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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
___X___ QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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)
ONE 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, 1999 was
16,860,175.
The number of shares of Class B Common Stock outstanding at November 1, 1999
was 3,958,421.
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THE GENERAL CHEMICAL GROUP INC.
FORM 10-Q
QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
INDEX
PAGE NO.
--------
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements
Consolidated Statements of Operations - Three Months
And Nine Months Ended September 30, 1998 and 1999..................... 1
Consolidated Balance Sheets - December 31, 1998 and
September 30, 1999.................................................... 2
Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 1998 and 1999..................................... 3
Consolidated Statement of Changes in Equity - Nine Months
Ended September 30, 1999.............................................. 4
Notes to Consolidated Financial Statements............................. 5-9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 10-12
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................................ 12
PART II. OTHER INFORMATION:
Item 6. Exhibits and Reports on Form 8-K.................................. 13
SIGNATURES................................................................. 14
EXHIBIT INDEX.............................................................. 15
EXHIBITS ................................................................. 16
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,
------------------------------- -----------------------------
1998 1999 1998 1999
---- ---- ---- ----
Net revenues.............................................. $ 64,218 $ 64,117 $ 197,602 $ 194,755
Cost of sales............................................. 49,744 51,715 152,648 156,905
Selling, general and administrative expense............... 4,259 4,352 12,329 14,647
------------ ------------ ------------ ------------
Operating profit.........................................` 10,215 8,050 32,625 23,203
Interest expense.......................................... 2,930 3,826 8,799 9,764
Interest income........................................... 253 442 568 859
Other (income) expense, net............................... (7) 3 308 (147)
------------ ------------ ------------ ------------
Income before income taxes and minority interest.......... 7,545 4,663 24,086 14,445
Minority interest......................................... 3,639 3,484 11,766 8,992
------------ ------------ ------------ ------------
Income before income taxes................................ 3,906 1,179 12,320 5,453
Income tax provision...................................... 1,021 65 3,496 1,066
------------ ------------ ------------ ------------
Net income..................................... $ 2,885 $ 1,114 $ 8,824 $ 4,387
============ ============ ============ ============
Earnings per common share:
Basic.......................................... $ .14 $ .05 $ .42 $ .21
============ ============ ============ ============
Assuming dilution.............................. $ .13 $ .05 $ .40 $ .20
============ ============ ============ ============
Dividends declared per share.............................. $ .05 $ - $ .15 $ .05
============ ============ ============ ============
See the accompanying notes to consolidated financial statements.
-1-
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
ASSETS
DECEMBER 31, SEPTEMBER 30,
----------- ------------
1998 1999
---- ----
(UNAUDITED)
Current assets:
Cash and cash equivalents................................................ $ 1,127 $ 34,995
Receivables, net......................................................... 58,601 55,759
Inventories.............................................................. 25,508 21,197
Deferred income taxes.................................................... 4,392 5,346
Other current assets..................................................... 1,659 4,412
------------ ------------
Total current assets.................................................. 91,287 121,709
Property, plant and equipment, net.............................................. 141,808 145,020
Other assets 15,619 22,304
------------ ------------
Total assets.......................................................... $ 248,714 $ 289,033
============ ============
LIABILITIES AND EQUITY (DEFICIT)
Current liabilities:
Accounts payable.......................................................... $ 24,298 $ 28,711
Accrued liabilities....................................................... 27,134 28,050
------------ ------------
Total current liabilities............................................. 51,432 56,761
Long-term debt.................................................................. -- 150,505
Other liabilities............................................................... 78,561 83,177
------------ ------------
Total liabilities..................................................... 129,993 290,443
Minority interest............................................................... 43,429 41,734
------------ ------------
Equity (Deficit):
Preferred Stock, $.01 par value; authorized 10,000,000
shares; none issued or outstanding...................................... -- --
Common Stock, $.01 par value; authorized 100,000,000
shares; issued: 12,654,489 and 18,557,314 shares at
