EXHIBIT 99.1
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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PAGE
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Report of Independent Accountants F-2
Consolidated Financial Statements:
Consolidated Balance Sheets,
June 30, 2003 (unaudited) and December 31, 2002 and 2001 F-3
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
six months ended June 30, 2003 (unaudited) and 2002 (unaudited) and the
years ended December 31, 2002, 2001 and 2000 F-4
Consolidated Statements of Stockholders' Equity
for the six months ended June 30, 2003 (unaudited)
and the years ended December 31, 2002, 2001 and 2000 F-5
Consolidated Statements of Cash Flows
for the six months ended June 30, 2003 (unaudited) and 2002 (unaudited)
and the years ended December 31, 2002, 2001 and 2000 F-6
Notes to Consolidated Financial Statements F-7 - F-23
Report of Independent Accountants
Board of Directors and Stockholders of
Gentek Holdings, Inc. and Subsidiaries:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations and comprehensive income (loss), of
stockholders' equity and of cash flows present fairly, in all material respects,
the financial position of Gentek Holdings, Inc. and its subsidiaries at December
31, 2002 and 2001 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. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PricewaterhouseCoopers LLP
February 14, 2003
Cleveland, Ohio
F-2
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (IN THOUSANDS OF DOLLARS)
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JUNE 30, DECEMBER 31,
2003 2002 2001
---- ---- ----
(UNAUDITED)
ASSETS
Current assets:
Cash $ 2,794 $ 4,100 $ 1,705
Accounts receivable, net of allowance for doubtful accounts
of $1,782 for 2003 (unaudited), $1,664 for 2002 and
$1,781 for 2001 44,620 26,689 26,371
Inventories 44,855 34,745 29,598
Other current assets 1,192 600 1,190
--------- --------- ---------
Total current assets 93,461 66,134 58,864
Property, plant and equipment, net 29,710 26,413 27,942
Other non-current assets:
Deferred charges and other intangible assets, net 2,553 2,523 2,660
Other assets 2,606 2,167 1,519
--------- --------- ---------
Total other non-current assets 5,159 4,690 4,179
--------- --------- ---------
Total assets $ 128,330 $ 97,237 $ 90,985
========= ========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Book overdrafts $ 2,770 $ 3,744 $ 2,273
Current portion of revolving credit agreements 27,993 6,307 4,798
Current portion of notes payable 1,068 915 904
Current portion of accrued warranty 2,313 2,103 2,164
Current portion of other liabilities 1,395 679 648
Accounts payable, trade 23,949 20,322 17,485
Accrued payroll and related taxes 5,671 4,982 5,358
Accrued expenses and other liabilities 4,728 5,350 5,860
--------- --------- ---------
Total current liabilities 69,887 44,402 39,490
Long-term liabilities, net of current portions:
Revolving credit agreements 8,287 9,147 15,930
Notes payable 5,113 4,843 5,869
Accrued warranty 10,629 8,858 8,856
Pension plans 3,521 4,033 2,204
Other liabilities 2,534 2,093 2,246
--------- --------- ---------
Total long-term liabilities, net of current portions 30,084 28,974 35,105
--------- --------- ---------
Total liabilities 99,971 73,376 74,595
--------- --------- ---------
Commitments and contingencies (Note 11)
Stockholders' equity:
Common stock:
Class A voting, convertible, par value $0.01 per share,
2,000,000 shares authorized, 983,721 shares outstanding 10 10 10
Class B non-voting, par value $0.01 per share, 2,000,000
shares authorized -0- shares outstanding - - -
Class C voting, convertible, par value $0.01 per share,
1,000,000 shares authorized, 400,000 shares outstanding 4 4 4
Class D non-voting, par value $0.01 per share, 1,000,000
shares authorized, -0- shares outstanding - - -
Additional paid-in capital 29,500 29,500 29,500
Accumulated deficit (1,363) (1,049) (10,219)
Accumulated other comprehensive income (loss) 208 (4,604) (2,905)
--------- ---------- ----------
Total stockholders' equity 28,359 23,861 16,390
--------- --------- ---------
Total liabilities and stockholders' equity $ 128,330 $ 97,237 $ 90,985
========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(IN THOUSANDS OF DOLLARS)
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SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- ------------------------
2003 2002 2002 2001 2000
(UNAUDITED) (UNAUDITED)
Net sales $ 132,911 $ 119,456 $260,060 $266,299 $263,144
Cost of sales 116,093 99,690 218,769 230,861 231,133
------------- ------------- -------- -------- --------
Gross profit 16,818 19,766 41,291 35,438 32,011
Selling, general and administrative expenses 14,723 13,634 26,363 28,629 26,674
------------- ------------- -------- -------- --------
Income from operations 2,095 6,132 14,928 6,809 5,337
Other expenses (income), net:
Interest expense 914 888 1,835 4,022 5,243
Amortization of financing fees 22 87 99 180 307
Foreign currency loss (gain) (239) 331 419 (112) 380
Gain on extinguishment of debt - - - (6,985) -
Other, net 141 98 715 (27) (103)
------------- ------------- -------- --------- ---------
Total other expenses (income), net 838 1,404 3,068 (2,922) 5,827
------------- ------------- -------- --------- --------
Income (loss) before provision for income
taxes 1,257 4,728 11,860 9,731 (490)
Provision for income taxes:
Current 1,427 1,506 3,065 2,060 1,117
Deferred 144 (184) (375) (410) 886
------------- -------------- --------- --------- --------
Total provision for income taxes 1,571 1,322 2,690 1,650 2,003
------------- ------------- -------- -------- --------
Net income (loss) (314) 3,406 9,170 8,081 (2,493)
Other comprehensive income (loss):
Foreign currency translation adjustment 4,812 1,167 196 (1,369) (731)
Minimum pension liability adjustment - - (1,895) (190) (413)
------------- ------------- --------- --------- ---------
Comprehensive income (loss) $ 4,498 $ 4,573 $ 7,471 $ 6,522 $ (3,637)
============= ============= ======== ======== =========
Income tax (expense) benefit related to the minimum pension liability adjustment
component of other comprehensive income (loss) was $(17) in 2002, $202 in 2001
and $294 in 2000.
