount of such liability can be
reasonably estimated. At December 31, 2004, accruals for environmental matters
were $35 million. The Company maintains a comprehensive insurance program,
including customary comprehensive general liability insurance for bodily injury
and property damage caused by various activities and occurrences and significant
excess coverage to insure against catastrophic occurrences. However, the Company
generally does not maintain insurance other than as described above for
potential liabilities related specifically to remediation of existing
environmental contamination or future environmental contamination, if any.
The Company maintains a program to manage its facilities' compliance with
environmental laws and regulations. Expenditures for 2004 approximated $14
million (of which approximately $4 million represented capital expenditures and
approximately $10 million related to ongoing operations and the management and
remediation of potential environmental contamination from prior operations).
Expenditures for 2003 approximated $17 million (of which approximately $4
million represented capital expenditures and approximately $13 million related
to ongoing operations and the management and remediation of potential
environmental contamination from prior operations). The Company expects
expenditures similar to 2004 levels in 2005. In addition, if environmental laws
and regulations affecting the Company's operations become more stringent, costs
for environmental compliance may increase above historical levels.
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 May 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP). The act, signed into law December 2003,
introduces a prescription drug benefit under Medicare as well as a federal
subsidy, under certain conditions, to sponsors of retiree health care benefit
plans. The Company adopted the provisions of the FSP during the third quarter of
2004, which resulted in a
-40-
reduction of the accumulated postretirement benefit obligation of $8 million.
This amount was not currently recognized, but will be amortized as a component
of net periodic postretirement benefit cost over future periods.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4." This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight handling costs and spoilage,
requiring these items be recognized as current-period charges. In addition, this
statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of this statement are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of this accounting
principle is not expected to have a material impact on the Company's financial
statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment
(Revised 2004)." This statement addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for the
company's equity instruments or liabilities that are based on the fair value of
the company's equity securities or may be settled by the issuance of these
securities. SFAS No. 123R eliminates the ability to account for share-based
compensation using the intrinsic value method and generally requires that such
transactions be accounted for using a fair value method. The provisions of this
statement are effective for financial statements issued for fiscal periods
beginning after June 15, 2005. The Company has yet to determine a transition
method to adopt SFAS 123R or which valuation method to use. The full impact that
the adoption of this statement will have on the Company's financial statements
will be determined by share-based payments granted in future periods, the
transition method and valuation model used.
Critical Accounting Policies and Estimates
The preparation of financial statements requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates. Our significant accounting policies are described in Note
2 to the audited consolidated financial statements. The significant accounting
policies which we believe are the most critical to the understanding of reported
financial results include the following:
Revenue Recognition - GenTek recognizes revenue when pervasive evidence of
an arrangement exists, delivery has occurred, the fee is fixed or determinable,
and collectibility is reasonably assured. Revenue is recognized from product
sales when title and risk of loss has passed to the customer consistent with the
related shipping terms, generally at the time products are shipped. The Company
records a provision for estimated sales returns and other allowances as a
reduction of revenue at the time of revenue recognition. Provisions for sales
returns and other allowances are determined using management's judgments of
required amounts, based upon the Company's historical experience. Actual returns
could differ from these estimates. However, if the total actual level of sales
returns differed from management's estimates by 10 percent, the effect would not
be material.
Accounts Receivable - GenTek maintains allowances for doubtful accounts for
estimated losses resulting from the inability of our customers to make required
payments. Allowances are based upon historical experience and information
available to management about the creditworthiness, financial condition and
payment history of our customers. If the financial condition of our customers
were to deteriorate, additional allowances may be required. To the extent that
management's estimate of the
-41-
uncollectible amount of receivables differs from the amount the Company is
ultimately not able to collect by 10 percent, our results would be impacted by
approximately $1 million.
Inventories - GenTek provides estimated inventory allowances for obsolete
and excess inventory based on assumptions about future demand and market
conditions. Allowances are based upon management's judgment of what future
demand will be for its various products, utilizing historical experience of
demand levels, projections of market demand in the future, and information
regarding any projected future changes in the markets the Company competes in.
These estimates of future demand are then compared to existing inventory levels
to determine the amount of any required allowance. If future demand or market
conditions are different than those projected by management, adjustments to
inventory allowances may be required. If actual experience differs from
management's estimates by 10 percent, the required adjustment would affect our
results by approximately $1 million.
Deferred Taxes - GenTek records a valuation allowance to reduce its
deferred tax assets to the amount the Company believes is more likely than not
to be realized based upon historical taxable income, projected future taxable
income and available tax planning strategies. Our estimates of future taxable
income are based upon our current operating forecast, which we believe to be
reasonable. As a result of the Company's emergence from bankruptcy and the
associated discharge of indebtedness, the Company revised its estimates of
future domestic taxable income, based on its new capital structure. Based on
these estimates and the Company's evaluation of potential tax-planning
strategies, the Company concluded that it was more likely than not that it would
be able to realize its domestic deferred tax assets, and accordingly reversed
its remaining valuation allowance for its domestic deferred tax assets of $99
million in November 2003 in the Predecessor Company financial statements. 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. However, different assumptions regarding our
current operating forecast could materially effect our estimates.
Impairment of Goodwill and Other Intangible Assets - GenTek records
impairment losses on goodwill and indefinite lived intangible assets based upon
an annual review of the value of the assets or when events and circumstances
indicate that the asset might be impaired and when the recorded value of the
asset is more than its fair value. Our estimates of fair value are based upon
our current operating forecast, which we believe to be reasonable. Significant
assumptions that underlie the fair value estimates include future growth rates
and weighted average cost of capital rates. However, different assumptions
regarding our current operating forecast could materially affect our results.
Impairment of Long-Lived Assets - GenTek records impairment losses on
long-lived assets when events and circumstances indicate that the assets might
be impaired and the undiscounted cash flows estimated to be generated by those
assets are less than their carrying amount. In this case, the Company records an
impairment loss equal to the difference between the fair value of the long-lived
assets and their carrying amount. Management's estimates of fair value are based
on discounted cash flow analyses and/or independent appraisals. Significant
assumptions underlying these estimates include future growth rates and weighted
average cost of capital rates. Our estimates of future cash flows are based upon
our current operating forecast, which we believe to be reasonable. However,
different assumptions regarding such cash flows or other assumptions that
underlie our fair value estimates could materially affect our results.
Pension and Other Post Retirement Benefits - GenTek records pension and
other post retirement benefit costs based on amounts developed from actuarial
valuations. Inherent in these valuations are key assumptions provided by the
Company to our actuaries, including the discount rate and expected long-
-42-
term rate of return on plan assets. For example, holding all other components of
the calculation constant, a change in the assumed discount rate by 1/4 percent
would change 2004 pension cost by approximately $0.3 million and the projected
pension benefit obligation by approximately $8 million. A change in the expected
long-term rate of return on plan assets of 1 percent would change 2004 pension
cost by approximately $2 million. Material changes in pension and other post
retirement benefit costs may occur in the future due to changes in these
assumptions, differences between actual experience and the assumptions used and
changes in the benefit plans.
Environmental Liabilities - GenTek has recorded accruals for environmental
liabilities based on current interpretation of environmental laws and
regulations when it is probable that a liability has been incurred and the
amount of such liability can be reasonably estimated. These estimates are
established based upon information available to management to date, including
the nature and extent of any environmental contamination, the available remedial
alternatives, cost estimates obtained from outside consultants for the
implementation of such remedial alternatives, the Company's experience with
similar activities undertaken at similar sites, and the legal and regulatory
framework in the jurisdiction in which the liability arose. Differences between
actual amounts incurred and our estimates or the receipt of new information with
respect to these liabilities could have a material effect on our estimates and
results of operations. In addition, discovery of unknown environmental
contamination, the adoption of new laws or regulations or modifications or
changes in enforcement of existing laws and regulations could require
adjustments to these accruals.
The impact and any associated risks related to these policies on our
business operations is discussed throughout Management's Discussion and Analysis
of Financial Condition and Results of Operations where such policies affect our
reported and expected financial results.
-43-
Reconciliation of Non-GAAP Financial Measures 2003
Successor Company Predecessor Company
as Reported as Reported
Period Ended Period Ended
December 31, November 10, Total Company
2003 2003 2003
----------------- ------------------- -------------
(In thousands)
Net revenues
Manufacturing ............................. $52,855 $ 373,002 $ 425,857
Performance Products ...................... 39,945 295,980 335,925
Corporate and other ....................... 2,620 18,647 21,267
------- --------- ---------
95,420 687,629 783,049
Cost of sales
Manufacturing ............................. 44,014 307,339 351,353
Performance Products ...................... 30,972 243,967 274,939
Corporate and other ....................... 1,773 16,848 18,621
------- --------- ---------
76,759 568,154 644,913
Selling, general and administrative expense
Manufacturing ............................. 5,190 33,281 38,471
Performance Products ...................... 5,172 29,304 34,476
Corporate and other ....................... 3,150 12,706 15,856
------- --------- ---------
13,512 75,291 88,803
Restructuring and impairment charges
Manufacturing ............................. (13) (1,062) (1,075)
Performance Products ...................... 293 25,542 25,835
Corporate and other ....................... 13 -- 13
------- --------- ---------
293 24,480 24,773
Operating profit (loss)
Manufacturing ............................. 3,664 33,444 37,108
Performance Products ...................... 3,508 (2,833) 675
Corporate and other ....................... (2,316) (10,907) (13,223)
------- --------- ---------
4,856 19,704 24,560
Interest expense ............................. 2,453 900 3,353
Interest income .............................. 61 331 392
Reorganization items ......................... -- (416,082) (416,082)
Other (income), net .......................... (1,309) (5,822) (7,131)
------- --------- ---------
Income from continuing operations
before income taxes .................... 3,773 441,039 444,812
Income tax provision (benefit) ............... 1,837 (25,051) (23,214)
------- --------- ---------
Income from continuing operations ......... 1,936 466,090 468,026
Income (loss) from discontinued operations ... (844) 28,302 27,458
------- --------- ---------
Net Income ............................. $ 1,092 $ 494,392 $ 495,484
======= ========= =========
-44-
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
The Company's cash flows and earnings are subject to fluctuations resulting
from changes in interest rates, foreign currency exchange rates and commodity
prices and the Company selectively uses financial instruments to manage these
risks. The Company's objective in managing its exposure to changes in interest
rates, foreign currency exchange rates and commodity prices 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, foreign currency rates and
commodity prices 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 rates, foreign currency exchange
rates and commodity prices. 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, foreign
currency exchange rates or commodity prices would not have a material impact on
the fair values, cash flows or earnings of the Company.
Item 8. Financial Statements and Supplementary Data.
-45-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
GENTEK INC.
Parsippany, New Jersey
We have audited the accompanying consolidated balance sheets of GenTek Inc.
and subsidiaries (the "Company") as of December 31, 2004 and 2003 (Successor
Company balance sheets), and the related statements of operations, changes in
equity, and cash flows for the year ended December 31, 2004, the period from
November 11, 2003 to December 31, 2003 (Successor Company operations), the
period from January 1, 2003 to November 10, 2003, and for the year ended
December 31, 2002 (Predecessor Company operations). Our audits also included the
financial statement schedule listed in the index at Item 15. These financial
statements and financial statement schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on the
financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 1 to the financial statements, on October 7, 2003, the
Bankruptcy Court of Delaware entered an order confirming the Plan of
Reorganization which became effective after the close of business on November
10, 2003. Accordingly, the accompanying financial statements have been prepared
in conformity with AICPA Statement of Position 90-7, "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code," for the Successor Company
as a new entity with assets, liabilities, and a capital structure having
carrying values not comparable with prior periods as described in Note 1.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of GenTek Inc. and subsidiaries as
of December 31, 2004 and 2003, and the results of their operations and their
cash flows for the year ended December 31, 2004, and the period from November
11, 2003 to December 31, 2003 in conformity with accounting principles generally
accepted in the United States of America. Further, in our opinion the
Predecessor Company financial statements referred to above present fairly, in
all material respects, the results of operations and their cash flows for the
period from January 1, 2003 to November 10, 2003, and for the year ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America.
As discussed in Note 2 to the financial statements, effective January 1,
2002, the Company changed its method of accounting for goodwill and certain
intangible assets to conform to Statement of Financial Accounting Standards No.
142.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the effectiveness of the
Company's internal control over financial reporting as of December 31, 2004,
based on the criteria established in Internal Control--Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission
and our report dated March 16, 2005 expressed an unqualified opinion on
management's assessment of the effectiveness of the Company's internal control
over financial reporting and an unqualified opinion on the effectiveness of the
Company's internal control over financial reporting.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 16, 2005
-46-
GENTEK INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except share data)
Successor Company Predecessor Company
--------------------------- ---------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------ ------------ ------------
Net revenues ...................................................... $843,919 $95,420 $ 687,629 $ 861,465
Cost of sales ..................................................... 726,912 76,759 568,154 701,072
Selling, general and administrative expense ....................... 84,702 13,512 75,291 96,857
Restructuring and impairment charges .............................. 10,848 293 24,480 --
Pension curtailment gain .......................................... 14,840 -- -- --
-------- ------- --------- ---------
Operating profit ............................................... 36,297 4,856 19,704 63,536
Interest expense (contractual interest for the period ended
November 10, 2003 and 2002 was $62,133 and $75,418,
respectively) .................................................. 8,557 2,453 900 59,342
Interest income ................................................... 772 61 331 1,389
Reorganization items .............................................. -- -- (416,082) 11,636
Other (income) expense, net ....................................... 8,946 (1,309) (5,822) (1,550)
-------- ------- --------- ---------
Income (loss) from continuing operations before income
taxes and cumulative effect of a change in accounting
principle ................................................... 19,566 3,773 441,039 (4,503)
Income tax provision (benefit) .................................... 13,955 1,837 (25,051) 95,815
-------- ------- --------- ---------
Income (loss) from continuing operations before
cumulative effect of a change in accounting principle ....... 5,611 1,936 466,090 (100,318)
Income (loss) from discontinued operations (net of tax for the
year ended December 31, 2004, periods ended December 31,
2003, November 10, 2003 and year ended December 31,
2002 of $87,526, $23, ($28,218), and ($10,782) ................. 189,707 (844) 28,302 (99,206)
-------- ------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle ........................................ 195,318 1,092 494,392 (199,524)
Cumulative effect of a change in accounting principle (net of a
tax benefit of $39,760) ........................................ -- -- -- (161,125)
-------- ------- --------- ---------
Net income (loss) ........................................ $195,318 $ 1,092 $ 494,392 $(360,649)
======== ======= ========= =========
Earnings (loss) per common share - basic:
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle ..................... $ .56 $ .19 $ 18.23 $ (3.93)
Income (loss) from discontinued operations ........................ 18.97 (.08) 1.11 (3.89)
-------- ------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle ........................................... 19.53 .11 19.34 (7.82)
Cumulative effect of a change in accounting principle ............. -- -- -- (6.31)
-------- ------- --------- ---------
Net income (loss) ........................................ $ 19.53 $ .11 $ 19.34 $ (14.13)
======== ======= ========= =========
Earnings (loss) per common share - assuming dilution:
Income (loss) from continuing operations before cumulative
effect of a change in accounting principle ..................... $ .56 $ .19 $ 18.23 $ (3.93)
Income (loss) from discontinued operations ........................ 18.92 (.08) 1.11 (3.89)
-------- ------- --------- ---------
Income (loss) before cumulative effect of a change in
accounting principle ........................................... 19.48 .11 19.34 (7.82)
Cumulative effect of a change in accounting principle ............. -- -- -- (6.31)
-------- ------- --------- ---------
Net income (loss) ........................................ $ 19.48 $ .11 $ 19.34 $ (14.13)
======== ======= ========= =========
See the accompanying notes to the consolidated financial statements.