December 31, 1998 and September 30, 1999, respectively.................. 127 186
Class B Common Stock, $.01 par value; authorized
40,000,000 shares, issued and outstanding: 9,758,421 and 3,958,421
shares at December 31, 1998 and September 30, 1999, respectively........ 97 39
Capital deficit........................................................... (51,675) (174,020)
Accumulated other comprehensive income.................................... (2,840) (2,868)
Retained earnings......................................................... 162,378 166,765
Treasury stock, at cost: 1,641,166 and 1,697,139 shares at
December 31, 1998 and September 30, 1999, respectively.................. (32,795) (33,246)
----------- ------------
Total equity (deficit).................................................... 75,292 (43,144)
------------ ------------
Total liabilities and equity (deficit)................................ $ 248,714 $ 289,033
============ ============
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,
----------------------
1998 1999
------- ------
Cash flows from operating activities:
Net income............................................................ $ 8,824 $ 4,387
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization....................................... 12,886 12,821
Net loss on disposition of long-term assets......................... 137 -
Decrease in receivables............................................. 11,715 2,842
(Increase) decrease in inventories.................................. (690) 4,311
(Decrease) increase in accounts payable............................ (4,653) 4,413
Increase in accrued liabilities..................................... 1,077 916
Decrease (increase) in other liabilities and assets, net............ 4,425 (2,494)
Increase (decrease) in minority interest............................ 1,223 (1,695)
------------ ------------
Net cash provided by operating activities....................... 34,944 25,501
------------ ------------
Cash flows from investing activities:
Capital expenditures.................................................. (13,283) (14,276)
------------ ------------
Net cash used for investing activities.......................... (13,283) (14,276)
------------ ------------
Cash flows from financing activities:
Net transactions with GenTek.......................................... (21,653) (122,470)
Proceeds from long-term debt.......................................... - 145,439
Other financing activities............................................ - (326)
------------ ------------
Net cash (used for) provided by financing activities............ (21,653) 22,643
------------ ------------
Increase in cash and cash equivalents........................................ 8 33,868
Cash and cash equivalents at beginning of period............................. 1,352 1,127
------------ ------------
Cash and cash equivalents at end of period................................... $ 1,360 $ 34,995
============ ============
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest............................................................ $ - $ 1,127
Taxes .............................................................. $ - $ 330
See the accompanying notes to consolidated financial statements.
-3-
THE GENERAL CHEMICAL GROUP INC.
CONSOLIDATED STATEMENT OF CHANGES IN EQUITY (DEFICIT)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
(IN THOUSANDS)
(UNAUDITED)
ACCUMULATED
CLASS B OTHER
COMMON COMMON TREASURY CAPITAL COMPREHENSIVE RETAINED
STOCK STOCK STOCK DEFICIT INCOME (LOSS) EARNINGS TOTAL
----- ----- ----- ------- ------------- -------- -----
Balance at December 31, 1998....... $ 127 $ 97 $(32,795) $ (182,057) $ (2,446) $ 162,378 $ (54,696)
Distribution of GenTek Inc....... -- -- -- 130,382 (394) -- 129,988
-------- -------- --------- ----------- ---------- --------- ----------
Balance at December 31, 1998
(as adjusted)..................... 127 97 (32,795) (51,675) (2,840) 162,378 75,292
Net Income..................... -- -- -- -- -- 4,387 4,387
Transfers to GenTek Inc............ -- -- -- (122,470) -- -- (122,470)
Comprehensive income............... -- -- -- -- (28) -- (28)
Conversion of Class B Common
Stock to Common Stock.......... 58 (58) -- -- -- -- --
Restricted unit plan grants,
cancellations, tax benefits and
other............................. 1 -- -- 125 -- -- 126
Purchase of Treasury Stock......... -- -- (451) -- -- -- (451)
-------- -------- --------- ----------- ----------- --------- ----------
Balance at September 30, 1999...... $ 186 $ 39 $(33,246) $ (174,020) $ (2,868) $ 166,765 $ (43,144)
======== ======== ========= =========== =========== ========= ==========
See the accompanying notes to consolidated financial statements.
-4-
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 1 - BASIS OF PRESENTATION
On April 30, 1999, The General Chemical Group Inc. ("GCG") completed
the separation of its Manufacturing and Performance Products businesses from its
Industrial Chemicals business through a distribution of stock of GenTek Inc.
("GenTek") to stockholders of GCG (the "Spinoff"). Pursuant to the Spinoff, GCG
transferred the Manufacturing and Performance Products businesses to a
wholly-owned subsidiary, GenTek Inc. and distributed the stock of GenTek to
shareholders of GCG. As a result of the Spinoff, GCG and GenTek became separate,
publicly-traded companies on the New York Stock Exchange. GCG continues to trade
using the GCG symbol. GCG owns and operates the Industrial Chemicals business,
and GenTek owns and operates the businesses comprising the Manufacturing and
Performance Products businesses.
