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As filed with the Securities and Exchange Commission on July 22, 1999.
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10/A
AMENDMENT NO. 1
GENERAL FORM FOR REGISTRATION OF SECURITIES
PURSUANT TO SECTION 12(B) OR 12(G) OF
THE SECURITIES EXCHANGE ACT OF 1934
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OMNOVA SOLUTIONS INC.
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C>
OHIO 34-1897652
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(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or Organization)
175 GHENT ROAD FAIRLAWN, OHIO 44333
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(Address of Principal Executive (Zip Code)
Offices)
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Registrant's telephone number, including area code (330) 869-4200
Securities to be registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Name of Each Exchange on Which Each
Title of Each Class to be so Class is to be Registered
Registered
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COMMON STOCK $0.10 PAR VALUE NEW YORK STOCK EXCHANGE
</TABLE>
Securities to be registered pursuant to Section 12(g) of the Act:
NONE
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ITEM 1. BUSINESS.
INTRODUCTION
OMNOVA Solutions Inc. (Omnova Solutions) was organized in June 1999 as a
wholly owned subsidiary of GenCorp Inc. Subject to the satisfaction or waiver of
certain conditions:
- GenCorp will contribute to Omnova Solutions GenCorp's Performance
Chemicals and Decorative & Building Products businesses and some other
corporate assets in exchange for shares of Omnova Solutions common
stock and Omnova Solution's assumption of liabilities related to those
businesses and assets; and
- GenCorp will declare and pay as a special dividend to the holders of
its common stock, on a pro rata basis, all of the outstanding shares
of capital stock of Omnova Solutions.
The foregoing transactions are referred to as the Distribution.
The Distribution is conditioned upon, among other things:
- approval of the Distribution by holders of at least a majority of the
outstanding GenCorp common stock as of the record date for the special
meeting of GenCorp's shareholders to be held on August 18, 1999;
- the effectiveness of this Registration Statement on Form 10; and
- there not being in effect any statute, rule, regulation or order of
any court, governmental or regulatory body that prohibits or makes
illegal the transactions contemplated by the Distribution.
The Distribution will not occur if the conditions described above are not
satisfied.
The GenCorp Board has retained discretion, even if all conditions to the
Distribution are satisfied, to abandon, defer or modify the Distribution.
Prior to the date of the special dividend contemplated by the Distribution,
GenCorp will transfer to Omnova Solutions the assets associated with the
Performance Chemicals and Decorative & Building Products businesses, and some
other corporate assets. These assets will include (1) the GenCorp Technology
Center, (2) GenCorp's corporate flight operations, (3) GenCorp's corporate
headquarters building in Fairlawn, Ohio and (4) the tangible and intangible
assets owned and leased for the Performance Chemicals and Decorative & Building
Products businesses. Omnova Solutions intends to dispose of the corporate flight
operations within a reasonable period after the Distribution. In exchange for
the assets transferred, Omnova Solutions will issue to GenCorp a number of
shares of Omnova Solutions common stock equal to the number of shares of GenCorp
common stock outstanding on the record date for the special dividend and assume
liabilities of GenCorp relating to the businesses and assets transferred.
In connection with the Distribution, it is anticipated that Omnova
Solutions will enter into a credit agreement with Bank of America, the terms of
which are currently being negotiated. The credit agreement is expected to
provide $250 million of available credit on a five-year revolving basis.
Immediately prior to the Distribution, Omnova Solutions will borrow
approximately $188 million under the credit agreement. At the same time, Omnova
Solutions will declare and distribute to GenCorp a special dividend in the
amount of approximately $188 million. Omnova Solutions expects to use funds
borrowed under the credit agreement to pay the special dividend to GenCorp. The
actual amount to be borrowed by Omnova Solutions and distributed to GenCorp will
be determined at the time of the Distribution.
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BACKGROUND
Following the Distribution, Omnova Solutions will operate two business
segments, Performance Chemicals and Decorative & Building Products. Omnova
Solutions had pro forma revenues of approximately $766 million for the fiscal
year ended November 30, 1998. Information regarding revenues, operating profits
and assets attributable to the two segments are contained in Omnova Solutions'
audited and unaudited combined financial statements included in this Form 10.
The Performance Chemicals business was founded in 1952 as a segment of The
General Tire & Rubber Company, GenCorp's predecessor, focusing primarily on the
manufacture of latex, an emulsion polymer, for the paper industry and tire cord
adhesives in its Mogadore, Ohio facility. During the 1960's, the segment began
expanding its product lines for the paper and carpet industries, and in 1993
opened a latex plant in Green Bay, Wisconsin to better serve the needs of its
paper customers in the Upper Midwest. The Decorative & Building Products segment
began in 1945 when The General Tire & Rubber Company purchased the Jeannette,
Pennsylvania coated fabric facility from the Pennsylvania Rubber Company. In
1963 the Company built a production facility in Columbus, Mississippi to
increase its capacity and product offering in coated fabrics.
Since the early 1990's, GenCorp has aggressively grown both businesses. For
Performance Chemicals, the 1996 acquisition of Morton International's Lytron(R)
plastic pigment latex product line broadened offerings to the paper industry.
The 1998 acquisition of Goodyear's Calhoun, Georgia latex facility provided
additional manufacturing capacity, a strong presence in the southeast and an
expanded customer base. Performance Chemicals also acquired Sequa Chemical's
U.S. specialty chemicals business in 1998, gaining manufacturing facilities in
Chester, South Carolina and Greensboro, North Carolina. This acquisition
expanded existing emulsion polymer market positions and provided entry into new
related specialty chemical markets. The 1999 acquisition of PolymerLatex's U.S.
acrylics business in Fitchburg, Massachusetts provided a key northeast location
while strengthening and diversifying served markets in acrylic emulsions and
other specialty chemicals. The most recent 1999 acquisition of Morton
International's global latex floor care business has provided Performance
Chemicals with a new and complementary product line and new customers, based on
existing technology. Performance Chemicals holds a strong number two market
position in the styrene butadiene latex industry. The number of Performance
Chemicals facilities has grown from two to six in the past few years, with
estimated available served markets growing from $1 billion to $3.5 billion.
Decorative & Building Products expanded its commercial wallcovering
capabilities in 1991 through the acquisition of Canadian General Towers'
commercial wallcovering business. Today, with the recent acquisition of Walker
Greenbank's U.K.-based Muraspec and Brymor commercial wallcovering businesses,
Decorative & Building Products has grown to be the worldwide leader in this
market. Brymor provides a European manufacturing base. Muraspec, a distribution
business with sales offices throughout the U.K. and Europe, serves as a key
European distribution platform from which to market commercial wallcoverings and
other decorative and building products. GenCorp acquired Goodyear's Reneer Films
Division in 1993, increasing vinyl film and decorative laminate capability for
the Decorative & Building Products business and elevating its market position in
vinyl woodgrain laminates to number one in North America. In 1997, Decorative &
Building Products acquired the Printworld business of Technographics, Inc.,
adding paper laminates to its vinyl laminate portfolio and gaining entry into
the transfer printing market for furnishings and apparel.
Omnova Solutions had approximately 2,600 employees at May 31, 1999 located
at offices, plants and other facilities located principally throughout the
United States and the United Kingdom.
Omnova Solutions has been, and will be until the date of the special
dividend contemplated by the Distribution, a wholly owned subsidiary of GenCorp.
Omnova Solutions' principal executive offices are located at 175 Ghent Road,
Fairlawn, Ohio 44333. Its telephone number at that address is (330) 869-4200.
GENERAL
Omnova Solutions develops, manufactures and markets emulsion polymers,
specialty chemicals and decorative and building products for a variety of
industrial, commercial and consumer markets. The Performance Chemicals unit's
broad range of emulsion polymers and specialty chemicals are used as coatings,
binders,
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adhesives, and additives for paper, carpet, textile and various other
industries. Decorative & Building Products designs, manufactures and markets a
comprehensive line of polyvinyl chloride and paper-based decorative and
performance-enhancing surface products including wallcovering, coated fabrics,
vinyl woodgrain and paper laminates and graphic arts and industrial films, as
well as membrane systems for roofing. Markets served include furniture,
transportation, construction, remodeling, interior decorating and graphic arts.
Of Omnova Solutions' 1998 historical revenues, approximately 36% were
derived from the Performance Chemicals business and 64% from the Decorative &
Building Products business.
PRODUCTS AND SERVICES
PERFORMANCE CHEMICALS
Performance Chemicals manufactures a broad line of emulsion polymers and
specialty chemicals for use in the paper, carpet, textile, nonwoven,
construction, coatings, adhesive and tire cord industries. Performance
Chemicals' products for the paper industry improve the strength, gloss and
printability of its customers' products. These products are primarily used in
the manufacture of coated papers for applications such as magazines, photo
papers and office forms. Latex formulations are also used to provide these same
characteristics to paperboard packaging for food and household products. The
business is also a leading producer of styrene butadiene latex for use as carpet
backing adhesive, which secures carpet fibers to backing materials. Through the
1998 acquisition of Sequa Chemicals, Performance Chemicals significantly
expanded its product line breadth to include specialty wet end formulations such
as opacifiers, lubricants and insolubilizers used in paper manufacturing. The
acquisition significantly expanded total product offerings to paper customers
and enabled Performance Chemicals to generate significant synergies through
consolidated purchasing of acrylic monomers, cross selling of textile and carpet
chemicals and enhanced applications development. Additionally, the acquisition
added a diverse line of textile processing, coating and finishing chemicals that
provide water, stain and oil repellency and permanent press properties to
natural and synthetic textile fibers for apparel, home furnishings and
upholstery.
Performance Chemicals' product portfolio includes a growing specialty
segment that provides resins, binders, coatings, adhesives and saturants to a
broad variety of markets that include nonwoven, graphic arts, industrial
coatings and construction. These products provide greater strength, improved
processing ability and enhanced appearance for customer products.
With a strong number two position in the latex industry, Performance
Chemicals is recognized in all of its markets for its core capabilities in
polymer technology, its ability to rapidly develop highly customized products
and its ability to provide innovative, cost effective customer solutions.
DECORATIVE & BUILDING PRODUCTS
Decorative & Building Products is a leading supplier of decorative
surfacing laminates for wood and metal applications and holds the number one
North American position in woodgrain laminates. Decorative laminate products are
manufactured utilizing vinyls, lightweight papers and foils. Unique ultraviolet
(UV) and electronic beam (EB) coatings provide scratch, stain and UV resistance.
In addition, Decorative & Building Products has further differentiated itself in
the decorative laminate market as a single source supplier of integrated vinyl
and paper laminate designs for the furniture and cabinet industries, building an
extensive library of patterns, designs and textures and developing rapid
make-to-order production capabilities. Important markets for these products
include furniture, kitchen cabinets, manufactured housing, flooring laminates,
consumer electronics and wrapped wood components. In particular, the growing
ready-to-assemble furniture market provides an attractive market for Omnova
Solutions' unique decorative laminates product offerings. Double polished clear
vinyl films for the graphic arts, office products and stationery markets are
also produced.
Decorative & Building Products is the leading global manufacturer of
wallcoverings for the commercial market. Its product line includes a broad range
of fabric-backed vinyl and paper-backed vinyl wallcovering designs. Its industry
leading styling and design library covers a broad range of styles, patterns,
textures, and colors, ranging from traditional to contemporary designs.
Additionally, Decorative & Building Products has built its leading position in
the commercial wallcoverings market by leveraging its reputation for product
durability
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and quality, global distribution network, extensive emboss and print roll
library, long-term customer relationships, and integrated
manufacturing/distribution/sourcing value proposition. Well-known brands include
Bolta(R), Essex(R), Genon(R), Lanark(R), Tower(TM) and X-Quest(R) in North
America and Muralon and Muraspec in Europe. Key end user markets include the
hospitality, healthcare, commercial office and retail industries.
Decorative & Building Products is the leading North American supplier of
vinyl coated fabrics and urethane fabrics for contract and residential home
furnishings, transportation seating and marine applications as well as a variety
of other industrial and commercial end use markets. Its coated fabrics are
durable, stain resistant and cost effective alternatives and complements to
leather and textile coverings. Competitive advantages in the coated fabric
industry are leveraged through creative design and styling capabilities,
performance enhancing coatings, innovative technical support programs, leading
brand names and established distribution channels.
Decorative & Building Products is also a leading North American
manufacturer and marketer of single-ply roofing membrane systems for the
commercial and industrial roofing market. Selling under the Genflex(TM) brand
name, it is the only North American single-ply roofing supplier that offers all
three single-ply roofing systems, EPDM, TPO and PVC. This allows for a tailored
solution for each type of roofing application requirement. Through the
introduction of innovative products, Decorative & Building Products has
developed programs that reduce the time and cost of installation.
Through its Printworld operations, Decorative & Building Products
manufactures heat transfer prints on paper used to decorate apparel and home
furnishings. Heat transfer printing is an innovative, unique process for
printing intricate patterns on natural and synthetic fabrics that can be used
widely in the home furnishing, commercial furnishing and apparel industries.
Decorative & Building Products has established leading market positions in
all of its product categories by utilizing the Company's core competencies in
design, compounding, calendering, printing, embossing and coating. Given similar
core competencies and base technology requirements, the business is able to
leverage its investments in manufacturing, process and design improvement across
this broad set of product lines and benefit from economies of scale. In
addition, its broad offering of decorative and building products uniquely
positions it to provide integrated decorative solutions for its customers.
BUSINESS STRATEGY
ORGANIC GROWTH BY PROVIDING TOTAL SOLUTIONS. Omnova Solutions intends to
grow organically by developing long-term customer relationships and positioning
itself as the preferred total solutions partner. Omnova Solutions' strategy is
to avoid commodity market segments and focus on products that are highly
customized to meet specific customer requirements. These relationships have
enabled Omnova Solutions to develop innovative products that provide superior
functional performance, higher decorative content, and more efficient, lower
cost production processes to meet customers' specific application needs and
enhance the value of their products. For example, new roofing system
developments have provided significant benefits to contractors and building
owners by substantially reducing installation time and labor costs.
PURSUE GROWTH THROUGH STRATEGIC ACQUISITIONS. Omnova Solutions' businesses
have achieved significant growth through acquisitions of companies that build on
existing markets and core product and process technologies. Omnova Solutions
plans to continue to pursue acquisitions, strategic partnerships and joint
ventures in the future, targeting technologies and products in high growth
markets that are strategically related to its existing product portfolio,
customer base and markets.
LEVERAGE CORE COMPETENCIES ACROSS BUSINESSES. Omnova Solutions' expertise
in high performance polymer-based chemistries, the design and development of
customized product applications and polymer processing capabilities are shared
across its business units and provide a unique and differentiating competitive
advantage. Performance Chemicals and Decorative & Building Products have
identified common growth platforms to capitalize on these technology linkages.
For example, Performance Chemicals has pursued the development and
commercialization of new polymer and specialty chemical additives to meet the
needs of its broadening market portfolio. These new formulations in advanced
coatings, inks and adhesives are beginning to be leveraged in the Decorative &
Building Products segment to enhance the performance of a number of its
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products. Omnova Solutions' aligned growth strategy targets opportunities for
both businesses to team as customers or suppliers in the paper, textile, carpet,
furniture and construction industries.
EXPAND STRONG RESEARCH AND DESIGN CAPABILITIES. Omnova Solutions is an
industry leader in research and development, as well as styling and design
capabilities. The Performance Chemicals segment has recently made a major
investment in a new high speed pilot paper coater, which will be used to
accelerate Omnova Solutions' development and commercialization of new coating
technologies in its core markets. Omnova Solutions started construction of a new
pilot plant in 1998, which will support Omnova Solutions' new product
development and customer qualifications efforts. The Decorative & Building
Products segment maintains design centers in Salem, New Hampshire, New York and
Hertfordshire, England where designers combine traditional design techniques
with state-of-the-art computer aided design equipment to create unique designs
for incorporation across Omnova Solutions' decorative product spectrum. Omnova
Solutions continues to strengthen its design capability through investments in
digital archiving of designs and digital sampling. In addition, the business has
increased its focus on technology and new product development to provide
differentiated value-added products to customers.
INCREASE TECHNOLOGY LINKAGES. Through increasing technology linkages and
materials utilization between the two segments, Omnova Solutions can
aggressively pursue the development and commercialization of new polymers as
well as the function and performance of its decorative coatings. These technical
and materials synergies allow Performance Chemicals and Decorative & Building
Products to target and expand key markets. Technological linkages, purchasing,
marketing and sales economies, and manufacturing economies will enable more cost
effective development of new products and will increase the effectiveness of
cost reduction initiatives at Omnova Solutions. For example, the Omnova
Solutions business units have a powerful collective knowledge base in paper,
nonwovens, textiles, printing technology, ink systems and performance coatings,
and the chemicals application skills to supply advantaged products for these
applications.
BROADEN INTERNATIONAL OPERATIONS. Omnova Solutions plans to continue to
increase its global supply capabilities and the markets it serves. For example,
the recent acquisition of the Brymor and Muraspec U.K.-based commercial
wallcovering business provided a European manufacturing, design and distribution
platform for the Decorative & Building Products segment. The Company is
committed to continuing to expand its international presence through a continued
aggressive acquisition, joint venture and alliance strategy.
IMPROVE PROFITABILITY THROUGH OPERATIONAL EXCELLENCE
INITIATIVES. Operational excellence processes including Six Sigma quality,
supply chain management and high performance workplace initiatives are utilized
throughout Omnova Solutions' businesses. Omnova Solutions plans to continue to
focus on operational excellence initiatives across the supply chain to drive
improvements in productivity, quality cost and safety.
MARKETS AND CUSTOMERS
Management believes that Performance Chemicals is a market leader in its
targeted product categories. The polymer and chemical coating and binding
markets are highly competitive based on price, quality, customer service,
product performance and innovations. Performance Chemicals is the leading
quality producer for latex in the paper industry. Several customers generate
more than 10% of Performance Chemicals total revenues. These customers include
industry leaders such as Champion, Shaw and Consolidated.
Management believes that Decorative & Building Products is a market leader
in its targeted product categories. Decorative & Building Products markets are
competitive based on decorative content, enhanced performance characteristics,
price, quality, customer service, brand name recognition and reputation.
Decorative & Building Products markets its products under numerous brand names
to different industries. Major customers of this unit are Steelcase, Bradco and
Ashley Furniture.
DISTRIBUTION METHODS
Methods of distribution used by Omnova Solutions vary widely depending on
the nature of the products and the industry or market served. Products are sold
either directly or through distributors.
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COMPETITION
Performance Chemicals competes with several large global chemical companies
including Dow, BASF and Rohm & Haas, some of which produce rather than buy major
raw materials. Performance Chemicals also competes with small to mid-sized
U.S.-focused suppliers of specialty chemicals including B.F. Goodrich, National
Starch, S. C. Johnson Polymers and Morton International. Depending on the
products involved and markets served, the basis of competition varies from
price, quality, customer and technical service, product performance and
innovation, and industry recognition. Overall, Performance Chemicals regards its
products to be competitive in its major markets and believes that it holds
leading or strong number two positions in several North American markets
including paper coatings, styrene butadiene latex carpet backing binders,
textile permanent press resins, nonwoven binders, paper tape release coatings
and saturants, and tire cord adhesives.
Decorative & Building Products competes in its served markets with numerous
competitors, many of which are smaller and privately-owned. Key competitors in
each product group include:
- Commercial wallcovering -- RJF International, Fidelity Paint Systems
- Coated fabrics -- Haartz and Uniroyal
- Decorative laminates -- Chiyoda, Dai Nippon and Toppan
- Building systems -- Carlisle, Firestone, and Manville
- Heat transfer printing -- Miroglio, Sublistatic and Transfertex
INTELLECTUAL PROPERTY
Omnova Solutions regards its patents, copyrights, trademarks, and similar
intellectual property as important to its success and relies upon patent,
copyright and trademark laws, as well as confidentiality agreements with its
employees and others, to protect its rights. Omnova Solutions pursues patents
for important developments and the registration of its important copyrights and
trademarks in the United States and, depending upon use, in other countries.
Omnova Solutions may be subject to claims of alleged infringement of the
patents, trademarks and other intellectual property rights of third parties from
time to time in the ordinary course of business. Omnova Solutions does not
believe that these legal proceedings or claims are likely to have, individually
or in the aggregate, a material adverse effect on Omnova Solutions' business,
financial condition or results of operations.
RAW MATERIALS
Performance Chemicals utilizes a variety of raw materials, primarily
monomers, in the manufacture of its products, all of which are generally
available from several qualified suppliers. Monomer costs are a major component
of the emulsion polymers produced by the business. The monomers used include
styrene, butadiene, acrylonitrile, hydroxyethyl acrylate, vinylpyridine,
vinylidiene chloride, acrylic acid, methacrylic acid, itaconic acid, vinyl
acetate, butyl acrylate, ethyl acrylate, methyl methacrylate, acrylamide,
n-methyol methacrylamide, acrylamide, and hydroxyethyl methacrylate.
Decorative & Building Products also utilizes a variety of raw materials
which are generally available from multiple suppliers. Key raw materials include
polyvinyl chloride resins, textiles, plasticizers, paper, and titanium dioxide.
Textiles and polyvinyl chloride resins represent approximately 47% of total raw
materials purchased on a dollar basis.
The cost of these raw materials has a significant impact on Omnova
Solutions' profitability. A significant increase in the price of monomers or
polyvinyl chloride resins could materially increase Omnova Solutions' operating
costs and materially adversely affect its profit margins. While Omnova Solutions
generally attempts to pass increased raw materials prices onto its customers in
the form of price increases, there has historically been a time delay between
increased raw materials prices and the ability to increase product prices. In
addition, Omnova Solutions may not be able to increase its prices sufficiently
to cover any significant raw materials cost increases.
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ENVIRONMENTAL MATTERS
The business operations of Omnova Solutions, like those of other companies
in the industries in which Omnova Solutions operates, are subject to numerous
foreign, federal, state and local environmental laws and regulations. These laws
and regulations not only affect Omnova Solutions' current operations, but also
could impose liability on Omnova Solutions for past operations that were
conducted in compliance with then applicable laws and regulations. Omnova
Solutions anticipates that these laws and regulations will become increasingly
stringent. Environmental liabilities related to discontinued operations will not
be assumed by Omnova Solutions and will remain obligations of GenCorp after the
Distribution.
EMPLOYEES
Omnova Solutions will employ approximately 2,600 employees after the
Distribution. Approximately 28% of these employees will be covered by collective
bargaining agreements. One of these agreements, covering approximately 22% of
Omnova Solutions' covered employees, will expire within the next 12 months. A
prolonged work stoppage at any of Omnova Solutions' facilities could materially
adversely affect Omnova Solutions' business and results of operations.
ITEM 2. FINANCIAL INFORMATION.
OMNOVA SOLUTIONS SELECTED HISTORICAL FINANCIAL DATA
The financial data as of November 30, 1997 and 1998 and for each of the
three years in the period ended November 1998, and as of and for the six months
ended May 31, 1998 and 1999 has been derived from the audited and unaudited
combined financial statements of Omnova Solutions contained in this Form 10. The
other historical financial data is unaudited. The historical combined financial
statements of Omnova Solutions contained in this Form 10 are presented as if
Omnova Solutions was a separate entity for all periods presented.
You should keep the following in mind when reviewing this data:
- Segment operating profit represents net sales less applicable costs,
expenses and provisions for restructuring and unusual items relating to
operations. Segment operating profit excludes corporate income and
expenses, provisions for nonoperating unusual items, interest expense and
income taxes.
- During fiscal 1994, Omnova Solutions recorded a charge of $23 million for
the cumulative effect of accounting changes for postretirement benefits
other than pensions and income taxes.
- During fiscal 1996, Omnova Solutions recorded unusual pre-tax income of
$4 million from the sale of the structural urethane adhesives business.
- During fiscal 1997, Omnova Solutions acquired Printworld. During fiscal
1998, Omnova Solutions acquired (1) the U.S. specialty chemicals business
of Sequa Chemicals, (2) the commercial wallcovering business of Walker
Greenbank PLC and (3) the Calhoun, Georgia latex facility of The Goodyear
Tire & Rubber Company. These acquisitions are reflected in the income
statement and balance sheet data beginning on the acquisition dates.
- During fiscal 1998, Omnova Solutions recorded a pre-tax unusual expense
of $8 million in the second quarter, which reduced segment operating
profit, related to exiting the residential wallcovering business. This
unusual expense was subsequently adjusted to $3 million in the fourth
quarter.
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<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED NOVEMBER 30, ENDED MAY 31,
-------------------------------- -------------
1994 1995 1996 1997 1998 1998 1999
---- ---- ---- ---- ---- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales.................................. $479 $525 $506 $548 $624 $287 $367
Segment operating profit................... 40 57 74 66 83 29 40
Income before cumulative effect of
accounting changes....................... 16 27 37 34 42 14 18
Cumulative effect of accounting changes.... (23) -- -- -- -- -- --
---- ---- ---- ---- ---- ---- ----
Net income (loss).......................... $ (7) $ 27 $ 37 $ 34 $ 42 $ 14 $ 18
==== ==== ==== ==== ==== ==== ====
BALANCE SHEET DATA (AT PERIOD END):
Total assets............................... $240 $226 $233 $277 $603 $348 $628
Long-term debt............................. -- -- -- -- -- -- --
Divisional equity.......................... 159 146 147 182 489 264 511
</TABLE>
OMNOVA SOLUTIONS CAPITALIZATION
The following table sets forth the capitalization of Omnova Solutions at
May 31, 1999, the Omnova Solutions principal financial adjustments that will
result from the Distribution and the pro forma capitalization of Omnova
Solutions after giving effect to the Distribution. You should read this data in
conjunction with the historical financial statements and the unaudited pro forma
condensed financial statements of Omnova Solutions included elsewhere in this
Form 10.
The pro forma adjustments reflect:
- The anticipated borrowing of approximately $188 million and the resulting
payment of a dividend to GenCorp in that amount. The actual amount to be
borrowed and paid to GenCorp will be determined immediately prior to the
Distribution.
- The $209 million effect of the Distribution on divisional equity
described in the Omnova Solutions Unaudited Pro Forma Condensed Combined
Balance Sheet as of May 31, 1999 included in this Form 10.
<TABLE>
<CAPTION>
MAY 31, 1999
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OMNOVA
OMNOVA PRO FORMA SOLUTIONS
SOLUTIONS ADJUSTMENTS PRO FORMA
--------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Notes payable............................................... $ 6 $ -- $ 6
Long-term debt.............................................. -- 188 188
---- ----- ----
Total debt.................................................. 6 188 194
Total divisional equity..................................... 511 (209) 302
---- ----- ----
TOTAL CAPITALIZATION........................................ $517 $ (21) $496
==== ===== ====
</TABLE>
OMNOVA SOLUTIONS MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Since 1994, GenCorp's key strategy has been to become a more focused
company in fewer businesses. The businesses targeted were those with the
greatest potential to generate value from continuing improved performance and
expansion in existing markets, and through enhanced growth by entering
attractive new and
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related markets. On December 17, 1998, GenCorp announced its plans to spin off
its Performance Chemicals and Decorative & Building Products businesses to
GenCorp shareholders as a separate publicly traded polymer products company
(Omnova Solutions).
Omnova Solutions will operate two business segments, Performance Chemicals
and Decorative & Building Products. The Performance Chemicals unit manufactures
a broad range of emulsion polymers and specialty chemicals used as coatings,
binders, adhesives, and additives for paper, carpet, textile and various other
specialty chemical industries. Decorative & Building Products designs,
manufactures and markets a comprehensive line of polyvinyl chloride and
paper-based decorative and functional surface products including wallcovering,
coated fabrics and vinyl woodgrain and paper laminates for furniture,
construction, remodeling and other commercial applications, as well as membrane
systems for roofing.
Omnova Solutions' sales are affected by numerous factors. In the
Performance Chemicals business, the key sales drivers are the ability to create
custom polymer and specialty chemical solutions to enhance customer product
performance; domestic demand for coated paper; and trends in the carpet,
textile, and specialty markets. In the Decorative & Building Products business,
commercial wallcovering and building systems sales are driven by trends in
refurbishment of commercial office buildings, hotels, hospitals and schools and,
to a lesser degree, new construction cycles. Product design and styling are
important product differentiators in the commercial wallcovering business. Sales
trends in decorative laminates and coated fabrics typically move with general
economic trends, with slightly greater growth due to the business units' ability
to produce enhanced designs and styles to meet the needs of commercial and
residential furniture customers. Omnova Solutions is subject to volatility in
its operating costs arising from changes in the price of several key raw
materials including polyvinyl chloride, styrene and butadiene.
Omnova Solutions' annual sales have grown from $479 million in 1994 to $624
million in 1998. During the same period, Omnova Solutions' segment operating
profit doubled from $40 million to $83 million. Omnova Solutions' revenue growth
is due to both strategic acquisitions and growth in existing product lines. The
significant growth in segment operating profit was due to acquisitions,
operational improvement initiatives, aggressive cost containment and a general
shift toward higher margin products.
Recent strategic acquisitions of Performance Chemicals include the purchase
of the Lytron(R) polystyrene latex plastic pigment business in 1996, which
broadened offerings to the paper industry; the acquisition of The Goodyear Tire
& Rubber Company's Calhoun, Georgia latex facility in 1998, which provided new
manufacturing capacity, increased presence in the Southeastern U.S. and an
expanded customer base; and the acquisition of Sequa Chemical's U.S. specialty
chemicals business in 1998, which expanded existing emulsion polymer market
positions and provided entry into new related specialty chemical markets. In
fiscal 1999, Performance Chemicals acquired PolymerLatex's U.S. acrylics
business in Fitchburg, Massachusetts which strengthened and diversified markets
in acrylic emulsions and other specialty chemicals; and Morton International's
global latex floor care business, which provided a complementary product line
and customer base. In 1996, Performance Chemicals sold its structural urethane
adhesives business.
Recent strategic acquisitions of Decorative & Building Products include the
purchase of Printworld in 1997, which added paper laminates to its vinyl
laminate portfolio and provided entry into the transfer printing market for
furnishings and apparel; and the 1998 acquisition of Walker Greenbank's
U.K.-based commercial wall-covering business which provided two European
facilities and a platform from which to market other decorative and building
products. Also during 1998, Decorative & Building Products sold its residential
wallcovering business.
