<PAGE>
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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, 2000
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 14, 2000: 135.835.
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of
August 14, 2000: none.
================================================================================
<PAGE>
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, 2000 DECEMBER 31, 1999
------------- ------------------
(unaudited)
<S> <C> <C>
ASSETS
Current assets
Cash $ 4,821 $ 4,696
Trade accounts receivable, net of allowance 32,085 26,896
of $273 and $249 at June 30, 2000 and
December 31, 1999, respectively
Other receivables 1,129 1,619
Inventory 19,820 23,788
Prepaid expenses and other current assets 550 553
Deferred taxes 806 814
-------- --------
Total current assets 59,211 58,366
Property and equipment, net 95,443 96,628
Other assets
Intangible assets, net 5,661 6,099
Goodwill, net 35,130 36,515
Other accounts receivable 194 334
Other 222 224
-------- --------
Total other assets 41,207 43,172
-------- --------
Total assets $195,861 $198,166
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, 2000 DECEMBER 31, 1999
-------------- ------------------
(unaudited)
<S> <C> <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable $ 12,937 $ 14,085
Other accounts payable 225 2,386
Income taxes payable 664 604
Accrued expenses and other current
liabilities 8,892 8,927
-------- --------
Total current liabilities 22,718 26,002
Long-term liabilities
Revolving line of credit 24,000 23,000
Long-term debt 120,000 120,000
Other long-term liabilities 4,586 4,621
Other accounts payable 702 592
Deferred taxes 1,256 1,646
-------- --------
Total long-term liabilities 150,544 149,859
Total liabilities $173,262 $175,861
Shareholder's Equity
Class A Voting Common Stock, $1 par value,
1,035 shares authorized, 136 shares issued and
outstanding at June 30, 2000 and December 31, 1999
Class B Nonvoting Common Stock, $1 par value, 215
shares authorized, 0 shares outstanding at June
30, 2000 and December 31, 1999
Additional paid-in capital 20,901 20,901
Retained earnings 3,078 2,020
Accumulated other comprehensive loss (1,380) (616)
-------- --------
Total shareholders' equity $ 22,599 $ 22,305
Total liabilities and shareholders' equity $195,861 $198,166
======== ========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS)
APRIL 1 APRIL 1 JAN. 1 JAN. 1
THROUGH THROUGH THROUGH THROUGH
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Net sales $ 46,578 $ 36,352 $ 88,408 $ 70,546
Costs of sales 34,951 27,408 67,434 54,036
---------------------------------------------------------------------------------------------
Gross profit 11,627 8,944 20,974 16,510
Selling general and
administrative expenses 5,912 4,933 11,424 9,339
----------------------------------------------------------------------------------------------
Income from operations 5,715 4,011 9,550 7,171
Other expense
Net interest expense (3,813) (3,069) (7,547) (6,155)
Foreign currency exchange loss (167) 0 (419) 0
Other 0 (28) 0 (33)
---------------------------------------------------------------------------------------------
Income before taxes 1,735 914 1,584 983
Provision for taxes 547 426 526 486
--------------------------------------------------------------------------------------------
Net income $ 1,188 $ 488 $ 1,058 $ 497
============ ============= ============= =============
Total comprehensive income $ 1,104 $ 488 $ 294 $ 497
============ ============= ============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
<TABLE>
<CAPTION>
(IN THOUSANDS)
APRIL 1 APRIL 1 JAN 1 JAN 1
THROUGH THROUGH THROUGH THROUGH
JUNE 30, 2000 JUNE 30, 1999 JUNE 30, 2000 JUNE 30, 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Cash flows from operating activities $ 1,188 $ 488 $ 1,058 $ 497
Net income
Adjustments to reconcile net income
