================================================================================ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2003 OR [_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ________ to ________ Commission File Number 1-13404 THE GENERAL CHEMICAL GROUP INC. (Exact name of Registrant as specified in its charter) Delaware 02-0423437 (State of other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Liberty Lane Hampton, New Hampshire 03842 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (603) 929-2606 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [_] The number of shares of Common Stock outstanding at November 1, 2003 was 3,111,910. The number of shares of Class B Common Stock outstanding at November 1, 2003 was 617,725. ================================================================================ THE GENERAL CHEMICAL GROUP INC. FORM 10-Q QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003 INDEX Page No. -------- PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated Statements of Operations - Three and Nine Months Ended September 30, 2002 and 2003................ 1 Consolidated Balance Sheets - December 31, 2002 and September 30, 2003...................................... 2 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2002 and 2003....................... 3 Notes to Consolidated Financial Statements................. 4-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations..................... 9-11 Item 3. Qualitative and Quantitative Disclosures about Market Risk.................................................... 11 Item 4. Controls and Procedures.................................... 11 PART II. OTHER INFORMATION Item 3. Defaults Upon Senior Securities............................ 12 Item 6. Exhibits and Reports on Form 8-K........................... 12 SIGNATURES......................................................... 13 CERTIFICATIONS..................................................... 14-17 Part I. Financial Information Item 1. Financial Statements THE GENERAL CHEMICAL GROUP INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) (unaudited) Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2002 2003 2002 2003 -------- ------- -------- -------- Net revenues .............................................. $71,327 $66,331 $202,534 $210,766 Cost of revenues .......................................... 58,442 61,652 170,437 195,268 Selling, general and administrative expense ............... 3,893 3,906 11,652 11,604 Reorganization expense .................................... -- 2,293 -- 5,791 ------- ------- -------- -------- Operating profit (loss) ................................... 8,992 (1,520) 20,445 (1,897) Interest expense .......................................... 3,737 3,827 10,956 11,302 Interest income ........................................... (77) (13) (247) (58) Foreign currency transaction (gains) losses ............... 473 (1,218) 293 (1,165) Other expense (income), net ............................... 47 (45) 120 92 ------- ------- -------- -------- Income (loss) before income taxes and minority interest ... 4,812 (4,071) 9,323 (12,068) Minority interest ......................................... 4,044 1,273 9,134 4,277 ------- ------- -------- -------- Income (loss) before income taxes ......................... 768 (5,344) 189 (16,345) Income tax provision (benefit) ............................ 2 2 (14) 4 ------- ------- -------- -------- Net income (loss) ...................................... $ 766 $(5,346) $ 203 $(16,349) ======= ======= ======== ======== Earnings (loss) per common share: Basic .................................................. $ 0.20 $ (1.43) $ 0.05 $ (4.37) ======= ======= ======== ======== Diluted ................................................ $ 0.19 $ (1.43) $ 0.05 $ (4.37) ======= ======= ======== ======== See the accompanying notes to consolidated financial statements. 1 THE GENERAL CHEMICAL GROUP INC. CONSOLIDATED BALANCE SHEETS (In thousands, except per share data) December 31, September 30, ASSETS 2002 2003 ------------ ------------- (unaudited) Current assets: Cash and cash equivalents ............................................. $ 13,078 $ 11,047 Receivables, net ...................................................... 49,392 44,010 Inventories ........................................................... 28,248 21,631 Other current assets .................................................. 5,881 4,440 --------- --------- Total current assets ............................................... 96,599 81,128 Property, plant and equipment, net ....................................... 91,062 91,464 Other assets ............................................................. 16,518 22,277 --------- --------- Total assets ....................................................... $ 204,179 $ 194,869 ========= ========= LIABILITIES AND EQUITY (DEFICIT) Current liabilities: Accounts payable ...................................................... $ 22,680 $ 20,192 Accrued liabilities ................................................... 29,266 31,656 Current portion of long-term debt ..................................... -- 155,410 --------- --------- Total current liabilities .......................................... 51,946 207,258 Long-term debt ........................................................... 