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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, 2002
OR
______ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
Commission File Number 001-14789
GENTEK INC.
(Exact name of Registrant as specified in its charter)
DELAWARE 02-0505547
(STATE OF OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NUMBER)
LIBERTY LANE
HAMPTON, NEW HAMPSHIRE 03842
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
Registrant's telephone number, including area code: (603) 929-2264
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Common stock, par value $.01 per share
(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 [ ] No [X]
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: $2,471,762.
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of February 28, 2003, was approximately $247,167. The
number of outstanding shares of the Registrant's Common Stock and Class B Common
Stock as of February 28, 2003 was 20,586,063 and 4,750,107, respectively.
DOCUMENTS INCORPORATED BY REFERENCE:
The Registrant's Proxy Statement for the Annual Meeting of Stockholders
to be held on May 2, 2003 is incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS.
GENERAL
GenTek Inc. (the "Company" or "GenTek") is a technology-driven
manufacturer of communications products, industrial components and performance
chemicals. GenTek was spun off from The General Chemical Group Inc. on April 30,
1999 (the "Spinoff"). The Company operates through three primary business
segments: communications, manufacturing and performance products. The
communications segment serves the public telecom and the private enterprise
network markets. The manufacturing segment serves the automotive, appliance and
electronic and industrial markets. The performance products segment serves
customers in many industries including the environmental services,
pharmaceutical and personal care, technology and chemical processing markets.
The Company's products are frequently highly engineered and are important
components of, or provide critical attributes to, its customers' end products or
operations. The Company operates over 80 manufacturing and production facilities
located primarily in the U.S. and Canada, with additional facilities in
Australia, Austria, China, Germany, Great Britain, India, Ireland and Mexico.
On October 11, 2002, GenTek and 31 of its direct and indirect
subsidiaries, including its Noma Company subsidiary (collectively, the
"Debtors"), filed voluntary petitions for reorganization relief (the "Filing")
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). The Debtors' cases are being jointly administered as Case No. 02-12986
(MFW). As a result of the Filing, an automatic stay was imposed against efforts
by claimants to collect amounts due or to proceed against property of the
Debtors. The Debtors have been operating, and will continue to operate, their
respective businesses as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. As such, they are permitted
to engage in ordinary course of business transactions without prior approval of
the Bankruptcy Court. Transactions outside of the ordinary course of business,
including certain sales of assets and certain requests for additional
financings, will require approval by the Bankruptcy Court. There is no assurance
that such approvals will be granted when requested.
On December 10, 2002, Noma Company sought and obtained from the Ontario
Superior Court of Justice, Canada, (the "Ontario Court") an initial order
pursuant to section 18.6 of the COMPANIES' CREDITORS ARRANGEMENT ACT, R.S.C.
1985, c. C-36, as amended ("CCAA"), recognizing the Filing and granting Noma
Company, among other things, a stay against claims, proceedings and the exercise
of any contractual rights against it or its property in Canada, and recognizing
various orders granted by the Bankruptcy Court.
The Debtors filed for relief under Chapter 11 as a result of the
Company's inability to obtain an amendment to its senior credit facility. The
Company believes that the protection afforded by Chapter 11 best preserves the
Debtors' ability to continue to serve their customers and preserve the value of
their businesses, while it reorganizes, and develops and implements a new
strategic plan to deleverage the Company's balance sheet and create an improved
long-term capital structure.
Since the Filing, the Company's available cash and continued cash flow
from operations have been adequate to fund ongoing operations and meet
anticipated obligations to customers, vendors and employees in the ordinary
course of business during the Chapter 11 process, and management believes it
will continue to remain adequate. Further, in order to augment its financial
flexibility during the Chapter 11 process, the Company negotiated with certain
members of its current pre-petition bank syndicate, and received approval from
the Bankruptcy Court on March 6, 2003, and approval from the Ontario Court on
March 13, 2003, to enter into a debtor-in-possession credit facility. The new
facility will enable the Company to issue up to $50 million of letters of
credit, including approximately $30 million of letters of credit issued under
the pre-petition credit facility, to support the Company and its subsidiaries'
undertakings (other than ordinary trade credit) and will provide the Company's
Noma Company
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subsidiary with a $10 million revolving credit facility for working capital and
other general corporate purposes of Noma Company. The facility matures on
September 30, 2003, but may be extended to December 31, 2003 by the holders of a
majority of the commitments. To support the payment obligations under the new
facility, the Bankruptcy Court awarded super-priority administrative expense
status to such obligations and granted the lenders senior priming liens (with
certain exceptions) on the Debtors' assets.
At hearings held on October 17, 2002 and November 7, 2002, the
Bankruptcy Court granted the Debtors' "first day" motions for various relief
designed to stabilize their operations and business relationships with their
customers, vendors, employees and other entities, and entered orders granting
authority to the Debtors to, among other things: (1) pay certain pre-petition
and post-petition employee wages, benefits and other employee obligations; (2)
honor customer programs; (3) pay certain pre-petition taxes and fees; (4) pay
certain pre-petition obligations to foreign vendors; (5) pay certain
pre-petition shipping charges; and (6) pay certain pre-petition claims of
critical vendors. The Bankruptcy Court also entered orders authorizing the
Debtors to use cash collateral of their senior lenders, and Noma Company to use
GenTek's cash collateral, on terms specified in such orders. All such orders
were also recognized by the Ontario Court.
As previously mentioned, as a result of the Filing, pending
pre-petition litigation and claims against the Debtors have been stayed
automatically in accordance with Section 362 of the Bankruptcy Code and no party
may take any action to seek payment on its pre-petition claims or to proceed
against property of the Debtors' estates except pursuant to further order of the
Bankruptcy Court. The filing resulted in an immediate acceleration of the
Company's senior credit facility and 11% Senior Subordinated Notes, subject
to the automatic stay.
As a general rule, all of the Debtors' contracts and leases continue in
effect in accordance with their terms notwithstanding the Filing, unless
otherwise ordered by the Bankruptcy Court. The Bankruptcy Court provides the
Debtors with the opportunity to reject any contracts or leases that are
burdensome or assume any contracts or leases that are favorable or otherwise
necessary to their business operations. In the event of a rejection of a
contract or lease by the Debtors, the affected parties may file rejection damage
claims, which are considered to be pre-petition claims. As a condition to
assumption of a contract or lease, the Debtors are required to cure breaches
under such agreements, including, without limitation, payment of any amounts due
and owing.
GenTek and the other Debtors have incurred, and will continue to incur,
significant administrative and reorganization expenses resulting from the Filing
and the continuing Chapter 11 proceedings. The amount of these expenses, which
are being expensed as incurred and reported as reorganization items, are
expected to have a material effect on the Company's results of operations.
The potential adverse publicity associated with the Filing and the
continuing Chapter 11 proceedings, and the resulting uncertainty regarding the
Company's future prospects may hinder the Company's ongoing business activities
and its ability to operate, fund and execute its business plan by: impairing
relations with existing and potential customers; limiting the Company's ability
to obtain trade credit; impairing present and future relationships with vendors;
and negatively impacting the ability of the Company to attract, retain and
compensate key employees and to retain employees generally.
The Company anticipates that most liabilities of the Debtors as of the
date of the Filing will be treated in accordance with one or more Chapter 11
plans of reorganization which will be proposed to be voted on by interested
parties and approved by the Bankruptcy Court in accordance with the provisions
of the Bankruptcy Code. Although the Debtors expect to file a plan that may
provide for its emergence from Chapter 11 during 2003, there can be no assurance
that a plan will be proposed by the Debtors or confirmed by the Bankruptcy
Court, or that any such plan will be consummated. At this time, it is not
possible for the Company to predict the effect of the Chapter 11 reorganization
process on the Company's businesses, various creditors and security holders, or
when it may be possible for the Debtors to emerge from Chapter 11.
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The ultimate treatment of and recovery, if any, by creditors and
security holders will not be determined until confirmation of a plan or plans of
reorganization. GenTek and the other Debtors are unable to predict at this time
what the treatment of creditors and equity holders of the respective Debtors
will ultimately be under any plan or plans of reorganization finally confirmed.
Although until a plan is approved there is substantial uncertainty as to the
treatment of creditors and equity holders, based upon information available to
it, the Company currently believes that the Debtors' proposed reorganization
plan or plans will provide for the cancellation of existing equity interests and
for limited recoveries by holders of debt securities. Accordingly, the Company
urges that appropriate caution be exercised with respect to existing and future
investments in any of these securities.
On February 28, 2003, the Company and Esseco S.p.A. announced plans to
form a joint venture, Esseco General Chemical LLC, to supply various sodium and
sulfur-based chemistries to the North American market. Initially, the joint
venture will focus on the supply and distribution of all grades of sodium
metabisulfite, sodium sulfite and sodium thiosulfate, among other products. It
is anticipated that the joint venture will be operational early in the second
quarter of 2003. The implementation of the joint venture is subject to certain
conditions, including approval of the Bankruptcy Court in Delaware. A motion
seeking such approval was filed on March 11, 2003.
