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, 2003
Commission File Number: 333-70011
GEO SPECIALTY CHEMICALS, INC.
(Exact Name of Registrant as Specified in Its Charter)
| Ohio (State or Other Jurisdiction of Incorporation or Organization) |
34-1708689 (I.R.S. Employer Identification No.) |
GEO Specialty Chemicals, Inc.
3201 Enterprise Parkway, Suite 490
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 o
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Yes o No x
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 13, 2003: 135.835
Shares of Class B Nonvoting Common Stock, $1.00 par value, as of May 13, 2003: none
PART I
FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS.
CONSOLIDATED BALANCE SHEETS (unaudited)
GEO SPECIALTY CHEMICALS, INC.
|
|
|
(IN THOUSANDS) |
| ||||
|
|
|
|
| ||||
|
|
|
MARCH 31, |
|
DECEMBER 31, |
| ||
|
|
|
|
|
|
| ||
| ASSETS |
|
|
|
|
|
|
|
| Current assets: |
|
|
|
|
|
|
|
| Cash |
|
$ |
9,786 |
|
$ |
11,420 |
|
| Trade accounts receivable, net of allowance of $242 and $242 at March 31, 2003 and December 31, 2002, respectively |
|
|
23,210 |
|
|
22,136 |
|
| Other receivables |
|
|
348 |
|
|
608 |
|
| Inventory |
|
|
28,017 |
|
|
26,984 |
|
| Prepaid expenses and other current assets |
|
|
1,846 |
|
|
1,794 |
|
| Deferred taxes |
|
|
333 |
|
|
400 |
|
|
|
|
|
|
|
|
|
|
| Total current assets |
|
|
63,540 |
|
|
63,342 |
|
| Property and equipment, net |
|
|
96,341 |
|
|
98,796 |
|
| Other assets |
|
|
|
|
|
|
|
| Intangible assets, net |
|
|
10,574 |
|
|
11,169 |
|
| Goodwill |
|
|
85,821 |
|
|
85,821 |
|
| Other accounts receivable |
|
|
1,975 |
|
|
1,527 |
|
| Deferred taxes |
|
|
6,728 |
|
|
5,163 |
|
| GEO Pinjarra designated assets |
4,990 | 5,047 | |||||
| Other |
|
|
44 |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110,132 |
|
|
108,773 |
|
|
|
|
$ |
270,013 |
|
$ |
270,911 |
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
| Current liabilities |
|
|
|
|
|
|
|
| Current portion of long-term debt |
|
$ |
975 |
|
$ |
975 |
|
| Accounts payable |
|
|
12,994 |
|
|
13,380 |
|
| Other accounts payable |
|
|
78 |
|
|
106 |
|
| Accrued expenses and other current liabilities |
|
|
6,950 |
|
|
9,404 |
|
|
|
|
|
|
|
|
|
|
| Total current liabilities |
|
|
20,997 |
|
|
23,865 |
|
| Long-term liabilities |
|
|
|
|
|
|
|
| Revolving line of credit |
|
|
5,000 |
|
|
— |
|
| Senior subordinated notes |
|
|
120,000 |
|
|
120,000 |
|
| Fair value adjustment |
|
|
2,843 |
|
|
2,930 |
|
|
|
|
|
|
|
|
|
|
| Fair value of senior subordinated notes |
|
|
122,843 |
|
|
122,930 |
|
| Term B notes |
|
|
95,550 |
|
|
95,550 |
|
| Other long-term liabilities |
|
|
6,052 |
|
|
6,148 |
|
| Deferred taxes |
|
|
186 |
|
|
349 |
|
|
|
|
|
|
|
|
|
|
| Total long-term liabilities |
|
|
229,631 |
|
|
224,977 |
|
| Shareholders’ equity |
|
|
|
|
|
|
|
| Class A Voting Common Stock, $1.00 par value, 1,035 shares authorized, 136 shares issued and outstanding at March 31, 2003 and December 31, 2002 |
|
|
|
|
|
|
|
| Class B Nonvoting Common Stock, $1.00 par value, 215 authorized, 0 outstanding at March 31, 2003 and December 31, 2002 |
|
|
|
|
|
|
|
| Additional paid-in capital |
|
$ |
20,901 |
|
