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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 September 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 November
15, 1999: 135.835
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of
November 15, 1999: none
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
(In thousands except share data)
Sept. 30, 1999 Sept. 30, 1998 December 31, 1998
-------------- -------------- -----------------
(unaudited) (unaudited)
ASSETS
Current assets
Cash $ 6,413 $ 1,222 $ 1,645
Trade accounts receivable, net 24,269 20,773 19,612
Other receivables 1,074 633 1,303
Inventory 19,815 9,943 9,476
Prepaid expenses & other current assets 672 1,386 792
Deferred taxes 778 0 418
----------- ----------- -----------
Total current assets 53,021 33,957 33,246
Property and equipment, net 97,240 91,773 92,669
Other assets
Intangible assets, net 5,380 5,476 5,614
Goodwill, net 31,509 32,623 31,743
Other accounts receivable 372 1,458 589
Other 5,243 0 664
----------- ----------- -----------
Total other assets 42,504 39,557 38,610
----------- ----------- -----------
Total assets $ 192,765 $ 165,287 $ 164,525
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 2,567 $ 760 $ 760
Accounts payable 11,222 9,662 7,564
Other accounts payable 968 0 448
Accrued expenses & other current liabilities 5,913 5,636 7,664
----------- ----------- -----------
Total current liabilities 20,670 16,058 16,436
Long-term liabilities
Revolving line of credit 21,000 0 0
Long-term debt 120,000 120,000 120,000
Other long-term liabilities 4,342 5,938 4,196
Other accounts payable 715 0 580
Deferred taxes 2,834 1,409 1,471
----------- ----------- -----------
Total long-term liabilities 148,891 127,347 126,247
Total liabilities $ 169,561 $ 143,405 $ 142,683
See accompanying notes to consolidated financial statements.
3
(In thousands except share data)
Sept. 30, 1999 Sept. 30, 1998 December 31, 1998
-------------- -------------- -----------------
(unaudited) (unaudited)
Shareholders' equity
Class A voting common stock, $1 par value, 1,035 shares
authorized, 136 shares issued and outstanding at
September 30, 1998, December 31, 1998 and September 30, 1999
Class B nonvoting common stock, $1 par value, 205 authorized, 0
outstanding at September 30, 1998, December 31, 1998
and September 30, 1999
Additional paid-in capital 20,901 20,901 20,901
Retained earnings 2,304 981 941
---------- ---------- ----------
Total shareholders' equity $ 23,205 $ 21,882 $ 21,842
Total liabilities and shareholders' equity $ 192,765 $ 165,287 $ 164,525
========== ========== ==========
See accompanying notes to consolidated financial statements.
4
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(In thousands)
July 1 through July 1 through January 1 through January 1 through
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- ----------------- -----------------
Net sales $ 37,606 $ 33,023 $ 108,152 $ 92,454
Cost of sales 28,136 26,634 82,172 75,490
---------- ---------- ----------- ----------
Gross profit 9,470 6,389 25,980 16,964
Selling, general & administrative
expenses 4,756 3,711 13,788 9,595
---------- ---------- ----------- ----------
Income from operations 4,714 2,678 12,192 7,369
Other income (expense)
Net interest expense (3,341) (3,089) (9,802) (5,978)
Other 6 134 (28) 100
Income (loss) before taxes and
extraordinary items 1,379 (277) 2,362 1,491
Provision for taxes (tax benefit) 519 (81) 1,006 502
Income (loss) on early extinguishment
of debt, net of tax 0 (1,497) 0 (1,497)
---------- ---------- ----------- ----------
Net income (loss) $ 860 $ (1,693) $ 1,356 $ (508)
========== ========== =========== ==========
See accompanying notes to consolidated financial statements.