On February 28, 2003, the Company announced a plan to wind down and
close operations in North Claymont, Delaware at the South Plant of the Delaware
Valley Works complex, an industrial facility owned and operated by the Company.
The plan is subject to approval by the Bankruptcy Court. A motion seeking such
approval was filed on March 4, 2003. If approved by the Bankruptcy Court, the
South Plant is expected to cease production on or about September 30, 2003. The
South Plant contains sulfuric acid regeneration and production facilities as
well as other operations. Failure of the Company to achieve such approval could
have a material adverse effect on the Company's results of operations. The
Company intends to comply fully with all of its environmental obligations in
connection with the decommissioning of the facility including, without
limitation, those relating to any investigation and remediation of the facility
required by law. Depending on the scope of any investigation and any remedial
activity required as a result, additional costs above those currently estimated
could be incurred over a period of the next several years. The Company is
currently unable to estimate the nature and extent of these potential additional
costs. As such, it is possible that the final outcome could have a material
adverse effect on the Company's results of operations, cash flows and financial
condition. Operations at the Delaware Valley Works' other manufacturing areas
located in the North Plant of the facility, including the production of sulfur,
fluorine, potassium and ammonia-based compounds and warehousing, distribution
and transportation operations, will continue.
To minimize the impact of the South Plant closure on its sulfuric acid
regeneration and merchant acid customers, the Company has made arrangements to
continue offering products and services to these customers through its four
other sulfuric acid facilities, supplemented by agreements with certain
strategic partners. In particular, the Company has negotiated with Rhodia Inc.
to assume responsibility for five of its sulfuric acid regeneration contracts,
subject to entering into appropriate modified contracts with the customers. A
motion seeking the Bankruptcy Court's approval of the transaction with Rhodia
Inc. was filed on March 11, 2003.
The consolidated financial statements included elsewhere in this report
have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"),
"FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE,"
and on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Filing, such realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code
and subject to Bankruptcy Court approval or otherwise as permitted in the normal
course of business, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in the consolidated
financial statements, which do not give effect to any adjustments to the
carrying value of assets or amount of liabilities that might be necessary as
consequence of a plan of reorganization. Liabilities and
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obligations whose treatment and satisfaction is dependent on the outcome of the
Chapter 11 cases have been segregated and classified as liabilities subject to
compromise in the consolidated balance sheet.
Pursuant to the Bankruptcy Code, schedules have been filed by the
Debtors with the Bankruptcy Court setting forth the assets and liabilities of
the Debtors as of the date of Filing. Differences between amounts recorded by
the Debtors and claims filed by creditors will be investigated and resolved as
part of the proceedings in the Chapter 11 cases. A bar date of April 14, 2003
has been set for the filing of proofs of claim against the Debtors. Accordingly,
the ultimate number and allowed amount of such claims are not presently known.
PRODUCTS AND SERVICES BY SEGMENT
The following table sets forth the Company's sales by segment for each
of the three years in the period ended December 31, 2002.
YEARS ENDED DECEMBER 31,
------------------------------------------------
2002 2001 2000
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(IN MILLIONS)
Communications................. $ 294.0 $ 405.0 $ 507.8
Manufacturing.................. 477.1 478.5 553.3
Performance Products........... 357.4 360.9 353.1
------------ ------------ ------------
$ 1,128.5 $ 1,244.4 $ 1,414.2
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COMMUNICATIONS SEGMENT
The communications segment is a global provider of products, systems
and services for local and wide area data and communications networks. These
products and services use and build on the throughput-enhancing technology that
the Company has developed. The Company's offerings include throughput-optimized
copper and fiber-optic cabling and connectivity products for both public and
private enterprise networks, as well as design, installation and maintenance
services for wide-area wireline and wireless networks.
The Company competes in the global markets for telecommunications and
data networking equipment and services, particularly the public telecom (or
access) and private enterprise (or premise) segments of these markets. The
public telecommunications network is comprised of the long-haul network (long
distance copper and fiber cables), the metro area (city wide) network, and the
access portion of the network. The Company competes primarily in this access
portion which consists of the telecommunications central office, remote
terminals and the local loop also known as the "last mile." The local loop links
the enterprise customer's home or office to the metro area and the long-haul
portions of the public network. The enterprise segment of the market consists of
the voice, data and video networks located within the customer's (or end-user's)
premises.
The communications segment's customers include Fortune 1000 companies,
incumbent local exchange carriers (ILECs), competitive local exchange carriers
(CLECs), internet service providers (ISPs), managed service providers (MSPs),
data networking equipment distributors, government institutions, public
utilities and academic institutions.
MANUFACTURING SEGMENT
The manufacturing segment provides a broad range of engineered
components 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
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bearings 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 jet-skis;
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
(OHC) engines which power cars, light trucks and sport utility vehicles. The
increased use of these OHC engines has resulted in significant volume growth
through market share gains, as vehicle manufacturers are able to obtain better
fuel economy and higher horsepower using OHC engines.
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.
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, crash and variation simulation analyses, experimental
dynamics and vehicle development programs, 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 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 2002.
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, ovens, ranges and vacuum cleaners;
o electronic office equipment, including copiers and printers; and
o various electronic products, such as medical equipment, ATM machines
and gaming machines.
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's manufacturing
facilities are strategically located in both Canada and Mexico, permitting the
Company to share with customers efficiencies gained through its operating scale
and lower costs.
The Company also owns a 50% interest in PrettlNoma Systems GmbH, a
joint venture that produces modular control panel systems for consumer appliance
manufacturers. PrettlNoma Systems is based in Neuruppin, Germany and, in
addition, operates facilities in Mexico, Poland and Turkey.
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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 plants strategically
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
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. Similar regeneration services are provided to
manufacturers of ion exchange resins and silicone polymers.
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, nutraceuticals, veterinary health products and other
personal care products.
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 and/or distributes 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 and ammonia sulfites used to produce fixing and developing
solutions for conventional film and x-ray processing;
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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 potassium fluoride and fluoborate derivatives sold into the metal
treatment, agrochemical, surfactant and analytical reagent markets; and
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.
For further information on geographic and segment data, see "Note 16 -
Geographic and Industry Segment Information" in the Notes to the Consolidated
Financial Statements.
RESTRUCTURING
During 2002, the Company initiated a restructuring program to reduce
its workforce in its communications segment, and recorded charges of
approximately $13 million primarily related to employee termination costs.
During 2001, the Company initiated a restructuring program to reduce
its workforce, close several plants and discontinue certain product lines. As a
result of the above actions, the Company recorded restructuring charges of
approximately $37 million, comprised of $20 million related to employee
termination costs, $12 million for asset write-downs related to management's
decision to exit a business and $5 million for lease obligations and other
closure costs for facilities which will no longer be used.
The Company expects to substantially complete implementation of its
restructuring programs by the end of 2003. Management does not expect that the
restructuring programs will have a material impact on the Company's revenues.
Cash payments charged against the restructuring liability totaled $9 million for
employee termination costs and $1 million for facility exit costs in 2001 and
$10 million for employee termination costs and $1 million for facility exit
costs in 2002. Management expects that cash outlays related to the restructuring
program will be substantially completed by the end of 2003, however certain
severance and facility exit costs, primarily lease obligations, have payment
terms extending beyond 2003. Management intends to fund these cash outlays from
cash flow generated by operations. Management expects that the actions described
above will result in an estimated annual reduction in employee and facility
related expense and cash flows of approximately $40-$45 million. The Company
began to realize these reductions in the third quarter of fiscal 2001.
COMPETITION
Competition in the markets served by the communications segment is
based on a number of factors, including but not limited to: product features,
quality, performance and reliability; product-line breadth and end-to-end
systems capabilities; global distribution and customer support capabilities;
customer service and technical support; relationships with customers,
distributors and system integrators; product interoperability and the ability to
support emerging protocols; brand recognition and price. Further, the ability to
achieve and maintain successful performance is dependent on our ability to
develop products that meet the ever-changing requirements of data and voice
communications technology. Due to the breadth of the Company's products and
services, it competes against different competitors in different product and
service areas, with the majority of its competitors focusing on only particular
segments of the total market in which the Company competes.
In the cabling and connectivity systems market, the primary competitors
capable of supplying entire solutions are Avaya, Cable Design Technologies,
Nexans and Tyco/AMP. Additionally, competitors that supply only the cabling
portion of a complete structured cabling solution include Belden, CommScope,
General Cable and Optical Cable Corporation. Connectivity competitors include
ADC Telecommunications, Hubbell, Huber & Suhner, Molex, Ortronics, Reichle &
De-Massari and 3M/Quante.