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (IN THOUSANDS OF DOLLARS)
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ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
---------------------------
ADDITIONAL FOREIGN MINIMUM
COMMON STOCK PAID-IN ACCUMULATED CURRENCY PENSION
----------------
CLASS A CLASS B CAPITAL DEFICIT TRANSLATION LIABILITY TOTAL
Balances at December 31, 1999 $ 10 $ 4 $ 29,500 $ (15,807) $ 305 $ (507) $ 13,505
Net loss - - - (2,493) - - (2,493)
Foreign currency
translation
adjustment - - - - (731) - (731)
Minimum pension
liability adjustment - - - - - (413) (413)
------ ----- --------- --------- --------- ---------- ----------
Balances at December 31, 2000 10 4 29,500 (18,300) (426) (920) 9,868
Net income - - - 8,081 - - 8,081
Foreign currency
translation
adjustment - - - - (1,369) - (1,369)
Minimum pension
liability adjustment - - - - - (190) (190)
------ ----- --------- --------- --------- ---------- ----------
Balances at December 31, 2001 10 4 29,500 (10,219) (1,795) (1,110) 16,390
Net income - - - 9,170 - - 9,170
Foreign currency
translation
adjustment - - - - 196 - 196
Minimum pension
liability adjustment - - - - - (1,895) (1,895)
------ ----- --------- --------- --------- ---------- ----------
Balances at December 31, 2002 10 4 29,500 (1,049) (1,599) (3,005) 23,861
Net loss (unaudited) - - - (314) - - (314)
Foreign currency
translation
adjustment
(unaudited) - - - - 4,812 - 4,812
------ ----- --------- --------- --------- --------- ---------
Balances at June 30, 2003
(unaudited) $ 10 $ 4 $ 29,500 $ (1,363) $ 3,213 $ (3,005) $ 28,359
====== ===== ========= ========== ========= ========== =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (IN THOUSANDS OF DOLLARS)
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SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- ------------------------
2003 2002 2002 2001 2000
(UNAUDITED) (UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (314) $ 3,406 $ 9,170 $ 8,081 $ (2,493)
---------- --------- --------- --------- ----------
Adjustments to reconcile net
income (loss) to net cash provided
by operating activities:
Depreciation 2,665 2,379 4,843 4,819 4,480
Amortization 108 169 260 2,150 803
Loss on disposal of property - - 528 - -
Gain on extinguishment of debt - - - (6,985) -
Non-cash other post employment
benefits (440) (302) (765) (681) (1,085)
Deferred income taxes 144 (184) (375) (410) 886
Changes in assets and liabilities:
Accounts receivable (15,632) (11,176) (205) (4,254) 3,991
Inventories (6,540) (8,154) (4,878) 1,705 (11)
Other current assets (537) 108 595 (704) 998
Accounts payable 1,615 1,482 2,709 3,650 (1,529)
Accrued payroll and related taxes 322 (342) (399) 2,107 (1,326)
Accrued warranty 1,570 (357) (84) 3,812 708
Pension plans (233) (186) 1,863 (293) 438
Other assets and liabilities, net (594) (1,136) (1,857) (3,269) 820
Accrued expenses and other
liabilities 1,025 2,931 (151) 706 (1,063)
--------- --------- ---------- --------- ----------
Total adjustments (16,527) (14,768) 2,084 2,353 8,110
---------- ---------- --------- --------- ---------
Cash provided by (used in)
operating activities (16,841) (11,362) 11,254 10,434 5,617
---------- ---------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property, plant and
equipment (2,839) (1,644) (3,606) (2,035) (3,709)
---------- ---------- ---------- ---------- ----------
Cash used in investing activities (2,839) (1,644) (3,606) (2,035) (3,709)
---------- ---------- ---------- ---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Book overdrafts (974) 3,978 1,471 2,273 -
Lines of credit borrowings 142,546 146,299 293,187 331,578 295,157
Lines of credit payments (122,729) (134,959) (298,672) (331,551) (295,337)
Repayment of notes payable (500) (611) (1,101) (10,191) (1,282)
Payments of financing fees (1) (20) (113) (710) (94)
---------- ---------- ---------- ---------- ----------
Cash provided by (used in)
financing activities 18,342 14,687 (5,228) (8,601) (1,556)
--------- --------- ---------- ---------- ----------
Effect of exchange rate changes on
cash 32 (92) (25) 5 (62)
--------- ---------- ---------- --------- ----------
Increase (decrease) in cash (1,306) 1,589 2,395 (197) 290
Cash, beginning of period 4,100 1,705 1,705 1,902 1,612
--------- --------- --------- --------- ---------
Cash, end of period $ 2,794 $ 3,294 $ 4,100 $ 1,705 $ 1,902
========= ========= ========= ========= =========
The accompanying notes are an integral part of these consolidated financial
statements.
F-6
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
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1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The significant accounts policies used in preparation of the consolidated
financial statements are as follows:
BUSINESS AND ORGANIZATION
Gentek Holdings, Inc. ("Holdings") was incorporated on July 8, 1997.
Holdings has a wholly-owned subsidiary, Gentek Building Products, Inc.
("GBPI"), which has a wholly-owned subsidiary Gentek Building Products
Limited ("GBPL"). Holdings, GBPI and GBPL are the successors to their
respective predecessor companies (after a restructuring as a result of a
stock purchase agreement in July 1997 with Amerimax Fabricated Products,
Inc. - "Amerimax") which acquired in June 1994 certain assets and assumed
certain liabilities of the Building Products Divisions of Alcan Aluminum
Corporation and Alcan Aluminium Limited ("Alcan").
GBPI and GBPL design, manufacture and distribute a broad variety of
aluminum, vinyl and steel siding, soffit and trim; vinyl windows; and
coated aluminum and steel coil. Two manufacturing facilities and thirteen
distribution centers are located in the United States and three
manufacturing facilities and twenty distribution centers are located in
Canada. Manufactured products fall into two basic categories of (1) vinyl,
aluminum and steel siding and related products for residential and light
commercial applications and (2) vinyl windows. GBPI and GBPL also coat
aluminum and steel coil for use by third parties. GBPI and GBPL
distribution centers sell both its manufactured and vendor purchased
resale products. Because most products are intended for exterior use,
sales tend to be lower during periods of inclement weather, especially in
northern markets which usually results in significantly less net sales in
the first and fourth quarters than any other periods of the year.
RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 143, "Accounting for Asset
Retirement Obligations". SFAS No. 143 requires companies to record the
fair value of a liability for an asset retirement obligation in the period
in which it was incurred. The amount recorded as a liability will be
capitalized by increasing the carrying amount of the related long-lived
asset, which is then depreciated over its useful life. The Company adopted
SFAS No. 143 on January 1, 2003 and adoption had no impact on its results
of operations, financial position or liquidity.
