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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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(Mark One) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
[X] OF THE SECURITIES EXCHANGE ACT OF 1934
--- FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002
COMMISSION FILE NUMBER 1-13404
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THE GENERAL CHEMICAL GROUP INC.
(Exact name of Registrant as specified in its charter)
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Delaware 02-0423437
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Liberty Lane
Hampton, New Hampshire 03842
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (603) 929-2606
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Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Title of each class
Common Stock, par value $.01 per share
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]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 1, 2003, was approximately $1,697,675.
The number of outstanding shares of the Registrant's Common Stock and Class
B Common Stock as of March 1, 2003 was 3,203,160 and 700,639, 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
Overview and Recent Developments
The General Chemical Group Inc. (the "Company" or "General Chemical Group"
or "GCG") is a leading producer of soda ash and calcium chloride in North
America. The Company's soda ash is used in the manufacture of glass,
sodium-based chemicals (such as baking soda), detergents, paper, textiles, food
and many other familiar consumer products. The Company's calcium chloride is
used primarily by highway and road maintenance organizations for dust control
and roadbed stabilization during the summer and for de-icing roads and sidewalks
during the winter.
The Company, whose predecessor companies date back to 1899, was organized
in 1988 as a Delaware corporation. The Company's businesses were transferred in
1986 by AlliedSignal, Inc. to a predecessor of the Company, at which time new
operating management was installed. On May 15, 1996, the Company completed an
initial public offering of its Common Stock. The Company's common stock is
listed on the Over the Counter (OTC) Bulletin Board under the symbol "GNMP".
On April 30, 1999, General Chemical Group completed the separation of its
Manufacturing and Performance Products businesses from its soda ash and calcium
chloride businesses through a spinoff (the "Spinoff"), which the Company
effected by distributing the stock of GenTek Inc. ("GenTek"), its wholly-owned
subsidiary, on a pro rata basis to its shareholders. As a result of the Spinoff,
GenTek became a separate company.
The Company produces natural soda ash from trona ore, the raw material
precursor of soda ash, at its Green River, Wyoming facility, where it has access
to the largest and most economically recoverable trona ore deposits in the
world. The Company operates its Green River facility through General Chemical
(Soda Ash) Partners ("GCSAP"), a partnership with subsidiaries of ACI
International Limited and TOSOH Corporation. The Company owns a 51% equity
interest and is the managing partner of this partnership. ACI International
Limited is a subsidiary of Owens-Illinois, Inc., one of the world's largest
consumers of soda ash. TOSOH Corporation is a leading chemical company and a
distributor of soda ash in Japan. The Company produces calcium chloride at its
facility in Amherstburg, Ontario, Canada.
In December, 2002, as part of a restructuring of operations to reduce
production costs, the Company closed its calcium chloride production facility in
Manistee, Michigan and has consolidated its North American production of calcium
chloride to its Amherstburg, Ontario, Canada production facility. The Company
has developed brine wells at its Amherstburg and Manistee facilities to
supplement its third party brine supply contract. In addition, the Company
recently entered into a joint venture with Tangshan Sanyou (Alkali) Group Ltd.
for the marketing and sale of calcium chloride in Asia, Europe, Africa and the
Middle East. The joint venture, General Chemical Tangshan Sanyou Company Ltd.,
plans to construct a 100,000 ton calcium chloride production facility in China.
The Company idled approximately 500,000 tons per year of synthetic soda ash
production capacity at its Amherstburg, Ontario, Canada facility in April 2001.
The Company continues producing calcium chloride in Amherstburg. The capacity
idled constituted approximately 15% of the Company's total soda ash production
capacity, and all of the Company's synthetic soda ash production capacity. The
Company idled this capacity because it required substantially more resources -
principally energy and necessary capital improvements - for the Company to
manufacture synthetic soda ash at Amherstburg than to manufacture natural soda
ash at its production facility in Green River, Wyoming. The Company shifted
production from its relatively high-cost synthetic soda ash facility in
Amherstburg to its lower-cost natural soda ash facility in Green River, thereby
eliminating cash operating losses incurred in operating the Amherstburg facility
and reducing its exposure to fluctuations in energy prices. The Company has the
flexibility to resume its Amherstburg soda ash operations if market conditions
dictate. Until such time, the Company continues to serve customers of its
Amherstburg soda ash facility from its facility in Green River and, where
appropriate, through resale arrangements with other soda ash producers.
The Company's recent financial performance has been adversely impacted by
lower soda ash prices, rising energy costs and the weaker economic environment.
On March 7, 2001, the Company and its lenders entered into an amendment to the
Company's senior secured credit agreement ("Senior Credit Agreement"), which
provided for more flexible financial covenants for 2001 and 2002 and more
restrictive covenants regarding restricted payments, investments, incurrence of
indebtedness, capital expenditures, sale of assets and related matters. While
the Company was in compliance with the amended financial and other covenants
contained in the Senior Credit Agreement through December 31, 2002, the
amendments to the financial covenants expired on that date. The Company
anticipates that it will not be able to meet the financial covenants that will
be calculated in respect of the Company's financial results for the quarter
ending March 31, 2003, which failure will constitute an event of default under
the Senior Credit Agreement. As a result
2
of the foregoing, the Company's audit report for the fiscal year ended December
31, 2002 contains a "going concern" qualification. The inability of the Company
to deliver to its senior lenders an audit report that does not contain such a
qualification will itself constitute an event of default under the Company's
Senior Credit Agreement.
Any event of default under the Senior Credit Agreement could have a
material adverse effect on our business, results of operations and financial
condition. The occurrence of an event of default under our Senior Credit
Agreement would give our senior lenders the right, among other things, to
declare all amounts outstanding under the Senior Credit Agreement to be
immediately due and payable, together with accrued and unpaid interest. In
addition, if an event of default occurs, our senior lenders would have the right
to block payments of any principal or interest obligation related to our 10 5/8%
Senior Subordinated Notes due 2009 ("Subordinated Notes") or the purchase or
redemption of such obligations. In accordance with the Forbearance and Amendment
Agreement described below, we do not intend to make the interest payment on the
Subordinated Notes that will come due on May 1, 2003. On May 31, 2003, the 30
day grace period with respect to payment defaults on the Subordinated Notes will
expire and the failure to make the May 1, 2003 interest payment by such date
would constitute an event of default under the Subordinated Notes, following
which the holders of 25% in aggregate principal amount of the Subordinated Notes
may accelerate the amounts due under the related Indenture.
On March 25, 2003, we entered into a Forbearance and Amendment Agreement
with the lenders under our Senior Credit Agreement, pursuant to which such
lenders have agreed not to exercise any remedies for the existing defaults
through July 30, 2003 to allow the Company time to pursue a restructuring of
its existing indebtedness. The Company intends to negotiate a restructuring
of its indebtedness with its senior lenders and representatives of the holders
of the Subordinated Notes over the next several months. Such a restructuring
could result in substantial dilution to the Company's existing equity holders.
However, there is no assurance that the Company will be successful in reaching
an agreement with its various lenders on a restructuring plan. If the lenders
were to accelerate maturity of amounts due under the Senior Credit Agreement,
or if the holders of the Subordinated Notes were to accelerate the amounts due
under the Indenture, the Company would not have sufficient funds to repay its
outstanding debt, and the Company would have to explore other strategic
alternatives, including a sale of assets, obtaining alternative sources of
funding or other restructuring alternatives, which would likely have a
material adverse effect on the Company and its business.
The Soda Ash and Calcium Chloride Businesses
Soda Ash
Soda ash is used in the manufacture of glass, sodium-based chemicals,
detergents, paper and other consumer products. It is also used in water
treatment, pulp and paper and other industrial end-use applications.
Approximately one-half of global soda ash demand is attributable to glass
production. The glass production market is comprised of manufacturers of bottles
and other containers, commercial, residential and automobile windows, mirrors,
fiberglass, television tubes, lighting ware, tableware, glassware and laboratory
ware.
The following table sets forth estimated global end-market soda ash
consumption in 2002, by volume (1):
Glass........................................................................54%
Chemicals....................................................................21%
Detergents...................................................................11%
Water treatment and other....................................................14%
- ----------
(1) Developed from industry sources.
Management estimates the total annual world market for soda ash to be
approximately 39 million tons. Management estimates that the Company accounted
for approximately 6% of worldwide production in 2002. All of the soda ash
produced in the United States is natural soda ash, while overseas manufacturers
produce primarily synthetic soda ash. Production of natural soda ash, in which
the Company specializes, requires significantly less energy and raw materials
than synthetic soda ash production, and as a result is a significantly less
costly process. This cost differential allows the Company and other United
States producers to competitively export significant volumes of natural soda ash
to international markets. Management estimates that United States producers
exported 4 million tons of soda ash in 2002. The United States producers export
soda ash primarily through American Natural Soda Ash Company ("ANSAC"), the
export cooperative of United States producers, which enhances the United States
producers' low cost position by leveraging the cooperative's global sales and
marketing operations and creating distribution economies of scale.
Exports. Almost all of the soda ash produced outside the United States is
synthetic soda ash, which involves significantly more energy, labor and raw
materials than the natural refining process used in the United States and, as a
result, its process is significantly more costly. The production cost
differential between natural and synthetic soda ash is generally sufficient to
offset the costs of transporting U.S. produced soda ash into export markets,
allowing the U.S. producers of natural soda ash to compete in most geographic
regions with local sources of synthetically produced soda ash.
3
The Company, along with the other five U.S. producers of natural soda ash,
is a member of ANSAC, a soda ash export cooperative organized in 1984 under an
exemption from U.S. antitrust laws provided under the Webb-Pommerene Act.
Through this cooperative, all six U.S. producers export soda ash to all parts of
the world except Canada and the members of the European Union, where U.S.
producers export soda ash directly. The primary export markets served by ANSAC
are Asia and Latin America and, to a lesser extent, the Middle East, Africa and
Eastern Europe. Each individual member's allocation of ANSAC's volume is based
on the member's total nameplate capacity, with any member's expansion phased-in
over a multi-year period for allocation purposes. ANSAC is the exclusive
distributor of the soda ash of its members; however, subject to certain
limitations, members can distribute soda ash directly to their international
affiliates for their own consumption. One of the U.S. producers, IMC Global, has
announced its intention to withdraw from ANSAC effective January 1, 2004.