Competition in the manufacturing segment's markets is based upon a
number of factors including
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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, Hitchiner, INA, Ingersoll-Rand, Sumitomo, Yazaki and
captive OEMs. In the appliance and electronic and industrial markets, the
Company competes with Belden, General Cable, International Wire, 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 pharmaceuticals and
personal care market, the Company's major competitors include Giulini, Summit
and Westwood. The Company's competitors in the environmental market include the
refineries that perform their own sulfuric acid regeneration, as well as Arch
Chemical, DuPont, Marsulex, 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, U.S. Aluminates
and other regional players in the water treatment market. Competitors in the
technology market include Ashland and Tyco/Mallinckrodt-Baker. Competitors in
the chemical processing market include BASF, Calabrian, Rhodia, Solvay S.A. and
U.S. Salt.
SUPPLIERS; AVAILABILITY OF RESOURCES
The Company purchases a variety of raw materials for its businesses.
The primary raw materials used by the communications segment are copper, steel
and plastic. The Company's primary raw materials in its 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, soda
ash (for the manufacture of sodium nitrites), bauxite and hydrate (for the
manufacture of alum), zirconium oxychloride (for the manufacture of
antiperspirant active ingredients) and sulfur (for the manufacture of sulfuric
acid).
The Company purchases raw materials from a number of suppliers and, in
most cases, believes that alternative sources are available to fulfill its
needs. In the Company's opinion, the raw materials needed for its businesses
will be available in sufficient supply on a competitive basis for the
foreseeable future.
SALES AND DISTRIBUTION
The Company's communications segment has approximately 500 sales,
marketing and customer service personnel in 25 countries around the world. The
Company's products are sold directly to key account customers, often pursuant to
multi-year agreements, and via its international third-party sales and
distribution network for smaller accounts.
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 120 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.
-8-
SEASONALITY; BACKLOGS
The businesses of the communications and manufacturing segments are
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, Australia, Austria, China, Germany, Great Britain, India,
Ireland, Mexico and other countries in which it operates. 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
capital expenditures which may be material or otherwise adversely impact the
Company's operations.
The Company has an established program to ensure that its facilities
comply with environmental laws and regulations. In 2002, expenditures made in
connection with this program approximated $17 million (of which approximately $3
million represented capital expenditures and approximately $14 million related
to ongoing operations and the management and remediation of potential
environmental contamination from prior operations). Expenditures for 2001
approximated $16 million (of which approximately $4 million represented capital
expenditures and approximately $12 million related to ongoing operations and the
management and remediation of potential environmental contamination from prior
operations). Management expects expenditures similar to 2002 levels in 2003. 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 state 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.
The 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 Administration that it has been identified as a "potentially
responsible party" under CERCLA at three 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.
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.
-9-
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., which has filed for bankruptcy. A sulfuric acid plant adjacent to the main
Avtex site was previously owned and operated by the Company. On September 30,
1998, the EPA issued an administrative order under Section 106 of CERCLA, which
requires The General Chemical Group Inc. (whose obligations the Company assumed
in connection with the Spinoff), AlliedSignal Inc. (now Honeywell) 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 requirements of the order include
preparation of a study to determine the extent of any contamination at the acid
plant site. The Company has provided for the estimated costs of $1.7 million for
these activities in its accrual for environmental liabilities relating to the
order. The Company is working cooperatively with the EPA with respect to
compliance with the order and believes that such compliance will not have a
material effect on its results of operations or financial condition.
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 certain portions 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. The Company is working
cooperatively with the EPA and Honeywell Inc. (formerly AlliedSignal Inc.),
prior owner of the Facility and current owner of a plant adjacent to the
Facility, to implement the actions required under the IAO. The requirements of
the IAO will be performed over the course of the next several years. The Company
has provided for the estimated costs of $2.4 million for these activities in its
accrual for environmental liabilities. As previously mentioned, on February 28,
2003 the Company announced a plan to wind down and close most South Plant
operations of its Delaware Valley facility. This closure could result in an
expansion of the investigation to be performed under the IAO. Depending on the
scope of any potential expansion of the investigation under the IAO and any
additional remedial activity required as a result, additional costs above those
currently estimated could be incurred over a period of the next several years.
The Company is currently unable to estimate the nature and extent of these
potential additional costs. As such, it is possible that the final outcome could
have a material adverse effect on the Company's results of operations, cash
flows or financial condition.
ANACORTES, WASHINGTON FACILITY. On March 30, 2000, the Company received
a Notice of Violation issued by the U.S. Environmental Protection Agency,
pursuant to which the EPA alleged that the routine replacement of certain
catalysts at the Company's Anacortes, Washington facility in 1990 constituted a
violation of the EPA's Prevention of Significant Deterioration ("PSD")
regulations promulgated under Sections 165 - 169 of the Clean Air Act. The
Company denies such allegation and will defend itself vigorously in this matter.
There has been no activity with respect to this matter during 2001 or 2002. In
the event that the Company is unsuccessful in its defense or cannot otherwise
resolve this matter with the EPA, potential penalties could exceed $100,000.
Management does not expect that this matter will have a material effect on the
financial condition, cash flows or results of operations of the Company.
Claims against the Debtors for environmental liabilities arising prior
to the Filing will be addressed in the Chapter 11 cases. In general, monetary
claims by private (non-governmental) parties relating to remedial actions at
off-site locations used for disposal prior to the Filing and penalties resulting
from violations of applicable environmental law before that time will be treated
as general unsecured claims. The Debtors are obligated to comply with applicable
environmental law in the conduct of their business as debtors-in-possession,
including any potential obligation to conduct investigations and implement
remedial actions at facilities the Company owns or operates, and thus will be
required to pay such expenses in full.
-10-
EMPLOYEES/LABOR RELATIONS
At December 31, 2002, the Company had approximately 7,500 employees, of
whom approximately 2,500 were full-time salaried employees, approximately 2,200
were full-time hourly employees (represented by 11 different unions) and
approximately 2,800 were hourly employees working in nonunion facilities.
Approximately 500 of the Company's 2,500 salaried employees are based in
Germany. German-based employees are members of unions and are subject to
industry-wide and other collective bargaining agreements.
The Company's union contracts have durations which vary from two to
four years. The Company's relationships with its different 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, 60, President and Chief Executive Officer and a
Director since April 1999. From 1994 until April 1999, he served as the
President and Chief Executive Officer and a Director of The General Chemical
Group Inc. Mr. Russell has also been the President and Chief Executive Officer
of General Chemical Corporation since 1986.
Matthew R. Friel, 36, Vice President, Chief Financial Officer and
Treasurer since September 2001. From September 1997 to September 2002, Mr. Friel
served as Managing Director of Latona Associates Inc. ("Latona Associates").
Latona Associates has provided GenTek with strategic management, business and
financial advisory services since 1995.
Michael R. Herman, 40, Vice President and General Counsel since April
1999. From 1997 until April 1999, he served as the Vice President and General
Counsel of General Chemical Corporation.
Ronald A. Lowy, 47, Chief Operating Officer of the Krone Group since
December 2000. Mr. Lowy served as Vice President and General Manager -
Automotive and Industrial Products of Prestolite Wire Corporation from January
2000 to December 2000, and Vice President and General Manager - Automotive
Products of Prestolite Wire Corporation from 1995 to 2000.
Kevin J. O'Connor, 52, Vice President and Controller since April 1999.
From March 1996 until April 1999, he served as the Controller of The General
Chemical Group Inc. Mr. O'Connor has also served as Controller of General
Chemical Corporation since 1986.
Ramanlal L. Patel, 57, President of the Manufacturing segment since
December 2001. Mr. Patel has also served as President and Chief Executive
Officer of Noma Company since December 2000. From 1997 to December 2000, he was
Chief Executive Officer of Pram Filtration Corporation.
Charles W. Shaver, 44, Vice President and General Manager for
Performance Products since November 2001. Mr. Shaver served as Vice President
and General Manager for Performance Products for Arch Chemicals, Inc. from 1999
to November 2001. From September 1996 to 1999 he served as Vice President of
Operations and Chief Operating Officer for MMT, Inc.
Matthew M. Walsh, 36, Vice President and Operations Controller since
December 2000. Mr. Walsh served as Vice President and Treasurer from January
2000 through December 2000. Mr. Walsh served as Group Controller-Performance
Products of General Chemical Corporation from October 1997 to December 1999.
-11-
ITEM 2. PROPERTIES.
The Company operates over 80 manufacturing and production facilities
located in the United States, Canada, Australia, Austria, China, Germany, Great
Britain, India, Ireland and Mexico. The Company's headquarters are located in
Hampton, New Hampshire.