The FASB has issued Interpretation ("FIN") No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees
of Indebtedness of Others". FIN No. 45 requires disclosures by guarantors
about the nature of, and maximum potential payments under, contracts that
contingently require the guarantor to make payments to the guaranteed
party under certain circumstances (such as financial guarantees and
product warranties). FIN No. 45 also requires the recognition by
guarantors of a liability, at fair value, for the obligation to stand
ready to perform under the terms of the contract. The recognition
provisions of FIN No. 45 do not apply to product warranties. The
disclosure provisions of FIN No. 45 are effective for periods ending after
December 15, 2002. The recognition provisions are effective on a
prospective basis to guarantees issued or modified after December 31,
2002. The Company has an indemnification clause within a facility lease
agreement which is considered to be a guarantee within the scope of FIN
45. The Company also guarantees certain employee mortgage loans (Note 5).
The Company does not consider these guarantees to be material to its
results of operations, financial position or liquidity. The Company has
adopted the disclosure provisions of FIN No. 45 (Note 1) and does not
expect the adoption of the recognition provisions of FIN No. 45 to have a
material impact on its results of operations, financial position or
liquidity.
In June of 2002, the FASB issued SFAS No. 146, Accounting for Costs
Associated with Exit or Disposal Activities. SFAS No. 146 requires that a
liability for a cost that is associated with an exit or disposal activity
be recognized when the liability is incurred. It nullifies the guidance of
the
F-7
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Emerging Issues Task Force ("EITF") in EITF Issue No. 94-3, Liability
Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (including Certain Costs Incurred in a Restructuring).
Under EITF Issue No. 94-3, an entity recognized a liability for an exit
cost on the date that the entity committed itself to an exit plan. In SFAS
No. 146, the Board acknowledges that an entity's commitment to a plan does
not, by itself, create a present obligation to other parties that meets
the definition of a liability. SFAS No. 146 also establishes that fair
value is the objective for the initial measurement of the liability. SFAS
No. 146 is effective for exit or disposal activities that are initiated
after December 31, 2002. There has been no material impact related to the
implementation of this recently issued statement on the Company's results
of operations, financial position or liquidity.
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 No. 148 provides alternative methods of
transition for a voluntary change to the fair value based method of
accounting for stock-based employee compensation. SFAS No. 148 also
requires prominent disclosures of the pro forma effect of using the fair
value method of accounting for stock-based employee compensation in both
annual and interim financial statements. The disclosure requirements of
SFAS No. 148 have been adopted in these financial statements. The
transition requirements of SFAS No. 148 are effective for fiscal years
ending after December 15, 2002. The Company has adopted SFAS No. 148 (see
the Stock-Based Compensation policy disclosure in this note) and the
adoption did not have an impact on the Company's financial position or on
its results of operations or liquidity.
On January 15, 2003, the FASB issued FIN 46, "Consolidation of Variable
Interest Entities." The objective of this interpretation is to improve
financial reporting by enterprises involved with variable interest
entities. This interpretation applies to variable interest entities
created after January 31, 2003. It applies in the first fiscal year or
interim period beginning after June 15, 2003, to variable interest
entities in which an enterprise holds a variable interest that it acquired
before February 1, 2003. The Company has no variable interest entities.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity". SFAS No. 150 improves the accounting for certain financial
instruments that, under previous guidance, issuers could account for as
equity. SFAS No. 150 requires that those instruments be classified as
liabilities in statements of financial position. This statement is
effective for interim periods beginning after June 15, 2003. On October
29, 2003, the FASB deferred the provisions of paragraphs 9 and 10 and
related guidance in the appendices of this pronouncement as they apply to
mandatorily redeemable preferred shares. The Company is currently
assessing what impact the adoption of SFAS No. 150 would have upon its
financial position, results of operations and liquidity.
PRINCIPLES OF CONSOLIDATION AND FOREIGN CURRENCY TRANSLATION
The accompanying consolidated financial statements include the accounts of
Holdings and its subsidiaries GBPI and GBPL (collectively, the "Company")
and are prepared in accordance with accounting principles generally
accepted in the United States of America. All significant intercompany
accounts and transactions have been eliminated.
The assets and liabilities of GBPL are denominated in Canadian currency
and have been translated in U.S. dollars using exchange rates in effect at
the balance sheet date. Revenue and expense items are translated at the
average exchange rate for the period. Translation adjustments are recorded
as a separate component of accumulated other comprehensive income (loss).
The net effect of currency gains and losses realized on business
transactions is included in other expenses (income) within the
Consolidated Statement of Operations and Comprehensive Income (Loss).
F-8
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
UNAUDITED INTERIM INFORMATION
The unaudited interim financial statements as of June 30, 2003 and for the
six months ended June 30, 2003 and 2002, included herein, have been
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Accordingly, they do not include all the information
and footnotes required by accounting principles generally accepted in the
United States of America for complete financial statements. In the opinion
of management, the unaudited interim financial statements contain all
adjustments (consisting of normal recurring adjustments) considered
necessary for a fair presentation. The interim financial statements are
not necessarily indicative of operating results for an entire year.
CONCENTRATIONS OF CREDIT RISK
GBPI and GBPL sell their products throughout the U.S. and Canada, and to a
lesser extent, to overseas markets. In 2002 and 2000, no customer
represented 10% or more of total net sales. During 2001 net sales to the
Company's largest customer represented approximately 10% of total net
sales. GBPI and GBPL perform ongoing credit evaluations of their customers
and generally do not require collateral. GBPI and GBPL monitor potential
credit losses and such losses have been within management's expectations.
DERIVATIVE FINANCIAL INSTRUMENTS
The Company does not have any derivative financial instruments and hedging
activities as defined by SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and does not enter into derivative
financial instruments or hedging activities for speculative or trading
purposes.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with a maturity of
three months or less, when purchased, to be cash equivalents. Cash
equivalents are stated at cost, which approximates market value. There
were no cash equivalents at December 31, 2002 or 2001.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amounts of the Company's cash and cash equivalents,
receivables, payables, and accrued expenses approximate fair value due to
the short-term maturities of these assets and liabilities. The carrying
amounts of the Company's credit facilities and term note payable
approximate fair value due to the variable, floating interest rate
structure of the notes.