Certain countries have from time to time limited or have considered limiting or
prohibiting sales of products through export cooperatives such as ANSAC on
grounds that they are anticompetitive, though the Company is not aware of any
activity in this regard that would be material to its business.
Soda Ash Pricing and Capacity Utilization. The Company's principal product
is soda ash, and the market price of soda ash affects the profitability of the
Company more than any other factor. The market price of soda ash fluctuates and
in recent years has been negatively affected by factors beyond the Company's
control, such as increases in energy and transportation costs, fluctuations in
the global supply of soda ash, decreases in global demand for the consumer
products that require soda ash for their manufacture and the availability and
price of products that can be substituted for soda ash.
Average United States soda ash prices have fallen from $83 per ton in 1996
to $69 per ton in 2002, primarily due to reduced demand and increases in
production capacity, including capacity expansions by existing producers from
late 1996 to late 2000 of approximately 2.4 million tons, and the entry of
American Soda LLC ("American Soda") into the market in 2000.
The following chart indicates the average industry price of U.S. soda ash
per ton and global capacity utilized during the period from 1992 to 2002.
Average Price U.S. Capacity
Year Per Ton(1) Utilization(2)
- ---- ------------- --------------
1992........................................... 81 90
1993........................................... 74 88
1994........................................... 70 91
1995........................................... 74 90
1996........................................... 83 89
1997........................................... 77 91
1998........................................... 75 87
1999........................................... 69 87
2000........................................... 66 88
2001........................................... 68 88
2002........................................... 69(3) 85(3)
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(1) Based on data from the U.S. Geological Survey (not adjusted for inflation),
FOB production facility.
(2) Based on 95 percent of nameplate capacity as reported by industry sources.
(3) Company estimate.
Soda Ash Capacity Expansions. From 1982 until 1999, no new natural soda ash
plants were built in North America. In the fourth quarter of 2000, the American
Soda plant, which solution mines nahcolite reserves in Rifle, Colorado, began
operation. American Soda's management has estimated that the annual capacity of
their facility will be 1,000,000 tons, although in 2002 the facility produced
approximately 600,000 tons. Since 1982, other than the American Soda facility,
capacity expansion in the United States has taken place through expansion of
existing facilities and improved operating efficiencies with such new natural
soda ash capacity generally being offset by the closure of older, higher-cost
synthetic soda ash plants outside the United States. Since 1982, announced
synthetic soda ash plant closures have included IMC Global's 300,000 ton
facility in Germany, Asahi Glass' 400,000 ton facility in Japan, SE Soda's
200,000 ton facility in Taiwan, and the idling of the Company's 500,000 ton
facility in Amherstburg, Ontario, Canada.
In late 1998 OCI Wyoming L.P. ("OCI") completed an 800,000 ton expansion of
its Green River facility. However, after completion of the expansion, OCI
mothballed 900,000 tons of previously constructed capacity at the facility due
to then current soda ash market conditions. During the fourth quarter of 1999,
FMC Corporation ("FMC") announced it was reducing capacity at its Granger, Green
River facility by 650,000 tons, despite the fact that it had completed a 700,000
ton expansion in 1999. In late 2000, Solvay Minerals completed a 400,000 ton
expansion of its Green River facility. During the second quarter of 2001, FMC
announced it was idling the remaining capacity of 650,000 tons at its Granger,
Green River facility. During 2002, the Company believes OCI restarted 300,000
tons of previously mothballed capacity.
4
Calcium Chloride
Management estimates that annual production of calcium chloride in North
America is approximately 1,200,000 tons. The primary uses for the Company's
calcium chloride--road maintenance and ice removal--are seasonal and weather
dependent. During the summer, the Company's calcium chloride is used in liquid
form on unpaved roads for dust control and roadbed stabilization. During the
winter, the Company's calcium chloride is used in flake and liquid form for ice
removal. The Company primarily markets its calcium chloride to highway and road
maintenance organizations, as well as other industrial and governmental users.
The Company also markets a range of calcium chloride-based products for sidewalk
and driveway de-icing applications through retail home improvement centers.
Competition
Soda Ash
The worldwide soda ash industry is comprised of a number of domestic and
international producers, some of which produce large volumes of soda ash in
multiple geographic regions. Solvay S.A., with natural soda ash operations in
the U.S. through its Solvay Minerals subsidiary, and multiple synthetic soda ash
production facilities in Western and Eastern Europe, is the world's single
largest producer of soda ash, with total estimated capacity of approximately 9.0
million tons. FMC's 1999 acquisition of Tg Soda Ash, Inc. increased FMC's
combined total capacity to more than 4.8 million tons, of which 1.3 million tons
are currently mothballed.
Given the global nature of the soda ash industry and major soda ash
consumers, the Company competes with both international and North American soda
ash producers. The international soda ash producers include Brunner Mond plc,
Penrice Soda Ash Products Pty Ltd., Solvay S.A. and various Eastern European and
Asian producers.
Soda Ash capacity outside of North America in 2002 was as follows:
Capacity in
Region Thousands of Tons(1)
- ------ --------------------
Eastern Europe........................................... 7,300
Western Europe........................................... 7,500
China.................................................... 8,600
Other Asian Countries.................................... 5,300
Rest of World............................................ 1,200
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Total capacity outside of North America............... 29,900
======
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(1) Estimated annual nameplate capacity; derived from industry sources.
North American soda ash capacity in 2002 was as follows:
Capacity in
Owner/Managing Partner Location Thousands of Tons(1)
- ---------------------- ---------- --------------------
General Chemical Group...................... Wyoming 2,800(2)
FMC Corporation............................. Wyoming 3,550(3)
Solvay Minerals............................. Wyoming 3,100
OCI Wyoming L.P............................. Wyoming 2,650(4)
IMC Global (5).............................. California 1,500
American Soda LLC .......................... Colorado 650(6)
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Total North American Capacity............ 14,250
======
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(1) Estimated annual nameplate capacity; derived from industry sources.
(2) Excludes 500,000 tons of mothballed capacity in Amherstburg, Ontario,
Canada.
(3) Excludes 1,300,000 tons of mothballed capacity.
(4) Excludes 600,000 tons of mothballed capacity.
(5) Currently held by IMC Global through its wholly-owned subsidiary, North
American Chemical Company.
(6) Company estimate.
The soda ash industry also faces competitive pressures from the increased
use of glass substitutes and recycled glass in the container industry.
Competition from increased use of glass substitutes, such as plastic, and
recycled glass in the container industry has
5
had a negative effect on the demand for soda ash. Demand for soda ash in the
container industry has declined from approximately 2,300,000 tons in 1987 to
approximately 1,657,000 tons in 2002. Management believes that the use of
plastic containers will continue to negatively impact the growth in domestic
demand for soda ash.
Calcium Chloride
The Company is the largest producer of calcium chloride in Canada. The
Company's major competitors are The Dow Chemical Company ("Dow Chemical"), TETRA
Technologies, Inc. ("TETRA"), and various local producers in Canada and the
United States. In the United States, the Company is the third largest
distributor of calcium chloride behind Dow Chemical and TETRA, and in Canada the
Company is the largest distributor of calcium chloride. With respect to
capacity, the Company's Amherstburg facility has 450,000 tons of capacity and it
is estimated that Dow Chemical also has 700,000 tons of capacity. The next
largest U.S. producer is TETRA, which operates four plants with estimated total
capacity of 350,000 tons.
In certain markets, calcium chloride competes with a number of substitute
products. For example, in the highway ice control market, calcium chloride
competes with alternative de-icers such as rock salt and magnesium chloride. As
such, the Company also competes with the producers of these substitute products.
Reserves and Control of Resources
The Company mines trona ore under leases with the United States government,
the State of Wyoming and the Anadarko Petroleum Corporation. The Company's trona
reserves and mines are located in the Green River, Wyoming area. In the Green
River basin, the Green River formation was deposited in a lake that began in the
early Eocene geologic period (approximately 35 million years ago) as a large
body of fresh water, shrank in size and became saline, expanded and then became
fresh water again. In general, the sediments deposited during the saline phase
of this lake, which included the trona deposits, are called the Wilkins Peak
Member, and the overlying and underlying fresh water deposits are called the
Laney Shale Member and Tipton Shale Member, respectively.
The Company's estimated proven reserves within bed No. 17, which it is
currently mining, consist of approximately 160 million tons of extractable ore.
At the 2002 operating rate of 2.4 million tons of soda ash per year (4.5 million
tons of trona ore), there is approximately a 36-year supply within bed No. 17.
For the three years ended December 31, 2002, annual production of trona ore
averaged approximately 4.5 million tons. In addition, the Company's estimated
recoverable reserves contain three other major mineable trona beds containing
approximately 437 million tons of extractable ore. These beds, which may require
significant capital to access, will provide approximately 97 years of added
reserves based on current operating rates.
The Company's Amherstburg, Ontario, Canada calcium chloride operation
obtains its brine requirements from brine wells in Amherstburg and Manistee and
also under a third party supply contract. The Company cannot give any assurance
that if its access to its brine sources are interrupted it will be able to
secure alternative sources in a timely manner and on satisfactory terms, if at
all. The Company's failure to do so would hinder its ability to manufacture
calcium chloride at its Amherstburg facility and would have a material adverse
effect on its results of operations.
General Chemical (Soda Ash) Partners
Since 1986, the Green River plant has been owned by GCSAP, a partnership of
which the Company is the managing partner. The Company owns a 51 percent equity
interest and ACI International Limited and TOSOH Corporation, through
wholly-owned subsidiaries, respectively, own 25 percent and 24 percent of the
partnership's equity interests. ACI International Limited, a major world
producer of container glass and a customer of GCSAP, is a wholly-owned
subsidiary of Owens-Illinois Inc., a worldwide producer of packaging materials.
