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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 March 31, 2002
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 May 15,
2002: 135.835
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of May
15, 2002: none
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
ASSETS (unaudited)
Current assets:
Cash $ 14,958 $ 19,782
Trade accounts receivable, net of allowance of $526 and $556
at March 31, 2002 and December 31, 2001, respectively 27,292 24,292
Other receivables 713 788
Inventory 28,736 28,921
Prepaid expenses and other current assets 2,588 1,601
Deferred taxes 1,504 1,401
--------------- ---------------
Total current assets 75,791 76,785
Property and equipment, net 105,938 108,522
Other assets
Intangible assets, net 8,287 8,671
Goodwill, net 89,741 90,292
Other accounts receivable 79 92
Deferred taxes 1,099 449
Other 1,681 1,692
--------------- ---------------
100,887 101,196
$ 282,616 $ 286,503
=============== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Current portion of long-term debt $ 1,050 $ 1,050
Accounts payable 15,069 14,127
Other accounts payable 88 112
Income taxes payable 2,543 2,927
Accrued expenses and other current liabilities 7,176 10,856
--------------- ---------------
Total current liabilities 25,926 29,072
Long-term liabilities
Revolving line of credit - -
Senior subordinated notes 120,000 120,000
Fair value adjustment (5,297) (4,611)
--------------- ---------------
Fair value of senior subordinated notes 114,703 115,389
Term B notes 103,950 103,950
Other long-term liabilities 9,936 8,983
Other accounts payable 3 252
Deferred taxes 496 -
--------------- ---------------
Total long-term liabilities 229,088 228,574
Shareholders' equity
Class A Voting Common Stock, $1.00 par value,
1,035 shares authorized, 136 shares issued
and outstanding at March 31, 2002 and
December 31, 2001
Class B Nonvoting Common Stock, $1.00 par value,
215 authorized, 0 outstanding at March 31, 2002
and December 31, 2001
Additional paid-in capital $ 20,901 $ 20,901
Retained earnings 7,347 8,829
Accumulated other comprehensive loss (646) (873)
------------ ------------
27,602 28,857
$ 282,616 $ 286,503
============ ============
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JANUARY 1 THROUGH JANUARY 1 THROUGH
MARCH 31, 2002 MARCH 31, 2001
----------------- -----------------
Net sales $ 40,428 $ 50,534
Cost of sales 33,558 36,214
------------- -----------
Gross profit 6,870 14,320
Selling, general and administrative expenses 4,834 5,844
------------- -----------
Income from operations 2,036 8,476
Other income (expense)
Net interest expense (4,287) (3,409)
Foreign currency exchange (loss) (168) (100)
Other 301 -
------------- -----------
Income (loss) before taxes (2,118) 4,967
Provision for taxes (benefit) (636) 2,170
------------- -----------
Net income (loss) $ (1,482) $ 2,797
============= ===========
Comprehensive income $ 227 $ -
============= ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JANUARY 1 THROUGH JANUARY 1 THROUGH
MARCH 31, 2002 MARCH 31, 2001
-------------------- --------------------
Cash flows from operating activities
Net income (loss) $ (1,482) $ 2,797
Adjustments to reconcile net income (loss) to net cash from
operating activities
Depreciation, depletion and amortization 4,033 3,489
Deferred income tax expenses (437) (254)
Fair value adjustment on derivative 10 -
Change in assets and liabilities
Trade accounts receivable (3,000) (4,120)
Other accounts receivable 87 324
Inventories 185 1,161
Prepaid expenses and other assets 291 (885)
Accounts payable (3,123) 3,354
Other liabilities (676) (50)
-------- --------
Net cash from operating activities (4,112) 5,816
Cash flows from investing activities
Purchases of property, plant and equipment (712) (2,000)
Cash flows from financing activities
Revolving lines of credit borrowings, net - -
Net change in cash (4,824) 3,816
Cash at beginning of period 19,782 7,930
-------- --------
Cash at end of period $ 14,958 $ 11,746
======== ========
Supplemental disclosure of cash flow information
Cash paid for
Interest $ 7,340 $ 6,352
Taxes 484 100
See accompanying notes to consolidated financial statements.