to net cash from operating activities
Depreciation, depletion and 3,542 2,628 6,641 5,249
amortization
Deferred income tax expense 9 425 (168) 485
Change in assets and liabilities
Trade accounts receivable (5,224) (403) (5,429) (1,471)
Other accounts receivable 198 (353) 621 (613)
Inventories 1,040 (1,838) 3,252 (485)
Prepaid expense and other assets 939 (264) 642 (95)
Accounts payable 1,266 5,163 (2,992) 5,373
Other liabilities (100) 556 (25) 500
------------- ------------- ------------- -------------
Net cash from operating activities 2,858 6,402 3,600 9,440
Cash flows from investing activities
Purchases of property, plant and
equipment (2,653) (1,114) (4,131) (2,500)
Acquisition of certain intangible assets
and equipment of Tetra Technologies Inc. 0 0 (250) 0
------------- ------------- ------------- -------------
Net cash flows from investing activities (2,653) (1,114) (4,381) (2,500)
Cash flows from financing activities
Borrowings (repayments) under
revolving line of credit (net) (5,000) (760) 1,000 (760)
Payments on deferred financing costs 0 25 0 (39)
------------- ------------- ------------- -------------
Net cash from financing activities (5,000) (735) 1,000 (799)
Effect of exchange rate changes on cash (45) 0 (94) 0
Net change in cash (4,840) 4,553 125 6,141
Cash at beginning of period 9,661 3,233 4,696 1,645
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C> <C> <C>
Cash at end of period 4,821 7,786 4,821 7,786
============ ============ ============ ============
Supplemental disclosure of cash flow
Information
Cash paid for
Interest (net of interest $ 1,001 $ 118 $ 7,110 $ 6,220
earned)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
GEO SPECIALTY CHEMICALS, INC.
NOTES TO CONSOLIDATED 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, oil field and
electronics 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 consolidated balance sheet at
June 30, 2000 and the consolidated statements of operations and cash flows for
the three and six month periods ended June 30, 2000 and 1999 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
consolidated financial statements for those interim periods are also unaudited.
The consolidated results of operations for the three and six month periods ended
June 30, 2000 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 and notes thereto
contained in GEOs' Annual Report on Form 10-K for the fiscal year ended December
31, 1999.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of GEO and its wholly-owned subsidiaries, GEO Specialty
Chemicals Ltd., GEO Holdings (Europe) SARL, GEO Gallium S.A., and Ingal Stade
GmbH. All significant intercompany balances and transactions have been
eliminated.
NOTE 2 - INVENTORIES
Inventories consist of the following components:
June 30, 2000 December 31, 1999
------------- -----------------
Raw materials $ 8,617 $12,633
Work in progress 3,284 2,688
Finished goods 7,919 8,467
------- -------
$19,820 $23,788
======= =======
<PAGE>
NOTE 3 -- COMPREHENSIVE INCOME (LOSS)
Comprehensive income (loss) consists of GEOs' net income (loss) and foreign
exchange translation adjustments.
NOTE 4 -- NEW ACCOUNTING STANDARDS
Beginning January 1, 2001, Statement on Financial Accounting Standards No.
133 (the "Statement") on derivatives will require all derivatives to be
recorded at fair value in the balance sheet. Unless designated as hedges,
changes in these fair values will be recorded in the income statement. Fair
value changes involving hedges will generally be recorded by offsetting
gains and losses on the hedge and on the hedged item, even if the fair
value of the hedged item is not otherwise recorded. Since GEO has no
significant derivative instruments or hedging activities, adoption of the
Statement is not expected to have a material effect on GEO's financial
statements, but the effect will depend on derivative holdings when this
standard applies.