Set forth below are the locations and uses of the Company's major
properties:
LOCATION USE
-------- ---
COMMUNICATIONS SEGMENT
Centennial, Colorado(1).......................... Offices
Sidney, Nebraska(2).............................. Production Facility
North Bennington, Vermont(1)..................... Production Facility
Racine, Wisconsin(2)............................. Production Facility and Offices
Sydney, Australia................................ Production Facility and Offices
Trumau, Austria.................................. Production Facility
Cheltenham, England.............................. Production Facility and Offices
Berlin, Germany(1)............................... Production Facility and Offices
Toluca, Mexico(1)................................ Production Facility
Shanghai, People's Republic of China............. Production Facility
Bangalore, India................................. Production Facility
MANUFACTURING SEGMENT
Southfield, Michigan(1).......................... Offices
Troy, Michigan(1)................................ Production Facility and Offices
Westland, Michigan(1)............................ Production Facility
Weaverville, North Carolina(2)................... Production Facility
Upper Sandusky, Ohio(1).......................... Production Facility
Toledo, Ohio..................................... Production Facility
Defiance, Ohio................................... Production Facility
Perrysburg, Ohio(1).............................. Production Facility and Offices
Mineral Wells, Texas............................. Production Facility
Imuris, Mexico................................... Production Facility
Juarez, Mexico(1)................................ Production Facility
Nogales, Mexico.................................. Production Facility
Concord, Ontario(2).............................. Production Facility
Guelph, Ontario(1)............................... Production Facility
Scarborough, Ontario(2).......................... Production Facility
Stouffville, Ontario(2).......................... Production Facility
Tillsonburg, Ontario(1).......................... Production Facility
Waterdown, Ontario............................... Production Facility
PERFORMANCE PRODUCTS SEGMENT
Hollister, California(2)......................... Production Facility and Offices
Pittsburg, California(2)......................... Production Facility
Richmond, California(2).......................... Production Facility
North Claymont, Delaware(2)...................... Production Facility, Offices and Warehouse
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(2).............................. Production Facility
-12-
Marcus Hook, Pennsylvania(2)..................... Production Facility, Offices and Warehouse
Celina, Texas(2)................................. Production Facility
Midlothian, Texas(2)............................. Production Facility
Anacortes, Washington............................ Production Facility
Dublin, Ireland.................................. Production Facility, Offices and Warehouse
Thorold, Ontario................................. Production Facility
Valleyfield, Quebec.............................. Production Facility
OFFICES
Hampton, New Hampshire(1)........................ Headquarters
Parsippany, New Jersey(1)........................ Offices
- -----------------------
(1) Leased.
(2) Mortgaged as security under the Company's senior credit facility.
ITEM 3. LEGAL PROCEEDINGS.
The Company is involved in claims, litigation, administrative
proceedings and investigations of various types, including the Sunoco Employee
litigation discussed below, and certain environmental proceedings previously
discussed. 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. See Item 1. "Business -
Environmental Matters" above.
As previously discussed, on October 11, 2002, GenTek and 31 of its
direct and indirect subsidiaries, including its Noma Company subsidiary
(collectively, the "Debtors") filed voluntary petitions for reorganization
relief (the "Filing") under Chapter 11 of the United States Bankruptcy Code (the
"Bankruptcy Code") in the United States Bankruptcy Court for the District of
Delaware (the "Bankruptcy Court"). The Debtors' cases are being jointly
administered as Case No. 02-12986 (MFW). As a result of the Debtors'
commencement of the Chapter 11 cases, an automatic stay has been imposed against
the commencement or continuation of legal proceedings against the Debtors
outside of the Bankruptcy Court. Claimants against the Debtors may assert their
claims in the Chapter 11 cases by filing a proof of claim, to which the Debtors
may object and seek a determination from the Bankruptcy Court as to the
allowability of the claim. Claimants who desire to liquidate their claims in
legal proceedings outside of the Bankruptcy Court will be required to obtain
relief from the automatic stay by order of the Bankruptcy Court. If such relief
is granted, the automatic stay will remain in effect with respect to the
collection of liquidated claim amounts. As a general rule, all claims against
the Debtors that seek a recovery from assets of the Debtors' estates will be
addressed in the Chapter 11 cases and paid only pursuant to the terms of a
confirmed plan of reorganization.
Sunoco Employee Litigation. In April 1998, approximately 40 employees
(and their respective spouses) of the Sunoco refinery in Marcus Hook,
Pennsylvania, filed lawsuits in the Court of Common Pleas, Delaware County,
Pennsylvania, against The General Chemical Group Inc. (whose obligations have
been assumed by the Company pursuant to the terms of the Spinoff), alleging that
sulfur dioxide and sulfur trioxide releases from the Company's Delaware Valley
facility caused various respiratory and pulmonary injuries. Unspecified damages
in excess of $50,000 for each plaintiff are sought. As a result of pretrial
proceedings, there are presently only 36 employees who are pursuing individual
personal injury claims and 29 spouses claiming loss of consortium. The scheduled
trial date is March 2003, but the trial will not commence at this time due to
the automatic stay previously mentioned. The Company has denied all material
allegations of the complaints and will continue to defend itself vigorously in
this matter. Management further believes that current accruals and available
insurance should provide adequate coverage in the event of an adverse result in
this matter and that, based on currently available information, this matter will
not have a material adverse effect on the Company's results of operations,
-13-
cash flows or financial condition.
In addition, on September 24, 1999 the same attorneys that filed the
April 1998 individual actions against the Company also filed a purported class
action complaint against the Company, titled Whisnant vs. General Chemical
Corporation, (in the Court of Common Pleas, Delaware County, Pennsylvania), on
behalf of more than 1,000 current and former employees of the Sunoco Marcus
Hook, Pennsylvania refinery located immediately adjacent to the Company's
Delaware Valley facility. The complaint alleges that unspecified releases of
sulfur dioxide and sulfur trioxide over unspecified timeframes caused injuries
to the plaintiffs, and seeks, among other things, to establish a "trust fund"
for medical monitoring for the plaintiffs. In May 2002, the trial court denied
plaintiffs' motion to certify the case to proceed as a class action. Plaintiffs
have appealed that decision. The Company will vigorously defend itself in this
matter. Management further believes that the Company's current accruals and
available insurance should provide adequate coverage in the event of an adverse
result in this matter, and that, based on currently available information, this
matter will not have a material adverse effect on the Company's results of
operations, cash flows or financial condition. Unless otherwise ordered by the
Bankruptcy Court, the claim is subject to the automatic stay and recoveries (if
any) sought thereon from assets of the Debtors will be addressed in the Chapter
11 cases.
Richmond Litigation. Starting on or about April 29, 2002, lawyers
claiming to represent approximately 44,000 persons filed approximately 24
lawsuits in Contra Costa, San Francisco and Alameda counties in California state
court, making claims against the Company and a third party arising out of a May
1, 2001 release of sulfur dioxide and sulfur trioxide from the Company's
Richmond, California sulfuric acid facility. A class action lawsuit arising out
of the same facts has also been filed. The release was caused when the third
party's truck hit a power pole and damaged an electrical substation owned by the
local utility, thereby knocking out electrical power to a number of users,
including the Company. This resulted in a loss of vacuum pressure at the
Company's facility, which led to the release. The Company, which has also filed
suit against the third party in California State Court in Contra Costa County in
connection with the May 1, 2001 incident, has been served with some of the
lawsuits. Some of the filed lawsuits also appear to allege damages arising out
of a separate alleged release of sulfur trioxide from the Richmond facility on
November 29, 2001, but it is unclear how many parties have actually made claims
at this time. 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, but the
amount of damages sought is not known. The Company has filed a petition for
coordination asking that all of the lawsuits be coordinated before a single
judge. That petition is pending. The Company will vigorously defend itself
against these lawsuits. The Company believes it has sufficient insurance
coverage in the event of an adverse result in these lawsuits and does not
believe that this matter will have a material adverse effect on its financial
condition, cash flows or results of operations. Unless otherwise ordered by the
Bankruptcy Court, the lawsuits are subject to the automatic stay and recoveries
(if any) sought thereon from assets of the Debtors will be addressed in the
Chapter 11 cases.
Delaware Valley Settlement. On July 2, 2002, the Company's Delaware
Valley facility experienced a release of fluosulfonic acid while loading a
railcar for delivery to a customer. In connection with this accident and other
releases and emissions at the Delaware Valley facility, the Company and
representatives of the Delaware Department of Natural Resources and
Environmental Control ("DNREC") have reached agreement to resolve all alleged
violations relating to the July 2, 2002 accident and any other releases and
emissions occurring on or after January 1, 2001. Without admitting liability,
the Company agreed to pay a $475,000 civil penalty, plus DNREC's out-of-pocket
costs in investigating the July 2, 2002 incident. In addition, the Company also
agreed, among other things to make certain improvements to its process safety
and risk management programs at the facility. The settlement was approved by the
Superior Court of the State of Delaware on September 25, 2002. On December 2,
2002, the Bankruptcy Court issued an order approving payment of the civil
penalty, and the Company has paid the penalty in full.
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
-14-
Filing are subject to the automatic stay, and recoveries sought thereon from
assets of the Debtors will be required to be dealt with in the Chapter 11 cases.