GEO SPECIALTY CHEMICALS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS EXCEPT SHARE DATA)
NOTE 1 - NATURE OF BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
Nature of Business: GEO Specialty Chemicals, Inc. (the Company or GEO)
was incorporated in the state of Ohio for the purpose of owning and operating
specialty chemical businesses. The Company's manufacturing process produces a
variety of specialty chemical products for use in various major chemical
markets. GEO produces more than 300 products. These products are used primarily
in the construction, paper, water treating, electronic, automotive and oil field
industries. GEO sells these products to customers located worldwide.
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. The
Company has a high level of indebtedness, which creates liquidity and debt
service risks.
INTERIM RESULTS (UNAUDITED): The accompanying consolidated balance sheet at
March 31, 2002 and the consolidated statements of operations and cash flows for
the three month periods ended March 31, 2002 and 2001 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 months ended March 31, 2002 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,
2001, and the notes thereto, which are included in GEO's Annual Report on Form
10-K filed with the Securities and Exchange Commission on March 22, 2002.
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.
COMPREHENSIVE INCOME (LOSS): Comprehensive income (loss) consists of GEO's net
income (loss), the effects of foreign exchange translation adjustments and the
effective gain or losses on financial instruments.
NOTE 2- FINANCIAL INSTRUMENTS
GEO adopted the Statement of Financial Accounting Standard (SFAS) No.
133, Accounting for Derivative Instruments and Hedging Activities on January 1,
2001. Accordingly all interest rate swaps and foreign currency option agreements
are accounted for as hedges of the related liability, firm commitment or
anticipated transaction when designated and effective of such items. The
effective portion of the gain or loss on the financial instrument is reported in
other comprehensive income (loss) and the ineffective portion is reported in
current earnings. The Company formally assesses, both at the hedge's inception
and on an ongoing basis, whether the derivatives used are highly effective in
offsetting changes in the cash flows or fair value of the hedged item. If it
becomes probable that the original hedged forecasted transaction will not occur,
the net gain or loss recorded in comprehensive income (loss) shall be
immediately reclassified into current earnings. The Company does not use
derivative financial instruments for trading or other speculative purposes and
does not use leveraged derivative instruments.
On November 15, 2001, the Company entered into two interest rate
derivative contracts with Citibank N.A. The purpose of the contracts was to
hedge the Company's interest expense by availing itself of the prevailing
interest rate conditions reflected by a steep yield curve and the Company's tax
situation. Both derivative contracts were for a notional amount of $90,000.
Under one contract, the "floating to fixed" contract, the Company
agreed to pay Citibank the equivalent of 3.67% annually through August 1, 2004
with payments being made on each February 1 and August 1 during the contract
period. Citibank agreed to pay the Company the six-month LIBOR rate, reset on
the first day of each semi-annual payment date during the contract period. This
contract corresponds to the Company's Term B floating rate debt.
Under the other contract, the "fixed to floating" contract, the Company
agreed to pay Citibank the equivalent of the six-month LIBOR rate as of the last
business day prior to the payment date plus 5.05%. Citibank agreed to pay the
Company during the same period 10.125%. The payment dates are February 1 and
August 1 of each year until August, 2008. As part of this transaction, the
Company sold to Citibank the right to cancel the contract on any payment date
commencing with August 1, 2004. This contract corresponds to the Senior
Subordinated Notes which have a fixed interest rate of 10.125%. Due to the
timing of the cancellation provision of the swap contract, the contract is not
considered to be 100% effective.
The Company has accounted for these interest rate derivative contracts
pursuant to FAS 133. The "floating to fixed" contract has been treated as a cash
flow hedge with 100% effectiveness. As of March 31, 2002 and December 31, 2001,
the fair value of the hedge was $1.0 million and $0.6 million, respectively.
This amount was recorded in other comprehensive income, net of tax and was
offset by a reduction in the other long-term liabilities in the accompanying
consolidated balance sheet.