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
RESULTS OF OPERATIONS
The following table sets forth certain consolidated operations data for GEO
expressed in millions of dollars and as a percentage of net sales:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- ------------------------
1999 2000 1999 2000
---- ---- ----- ----
$ % $ % $ % $ %
-- -- -- -- -- -- -- --
Net Sales $36.4 100.0% $46.6 100.0% $70.5 100.0% $88.4 100.0%
Gross profit 8.9 24.6 11.7 25.1 16.5 23.4 21.0 23.8
Operating income 4.0 11.0 5.7 12.2 7.2 10.2 9.6 10.9
Net income (loss) 0.5 1.5 1.2 2.6 0.5 0.7 1.1 1.2
EBIDTA 6.7 18.3 9.0 19.3 12.4 17.6 15.9 18.0
Net interest expense 3.1 8.4 3.8 8.2 6.2 8.8 7.5 8.5
Capital expenditures 1.1 3.1 2.7 5.8 2.5 3.5 4.1 4.6
THREE MONTHS ENDED JUNE 30, 2000 COMPARED TO THREE MONTHS ENDED JUNE 30, 1999
Net Sales. Net sales for the three months ended June 30, 2000 were $46.6
million, representing a $10.2 million or 28.0% increase compared to $36.4
million of net sales during the same period in 1999. Most of the increase was
attributable to the Gallium acquisition, which added $7.4 million of net sales.
Excluding the impact of the Gallium acquisition, net sales were higher by $2.8
million. This increase was driven primarily by increased sales of $2.3 million
of aluminum compounds to the industrial water treatment industry.
Gross Profit. Gross profit for the three months ended June 30, 2000 was $11.7
million, or 25.1% of net sales, representing a $2.8 million or 31.5% increase
compared with gross profit of $8.9 million, or 24.6% of net sales, during the
same period in 1999. The Gallium business contributed $3.3 million of the
increase. Excluding the impact of the Gallium acquisition, gross profit
decreased slightly as variable costs (i.e. raw materials and freight) were less
favorable relative to sales in all business units.
Operating Income. Operating income for the three months ended June 30, 2000 was
$5.7 million, or 12.2% of net sales, representing a $1.7 million or 42.5%
increase compared with operating income of $4.0 million, or 11.0% of net sales,
during the same period in 1999. The increase was due to the contribution of the
Gallium business net of additional amortization of goodwill and other long-term
assets associated with the acquisition.
Net Income. Net income for the three months ended June 30, 2000 was $1.2
million, or 2.6% of net sales, representing a $0.7 million or 140% increase
compared with net income of $0.5 million, or 1.5% of net sales, during the same
period in 1999. The increase in net income was attributable to the Gallium
acquisition.
EBITDA. EBITDA for the three months ended June 30, 2000 was $9.0 million, or
19.3% of net sales, representing a $2.3 million or 34.3% increase compared with
EBITDA of $6.7 million, or 18.3% of net sales, during the same period in 1999.
The Gallium acquisition contributed $3.2 million of EBITDA, which more than
offset the $0.9 million decline in the rest of the business, mainly in paper
chemicals and construction additives.
Net Interest Expense. Net interest expense for the three months ended June 30,
2000 was $3.8 million, or 8.2% of net sales, representing a $0.7 million or
22.6% increase from the net interest expense of $3.1 million, or 8.4% of net
sales, during the same period in 1999. The increase in net interest expense was
attributable to additional indebtedness related to the Gallium acquisition.
Capital Expenditures. Capital expenditures for the three months ended June 30,
2000 were $2.7 million or a $1.6 million increase compared to $1.1 million of
capital expenditures during the same period in 1999. Most of the increase in
capital expenditures was related to capacity increases for the production of
gallium and coating additives.
<PAGE>
SIX MONTHS ENDED JUNE 30, 2000 COMPARED TO SIX MONTHS ENDED JUNE 30, 1999
Net Sales. Net sales for the six months ended June 30, 2000 were $88.4 million,
representing a $17.9 million or 25.4% increase compared with net sales of $70.5
million during the same period in 1999. The increase in net sales was primarily
attributable to the impact of the acquisition of the Gallium business from
Rhodia Chimie S.A., which occurred on September 1, 1999. Net sales of the
Gallium business, which produces high purity materials used in the electronics
industry, were $13.1 million in the first six months of 2000. Excluding the
impact of the Gallium acquisition, GEO's net sales increased by $4.8 million or
6.8% compared to the same period in 1999. This increase was due primarily to
improved sales of aluminum compounds used in industrial and municipal water
treatment applications.