The combined financial statements of Omnova Solutions generally reflect the
financial position, results of operations and cash flows of the operations
expected to be transferred to Omnova Solutions in connection with the
Distribution. Accordingly, Omnova Solutions' combined financial statements have
been carved out from the consolidated financial statements of GenCorp using the
historical results of operations and historical basis of the assets and
liabilities of Omnova Solutions' businesses and the allocation methodology
described in Note A to Omnova Solutions' Combined Financial Statements. Omnova
Solutions will operate as two business segments, Performance Chemicals and
Decorative & Building Products. The combined financial statements of Omnova
Solutions do not include certain assets and liabilities which will be
transferred to Omnova Solutions in
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<PAGE> 11
connection with the Distribution. See "Item 13. Financial Statements and
Supplementary Data -- Omnova Solutions Unaudited Pro Forma Condensed Combined
Financial Statements" and Note A to Omnova Solutions' Combined Financial
Statements. Management believes the assumptions underlying Omnova Solutions'
financial statements are reasonable.
RESULTS OF OPERATIONS FIRST SIX MONTHS FISCAL 1999 COMPARED TO FISCAL 1998
Net sales for the Omnova Solutions businesses in the first six months of
1999 increased 28% to $367 million compared to $287 million in the first six
months of 1998. Sales increased in both Decorative & Building Products and
Performance Chemicals, primarily from sales attributable to acquisitions. Total
segment operating profit increased 8% to $40 million for the first six months of
1999 versus $37 million in the first six months of 1998 excluding an unusual
item. Operating margins decreased to 10.9% in the first six months of 1999
compared to 12.9% in the first six months of 1998, due primarily to lower
average unit selling prices across certain Performance Chemicals product lines,
and increased new product development spending.
Net sales for Performance Chemicals increased for the first six months of
1999 by 54% to $156 million compared to $101 million in the first six months of
1998. The increase reflects sales attributable to the 1998 acquisitions.
Excluding the effect of acquired businesses, volume was flat compared to 1998
while pricing was down slightly. Segment operating profit of $14 million for the
first six months of 1999 was even with the first six months of 1998. Segment
operating margins declined to 9.0% in the first six months of 1999 versus 13.9%
in the first six months of 1998. The decline is primarily due to lower pricing
and integration costs related to acquisition activity in the latter half of
1998.
During the first six months of 1999, Performance Chemicals completed the $8
million acquisition of Morton International's global latex floor care business,
adding a complementary product line and customer base, and expanding its
presence in Europe and the Far East. Performance Chemicals also acquired during
the first half of 1999 the U.S. acrylic emulsion polymers business of
PolymerLatex for $9 million, located in Fitchburg, Massachusetts which
strengthened and diversified markets in acrylic emulsions and other specialty
chemicals.
Net sales for Decorative & Building Products increased for the first six
months of 1999 by 13.0% to $211 million compared to $186 million in the first
six months of 1998. The increase was mainly related to the European wallcovering
acquisition, paper laminates and building systems businesses. Segment operating
profit during the first six months of 1999 improved 13% to $26 million versus
$23 million in the first six months of 1998 excluding an unusual item. Segment
operating margins were comparable at 12.3% for the first six months of 1999
versus 12.4% for the first six months of 1998.
During fiscal 1998, Decorative & Building Products recorded a pre-tax
unusual expense of $8 million in the second quarter, which reduced segment
operating profit, related to exiting its residential wallcovering business. This
unusual expense was subsequently adjusted to $3 million in the fourth quarter.
Interest expense allocated from GenCorp increased to $10 million in the
first six months of 1999 compared to $3 million in the first six months of 1998.
The increase in interest expense relates to the increase in GenCorp's debt from
May 31, 1998 to May 31, 1999 due primarily to the fiscal 1998 acquisitions.
RESULTS OF OPERATIONS FISCAL 1998 COMPARED TO FISCAL 1997
Total sales for Omnova Solutions increased $76 million, or 14%, to $624
million in 1998 from $548 million in 1997. Total segment operating profit,
excluding unusual items, in 1998 increased $20 million, or 30% to $86 million in
1998 from $66 million in 1997. Net income was $42 million in 1998 compared to
$34 million in 1997, a 24% increase.
Sales for Performance Chemicals increased $46 million, or 26%, to $226
million in 1998 from $180 million in 1997. The increase was attributable to the
recent acquisitions and volume growth in the existing product lines, partially
offset by a modest decline in pricing. Segment operating profit for Performance
Chemicals increased by $13 million, or 59%, to $35 million in 1998 from $22
million in 1997. The increase was also attributable to the recent acquisitions
and volume growth in the existing product lines. Operating profit margins for
Performance
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<PAGE> 12
Chemicals increased to 15.5% in 1998 from 12.2% in 1997, resulting primarily
from lower raw material pricing in 1998.
Decorative & Building Products sales increased $30 million, or 8%, to $398
million in 1998 from $368 million in 1997. The increase was primarily
attributable to sales related to the commercial wallcovering business acquired
in 1998 and higher sales in the building systems, decorative laminates and
coated fabrics businesses. Segment operating profit, excluding unusual items,
increased by $7 million, or 16%, to $51 million in 1998 from $44 million in
1997. Segment operating profit margins for this segment increased to 12.8% in
1998 from 12.0% in 1997. These increases were related to the 1998 acquisition
and the strong performance of building systems, decorative laminates, heat
transfer and coated fabrics product lines.
Interest expense allocated from GenCorp increased to $8 million in 1998
compared to $4 million in 1997. The increase in interest expense relates to the
increase in GenCorp's debt during fiscal 1998 due primarily to the fiscal 1998
acquisitions.
As compared to 1998, other (income) expense was favorably impacted in
fiscal 1997 by the reimbursement of expenses related to an environmental
settlement. Omnova Solutions recognized unusual expense of $3 million in 1998
related to exiting the residential wallcovering business.
RESULTS OF OPERATIONS FISCAL 1997 COMPARED TO FISCAL 1996
Total sales for Omnova Solutions increased $42 million, or 8% in 1997 to
$548 million from $506 million in 1996. Total segment operating profit,
excluding unusual items, in 1997 decreased $4 million or 6% to $66 million in
1997 from $70 million in 1996. Net income was $34 million in 1997 compared to
$37 million in 1996, an 8% decrease.
Sales for Performance Chemicals increased 8% to $180 million in 1997 from
$166 million in 1996. The improvement was primarily due to volume increases
across paper coating and Lytron(R) product lines. Segment operating profit,
excluding unusual items, in 1997 was $22 million compared to $25 million in
1996. Segment operating profit margins declined to 12.2% from 15.1%. The
decrease was attributable to lower average selling prices and increased raw
material costs, which were consistent with the industry.
Decorative & Building Products sales increased 8% to $368 million in 1997
from $340 million in 1996. The improvement was primarily due to volume growth in
the commercial wallcovering and roofing product lines, and the acquisition of
Technographics Inc.'s Printworld business. This increase was partially offset by
sales declines in the residential wallcovering and plastic films businesses.
Segment operating profit in 1997 was $44 million compared to $45 million in
1996. Segment operating profit margins were 12.0% in 1997 compared to 13.2% in
1996. The decrease was attributable to increased raw material costs and start-up
costs related to new product offerings during fiscal 1997.
Interest expense allocated from GenCorp decreased to $4 million in 1997
compared to $8 million in 1996. The decrease in interest expense relates
primarily to the conversion of GenCorp's $115,000,000 8% Convertible
Subordinated Debentures Due August 1, 2002 into GenCorp common stock.
Other (income) expense was favorably impacted in fiscal 1997 by the
reimbursement of expenses related to an environmental settlement. There were no
unusual items in 1997 as compared to 1996 when Omnova Solutions recognized
unusual income of $4 million from the sale of the structural urethane adhesives
business.
FINANCIAL RESOURCES AND CAPITAL SPENDING
First Six Months 1999 and 1998
Cash flow provided by operating activities for the first six months of
fiscal 1999 was $13 million as compared to $12 million in the first six months
of 1998.
For the first six months of 1999, $16 million was used for investing
activities, including the acquisitions of the global latex floor care business
of Morton International Inc. for $8 million and the U.S. acrylics emulsion
business of PolymerLatex for $9 million, consisting of cash of $3 million and a
note for $6 million, and capital
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<PAGE> 13
expenditures of $14 million, offset by proceeds of $9 million from the sale of
the residential wallcovering business. This is compared to $80 million used for
investing activities in the first six months of 1998, including the acquisition
of The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility for $74
million and capital expenditures of $6 million.
Fiscal 1998, 1997, and 1996
Cash flow provided by operating activities for fiscal 1998 was $52 million
compared to $57 million in 1997 and $51 million in 1996. Working capital
requirements for Omnova Solutions have remained relatively constant from
year-to-year.
In fiscal 1998, $312 million was used for investing activities including
$294 million for acquisitions and capital expenditures of $18 million. The
acquisitions included Sequa Corporation's specialty chemicals unit for $108
million, Walker Greenbank's commercial wallcovering business for $112 million
and The Goodyear Tire & Rubber Company's Calhoun, Georgia latex facility for $74
million. This is compared to $58 million used for investing activities in fiscal
1997, which included the acquisition of Technographics, Inc.'s Printworld
business for $47 million and capital expenditures of $11 million. Cash flow used
in investing activities during fiscal 1996 was $15 million, which included the
acquisition of Morton International's Lytron(R) business for $4 million and
capital expenditures of $15 million, offset by $4 million of proceeds received
from the sale of the structural urethane adhesives business.
Cash flow provided by financing activities in fiscal 1998 was $264 million
compared to $1 million in 1997 and cash flow used of $36 million in 1996. The
increase in net transactions with GenCorp during fiscal 1998 was primarily due
to cash required by Omnova Solutions for its fiscal 1998 acquisitions.
Capital Spending
Capital expenditures were made and are planned principally for capacity
expansion and asset replacement, cost reduction, safety and productivity
improvements and environmental protection. Capital expenditures totaled $14
million for the first six months of fiscal 1999, and $18 million in 1998, $11
million in 1997 and $15 million in 1996. Omnova Solutions' total capital
expenditures in 1999 are currently projected to be approximately $53 million.
Planned expenditures for 1999 increased significantly due to $10 million of
planned equipment upgrades and additions in Decorative & Building Products; $8
million planned for Performance Chemicals' capacity expansion and renovation of
its pilot plant; and $12 million for planned improvements to recently acquired
businesses including Sequa Chemicals and Walker Greenbank's commercial
wallcovering business. Management of Omnova Solutions plans to fund these
capital expenditures from cash flow from operations and, if necessary, from
borrowings under its new credit facility.
Based upon current and anticipated levels of operations and plans for
integrating recent acquisitions, Omnova Solutions believes that its cash flow
from operations, combined with borrowings that will be available under its new
credit facility will be sufficient to enable Omnova Solutions to meet its
current and anticipated cash operating requirements, including scheduled
interest and principal payments, capital expenditures and working capital needs
for the next 12 months. However, actual capital requirements may change,
particularly as a result of any acquisitions which Omnova Solutions may make.
The ability of Omnova Solutions to meet its current and anticipated operating
requirements will be dependent upon the future performance of Omnova Solutions
which, in turn, will be subject to general economic conditions and to financial,
business and other factors, including factors beyond Omnova Solutions' control.
Depending on the nature, size and timing of future acquisitions, Omnova
Solutions may be required to raise additional financing. There can be no
assurances that additional financing will be available to Omnova Solutions on
acceptable terms. In addition, the tax rules related to the Distribution may
limit Omnova Solutions' ability for a period of time to fund acquisitions
through the issuance of equity securities. See "Item 7. Certain Relationships
and Related Transactions -- Distribution Agreement." Substantially all of the
debt of Omnova Solutions will bear interest at variable rates; therefore, its
liquidity and financial condition is and will continue to be affected by changes
in prevailing interest rates.
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<PAGE> 14
ENVIRONMENTAL MATTERS
Omnova Solutions' policy is to conduct its businesses with due regard for
the preservation and protection of the environment. Omnova Solutions devotes
resources and management attention to environmental matters and actively manages
its ongoing processes to comply with extensive environmental laws and
regulations.
Capital expenditures for projects related to the environment were
approximately $1 million in each of 1998, 1997 and 1996. Omnova Solutions
currently forecasts that capital expenditures for environmental projects will
approximate $2 million in each of 1999 and 2000. During 1998, noncapital
expenditures for environmental compliance and protection totaled $4 million all
of which were for recurring costs associated with managing hazardous substances
and pollution abatement in ongoing operations. Similar noncapital expenditures
were $3 million in each of 1997 and 1996. It is presently expected that
noncapital environmental expenditures for the next several years will be
consistent with historical expenditure levels.
Management believes, on the basis of presently available information, that
resolution of environmental matters will not materially affect future results of
operations, liquidity, capital resources or the consolidated financial condition
of Omnova Solutions.
INFORMATION SYSTEMS AND THE YEAR 2000
Omnova Solutions is currently engaged in a comprehensive project to upgrade
its information, technology, manufacturing and facilities computer hardware and
software programs to address the Year 2000 issue at its domestic and
international businesses. Many of Omnova Solutions' systems include new hardware
and updated software packages purchased from established vendors who have
represented that these systems are Year 2000 ready. Omnova Solutions does not
have large centralized systems, a factor which Omnova Solutions believes reduces
the risk of a single point of failure having wide-spread impact on Omnova
Solutions.
As part of this project, Omnova Solutions has formally communicated with
all of its significant suppliers, vendors and large customers to determine the
extent to which Omnova Solutions is vulnerable to those parties' failures to
correct their own Year 2000 issues. As of May 31, 1999, Omnova Solutions has
received approximately 95% of the responses, and those responses generally
indicate that these parties will be Year 2000 ready.
Omnova Solutions has completed an inventory and assessment of its
information technology systems. Both internal and external resources are being
utilized to test Omnova Solutions' software for Year 2000 readiness and, where
necessary, the systems are being remediated through upgrading, replacement or
reprogramming. Also, Omnova Solutions has completed an inventory and assessment
of its non-information technology (embedded) systems, prioritizing the impact of
each of these systems on Omnova Solutions' ability to conduct its operations
and, as necessary, obtaining vendor verification and/or remediation of those
systems. The process of analyzing, prioritizing, remediating and testing will be
an iterative process until all critical systems are Year 2000 ready.
The estimated cost for this project is projected to range between $4
million and $5 million, which is being funded through operating cash flows.
Omnova Solutions has spent approximately $3 million as of May 31, 1999 on this
project, most of which has been for internal remediation efforts and expects to
spend a significant amount of the remaining budget by the end of the third
quarter of fiscal 1999. Excluding recent acquisitions, Omnova Solutions believes
that approximately 90% of its systems are Year 2000 ready as of May 31, 1999 and
it is in the control and monitoring phase of the project. Late 1998 acquisitions
are approximately 60% complete and are targeted for completion by October 31,
1999.
Based upon currently available information and considering Omnova
Solutions' decentralized systems and Year 2000 efforts, management believes that
the most reasonably likely worst case scenario could result in minor short-term
business interruptions. Omnova Solutions is preparing contingency plans which
include alternative sourcing to minimize any disruptions to its businesses
resulting from a vendor or supplier not being Year 2000 ready. However, failure
by Omnova Solutions and/or vendors and customers to complete Year 2000 readiness
work in a timely manner could have a material adverse effect on certain of
Omnova Solutions' operations.
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<PAGE> 15
Omnova Solutions' exposure could increase or its timetable for Year 2000
readiness could be delayed as a result of any new acquisitions.
ADOPTION OF THE EURO
Based upon a preliminary evaluation, management believes that the adoption
of the Euro by the European Economic Community will not have a material impact
on Omnova Solutions' international businesses. Omnova Solutions' foreign
operations currently are small and each operation conducts the majority of its
business in a single currency with minimal price variations between countries.
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
Although Omnova Solutions conducts business in foreign countries,
international operations were not material to Omnova Solutions' consolidated
financial position, results of operations or cash flows as of May 31, 1999.
Additionally, foreign currency transaction gains and losses were not material to
Omnova Solutions' results of operations for the six months ended May 31, 1999.
While international operations have not been significant in the past, Omnova
Solutions could be subject to material foreign currency exchange rate risk with
respect to future operations and cash flows due to Omnova Solutions' acquisition
of the European wallcovering business in late 1998. To date, Omnova Solutions
has not entered into any significant foreign currency forward exchange contracts
or other derivative financial instruments to hedge the effects of adverse
fluctuations in foreign currency exchange rates. Omnova Solutions is evaluating
the future use of these financial instruments.
NEW ACCOUNTING PRONOUNCEMENTS
Omnova Solutions adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), as of December 1, 1998, which
established standards for reporting and displaying comprehensive income and its
components in the financial statements. The adoption of SFAS 130, which had no
impact on Omnova Solutions' net income or divisional equity, requires
translation adjustments to be included in other comprehensive income.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). This statement is required to be adopted in fiscal year
1999. SFAS 131 requires that annual and interim financial and descriptive
information about reportable operating segments be reported on the same basis
used internally for evaluating segment performance and the allocation of
resources. While Omnova Solutions has not yet determined the impact of adopting
SFAS 131 on its financial statement disclosures, Omnova Solutions does not
expect any change to its primary financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in fiscal
year 2001. Because of Omnova Solutions' minimal use of derivatives, management
does not anticipate that the adoption of this Statement will have a significant
effect on earnings or the financial position of Omnova Solutions.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-up Activities" (SOP 98-5). SOP 98-5 is effective for Omnova Solutions
beginning on December 1, 1999, and requires that start-up costs capitalized
prior to December 1, 1999 be written off and any future start-up costs be
expensed as incurred. Omnova Solutions has no capitalized start-up costs;
therefore the adoption of SOP 98-5 will not have an effect on the combined
financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal Use" (SOP 98-1). SOP
98-1 is effective for Omnova Solutions beginning on December 1, 1999. SOP 98-1
will require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
Omnova Solutions believes it is in compliance with the standards established by
SOP 98-1 and that its implementation will not impact Omnova Solutions' future
earnings or financial position.
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FORWARD-LOOKING STATEMENTS
This Form 10 contains forward-looking statements as defined by the Private
Securities Litigation Reform Act of 1995. These statements present (without
limitation) the expectations, beliefs, plans and objectives of management and
future financial performance and/or assumptions underlying or judgments
concerning matters discussed in this document. These discussions and any other
discussions contained in this registration statement, except to the extent that
they contain historical facts, are forward-looking and accordingly involve
estimates, assumptions, judgments and uncertainties; in particular, this
pertains to management's comments on financial resources, capital spending and
the outlook for each of Omnova Solutions' business segments. The outcomes of
forward-looking statements and material contingencies could differ materially
from those discussed due to inherent economic risks and changes in prevailing
governmental policies and regulatory actions. In addition to certain contingency
matters and their respective cautionary statements discussed elsewhere in this
Form 10, the Forward-Looking Statements section of this Management's Discussion
and Analysis indicates some important factors that could cause actual results or
outcomes to differ materially from those addressed in the forward-looking
statements.
Some important factors that could cause Omnova Solutions' actual results or
outcomes to differ from those expressed in its forward-looking statements
include, but are not limited to, the following:
- General economic trends affecting Omnova Solutions' markets
- Governmental and regulatory policies including environmental regulations
- Omnova Solutions' acquisition activities
- Raw material prices for chemical feed stocks including polyvinyl
chloride, styrene and butadiene
- The ability of Omnova Solutions and its customers and vendors to
successfully modify and convert their systems to be Year 2000 ready
- Fluctuations in exchange rates of foreign currencies and other risks
associated with foreign operations
Additional risk factors may be described from time to time in Omnova
Solutions' filings with the Securities and Exchange Commission. All of these
risk factors are difficult to predict, contain material uncertainties that may
affect actual results and may be beyond Omnova Solutions' control.
ITEM 3. PROPERTIES.
Significant operating, manufacturing, research, design and/or sales and
marketing facilities of Omnova Solutions after the Distribution are set forth
below.
CORPORATE HEADQUARTERS AFTER THE DISTRIBUTION:
<TABLE>
<S> <C>
Omnova Solutions *Omnova Solutions Overseas
175 Ghent Road 545 Orchard Road
Fairlawn, OH 44333-3300 #09-05 Far East Shopping Centre
330/869-4200 Singapore 238882
(65) 733-7080
Technology Center
2990 Gilchrist Road
Akron, OH 44305-4489
330/794-6300
</TABLE>
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<PAGE> 17
PERFORMANCE CHEMICALS:
<TABLE>
<S> <C>
Headquarters: Sales/Manufacturing/Technical/Distribution:
165 S. Cleveland Avenue Akron, OH
Mogadore, OH 44260-1593 Calhoun, GA
330/628-6550 Chester, SC
*Dalton, GA
Fitchburg, MA
Green Bay, WI
Greensboro, NC
Mogadore, OH
</TABLE>
DECORATIVE & BUILDING PRODUCTS:
<TABLE>
<S> <C> <C>
Sales/Marketing/Design/
Headquarters Manufacturing Facilities: Distribution:
175 Ghent Road Auburn, PA *Asnieres, France
Fairlawn, OH 44333-3300 Columbus, MS *Brussels, Belgium
330/869-4200 Jeannette, PA *Charlotte, NC
Kent, England Herfordshire, England
Monroe, NC *Jebei Ali, Dubai, UAE
*Maumee, OH
*New York, NY
*Paris, France
*Pine Brook, NJ
Salem, NH
</TABLE>
- ---------------
* An asterisk next to a facility listed above indicates that it is a leased
property.
In addition, Omnova Solutions owns and leases properties (primarily
machinery, warehouse and office facilities) in various regions of the country
for use in the ordinary course of business.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Omnova Solutions is presently a wholly owned subsidiary of GenCorp. The
following table sets forth information regarding the beneficial ownership of
Omnova Solutions common stock immediately after the Distribution, as if the
Distribution took place on May 31, 1999, by (1) each person known by GenCorp who
would beneficially own more than 5% of the outstanding Omnova Solutions common
stock; (2) each of the persons who are expected to serve as a director of Omnova
Solutions; (3) each of the executive officers listed on
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<PAGE> 18
the Summary Compensation Table under "Item 6. Executive Compensation;" and (4)
all persons expected to be Omnova Solutions directors and executive officers
after the Distribution, as a group.
<TABLE>
SHARES PERCENT
BENEFICIAL OWNER BENEFICIALLY OWNED OF CLASS
- ------------------------------------------------------------ --------- -----
<S> <C> <C>
GenCorp and Omnova Solutions employee savings plans......... 5,789,750 13.86%(1)
175 Ghent Road
Fairlawn, OH 44333
FMR Corp.................................................... 4,406,173 10.55%(2)
82 Devonshire Street
Boston, MA 02109
Mario J. Gabelli/Gabelli Funds Inc.......................... 3,217,875 7.70%(3)
One Corporate Center
Rye, NY 10580
Franklin Resources, Inc..................................... 2,739,300 6.56%(4)
777 Mariners Island Boulevard
San Mateo, CA 94404
The Prudential Insurance Company of America................. 2,176,745 5.21%(5)
Prudential Plaza
Newark, NJ 07102
Merrill Lynch & Co. Inc..................................... 2,877,566 6.89%(6)
World Financial Center, North Tower
250 Vesey Street
New York, NY 10381
Edward P. Campbell.......................................... 1,250 *
Charles A. Corry............................................ 3,150 *
Diane E. McGarry............................................ 1,827 *
Steven W. Percy............................................. 1,084 *
R. Byron Pipes.............................................. 2,034 *
John B. Yasinsky............................................ 753,906(7)(8) 1.78%
Nathaniel J. Mass........................................... 116,868(7)(8) *
Kevin M. McMullen........................................... 91,557(7)(8) *
Marvin W. Zima.............................................. 58,411(7)(8) *
Michael E. Hicks............................................ 43,048(7)(8) *
All directors and executive officers........................ 1,124,012(7)(8) 2.64%
as a group (13 persons)
</TABLE>
- ---------------
* Less than one percent.
(1) Shares held at May 31, 1999 by the trustee for the GenCorp employee savings
plans, Mellon Bank, included 471,156 shares held for the GenCorp Profit
Sharing Retirement and Savings Plan, and 5,318,594 shares held for the
GenCorp Retirement Savings Plan. Shares are voted by the Trustee in
accordance with the instructions of the participating employees to whose
accounts such shares are allocated, except that shares for which no employee
instructions are received and shares held for the plans which have not been
allocated to participants' accounts may be voted by the Trustee in
accordance with instructions given by the Benefits Management Committee for
the plans. The Benefits Management Committee presently consists of four
persons, all of whom are officers of GenCorp.
(2) FMR reported that it had sole power to vote 380,600 shares, sole dispositive
power with respect to 4,173,900 shares and no shared voting or dispositive
power in Amendment No. 4 to Schedule 13G dated February 1, 1999 and filed
with the Securities and Exchange Commission.
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<PAGE> 19
(3) Mario J. Gabelli, directly as to 2,625 shares and through and shared with
various entities within Gabelli Funds Inc. as to the balance of the shares,
has investment discretion with respect to all shares, sole voting authority
with respect to 3,202,875 shares and no voting authority with respect to
15,000 shares, according to Amendment No. 26 to Schedule 13D dated January
8, 1998 and filed with the Securities and Exchange Commission.
(4) Franklin Resources, Inc. reports sole voting and dispositive authority for
2,020,600 shares held by Franklin Mutual Advisers, Inc., sole voting and
dispositive authority for 641,000 shares held by Templeton Investment
Counsel, Inc., and sole voting and dispositive power for 77,700 shares held
by Templeton Management Limited in amendment No. 1 to Schedule 13G dated
January 22, 1999 and filed with the Securities and Exchange Commission.
(5) Prudential reported that it had sole voting and dispositive authority with
respect to 1,490,700 shares and shared voting and dispositive authority with
respect to 686,045 shares in Amendment No. 4 to Schedule 13G dated January
26, 1999 and filed with the Securities and Exchange Commission.
(6) Merrill Lynch & Co., Inc., reported on behalf of Merrill Lynch Asset
Management Group having shared voting power and shared dispositive power
with respect to 2,877,566 shares and no sole voting or dispositive power in
Schedule 13G dated February 4, 1999 and filed with the Securities and
Exchange Commission.
(7) Includes shares subject to stock options which may be exercised within 60
days of May 31, 1999 as follows: Mr. Yasinsky, 653,733 shares (reflecting
the option allocations described under "Item 7. Certain Relationships and
Related Transactions -- Agreement on Employee Matters"); Mr. Mass, 107,500
shares; Mr. McMullen, 85,000 shares; Mr. Zima, 23,500 shares; and Mr. Hicks,
24,550 shares and all directors and executive officers as a group, 759,576
shares. Nonemployee directors do not participate in GenCorp's existing stock
option plan.
(8) Includes the approximate number of shares credited to the individual's
account as of May 31, 1999 under the GenCorp Retirement Savings Plan, and
where applicable, under the GenCorp Stock Incentive Compensation Plan and
under the GenCorp Profit Sharing Retirement and Savings Plan, a savings plan
for salaried employees sponsored by GenCorp prior to September 1989.
ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS.
OMNOVA SOLUTIONS MANAGEMENT
The following table sets forth the names and information as to the persons
who are expected to serve as Directors and executive officers of Omnova
Solutions immediately after the Distribution. Management anticipates that
following the Distribution, the number of directors on the Omnova Solutions
Board will be set at nine, and there will be three vacancies on the Omnova
Solutions Board following the Distribution. The Omnova Solutions Board may fill
one or more of those vacancies and those persons will serve until the annual
meeting of Omnova Solutions shareholders to be held in 2000, 2001 or 2002.
GenCorp is currently evaluating additional candidates to serve as additional
directors of Omnova Solutions following the Distribution.
19
<PAGE> 20
<TABLE>
<CAPTION>
DIRECTOR OF EXPECTED POSITION
NAME AGE GENCORP SINCE WITH OMNOVA SOLUTIONS
---- --- ------------- ---------------------
<S> <C> <C> <C>
Edward P. Campbell................ 49 1999 Director
Charles A. Corry.................. 67 1995 Director
Diane E. McGarry.................. 49 1995 Director
Steven W. Percy................... 52 1997 Director
Dr. R. Byron Pipes................ 57 1993 Director
John B. Yasinsky.................. 60 1993 Chairman and Chief Executive
Officer; Director
Marvin W. Zima.................... 61 N/A Vice President; President,
Performance Chemicals Division
Kevin M. McMullen................. 38 N/A Vice President; President,
Decorative & Building Products
Division
Michael E. Hicks.................. 41 N/A Senior Vice President and Chief
Financial Officer
James C. LeMay.................... 42 N/A Senior Vice President, Law and
General Counsel
Nathaniel J. Mass................. 48 N/A Senior Vice President, Strategic
Growth
Gregory T. Troy................... 44 N/A Senior Vice President, Human
Resources
Cynthia A. Slack.................. 50 N/A Secretary
</TABLE>
EDWARD P. CAMPBELL
Mr. Campbell has served as President and Chief Executive Officer of Nordson
Corporation, Westlake, OH, an international manufacturer of industrial
application equipment, since 1997. Prior to that time, he was Chief Operating
Officer of Nordson from 1994 to 1997 and Vice President of Nordson from 1988 to
1994. He is also a director of KeyCorp, Cleveland, OH. Mr. Campbell is a member
of the Audit and Finance Committees of GenCorp's Board.
CHARLES A. CORRY
Mr. Corry currently serves as a director of USX Corporation, Pittsburgh,
PA, a producer of energy and metal products and until recently, Mr. Corry also
served as Chairman of the Executive Committee of USX. He was Chairman and Chief
Executive Officer of USX from 1989 until his retirement in 1995 and President
and a director since February 1988. He is also a director of Mellon Bank
Corporation and Mellon Bank, N.A., Pittsburgh, PA. Mr. Corry is Chairman of the
Organization & Compensation Committee and a member of the Finance, Nominating &
Corporate Governance and Executive Committees of the GenCorp Board.
DIANE E. MCGARRY
Ms. McGarry has served as Senior Vice President, Eastern Operations, North
American Solutions Group, of Xerox Corporation, Rochester, NY, a manufacturer of
copiers and electronic office equipment, since January 1999. She was previously
Vice President/General Manager of the Color Solutions Business Unit of Xerox
from March 1998 until January 1999; Chairman, President and Chief Executive
Officer of Xerox Canada Inc., North York, Ontario, Canada, from 1993 until March
1998; Director, Sales Operations for the United Kingdom for Rank Xerox, a joint
venture between Xerox and the Rank Organization from 1991 to 1993; and Executive
Assistant to the Chairman and Chief Executive Officer of Xerox from February
1990 to 1991. Ms. McGarry is a member of the Audit and Organization &
Compensation Committees and Chairperson of the Government Affairs &
Environmental Issues Committee of the GenCorp Board.
20
<PAGE> 21
STEVEN W. PERCY
Mr. Percy has served as Chairman and Chief Executive Officer of BP America
Inc., Cleveland, OH, a petroleum extraction, refining and distribution company,
from 1996 until March 31, 1999 and the BP/Amoco merger. He was Executive Vice
President of BP America and President of BP Oil in the United States from 1992
to 1996; and Group Treasurer of the British Petroleum Company, plc and Chief
Executive of BP Finance International from 1989 until 1992. Mr. Percy is a
member of the Organization & Compensation and Nominating & Corporate Governance
Committees of the GenCorp Board.
