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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, 2001
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 9,
2001: 135.835.
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of August 9,
2001: none.
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PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
(unaudited)
ASSETS
Current assets
Cash $ 18,511 $ 7,930
Trade accounts receivable, net of allowance
of $429 and $425 at June 30, 2001 and
December 31, 2000, respectively 33,111 26,957
Other receivables 3,912 1,427
Inventory 23,677 18,213
Prepaid expenses and other current assets 3,063 975
Deferred taxes 1,054 1,064
-------- --------
Total current assets 83,328 56,566
Property and equipment, net 112,397 94,337
Other assets
Intangible assets, net 9,222 5,329
Goodwill, net 92,702 33,527
Other accounts receivable 56 120
Other 98 155
-------- --------
Total other assets 102,078 39,131
-------- --------
Total assets $297,803 $190,034
======== ========
See accompanying notes to consolidated financial statements.
(IN THOUSANDS EXCEPT SHARE DATA)
JUNE 30, 2001 DECEMBER 31, 2000
------------- -----------------
LIABILITIES AND SHAREHOLDERS' EQUITY (unaudited)
Current liabilities
Accounts payable $ 17,240 $ 13,072
Other accounts payable 222 272
Income taxes payable 3,676 2,208
Accrued expenses and other current
liabilities 9,915 9,551
-------- --------
Total current liabilities 31,053 25,103
Long-term liabilities
Revolving line of credit - 10,000
Long-term debt 225,000 120,000
Other long-term liabilities 5,195 5,091
Other accounts payable - 337
Deferred taxes 3,602 3,317
-------- --------
Total long-term liabilities 233,797 138,745
-------- --------
Total liabilities $264,850 $163,848
Shareholders' equity
Class A Voting Common Stock, $1.00 par value,
1,035 shares authorized, 135.835 shares issued
and outstanding at June 30, 2001 and December
31, 2000
Class B Nonvoting Common Stock, $1 par value, 215
shares authorized, 0 shares outstanding at June
30, 2001 and December 31, 2000
Additional paid-in capital 20,901 20,901
Retained earnings 13,871 7,104
Accumulated other comprehensive loss (1,819) (1,819)
-------- --------
Total shareholders' equity $ 32,953 $ 26,186
-------- --------
Total liabilities and shareholders' equity $297,803 $190,034
======== ========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
APRIL 1 APRIL 1 JAN 1 JAN. 1
THROUGH THROUGH THROUGH THROUGH
JUNE 30, 2001 JUNE 30, 2000 JUNE 30, 2001 JUNE 30, 2000
------------- -------------- -------------- --------------
Net sales $ 50,776 $ 46,578 $ 101,311 $ 88,408
Costs of sales 37,049 34,951 73,264 67,434
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Gross profit 13,727 11,627 28,047 20,974
Selling general and administrative
expense 5,766 5,912 11,610 11,424
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Income from operations 7,961 5,715 16,437 9,550
Other expense
Net interest expense (4,085) (3,813) (7,494) (7,547)
Foreign currency exchange gain
(loss) 98 (167) (2) (419)
Other 2,766 0 2,766 0
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Income before taxes 6,740 1,735 11,707 1,584
Provision for taxes 2,770 547 4,940 526
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Net income $ 3,970 $ 1,188 $ 6,767 $ 1,058
=========== =========== ============ ===========
Total comprehensive income $ 3,970 $ 1,104 $ 6,767 $ 294
=========== =========== ============ ===========
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
(IN THOUSANDS)
JAN 1 JAN 1
THROUGH THROUGH
JUNE 30, 2001 JUNE 30, 2000
------------- -------------
Cash flows from operating activities
Net income $ 6,767 $ 1,058
Adjustments to reconcile net income
to net cash from operating
activities
Depreciation, depletion and
amortization 7,559 6,641
Gain on sale of Paper Chemicals
business (2,766) -
Deferred income tax expense 294 (168)
Change in assets and liabilities
Trade accounts receivable (5,027) (5,429)
Other accounts receivable (1,660) 621
Inventories (366) 3,252
Prepaid expense and other assets (1,549) 642
Accounts payable 4,822 (2,992)
Other liabilities 105 (25)
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Net cash from operating activities 8,179 3,600
Cash flows from investing activities
Purchases of property, plant and
equipment (3,530) (4,381)
Proceeds from sale of Paper Chemicals
business 8,500 -
Purchase of assets of Peroxy
Chemicals business from Hercules,
Incorporated (93,137) -
--------- ---------
Net cash flows from investing
activities (88,167) (4,381)
Cash flows from financing activities
Borrowings (repayments) under
revolving line of credit (net) (10,000) 1,000
Borrowings on Term B facility 105,000
Payments on deferred financing
costs (4,431) -
--------- ---------
Net cash from financing activities 90,569 1,000
Effect of exchange rate changes on
cash - (94)
Net change in cash 10,581 125
Cash at beginning of period 7,930 4,696
Cash at end of period 18,511 4,821
======== =======
Supplemental disclosure of cash flow
Information
Cash paid for
Interest $ 6,997 $ 7,110
Taxes 1,855 514
In conjunction with acquisition of the Peroxy Chemicals business from Hercules
Incorporated liabilities were assumed as follows:
Fair value of assets acquired $ 93,513
Cash paid (93,137)
--------
Liabilities assumed 376
See accompanying notes to consolidated financial statements.