Gross Profit. Gross profit for the six months ended June 30, 2000 was $21.0
million, or 23.8% of net sales, representing a $4.5 million or 27.3% increase
compared with gross profit of $16.5 million, or 23.4% of net sales, during the
same period in 1999. The increase in gross profit was primarily attributable to
the Gallium acquisition. Excluding the impact of the Gallium acquisition, gross
profit declined by $0.8 million due to slightly higher raw material costs as
well as higher freight and production expenses, especially utility expenses.
The higher gross profit as a percent of net sales reflects the impact of the
Gallium business on the overall sales mix.
Operating Income. Operating income for the six months ended June 30, 2000 was
$9.6 million, or 10.9% of net sales, representing a $2.4 million or 33.3%
increase compared with operating income of $7.2 million, or 10.2% of net sales,
during the same period in 1999. The increase in operating income was
attributable to the Gallium acquisition. Excluding the impact of the Gallium
acquisition, operating income was lower by $0.8 million due to lower gross
margin and higher selling and administrative expenses.
Net Income (Loss). Net income for the six months ended June 30, 2000 was $1.1
million, or 1.2% of net sales, representing a $0.6 million or 120% increase
compared with net income of $0.5 million, or 0.7% of net sales, during the same
period in 1999. The increase in net income was due primarily to the additional
operating income generated by the Gallium acquisition, partially offset by
foreign exchange losses and additional net interest expense related to the
Gallium acquisition and the lower operating profit contribution of the remaining
parts of the business.
EBITDA. EBITDA for the six months ended June 30, 2000 was $15.9 million, or
18.0% of net sales, representing a $3.5 million or 28.2% increase compared to
EBITDA of $12.4 million, or 17.6% of net sales, during the same period in 1999.
The increase in EBITDA was attributable to the Gallium acquisition, which
generated $4.9 million in EBITDA during the first six months of 2000. This
increase was partially offset by the unfavorable impact of higher raw material,
freight, production and selling expenses noted previously.
Net Interest Expense. Net interest expense for the six months ended June 30,
2000 was $7.5 million, or 8.5% of net sales, an increase of $1.3 million or
21.0% compared to net interest expense of $6.2 million, or 8.8% of net sales,
during the same period in 1999. The increase in net interest expense was due to
the additional debt incurred to fund the Gallium acquisition.
Capital Expenditures. Capital expenditures for the six months ended June 30,
2000 were $4.1 million or a $1.6 million increase compared to $2.5 million of
capital expenditures during the same period in 1999. The increase in capital
expenditures reflects the additional production capacity being added in the
Trimet and Gallium units.
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 GEO's existing credit facility. As of June 30,
2000, GEO had no material commitments for capital expenditures.
Net cash provided from operations for the six month periods ending June 30,
2000 and 1999 was $3.6 million and $9.4 million, respectively. The $5.8 million
reduction was due primarily to increased accounts receivable of $4.0 million,
caused by an increase in net sales, especially export sales, and collection
delays at several specific major customers related primarily to system changes.
In connection with the Trimet acquisition on July 31, 1998, GEO refinanced its
existing senior debt by issuing $120.0 million of 10 1/8% Senior Subordinated
Notes due 2008. GEO's senior revolving credit facility, which was amended in
connection with the Gallium acquisition, currently includes $45.0 million of
available borrowing. The
<PAGE>
amended facility expires in 2003 and has no interim amortization requirements.
Borrowings under the senior revolving credit facility bear interest, at GEO's
option, at:
. 1.25% above the higher of the adjusted certificate of deposit rate plus
0.5% or the prime lending rate of Bankers Trust Company; or
. an adjusted Eurodollar rate plus 2.25%.