-47-
GENTEK INC.
CONSOLIDATED BALANCE SHEETS
(In thousands, except share data)
Successor Company
-------------------------------------
December 31, 2004 December 31, 2003
----------------- -----------------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 9,826 $ 26,646
Receivables, net .................................................. 117,636 104,281
Inventories ....................................................... 76,174 62,455
Deferred income taxes ............................................. 14,225 18,958
Other current assets .............................................. 7,369 14,541
-------- ----------
Total current assets ........................................... 225,230 226,881
Property, plant and equipment, net ................................... 284,957 294,114
Goodwill ............................................................. 154,365 153,799
Intangible assets .................................................... 70,532 73,214
Deferred income taxes ................................................ 3,737 10,543
Assets held for sale ................................................. 962 282,096
Other assets ......................................................... 13,843 26,162
-------- ----------
Total assets ................................................... $753,626 $1,066,809
======== ==========
LIABILITIES AND EQUITY
Current liabilities:
Accounts payable .................................................. $ 55,294 $ 28,310
Accrued liabilities ............................................... 71,562 105,926
Current portion of long-term debt ................................. 1,489 338
-------- ----------
Total current liabilities ...................................... 128,345 134,574
Long-term debt ....................................................... 11,047 250,850
Pension and postretirement obligations ............................... 142,758 157,895
Liabilities of businesses held for sale .............................. -- 167,246
Other liabilities .................................................... 71,049 71,427
-------- ----------
Total liabilities ............................................. 353,199 781,992
-------- ----------
Contingently redeemable warrants ..................................... -- 6,030
-------- ----------
Equity:
Preferred stock, $.01 par value; authorized: 10,000,000 shares;
none issued or outstanding ..................................... -- --
Common stock, no par value; authorized: 100,000,000 shares;
issued: 10,098,570 and 10,000,000 shares at December 31,
2004 and 2003, respectively .................................... 271,690 268,084
Unearned compensation ............................................. (2,123) --
Warrants .......................................................... 8,361 8,361
Accumulated other comprehensive income (loss)...................... (886) 1,250
Retained earnings ................................................. 123,385 1,092
-------- ----------
Total equity ................................................... 400,427 278,787
-------- ----------
Total liabilities and equity ................................... $753,626 $1,066,809
======== ==========
See the accompanying notes to the consolidated financial statements.
-48-
GENTEK INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
Successor Company Predecessor Company
--------------------------- ---------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net income (loss) ............................................ $ 195,318 $ 1,092 $ 494,392 $(360,649)
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Discontinued operations ................................... (189,707) 844 (28,302) 99,206
Cumulative effect of a change in accounting principle ..... -- -- -- 161,125
Pension curtailment gain .................................. (14,840) -- -- --
Depreciation and amortization ............................. 47,397 4,410 26,174 34,066
Asset impairment and write-down charges ................... -- -- 24,661 --
Reorganization items ...................................... -- -- (416,080) 11,636
Net loss on disposition of long-term assets ............... 7,262 484 224 47
Long-term incentive plan costs, net ....................... 1,483 -- 3 (525)
(Increase) decrease in receivables ........................ (12,409) 10,558 18,068 (4,468)
(Increase) decrease in inventories ........................ (8,766) 652 2,872 (1,281)
(Increase) decrease in deferred tax assets ................ 12,881 22,874 (63,553) 80,935
Increase (decrease) in accounts payable ................... 26,767 (2,244) (2,353) (3,762)
Increase (decrease) in accrued liabilities ................ (36,485) (13,791) (40) (428)
Decrease in other liabilities and assets, net ............. (2,447) (10,091) (12,847) (74)
--------- -------- --------- ---------
Net cash provided by continuing operations ............. 26,454 14,788 43,219 15,828
Net cash provided by (used for) discontinued
operations .......................................... 8,163 (18,105) 27,119 288
--------- -------- --------- ---------
Net cash provided by (used for) operating activities ... 34,617 (3,317) 70,338 16,116
--------- -------- --------- ---------
Net cash used for reorganization items .......................... -- -- (18,187) (464)
--------- -------- --------- ---------
Cash flows from investing activities:
Capital expenditures ......................................... (30,975) (7,927) (25,831) (40,929)
Proceeds from sales or disposals of long-term assets ......... 17,282 9 3 12,913
Proceeds from sale of discontinued operation, net ............ 290,575 -- -- --
Acquisition of businesses net of cash acquired* .............. (5,100) -- -- (338)
Other investing activities ................................... (75) (13) (166) --
--------- -------- --------- ---------
Net cash used for investing activities ................. 271,707 (7,931) (25,994) (28,354)
--------- -------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ................................. 30,131 -- -- 160,032
Repayment of long-term debt .................................. (274,466) (2,867) (93,740) (41,832)
Redemption of tranche A warrants ............................. (8,365) -- -- --
Dividends .................................................... (70,690) -- -- --
Debt issuance costs - reorganization ......................... -- -- (688) --
Capital contribution ......................................... -- -- 2,640 --
Payments to acquire treasury stock ........................... -- -- -- (1)
--------- -------- --------- ---------
Net cash provided by (used for) financing activities ... (323,390) (2,867) (91,788) 118,199
--------- -------- --------- ---------
Effect of exchange rate changes on cash ......................... 246 47 840 8
--------- -------- --------- ---------
Increase (decrease) in cash and cash equivalents ................ (16,820) (14,068) (64,791) 105,505
Cash and cash equivalents at beginning of period ................ 26,646 40,714 105,505 --
--------- -------- --------- ---------
Cash and cash equivalents at end of period ...................... $ 9,826 $ 26,646 $ 40,714 $ 105,505
========= ======== ========= =========
Supplemental information:
Cash paid (refunded) for income taxes ........................ $ 13,320 $ 388 $ (3,326) $ (20,867)
========= ======== ========= =========
Cash paid for interest ....................................... $ 8,762 $ 940 $ 873 $ 50,748
========= ======== ========= =========
*Acquisition of businesses net of cash acquired:
Working capital, other than cash ............................. $ (2,518) $ -- $ -- $ --
Property, plant and equipment ................................ (5,145) -- -- (338)
Other assets ................................................. (847) -- -- --
Non current laibilities ...................................... 3,410 -- -- --
--------- -------- --------- ---------
Total cash used to acquire businesses .................. $ (5,100) $ -- $ -- $ (338)
========= ======== ========= =========
See the accompanying notes to the consolidated financial statements.
-49-
GENTEK INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
For the Three Years Ended December 31, 2004
(In thousands, except per share data)
Class B
Common Common Unearned Treasury
Stock Stock Compensation Warrants Stock
--------- ------- ------------ -------- --------
Predecessor
Balance at January 1, 2002 .............................. $ 207 $ 48 $ -- $ -- $(1,244)
Components of comprehensive loss:
Net loss .......................................... -- -- -- -- --
Change in net unrealized loss on
securities (net of tax of $148) ................ -- -- -- -- --
Minimum pension liability adjustments ............. -- -- -- -- --
Change in net unrealized loss on derivative
instruments (net of tax of $(39)) .............. -- -- -- -- --
Foreign currency translation adjustments
(net of tax of $4,322) ......................... -- -- -- -- --
Comprehensive loss ...................................
Conversion of Class B Common Stock to
Common Stock ...................................... 9 (9) -- -- --
Long-term incentive plan grants, net ................. -- -- -- -- --
Purchase of treasury stock ........................... -- -- -- -- (1)
-------- ---- ------- ------ -------
Balance at December 31, 2002 ............................ 216 39 -- -- (1,245)
Components of comprehensive income:
Net income ........................................ -- -- -- -- --
Minimum pension liability adjustments ............. -- -- -- -- --
Change in net unrealized loss on derivative
instruments (net of tax of $4,218) ............. -- -- -- -- --
Foreign currency translation adjustments
(net of tax of $5,105) ......................... -- -- -- -- --
Comprehensive income .................................
Conversion of Class B Common Stock to Common Stock ... 14 (14) -- -- --
Capital contribution ................................. -- -- -- -- --
Long-term incentive plan grants, net ................. -- -- -- -- --
Cancellation of Predecessor Common Stock
and Class B Common Stock .......................... (230) (25) -- -- 1,245
Issuance of Common Stock to creditors ................ 268,084 -- -- 8,361 --
Fresh Start Adjustments .............................. -- -- -- -- --
-------- ---- ------- ------ -------
Balance at November 10, 2003 ............................ 268,084 -- -- 8,361 --
Successor
Components of comprehensive income:
Net income ........................................ -- -- -- -- --
Foreign currency translation adjustments
(net of tax of $816) ........................... -- -- -- -- --
Comprehensive income .................................
-------- ---- ------- ------ -------
Balance at December 31, 2003 ............................ 268,084 -- -- 8,361 --
Components of comprehensive income:
Net income ........................................ -- -- -- -- --
Minimum pension liability adjustments
(net of tax of $(1,010)) ....................... -- -- -- -- --
Foreign currency translation adjustments
(net of tax of $(420)) ......................... -- -- -- -- --
Change in unrealized gain on derivative
instruments (net of tax of $34) ................ -- -- -- -- --
Comprehensive income .................................
Long-term incentive plan grants, net ................. 3,606 -- (2,123) -- --
Tranche A warrant payment ............................ -- -- -- -- --
Dividends ............................................ -- -- -- -- --
-------- ---- ------- ------ -------
Balance at December 31, 2004 ............................ $271,690 $ -- $(2,123) $8,361 $ --
======== ==== ======= ====== =======
Accumulated
Other Retained
Comprehensive Earnings
Paid in Income (Accumulated
Capital (Loss) Deficit) Total
------- ------------- ------------ ---------
Predecessor
Balance at December 31, 2001 ............................ $ 3,830 $(24,302) $(120,876) $(142,337)
Components of comprehensive loss:
Net loss .......................................... -- -- (360,649) (360,649)
Change in net unrealized loss on
securities (net of tax of $148) ................ -- 226 -- 226
Minimum pension liability adjustments ............. -- (24,346) -- (24,346)
Change in net unrealized loss on derivative
instruments (net of tax of $(39)) .............. -- 2,544 -- 2,544
Foreign currency translation adjustments
(net of tax of $4,322) ......................... -- 14,767 -- 14,767
---------
Comprehensive loss ................................... (367,458)
Conversion of Class B Common Stock to
Common Stock ...................................... -- -- -- --
Long-term incentive plan grants, net ................. (525) -- -- (525)
Purchase of treasury stock ........................... -- -- -- (1)
------- -------- --------- ---------
Balance at December 31, 2002 ............................ 3,305 (31,111) (481,525) (510,321)
Components of comprehensive income:
Net income ........................................ -- -- 494,392 494,392
Minimum pension liability adjustments ............. -- 9,510 -- 9,510
Change in net unrealized loss on derivative
instruments (net of tax of $4,218) ............. -- 3,847 -- 3,847
Foreign currency translation adjustments
(net of tax of $5,105) ......................... -- (360) -- (360)
---------
Comprehensive income ................................. 507,389
Conversion of Class B Common Stock to Common Stock ... -- -- -- --
Capital contribution ................................. 4,325 -- -- 4,325
Long-term incentive plan grants, net ................. 3 -- -- 3
Cancellation of Predecessor Common Stock
and Class B Common Stock .......................... (990) -- -- --
Issuance of Common Stock to creditors ................ -- -- -- 276,445
Fresh Start Adjustments .............................. (6,643) 18,114 (12,867) (1,396)
------- -------- --------- ---------
Balance at November 10, 2003 ............................ -- -- -- 276,445
Successor
Components of comprehensive income:
Net income ........................................ -- -- 1,092 1,092
Foreign currency translation adjustments
(net of tax of $816) ........................... -- 1,250 -- 1,250
---------
Comprehensive income ................................. 2,342
------- -------- --------- ---------
Balance at December 31, 2003 ............................ -- 1,250 1,092 278,787
Components of comprehensive income:
Net income ........................................ -- -- 195,318 195,318
Minimum pension liability adjustments
(net of tax of $(1,010)) ....................... -- (1,543) -- (1,543)
Foreign currency translation adjustments
(net of tax of $(420)) ......................... -- (644) -- (644)
Change in unrealized gain on derivative
instruments (net of tax of $34) ................ -- 51 -- 51
---------
Comprehensive income ................................. 193,182
Long-term incentive plan grants, net ................. -- -- -- 1,483
Tranche A warrant payment ............................ -- -- (2,335) (2,335)
Dividends ............................................ -- -- (70,690) (70,690)
------- -------- --------- ---------
Balance at December 31, 2004 ............................ $ -- $ (886) $ 123,385 $ 400,427
======= ======== ========= =========
See the accompanying notes to the consolidated financial statements.
-50-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share data)
Note 1 - Basis of Presentation
GenTek Inc. ("GenTek" or the "Company") is a holding company with no
independent operations and, therefore, is dependent upon cash flow from its
subsidiaries to meet obligations. GenTek's subsidiaries operate through two
primary business segments: manufacturing and performance products. The
manufacturing segment provides a broad range of engineered components and
services to three principal markets: automotive, appliance and electronic, and
industrial. The performance products segment provides a broad range of
value-added products and services to four principal markets: environmental
services, pharmaceutical and personal care, technology and chemical processing.
The Company operates over 60 manufacturing and production facilities located
primarily in the U.S., Canada, Mexico and India.
On May 18, 2004, the Company sold its KRONE communications business to ADC
Telecommunications, Inc. (ADC) and recognized a gain on the sale of $185,044.
Accordingly, the business has been classified as discontinued operations. See
Note 16.
On June 30, 2004, the Company acquired a wire harness and subassembly
manufacturing facility located in Reynosa, Mexico from Whirlpool Corporation for
$8,400. As part of the transaction, the Company entered into a seven year supply
agreement to supply wire harnesses, panel assemblies, copper tubing and related
components to Whirlpool's North American appliance production facilities. The
results of operations of the facility have been included in the financial
statements beginning July 1, 2004. The pro forma impact of the acquisition on
financial position, net income and earnings per share is not material. Revenues
from the supply agreement were $80,966 for the six month period ended December
31, 2004. As a result of the supply agreement and other existing business,
Whirlpool accounted for approximately 14 percent of the Company's revenues for
the year ended December 31, 2004 and approximately 16 percent of the Company's
gross trade receivables at December 31, 2004.