5
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(In thousands)
July 1 July 1 January 1 January 1
through through through through
Sept. 30, 1999 Sept. 30, 1998 Sept. 30, 1999 Sept. 30, 1998
-------------- -------------- -------------- --------------
Cash flows from operating activities
Net income (loss) $ 860 $ (1,693) $ 1,356 $ (508)
Adjustments to reconcile net income
(loss) to net cash from operating
activities
Depreciation, depletion and
amortization 2,585 2,346 8,144 5,502
Extraordinary loss on early
extinguishment of debt 0 1,497 0 1,497
Deferred income tax expense (benefit) 325 (86) 810 (86)
Bad debt expense
Change in assets and liabilities
Trade accounts receivable (3,134) (783) (4,605) (2,293)
Other accounts receivable 910 (33) 297 69
Inventories 1,044 (138) 559 236
Prepaid expenses and other assets 452 (859) 47 (1,109)
Accounts payable & accrued expenses (4,472) 2,659 901 940
Other accounts payable 194 245 696 0
Other liabilities 405 0 405 0
-------- ---------- --------- --------
Net cash from operating activities (831) 3,155 8,610 4,248
Cash flows from investing activities
Purchase of property, plant and equipment (1,269) (1,349) (3,769) (3,806)
Acquisitions (19,923) (59,816) (19,923) (59,816)
-------- ----------- ---------- ---------
Net cash from investing activities (21,193) (61,165) (23,692) (63,622)
Cash flows from financing activities
Revolving lines of credit borrowings 21,000 (3,360) 21,000 (3,640)
(payments), net
Proceeds from bank borrowing
Proceeds from issuance of subordinated
notes 0 120,000 0 120,000
Payments made on long-term borrowing 0 (56,575) (780) (57,975)
Proceeds for issuance of stock 0 6,000 0 6,000
Payments on capital leases
Payments on deferred financing costs (359) (4,485) (396) (4,485)
-------- ---------- --------- --------
Net cash from financing activities 20,641 61,580 19,824 59,900
Effect of exchange rate on cash 9 0 9 0
Net change in cash (1,374) (71) 4,768 526
Cash at beginning of period 7,786 1,292 1,645 696
-------- ---------- --------- --------
Cash at end of period $ 6,413 $ 1,222 $ 6,413 $ 1,222
======== ========== ========= ========
Supplemental disclosure of cash
Flow information
Cash paid for
Interest (net of interest earned) $ 6,027 $ 1,369 $ 12,254 $ 4,216
Taxes - 0 0 440
Supplemental disclosure of non-cash
investing and financing activities:
In conjunction with the acquisition
of the assets, liabilities were assumed
as follows:
Fair value of assets required 24,290 62,393
Cash paid (19,923) (59,816)
Due to seller (2,552) (1,290)
------ ------
Liabilities assumed 1,815 1,287
See accompanying notes to consolidated financial statements.
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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 semi-
conductor 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 sheets at
September 30, 1999 and 1998 and the statements of operations for the three and
nine month periods ended September 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 nine month periods ended September 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.
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.
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NOTE 2 -- ACQUISITIONS
On September 1, 1999, GEO purchased from Rhodia Chimie S.A., the former
chemical unit of Rhone-Poulenc, all of the outstanding shares of Rhodia's
wholly owned French subsidiary. This subsidiary owns both the operating assets
of a gallium purification business located in Salindres, France and the shares
of a German corporation that carries on gallium extraction operations in Stade,
Germany. The purchased business provides various grades of gallium to customers
in the semi-conductor market worldwide. The purchase price of $22,475 was
allocated as follows:
Current assets $ 11,657
Property and equipment 6,270
Other assets 67
Liabilities (1,815)
Net assets acquired 16,179
Excess of cost over fair value 6,296
---------
Purchase Price $ 22,475
=========
NOTE 3 -- INVENTORIES
Inventories consist of the following components:
September 30, December 31,
1999 1998
------------------- -------------------
Raw materials............................................ $ 9,067 $ 3,065
Work in progress......................................... 3,002 341
Finished goods........................................... 7,707 6,070
------------------- -------------------
$19,815 $ 9,476
======= =======
NOTE 4 -- REVOLVING LINE OF CREDIT
In connection with the September 1, 1999 transaction discussed in Note
2, GEO's $25.0 million revolving line of credit was amended to increase the
amount available to $45.0 million. At September 30, 1999 and December 31, 1998,
GEO had borrowed $21.0 million and $0, respectively, under the agreement. The
borrowings outstanding bear interest at 2.25% above the Eurodollar rate. As of
September 30, 1999, the rate was 7.75%.