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 foreign 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. The
Company has a high level of indebtedness, which creates liquidity and debt
service risks.
INTERIM RESULTS (UNAUDITED): The accompanying consolidated balance sheet at
June 30, 2001 and the consolidated statements of operations and cash flows for
the three and six month periods ended June 30, 2001 and 2000 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, 2001 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, 2000, and the notes thereto, which are included in GEO's Annual
Report on Form 10-K for the fiscal year ended December 31, 2000.
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.
FOREIGN CURRENCY TRANSLATION: Effective January 1, 2001, GEO's wholly-owned
subsidiaries, GEO Holdings (Europe) SARL, GEO Gallium S.A. and Ingal Stade GmbH
changed their functional currency from the French franc to the U. S. dollar, due
to various economic factors. This change did not have a material effect on the
financial statements.
NOTE 2 -- DISPOSITION OF ASSETS
On April 19, 2001, GEO sold to ONDEO Nalco Company (Nalco) certain assets of its
Paper Chemicals business for $8,500 in cash plus the assumption by Nalco of
certain liabilities associated with the Paper Chemicals business. GEO recognized
a pre-tax gain of approximately $2,766 on the sale. Annual revenues for the
paper chemicals business as of December 31, 2000 were $26,315.
The Asset Purchase Agreement with Nalco provides for GEO to receive additional
consideration from Nalco if certain sales volumes are achieved by Nalco on
specific products sold during the first two years following the closing. The
maximum additional consideration that can be received by GEO over the two-year
period is $2,000.
In connection with the sale, GEO entered into various supply agreements with
Nalco, pursuant to which GEO will produce specific paper coating products for
Nalco over a period of the next five years.
NOTE 3 -- ACQUISITIONS
On May 31, 2001, GEO purchased from Hercules Incorporated (Hercules)
substantially all of the assets, net of certain assumed liabilities, of
Hercules' Peroxy Chemicals division. The assets acquired include accounts
receivable, inventory, buildings, and machinery and equipment. The Peroxide
business produces various organic peroxide products used in the vulcanization,
catalysis and processing of polymers and elastometric compounds. The purchase
price was $93,137, allocated as follows:
Current assets $ 11,200
Land 300
Buildings 2,313
Property and equipment 18,710
Liabilities assumed (376)
Excess of cost over fair value 60,990
------
Purchase price 93,137
The $60,990 intangible asset and goodwill will be amortized over 15 years until
January 1, 2002 at which time amortization of goodwill will cease upon
implementation of Financial Accounting Standard No. 142. The goodwill will then
be evaluated annually for impairment.
In connection with the purchase, GEO has entered into two tolling agreements
with Hercules, pursuant to which Hercules will produce certain peroxy products
for GEO on a tolling basis for an initial term of one year.