Management believes that Owens-Illinois and ACI International as a combined
entity represents one of the largest single purchasers of soda ash with annual
domestic and international requirements of approximately 2 million tons. TOSOH
Corporation is a leading chemical company and distributor of soda ash in the
Japanese market whose operations previously included a 300,000 ton synthetic
soda ash facility in Nanyo, Japan. In 1997, TOSOH Corporation closed its
synthetic soda ash facility and began purchasing soda ash through ANSAC.
The Company has been the managing partner of GCSAP since 1986, when the
partnership was formed. As managing partner, the Company has had and will
continue to have overall responsibility for management of the partnership,
including with respect to all operational, sales, marketing and financial
matters. However, certain significant actions of the partnership must be
approved by a majority, or in certain instances, all of the partners. The
partnership shall terminate on December 31, 2011, unless extended for an
additional five years or unless the partners mutually decide to terminate it at
any time prior to such date.
The partnership agreement requires the partnership to make quarterly cash
distributions to each of the three partners. The partnership agreement also
prohibits the partners from transferring their equity interests or withdrawing
from the partnership without the
6
consent of the other partners. The obligations of each partner are guaranteed by
its parent. Pursuant to a guaranty agreement, each parent company has agreed to
certain restrictions on its ability to sell the stock of its partner subsidiary.
If the parent company of any partner proposes to transfer ownership of its
partner subsidiary, the nontransferring parent companies may either: (1) acquire
the transferred partner, or its partnership interest, pursuant to a right of
first refusal; or (2) require the transferring parent company, or the proposed
purchaser, to acquire the partnership interest held by their own partner
subsidiaries.
If one or both of the Company's partners in GCSAP, Owens-Illinois, or TOSOH
Corporation, were to seek to transfer its interest in GCSAP and the Company did
not or could not exercise its right of first refusal, one or more new partners
could be admitted to the partnership. Any such new partner may have business or
financial objectives for GCSAP that are different from those of the Company.
Partnership with Church & Dwight
GCSAP and Church & Dwight are partners in a partnership that owns trona
reserves. Church & Dwight is the leading United States and worldwide producer of
sodium bicarbonate, commonly known as baking soda, sold under the Arm &
Hammer(R) brand. The trona is mined and processed by GCSAP under a tolling
agreement and all of the soda ash produced is purchased by Church & Dwight under
a sales contract.
Seasonality and Backlogs
Sales of soda ash are generally not seasonal, except for sales to the glass
container industry, which increase significantly in the summer due to stronger
beverage demand. Sales of calcium chloride are concentrated in late spring and
summer for dust control and late fall and winter for de-icing. As a result, the
Company's sales are generally lowest in the first quarter and highest in the
second quarter.
Due to the nature of our business, there are no significant backlogs.
Environmental Matters
The Company's mining and production operations, which have been conducted
at its Green River, Manistee and Amherstburg sites for many years, are subject
to numerous laws and regulations relating to the protection of human health and
the environment in the U.S. and Canada. The Company has an established program
to ensure that its facilities comply with environmental 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. In addition, 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, or
changes in the operation of the Company's business or the discovery of
additional or unknown environmental contamination, could require expenditures
which might be material to the Company's results of operations or financial
condition. For further discussion of the Company's efforts to comply with the
environmental laws and regulations to which its operations are subject, as well
as a discussion of potential liabilities known to the Company under such laws
and regulations, see "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Environmental Matters".
The Company, as the former parent of GenTek, may under certain
circumstances be found liable for obligations of GenTek related to the use or
transport of hazardous substances or environmental contamination at facilities
of GenTek for periods prior to the Spinoff. On October 11, 2002 GenTek filed for
reorganization under Chapter 11 of the U.S. Bankruptcy Code. Although GenTek has
agreed to indemnify and hold the Company harmless with respect to all such
liabilities and to bear all of the Company's expenses for defending any claims
related to these matters, the Company's results of operations or financial
condition could be materially adversely affected in the event GenTek is unable
or unwilling to perform its indemnification obligations.
On March 13, 2000, the Company's Canadian subsidiary received a letter from
Environment Canada ("EC"). The letter informed the Company that it faces an
alleged violation of the Canadian Fisheries Act, R.S.C., as amended, with
respect to effluent discharges at its Amherstburg, Ontario facility. According
to EC, the Company's chloride level of its effluent discharged to the Detroit
River exceeded permitted levels. The idling of the Amherstburg synthetic soda
ash production facility in April 2001 has improved the quality of the effluent
such that it complies with the Canadian Fisheries Act requirements as of August
2001. For principally this reason, EC notified the Company on June 12, 2002 that
it was closing its investigation into this matter. Because of the foregoing, the
Company does not believe that any additional expenses and/or capital
expenditures will be incurred in connection with this matter which would be
material to the Company's results of operations and/or financial condition.
7
Employees/Labor Relations
As of December 31, 2002, the Company had 735 employees, 241 of whom were
full-time salaried employees, 463 were full-time hourly employees and 31 were
hourly employees working in nonunion facilities.
Three union contracts, covering 463 employees at the Green River, Wyoming
and Amherstburg, Ontario facilities, have durations of three years and were
renewed during 2002.
Set forth below is information with respect to each of the Company's
executive officers and/or key employees.
John M. Kehoe, Jr., 69, is the President and Chief Executive Officer and a
Director of the Company. Since June 1999, Mr. Kehoe has served as the Chairman
of Wheelabrator Technologies Inc., a provider of waste management services that
is part of Waste Management. Mr. Kehoe was the President and Chief Executive
Officer of Wheelabrator Technologies, Inc. from January 1993 to June 1999.
DeLyle W. Bloomquist, 44, is Vice President and Chief Operating Officer of
the Company. Mr. Bloomquist was from 1996 until the Spinoff the Vice President
and General Manager, Industrial Chemicals of General Chemical Corporation.
David S. Graziosi, 37, is Vice President and Chief Financial Officer of the
Company. Mr. Graziosi was the Director of Finance for GenTek Inc. from August
1999 to February 2000. Mr. Graziosi held several financial management positions
in Sun Chemical Group B.V. from August 1996 to August 1999.
John D. Sanford, 49, is Executive Vice President of the Company. Since
April 2000, Mr. Sanford has served as Vice President and Chief Financial Officer
of ProcureNet, Inc., a provider of procurement and supply chain management
services to United States federal government agencies. Between November 1997 and
May 1999, he served as Executive Vice President and Chief Financial Officer of
CDI Corporation, a leading provider of temporary and permanent staffing
services. Prior to November 1997, Mr. Sanford was Senior Vice President and
Chief Financial Officer of Waste Management Inc.
Item 2. Properties
The Company's headquarters is located in Hampton, New Hampshire. The
locations and uses of major properties of the Company are as follows:
Location Use
-------- ---
United States Green River, Wyoming Trona Mine and Manufacturing
Facility
Manistee, Michigan Calcium Chloride Brine Wells
* Hampton, New Hampshire Headquarters
* Parsippany, New Jersey Offices
Canada Amherstburg, Ontario Manufacturing Facility
Brooks, Ontario Calcium Chloride Brine Fields
Drumheller, Ontario Calcium Chloride Brine Fields
* Mississauga, Ontario Offices
Philippines * Manila, Philippines Warehouse and Offices
- ----------
* Leased
Item 3. Legal Proceedings
The Company anticipates that it will not be able to meet the financial
covenants under its Senior Credit Agreement that will be calculated in respect
of the Company's financial results for the quarter ending March 31, 2003. The
failure to comply with these covenants would be an event of default under the
Senior Credit Agreement and our anticipated non-payment of the next interest
payment on our Subordinated Notes would be an event of default under the
Indenture for the Subordinated Notes. We have entered into a Forbearance and
Amendment Agreement as of March 25, 2003 with the lenders under our Senior
Credit Agreement, pursuant to which such lenders have agreed not to exercise any
remedies for the existing defaults through July 30, 2003, and have commenced
negotiations with these lenders and the holders of the Subordinated Notes on a
restructuring of its existing indebtedness. However, if we are unable to reach
agreement on a restructuring plan, our various lenders may determine to exercise
their legal remedies including accelerating obligations under the Senior Credit
Agreement or the Subordinated Notes or commencing a legal action against the
Company.
8
The Company from time to time also becomes involved in claims, litigation,
administrative proceedings and investigations relative to various matters.
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 or financial condition. See also "Item 7 -- Management's Discussion
and Analysis of Financial Condition and Results of Operations -- Environmental
Matters".
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.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Market Information
The Company's common stock is traded on the Over the Counter (OTC) Bulletin
Board under the symbol "GNMP". The Company's common stock was traded on the New
York Stock Exchange ("NYSE") until July 18, 2001, at which time the NYSE
suspended trading of the Company's common stock. Effective with the open of the
market on July 19, 2001, the Company's common stock began trading over the
counter. In addition, the Company effected a one-for-ten reverse split of its
common stock, effective as of the close of business on July 18, 2001. The
following table shows the high and low recorded trading prices of the Company's
common stock, as reported on the NYSE composite tape and over the counter market
for each of the quarterly periods listed (for pre-July 19, 2001 periods,
adjusted to give effect to the one-for-ten reverse split):
Year Ended December 31, 2001 High Low
- ---------------------------- ------ -----
First Quarter................................................. $11.25 $7.50
Second Quarter................................................ 8.80 4.00
Third Quarter................................................. 3.75 2.00
Fourth Quarter................................................ 4.50 2.40
Year Ended December 31, 2002
- ----------------------------
First Quarter................................................. $ 4.00 $2.75
Second Quarter................................................ 3.60 2.80
Third Quarter................................................. 3.90 1.75
Fourth Quarter................................................ 2.75 0.50
- ----------
At March 1, 2003, there were 157 stockholders of record of the Company's
common stock and 3 stockholders of record of the Company's Class B common stock.