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 in the United States Bankruptcy Court for the
District of Delaware (the "Bankruptcy Court"). The Debtors' cases were jointly
administered as Case No. 02-12986 (MFW).
The Debtors filed for relief under Chapter 11 as a result of the Company's
inability to obtain an amendment to its pre-petition senior credit facility. The
protection afforded by Chapter 11 allowed the Debtors to continue to serve their
customers and preserve the value of their businesses, while they reorganized and
worked to develop and implement a strategic plan to deleverage the Company's
balance sheet and create an improved long-term capital structure.
On October 7, 2003, the Bankruptcy Court entered an order confirming the
Debtors' plan of reorganization (the "Plan"). The Plan became effective in
accordance with its terms on November 10, 2003 (the "Effective Date").
Pursuant to the provisions of the Plan, in full satisfaction of their
allowable claims: (i) the holders of existing secured claims under the Company's
pre-petition credit facility (excluding the tranche in which Noma
-51-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Company is a borrower to the extent such holders were secured by Noma) initially
received approximately 81 percent of the common stock of the reorganized Company
(the "Reorganized Company"), $60,000 in cash (reduced by certain payments) and
$216,500 principal amount of Senior Term Loan Agreement issued by the
Reorganized Company; (ii) holders of existing secured claims under the term loan
facility to Noma Company under the Company's pre-petition credit facility
received approximately 13 percent of the common stock of the Reorganized Company
and $33,500 principal amount of senior term notes issued by the Reorganized
Company; (iii) holders of general unsecured claims and trade vendor claims who
elected to receive equity in the Reorganized Company on account of their claims
received a pro rata distribution of up to approximately 2 percent, in the
aggregate, of the common stock of the Reorganized Company and warrants to
purchase additional shares of the common stock of the Reorganized Company; (iv)
holders of general unsecured claims and trade vendor claims that elected not to
receive equity of the Reorganized Company received an amount in cash equal to
the lesser of (A) 6 percent of each such holder's allowed claim or (B) each such
holder's pro rata share of $5,000; (v) holders of unsecured claims relating to
the Company's existing bonds received approximately 4 percent of the common
stock of the Reorganized Company and warrants to purchase additional shares of
the common stock of the Reorganized Company; (vi) upon the liquidation of their
disputed claims, holders of California Tort Claims (as defined in the Plan), to
the extent they are determined to hold allowable claims, will receive the same
treatment of any uninsured portion of their claims (excluding any portion of
such claims attributable to noncompensatory damages) as they would have received
had such claims been classified as general unsecured claims (except that such
holders will not be entitled to elect cash instead of equity); (vii) holders of
Pennsylvania Tort Claims (as defined in the Plan) received, through their class
representative, an aggregate distribution of $120 in cash, a note in the
principal amount of $675, and a payment from the Debtors' insurer; and (viii)
holders of claims described in subsections (i), (iii), (iv), (v) and (vi) above
will be entitled to receive a portion of any amounts recovered by a preference
claim litigation trust created pursuant to the Plan. In addition to the
foregoing, pursuant to the Plan administrative expense claims, priority claims,
convenience claims, a secured claim of the Company against Noma Company in the
amount of approximately $5,693 and certain other secured claims, were paid in
full. Furthermore, the Plan provided for the cancellation of all then
outstanding shares of common stock of the Company without any distribution to be
made to the holders of such shares.
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. In connection with its emergence
from bankruptcy on November 10, 2003, the Company has adopted fresh-start
reporting in accordance with SOP 90-7. Accordingly, the Company's post-emergence
financial statements ("Successor") are not comparable with its pre-emergence
financial statements ("Predecessor"). All references to the period ended
November 10, 2003 refer to the period from January 1, 2003 to November 10, 2003
and all references to the period ended December 31, 2003 refer to the period
November 11, 2003 to December 31, 2003.
-52-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Note 2 - Summary of Significant Accounting Policies
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
The consolidated financial statements include the accounts of the Company
and all of its majority owned subsidiaries. Investments in affiliates in which
ownership is at least 20 percent, but less than a majority voting interest, are
accounted for using the equity method. Investments in less than 20 percent owned
affiliates are accounted for using the cost method. Intercompany balances and
transactions are eliminated in consolidation.
All highly liquid instruments purchased with a maturity of three months or
less are considered to be cash equivalents.
Inventories are valued at the lower of cost or market, using the last-in,
first-out ("LIFO") method for certain domestic production inventories and the
first-in, first-out ("FIFO") or average-cost method for all other inventories.
Production inventory costs include material, labor and factory overhead.
Property, plant and equipment are carried at cost and are depreciated
principally using the straight-line method. Estimated lives range from five to
35 years for buildings and leasehold improvements and 3 to 15 years for
machinery and equipment.
Intangible assets that have finite lives are amortized using the
straight-line method, over their estimated useful lives, which range from 4 to
15 years.
The Company reviews long-lived assets for impairment whenever events and
circumstances indicate that the carrying amount of an asset may not be
recoverable. Recoverability of assets to be held and used is measured by
comparing the carrying amount of these assets against the estimated undiscounted
future cash flows to be generated by the assets. At the time such evaluations
indicate that the future cash flows are not sufficient to recover the carrying
value of such assets, the carrying values are adjusted to their fair values,
which have been determined on a discounted cash flow basis. Assets to be
disposed of are reported at the lower of their carrying amount or fair value
less costs to sell.
The Company reviews goodwill and indefinite lived intangible assets for
impairment annually and whenever events and circumstances indicate that the
recorded value of the assets might be more than its fair value. Estimated fair
values are determined based upon a number of factors, including independent
appraisals and current operating forecasts.
Accruals for product warranties are estimated based upon historical
warranty experience and are recorded at the time revenue is recognized.
-53-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Accruals for environmental liabilities are recorded based on current
interpretations of environmental laws and regulations when it is probable that a
liability has been incurred and the amount of such a liability can be reasonably
estimated.
Accruals for pension and other post-retirement benefit costs utilize a
number of accounting mechanisms that reduce the volatility of reported costs.
Differences between actuarial assumptions and actual plan results are deferred
and are amortized into expense only when the accumulated differences exceed 10
percent of the greater of the projected benefit obligation or the market-related
value of plan assets. If necessary, the excess is amortized over the average
remaining service period of active employees. Additionally, the impact of asset
performance on pension expense is recognized over a five-year phase-in period
though a "market-related" value of assets calculation. Since the market-related
value of assets recognizes investment gains or losses over a five-year period,
the future value of assets will be impacted as previously deferred gains or
losses are recognized.
The Company recognizes revenue when persuasive evidence of an arrangement
exists, delivery has occurred, the amount is fixed or determinable, and
collectibility is reasonably assured. Revenue is recognized from product sales
when title and risk of loss has passed to the customer consistent with the
related shipping terms, generally at the time products are shipped. The Company
records a provision for estimated sales returns and other allowances as a
reduction of revenue at the time of revenue recognition.
Compensation cost for stock-based employee compensation plans is recognized
using the intrinsic value method. The following table illustrates the effect on
net income (loss) and earnings (loss) per share if the Company had applied the
fair value based method to recognize stock-based employee compensation.
Successor Company Predecessor Company
--------------------------- ---------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------ ------------ ------------
Net income (loss) as reported ............ $195,318 $1,092 $494,392 $(360,649)
Deduct: Total stock-based employee
compensation income (expense) determined
under fair value based method for all
awards, net of related tax effects ..... (293) -- 1,479 (1,623)
-------- ------ -------- ---------
Pro forma net income (loss) ............... $195,025 $1,092 $495,871 $(362,272)
======== ====== ======== =========
Earnings (loss) per share:
Basic - as reported .................... $ 19.53 $ .11 $ 19.34 $ (14.13)
======== ====== ======== =========
Basic - pro forma ...................... $ 19.50 $ .11 $ 19.40 $ (14.19)
======== ====== ======== =========
Diluted - as reported .................. $ 19.48 $ .11 $ 19.34 $ (14.13)
======== ====== ======== =========
Diluted - pro forma .................... $ 19.45 $ .11 $ 19.40 $ (14.19)
======== ====== ======== =========
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 with
the following assumptions (are not applicable for 2003 and 2002 as there were no
grants made):
2004
------
Dividend yield ....................................................... --
Expected volatility .................................................. 50%
-54-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Risk-free interest rate .............................................. 2.32%
Expected holding period (in years) ................................... 4
Weighted average fair value .......................................... $14.82
Income taxes are accounted for under the asset and liability method. Under
this method, deferred tax assets and liabilities are recognized for the
estimated future tax consequences attributable to differences between the
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases, and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates in
effect for the year in which those temporary differences are expected to be
recovered or settled. A valuation allowance is recorded to reduce the carrying
amounts of deferred tax assets if it is more likely than not that such assets
will not be realized.
The Company does not hold or issue financial instruments for trading
purposes. The Company uses derivative financial instruments primarily for
purposes of hedging exposures to fluctuations in interest rates, foreign
currency exchange rates and commodity prices. The differential to be paid or
received on interest rate swaps is recognized as an adjustment to interest
expense. Gains and losses on hedges of existing assets or liabilities are
included in the carrying amounts of those assets or liabilities and ultimately
recognized in earnings. Gains and losses related to qualifying hedges of firm
commitments or anticipated transactions are deferred and are recognized in
earnings or as adjustments of carrying amounts when the hedged transaction
occurs.
The components of accumulated other comprehensive income (loss) are as
follows:
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Foreign currency translation ..................... $ 606 $1,250
Minimum pension liability adjustments ............ (1,543) --
Net unrealized gain on derivative instruments .... 51 --
------- ------
Accumulated other comprehensive income (loss) .... $ (886) $1,250
======= ======
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 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.
-55-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
In May 2004, the FASB issued Staff Position No. FAS 106-2, "Accounting and
Disclosure Requirements Related to the Medicare Prescription Drug, Improvement
and Modernization Act of 2003" (FSP). The act, signed into law December 2003,
introduces a prescription drug benefit under Medicare as well as a federal
subsidy, under certain conditions, to sponsors of retiree health care benefit
plans. The Company adopted the provisions of the FSP during the third quarter of
2004, which resulted in a reduction of the accumulated postretirement benefit
obligation of $8,220. This amount was not currently recognized, but will be
amortized as a component of net periodic postretirement benefit cost over future
periods.
In November 2004, the FASB issued SFAS No. 151, "Inventory Costs - an
Amendment of ARB No. 43, Chapter 4." This statement clarifies the accounting for
abnormal amounts of idle facility expense, freight handling costs and spoilage,
requiring these items be recognized as current-period charges. In addition, this
statement requires that allocation of fixed production overheads to the costs of
conversion be based on the normal capacity of the production facilities. The
provisions of this statement are effective for inventory costs incurred during
fiscal years beginning after June 15, 2005. The adoption of this accounting
principle is not expected to have a material impact on the Company's financial
statements.
In December 2004, the FASB issued SFAS No. 123R, "Share-Based Payment
(Revised 2004)." This statement addresses the accounting for share-based payment
transactions in which a company receives employee services in exchange for the
company's equity instruments or liabilities that are based on the fair value of
the company's equity securities or may be settled by the issuance of these
securities. SFAS No. 123R eliminates the ability to account for share-based
compensation using the intrinsic value method and generally requires that such
transactions be accounted for using a fair value method. The provisions of this
statement are effective for financial statements issued for fiscal periods
beginning after June 15, 2005. The Company has yet to determine a transition
method to adopt SFAS 123R or which valuation method to use. The full impact that
the adoption of this statement will have on the Company's financial statements
will be determined by share-based payments granted in future periods, the
transition method and valuation model used.
Certain prior-period amounts have been reclassified to conform with the
current presentation.
Note 3 - Fresh-Start Reporting, Reorganization Items and Liabilities Subject to
Compromise
The Debtors' emergence from bankruptcy proceedings on November 10, 2003
resulted in a new reporting entity and adoption of fresh-start reporting as of
that date in accordance with SOP 90-7. Accordingly, assets have been stated at
fair value, liabilities have been recorded at the present value of amounts
estimated to be paid, the accumulated deficit has been eliminated and new debt
and equity securities have been recorded in accordance with distributions
pursuant to the Plan. In addition, all accounting principles required to be
adopted within the next twelve months following the adoption of fresh-start
reporting were adopted as of November 10, 2003. Adjustments to the Company's
assets and liabilities to fair value were based upon the Company's
reorganization value of $550,000 as included in the Plan and as approved by the
Bankruptcy Court. In determining the reorganization value, the Company (and its
financial advisors) considered several matters, including the following: (i)
certain recent historical financial information of the Company, (ii) the
Company's overall business plan, including long-term risks and opportunities,
(iii) certain financial projections prepared by the Company
-56-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
and the assumptions underlying them, (iv) the market value of publicly traded
companies that are reasonably comparable to the Company, (v) the purchase price
paid in acquisitions of comparable companies and (vi) certain additional
economic and industry conditions. Sensitive assumptions included in the
foregoing determination about which there is a reasonable possibility of the
occurrence of a variation that would have significantly affected measurement of
reorganization value included projected future cash flows and growth rates,
estimates of the effects of execution of the Company's business plan, selection
of companies deemed to be comparable to the Company, and assumptions regarding
underlying economic and industry conditions. The Company determined its
reorganization equity value of $282,000 by subtracting the Company's debt of
$268,000 on the Effective Date from the reorganization value of $550,000.
As a result of the adoption of fresh-start reporting, the Company's
post-emergence financial statements are not comparable with its pre-emergence
financial statements. The following table reflects the implementation of the
Plan and the adjustments recorded to the Company's assets and liabilities to
reflect the implementation of the Plan and the adjustments of such assets and
liabilities to fair value at November 10, 2003.