DR. R. BYRON PIPES
Dr. Pipes has served as Distinguished Visiting Scientist, College of
William and Mary, Williamsburg, VA since 1998. He was the Seventeenth President
of Rensselaer Polytechnic Institute, Troy, NY from 1993 until 1998. He was
Provost of the University of Delaware from 1991 until 1993 and Dean of the
College of Engineering from 1985 until 1993. Dr. Pipes is Chairman of the
Nominating & Corporate Governance Committee and a member of the Executive and
Finance Committees of the GenCorp Board.
JOHN B. YASINSKY
Mr. Yasinsky has served as Chairman of the GenCorp Board since March 1995
and Chief Executive Officer and President of GenCorp since July 1994. He was
President and Chief Operating Officer of GenCorp from November 1993 until July
1994. Previously, he was Group President, Westinghouse Electric Corporation,
Pittsburgh, PA, a power generation and electrical equipment manufacturing
company, from February 1993 until November 1993 and President, Westinghouse
Power Systems from 1990 to 1993. He is also a director of CMS Energy
Corporation, Dearborn, MI and Consumers Power Company, Jackson, MI. Mr. Yasinsky
is Chairman of the Executive Committee of the GenCorp Board.
MARVIN W. ZIMA
Mr. Zima has served as Vice President of GenCorp since August 1994 and
President of GenCorp's Performance Chemicals business unit since 1991. He was
previously President and Chief Executive Officer of Uniroyal Engineered Products
from 1987 to 1991 and held various other management positions with Uniroyal from
1982 to 1987.
KEVIN M. MCMULLEN
Mr. McMullen has served as Vice President of GenCorp and President of
GenCorp's Decorative & Building Products business unit since September 1996. He
was previously General Manager of General Electric Corporation's Lighting
Division from 1991 to 1996 and Senior Engagement Manager at McKinsey and
Company, a business consulting firm, from 1985 to 1991.
MICHAEL E. HICKS
Mr. Hicks has served as Senior Vice President, Chief Financial Officer and
Treasurer of GenCorp since February 1999. He was previously Treasurer of GenCorp
since September 1994 and Director of Treasury of GenCorp from 1989 to 1994.
JAMES C. LEMAY
Mr. LeMay has served as Assistant General Counsel of GenCorp since May
1997. He was previously Senior Counsel of GenCorp from May 1990 to May 1997.
NATHANIEL J. MASS
Mr. Mass has served as Senior Vice President of Strategic Growth of GenCorp
since June 1996. He was previously Partner and Director of the Business Dynamics
Center, McKinsey and Company from 1994 to June 1996; Chief Executive Officer,
Light Sciences Inc. from 1991 to 1993 and Director of Worldwide Strategic
Planning, Exxon Chemical Company from 1988 to 1991.
21
<PAGE> 22
GREGORY T. TROY
Mr. Troy has served as Director, Human Resources of Performance Chemicals
since December 1996. He was previously Director, Human Resources of Bosch
Braking Systems (formerly AlliedSignal) from 1995 to December 1996; Employee
Relations Area Manager Manufacturing of Mobil Corporation's Plastics Division
from 1994 to 1995; Senior Human Resources Advisor of Mobil's Petrochemicals
Division from 1993 to 1994 and Employee Relations Manager of Mobil's Houston
Olefina Plant from 1991 to 1993.
CYNTHIA A. SLACK
Ms. Slack has served as Assistant Secretary and Senior Counsel, Finance and
Securities of GenCorp since September 1997. Previously, Ms. Slack was Assistant
Secretary and Counsel, Finance and Securities of GenCorp from March 1997 to
September 1997 and Counsel, Finance and Securities of GenCorp since February
1990.
CLASSIFICATION OF OMNOVA SOLUTIONS BOARD
Omnova Solutions' articles of incorporation will provide that the Omnova
Solutions Board will be divided into three classes of directors to be as nearly
equal in number of directors as possible. Class I will consist of John B.
Yasinsky and Dr. R. Byron Pipes and their current term of office will expire at
Omnova Solutions' 2000 annual meeting of shareholders. Class II will consist of
Diane E. McGarry and Steven W. Percy and their current term of office will
expire at Omnova Solutions' 2001 annual meeting of shareholders. Class III will
consist of Edward P. Campbell and Charles A. Corry and their current term of
office will expire at Omnova Solutions' 2002 annual meeting of shareholders. At
each annual shareholders' meeting, directors will be elected for a term of three
years and hold office until their successors are elected and qualified or until
their earlier removal or resignation. Newly created directorships resulting from
an increase in the number of directors or any vacancies on Omnova Solutions'
Board resulting from death, resignation, disqualification, removal or other
cause may be filled by a majority of the remaining directors then in office.
COMMITTEES
The Omnova Solutions Board is expected to have five standing committees:
(1) Organization & Compensation; (2) Audit; (3) Executive; (4) Finance; and (5)
Nominating & Corporate Governance.
ORGANIZATION & COMPENSATION COMMITTEE. The Organization & Compensation
Committee will review periodically the organization of Omnova Solutions and its
management, including major changes in the organization of Omnova Solutions and
the responsibility of management as proposed by the Chief Executive Officer. It
will monitor executive development and succession planning, review the
effectiveness and performance of senior management and make recommendations to
the Omnova Solutions Board concerning the appointment and removal of officers.
It will also periodically review the compensation philosophy, policies and
practices of Omnova Solutions and make recommendations to the Omnova Solutions
Board concerning major changes, as appropriate. It will annually review changes
in Omnova Solutions' employee benefit, savings and retirement plans and report
on those changes to the Omnova Solutions Board. The committee will also
administer Omnova Solutions' incentive and deferred compensation plans and
approve, and in some cases recommend to the Omnova Solutions Board for approval,
the compensation of employee-directors, officers, and principal executives of
Omnova Solutions. The members of the Organization & Compensation Committee are
expected to be Charles A. Corry, Chairman, Edward P. Campbell, Diane E. McGarry
and Steven W. Percy.
AUDIT COMMITTEE. The Audit Committee will review and evaluate the scope of
the audits to be performed, the adequacy of services performed by, and the fees
and compensation of the independent auditors and receive and review a report
from the independent auditors prior to the publication of Omnova Solutions'
audited financial statements. It will also consider and recommend to the Omnova
Solutions Board the selection of the independent auditors to examine the
consolidated financial statements of Omnova Solutions for the next year. It will
review and evaluate the scope and appropriateness of Omnova Solutions' internal
audit programs and plans and its system of internal control. The committee will
review and evaluate the appropriateness of Omnova Solutions' accounting
principles and practices and financial reporting and receive periodic reports
from the internal audit
22
<PAGE> 23
and law departments on a number of matters, including compliance with Omnova
Solutions' policy on legal and ethical conduct. Members of the Audit Committee
are expected to be: Steven W. Percy, Chairman, Edward P. Campbell and Diane E.
McGarry.
EXECUTIVE COMMITTEE. During the intervals between meetings of the Board of
Directors, the Executive Committee, unless restricted by resolution of the
Omnova Solutions Board, will be able to exercise, under the control and
direction of the Omnova Solutions Board, all of the powers of the Omnova
Solutions Board in the management and control of the business of Omnova
Solutions. Members of the Executive Committee are expected to be: John B.
Yasinsky, Chairman, Charles A. Corry and R. Byron Pipes.
FINANCE COMMITTEE. The Finance Committee will make recommendations to the
Omnova Solutions Board in regard to Omnova Solutions' planning with respect to
its capital structure and raising of its long-term capital and with regard to
dividend actions. It will review the performance and management of Omnova
Solutions' employee benefit funds and make recommendations to the Omnova
Solutions Board in regard to contributions to any pension plan, profit sharing,
retirement or savings plan of Omnova Solutions, or any proposed changes in the
funding method or interest assumption or in amortization of liabilities in
connection with funding any plan. Members of the Finance Committee are expected
to be: Edward P. Campbell, Chairman, Charles A. Corry, Steven W. Percy and R.
Byron Pipes.
NOMINATING & CORPORATE GOVERNANCE COMMITTEE. The Nominating & Corporate
Governance Committee will periodically review and make recommendations to the
Omnova Solutions Board concerning the criteria for selection and retention of
directors, the composition of the Omnova Solutions Board, structure and function
of Omnova Solutions Board committees, retirement policies and compensation and
benefits of directors. It will recommend to the Omnova Solutions Board qualified
candidates to serve as directors of Omnova Solutions and aid in attracting
qualified candidates to the Omnova Solutions Board. It will also consider and
make recommendations to the Omnova Solutions Board concerning direct nominations
submitted by shareholders. Members of the Nominating & Corporate Governance
Committee are expected to be: R. Byron Pipes, Chairman, Charles A. Corry and
Diane E. McGarry.
ITEM 6. EXECUTIVE COMPENSATION.
COMPENSATION OF DIRECTORS
Each nonemployee director of Omnova Solutions will receive a retainer of
$24,000 per year and an attendance fee of $1,000 for each Board and Committee
meeting attended. Nonemployee directors who served as Chairman of a committee of
the Omnova Solutions Board will receive an annual fee of $2,000 in consideration
of that service.
Nonemployee directors will be able to elect annually to defer all or a
percentage of their retainer, any committee Chairman's fee and meeting
attendance fees pursuant to a deferred compensation plan for nonemployee
directors. The plan will be unfunded, and deferred amounts will be credited, at
the election of the director, with phantom shares in an Omnova Solutions stock
fund, an S&P 500 index fund, or a cash deposit program. Deferred amounts and
earnings will be payable after termination of Omnova Solutions Board service in
either a lump sum or installments as elected by the director.
In March 1998 each GenCorp nonemployee director received 200 restricted
shares of GenCorp common stock. These restricted shares will vest March 25,
2000. In March 1999, each GenCorp nonemployee director received 250 restricted
shares of GenCorp common stock. These restricted shares will vest on March 30,
2001. Vesting will be accelerated in full upon resignation from the GenCorp
Board to serve on the Omnova Solutions Board. Dividends on restricted shares are
automatically reinvested through GenCorp's dividend reinvestment program unless
a director chooses otherwise. All shares may be voted, but ownership may not be
transferred until service on the GenCorp Board terminates. Unvested shares will
be forfeited in the event of a voluntary resignation (other than resignation to
serve on the Omnova Solutions Board) or refusal to stand for reelection, but
vesting will be accelerated in the event of death, disability or retirement
pursuant to the Retirement Plan for Nonemployee Directors described below or
upon the occurrence of a change in control or announcement of a
23
<PAGE> 24
tender or exchange offer which would result in a person holding beneficial
ownership of 30% of more of the outstanding GenCorp common stock.
Nonemployee directors of Omnova Solutions will be eligible for stock option
grants and restricted stock awards under the Omnova Solutions 1999 Equity and
Performance Incentive Plan.
Each nonemployee director who terminates his or her service on the Omnova
Solutions Board after at least 60 months of service (including service on the
GenCorp Board) will receive an annual retirement benefit equal to the retainer
in effect on the date the director's service terminates, payable in monthly
installments, until the number of monthly payments made equals the lesser of (1)
the individual's months of service as a director, or (2) 120 monthly payments.
In the event of death prior to payment of the applicable number of installments,
the aggregate amount of unpaid monthly installments will be paid, in a lump sum,
to the retired director's surviving spouse or other designated beneficiary, if
any, or to the retired director's estate.
Under the Omnova Solutions Board's retirement policy, a director's term of
office normally will expire at the annual meeting following his or her
seventieth birthday regardless of the term of the class for which the director
was last elected. Under special circumstances, however, the Omnova Solutions
Board may waive immediate compliance and request that a director postpone his or
her retirement until a later date.
Directors who are also employees of Omnova Solutions will not be
compensated separately for serving on the Omnova Solutions Board and will not be
paid a retainer or additional compensation for attendance at Board or committee
meetings.
COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS
The following tables set forth information concerning annual and long-term
compensation for services rendered to GenCorp for fiscal 1998, 1997 and 1996 by
those persons who are expected to be the Chief Executive Officer and the other
four most highly compensated executive officers of Omnova Solutions (determined
by reference to fiscal 1998 compensation) immediately following the Distribution
(the "Named Omnova Solutions Executive Officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION LONG TERM COMPENSATION
--------------------------------------- ----------------------------
AWARDS PAYOUTS
---------------------------- ------------
RESTRICTED LTIP
OTHER ANNUAL STOCK SECURITIES PAYOUTS ALL OTHER
NAME AND CURRENT SALARY BONUS COMPENSATION AWARDS UNDERLYING COMPENSATION COMPENSATION
PRINCIPAL POSITION YEAR ($) ($) ($) ($) OPTIONS/SARS(8) ($) ($)(12)(13)
------------------ ---- ------- ------- ------------ ---------- --------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
John B. Yasinsky............ 1998 695,833 800,000(1) 16,000(6) -- 85,000 420,000(9) 69,563
Chairman, Chief 1997 666,667 850,000(2) 16,000(6) -- 100,000 698,200(10) 54,466
Executive Officer 1996 620,833 600,000(3) 16,000(6) -- 100,000 281,266(11) 47,065
and President of GenCorp
Nathaniel J. Mass........... 1998 338,333 295,000(1) 6,643(7) -- 24,000 98,539(9) 28,050
Senior Vice President, 1997 320,833 285,000(2) 156,696(7) -- 30,000 -- 18,324
Strategic Growth of
GenCorp 1996 144,423 250,000(4) 2,621(7) -- 75,000 -- 6,066
Kevin M. McMullen........... 1998 275,000 225,000(1) -- -- 20,000 125,441(9) 20,063
Vice President; 1997 270,833 175,000(2) -- -- 25,000 -- 16,405
President, Decorative 1996 56,890 220,000(5) -- -- 75,000 -- 1,876
& Building Products
business unit of GenCorp
Marvin W. Zima.............. 1998 211,667 208,000(1) 10,000(6) -- 15,000 24,143(9) 15,266
Vice President; 1997 202,500 87,000(2) 10,000(6) -- 15,000 74,456(10) 16,782
President of 1996 187,500 140,000(3) 10,000(6) -- 15,000 88,545(11) 16,478
Performance Chemicals
business unit of GenCorp
Michael E. Hicks............ 1998 160,000 66,900(1) -- -- 5,000 42,175(9) 14,002
Senior Vice President 1997 150,883 75,200(2) -- -- 13,000 70,271(10) 11,930
and Chief Financial 1996 129,667 50,000(3) -- -- 7,000 -- 9,912
Officer of GenCorp
</TABLE>
24
<PAGE> 25
- ---------------
(1) Elected officers received 20% of their net 1998 incentive bonuses in shares
of GenCorp common stock (based upon the closing price on January 29, 1999
as reported on the NYSE) as follows: Mr. Yasinsky, 4,163 shares; Mr. Mass,
1,416 shares; Mr. McMullen, 1,146 shares; Mr. Zima, 1,639 shares; and Mr.
Hicks, 1,480 shares.
(2) Elected officers received 20% of their net 1997 incentive bonuses in shares
of GenCorp common stock (based upon the closing price on January 30, 1998
as reported on the NYSE) as follows: Mr. Yasinsky, 4,179 shares; Mr. Mass
1,349 shares; Mr. McMullen, 837 shares; Mr. Zima, 2,344 shares; and Mr.
Hicks, 2,178 shares.
(3) Messrs. Yasinsky, Zima and Hicks received part payment of their 1996
incentive bonuses in shares of GenCorp common stock (based upon the closing
price on January 20, 1997 as reported on the NYSE) as follows: Mr.
Yasinsky, 9,140 shares; Mr. Zima, 1,278 shares; and Mr. Hicks, 122 shares.
(4) Includes a 1996 year-end payment of $100,000 and a one-time payment of
$150,000 pursuant to Mr. Mass' employment agreement to compensate him for
loss of a 1996 bonus from his former employer.
(5) Includes a 1996 year-end incentive bonus of $125,000 and a hiring bonus of
$95,000 pursuant to Mr. McMullen's employment agreement.
(6) Cash allowance in lieu of a company provided automobile. Perquisites and
other personal benefits provided to the Named Omnova Solutions Officers
during 1998, 1997 and 1996 did not exceed disclosure thresholds established
by the Securities and Exchange Commission.
(7) Reimbursement for taxes payable in connection with relocation.
(8) Shares of GenCorp common stock underlying options granted pursuant to the
GenCorp Inc. 1997 and 1993 Stock Option Plans.
(9) Amounts paid for the 1996-1998 performance period under GenCorp's Long-Term
Incentive Program. The net amount, after tax withholding, was paid in
shares of GenCorp common stock based upon the January 29, 1999 closing
price on the NYSE.
(10) Amounts paid for the 1995-1997 performance period under GenCorp's Long-Term
Incentive Program. The net amount, after tax withholding, was paid in
shares of GenCorp common stock based upon the January 30, 1998 closing
price on the NYSE. Messrs. Mass and McMullen did not participate during the
1995-1997 performance period.
(11) Awards paid for the 1994-1996 performance period under GenCorp's Long-Term
Incentive Program. Messrs. Mass, McMullen and Hicks did not participate
during the 1994-1996 performance period.
(12) Amounts accrued as dividend and interest earnings on prior years' awards
under GenCorp's Stock Incentive Compensation Plan. Dividends declared on
common stock credited to the executive's account in the trust fund are
credited to the executive's account as an additional number of shares
determined by dividing the aggregate amount of the dividend by the market
value of common stock on the dividend date. The actual value of the shares
distributed on a future payment date will be based upon the market value of
GenCorp common stock at the future payment date. Amounts accrued during
1998, and the number of shares attributable thereto were: Mr. Zima, $1,826
or 73 shares and Mr. Hicks, $3,418 or 137 shares. Messrs. Yasinsky, Mass
and McMullen did not participate in the Plan.
(13) Company contributions to the executive's account in the GenCorp Retirement
Savings Plan and, where applicable, the amount credited to the executive's
account in GenCorp's Benefits Restoration Plan, a nonfunded plan which
restores to the individual's account amounts otherwise excluded due to
limitations imposed by the Internal Revenue Code on contributions and
includable compensation under qualified plans. Amounts credited during 1998
were: Mr. Yasinsky $69,563, Mr. Mass $28,050, Mr. McMullen $20,063, Mr.
Zima $13,440 and Mr. Hicks $10,584.
25
<PAGE> 26
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
-----------------------------
NUMBER OF PERCENT OF
SECURITIES TOTAL
UNDERLYING OPTIONS/SARS
OPTIONS/SARS GRANTED TO EXERCISE OR
GRANTED EMPLOYEES BASE PRICE EXPIRATION
NAME (#) (1) IN FISCAL YEAR ($ /SHARE)(2) DATE
---- ------------ -------------- ---------------- ----------
<S> <C> <C> <C> <C>
John B. Yasinsky..... 85,000 11.30% $30.1875 3-25-08
Nathaniel J. Mass.... 24,000 3.19 $30.1875 3-25-08
Kevin M. McMullen.... 20,000 2.66 $30.1875 3-25-08
Marvin W. Zima....... 15,000 1.99 $30.1875 3-25-08
Michael E. Hicks..... 15,000 0.66 $30.1875 3-25-08
All Shareholders(5).. N/A N/A N/A N/A
<CAPTION>
POTENTIAL REALIZABLE VALUE AT ASSUMED ANNUAL
RATES OF STOCK PRICE APPRECIATION FOR OPTION TERM
(TEN YEARS)(3)(4)
-------------------------------------------------
NAME 0% ($) 5% ($) 10% ($)
---- ----------- ---------------- ----------------
<S> <C> <C> <C>
John B. Yasinsky..... $ 0 1,613,704 4,089,444
Nathaniel J. Mass.... 0 455,634 1,154,666
Kevin M. McMullen.... 0 379,695 962,222
Marvin W. Zima....... 0 284,771 721,667
Michael E. Hicks..... 0 94,924 240,556
All Shareholders(5).. 0 2,041,909,423 3,251,399,497
</TABLE>
- ---------------
(1) Non-qualified stock options granted pursuant to the GenCorp Inc. 1997 Stock
Option Plan ("Plan") for the number of shares of GenCorp common stock
indicated. No stock appreciation rights were granted in 1998. Options become
exercisable in 25% increments on September 22, 1998 and March 25, 1999, 2000
and 2001, respectively.
(2) Exercise price equals the closing market price of GenCorp common stock on
the date of grant on the NYSE.
(3) The 0%, 5% and 10% appreciation over 10 years' option valuation method
assumes a stock price of $30.1875, $49.17 and $78.30, respectively, at March
25, 2008.
(4) The potential realizable values are shown in the table in conformity with
Securities and Exchange Commission regulations, and are not intended to
forecast possible future appreciation. GenCorp is not aware of any formula
which will predict with reasonable accuracy the future appreciation of
equity securities. No benefit can be realized by optionees without an
appreciation in stock price, which will benefit all shareholders
commensurately.
(5) Based upon 41,525,640 shares of GenCorp common stock outstanding on December
31, 1998.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING UNEXERCISED VALUE OF UNEXERCISED IN-THE-
SHARES OPTIONS/SARS AT FISCAL YEAR MONEY OPTIONS /SARS AT
ACQUIRED END (#)(1) FISCAL YEAR END ($)
ON VALUE ---------------------------- ----------------------------
NAME EXERCISE (#) REALIZED ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---- ------------ ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
John B. Yasinsky....... 0 0 444,050 138,750 $4,304,787 $484,375
Nathaniel J. Mass...... 2,000 $12,625 75,250 51,750 606,531 264,844
Kevin M. McMullen...... 0 0 73,750 46,250 667,969 269,531
Marvin W. Zima......... 0 0 14,750 21,250 108,375 56,250
Michael E. Hicks....... 0 0 20,050 10,250 181,213 36,563
</TABLE>
- ---------------
(1) No SARs have been issued under the Plan.
26
<PAGE> 27
LONG-TERM INCENTIVE PLANS -- AWARDS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
ESTIMATED FUTURE
PAYOUTS UNDER NON-
STOCK PRICE-BASED
PERFORMANCE OR PLANS(2)(3)
NUMBER OF OTHER PERIOD UNTIL --------------------
SHARES, UNITS OR MATURATION OR THRESHOLD TARGET MAXIMUM
NAME OTHER RIGHTS PAYOUT ($) ($) ($)
---- ---------------- ------------------ --------- ------- -------
<S> <C> <C> <C> <C> <C>
John B. Yasinsky............. (1) 3 Years 224,375 448,750 897,500
Nathaniel J. Mass............ (1) 3 Years 63,333 126,667 253,333
Kevin M. McMullen............ (1) 3 Years 49,583 99,167 198,333
Marvin W. Zima............... (1) 3 Years 30,617 61,233 122,467
Michael E. Hicks............. (1) 3 Years 23,520 47,040 94,080
</TABLE>
- ---------------
(1) Indicates awards under the GenCorp Inc. Long-Term Incentive Program
("Program") pursuant to which key employees designated by the Organization &
Compensation Committee of the GenCorp Board may receive incentive payments
equal to specified percentages of average annual compensation (salary and
bonus paid under GenCorp's Executive Incentive Compensation Program) upon
attainment of specified threshold, target or maximum levels of financial
performance ("performance goals") over a three-year performance period. For
the 1998-2000 performance period, threshold, target and maximum performance
goals for corporate officers are designated percentages of corporate return
on assets employed and earnings per share growth, and for business unit
presidents, designated percentages of corporate and business unit return on
assets employed and operating profit growth for their respective business
units. No payments are made under the Program if financial performance for
the performance period falls below threshold levels.
(2) Percentages of average annual compensation (determined for the three-year
performance period) payable to participants upon attainment of performance
goals for the 1998-2000 performance period are as follows:
<TABLE>
<CAPTION>
THRESHOLD TARGET MAXIMUM
--------- ------ -------
<S> <C> <C> <C>
GenCorp Chairman, CEO and President....................... 15% 30% 60%
GenCorp Senior Vice Presidents / Other Corporate
Officers................................................ 10% 20% 40%
GenCorp Business Unit Presidents.......................... 10% 20% 40%
</TABLE>
(3) For purposes of the table above, estimated future payouts have been
calculated on the basis of the participant's 1998 fiscal year salary and
bonus shown in the Summary Compensation Table above. Performance awards
under GenCorp's Long-Term Incentive Program for the three-year performance
period ending November 30, 1999 will be determined based upon (1) actual
performance up to the date of the special dividend contemplated by the
Distribution, and (2) budgeted performance, for the remainder of the period,
according to GenCorp's annual operating plan. Pro rata performance awards
will be paid under the GenCorp plan for the performance periods ending
November 30, 2000 and November 30, 2001. Pro rata performance awards for
each partial performance period will be determined based upon (1) actual
performance up to the date of the special dividend contemplated by the
Distribution, and (2) budgeted performance, for the remainder of the fiscal
year ending November 30, 1999, according to GenCorp's annual operating plan.
PENSION BENEFITS
GenCorp's salaried pension plans include several formulas for the
determination of benefits, and require that the formula providing the highest
benefit be utilized to determine an individual employee's actual benefit.
Benefits for Messrs. Mass, McMullen, Zima and Hicks have been determined
pursuant to a formula which utilizes five-year average compensation for years of
service prior to December 1, 1999 and a career average formula for service from
December 1, 1999 to normal retirement. The benefit for Mr. Yasinsky has been
determined pursuant to the terms of his employment agreement. Estimated benefits
are shown below because the required calculations do not lend themselves to a
typical pension plan table where benefits can be determined by the reader solely
upon the basis of years of service and final compensation.
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<TABLE>
<CAPTION>
APPROXIMATE ESTIMATED
YEARS OF CREDITED ANNUAL BENEFITS
SERVICE AT PAYABLE AT
NAME NORMAL RETIREMENT NORMAL RETIREMENT(1)
---- ----------------- --------------------
<S> <C> <C>
John B. Yasinsky(2)...................................... 41 $885,442
Nathaniel J. Mass........................................ 19 224,647
Kevin M. McMullen........................................ 29 245,717
Marvin W. Zima........................................... 11 58,915
Michael E. Hicks......................................... 45 163,780
</TABLE>
- ---------------
(1) Retirement benefits shown in the table for Messrs. Mass, McMullen, Zima and
Hicks were calculated pursuant to the terms of the Pension Plan for Salaried
Employees of GenCorp Inc. (the "GenCorp Pension Plan"). There is no offset
for Social Security payments. Mr. Yasinsky's retirement benefit has been
determined pursuant to the supplemental pension provisions of his employment
agreement described under " -- Employment Contracts and Termination of
Employment and Change in Control Arrangements."
The benefits shown are estimated and have not been adjusted for any survivor
option. Each estimated benefit is based upon the assumption that the
executive will remain an employee until age 65 at a rate of compensation
equivalent to that in effect on December 1, 1998 and that the pension plan
under which the estimated benefit is calculated will remain unchanged.
Benefits for Messrs. Mass, McMullen, Zima and Hicks have been determined by
a formula which provides for a benefit (A) for years of service prior to
December 1, 1999 of (1) 1.125% of five-year average compensation ("average
compensation") up to the average Social Security wage base ("ASSWB") plus
1.5% of average compensation in excess of the ASSWB multiplied by the total
of such years of service up to 35 years and (2) 1.5% of average compensation
multiplied by the total years of service in excess of 35 years, and (B) for
each year of service after December 1, 1999 (1) prior to attainment of 35
years of service, 1.625% of annual compensation up to the ASSWB plus 2.0% of
annual compensation in excess of the ASSWB, and (2) after attainment of 35
years of service, 2.0% of annual compensation.
The benefits shown in the table have not been reduced to reflect either (1)
the limitation on includable compensation or the overall benefit limitation
imposed on pension plans qualified under Section 401(a) of the Code, or (2)
a plan's own exclusions from includable compensation, since the amount of
any of those reductions will be restored to the individual pursuant to the
terms of GenCorp's Benefits Restoration Plan, a nonfunded plan with benefits
payable out of the general assets of GenCorp.
(2) Mr. Yasinsky's benefit is the product of (1) total years of service
(including 30 years credited upon Mr. Yasinsky's employment with GenCorp,
plus additional years accrued as an employee with Omnova Solutions until age
65), (2) 1.47%, and (3) the average of his five highest years of
compensation (salary and incentive bonus only) during the ten years
preceding retirement. Under the terms of Mr. Yasinsky's employment
agreement, amounts determined pursuant to the foregoing formula will be paid
out of GenCorp funds and will be offset by any payments made from the
GenCorp Pension Plan and the pension plan of his prior employer.
OMNOVA SOLUTIONS 1999 EQUITY AND PERFORMANCE INCENTIVE PLAN
Omnova Solutions desires to establish an equity performance and incentive
plan in order to integrate GenCorp's existing stock option and long-term
incentive plans and to more closely align the interests of its executives with
those of Omnova Solutions' shareholders. For this purpose, subject to the
approval of the shareholders, Omnova Solutions has adopted the Omnova Solutions
1999 Equity and Performance Incentive Plan. A copy of the plan has been filed as
an exhibit to this Form 10. A summary of the plan is set forth below.
Approximately 8 officers, 50 key employees and 8 nonemployee directors of
Omnova Solutions are expected to be eligible to receive awards under the plan.
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<PAGE> 29
PLAN SUMMARY
General. Under the plan, Omnova Solutions' Board is authorized to make
awards of (1) options to purchase shares of Omnova Solutions' common stock, (2)
performance stock and performance units, (3) restricted stock, (4) deferred
stock or (5) appreciation rights. Omnova Solutions' Organization and
Compensation Committee will be authorized to oversee the plan and to make awards
and grants under the plan.
Shares Available Under the Plan. The number of shares of Omnova Solutions'
common stock that may be issued or transferred (1) upon the exercise of options
("Option Rights"), (2) as restricted stock ("Restricted Stock") and released
from all substantial risks of forfeiture, (3) as deferred stock ("Deferred
Stock"), (4) in payment of performance stock ("Performance Stock") or
performance units ("Performance Units") that have been earned, (5) in payment of
dividend equivalents paid with respect to awards made under the plan, or (6) in
payment of appreciation rights may not exceed a total of 2,400,000, subject to
some adjustments pursuant to the terms of the plan. These shares of common stock
may be original issue or treasury shares or a combination of both.
Eligibility. Officers, key employees and nonemployee directors of Omnova
Solutions, as well as any person who has agreed to begin serving in such
capacity within 30 days of the date of the grant are eligible to be selected by
Omnova Solutions' Board to receive benefits under the plan. Omnova Solutions'
Organization and Compensation Committee will select those who will receive
grants on the basis of management objectives.
