<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934.
For the quarterly period ended June 30, 1999
Commission File Number: 333-70011
GEO SPECIALTY CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
Ohio 34-1708689
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
GEO Specialty Chemicals, Inc.
28601 Chagrin Boulevard, Suite 210
Cleveland, Ohio 44122
(Address, including Zip Code, of Principal Executive Offices)
(216) 464-5564
(Registrant's Telephone Number, including Area Code)
Indicate by check mark whether the registrant: (l) has filed all
reports required to be filed by Section 13 or l5(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Shares of Class A Voting Common Stock, $1.00 par value, as of August
16, 1999: 135.835
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of
August 16, 1999: none
===========================================================================
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 7,786 $ 1,645
Trade accounts receivable, net 21,083 19,612
Other receivables 1,916 1,303
Inventory 9,960 9,476
Prepaid expenses & other current assets 950 792
Deferred taxes 576 418
---------- ----------
Total current assets 42,271 33,246
Property and equipment, net 91,610 92,669
Other assets
Intangible assets, net 5,356 5,614
Goodwill, net 30,466 31,743
Other accounts receivable 527 589
Other 548 664
---------- ----------
Total other assets 36,897 38,610
---------- ----------
Total assets $ 170,778 $ 164,525
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 0 $ 760
Accounts payable 12,477 7,564
Other accounts payable 662 448
Accrued expenses & other current
liabilities 8,153 7,664
---------- ----------
Total current liabilities 21,292 16,436
Long-term liabilities
Revolving line of credit 0 0
Long-term debt 120,000 120,000
Other long-term liabilities 4,130 4,196
Other accounts payable 903 580
Deferred taxes 2,113 1,471
---------- ----------
Total long-term liabilities 127,147 126,247
Total liabilities $ 148,439 $ 142,683
</TABLE>
See accompanying notes to financial statements.
<PAGE> 3
<TABLE>
<CAPTION>
(IN THOUSANDS)
JUNE 30, 1999 DECEMBER 31, 1998
------------- -----------------
<S> <C> <C>
Shareholders' Equity
Class A Voting Common Stock, $1 par
value, 1,035 shares
authorized, 136 shares
issued and outstanding at
June 30, 1999 and December 31, 1998
Class B Nonvoting Common Stock, $1
par value, 205 shares authorized, 0 shares
outstanding at June 30, 1999 and
December 31, 1998
Additional paid-in capital 20,901 20,901
Retained earnings 1,438 941
---------- ----------
Total shareholders' equity $ 22,339 $ 21,842
Total liabilities and shareholders' equity $ 170,778 $ 164,525
========== ==========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 4
STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS)
APRIL 1 THROUGH APRIL 1 THROUGH JAN. 1 THROUGH JAN. 1 THROUGH
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 36,352 $ 29,226 $ 70,546 $ 59,431
Cost of sales 27,408 23,919 54,036 48,856
-------- -------- -------- --------
Gross profit 8,944 5,307 16,510 10,575
Selling, general & administrative expenses 4,933 3,018 9,339 5,884
-------- -------- -------- --------
Income from operations 4,011 2,289 7,171 4,691
Other expense
Net interest expense (3,069) (1,495) (6,155) (2,889)
Other (28) (14) (33) (34)
Income before taxes 914 780 983 1,768
Provision for taxes (426) (267) (486) (583)
-------- -------- -------- --------
Net income $ 488 $ 513 $ 497 $ 1,185
======== ======== ======== ========
</TABLE>
See accompanying notes to financial statements.