Condensed Balance Sheet
Debt Fresh-Start
Predecessor(1) Discharge(2) Adjustments(3) Successor
-------------- ------------ -------------- ----------
Current assets:
Cash and cash equivalents ................ $ 91,657 $ (50,943) $ -- $ 40,714
Receivables, net ......................... 114,205 -- -- 114,205
Inventories .............................. 60,317 -- 2,759 63,076
Other current assets ..................... 19,465 19,959 (959) 38,465
---------- --------- -------- ----------
Total current assets ..................... 285,644 (30,984) 1,800 256,460
Property, plant and equipment, net .......... 215,589 -- 74,477 290,066
Goodwill .................................... 127,959 -- 25,840 153,799
Assets held for sale ........................ 267,501 26,656 (11,083) 283,074
Other assets ................................ 23,174 24,770 66,716 114,660
---------- --------- -------- ----------
Total assets ............................. $ 919,867 $ 20,442 $157,750 $1,098,059
========== ========= ======== ==========
Current liabilities:
Accounts payable ......................... $ 30,333 $ -- $ -- $ 30,333
Accrued liabilities ...................... 112,026 5,120 -- 117,146
Current portion of long-term debt ........ 101 -- -- 101
---------- --------- -------- ----------
Total current liabilities ................ 142,460 5,120 -- 147,580
Long-term debt .............................. 510 250,591 -- 251,101
Liabilities subject to compromise ........... 972,201 (972,201) -- --
Liabilities of businesses held for sale ..... 175,994 (3,883) (564) 171,547
Other liabilities ........................... 185,993 -- 59,362 245,355
---------- --------- -------- ----------
Total liabilities ........................ 1,477,158 (720,373) 58,798 815,583
---------- --------- -------- ----------
Contingently redeemable warrants ............ -- 6,030 -- 6,030
---------- --------- -------- ----------
Equity (deficit) ............................ (557,291) 734,785 98,952 276,446
---------- --------- -------- ----------
Total liabilities and equity (deficit) ... $ 919,867 $ 20,442 $157,750 $1,098,059
========== ========= ======== ==========
-57-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
- ----------
(1) Represents the balance sheet of the Company at November 10, 2003, prior to
emergence from bankruptcy.
(2) Reflects the discharge of liabilities subject to compromise in accordance
with the Confirmed Plan. Adjustments include the cash payment primarily to
pre-petition secured creditors of $50,943, accruals for payments to
unsecured creditors of $5,120, the issuance of debt of $250,591 (see note
10), and the issuance of new equity to former creditors, including common
stock of $268,084, warrants of $8,361 and contingently redeemable warrants
of $6,030 (see note 11). Additionally, other current assets and other
assets reflect the reversal of the valuation allowance previously recorded
against net domestic deferred tax assets of $44,729 (see Note 6).
(3) Reflects adjustments to record assets and liabilities at fair value as of
Effective Date. Significant adjustments include those to property, plant,
and equipment of $74,477 (see note 9), intangible assets of $73,149 (see
note 9) pension and postretirement assets and liabilities of $64,447 (see
note 7) and other assets and liabilities of $221. Additionally, adjustments
include those to reflect inventory at fair value less cost to dispose
totaling $2,759 and the deferred tax effects of the fresh-start adjustments
of $7,850.
Reorganization items in the consolidated statements of operations consists of
the following:
Periods Ended
---------------------------
November 10, December 31,
2003 2002
------------ ------------
Professional fees ................................ $ 25,625 $ 6,006
Employee costs ................................... 20,470 2,528
Interest income .................................. (608) (185)
Settlement of pre-petition liabilities ........... (1,264) (985)
Write off of unamortized debt issuance costs ..... 11,730 --
Gain on debt discharge ........................... (377,193) --
Fresh-start accounting adjustments ............... (112,211) --
Other ............................................ 17,369 4,272
--------- -------
$(416,082) $11,636
========= =======
The gain on debt discharge is determined as follows:
Period Ended
November 10,
2003
------------
Liabilities discharged ....................................... $976,084
Less: Cash payments made ..................................... 50,943
Accruals for future payments to be made ................ 5,120
Debt issued ............................................ 250,591
Common stock and warrants issued ....................... 276,446
Contingently redeemable warrants issued ................ 6,030
Gain included in income from discontinued operations ... 3,500
Other comprehensive income adjustment .................. 6,261
--------
Gain on debt discharge ................................. $377,193
========
-58-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
The income effect of the fresh-start accounting adjustments is comprised of the
following:
Period Ended
November 10,
2003
------------
Inventory ....................................................... $ 2,759
Property, plant and equipment ................................... 74,477
Goodwill ........................................................ 26,052
Intangible assets ............................................... 73,149
Pension and postretirement assets and liabilities ............... (64,447)
Other assets and liabilities .................................... 221
--------
Net fresh-start accounting adjustment ........................... $112,211
========
Note 4 - Restructuring and Impairment Charges
Restructuring Charges
During 2004, the Company initiated actions to close one facility in its
manufacturing segment and two facilities in its performance products segment. In
addition, the Company initiated a workforce reduction affecting its corporate
and other businesses. The Company's restructuring actions during 2003 consist of
two plant closures in its performance products segment. The Company expects to
substantially complete implementation of these restructuring actions by the end
of 2005. The following tables summarize the Company's expected costs and
accruals for these restructuring actions:
Performance Corporate
Products Manufacturing & Other Total
----------- ------------- --------- -------
Employee Termination Costs
Cumulative costs incurred ........................ $ 8,365 $ 1,265 $350 $ 9,980
Costs anticipated to be incurred in the future ... 39 235 -- 274
------- ------- ---- -------
Total costs to be incurred ....................... $ 8,404 $ 1,500 $350 $10,254
======= ======= ==== =======
Provisions - restructuring ....................... $ 985 $ -- $ -- $ 985
Provisions - reorganization items ................ 6,000 -- -- 6,000
Amounts paid ..................................... (4,288) -- -- (4,288)
------- ------- ---- -------
Accrual balance at December 31, 2003 ............. $ 2,697 $ -- $ -- $ 2,697
Provisions ....................................... 1,381 1,265 350 2,996
Amounts paid ..................................... (3,134) (1,058) (73) (4,265)
------- ------- ---- -------
Accrual balance at December 31, 2004 ............. $ 944 $ 207 $277 $ 1,428
======= ======= ==== =======
In the performance products segment, included in costs incurred during
2004, but not in provisions in the accrual roll forward, is $1,130 of
contractual termination pension benefits, which have been recorded in the
pension liability.
-59-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Performance Corporate
Products Manufacturing & Other Total
----------- ------------- --------- ---------
Facility Exit Costs
Cumulative costs incurred ....................... $ 14,253 $ 430 $-- $ 14,683
Costs anticipated to be incurred in the future .. 904 39 -- 943
-------- ----- --- --------
Total costs to be incurred ...................... $ 15,157 $ 469 $-- $ 15,626
======== ===== === ========
Provisions - restructuring ...................... $ 191 $ -- $-- $ 191
Provisions - reorganization items ............... 7,949 -- -- 7,949
Amounts paid .................................... (2,489) -- -- (2,489)
-------- ----- --- --------
Accrual balance at December 31, 2003 ............ $ 5,651 $ -- $-- $ 5,651
Provisions ...................................... 6,113 430 -- 6,543
Amounts paid .................................... (10,921) (430) -- (11,351)
-------- ----- --- --------
Accrual balance at December 31, 2004 ............ $ 843 $ -- $-- $ 843
======== ===== === ========
The Company's restructuring programs initiated in prior years have been
completed. The following tables summarize the Company's liabilities for
restructuring programs initiated in prior years:
Employee
Termination Facility Exit
Costs Costs
----------- -------------
Balance at December 31, 2002................... $ 2,144 $ 936
Reclassification from liabilities subject to
compromise.................................. -- 186
Adjustments.................................... (151) (913)
Amounts paid................................... (1,993) (209)
-------- -----
Balance at December 31, 2003................... $ -- $ --
======== =====
During 2001, the Company determined that it would close a facility in the
manufacturing segment, due to notification received from the facilities' largest
customer that it was terminating its contract. Subsequently, the customer has
repeatedly delayed the contract termination date. During this time frame, other
business conditions at this facility along with other related manufacturing
facilities have caused the Company to change its plans for this facility, and
continue to operate it. Accordingly, during 2003 the previously recorded
facility exit costs were reversed. Adjustments to employee termination costs are
the result of differences in the estimated costs and the amount ultimately
incurred.
Impairment Charges
During December 2004, the Company closed a facility in Klamath Falls,
Oregon, which is included in the performance products segment. Accordingly, the
Company reclassified the assets at the facility (primarily land and building) to
assets held for sale and 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 $178 to reduce the fixed assets to fair value,
which was determined based on a number of factors, including an analysis of
market transactions for similar assets.
On September 30, 2004, certain subsidiaries of the Company entered into a
share purchase and transfer agreement under which the Company agreed to sell its
50 percent interest in the PrettlNoma Systems joint venture to Prettl Industrie
Beteiligungs GmbH. The agreement effectively terminates the
-60-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
joint venture which supplies panel systems for the appliance industry. As a
result, the Company recorded an impairment to the carrying value of its
investment in the joint venture in other (income) expense of $12,670, reflecting
an other than temporary decline in value in accordance with the provisions of
Accounting Principles Board Opinion No. 18.
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 on a number of factors, including an analysis of market
transactions for similar assets.
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 warrants, stock options and restricted units, using the treasury
stock method.
The components of the denominator for basic earnings per common share and
diluted earnings per common share are reconciled as follows:
Successor Company Predecessor Company
--------------------------- ---------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------ ------------ ------------
Basic earnings per common share:
Weighted average common shares
outstanding ................... 10,000,000 10,000,000 25,564,310 25,527,570
---------- ---------- ---------- ----------
Diluted earnings per common share:
Weighted average common shares
outstanding ................... 10,000,000 10,000,000 25,564,310 25,527,570
Options and restricted stock ..... 27,500 -- 625 --
---------- ---------- ---------- ----------
Total ......................... 10,027,500 10,000,000 25,564,935 25,527,570
========== ========== ========== ==========
For the year ended December 31, 2004, the periods ended December 31, 2003
and November 10, 2003 and the year ended December 31, 2002 there were
potentially dilutive securities totaling 1,067,973, 2,094,645, 2,659,000 and
2,922,813, respectively, that were not included in the computation of diluted
earnings per common share due to their anti-dilutive effect.
-61-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Note 6 - Income Taxes
Income from continuing operations before income taxes is as follows:
Successor Company Predecessor Company
---------------------------- ----------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------- ------------- ------------
United States .. $ 7,684 $ (774) $458,438 $(30,085)
Foreign ........ 11,882 4,547 (17,399) 25,582
------- ------ -------- --------
Total ....... $19,566 $3,773 $441,039 $ (4,503)
======= ====== ======== ========
The components of the income tax provision (benefit) are as follows:
Successor Company Predecessor Company
---------------------------- ----------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------- ------------- ------------
United States:
Current ..... $(4,366) $ -- $ -- $(8,674)
Deferred .... 14,740 1,737 (9,836) 93,826
Foreign:
Current ..... 5,814 578 (1,646) 2,867
Deferred .... (2,793) (579) (11,922) 1,109
State:
Current ..... (1,208) -- 824 1,151
Deferred .... 1,768 101 (2,471) 5,536
------- ------ -------- -------
Total ....... $13,955 $1,837 $(25,051) $95,815
======= ====== ======== =======
A summary of the components of deferred tax assets and liabilities is as
follows:
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Net operating loss carry forwards ......... $ 8,947 $ 7,274
Postretirement benefits ................... 56,889 69,998
Other accruals not currently deductible ... 34,384 41,474
Goodwill .................................. 24,146 25,736
Foreign operations ........................ 19,678 15,759
Other ..................................... -- 99
-------- --------
Deferred tax assets .................... 144,044 160,340
-------- --------
Intangibles ............................... 27,084 29,480
Property, plant and equipment ............. 78,994 87,300
Other ..................................... 11,008 8,671
-------- --------
Deferred tax liabilities ............... 117,086 125,451
Valuation allowance ....................... 21,867 16,455
-------- --------
Net deferred tax assets (liabilities) .. $ 5,091 $ 18,434
======== ========
-62-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
At December 31, 2004 and 2003, the Company had deferred tax assets of
$19,678 and $15,759 related to foreign tax credits, for which a full valuation
allowance had been provided. Net operating loss carryforwards in the United
States will expire in future years through 2017. During the second quarter of
2002, the Company revised its projection of domestic taxable income. These
estimates projected significantly lower domestic taxable income than previous
projections, principally due to the downturn in the global communications
market. As a result of lower projected domestic taxable income and the Company's
evaluation of potential tax planning strategies, the Company concluded that it
was more likely than not that it would not be able to realize its domestic net
deferred tax assets. Accordingly, during 2002 the Company recorded an increase
to its valuation allowance of $98 million effectively reducing the carrying
value of its domestic net deferred tax assets to zero. On November 10, 2003, the
Company emerged from Chapter 11 and for the period ended November 10, 2003
recorded income of $377 million related to the discharge of indebtedness. The
Company recorded tax expense for the period ended November 10, 2003 of $57
million on this income, which represents a non-cash charge related to a
reduction in the value of the Company's tax basis in its assets as required by
the Internal Revenue Code. Based upon projections of the Company's future
domestic taxable income the Company concluded during the fourth quarter of 2003
that it was more likely than not it would be able to realize its domestic net
deferred tax assets. Accordingly, during the period ended November 10, 2003 the
Company recorded a decrease in its valuation allowance of $99 million
effectively restoring the carrying value of its domestic net deferred tax asset.
The increase to the valuation allowance during 2004 is primarily due to
foreign tax credits generated during the year for which the Company has
concluded that it is more likely than not that the credits will not be realized.
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. The Company intends to take advantage
of the foreign earnings repatriation provision of the American Jobs Creation Act
of 2004 for certain foreign earnings repatriated during 2004. The effect on tax
expense of applying this provision to eligible dividends is approximately $734.
The difference between the Company's effective income tax rate and the
United States statutory rate is reconciled below:
Successor Company Predecessor Company
--------------------------- ---------------------------
Year Ended Period Ended Period Ended Year Ended
December 31, December 31, November 10, December 31,
2004 2003 2003 2002
------------ ------------ ------------ ------------
U.S. federal statutory rate ................. 35.0% 35.0% 35.0% (35.0)%
State income taxes, net of federal benefit... 2.0 (0.8) 0.2 (17.9)
Tax effect of foreign operations ............ 22.7 13.7 (1.1) 149.4
Valuation allowance ......................... -- -- (16.4) 2,056.5
Impact of attribute reduction ............... -- -- (16.9) --
Sale of equity interest ..................... 11.7 -- -- --
Fresh Start adjustment ...................... -- -- (6.2) --
Other ....................................... (0.1) 0.8 (0.3) (24.4)
---- ---- ----- -------
Total .................................... 71.3% 48.7% (5.7)% 2,128.6%
==== ==== ===== =======
Note 7 - Pension Plans and Other Postretirement Benefits
The Company maintains several defined benefit pension plans covering
certain employees in Canada, Ireland and the United States. A participating
employee's annual postretirement pension benefit
-63-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
is determined by the employee's credited service and, in most plans, final
average annual earnings with the Company. Vesting requirements are from two to
five years.
The Company also sponsors several defined contribution pension plans
covering certain employees in Canada and the United States. The Company's
contributions are based upon a formula utilizing an employee's credited service
and average annual salary. Vesting requirements are from two to five years. The
Company's cost to provide this benefit was $2,215, $168, $585 and $855 for the
year ended December 31, 2004, the periods ended December 31, 2003 and November
10, 2003 and the year ended December 31, 2002, respectively.