INVENTORIES
Inventories are stated at the lower of cost or market. Cost is determined
under the average cost method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Significant additions
and improvements are capitalized while expenditures for maintenance and
repairs are charged to operations as incurred. The cost of assets retired
or otherwise disposed of and the related accumulated depreciation are
eliminated from accounts in the year of disposal. Gains and losses
resulting from disposals are included in operations.
Depreciation is computed using the straight-line method based on the
following ranges of estimated useful lives:
Buildings and improvements 10-40 years
Leasehold improvements Life of lease or 40 years
Machinery and equipment 5-10 years
Tooling and dies 2-5 years
Furniture, fixture and office equipment 5-7 years
F-9
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
The Company reviews for impairment whenever events or changes in
circumstances indicate that the carrying amount of property, plant and
equipment may not be recoverable. If it is determined that an impairment
loss has occurred based on expected future cash flows, the loss is
recognized in the Consolidated Statement of Operations.
The Company adopted SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets" effective January 1, 2002. SFAS No. 144
superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived
Assets and for Long-Lived Assets to be Disposed of". SFAS No. 144 retains
the fundamental recognition and measurement provisions of SFAS No. 121 for
assets to be held and used and assets to be disposed of by sales, but the
standard develops a single accounting model for long-lived assets to be
disposed of and for certain obligations associated with a disposal
activity. The adoption of SFAS No. 144 had no effect on the consolidated
financial statements.
DEFERRED CHARGES AND OTHER INTANGIBLE ASSETS
Deferred charges and other intangible assets consist of deferred financing
charges and costs assigned to various technology, patent and trademark
agreements and rights.
The Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets"
effective January 1, 2002. Goodwill is recorded when the cost of acquired
business exceeds the fair value of the identifiable net assets acquired.
Goodwill and intangible assets with an indefinite useful life are tested
for impairment annually or when events or circumstances indicate that
impairment may have occurred. The Company has elected to perform the
impairment test annually as of December 31. If considered impaired, the
intangible asset is written down to fair value. SFAS No. 142 also required
the Company to reassess the useful lives of intangible assets and adjust
the remaining amortization periods accordingly. The Company did not cease
amortization related to any of its intangible assets or change the useful
lives as a result of this reassessment. The Company had no goodwill or
indefinite useful life intangibles recorded as of January 1, 2002.
Prior to 2002, the Company reviewed for impairment whenever events or
changes in circumstances indicated that the carrying amount of intangibles
may not be recoverable. If it was determined that an impairment loss
occurred based on a market value approach, the loss was recognized in the
Consolidated Statement of Operations (Note 4).
These items are being amortized using the straight-line method over the
respective useful lives as follows:
Financing charges 3 years
Technology license agreements 30 years
Patents and trademarks 17 and 30 years
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred tax assets and liabilities are determined based on differences
between financial reporting and tax bases of assets and liabilities and
are measured using enacted tax rates and laws that will be in effect when
the differences are expected to reverse. The effect on deferred taxes of a
change in tax rates is recognized in the period that includes the
enactment date. A valuation allowance is provided for deferred taxes if it
is more likely than not that these items will expire before the Company is
able to realize their benefit, or that future deductibility is uncertain.
Holdings files a consolidated U.S. federal income tax return with GBPI.
GBPL files a separate federal income tax return in Canada.
F-10
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
REVENUE RECOGNITION
Revenues are recognized when finished products are shipped to unaffiliated
customers and both title and the risk and rewards of ownership are
transferred. Revenues include both direct sales as well as toll processing
revenue. Toll processing revenues result from the Company performing steel
and aluminum processing operations without acquiring ownership for the
material and is recorded on a net basis in net sales. Toll processing
revenues were $3,768, $3,185, and $3,491 for the years ended December 31,
2002, 2001 and 2000, respectively.
Sales incentives given to customers are recorded as a reduction of revenue
when the corresponding revenues are recorded in the Consolidated
Statements of Operations.
PRODUCT WARRANTY COSTS AND SERVICE RETURNS
Consistent with industry practice, the Company provides to homeowners
limited warranties on certain products, primarily related to siding and
window product categories. Warranties are of varying lengths of time from
the date of purchase including up to lifetime. Warranties cover product
failures such as peeling, chipping, cracking and fading, hail damage as
well as manufacturing defects. Window product warranties also cover
failures such as glass seals and breakage, mechanical parts and frame
integrity.
The Company has various options for remedying product warranty claims
including repair, refinishing or replacement and directly incurs the cost
of these remedies. Warranties also become reduced under certain conditions
of time and change in homeownership. Liabilities for future warranty costs
are provided annually based on management's estimates of such future costs
using historical trends and sales of products to which such costs relate.
Certain metal coating suppliers provide material warranties to the Company
that may mitigate the costs incurred by the Company. Warranty reserves are
based on past claims experience, sales history and other factors. An
independent actuary assists the Company to determine reserve amounts
related to significant product failures (Note 11).
Reconciliation of warranty reserve activity is as follows for the six
months ended June 30, 2003 and the year ended December 31, 2002:
JUNE 30, DECEMBER 31,
2003 2002
(UNAUDITED)
Balance at the beginning of the period $ 10,961 $ 11,020
Provision for warranties issued 1,390 2,084
Provision for pre-existing warranties 2,404 702
Settlements made during the period (1,813) (2,845)
---------- ----------
Balance at the end of the period $ 12,942 $ 10,961
========= =========
STOCK-BASED COMPENSATION
At December 31, 2002, the Company has a stock-based employee compensation
plan, which is described more fully in Note 10. The Company accounts for
this plan under the recognition and measurement principles of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees". No stock-based employee compensation cost is reflected in net
income, as all options are granted at an exercise price equal to the
market value of the underlying common stock on the date of grant. The fair
value of each option grant is estimated on the date of grant, most
recently during 2000, using a present value calculation with the following
weighted average assumptions: risk free interest rate 5.10%; 0% dividend
yield; 0% volatility and an expected life of ten years. The following
table illustrates the effect on net income (loss) if the Company had
applied the fair value recognition provisions of SFAS No. 123, "Accounting
for Stock-Based Compensation", to stock-based employee compensation.