The following table sets forth the securities authorized for issuance under
the Company's equity compensation plan:
Number of securities to Weighted average Number of securities remaining
be issued upon exercise exercise of available for future issuance
of existing options outstanding options {excluding securities reflected in
(a) (b)(1) in (a)} (c)(2)
----------------------- ------------------- ----------------------------------
Plan Category
Equity compensation plans approved by
security holders..................... 230,825 $39.16 201,803
Equity compensation plans not approved
by security holders.................. -- -- --
------- ------ -------
Total................................... 230,825 $39.16 201,803
======= ====== =======
(1) Does not include 11,089 restricted units included in column (a) which have
no exercise price.
(2) The shares listed in column (c) may be issued in the form of Other Stock
Based Awards, which include restricted or unrestricted stock, restricted or
unrestricted stock units or dividend equivalents.
9
Dividends
Since the Spinoff, the Company has not paid a cash dividend and does not
expect that cash dividends will be paid to holders of its Common Stock in the
foreseeable future. In addition, certain restrictions in the Company's debt
instruments limit the ability of the Company to pay dividends.
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,
---------------------------------------------------------------
1998 1999 2000 2001 2002
-------- -------- -------- -------- ---------
(Dollars in thousands, except per share data)
Statement of Operations Data:
Net revenues..................................... $303,624 $312,617 $296,522 $286,056 $ 277,890
Operating profit (loss).......................... 41,049(1) 30,607(2) (46,352)(3) 11,442(4) 19,427(5)
Minority interest................................ 16,666 12,787 11,180 6,979 12,840
Income (loss) before interest expense and income
taxes ........................................ 24,342(1) 19,159(2) (48,905)(3) 4,361(4) 6,531(5)
Net income (loss)................................ 9,424(1) 4,985(2) (48,529)(3) (11,527)(4) (8,364)(5)
Per Common Share Data:
Net income (loss) basic.......................... $ 4.48(1) $ 2.38(2) $ (23.05)(3) $ (3.70)(4) (2.14)(5)
Net income (loss) diluted........................ 4.31(1) 2.32(2) (23.05)(3) (3.70)(4) (2.14)(5)
Other Data:
Capital expenditures............................. $ 18,498 $ 24,061 $ 20,836 $ 8,436 $ 7,889
Depreciation and amortization.................... 16,999 17,801 19,148 17,084 11,609
Balance Sheet Data (at end of period):
Cash and cash equivalents........................ $ 1,127 $ 26,630 $ 20,815 $ 16,045 $ 13,078
Total assets..................................... 248,714 293,208 251,000 220,191 204,179
Long-term debt................................... -- 150,919 149,314 146,487 144,394
Total equity (deficit)........................... 75,292 (46,893) (96,557) (95,452) (111,830)
- ----------
(1) Includes incremental accruals of $2.3 million ($1.4 million after tax or
$.64 per diluted share) principally related to cost of sales ($.9 million)
for the reclamation of brine wells and selling, general and administrative
expense ($1.4 million) primarily due to product delivery litigation.
(2) Includes a one-time charge of $1.9 million ($1.2 million after tax or $.56
per diluted share) related to the Spinoff.
(3) Includes a one-time gain on the sale of assets of $7.7 million ($6.3
million after tax or $2.99 per diluted share) and a restructuring charge of
$59.8 million ($46.5 million after tax or $22.09 per diluted share) related
to the idling of the synthetic soda ash production capacity in Amherstburg,
Ontario.
(4) Includes a restructuring charge of $1.7 million ($1.7 million after tax or
$.55 per diluted share) related to revised actuarial estimates of employee
termination benefits from the idling of the Amherstburg synthetic soda ash
production capacity.
(5) Includes a restructuring charge of $7.7 million ($7.7 million after tax or
$1.97 per diluted share) related to the closing of the calcium chloride
production facility in Manistee, Michigan.
10
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
The Company is a leading global producer of soda ash and North American
producer of calcium chloride. The Company produces natural soda ash at its
facility in Green River, Wyoming, and calcium chloride at its facility in
Amherstburg, Ontario. The Company's soda ash is used in the manufacture of
glass, sodium-based chemicals (such as baking soda), detergents, paper,
textiles, food and many other familiar consumer products. The Company's calcium
chloride is used primarily by highway and road maintenance organizations for
dust control and roadbed stabilization during the summer and for de-icing roads
and sidewalks during the winter.
The Company's Green River facility, including the facilities and leases for
mining trona ore, is owned and operated through General Chemical (Soda Ash)
Partners, a partnership in which GCG owns a 51 percent partnership interest and
of which GCG is the managing partner. See "Item 1 -- Business -- General
Chemical (Soda Ash) Partners".
The Company's principal product is soda ash, and the profitability of its
operations is affected by the market price of soda ash more than any other
factor. For a discussion of factors affecting the prices of and demand for soda
ash, see "Item 1 -- Business." Average United States soda ash prices have fallen
from $83 per ton in 1996 to $69 per ton in 2002, due to reduced demand and
increases in production capacity. Average U.S. soda ash prices were $66 in 2000,
$68 in 2001 and $69 in 2002. Recently completed 2003 domestic soda ash supply
contracts include an average decrease in price of $5 per ton. High-energy prices
and concomitantly high transportation costs have negatively impacted the
Company's profitability in recent years.
The Company closed its calcium chloride production facility in Manistee,
Michigan in December 2002 and has consolidated its North American calcium
chloride production at its Amherstburg, Ontario facility. The Company recorded a
pre-tax charge of approximately $7.7 million in the fourth quarter of 2002 in
connection with the closing of its Manistee, Michigan calcium chloride
production facility. This charge included a $6.5 million noncash write-down in
the value of the plant assets, as well as severance and other cash charges of
$1.2 million.
The Company idled approximately 500,000 tons per year of synthetic soda ash
production capacity at its Amherstburg, Ontario, Canada facility in April 2001.
The capacity idled constituted approximately 15% of the Company's total soda ash
production capacity, and all of its synthetic soda ash production capacity. The
Company continues producing calcium chloride at Amherstburg. The Company
recorded a pre-tax charge of approximately $59.8 million in the fourth quarter
of 2000 in connection with the idling of its Amherstburg synthetic soda ash
capacity. This charge included a $43.5 million noncash write-down of the value
of the idled plant assets, as well as severance and other cash charges of
approximately $16.3 million. In the second quarter of 2001, the Company recorded
an additional restructuring charge of $1.7 million for revised actuarial
estimates of employee termination benefits.
The recent decline in the global equity markets has resulted in a decrease
in the value of the assets in our pension plans. The Company recorded a minimum
pension liability of approximately $8.2 million with corresponding reductions in
minority interest of $0.8 million and equity of $7.4 million on December 31,
2002. In addition, based on the value of the assets in our defined benefit
pension plans, we will be required to fund approximately $5.2 million to the
plans in fiscal 2003.
The Company, as the former parent of GenTek, may under certain
circumstances be found liable for obligations of GenTek related to the use or
transport of hazardous substances or environmental contamination at facilities
of GenTek for periods prior to the Spinoff. Although GenTek has agreed to
indemnify and hold the Company harmless with respect to all such liabilities,
GenTek may be unable or unwilling to perform its indemnification obligations as
a consequence of it filing under Chapter 11 of the U.S. Bankruptcy Code on
October 11, 2002. The Company's results of operations or financial condition
could be materially adversely affected by these eventualities.
This discussion should be read in conjunction with the Company's
Consolidated Financial Statements and the respective notes thereto included in
Item 8 Financial Statements and Supplementary Data.
Covenant Compliance and Restructuring Efforts
On March 7, 2001, the Company and its bank lenders entered into an
amendment to the Company's Senior Credit Agreement, which provided for more
flexible financial covenants for 2001 and 2002 and more restrictive covenants
regarding restricted payments, investments, incurrence of indebtedness, capital
expenditures, sale of assets and related matters. While the Company was in
compliance with the amended financial and other covenants contained in the
Senior Credit Agreement through December 31, 2002, the amendments to the
financial covenants expired on that date. The Company anticipates that it will
not be able to meet the financial
11
covenants that will be calculated in respect of the Company's financial results
for the quarter ending March 31, 2003, which failure will constitute an event of
default under the Senior Credit Agreement. As a result of the foregoing, the
Company's audit report for the fiscal year ended December 31, 2002 contains an
explanatory paragraph regarding the Company's ability to continue as a going
concern. The inability of the Company to deliver to its lenders an audit report
that does not contain such a paragraph will itself constitute an event of
default under the Company's Senior Credit Agreement.
Any event of default under the Senior Credit Agreement could have a
material adverse effect on our business, results of operations and financial
condition. The occurrence of an event of default under our Senior Credit
Agreement would give our senior lenders the right, among other things, to
declare all amounts outstanding under the Senior Credit Agreement to be
immediately due and payable, together with accrued and unpaid interest. In
addition, if an event of default occurs, our senior lenders would have the right
to block payments of any principal or interest obligation related to our
Subordinated Notes or the purchase or redemption of such obligations. In
accordance with the Forbearance and Amendment Agreement described below, we do
not intend to make the interest payment on the Subordinated Notes that will come
due on May 1, 2003. On May 31, 2003, the 30 day grace period with respect to
payment defaults on the Subordinated Notes will expire and the failure to make
the May 1, 2003 interest payment by such date would constitute an event of
default under the Subordinated Notes, following which the holders of 25% in
aggregate principal amount of the Subordinated Notes may accelerate the amounts
due under the related Indenture.
On March 25, 2003, we entered into a Forbearance and Amendment Agreement
with the lenders under our Senior Credit Agreement, pursuant to which such
lenders have agreed not to exercise any remedies for the existing defaults
through July 30, 2003 to allow the Company time to pursue a restructuring of its
existing indebtedness. During the forbearance period the Company has agreed to
restrict its ability to incur additional liens, make payments on account of
indebtedness other than indebtedness under the Senior Credit Agreement or
currently scheduled payments, make any direct or indirect payment on or in
respect of the Subordinated Notes, or request Eurodollar loans with an interest
period of longer than two months. In addition, the Company has agreed to
permanently reduce the total commitments available under our Senior Credit
Agreement to $70 million and to reduce the total commitments during the
forbearance period to the lesser of (i) $60 million or (ii) 115% of the
projected usage under the Senior Credit Agreement for such day according to
a fixed schedule. We are also required under the Forbearance and Amendment
Agreement to meet certain milestones in the progress of our restructuring
efforts.