Option Rights. Option Rights entitle the optionee to purchase shares of
Omnova Solutions' common stock at a predetermined price per share (which may not
be less than the market value at the date of grant, except for non-qualified
stock options granted in lieu of salary or bonus, which may be not less than 85%
of the market value at the date of grant). Each grant will specify whether the
option price will be payable (1) in cash at the time of exercise, (2) by the
transfer to Omnova Solutions of shares of common stock owned by the optionee for
at least six months, having a value at the time of exercise equal to the option
price, (3) if authorized by Omnova Solutions' Board or its Organization and
Compensation Committee, the delivery of shares of Restricted Stock or other
forfeitable shares, Deferred Stock, Performance Stock, other vested Option
Rights, or Performance Units, or (4) a combination of those payment methods.
Grants may provide for deferred payment of the option price from the proceeds of
sale through a broker on the date of exercise of some or all of the shares of
Omnova Solutions' common stock to which the exercise relates.
No Option Rights may be exercisable more than ten years from the date of
grant. Each grant must specify the period of continuous employment with Omnova
Solutions that is required before the Option Rights become exercisable. Grants
may provide for earlier exercise of an Option Right in the event of a "change in
control" of Omnova Solutions or other similar transactions or events. Grants may
also specify management objectives that must be achieved as a condition to the
exercise of the option. Successive grants may be made to the same optionee
whether or not previously granted Option Rights remain unexercised.
Restricted Stock. An award of Restricted Stock involves the immediate
transfer of ownership of a specific number of shares of Omnova Solutions common
stock by Omnova Solutions to a participant in consideration of the performance
of services. The participant is immediately entitled to voting, dividend and
other ownership rights in such shares. The transfer may be made without
additional consideration or in consideration of a payment by the participant
that is less than current market value, as the Omnova Solutions Board may
determine. The Omnova Solutions Board may condition the award on the achievement
of specified management objectives.
Restricted Stock must be subject to a "substantial risk of forfeiture"
within the meaning of Section 83 of the Internal Revenue Code for a period to be
determined by the Omnova Solutions Board. An example would be a provision that
the Restricted Stock would be forfeited if the participant ceased to serve as an
officer or key employee of Omnova Solutions during a specified period of years.
If service alone is the criterion for non-forfeiture, the period of service must
be at least three years; if other management objectives are included, non-
forfeiture may occur one year from the date of grant. In order to enforce these
forfeiture provisions, the transferability of Restricted Stock will be
prohibited or restricted in a manner and to the extent prescribed by Omnova
Solutions' Board for the period during which the forfeiture provisions are to
continue. Omnova
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<PAGE> 30
Solutions' Board may provide for a shorter period during which the forfeiture
provisions are to apply in the event of a change in control of Omnova Solutions
or other similar transaction or event.
Deferred Stock. An award of Deferred Stock constitutes an agreement by
Omnova Solutions to deliver shares of its common stock to the participant in the
future in consideration of the performance of services. However, the Deferred
Stock award may be subject to the fulfillment of certain conditions, such as
management objectives, during the deferral period specified by Omnova Solutions'
Board. During the deferral period, the participant cannot transfer any rights in
the award and has no right to vote the shares of Deferred Stock, but Omnova
Solutions' Board may, on or after the date of the award, authorize the payment
of dividend equivalents on such shares on a current, deferred or contingent
basis, either in cash or in additional shares of Omnova Solutions common stock.
Awards of Deferred Stock can be made without additional consideration or in
consideration of a payment by the participant that is less than the market value
per share on the date of award. Deferred Stock must be subject to performance of
services for at least three years; provided that if management objectives are
included, the performance of services must be for at least one year. Omnova
Solutions' Board determines the deferral period at the date of the award, and
may provide for a deferral period of less than three years in the event of a
change in control of Omnova Solutions or other similar transaction or event.
Performance Stock and Performance Units. Performance Stock and Performance
Units involve awards that become payable upon the achievement of specified
management objectives during a designated performance period. This performance
period may be subject to earlier termination in the event of death, retirement
or a change in control of Omnova Solutions or other similar transaction or
event. A minimum level of acceptable achievement may also be established by
Omnova Solutions' Board. If, by the end of the performance period, the
participant has achieved the specified management objectives, the participant
will be deemed to have fully earned the Performance Stock or Performance Units.
If the participant has not achieved the management objectives, but has attained
or exceeded the predetermined minimum, the participant will be deemed to have
partly earned the Performance Stock and/or Performance Units (such part to be
determined in accordance with a formula). To the extent earned, the Performance
Stock and/or Performance Units will be paid to the participant at the time and
in the manner determined by Omnova Solutions' Board in cash, shares of Omnova
Solutions common stock or in any combination of those methods. Each award of
Performance Stock or Performance Units may be subject to adjustment to reflect
changes in compensation or other factors, so long as no adjustment would result
in the loss of an available exemption for the award under Section 162(m) of the
Internal Revenue Code. Omnova Solutions' Board or its Organization and
Compensation Committee may provide for the payment of dividend equivalents to
the holder on a current, deferred or contingent basis, either in cash or in
additional Omnova Solutions common stock.
Appreciation Rights. An Appreciation Right ("Appreciation Right") entitles
the holder, by surrender of the related Option Right (if granted in connection
with Option Rights) or by itself (if granted as a free-standing Appreciation
Right), to receive from Omnova Solutions an amount equal to 100%, or a lesser
percentage as Omnova Solutions' Board may determine, of the spread between the
strike price (or the option price if granted in tandem with Option Rights) and
the then-current market value of Omnova Solutions' common stock. Any grant may
specify that the amount payable on exercise of an Appreciation Right may be paid
by Omnova Solutions in cash, in Omnova Solutions common stock, or in any
combination of the two, and may either grant to the optionee or retain in Omnova
Solutions' Board the right to elect among those alternatives. Any grant may
specify that the Appreciation Right may be exercised only in the event of a
"change in control" or other similar transaction or event. Any grant of
Appreciation Rights may specify management objectives that must be achieved as a
condition to the exercise of those rights.
Management Objectives. The plan requires that Omnova Solutions' Board
establish performance goals for purposes of Performance Stock and Performance
Units. In addition, if Omnova Solutions' Board so chooses, Option Rights,
Restricted Stock and Deferred Stock may also specify management objectives.
Management objectives may be described either in terms of firm-wide objectives,
individual participant objectives, or objectives related to performance of the
division, subsidiary, department or function within Omnova Solutions in which
the participant is employed. Management objectives applicable to any award may
include specified levels of and/or growth in (1) cash flow, (2) earnings per
share, (3) earnings before interest and taxes, (4) earnings per
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<PAGE> 31
share growth, (5) net income, (6) return on assets, (7) return on assets
employed (8) return on equity, (9) return on invested capital, (10) return on
total capital, (11) revenue growth, (12) stock price, (13) total return to
stockholders, (14) economic value added, (15) operating profit growth, or any
combination of those methods. If Omnova Solutions' Board determines that a
change in the business, operations, corporate structure or capital structure of
Omnova Solutions, or the manner in which it conducts its business, or other
events or circumstances render the management objectives unsuitable, Omnova
Solutions' Board may modify the performance goals or the related minimum
acceptable level of achievement, in whole or in part, as Omnova Solutions' Board
deems appropriate and equitable, unless the result would be to make an award
otherwise eligible for an exemption under Section 162(m) of the Internal Revenue
Code ineligible for such an exemption.
Transferability. Except as otherwise determined by Omnova Solutions' Board,
no Option Right or other award under the plan is transferable by a participant
other than by will or the laws of descent and distribution, or (except for
incentive stock options) to the participant's immediate family or trusts
established solely for the benefit of one or more members of the immediate
family. Except as otherwise determined by Omnova Solutions' Board, Option Rights
are exercisable during the optionee's lifetime only by him or her.
The Board of Directors may specify at the date of grant that part or all of
the shares of Omnova Solutions common stock that are (1) to be issued or
transferred by Omnova Solutions upon exercise of Option Rights, upon termination
of the deferral period applicable to Deferred Stock or upon payment under any
grant of Performance Stock or Performance Units or (2) no longer subject to the
substantial risk of forfeiture and restrictions on transfer referred to in the
plan, shall be subject to further restrictions on transfer.
Adjustments. The Plan provides that the number of shares available for
awards will be adjusted to account for (a) shares relating to awards that expire
or are forfeited under the Plan, or (b) shares that are transferred, surrendered
or relinquished in payment of the option exercise price for satisfaction of
withholding rules for the exercise or receipt of awards under the Plan. This
permits the grant of additional awards equal to the number of shares turned in
by award recipients. The maximum number of shares of Omnova Solutions common
stock covered by outstanding Option Rights, Deferred Stock, Performance Stock
and Restricted Stock granted under the plan, and the prices per share applicable
to those shares, are subject to adjustment in the event of stock dividends,
stock splits, combinations of shares, recapitalizations, mergers,
consolidations, spin-offs, reorganizations, liquidations, issuances of rights or
warrants, and similar events. In the event of any such transaction, Omnova
Solutions' Board is given discretion to provide a substitution of alternative
consideration for any or all outstanding awards under the plan, as it in good
faith determines to be equitable under the circumstances, and may require the
surrender of all awards so replaced. Omnova Solutions' Board may also make or
provide for adjustments in the numerical limitations under the plan as Omnova
Solutions' Board may determine appropriate to reflect any of the foregoing
transactions or events.
Omnova Solutions' Board is authorized to interpret the plan and related
agreements and other documents. Omnova Solutions' Board may make awards to
employees under any or a combination of all of the various categories of awards
that are authorized under the plan, or in its discretion, make no awards. The
plan may be amended from time to time by Omnova Solutions' Board. However, any
amendment that must be approved by the shareholders of Omnova Solutions in order
to comply with applicable law or the rules of the principal national securities
exchange or quotation system upon which Omnova Solutions common stock is traded
or quoted will not be effective unless and until such approval has been obtained
in compliance with those applicable laws or rules. These amendments would
include any increase in the number of shares issued or certain other increases
in awards available under the plan (except for increases caused by adjustments
made pursuant to the plan). Presentation of the plan or any amendment of the
plan for shareholder approval is not to be construed to limit Omnova Solutions'
authority to offer similar or dissimilar benefits through plans that are not
subject to shareholder approval.
Omnova Solutions' Board may provide for special terms for awards to
participants who are foreign nationals or who are employed by Omnova Solutions
outside the United States of America as Omnova Solutions' Board may consider
necessary or appropriate to accommodate differences in local law, tax policy or
custom.
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The plan provides that awards representing no more than 3% of the shares
available under the plan may not be required to meet certain restrictions
otherwise applicable to restricted stock, deferred stock and performance stock
awards under the plans.
Omnova Solutions' Board may not, without further approval of its
shareholders, authorize the amendment of any outstanding Option Right to reduce
the option price. Furthermore, no Option Right may be canceled and replaced with
awards having a lower option price without further approval of the shareholders
of Omnova Solutions. The plan does not confer on any participant a right to
continued employment with Omnova Solutions.
ACCOUNTING TREATMENT
Performance Shares and Performance Units will require a charge against
income of Omnova Solutions periodically representing increases in the value of
the anticipated benefits. The charge is based on the dollar amount expected to
be paid at the end of the performance period. Restricted Stock and Deferred
Stock will require a charge against income equal to the fair market value of the
awarded shares at the time of award less the amount, if any, paid or payable by
the awardee. The charge is spread over the earn-out period for the Restricted or
Deferred Stock. Given the variety of awards that may be made separately or in
combination under the plan, actual awards may result in periodic charges against
income in some other circumstances.
EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND CHANGE IN CONTROL
ARRANGEMENTS
If the Directors remove Mr. Yasinsky from the position of Chairman and CEO
of GenCorp or Omnova Solutions prior to age 65 for any reason other than for
"cause" as defined in his October 18, 1993 employment agreement, Mr. Yasinsky
may elect to terminate his employment and receive (a) a termination payment
equal to two times the sum of (1) his annual base salary at the time of
termination and (2) his incentive bonus for the last completed fiscal year
preceding termination, and (b) a supplemental pension determined as described in
footnote (2) under "Pension Benefits". The agreement also provides that Mr.
Yasinsky will participate in the GenCorp Pension Plan and that his supplemental
pension will be offset by the amount of any pension payment made from the
GenCorp Pension Plan and pension payment received from his former employer. The
normal form of payment of the supplemental pension will be a 50% or 100% joint
and survivor annuity, unless Mr. Yasinsky elects a lump-sum payment. If elected,
the amount of any lump-sum payment will be calculated using the then-current
interest rate for 30-year Treasury securities, as approved by the GenCorp Board
for the calculation of lump-sum payments under all GenCorp benefit plans and
deferred compensation arrangements. In the event of death prior to electing a
payment option, the supplemental pension will be paid to Mr. Yasinsky's
surviving spouse for her life, calculated as if he had attained age 62, retired,
and elected a joint and 100% survivor annuity. In the event of disability prior
to age 62, GenCorp or Omnova Solutions will pay Mr. Yasinsky an amount equal to
60% of his base monthly salary (offset for payments received under Social
Security) until eligible for supplemental pension benefits at age 62.
Mr. Nathaniel J. Mass' May 13, 1996 employment agreement provided an
initial base salary of $300,000 per annum, increasing to $325,000 on February 1,
1997, a one time bonus of $150,000 to compensate him for loss of an expected
bonus payment from his prior employer, a prorated 1996 incentive bonus, with a
minimum of $75,000 and an option to purchase 75,000 shares of GenCorp common
stock at an exercise price equal to the closing market price on his employment
date. If Mr. Mass' employment is terminated by GenCorp, for reasons other than
for cause or due to disability or mandatory retirement, he will be eligible to
receive separation pay in the form of (a) continuing base salary at the rate in
effect on the date of termination and (b) continuing bonus payments, each in the
annualized amount of his last bonus payment preceding the date of termination,
for a period not to exceed the shortest of (1) two years from the date of
termination, or (2) until he obtains comparable employment.
Mr. Kevin McMullen's July 16, 1996 employment agreement provided an initial
base salary of $250,000 per annum, subject to pro-rata adjustment at the end of
the 1996 fiscal year, a one-time hiring bonus of $95,000, a 1996 incentive bonus
of $125,000, and an option to purchase 75,000 shares of GenCorp common stock at
an exercise price equal to the closing market price on his employment date. If
Mr. McMullen's employment is terminated by GenCorp other than for cause,
disability or retirement, he will be eligible for continuation of his
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<PAGE> 33
base salary in effect at termination for a period not to exceed the shorter of
(1) eighteen months or (2) until he obtains comparable employment.
GenCorp adopted the 1999 Key Employee Retention Plan which provides for
payment of up to two annual cash retention payments to eligible employees who
satisfactorily continue their employment with GenCorp or Omnova Solutions,
attain specific performance objectives (including completion of the
Distribution) and meet all plan requirements. In the event that the Distribution
does not occur before February 1, 2000, for whatever reason, a pro rata share of
the retention payment will be made and there will be no obligation to pay any
future payments. To date, 14 key employees have received Key Employee Retention
Letter Agreements pursuant to the plan, providing for individual total retention
payments ranging from $75,000 to $800,000. Pursuant to the plan, the following
payments may be made to the following Named Omnova Solutions Officers at the end
of the first and second years, respectively: Mr. Yasinsky, $200,000 and
$600,000; Mr. McMullen, $150,000 and $150,000; Mr. Mass, $150,000 and $150,000;
Mr. Zima, $150,000 and $150,000; and Mr. Hicks, $75,000 and $75,000.
At the time of the Distribution, it is intended that Omnova Solutions will
assume the foregoing employment contracts and termination of employment and
change-in-control arrangements with appropriate modifications.
During 1997 the GenCorp Board of Directors authorized GenCorp to enter into
amended and restated severance agreements with ten existing elected officers.
The severance agreements provide for a severance payment in an amount equal to
the officer's base salary plus bonus (as defined in the agreement) multiplied by
a factor of 3 in the case of the GenCorp Chief Executive Officer or a GenCorp
Senior Vice President, or by a factor of 2 for other covered officers, if within
three years after a change-in-control (as such term is defined in the
agreements), the officer's employment is terminated (1) by GenCorp for any
reason other than death, disability or cause, or (2) by the officer following
the occurrence of one or more adverse events enumerated in the agreement. The
agreements provide for payment of performance awards under the Long-Term
Incentive Program, continuation of health and life benefits for 24 or 36 months,
as appropriate, vesting of accrued retirement benefits, payment of the amount
required to cover excise taxes, if any, financial counseling, outplacement, and
accounting fees and costs of legal representation if required to enforce the
agreement. Mr. Wolfe's agreement includes a provision for payment of the same
severance compensation if his employment is terminated within three years after
a change-in-control of Aerojet. The severance agreements renew annually unless
terminated pursuant to their provisions.
Omnova Solutions will either assume current GenCorp severance agreements
with appropriate modifications or will enter into severance agreements with
Omnova Solutions officers who currently are not parties to such agreements.
Agreements for Messrs. Yasinsky and Mass each will include a requirement that
any amount which may become payable under the severance agreement be offset by
any amount which may be paid under the individual executive's employment
agreement as a result of termination of employment due to a change-in-control.
Mr. Yasinsky's agreement will provide that he may terminate his employment for
any reason, or without reason, during the 30-day period immediately following
the date six months after the occurrence of a change-in-control, with the right
to severance compensation under this agreement.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Omnova Solutions is wholly owned by GenCorp, and its results have been
included in GenCorp's consolidated financial results. After the Distribution,
the results of operations of Omnova Solutions will no longer be consolidated
with GenCorp and Omnova Solutions will be an independent public company.
Furthermore, except as described below, all contractual relationships existing
prior to the Distribution between GenCorp after the Distribution (sometimes
referred to as New GenCorp) and Omnova Solutions will be terminated except for
commercial relationships in the ordinary course of business.
Prior to the Distribution, GenCorp and Omnova Solutions will enter into
certain agreements, described below, governing their relationship subsequent to
the Distribution and providing for the allocation of tax and other liabilities
and obligations arising from periods prior to the Distribution. Each of GenCorp
and Omnova Solutions believes that the agreements are fair.
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<PAGE> 34
Copies of the forms of the material agreements have been or will be filed
as exhibits to this Registration Statement on Form 10. The following description
summarizes the material terms of these agreements.
DISTRIBUTION AGREEMENT
GenCorp and Omnova Solutions will enter into a distribution agreement
providing for, among other things, corporate transactions required to effect the
Distribution and other arrangements between GenCorp and Omnova Solutions with
respect to or in consequence of the Distribution.
The distribution agreement will provide for, with certain exceptions, (1)
the contribution of assets to Omnova Solutions by GenCorp, and (2) assumptions
of liabilities and cross-indemnities designed principally to place financial
responsibility for the liabilities of GenCorp and its subsidiaries other than
Omnova Solutions with New GenCorp and financial responsibilities for the
liabilities to be assumed by Omnova Solutions with Omnova Solutions. Each of New
GenCorp and Omnova Solutions will have sole responsibility for claims arising
out of its respective activities after the Distribution. Further, the
distribution agreement will provide that New GenCorp and Omnova Solutions will
not take any action to cause the Distribution to be taxable to GenCorp or its
shareholders, and that New GenCorp and Omnova Solutions will indemnify each
other for any adverse consequences incurred as a result of their breach of that
obligation to the other.
The distribution agreement will also provide that each of New GenCorp and
Omnova Solutions will be granted mutual access to certain historical records and
information in the possession of the other, and requires the retention by each
of New GenCorp and Omnova Solutions for a period of six years following the
Distribution of all information in its possession, and thereafter requires that
each party give the other prior notice of its intention to dispose of the
information.
The distribution agreement will also provide that, except as otherwise set
forth therein or in any other agreement, all costs or expenses incurred on or
prior to the Distribution date in connection with the Distribution will be
charged to and paid by the party incurring the costs or expenses. Except as set
forth in the Distribution Agreement or any related agreement, each party will
bear its own costs and expenses incurred after the Distribution.
TAX MATTERS AGREEMENT
As part of the Distribution, GenCorp and Omnova Solutions will enter into a
tax matters agreement that will provide, among other things, for the allocation
of Federal, state, local and foreign tax liabilities for periods prior to and
including the Distribution date. Through the Distribution date, Omnova Solutions
has been and will be included in GenCorp's consolidated Federal income tax
returns and, in certain states, GenCorp's state tax returns. In general, the tax
matters agreement will provide that New GenCorp will be liable for taxes related
to GenCorp, New GenCorp and Omnova Solutions for all periods prior to the
Distribution. In addition, New GenCorp will be entitled to all refunds related
to GenCorp, New GenCorp and Omnova Solutions for all periods prior to the
Distribution. Though valid as between New GenCorp and Omnova Solutions, the tax
matters agreement is not binding on the IRS and does not affect the several
liability of GenCorp and Omnova Solutions for all federal income taxes of the
consolidated group required to be shown on the consolidated Federal income tax
returns.
ALTERNATIVE DISPUTE RESOLUTION AGREEMENT
GenCorp and Omnova Solutions will enter into an alternative dispute
resolution agreement establishing procedures for resolving disputes that may
arise between them after the Distribution. The alternative dispute resolution
agreement will provide for both mediation and arbitration, which would be the
exclusive methods for resolution of most disputes between the parties that arise
prior to the Distribution or in connection with the Distribution and would
reduce the possibility of litigation between them.
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AGREEMENT ON EMPLOYEE MATTERS
GenCorp and Omnova Solutions will enter into an agreement on employee
matters providing for the treatment of employee benefit matters and other
compensation arrangements for former and current employees of Omnova Solutions
and its subsidiaries.
OMNOVA SOLUTIONS SALARIED PENSION PLAN. Prior to the Distribution, Omnova
Solutions will establish its own pension plan for the benefit of its active
salaried employees and those former salaried employees who terminated employment
from active business locations of Omnova Solutions. The terms of the Omnova
Solutions salaried pension plan will be substantially identical to the GenCorp
salaried pension plan. Omnova Solutions employees who participate in the GenCorp
salaried pension plan will be eligible for immediate participation in the Omnova
Solutions salaried pension plan. Omnova Solutions salaried employees also will
be credited under the Omnova Solutions salaried pension plan, for eligibility
and vesting purposes, with service credited to them under the GenCorp salaried
pension plan. Those assets and liabilities of the GenCorp salaried pension plan
which are attributable to Omnova Solutions plan participants (including a pro
rata share of surplus plan assets) will be transferred from the GenCorp salaried
pension plan to the Omnova Solutions salaried pension plan in connection with
the Distribution, following which the Omnova Solutions salaried employees will
receive benefit service with respect to service credited to them under the
GenCorp salaried pension plan. These transfers will result in Omnova Solutions
having estimated prepaid pension cost, based on actuarial estimates, of
approximately $26 million.
OMNOVA SOLUTIONS HOURLY PENSION PLAN. Prior to the Distribution, Omnova
Solutions will establish its own pension plan for the benefit of its active
hourly employees and those former hourly employees who terminated employment
from active business locations of Omnova Solutions. The terms of the Omnova
Solutions hourly pension plan will be substantially identical to the GenCorp
hourly pension plan. Omnova Solutions employees who participate in the GenCorp
hourly pension plan will be eligible for immediate participation in the Omnova
Solutions hourly pension plan. Omnova Solutions employees also will be credited
under the Omnova Solutions hourly pension plan, for eligibility and vesting
purposes, with service credited to them under the GenCorp hourly pension plan.
Those assets and liabilities of the GenCorp hourly pension plan which are
attributable to the Omnova Solutions hourly plan participants (including a pro
rata share of surplus plan assets) will be transferred from the GenCorp hourly
pension plan to the Omnova Solutions hourly pension plan in connection with the
Distribution, following which the Omnova Solutions hourly employees will receive
benefit service with respect to service credited to them under the GenCorp
hourly pension plan. These transfers will result in Omnova Solutions having
estimated prepaid pension cost, based on actuarial estimates, of approximately
$9 million.
POSTRETIREMENT BENEFITS. GenCorp currently provides certain health care and
life insurance benefits to most retired employees in the United States with
varied coverage by employee groups. The health care plans generally provide for
cost sharing in the form of retiree contributions, deductibles and coinsurance
between GenCorp and its retirees. The unfunded benefit obligation reported in
GenCorp's financial statements for such postretirement benefits will be
allocated between New GenCorp and Omnova Solutions as follows: (1) approximately
$303 million for active employees remaining New GenCorp employees and former
employees who do not become employees of Omnova Solutions will be retained by
New GenCorp; and (2) approximately $46 million for active employees transferred
to Omnova Solutions and former employees who terminated employment from active
business locations of Omnova Solutions will be assumed by Omnova Solutions.
JOINT SAVINGS PLAN. As of the Distribution, the GenCorp retirement savings
plans will become a multiple employer plan in which both New GenCorp and Omnova
Solutions will be unrelated participating employers. On and after the date of
the special dividend contemplated by the Distribution, employer matching
contributions on behalf of New GenCorp employees will be made solely by New
GenCorp and solely to the New GenCorp stock fund, and employer matching
contributions on behalf of Omnova Solutions employees will be made solely by
Omnova Solutions and solely to the Omnova Solutions stock fund. Not later than
the later of October 31, 2001 or two years after the Distribution, the accounts
of Omnova Solutions employees and former Omnova Solutions employees will be
transferred to a new separate savings plan to be established by Omnova
Solutions. Thereafter, neither Omnova Solutions nor its employees will
participate in the New GenCorp retirement savings plan.
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Omnova Solutions common stock held in the accounts of New GenCorp employees
that is attributable to contributions made before the Distribution may be
retained in the Omnova Solutions stock fund, transferred to the New GenCorp
stock fund or transferred to any other investment funds in the retirement
savings plan at the participant's election in accordance with the terms of the
retirement savings plan. Except as provided in the preceding sentence,
contributions made to or held under the retirement savings plan on behalf of New
GenCorp employees may not be invested in the Omnova Solutions stock fund. Any
dividends on Omnova Solutions common stock in accounts of New GenCorp employees
will be reinvested in the Omnova Solutions stock fund.
New GenCorp common stock held in the accounts of Omnova Solutions employees
that is attributable to contributions made before the Distribution may be
retained in the New GenCorp stock fund, transferred to the Omnova Solutions
stock fund or transferred to any other investment fund in the retirement savings
plan at the participant's election in accordance with the term of the retirement
savings plan. Except as provided in the preceding sentence, contributions made
to or held under the retirement savings plan on behalf of Omnova Solutions
employees may not be invested in the New GenCorp stock fund. Any dividends after
the Distribution date on New GenCorp common stock in accounts of Omnova
Solutions employees will be reinvested in the New GenCorp stock fund.
STOCK INCENTIVE COMPENSATION PLAN. Prior to the Distribution date, the
GenCorp Inc. Stock Incentive Compensation Plan will be terminated, and all
accounts of participants, whether represented by GenCorp shares held in a trust
or cash payment obligations will be distributed to participants, subject to the
normal tax withholding provisions in the plan.
GENCORP 1993 AND 1997 STOCK OPTION PLANS. Prior to the date of the special
dividend contemplated by the Distribution, exercisable options under the GenCorp
1993 and 1997 Stock Option Plans for (1) active employees, (2) retirees, and (3)
other former employees whose options remain exercisable, will be split into
options to acquire New GenCorp common stock and Omnova Solutions common stock.
Except with respect to options held by the chief executive officers of New
GenCorp and Omnova Solutions, the number of exercisable options in each company
will each equal the number of exercisable options under the GenCorp Stock Option
Plans. With respect to exercisable options held by the chief executive officers,
(1) Mr. Wolfe's options will be converted into 66 2/3% New GenCorp options and
33 1/3% Omnova Solutions options, and (2) Mr. Yasinsky's options will be
converted into 66 2/3% Omnova Solutions options and 33 1/3% New GenCorp options.
The exercise price of each resulting option will bear the same ratio to the
market price, as of the date of the special dividend contemplated by the
Distribution, of the respective company's stock, as the exercise price of the
original GenCorp option bore to the market price of GenCorp shares immediately
before the Distribution date.
Unexercisable options under the GenCorp 1997 Stock Option Plan for New
GenCorp employees will be replaced with a number of unexercisable New GenCorp
options under that plan which will, based upon (1) the market price of GenCorp
shares immediately after the date of the special dividend contemplated by the
Distribution and (2) the exercise prices for those options, have an aggregate
intrinsic value equal to that of the unexercisable GenCorp options immediately
before the date of the special dividend contemplated by the Distribution.
Unexercisable options under the GenCorp 1997 Stock Option Plan for Omnova
Solutions employees will be replaced with a number of unexercisable Omnova
Solutions options which will, based upon (1) the market price of Omnova
Solutions shares immediately after the date of the special dividend contemplated
by the Distribution and (2) the exercise price for such options, have an
aggregate intrinsic value equal to that of the unexercisable GenCorp options
immediately before the date of the special dividend contemplated by the
Distribution.
In converting the stock option plans for the Distribution, the exercisable
and unexercisable aggregate intrinsic value of the options immediately after the
conversion will be equal to the aggregate intrinsic value immediately before the
conversion. The ratio of the exercise price per option to the market value per
share will not be reduced and the vesting provisions and option period of the
Omnova Solutions and New GenCorp options will be the same as for the original
GenCorp options. Accordingly, no compensation expense will be recognized by
Omnova Solutions or New GenCorp.
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UNFUNDED DEFERRED COMPENSATION. GenCorp has unfunded obligations to pay
deferred compensation and retirement income under its Benefits Restoration Plan,
Deferred Bonus Plan, Non-Employee Directors Retirement and Deferred Compensation
Plans, 1996 Supplemental Retirement Plan for Management Employees, individual
employment agreements, and other miscellaneous plans related to discontinued
operations. Subject to legal requirements for employee acquiescence, benefit
obligations for (1) active employees transferred to Omnova Solutions, (2)
retired employees who terminated employment from active business locations of
Omnova Solutions, and (3) GenCorp directors resigning to become members of the
Omnova Solutions Board, will be assumed by Omnova Solutions. Benefit obligations
for (4) active employees remaining New GenCorp employees, (5) GenCorp directors
remaining on the New GenCorp Board, (6) other retired employees, and (7) retired
directors, will be retained by New GenCorp.
Former employees and directors will be able to elect a lump-sum payment of
their deferred compensation, subject to (1) a 10% reduction in order to avoid
adverse tax consequences, and (2) all applicable tax withholding. Active
employees and directors may receive lump-sum payments upon termination of
employment or board service with GenCorp, New GenCorp or Omnova Solutions based
upon appropriate advance elections or discretionary approval by the appropriate
company's benefit management committee. Under the agreement on employee matters,
New GenCorp will indemnify the payment of unfunded obligations assumed by Omnova
Solutions as of the date of the special dividend contemplated by the
Distribution, and Omnova Solutions will indemnify the payment of unfunded
obligations retained by New GenCorp as of the date of the special dividend
contemplated by the Distribution.