144,394 -- Other liabilities ........................................................ 86,522 91,486 --------- --------- Total liabilities .................................................. 282,862 298,744 --------- --------- Minority interest ........................................................ 33,147 31,553 --------- --------- Equity (Deficit): Preferred Stock, $.01 par value; authorized 1,000,000 shares; none issued or outstanding ................................. -- -- Common Stock, $.01 par value; authorized 10,000,000 shares; issued 3,387,737 and 3,291,293 shares and outstanding 3,208,354 and 3,111,910 shares at December 31, 2002 and September 30, 2003, respectively ................................... 34 32 Class B Common Stock, $.01 par value; authorized 4,000,000 shares, issued and outstanding: 700,639 and 617,725 shares at December 31, 2002 and September 30, 2003, respectively .......... 7 6 Capital deficit ....................................................... (94,748) (94,748) Accumulated other comprehensive loss .................................. (9,443) (16,689) Retained earnings ..................................................... 25,572 9,223 Treasury stock, at cost: 179,383 shares at December 31, 2002 and September 30, 2003, respectively ............. (33,252) (33,252) --------- --------- Total equity (deficit) ................................................ (111,830) (135,428) --------- --------- Total liabilities and equity (deficit) ............................. $ 204,179 $ 194,869 ========= ========= See the accompanying notes to consolidated financial statements. 2 THE GENERAL CHEMICAL GROUP INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) (unaudited) Nine Months Ended September 30, ------------------- 2002 2003 -------- -------- Cash flows from operating activities: Net income (loss)...................................................... $ 203 $(16,349) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization....................................... 9,111 8,403 Decrease in receivables............................................. 4,902 4,371 (Increase) decrease in inventories.................................. (3,133) 5,249 Increase (decrease) in accounts payable............................. 1,940 (3,456) Increase in accrued liabilities..................................... 3,767 1,624 (Increase) decrease in other liabilities and assets, net............ (659) 2,537 Decrease in minority interest....................................... (369) (1,594) -------- -------- Net cash provided by operating activities........................ 15,762 785 -------- -------- Cash flows from investing activities: Capital expenditures................................................... (5,482) (6,337) -------- -------- Net cash used by investing activities............................ (5,482) (6,337) -------- -------- Cash flows from financing activities: Borrowings under credit facility.................................... 5,106 7,177 Repayment under credit facility..................................... (5,076) (3,653) Other financing activities.......................................... 1 (3) -------- -------- Net cash provided by financing activities........................ 31 3,521 -------- -------- Increase (decrease) in cash and cash equivalents.......................... 10,311 (2,031) Cash and cash equivalents at beginning of period.......................... 16,045 13,078 -------- -------- Cash and cash equivalents at end of period................................ $ 26,356 $ 11,047 ======== ======== Supplemental disclosure of cash flow information: Cash paid (refunded) during the period for: Interest......................................................... $ 7,642 $ 2,649 Taxes............................................................ (1,219) (3,647) See the accompanying notes to consolidated financial statements. 3 THE GENERAL CHEMICAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS For the three and nine months ended September 30, 2003 (Dollars in thousands) (unaudited) Note 1 - Basis of Presentation The General Chemical Group Inc. ("GCG" together with its subsidiaries, the "Company") is a leading North American supplier of soda ash and calcium chloride to a broad range of industrial and municipal customers. The primary end markets for soda ash include glass production, sodium-based chemicals, powdered detergents, water treatment and other industrial end uses. Calcium chloride is mainly used for dust control and roadbed stabilization during the summer and melting ice during the winter. The Company's recent financial performance has been negatively impacted by lower soda ash prices, rising energy costs and the weaker economic environment. The Company failed to make the interest payments on its Subordinated Notes that were due on May 1, 2003 and November 1, 2003. In addition, since April 1, 2003 the Company has not been in compliance with certain financial and other covenants contained in its Credit Agreement, dated as of April 30, 1999 (the "Senior Credit Agreement"), among General Chemical Industrial Products, Inc., as Borrower, the banks and other financial institutions designated as lenders, JPMorgan Chase (formerly The Chase Manhattan Bank), as Administrative Agent, JPMorgan Chase of Canada (formerly The Chase Manhattan Bank of Canada), as Canadian Administrative Agent, the Bank of Nova Scotia, as Syndication Agent, and The First National Bank