The "fixed to floating" contract has been treated as a fair value
hedge. As of March 31, 2002 and December 31, 2001, the fair market value of the
hedge was $5.6 million and $4.3 million, respectively, at which time, based on
the change in the fair value of the risk being hedged, a portion of this hedge
was deemed to be ineffective. Thus in accordance with FAS 133 the fair market
value of the hedge was recorded and was reflected in the other long-term
liabilities on the accompanying consolidated balance sheet. The change in the
fair value of the risk being hedged was recorded and is reflected as a $5.3
million and $4.6 million reduction in the senior subordinated notes as of March
31, 2002 and December 31, 2001, respectively. The change in the ineffective
portion of $(0.6) million and $0.3 million is reflected in current earnings
(loss) as of March 31, 2002 and December 31, 2001, respectively.
As a result of GEO's global operating activities, GEO is exposed to
market risks from changes in foreign currency exchange rates which may adversely
affect GEO's operating results and financial position. GEO's goal is to minimize
its risks from foreign currency exchange rate fluctuations through its normal
operating activities and, when deemed appropriate, through the use of derivative
financial instruments. GEO does not use derivative financial instruments for
trading or other speculative purposes and does not use leveraged derivative
financial instruments.
GEO's exposure to market risk for changes in foreign currency exchange
rates arises from financial activities between subsidiaries and firm commitments
arising from international transactions. GEO attempts to have such transaction
exposure hedged with internal natural offsets to the fullest extent possible
and, once these opportunities have been exhausted, through foreign currency
option agreements with third parties. During 2001, GEO, entered into option
contracts that collar the Australian dollar between .47 and .53 in relation to
the U.S. dollar, in anticipation of capital project expenditures in Pinjarra,
Australia. GEO entered into those contracts at no cost. These contracts mature
through December 31, 2002. In accordance with SFAS 133 as of December 31, 2001
these contracts were deemed to be 100% effective and the effective gain was
reflected in other comprehensive income. In 2002, the Company has elected to
defer the Pinjarra project until 2003. Due to the fact these contracts expire in
2002 these contracts are deemed to be ineffective as of March 31, 2002. Thus in
accordance with SFAS 133 the ineffective gain on these contracts is reflected in
current earnings. The fair value of the contracts was $0.7 million and .63 as of
March 31, 2002 and December 31, 2001, respectively.
NOTE 3 - GOODWILL AND OTHER INTANGIBLE ASSETS
GEO adopted FAS 142, "Goodwill and Other Intangible Assets" on January
1, 2002. This statement resulted in the cessation of goodwill amortization. All
of the provisions of this statement will be applied to future fiscal years, to
all goodwill and intangible assets recognized in GEO's statement of financial
position, regardless of when these assets were initially recognized.
As of March 31, 2002, GEO has goodwill and intangible assets (net of
amortization) of $98,027. For the three months ended March 31, 2002, GEO
recorded $499 in amortization expense associated with the intangible assets. For
the three months ended March 31, 2001, GEO recognized $925 in amortization
expense relating to goodwill and intangible assets of which $698 directly
related to goodwill amortization. The following adjusts reported net income
(loss) to exclude goodwill amortization.
2002 2001
---- ----
Reported net income (loss) $(1,482) $2,797
Add back goodwill amortization - 698
------- ------
Adjusted net income $(1,482) $3,495
NOTE 4 - CREDIT FACILITY AND LONG-TERM BORROWING
On May 14, 2002, the Senior Credit Agreement entered in May, 2001 with Bankers
Trust Company, Salomon Smith Barney Inc. (CitiGroup) and various other financial
institutions (the lenders) was amended. Pursuant to the amendment, the Term Loan
B Facility was reduced from $105.0 million to $97.5 million and the Revolving
Credit Facility was reduced from $40.0 million to $20.0 million. The interest
margins on the Term Loan B Facility and the Revolving Credit Facility were
increased and another line reflecting a higher leverage ratio was added to the
pricing grid for each facility.
As part of the amendment, effective March 31, 2002, certain covenants of the
senior credit facility were changed for the period January 1, 2002 until
December 31, 2003. During this 24 month period less rigorous leverage and
interest coverage ratios will be effective. Also, amended was the maximum
allowed capital expenditures covenant which was reduced from
$13.0 million to $10.0 million annually. In addition, restrictions were placed
on any capital expenditures pertaining to the Company's Pinjarra Project during
the 24 month period.