The Company intends to negotiate a restructuring of its indebtedness with
its senior lenders and representatives of the holders of the Subordinated Notes
over the next several months. Such a restructuring could result in substantial
dilution to the Company's existing equity holders. However, there is no
assurance that the Company will be successful in reaching an agreement with its
various lenders on a restructuring plan. If the lenders were to accelerate
maturity of amounts due under the Senior Credit Agreement, or if the holders of
the Subordinated Notes were to accelerate the amounts due under the Indenture,
the Company would not have sufficient funds to repay its outstanding debt, and
the Company would have to explore other strategic alternatives, including a sale
of assets, obtaining alternative sources of funding or other restructuring
alternatives, which would likely have a material adverse effect on the Company
and its business.
Critical Accounting Policies
The discussion and analysis of the Company's financial condition and
results of operations are based on the Company's consolidated financial
statements, which have been prepared in accordance with accounting principles
generally accepted in the United States. The preparation of these financial
statements requires the Company to make estimates and assumptions that affect
the reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. On an on-going
basis, management evaluates its estimates and judgments, including those related
to product returns, bad debts, inventory obsolescence, income taxes,
restructuring costs, retirement and insurance costs, and contingencies and
litigation. Those estimates and assumptions are based on the Company's
historical experience, observance of trends in the industry, and various other
factors that are believed to be reasonable under the circumstances; the results
of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results
may differ from those estimates under different assumptions or conditions.
The Company maintains an allowance for doubtful accounts for estimated
losses resulting from the inability of its customers to make required payments.
The Company provides for the allowance for doubtful accounts when it becomes
likely or known that the financial condition of a customer has deteriorated,
resulting in their inability to make payments. If those conditions change,
changes to the allowance for doubtful accounts may be necessary.
The Company writes down inventory for the estimated difference between the
cost of inventory and the estimated market value based upon assumptions about
future demand and market conditions. If actual future demand or market
conditions are less favorable than those projected by management, additional
inventory write-downs may be required.
12
The Company records accruals for environmental liabilities, based on
current interpretations of environmental laws and regulations when it is
probable that a liability has been incurred and the amount can be reasonably
estimated. The Company's estimates are based upon reports prepared by
environmental specialists and management's knowledge and experiences with these
environmental matters. If interpretations of applicable laws and regulations and
cleanup methods or the extent of our responsibility change from our current
estimates, revisions to our estimated environmental liability may be required.
The Company records a valuation allowance to reduce deferred tax assets to
an amount that is more likely than not to be realized. While the Company has
considered future taxable income and ongoing tax planning strategies in
assessing the need for a valuation allowance, the Company cannot ensure that
such future events will occur. In the event that the Company determines that the
Company will not be able to realize all or portion of our deferred tax assets,
an adjustment to reduce assets and increase deferred tax expense would be
recorded.
Although the Company considers these policies to require management's more
complex estimates and assumptions, you may refer to "Item 8 - Financial
Statements and Supplementary Data - Note 2 - Summary of Significant Accounting
Policies" for a description of the Company's accounting policies necessary for a
complete understanding of the Company's financial statements.
Results of Operations
The following table sets forth statement of operations data for each of the
three years ended December 31, 2000, 2001 and 2002 and the corresponding
percentage of the net revenues for the relevant periods presented.
Years Ended December 31,
--------------------------------------------------------------
2000 2001 2002
--------------- ------------------------ ----------------
(Dollars in millions)
Net revenues .................................. $296.5 100% $286.1 100% $277.9 100%
Gross profit .................................. 30.4 10 30.1 11 43.0 15
Selling, general and administrative expense ... 17.0 6 16.9 6 15.8 6
Restructuring charge .......................... 59.8 20 1.7 1 7.7 3
Operating profit (loss) ....................... (46.4)(1) 16 11.4 (2) 4 19.4(3) 7
Interest expense .............................. 15.9 5 15.6 6 14.9 5
Minority interest ............................. 11.2 4 7.0 2 12.8 5
Net loss ...................................... (48.5)(1) 16 (11.5)(2) 4 (8.4)(3) 3
- ----------
1) Includes a one-time gain on the sale of assets of $7.7 million ($6.3
million after tax), and restructuring charge of $59.8 million ($46.5
million after tax) related to the idling of the synthetic soda ash
production capacity in Amherstburg, Ontario.
2) Includes a restructuring charge of $1.7 million ($1.7 million after tax)
related to revised actuarial estimates of employee termination benefits
from the idling of the Amherstburg synthetic soda ash production capacity.
3) Includes a restructuring charge of $7.7 million ($7.7 million after tax)
related to the closing of the calcium chloride production facility in
Manistee, Michigan.
2002 as Compared with 2001
Net revenues for 2002 were $277.9 million, which was $8.2 million, or 2.9
percent below the prior year level. Net revenues were negatively affected by
lower soda ash volumes due to the April 2001 idling of the Company's synthetic
soda ash production capacity in Amherstburg, Ontario, Canada, as well as lower
calcium chloride volumes due to warm winter weather partially offset by higher
domestic soda ash prices.
Gross profit for 2002 was $43.0 million compared with $30.1 million in
2001. Gross profit as a percentage of net revenues for 2002 increased to 15.5
percent from 10.5 percent for 2001. These increases were primarily due to lower
operating costs resulting from the April 2001 idling of the Company's synthetic
soda ash production capacity, lower energy costs and depreciation expense, and
higher domestic soda ash prices, partially offset by lower calcium chloride
volumes, and higher calcium chloride feedstock costs. In addition, the prior
year includes costs incurred to start up operations at the Company's Manistee,
Michigan calcium chloride facility which was subsequently closed in December
2002.
Selling, general and administrative expense as a percentage of net revenues
for 2002 was 5.7 percent as compared to 5.9 percent in 2001.
Restructuring charge of $7.7 million in 2002 was due to the closure of the
Company's calcium chloride production facility in Manistee, Michigan.
13
Restructuring charge of $1.7 million in 2001 was due to revised actuarial
estimates of employee termination benefits for the April 2001 idling of the
Company's synthetic soda ash production capacity.
Interest expense for 2002 was $14.9 million, which was $0.7 million lower
than the comparable prior period level primarily due to lower borrowing rates
partially offset by costs to amend the Company's Senior Credit Agreement and an
increase in borrowings under the credit facility.
Minority interest for 2002 was $12.8 million, versus $7.0 million for 2001.
The increase reflects higher earnings at General Chemical (Soda Ash) Partners
primarily due to higher domestic soda ash prices, lower energy costs and
depreciation expense.
Net loss was $8.4 million for 2002, versus a net loss of $11.5 million for
2001, for the foregoing reasons.
2001 as Compared with 2000
Net revenues for 2001 were $286.1 million, which was $10.4 million, or 3.5
percent below the prior year level. Net revenues were negatively affected by
lower soda ash volumes due to the April 2001 idling of the Company's synthetic
soda ash production capacity in Amherstburg, Ontario, Canada, as well as lower
calcium chloride volumes due to reduced export demand partially offset by higher
calcium chloride prices.
Gross profit for 2001 was $30.1 million compared with $30.4 million in
2000. Gross profit as a percentage of net revenues for 2001 increased to 10.5
percent from 10.3 percent for 2000. This increase in gross profit as a
percentage of net revenues was primarily due to higher calcium chloride prices
and lower operating costs resulting from the April 2001 idling of the Company's
Amherstburg soda ash facility partially offset by higher energy costs at General
Chemical (Soda Ash) Partners as well as costs incurred to start up operations at
our Manistee, Michigan calcium chloride facility.
Selling, general and administrative expense as a percentage of net revenues
for 2001 was 5.9 percent as compared to 5.7 percent in 2000.
Restructuring charge of $1.7 million in 2001 was due to revised actuarial
estimates of employee termination benefits for the April 2001 idling of the
Company's synthetic soda ash production capacity in Amherstburg, Ontario,
Canada.
Interest expense for 2001 was $15.6 million, which was $0.3 million lower
than the comparable prior period level primarily due to lower borrowing rates
partially offset by costs to amend the Company's Senior Credit Agreement.
Minority interest for 2001 was $7.0 million, versus $11.2 million for 2000.
The decrease reflects lower earnings at General Chemical (Soda Ash) Partners
primarily due to higher energy costs.
Net loss was $11.5 million for 2001, versus a net loss of $48.5 million for
2000, for the foregoing reasons.
Liquidity and Capital Resources
Cash and cash equivalents were $13.1 million at December 31, 2002 compared
with $16.0 million at December 31, 2001. During 2002 the Company provided cash
flow from operating activities of $4.9 million and used cash of $7.9 million for
capital expenditures.
The Company had working capital of $44.7 million at December 31, 2002 as
compared with $51.4 million at December 31, 2001. The decrease in working
capital principally reflects higher accounts payable and lower deferred income
taxes and cash balances partially offset by higher inventories and receivables
and lower accrued liabilities.
The Company's liquidity needs arise primarily from working capital
requirements, capital expenditures and interest and principal payment
obligations. The Company satisfies its liquidity needs from cash flow from
operations and short-term borrowings under its Senior Credit Agreement.
Accordingly, the Company's ability to satisfy its capital requirements will be
dependent upon future financial performance, which in turn will be subject to
general economic conditions and to financial, business and other factors,
including factors beyond the Company's control. The Company has borrowed, and
expects to borrow, from time to time under its Senior Credit Agreement for
working capital needs resulting from the seasonality of its calcium chloride
business. The Company's ability to borrow under its Senior Credit Agreement is
subject to certain conditions including the Company's compliance with its
financial covenants and the terms of the Forbearance and Amendment Agreement.