of Chicago, as Documentation Agent. At September 30, 2003, the Company owed $109.7 million, including accrued and unpaid interest, in respect of its Subordinated Notes and $55.4 million under its Senior Credit Agreement, all of which obligations are classified as current. The Company has commenced discussions with its creditors with respect to the restructuring of the Company's indebtedness. The Company expects that such restructuring, if successfully concluded, will result in the extinguishment of the Company's existing equity interests and a reduction in the amount of the Company's indebtedness to a level that the Company believes that it can service out of its existing operations. However, there can be no assurance that the Company will be able to reach agreement with its creditors on the terms of any restructuring; if no such agreement is reached, the Company would be unable to repay its outstanding indebtedness and would have to explore other alternatives, including a reorganization of the Company, a sale of the Company's assets pursuant to Chapter 11 of the United States Bankruptcy Code (the "Bankruptcy Code") or a liquidation pursuant to Chapter 7 of the Bankruptcy Code. See Note 6 - - Long-Term Debt for further discussion. The accompanying unaudited interim consolidated financial statements as of September 30, 2003 and for the three and nine months ended September 30, 2003 reflect the operations of GCG and its subsidiaries. These unaudited interim financial statements have been prepared by the Company pursuant to Article 10 of the Securities and Exchange Commission's Regulation S-X. The financial statements do not include certain information and footnotes required by generally accepted accounting principles. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included. Operating results for the nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003. The Company's financial statements should be read in conjunction with the financial statements and the notes thereto for the year ended December 31, 2002 included in the Company's Annual Report on Form 10-K. In April 2003, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. This statement amends SFAS 133 to clarify the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. The Company adopted the provisions of this statement on its effective date. The adoption of this statement did not have a material impact to its consolidated financial statements. 4 THE GENERAL CHEMICAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) For the three and nine months ended September 30, 2003 (Dollars in thousands) (unaudited) On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which aims to eliminate diversity in practice by requiring that the "freestanding" financial instruments be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company adopted the provisions of the statement on its effective date. The adoption of this statement did not have a material impact to its consolidated financial statements. In January 2003, the FASB issued Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities". The Company has no arrangements that would be subject to this interpretation. Note 2 - Comprehensive Loss Total comprehensive loss is comprised of net loss, foreign currency translation adjustments and the change in unrealized gains and losses on derivative instruments. Total comprehensive loss for the three and nine months ended September 30, 2002 and 2003 was ($8,816) and ($6,361), and ($172) and ($23,595), respectively. Note 3 - Stock Compensation and Earnings (Loss) Per Common Share Statement of Financial Accounting Standards, No. 123, "Accounting for Stock-Based Compensation", as amended by Statement of Financial Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure", permits an entity to continue to account for employee stock-based compensation under APB Opinion No. 25, "Accounting for Stock Issued to Employees", or adopt a fair value based method of accounting for such compensation. The Company has elected to continue to account for stock-based compensation under Opinion No. 25. Accordingly no compensation expense has been recognized in connection with options granted. Had compensation expense for options granted been determined based on the fair value at the date of grant in accordance with Statement No. 123, the Company's net income (loss) and earnings (loss) per share would have been as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2003 2002 2003 ----- ------- ----- -------- Net income (loss) as reported.................................. $ 766 $(5,346) $ 203 $(16,349) Deduct: Total stock based employee compensation expense determined under fair value based methods for all awards, Net of related tax effects.... (44) (3) (132) (9) ----- ------- ----- -------- Pro forma net income (loss).................................... $ 722 $(5,349) $ 71 $(16,358) ===== ======= ===== ======== Earnings (loss) per share: Basic - as reported............................................ $0.20 $ (1.43) $0.05 $ (4.37) Diluted - as reported.......................................... $0.19 $ (1.43) $0.05 $ (4.37) Basic - pro forma.............................................. $0.18 $ (1.43) $0.02 $ (4.37) Diluted - pro forma............................................ $0.18 $ (1.43) $0.02 $ (4.37) The computation of basic earnings (loss) per common share is based on the weighted average number of common shares and contingently issuable shares outstanding during the period. The computation of diluted earnings (loss) per common share assumes the foregoing and, in addition, the exercise of all stock options and restricted units, using the treasury stock method. 5 THE GENERAL CHEMICAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) For the three and nine months ended September 30, 2003 (Dollars in thousands) (unaudited) The components of the denominator for basic and diluted earnings (loss) per common share are reconciled as follows: Three Months Ended Nine Months Ended September 30, September 30, --------------------- --------------------- 2002 2003 2002 2003 --------- --------- --------- --------- Basic earnings (loss) per common share: Weighted average common shares outstanding..... 3,920,691 3,740,724 3,907,387 3,740,724 ========= ========= ========= ========= Diluted earnings (loss) per common share: Weighted average common shares outstanding..... 3,920,691 3,740,724 3,907,387 3,740,724 Options and Restricted Units................... 11,958 -- 3,986 -- --------- --------- --------- --------- 3,932,649 3,740,724 3,911,373 3,740,724 ========= ========= ========= ========= At September 30, 2002 and 2003, options to purchase 205,346 shares and 215,796 shares of common stock, respectively, were not included in the computation of diluted earnings (loss) per common share because the exercise price was greater than the average market price of the common shares. The options, which expire during 2008, 2009 and 2010, were still outstanding at September 30, 2003. At September 30, 2003, 11,089 restricted units and options were not included in the calculation of diluted earnings (loss) per common share because its inclusion would have resulted in an antidilutive effect. Note 4 - Additional Financial Information The components of inventories were as follows: December 31, September 30, 2002 2003 ------------ ------------- Raw materials.................................... $ 1,172 $ 2,278 Work in process.................................. 3,134 1,193 Finished products................................ 16,830 11,450 Supplies and containers.......................... 7,112 6,710 ------- ------- $28,248 $21,631 ======= ======= Note 5 - Restructuring In the fourth quarter of 2000, the Company recorded a pretax restructuring charge, including related asset writedowns and workforce reductions, of $59.8 million. In the second quarter of 2001, the Company provided for additional pretax restructuring charges of $1.7 million for revised actuarial estimates of employee termination benefits. The restructuring involved the idling of the Company's synthetic soda ash production capacity in Amherstburg, Ontario, Canada. The balance of the restructuring reserve at December 31, 2002 was $2.1 million. Spending against this reserve was $1.3 million during the nine months ended September 30, 2003. In the fourth quarter of 2002, the Company recorded a pretax restructuring charge, including related asset writedowns and workforce reductions, of $7.7 million. The restructuring involved the closing of the Company's calcium chloride production capacity in Manistee, Michigan which resulted in the writedown of long-lived assets and workforce reductions of approximately 40 hourly and salaried employees. The balance of the restructuring reserve at December 31, 2002 was $1.1 million. Spending against this reserve was $0.5 million during the nine months ended September 30, 2003. 6 THE GENERAL CHEMICAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued) For the three and nine months ended September 30, 2003 (Dollars in thousands) (unaudited) Note 6 - Long-Term Debt The Company failed to make the interest payments on its Subordinated Notes that were due on May 1, 2003 and November 1, 2003. In addition, since April 1, 2003 the Company has not been in compliance with certain financial and other covenants contained in its Senior Credit Agreement. As a result of such defaults, the holders of the Subordinated Notes and the lenders under the Company's Senior Credit Agreement may declare all amounts outstanding thereunder, including all accrued and unpaid interest, immediately due and payable. At September 30, 2003, the outstanding principal amount of the Company's Subordinated Notes was $100 million, and the outstanding amount due under the Company's Senior Credit Agreement was $55.4 million, all of which is classified as current. On March 25, 2003, the Company entered into a Forbearance and Amendment Agreement with the lenders under its Senior Credit Agreement, pursuant to which such lenders agreed not to exercise any remedies for the existing defaults through July 30, 2003 to allow the Company time to pursue a restructuring of its existing indebtedness. Such lenders extended the forbearance agreement on July 31, 2003 and October 1, 2003. Currently, the forbearance period expires on January 15, 2004. During the forbearance period the Company has agreed to restrict its ability to incur additional liens, make payments on account of indebtedness other than indebtedness under the Senior Credit Agreement or currently scheduled payments, make any direct or indirect payment on or in respect of the Subordinated Notes, or request loans or advances. In addition, the Company has agreed to permanently reduce the total commitments available under its Senior Credit Agreement to $70 million