The Company also maintains several plans providing postretirement benefits
other than pensions covering certain hourly and salaried employees in Canada and
the United States. The Company funds these benefits on a pay-as-you-go basis.
Accruals for pension and other post-retirement benefit costs utilize a
number of accounting mechanisms that reduce the volatility of reported costs.
Differences between actuarial assumptions and actual plan results are deferred
and are amortized into expense only when the accumulated differences exceed 10
percent of the greater of the projected benefit obligation or the market-related
value of plan assets. If necessary, the excess is amortized over the average
remaining service period of active employees. Additionally, the impact of asset
performance on pension expense is recognized over a five-year phase-in period
though a "market-related" value of assets calculation. Since the market-related
value of assets recognizes investment gains or losses over a five-year period,
the future value of assets will be impacted as previously deferred gains or
losses are recognized.
Pension Benefits Other Postretirement Benefits
----------------------------------------- -----------------------------------------
Successor Predecessor Successor Predecessor
Company Company Company Company
------------------- ------------------- ------------------- -------------------
Year Period Period Year Year Period Period Year
Ended Ended Ended Ended Ended Ended Ended Ended
December December November December December December November December
31, 2004 31, 2003 10, 2003 31, 2002 31, 2004 31, 2003 10, 2003 31, 2002
-------- -------- -------- -------- -------- -------- -------- --------
Components of net periodic
benefit cost:
Service cost ............... $ 2,636 $ 1,299 $3,868 $ 4,408 $1,189 $237 $1,046 $1,109
Interest cost .............. 13,869 3,326 9,961 12,746 3,587 709 3,135 3,626
Expected return on plan
assets .................. (12,375) (3,175) (9,530) (15,354) -- -- -- --
Amortization of net:
Prior service cost ...... 56 -- 255 306 (1,366) -- (652) (782)
(Gain)/loss ............. -- -- 535 (230) (163) -- 38 39
-------- ------- ------ ------- ------ ---- ------ ------
Net periodic benefit cost .. $ 4,186 $ 1,450 $5,089 $ 1,876 $3,247 $946 $3,567 $3,992
======== ======= ====== ======= ====== ==== ====== ======
During the first quarter of 2004, the Company notified its employees that
benefit accruals in defined benefit pension plans covering domestic salaried and
certain hourly employees would be frozen effective April 1, 2004. This action
resulted in a curtailment gain of $14,840. During the second quarter of 2004,
the Company accrued $1,130 of contractual termination pension benefits, related
to the closure of a plant, which was recorded as a component of restructuring
and impairment charges.
-64-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
In addition, during 2003 the Company closed two plant facilities which
resulted in curtailment losses recognized of $206 and $2,382 for the pension and
other post-retirement benefit plans, respectively, and contractual termination
benefits of $6,289 for the pension plan. These amounts were recognized as a
component of reorganization items, net.
Other
Pension Benefits Postretirement Benefits
December 31, December 31,
-------------------- -----------------------
2004 2003 2004 2003
-------- --------- -------- --------
Change in benefit obligation:
Benefit obligation at prior measurement date...... $247,693 $ 206,667 $ 74,648 $ 59,434
Service cost...................................... 2,636 5,167 1,189 1,283
Employee contributions............................ 16 40 -- --
Interest cost..................................... 13,869 13,287 3,587 3,845
Actuarial (gain)/loss............................. 5,098 26,514 (4,613) 11,005
Foreign currency translation...................... 1,060 2,244 318 435
Benefits paid..................................... (14,102) (10,856) (6,048) (4,083)
Plan amendments................................... 983 -- (18,165) --
Curtailments...................................... (18,051) (1,659) -- 2,729
Special termination benefits...................... 1,130 6,289 -- --
-------- --------- -------- --------
Benefit obligation at measurement date ........... $240,609 $ 247,693 $ 50,916 $ 74,648
======== ========= ======== ========
Change in plan assets:
Fair value of assets at prior measurement date.... $144,783 $ 132,273 $ -- $ --
Actual return on plan assets...................... 13,468 18,821 -- --
Employer contributions............................ 22,883 2,582 6,048 4,083
Employee contributions............................ 16 40 -- --
Foreign currency translation...................... 1,060 1,923 -- --
Benefits paid..................................... (14,102) (10,856) (6,048) (4,083)
-------- --------- -------- --------
Fair value of assets at measurement date.......... $168,108 $ 144,783 $ -- $ --
======== ========= ======== ========
Reconciliation of funded status:
Funded status..................................... $(72,501) $(102,910) $(50,916) $(74,648)
Unrecognized net:
Prior service cost............................. 927 -- (16,799) --
(Gain)/loss.................................... (514) (1,419) (4,691) (343)
-------- --------- -------- --------
Net amount recognized............................. $(72,088) $(104,329) $(72,406) $(74,991)
======== ========= ======== ========
Amounts recognized in the balance sheet:
Prepaid benefit cost.............................. $ -- $ 295 $ -- $ --
Accrued liability................................. (75,569) (104,624) (72,406) (74,991)
Intangible asset.................................. 927 -- -- --
Accumulated other comprehensive income............ 2,554 -- -- --
-------- --------- -------- --------
Net amount recognized............................. $(72,088) $(104,329) $(72,406) $(74,991)
======== ========= ======== ========
During the third quarter of 2004, the Company adopted the provisions of
FASB Staff Position No. FAS 106-2, "Accounting and Disclosure Requirements
Related to the Medicare Prescription Drug, Improvement and Modernization Act of
2003" (FSP FAS 106-2). The effect of adopting FSP FAS 106-2
-65-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
was a reduction to the accumulated postretirement benefit obligation of $8,220.
This reduction will be amortized as a component of net periodic postretirement
benefit cost over the average remaining service periods of active plan
participants. Amortization of this experience gain for the second half of 2004
was $163. In addition, the adoption of FSP FAS 106-2 had the effect of reducing
the service cost and interest cost components of net periodic postretirement
benefit cost for the second half of 2004 by $65 and $248, respectively.
Additionally, effective July 1, 2004, the Company implemented plan
amendments to certain postretirement medical plans which cap the Company's cost
for providing these benefits at current levels. The effect of these changes was
a reduction to the accumulated postretirement benefit obligation of $18,165
which will be amortized as a component of net periodic postretirement benefit
cost over the average remaining service period until full eligibility of active
plan participants.
The accumulated benefit obligations for the defined benefit plans were
$235,450 and $217,985 at December 31, 2004 and 2003, respectively. For pension
plans included above with aggregate benefit obligations and accumulated benefit
obligations in excess of plan assets, at December 31, 2004 and 2003, the
projected benefit obligations were $237,747 and $242,523, respectively, the
accumulated benefit obligations were $232,645 and $213,005, respectively, and
the fair values of plan assets for these plans were $165,212 and $139,317,
respectively.
Gross benefits expected to be paid from the plans and Medicare Part D
federal subsidy payments expected to be received are as follows:
Other
Pension Postretirement Federal
Benefits Benefits Subsidies
-------- -------- ---------
2005 15,300 4,500 0
2006 18,200 4,700 500
2007 15,800 5,000 600
2008 16,000 5,200 600
2009 16,400 5,500 600
2010-2014 92,400 30,900 3,500
The weighted-average assumptions used to determine benefit obligations for
the plans were:
2004 2003 2002
----- ---- -----
Discount rate ....................................... 5 3/4% 6% 6 1/2%
Average rate of increase in employee compensation ... 4% 5% 5%
The weighted-average assumptions used to determine net periodic benefit
cost for the plans were:
2004 2003 2002
---- ----- -----
Discount rate....................................... 6% 6 1/2% 7 1/4%
Long-term rate of return on assets.................. 8% 8% 9%
Average rate of increase in employee compensation... 5% 5% 5%
The expected long-term rate of return on assets is developed based upon the
expected future return of asset classes the plans invest in, along with the
expected future mix of investments in the
-66-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
pension trusts. The Company considers historical returns of the pension assets,
independent market forecasts and management estimates when developing the
expected long-term rate of return on assets.
The health care cost trend rate used in accounting for the medical plans
was 10 percent in 2004 (decreasing to 6 percent in the year 2009 and beyond) and
11 percent in 2003 (decreasing to 6 percent in the year 2009 and beyond). A one
percent increase in the health care trend rate would increase the accumulated
postretirement benefit obligation by $4,051 at year-end 2004 and the net
periodic cost by $449 for the year. A one percent decrease in the health care
trend rate would decrease the accumulated postretirement benefit obligation by
$3,523 at year-end 2004 and the net periodic cost by $381 for the year.
The dates used to measure plan assets and liabilities were October 31, 2004
and 2003 for all plans.
The pension trusts' weighted-average asset allocations at October 31, 2004
and 2003 were:
2004 2003
---- ----
Asset Category
Debt securities ..... 55% 54%
Equity securities ... 43% 44%
Real estate ......... 2% 2%
--- ---
100% 100%
=== ===
The Company's investment policy for its pension trusts is to balance risk
and return through a diversified portfolio of fixed income securities, equity
securities and private equity investments. Maturities for fixed income
securities are managed such that sufficient liquidity exists to meet near-term
benefit payment obligations. In 2005, the Company expects to contribute
approximately $36 million to its pension plan trusts.
Note 8 - Commitments and Contingencies
Future minimum rental payments for operating leases (primarily for
transportation equipment, offices and warehouses) having initial or remaining
noncancellable lease terms in excess of one year as of December 31, 2004 are as
follows:
Years Ending December 31,
2005 ..................... $ 6,650
2006 ..................... 5,575
2007 ..................... 5,109
2008 ..................... 4,767
2009 ..................... 3,864
thereafter ............... 2,889
-------
$28,854
=======
Rental expense for the year ended December 31, 2004, the periods ended
December 31, 2003 and November 10, 2003 and the year ended December 31, 2002 was
$12,307, $1,617, $9,385, and $10,998, respectively.
-67-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Environmental Matters
Accruals for environmental liabilities are recorded based on current
interpretations of applicable environmental laws and regulations when it is
probable that a liability has been incurred and the amount of such liability can
be reasonably estimated. Estimates are established based upon information
available to management to date, the nature and extent of the environmental
liability, the Company's experience with similar activities undertaken,
estimates obtained from outside consultants and the legal and regulatory
framework in the jurisdiction in which the liability arose. The potential costs
related to environmental matters and their estimated impact on future operations
are difficult to predict due to the uncertainties regarding the extent of any
required remediation, the complexity and interpretation of applicable laws and
regulations, possible modification of existing laws and regulations or the
adoption of new laws or regulations in the future, and the numerous alternative
remediation methods and their related varying costs. The material components of
the Company's environmental accruals include potential costs, as applicable, for
investigation, monitoring, remediation and ongoing maintenance activities at any
affected site. Accrued liabilities for environmental matters do not include
third-party recoveries nor have they been discounted. Activity in the aggregate
accrued liability for environmental matters is summarized as follows:
2004 2003
------- -------
Balance at beginning of period ... $29,103 $26,605
Accruals, net .................... 10,518 4,026
Payments ......................... (5,121) (1,640)
Foreign exchange and other ....... 32 112
------- -------
Balance at end of period ......... $34,532 $29,103
======= =======
On April 30, 2004, the Company and Honeywell International Inc. entered
into a settlement agreement relating to the Company's proposed rejection in the
Company's bankruptcy proceedings of certain executory contracts dealing with
environmental issues at sites formerly owned by Honeywell's predecessor, along
with certain other claims made by Honeywell. The settlement agreement provides,
among other things, that the Company will transfer ownership of two sites to
Honeywell in exchange for Honeywell assuming all environmental liabilities at
these sites, along with any groundwater contamination at another site. In
addition, Honeywell agreed to share with the Company the costs of certain
environmental remediation at two other sites that will continue to be owned by
GenTek. Accordingly, the Company recorded a receivable of $6,000, which
represents amounts expected to be received over the next several years from
Honeywell in accordance with the cost sharing provisions of the agreement.
Contingencies
The Company is involved in various claims, litigation, administrative
proceedings and investigations. Although the amount of any ultimate liability
which could arise with respect to these matters cannot be accurately predicted,
it is the opinion of management, based upon currently available information,
that any such liability will have no material adverse effect on the Company's
financial condition, results of operations or cash flows.
-68-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Note 9 - Additional Financial Information
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Receivables
Trade ............................. $114,320 $103,032
Other ............................. 11,509 9,903
Allowance for doubtful accounts ... (8,193) (8,654)
-------- --------
$117,636 $104,281
======== ========
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Inventories
Raw materials ............. $32,394 $24,637
Work in process ........... 9,630 8,475
Finished products ......... 32,493 26,698
Supplies and containers ... 1,657 2,645
------- -------
$76,174 $62,455
======= =======
Inventories valued at LIFO amounted to $11,782 and $13,852 at December 31,
2004 and 2003, respectively, which were above and (below) estimated replacement
cost by $(538) and $1, respectively. The impact of LIFO liquidations in 2004,
2003 and 2002 was not significant.
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Property, Plant and Equipment
Land and improvements ............................. $ 52,329 $ 55,507
Machinery and equipment ........................... 198,469 175,223
Buildings and leasehold improvements .............. 53,179 43,181
Construction in progress .......................... 24,040 23,768
-------- --------
328,017 297,679
Less: accumulated depreciation and amortization ... 43,060 3,565
-------- --------
$284,957 $294,114
======== ========
Performance
Products Manufacturing Total
----------- ------------- --------
Goodwill
Balance at January 1, 2003 ..... 21,738 105,986 127,724
Foreign currency translation ... -- 236 236
Reorganization adjustments ..... (10,065) 35,904 25,839
-------- -------- --------
Balance at December 31, 2003 ... $ 11,673 $142,126 $153,799
======== ======== ========
Foreign currency translation ... -- 112 112
Acquisitions ................... 454 -- 454
-------- -------- --------
Balance at December 31, 2004 ... $ 12,127 $142,238 $154,365
======== ======== ========
-69-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Successor Company
------------------------------------------
December 31, December 31, Weighted
2004 2003 Average Life
------------ ------------ ------------
Intangible Assets
Patents - gross ................ $13,050 $12,947 13 1/2 years
Accumulated amortization .... 1,077 120
------- -------
Patents - net .................. 11,973 12,827
Customer related - gross ....... 42,642 39,000 8 years
Accumulated amortization .... 6,083 613
------- -------
Customer related - net ......... 36,559 38,387
Trademarks - indefinite life ... 22,000 22,000
------- -------
$70,532 $73,214
======= =======
In conjunction with the adoption of fresh-start accounting (see note 3),
the Company has allocated a portion of the reorganization value to reflect
identifiable intangible assets at estimated fair values. During the year ended
December 31, 2004 and period ended December 31, 2003, the Company recognized
$6,427 and $733 of amortization expense, respectively. The estimated
amortization expense for each of the next 5 years is $6,717, $6,717, $6,592,
$5,833 and $4,972.