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 2002.
-15-
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
MARKET INFORMATION
The Company's Common Stock is currently traded on the Over The Counter
Bulletin Board under the symbol "GNKIQ." The Company's Class B Common Stock has
ten votes per share, is subject to significant restrictions on transfer and is
convertible at any time into Common Stock on a share-for-share basis. The Common
Stock and Class B Common Stock are substantially identical, except as to the
disparity in voting power, restriction on transfer and conversion provisions.
There is no established public trading market for the Company's Class B Common
Stock. The table below shows the high and low recorded sales prices of the
Company's Common Stock, for each quarterly period within the last two years.
2002
--------------------------------------------------
First Second Third Fourth
Stock price - high $ 1.97 $ .47 $ .23 $ .095
Stock price - low $ .30 $ .15 $ .08 $ .015
2001
--------------------------------------------------
First Second Third Fourth
Stock price - high $ 16.60 $ 13.00 $ 7.75 $ 4.00
Stock price - low $ 10.40 $ 5.26 $ 3.25 $ 1.11
As of March 13, 2003, there were 141 stockholders of record of the
Company's Common Stock and 4 stockholders of record of the Company's Class B
Common Stock.
DIVIDENDS
The Company paid a regular quarterly cash dividend of $.05 per share
for the first, second and third quarters of 2001. During the fourth quarter of
2001, the Company suspended the payment of quarterly dividends and no dividends
were paid in 2002.
EQUITY COMPENSATION PLAN INFORMATION
Number of securities Weighted-average Number of securities remaining
to be issued upon exercise exercise price of for future issuance under equity
of outstanding options, outstanding options, compensation plans (excluding
Plan Category warrants and rights warrants and rights securities reflected in column (a)
- ----------------------- ----------------------------- ------------------------ ------------------------------------
(a) (b) (c) (1)
Equity compensation
plans approved by
security holders 2,951,923 $11.66 (2) 1,330,165
Equity compensation
plans not approved
by security holders 0 N/A 0
----------------------------- ------------------------ ------------------------------------
Total 2,951,923 $11.66 1,330,165
(1) The shares listed in column (c) may be issued in the form of options or
other stock-based awards, which include restricted or unrestricted
stock, restricted stock appreciation rights, performance shares and
performance units and dividend equivalents.
(2) Calculation does not include 110,923 restricted units, which represent
rights to receive common stock, included in column (a) which have no
exercise price.
-16-
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.
YEARS ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
2002 2001 2000 1999 1998
---- ---- ---- ---- ----
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Net revenues ............................ $ 1,128,533 $ 1,244,420 $1,414,187 $1,032,925 $ 534,838
Restructuring and impairment charges .... 78,238 187,417 -- -- --
Operating profit (loss) ................. (25,071) (172,746)(1) 159,291(2) 115,087(3) 50,950(4)
Interest expense ........................ 60,135 74,980 74,948 45,979 18,163
Income (loss) from continuing operations (5) (199,524)(6) (170,844)(1) 50,241(2) 35,033(3) 36,759(7)
Income from discontinued operations ..... -- -- -- 1,006 10,299
Net income (loss) (5)(8) ................ $ (360,649)(6) $ (170,844)(1) $ 50,241(2) $ 31,100(3) $ 43,397(7)
PER SHARE:
Income (loss) from continuing operations
- basic (5) ............................. $ (7.82)(6) $ (6.72)(1) $ 2.04(2) $ 1.67(3) $ 1.74(7)
Income (loss) from continuing operations
- diluted (5) ........................... (7.82)(6) (6.72)(1) 1.99(2) 1.64(3) 1.69(7)
Net income (loss) - basic (5)(8) ........ (14.13)(6) (6.72)(1) 2.04(2) 1.48(3) 2.06(7)
Net income (loss) - diluted (5)(8) ...... (14.13)(6) (6.72)(1) 1.99(2) 1.45(3) 1.99(7)
Dividends (9) ........................... -- .15 .20 .20 .20
OTHER DATA:
Capital expenditures .................... $ 52,440 $ 77,778 $ 81,298 $ 47,323 $ 41,961
Depreciation and amortization ........... 47,903 68,317 68,973 54,222 25,514
BALANCE SHEET DATA (AT END OF PERIOD):
Cash and cash equivalents ............... $ 133,030 $ 9,205 $ 4,459 $ 20,687 $ 61,598
Total assets ............................ 956,985 1,164,843 1,350,722 1,254,866 570,283
Long-term debt (including current
portion) .............................. 939,529 832,426 818,812 724,115 357,531
Total equity (deficit) .................. (510,321) (142,337) 47,658 56,403 (28,465)
- ---------------------
(1) Includes charges of $60.0 million ($36.3 million after tax or $1.43 per
share), principally related to provisions for obsolete and excess inventory
and loss provisions for accounts receivable.
(2) Includes a charge of $5.8 million ($3.5 million after tax or $.14 per
share) for purchased in-process research and development.
(3) Includes a charge of $6.2 million ($3.7 million after tax or $.17 per
share) primarily related to the Spinoff.
(4) Includes a charge of $12.1 million ($7.3 million after tax or $.33 per
share) primarily due to an asset impairment write-down for two of the
Company's manufacturing facilities and incremental accruals of $9.8 million
($5.9 million after tax or $.27 per share) principally related to
litigation and environmental spending.
(5) Includes an increase to the deferred tax asset valuation allowance of
$142.8 million ($5.59 per share) in 2002 to record a valuation allowance
for the Company's net domestic deferred tax assets and, in 2000, a charge
of $2.8 million ($.11 per share) to revalue certain deferred tax assets in
Germany.
(6) Includes reorganization items of $11.6 million ($.46 per share).
(7) Includes a nonrecurring gain of $19.5 million ($.89 per share) related to
an income tax settlement and the impact of the adjustments in footnote
four.
(8) Includes the cumulative effect of a change in accounting principle of
$161.1 million ($6.31 per share) in 2002 and extraordinary losses net of
tax of $4.9 million ($.23 per share) and $3.7 million ($.17 per share),
related to the early retirement of certain indebtedness, for the years 1999
and 1998, respectively.
(9) During the fourth quarter of 2001, the Company suspended the payment of
quarterly dividends.
-17-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
OVERVIEW
GenTek Inc. is a technology-driven manufacturer of communications
products, industrial components and performance chemicals. The Company operates
through three primary business segments: communications, manufacturing and
performance products. The communications segment serves the public telecom and
the private enterprise network markets. The manufacturing segment serves the
automotive, appliance and electronic and industrial markets. The performance
products segment serves customers in many industries including the environmental
services, pharmaceutical and personal care, technology and chemical processing
markets.
On October 11, 2002, GenTek and 31 of its direct and indirect
subsidiaries, including its Noma Company subsidiary (collectively, the
"Debtors"), filed voluntary petitions for reorganization relief (the "Filing")
under Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") in
the United States Bankruptcy Court for the District of Delaware (the "Bankruptcy
Court"). The Debtors' cases are being jointly administered as Case No. 02-12986
(MFW). As a result of the Filing, an automatic stay was imposed against efforts
by claimants to collect amounts due or to proceed against property of the
Debtors. The Debtors have been operating, and will continue to operate, their
respective businesses as "debtors-in-possession" under the jurisdiction of the
Bankruptcy Court and in accordance with the applicable provisions of the
Bankruptcy Code and orders of the Bankruptcy Court. As such, they are permitted
to engage in ordinary course of business transactions without prior approval of
the Bankruptcy Court. Transactions outside of the ordinary course of business,
including certain sales of assets and certain requests for additional
financings, will require approval by the Bankruptcy Court. There is no assurance
that such approvals will be granted when requested.
On December 10, 2002, Noma Company sought and obtained from the Ontario
Superior Court of Justice, Canada (the "Ontario Court"), an initial order
pursuant to section 18.6 of the COMPANIES' CREDITORS ARRANGEMENT Act, R.S.C.
1985, c. C-36, as amended ("CCAA"), recognizing the Filing and granting Noma
Company, among other things, a stay against claims, proceedings and the exercise
of any contractual rights against it or its property in Canada, and recognizing
various orders granted by the Bankruptcy Court.
The Debtors filed for relief under Chapter 11 as a result of the
Company's inability to obtain an amendment to its senior credit facility. The
Company believes that the protection afforded by Chapter 11 best preserves the
Debtors' ability to continue to serve their customers and preserve the value of
its businesses, while it reorganizes, and develops and implements a new
strategic plan to deleverage the Company's balance sheet and create an improved
long-term capital structure.