<PAGE> 5
STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS)
JAN. 1 THROUGH JAN. 1 THROUGH APRIL 1 THROUGH APRIL 1 THROUGH
JUNE 30, 1999 JUNE 30, 1998 JUNE 30, 1999 JUNE 30, 1998
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities
Net income $ 497 $ 1,185 $ 488 $ 513
Adjustments to reconcile net income
to net cash from operating activities
Depreciation, depletion and amortization 5,249 3,156 2,628 1,594
Deferred income tax expense 485 0 425 0
Change in assets and liabilities
Trade accounts receivable (1,471) (1,510) (403) 1,246
Other accounts receivable (613) 102 (353) 136
Inventories (485) 374 (1,838) 627
Prepaid expenses and other assets (95) (250) (264) (112)
Accounts payable & accrued expenses 5,373 (1,719) 5,163 (6)
Other accounts payable 500 (245) 500 (245)
Other liabilities 0 0 56 0
------- ------- ------ ------
Net cash from operating activities 9,440 1,093 6,402 3,753
Cash flows from investing activities
Purchases of property, plant and equipment (2,500) (2,457) (1,114) (1,208)
Cash flows from financing activities
Revolving lines of credit borrowings
(payments), net 0 3,360 0 (640)
Proceeds from bank borrowing 0 0 0 775
Payments made on long-term borrowing (760) (1,400) (760) (1,400)
Payments on deferred financing costs (39) 0 25 0
------- ------- ------ ------
Net cash from financing activities (799) 1,960 (735) (1,265)
Net change in cash 6,141 596 4,553 1,280
Cash at beginning of period 1,645 696 3,233 12
------- ------- ------ ------
Cash at end of period 7,786 1,292 7,786 1,292
======= ======= ====== ======
Supplemental disclosure of cash flow
Information
Cash paid for
Interest (net of interest earned) $ 6,220 $ 2,847 $ 118 $ 1,420
Taxes 0 440 0 300
</TABLE>
See accompanying notes to financial statements.
<PAGE> 6
GEO SPECIALTY CHEMICALS, INC.
NOTES TO FINANCIAL STATEMENTS
(IN THOUSANDS)
NOTE 1 -- NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: GEO Specialty Chemicals, Inc. was incorporated in
the state of Ohio for the purpose of owning and operating specialty chemical
businesses. GEO produces a variety of specialty chemical products for use in
various major chemical markets. GEO produces more than 300 products which are
used primarily in the construction, paper, water treatment and oil field
industries. GEO sells these products to customers located throughout the United
States and in some European markets.
GEO operates in an environment with many financial and operating risks,
including, but not limited to, intense competition, fluctuations in cost and
supply of raw materials, technological changes, and environmental matters.
INTERIM RESULTS (UNAUDITED): The accompanying balance sheet at June 30,
1999 and the statements of operations for the three and six month periods ended
June 30, 1999 and 1998 are unaudited. In the opinion of management, these
statements have been prepared on the same basis as the audited financial
statements and include all adjustments, consisting of only normal recurring
adjustments, necessary for the fair presentation of the results of the interim
periods. The data disclosed in these notes to the financial statements for those
interim periods are also unaudited. The results of operations for the three and
six month periods ended June 30, 1999 are not necessarily indicative of the
results expected for the full calendar year. Because all of the disclosures
required by generally accepted accounting principles are not included, these
interim statements should be read in conjunction with GEO's financial statements
for the year ended December 31, 1998, and the notes thereto, which are included
in GEO's Registration Statement on Form S-1 filed with, and declared effective
by, the Securities and Exchange Commission on May 14, 1999.
NOTE 2 -- ACQUISITIONS
On July 31, 1998, pursuant to an acquisition agreement dated June 29,
1998, GEO purchased substantially all of the assets of the TRIMET Technical
Products Division of Mallinckrodt Inc. from Mallinckrodt Inc. and its
affiliates. The TRIMET business produces specialty chemicals used primarily in
the coatings industry by customers located in the United States and Europe. The
contractual purchase price was $60,000, adjusted by $1,106 to reflect TRIMET's
actual working capital amount at closing. The acquisition has been accounted for
as a purchase and, accordingly, the results of operations of TRIMET have been
included in GEO's financial statements from the date of acquisition. The
purchase price has been allocated to the assets acquired based upon fair values
using independent appraisals.