14
While the Company was in compliance with the amended financial and other
covenants contained in the Senior Credit Agreement through December 31, 2002,
the Company anticipates that it will not be able to meet the financial covenants
that will be calculated in respect of the Company's financial results for the
quarter ending March 31, 2003, which failure will constitute an event of default
under the Senior Credit Agreement. As a result of the foregoing, the Company's
audit report for the fiscal year ended December 31, 2002 contains an explanatory
paragraph regarding the Company's ability to continue as a going concern. The
inability of the Company to deliver to its senior lenders an audit report that
does not contain such a paragraph will itself constitute an event of default
under the Company's Senior Credit Agreement. The Company's failure to meet such
covenant requirements will result in the Senior Credit Agreement becoming
callable by the lenders. In addition, in accordance with the Forbearance and
Amendment Agreement described below we are not permitted to make payments on
our Subordinated Notes, and failure to pay within the grace period for the next
payment date would constitute an event of default causing the Subordinated Notes
to be callable as well. If the Company fails to be in compliance with its
financial or other covenants under the Senior Credit Agreement or if the
borrowings under that facility are called by the lenders, counterparties to the
Company's interest rate swap agreement will have the right to require the
Company to cash settle this agreement by paying fair value to the
counterparties.
On March 25, 2003, we entered into a Forbearance and Amendment Agreement
with the lenders under our Senior Credit Agreement, pursuant to which such
lenders have agreed not to exercise any remedies for the existing defaults
through July 30, 2003 to allow the Company time to pursue a restructuring of its
existing indebtedness.
The Company's seasonal working capital requirements are expected to result
in peak borrowing needs during June and July of 2003. The Forbearance and
Amendment Agreement allows the Company to borrow up to the lesser of (i) $60
million or (ii) 115% of the projected usage under the Senior Credit Agreement
for such day according to a fixed schedule through the end of the forbearance
period on July 30, 2003. The Company also anticipates fees and expenses
associated with its restructuring efforts of approximately $7.0 million. In
addition, the Company paid a fee equal to .50% of the total commitments to the
senior lenders for their forbearance and increased the applicable margins for
loans under the Senior Credit Agreement. The Company's ongoing liquidity will
depend upon a number of factors, including our ability to develop and implement
a restructuring plan, available cash resources, cash flows from operations, and
proceeds from the sale of assets, if any. As part of its restructuring efforts,
the Company has commenced discussions with its lenders towards amending its
Senior Credit Agreement and restructuring its obligations under the
Subordinated Notes. If these discussions do not result in an acceptable
amendment or restructuring of our existing indebtedness, or if our expectations
regarding any of the other factors enumerated above are not realized, we may be
required to reduce capital expenditures, sell additional assets, restructure all
or a portion of our existing debt or obtain alternative sources of financing.
However, there can be no assurance that alternative sources of financing will be
available or at terms which are favorable to the Company. These conditions,
together with the Company's net loss in fiscal 2002, raise substantial doubt
about the Company's ability to continue as a going concern. The Company's
consolidated financial statements do not include any adjustments to reflect the
possible future effects on the recoverability and classification of assets or
liabilities that may result from the outcome of this uncertainty. To the extent
that the relevant debt covenants are not amended or the respective debt is
accelerated or not otherwise restructured or refinanced prior to the issuance of
the Company's quarterly report on Form 10-Q for the quarter ending June 30,
2003, a significant portion of the Company's debt will be classified as a
current liability.
On April 30, 1999, the Company completed the offering of $100 million 10
5/8% Senior Subordinated Notes, due 2009. Approximately $80 million of the net
proceeds were used to fund a distribution to GenTek prior to the Spinoff and the
balance for general corporate purposes. In addition, concurrent with the
Spinoff, the Company entered into the Senior Credit Agreement, due 2004 with an
original capacity of $85 million. As part of the Forbearance and Amendment
Agreement to the Company's Senior Credit Agreement, the maximum amount that the
Company may borrow under its Senior Credit Agreement during 2003 was permanently
reduced to $70 million and further reduced during the forbearance period to up
to the lesser of (i) $60 million or (ii) 115% of the projected usage under the
Senior Credit Agreement for such day according to a fixed schedule through the
end of the forbearance period on July 30, 2003.
The Company is significantly leveraged and, absent the restructuring, will
not have the operating cash flow to service its long-term debt. At December 31,
2002, outstanding indebtedness consisted of $100 million of Subordinated Notes,
$44.4 million outstanding under the Senior Credit Agreement and $2.3 million of
letters of credit. The Company's leverage and debt service requirements (1)
increase its vulnerability to economic downturns, (2) potentially limit the
Company's ability to respond to competitive pressures, and (3) may limit the
Company's ability to obtain additional financing in the future for working
capital, capital expenditures, acquisitions, strategic investments or general
corporate purposes. The Company's Subordinated Notes Indenture and Credit
Facility Agreement impose operating and financial restrictions on the Company.
These covenants affect, and in certain cases, limit the Company's ability to
incur additional indebtedness, make capital expenditures, make investments and
acquisitions and sell assets, pay dividends and make other distributions to
shareholders, and consolidate, merge or sell all or substantially all assets.
In addition, pursuant to the Forbearance and Amendment Agreement, the
Company agreed to restrict its ability to incur additional liens, make payments
on account of indebtedness other than indebtedness under the Senior Credit
Agreement or currently
15
scheduled payments, make any direct or indirect payment on or in respect of the
Subordinated Notes, or request Eurodollar loans with an interest period of
longer than two months.
The Company uses supplier contracts related to future natural gas
requirements. The objective is to limit the fluctuations in prices paid and the
potential volatility in earnings or cash flows from future price movements.
The Company is required to restore certain land to its pre-existing state
upon ceasing of operations or federal enforcement. In addition, these
liabilities have been collateralized through self-bonding and surety bonds with
third party insurers, although the Company will be required to reimburse the
insurers upon their payment of amounts due under the bonds for the restoration
of land. The Company has recorded liabilities for this restoration in the
accompanying financial statements.
Future minimum rental payments for operating leases (primarily for
transportation equipment, mining equipment, offices and warehouses) having
initial or remaining noncancellable lease terms in excess of one year as of
December 31, 2002 are as follows (in thousands):
Years Ending December 31,
- -------------------------
2003................................... $10,851
2004................................... 9,555
2005................................... 8,299
2006................................... 6,794
2007 .................................. 5,007
Thereafter............................. 9,022
The recent decline in the global equity markets has resulted in a decrease
in the value of the assets in our defined benefit pension plans. This decline
will likely adversely affect our related accounting results in future periods
through higher pension expense, additional minimum liabilities with
corresponding reductions in equity, and increased cash funding requirements. In
addition, the Company may incur higher expense related to our postretirement
health plans as a result of higher health care cost trends.
The Company recorded a minimum pension liability of approximately $8.2
million with corresponding reductions in minority interest of $0.8 million and
equity of $7.4 million on December 31, 2002.
Future estimated cash contributions to fund the Company's defined benefit
pension plans are as follows (in thousands):
Years Ending December 31,
- -------------------------
2003................................... $ 5,226
2004................................... 8,718
2005................................... 10,663
2006................................... 11,176
2007 .................................. 9,830
Related Party Agreements
The Company is party to a management agreement with Latona Associates Inc.
(which is controlled by a stockholder of the Company) under which the Company
receives corporate supervisory and administrative services and strategic
guidance for a quarterly fee. This management fee was $1.6 million, $1.6
million, and $1.7 million in 2000, 2001 and 2002, respectively.
The Company and GenTek entered into various transition support agreements
that provide mechanisms for an orderly transition after the Spinoff. For the
years ended December 31, 2000, 2001 and 2002, the Company paid GenTek $1.7
million, $1.4 million, and $1.4 million related to these transition support
agreements.
GenTek provides the Company with management information services, and
subleases to it office space in Parsippany, New Jersey used as its operations
headquarters, pursuant to agreements entered into at the Spinoff . On October
11, 2002, GenTek filed for reorganization under Chapter 11 of the U.S.
Bankruptcy Code. If GenTek becomes unable to meet its obligations under these
agreements, the Company would have to obtain our management information services
and office space from third parties. The Company is developing a contingency
plan in the event GenTek terminates these agreements. No assurances can be given
as to the timely and cost effective replacement of management information
services.
The Company supplies soda ash and calcium chloride to GenTek. For the years
ended December 31, 2000, 2001 and 2002, sales
16
to GenTek amounted to $4.4 million, $4.0 million, and $2.8 million,
respectively.
Environmental Matters
The Company's mining and production operations, which have been conducted
at its Green River, Manistee and Amherstburg sites for many years, are subject
to numerous laws and regulations relating to the protection of human health and
the environment in the U.S. and Canada. The Company has an established program
to ensure that its facilities comply with environmental 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. In addition, 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, or
changes in the operation of the Company's business or the discovery of
additional or unknown environmental contamination could require expenditures
which might be material to the Company's results of operations or financial
condition.
On March 13, 2000, the Company's Canadian subsidiary received a letter from
Environment Canada ("EC"). The letter informed the Company that it faces an
alleged violation of the Canadian Fisheries Act, R.S.C., as amended, with
respect to effluent discharges at its Amherstburg, Ontario facility. According
to EC, the Company's chloride level of its effluent discharged to the Detroit
River exceeded permitted levels. The idling of the Amherstburg synthetic soda
ash production in April 2001 has improved the quality of the effluent such that
it complies with the Canadian Fisheries Act requirements as of August 2001. For
principally this reason, EC notified the Company on June 12, 2002 that it was
closing its investigation into this matter. Because of the foregoing, the
Company does not believe that any additional expenses and/or capital
expenditures will be incurred in connection with this matter which would be
material to the Company's results of operations and/or financial condition.