On March 18, 1999, GCG filed with the Securities and Exchange
Commission a report on Form 8-K with respect to the Spinoff, and on April 8,
1999 GenTek Inc. filed with the Securities and Exchange Commission an Amendment
No. 2 to Registration Statement on Form 10 to register its common stock under
the Securities Exchange Act of 1934. Both such Form 8-K and Form 10-K are
incorporated herein by reference.
The Spinoff was treated as a reverse spinoff for financial statement
purposes because a greater proportion of GCG's assets and operations are held by
GenTek after the Spinoff. Therefore, the Spinoff has been reflected, for
financial statement presentation, as if GCG is a new company consisting of the
Industrial Chemicals business. Included in selling, general and administrative
expense in the accompanying consolidated statement of operations for the nine
months ended September 30, 1999 are Spinoff related expenses of $1,900.
The accompanying unaudited consolidated financial statements include
the accounts of GCG and its subsidiaries (collectively, the "Company"). These
unaudited financial statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. 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, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999. The Company's
financial statements should be read in conjunction with the financial statements
and the notes thereto for the Industrial Chemicals business for the year ended
December 31, 1998 included in the Form 8-K and the Form 10.
For the purpose of governing certain ongoing relationships between the
Company and GenTek after the Spinoff and to provide mechanisms for an orderly
transition, the Company and GenTek have entered into various agreements.
Management believes that the agreements are comparable to those which would have
been reached in arm's length negotiations with unaffiliated parties.
Certain prior-period amounts have been reclassified to conform with the
current presentation.
-5-
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 2 - COMPREHENSIVE INCOME
Total comprehensive income is comprised of net income and foreign
currency translation gains and losses. Total comprehensive income for the nine
months ended September 30, 1998 and 1999 was $8,634 and $4,369, respectively.
NOTE 3 - EARNINGS PER SHARE
The computation of basic earnings per share is based on the weighted
average number of common shares and contingently issuable shares outstanding
during the period. The computation of diluted earnings per share assumes the
foregoing and, in addition, the exercise of all stock options and restricted
units, using the treasury stock method.
The components of the denominator for basic earnings per common share
and diluted earnings per common share are reconciled as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------ -------------
1998 1999 1998 1999
---- ---- ---- ----
Basic earnings per common share:
Weighted average common shares
Outstanding.............................. 21,099,838 20,987,144 21,085,181 20,917,236
========== ========== ========== ==========
Diluted earnings per common share:
Weighted average common shares
Outstanding.............................. 21,099,838 20,987,144 21,085,181 20,917,236
Options and Restricted Units............. 776,724 475,614 894,297 552,865
---------- ---------- ----------- ----------
Denominator for diluted earnings per
common share............................. 21,876,562 21,462,758 21,979,478 21,470,101
========== ========== ========== ==========
At September 30, 1998 and 1999 options to purchase 60,000 shares and
1,674,500 shares of common stock, respectively, were not included in the
computation of diluted earnings per common share because the exercise price was
greater than the average market price of the common shares. The options, which
expire during 2007, 2008 and 2009, were still outstanding at September 30, 1999.
-6-
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
NOTE 4 - ADDITIONAL FINANCIAL INFORMATION
The components of inventories were as follows:
DECEMBER 31, SEPTEMBER 30,
1998 1999
---- ----
(UNAUDITED)
Raw materials...................................... $ 3,480 $ 2,728
Work in process.................................... 1,839 1,550
Finished products.................................. 13,297 9,673
Supplies and containers............................ 6,892 7,246
------------- -----------
$ 25,508 $ 21,197
============= ===========
NOTE 5 - LONG-TERM DEBT
Long-term debt consists of the following:
DECEMBER 31, SEPTEMBER 30,
MATURITIES 1998 1999
---------- ---- ----
(UNAUDITED)
$85 Million Revolving Credit
Facility-floating rate............ 2004 $ -- $ 50,505
Senior Subordinated
Notes - 10 5/8%................... 2009 -- 100,000
------------- -------------
Total Debt............................. -- 150,505
Less: Current Portion............. -- --
------------- -------------
Net Long-Term Debt..................... $ -- $ 150,505
============= =============
On April 30, 1999, in connection with the Spinoff, the Company's
subsidiary, General Chemical Industrial Products Inc. ("GCIP"), and GCIP's
Canadian subsidiary, General Chemical Canada Ltd., entered into an $85 million
revolving credit facility ("Credit Facility") with certain lenders party
thereto, The Chase Manhattan Bank, as Administrative Agent, 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. Of this amount, up to $60 million is available for borrowing by the
Canadian subsidiary. In addition, on April 30, 1999, GCIP issued and sold $100
million aggregate principal amount of 10 5/8% Senior Subordinated Notes due
2009.