ANNUAL BONUSES. Bonus amounts under GenCorp's Executive Incentive
Compensation Plan for the period ending November 30, 1999 will be determined
based upon (1) actual performance up to the date of the special dividend
contemplated by the Distribution, and (2) budgeted performance, for the
remainder of the period, according to GenCorp's annual operating plan. Subject
to legal requirements for employee acquiescence, bonus obligations will be
assumed by Omnova Solutions for all Omnova Solutions employees, and paid in
cash. Bonus obligations will be paid in cash by New GenCorp for all New GenCorp
employees and for terminated GenCorp employees who are not employed by Omnova
Solutions.
LONG-TERM INCENTIVE COMPENSATION. Performance awards under GenCorp's
Long-Term Incentive Program for the three-year performance period ending
November 30, 1999 will be determined based upon (1) actual performance up to the
date of the special dividend contemplated by the Distribution, and (2) budgeted
performance, for the remainder of the period, according to GenCorp's annual
operating plan. Pro rata performance awards will be paid under the GenCorp plan
for the performance periods ending November 30, 2000 and November 30, 2001. Pro
rata performance awards for each partial performance period will be determined
based upon (1) actual performance up to the date of the special dividend
contemplated by the Distribution, and (2) budgeted performance, for the
remainder of the fiscal year ending November 30, 1999, according to GenCorp's
annual operating plan. Subject to legal requirements for employee acquiescence,
performance award obligations will be assumed by Omnova Solutions for all Omnova
Solutions employees and paid in cash. Performance award obligations will be paid
in cash by New GenCorp for all New GenCorp employees and for terminated GenCorp
employees who are not employed by Omnova Solutions.
DIRECTOR COMPENSATION. Subject to legal requirements for director
acquiescence, benefit obligations for GenCorp directors resigning to become
members of the Omnova Solutions Board will be assumed by Omnova Solutions.
Benefit obligations for GenCorp directors remaining on the New GenCorp Board and
retired directors will be retained by New GenCorp.
ENHANCED RETIREMENT AND SEPARATION PAY PLANS. GenCorp adopted a Voluntary
Enhanced Retirement Program (VERP) and Enhanced Involuntary Separation Pay Plan
(EISP) which are associated with and contingent upon the Distribution. The VERP
offers enhanced retirement benefits to eligible salaried employees within a
number of corporate facilities and divisional headquarters. The majority of the
related benefits will be paid from the defined benefit pension and retiree
health care plans of New GenCorp and Omnova Solutions. The maximum estimated
cost of the VERP could range up to $7.6 million. The maximum estimated cost of
the EISP could range up to $2.1 million. The actual cost of both the VERP and
the EISP will be reflected in the financial
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statements of GenCorp prior to the Distribution. The total number of
participants and the timing of their departure are not yet known.
ADMINISTRATIVE SERVICES. For a transition period not to exceed two years
after the Distribution, the Joint Savings Plan and other benefit programs
currently applicable to GenCorp active employees and retirees will be
administered under a transition services arrangement between New GenCorp and
Omnova Solutions. The purpose of the transition services arrangement will be to
allow for an orderly transition of administrative responsibility for ongoing
GenCorp benefit programs to administrative staffs of New GenCorp and Omnova
Solutions. In accordance with the transition services agreement, Omnova
Solutions will reimburse New GenCorp, and New GenCorp will reimburse Omnova
Solutions, for all direct and indirect costs incurred by each to provide these
services on terms believed by New GenCorp and Omnova Solutions to be
commercially reasonable.
With respect to other employee welfare benefit plans, policies, contracts
and arrangements of GenCorp, such as GenCorp's medical reimbursement and
vacation, sick leave and jury duty policies, the agreement on employee matters
will generally provide that Omnova Solutions will adopt, and be solely
responsible for substantially identical, plans, policies, contracts and
arrangements, to be effective from and after the date of the special dividend
contemplated by the Distribution, with respect to individuals who will be
employees of Omnova Solutions and their beneficiaries after the date of the
special dividend contemplated by the Distribution. The agreement on employee
matters also will provide that service with GenCorp prior to the date of the
special dividend contemplated by the Distribution will be counted for purposes
of participation, vesting and, following appropriate asset transfers, benefit
accruals under the plans, policies, contracts and arrangements of Omnova
Solutions following the date of the special dividend contemplated by the
Distribution.
INTELLECTUAL PROPERTY
In connection with the Distribution, intellectual property, including
patents, trademarks, copyrights, trade secrets and inventions used primarily by,
or being developed primarily for, Performance Chemicals and Decorative &
Building Products will be transferred to Omnova Solutions. In addition, a
license agreement will be established, subject to the rights of the U.S.
government, allowing Omnova Solutions to pursue commercialization of fluorinated
oxetane technology and associated oxetane technology originally conceived by
Aerojet, in Omnova Solutions' areas of interest and allowing New GenCorp to
pursue the technology in its areas of interest.
TRANSITION SERVICES AGREEMENT
GenCorp and Omnova Solutions will enter into a transition services
agreement which will provide for Omnova Solutions to continue to supply to New
GenCorp, for periods generally not to exceed two years and subject to
conditions, transitional administrative services for Vehicle Sealing operations,
including accounts receivable collections, payroll, real estate, data
communications and word processing, and to assist in effecting an orderly
transition following the Distribution. Omnova Solutions will be entitled to
reimbursement for all direct and indirect costs of providing these transitional
services on terms believed by Omnova Solutions and New GenCorp to be
commercially reasonable. These costs are not expected to be material.
ITEM 8. LEGAL PROCEEDINGS.
Omnova Solutions is subject to various legal actions, governmental
investigations, and proceedings relating to a wide range of matters. In the
opinion of management, after reviewing the information which is currently
available with respect to these matters and consulting with counsel, any
liability which may ultimately be incurred with respect to these matters will
not materially affect the consolidated financial condition of Omnova Solutions.
The effect of resolution of these matters on results of operations cannot be
predicted because any effect depends on both future results of operations and
the amount and timing of the resolution of these matters.
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ITEM 9. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER
MATTERS.
Omnova Solutions intends to apply to the NYSE for the listing of the Omnova
Solutions common stock. Omnova Solutions initially will have approximately
12,163 stockholders of record based upon the number of shareholders of record of
GenCorp as of May 31, 1999. It is presently anticipated that Omnova Solutions
common stock will be approved for listing on the NYSE prior to the Distribution
date, and trading may commence on a "when-issued" basis prior to the
Distribution. It is also possible that New GenCorp common stock would be traded
on a "when-distributed" basis prior to the Distribution. On the trading day
following the date that certificates for Omnova Solutions common stock are
mailed by the Distribution agent, "when-issued" or "when-distributed" trading,
as applicable, in respect of each of the Omnova Solutions common stock and New
GenCorp common stock would end and "regular-way" trading would begin. The NYSE
will not approve any trading of the Omnova Solutions common stock until the
Securities and Exchange Commission (the "Commission") has declared effective
this Form 10.
There is now no public market for Omnova Solutions common stock. Prices at
which Omnova Solutions common stock may trade prior to the Distribution on a
"when-issued" basis or after the Distribution cannot be predicted. Until the
Omnova Solutions common stock is fully distributed and an orderly market
develops, the prices at which trading in Omnova Solutions common stock occurs
may fluctuate significantly. The price at which Omnova Solutions common stock
trades after the Distribution will be determined by the marketplace and may be
influenced by many factors, including, among others, the depth and liquidity of
the market for Omnova Solutions common stock, investor perception of Omnova
Solutions and the industries in which it participates, Omnova Solutions'
operating results, Omnova Solutions' dividend policy and general economic and
market conditions. Market prices may also be affected by provisions of Omnova
Solutions' articles of incorporation and code of regulations as each will be in
effect following the Distribution, which may have an antitakeover effect. See
"Item 11. Description of Registrant's Securities to be Registered -- Certain
Change in Control Effects of Certain Provisions of the Articles of Incorporation
and Code of Regulations of Omnova Solutions".
The Omnova Solutions common stock distributed to holders of GenCorp common
stock in the Distribution will be freely transferable, except for shares
received by persons who may be deemed to be "affiliates" of Omnova Solutions
under the Securities Act of 1933. Persons who may be deemed to be affiliates of
Omnova Solutions after the Distribution generally include individuals or
entities that control, are controlled by, or are under common control with
Omnova Solutions and include directors and executive officers of Omnova
Solutions. Persons who are affiliates of Omnova Solutions will be permitted to
sell their shares of Omnova Solutions common stock only pursuant to an effective
registration statement under the Securities Act or an exemption from the
registration requirements of the Securities Act, such as the exemption afforded
by Section 4(2) of the Securities Act or by Rule 144.
The Bank of New York will act as the transfer agent and registrar for the
Omnova Solutions common stock after the Distribution is completed.
The dividend policy of Omnova Solutions will be determined by the Omnova
Solutions Board. The payment and level of any cash dividends by Omnova Solutions
after the Distribution will be subject to the discretion of the Omnova Solutions
Board of Directors. Future dividend decisions will depend on a number of
factors, including the future results of operations and financial condition of
Omnova Solutions, state law requirements and other factors. Although there can
be no assurance that Omnova Solutions will pay any dividends, management of
Omnova Solutions intends to pay cash dividends and believes that its cash flows
after the Distribution should be sufficiently strong that, barring unforeseen
circumstances, a cash dividend can be paid for the foreseeable future. It is
anticipated that Omnova Solutions' credit arrangements after the Distribution
will limit its ability to pay dividends.
ITEM 10. RECENT SALES OF UNREGISTERED SECURITIES.
Effective June 30, 1999, Omnova Solutions issued to GenCorp 10 shares of
Omnova Solutions common stock in exchange for $1,000. This issuance was exempt
from registration under Section 4(2) of the Securities Act of 1933 because it
was a transaction not involving a public offering.
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ITEM 11. DESCRIPTION OF REGISTRANT'S SECURITIES TO BE REGISTERED.
AUTHORIZED CAPITAL STOCK
After the Distribution, Omnova Solutions' authorized capital stock will
consist of 150,000,000 shares of common stock, $0.10 par value per share, and
15,000,000 shares of preferred stock, $1.00 par value per share. Based on the
number of shares of GenCorp common stock outstanding on June 30, 1999,
approximately 41,817,650 shares of Omnova Solutions common stock will be
transferred by GenCorp to its shareholders in the Distribution. Currently, there
are no shares of Omnova Solutions preferred stock outstanding.
OMNOVA SOLUTIONS COMMON STOCK
Subject to rights of any holders of preferred stock, each outstanding share
of Omnova Solutions common stock will be entitled to such dividends as may be
declared from time to time by the Board of Directors of Omnova Solutions. See
"Dividend Policies -- Omnova Solutions Dividend Policy." Each outstanding share
of Omnova Solutions common stock will be entitled to one vote on all matters
submitted to a vote of shareholders. After the Distribution, pursuant to the
Omnova Solutions Articles of Incorporation, holders of Omnova Solutions common
stock will not have the right to cumulative voting; therefore, the holders of a
majority of the shares voting for the election of the Board of Directors of
Omnova Solutions will be able to elect all the directors standing for election,
if they so choose. In the event of liquidation, dissolution or winding up of
Omnova Solutions, holders of Omnova Solutions common stock will be entitled to
receive on a pro rata basis any assets remaining after provision for payment of
creditors and any holders of Omnova Solutions Preferred Stock.
NO PREEMPTIVE RIGHTS
Except as may be provided in any Preferred Stock Designation, no holder of
any class of stock of Omnova Solutions authorized at the time of the
Distribution will have any preemptive right to subscribe to any securities of
Omnova Solutions of any kind.
CERTAIN EFFECTS OF AUTHORIZED BUT UNISSUED STOCK
One of the effects of the existence of unissued and unreserved Omnova
Solutions common stock may be to enable the Omnova Solutions Board to render
more difficult or to discourage an attempt to obtain control of Omnova Solutions
by means of a merger, tender offer, proxy contest or otherwise, and thereby to
protect the continuity of Omnova Solutions' management. If, in the due exercise
of its fiduciary obligations, for example, the Omnova Solutions Board were to
determine that a takeover proposal was not in Omnova Solutions' best interests,
such shares could be issued by the Omnova Solutions Board without shareholder
approval in one or more private placements or other transactions that might
prevent or render more difficult or costly the completion of the takeover
transaction by diluting the voting or other rights of the proposed acquiror or
insurgent shareholder or shareholder group, by creating a substantial voting
block in institutional or other hands that might undertake to support the
position of the incumbent Omnova Solutions Board, or by effecting an acquisition
that might complicate or preclude the takeover.
Although Ohio law and the Omnova Solutions Articles would not require
shareholder approval to issue authorized shares, the NYSE, on which the Omnova
Solutions common stock is expected to be listed, requires shareholder approval
of certain issuances as a condition of listing the additional shares or, in some
instances, of continued listing of the outstanding shares.
In addition, certain other provisions of the Omnova Solutions articles of
incorporation and Omnova Solutions code of regulations, which are described
below, may have the effect, alone or in combination with each other or with the
existence of authorized but unissued shares of capital stock, of rendering more
difficult or discouraging an acquisition of Omnova Solutions deemed undesirable
by the Omnova Solutions Board. See "-- Certain Anti-Takeover Provisions Relating
to Omnova Solutions."
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CERTAIN ANTI-TAKEOVER PROVISIONS RELATING TO OMNOVA SOLUTIONS
Omnova Solutions' articles of incorporation contain several provisions that
may make the acquisition of control of Omnova Solutions by means of a tender
offer, open market purchase, proxy fight, or otherwise more difficult. Omnova
Solutions' code of regulations also contain provisions that could have an
anti-takeover effect.
These provisions of Omnova Solutions' articles of incorporation and code of
regulations are designed to encourage persons seeking to acquire control of
Omnova Solutions to negotiate the terms with the Omnova Solutions Board. Omnova
Solutions believes that, as a general rule, the interest of Omnova Solutions
shareholders would be served best if any change in control results from
negotiations with the Omnova Solutions Board based upon careful consideration of
the proposed terms, such as the price to be paid to shareholders, the form of
consideration to be paid and the anticipated tax effects of the transaction.
The provisions could, however, have the effect of discouraging a
prospective acquiror from making a tender offer or otherwise attempting to
obtain control of Omnova Solutions. To the extent that these provisions
discourage takeover attempts, they could deprive shareholders of opportunities
to realize takeover premiums for their shares. Moreover, these provisions could
discourage accumulations of large blocks of Omnova Solutions common stock, thus
depriving shareholders of any advantages which large accumulations of stock
might provide.
Set forth below is a summary of the relevant provisions of Omnova
Solutions' articles of incorporation and code of regulations and certain
applicable sections of the Ohio General Corporation Law. Such summary does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, all of the provisions of Omnova Solutions' articles of
incorporation and code of regulations, which will be filed as exhibits to the
Registration Statement on Form 10 to be filed by Omnova Solutions with the
Securities and Exchange Commission.
CONTROL SHARE ACQUISITIONS
Section 1701.831 of the Ohio General Corporation Law provides that certain
notice and informational filings and special shareholder meeting and voting
procedures must be followed prior to consummation of a proposed "control share
acquisition." The Ohio General Corporation Law defines a "control share
acquisition" as any acquisition of an issuer's shares which would entitle the
acquiror, immediately after that acquisition, directly or indirectly, to
exercise or direct the exercise of voting power of the issuer in the election of
directors within any of the following ranges of that voting power:
- one-fifth or more but less than one-third of that voting power;
- one-third or more but less than a majority of that voting power; or
- a majority or more of that voting power.
Assuming compliance with the notice and information filings prescribed by
statute, the proposed control share acquisition may be made only if, at a
special meeting of shareholders, the acquisition is approved by both a majority
of the voting power of the issuer represented at the meeting and a majority of
the voting power remaining after excluding the combined voting power of the
"interested shares." "Interested shares" are the shares held by the intended
acquiror, the employee-directors and officers of the issuer as well as certain
shares that were acquired after the date of the first public disclosure of the
acquisition but before the record date for the shareholders meeting and shares
that were transferred, together with the voting power thereof, after the record
date for the shareholders meeting.
BUSINESS COMBINATIONS WITH CERTAIN PERSONS
Omnova Solutions is subject to Chapter 1704 of the Ohio General Corporation
Law, which prohibits certain business combinations and transactions between an
"issuing public corporation" and an "Ohio law interested shareholder" for at
least three years after the Ohio law interested shareholder attains 10%
ownership, unless the board of directors of the issuing public corporation
approves the transaction before the Ohio law interested shareholder attains 10%
ownership. An "issuing public corporation" is an Ohio corporation with 50 or
more shareholders that has its principal place of business, principal executive
offices, or substantial assets within the
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State of Ohio, and as to which no close corporation agreement exists. An "Ohio
law interested shareholder" is a beneficial owner of 10% or more of the shares
of a corporation. Examples of transactions regulated by Chapter 1704 include the
disposition of assets, mergers and consolidations, voluntary dissolutions and
the transfer of shares.
Subsequent to the three-year period, a transaction subject to Chapter 1704
may take place provided that certain conditions are satisfied, including:
- prior to the interested shareholder's share acquisition date, the
board of directors approved the purchase of shares by the interested
shareholder;
- the transaction is approved by the holders of shares with at least
66 2/3% of the voting power of the corporation (or a different
proportion set forth in the articles of incorporation), including at
least a majority of the outstanding shares after excluding shares
controlled by the Ohio law interested shareholder; or
- the business combination results in shareholders, other than the
Ohio law interested shareholder, receiving a fair price plus
interest for their shares.
Chapter 1704 is applicable to all corporations formed under Ohio law.
CLASSIFIED BOARD OF DIRECTORS
The Omnova Solutions code of regulations provides for the Omnova Solutions
Board to be divided into three classes of directors, as nearly equal in number
as possible, serving staggered terms. Approximately 1/3 of the Board is to be
elected each year. See "Item 5. Directors and Executive
Officers -- Classification of Omnova Solutions Board."
The provision for a classified board could prevent a party who acquires
control of a majority of the outstanding voting stock from obtaining control of
the Omnova Solutions Board until the second annual shareholders meeting
following the date the acquiror obtains a controlling stock interest. The
classified board provision could have the effect of discouraging a potential
acquiror from making a tender offer or otherwise attempting to obtain control of
Omnova Solutions and could increase the likelihood that incumbent directors will
retain their positions.
Omnova Solutions believes that a classified board will help to assure the
continuity and stability of the Omnova Solutions Board and Omnova Solutions'
business strategies and policies as determined by the Omnova Solutions Board,
because a majority of the directors will eventually have prior experience as
directors of Omnova Solutions.
The classified board provisions should also help to ensure that the Omnova
Solutions Board, if confronted with an unsolicited proposal from a third party
that has acquired a block of the voting stock of Omnova Solutions, will have
sufficient time to review the proposal and appropriate alternatives and to seek
the best available result for all shareholders.
NUMBER OF DIRECTORS; REMOVAL; VACANCIES
The Omnova Solutions code of regulations provides that the number of
directors shall be set either by resolution of the Omnova Solutions Board
adopted by the affirmative vote of a majority of the Omnova Solutions Board or
by the affirmative vote of the holders of at least 80% of the voting power of
Omnova Solutions, voting together as a single class; provided that the number of
directors shall not be fewer than seven or greater than 17.
Pursuant to the Omnova Solutions code of regulations, each director will
serve until his or her successor is duly elected and qualified, unless he or she
resigns, dies, becomes disqualified, or is removed. Omnova Solutions' code of
regulations prohibits the removal of directors from the Omnova Solutions Board
by the shareholders.
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Further, the Omnova Solutions code of regulations prohibits removal of directors
by the directors, except when the director to be removed:
- has been found by a court of competent jurisdiction to be of unsound
mind, or if he or she is adjudicated bankrupt;
- has failed to qualify as a director by accepting in writing his or
her election or by acting at a meeting of the Omnova Solutions
Board;
- is unable to engage in any substantial gainful activity by reason of
any medically determinable physical or mental impairment that is
expected to be permanent;
- has, since his or her election as a director, been convicted of a
crime constituting a felony or involving fraud, embezzlement or
theft; or
- has, since his or her election as a director, been found by a court
of competent jurisdiction in a civil action to have breached his or
her duty of loyalty to the company or any other company.
The Omnova Solutions code of regulations further provides that generally
vacancies or newly created directorships in the Omnova Solutions Board may only
be filled by a resolution approved by a majority of the Omnova Solutions Board
and any director so chosen will hold office until the next election of the class
for which such director was chosen.
SHAREHOLDER ACTION; SPECIAL MEETINGS
Under the Ohio General Corporation Law, unless prohibited by the articles
of incorporation or the code of regulations, any action by shareholders
generally must be taken at a meeting, unless a written consent stating the
action to be taken is signed by all the shareholders who would be entitled to
notice of the meeting held to consider the subject matter of the written
consent. Omnova Solutions' code of regulations does not prohibit shareholders
from acting by written consent.
Under the Ohio General Corporation Law, a special meeting of shareholders
may be called by the chairman, the president, the directors by action at a
meeting, a majority of the directors voting without a meeting, persons owning
25% of the outstanding shares entitled to vote at that meeting, or a less or
greater proportion as specified in the articles or regulations but not greater
than 50%, or the person(s) authorized to do so by the articles of incorporation
or the code of regulations. Omnova Solutions' code of regulations provides that
special meetings of shareholders may be called by the Chairman of the Omnova
Solutions Board, the President of Omnova Solutions, a majority of the directors
acting with or without a meeting or by any person or persons who hold not less
than 50% of all shares entitled to vote at that shareholders meeting.
SHAREHOLDER PROPOSALS AND NOMINATIONS
Omnova Solutions' code of regulations establishes an advance notice
procedure for shareholder proposals to be brought before an annual or special
meeting of shareholders of Omnova Solutions, including proposed nominations of
persons for election to the Omnova Solutions Board. Shareholders at an annual or
special meeting may only consider proposals or nominations brought before the
meeting by Omnova Solutions, by or at the direction of the Board or by a
shareholder that was a shareholder of record on the record date for the meeting,
that is entitled to vote at the meeting and that has given to Omnova Solutions'
Secretary timely written notice, in proper form, of the shareholder's intention
to bring that business before the meeting.
To be timely, notice by shareholders of nominations or proposals to be
brought before any annual meeting of shareholders, or before any special meeting
of shareholders, must be delivered to the Secretary of Omnova Solutions not less
than 60 nor more than 90 calendar days prior to the first anniversary of the
date on which Omnova Solutions first mailed its proxy materials for the
preceding year's annual meeting of shareholders, provided, however, that if the
date of the annual meeting is advanced more than 30 calendar days prior to or
delayed by more than 30 calendar days after the anniversary of the preceding
year's annual meeting, notice by the shareholder to be timely must be so
delivered not later than the close of business on the later of the 90th calendar
43
<PAGE> 44
day prior to such annual meeting or the 10th calendar day following the day on
which public announcement of the date of such meeting is first made.
Each notice by shareholders must set forth (1) the name and address of the
shareholder who intends to make the nomination or proposal and of any beneficial
owner on whose behalf the nomination or proposal is made and (2) the class and
number of shares of Omnova Solutions common stock that are owned beneficially
and of record by such shareholder and beneficial owner, if any. In the case of a
shareholder proposal, the notice must also set forth a brief description of the
business desired to be brought before the meeting, the reasons for conducting
such business at the meeting and any material interest of such shareholder or
beneficial owner, if any, in that proposed business. In the case of nomination
of any person for election as a director, the notice must also set forth any
information regarding the nominee proposed by the shareholder that would be
required to be included in a proxy statement filed pursuant to the proxy rules
of the Commission and the consent, if so required, of the nominee to be named in
a proxy statement as a candidate for election and to serve as a director of
Omnova Solutions if elected.
Although Omnova Solutions' code of regulations does not give the Omnova
Solutions Board the power to approve or disapprove shareholder nominations of
candidates or proposals regarding other business to be conducted at a special or
annual meeting, Omnova Solutions' code of regulations may have the effect of
precluding the conduct of certain business at a meeting if the proper procedures
are not followed or may discourage or defer a potential acquiror from conducting
a solicitation of proxies to elect its own slate of directors or otherwise
attempting to obtain control of Omnova Solutions.
PREFERRED STOCK
The Omnova Solutions articles of incorporation establish three series of
Omnova Solutions preferred stock, and authorize the Omnova Solutions Board to
determine, with respect to any series, the terms and rights of such series
(other than voting), including dividend and liquidation rights.
The provisions authorizing the Omnova Solutions Board to issue Omnova
Solutions preferred stock in series with such terms as it may designate will
provide Omnova Solutions with flexibility in structuring possible future
financings and acquisitions, and in meeting other corporate needs which might
arise. The authorized shares of Omnova Solutions preferred stock, as well as
shares of Omnova Solutions common stock, will be available for issuance without
further action by shareholders, unless such action is required by applicable law
or the rules of the NYSE. Those rules require shareholder approval as a
prerequisite to listing shares in several instances, including where the present
or potential issuance of shares could result in an increase in the number of
shares of common stock, or in the amount of voting securities outstanding of at
least 20%.
Although the Omnova Solutions Board has no present intention of doing so,
it could issue a series of Omnova Solutions preferred stock that could,
depending on its terms, impede the completion of a takeover attempt, including
one in which shareholders might receive a premium for their stock over the then
current market price.
AMENDMENT OF CHARTER DOCUMENTS
Ohio law permits the adoption of amendments to the articles of
incorporation if those amendments are approved at a meeting held for that
purpose by the holders of shares entitling them to exercise two-thirds of the
voting power of the corporation, or a lesser, but not less than a majority, or
greater vote as specified in the articles of incorporation. Amendment of Omnova
Solutions' articles of incorporation requires the approval of the holders of at
least 66 2/3% of the voting power then outstanding, except that amendment of any
of the following provisions requires the affirmative vote of the holders of
shares of Omnova Solutions entitled to exercise 80% of the voting power of
Omnova Solutions:
- Article V, which relates to the board's ability to determine the
terms and rights of series of Omnova Solutions preferred stock;
- Article VI, which relates to the elimination of cumulative voting;
44
<PAGE> 45
- Article VII, which relates to the elimination of pre-emptive rights;
and
- Article VIII, which relates to the directors' authority to purchase
any securities of Omnova Solutions.
Under the Ohio General Corporation Law, a code of regulations may be
adopted, amended or repealed only by approval of the shareholders either at a
meeting of shareholders by the affirmative vote of the holders of shares
entitling them to exercise a majority of the voting power on that proposal or by
written consent signed by holders of shares entitling them to exercise 66 2/3%
of the voting power on that proposal, or if the regulations so provide, by the
affirmative vote or written consent of the holders of shares entitling them to
exercise a greater or lesser proportion, but not less than a majority of the
voting power. Omnova Solutions' code of regulations provides that the code of
regulations may be amended at any meeting of shareholders, provided that any
such amendment proposed for consideration has been described in the notice of
meeting. Omnova Solutions' code of regulations further provides that amendment
of any of the following provisions requires the affirmative vote of the holders
of shares of Omnova Solutions entitled to exercise 80% of the voting power of
Omnova Solutions:
- Regulation 1, which relates to the time and place of shareholder
meetings;
- Regulation 3(a), which relates to the calling of special shareholder
meetings;
- Regulation 8, which relates to the order of business at shareholder
meetings and advance notification requirements for proposals for
business to be conducted at shareholder meetings;
- Regulation 10, which relates to the number, term, classification and
election of directors;
- Regulation 11, which relates to newly created directorships and
vacant directorships;
- Regulation 12, which relates to removal of directors;
- Regulation 13, which relates to nomination and election of directors
and advance notification requirements relating thereto; and
- Regulation 30, which relates to indemnification for directors and
officers, among others.
SHARE PURCHASE RIGHTS PLAN
It is anticipated that the Omnova Solutions Board will consider and may
adopt a share purchase rights plan on or after the Distribution Date.
ITEM 12. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Generally, a director of an Ohio corporation will not be found to have
violated his fiduciary duties unless there is proof by clear and convincing
evidence that the director has not acted in good faith, in a manner he
reasonably believes to be in or not opposed to the best interests of the
corporation, or with the care that an ordinarily prudent person in a like
position would use under similar circumstances. In general, a director is liable
for monetary damages for any action or omission as a director only if it is
proved by clear and convincing evidence that such act or omission was undertaken
either with deliberate intent to cause injury to the corporation or with
reckless disregard for the best interests of the corporation.
Under Ohio law, a corporation must indemnify its directors, as well as its
officers, employees and agents, against expenses where any such person is
successful on the merits or otherwise in defense of an action, suit or
proceeding. A corporation may indemnify such persons in actions, suits and
proceedings (including derivative suits) if the individual has acted in good
faith and in a manner that he believes to be in or not opposed to the best
interests of the corporation. In the case of a criminal proceeding, the
individual must also have no reasonable cause to believe that his conduct was
unlawful. Indemnification may be made only if ordered by a court or if
authorized in a specific case upon a determination that the applicable standard
of conduct has been met. Such a determination may be made by a majority of the
disinterested directors, by independent legal counsel or by the shareholders. In
order to obtain reimbursement for expenses in advance of the final disposition
of any action, the individual must provide an undertaking to repay the amount if
it is ultimately determined that he is not entitled to be indemnified.
45
<PAGE> 46
In general, Ohio law requires that all expenses, including attorney's fees,
incurred by a director in defending any action, suit or proceeding be paid by
the corporation as they are incurred in advance of final disposition if the
director agrees to repay such amounts if it is proved by clear and convincing
evidence that his action or omission was undertaken with deliberate intent to
cause injury to the corporation or with reckless disregard for the best
interests of the corporation and if the director reasonably cooperates with the
corporation concerning the action, suit or proceeding.
The code of regulations of Omnova Solutions provide for indemnification
that is coextensive with that permitted under Ohio law. In addition, Omnova
Solutions entered into or will enter into agreements that indemnify its
directors and certain of its officers to the maximum extent permitted by
applicable law. The indemnification so granted is not limited to the
indemnification specifically authorized by the Ohio General Corporation Law.
Each agreement represents a contractual obligation of Omnova Solutions which
cannot be altered unilaterally.
ITEM 13. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
HISTORICAL FINANCIAL STATEMENTS
The historical financial information required by this item is contained in
the financial statements that are listed on page F-1 of this Form 10 and are
filed herewith.