NOTE 3 -- INVENTORIES
Inventories consist of the following components:
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998
-------- ------------
<S> <C> <C>
Raw materials.................................. $ 4,523 $ 3,065
Work in progress............................... 69 341
Finished goods................................. 5,368 6,070
--------- ---------
$ 9,960 $ 9,476
========= =========
</TABLE>
<PAGE> 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
On July 31, 1998, GEO acquired the TRIMET Technical Products Division
of Mallinckrodt Inc. for approximately $61.1 million. To fund this acquisition
as well as to refinance GEO's existing indebtedness, GEO issued $120.0 million
of 10 1/8% Senior Subordinated Notes and issued additional Common Stock for $6.0
million. As a result of this refinancing, GEO did not have any senior secured
indebtedness as of June 30, 1999. The impact of the refinancing on GEO's balance
sheet as of June 30, 1999 compared to GEO's balance sheet as of June 30, 1998
was increases in Senior Subordinated Notes of $120.0 million and shareholders'
equity of $6.0 million, a decrease in senior term loans of $57.2 million, of
which $3.6 million was due within twelve months, and a decrease in the balance
of the senior revolving credit facility of $7.0 million. As of June 30, 1999,
GEO had $25.0 million available under its new senior revolving credit facility.
RESULTS OF OPERATIONS
The following table sets forth certain operations data for GEO
expressed in millions of dollars and as a percentage of net sales for the
respective period.
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
$ % $ % $ % $ %
------- ----- ------- ------ ------- ------ ------- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 36.4 100.0% $ 29.2 100.0% $ 70.5 100.0% $ 59.4 100.0%
Gross profit 8.9 24.6 5.3 18.2 16.5 23.4 10.6 17.8
Operating income 4.0 11.0 2.3 7.8 7.2 10.2 4.7 7.9
Net income 0.5 1.5 0.5 1.8 0.5 0.7 1.2 2.0
EBITDA 6.7 18.3 3.9 13.4 12.4 17.6 7.9 13.3
Net interest expense 3.1 8.4 1.5 5.1 6.2 8.8 2.9 4.9
Capital expenditures 1.1 3.1 1.2 4.1 2.5 3.5 2.5 4.1
</TABLE>
THREE MONTHS ENDED JUNE 30, 1999 COMPARED TO THREE MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales for the three months ended June 30, 1999 were
$36.4 million, representing a $7.1 million or 24.4% increase compared to net
sales of $29.2 million during the same period in 1998. The increase was
attributable to the TRIMET acquisition which added $7.7 million in net sales.
Excluding the impact of the TRIMET acquisition, net sales were lower by $0.6
million, of which $0.5 million was attributable to decreased sales to the paper
industry.
Gross Profit. Gross profit for the three months ended June 30, 1999 was
$8.9 million, or 24.6% of net sales, representing a $3.6 million or 68.5%
increase compared to a gross profit of $5.3 million, or 18.2% of net sales,
during the same period in 1998. The TRIMET business contributed $2.8 million of
the increase. The remainder of the increase in gross profit was attributable to
improved variable margins associated with the TRIMET acquisition, resulting from
lower raw material costs and a more favorable product mix.
<PAGE> 8
Operating Income. Operating income for the three months ended June 30,
1999 was $4.0 million, or 11.0% of net sales, representing a $1.7 million or
75.2% increase compared to operating income of $2.3 million, or 7.8% of net
sales, during the same period in 1998. The increase in operating income was
primarily attributable to the contribution of the TRIMET business, net of
additional amortization of goodwill and other long-term assets associated with
the TRIMET acquisition.
Net Income. Net income for the three months ended June 30, 1999 was
$0.5 million, or 1.5% of net sales, representing no change in net income
compared to the same period in 1998 when net income was $0.5 million, or 1.8% of
net sales. The lack of change was attributable to an increased interest expense
of $1.6 million and slightly increased taxes of $0.1 million.
EBITDA. EBITDA for the three month period ended June 30, 1999 was $6.7
million, or 18.3% of net sales, representing $2.8 million or 71.8% increase
compared to EBITDA of $3.9 million, or 13.4% of net sales, during the same
period in 1998. The TRIMET acquisition contributed $2.6 million of the increase
and the remainder of the increase was attributable to improved variable margin
contributions resulting from lower raw material costs and a more favorable
product mix.