-7-
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
The Company applied the proceeds of its initial borrowing under the Credit
Facility and a portion of the proceeds of the offering of its Senior
Subordinated Notes to repay approximately $122 million of pre-Spinoff debt. On
November 9, 1999, GCIP completed its exchange offer pursuant to which all of
GCIP's unregistered 10 5/8% Senior Subordinated Notes due 2009 (issued on April
30, 1999) were exchanged for registered 10 5/8% Senior Subordinated Notes due
2009 that are identical to the terms of the unregistered notes. The Securities
and Exchange Commission declared effective GCIP's Registration Statement on Form
S-4 with respect to such registered notes on October 6, 1999.
The Senior Subordinated Notes are unsecured while the $85 million
Credit Facility is secured by 100% of the capital stock of GCIP, 100% of the
owned capital stock of, and guarantees from, the direct and indirect domestic
subsidiaries of GCIP, 65% of certain foreign subsidiaries of GCIP and
substantially all of the other assets of GCIP. In addition, the portion of the
Credit Facility available to GCIP's Canadian subsidiary is secured by
substantially all of the assets of the GCIP's Canadian subsidiary. The Senior
Subordinated Notes and the Credit Facility contain certain covenants with
respect to additional indebtedness, and preferred stock by subsidiaries,
restricted payments, transactions with affiliates, liens, dividends and other
payment instructions affecting subsidiaries, consolidations, mergers, the sale
of assets and financial tests.
NOTE 6 - DIVIDENDS
On March 10, 1999, GCG's Board of Directors declared a quarterly cash
dividend of $.05 per share, payable April 5, 1999, to shareholders of record on
March 24, 1999. As a consequence of the Spinoff, the Board of Directors of GCG
does not expect to pay dividends in the future. The dividend policies of GCG are
subject to change and will be based on, among other factors, its operating
results and financial requirements and the restrictions imposed by its financing
facilities.
NOTE 7 - RELATED PARTY TRANSACTIONS
MANAGEMENT AGREEMENT
GCG is party to a management agreement with Latona Associates
("Latona") (which is controlled by a shareholder of GCG) pursuant to which
Latona provides GCG, subject to the direction and supervision of the Board of
Directors of the Company (i) senior corporate functions (including supervision
of the Company's finance, legal and executive recruitment functions) and (ii)
services in connection with acquisition candidates and acquiring financing for
such transactions for a fee. In connection with the Spinoff, Latona agreed to
provide its services separately to GCG and GenTek. GCG's share of this
management fee is $855 and $1,113 for the nine months ended September 30, 1998
and 1999, respectively.
TRANSITION SUPPORT AGREEMENT
GCG and GenTek have entered into various transition agreements that
provide mechanisms for an orderly transition after the Spinoff. For the period
from April 30, 1999 to September 30, 1999, GenTek charged GCG $1,534 related to
these transition agreements.
-8-
THE GENERAL CHEMICAL GROUP INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONCLUDED)
FOR THE THREE AND NINE MONTHS ENDED
SEPTEMBER 30, 1999
(DOLLARS IN THOUSANDS)
(UNAUDITED)
OTHER TRANSACTIONS
Following the Spinoff, GCG continues to supply soda ash to General
Chemical Corporation ("GCC"), a wholly-owned subsidiary of GenTek. For the nine
months ended September 30, 1998 and 1999, sales to GCC amounted to $4,045 and
$10,045, respectively.