$ |
20,901 |
|
| Retained earnings |
|
|
1,923 |
|
|
4,892 |
|
| Accumulated other comprehensive loss |
|
|
(3,439 |
) |
|
(3,724 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
19,385 |
|
|
22,069 |
|
|
|
|
$ |
270,013 |
|
$ |
270,911 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
|
|
|
(IN THOUSANDS) |
| ||||
|
|
|
|
| ||||
|
|
|
JANUARY 1 |
|
JANUARY 1 |
| ||
|
|
|
|
|
|
| ||
| Net sales |
|
$ |
39,225 |
|
$ |
40,428 |
|
| Cost of sales |
|
|
34,966 |
|
|
33,558 |
|
|
|
|
|
|
|
|
|
|
| Gross profit |
|
|
4,259 |
|
|
6,870 |
|
| Selling, general and administrative expenses |
|
|
4,216 |
|
|
4,834 |
|
| Other (income) expense |
|
|
— |
|
|
(133 |
) |
|
|
|
|
|
|
|
|
|
| Income before interest and taxes |
|
|
43 |
|
|
2,169 |
|
| Net interest expense |
|
|
5,125 |
|
|
4,287 |
|
|
|
|
|
|
|
|
|
|
| Loss before income taxes |
|
|
(5,082 |
) |
|
(2,118 |
) |
| Provision for taxes (benefit) |
|
|
(2,113 |
) |
|
(636 |
) |
|
|
|
|
|
|
|
|
|
| Net loss |
|
$ |
(2,969 |
) |
$ |
(1,482 |
) |
|
|
|
|
|
|
|
|
|
| Comprehensive income (loss) |
|
$ |
(2,684 |
) |
$ |
227 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
GEO SPECIALTY CHEMICALS, INC.
|
|
|
(IN THOUSANDS) |
| ||||
|
|
|
|
| ||||
|
|
|
JANUARY 1 |
|
JANUARY 1 |
| ||
|
|
|
|
|
|
| ||
| Cash flows from operating activities |
|
|
|
|
|
|
|
| Net loss |
|
$ |
(2,969 |
) |
$ |
(1,482 |
) |
| Adjustments to reconcile net loss to net cash from operating activities |
|
|
|
|
|
|
|
| Depreciation, depletion and amortization |
|
|
3,742 |
|
|
4,033 |
|
| Deferred income tax expenses |
|
|
(1,660 |
) |
|
(256 |
) |
| Change in assets and liabilities |
|
|
|
|
|
|
|
| Trade accounts receivable |
|
|
(1,074 |
) |
|
(3,000 |
) |
| Other accounts receivable |
|
|
(188 |
) |
|
87 |
|
| Inventories |
|
|
(1,033 |
) |
|
185 |
|
| Prepaid expenses and other assets |
|
|
(57 |
) |
|
(1,236 |
) |
| Accounts payable |
|
|
(2,839 |
) |
|
(3,123 |
) |
| Other liabilities |
|
|
(124 |
) |
|
680 |
|
|
|
|
|
|
|
|
|
|
| Net cash from operating activities |
|
|
(6,202 |
) |
|
(4,112 |
) |
| Cash flows from investing activities |
|
|
|
|
|
|
|
| Purchases of property, plant and equipment |
|
|
(432 |
) |
|
(712 |
) |
| Cash flows from financing activities |
|
|
|
|
|
|
|
| Revolving lines of credit borrowings, net |
|
|
5,000 |
|
|
— |
|
| Net change in cash |
|
|
(1,634 |
) |
|
(4,824 |
) |
| Cash at beginning of period |
|
|
11,420 |
|
|
19,782 |
|
|
|
|
|
|
|
|
|
|
| Cash at end of period |
|
$ |
9,786 |
|
$ |
14,958 |
|
|
|
|
|
|
|
|
|
|
| Supplemental disclosure of cash flow information |
|
|
|
|
|
|
|
| Cash paid for |
|
|
|
|
|
|
|
| Interest |
|
$ |
7,825 |
|
$ |
7,340 |
|
| Taxes |
|
|
— |
|
|
484 |
|
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, 2003 and the consolidated statements of operations and cash flows for the three month periods ended March 31, 2003 and 2002 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, 2003 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 consolidated financial statements for the year ended December 31, 2002, and the notes thereto, which are included in GEO’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on April 15, 2003.