Net Interest Expense. Net interest expense for the three months ended
June 30, 1999 was $3.1 million, or 8.4% of net sales, representing a $1.6
million or 106.7% increase compared to a net interest expense of $1.5 million,
or 5.1% of net sales, during the same period in 1998. The increase in net
interest expense was attributable to additional indebtedness related to the
TRIMET acquisition and higher interest rates on GEO's 10 1/8% Senior
Subordinated Notes.
SIX MONTHS ENDED JUNE 30, 1999 COMPARED TO SIX MONTHS ENDED JUNE 30, 1998
Net Sales. Net sales for the six months ended June 30, 1999 were $70.5
million, representing a $11.1 million or 18.7% increase compared to net sales of
$59.4 million during the same period in 1998. The increase in net sales was
attributable to the impact of the TRIMET acquisition which occurred on July 31,
1998. Net sales of the TRIMET group, which produces additives used in the
coatings and resins industries, were $15.5 million for the six months ended June
30, 1999. Excluding the impact of the TRIMET acquisition, GEO's net sales for
the six months ended June 30, 1999 declined by $4.4 million or 7.4% compared to
the same period in 1998. This decline in net sales was due to soft markets in
the paper and oil & gas industries, especially during the first quarter of 1999.
Gross Profit. Gross profit for the six months ended June 30, 1999 was
$16.5 million, or 23.4% of net sales, representing a $5.9 million or 55.7%
increase compared to a gross profit of $10.6 million, or 17.8% of net sales,
during the same period in 1998. The increase in gross profit was primarily
attributable to the TRIMET acquisition. The increase in gross margin as a
percent of net sales reflects the effect of: (a) lower raw material costs
experienced by all product groups, (b) improved product mix related to the
TRIMET products, and (c) slightly lower plant operating expenses excluding
the impact of the TRIMET acquisition.
Operating Income. Operating income for the six months ended June 30,
1999 was $7.2 million, or 10.2% of net sales, representing a $2.5 million or
53.2% increase compared to an operating income of $4.7 million, or 7.9% of net
sales, during the same period in 1998. The increase in operating income was
primarily attributable to the TRIMET acquisition. Operating income was
negatively impacted by (a) $1.2 million due to amortization of goodwill and
<PAGE> 9
intangible assets associated with the TRIMET acquisition and (b) a $0.6
million increase in selling, general and administrative expenses related to
the TRIMET business.
Net Income. Net income for the six months ended June 30, 1999 was $0.5
million, or 0.7% of net sales, representing a $0.7 million decline compared to
net income of $1.2 million, or 2.0% of net sales, during the same period in
1998. The decrease in net income was primarily due to a $3.3 million increase in
net interest expense reflecting the refinancing of GEO's senior debt in
connection with the TRIMET acquisition (i.e. additional net debt of $54.9
million and higher overall interest rate). Partially offsetting the higher
interest charges was a $0.1 million reduction in income taxes compared to the
same period in 1998 and a $2.5 million improvement in operating income.
EBITDA. EBITDA for the six months ended June 30, 1999 was $12.4
million, or 17.6% of net sales, representing a $4.5 million or 57.1% increase
compared to EBITDA of $7.9 million, or 13.3% of net sales, during the same
period in 1998. The increase in EBITDA was attributable to the TRIMET
acquisition, which generated $5.6 million in EBITDA during the first six months
of 1999. This increase was partially offset by the unfavorable impact of reduced
net sales to the paper and oil & gas industries as noted above.
Net Interest Expense. Net interest expense for the six months ended
June 30, 1999 was $6.2 million, or 8.8% of net sales, representing a $3.3
million or 113.8% increase compared to a net interest expense of $2.9 million,
or 4.9% of net sales, for the same period in 1998. The increase was due to the
additional debt incurred to fund the TRIMET acquisition and the higher borrowing
costs associated with GEO's 10 1/8% Senior Subordinated Notes.
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
GEO's primary cash needs are working capital, capital expenditures and
debt service. GEO has financed these needs from internally generated cash flow,
in addition to periodic draws on its existing senior revolving credit facility.
As of June 30, 1999, GEO had no material commitments for capital expenditures.