and to reduce the total commitments during the forbearance period to the lesser of (i) $60 million or (ii) 115% of the projected usage under the Senior Credit Agreement for such day according to a fixed schedule. The Company is also required under the Forbearance and Amendment Agreement to meet certain milestones in the progress of its restructuring efforts. The Company continues to have discussions with its creditors with respect to the restructuring of the Company's indebtedness. In connection with such activities, the Company has recorded reorganization expense of $2.3 million and $5.8 million, respectively for the three and nine months ended September 30, 2003. The Company expects that such restructuring, if successfully concluded, will result in the extinguishment of the Company's existing equity interests and a reduction in the amount of the Company's indebtedness to a level that the Company believes that it can service out of its existing operations. However, there can be no assurance that the Company will be able to reach agreement with its creditors on the terms of any restructuring; if no such agreement is reached, the Company would be unable to repay its outstanding indebtedness and would have to explore other alternatives, including a reorganization of the Company, a sale of the Company's assets pursuant to Chapter 11 of the Bankruptcy Code or a liquidation pursuant to Chapter 7 of the Bankruptcy Code. Note 7 - Related Party Transactions Management Agreement The Company is party to a management agreement with Latona Associates Inc. (which is controlled by a stockholder of the Company) under which the Company receives corporate supervisory and administrative services and strategic guidance for a quarterly fee. This management fee was $1,251 and $1,284 for the nine months ended September 30, 2002 and 2003, respectively. Transition Support Agreement In connection with the spinoff of GenTek, Inc. ("GenTek") in April 1999, GenTek agreed to provide the Company with certain management information services and to sublease to the Company the office space in Parsippany, New Jersey used as its operations headquarters. For the nine months ended September 30, 2002 and 2003, the Company paid GenTek $1,034 and $1,056, respectively, related to these services and office space. 7 THE GENERAL CHEMICAL GROUP INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Concluded) For the three and nine months ended September 30, 2003 (Dollars in thousands) (unaudited) Other Transactions GCG supplies soda ash to GenTek. For the nine months ended September 30, 2002 and 2003, sales to GenTek amounted to $1,994 and $1,813, respectively. Note 8 - Geographic Information Net Revenues Income (Loss) Before Income Taxes September 30, September 30, -------------------- --------------------------------- 2002 2003 2002 2003 --------- -------- -------- -------- United States............................... $ 167,871 $167,055 $ 3,399 $(11,079) Foreign..................................... 69,493 67,391 (3,210) (5,266) Elimination................................. (34,830) (23,680) -- -- --------- -------- -------- -------- $ 202,534 $210,766 $ 189 $(16,345) ========= ======== ======== ======== Note 9 - Segment Information Industry segment information is summarized as follows: Three Months Ended Nine Months Ended September 30, September 30, ------------------ ------------------- 2002 2003 2002 2003 ------- ------- -------- -------- Net revenues: Soda Ash................................. $55,746 $55,136 $160,202 $166,208 Calcium Chloride......................... 15,581 11,195 42,332 44,558 ------- ------- -------- -------- $71,327 $66,331 $202,534 $210,766 ======= ======= ======== ======== Income (loss) before income taxes: Soda Ash................................. $ 4,690 $ 1,625 $ 10,935 $ 5,437 Calcium Chloride ........................ 383 (1,831) 537 (5,488) ------- ------- -------- -------- Subtotal.............................. 5,073 (206) 11,472 (51) Elimination and other corporate expenses ... (4,305) (5,138) (11,283) (16,294) ------- ------- -------- -------- $ 768 $(5,344) $ 189 $(16,345) ======= ======= ======== ======== Income (loss) before income taxes for elimination and other corporate expenses includes financial reorganization expenses of $2,293 and $5,791 recorded in the three and nine months ended September 30, 2003, respectively. Three Months Ended Nine Months Ended September 30, September 30, ------------------ ----------------- 2002 2003 2002 2003 ------ ------ ------ ------ Capital Expenditures: Soda Ash................................. $ 449 $ 753 $2,316 $3,626 Calcium Chloride......................... 1,174 476 3,129 2,688 Elimination and other corporate expenses ... 6 1 37 23 ------ ------ ------ ------ $1,629 $1,230 $5,482 $6,337 ====== ====== ====== ====== Depreciation & Amortization: Soda Ash................................. $2,296 $2,394 $7,195 $6,826 Calcium Chloride......................... 456 333 1,256 934 Elimination and other corporate expenses.... 