F-11
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
SIX MONTHS
ENDED JUNE 30, YEARS ENDED DECEMBER 31,
-------------- ------------------------
2003 2002 2002 2001 2000
(UNAUDITED) (UNAUDITED)
Net income (loss), as reported $ (314) $ 3,406 $ 9,170 $ 8,081 $ (2,493)
Deduct: total stock-based
employee compensation expense
determined under fair value based
method for all awards, net of
related tax effects (10) (16) (27) (149) (179)
---------- ---------- ---------- ---------- ----------
Pro forma net income (loss) $ (324) $ 3,390 $ 9,143 $ 7,932 $ (2,672)
========== ========= ========= ========= ==========
COMPREHENSIVE INCOME (LOSS)
SFAS No. 130, "Reporting Comprehensive Income", establishes standards for
reporting and display of comprehensive income (loss) and its components in
financial statements. It requires that all items that are required to be
recognized under accounting standards as components of comprehensive
income (loss) be reported in a financial statement that is displayed with
the same prominence as other financial statements. Comprehensive income
(loss) consists of foreign currency translation transactions and minimum
pension liability adjustments, and is presented in the Consolidated
Statements of Operations and Comprehensive Income (Loss).
USE OF SIGNIFICANT ACCOUNTING ESTIMATES
The preparation of consolidated 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 and disclosures of contingent
assets and liabilities at the dates of the consolidated financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.
2. INVENTORIES
Inventories consist of the following at June 30, 2003, December 31, 2002
and 2001:
JUNE 30, DECEMBER 31,
--------------------
2003 2002 2001
(UNAUDITED)
Raw materials and supplies $ 17,758 $ 14,870 $ 11,265
Finished products 27,097 19,875 18,333
--------- --------- ---------
Total $ 44,855 $ 34,745 $ 29,598
========= ========= =========
F-12
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
3. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following at December 31,
2002 and 2001:
DECEMBER 31,
------------
2002 2001
Land and improvements $ 2,129 $ 2,103
Buildings and improvements 9,452 9,279
Machinery, equipment, tooling and dies 39,370 38,497
Furniture, fixtures and office equipment 2,863 2,448
Construction in progress 1,452 624
--------- ---------
55,266 52,951
Less: accumulated depreciation and amortization (28,853) (25,009)
---------- ----------
Total $ 26,413 $ 27,942
========= =========
4. DEFERRED CHARGES AND OTHER INTANGIBLE ASSETS
Deferred charges and other intangible assets consist of the following at
December 31, 2002 and 2001:
DECEMBER 31,
------------
2002 2001
Financing charges $ 113 $ 286
Technology agreement licenses 1,194 1,194
Patents and trademarks 2,527 2,508
--------- ---------
3,834 3,988
Less: accumulated amortization (1,311) (1,328)
---------- ----------
Total $ 2,523 $ 2,660
========= =========
At December 31, 2002, amortization expense of definite lived intangibles
for the next five years will be as follows: 2003, $217; 2004, $199; 2005,
$170; 2006, $162; 2007, $162.
During 2001, the Company wrote-off its remaining goodwill from
acquisitions after reviewing recent events and circumstances. The Company
recorded an impairment charge of $1,511. This impairment charge is
included in selling, general and administrative expenses in the 2001
Consolidated Statement of Operations. Goodwill amortization expense
included in the Company's results of operations during 2000 was $67.
5. EMPLOYEE LOANS
The Company has made interest free mortgage loans to employees upon
relocation aggregating $126 and $201 which are included in other assets on
the Company's consolidated balance sheets at December 31, 2002 and 2001,
respectively. Repayment terms range from 5 to 25 years and the mortgages
are generally collateralized by the value of the underlying assets.
Mortgage loans taken
F-13
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
out personally by employees of GBPL, as a result of relocation, are
guaranteed by Holdings and aggregate $17 and $29 at December 31, 2002 and
2001, respectively. The Company has agreed to pay the interest expense
related to these loans on behalf of the employees.
6. FINANCING ARRANGEMENTS
Balances outstanding on financing agreements consist of the following at
December 31, 2002 and 2001:
DECEMBER 31,
2002 2001
GBPI Revolving Credit Facility $ 13,223 $ 6,408
GBPL Revolving Credit Facility 2,231 14,320
GBPL Term Loan 5,758 6,773
--------- ---------
21,212 27,501
Less: current portions (7,222) (5,702)
---------- ----------
Long-term portions $ 13,990 $ 21,799
========= =========
Aggregate maturities of financing arrangements at December 31, 2002 are
as follows:
2003 $ 7,222
2004 915
2005 13,075
---------
Total $21,212
=========
Total interest paid on the above financing arrangements totaled $2,371,
$4,609 and $5,010 in 2002, 2001 and 2000, respectively.
At December 31, 2002 and 2001, management intended to finance future
accounts receivable and inventories for more than one year, and estimated
that the amount of borrowings under its revolving credit facilities
classified as long-term which amounts would not exceed the eligible
collateral at any time during the period.
The credit agreements contain various covenants that, among other things,
limit the Company's ability to incur debt, pay dividends and exceed a
capital expenditure level of $5,500; specifies minimum levels of
consolidated adjusted tangible net worth on a monthly basis ($16,000 at
December 31, 2002) and a fixed charge coverage ratio of 1.1 to 1.0. The
credit agreements are subject to early termination fees.
GBPI Revolving Credit Facility
The facility provides up to $30 million on the revolving credit facility
and extends through April 2005. Borrowings under this commitment contain
interest pricing options of prime plus 0.25% (prime 4.25% at December 31,
2002) or LIBOR plus 2.50% (LIBOR 1.38% at December 31, 2002). The Company
is obligated to pay a commitment fee of 0.375% per annum on the sum of the
average daily unused portion of the revolving credit commitment. The
weighted average interest rate paid on this facility during 2002 was
5.34%. GBPI may borrow revolving credit loans from time to time in an
aggregate amount not to exceed the lesser of: (a) $30 million or (b) the
sum of 85% of all
F-14
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
eligible accounts receivable and the value of 60% of all eligible
inventories of GBPI calculated from time to time as provided therein and
subjected to certain limitations. The revolving credit facility allows for
issuance of letters of credit which are also attributable to the same
collateral base. At December 31, 2002 and 2001, the Company had letters of
credit outstanding of $1,236 and $1,122, respectively. At December 31,
2002, there was $6,437 of unused revolving credit commitment available.
The GBPI Credit Agreement is collateralized by a pledge of 65% of the
outstanding stock of GBPL and substantially all the assets of GBPI and is
guaranteed by Holdings.
GBPL Credit Facility
GBPL has a credit agreement with the same financial institution as GBPI.