NOTE 8 - GEOGRAPHIC INFORMATION
TOTAL REVENUES OPERATING PROFIT
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
1998 1999 1998 1999
---- ---- ---- ----
United States............................. $ 147,539 $ 139,831 $ 24,507 $ 15,906
Foreign ................................. 72,746 76,485 8,399 7,511
Elimination .............................. (22,683) (21,561) (281) (214)
----------- ------------ ---------- ----------
$ 197,602 $ 194,755 $ 32,625 $ 23,203
=========== ============ ========== ==========
-9-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Financial Condition
September 30, 1999 Compared with December 31, 1998
Cash and cash equivalents were $35.0 million at September 30, 1999
compared with $1.1 million at December 31, 1998. During the first nine months of
1999, the Company generated cash flow from operating activities of $25.5 million
and received net proceeds from debt of $145.4 million, and used cash of $14.3
million for capital expenditures and transferred $122.5 million to GenTek for
repayment of preSpinoff debt.
The Company had working capital of $ 64.9 million at September 30, 1999
as compared with $39.9 million at December 31, 1998. This increase in working
capital principally reflects higher cash balances due to the proceeds from debt
partially offset by the transfer to GenTek for repayment of preSpinoff debt.
Results of Operations
September 30, 1999 Compared with September 30, 1998
Net revenues for the three month period ended September 30, 1999 were
essentially unchanged at $64.1 million as compared to $64.2 million in the
comparable prior period. Net revenues were negatively affected by lower soda ash
prices, partially offset by higher sales volume of soda ash. Net revenues for
the nine month period ended September 30, 1999 decreased 1% to $194.8 million
from $197.6 million for the comparable period in 1998. This decrease is due to
lower soda ash prices partially offset by higher sales of calcium chloride and
soda ash.
Gross profit for the three month period ended September 30, 1999
decreased $2.1 million to $12.4 million from $14.5 million for the comparable
prior year period. Gross profit as a percentage of net revenues for the three
month period ended September 30, 1999 decreased to 19 percent from 23 percent
for the same period in 1998. Gross profit for the nine month period ended
September 30, 1999 decreased $7.1 million to $37.9 million from $45.0 million
for the comparable prior year period. Gross profit as a percentage of net
revenues for the nine month period ended September 30, 1999 decreased to 19
percent from 23 percent for the same period in 1998. These decreases were
primarily due to the above-mentioned lower soda ash prices.
Selling, general and administrative expense increased $0.1 million and
$2.3 million for the three and nine month periods ended September 30, 1999 as
compared to the prior period principally due to the $1.9 million one-time charge
related to legal, audit, actuarial and other Spinoff related charges in the
second quarter. Selling, general and administrative expense as a percentage of
net revenues for the nine month period ended September 30, 1999 and 1998
increased to 8 percent from 6 percent for the same period in 1998 primarily due
to the above-mentioned one-time charge.
Interest expense for the three and nine month periods ended September
30, 1999 was $3.8 million and $9.8 million, which was $0.9 million and $1.0
million higher, respectively, than the comparable prior period level as a result
of the issuance of the Senior Subordinated Notes and borrowings under the Credit
Facility.
Interest income for the three and nine month periods ended September
30, 1999 was $0.4 million and $0.9 million, respectively, versus $0.3 million
and $0.6 million for the same periods in 1998 as a result of the net proceeds
from the issuance of the Senior Subordinated Notes.
Minority interest for the three and nine month periods ended September
30, 1999 was $3.5 million and $9.0 million, respectively, versus $3.6 million
and $11.8 million for the same periods in 1998. The decreases in both periods
reflect lower earnings due to weaker soda ash pricing of General Chemical (Soda
Ash) Partners.
-10-
Net income was $1.1 million and $4.4 million for the three and nine
month periods ended September 30, 1999, respectively, versus $2.9 million and
$8.8 million for the comparable periods in 1998, for the foregoing reasons.
YEAR 2000 ISSUE
Following the Spinoff, GenTek provides us with management information
systems and related functions, including personnel, hardware and software,
through December 31, 2001 on a service contract basis. During this period, as
provided in the transition support agreement, GenTek will provide us services
related to the remediation of the Year 2000 problem for our business. A Year
2000 problem can occur where date-sensitive software uses two digit year date
fields, sorting the Year 2000 ("00") before the Year 1999 ("99"). The Year 2000
problem can arise in hardware, software, or any other equipment or process that
uses embedded software or other technology, including non-information technology
equipment and systems. The failure of such systems to properly recognize dates
after December 31, 1999 could result in data corruption and processing errors.