OMNOVA SOLUTIONS UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The following unaudited pro forma condensed combined balance sheet as of
May 31, 1999 and the unaudited pro forma condensed statements of combined income
for the six months ended May 31, 1999 and for the year ended November 30, 1998
give effect to Omnova Solutions as a stand-alone entity. The pro forma condensed
combined balance sheet is presented as if the Distribution had occurred on May
31, 1999, and the pro forma condensed statements of combined income are
presented as if the Distribution and the 1998 acquisitions had occurred as of
the beginning of the periods presented. These pro forma combined financial
statements reflect the anticipated borrowing by Omnova Solutions of
approximately $188 million and the payment of the borrowings by Omnova Solutions
to GenCorp in the form of a dividend. The actual amount to be borrowed by Omnova
Solutions and paid as a dividend to GenCorp will be determined at the time of
the Distribution. The actual amount will depend, in part, on the amount of
borrowings by GenCorp at that time. GenCorp's borrowings fluctuate throughout
its fiscal year. The pro forma information is presented for illustrative
purposes only and is not necessarily indicative of the results that would have
been obtained had the transactions actually occurred on the dates assumed, nor
is it necessarily indicative of the future combined results of operations.
The pro forma condensed combined financial statements should be read in
conjunction with the historical combined financial statements and the related
notes thereto of Omnova Solutions included in this Form 10.
46
<PAGE> 47
OMNOVA SOLUTIONS
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MAY 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ------------------------
OMNOVA OMNOVA
SOLUTIONS ADJUSTMENTS SOLUTIONS
---------- ----------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents................................... $ 6 $ 6
Accounts receivable, net.................................... 113 113
Inventories................................................. 59 59
Deferred income taxes....................................... 9 9
Prepaid expenses and other.................................. 3 3
---- ----
TOTAL CURRENT ASSETS........................................ 190 190
Prepaid pension............................................. $ 40(1) 40
Property, plant and equipment, net.......................... 196 12(2) 208
Goodwill, net............................................... 156 156
Patents and other intangible assets, net.................... 81 81
Other assets................................................ 5 5
---- ----- ----
TOTAL ASSETS................................................ $628 $ 52 $680
==== ===== ====
LIABILITIES AND DIVISIONAL EQUITY:
CURRENT LIABILITIES
Notes payable............................................... $ 6 $ 6
Accounts payable............................................ 68 68
Accrued payroll and personal property taxes................. 10 10
Other current liabilities................................... 7 $ 3(1) 12
2(2)
---- ----- ----
TOTAL CURRENT LIABILITIES................................... 91 5 96
Long-term debt.............................................. 188(3) 188
Postretirement benefits other than pensions................. 44(1) 44
Deferred income taxes....................................... 17 (3)(1) 14
Other liabilities........................................... 9 27(2) 36
---- ----- ----
TOTAL LIABILITIES........................................... 117 261 378
DIVISIONAL EQUITY........................................... 511 (209)(4) 302
---- ----- ----
TOTAL LIABILITIES AND DIVISIONAL EQUITY..................... $628 $ 52 $680
==== ===== ====
</TABLE>
See Notes to Unaudited Pro Forma Condensed Combined Balance Sheet as of May 31,
1999.
47
<PAGE> 48
OMNOVA SOLUTIONS NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
MAY 31, 1999
(1) To record the transfer of net pension assets and retiree medical obligations
and related deferred income taxes from GenCorp to Omnova Solutions. The
estimated prepaid pension asset is attributable to the excess of pension
assets over liabilities related to Omnova Solutions employees and retirees.
The projected prepaid pension asset of $40 million and retiree medical
benefit obligations of $47 million were actuarially determined based on
Omnova Solutions' active and retired participants in the plans and the
actuarial assumptions used were consistent with assumptions previously used
by GenCorp. The pension assets were split based on the requirements of
Section 414(i) of the Internal Revenue Code as prescribed by the Pension
Benefit Guaranty Corporation and other management considerations.
(2) To record the transfer of certain property, plant and equipment, primarily
GenCorp's corporate headquarters, related liabilities and deferred taxes
from GenCorp.
(3) Reflects the anticipated borrowing by Omnova Solutions of approximately $188
million. The proceeds from the borrowing will be used to pay a dividend to
GenCorp.
(4) To record the effect on divisional equity of the pro forma adjustments
referred to in notes (1), (2) and (3) above.
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
Transfer of prepaid pension(1)...................... $ 40
Transfer of postretirement benefits other than
pensions(1)....................................... (47)
Transfer of certain property, plant and equipment
and related liabilities(2)........................ (17)
Deferred income taxes related to (1)................ 3
Payment of dividend to GenCorp(3)................... (188)
-----
$(209)
=====
</TABLE>
48
<PAGE> 49
OMNOVA SOLUTIONS
UNAUDITED PRO FORMA CONDENSED STATEMENT OF COMBINED INCOME
SIX MONTHS ENDED MAY 31, 1999
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ----------------------------
OMNOVA OMNOVA
SOLUTIONS ADJUSTMENTS SOLUTIONS
------------ ------------- -----------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
NET SALES................................................ $367 $ -- $ 367
COSTS AND EXPENSES
Cost of products sold.................................... 236 (4)(1) 232
Selling, general and administrative...................... 77 (2)(1) 78
3(2)
Depreciation............................................. 12 -- 12
Interest expense......................................... 10 (5)(3) 5
Other (income) expense, net.............................. 3 -- 3
---- ------ -------
338 (8) 330
---- ------ -------
INCOME BEFORE INCOME TAXES............................... 29 8 37
Income taxes............................................. 11 3(4) 14
---- ------ -------
NET INCOME............................................... $ 18 $ 5 $ 23
==== ====== =======
PRO FORMA NET INCOME PER SHARE:
Basic.................................................. $ .55(6)
Diluted................................................ $ .55(6)
WEIGHTED AVERAGE NUMBER OF SHARES (IN THOUSANDS):
Basic.................................................. 41,658
Diluted................................................ 42,108
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statement of Combined Income
for the Six Months Ended May 31, 1999 and for the Year Ended November 30, 1998.
49
<PAGE> 50
OMNOVA SOLUTIONS
UNAUDITED PRO FORMA CONDENSED STATEMENT OF COMBINED INCOME
YEAR ENDED NOVEMBER 30, 1998
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL -------------------------------------------
OMNOVA OMNOVA
SOLUTIONS ADJUSTMENTS ACQUISITIONS(5) SOLUTIONS
---------- ----------- --------------- ---------
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
NET SALES.................................. $624 $ -- $142 $ 766
COSTS AND EXPENSES
Cost of products sold...................... 407 (4)(1) 87 490
Selling, general and administrative........ 117 (4)(1) 36 158
9(2)
Depreciation............................... 18 1(2) 7 26
Interest expense........................... 8 3(3) -- 11
Other (income) expense, net................ 1 -- -- 1
Unusual items.............................. 3 -- -- 3
---- ------ ---- -------
554 5 130 689
---- ------ ---- -------
INCOME BEFORE INCOME TAXES................. 70 (5) 12 77
Income taxes (benefit)..................... 28 (2)(4) 5 31
---- ------ ---- -------
NET INCOME................................. $ 42 $ (3) $ 7 $ 46
==== ====== ==== =======
PRO FORMA NET INCOME PER SHARE:
Basic.................................... $ 1.11(6)
Diluted.................................. $ 1.09(6)
WEIGHTED AVERAGE NUMBER OF SHARES
(IN THOUSANDS):
Basic.................................... 41,468
Diluted.................................. 42,039
</TABLE>
See Notes to Unaudited Pro Forma Condensed Statement of Combined Income
for the Six Months Ended May 31, 1999 and for the Year Ended November 30, 1998.
50
<PAGE> 51
OMNOVA SOLUTIONS NOTES TO UNAUDITED PRO FORMA
CONDENSED STATEMENTS OF COMBINED INCOME
FOR THE SIX MONTHS ENDED MAY 31, 1999 AND FOR THE YEAR ENDED NOVEMBER 30, 1998
(1) To record the decrease in pension expense attributable to the transfer of a
portion of the excess of the defined benefit pension plans' assets over the
related obligations for Omnova Solutions employees and retirees.
(2) To transfer corporate costs that will be assumed by Omnova Solutions as a
result of the Distribution. This adjustment also includes the cost
associated with the corporate assets and liabilities transferred from
GenCorp. After the Distribution, these costs will no longer be incurred by
GenCorp. These costs, along with the general and administrative costs
already allocated to Omnova Solutions in its historical combined financial
statements total approximately $22 million in 1998, which management
believes are representative of the annual general and administrative costs
on a stand alone basis.
(3) To adjust interest expense to the amount computed based on the anticipated
borrowing of $188 million as a result of the Distribution. The interest rate
was 5.5% and 5.8% for the six months ended May 31, 1999 and for the year
ended November 30, 1998, respectively. The interest rate was primarily based
on LIBOR plus a margin as specified in GenCorp's credit agreement. A quarter
point change in the interest rate would result in a $.2 million and a $.5
million change in interest expense for the six months ended May 31, 1999 and
for the year ended November 30, 1998, respectively.
(4) To record the estimated income taxes related to the pro forma adjustments
referred to in notes (1), (2) and (3) above at an estimated combined U.S.
federal and state income tax rate of 40%.
(5) Represents the results of operations of the 1998 acquisitions from the
beginning of fiscal year 1998 through the dates of acquisition with
adjustments to reflect the amortization of goodwill and other intangible
amounts together with the related income tax effects at a 40% rate.
(6) The pro forma earnings per share were calculated based on a one for one
share distribution and equivalent stock options being granted to holders of
GenCorp stock options.
ITEM 14. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
ITEM 15. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements. See page F-1 for a listing of financial
statements filed as part of this Form 10.
(b) Exhibits. See the Exhibit Index beginning on page X-1 of this Form
10 for a list of exhibits filed or to be filed as part of this Form 10.
51
<PAGE> 52
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities Exchange Act
of 1934, the registrant has duly caused this amendment to registration statement
to be signed on its behalf by the undersigned, thereunto duly authorized.
Date: July 22, 1999
OMNOVA Solutions Inc.
(Registrant)
By: /s/ Michael E. Hicks
------------------------------------
Michael E. Hicks
Senior Vice President and Chief
Financial Officer
52
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
OMNOVA SOLUTIONS INC.
Report of Independent Auditors............................ F-2
Combined Balance Sheets as of November 30, 1998 and 1997
and May 31, 1999 (unaudited)........................... F-3
Statements of Combined Income for the years ended November
30, 1998, 1997 and 1996 and for the six month periods
ended May 31, 1999 and 1998 (unaudited)................ F-4
Statements of Combined Divisional Equity for the years
ended November 30, 1998, 1997 and 1996 and for the six
month period ended May 31, 1999 (unaudited)............ F-5
Statements of Combined Cash Flows for the years ended
November 30, 1998, 1997 and 1996 and for the six month
periods ended May 31, 1999 and 1998 (unaudited)........ F-6
Notes to Combined Financial Statements.................... F-7
SIGNIFICANT ACQUISITIONS
SEQUA CHEMICALS CORPORATION
Report of Independent Public Accountants.................. F-17
Consolidated Statement of Income for the Period from
January 1, 1998 to October 28, 1998.................... F-18
Consolidated Statement of Cash Flows for the Period from
January 1, 1998 to October 28, 1998.................... F-19
Consolidated Statement of Changes in Shareholders' Equity
for the Period from January 1, 1998 to October 28,
1998................................................... F-20
Notes to Consolidated Financial Statements................ F-21
THE EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
Report of Independent Auditors............................ F-25
Combined Profit and Loss Account for the Years Ended
January 31, 1998 and 1997 and for the Six Month Periods
Ended July 31, 1998 and 1997 (unaudited)............... F-26
Combined Statements of Total Recognized Gains and Losses
for the Years Ended January 31, 1998 and 1997 and for
the Six Month Periods Ended July 31, 1998 and 1997
(unaudited)............................................ F-27
Combined Note of Historical Cost Profits and Losses for
the Years Ended January 31, 1998 and 1997 and for the
Six Month Periods Ended July 31, 1998 and 1997
(unaudited)............................................ F-27
Combined Cash Flow Statements for the Years Ended January
31, 1998 and 1997 and for the Six Month Periods Ended
July 31, 1998 and 1997 (unaudited)..................... F-28
Notes to the Combined Financial Statements................ F-31
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF GENCORP INC.:
We have audited the accompanying combined balance sheets of OMNOVA
Solutions Inc. (the Performance Chemicals and Decorative & Building Products
businesses of GenCorp Inc.) as of November 30, 1998 and 1997, and the related
statements of combined income, divisional equity and cash flows for each of the
three years in the period ended November 30, 1998. These financial statements
are the responsibility of GenCorp Inc.'s management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the combined financial position of OMNOVA Solutions
Inc. at November 30, 1998 and 1997, and the combined results of its operations
and its cash flows for each of the three years in the period ended November 30,
1998, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Akron, Ohio
April 14, 1999
F-2
<PAGE> 55
OMNOVA SOLUTIONS
COMBINED BALANCE SHEETS
<TABLE>
<CAPTION>
NOVEMBER 30,
MAY 31, ------------
1999 1998 1997
----------- ---- ----
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
ASSETS:
CURRENT ASSETS
Cash and cash equivalents................................... $ 6 $ 4 $ --
Accounts receivable, net.................................... 113 102 71
Inventories................................................. 59 57 36
Deferred income taxes....................................... 9 9 8
Prepaid expenses and other.................................. 3 2 --
---- ---- ----
TOTAL CURRENT ASSETS........................................ 190 174 115
Property, plant and equipment, net.......................... 196 193 122
Goodwill, net............................................... 156 155 27
Patents and other intangible assets, net.................... 81 76 8
Other assets................................................ 5 5 5
---- ---- ----
TOTAL ASSETS................................................ $628 $603 $277
==== ==== ====
LIABILITIES AND DIVISIONAL EQUITY:
CURRENT LIABILITIES
Notes payable............................................... $ 6 $ -- $ --
Accounts payable............................................ 68 73 58
Accrued payroll and personal property taxes................. 10 12 10
Other current liabilities................................... 7 4 4
---- ---- ----
TOTAL CURRENT LIABILITIES................................... 91 89 72
Deferred income taxes....................................... 17 16 14
Other liabilities........................................... 9 9 9
---- ---- ----
TOTAL LIABILITIES........................................... 117 114 95
DIVISIONAL EQUITY........................................... 511 489 182
---- ---- ----
TOTAL LIABILITIES AND DIVISIONAL EQUITY..................... $628 $603 $277
==== ==== ====
</TABLE>
See notes to combined financial statements.
F-3
<PAGE> 56
OMNOVA SOLUTIONS
STATEMENTS OF COMBINED INCOME
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEARS ENDED NOVEMBER 30,
------------ --------------------------
1999 1998 1998 1997 1996
---- ---- ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
NET SALES............................................. $367 $287 $624 $548 $506
COSTS AND EXPENSES
Cost of products sold................................. 236 190 407 369 329
Selling, general and administrative................... 77 55 117 106 97
Depreciation.......................................... 12 8 18 15 14
Interest expense allocated from GenCorp............... 10 3 8 4 8
Other (income) expense, net........................... 3 -- 1 (3) 1
Unusual items......................................... -- 8 3 -- (4)
---- ---- ---- ---- ----
338 264 554 491 445
---- ---- ---- ---- ----
INCOME BEFORE INCOME TAXES............................ 29 23 70 57 61
Income taxes.......................................... 11 9 28 23 24
---- ---- ---- ---- ----
NET INCOME............................................ $ 18 $ 14 $ 42 $ 34 $ 37
==== ==== ==== ==== ====
</TABLE>
See notes to combined financial statements.
F-4
<PAGE> 57
OMNOVA SOLUTIONS
STATEMENTS OF COMBINED DIVISIONAL EQUITY
<TABLE>
<CAPTION>
SIX MONTHS ENDED YEARS ENDED NOVEMBER 30,
MAY 31, --------------------------
1999 1998 1997 1996
------------------ ------ ------ ------
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
Balance at beginning of period..................... $489 $182 $147 $146
Net income......................................... 18 42 34 37
Foreign currency translation adjustment............ (1) 1 -- --
---- ---- ---- ----
Total comprehensive income......................... 17 43 34 37
Net transactions with GenCorp...................... 5 264 1 (36)
---- ---- ---- ----
Balance at end of period........................... $511 $489 $182 $147
==== ==== ==== ====
</TABLE>
See notes to combined financial statements.
F-5
<PAGE> 58
OMNOVA SOLUTIONS
STATEMENTS OF COMBINED CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
MAY 31, YEARS ENDED NOVEMBER 30,
------------ ------------------------
1999 1998 1998 1997 1996
---- ---- ------ ----- -----
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net income............................................ $ 18 $ 14 $ 42 $ 34 $ 37
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Provision for unusual item.......................... -- 8 3 -- --
Gain on sale of businesses.......................... -- -- -- -- (4)
Depreciation, amortization and loss/gain on disposal
of fixed assets.................................. 12 8 21 16 14
Deferred income taxes............................... 1 -- 1 -- (1)
Changes in operating assets and liabilities net of
effects of acquisitions and dispositions of
businesses:
Accounts receivable.............................. (11) (7) (7) (2) (3)
Inventories...................................... (1) 4 1 3 --
Other current assets............................. (1) (1) -- -- --
Current liabilities.............................. (13) (13) (7) 5 5
Other non-current assets......................... 8 -- (3) -- 1
Other long-term liabilities...................... -- (1) 1 1 2
---- ---- ----- ---- ----
NET CASH PROVIDED BY OPERATING ACTIVITIES............. 13 12 52 57 51
INVESTING ACTIVITIES
Capital expenditures.................................. (14) (6) (18) (11) (15)
Proceeds from business and asset dispositions......... 9 -- -- -- 4
Business acquisitions................................. (11) (74) (294) (47) (4)
---- ---- ----- ---- ----
NET CASH USED IN INVESTING ACTIVITIES................. (16) (80) (312) (58) (15)
FINANCING ACTIVITIES
Net transactions with GenCorp......................... 5 68 264 1 (36)
---- ---- ----- ---- ----
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES... 5 68 264 1 (36)
---- ---- ----- ---- ----
NET INCREASE IN CASH AND CASH EQUIVALENTS............. 2 -- 4 -- --
Cash and cash equivalents at beginning of period...... 4 -- -- -- --
---- ---- ----- ---- ----
CASH AND CASH EQUIVALENTS AT END OF
PERIOD.............................................. $ 6 $ -- $ 4 $ -- $ --
==== ==== ===== ==== ====
</TABLE>
See notes to combined financial statements.
F-6
<PAGE> 59
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
NOVEMBER 30, 1998, 1997 AND 1996
INFORMATION AS OF AND FOR THE PERIODS ENDED
MAY 31, 1999 AND 1998 IS UNAUDITED
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION -- On December 17, 1998, GenCorp's (Company) Board of
Directors announced a plan to spin off its Performance Chemicals and Decorative
& Building Products businesses (OMNOVA Solutions Inc.) to its shareholders.
These businesses have been operated as divisions of GenCorp and include a
subsidiary operated in the United Kingdom. In the spin-off, each of the
Company's shareholders will receive a pro rata share of the voting common stock
of OMNOVA Solutions Inc. (Omnova Solutions) in a special dividend (Distribution)
and Omnova Solutions will become a separately traded, publicly held company. The
Company has received a ruling from the U.S. Internal Revenue Service (the IRS)
that this transaction will be free from U.S. federal income taxes. The
Distribution is subject to several conditions, including shareholder approval as
well as market conditions at the time of the proposed spin-off.
The accompanying combined financial statements have been prepared on a
basis which reflects the historical financial statements of Omnova Solutions.
This assumes that the businesses of the Company expected to be contributed to
Omnova Solutions in connection with the Distribution were organized as a
separate legal entity. Generally, only assets and liabilities of the ongoing
Omnova Solutions businesses expected to be transferred to Omnova Solutions prior
to the Distribution were included in the Combined Balance Sheets.
The Company provides certain general and administrative services to Omnova
Solutions including administration, finance, legal, treasury, information
systems and human resources. The cost for these services was allocated to Omnova
Solutions by the Company based upon a formula that includes sales, gross payroll
and average invested capital. Management of the Company believes that the
allocation of cost for these services is reasonable. These allocations were $12
million, $13 million, and $12 million in 1998, 1997 and 1996, respectively, and
$7 million and $6 million for the six month periods ended May 31, 1999 and 1998,
respectively. After the Distribution, Omnova Solutions will be required to
perform these general and administrative services using its own resources or
purchased services and will be responsible for the costs and expenses associated
with the management of a public company. Omnova Solutions' management estimates
that the costs of such general and administrative expenses on a stand-alone
basis would have been approximately $22 million in 1998.
As described in Note J, Omnova Solutions' employees and retirees
participate in various Company pension, health care, savings and other benefit
plans. The net expenses related to these plans are included in the Omnova
Solutions combined financial statements generally based on historical pension
asset allocations and actuarial analyses for pension and retiree health care
obligations and based on actual cost for active health care, savings and other
benefit plans.
The Company uses a centralized approach to cash management and financing
for its domestic operations. As a result, cash and cash equivalents and debt
were not allocated to Omnova Solutions' domestic operations in the historical
financial statements. The cash and cash equivalents included in the Combined
Balance Sheets relate to Omnova Solutions' foreign operations. Omnova Solutions
generally has not had borrowings except amounts due to the Company. Interest
expense has been allocated to Omnova Solutions in the combined financial
statements to reflect Omnova Solutions' pro rata share of the financing
structure of the Company. The allocation in the combined financial statements is
based upon the percentage relationship between the average net assets employed
in Omnova Solutions' operations and the Company's overall average net assets. As
a stand alone entity, Omnova Solutions will establish its own credit facilities.
It is anticipated that as of the date of the Distribution, Omnova Solutions will
borrow an amount and pay the Company a dividend. The actual amount to be
borrowed by Omnova Solutions and paid as a dividend to the Company will be
determined at the time of the Distribution. The actual amount will depend, in
part, on the amount of the borrowings by the Company at that time.
F-7
<PAGE> 60
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
The allocation methodology followed in preparing the combined financial
statements may not necessarily reflect the results of operations, cash flows, or
financial position of Omnova Solutions in the future, or what the results would
have been had Omnova Solutions been a separate stand-alone public entity for all
periods presented.
The Distribution will be accomplished through a distribution agreement that
will provide for, among other things, the assets to be contributed to Omnova
Solutions and the liabilities to be assumed by Omnova Solutions, certain of
which assets and liabilities have not been included in the accompanying Combined
Balance Sheets. Those assets and liabilities include, among other things, a
defined amount of debt and related corporate assets and liabilities.
The Company and Omnova Solutions will also enter into an employee benefits
and compensation allocation agreement to set forth the manner in which assets
and liabilities under employee benefit plans and other employment related
liabilities will be allocated between them. Certain assets and liabilities
related to the plans have not been included in the accompanying Combined Balance
Sheets. These included, among other things, assets and liabilities for the U.S.
defined benefit pension plans and obligations for health care and other
postretirement benefits that Omnova Solutions is expected to retain for
substantially all of its active and retired U.S. employees.
The final determination of the assets to be contributed to Omnova Solutions
and the liabilities to be assumed by Omnova Solutions and the dividend to be
paid by Omnova Solutions to the Company will be made pursuant to the agreements
to be entered into between the Company and Omnova Solutions in connection with
the Distribution. As of the date of the Distribution, the net effect of the
final transfer and dividend will be treated as a reduction in "Divisional
Equity" in the Combined Balance Sheets.
PRINCIPLES OF COMBINATION -- The combined financial statements of Omnova
Solutions include the accounts of the related businesses. Significant
interdivisional accounts and transactions have been eliminated.
REVENUE RECOGNITION -- Sales are recorded when products are shipped.
USE OF ESTIMATES -- The preparation of the combined financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported in the combined
financial statements and accompanying notes. Actual results could differ from
those estimates.
ENVIRONMENTAL COSTS -- Omnova Solutions expenses, on a current basis,
recurring costs associated with managing hazardous substances and pollution in
ongoing operations. Omnova Solutions accrues for costs associated with the
remediation of environmental pollution when it becomes probable that a liability
has been incurred and its proportionate share of the amount can be reasonably
estimated. Omnova Solutions recognizes amounts recoverable from insurance
carriers or other third parties when the collection of such amounts is probable
and estimatable. Accruals are not material.
FAIR VALUE OF FINANCIAL INSTRUMENTS -- Omnova Solutions' cash equivalents
bear interest at market rates and therefore their carrying values approximate
their fair values.
INVENTORIES -- Inventories are stated at the lower of cost or market,
primarily using the last-in, first-out method.
LONG-LIVED ASSETS -- Property, plant and equipment are recorded at cost.
Refurbishment costs are capitalized in the property accounts whereas ordinary
maintenance and repair costs are expensed as incurred. Depreciation is computed
principally using the straight-line method. Depreciable lives on buildings and
improvements, and machinery and equipment, range from 10 to 40 years and 3 to 20
years, respectively.
Goodwill represents the excess of the purchase price over the estimated
fair value of the net assets acquired and is amortized on a straight-line basis
over periods ranging from 15 to 40 years. Identifiable intangible assets,
F-8
<PAGE> 61
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
such as patents, trademarks and licenses, are recorded at cost or when acquired
as part of a business combination at their estimated fair value. Identifiable
intangible assets are amortized over their estimated useful lives using the
straight-line method over periods ranging from 3 to 15 years. Accumulated
amortization of goodwill and identifiable intangible assets at November 30, 1998
and 1997 was $4 million and $1 million, respectively.
Impairment of long-lived assets is recognized when events or changes in
circumstances indicate that the carrying amount of the asset or related group of
assets may not be recoverable. If the expected future undiscounted cash flows
are less than the carrying amount of the asset, an impairment loss is recognized
at that time. Measurement of impairment may be based upon appraisal, market
value of similar assets, or discounted cash flows.
INCOME TAXES -- Omnova Solutions is included in the consolidated returns
filed by GenCorp and its subsidiaries in various U.S. and foreign jurisdictions.
The tax provisions reflected in the Statements of Combined Income have been
computed as if Omnova Solutions was a separate company. The accompanying
Combined Balance Sheets include deferred tax amounts applicable to Omnova
Solutions which result from temporary differences between the carrying amount of
assets and liabilities for financial reporting and income tax purposes. Taxes
currently payable and income tax payments are recorded directly by GenCorp and,
as a result, amounts related to Omnova Solutions are included in "Net
transactions with GenCorp" in the Statements of Combined Cash Flows.
EARNINGS PER SHARE -- Historical earnings per share have not been presented
as Omnova Solutions was operated as a division of the Company and had no
outstanding stock.
INTERIM FINANCIAL INFORMATION -- The financial information at May 31, 1999,
and for the six months ended May 31, 1999 and 1998 is unaudited but includes all
adjustments (consisting only of normal recurring adjustments) which Omnova
Solutions considers necessary for a fair presentation of its financial position,
operating results and cash flows. Results of these periods are not necessarily
indicative of results expected for the entire year.
NOTE B -- UNUSUAL ITEMS
In 1998, Omnova Solutions recognized unusual expense of $3 million related
to exiting the residential wallcovering business. In 1996, Omnova Solutions
recognized unusual income of $4 million from the sale of the structural urethane
adhesives business.
NOTE C -- NEW ACCOUNTING PRONOUNCEMENTS
Omnova Solutions adopted Statement of Financial Accounting Standards No.
130, "Reporting Comprehensive Income" (SFAS 130), as of December 1, 1998, which
established standards for reporting and displaying comprehensive income and its
components in the financial statements. The adoption of SFAS 130, which had no
impact on Omnova Solutions' net income or divisional equity, requires
translation adjustments to be included in other comprehensive income.
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 131, "Disclosures about Segments of an Enterprise and Related
Information" (SFAS 131). This statement is required to be adopted in fiscal year
1999. SFAS 131 requires that annual and interim financial and descriptive
information about reportable operating segments be reported on the same basis
used internally for evaluating segment performance and the allocation of
resources. While Omnova Solutions has not yet determined the impact of adopting
SFAS 131 on its financial statement disclosures, Omnova Solutions does not
expect any change to its primary financial statements.
In June 1998, the FASB issued Statement No. 133, "Accounting for Derivative
Instruments and Hedging Activities", which is required to be adopted in fiscal
year 2001. Because of Omnova Solutions' minimal use of
F-9
<PAGE> 62
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
derivatives, management does not anticipate that the adoption of this Statement
will have a significant effect on earnings or the financial position of Omnova
Solutions.
In April 1998, the American Institute of Certified Public Accountants
(AICPA) issued Statement of Position (SOP) 98-5, "Reporting the Costs of
Start-Up Activities" (SOP 98-5). SOP 98-5 is effective beginning on December 1,
1999, and requires that start-up costs capitalized prior to December 1, 1999 be
written off and any future start-up costs be expensed as incurred. Omnova
Solutions has no capitalized start-up costs and therefore, the adoption of SOP
98-5 will not have an effect on the combined financial statements.
In March 1998, the AICPA issued SOP 98-1, "Accounting For the Costs of
Computer Software Developed For or Obtained For Internal Use" (SOP 98-1). SOP
98-1 is effective for Omnova Solutions beginning on December 1, 1999. SOP 98-1
will require the capitalization of certain costs incurred after the date of
adoption in connection with developing or obtaining software for internal use.
Omnova Solutions believes it is in compliance with the standards established by
SOP 98-1 and as such SOP 98-1 will not impact Omnova Solutions' future earnings
or financial position.
NOTE D -- ACQUISITIONS AND DIVESTITURES
ACQUISITIONS
On October 29, 1998, Omnova Solutions acquired certain net assets of Sequa
Chemicals, the specialty chemicals unit of Sequa Corporation, for $108 million
in cash. This acquisition provided technology, customers and increased capacity
for an array of emulsion polymers and polymer hybrids including acrylics and
vinyl acetate. The preliminary purchase price allocation resulted in goodwill
and other intangible assets of approximately $61 million which are being
amortized over periods ranging from 5 to 40 years.
On August 14, 1998, Omnova Solutions acquired the commercial wallcovering
business of Walker Greenbank PLC, which is based in the United Kingdom, for $112
million in cash. The preliminary purchase price allocation resulted in goodwill
and other intangible assets of approximately $80 million which are being
amortized over periods ranging from 5 to 40 years.
On March 1, 1998, Omnova Solutions acquired The Goodyear Tire & Rubber
Company's Calhoun, Georgia latex facility for an aggregate consideration of $78
million, of which $74 million was paid in cash and $4 million was paid through
the retention of receivables. The acquisition resulted in goodwill and other
intangible assets of $59 million which are being amortized over periods ranging
from 3 to 40 years.
On May 7, 1997, Omnova Solutions acquired certain net assets of Printworld
from Technographics, Inc. for $47 million in cash. The acquisition resulted in
goodwill and other intangible assets of $32 million which are being amortized
over periods ranging from 3 to 30 years.
On August 23, 1996, Omnova Solutions purchased the Lytron(R) polystyrene
latex plastic pigment business from Morton International Inc. for approximately
$4 million. The acquisition resulted in intangible assets of $3 million which
are being amortized over 15 years.