Accounting Pronouncements
In July 2001, the Financial Accounting Standards Board ("FASB"), issued
Statement of Financial Accounting Standards ("SFAS") No. 141, Business
Combinations and No. 142, Goodwill and Other Intangible Assets. SFAS 141
requires that all business combinations initiated after June 30, 2001, be
accounted for using the purchase method of accounting. In addition, it further
clarifies the criteria for recognition of intangible assets separately from
goodwill. The Company adopted this statement effective July 1, 2001. SFAS 142
establishes new standards for goodwill acquired in a business combination and
eliminates the amortization of goodwill over its estimated useful life. Rather,
goodwill will now be tested for impairment annually, or more frequently if
circumstances indicate potential impairment, by applying a fair value based
test. The Company adopted this statement effective January 1, 2002. The adoption
of this standard did not have a material impact on the Company's financial
position or results of operations.
In August 2001, the FASB issued SFAS No. 143, Accounting for Asset
Retirement Obligations. SFAS 143 addresses financial accounting and reporting
for obligations associated with the retirement of tangible long-lived assets and
the associated asset retirement costs. SFAS 143 requires that the fair value of
a liability for an asset retirement obligation be recognized in the period in
which it is incurred if a reasonable estimate of fair value can be made. The
associated asset retirement costs are capitalized as part of the carrying amount
of the long-lived asset. The Company adopted SFAS 143 effective January 1, 2001.
The adoption of this standard did not have a material impact on the Company's
financial position or results of operations.
In October 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. SFAS 144 addresses financial
accounting and reporting for the impairment of long-lived assets and for
long-lived assets to be disposed of. SFAS 144 supersedes FASB Statement No. 121,
Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of. SFAS 144 retains the fundamental provisions of SFAS 121 for (a)
recognition and measurement of the impairment of long-lived assets to be held
and used and (b) measurement of long-lived assets to be disposed of by sale. The
Company adopted this statement effective January 1, 2002. The adoption of this
standard did not have a material impact on the Company's financial position or
results of operations.
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
4, 44 and 64, Amendment of FASB Statement 13, and Technical Corrections. SFAS
145 rescinds the provisions of SFAS 4 that requires companies to classify
certain gains and losses from debt extinguishments as extraordinary items,
eliminates the provisions of SFAS 44 regarding transition to the Motor Carrier
Act of 1980 and amends the provisions of SFAS 13 to require that certain lease
modifications be treated as sale leaseback transactions. The provisions of SFAS
145 related to classification of debt extinguishment are effective for fiscal
years beginning after May 15, 2002. Commencing January 1, 2003, the Company will
classify debt extinguishment costs within income from operations. The provisions
of SFAS 145 related to lease modifications are effective for transactions
occurring after May 15, 2002. The Company does not expect the provisions of SFAS
145 related to lease modifications to have a material impact on its financial
position or results of operations.
In June 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. SFAS 146
17
nullifies Emerging Issues Task Force ("EITF") No. 94-3, Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). The principal difference
between SFAS 146 and EITF 94-3 relates to its requirements for recognition of a
liability for a cost associated with an exit or disposal activity. SFAS 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of an entity's commitment
to an exit plan. SFAS 146 is effective for exit and disposal activities that are
initiated after December 31, 2002. The Company does not expect the provisions of
SFAS 146 to have a material impact on its financial position or results of
operations.
In December 2002, the FASB issued SFAS No. 148 Accounting for Stock-Based
Compensation - Transition and Disclosure, an amendment of FASB Statement No.
123. SFAS 148 amends SFAS No. 123, Accounting for Stock-Based Compensation, to
provide alternative methods of transition for a voluntary change to the fair
value based method of accounting for stock-based employee compensation. In
addition, SFAS 148 amends the disclosure requirements of SFAS 123 to require
prominent disclosures in both annual and interim financial statements about the
method of accounting for stock-based employee compensation and the effect of the
method used on reported results. The Company is required to implement SFAS 148
in fiscal 2003 and certain disclosure provisions for the year ended December 31,
2002. The Company does not expect the provisions of SFAS 148 to have a material
impact on its financial position or results of operations.
In November 2002, FASB Interpretation ("FIN") 45, Guarantor's Accounting
And Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others, was approved by the FASB. FIN 45 clarifies that a
guarantor is required to recognize, at the inception of a guarantee, a liability
for the fair value of the obligation undertaken in issuing the guarantee. The
initial recognition and initial measurement provisions of this interpretation
are applicable on a prospective basis to guarantees issued or modified after
December 31, 2002. The interpretation also requires enhanced and additional
disclosures of guarantees in financial statements ending after December 15,
2002. In the normal course of business, the Company does not issue guarantees,
accordingly this interpretation has no effect on the financial statements.
Forward-Looking Statements
This Annual Report includes forward-looking statements. All statements
other than statements of historical facts included in this Annual Report may
constitute forward-looking statements. The Company has based these
forward-looking statements on its current expectations and projections about
future events. Although it believes that the assumptions made in connection with
the forward-looking statements are reasonable, there can be no assurances that
its assumptions and expectations will prove to have been correct. These
forward-looking statements are subject to various risks, uncertainties and
assumptions including, among other things:
o The Company's ability to reach agreement with its various lenders on
amending or restructuring its existing debt and successfully
implementing a restructuring plan;
o If the Company is unable to reach agreement on or implement a
restructuring plan; the Company may become the subject of adverse
legal proceedings;
o The Company's outstanding indebtedness and its leverage, and the
restrictions imposed by its indebtedness and the Company's ability to
comply with these restrictions;
o The Company's ability to obtain or develop sufficient calcium chloride
brine sources on satisfactory terms;
o Fluctuations in the world market price for soda ash due to changes in
supply and demand;
o Fluctuations in prices for calcium chloride in North America due to
changes in supply and demand;
o Increases in the Company's energy, transportation or labor costs;
o Future modifications to existing laws and regulations affecting the
environment, health and safety;
o Discovery of unknown contingent liabilities, including environmental
contamination at its facilities, and
o The Company' s ability to complete and start-up a calcium chloride
joint venture in China.
The Company undertakes no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information, future
events or otherwise. In light of these risks, uncertainties and assumptions, the
forward-looking events discussed in this Annual Report might not occur.
18
Item 7a. Qualitative and Quantitative Disclosures about Market Risk
Market risk represents the loss that may impact the consolidated financial
position, results of operations or cash flows of the Company. The Company is
exposed to market risk in the areas of interest and foreign exchange rates.
The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's debt obligations. The Company has no cash flow
exposure due to rate changes on its $100 million in 10 5/8% Senior Subordinated
Notes, as the interest rates on these notes are fixed.
However, the Company does have cash flow exposure on its committed and
uncommitted Senior Credit Agreement as interest is based on a floating rate. At
December 31, 2002 the Company had $44.4 million in borrowings under the credit
facility that had variable pricing. Accordingly, as of fiscal 2002, a 1% change
in the floating rate will result in interest expense fluctuating approximately
$0.5 million. As of fiscal 2001, the Company also had $46.5 million in
borrowings under the Senior Credit Agreement that had a floating interest rate.
Accordingly, as of fiscal 2001 a 1% change in the floating rate would have
resulted in interest expense fluctuating approximately $0.5 million.
The Company is also exposed to foreign exchange risk primarily to the
extent of adverse fluctuation in the Canadian dollar.
In October 2002, the Company entered into an interest rate swap agreement
with a total notional amount of $8.8 million that qualifies and is designated as
a cash flow hedge in accordance with SFAS 133, Accounting for Derivative
Instruments and Hedging Activities. The swap agreement matures in April 2004 and
was executed in order to convert a portion of the Senior Credit Agreement
floating-rate debt into fixed-rate debt, maintain a capital structure containing
appropriate amounts of fixed and floating-rate debt, and reduce net interest
payments and expense in the near-term. The Company has recorded the change in
fair value of this interest rate swap at December 31, 2002 as a component of
other comprehensive income. At December 31, 2002, a 10 percent change in
interest rate structure would not materially change the fair value of the
interest rate swap.
The Company does not expect to enter into financial instruments for trading
purposes. The Company anticipates periodically entering into interest rate swap
agreements to effectively convert all or a portion of floating-rate debt to
fixed-rate debt in order to reduce exposure to movements in interest rates. Such
agreements would involve the exchange of fixed and floating interest rate
payments over the life of the agreement without the exchange of the underlying
principal amounts. The Company also anticipates periodically entering into
currency agreements to partially reduce exposure to movements in currency
exchange rates. Swap and currency agreements will only be entered into with
creditworthy parties.
Item 8. Financial Statements and Supplementary Data
19
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders of
THE GENERAL CHEMICAL GROUP INC.:
We have audited the accompanying consolidated balance sheets of The General
Chemical Group Inc. and subsidiaries (the "Company") as of December 31, 2001 and
2002, and the related consolidated statements of operations, changes in equity
(deficit) and cash flows for each of the three years in the period ended
December 31, 2002. Our audits also included the financial statement schedule
listed in the Index at Item 15. These financial statements and financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedule based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of The General Chemical Group Inc.
and subsidiaries as of December 31, 2001 and 2002, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. Also, in our opinion, such financial statement
schedule, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
The accompanying consolidated financial statements for the year ended
December 31, 2002 have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1 to the consolidated financial
statements, the Company's ability to maintain compliance with its debt covenants
during 2003 raises substantial doubt about its ability to continue as a going
concern. Management's plans concerning these matters are also described in Note
1. The financial statements do not include any adjustments that might result
from the outcome of this uncertainty.