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ITEM 2. 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 for the
respective period:
THREE MONTHS ENDED SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
-------------------------------- ----------------------------------
1999 1998 1999 1998
---- ---- ---- ----
$ % $ % $ % $ %
------- ----- ------- ----- -------- ------ ------- -----
Net sales $ 37.6 100.0% $ 33.0 100.0% $ 108.2 100.0% $ 92.5 100.0%
Gross profit 9.5 25.3 6.4 19.4 26.0 24.0 17.0 18.4
Operating income 4.7 12.5 2.7 8.2 12.2 11.3 7.4 8.0
Net income (loss) 0.9 2.4 (1.7) (5.1) 1.4 1.3 (0.5) (0.5)
EBITDA 7.4 19.7 4.5 13.6 19.8 18.3 13.0 14.1
Net interest expense 3.3 8.8 3.1 9.4 9.8 9.1 6.0 6.5
Capital expenditures 1.3 3.5 1.3 3.9 3.8 3.5 3.8 4.1
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THREE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO THREE MONTHS ENDED SEPTEMBER
30, 1998
Net Sales. Net sales for the three months ended September 30, 1999 were
$37.6 million, representing a $4.6 million or 13.9% increase compared to $33.0
million of net sales during the same period in 1998. A substantial amount of the
increase was attributable to the TRIMET and gallium acquisitions which added
$2.2 million and $1.4 million, respectively, to net sales. Excluding the impact
of the acquisitions, net sales were higher by $1.0 million, or 3.0%, driven
primarily by sales to the water treatment and construction markets.
Gross Profit. Gross profit for the three months ended September 30,
1999 was $9.5 million, or 25.3% of net sales, representing a $3.1 million or
48.4% increase compared to gross profit of $6.4 million, or 19.4% of net sales,
during the same period in 1998. The TRIMET and gallium acquisitions each
contributed $0.7 million to the increase. The remainder of the increase in
gross profit was attributable to improved variable margins resulting from lower
raw material costs and a more favorable product mix.
Operating Income. Operating income for the three months ended September
30, 1999 was $4.7 million, or 12.5% of net sales, representing a $2.0 million or
74.1% increase compared to operating income of $2.7 million, or 8.2% of net
sales, during the same period in 1998. The increase was primarily due to (i) the
contribution of the TRIMET and gallium businesses, net of additional
amortization of goodwill and other long-term assets associated with the
acquisitions and (ii) the improvement in gross profit resulting from more
favorable raw material costs.
Net Income. Net income for the three months ended September 30,
1999 was $0.9 million, or 2.4% of net sales, representing a $2.6 million
increase compared to net income of ($1.7) million during the same period in
1998. The major cause for the increase was the absence of a $1.5 million
extraordinary loss related to the early extinguishment of debt in connection
with the TRIMET acquisition.
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The remainder of the increase was primarily attributable to the after-tax
improvement in operating net income.
EBITDA. EBITDA for the three months ended September 30, 1999 was $7.4
million, or 19.7% of net sales, representing a $2.9 million or 64.4% increase
compared to EBITDA of $4.5 million, or 13.6% of net sales, during the same
period in 1998. The impact of the TRIMET and gallium acquisitions contributed
$1.3 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
September 30, 1999 was $3.3 million, or 8.8% of net sales, representing a $0.2
million or 6.1% increase compared to net interest expense of $3.1 million, or
9.4% 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 the senior subordinated notes.