The terms of the credit facility are as follows:
Revolving Credit Facility - This commitment of $28.6 million extends
through April 2005. Borrowings under this commitment contain interest
pricing options of Canadian prime plus 0.75% (Canadian prime 4.50% at
December 31, 2002) and Bankers Acceptance Note Rate plus 2.50% (Bankers
Acceptance Note Rate 2.83% at December 31, 2002). The Company is obligated
to pay a commitment fee of 0.375% per annum on the sum of the average
daily unused portion of the revolving credit commitment. The weighted
average interest rate paid on this facility during 2002 was 5.49%. GBPL
was able to borrow revolving credit loans from time to time in an
aggregate amount not to exceed the lesser of (a) $28.6 million or (b) the
sum of 85% of all eligible accounts receivable and the value of 65% of all
eligible inventories of GBPL calculated from time to time as provided
therein and subject to certain limitations. At December 31, 2002, there
was $16,780 of unused revolving credit commitment available.
Term Loan - Principal was payable in monthly installments of $77 plus
interest through April 2005 with the balance due at that time. Borrowings
under the term loan contain interest pricing options of Canadian prime
plus 1.0% and Bankers Acceptance Note Rate plus 3.0%.
GBPL had available an additional term facility not to exceed $3.2 million
to finance capital expenditures. No amounts have been borrowed on this
facility to date.
The GBPL Credit Agreement is collateralized by the pledge of 35% of the
outstanding stock of GBPL as well as substantially all the assets of GBPL
and is guaranteed by GBPI and Holdings.
Subordinated Note Payable
GBPI maintained a $15 million note agreement with Alcan ("Alcan Note")
that was due on July 17, 2002. On December 21, 2001, the Company entered
into a payoff agreement with Alcan for a lump-sum settlement of the
outstanding note and all remaining accrued interest. As a result of this
lump-sum settlement, the Company recognized a gain on the extinguishment
of the debt in the amount of $6,985 net of fees of $515. In April, 2002,
the FASB issued SFAS No. 145 "Rescission of FASB Statements No. 4, 44, and
64, Amendment of FASB Statement No. 13, and Technical Corrections" which
required the Company to record the extinguishment of debt as income from
continuing operations. In accordance with SFAS 145, this gain on the
extinguishment of debt was reclassified on the 2001 consolidated statement
of operations and comprehensive income (loss) to conform to the new
pronouncement.
7. EMPLOYEE BENEFIT PLANS
Pension
The Company has contributory and noncontributory defined benefit pension
eligible employees. The Company maintains a number of hourly retirement
plans resulting from collective bargaining
F-15
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
agreements covering active and retired employees associated with the
respective bargaining agreements. In addition, the Company maintains a
plan for salaried and non-union hourly employees in Canada ("Canadian
Pension Plan"). Benefits under the hourly plans are generally based on
various monthly amounts for each year of credited service. Under the
Canadian Pension Plan, benefits are generally based on the employee's
compensation during the three years prior to retirement.
In general, the Company's policy is to fund these plans based on legal
requirements, tax considerations, local practices and investment
opportunities. The components of pension expense for all defined benefit
plans are as follows for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Benefit cost $ 916 $ 522 $ 195
Employer contributions 1,153 784 657
Benefits paid 621 978 372
Significant plan assumptions for 2002, 2001 and 2000 include the
following: (1) the discount rates used for plans in 2002 was 6.75%, ranged
from 7.40% to 7.00% in 2001 and ranged from 7.75% to 7.2% in 2000; (2) the
expected long-term rate of return ranged from 9.0% to 8.75%; and (3) the
expected rate of salaried compensation increases for all plans was 3.5%.
Plan assets consist primarily of listed common stocks and corporate and
government bonds. The following table sets forth the plans' combined
funded status accounted for using SFAS No. 87, "Employers Accounting for
Pensions" and the amounts recognized in the Company's Consolidated
Financial Statements at December 31, 2002 and 2001:
2002 2001
---- ----
Plan assets at fair value $ 18,529 $ 19,315
Projected benefit obligation 25,039 21,566
--------- ---------
Net pension liability $ (6,510) $ (2,251)
========== ==========
In accordance with SFAS No. 87, the Company recorded in 2002 and 2001 a
minimum pension liability for plans where the accumulated benefit
obligation exceeded the fair value of plan assets. Additional liabilities
of $3,413 and $1,010 were reflected in other liabilities at December 31,
2002 and 2001 respectively. Corresponding amounts of $1,119 and $364
related to unrecognized prior service costs were also reflected as prepaid
assets at December 31, 2002 and 2001, respectively. Reductions to
shareholders' equity, net of income tax effects, of $1,895, $190 and $413
were recorded in 2002, 2001 and 2000, respectively, as a result of the
additional minimum liability adjustments.
The Company has contributory incentive savings plans covering all
full-time salaried and non-union hourly employees. Under the plans, U.S.
participants may make voluntary contributions from 1% to 16% of annual
compensation and Canadian participants can make unlimited contributions.
The Company contributes fifty to seventy cents, depending on the
participant's level of continuous service, for each dollar of participant
contribution up to 6% in the U.S. and up to 4% in Canada, of employee
compensation. Company contributions are subject to statutory limitations
in the U.S. During 2002, 2001 and 2000, GBPI and GBPL contributed $469,
$407 and $509, respectively, in the form of matching contributions to
these plans. GBPI committed to fund additional voluntary contributions of
$357, $471 and $145 during 2002, 2001 and 2000, respectively. Additional
voluntary contributions are funded in the following year.
F-16
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
Other Post Employment Benefits
The Company provides postretirement medical and life insurance benefits to
certain retirees and eligible dependents for U.S. employees of the
Company. GBPL has similar plans for retirees; however, most retirees are
covered by government-sponsored programs. The medical plan is
contributory, with retiree contributions adjusted periodically. The plans
are not funded and pay reasonable and customary charges for medically
necessary expenses incurred by retirees, after stated deductibles have
been met. The Company has reserved the right to change or eliminate these
benefit plans. In 1999, the GBPI Plan was amended to cancel benefits to
certain classes of former employees. A gain of $1.6 million resulted which
is being amortized over 5.5 years.