Capital expenditures during the three month period ended June 30, 1999
were $1.2 million, an increase of $0.1 million compared to capital expenditures
of $1.1 million during the same period in 1998. Capital expenditures for the six
months ended June 30, 1999 were $2.5 million, representing no increase from the
same period in 1998.
Net cash provided from operations for the second quarter of 1998 was
$3.8 million and for the second quarter of 1999 was $6.4 million. The $2.6
million improvement in net cash provided from operations was generated primarily
from the increase in accounts payable of $5.0 million and increased non-cash
costs of $1.0 million, which reflects the impact of the TRIMET acquisition.
Net cash provided from operation for the six months ended June 30, 1998
was $1.1 million and for the six months ended June 30, 1999 was $9.4 million.
The $8.3 million improvement in net cash provided from operations was generated
primarily from the increase in accounts payable of $7.1 million and increased
non-cash costs of $2.1 million, which reflects the impact of the TRIMET
acquisition.
In connection with the TRIMET acquisition, GEO refinanced its senior
debt by issuing $120.0 million of 10 1/8% Senior Subordinated Notes and amending
its credit facility to include $25.0 million of borrowing availability under a
new senior revolving credit facility. The $25.0 million amended credit facility
has a five year duration and no interim amortization requirements. As of June
30, 1999, GEO had no draws outstanding on the new senior revolving credit
facility.
GEO believes that cash generated from operations, together with amounts
available under its senior revolving credit facility, will be adequate to meet
its debt service requirements, capital expenditures and working capital needs
for the foreseeable future, although no assurance can be given in this regard.
"YEAR 2000" COMPLIANCE
Information Technology Systems. In May 1997, GEO initiated a program to
upgrade its information technology systems. The major components of this program
include enterprise level integrated applications software, communications
software and wide area network and server computers. These components were
acquired from leading vendors, including Digital Equipment Corporation, Oracle
Corporation, International Business Machines Corporation, Ross Systems, Inc. and
MCI Communications Corporation. Each purchased component was represented as
being "Year 2000" compliant. GEO plans to complete its information technology
systems upgrade by the middle of 1999 and will conduct further testing and
validation in late 1999. Since "Year 2000" compliance was a selection criteria
for all newly purchased information and auxiliary systems, GEO believes that
its information systems, which include its financial, manufacturing, and
distribution systems, and the majority of its auxiliary systems, which include
its labeling and quality control systems, are compliant. GEO has initiated a
program to upgrade its remaining auxiliary systems, which include its invoicing
and bar coding systems. GEO has upgraded its invoicing system by transferring
all invoicing functions to newly purchased systems which were represented as
being "Year 2000" compliant. GEO will continue testing its bar coding systems
during the third quarter of 1999 and will perform any necessary upgrades by the
end of September 1999.
<PAGE> 11
All of GEO's servers and associated operating systems are relatively
new and therefore believed to be "Year 2000" compliant. GEO anticipates that its
remaining systems will require ROM upgrades only. GEO plans to complete these
upgrades by the end of the third quarter of 1999. GEO also has engaged Compaq
Computer Corporation to perform "Year 2000" compliance assessments on all of its
Compaq and Digital Equipment Corporation servers during the third quarter of
1999. Although GEO plans to complete its information technology systems upgrade
according to this schedule, it can provide no assurance that the process will
occur without unexpected difficulty, delay or expense. GEO believes that it has
upgraded and tested approximately 75% of its information technology systems.
Non-Information Technology Systems. GEO believes that its
administrative/business applications are "Year 2000" compliant. In light of its
completed business/administrative project to upgrade selected non-"Year 2000"
compliant computers and convert all office automation tools to Microsoft Office
97 platform, GEO believes that it is "Year 2000" compliant in the area of office
automation. Approximately 40 personal computers purchased during 1997 required
software upgrades. GEO has accomplished 100% of these upgrades as of June 1999
as part of the office automation conversion project. Sixty computers were also
replaced as part of this project.