Since the Filing, the Company's available cash and continued cash flow
from operations have been adequate to fund ongoing operations and meet
anticipated obligations to customers, vendors and employees in the ordinary
course of business during the Chapter 11 process, and management believes it
will continue to remain adequate. Further, in order to augment its financial
flexibility during the Chapter 11 process, the Company negotiated with certain
members of its pre-petition bank syndicate, and received approval from the
Bankruptcy Court on March 6, 2003, and approval from the Ontario Court on March
13, 2003, to enter into a debtor-in-possession credit facility. The new facility
will enable the Company to issue up to $50 million of letters of credit,
including approximately $30 million of letters of credit issued under the
pre-petition credit facility, to support the Company and its subsidiaries'
undertakings (other than ordinary trade credit) and will provide the Company's
Noma Company subsidiary with a $10 million revolving credit facility for working
capital and other general corporate purposes of Noma Company. The facility
matures on September 30, 2003, but may be extended to December 31, 2003 by the
holders of a majority of the commitments. To support the payment obligations
under the new facility, the Bankruptcy Court awarded super-priority
administrative expense status to such obligations and granted the lenders senior
priming liens (with certain exceptions) on the Debtors' assets.
-18-
At hearings held on October 17, 2002 and November 7, 2002, the
Bankruptcy Court granted the Debtors' "first day" motions for various relief
designed to stabilize their operations and business relationships with their
customers, vendors, employees and other entities, and entered orders granting
authority to the Debtors to, among other things: (1) pay certain pre-petition
and post-petition employee wages, benefits and other employee obligations; (2)
honor customer programs; (3) pay certain pre-petition taxes and fees; (4) pay
certain pre-petition obligations to foreign vendors; (5) pay certain
pre-petition shipping charges; and (6) pay certain pre-petition claims of
critical vendors. The Bankruptcy Court also entered orders authorizing the
Debtors to use cash collateral of their senior lenders, and Noma Company to use
GenTek's cash collateral, on terms specified in such orders. All such orders
were also recognized by the Ontario Court.
As previously mentioned, as a result of the Filing, pending
pre-petition litigation and claims against the Debtors have been stayed
automatically in accordance with Section 362 of the Bankruptcy Code and no party
may take any action to seek payment on its pre-petition claims or to proceed
against property of the Debtors' estates except pursuant to further order of the
Bankruptcy Court. The Filing resulted in an immediate acceleration of the
Company's senior credit facility and 11% Senior Subordinated Notes, subject
to the automatic stay.
As a general rule, all of the Debtors' contracts and leases continue in
effect in accordance with their terms notwithstanding the Filing, unless
otherwise ordered by the Bankruptcy Court. The Bankruptcy Court provides the
Debtors with the opportunity to reject any contracts or leases that are
burdensome or assume any contracts or leases that are favorable or otherwise
necessary to their business operations. In the event of a rejection of a
contract or lease by the Debtors, the affected parties may file rejection damage
claims, which are considered to be pre-petition claims. As a condition to
assumption of a contract or lease, the Debtors are required to cure breaches
under such agreements, including, without limitation, payment of any amounts due
and owing.
GenTek and the other Debtors have incurred, and will continue to incur,
significant administrative and reorganization expenses resulting from the Filing
and the continuing Chapter 11 proceedings. The amount of these expenses, which
are being expensed as incurred and reported as reorganization items, are
expected to have a material effect on the Company's results of operations.
The potential adverse publicity associated with the Filing and the
continuing Chapter 11 proceedings, and the resulting uncertainty regarding
the Company's future prospects may hinder the Company's ongoing business
activities and its ability to operate, fund and execute its business plan by:
impairing relations with existing and potential customers; limiting the
Company's ability to obtain trade credit; impairing present and future
relationships with vendors; and negatively impacting the ability of the Company
to attract, retain and compensate key employees and to retain employees
generally.
The Company anticipates that most liabilities of the Debtors as of the
date of the Filing will be treated in accordance with one or more Chapter 11
plans of reorganization which will be proposed to be voted on by interested
parties and approved by the Bankruptcy Court in accordance with the provisions
of the Bankruptcy Code. Although the Debtors expect to file a plan that may
provide for its emergence from Chapter 11 during 2003, there can be no assurance
that a plan will be proposed by the Debtors or confirmed by the Bankruptcy
Court, or that any such plan will be consummated. At this time, it is not
possible for the Company to predict the effect of the Chapter 11 reorganization
process on the Company's businesses, various creditors and security holders, or
when it may be possible for the Debtors to emerge from Chapter 11.
The ultimate treatment of and recovery, if any, by creditors and
security holders will not be determined until confirmation of a plan or plans of
reorganization. GenTek and the other Debtors are unable to predict at this time
what the treatment of creditors and equity holders of the respective Debtors
will ultimately be under any plan or plans of reorganization finally confirmed.
Although until a plan is approved there is substantial uncertainty as to the
treatment of creditors and equity holders, based upon information available to
it, the Company currently believes that the Debtors' proposed reorganization
plan or plans will provide for the cancellation of existing equity interests and
for limited recoveries by
-19-
holders of debt securities. Accordingly, the Company urges that appropriate
caution be exercised with respect to existing and future investments in any of
these securities.
On February 28, 2003, the Company and Esseco S.p.A. announced plans to
form a joint venture, Esseco General Chemical LLC, to supply various sodium and
sulfur-based chemistries to the North American market. Initially, the joint
venture will focus on the supply and distribution of all grades of sodium
metabisulfite, sodium sulfite and sodium thiosulfate, among other products. It
is anticipated that the joint venture will be operational early in the second
quarter of 2003. The implementation of the joint venture is subject to certain
conditions, including approval of the Bankruptcy Court in Delaware. A motion
seeking such approval was filed on March 11, 2003.
On February 28, 2003, the Company announced a plan to wind down and
close operations in Claymont, Delaware at the South Plant of the Delaware Valley
Works complex, an industrial facility owned and operated by the Company. The
plan is subject to approval by the Bankruptcy Court. A motion seeking such
approval was filed on March 4, 2003. If approved by the Bankruptcy Court, the
South Plant is expected to cease production on or about September 30, 2003.
Failure of the Company to achieve such approval could have a material adverse
effect on the Company's results of operations. The South Plant contains sulfuric
acid regeneration and production facilities as well as other operations. The
Company intends to comply fully with all of its environmental obligations in
connection with the decommissioning of the facility including, without
limitation, those relating to any investigation and remediation of the facility
required by law. Depending on the scope of any investigation and any remedial
activity required as a result, additional costs above those currently estimated
could be incurred over a period of the next several years. The Company is
currently unable to estimate the nature and extent of these potential additional
costs. As such, it is possible that the final outcome could have a material
adverse effect on the Company's results of operations, cash flows and financial
condition. Operations at the Delaware Valley Works' other manufacturing areas
located in the North Plant of the facility, including the production of sulfur,
fluorine, potassium and ammonia-based compounds and warehousing, distribution
and transportation operations, will continue.
To minimize the impact of the South Plant closure on its sulfuric acid
regeneration and merchant acid customers, the Company has made arrangements to
continue offering products and services to these customers through its four
other sulfuric acid facilities, supplemented by agreements with certain
strategic partners. In particular, the Company has negotiated with Rhodia Inc.
to assume responsibility for five of its sulfuric acid regeneration contracts,
subject to entering into appropriate modified contracts with the customers. A
motion seeking the Bankruptcy Court's approval of the transaction with Rhodia
Inc. was filed on March 11, 2003.
The consolidated financial statements included elsewhere in this report
have been prepared in accordance with Statement of Position 90-7 ("SOP 90-7"),
"FINANCIAL REPORTING BY ENTITIES IN REORGANIZATION UNDER THE BANKRUPTCY CODE,"
and on a going concern basis, which contemplates continuity of operations,
realization of assets and liquidation of liabilities in the ordinary course of
business. However, as a result of the Filing, such realization of assets and
liquidation of liabilities are subject to uncertainty. While operating as
debtors-in-possession under the protection of Chapter 11 of the Bankruptcy Code
and subject to Bankruptcy Court approval or otherwise as permitted in the normal
course of business, the Debtors may sell or otherwise dispose of assets and
liquidate or settle liabilities for amounts other than those reflected in the
consolidated financial statements. Further, a plan of reorganization could
materially change the amounts and classifications reported in the consolidated
financial statements, which do not give effect to any adjustments to the
carrying value of assets or amount of liabilities that might be necessary as
consequence of a plan of reorganization. Liabilities and obligations whose
treatment and satisfaction is dependent on the outcome of the Chapter 11 cases
have been segregated and classified as liabilities subject to compromise in the
consolidated balance sheet.
Pursuant to the Bankruptcy Code, schedules have been filed by the
Debtors with the Bankruptcy Court setting forth the assets and liabilities of
the Debtors as of the date of Filing. Differences between amounts recorded by
the Debtors and claims filed by creditors will be investigated and resolved as
part of the proceedings in the Chapter 11 cases. A bar date of April 14, 2003
has been set for the filing of proofs
-20-
of claim against the Debtors. Accordingly, the ultimate number and allowed
amount of such claims are not presently known.