NOTE 4 -- CREDIT FACILITY AND LONG-TERM BORROWINGS
In conjunction with the acquisition of the Peroxy Chemicals business, as
discussed in Note 3, GEO entered into an Amended and Restated Credit Agreement
with Bankers Trust Company, Salomon Smith Barney Inc. and various other
financial institutions (the "Lenders"), pursuant to which the Lenders have
extended credit facilities in the amount of $145,000 (the "Credit Facility") to
GEO, consisting of (A) a Term Loan B Facility in the amount of $105,000,
maturing on December 31, 2007 and bearing interest, at GEO's option, at a
Reserved Adjusted Eurocurrency Rate plus 3.25% to 4.00%, depending on GEO's
leverage ratio, or a Base Rate plus 2.25% to 3.00%, depending on GEO's leverage
ratio, and (B) a $40,000 Revolving Credit Facility, maturing on June 30, 2005
and bearing interest, at GEO's option, at a Reserved Adjusted Eurocurrency Rate
plus 2.25% to 3.50%, depending on GEO's leverage ratio, or a Base Rate plus
1.25% to 2.50%, depending on GEO's leverage ratio. The Term Loan B facility
funds were utilized for the acquisition of the Peroxy Chemicals business and
related costs incurred in conjunction with the acquisition, as well as to
refinance GEO's existing revolving credit facility and for working capital and
general corporate purposes.
The Term Loan B Facility requires annual principal repayments of $ 1,050 as of
June 30, 2002 and June 30, 2003. Thereafter, semiannual payments of $5,000 are
required through December 31, 2007, at which time a balloon payment of the
remaining principal balance will be due.
All tangible and intangible assets of GEO, including GEO's ownership interests
in its subsidiaries, secure GEO's obligations under the Credit Facility. The
Credit Facility is senior in right of payment to GEO's outstanding Senior
Subordinated Notes.
The Credit Facility requires GEO to meet certain affirmative and negative
covenants, which include certain restrictions on future indebtedness, capital
expenditures and dividend payments and to meet certain interest-coverage and
leverage ratios.
NOTE 5 -- INVENTORY
Inventory consists of the following components:
June 30, 2001 December 31, 2000
------------- -----------------
Raw materials $ 9,378 $ 6,223
Work in progress 2,492 3,696
Finished goods 11,807 8,294
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$ 23,677 $ 18,213
======== ========
NOTE 6 -- NEW ACCOUNTING PRONOUNCEMENTS
The adoption of Financial Accounting Standard No. 133, "Accounting for
Derivatives Instruments and Hedging Activities," was required as of January 1,
2001. The standard established methods of accounting for derivative financial
instruments and hedging activities related to those instruments as well as other
hedging activities. As of June 30, 2001, GEO has not held any derivative
instruments and does not engage in any hedging activities. Thus, the adoption of
this standard has not had a material impact on the consolidated financial
statements.
The Financial Accounting Standards Board also issued FAS No. 141, "Business
Combinations," and FAS No. 142, "Goodwill and Other Intangible Assets" in June
2001.
Under FAS 141, the pooling method may no longer be used for business
combinations announced after June 30, 2001. The statement also requires that in
any prior business combination, if an intangible asset was recorded but was
reported as goodwill, the carrying amount of the intangible asset should now be
separately reported. If an intangible was recorded that does not now meet the
requirement to be an identified intangible this amount should be included in
goodwill.
FAS No. 142, "Goodwill and Other Intangible Assets", eliminates the periodic
amortization of goodwill from all future and prior business combinations
beginning January 1, 2002. Upon adoption, goodwill should be evaluated for
impairment. The impairment test shall include valuing the fair value of the
reporting entity and comparing its carrying amount (including allocated
goodwill), with any excess of purchase price over new fair value estimate.
The useful life of intangible assets acquired before July 1, 2001 should be
reassessed upon adoption of this statement. Intangibles with an indefinite
useful life must be tested for impairment upon adoption and annually thereafter
at the reporting unit level.
GEO is required to adopt this standard on January 1, 2002. GEO is currently
evaluating the effects of the implementation of these standards. As of June 30,
2001, GEO has goodwill and other intangible assets (net of amortization) of
$101,924.
NOTE 7 -- COMPREHENSIVE INCOME
Comprehensive income consists of GEOs' net income and foreign exchange
translation adjustments.