GEO's communication infrastructure is comprised of wide and local area
networks, which connect 19 locations, and local telephone hardware and service
providers. GEO has contacted local and wide area network service providers and
hardware vendors to determine any "Year 2000" issues. GEO has received responses
from all six of the vendors solicited. Three have responded that they are "Year
2000" compliant, one has responded that it will be compliant by the end of 1999,
and two have stated that the equipment that they have provided GEO will require
operating systems upgrades, which GEO plans to have completed by the middle of
the third quarter of 1999. GEO has also begun contacting all local telephone
service providers to determine their "Year 2000" readiness. To date, GEO has
contacted nineteen local telephone hardware and service providers. Eight have
responded that their equipment is "Year 2000" compliant and that their service
will be compliant by the end of 1999. GEO is soliciting follow-up responses from
the remaining eleven providers and will complete this inquiry by the end of the
third quarter of 1999. Any hardware or service provider that is not compliant
will be upgraded or replaced by the end of the third quarter of 1999.
GEO has conducted internal "Year 2000" compliance audits of its
manufacturing facilities and has found no technical infrastructure,
manufacturing and warehousing equipment or environmental systems that have the
potential to create business interruptions. Approximately 75% of the
non-compliant systems, such as phone systems and distribution control systems,
have been tested and upgraded. GEO engaged an outside consultant to verify the
results of the internal "Year 2000" compliance audit of its Cedartown, Allentown
and Harrison facilities, since these facilities have the most significant
financial impact on GEO. These evaluations were completed at the end of April
1999, and GEO received the results of these evaluations in late July 1999. Based
on these reports, GEO believes that such facilities are 100% compliant.
Third Party Communications. GEO is currently in the process of
soliciting written responses from all suppliers of products and transportation
services regarding their "Year 2000" readiness. The major chemical suppliers
have either recently converted to enterprise business software that is certified
to be compliant or have informed GEO that they will do so by the end of the
third quarter of 1999. GEO has solicited responses from the 61 most significant
raw material suppliers out of its 104 total raw material suppliers. GEO has also
solicited all 58 of its transportation service carriers. To date, GEO has
received 30 responses from its raw material suppliers and 21 responses from its
transportation service carriers. All respondents have indicated that they are
"Year 2000" compliant. GEO sent follow-up requests during the second quarter of
1999 to those suppliers and carriers who had not responded and has received a
response from a large percentage of this group. The responses are currently
being evaluated and will continue to be evaluated through the third quarter of
1999. GEO will arrange for alternative suppliers and carriers if necessary. GEO
has not conducted compliance audits of its utility service providers, including
its providers of electricity, natural gas and water. However, GEO has solicited
all of its utility service providers for "Year 2000" compliance and all of its
providers have responded with expectations of full compliance by December 1999.
<PAGE> 12
"Year 2000" Worst Case Scenario. GEO's worst case scenario with respect
to "Year 2000" issues is the loss of utility services at its manufacturing
facilities. GEO could adjust inventory levels to compensate for any
manufacturing interruption at all facilities except Allentown. The risk at
Allentown is that alternate manufacturers or manufacturing sites and/or capacity
increase projects may not be in place in time. Interruption of utility service
is a concern of GEO but, based on the "Year 2000" readiness efforts of the
utility companies that serve GEO, is not considered a significant risk.
"Year 2000" Expenditures. GEO's total "Year 2000" expenditures are
projected to be $0.2 million. Approximately $0.1 million has been spent
through June 1999, and the remaining $0.1 million is projected to be spent
during the remainder of 1999. The majority of these expenditures has been in the
form of upgrades to existing systems which were not "Year 2000" compliant.