CRITICAL ACCOUNTING POLICIES
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 consolidated financial statements. The significant accounting policies
which we believe are the most critical to the understanding of reported
financial results include the following:
Accounts Receivable - GenTek maintains allowances for doubtful accounts
for estimated losses resulting from the inability of our customers to make
required payments. If the financial condition of our customers were to
deteriorate, additional allowances may be required.
Inventories - GenTek provides estimated inventory allowances for
obsolete and excess inventory based on assumptions about future demand and
market conditions. If future demand or market conditions are different than
those projected by management, adjustments to inventory allowances may be
required.
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. 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 during 2002 and the Company's evaluation of potential
tax-planning strategies, the Company has concluded that it is more likely than
not that it will not be able to realize its domestic net deferred tax assets.
Accordingly, during 2002 the Company recorded an increase to its valuation
allowance of $143 million effectively reducing the carrying value of its
domestic net deferred tax assets to zero. The Company will continue to monitor
the likelihood of realizing its net deferred tax assets and future adjustments
to the deferred tax asset valuation allowances will be recorded as necessary.
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 other 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 independent
appraisals and our current operating forecast, which we believe to be
reasonable. However, different assumptions regarding our current operating
forecast could materially effect our estimates.
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. 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 could
materially affect our estimates.
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-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 experience and the assumptions used and
changes in the benefit plans.
Environmental Liabilities - GenTek has recorded accruals for
environmental liabilities based on
-21-
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. However, 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.
RESULTS OF OPERATIONS
The following table sets forth the Company's net revenues and operating
profit (loss) by segment for each of the three years in the period ended
December 31, 2002.
YEARS ENDED DECEMBER 31,
--------------------------------------------------------------
2002 2001 2000
----------------- ------------------ -------------------
(IN MILLIONS)
Net Revenues:
- -------------
Performance Products............................ $ 357.4 $ 360.9 $ 353.1
Manufacturing................................... 477.1 478.5 553.3
Communications.................................. 294.0 405.0 507.8
--------- --------- ---------
Total...................................... $ 1,128.5 $ 1,244.4 $ 1,414.2
========= ========= =========
Operating Profit (Loss):
- ------------------------
Performance Products............................ $ 28.6 $ (30.4) $ 40.0
Manufacturing................................... 44.8 (10.8) 64.2
Communications.................................. (89.5) (119.1) 59.9
Elimination/Other Corporate..................... (9.0) (12.4) (4.8)
--------- --------- ---------
Total...................................... $ (25.1) $ (172.7) $ 159.3
========= ========= =========
2002 COMPARED WITH 2001
Net revenues were $1,129 million for the year 2002 compared with $1,244
million for 2001. This decrease is principally due to a decrease in sales in the
communications segment as a result of lower volumes and pricing pressures,
principally driven by a continuing weakness in demand for the Company's public
and private network products and services in the North American and European
markets. Sales in the performance products segment decreased $4 million due to
lower sales in the environmental services and chemical processing markets,
partially offset by higher sales in the pharmaceutical and personal care market
and the technology market. Sales in the manufacturing segment decreased $1.4
million as the result of lower sales in the appliance and electronic market and
the automotive services market, partially offset by higher sales in the
industrial and automotive markets.
Gross profit of $229 million in 2002 was $21 million below the prior
year level. This decrease is principally due to lower sales volume in the
communications segment and costs associated with the expedited repair of two
boilers and a loss of production at one of the Company's performance products
facilities, partially offset by a $31 million charge to cost of sales recorded
during 2001 primarily due to obsolete and excess inventory, discontinued
products and fixed asset write-offs, and lower goodwill amortization and
depreciation expense.
Selling, general and administrative expense was $176 million for 2002
as compared with $236 million for 2001. This decrease is the result of a $29
million charge the Company recorded in 2001 principally due to a loss provision
for accounts receivable and lower expenses in the communications segment
reflecting the impact of the Company's restructuring programs, which included
the closure of two non-core research and development facilities in 2001.
During 2002, the Company initiated a restructuring program to reduce
its workforce in its communications segment, and recorded charges of
approximately $13 million primarily related to employee termination costs.
-22-
The Company has continued to experience significant declines in its
communications businesses resulting in operating losses for several business
units in 2002. The Company's revised forecast for these businesses indicated
that, based upon continuing diminished prospects in the market served by these
operations, the cash flow to be generated by these businesses would not be
sufficient to recover the carrying value of the long-lived assets at these
operations. In the second quarter of 2002, the Company recorded non-cash
impairment charges totaling $22 million primarily related to fixed assets at two
manufacturing facilities in the communications segment. In the third quarter of
2002, the Company recorded non-cash impairment charges totaling $42 million
primarily related to fixed assets in the Company's connectivity products
business in the communications segment. The charges were due to changes in the
principal markets served by these operations. The fair values of the assets were
determined based upon a calculation of the present value of the expected future
cash flows.
Operating loss for 2002 was $25 million as compared to an operating
loss of $173 million in 2001. The operating loss for 2001 includes
restructuring, impairment and other charges totaling $247 million related to
asset impairments, severance, plant closures, discontinuation of certain product
lines and receivable and inventory write downs. The operating loss for 2002
includes restructuring and impairment charges totaling $78 million, lower
depreciation expense as a result of asset impairment charges recorded in 2001
and lower amortization expense due to an accounting change related to SFAS No.
142. Excluding these factors, operating income for 2002 decreased $44 million
versus the prior year principally due to the lower sales volume in the
communication segment, unfavorable performance in the performance products
segment due to costs associated with the expedited repair of two boilers and a
loss of production at one of the Company's facilities, partially offset by
favorable performance in the manufacturing segment reflecting a more stable
automotive production environment and the impact of the Company's restructuring
program implemented in 2001, partially offset by lower prices.
Interest expense was $60 million for the year 2002 as compared to $75
million for the prior year. This decrease is principally due to no interest
expense being recorded on the Company's senior credit facility and 11% Senior
Subordinated Notes subsequent to the Company's Chapter 11 filing on October 11,
2002 and lower interest rates during the first nine months of 2002, partially
offset by higher average debt balances during the first nine months of 2002 as
compared to 2001. The Company is currently making adequate protection payments
to its senior creditors, which are being treated for accounting purposes as
reductions in principle.
The Company recorded income tax expense of $107 million for the year
2002. 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 is more likely than not that it will not be able to
realize its domestic net deferred tax assets. Accordingly, during 2002 the
Company recorded an increase to its valuation allowance of $143 million
effectively reducing the carrying value of its domestic net deferred tax assets
to zero. The Company will continue to monitor the likelihood of realizing its
net deferred tax assets and future adjustments to the deferred tax asset
valuation allowances will be recorded as necessary.
The Company adopted SFAS No. 142 "GOODWILL AND OTHER INTANGIBLE ASSETS"
effective January 1, 2002, which resulted in a charge of $161 million (net of a
tax benefit of $40 million) reported as a cumulative effect of a change in
accounting principle. Please see "Recent Accounting Pronouncements".
2001 COMPARED WITH 2000
Net revenues were $1,244 million for the year 2001 compared with $1,414
million for 2000. This decrease reflects lower volumes in the manufacturing and
communications segments reflecting the general economic slowdown, partially
offset by higher sales in the performance products segment, principally due to
higher volumes in the environmental services market. Manufacturing volumes were
negatively impacted principally by lower production levels in the North American
automotive sector. Lower communications volumes were principally driven by a
slowdown in the Company's North American public and premises network markets.
-23-
Gross profit of $250 million in 2001 was $127 million below the prior
year level. This decrease reflects the above mentioned lower volumes in the
communications and manufacturing segments, lower pricing in the manufacturing
segment and a $31 million charge to cost of sales principally due to obsolete
and excess inventory, discontinued products and fixed asset write-offs.
Selling, general and administrative expense of $236 million was $23
million higher than the prior year level. This increase was attributable to a
$29 million charge the Company recorded principally due to a loss provision for
accounts receivable for certain customers who have filed for bankruptcy or whose
current financial condition and payment history indicate payment is doubtful.
This increase was partially offset by the benefits of the Company's cost
reduction programs implemented in the second, third and fourth quarters of 2001.
During 2001, the Company initiated a restructuring program to reduce
its workforce, close several plants and discontinue certain product lines. As a
result of the above actions, the Company recorded restructuring charges of
approximately $37 million, comprised of $20 million related to employee
termination costs, $12 million for asset write-downs related to management's
decision to exit a business and $5 million for lease obligations and other
closure costs for facilities which will no longer be used.
In the early part of 2001, operating losses were experienced in certain
of the Company's operations. Additionally, forecasts updated at that time
indicated significantly diminished prospects for these operations. As a result
of these circumstances, management determined that the long-lived assets of
these operations should be assessed for impairment. Based on the outcome of this
assessment, the Company recorded a non-cash asset impairment charge of $84
million in the second quarter of 2001. This charge includes write-downs of fixed
assets of $57 million, goodwill and intangible assets of $24 million and an
investment and other long-term assets of $3 million. The second-quarter charge
primarily related to nine facilities in the performance products segment
totaling $59 million and certain intangible assets in the communications segment
totaling $22 million. The charge for eight of the nine performance products
facilities was due to changes in the principal markets served by these units.