As of June 30, 2000, GEO's interest rate under the senior revolving credit
facility was 9.0625%. The senior revolving credit facility contains customary
covenants which include the maintenance of certain financial ratios.
During the six months ended June 30, 2000, GEO borrowed an additional $6.0
million under its senior revolving credit facility. This borrowing was made to
fund a reduction in current liabilities and the semi-annual interest payment
related to GEO's outstanding senior subordinated notes. Between March 31 and
June 30, 2000, GEO reduced its borrowings under its senior revolving credit
facility by $5.0 million, thereby increasing the availability under the facility
to $21.0 million.
As of June 30, 2000, GEO had a cash balance of $4.8 million, compared to $7.8
million as of June 30, 1999. The cash balance was decreased between March 31 and
June 30, 2000, in order to reduce the amount borrowed under GEO's senior
revolving credit facility, as noted above.
GEO believes that cash generated from operations, together with amounts
available under the 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.
The overall effects of inflation on GEO's business during the periods discussed
have not been significant. GEO monitors the prices it charges for its products
on an ongoing basis and believes that it will be able to adjust those prices to
take into account any future changes in the rate of inflation.
Disclosure Regarding Forward-Looking Statements Contained in this Report
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: (1)loss of key customers or increased
competitive pressures; (2)changes in customer spending levels;(3) increases in
interest rates or GEO's cost of borrowing or a default under any material debt
agreement; (4)unavailability of funds for capital expenditures or research and
development; (5) GEO's inability to fund acquisitions, find suitable acquisition
candidates or integrate acquired businesses; (6) changes in governmental,
environmental or other regulations; and (7) changes in general economic or
market conditions. Given these uncertainties, you should not place undue
reliance upon such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
GEO does not engage in hedging or other market structure derivative trading
activities. Additionally, GEO's debt obligations are primarily fixed rate in
nature and, as such, are not sensitive to changes in interest rates. However,
GEO's senior revolving credit facility bears interest at a variable rate. GEO is
a party to an agreement, expiring on June 26, 2000, which provides for financial
stability in the event of fluctuations in interest rates in respect of $15
million under GEO's senior revolving credit facility. The floor and cap under
this arrangement are based upon U.S. Dollar three-month LIBOR (as fixed by the
British Bankers Association) of 5.25% and 7.75%, respectively. If these
thresholds are breached, the arrangement will allow GEO to continue to cover its
interest obligations, in respect of up to $15 million under its senior revolving
credit facility, at the cap or floor level, notwithstanding the prevailing
market interest rate at that time. GEO does not believe that its market risk
financial instruments on June 30, 2000 would have a material effect on future
operations or cash flow.
<PAGE>
GEO's foreign operations are subject to the usual risks that may affect
such operations. These include, among other things, exchange controls and
currency restrictions, currency fluctuations, changes in local economic
conditions, unsettled political conditions, and foreign government-sponsored
boycotts of GEO's products or services for noncommercial reasons. Most of the
identifiable assets associated with foreign operations are located in countries
where GEO believes such risks to be minimal. In addition, GEO does not consider
the market risk exposure relating to currency exchange to be material.
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 issuance of the notes. The fair value of GEO's long-
term debt as of June 30, 2000, based upon market quotations, is approximately
$102.0 million. Based on a hypothetical immediate 100 basis point increase in
interest rates at June 30, 2000, the fair value of GEO's fixed rate long-term
notes would be impacted by a net decrease of $8.0 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, 2000 of $8.7 million.
<PAGE>
PART II
OTHER INFORMATION
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, 2000.
<PAGE>
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 14, 2000 By: /s/ William P. Eckman
____________________________________________
William P. Eckman
Executive Vice President and Chief Financial
Officer (duly authorized officer and principal
financial officer)