FORWARD-LOOKING STATEMENTS
Certain statements contained in this report, including statements
containing the words "believes," "anticipates," "intends," "expects," "should,"
"may," "will," "continue" and "estimate," and similar words, constitute
"forward-looking statements" under the federal securities laws. These
forward-looking statements involve known and unknown risks, uncertainties and
other factors that may cause the actual results, performance or achievements of
GEO or its industry to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. Important factors that could cause actual results to differ
materially from GEO's expectations include the following: loss of key customers
or increased competitive pressures; changes in customer spending levels;
increases in interest rates or GEO's cost of borrowing or a default under any
material debt agreement; unavailability of funds for capital expenditures or
research and development; changes in governmental, environmental or other
regulations; or changes in general economic conditions. Given these
uncertainties, you should not place undue reliance upon such forward-looking
statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
The fair value of GEO's fixed rate long-term notes is sensitive to
changes in interest rates. Interest rate changes would result in gains/losses in
the fair value of the notes due to differences between the market interest rates
and rates at the date of the note's issuance. Based on a hypothetical immediate
100 basis point increase in interest rates at June 30, 1999, the fair value of
GEO's fixed rate long-term notes would be impacted by a net decrease of $10.4
million. Conversely, a 100 basis point decrease in interest rates would result
in a net increase in the fair value of GEO's fixed rate long-term notes at June
30, 1999 of $11.4 million.
GEO is subject to foreign currency exchange rate risk relating to
receipts from customers in foreign currencies. Less than 2% of receipts are
contracted with foreign currencies, and GEO does not consider the market risk
exposure relating to currency exchange to be material.
GEO is subject to commodity price risk relative to the purchase of
commodity chemicals as raw materials in its manufacturing processes. These raw
materials are generally available from several suppliers and are purchased under
agreements negotiated annually with two or more vendors per raw material.
Historically, GEO has been able to pass on price increases to its customers
within 90 to 120 days. Based upon GEO's agreements with multiple vendors and its
ability to pass along price increases, the exposure to commodity price risk is
not considered to be material.
<PAGE> 13
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION.
On August 6th, 1999 GEO entered into an agreement with Rhodia Chimie
S.A., the former chemical unit of the French multinational corporation,
Rhone-Poulenc, to purchase Rhodia's gallium extraction and purification business
for a purchase price of approximately 125,000,000 French francs, less
indebtedness for borrowed money of the acquired business. The business is
currently part of Rhodia's Rare Earth Division, and provides various grades of
gallium to the semi-conductor market for applications in optoelectronics (light
emitting diodes) systems and telecommunications.
The agreement contemplates a purchase of all of the issued capital
stock of a wholly owned French subsidiary of Rhodia which owns both the French
operating assets of the gallium purification business and the capital stock of a
German corporation that carries on gallium extraction operations in Stade,
Germany. GEO will also have an option to acquire from Rhodia an Australian
corporation owning a currently dormant gallium extraction facility near
Pinjarra, Australia. The agreement is subject to a number of customary
conditions to closing.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
27 Article 5 of Regulation S-X, Financial Data Schedule
(b) Reports on Form 8-K.
GEO filed no Current Reports on Form 8-K with the Securities
and Exchange Commission during the three month period ended June 30, 1999.
<PAGE> 14
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.
GEO SPECIALTY CHEMICALS, INC.
Date: August 16, 1999 By: /s/ William P. Eckman
---------------------------
William P. Eckman
Executive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET OF GEO SPECIALTY CHEMICALS, INC. AS OF JUNE 30, 1999
AND THE CONSOLIDATED STATEMENT OF INCOME FOR THE THREE MONTHS ENDED JUNE 30,
1999. EXCEPT FOR THE DATES AND PER SHARE DATA, ALL AMOUNTS ARE IN THOUSANDS
OF DOLLARS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> APR-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 7,786
<SECURITIES> 0
<RECEIVABLES> 21,425
<ALLOWANCES> 342
<INVENTORY> 9,960
<CURRENT-ASSETS> 42,271
<PP&E> 104,846
<DEPRECIATION> 13,236
<TOTAL-ASSETS> 170,778
<CURRENT-LIABILITIES> 21,292
<BONDS> 120,000
0
0
<COMMON> 0
<OTHER-SE> 22,339
<TOTAL-LIABILITY-AND-EQUITY> 170,778
<SALES> 36,352
<TOTAL-REVENUES> 36,352
<CGS> 27,408
<TOTAL-COSTS> 35,410
<OTHER-EXPENSES> 28
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,069
<INCOME-PRETAX> 914
<INCOME-TAX> 426
<INCOME-CONTINUING> 488
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 488
<EPS-BASIC> 3,588.2
<EPS-DILUTED> 3,588.2
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