All of the above acquisitions were accounted for using the purchase method
and were included in the results of operations of Omnova Solutions from the
respective dates of acquisition.
The following unaudited pro forma information presents a summary of the
combined results of operations of Omnova Solutions as if the fiscal 1998
acquisitions had occurred at the beginning of fiscal 1997, with pro forma
adjustments to reflect the amortization of goodwill and other intangible assets
and interest expense on incurred debt together with the related income tax
effects. The pro forma financial information is not necessarily indicative of
the combined results of operations if the acquisitions had actually occurred at
the beginning of fiscal 1997.
F-10
<PAGE> 63
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997
--------- ---------
(DOLLARS IN MILLIONS)
<S> <C> <C>
NET SALES.............................................. $766 $748
==== ====
NET INCOME............................................. $ 43 $ 35
==== ====
</TABLE>
On April 27, 1999, Omnova Solutions acquired the global latex floor care
business of Morton International Inc. for $8 million.
On December 2, 1998, Omnova Solutions acquired the U.S. acrylic emulsion
polymers business of PolymerLatex, located in Fitchburg, Massachusetts, for $9
million, consisting of cash of $3 million and a note payable of $6 million due
December 1, 1999.
DIVESTITURES
On December 14, 1998, Omnova Solutions sold its residential wallcovering
business to Blue Mountain Wallcoverings, Inc. for an aggregate consideration of
approximately $9 million. The loss on the sale of this business was reflected in
the 1998 results of operations.
On November 19, 1996, Omnova Solutions completed the sale of substantially
all of the assets and certain liabilities of its structural urethane adhesives
business to Ashland Inc. for an aggregate consideration of approximately $4
million.
NOTE E -- RESEARCH AND DEVELOPMENT EXPENSE
Research and development (R&D) expenses were $9 million in 1998 and $8
million in each of 1997 and 1996. R&D expenses include the costs of technical
activities that are useful in developing new products, services, processes or
techniques, as well as those expenses for technical activities that may
significantly improve existing products or processes.
NOTE F -- INCOME TAXES
<TABLE>
<CAPTION>
YEARS ENDED NOVEMBER 30,
-------------------------
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
INCOME TAXES (BENEFIT)
CURRENT
U.S. federal.............................................. $ 22 $ 19 $ 20
State and local........................................... 5 4 5
----- ----- -----
27 23 25
DEFERRED -- U.S. FEDERAL.................................. 1 -- (1)
----- ----- -----
$ 28 $ 23 $ 24
===== ===== =====
EFFECTIVE INCOME TAX RATE
Statutory federal income tax rate......................... 35.0% 35.0% 35.0%
State and local income taxes, net of federal income tax
benefit................................................. 5.0 5.0 5.0
----- ----- -----
EFFECTIVE INCOME TAX RATE................................. 40.0% 40.0% 40.0%
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
NOVEMBER 30,
----------------------------------------------
1998 1997
--------------------- ---------------------
ASSETS LIABILITIES ASSETS LIABILITIES
------ ----------- ------ -----------
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
DEFERRED TAXES
Accrued estimated costs........................ $13 $-- $11 $--
Depreciation................................... -- 20 -- 17
--- --- --- ---
$13 $20 $11 $17
=== === === ===
</TABLE>
F-11
<PAGE> 64
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Omnova Solutions' foreign pretax earnings were not material.
NOTE G -- ACCOUNTS RECEIVABLE
Omnova Solutions' receivables are generally unsecured and are not backed by
collateral from its customers. No one customer represented more than 10 percent
of Omnova Solutions' net trade receivables. The allowance for doubtful accounts
was $4 million and $3 million at November 30, 1998 and 1997, respectively and $4
million at May 31, 1999.
NOTE H -- INVENTORIES
<TABLE>
<CAPTION>
NOVEMBER 30,
MAY 31, ------------
1999 1998 1997
----------- ---- ----
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Raw materials and supplies................................ $ 25 $ 25 $ 18
Work-in-process........................................... 5 5 4
Finished products......................................... 58 60 45
---- ---- ----
Approximate replacement cost of inventories............... 88 90 67
Reserves, primarily LIFO.................................. (29) (33) (31)
---- ---- ----
$ 59 $ 57 $ 36
==== ==== ====
</TABLE>
Inventories using the LIFO method represented 82 percent and 92 percent of
inventories at replacement cost at November 30, 1998 and 1997, respectively and
80 percent at May 31, 1999. The LIFO reserve was $21 million, $20 million and
$26 million at May 31, 1999 and November 30, 1998 and 1997, respectively.
NOTE I -- PROPERTY, PLANT AND EQUIPMENT, NET
<TABLE>
<CAPTION>
NOVEMBER 30,
MAY 31, --------------
1999 1998 1997
----------- ----- -----
(UNAUDITED)
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
Land.................................................... $ 7 $ 7 $ 1
Building and improvements............................... 73 71 48
Machinery and equipment................................. 257 281 215
Construction in progress................................ 27 15 7
----- ----- -----
364 374 271
Accumulated depreciation................................ (168) (181) (149)
----- ----- -----
$ 196 $ 193 $ 122
===== ===== =====
</TABLE>
NOTE J -- EMPLOYEE BENEFIT PLANS
In February 1998, the FASB issued Statement No. 132, "Employers'
Disclosures about Pensions and Other Postretirement Benefits" (SFAS 132). SFAS
132 supersedes the disclosure requirements in Statements No. 87, "Employers'
Accounting for Pensions", No. 88, "Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans and for Termination Benefits", and No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions." SFAS
132 addresses disclosure issues only and did not change the measurement or
recognition provisions specified in those Statements.
F-12
<PAGE> 65
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
PENSION PLANS -- Omnova Solutions participates in a number of GenCorp
sponsored defined benefit pension plans which cover substantially all salaried
and hourly employees. Normal retirement age is generally 65, but certain plan
provisions allow for earlier retirement. The funding policy for the pension
plans is consistent with the funding requirements of federal law. The pension
plans provide for pension benefits, the amounts of which are calculated under
formulas principally based on average earnings and length of service for
salaried employees and under negotiated nonwage based formulas for hourly
employees. The majority of the pension plans' assets are invested in listed
stocks and bonds and short-term investments.
Pension expense allocated to Omnova Solutions in fiscal 1998, 1997 and 1996
was $6 million, $5 million and $5 million, respectively.
HEALTH CARE PLANS -- Omnova Solutions also participates in a number of
GenCorp sponsored health care and life insurance programs which cover most
retired employees in the United States. The health care programs generally
provide for cost sharing in the form of contributions, deductibles and
coinsurance between GenCorp and the retirees. Retirees in certain other
countries are provided similar benefits by plans sponsored by their governments.
Retiree health care expense allocated to Omnova Solutions for 1998, 1997
and 1996 was $3 million, $3 million and $4 million, respectively.
The following table sets forth the GenCorp plans' funded status and related
accrued pension costs that include Omnova Solutions employees as participants.
<TABLE>
<CAPTION>
PENSION HEALTH CARE
------------ --------------
1998 1997 1998 1997
---- ---- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of year..................... $494 $454 $ 242 $ 232
Service cost.............................................. 8 7 1 1
Interest cost............................................. 33 34 16 17
Amendments................................................ 2 3 -- 3
Actuarial loss............................................ (5) 32 4 12
Benefits paid............................................. (37) (36) (25) (23)
---- ---- ----- -----
BENEFIT OBLIGATION AT END OF YEAR........................... 495 494 238 242
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year.............. 690 626 -- --
Actual return on assets................................... 101 100 -- --
Employer contributions.................................... -- -- 25 23
Benefits paid............................................. (37) (36) (25) (23)
---- ---- ----- -----
FAIR VALUE OF PLAN ASSETS AT END OF YEAR.................... 754 690 -- --
Funded status............................................... 259 196 (238) (242)
Unrecognized actuarial (gain)/loss........................ (142) (88) 25 21
Unrecognized prior service cost........................... 17 17 (7) (7)
Unrecognized transition amount............................ (20) (24) -- --
Minimum funding liability................................. (5) (5) -- --
---- ---- ----- -----
NET AMOUNT RECOGNIZED....................................... $109 $ 96 $(220) $(228)
==== ==== ===== =====
</TABLE>
F-13
<PAGE> 66
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
PENSION HEALTH CARE
------------ --------------
1998 1997 1998 1997
---- ---- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C> <C>
WEIGHTED-AVERAGE ASSUMPTIONS
Discount rate............................................. 7.00% 7.00% 7.00% 7.00%
Expected return on plan assets............................ 8.75% 8.75% N/A N/A
Rate of compensation increase............................. 4.50% 4.50% N/A N/A
</TABLE>
The projected benefit obligation, accumulated benefit obligation and fair
value of plan assets for the pension plans with accumulated benefit obligations
in excess of plan assets were $14 million, $12 million, and $0, respectively, as
of November 30, 1998, and $12 million, $11 million, and $0, respectively, as of
November 30, 1997.
For measurement purposes, a 9 percent annual rate of increase in the per
capita cost of retiree health care benefits was assumed for 1999. The rate was
assumed to decrease gradually to 6 percent for 2002 and remain at that level
thereafter.
Because most employer benefits are capped, assumed health care cost trend
rates have a minimal effect on the amounts reported for the health care plans. A
one-percentage point increase/decrease in assumed health care cost trend rates
would increase/decrease the benefit obligation at November 30, 1998 by $4
million and increase/ decrease the aggregate of the service and interest
components of net periodic cost by $0.3 million.
Omnova Solutions participates in a number of GenCorp sponsored defined
contribution pension plans. Participation in these plans is available to
substantially all salaried employees and to certain groups of hourly employees.
Contributions to these plans are based on either a percentage of employee
contributions or on a specified amount per hour based on the provisions of each
plan. The cost of these plans for Omnova Solutions was $2 million in each of
1998 and 1997 and $1 million in 1996.
NOTE K -- LEASE COMMITMENTS
Omnova Solutions leases certain facilities, machinery and equipment and
office buildings under long-term, noncancelable operating leases. The leases
generally provide for renewal options ranging from five to ten years and require
Omnova Solutions to pay for utilities, insurance, taxes and maintenance. Rent
expense was $4 million in 1998 and $3 million in each of 1997 and 1996. Future
minimum commitments at November 30, 1998 for existing operating leases were $14
million with annual amounts declining from $4 million in 1999 to $1 million in
2003. Omnova Solutions' obligation for leases after 2003 is $1 million.
NOTE L -- CONTINGENCIES
Omnova Solutions is subject to various legal actions and proceedings
relating to a wide range of matters. In the opinion of management, after
reviewing the information which is currently available with respect to such
matters and consulting with legal counsel, any liability which may ultimately be
incurred with respect to these matters will not materially affect the financial
condition of Omnova Solutions. The effect of resolution of these matters on
results of operations cannot be predicted because any such effect depends on
both future results of operations and the amount and timing of the resolution of
such matters.
NOTE M -- BUSINESS SEGMENT INFORMATION
Omnova Solutions designs and manufactures performance chemicals and
decorative and building products for industry and consumers. Omnova Solutions is
a leading producer of polymer-based products. Its principal markets include the
paper industry and residential and commercial construction, as well as diverse
consumer and industrial markets that demand a broad range of products and
solutions. No one customer accounts for 10 percent of consolidated sales.
F-14
<PAGE> 67
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Segment operating profit represents net sales less applicable costs,
expenses and provisions for restructuring and unusual items relating to
operations. Segment operating profit excludes corporate income and expenses,
interest expense and income taxes.
In 1998, Decorative & Building Products recognized unusual expense of $3
million related to exiting the residential wallcovering business. In 1996,
Performance Chemicals recognized unusual income of $4 million from the sale of
the structural urethane adhesives business.
Approximately 28% of Omnova Solutions' employees are covered by collective
bargaining agreements. One of these agreements, covering approximately 22% of
Omnova Solutions' covered employees, will expire within the next 12 months.
Omnova Solutions has not experienced significant work stoppage at any of its
facilities in the past. However, a prolonged work stoppage at any of Omnova
Solutions' facilities could materially adversely affect Omnova Solutions'
business and results of operations.
Omnova Solutions' operations are located primarily in the United States and
Europe starting in 1998. Inter-area sales are not significant to the total sales
of any geographic area. Unusual items included in operating profit pertained to
United States operations.
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
BUSINESS SEGMENT INFORMATION
NET SALES
Performance Chemicals....................................... $226 $180 $166
Decorative & Building Products.............................. 398 368 340
---- ---- ----
$624 $548 $506
==== ==== ====
INCOME
Performance Chemicals....................................... $ 35 $ 22 $ 25
Decorative & Building Products.............................. 51 44 45
Unusual items............................................... (3) -- 4
---- ---- ----
SEGMENT OPERATING PROFIT.................................... 83 66 74
Interest expense............................................ (8) (4) (8)
Corporate expenses.......................................... (5) (5) (5)
---- ---- ----
INCOME BEFORE INCOME TAXES.................................. $ 70 $ 57 $ 61
==== ==== ====
IDENTIFIABLE ASSETS
Performance Chemicals....................................... $290 $ 91 $ 87
Decorative & Building Products.............................. 313 186 146
---- ---- ----
TOTAL ASSETS................................................ $603 $277 $233
==== ==== ====
CAPITAL EXPENDITURES
Performance Chemicals....................................... $ 5 $ 6 $ 9
Decorative & Building Products.............................. 13 5 6
---- ---- ----
$ 18 $ 11 $ 15
==== ==== ====
DEPRECIATION
Performance Chemicals....................................... $ 6 $ 5 $ 5
Decorative & Building Products.............................. 12 10 9
---- ---- ----
$ 18 $ 15 $ 14
==== ==== ====
</TABLE>
F-15
<PAGE> 68
OMNOVA SOLUTIONS
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
----- ----- -----
(DOLLARS IN MILLIONS)
<S> <C> <C> <C>
GEOGRAPHIC INFORMATION
NET SALES
Europe...................................................... $ 15 $ -- $ --
United States............................................... 572 512 477
United States export sales.................................. 37 36 29
---- ---- ----
$624 $548 $506
==== ==== ====
SEGMENT OPERATING PROFIT
Europe...................................................... $ 2 $ -- $ --
United States............................................... 84 66 70
Unusual items............................................... (3) -- 4
---- ---- ----
$ 83 $ 66 $ 74
==== ==== ====
IDENTIFIABLE ASSETS
Europe...................................................... $129 $ -- $ --
United States............................................... 474 277 233
---- ---- ----
TOTAL ASSETS................................................ $603 $277 $233
==== ==== ====
</TABLE>
F-16
<PAGE> 69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
GenCorp Inc.:
We have audited the accompanying consolidated statements of income, cash
flows and changes in shareholder's equity of Sequa Chemicals Corporation for the
period from January 1, 1998 to October 28, 1998. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, Sequa Chemicals Corporation's results of operations
and cash flows for the period from January 1, 1998 to October 28, 1998, in
conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
New York, New York
March 31, 1999
F-17
<PAGE> 70
SEQUA CHEMICALS CORPORATION
CONSOLIDATED STATEMENT OF INCOME
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 28, 1998
<TABLE>
<S> <C>
SALES, net.................................................. $74,004,195
COSTS AND EXPENSES:
Cost of sales............................................. 56,777,038
Selling, general and administrative....................... 10,088,467
Depreciation and amortization............................. 3,662,093
Research and development.................................. 1,672,625
-----------
Total costs and expenses.......................... 72,200,223
-----------
OPERATING INCOME............................................ 1,803,972
INTEREST EXPENSE............................................ 1,474,264
-----------
Income before income taxes................................ 329,708
INCOME TAX PROVISION........................................ 206,249
-----------
Net income................................................ $ 123,459
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-18
<PAGE> 71
SEQUA CHEMICALS CORPORATION
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 28, 1998
<TABLE>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 123,459
Adjustments to reconcile net cash provided by operating
activities --
Depreciation and amortization.......................... 3,662,093
Provision for losses on receivables.................... 228,511
Other cash flows from operating activities --
Changes in operating assets and liabilities --
Receivables.......................................... (1,397,118)
Inventories.......................................... (689,832)
Other current assets................................. 52,269
Other noncurrent assets.............................. (144,271)
Accounts payable and accrued expenses................ 302,421
Other noncurrent liabilities......................... 147,711
-----------
Net cash provided by operating activities......... 2,285,243
-----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment................. (4,230,835)
-----------
Net cash used in investing activities............. (4,230,835)
-----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings from Sequa Corporation......................... 1,540,559
-----------
Net cash provided by financing activities......... 1,540,559
-----------
Net decrease in cash and cash equivalents......... (405,033)
CASH AND CASH EQUIVALENTS, beginning of period.............. 643,114
-----------
CASH AND CASH EQUIVALENTS, end of period.................... $ 238,081
===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-19
<PAGE> 72
SEQUA CHEMICALS CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDER'S EQUITY
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 28, 1998
<TABLE>
<CAPTION>
ACCUMULATED
CAPITAL IN OTHER TOTAL
EXCESS OF COMPREHENSIVE RETAINED SHAREHOLDER'S
COMMON STOCK PAR VALUE INCOME (LOSS) EARNINGS EQUITY
------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1998...... $80,782 $14,662,955 $(28,413) $27,714,544 $42,429,868
------- ----------- -------- ----------- -----------
Net income.................. 123,459 123,459
Foreign currency translation
adjustment............... (55,332) (55,332)
-----------
Comprehensive income........ 68,127
------- ----------- -------- ----------- -----------
BALANCE, October 28, 1998..... $80,782 $14,662,955 $(83,745) $27,838,003 $42,497,995
======= =========== ======== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
F-20
<PAGE> 73
SEQUA CHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM JANUARY 1, 1998 TO OCTOBER 28, 1998
1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES
BASIS OF PRESENTATION
Through October 28, 1998, Sequa Chemicals, Inc. ("Sequa Chemicals" or the
"Company") was a wholly owned subsidiary of Sequa Corporation. The consolidated
financial statements of Sequa Chemicals have been prepared on a stand-alone
basis and include the accounts of its majority owned subsidiaries. All
intercompany accounts have been eliminated in consolidation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers time
deposits, certificates of deposit and marketable securities with original
maturities of three months or less when purchased to be cash equivalents.
PROPERTY, PLANT AND EQUIPMENT
For financial reporting purposes, depreciation and amortization of
property, plant and equipment costs are computed using the straight-line method
over their estimated useful lives which range between 10 and 30 years.
Accelerated depreciation methods are used for income tax purposes.
The Company reviews properties for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be fully
recoverable. If the estimated future cash flows expected to result from the use
of an asset and its eventual disposition are less than the carrying amount of
the asset, then the property is written down to its fair market value.
Upon sale or retirement of properties, the related costs and accumulated
depreciation are removed from the accounts, and any gain or loss is reflected
currently. For the period from January 1, 1998 to October 28, 1998, total
depreciation expense was $2,789,527.
GOODWILL AND OTHER INTANGIBLES
Excess of cost over net assets of companies acquired (goodwill) is being
amortized on a straight-line basis over periods not exceeding forty years. The
recoverability of goodwill is evaluated at the operating unit level by an
analysis of operating results and consideration of other significant events or
changes in the business environment. If an operating unit has current operating
losses, and based upon projections there is a likelihood that such operating
losses will continue, the Company evaluates whether impairment exists on the
basis of undiscounted expected future cash flows from operations before interest
during the remaining amortization period. If impairment exists, the carrying
amount of the goodwill is reduced to market value.
The Company has also acquired patents and trademarks related to certain
manufacturing related processes. Such patents and trademarks are being amortized
over a period of eleven years.
Amortization expense related to goodwill and other intangibles for the
period from January 1, 1998 to October 28, 1998 was $872,566.
F-21
<PAGE> 74
SEQUA CHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
FOREIGN CURRENCY TRANSLATION
The financial position and results of operations of the Company's foreign
subsidiaries are measured using local currency as the functional currency.
Assets and liabilities of operations denominated in foreign currencies are
translated into U.S. dollars at exchange rates in effect at year-end, while
revenues and expenses are translated at weighted average exchange rates
prevailing during the year. The resulting translation gains and losses on assets
and liabilities are charged or credited directly to cumulative translation
adjustment, a component of shareholder's equity, and are not included in net
income until realized through sale or liquidation of the investment.
ENVIRONMENTAL REMEDIATION AND COMPLIANCE
It is the Company's policy to accrue environmental remediation costs for
identified sites when it is probable that a liability has been incurred and the
amount of loss can be reasonably estimated. Accrued environmental remediation
and compliance costs include remedial investigation and feasibility studies,
outside legal, consulting and remediation project management fees, projected
cost of remediation activities, site closure and post-remediation monitoring
costs. For the period from January 1, 1998 to October 28, 1998, the total amount
charged to selling, general and administrative expense for environmental and
remediation compliance efforts was approximately $3,000,000.
REVENUE RECOGNITION
Sales are recorded when title passes to the customer, which is when
products are shipped.
RESEARCH AND DEVELOPMENT
Research and development costs are charged to expense as incurred.
COMPREHENSIVE INCOME
Effective January 1, 1998, Sequa Chemicals adopted Statement of Financial
Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income." This
statement establishes standards for the reporting of comprehensive income and
its components in financial statements. Comprehensive income consists of net
income and other gains and losses affecting shareholder's equity that, under
generally accepted accounting principles, are excluded from net income. For
Sequa Chemicals, these items consist of foreign currency translation
adjustments. The adoption of SFAS No. 130 did not have a material effect on
Sequa Chemical's primary financial statements, but did affect the presentation
of the accompanying consolidated statement of changes in shareholder's equity.
SEGMENT INFORMATION
Sequa Chemicals adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." Sequa Chemicals has only one segment,
Chemicals, and accordingly no additional segment information has been provided.
F-22
<PAGE> 75
SEQUA CHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2. TRANSACTIONS WITH PARENT
The Company participates in various corporate programs administered by
Sequa Corporation. Expenses representing the cost to operate Sequa Chemicals on
a stand-alone basis have been included in the accompanying consolidated
statement of income. Such costs include the following:
<TABLE>
<S> <C>
Selling, general and administrative expenses................ $1,170,963
401(k) expenses............................................. 1,011,296
Insurance expenses.......................................... 1,763,708
EPA costs................................................... 3,000,000
Interest expense on average debt............................ 1,474,264
----------
Total corporate expense..................................... $8,420,231
==========
</TABLE>
There were no other material related party transactions for the period.
3. INCOME TAXES
Income taxes are recognized during the year in which transactions enter
into the determination of financial statement income, with deferred taxes being
provided for temporary differences between amounts of assets and liabilities
recorded for tax and financial reporting purposes. The income tax provision
included in the consolidated statement of income has been prepared as if Sequa
Chemicals was a stand-alone entity for the period from January 1, 1998 to
October 28, 1998.
The income tax provision for the period from January 1, 1998 to October 28,
1998, consisted of:
<TABLE>
<S> <C>
United States federal
Current................................................... $ 828,959
Deferred.................................................. (700,216)
State and local............................................. 77,506
---------
$ 206,249
=========
</TABLE>
The income tax provision is different from the amount computed by applying
the U.S. federal statutory income tax rate of 35% to income before income taxes.
The reasons for this difference for the period from January 1, 1998 to October
28, 1998, are as follows:
<TABLE>
<S> <C>
Computed income taxes at statutory rate..................... $115,398
State and local taxes, net of federal income tax benefit.... 50,379
Meals and entertainment..................................... 40,472
--------
$206,249
========
</TABLE>
No provision has been made for U.S. or additional foreign taxes on
undistributed earnings of foreign subsidiaries as those earnings are intended to
be permanently reinvested. Such earnings would become taxable upon the sale or
liquidation of these foreign subsidiaries or upon the remittance of dividends.
The components of income before income taxes for the period from January 1,
1998 to October 28, 1998, were:
<TABLE>
<S> <C>
Domestic.................................................... $323,613
Foreign..................................................... 6,095
--------
$329,708
========
</TABLE>
F-23
<PAGE> 76
SEQUA CHEMICALS CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. SUBSEQUENT EVENT
On October 29, 1998, Sequa Corporation sold the net operating assets of
Sequa Chemicals to GenCorp Inc. for approximately $108 million in cash.
F-24
<PAGE> 77
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
REPORT OF INDEPENDENT AUDITORS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS OF GENCORP INC.
In our opinion, the accompanying combined profit and loss account, combined
statement of total recognised gains and losses and combined statement of cash
flows present fairly, in all material respects, the combined profit and combined
cash flows of the European Commercial Wallcoverings Business for the years ended
January 31, 1998 and January 31, 1997 in conformity with accounting principles
generally accepted in the United Kingdom. These financial statements are the
responsibility of the management of the European Commercial Wallcoverings
Business; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United Kingdom
which are substantially the same as auditing standards generally accepted in the
United States. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
Accounting principles generally accepted in the United Kingdom vary in
certain significant respects from accounting principles generally accepted in
the United States. The application of the latter would have affected the
determination of combined profit expressed in pounds sterling for both of the
two years in the period ended January 31, 1998 to the extent summarised in note
12 to the combined financial statements.
PRICEWATERHOUSECOOPERS
PRICEWATERHOUSECOOPERS
Chartered Accountants
St Albans, England
May 27, 1999
F-25
<PAGE> 78
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
COMBINED PROFIT AND LOSS ACCOUNT
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
NOTE L'000 L'000 L'000 L'000
---- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
TURNOVER.............................. 3 40,727 40,657 19,372 19,357
Cost of sales......................... (14,394) (15,653) (6,418) (6,526)
------- ------- ------ ------
GROSS PROFIT.......................... 26,333 25,004 12,954 12,831
Distribution costs.................... (10,740) (11,012) (6,124) (5,948)
Administrative expenses............... (9,702) (9,331) (3,783) (3,961)
Other income.......................... 212 203 1 8
------- ------- ------ ------
OPERATING PROFIT...................... 4 6,103 4,864 3,048 2,930
Investment income and interest
receivable.......................... 5 99 107 49 12
Interest payable and similar
charges............................. 6 (88) (131) (19) (50)
------- ------- ------ ------
PROFIT ON ORDINARY ACTIVITIES BEFORE
TAXATION............................ 6,114 4,840 3,078 2,892
Tax on profit on ordinary
activities.......................... 9 (1,897) (1,734) (978) (1,084)
------- ------- ------ ------
PROFIT FOR THE PERIOD................. 4,217 3,106 2,100 1,808
======= ======= ====== ======
</TABLE>
F-26
<PAGE> 79
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
COMBINED STATEMENT OF TOTAL RECOGNISED GAINS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Profit for the financial period............. 4,217 3,106 2,100 1,808
Currency translation differences............ 117 119 55 74
----- ----- ----- -----
Total recognised gains and losses relating
to the period............................. 4,334 3,225 2,155 1,882
===== ===== ===== =====
</TABLE>
COMBINED NOTE OF HISTORICAL COST PROFITS AND LOSSES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Profit on ordinary activities before
taxation.................................. 6,114 4,840 3,078 2,892
Difference between historical cost
depreciation charge and actual
depreciation charge....................... 22 22 11 11
----- ----- ----- -----
Historical cost profit on ordinary
activities before taxation................ 6,136 4,862 3,089 2,903
----- ----- ----- -----
Historical cost profit for the period after
taxation.................................. 4,232 3,121 2,107 1,815
===== ===== ===== =====
</TABLE>
F-27
<PAGE> 80
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
COMBINED CASH FLOW STATEMENT
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
NOTE L'000 L'000 L'000 L'000
---- ----------- ----------- -------------- --------------
<S> <C> <C> <C> <C> <C>
NET CASH INFLOW/(OUTFLOW) FROM
OPERATING ACTIVITIES................. A 5,235 5,705 (3,779) (33)
RETURNS ON INVESTMENT AND SERVICING OF
FINANCE
Interest received...................... 99 107 49 12
Interest paid.......................... (88) (131) (19) (50)
------ ------ ------ ------
NET CASH INFLOW/(OUTFLOW) FROM RETURNS
ON INVESTMENT AND SERVICING OF
FINANCE.............................. 11 (24) 30 (38)
TAXATION
Corporation tax received/(paid)........ 122 (793) (123) (14)
CAPITAL EXPENDITURE AND FINANCIAL
INVESTMENT
Payments to acquire tangible fixed
assets............................... (2,426) (5,061) (787) (1,075)
Proceeds from sales of tangible fixed
assets............................... 182 82 10 15
------ ------ ------ ------
NET CASH OUTFLOW FROM INVESTING
ACTIVITIES........................... (2,244) (4,979) (777) (1,060)
------ ------ ------ ------
NET CASH INFLOW/(OUTFLOW) BEFORE AND
AFTER FINANCING...................... 3,124 (91) (4,649) (1,145)
====== ====== ====== ======
</TABLE>
F-28
<PAGE> 81
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED CASH FLOW STATEMENT
A RECONCILIATION OF OPERATING PROFIT TO NET CASH INFLOW FROM OPERATIONS
<TABLE>
<CAPTION>
6 MONTHS ENDED
YEAR ENDED YEAR ENDED JULY 31, 6 MONTHS ENDED
JANUARY 31, JANUARY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Operating profit.......................... 6,103 4,864 3,048 2,930
Depreciation.............................. 1,371 1,150 675 651
(Profit)/loss on disposal of fixed
assets.................................. (10) 29 6 --
Decrease/(Increase) in stock.............. 247 (1,020) 623 104
(Increase)/Decrease in debtors............ (2,346) (730) (5,412) (1,198)
(Decrease)/Increase in creditors.......... (130) 1,412 (2,719) (2,520)
------ ------ ------ ------
Net cash inflow/(outflow) from operating
activities.............................. 5,235 5,705 (3,779) (33)
====== ====== ====== ======
</TABLE>
B RECONCILIATION OF NET CASH FLOW TO MOVEMENT IN NET DEBT
<TABLE>
<CAPTION>
6 MONTHS ENDED
YEAR ENDED YEAR ENDED JULY 31, 6 MONTHS ENDED
JANUARY 31, JANUARY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Increase/(decrease) in cash for period.... 3,124 (91) (4,649) (1,145)
Translation difference.................... (29) (40) -- (33)
------ ------ ------ ------
Change in net debt........................ 3,095 (131) (4,649) (1,178)
Net cash opening.......................... 2,455 2,586 5,550 2,455
------ ------ ------ ------
Net cash closing.......................... 5,550 2,455 901 1,277
====== ====== ====== ======
</TABLE>
C ANALYSIS OF CHANGE IN NET DEBT
<TABLE>
<CAPTION>
AT EXCHANGE AT
FEBRUARY 1, 1997 CASH FLOW MOVEMENT JANUARY 31, 1998
L'000 L'000 L'000 L'000
---------------- --------- -------- ----------------
<S> <C> <C> <C> <C>
Cash at bank and in hand..................... 3,254 2,325 (29) 5,550
Bank overdraft............................... (799) 799 -- --
----- ----- --- -----
2,455 3,124 (29) 5,550
===== ===== === =====
</TABLE>
F-29
<PAGE> 82
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO COMBINED CASH FLOW STATEMENT -- (CONTINUED)
<TABLE>
<CAPTION>
AT EXCHANGE AT
FEBRUARY 1, 1996 CASH FLOW MOVEMENT JANUARY 31, 1997
L'000 L'000 L'000 L'000
---------------- --------- -------- ----------------
<S> <C> <C> <C> <C>
Cash at bank and in hand..................... 3,672 (378) (40) 3,254
Bank overdraft............................... (1,086) 287 -- (799)
------ ---- --- -----
2,586 (91) (40) 2,455
====== ==== === =====
</TABLE>
<TABLE>
<CAPTION>
AT EXCHANGE AT
FEBRUARY 1, 1998 CASH FLOW MOVEMENT JULY 31, 1998
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
---------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Cash at bank and in hand..................... 5,550 (4,349) -- 1,201
Bank overdraft............................... -- (300) -- (300)
----- ------ --- -----
5,550 (4,649) -- 901
===== ====== === =====
</TABLE>
<TABLE>
<CAPTION>
AT EXCHANGE AT
FEBRUARY 1, 1997 CASH FLOW MOVEMENT JULY 31, 1997
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
---------------- ----------- ----------- ----------------
<S> <C> <C> <C> <C>
Cash at bank and in hand..................... 3,254 (1,944) (33) 1,277
Bank overdraft............................... (799) 799 -- --
----- ------ --- -----
2,455 (1,145) (33) 1,277
===== ====== === =====
</TABLE>
F-30
<PAGE> 83
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
1. BASIS OF PREPARATION
The combined financial statements reflect the combined operations of
Brymor, Muraspec, Muraspec Belgium and Muraspec SARL, which together formed the
commercial wallcoverings business ("the European Commercial Wallcoverings
Business") purchased by GenCorp Inc. in a transaction completed on August 13,
1998. Brymor, Muraspec and Muraspec Belgium were operating divisions within the
Walker Greenbank PLC group whilst Muraspec SARL was a wholly-owned subsidiary
whose ultimate parent company was Walker Greenbank PLC.