Several other sections of the Senior Credit Agreement were amended. These
amendments were primarily made to limit the Company's wherewithal to make
acquisitions without the approval of the lenders, provide for the use of
additional shareholder or other subordinated funding for certain major projects,
reduce the amount of cash the Company can retain from divestments and to clarify
certain definitions and reporting requirements.
Also in connection with the execution of this amendment, GEO was required to
make a 7.5 million principal payment on the Term B loan on May 15, 2002.
NOTE 5 -- INVENTORIES
Inventories consist of the following components:
March 31, December 31,
2002 2001
----------- -----------
Raw materials ............................ $ 7,948 $ 8,753
Work in progress ......................... 65 59
Finished goods ........................... 20,723 20,109
------- -------
$28,736 $28,921
======= =======
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
Results of Operations
The following table sets forth certain operations data of GEO for the
first quarter of 2001 and the first quarter of 2002 expressed in millions of
dollars and as a percentage of net sales for the respective period.
THREE MONTHS ENDED MARCH 31,
2001 2002
--------------------- -------------------
$ % $ %
--------- --------- --------- --------
Net sales $ 50.5 100.0% $ 40.4 100.0%
Gross profit 14.3 28.3 6.9 17.1
Operating income 8.5 16.8 2.0 5.0
Net income (loss) 2.8 5.5 (1.5) (3.7)
EBITDA 11.8 23.4 5.7 14.1
Net interest expense 3.4 6.7 4.3 10.6
Capital expenditures 2.0 4.0 0.7 1.7
THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THREE MONTHS ENDED MARCH 31, 2001
Net Sales. Net sales for the three months ended March 31, 2002 were $40.4
million, representing a $10.1 million or 20% decrease compared with net sales of
$50.5 million during the same period in 2001. The decrease in net sales was
attributable primarily to 1) gallium sales to the global electronics industry,
down $12.3 million due to a dramatic decrease in market demand which started in
the third quarter of 2001, 2) a $3.4 million decrease in sales due to the
divestment of the paper chemicals business in the second quarter of 2001, and 3)
reduced sales of water treating and merchant clay products of $2.7 million due
mostly to lower demand, especially to paper mills and natural gas producers.
Partially offsetting these decreases was the $8.7 million of net sales of
organic peroxide products generated by the business acquired from Hercules, Inc.
in May of 2001.
Gross Profit. Gross profit for the three months ended March 31, 2002 was $6.9
million, or 17.1% of net sales, representing a $7.4 million or 51.7% decrease
compared to a gross profit of $14.3 million, or 28.3% of net sales, during the
comparable period in 2001. Lower net sales generated caused the decrease in
gross profit which was attributable to the gallium business, $8.5 million, the
divestment of the paper chemicals business, $1.7 million, and merchant clay,
$0.2 million. Again, partially offsetting these declines was the organic
peroxide contribution of $3.0 million. In comparison to the same period in 2001,
key components of the cost of goods sold, i.e. raw materials and production
costs, were favorable as the unit cost of materials such as natural gas,
methanol, aluminum, and naphthlene were lower and production costs, ex organic
peroxides, were $1.0 million lower. As a result of these favorable developments,
gross profit excluding gallium and organic peroxides, declined by only 33.2% or
$1.9 million, most all of which was attributable to the paper chemical
divestment.
Operating Income. Operating income for the three months ended March 31, 2002 was
$2.0 million, or 5.0% of net sales, representing a $6.5 million or 76.5%
decrease compared with an operating income of $8.5 million, or 16.8% of net
sales, during the comparable period in 2001. The decrease in operating income
was attributable primarily to the overall decrease in gross profit of $7.4
million noted previously. A reduction in selling, general and administrative
expenses of $1.2 million related to the divestment of the paper chemicals
business and GEO's adoption of SFAS 142 in which it ceased recording
amortization expense associated with goodwill, which was approximately $0.7
million for the three months ended March 31, 2001. This decrease in expense was
offset by an increase in selling and administrative costs of the organic
peroxides business, $0.8, reduced by lower costs in similar functions in other
areas of the company.