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Accrued Liabilities
Wages, salaries and benefits ..... $21,925 $ 24,550
Pension obligations .............. 1,510 19,038
Employee termination costs ....... 1,428 2,845
Bankruptcy obligations ........... 2,370 14,944
Taxes, other than income taxes ... 4,947 5,864
Other ............................ 39,382 38,685
------- --------
$71,562 $105,926
======= ========
Note 10 - Long-Term Debt
Successor Company
---------------------------
December 31, December 31,
Maturities 2004 2003
---------- ------------ ------------
Revolving credit facility - floating rates ... 2008 $ 6,500 $ --
Senior term loan agreement - floating rate ... 2008 -- 250,000
Other debt - various ......................... 2004-2018 6,036 1,188
------- --------
Total debt ................................ 12,536 251,188
Less: current portion ..................... 1,489 338
------- --------
Net long-term debt ........................ $11,047 $250,850
======= ========
-70-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Aggregate maturities of long term debt are as follows: 2005, $1,489; 2006,
$1,755; 2007, $2,306; 2008, $6,736; 2009, $40; thereafter, $210.
On November 10, 2003, GenTek, substantially all of GenTek's domestic
subsidiaries, and Noma Company (collectively, "the Borrowers") entered into a
$125 million Revolving Credit Facility which matures on November 10, 2008. The
facility includes a letter of credit sub-limit of $60 million. The facility is
secured by a first priority lien on substantially all of the assets of the
Borrowers and 65 percent of the stock of first-tier foreign subsidiaries. The
facility bears interest at variable rates based on a base rate or LIBOR plus an
applicable margin. The current margins are 1.25 percent for base rate borrowings
and 2.25 percent for LIBOR borrowings. The margins are subject to periodic
adjustment based upon the financial performance of the Company. The rate in
effect at December 31, 2004 was 6.5 percent. The facility contains debt
covenants which impose certain restrictions on the Company's ability to, among
other things, incur additional debt, pay dividends, make investments or sell
assets. Additionally, certain asset sale proceeds must be used to repay
indebtedness.
In addition, on November 10, 2003, the Company issued $250 million of
senior term debt under the Senior Term Loan Agreement. In conjunction with the
sale of KRONE communications business, all amounts outstanding were repaid and
the agreement was terminated. The interest rate in effect at December 31, 2003
was 6.0 percent.
Commitment fees paid for the Company's credit facilities were $497, $54 and
$92 for the year ended December 31, 2004, the period ended November 10, 2003 and
the year ended December 31, 2002, respectively. The unused letter of credit
balance available under the Company's credit facilities was $43,352 and $24,322
at December 31, 2004 and 2003, respectively.
Note 11 - Capital Stock
On the Effective Date all existing equity securities of the Company were
cancelled and the Company issued 10,000,000 shares of common stock, no par
value. The common stock is subject to certain restrictions on transfer which
generally prohibit the transfer of common stock by a holder who holds or would
hold more than 4.75 percent of the total value of our outstanding equity
securities without the prior written consent of our board of directors. These
restrictions will remain in effect until the earlier of November 10, 2005 or the
date that the board of directors determines that such restrictions are no longer
necessary to protect certain tax benefits.
In addition, the Company issued the following warrants:
December 31, 2004 December 31, 2003
----------------------------- -----------------------------
Number of Number of
Expiration Date shares covered Strike Price shares covered Strike Price
----------------- -------------- ------------ -------------- ------------
Tranche A November 10, 2006 -- $ -- 1,173,184 $58.50
Tranche B November 10, 2008 717,531 $55.65 619,095 $64.50
Tranche C November 10, 2010 350,442 $61.35 302,366 $71.11
-71-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
The terms of the warrants provide for the number of shares covered by the
warrants and the strike price to be adjusted in the case of certain events,
including dividends. During December, 2004, the Company paid a special dividend
of $7.00 per share, and the number of shares covered by the warrants and their
strike price was adjusted pursuant their terms.
The terms of the Tranche A warrants contained a contingent redemption
feature, which was triggered by a sale of all or substantially all of the assets
of the communications business. Accordingly, these warrants were classified as
temporary equity. The sale of the KRONE communications business triggered the
contingent redemption feature. The Company made the required payment of $8,365
($7.13 per warrant) on June 30, 2004 and the Tranche A warrants expired. The
difference between the amount paid and the carrying amount was treated as a
reduction in stockholder's equity.
The Company's previously issued authorized capital stock consisted of
100,000,000 shares of Common Stock, par value $.01 per share and 40,000,000
shares of Class B Common Stock, par value $.01 per share, which had ten votes
per share, were subject to significant restrictions on transfer and was
convertible at any time into Common Stock on a share-for-share basis. The Common
Stock and Class B Common Stock were substantially identical, except for the
disparity in voting power, restriction on transfer and conversion provisions.
Note 12 - Stock Incentive Plans
On the Effective Date, the Company adopted a new management and directors
incentive plan under which stock options, restricted stock and other stock-based
awards may be granted to employees, officers, and directors. Grants under the
plan generally vest over two to three years and options have a maximum term of
ten years. Compensation cost recorded for stock-based compensation under this
plan was $1,483 for the year ended December 31, 2004. During 2004, there were
130,406 shares of restricted stock issued with a weighted-average grant date
value of $36.43. At December 31, 2004, there were 98,572 shares of restricted
stock remaining outstanding. As of December 31, 2004, the total number of shares
authorized for grant under this plan was 1,000,000 with 748,860 shares available
for grant.
All awards issued under prior incentive plans were cancelled on the
Effective Date. The Company had several long-term incentive plans pursuant to
which stock options and other equity-related incentive awards were granted to
officers, non-employee directors and other key people. Compensation cost
(income) recorded for stock-based compensation under those plans was $3 and
$(525), for the period ended November 10, 2003 and the year ended December 2002,
respectively.
-72-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Information with respect to all stock options is summarized below:
2004 2003 2002
------------------------ --------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
------- -------------- --------- -------------- --------- --------------
Outstanding at
beginning of year... -- $ -- 2,841,000 $11.66 3,004,000 $11.60
Options granted........ 148,342 36.00 -- -- -- --
Options exercised...... -- -- -- -- -- --
Options forfeited...... 16,363 36.00 2,841,000 11.66 163,000 10.56
Option modification.... 20,589 31.14 -- -- -- --
------- --------- ---------
Outstanding at end
of year............. 152,568 $31.14 -- $ -- 2,841,000 $11.66
======= ========= =========
Exercisable at end
of year............. -- $ -- -- $ -- 1,950,200 $12.45
As a result of the special dividend of $7.00 per share in December 2004,
outstanding stock options were modified pursuant to an equitable adjustment
calculation to maintain the aggregate amount of intrinsic value for the options
and to ensure that the ratio of the exercise price per share to the market value
per share was not reduced. The effect of this modification was to increase the
number of options outstanding by 20,589 and reduce the exercise price of the
options from $36.00 to $31.14.
All options outstanding at December 31, 2004 have an exercise price of
$31.14 and a remaining contractual life of 9.25 years.
Note 13 - Financial Instruments
Investments
All marketable equity securities are classified as available-for-sale, with
net unrealized gains and losses shown as a component of accumulated other
comprehensive income (loss). At December 31, 2004 and 2003, there were no
marketable equity securities held by the Company. Realized gains and losses are
determined on the average cost method. Sales of investments were as follows:
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
Proceeds................ $-- $-- $561
Gross realized losses... $-- $-- $386
Swap Agreements
The Company periodically enters into interest rate swap agreements to
effectively convert a portion of its floating-rate to fixed-rate debt in order
to reduce the Company's exposure to movements in interest rates and achieve a
desired proportion of variable versus fixed-rate debt. Such agreements involve
the exchange of fixed and floating interest rate payments over the life of the
agreement without the exchange of the underlying principal amounts. Accordingly,
the impact of fluctuations in interest
-73-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
rates on these interest rate swap agreements is fully offset by the opposite
impact on the related debt. Swap agreements are only entered into with strong
creditworthy counterparties. All swap agreements in effect in 2002 had been
designated as cash flow hedges, and all were 100 percent effective. As a result,
there is no impact to earnings due to hedge ineffectiveness. As a result of the
Filing, the Company discontinued hedge accounting for its interest rate swaps
since it was no longer probable that the forecasted variable interest payments
would occur. Additionally, a charge of $4,272 was recorded in reorganization
items, which represents amounts which would have been reclassified from
accumulated other comprehensive income amounts to the statement of operations
had interest payments been made during the estimated period of time the Company
will be reorganizing under Chapter 11. The Company's swap agreements were
terminated in conjunction with our emergence from Chapter 11. There were no swap
agreements outstanding as of December 31, 2004 and 2003.
Fair Value of Financial Instruments
Successor Company
---------------------------------------------
December 31, 2004 December 31, 2003
--------------------- ---------------------
Carrying Carrying
Amount Fair Value Amount Fair Value
-------- ---------- -------- ----------
Long-term debt........... $12,536 $12,536 $251,188 $251,188
Derivative instruments... $ 85 $ 85 $ -- $ --
The fair values of cash and cash equivalents, receivables and payables
approximate their carrying values due to the short-term nature of the
instruments. The fair value of the Company's long-term debt was based on quoted
market prices for traded debt and discounted cash flow analyses on its nontraded
debt.
Note 14 - Geographic and Industry Segment Information
GenTek operates through two primary business segments: manufacturing and
performance products. As a result of the reclassification of the KRONE
communications business to discontinued operations, the communications segment
is no longer a reportable segment. The business segments were determined based
on several factors including products and services provided and markets served.
Each segment is managed separately. The manufacturing segment provides a broad
range of engineered components and services to the automotive, appliance and
electronic and industrial markets. The performance products segment manufactures
a broad range of products and services to four principal markets: environmental
services, pharmaceutical and personal care, chemical processing and technology.
The accounting policies of the segments are the same as those described in the
summary of significant accounting policies.
-74-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Industry segment information is summarized as follows:
Net Revenues Operating Profit (Loss)
----------------------------------------- ------------------------------------------
Successor Company Predecessor Company Successor Company Predecessor Company
------------------- ------------------- ------------------- --------------------
Year Period Period Year Year Period Period Year
Ended Ended Ended Ended Ended Ended Ended Ended
December December November December December December November December
31, 2004 31, 2003 10, 2003 31, 2002 31, 2004 31, 2003 10, 2003 31, 2002
-------- -------- -------- -------- -------- -------- -------- --------
Manufacturing...................... $514,625 $52,855 $373,002 $477,113 $ 25,181 $ 3,664 $ 33,444 $44,807
Performance Products............... 316,573 39,945 295,980 357,427 21,257 3,508 (2,833) 28,657
Corporate and other................ 12,721 2,620 18,647 26,925 (10,141) (2,316) (10,907) (9,928)
-------- ------- -------- -------- -------- ------- --------- -------
Consolidated....................... $843,919 $95,420 $687,629 $861,465 36,297 4,856 19,704 63,536
======== ======= ======== ========
Interest expense................... 8,557 2,453 900 59,342
Other (income), expense net........ 8,174 (1,370) (422,235) 8,697
-------- ------- --------- -------
Consolidated income (loss)
from continuing operations
before income taxes and
cumulative effect of a change
in accounting principle......... $ 19,566 $ 3,773 $ 441,039 $(4,503)
======== ======= ========= =======
Capital Expenditures Depreciation and Amortization
----------------------------------------- -----------------------------------------
Successor Company Predecessor Company Successor Company Predecessor Company
------------------- ------------------- ------------------- -------------------
Year Period Period Year Year Period Period Year
Ended Ended Ended Ended Ended Ended Ended Ended
December December November December December December November December
31, 2004 31, 2003 10, 2003 31, 2002 31, 2004 31, 2003 10, 2003 31, 2002
-------- -------- -------- -------- -------- -------- -------- --------
Manufacturing...................... $10,430 $2,319 $ 6,449 $15,855 $26,607 $3,005 $14,783 $16,891
Performance Products............... 20,056 5,517 18,516 23,808 19,292 1,167 10,134 15,236
Corporate and other................ 489 91 866 1,266 1,498 238 1,257 1,939
------- ------ ------- ------- ------- ------ ------- -------
Consolidated....................... $30,975 $7,927 $25,831 $40,929 $47,397 $4,410 $26,174 $34,066
======= ====== ======= ======= ======= ====== ======= =======
Identifiable Assets
---------------------------
Successor Company
---------------------------
December 31, December 31,
2004 2003
------------ ------------
Manufacturing (1).................. $453,906 $ 454,040
Performance Products(2)............ 274,193 299,120
Corporate and other................ 24,565 31,797
Assets held for sale............... 962 281,852
-------- ----------
Consolidated....................... $753,626 $1,066,809
======== ==========
- ----------
(1) Includes equity method investments of $0 and $20,387, respectively.
(2) Includes equity method investments of $339 and $179, respectively.
-75-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
Geographic area information is summarized as follows:
External Revenues(1) Long-Lived Assets(2)
----------------------------------------------------- ---------------------------
Successor Company Predecessor Company Successor Company
------------------------- ------------------------- ---------------------------
Year Ended Period Ended Period Ended Year Ended
December December November December December 31, December 31,
31, 2004 31, 2003 10, 2003 31, 2002 2004 2003
---------- ------------ ------------ ---------- ------------ ------------
United States.... $654,270 $74,941 $540,052 $698,466 $245,357 $271,235
Canada........... 143,614 15,027 108,287 114,521 46,530 44,031
Other foreign.... 46,035 5,452 39,290 48,478 7,875 5,010
-------- ------- -------- -------- -------- --------
Consolidated..... $843,919 $95,420 $687,629 $861,465 $299,762 $320,276
======== ======= ======== ======== ======== ========
- ----------
(1) Revenues are attributed to geographic areas based on the locations of
customers.
(2) Represents all non-current assets except deferred tax assets, goodwill and
other intangible assets.
Note 15 - Related Party Transactions
Management Agreement
The Company was party to a management agreement with Latona Associates
Inc., which is controlled by a former stockholder of the Company, under which
the Company received corporate supervisory and administrative services and
strategic guidance. For the year ending December 31, 2002, the Company was
charged $5,017. Latona waived its right to be paid during the Chapter 11
proceedings. All amounts due to Latona for this period, totaling $4,325, were
recorded as a capital contribution. The original management agreement was
terminated on the Effective Date. Subsequently, the Company and Latona entered
into a new management support services agreement with a one-year term which
expired in November 2004. Pursuant to this agreement, the Company was charged
$3,000 and $1,950 for the year ending December 31, 2004 and the period ending
December 31, 2003, respectively.