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 the
Company expressed in millions of dollars and as a percentage of net sales:
Three Months Ended June 30, Six Months Ended June 30,
--------------------------- -------------------------
2000 2001 2000 2001
------ ------ ----- ------
$ % $ % $ % $ %
----- ----- ----- ----- ----- ----- ------ -----
Net sales $46.6 100.0% $50.7 100.0% $88.4 100.0% $101.3 100.0%
Gross profit 11.7 25.1 13.7 27.0 21.0 23.8 28.0 27.7
Operating income 5.7 12.2 8.0 15.7 9.6 10.9 16.4 16.2
Net income 1.2 2.6 3.9 7.6 1.1 1.2 6.8 6.7
EBITDA 9.0 19.3 11.8 23.2 15.9 18.0 23.6 23.3
Net interest expense 3.8 8.2 4.1 8.0 7.5 8.5 7.5 7.4
Capital expenditures 2.7 5.8 1.5 3.0 4.1 4.6 3.5 3.5
SIX MONTHS ENDED JUNE 30, 2001 COMPARED TO SIX MONTHS ENDED JUNE 30, 2000
Net Sales. Net sales for the six months ended June 30, 2001 were $101.3 million,
representing a $12.9 million or 14.6% increase compared with net sales of $88.4
million during the same period in 2000. The increase in net sales was primarily
attributable to the gallium business which accounted for $10.6 million of the
increase. The gallium business, which produces high purity materials used
primarily in the electronics industry, increase in net sales was driven by
higher prices. The remaining increase in net sales was mostly attributable to
the acquisition of the peroxide chemicals business unit from Hercules,
Incorporated on May 31, 2001. The first month of sales for this unit was $4.2
million. Partially offsetting this increase in net sales was the impact of the
divestment of the Paper Chemicals unit, excluding manufacturing assets, on April
15, 2001 to ONDEO Nalco. As part of the divestment, GEO agreed to a supply
agreement under which GEO supplies finished products to ONDEO Nalco at standard
cost. The net revenue decrease resulting from the divestment and subsequent
supply agreement was $2.3 million. The remaining $0.4 million increase in net
sales reflects gains in net sales to construction markets and aluminum chemicals
sold mostly to water treatment markets of $2.4 million or 10.2% and $0.6 million
or 2.5% respectively partially offset by a $2.6 million or 15.5% decrease in
sales to the coatings market.
Gross Profit. Gross profit for the six months ended June 30, 2001 was $28.0
million, or 27.7% of net sales, representing a $7.0 million or 33.3% increase
compared with gross profit of $21.0 million, or 23.8% of net sales, during the
same period in 2000. The increase in gross profit was primarily attributable to
the gallium business which experienced a $10.7 million or a 205% gain in gross
profit due to the higher prices noted previously. The gross profit contribution
of the newly acquired peroxide business was largely offset by the impact of the
divested Paper Chemicals business, resulting in a net $0.2 million increase. GEO
experienced a $3.9 million decrease in gross profit in the remainder of its
business. Despite a slightly higher revenue level, GEO experienced higher costs,
especially raw material and utility costs early in 2001, and an unfavorable
sales mix due to the decline in sales to the coatings market. The higher gross
profit as a percent of net sales reflects the impact of the gallium business on
the overall sales mix and higher prices for gallium products particularly during
the second quarter of 2001.
Operating Income. Operating income for the six months ended June 30, 2001 was
$16.4 million, or 16.2% of net sales, representing a $6.8 million or 70.8%
increase compared with operating income of $9.6 million, or 10.9% of net sales,
during the same period in 2000. The increase in operating income was
attributable to the gallium business which contributed $10.4 of the increase.
Partially offsetting the contribution of the gallium business was the $3.9
million decline in gross margin of the rest of the business noted previously.
The remaining slight improvement in operating income reflects the net
contribution of the acquired peroxide business and divested paper chemical
business.
Net Income. Net income for the six months ended June 30, 2001 was $6.8 million,
or 6.7% of net sales, representing a $5.7 million or 518% increase compared with
net income of $1.1 million, or 1.2% of net sales, during the same period in
2000. The increase in net income was due primarily to the additional operating
income generated by the gallium business and the pre-tax gain on the sale of the
paper chemical business of $2.8 million. Partially offsetting
the increase in gallium generated operating income was an increase in income
taxes, particularly foreign taxes related to the gallium business, of $4.9
million.
EBITDA. EBITDA for the six months ended June 30, 2001 was $23.6 million, or
23.3% of net sales, representing a $7.7 million or 48.4% increase compared to
EBITDA of $15.9 million, or 18.0% of net sales, during the same period in 2000.
The increase in EBITDA was attributable to the gallium business, which generated
an additional $10.5 million in EBITDA compared to the first six months of 2000.
The most significant items which partially offset the gallium related increase
were the decline in net sales to the coatings markets and higher raw material
and utility costs. The net EBITDA contribution of the recently acquired peroxide
business and the divested paper chemicals business was approximately $1.1
million.