Postretirement benefit costs include the following components for the
years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
Benefit income $ (395) $ (297) $ (344)
Employer contributions (121) (117) (114)
Employee contributions (28) (32) (27)
Benefits paid 149 149 141
The following reconciles the Company's combined funded status to amounts
recognized in the Company's Consolidated Balance Sheet at December 31,
2002 and 2001:
2002 2001
Accumulated postretirement benefit $ 1,177 $ 1,691
Plan assets at fair value - -
--------- --------
Accrued post retirement benefit costs $ 1,177 $ 1,691
========= =========
For measurement purposes, a graded 4.85% annual rate of increase in the
general inflation of covered benefits (i.e., health care cost trend rate)
was assumed for 2002 and 2001. The health care cost trend rate assumption
has a significant effect on the amount reported. To illustrate, increasing
the assumed health care cost trend rate by 1% each year would increase the
accumulated postretirement benefit obligation as of December 31, 2002 by
$2 and the aggregate of the services and interest cost components of net
periodic postretirement benefit cost by an immaterial amount. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 6.75% and 7.4% at December 31, 2002 and 2001,
respectively.
F-17
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
8. LEASES
The Company leases various facilities, machinery and equipment and
vehicles under noncancelable operating lease agreements. Several of these
leases are subject to renewal options under various terms.
Minimum rental commitments are summarized under the agreement and are as
follows:
2003 $ 5,783
2004 4,892
2005 3,940
2006 2,890
2007 2,396
Thereafter 5,930
---------
Total minimum payments $ 25,831
=========
Operating lease payments aggregated $6,846, $6,764 and $6,492 in 2002,
2001 and 2000, respectively.
9. INCOME TAXES
The Company's income tax expense (benefit) consists of the following
components for the years ended December 31:
2002 2001 2000
Current income tax expense:
U.S.:
Federal $ (200) $ 200 $ -
State - - -
Canada 3,265 1,860 1,117
--------- --------- ---------
3,065 2,060 1,117
Deferred income tax benefit:
U.S.:
Federal - - -
State - - -
Canada (375) (410) 886
--------- --------- ---------
(375) (410) 886
--------- --------- ---------
$ 2,690 $ 1,650 $ 2,003
========= ========= =========
F-18
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
A reconciliation of the income tax expense (benefit) compared with the
U.S. statutory tax rate of 34% for the years ended December 31, is as
follows:
2002 2001 2000
Tax provision at U.S. Statutory Rate $ 4,033 $ 3,309 $ (167)
State and local taxes, net of Federal benefit 151 224 (127)
Deferred tax valuation allowance (1,565) (1,934) 1,982
Foreign rate differential (26) (75) 189
Nondeductible expenses 97 126 126
--------- --------- ---------
Income tax expense (benefit) $ 2,690 $ 1,650 $ 2,003
========= ========= =========
For the six months ended June 30, 2003 and 2002 the actual income tax
expense is different than the expected income tax expense (based on the
Federal U.S. tax rate of 34%) due to differences in foreign and
provisional rates and no income tax expense (benefit) being recorded for
U.S. purposes due to the full valuation allowance recorded against the net
U.S. deferred tax asset.
At December 31, 2002, Holdings has consolidated U.S. operating loss
carryforwards of approximately $11,787, which are available to offset
future taxable income. The income tax carryforwards begin to expire in
2012.
During 2000, the Company utilized the remaining foreign operating loss
carryforwards related to GBPL.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes and the
benefits of existing operating loss carryforwards.
F-19
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
At December 31, 2002 and 2001, the components of the net deferred tax
assets (liabilities) are as follows:
2002 2001
Deferred tax assets:
Accounts receivable $ 493 $ 565
Inventory 216 233
Pension 726 138
Post retirement benefits 437 642
Product warranty 4,055 4,140
Accrued expenses 391 406
Employee benefits 511 649
Operating loss carryforwards 3,931 5,503
Deferred tax valuation allowance (7,906) (9,471)
---------- ----------
Total deferred tax assets 2,854 2,805
--------- ---------
Deferred tax liabilities:
Property, plant and equipment 3,271 3,767
Intangibles 879 932
--------- ---------
Total deferred tax liabilities 4,150 4,699
--------- ---------
Net deferred tax liability $ 1,296 $ 1,894
========= =========
At December 31, 2002 and 2001, GBPI has recorded a valuation allowance of
$7,906 and $9,471 respectively, related to all of its U.S. net deferred
tax assets as it has been deemed more likely than not based on the weight
of available evidence that these U.S. net deferred tax assets will not be
realized.
Income taxes paid for the year ended December 31, 2002, 2001 and 2000
totaled $2,661, $1,515 and $727, respectively.
10. STOCKHOLDERS' EQUITY
The Class A common shares which are fully paid can be converted to Class B
common shares on a one-to-one basis and/or Class C common shares which are
fully paid can be converted to Class D common shares on a one-to-one
basis, except that conversions are not allowable if no respective shares
of Class A and/or Class C shares would be issued and outstanding after the
conversion. Authorized and unissued shares of Class B and Class D common
shares are required to be reserved sufficient to effect the respective
conversions and any Class A and/or Class C common shares. Converted shares
must be canceled and may not be reissued. Subject to the Company's credit
facilities (Note 6), dividends are permitted as long as equal dividends
are declared and paid for each class.
In connection with the formation of predecessor Holdings, certain
management investors, subscribed for 31,543 Class A common shares of
Holdings for $631 and subscribed for 2,178 Class A restricted common
shares of Holdings and options to purchase 4,532 Class A restricted common
shares which were accepted by Holdings. Holdings committed to and
contributed the proceeds from the sale of these Class A common shares,
restricted shares and options to predecessor GBPI
F-20
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
in the form of an additional capital contribution upon the receipt of the
proceeds from the management investors.
All classes of Common Stock are subject to the terms of a Stockholder
Agreement as well as a Management Investors Agreement and an Institutional
Investor Agreement, as appropriate. These Agreements contain certain
covenants and restrict the transfer of the different classes of common
stock to varying degrees. In the event an employee ceases to be employed
by the Company, or desires to sell his/her common shares, the Company has
the option to purchase the shares subject to certain rights of first
refusal.
In 1997 the Board of Directors approved the establishment of the 1997
Amended and Restated Equity Incentive Plan ("Incentive Plan"). Under the
Incentive Plan, 111,670 shares of the Company's Class A or Class B common
shares are available for issuance under the Company's stock option
agreements. The Company also agreed to assume certain stock option
agreements of predecessor Holdings, which aggregated 26,230 shares of
Class A common shares. These predecessor options, to the extent they
expire or are forfeited, increase the number of options available under
the Incentive Plan.
Incentive options outstanding were granted at then fair market value and
vest over five-year periods. Options expire ten-years from their date of
grant subject to earlier termination in certain events related to
termination of employment. Upon the sale of the Company, all options vest
(Note 12).