The transition support agreement provides that generally GenTek will
not be liable to us for any costs, losses, damages or claims related to any Year
2000 services provided by it under the transition support agreement, other than
for gross negligence or willful misconduct. We intend to work with GenTek on the
separation of management information systems functions after resolution of Year
2000 problems. We anticipate that we will recruit our own staff for this work
during 2001 and that by approximately December 2001 a separation of our and
GenTek's functions will be completed.
We completed an assessment of our business' Year 2000 compliance status
in early 1997. This assessment found that the majority of our systems were Year
2000 compliant. The assessment revealed some minor problems with the maintenance
management and order processing systems and several process control systems.
Immediately thereafter, we began a remediation program to correct these material
systems. We did not entirely replace any systems necessary to the operation of
our facilities.
We completed the majority of our remediation efforts in 1998 and
completed the remaining work in the third quarter of 1999. The following
schedule describes our progress by phase and the final completion date with
respect to our material systems.
INVENTORY/ COMPLETION
TYPE OF SYSTEM ASSESSMENT REMEDIATION TESTING IMPLEMENTATION DATE
- -------------- ---------- ----------- ------- -------------- ----
Business Application.................. Complete Complete Complete Complete 1/99
Manufacturing Systems................. Complete Complete Complete Complete 8/99
Technical Infrastructure.............. Complete Complete Complete Complete 6/99
As of September 30, 1999, a total of approximately $1.0 million had
been spent in connection with the Year 2000 program for our business and
GenTek's business. We believe that as of August 31, 1999 all material systems
were Year 2000 compliant and, therefore, we expect no additional expenditures
relating to the material systems of our business. We have used and will continue
to use funds from operations to bring our systems into Year 2000 compliance. In
the event that material systems of our business do not prove to be Year 2000
compliant, we may experience reductions or interruptions in operations which
could have a material adverse effect on our results of operations.
We have also evaluated critical vendors, suppliers and service
providers for Year 2000 compliance, including the railroad and trucking
companies we use to ship our products. This evaluation included sending out
letters with questionnaires to all key suppliers together with follow-up
telephone calls and additional
-11-
correspondence to complete the evaluation. Based upon the information we
obtained from those suppliers, we do not anticipate that the failure of any
of our key suppliers will have a material impact to our business operations.
However, the process of evaluating the Year 2000 compliance of material third
parties is continually ongoing and, therefore, we can make no guaranty or
warranty as to such third parties' future compliance status or its potential
effect on us.
We have developed preliminary contingency plans to deal with three
worst case Year 2000 scenarios:
(1) We cannot obtain sufficient critical raw materials over an extended period
of time;
(2) Intermittent power outages occur at our facilities; and/or
(3) Railcars become difficult to obtain due to congestion in the railcar system.
Our preliminary contingency plan consists of the following:
First, to insure that our facilities will have sufficient raw
materials, we expect to build up critical supplies and develop alternate sources
of raw material suppliers as we approach year-end. This has been a regular
practice at both our facilities due to the harsh winter climate. Second, we
believe that as both our facilities have capacity to generate electrical power,
they may be able to sustain operations through short-term power outages. Lastly,
we expect to build inventories of railcars at our rail sidings and arrange to
use truck carriers to deliver products although any such arrangements are likely
only to address short-term congestion in the railcar system.
There can be no assurance, however, that we will be able to
successfully carry out our contingency plans, that our contingency plans will
adequately address the above worst case Year 2000 scenarios, or that these
contingency plans will address every Year 2000 problem resulting from the
failure of our suppliers to be Year 2000 compliant. As a result, we are likely
to experience interruptions, slowdowns or increased costs in our business if our
suppliers fail to be Year 2000 compliant.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK
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 its
floating-rate debt to fixed-rate debt in order to reduce its 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 its exposure
to movements in currency exchange rates. Swap agreements will only be entered
into with strong creditworthy parties.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.01 Financial Data Schedule
(b) No reports were filed on Form 8-K.
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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 15, 1999 /s/ John M. Kehoe, Jr
---------------------------------------------
JOHN M. KEHOE, JR.
President and Chief Executive Officer
(Principal Executive Officer) and Director
Date November 15, 1999 /s/ Stewart A. Fisher
----------------------------------------------
STEWART A. FISHER
Vice President and Chief Financial Officer
(Principal Financial and Accounting Officer) and
Director
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EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION PAGE
- ----------- ----------- ----
27 Financial Data Schedule..................................... 16
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