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., Ingal Stade GmbH and GEO Pinjarra Pty, Ltd. 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, the recognition of an additional minimum liability associated with GEO’s defined benefit retirement plans and the effective gain or losses on financial instruments.
RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform to current year presentation. There is no effect on net income (loss) as a result of the reclassification.
NOTE 2 – CREDIT FACILITY AND LONG-TERM BORROWING
On April 14, 2003, the senior credit agreement originally entered into in May 2001, and later amended in May 2002, with Deutsche Bank Trust Company Americas, formerly known as Bankers Trust Company, and various other financial institutions was amended. Pursuant to the amendment, the borrowings on the $20 million Revolving Credit Facility in excess of $5.0 million must be supported by a letter of credit issued by the Company’s major shareholder, Charter Oak Partners. Also, the interest margin on the Term Loan B Facility was increased.
As part of the amendment, effective March 31, 2003, certain covenants of the senior credit facility were changed for the period January 1, 2003 until December 31, 2003. During this twelve month period less rigorous
leverage and interest coverage ratios will be effective. Also, the limit on annual capital expenditures was reduced from $10.0 million to $7.0 million. Restrictions remain on any capital expenditures pertaining to the Company’s Pinjarra Project during the twelve month period.
Several other sections of the senior credit agreement were amended. These amendments were made primarily to limit the Company’s ability to make acquisitions without the approval of the lenders, provide for the use of additional shareholder or other subordinated funding for certain major projects, limit the amount of cash the Company can hold, reduce the amount of cash the Company can retain from divestments, and to clarify certain definitions and reporting requirements.
NOTE 3– INVENTORIES
Inventories consist of the following components:
|
|
|
March 31, |
|
December 31, |
| ||
|
|
|
|
|
|
| ||
| Raw materials |
|
$ |
8,019 |
|
$ |
7,047 |
|
| Work in progress |
|
|
89 |
|
|
89 |
|
| Finished goods |
|
|
19,909 |
|
|
19,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,017 |
|
$ |
26,984 |
|
|
|
|
|
|
|
|
|
|
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 2002 and the first quarter of 2003 expressed in millions of dollars and as a percentage of net sales for the respective period.
|
|
|
THREE MONTHS ENDED MARCH 31, |
| ||||||||
|
|
|
|
| ||||||||
|
|
|
2002 |
|
2003 |
| ||||||
|
|
|
|
|
|
| ||||||
|
|
|
$ |
|
% |
|
$ |
|
% |
| ||
|
|
|
|
|
|
|
|
|
|
| ||
| Net Sales |
|
$ |
40.4 |
|
100.0 |
% |
$ |
39.2 |
|
100.0 |
% |
| Gross Profit |
|
|
6.9 |
|
17.0 |
|
|
4.3 |
|
10.9 |
|
| Income Before Interest & Taxes |
|
|
2.2 |
|
5.4 |
|
|
0.0 |
|
0.1 |
|
| Net Interest Expense & Taxes |
|
|
4.3 |
|
10.6 |
|
|
5.1 |
|
13.1 |
|
| Net Loss |
|
|
(1.5 |
) |
(3.7 |
) |
|
(3.0 |
) |
(7.8 |
) |
| Capital Expenditures |
|
|
0.7 |
|
1.7 |
|
|
0.4 |
|
1.1 |
|
THREE MONTHS ENDED MARCH 31, 2003 COMPARED TO THREE MONTHS ENDED MARCH 31, 2002
Net Sales. Net sales for the three months ended March 31, 2003 were $39.2 million, representing a $1.2 million or 3% decrease compared with net sales of $40.4 million during the same period in 2002. The decrease in net sales was attributable primarily to a $1.3 million decrease in organic peroxide revenue, due mostly to reduced selling prices at a major account that began in the fourth quarter of 2002. Also, compared to the first quarter of 2002, sales to Cognis under a supply agreement were $0.9 million lower as the contract was terminated