The following summarizes the changes in the number of Class A common
shares under option for the years ended December 31, 2002, 2001 and 2000:
2002 2001 2000
---- ---- ----
AVERAGE AVERAGE AVERAGE
NUMBER EXERCISE NUMBER EXERCISE NUMBER EXERCISE
OF PRICE OF PRICE OF PRICE
OPTIONS (WHOLE OPTIONS (WHOLE OPTIONS (WHOLE
DOLLARS) DOLLARS) DOLLARS)
Options outstanding,
beginning of year 141,097 $ 9.68 141,097 $ 9.68 141,981 $ 9.68
Options granted during the year -- $ -- -- $ -- 250 $ 10.00
Options canceled during the year (1,851) $ 10.00 -- $ -- (1,134) $ 10.00
------- ------- -------
Options outstanding, end of the year 139,246 $ 9.67 141,097 $ 9.68 141,097 $ 9.68
======= ======= =======
Options exercisable, end of the year 123,766 $ 9.63 105,657 $ 9.57 75,656 $ 9.41
======= ======= =======
Options available for grant,
end of the year 3,186 1,335 1,335
======= ======= =======
11. COMMITMENTS AND CONTINGENCIES
General
Various claims, lawsuits, and complaints arising in the ordinary course of
business have been filed or are pending against the Company or may arise
in the future involving allegations of negligence, product defects, and
breach of warranty, among other allegations. Some of the foregoing matters
involve or may involve compensatory or punitive damages in large amounts.
Litigation is subject to many uncertainties, the outcome of individual
litigated matters is not predictable with assurance, and it is possible
that some of the foregoing matters could be decided unfavorably to the
Company. Although the liability, if any, associated with these matters was
not determinable at December 31, 2002, it is the opinion of management of
the Company that all such matters are either indemnified by the
predecessor companies or adequately accrued for or are adequately covered
by insurance
F-21
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
or, if not so covered, are without merit or are of such kind, or involved
such amounts, as would not have a significant effect on the consolidated
financial position, results of the operations or cash flows of the Company
if disposed of unfavorably.
Management Advisory Agreement
Genstar Investment Corporation ("GIC"), a stockholders representation
group, entered into a management advisory agreement with Holdings and GBPI
whereby GIC was retained as a management and corporate consultant. Fees
under the agreement are $500 per annum, and may only be paid if the
Company's fixed charge coverage, as defined in its bank financing
agreement (Note 6), is at least 1:1. In May 2001, the bank allowed a
one-time payment of accrued fees in the amount of $1,250 in 2001. At
December 31, 2002 and 2001, $125 of such fees were accrued and unpaid.
Amounts not paid when due bear interest at 10% per annum. This agreement
is through December 15, 2004 (Note 12).
Indemnification Agreement
In conjunction with a stock purchase agreement ("Stock Purchase
Agreement") with Amerimax to sell the Fabral Division (a previous division
of the Company) in 1997, Holdings and GBPI have agreed to jointly and
severally indemnify Amerimax with respect to liabilities and related
matters resulting from or arising out of (1) any transfer of assets or
liabilities, (2) certain product warranty obligations of predecessor GBPI
or (3) breach or misrepresentation of certain responsibilities and
warranties in the Stock Purchase Agreement. Subject to certain conditions,
the product warranty indemnification excludes de-minimus claims and the
first four claims under $25. The breach of certain representations and
warranties are only indemnified to the extent claims for such breach
exceeds $25 for any single claim and $300 in the aggregate.
Other Agreement
The Company has, subject to certain restrictions, and covenants, 30 year
royalty-free, non-exclusive and non-transferable technology licenses to
use the Alcan direct coater and strip deburring unit to manufacture, sell
and distribute products in the United States and Canada with restrictions
for export usage.
Warranty Matters
As discussed in Note 1, the Company provides various warranties to end-use
consumers of its manufactured products. During 2000, the Company incurred
a significantly higher incidence of steel siding warranty claims and
costs. These claims were primarily the result of failures related to
certain colors of polyvinyl-coated steel siding products which occurred in
areas exposed to a combination of high heat and solar radiation conditions
and which to date have been isolated to a certain period of production
years. Based on extensive laboratory analysis and investigations,
management feels it has significant evidence to support that the coating
failures relate to improperly formulated materials provided by its coating
supplier.
Annually, management examines existing claims data and determines, with
the assistance of an independent actuary, the amount of the estimated
liability necessary to cover these estimated future claims. At December
31, 2002, the estimated future costs ranged from $3,200 to $9,800. Charges
to operations aggregated $2,414 (unaudited) for the six months ended June
30, 2003 and $546, $4,200, and $1,400 for the years ended December 31,
2002, 2001 and 2000, respectively. Liabilities of $3,200 and $4,200 were
recorded at December 31, 2002 and 2001, respectively. Through June 30,
2003, total claims costs of $5,753 (unaudited) have been paid.
During 2001, management attempted to negotiate a financial resolution with
its coating supplier without success. As a result, the Company filed suit
against the supplier. The matter is in discovery stages. While management
believes that the facts it has accumulated support the position that the
warranty claims being incurred are a direct result of the faulty
poly-vinyl coatings provided by the Company's supplier, no gains have been
recorded due to the uncertainty of the
F-22
GENTEK HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS (IN THOUSANDS OF DOLLARS)
- --------------------------------------------------------------------------------
outcome of the litigation. The Company incurred expenses of $435
(unaudited) for the six months ended June 30, 2003 and $492, $360 and $0
for the year ended December 31, 2002, 2001 and 2000, respectively related
to investigation of the coating failures and litigation.
Other
At December 31, 2002, the Company is obligated to purchase certain
machinery at a cost of $1,248, net of deposits made of $647.
The Company enters into arrangements with key material producers for the
supply of certain raw materials used in production. These arrangements
provide for purchasing terms and conditions and include variable pricing
formulas which are generally tied to published market indexes. Durations
for these arrangements range from one to three years.
12. SUBSEQUENT EVENTS (UNAUDITED)
On August 29, 2003, Associated Materials Incorporated ("Associated
Materials") acquired all of the issued and outstanding shares of capital
stock and repaid the credit facilities and term note of Holdings for an
aggregate purchase price of approximately $112.1 million in cash, which
includes a working capital adjustment. All of the Company's stock options
(Note 10) vested upon the closing of the acquisition and each option
holder's options were exchanged for the option's then fair value, the
equivalent value of an outstanding share of capital stock at the time of
the transaction. The GIC management advisory agreement (Note 11) was
terminated in conjunction with the acquisition.
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