221 214 660 643 ------ ------ ------ ------ $2,973 $2,941 $9,111 $8,403 ====== ====== ====== ====== 8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Condition September 30, 2003 Compared with December 31, 2002 Cash and cash equivalents were $11.0 million at September 30, 2003 compared with $13.1 million at December 31, 2002. During the first nine months of 2003, the Company provided cash flow from operating activities of $0.8 million, used cash of $6.3 million for capital expenditures and provided net cash from borrowings of $3.5 million. The Company had working capital of $(126.1) million at September 30, 2003 as compared with $44.7 million at December 31, 2002. This decrease in working capital principally reflects the reclassification of amounts due under the Senior Credit Agreement and Subordinated Notes to current, lower cash balances, receivables, inventories, other current assets and higher accrued liabilities, partially offset by lower accounts payable. The Company failed to make the interest payments on its Subordinated Notes that were due on May 1, 2003 and November 1, 2003. In addition, since April 1, 2003 the Company has not been in compliance with certain financial and other covenants contained in its Senior Credit Agreement. As a result of such defaults, the holders of the Subordinated Notes and the lenders under the Company's Senior Credit Agreement may declare all amounts outstanding thereunder, including all accrued and unpaid interest, immediately due and payable. As of September 30, 2003, the outstanding principal amount of the Company's Subordinated Notes was $100 million, and the outstanding amount due under the Company's Senior Credit Agreement was $55.4 million, all of which is classified as current. On March 25, 2003, the Company entered into a Forbearance and Amendment Agreement with the lenders under its Senior Credit Agreement, pursuant to which such lenders agreed not to exercise any remedies for the existing defaults through July 30, 2003 to allow the Company time to pursue a restructuring of its existing indebtedness. Such lenders extended the forbearance agreement on July 31, 2003 and October 1, 2003. Currently, the forbearance period expires on January 15, 2004. During the forbearance period the Company has agreed to restrict its ability to incur additional liens, make payments on account of indebtedness other than indebtedness under the Senior Credit Agreement or currently scheduled payments, make any direct or indirect payment on or in respect of the Subordinated Notes, or request loans or advances. In addition, the Company has agreed to permanently reduce the total commitments available under its Senior Credit Agreement to $70 million and to reduce the total commitments during the forbearance period to the lesser of (i) $60 million or (ii) 115% of the projected usage under the Senior Credit Agreement for such day according to a fixed schedule. The Company is also required under the Forbearance and Amendment Agreement to meet certain milestones in the progress of its restructuring efforts. The Company continues to have discussions with its creditors with respect to the restructuring of the Company's indebtedness. The Company expects that such restructuring, if successfully concluded, will result in the extinguishment of the Company's existing equity interests and a reduction in the amount of the Company's indebtedness to a level that the Company believes that it can service out of its existing operations. However, there can be no assurance that the Company will be able to reach agreement with its creditors on the terms of any restructuring; if no such agreement is reached, the Company would be unable to repay its outstanding indebtedness and would have to explore other alternatives, including a reorganization of the Company, a sale of the Company's assets pursuant to Chapter 11 of the Bankruptcy Code or a liquidation pursuant to Chapter 7 of the Bankruptcy Code. The Company's leverage and debt service requirements (1) increase its vulnerability to economic downturns, (2) potentially limit the Company's ability to respond to competitive pressures, and (3) may limit the Company's ability to obtain additional financing in the future for working capital, capital expenditures, acquisitions, strategic 9 investments or general corporate purposes. The Company's Subordinated Notes Indenture and Senior Credit Agreement impose operating and financial restrictions on the Company. These covenants affect, and in certain cases, limit the Company's ability to incur additional indebtedness, make capital expenditures, make investments and acquisitions and sell assets, pay dividends and make other distributions to shareholders, and consolidate, merge or sell all or substantially all assets. In addition, pursuant to the Forbearance and Amendment Agreement, the Company agreed to restrict its ability to incur additional liens, make payments on account of indebtedness other than indebtedness under the Senior Credit Agreement or currently scheduled payments, make any direct or indirect payment on or in respect of the Subordinated Notes, or request Eurodollar loans with an interest period of longer than two months. Results of Operations September 30, 2003 Compared with September 30, 2002 Net revenues for the three and nine month periods ended September 30, 2003 decreased 7.0 percent and increased 4.1 percent to $66.3 million and $210.8 million, respectively, from $71.3 million and $202.5 million for the comparable prior year periods. Net revenues for the three month period ended September 30, 2003 were negatively affected by lower domestic soda ash prices as well as lower calcium chloride volumes, partially offset by a stronger Canadian dollar. Net revenues for the nine month period ended September 