Net Income. Net income (loss) for the three months ended March 31, 2002 was
($1.5) million representing a $4.3 million decrease compared with net income of
$2.8 million during the comparable period in 2001. The decrease in net income
was primarily due to the decrease in operating profit previously noted and an
increase in net interest expenses of $0.9 million reflecting the increased debt
and amortization of financing costs related to the organic peroxide acquisition.
Partially offsetting these
decreases in net income was a lower income tax provision of $2.8 million
associated with the decline in income in the period ended March 31, 2002
compared to the same period in 2001.
EBITDA. EBITDA for the three months ended March 31, 2002 was $5.7 million, or
14.1% of net sales, representing a $6.1 million or 51.7% decrease compared to an
EBITDA of $11.8 million, or 23.4% of net sales, during the comparable period in
2001. The decrease in EBITDA was attributable to the performance of the gallium
business highlighted previously offset, partially by the contribution of the
organic peroxide business, $2.6 million, and stronger results from coating and
construction chemicals.
Net Interest Expense. Net interest expense, for the three months ended March 31,
2002 was $4.3 million versus $3.4 million for the period ending March 31, 2001.
The increase was due to the higher net debt level, $210 million, a 78% increase,
compared to the same period in 2001. Cash paid for interest during the period
ended March 31, 2002 was $7.3 million compared to $6.4 million during the same
period in 2001. As of the end of March, 2002 there was no draw on the revolving
loan facility and the cash balance was $15 million.
Capital Expenditures. Capital expenditures for the three months ended March 31,
2002 were $0.7 million compared to $2.0 million of capital expenditures during
the comparable period in 2001. The expenditures during 2002 reflect an unusually
low amount of basic capital investments to maintain the business.
LIQUIDITY AND CAPITAL RESOURCES
GEO's primary cash needs are for 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 credit facility.
In December 2001, GEO entered into a formal agreement with Alcoa of Australia
concerning the restart of the gallium extraction facility in Pinjarra, Australia
for a ten year period. Pursuant to the agreement, GEO has 36 months to begin
actions to start its gallium operations without incurring a penalty. GEO also
has an option to acquire the shares of Rhodia Pinjarra Ltd., the current owner
of the dormant gallium extraction plant in Pinjarra. This option expires in
September, 2002. As of March 31, 2002, GEO was working with Rhodia S.A. on
details necessary to execute the option prior to September, 2002. All other work
by GEO on the Pinjarra project was in suspension as of March 31, 2002 due to the
weak condition of the global gallium market.
As of March 31, 2002, GEO's cash balance was $15.0 million versus a balance of
$11.7 million as of March 31, 2001.
Net cash provided from operations for the three months ended March 31 for 2001
and 2002 was $5.8 million and $(4.1) million, respectively. The $9.9 million
change was due primarily to the decrease in net income and an unfavorable change
in net working capital due mostly to higher inventory levels as of March 31,
2002 as opposed to March 31, 2001.
On May 14, 2002, GEO's senior credit agreement was amended with an effective
date of March 31, 2002. As part of the amendment the term debt was reduced from
$105.0 million to $97.5 million and the revolving credit facility was reduced
from $40.0 million to $20.0 million. Additionally, the interest margins paid
under the term debt facility and the revolving credit facility were increased
and another line reflecting a higher leverage ratio was added to the pricing
grid corresponding to both debt facilities. As of March 31, 2002, GEO had no
borrowings outstanding on its $20.0 million revolving credit facility.
Borrowings under the revolving credit facility bear interest, at GEO's option,
at:
. 2.25% above the higher of a Federal Funds rate plus 0.5% or the
prime lending rate of Bankers Trust Company; or
. an adjusted Eurodollar rate plus 4.50%.
The term loan under the senior credit agreement bears interest, at GEO's
option, at:
2.75% above the higher of a Federal Funds rate plus 0.5% or the prime
lending rate of the Bankers Trust Company; or
an adjusted Eurodollar rate plus 5.00%
The Federal Funds rate and the Eurodollar rate margin for both the revolving
credit facility and the term loan can vary from fiscal quarter to fiscal quarter
depending on GEO's net leverage ratio, i.e. net indebtedness divided by EBITDA
for the four previous quarters.