Other Transactions
GenTek provides The General Chemical Group Inc. ("GCG") with certain
administrative services pursuant to a transition support agreement entered into
in connection with the spinoff of GenTek from GCG in 1999. For the year ended
December 31, 2004, the periods ended December 31, 2003 and November 10, 2003 and
the year ended December 31, 2002, GenTek charged GCG $1,214, $235, $1,173 and
$1,383, respectively, related to this agreement. GCG supplies soda ash and
calcium chloride to GenTek. For the year ended December 31, 2004, the periods
ended December 31, 2003 and November 10, 2003 and the year ended December 31,
2002, purchases from GCG amounted to $2,675, $458, $2,252 and $2,794,
respectively.
GenTek provided Prestolite Wire Corporation ("Prestolite"), a company
controlled by a former stockholder of the Company, with corporate and
administrative services, pursuant to a management agreement. For the year ended
December 31, 2004, the periods ended December 31, 2003 and November 10, 2003 and
the year ended December 31, 2002, GenTek charged Prestolite $250, $313, $1,568
and $2,078, respectively. GenTek and Prestolite buy and sell certain wire and
cable products from each
-76-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
other. Purchases from Prestolite for the year ended December 31, 2004, the
periods ended December 31, 2003 and November 10, 2003 and the year ended
December 31, 2002 were $1,319, $328, $2,671 and $5,914, respectively. Sales to
Prestolite for the year ended December 31, 2004, the periods ended December 31,
2003 and November 10, 2003 and the year ended December 31, 2002 were $10,653,
$2,144, $7,532 and $3,761, respectively. In addition, the Company permits
Prestolite to utilize a portion of its Nogales, Arizona warehouse and its
Nogales, Mexico plant facility. Payments from Prestolite for the year ended
December 31, 2004, the periods ended December 31, 2003 and November 10, 2003 and
the year ended December 31, 2002 were $316, $61, $197 and $228, respectively.
Certain of Prestolite's insurance was formerly written under the Company's
policies. Prestolite paid its ratable share of the Company's premium for this
insurance. Payments from Prestolite for the period ended November 10, 2003 and
the year ended December 31, 2002 were $16 and $268, respectively. Prestolite
permits one of the Company's subsidiaries to share its Southfield, Michigan
corporate location. The Company pays Prestolite a portion of the cost of leasing
and operating the Southfield premises. Payments by the Company for the year
ended December 31, 2004, the periods ended December 31, 2003 and November 10,
2003 and the year ended December 31, 2002 were $323, $26, $127 and $113,
respectively.
Note 16 - Discontinued Operations
On March 25, 2004, the Company signed a definitive agreement to sell its
KRONE communications business. The transaction was completed on May 18, 2004 and
resulted in a gain of $185,044, net of a tax provision of $81,115 of which
$5,560 represents the current or cash portion and $75,555 represents the
deferred portion. The net gain is included in income from discontinued
operations. The carrying amount of the major classes of assets and liabilities
included in the transaction were as follows:
December 31, 2003
-----------------
Current assets................... $156,619
Property, plant and equipment.... 62,050
Other assets..................... 63,183
Current liabilities.............. 77,508
Non-current liabilities.......... 89,738
The businesses included in discontinued operations had revenues of
$130,958, $46,775, $269,266 and $267,068 and pretax profit (loss) of $11,074,
$(490), $(247) and $(88,424) for the year ended December 31, 2004, the periods
ended December 31, 2003 and November 10, 2003 and the year ended December 31,
2002, respectively. The businesses were formerly reported as part of the
communications segment, which is no longer a reportable segment as a result of
the reclassification of this business to discontinued operations.
Note 17 - Subsequent Event (Unaudited)
On February 28, 2005, the Company's board of directors declared a special
dividend of $31.00 per common share payable on March 16, 2005 to holders of
record on March 10, 2005. Also, on February 28, 2005, GenTek closed on a secured
financing consisting of $370 million of term loans and a $60 million revolving
credit facility (the "Credit Facilities"). The term loans include a $235 million
first lien loan due in March 2011 with an interest rate of LIBOR plus 2.75% or
base rate plus 1.75%, subject
-77-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
(Dollars in thousands, except per share data)
to a rate reduction of 0.25% if such term loan is rated B1 or better by Moody's
Investor Services, Inc. and a $135 million second lien loan due March 2012 with
an interest rate of LIBOR plus 5.75% or base rate plus 4.75%. The $60 million
revolving credit facility matures in March 2010 and carries an interest rate of
LIBOR plus 2.75% or base rate plus 1.75%, subject to rate reductions under a
pricing grid if Company's leverage ratio decreases. The first lien term loan is
subject to amortization of $2.35 million per year for five years, with the
remainder payable over the sixth year. There is no amortization over the term of
the second lien loan. The Company will use approximately $313 million of the
financing proceeds to pay a special dividend and $35 million of the proceeds to
pre-fund certain defined benefit pension obligations. The remainder of the
proceeds will be used to pay transaction fees, to refinance existing debt and
for general corporate purposes. The Credit Facilities are secured by liens on
substantially all of the personal property and certain real property of the
Company and its domestic subsidiaries. The Credit Facilities contain covenants
which impose certain restrictions on the Company's ability to, among other
things, incur additional debt, pay dividends, make investments or sell assets.
Additionally, a portion of excess cash flow, as defined in the Credit
Facilities, and certain non-recurring cash inflows such as proceeds from asset
sales, insurance recoveries, and equity offerings must be used to pay down
indebtedness and may not be reborrowed. In addition, the Credit Facilities
contain certain financial covenants which include total leverage, total interest
coverage and maximum capital expenditures.
In conjunction with securing the Credit Facilities, all amounts outstanding
under the Company's $125 million Revolving Credit Facility were repaid and the
underlying credit agreement was terminated.
Note 18 - Unaudited Quarterly Information
Successor Company
-----------------------------------------------
2004
-----------------------------------------------
First Second Third Fourth
-------- -------- -------- --------
Net revenues................................... $192,930 $201,590 $231,293 $218,106
Gross profit................................... 29,669 29,328 31,880 26,130
Net income (loss).............................. 14,805(1) 185,118(2) (5,293)(3) 688(4)
======== ======== ======== ========
Earnings (loss) per common share - basic:
Net income (loss).............................. $ 1.48 $ 18.51 $ (0.53) $ 0.07
======== ======== ======== ========
Earnings (loss) per common share - diluted:
Net income (loss).............................. $ 1.48 $ 18.49 $ (0.53) $ 0.07
======== ======== ======== ========
- ----------
(1) Includes restructuring charges of $972 and a pension curtailment gain of
$14,840.
(2) Includes restructuring charges of $6,072 and gain on sale of the KRONE
communications business of $185,044.
(3) Includes restructuring charges of $2,288.
(4) Includes restructuring and impairment charges of $1,516.
-78-
GENTEK INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS - (Concluded)
(Dollars in thousands, except per share data)
Successor
Predecessor Company Company
-------------------------------------------------- ---------
Period Period
2003 Ended Ended
------------------------------------ November December
First Second Third 10, 2003 31, 2003
-------- -------- -------- -------- ---------
Net revenues.................. $197,048 $204,982 $191,257 $ 94,342 $95,420
Gross profit.................. 27,716 34,070 37,222 20,467 18,661
Net income (loss)............. (28,909)(1) (9,794)(2) (4,781)(3) 537,876(4) 1,092(5)
======== ======== ======== ======== =======
Earnings (loss) per common
share - basic:
Net income (loss)............. $ (1.13) $ (0.38) $ (0.19) $ 21.04 $ 0.11
======== ======== ======== ======== =======
Earnings (loss) per common
share - diluted:
Net income (loss)............. $ (1.13) $ (0.38) $ (0.19) $ 21.04 $ 0.11
======== ======== ======== ======== =======
- ----------
(1) Includes reorganization charges of $8,958 and asset impairment charges of
$24,661.
(2) Includes reorganization charges of $24,832.
(3) Includes reorganization charges of $20,652 and restructuring and asset
impairment charges of $3,109.
(4) Includes reorganization gain of $466,236, restructuring charges of $1,054,
and the reversal of valuation allowance related to net domestic deferred
tax assets of $72,232.
(5) Includes restructuring charges of $1,047.
-79-
Item 9. - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
Item 9A. - Controls and Procedures
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.
Management's Report On Internal Control Over Financial Reporting
The management of GenTek Inc is responsible for establishing and
maintaining adequate internal control over financial reporting for the Company,
as such term is defined in Exchange Act Rules 13a-15(f). The Company's internal
control over financial reporting is designed to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally
accepted accounting principles.
Because of its inherent limitations, internal control over financial
reporting may not prevent or detect misstatements. Projections of any evaluation
of effectiveness to future periods are subject to risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
Under the supervision of our principal executive and principal financial
officers and with the participation of our management, we conducted an
evaluation of the effectiveness of our internal control over financial reporting
based on the framework in the Internal Control - Integrated Framework issued by
the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on our evaluation under the framework in the Internal Control - Integrated
Framework issued by COSO, our management concluded that the Company's internal
control over financial reporting was effective as of December 31, 2004.
GenTek Inc. acquired a wire harness and subassembly manufacturing facility
from Whirlpool, Inc. on June 30, 2004, and management's conclusions about the
effectiveness of its internal control over financial reporting does not extend
to the internal controls of this business. This business had total assets of $15
million as of December 31, 2004 and total revenues of approximately $80 million
for the six months ended December 31, 2004, which are included in our
consolidated financial statements.
GenTek's independent registered public accounting firm, Deloitte & Touche
LLP, have audited GenTek's financial statements for the year ended December 31,
2004 included in this annual report on Form 10-K and, as part of that audit,
have issued a report on management's assessment of internal control over
financial reporting, a copy of which is included in this annual report on Form
10-K.
-80-
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders of
GENTEK INC.
Parsippany, New Jersey
We have audited management's assessment, included in the accompanying
Management's Report On Internal Control Over Financial Reporting, that GenTek
Inc. and subsidiaries (the "Company") maintained effective internal control over
financial reporting as of December 31, 2004, based on criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. As described in Management's Report On
Internal Control Over Financial Reporting, management excluded from their
assessment the internal control over financial reporting at a wire harness and
subassembly manufacturing facility, which was acquired from Whirlpool on June
30, 2004 and whose financial statements reflect total assets and revenues
constituting 2.0 and 9.5 percent, respectively, of the related consolidated
financial statement amounts as of and for the year ended December 31, 2004.
Accordingly, our audit did not include the internal control over financial
reporting at a wire harness and subassembly manufacturing facility the Company
acquired from Whirlpool. The Company's management is responsible for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting. Our
responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all
material respects. Our audit included obtaining an understanding of internal
control over financial reporting, evaluating management's assessment, testing
and evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our
opinions.
A company's internal control over financial reporting is a process designed
by, or under the supervision of, the company's principal executive and principal
financial officers, or persons performing similar functions, and effected by the
company's board of directors, management, and other personnel to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial
reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error
-81-
or fraud may not be prevented or detected on a timely basis. Also, projections
of any evaluation of the effectiveness of the internal control over financial
reporting to future periods are subject to the risk that the controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that the Company maintained
effective internal control over financial reporting as of December 31, 2004, is
fairly stated, in all material respects, based on the criteria established in
Internal Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Also in our opinion, the Company
maintained, in all material respects, effective internal control over financial
reporting as of December 31, 2004, based on the criteria established in Internal
Control--Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public
Company Accounting Oversight Board (United States), the consolidated financial
statements as of and for the year ended December 31, 2004 of the Company and our
report dated March 16, 2005 expressed an unqualified opinion on those financial
statements.
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 16, 2005
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Changes in 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 III
Item 10. Directors and Executive Officers of the Registrant.
Directors. For information relating to the Company's Directors, see the
information under the caption "Election of Directors" in the Company's
definitive 2004 Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A of the Securities Exchange Act of 1934, as
amended, within 120 days after the fiscal year ended December 31, 2004 (the
"Proxy Statement"), which is hereby incorporated by reference.
Executive Officers. For information relating to the Company's executive
officers, see the information contained under the caption "Executive Officers
and Key Employees" in Part I of this report.
Compliance with Section 16(a) of the Exchange Act. For information relating
to the compliance of the directors and officers of the Company, as well as any
holder of ten percent or more of any registered class of the equity securities
of the Company with Section 16(a) of the Exchange Act, see the information under
the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in the
Company's Proxy Statement, which is hereby incorporated by reference.
Item 11. Executive Compensation.
Executive Compensation. For information relating to the compensation of the
Company's executives, see the information under the caption "Executive
Compensation" in the Company's Proxy Statement, which is hereby incorporated by
reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Security Ownership of Certain Beneficial Owners. For information relating
to the beneficial ownership of more than five percent of the Company's Common
Stock, see the information under the caption "Security Ownership of Management
and Certain Beneficial Owners" in the Company's Proxy Statement, which is hereby
incorporated by reference.
Security Ownership of Management. For information relating to the
beneficial ownership of the Company's Common Stock by Management, see the
information under the caption "Security Ownership of Management and Certain
Beneficial Owners" in the Company's Proxy Statement, which is hereby
incorporated by reference.
Securities Authorized for Issuance Under Equity Compensation Plans. For
certain information relating to equity compensation plans, see the information
under the caption "Equity Compensation Plan Information" in the Company's Proxy
Statement, which is hereby incorporated by reference.
Item 13. Certain Relationships and Related Transactions.
Certain Relationships and Related Transactions. For information relating to
certain relationships and related transactions of the Company, see the
information under the caption "Certain Relationships
-83-
and Related Transactions" in the Company's Proxy Statement, which is hereby
incorporated by reference.
Item 14. Principal Accounting Fees and Services
Principal Accountant Fees and Services. For information relating to the
principal accountant fees and services, see the information under the caption
"Principal Accountant Fees and Services" in the Company's Proxy Statement, which
is hereby incorporated by reference.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
Financial Statement Schedules
See Index to Financial Statement Schedule on page 88.
List of Exhibits
Exhibit No. Description
- ----------- -----------
2.1 Joint Plan of Reorganization Under Chapter 11, Title 11, United
States Code of GenTek Inc., et al., and Noma Company, Debtors,
dated August 28, 2003, as filed with the United States Bankruptcy
Court for the District of Delaware on August 28, 2003
(incorporated by reference to Exhibit 2.1 of the Registrant's Form
8-K, filed with the Commission on October 21, 2003).
2.2 First Modification to Joint Plan of Reorganization Under Chapter
11, Title 11, United States Code of GenTek Inc., et al., and Noma
Company, Debtors, dated October 3, 2003 as filed with the United
States Bankruptcy Court for the District of Delaware on October 3,
2003 (incorporated by reference to Exhibit 2.2 of the Registrant's
Form 8-K, filed with the Commission on October 21, 2003).
2.3 Order confirming Joint Plan of Reorganization Under Chapter 11,
Title 11, United States Code of GenTek Inc., et al., and Noma
Company, Debtors, as Modified, as entered by the United States
Bankruptcy Court for the District of Delaware on October 7, 2003
(incorporated by reference to Exhibit 2.3 of the Registrant's Form
8-K, filed with the Commission on October 21, 2003).