Net Interest Expense. Net interest expense for the six months ended June 30,
2001 was $7.5 million, or 7.4% of net sales, an amount essentially equivalent
to net interest expense of $7.5 million, or 8.5% of net sales, during the same
period in 2000.
Capital Expenditures. Capital expenditures for the six months ended June 30,
2001 were $3.5 million or a $0.6 million decrease compared to $4.1 million of
capital expenditures during the same period in 2000. The decrease in capital
expenditures reflects the absence of special projects while the first six months
of 2000 included capital expenditures to add production capacity for coating
additive and gallium products.
THREE MONTHS ENDED JUNE 30, 2001 COMPARED TO THREE MONTHS ENDED JUNE 30, 2000
Net Sales. Net sales for the three months ended June 30, 2001 were $50.7
million, representing a $4.1 million or 8.8% increase compared to $46.6 million
of net sales during the same period in 2000. Most of the increase in net sales
was attributable to the gallium business and sales to various segments in the
construction market which increased by $3.3 million or 45.1% and $1.1 million or
9.4% of net sales respectively. The increase in gallium sales was mostly the
result of higher prices while the construction related sales were primarily
volume driven. Also, there was a net increase in revenue attributable to the
peroxide acquisition and the paper chemical divestment of $1.8 million.
Partially offsetting these increases was a 19.7% or $1.7 million decline in
sales, mostly volume related, to the coatings market and a slight decline, 3.1%
or $0.4 million decline in aluminum products sold mostly to water treatment
markets.
Gross Profit. Gross profit for the three months ended June 30, 2001 was $13.7
million, or 27.0% of net sales, representing a $2.0 million or 17.1% increase
compared with gross profit of $11.7 million, or 25.1% of net sales, during the
same period in 2000. The gallium business contributed $4.0 million of the
increase due primarily to higher prices during the period. The most significant
decline in gross margin was experienced in products sold to the coatings market
as a combination of lower volume and higher raw material costs resulted in a
47.3% or $1.4 million deterioration in gross margin. Similarly, the volume
related gross margin decline of $0.2 million and higher plant costs of $0.1
million negatively impacted products sold to the water treatment and
construction markets. Gross margin was also unfavorable, $0.2 million, because
of the net impact of the peroxide chemical acquisition and the paper chemical
divestment.
Operating Income. Operating income for the three months ended June 30, 2001 was
$8.0 million, or 15.7% of net sales, representing a $2.3 million or 40.4%
increase compared with operating income of $5.7 million, or 12.2% of net sales,
during the same period in 2000. The increase was due to the performance of the
gallium business, up $3.8 million, partially offset by the gross margin
deterioration in coating products, $1.4 million, and the water treatment
products, $0.2 million.
Net Income. Net income for the three months ended June 30, 2001 was $3.9
million, or 7.6% of net sales, representing a $2.7 million or 225% increase
compared with net income of $1.2 million, or 2.6% of net sales, during the same
period in 2000. The increase in net income was primarily attributable to the
divestment of the paper chemicals business. The additional operating income
generated by the gallium results was offset by a higher tax provision,
especially foreign, and an increase in net interest expense related to the
refinancing associated with the acquisition of the peroxide business.
EBITDA. EBITDA for the three months ended June 30, 2001 was $11.8 million, or
23.2% of net sales, representing a $2.8 million or 31.1% increase compared with
EBITDA of $9.0 million, or 19.3% of EBITDA, during the same
period in 2000. The gallium business contributed $3.8 million to the EBITDA more
than offsetting a $1.5 million EBITDA decline caused mostly by lower sales
volume of products sold to the coatings and water treatment markets. The
remaining favorable contribution to EBITDA, $0.5 million, was mostly due to the
net favorable impact of the peroxide acquisition and the paper chemical
divestment.
Net Interest Expense. Net interest expense for the three months ended June 30,
2001 was $4.1 million, or 8.2% of net sales, representing a $0.3 million or 7.9%
increase from the net interest expense of $3.8 million, or 8.0% of net sales,
during the same period in 2000. The increase in net interest expense was
attributable to additional indebtedness related to the peroxide acquisition,
$81.0 million, partially offset by lower interest rates and an increase in
interest income generated by a $13.7 million increase in cash balances.