Capital Expenditures. Capital expenditures during the three months
ended September 30, 1999 were $1.3 million, compared to $1.3 million during the
same period in 1998.
NINE MONTHS ENDED SEPTEMBER 30, 1999 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30,
1998
Net Sales. Net sales for the nine months ended September 30, 1999 were
$108.2 million, representing a $15.7 million or 17.0% increase compared with net
sales of $92.5 million during the same period in 1998. The increase in net
sales was primarily attributable to the impact of the acquisition of the TRIMET
Technical Products division of Mallinckrodt Inc., which occurred on July 31,
1998. Net sales of the TRIMET group, which produces additives used in the
coatings and resins industries, were $23.1 million in the first nine months of
1999. Excluding the impact of the TRIMET acquisition and the acquisition of the
gallium business of Rhodia on September 1, 1999, which generated $1.4 million
in net sales, GEO's net sales declined by $3.3 million or 3.6% 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 three months of
1999.
Gross Profit. Gross profit for the nine months ended September 30, 1999
was $26.0 million, or 24.0% of net sales, representing a $9.0 million or 53.0%
increase compared to gross profit of $17.0 million, or 18.4% of net sales,
during the same period in 1998. The increase in gross profit was primarily
attributable to the TRIMET and gallium acquisitions. The increase in gross
profit as a percent of net sales reflects the effect of: (i) lower raw material
costs experienced by all product groups, (ii) improved product mix related to
the TRIMET and gallium products, and (iii) slightly lower plant operating
expenses.
Operating Income. Operating income for the nine months ended September
30, 1999 was $12.2 million, or 11.3% of net sales, representing a $4.8 million
or 64.9% increase compared to operating income of $7.4 million, or 8.0% of net
sales, during the same period in 1998. The increase in operating income was
primarily attributable to the TRIMET and gallium acquisitions.
Net Income (Loss). Net income for the nine months ended September 30,
1999 was $1.4 million, or 1.3% of net sales, representing a $1.9 million
increase compared to net income of ($0.5) million in the same period in 1998.
The increase was due to the operating income generated by the TRIMET and gallium
acquisitions, partially offset by increased interest expense incurred to fund
the acquisitions and additional income taxes. Also having an impact on the
period-to-period comparison was an extraordinary loss of $1.5 million in 1998
due to the early extinguishment of debt in connection with the TRIMET
acquisition refinancing.
EBITDA. EBITDA for the nine months ended September 30, 1999 was $19.8
million, or 18.3% of net sales, representing a $6.8 million or 52.3% increase
compared to EBITDA of $13.0 million, or 14.1% of net sales, during the same
period in 1998. Most of the increase in EBITDA was attributable to the TRIMET
acquisition, which generated $5.8 million of additional EBITDA during the first
nine months of 1999 compared to the same period in 1998, when GEO owned the
business for only two months. The remaining difference was attributable to
improved margins due to lower raw material costs and the contribution of the
gallium business which was acquired on September 1, 1999.
Net Interest Expense. Net interest expense for the nine months ended
September 30, 1999 was $9.8 million, or 9.1% of net sales, representing an
increase of $3.8 million or 63.3% compared to net interest expense of $6.0
million, or 6.5% of net sales, during 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 the senior subordinated notes.
Capital Expenditures. Capital expenditures for the nine months ended
September 30, 1999 of $3.8 million were similar to the same period in 1998
which were also $3.8 million.
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 revolving credit facility. As of
September 30, 1999, GEO had no material commitments for capital expenditures.
Net cash provided by operations for the nine months ended September 30,
1999 was $8.6 million, which consisted primarily of net income of $1.4 million,
depreciation and amortization expense of $7.8 million, and a net reduction in
working capital.