3.1 Second Amended and Restated Certificate of Incorporation of GenTek
Inc., effective as of November 7, 2003 (incorporated by reference
to the Registrant's Form 8-A to amend its Form 10, dated November
10, 2003, as filed with the Securities and Exchange Commission).
3.2 Amended and Restated By-Laws of GenTek Inc., effective as of
November 10, 2003 (incorporated by reference to the Registrant's
Form 8-A to amend its Form 10, dated November 10, 2003, as filed
with the Securities and Exchange Commission).
4.1 GenTek Inc. Tranche B Warrant Agreement, dated as of November 10,
2003 (incorporated by reference to the Registrant's Form 8-A to
amend its Form 10, dated November 10, 2003, as
-84-
filed with the Securities and Exchange Commission).
4.2 GenTek Inc. Tranche C Warrant Agreement, dated as of November 10,
2003 (incorporated by reference to the Registrant's Form 8-A to
amend its Form 10, dated November 10, 2003, as filed with the
Securities and Exchange Commission).
10.1 Form of Registration Rights Agreement by and among the Company and
the holders named therein dated as of November 10, 2003
(incorporated by reference to the Registrant's Form 8-A to amend
its Form 10, dated November 10, 2003, as filed with the Securities
and Exchange Commission).
10.2 GenTek Inc. 2003 Management and Directors Incentive Plan
(incorporated by reference to the Registrant's Form 10-Q dated
September 30, 2003, as filed with the Securities and Exchange
Commission).
10.3 GenTek Key Employee Retention Plan (incorporated by reference to
Exhibit 10.14 to the Registrant's Form 10-K/A dated April 30,
2003, as filed with the Securities and Exchange Commission).
10.4 Form of Indemnification Agreement (incorporated by reference to
the Registrant's Form 10-K dated December 31, 2003, as filed with
the Securities and Exchange Commission).
10.5 GenTek Performance Plan (incorporated by reference to the Exhibit
10.3 to the Registrant's Amendment No. 2 to Form 10, dated April
8, 1999, as filed with the Securities and Exchange Commission).
10.6 Tax Sharing Agreement between GenTek Inc. and the General Chemical
Group Inc. (incorporated by reference to the Exhibit 10.6 to the
Registrant's Amendment No. 2 to Form 10, dated April 8, 1999, as
filed with the Securities and Exchange Commission).
10.7 Share Purchase Agreement by and among ADC Telecommunications Inc.,
Krone International Holding Inc., Krone Digital Communications
Inc., GenTek Holding Corporation, and GenTek Inc., dated March 25,
2004 (incorporated by reference to Exhibit 10.14 of the
Registrant's Form 10-Q for the period ended March 31, 2004, as
filed with Securities and Exchange Commission).
10.8 Employment Agreement with Richard R. Russell (incorporated by
reference to the Registrant's Form 10-Q dated June 30, 2004, as
filed with the Securities and Exchange Commission).
10.9 Amendment to Employment Agreement with Richard R. Russell.
10.10 Form of Director Restricted Stock Agreement (incorporated by
reference to the Registrant's Form 10-Q dated June 30, 2004, as
filed with the Securities and Exchange Commission).
10.11 Form of Emergence Shares Restricted Stock Agreement (incorporated
by reference to the Registrant's Form 10-Q dated June 30, 2004, as
filed with the Securities and Exchange Commission).
-85-
10.12 Form of Restricted Stock Agreement (incorporated by reference to
the Registrant's Form 10-Q dated June 30, 2004, as filed with the
Securities and Exchange Commission).
10.13 Form of Stock Option Agreement (incorporated by reference to the
Registrant's Form 10-Q dated June 30, 2004, as filed with the
Securities and Exchange Commission).
10.14 Form of Performance Cash Award Agreement (incorporated by
reference to the Registrant's Form 10-Q dated June 30, 2004, as
filed with the Securities and Exchange Commission).
10.15 Retention Agreement with Matthew R. Friel (incorporated by
reference to the Registrant's Form 10-Q dated September 30, 2004,
as filed with the Securities and Exchange Commission).
10.16 Form of Letter Agreement and Term Sheet (incorporated by reference
to the Registrant's Form 10-Q dated September 30, 2004, as filed
with the Securities and Exchange Commission).
10.17 Master Settlement Agreement, dated April 30, 2004, among GenTek
Holding Corporation, General Chemical LLC, and Honeywell
International Inc. (incorporated by reference to the Registrant's
Form 10-Q dated September 30, 2004, as filed with the Securities
and Exchange Commission).
10.18 First Lien Credit and Guaranty Agreement among GenTek, Inc.,
GenTek Holding LLC, as borrower, the other guarantors party
thereto, the lenders party thereto from time to time, Goldman
Sachs Credit Partners L.P., as joint lead arranger, General
Electric Capital Corporation, as co-administrative agent, and Bank
of America, N.A., as co-administrative agent and collateral agent,
dated February 28, 2005.
10.19 Second Lien Credit and Guaranty Agreement among GenTek, Inc.,
GenTek Holding LLC, as borrower, the other guarantors party
thereto, the lenders party thereto from time to time, Goldman
Sachs Credit Partners L.P., as joint lead arranger, sole
bookrunner, syndication agent, administrative agent and as
collateral agent, Bank of America Securities LLC, as joint lead
arranger and Bank of America, N.A., as documentation agent, dated
February 28, 2005.
21 Subsidiaries of the Registrant.
23 Consent of Independent Registered Public Accounting Firm.
31.1 GenTek 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.
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.
-86-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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, on the 16th day of
March, 2005.
GENTEK INC.
By: /s/ Richard R. Russell
-------------------------------
Name: Richard R. Russell
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
Principal executive officer:
/s/ Richard R. Russell President and Chief Executive March 16, 2005
- -------------------------- Officer
(Richard R. Russell)
Principal financial and accounting officer:
/s/ Matthew M. Walsh Vice President and Chief Financial March 16, 2005
- -------------------------- Officer
(Matthew M. Walsh)
Directors:
/s/ John G. Johnson, Jr. Chairman and Director March 16, 2005
- --------------------------
John G. Johnson, Jr.
/s/ Dugald K. Campbell Director March 16, 2005
- --------------------------
Dugald K. Campbell
/s/ Henry L. Druker Director March 16, 2005
- --------------------------
Henry L. Druker
/s/ Kathleen R. Flaherty Director March 16, 2005
- --------------------------
Kathleen R. Flaherty
/s/ Bruce D. Martin Director March 16, 2005
- --------------------------
Bruce D. Martin
/s/ John f. McGovern Director March 16, 2005
- --------------------------
John F. McGovern
/s/ William E. Redmond Director March 16, 2005
- --------------------------
William E. Redmond, Jr.
/s/ Richard R. Russell Director March 16, 2005
- --------------------------
Richard R. Russell
-87-
GENTEK INC.
INDEX TO FINANCIAL STATEMENT SCHEDULE
Schedule II -- Valuation and Qualifying Accounts ............................ 89
Schedules required by Article 12 of Regulation S-X, other than those listed
above, are omitted because of the absence of the conditions under which they are
required or because the required information is included in the consolidated
financial statements or notes thereto.
-88-
GENTEK INC.
Valuation and Qualifying Accounts
Balance at Additions
Beginning of Charged Deductions Balance at
Period To Income From Reserves Other* End of Period
------------ --------- ------------- ------ -------------
(In thousands)
Year ended December 31, 2004
Allowance for doubtful accounts... $8,654 $2,772 $(3,086) $(147) $8,193
Year ended December 31, 2003
Allowance for doubtful accounts... $8,295 $4,486 $(4,327) $ 200 $8,654
Year ended December 31, 2002
Allowance for doubtful accounts... $7,440 $2,190 $(1,204) $(131) $8,295
* Primarily foreign exchange
-89-
EXHIBIT INDEX
Exhibit Page
No. Number
- ------- ------
2.1 Joint Plan of Reorganization Under Chapter 11, Title 11,
United States Code of GenTek Inc., et al., and Noma Company,
Debtors, dated August 28, 2003, as filed with the United
States Bankruptcy Court for the District of Delaware on
August 28, 2003 (incorporated by reference to Exhibit 2.1 of
the Registrant's Form 8-K, filed with the Commission on
October 21, 2003)............................................
2.2 First Modification to Joint Plan of Reorganization Under
Chapter 11, Title 11, United States Code of GenTek Inc., et
al., and Noma Company, Debtors, dated October 3, 2003 as
filed with the United States Bankruptcy Court for the
District of Delaware on October 3, 2003 (incorporated by
reference to Exhibit 2.2 of the Registrant's Form 8-K, filed
with the Commission on October 21, 2003).....................
2.3 Order confirming Joint Plan of Reorganization Under Chapter
11, Title 11, United States Code of GenTek Inc., et al., and
Noma Company, Debtors, as Modified, as entered by the United
States Bankruptcy Court for the District of Delaware on
October 7, 2003 (incorporated by reference to Exhibit 2.3 of
the Registrant's Form 8-K, filed with the Commission on
October 21, 2003)............................................
3.1 Second Amended and Restated Certificate of Incorporation of
GenTek Inc., effective as of November 7, 2003 (incorporated
by reference to the Registrant's Form 8-A to amend its Form
10, dated November 10, 2003, as filed with the Securities and
Exchange Commission).........................................
3.2 Amended and Restated By-Laws of GenTek Inc., effective as of
November 10, 2003 (incorporated by reference to the
Registrant's Form 8-A to amend its Form 10, dated November
10, 2003, as filed with the Securities and Exchange
Commission)..................................................
4.1 GenTek Inc. Tranche B Warrant Agreement, dated as of November
10, 2003 (incorporated by reference to the Registrant's Form
8-A to amend its Form 10, dated November 10, 2003, as filed
with the Securities and Exchange Commission). ...............
4.2 GenTek Inc. Tranche C Warrant Agreement, dated as of November
10, 2003 (incorporated by reference to the Registrant's Form
8-A to amend its Form 10, dated November 10, 2003, as filed
with the Securities and Exchange Commission).................
10.1 Form of Registration Rights Agreement by and among the
Company and the holders named therein dated as of November
10, 2003 (incorporated by reference to the Registrant's Form
8-A to amend its Form 10, dated November 10, 2003, as filed
with the Securities and Exchange Commission).................
-90-
10.2 GenTek Inc. 2003 Management and Directors Incentive Plan
(incorporated by reference to the Registrant's Form 10-Q
dated September 30, 2003, as filed with the Securities and
Exchange Commission).........................................
10.3 GenTek Key Employee Retention Plan (incorporated by reference
to Exhibit 10.14 to the Registrant's Form 10-K/A dated April
30, 2003, as filed with the Securities and Exchange
Commission)..................................................
10.4 Form of Indemnification Agreement (incorporated by reference
to the Registrant's Form 10-K dated December 31, 2003, as
filed with the Securities and Exchange Commission)...........
10.5 GenTek Performance Plan (incorporated by reference to the
Exhibit 10.3 to the Registrant's Amendment No. 2 to Form 10,
dated April 8, 1999, as filed with the Securities and
Exchange Commission).........................................
10.6 Tax Sharing Agreement between GenTek Inc. and the General
Chemical Group Inc. (incorporated by reference to the Exhibit
10.6 to the Registrant's Amendment No. 2 to Form 10, dated
April 8, 1999, as filed with the Securities and Exchange
Commission)..................................................
10.7 Share Purchase Agreement by and among ADC Telecommunications
Inc., Krone International Holding Inc., Krone Digital
Communications Inc., GenTek Holding Corporation, and GenTek
Inc., dated March 25, 2004 (incorporated by reference to
Exhibit 10.14 of the Registrant's Form 10-Q for the period
ended March 31, 2004, as filed with Securities and Exchange
Commission)..................................................
10.8 Employment Agreement with Richard R. Russell (incorporated by
reference to the Registrant's Form 10-Q dated June 30, 2004,
as filed with the Securities and Exchange Commission)........
10.9 Amendment to Employment Agreement with Richard R. Russell. ..
10.10 Form of Director Restricted Stock Agreement (incorporated by
reference to the Registrant's Form 10-Q dated June 30, 2004,
as filed with the Securities and Exchange Commission)........
10.11 Form of Emergence Shares Restricted Stock Agreement
(incorporated by reference to the Registrant's Form 10-Q
dated June 30, 2004, as filed with the Securities and
Exchange Commission).........................................
10.12 Form of Restricted Stock Agreement (incorporated by reference
to the Registrant's Form 10-Q dated June 30, 2004, as filed
with the Securities and Exchange Commission).................
10.13 Form of Stock Option Agreement (incorporated by reference to
the Registrant's Form 10-Q dated June 30, 2004, as filed with
the Securities and Exchange Commission)......................
-91-
10.14 Form of Performance Cash Award Agreement (incorporated by
reference to the Registrant's Form 10-Q dated June 30, 2004,
as filed with the Securities and Exchange Commission)........
10.15 Retention Agreement with Matthew R. Friel (incorporated by
reference to the Registrant's Form 10-Q dated September 30,
2004, as filed with the Securities and Exchange
Commission)..................................................
10.16 Form of Letter Agreement and Term Sheet (incorporated by
reference to the Registrant's Form 10-Q dated September 30,
2004, as filed with the Securities and Exchange
Commission)..................................................
10.17 Master Settlement Agreement, dated April 30, 2004, among
GenTek Holding Corporation, General Chemical LLC, and
Honeywell International Inc. (incorporated by reference to
the Registrant's Form 10-Q dated September 30, 2004, as filed
with the Securities and Exchange Commission).................
10.18 First Lien Credit and Guaranty Agreement among GenTek, Inc.,
GenTek Holding LLC, as borrower, the other guarantors party
thereto, the lenders party thereto from time to time, Goldman
Sachs Credit Partners L.P., as joint lead arranger, General
Electric Capital Corporation, as co-administrative agent, and
Bank of America, N.A., as co-administrative agent and
collateral agent, dated February 28, 2005....................
10.19 Second Lien Credit and Guaranty Agreement among GenTek, Inc.,
GenTek Holding LLC, as borrower, the other guarantors party
thereto, the lenders party thereto from time to time, Goldman
Sachs Credit Partners L.P., as joint lead arranger, sole
bookrunner, syndication agent, administrative agent and as
collateral agent, Bank of America Securities LLC, as joint
lead arranger and Bank of America, N.A., as documentation
agent, dated February 28, 2005...............................
21 Subsidiaries of the Registrant...............................
23 Consent of Independent Registered Public Accounting Firm.....
31.1 GenTek 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...................................
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....
-92-
STATEMENT OF DIFFERENCES
The section symbol shall be expressed as................................ 'SS'
The greater-than-or-equal-to sign shall be expressed as................. >=