The fair values of the assets of these facilities were determined based upon a
calculation of the present value of the expected future cash flows to be
generated by these facilities. The charge for one performance products facility
resulted from the facility's principal customer's decision to close its plant.
The fair value of the assets at this facility was based upon a third-party
appraisal. The impairment charge for the Company's communications segment is
related to certain purchased technologies acquired in 2000 for the purpose of
developing new products and services and expanding existing product offerings,
and was due to the significant downturn in the telecommunications market to be
served by these acquisitions. The Company determined the fair values of the
related goodwill and intangible assets using a calculation of the present value
of the expected future cash flows. During 2001, development of new products and
service offerings based upon these purchased technologies was ultimately
discontinued.
As the year progressed, the Company experienced a significant decline
in certain other businesses resulting in operating losses for these business
units. The Company's revised forecast prepared in the fourth quarter indicated
that, based upon diminished prospects in the markets served by certain
operations, the cash flows to be generated by these businesses would not be
sufficient to recover the carrying value of the long-lived assets at these
operations. In the fourth quarter of 2001, the Company recorded additional
non-cash impairment charges for long-lived assets totaling $67 million, of which
$55 million related to fixed assets, $9 million to goodwill and intangibles and
$3 million to an equity investment. The charge primarily related to two
facilities in the communications segment totaling $46 million and two facilities
and an equity investment in the manufacturing segment totaling $21 million. The
charge for one facility in the manufacturing segment relates to notification by
the facility's largest customer in the fourth quarter that the customer was
terminating its contract. As a result, management re-evaluated the forecast for
this business and deemed it appropriate to test the carrying value of long-lived
assets for impairment. The charge was recorded to reduce the carrying value to
fair
-24-
value, as determined using the present value of expected future cash flows. The
charge for the other facilities was due to changes in the principal markets
served by these units. The fair values of the assets were determined based upon
a calculation of the present value of the expected future cash flows.
Interest expense was $75 million for the year 2001, which was
comparable to the prior year level. Higher average outstanding debt balances
were offset by the effect of lower interest rates on the Company's floating rate
debt. The Company's average effective interest rate was 8.7 percent in 2001
compared with 10.2 percent in 2000.
The Company recorded an income tax benefit of $75 million for the year
2001 compared to a provision of $39 million for the year 2000. On July 14, 2000
legislation was enacted in Germany reducing income tax rates beginning January
1, 2001. Accordingly, the Company recorded a $2.8 million charge to income tax
expense during 2000 reflecting the revaluation of certain deferred tax assets at
the new lower effective tax rates. Prior to its acquisition by GenTek, Digital
was a division of Prestolite Wire Corporation ("Prestolite"), which is an
S-Corporation and, consequently, is not subject to federal income taxes. The pro
forma income tax provision that would have been reported by the Company had
Prestolite not been an S-Corporation prior to the acquisition was $41 million
for 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $133 million at December 31, 2002
compared with $9 million at year-end 2001. During 2002, the Company generated
cash flow from operations of $46 million, had proceeds from asset sales of $14
million and had net proceeds from long-term debt of $116 million, which was used
in part to make capital expenditures of $52 million.
The Company had working capital of $256 million at December 31, 2002 as
compared with $79 million at December 31, 2001. This increase in working capital
principally reflects higher cash and lower accounts payable balances.
During the first quarter of 2002, the Company borrowed all of its
remaining availability on its revolving credit facility, which approximated $155
million. As of December 31, 2002, the Company had approximately $133 million in
cash on hand, which management believes will provide sufficient liquidity to
fund ongoing operations and meet anticipated obligations to customers, vendors
and employees in the ordinary course of business during the Chapter 11 process.
At hearings held on October 17 and November 7, 2002, the Bankruptcy Court
entered orders authorizing the Debtors' to use cash collateral of their senior
lenders, and Noma Company to use GenTek's cash collateral, on terms specified in
such orders. In order to augment its financial flexibility during the Chapter 11
process, the Company negotiated with certain members of its pre-petition bank
syndicate, and received approval from the Bankruptcy Court on March 6, 2003, and
approval from the Ontario Court on March 13, 2003, to enter into a
debtor-in-possession credit facility. The new facility will enable the Company
to issue up to $50 million of letters of credit, including approximately $30
million of letters of credit issued under the pre-petition credit facility, to
support the Company and its subsidiaries' undertakings (other than ordinary
trade credit) and will provide the Company's Noma Company subsidiary with a $10
million revolving credit facility for working capital and other general
corporate purposes of Noma Company. The facility matures on September 30, 2003,
but may be extended to December 31, 2003 by the holders of a majority of the
commitments. To support the payment obligations under the new facility, the
Bankruptcy Court awarded super-priority administrative expense status to such
obligations and granted the lenders senior priming liens (with certain
exceptions) on the Debtors' assets.
The Filing resulted in an immediate acceleration of the principal
amount and accrued and unpaid interest on the Company's senior credit facility
and 11% Senior Subordinated Notes. Outstanding balances for the senior credit
facility and the 11% Senior Subordinated Notes have been reclassified to
liabilities subject to compromise. In connection with its use of cash collateral
under the credit facility, the Company is currently making adequate protection
payments to its senior creditors, which are being recorded as reductions in
principle for accounting purposes.
-25-
GenTek and the other Debtors will incur significant administrative and
reorganization expenses resulting from the Chapter 11 filing. The amount of
these expenses, which will be expensed as incurred, are expected to have a
material effect on the Company's results of operations.
The potential adverse publicity associated with the Filing and the
continuing Chapter 11 proceedings, and the resulting uncertainty regarding the
Company's future prospects may hinder the Company's ongoing business activities
and its ability to operate, fund and execute its business plan by: impairing
relations with existing and potential customers; limiting the Company's ability
to obtain trade credit; impairing present and future relationships with vendors;
and negatively impacting the ability of the Company to attract, retain and
compensate key employees and to retain employees generally.
At December 31, 2002, as a result of the recent investment performance
of the assets in the Company's various pension trusts, the Company's domestic
pension plans were underfunded by approximately $72 million. As a result, the
Company anticipates that, beginning in 2004, it will be required to make
contributions to its domestic pension plans which will average approximately $16
million per year for the next four years. In addition, for 2003 the Company will
lower its expected rate of return used in calculating pension expense from 9% to
8% for its domestic pension plans. The effect of this assumption change, the
change in the discount rate used from 7.25% to 6.5% and the pension assets
recent investment performance will be to increase pension expense by
approximately $4 million over 2002 levels.
RESTRUCTURING
The Company expects to substantially complete implementation of its
restructuring programs by the end of 2003. Management does not expect that the
restructuring programs will have a material impact on the Company's revenues.
Cash payments charged against the restructuring liability totaled $9 million for
employee termination costs and $1 million for facility exit costs in 2001 and
$10 million for employee termination costs and $2 million for facility exit
costs in 2002. Management expects that cash outlays related to the restructuring
program will be substantially completed by the end of 2003, however certain
severance and facility exit costs, primarily lease obligations, have payment
terms extending beyond 2003. Management intends to fund these cash outlays from
cash flow generated by operations. Management expects that the actions described
above will result in an estimated annual reduction in employee and facility
related expense and cash flows of approximately $40-$45 million. The Company
began to realize these reductions in the third quarter of fiscal 2001.
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, Australia, Austria, China, Germany, Great Britain, India,
Ireland, Mexico and other countries in which it operates. 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 proceedings and inquiries, the Company believes that
any such liability would not have a material adverse effect on its financial
position or results of operations. However, modifications or changes in
enforcement 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 expenditures which might be material to the Company's
financial position, cash flows or results of operations. See also "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, 2002, accruals for environmental
matters were $27 million. The Company maintains a comprehensive insurance
program, including customary comprehensive general liability insurance for
bodily injury and property damage
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caused by various activities and occurrences and significant excess coverage to
insure against catastrophic occurrences. However, the Company does not maintain
any 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 has an established program to ensure that its facilities
comply with environmental laws and regulations. In 2002, expenditures made in
connection with this program approximated $17 million (of which approximately $3
million represented capital expenditures and approximately $14 million related
to ongoing operations and the management and remediation of potential
environmental contamination from prior operations). Expenditures for 2001
approximated $16 million (of which approximately $4 million represented capital
expenditures and approximately $12 million related to ongoing operations and the
management and remediation of potential environmental contamination from prior
operations). Management expects expenditures similar to 2002 levels in 2003. In
addition, if environmental laws and regulations affecting the Company's
operations become more stringent, costs for environmental compliance may
increase above historical levels.
Claims