As of March 31, 2002, based on the amendment dated May 14, 2002 and effective as
of March 31, 2002, the interest rates under the term debt and the revolving
credit facility were approximately 7.0% and 6.5%, respectively. The revolving
credit facility contains customary covenants which include the maintenance of
certain financial ratios which were also amended effective March 31, 2002.
Cash paid for interest during the three month period ended March 31, 2002 was
$7.3 million versus $6.4 million during the same period in 2001. Net financing
charges, excluding amortization of financing fees, were $4.0 million during the
three month period ended March 31, 2002 versus $3.2 million during the same
period in 2001.
Cash paid for taxes for the three month period ended March 31, 2002 was $0.5
million compared to $0.1 million during the same period in 2001.
GEO believes that cash generated from operations, together with amounts
available under the 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.
GEO has the following contractual and commercial commitments obligations as of
March 31, 2002 but can impact its liquidity:
Contractual
Obligations (in Principal Payments Due by Period
thousands)
- -------------------------------------------------------------------------------------------------
Less Than 1 After
Total Year 1-3 Years 4-5 Years 5 Years
- -------------------------------------------------------------------------------------------------
Long-Term Debt $225,000 1,050 11,050 20,000 192,900
Line of Credit -- -- -- -- --
Operating Leases 1,386 857 465 64 --
- -------------------------------------------------------------------------------------------------
Total Contractual
Cash Obligations $226,386 1,907 11,515 20,064 192,900
- -------------------------------------------------------------------------------------------------
Other Commercial
Commitments (in Amount of Commitment Expiration Per Period
thousands)
- -------------------------------------------------------------------------------------------------
Total
Amounts Less Than 1 Over 5
Committed Year 1-3 Years 4-5 Years Years
- -------------------------------------------------------------------------------------------------
Lines of Credit $ 40,000 -- -- 40,000 --
Standby Letters of
Credit -- -- -- -- --
- -------------------------------------------------------------------------------------------------
Total Commercial
Commitments $ 40,000 -- -- 40,000 --
- -------------------------------------------------------------------------------------------------
As of May 14, 2002 GEO's senior credit agreement was amended. As part of the
amendment a $7.5 million principal repayment was required on the long-term debt
outstanding under the Term B loan outstanding and the borrowing availability
under the revolving line of credit was reduced from $40 million to $20 million.
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
Some of the statements made 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. Some of the factors that could cause actual results to differ
materially from GEO's expectations include the following: (1) changes in general
economic conditions that might impact the demand for GEO's products, in the
United States or in the foreign countries where GEO sells products; (2)
decreases in customer spending levels due to general economic conditions or
other factors affecting their volume of business; (3) the increased risk during
economic downturns that GEO's customers may declare bankruptcy or experience
payment difficulties; (4) increases in GEO's cost of borrowing or a default or
covenant violation under GEO's indenture of other material debt agreement; (5)
GEO's inability to effect additional acquisitions; (6) a decrease in the rate of
growth of GEO's gallium or other product sales; (7) GEO's inability to
effectively integrate, or maintain or grow the sales of, acquired businesses, or
its incurrence of greater than expected expenses in connection with operating
acquired businesses; (8) GEO's inability to repay or refinance its indebtedness
at such time as the principal amounts thereof become payable or are accelerated;
and (9) changes in environmental or other governmental regulations or
enforcement. Given these uncertainties, you should not place undue reliance upon
such forward-looking statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK.
As a result of GEO's global operating activities, GEO is exposed to
market risks from changes in interest rates and in foreign currency exchange
rates which may adversely affect GEO's operating results and financial position.
GEO's goal is to minimize its risks from interest and foreign currency exchange
rate fluctuations through its normal operating activities and financing
activities and, when deemed appropriate, through the use of derivative financial
instruments. GEO does not use derivative financial instruments for trading or
other speculative purposes and does not use leveraged derivative financial
instruments.