Capital Expenditures. Capital expenditures for the three months ended June 30,
2001 were $1.5 million, or 3.0% of net sales, representing a $1.2 million
decrease compared to $2.7 million of capital expenditures during the same period
in 2000. Most of the decrease in capital expenditures reflects an absence of
major capital projects such as the capacity increases in gallium and coating
additives during the same period in 2000.
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 revolving credit facility. As of June 30,
2001, GEO had no material commitments for capital expenditures although the
Company has publicly announced its intention to invest approximately $40.0
million to renovate and upgrade a gallium extraction facility in Pinjarra,
Australia. Most of this investment is expected to be made in the fourth quarter
of 2001 and the first quarter of 2002.
Net cash provided from operations for the six month periods ending June 30, 2001
and 2000 was $8.2 million and $3.6 million, respectively. The $4.6 million
increase was due primarily to increases in net income and tax liabilities.
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. On May 31, 2001, GEO amended its senior credit agreement in
conjunction with the acquisition of the peroxide chemicals business from
Hercules, Incorporated. Under the amended credit agreement, GEO's revolving loan
credit facility was reduced from $45.0 million to $40.0 million. There was no
draw on the revolving loan facility as of June 30, 2001. GEO also borrowed under
the amended senior credit agreement $105.0 million through a Term B loan
facility which was syndicated to more than 20 banks and institional investors.
The amended revolving loan facility expires in 2005 and the Term B loan facility
expires in December, 2007. The revolving credit facility has no annual
amortization requirement. The Term B loan facility has a 1% per cent per annum
amortization requirement until June 30, 2004 at which time the first semi-annual
amortization payment of $5.0 million is due. The semi-annual $5.0 million
payments are due until the expiration of the Term B loan when the total of the
remaining Term B balance is due. Finally, the Term B loan also has a mandatory
prepayment provision based on an annual calculation of excess cash flow.
Borrowing under the revolving credit facility and the Term B Credit facility
bear interest, at GEO's option, at:
. 1.25% to 2.50% (depending on GEO's leverage ratio) for the revolving
facility and 2.25% to 3.00% (depending on GEO's leverage ratio) for the
Term B facility 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% to 3.50% (depending on GEO's
leverage ratio) for the revolving facility and 3.25% to 4.00% (depending
on GEO's leverage ratio) for the Term B facility.
As of June 30, 2001, GEO's interest rate under the Term B facility was 7.5625%.
The Company did not have any draw on its senior revolving credit facility as of
June 30, 2001. The overall senior credit agreement which includes both the
revolving credit facility and the Term B facility contains customary covenants
including the maintenance of certain financial ratios.
During the six months ended June 30, 2001, GEO repaid $10.0 million of its
senior revolving credit facility. On May 31, 2001, GEO borrowed the full amount
of $105.0 million of its Term B facility. This borrowing was made to fund the
acquisition of the peroxide chemical business and fund various transaction and
financing fees
related to the acquisition. Additionally, the Term B loan resulted in an
increase in the Company's cash balance of approximately $8.0 million.
As of June 30, 2001, GEO had a cash balance of $18.5 million and $40.0 million
available under its revolving loan facility. This level of liquidity compares to
a cash balance of $4.8 million and $21.0 million of revolving loan availability
as of June 30, 2000. The cash balance was increased by $6.8 million between
March 31 and June 30, 2001, and the revolving loan balance was reduced by $10.0
million during the same period.
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) 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 or other material debt agreement; (5) GEO's inability to
effectively integrate acquired businesses; (6) a decrease in the rate of growth
of GEO's gallium or other product sales; and (7) 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.
GEO has not engaged in hedging or other market structure derivative trading
activities as of June 30, 2001. GEO's debt obligations are partially at fixed
interest rates and at variable rates. GEO does not believe that its market risk
financial instruments on June 30, 2001 would have a material impact on future
operations or cash flow.
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, 2001, based upon market quotations, is approximately
$112.8 million. Based on a hypothetical immediate 100 basis point increase in
interest rates at June 30, 2001, the fair value of GEO's fixed rate long-term
notes would be impacted by a net decrease of $7.8 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, 2001 of $8.4 million.
PART II
OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits.
None.
(b) Reports on Form 8-K.
GEO filed a report on Form 8-K with the Securities and Exchange
Commission on June 15, 2001 relating to the Peroxy Chemicals acquisition.
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 9, 2001 By: /s/ William P. Eckman
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William P. Eckman
Executive Vice President and Chief
Financial Officer (duly authorized officer
and principal financial officer)