Net cash used in investing activities was $23.7 million for the nine
months ended September 30, 1999. GEO used $19.9 million for the purchase of the
gallium business from a subsidiary of Rhodia Chimie, S.A., and $3.8 million was
used to fund other capital expenditures.
Net cash provided by financing activities was $19.8 million for the
nine months ended September 30, 1999. GEO borrowed $21.0 million from its $45.0
million revolving credit facility to finance the purchase of the gallium
business, and $1.2 million was used to repay another loan ($0.8 million) and
for bond registration and financing fees ($0.4 million).
In connection with the TRIMET acquisition, GEO refinanced its existing
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. The
credit facility was again amended as of September 3, 1999 in connection with the
gallium acquisition. The amendment increased the availability under the
revolving credit facility to $45.0 million. As of September 30, 1999, GEO had
$21.0 million outstanding on the 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.
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"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 has completed its information technology
systems upgrade and will conduct system testing and validation through the end
of 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 upgraded auxiliary systems,
which include its bar coding system. The invoicing system upgrade was completed
by transferring all invoicing functions to newly purchased systems which were
represented as being "Year 2000" compliant.
All GEO servers and associated operating systems are relatively new and
therefore believed to be "Year 2000" compliant. Of GEO's remaining systems, one
required a ROM upgrade, which was completed during the third quarter of 1999.
GEO engaged Compaq Computer Corporation to perform "Year 2000" compliance
assessments on all Compaq and Digital Equipment Corporation servers and
installed software. Based on the report finding, GEO believes that all critical
systems are 100% "Year 2000" compliant. Last minute vendor-supplied "Year 2000"
patches continue to be installed. GEO believes it has upgraded and tested
approximately 95% 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
and received software upgrades. GEO believes that it 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 22 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. All have responded that they are "Year
2000" compliant. 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. With the exception of
one, all vendors have responded that their equipment and service is "Year 2000"
compliant. Equipment replacement is scheduled for the one non-compliant site.
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. 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 all critical systems at
these manufacturing facilities are 100% "Year 2000" compliant and that such
facilities are 100% compliant.
THIRD PARTY COMMUNICATIONS. To date GEO has solicited 108 suppliers of
products and transportation services regarding their "Year 2000" readiness. Of
these, 87 responses have been received. All respondents have indicated that they
are "Year 2000" compliant. A review of non-respondents will be conducted to
access the impact on GEO's business. GEO believes that substitute arrangements
can be made for suppliers that are not "Year 2000" compliant and present a
potential detriment to GEO's business continuity. GEO has not conducted
compliance audits of its utility service providers, including its providers of
12
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.
"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
September 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.
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,"
"could," "may," "will," "can," "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, its industry or others 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) changes in governmental,
environmental or other regulations; (6) changes in general economic conditions;
(7) the failure of any of GEO's information technology systems or
non-information technology systems or any of the associated software to be "Year
2000" compliant; (8) the failure of any of GEO's suppliers, customers or service
providers to be "Year 2000" compliant; or (9) the potential inability of GEO to
respond to its identified "Year 2000" worst case scenario or any other "Year
2000" failure in a timely manner and in a manner that does not involve material
expenditures or loss of business. 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 September 30, 1999, the fair value
of GEO's fixed rate long-term notes would be impacted by a net decrease of
$10.1 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 September 30, 1999 of $11.1 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.
13
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.
On September 23, 1999, GEO filed with the SEC a Current Report
on Form 8-K relating to the purchase, by its newly formed and wholly
owned French subsidiary GEO Holdings (Europe) SARL, of a gallium
extraction and purification business from Rhodia Chimie S.A. Financial
statements and pro forma financial information will be filed, pursuant
to the provisions of Item 7(a)(4) of Form 8-K, in an amendment to the
Current Report on Form 8-K filed on or before November 22, 1999.
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: November 15, 1999 By: /s/ William P. Eckman
--------------------------------
William P. Eckman
Executive Vice President and
Chief Financial Officer
(duly authorized officer and
principal financial officer)