The combined financial statements comprise a combined profit and loss
account, a combined statement of total recognised gains and losses and a
combined statement of cash flows, together with related accounting policies and
footnotes, for the European Commercial Wallcoverings Business. The combined
financial statements cover the years ended January 31, 1998 and January 31, 1997
and the six month periods ended July 31, 1998 and July 31, 1997.
No balance sheets are presented in these combined financial statements.
Accounting policies in respect of balance sheet items are included only in
respect of their relevance to the reconciliation of movement in shareholders'
funds.
The information presented for the years ended January 31, 1998 and January
31, 1997 is audited ("Audited Combined Financial Statements"). Information for
the 6 month periods ended July 31, 1998 and July 31, 1997 is unaudited
("Unaudited Combined Financial Statements").
The accompanying unaudited combined profit and loss account and cash flows
for the six months ended July 31, 1998 and July 31, 1997 have been prepared on
the same basis as the Audited Combined Financial Statements and, in the opinion
of management, include all adjustments necessary to present fairly the financial
information set forth therein.
During the periods included in these combined financial statements the
European Commercial Wallcoverings Business did not constitute a separate group
or company; however, for the purpose of this presentation, Brymor, Muraspec,
Muraspec Belgium and Muraspec SARL were each accounted for on a stand-alone
basis. In view of the historical structure of the European Commercial
Wallcoverings Business a separate combination of the individual entities has
been prepared for the financial statement periods presented in these financial
statements. These financial statements are the responsibility of GenCorp Inc.
The combined financial statements are based on an aggregation of the
results of Brymor, Muraspec, Muraspec Belgium and Muraspec SARL. Transactions
and balances between these four elements have been eliminated on aggregation.
The combined profit and loss account of the European Commercial Wallcoverings
Business include all material revenues and expenses that would have been
incurred had the European Commercial Wallcoverings Business operated on a
stand-alone basis.
The financial statements have been prepared in all material respects in
accordance with Generally Accepted Accounting Principles in the UK ("UK GAAP")
and are expressed in pounds sterling ("GBP").
INTEREST
The European Commercial Wallcoverings Business has participated in cash
sweep arrangements operated by Walker Greenbank PLC, whereby certain cash
balances have been cleared periodically to central accounts held by Walker
Greenbank PLC. Similarly, to the extent that the European Commercial
Wallcoverings Business has had short-term borrowing requirements it has borrowed
from Walker Greenbank PLC. No interest has generally been received or charged in
respect of balances with Walker Greenbank PLC.
F-31
<PAGE> 84
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
TAXATION
During the periods included in these combined financial statements only
Muraspec SARL constituted a separate company for taxation purposes. Brymor,
Muraspec and Muraspec Belgium were operating divisions within Walker Greenbank
PLC. For the purposes of these combined financial statements, separate
corporation and deferred tax calculations have been prepared as if the three
operating divisions had been stand-alone companies. The assumption has been made
that any tax liabilities arising that were not paid by the European Commercial
Wallcoverings Business were settled by Walker Greenbank PLC as a capital
contribution to the European Commercial Wallcoverings business.
GROUP MANAGEMENT CHARGES
During the periods covered by these combined financial statements, the
European Commercial Wallcoverings Business received charges for head office
services carried out, or costs incurred on its behalf, by Walker Greenbank PLC.
These management charges were allocated between the businesses making up the
Walker Greenbank PLC group on bases that Walker Greenbank PLC management
determined to be reasonable. These bases have varied during the periods covered
by those combined financial statements.
It is possible that the level of cost incurred for such services would have
been different had the European Commercial Wallcoverings Business existed as a
stand-alone entity during those periods.
PENSIONS
During the periods covered by these combined financial statements certain
employees of the European Commercial Wallcoverings Business were members of
either one of two separate defined benefit group pension schemes operated by
Walker Greenbank PLC. Separate actuarial calculations have been performed to
determine an appropriate pensions charge for these employees under UK generally
accepted accounting practice.
SUBSEQUENT EVENTS
No account has been taken of changes in accounting policy, estimates or
judgement arising directly from the acquisition by GenCorp Inc. on August 13,
1998.
2. ACCOUNTING POLICIES
The principal accounting policies are set out below.
ACCOUNTING CONVENTION
The financial statements are prepared under the historical cost convention
modified for the revaluation of certain properties and in accordance with
applicable accounting standards.
PATTERN BOOKS AND SHADE CARDS
The cost of pattern books and shade cards for ranges launched in the year
is charged directly to the profit and loss account.
Costs incurred in developing pattern books and shade cards for ranges not
yet launched are held within work in progress in stocks and are written off in
the year of launch. Pattern books and shade cards held for resale are included
in finished goods at the lower of cost and net realisable value.
F-32
<PAGE> 85
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
FOREIGN CURRENCY
Monetary assets and liabilities denominated in foreign currencies are
translated at the rate of exchange ruling at the balance sheet date.
Transactions in foreign currencies are recorded at the rate ruling at the date
of the transaction or, if hedged, at the forward contract rate.
The balance sheets of overseas entities are translated at the rates of
exchange ruling at the balance sheet date. The profit and loss accounts are
translated at the average rates of exchange applicable to the accounting period.
TURNOVER
The group turnover represents the invoiced value, excluding VAT, of sales
to external customers.
STOCKS
Stocks and work in progress are stated at the lower of cost and net
realisable value. Cost comprises direct materials, on a first-in, first-out
basis, and direct labour plus attributable production overheads based on a
normal level of activity. Net realisable value is based on estimated selling
prices less anticipated costs to disposal.
PENSIONS
The cost of providing retirement pensions and related benefits is charged
to the profit and loss account over the periods during which members are
employed. Any surplus of assets over liabilities is apportioned over the
expected remaining service lives of current employees in the schemes.
RESEARCH AND DEVELOPMENT
Costs incurred in setting up production lines for new product ranges are
capitalised and amortised over the expected lives of those ranges. Other
research and development expenditure is written off as incurred.
FIXED ASSETS
Depreciation is charged on a straight-line basis on the original cost or
subsequent valuation of assets (excluding freehold land) after deduction of any
estimated residual value.
The principal annual rates are:
<TABLE>
<S> <C>
Freehold Buildings 2%
Short and Long Leaseholds Over the unexpired period of lease
Plant, Equipment and Vehicles Between 5% and 33%
</TABLE>
Land and buildings are stated at cost plus any revaluation reserve less
provision for permanent diminution in value.
The direct costs of developing computer software for internal use are
capitalised as part of fixed assets within the category of Plant, Equipment and
Vehicles.
LEASING AND HIRE PURCHASE COMMITMENTS
Rentals paid under operating leases are charged to income as incurred.
F-33
<PAGE> 86
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
DEFERRED TAXATION
Deferred taxation is provided on all timing differences only to the extent
that they are expected to reverse in the foreseeable future, calculated at the
rate at which it is estimated that tax will be payable.
3. TURNOVER
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Analysis by geographical market:
United Kingdom.............................. 30,130 30,676 14,699 14,627
Continental Europe.......................... 6,782 5,743 2,793 2,888
Other....................................... 3,815 4,238 1,880 1,842
------ ------ ------ ------
40,727 40,657 19,372 19,357
====== ====== ====== ======
</TABLE>
4. OPERATING PROFIT
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Operating profit is stated after charging:
Depreciation of fixed assets................ 1,371 1,150 675 651
Auditor's remuneration - audit services..... 44 39 22 22
- non-audit
services.................................. 25 9 7 9
Operating lease rentals
- - land and buildings........................ 674 733 355 342
- - others.................................... 650 578 295 327
Group management charges.................... 1,833 1,833 879 877
====== ====== ====== ======
</TABLE>
5. INVESTMENT INCOME AND INTEREST RECEIVABLE
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Interest received and receivable
Bank interest............................... 99 107 49 12
====== ====== ====== ======
</TABLE>
F-34
<PAGE> 87
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
6. INTEREST PAYABLE AND SIMILAR CHARGES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
On bank loans and overdrafts repayable
within five years......................... 50 90 19 31
Interest on parent company loan............. 38 41 -- 19
------ ------ ------ ------
88 131 19 50
====== ====== ====== ======
</TABLE>
7. INFORMATION ON EMPLOYEES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Staff costs
Wages and salaries.......................... 10,854 10,782 5,341 5,554
Social Security costs....................... 1,079 1,104 537 558
Other pension costs......................... 832 834 426 417
------ ------ ------ ------
12,765 12,720 6,304 6,529
====== ====== ====== ======
</TABLE>
The average number of employees during the year was as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
NUMBER NUMBER NUMBER NUMBER
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Sales/warehouse............................. 240 242 232 238
Management and administration............... 61 60 56 60
Production.................................. 139 134 134 130
Development/marketing....................... 40 40 35 40
------ ------ ------ ------
480 476 457 468
====== ====== ====== ======
</TABLE>
No information is presented for directors' emoluments as the European
Commercial Wallcoverings Business had no directors during the periods covered by
these financial statements.
8. PENSION COSTS
Qualifying employees of the European Commercial Wallcoverings Business were
members of one of two defined benefit pension schemes operated by Walker
Greenbank PLC during the periods covered by these financial statements. The
assets of the schemes are held in separate trustee administered funds.
The pension costs are assessed in accordance with the advice of an
independent qualified actuary using the projected unit method. These schemes are
subjected to triennial actuarial reviews with the most recent ones having been
at 6 April 1996 for the major scheme and 6 April 1995 for the Abaris Holdings
Limited Pension Scheme (formerly Warner Fabrics Scheme).
F-35
<PAGE> 88
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
The principal actuarial assumptions applied for the two schemes were as
follows:
<TABLE>
<S> <C>
Investment returns 9.0% per annum
Salary growth 7.0% per annum
Pension increases 5.0% per annum in excess of Guaranteed Minimum Pension
</TABLE>
Assets have been valued using the discounted income method assuming a
dividend growth rate of 4.5% per annum.
At the latest actuarial valuation, the aggregate market value of the assets
of the major scheme was L22,173,000. The actuarial value of the assets of the
scheme was sufficient to cover 106% of the liability for benefits which have
accrued to members on an ongoing basis.
At the last actuarial valuation, the aggregate market value of the assets
of the Abaris Holdings Limited Pension scheme (formerly Warner Fabrics Scheme)
was L2,423,000. The actuarial value of the assets of the scheme was sufficient
to cover 205% of the liability for benefits which have accrued to members on an
ongoing basis.
9. TAX ON PROFIT ON ORDINARY ACTIVITIES
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
The taxation (credit)/charge comprises:
UK corporation tax
- - current year.............................. 1,630 1,376 900 836
Overseas corporation tax.................... 104 (44) 59 60
Deferred tax................................ 163 402 19 188
----- ----- --- -----
1,897 1,734 978 1,084
===== ===== === =====
</TABLE>
10. OPERATING LEASES COMMITMENTS
Annual commitments due under non-cancellable operating leases are as
follows:
<TABLE>
<CAPTION>
6 MONTHS ENDED
YEAR ENDED JULY 31, 1998
JANUARY 31, 1998 (UNAUDITED)
------------------------- -------------------------
LAND & BUILDINGS OTHERS LAND & BUILDINGS OTHERS
L'000 L'000 L'000 L'000
---------------- ------ ---------------- ------
<S> <C> <C> <C> <C>
Within one year................................. 522 275 706 167
Between one and five years...................... 1,389 488 1,431 338
Over five years................................. 92 -- -- --
----- --- ----- ---
2,003 763 2,137 505
===== === ===== ===
</TABLE>
F-36
<PAGE> 89
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
11. COMBINED RECONCILIATION OF MOVEMENTS IN NET ASSETS
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED 6 MONTHS ENDED 6 MONTHS ENDED
JANUARY 31, JANUARY 31, JULY 31, 1998 JULY 31, 1997
1998 1997 (UNAUDITED) (UNAUDITED)
L'000 L'000 L'000 L'000
----------- ----------- -------------- --------------
<S> <C> <C> <C> <C>
Retained profit for the year................ 4,217 3,106 2,100 1,808
Currency translation differences............ 117 119 55 74
Capital contribution........................ 1,602 1,319 959 895
------ ------ ------ ------
Net addition to net assets.................. 5,936 4,544 3,114 2,777
Opening net assets.......................... 43,651 39,107 49,587 43,651
------ ------ ------ ------
Closing net assets.......................... 49,587 43,651 52,701 46,428
====== ====== ====== ======
</TABLE>
Capital contribution relates to tax liabilities settled by Walker Greenbank
PLC on behalf of the European Commercial Wallcoverings Business.
12. DESCRIPTION OF SIGNIFICANT DIFFERENCES BETWEEN UK GAAP AND US GAAP
The combined financial statements are prepared in accordance with generally
accepted accounting principles in the United Kingdom ("UK GAAP"), which differ
in certain respects from generally accepted accounting principles in the United
States ("US GAAP").
The principal differences between UK GAAP and US GAAP are presented below
together with explanations of certain adjustments that affect consolidated net
income and total shareholders' equity as of and for the years ended January 31,
1998 and January 31, 1997 and for the six month periods ended July 31, 1998 and
July 31, 1997:
(1) CAPITALISED PRODUCT AND COMPUTER SOFTWARE DEVELOPMENT COSTS
The European Commercial Wallcoverings Business has a policy of capitalising
certain development costs in respect of new product ranges and computer software
development costs. These development costs are amortised over a three year
period. Under US GAAP, such development costs are expensed as incurred.
(2) REVALUATION OF PROPERTY AND EQUIPMENT
Under UK GAAP, companies are permitted to perform revaluations of property
on a periodic basis and adjust the carrying values to the revalued fair market
value. The related depreciation is calculated on the revalued amounts where
applicable. Any surplus or deficit on the revaluation of property and equipment
is taken directly to a revaluation reserve, which is part of shareholders'
funds.
Under US GAAP, such revaluations are not permitted and depreciation is
provided on the original cost of property and equipment.
(3) PENSIONS
Under UK GAAP, an actuarial valuation method must be used to determine
annual pension cost. The valuation is normally performed every three years. The
benefit obligation is discounted at a long term risk adjusted rate and the plan
assets are valued on an actuarial basis. The expected cost of pensions is
charged to the profit and loss account so as to spread the variation from the
regular cost over the expected remaining service lives of employees.
F-37
<PAGE> 90
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
Under US GAAP, annual actuarial valuations must be carried out for defined
benefit pension obligations. The present value of the benefit obligation is
determined using a current market discount rate such as that of a high quality,
fixed rate debt instrument and the plan assets are valued on a market or market
related basis. Actuarial gains and losses that arise within a prescribed
"corridor" do not have to be amortised. Actuarial gains and losses outside the
corridor are amortised over the average expected remaining service of employees.
The principal actuarial assumptions for the two Walker Greenbank PLC UK
pension plans under SFAS Nos. 87 and 132 are as follows:
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED
JANUARY 31, JANUARY 31, 6 MONTHS ENDED 6 MONTHS ENDED
1998 1997 JULY 31, 1998 JULY 31, 1997
----------- ----------- -------------- --------------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
Discount rate............................... 6.75% 8% 6.25% 7.75%
Expected return on plan assets.............. 9% 9% 9% 9%
Rate of compensation increase............... 5% 6% 5.25% 5.5%
==== == ==== ====
</TABLE>
F-38
<PAGE> 91
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
The components of pension expense which arise under SFAS Nos. 87 and 132
are as follows:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 31, 1997 JULY 31, 1998 JULY 31, 1997
L'000 L'000 L'000 L'000
---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
CHANGE IN BENEFIT OBLIGATION
Benefit obligation at beginning of
year.................................. 8,013 6,003 11,354 8,013
Service cost............................ 747 571 421 366
Interest cost........................... 641 510 384 321
Plan participants' contributions........ 372 367 187 187
Actuarial gain.......................... 1,581 562 1,813 (299)
------ ----- ------ ------
BENEFIT OBLIGATION AT END OF YEAR....... 11,354 8,013 14,159 8,588
====== ===== ====== ======
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning
of year............................... 9,427 7,185 12,248 9,427
Actual return on plan assets............ 2,094 1,287 1,319 706
Contribution by employer................ 355 588 -- 178
Contributions by plan participants...... 372 367 187 187
------ ----- ------ ------
FAIR VALUE OF PLAN ASSETS AT END OF
YEAR.................................. 12,248 9,427 13,754 10,498
====== ===== ====== ======
FUNDED STATUS
Projected benefit obligations........... 11,354 8,013 14,159 8,588
Plan assets at fair value............... 12,248 9,427 13,754 10,498
Funded status........................... 894 1,414 (405) 1,910
Unrecognised transition amount.......... (472) (551) (433) (512)
Unrecognised prior service cost......... -- -- 1,307 (660)
Unrecognised net (gain) or loss......... 256 (79) -- --
------ ----- ------ ------
PREPAID BENEFIT COST.................... 678 784 469 738
====== ===== ====== ======
COMPONENTS OF NET PERIODIC BENEFIT COST
Service cost............................ 747 571 421 366
Interest cost........................... 641 510 384 321
Expected return on plan assets.......... (848) (647) (551) (424)
Amortisation of transitional asset...... (79) (79) (39) (39)
Recognised net actuarial gain........... -- -- (6) --
------ ----- ------ ------
NET PERIODIC BENEFIT COST............... 461 355 209 224
====== ===== ====== ======
</TABLE>
(4) COMPREHENSIVE INCOME
Under UK GAAP, the Statement of Total Recognised Gains and Losses presents
the components of other comprehensive income net of tax. Under US GAAP,
disclosure of the amount of income tax expense or benefit separately allocated
to the components of other comprehensive income should be provided. The tax
effect related to comprehensive income -- currency translation
differences -- for the periods ended January 31, 1998 and 1997, and for the six
month periods ended July 31, 1998 and 1997, is L36,000, L43,000, L17,000 and
L28,000 respectively.
F-39
<PAGE> 92
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
(5) OTHER DIFFERENCES
Other minor differences exist between UK GAAP and US GAAP in respect of
certain items reflected in the consolidated financial statements. Such
differences are immaterial to the reconciliation of net income and shareholders
funds and accordingly have been excluded from the reconciliations on the
following pages.
(6) EFFECT ON NET INCOME OF DIFFERENCES BETWEEN UK GAAP AND US GAAP
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 31, 1997 JULY 31, 1998 JULY 31, 1997
L L L L
---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Reconciliation of net income:
Net income reported under UK GAAP....... 4,217 3,106 2,100 1,808
US GAAP adjustments:
Capitalised product development
costs................................. (101) (113) (9) (50)
Capitalised computer software
development costs..................... (12) (70) (7) (5)
Depreciation of fixed assets.......... 22 22 11 11
Pension expense....................... 152 107 154 83
Deferred tax effect of US GAAP
adjustments........................... (19) 18 (46) (12)
----- ----- ----- -----
Presentation of net income under US
GAAP.................................. 4,259 3,070 2,203 1,835
===== ===== ===== =====
</TABLE>
(7) EFFECT ON NET ASSETS OF DIFFERENCES BETWEEN UK GAAP AND US GAAP
RECONCILIATION OF NET ASSETS:
<TABLE>
<CAPTION>
JANUARY 31, 1998 JANUARY 31, 1997 JULY 31, 1998 JULY 31, 1997
L L L L
---------------- ---------------- ------------- -------------
<S> <C> <C> <C> <C>
Total net assets under UK GAAP.......... 49,587 43,651 52,701 46,428
US GAAP adjustments:
Cumulative write-off of capitalised
product development costs............. (214) (113) (223) (163)
Cumulative write-off of capitalised
computer development costs............ (82) (70) (89) (75)
Accumulated depreciation on revalued
assets................................ 110 88 121 99
Revaluation of assets................... (1,942) (1,942) (1,942) (1,942)
Prepaid pension costs................... 810 658 964 741
Deferred tax effect on US GAAP
adjustments........................... 447 480 400 446
------ ------ ------ ------
Net assets in accordance with US GAAP... 48,716 42,752 51,932 45,534
====== ====== ====== ======
</TABLE>
F-40
<PAGE> 93
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
CHANGES IN US GAAP NET ASSETS ARE AS FOLLOWS:
<TABLE>
<S> <C>
Net assets at January 31, 1996.............................. 38,192
Net income for the period................................... 3,070
Currency translation adjustment............................. 83
------
Capital contribution........................................ 1,319
Net assets at January 31, 1997.............................. 42,664
Net income for the period................................... 4,259
Currency translation adjustment............................. 81
------
Capital contribution........................................ 1,602
Net assets at January 31, 1998.............................. 48,606
Net income for the period................................... 2,203
Currency translation adjustment............................. 43
------
Capital contribution........................................ 959
Net assets at July 31, 1998................................. 51,811
======
</TABLE>
(8) CONSOLIDATED STATEMENT OF CASH FLOWS
The Company's consolidated cash flow statement is prepared in accordance
with UK Financial Reporting Standard No 1 "Cash Flow Statements" and presents
substantially the same information as that required under US GAAP. However,
there are certain differences in classification of items within the cash flow
statement and with regard to the definition of cash and cash equivalents between
UK and US GAAP.
Under UK GAAP cash flows represent increases or decreases in cash, which is
comprised of cash in hand and deposits repayable on demand less overdrafts. Cash
flows are presented in the following categories (i) operating activities (ii)
returns on investments and servicing of finance (iii) taxation (iv) capital
expenditure and financial investment (v) acquisitions and disposals (vi) equity
dividends paid (vii) management of liquid resource and (viii) financing
activities.
Under US GAAP cash flows represent increases or decreases in cash and cash
equivalents, which include short term highly liquid investments with original
maturities of less than 90 days and exclude overdrafts. Cash flows are reported
in only three categories of operating activities, investing activities and
financing activities.
Cash flows from taxation and returns on investments and servicing of
finance are operating activities under US GAAP. The payment of dividends and
debt issue costs are included under financing activities. Capitalised interest
is included under investing activities for US GAAP purposes.
Cash flows from capital expenditure and financial investment as well as
cash flows from acquisitions and disposals are included as investing activities
under US GAAP. Cash flows from the management of liquid resources are included
in the overall cash movement since liquid resources are considered cash
equivalents under US GAAP.
Cash, for purposes of the cash flow under UK GAAP, includes bank overdrafts
but excludes liquid resources. Under US GAAP bank overdrafts are considered
loans and the movements thereon are included in financing activities. Liquid
resources are considered cash equivalents and the movements thereon are included
in the overall cash movement.
F-41
<PAGE> 94
EUROPEAN COMMERCIAL WALLCOVERINGS BUSINESS
NOTES TO THE COMBINED FINANCIAL STATEMENTS--(CONTINUED)
INFORMATION FOR THE 6 MONTH PERIODS ENDED JULY 31, 1998 AND JULY 31, 1997 IS
UNAUDITED.
The following table summarises the statement of cash flows for the European
Commercial Wallcoverings Business as if they had been presented in accordance
with US GAAP and included the adjustment which reconcile cash and cash
equivalents under UK GAAP to cash and cash equivalents under US GAAP.
<TABLE>
<CAPTION>
JANUARY 31, JANUARY 31, JULY 31, JULY 31,
1998 1997 1998 1997
----------- ----------- -------- --------
<S> <C> <C> <C> <C>
Reconciliation of cash flows
Net cash flow from operating activities................ 5,224 4,724 (3,928) (1,790)
Net cash provided by (used in) investing activities.... (2,244) (4,979) (777) (1,060)
Net cash provided by (used in) financing activities.... (799) (287) 300 799
------ ------ ------ ------
Net increase/(decrease) in cash and cash equivalents
under US GAAP........................................ 2,181 (542) (4,405) (2,051)
Effect of exchange rates on cash and cash
equivalents.......................................... 115 124 56 74
Cash and cash equivalents under US GAAP at beginning of
period............................................... 3,254 3,672 5,550 3,254
------ ------ ------ ------
Cash and cash equivalents under US GAAP at end of
period............................................... 5,550 3,254 1,201 1,277
====== ====== ====== ======
Additional cash flow information
Interest paid.......................................... (88) (131) (19) 50
Income tax paid........................................ -- (793) (123) (14)
====== ====== ====== ======
</TABLE>
F-42
<PAGE> 95
OMNOVA SOLUTIONS INC.
EXHIBIT INDEX TO
FORM 10 REGISTRATION STATEMENT
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION
- ------- -----------
<S> <C>
2.1* Form of Distribution Agreement between OMNOVA Solutions Inc.
("Omnova Solutions") and GenCorp Inc ("GenCorp").
3.1* Composite Articles of Incorporation of Omnova Solutions (as
amended).
3.2* Form of Amended and Restated Articles of Incorporation of
Omnova Solutions.
3.3* Code of Regulations of Omnova Solutions.
3.4* Form of Amended and Restated Code of Regulation of Omnova
Solutions.
10.1* Employment Agreement dated October 15, 1993 (with
amendments) between GenCorp and John B. Yasinsky, to be
assumed by Omnova Solutions.
10.2* Employment Agreement dated May 10, 1996 between GenCorp and
Nathaniel J. Mass, to be assumed by Omnova Solutions.
10.3* Employment Agreement dated July 16, 1996 between GenCorp and
Kevin M. McMullen, to be assumed by Omnova Solutions.
10.4* Severance Agreement to be granted to John B. Yasinsky by
Omnova Solutions.
10.5* Severance Agreement to be granted to Nathaniel J. Mass by
Omnova Solutions
10.6* Form of Severance Agreement to be granted to certain
executive officers of Omnova Solutions (other than the
officers identified above).
10.7* Omnova Solutions 1999 Equity and Performance Incentive Plan.
10.8* Omnova Solutions Deferred Compensation Plan for Nonemployee
Directors.
10.9* Retirement Plan for Nonemployee Directors of Omnova
Solutions.
10.10* Omnova Solutions Executive Incentive Compensation Program.
10.11* Benefits Restoration Plan for Salaried Employees of Omnova
Solutions.
10.12* Omnova Solutions Deferred Bonus Plan.
10.13* 1999 GenCorp Key Employee Retention Plan.
10.14* Form of Key Employee Retention Letter Agreement.
10.15* Form of Tax Matters Agreement between Omnova Solutions and
GenCorp.
10.16* Form of Alternative Dispute Resolution Agreement between
Omnova Solutions and GenCorp.
10.17* Form of Agreement on Employee Matters between Omnova
Solutions and GenCorp.
10.18* Form of Services and Support Agreement between Omnova
Solutions and GenCorp.
10.19* Form of Director and Officer Indemnification Agreement.
10.20* Form of Director Indemnification Agreement.
10.21* Form of Officer Indemnification Agreement.
27.1 Financial Data Schedule.
</TABLE>
- ---------------
* Previously filed as an exhibit to Omnova Solutions Form 10 as filed with the
Securities and Exchange Commission on July 9, 1999.
X-1
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1999
<PERIOD-END> MAY-31-1999
<CASH> 6,000
<SECURITIES> 0
<RECEIVABLES> 113,000
<ALLOWANCES> 0
<INVENTORY> 59,000
<CURRENT-ASSETS> 190,000
<PP&E> 364,000
<DEPRECIATION> 168,000
<TOTAL-ASSETS> 628,000
<CURRENT-LIABILITIES> 91,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 511,000
<TOTAL-LIABILITY-AND-EQUITY> 628,000
<SALES> 367,000
<TOTAL-REVENUES> 367,000
<CGS> 236,000
<TOTAL-COSTS> 325,000
<OTHER-EXPENSES> 3,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 10,000
<INCOME-PRETAX> 29,000
<INCOME-TAX> 11,000
<INCOME-CONTINUING> 18,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> NOV-30-1998
<PERIOD-END> MAY-31-1998
<CASH> 0
<SECURITIES> 0
<RECEIVABLES> 78,000
<ALLOWANCES> 0
<INVENTORY> 37,000
<CURRENT-ASSETS> 124,000
<PP&E> 291,000
<DEPRECIATION> 163,000
<TOTAL-ASSETS> 348,000
<CURRENT-LIABILITIES> 62,000
<BONDS> 0
0
0
<COMMON> 0
<OTHER-SE> 264,000
<TOTAL-LIABILITY-AND-EQUITY> 348,000
<SALES> 287,000
<TOTAL-REVENUES> 287,000
<CGS> 190,000
<TOTAL-COSTS> 253,000
<OTHER-EXPENSES> 8,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 3,000
<INCOME-PRETAX> 23,000
<INCOME-TAX> 9,000
<INCOME-CONTINUING> 14,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,000
<EPS-BASIC> 0
<EPS-DILUTED> 0
</TABLE>