30, 2003 were positively affected by higher soda ash volumes and a stronger Canadian dollar, partially offset by lower domestic soda ash prices and calcium chloride volumes. Gross profit for the three month period ended September 30, 2003 decreased $8.2 million to $4.7 million from $12.9 million for the comparable prior year period. Gross profit as a percentage of net revenues for the three month period ended September 30, 2003 decreased to 7.0 percent from 18.1 percent for the same period in 2002. Gross profit for the nine month period ended September 30, 2003 decreased $16.6 million to $15.5 million from $32.1 million for the comparable prior year period. Gross profit as a percentage of net revenues for the nine month period ended September 30, 2003 decreased to 7.4 percent from 15.9 percent for the same period in 2002. These decreases were primarily due to higher energy costs, lower domestic soda ash prices, higher calcium chloride feedstock costs and a stronger Canadian dollar. Selling, general and administrative expense was $3.9 million and $11.6 million for the three and nine month periods ended September 30, 2003, respectively, versus $3.9 million and $11.7 million for the comparable prior year periods. Reorganization expense for the three and nine month periods ended September 30, 2003 was $2.3 million and $5.8 million, respectively. Interest expense for the three and nine month periods ended September 30, 2003 was $3.8 million and $11.3 million, which was $0.1 million and $0.3 million higher, respectively, than the comparable prior period. Minority interest for the three and nine month periods ended September 30, 2003 was $1.3 million and $4.3 million, respectively, versus $4.0 million and $9.1 million for the same period in 2002. The decreases in both periods reflect lower earnings at General Chemical (Soda Ash) Partners primarily due to lower domestic soda ash prices and higher energy costs. Net income (loss) was $(5.3) million and $(16.3) million for the three and nine month periods ended September 30, 2003, respectively, versus $0.8 million and $0.2 million for the comparable prior year periods, for the foregoing reasons. 10 Recent Accounting Pronouncements In April 2003, the FASB issued SFAS No. 149,"Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This Statement is effective for contracts entered into or modified after June 30, 2003, with certain exceptions. This statement amends SFAS 133 to clarify the financial accounting and reporting of derivative instruments and hedging activities and requires contracts with similar characteristics to be accounted for on a comparable basis. The Company adopted the provisions of the statement on its effective date. The adoption of this statement did not have a material impact to its consolidated financial statements. On May 15, 2003, the FASB issued SFAS No. 150 "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity", which aims to eliminate diversity in practice by requiring that the "freestanding" financial instruments be reported as liabilities by their issuers. The provisions of SFAS 150, which also include a number of new disclosure requirements, are effective for instruments entered into or modified after May 31, 2003 and for pre-existing instruments as of the beginning of the first interim period that commences after June 15, 2003. The Company adopted the provisions of the statement on its effective date. The adoption of this statement did not have a material impact to its consolidated financial statements. In January 2003, the FASB issued Interpretation No. ("FIN") 46, "Consolidation of Variable Interest Entities". The Company has no arrangements that would be subject to this interpretation. Information Concerning Forward-Looking Statements Certain of the statements contained in this report (other than the Company's consolidated financial statements and other statements of historical fact) are forward-looking statements, including, without limitation, (i) the statement in "--Financial Condition" concerning the Company's expectation that such restructuting, if successfully concluded, will result in the extinguishment of the Company's existing equity interests and a reduction in the amount of the Company's indebtedness to a level that the Company believes that it can service out of its existing operations, and (ii) other statements as to management's or the Company's expectations or beliefs presented in this "Managements's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements are made based upon management's current expectations and beliefs concerning future developments and their potential effects upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on the Company will be those anticipated by management. The important factors described in this report (including, without limitation, those discussed in "--Financial Condition"), in the Company's Annual report on Form 10-K for the year ended December 31, 2002, or in other Securities and Exchange Commission filings (which factors are incorporated herein by reference), could affect (and in some cases have affected) the Company's actual results and could cause such results to differ materially from estimates or expectations reflected in such forward-looking statements. While the Company periodically reassesses material trends and uncertainties affecting the Company's results of operations and financial condition