DELOITTE & TOUCHE LLP
Parsippany, New Jersey
February 13, 2003
(except for Note 12 as to which the date is March 25, 2003)
20
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31,
-------------------------------------
2000 2001 2002
-------- -------- --------
(In thousands, except per share data)
Net revenues .............................................. $296,522 $286,056 $277,890
Cost of revenues .......................................... 266,080 255,991 234,914
Selling, general and administrative expense ............... 16,992 16,902 15,849
Restructuring charge ...................................... 59,802 1,721 7,700
-------- -------- --------
Operating profit (loss) ................................... (46,352) 11,442 19,427
Interest expense .......................................... 15,921 15,590 14,865
Gain on sale of assets .................................... 7,671 -- --
Interest income ........................................... 1,302 960 320
Foreign currency transaction losses ....................... 24 931 270
Other expense, net ........................................ 322 131 106
-------- -------- --------
Income (loss) before minority interest and income taxes ... (53,646) (4,250) 4,506
Minority interest ......................................... 11,180 6,979 12,840
-------- -------- --------
Loss before income taxes .................................. (64,826) (11,229) (8,334)
Income tax provision (benefit) ............................ (16,297) 298 30
-------- -------- --------
Net loss ............................................... $(48,529) $(11,527) $ (8,364)
======== ======== ========
Loss per common share:
Basic .................................................. $ (23.05) $ (3.70) $ (2.14)
======== ======== ========
Diluted ................................................ $ (23.05) $ (3.70) $ (2.14)
======== ======== ========
See the accompanying notes to consolidated financial statements.
21
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
December 31,
---------------------
2001 2002
-------- ---------
(In thousands, except
share data)
ASSETS
Current assets:
Cash and cash equivalents ....................................... $ 16,045 $ 13,078
Receivables, net ................................................ 48,616 49,392
Inventories ..................................................... 25,813 28,248
Deferred income taxes ........................................... 6,934 --
Other current assets ............................................ 5,485 5,881
-------- ---------
Total current assets ......................................... 102,893 96,599
Property, plant and equipment, net ................................. 100,365 91,062
Other assets ....................................................... 16,933 16,518
-------- ---------
Total assets ................................................. $220,191 $ 204,179
======== =========
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable ................................................ $ 21,177 $ 22,680
Accrued liabilities ............................................. 30,355 29,266
-------- ---------
Total current liabilities .................................... 51,532 51,946
Long-term debt ..................................................... 146,487 144,394
Other liabilities .................................................. 78,641 86,522
-------- ---------
Total liabilities ............................................ 276,660 282,862
-------- ---------
Minority interest .................................................. 38,983 33,147
Equity (deficit):
Preferred Stock, $.01 par value; authorized 1,000,000 shares;
none issued or outstanding ................................... -- --
Common Stock, $.01 par value; authorized 10,000,000 shares;
issued and outstanding: 3,348,910 and 3,382,543 shares at
December 31, 2001 and 2002, respectively ..................... 33 34
Class B Common Stock, $.01 par value; authorized 4,000,000
shares; issued and outstanding: 700,639 shares
at December 31, 2001 and 2002, respectively .................. 7 7
Capital (deficit) ............................................... (94,748) (94,748)
Accumulated other comprehensive loss ............................ (1,428) (9,443)
Retained earnings ............................................... 33,936 25,572
Treasury stock, at cost: 174,189 and 179,383 shares at
December 31, 2001 and 2002, respectively ..................... (33,252) (33,252)
-------- ---------
Total equity (deficit) ....................................... (95,452) (111,830)
-------- ---------
Total liabilities and equity (deficit) ....................... $220,191 $ 204,179
======== =========
See the accompanying notes to consolidated financial statements.
22
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
-----------------------------
2000 2001 2002
-------- -------- -------
(In thousands)
Cash flows from operating activities:
Net loss ................................................... $(48,529) $(11,527) $(8,364)
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
Depreciation and amortization .............................. 19,148 17,084 11,609
Deferred income tax ........................................ (8,163) 2,446 5,042
Net loss on disposition of long-term assets ................ 33,795 289 6,317
Decrease (increase) in receivables ......................... (902) 10,256 (776)
Decrease (increase) in inventories ......................... 3,584 (4,106) (2,435)
Increase (decrease) in accounts payable .................... 4,472 (10,920) 1,503
Increase (decrease) in accrued liabilities ................. 12,172 (12,240) (1,089)
Increase (decrease) in other liabilities and assets, net ... (8,269) 4,992 (1,080)
Decrease in minority interest .............................. (633) (2,463) (5,836)
-------- -------- -------
Net cash provided by (used in) operating activities 6,675 (6,189) 4,891
-------- -------- -------
Cash flows from investing activities:
Capital expenditures ....................................... (20,836) (8,436) (7,889)
Proceeds from sales or disposals of long-term assets ....... 8,080 -- --
-------- -------- -------
Net cash used for investing activities .................. (12,756) (8,436) (7,889)
-------- -------- -------
Cash flows from financing activities:
Borrowings under credit facility ........................... -- -- 5,106
Repayment of credit facility ............................... -- -- (5,076)
Proceeds from sales of stock ............................... -- 9,655 --
Other financing activities ................................. 266 200 1
-------- -------- -------
Net cash provided by financing activities ............... 266 9,855 31
-------- -------- -------
Decrease in cash and cash equivalents ......................... (5,815) (4,770) (2,967)
Cash and cash equivalents at beginning of period .............. 26,630 20,815 16,045
-------- -------- -------
Cash and cash equivalents at end of period .................... $ 20,815 $ 16,045 $13,078
======== ======== =======
Cash refunded for income taxes, net of payments ............ $ 1,460 $ 8,272 $ 6,288
======== ======== =======
Cash paid for interest ..................................... $ 14,786 $ 14,668 $13,494
======== ======== =======
See the accompanying notes to consolidated financial statements.
23
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (DEFICIT)
For the three years ended December 31, 2002
Accumulated
Class B Other
Common Common Treasury Capital Comprehensive Retained Comprehensive
Stock Stock Stock Deficit Loss Earnings Total Income (Loss)
------ ------- -------- --------- ------------- -------- --------- -------------
(In thousands, except per share data)
Balance at December 31, 1999 .... $19 $ 4 $(33,246) $(104,858) $(2,804) $ 93,992 $ (46,893)
Net loss ..................... -- -- -- -- -- (48,529) (48,529) $(48,529)
Foreign currency translation . -- -- -- -- (1,401) -- (1,401) (1,401)
--------
Comprehensive loss ........... -- -- -- -- -- -- -- $(49,930)
========
Restricted Unit Plan grants,
cancellations, tax benefits
and other ................. -- -- -- 272 -- -- 272
Purchase of Treasury stock ... -- -- (6) -- -- -- (6)
--- --- -------- --------- ------- -------- ---------
Balance at December 31, 2000 .... 19 4 (33,252) (104,586) (4,205) 45,463 (96,557)
Net loss ..................... -- -- -- -- -- (11,527) (11,527) $(11,527)
Foreign currency translation . -- -- -- -- 2,777 -- 2,777 2,777
--------
Comprehensive loss ........... -- -- -- -- -- -- -- $ (8,750)
========
Restricted Unit Plan grants,
cancellations, tax benefits
and other ................. -- -- -- 200 -- -- 200
Rights Offering .............. 14 3 -- 9,638 -- -- 9,655
--- --- -------- --------- ------- -------- ---------
Balance at December 31, 2001 .... 33 7 (33,252) (94,748) (1,428) 33,936 (95,452)
Net loss ..................... -- -- -- -- -- (8,364) (8,364) $ (8,364)
Foreign currency translation . -- -- -- -- (521) -- (521) (521)
Change in net unrealized loss on
derivative instrument ..... -- -- -- -- (54) -- (54) (54)
Minimum premium liability
adjustment ................ -- -- -- -- (7,440) -- (7,440) (7,440)
--------
Comprehensive loss ........... -- -- -- -- -- -- -- $(16,379)
========
Restricted Unit Plan grants,
cancellations, tax benefits
and other ................. 1 -- -- -- -- 1
--- --- -------- --------- ------- -------- ---------
Balance at December 31, 2002 .... $34 $ 7 $(33,252) $ (94,748) $(9,443) $ 25,572 $(111,830)
=== === ======== ========= ======= ======== =========
See the accompanying notes to consolidated financial statements.
24
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except share data)
Note 1 -- Basis of Presentation
The General Chemical Group Inc. ("GCG" or the "Company") is a leading North
American supplier of soda ash and calcium chloride to a broad range of
industrial and municipal customers. The primary end markets for soda ash include
glass production, sodium-based chemicals, powdered detergents, water treatment
and other industrial end uses. Calcium chloride is mainly used for dust control
and roadbed stabilization during the summer and melting ice during the winter.
On April 30, 1999, General Chemical Group completed the separation of its
Manufacturing and Performance Products businesses from its soda ash and calcium
chloride businesses through a spinoff (the "Spinoff"), which the Company
effected by distributing the stock of GenTek Inc. ("GenTek"), its wholly-owned
subsidiary, on a pro rata basis to its shareholders. As a result of the Spinoff,
GenTek became a separate company.
The Company's recent financial performance has been negatively impacted by
lower soda ash pricing, rising energy costs and the weaker economic environment.
The Company is in compliance with its financial and other covenants contained
in its Revolving Credit Facility as of December 31, 2002. However, management
anticipates that it will not be in compliance with certain financial covenants
contained in its credit facility for the quarter ending March 31, 2003. The
Company's failure to meet such debt covenant requirements will result in the
Company's long-term debt becoming callable by the Company's lenders. The Company
has commenced discussions with its lenders towards restructuring its existing
indebtedness. If these discussions do not result in an acceptable restructuring
plan, the Company will not have sufficient funds to repay its outstanding
debt, and would explore alternative sources of financing. However, there can be
no assurance that alternative sources of financing will be available or on terms
which are favorable to the Company. The consolidated financial statements have
been prepared assuming that the Company will continue as a going concern and do
not include any adjustments that might result from the outcome of this
uncertainty. See Note 12 -- Long-Term Debt for further discussion.
The Company effected a one-for-ten reverse split of its common stock,
effective as of the close of business on July, 18, 2001. The accompanying
financial statements reflect the one-for-ten reverse split for all periods
presented.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Note 2 -- Summary of Significant Accounting Policies
The accompanying consolidated financial statements reflect the results of
operations and financial position of the Company, including wholly-owned
subsidiaries and General Chemical (Soda Ash) Partners ("GCSAP") of which the
Company owns 51 percent. Minority interests relate solely to partnerships,
primarily GCSAP, in which the Company has a controlling interest. Intercompany
balances and transactions are eliminated in consolidation.
Included in other current assets