GEO's exposure to market risk for changes in foreign currency exchange
rates arises from financing activities between subsidiaries and firm commitments
arising from international transactions. GEO attempts to have such transaction
exposure hedged with internal natural offsets to the fullest extent possible
and, once these opportunities have been exhausted, through foreign currency
option agreements with third parties. During 2001, GEO entered into option
contracts that collar the Australian dollar between .47 and .53 in relation to
the U.S. dollar, in anticipation of capital project expenditures in Pinjarra,
Australia. GEO entered into these contracts at no cost. These contracts mature
through December 31, 2002. Two of the contracts were terminated in April, 2002
and resulted in a gain of $433,000. At March 31, 2002, GEO's options had a
carrying value of $701,000 due to the strengthening of the Australian dollar
from the transaction date to the end of the current quarter.
GEO's exposure to market risk from changes in interest rates relates
primarily to GEO's debt obligations. GEO has both fixed and variable debt
obligations and used interest rate swaps to manage the exposure to interest rate
movements and reduce borrowing costs. On November 15, 2001, GEO entered into two
interest rate derivative contracts with Citibank N.A. The purposed of the
contracts is to hedge GEO's interest expense by availing itself of the
prevailing interest rate conditions reflected by a steep yield curve and GEO's
tax situation. Both derivative contracts were for a notional amount of $90.0
million.
Under one contract, the "floating to fixed" contract, GEO agreed to pay
Citibank the equivalent of 3.67% annually through August 1, 2004 with payments
being made on each February 1 and August 1 during the contract period. Citibank
agreed to pay GEO the six-month LIBOR rate, reset on the first day of each
semi-annual payment date during the contract period. The contract corresponds to
the floating rate debt under GEO's Senior Credit Facility.
Under the other contract, the "fixed to floating" contract, GEO agreed
to pay Citibank the equivalent of the six month LIBOR rate as of the last
business day prior to the payment date plus 5.05%. Citibank agreed to pay GEO
during the same period 10.125%. The payment dates are February 1 and August 1 of
each year until August 1, 2008. As part of this transaction, GEO sold Citibank
the right to cancel the contract on any payment date commencing with August 1,
2004. This contract corresponds to the Senior Subordinated Notes which have a
fixed interest rate of 10.125%. Due to the timing of the cancellation provision
of the swap contract, the contract is not considered to be 100% effective.
GEO has accounted for these interest rate derivative contracts pursuant
to FAS 133. The "floating to fixed" contract has been treated as a cash flow
hedge with 100% effectiveness. As of March 31, 2002, the fair value of the hedge
was, net of tax, $0.6 million. This amount was recorded in other comprehensive
income and was offset by a reduction in other long-term liabilities on GEO's
balance sheet.
The "fixed to floating" contract has been treated as a fair value
hedge. As of March 31, 2002, the fair market value of the hedge was $5.6 million
at which time, based on the change in the fair value of the risk being hedged,
this hedge was considered to be 93.1% effective. The accounting treatment for
recording the fair value hedge was as follows: 1) the ineffective portion of the
hedge was recorded as a net of tax loss of $0.4 million in other income on GEO's
income statement, 2) the change in the fair value of the risk being hedged was
reflected as a $5.3 million reduction in the value of the Senior Subordinated
Notes and 3) the other long-term liabilities were increased by $5.6 million, the
fair market value of the fair value hedge derivative.
GEO's foreign operations are subject to the usual risks that may affect
such operations. They 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. Based on a hypothetical
immediate 100 basis point increase in interest rates at March 31, 2002, the fair
value of GEO's fixed rate long-term notes would be impacted by a net decrease of
$6.2 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 March 31, 2002 of $6.6 million.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
10.1 First Amendment to Amended and Restated Credit Agreement,
dated as of May 14, 2002, by and among GEO Speciality Chemicals, Inc., Deutsche
Bank Trust Company Americas, as administrative agent, Salomon Smith Barney
Inc., as syndication agent, US Bank National Association, as documentation
agent, and certain other financial institutions.
(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 March 31, 2002.
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.
By: _________________________________________________________
Date: May 15, 2002
/s/ William P. Eckman
William P. Eckman
Executive Vice President and Chief Financial Officer
(duly authorized officer and principal financial officer)