in connection with its preparation of management's discussion and analysis of results of operations and financial condition contained in its quarterly and annual reports, the Company does not intend to review or revise any particular forward-looking statement referenced in this report in light of future events. Item 3. Qualitative and Quantitative Disclosures about Market Risk The Company's cash flows and earnings are subject to fluctuations resulting from changes in interest rates and changes in foreign currency exchange rates and the Company selectively uses financial instruments to manage these risks. The Company's objective in managing its exposure to changes in foreign currency exchange rates and interest rates is to reduce volatility on earnings and cash flow associated with such changes. The Company has not entered, and does not intend to enter, into financial instruments for speculation or trading purposes. The Company measures the market risk related to its holding of financial instruments based on changes in interest rates and foreign currency rates using a sensitivity analysis. The sensitivity analysis measures the potential loss in fair values, cash flows and earnings based on a hypothetical 10 percent change in interest and currency exchange rates. The Company used current market rates on its debt and derivative portfolio to perform the sensitivity analysis. Such analysis indicates that a hypothetical 10 percent change in interest rates or foreign currency exchange rates would not have a material impact on the fair values, cash flows or earnings of the Company. In October 2002, the Company entered into an interest rate swap agreement with a total notional amount of $8.8 million that qualifies and is designated as a cash flow hedge in accordance with SFAS 133, "Accounting for Derivative Instruments and Hedging Activities." The swap agreement matures in April 2004 and was executed in order to convert a portion of the Senior Credit Agreement floating-rate debt into fixed-rate debt, maintain a capital structure containing appropriate amounts of fixed and floating-rate debt; and reduce net interest payments and expense in the near-term. The Company has recorded the change in fair value of this interest rate swap as a component of comprehensive income. Item 4. Controls and Procedures The Company carried out an evaluation, under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures pursuant to Exchange Act Rule 13a-15 as of the end of the period covered by this report. Based upon that evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures are effective in timely alerting them to material information relating to the Company required to be included in this report. There has been no significant change in the Company's internal controls or procedures during the fiscal quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting. 11 Part II - Other Information Item 3. Defaults Upon Senior Securities The Company was not in compliance with the financial and other covenants contained in the Senior Credit Agreement, which constitutes an event of default under the Senior Credit Agreement. The Company's failure to meet such covenant requirements resulted in the Senior Credit Agreement becoming callable by the lenders. In addition, in accordance with the Forbearance and Amendment Agreement the Company was not permitted to make interest payments of $10.6 million on its Subordinated Notes, and failure to pay within the grace period constituted an event of default causing the Subordinated Notes to be callable as well. As a result of the Company's failure to be in compliance with its financial and other covenants under the Senior Credit Agreement, counterparties to the Company's interest rate swap agreement have the right to require the Company to cash settle this agreement by paying fair value to the counterparties. The Company continues to have discussions with its lenders towards amending its Senior Credit Agreement and restructuring its obligations under the Subordinated Notes. If these discussions do not result in an acceptable amendment or restructuring of our existing indebtedness, or if our expectations regarding any of the other factors enumerated above are not realized, the Company may be required to reduce capital expenditures, sell additional assets, restructure all or a portion of our existing debt or obtain alternative sources of financing. However, there can be no assurance that alternative sources of financing will be available or at terms which are favorable to the Company. Item 6. Exhibits and Reports on Form 8-K (a) Exhibits: 31.1 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2 Certification furnished pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. (b) No reports were filed on Form 8-K. 12 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE GENERAL CHEMICAL GROUP INC. Registrant Date November 14, 2003 /s/ John M. Kehoe, Jr. ------------------------------------------------ John M. Kehoe, Jr. President and Chief Executive Officer (Principal Executive Officer) and Director Date November 14, 2003 /s/ David S. Graziosi ------------------------------------------------ David S. Graziosi Vice President and Chief Financial Officer (Principal Financial and Accounting Officer) 13 STATEMENT OF DIFFERENCES ------------------------ The section symbol shall be expressed as................................ 'SS'