<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1999. COMMISSION FILE NUMBER 1-11804
THE GEON COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1730488
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Geon Center, Avon Lake, Ohio 44012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 930-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 1999 there were 23,725,620 shares of common stock outstanding.
There is only one class of common stock.
<PAGE> 2
Part I. Financial Information
Item 1. Financial Statements
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- -------
<S> <C> <C> <C> <C>
Sales $ 296.9 $ 330.7 $ 622.7 $ 655.2
Operating costs and expenses:
Cost of sales 239.0 285.3 503.7 568.7
Selling and administrative 20.1 17.6 41.8 34.6
Depreciation and amortization 10.2 15.4 25.2 29.9
Employee separation and plant phase-out 1.3 -- 2.4 --
Income (loss) from equity affiliates (2.1) 2.3 (3.6) 5.4
--------- -------- -------- -------
Operating income 24.2 14.7 46.0 27.4
Interest expense (3.6) (3.8) (7.2) (7.6)
Interest income .3 .3 .6 .9
Other income (expense), net (1.8) (3.0) (2.2) (2.7)
Gain on formation of joint ventures 92.9 -- 92.9 --
--------- -------- -------- -------
Income before income taxes and cumulative effect of
a change in accounting for start-up costs 112.0 8.2 130.1 18.0
Income tax expense (43.5) (3.4) (50.5) (7.4)
--------- -------- -------- -------
Income, before cumulative effect of a change
in accounting 68.5 4.8 79.6 10.6
Cumulative effect of a change in accounting for
start-up costs, net of income tax benefit of $0.9 million -- -- (1.5) --
--------- -------- -------- -------
Net income $ 68.5 $ 4.8 $ 78.1 $ 10.6
========= ======== ======== =======
Basic earnings per share of common stock:
Basic earnings per share before cumulative effect
of a change in accounting $ 2.95 $ .21 $ 3.43 $ .46
Cumulative effect of a change in accounting -- -- (.06) --
--------- --------- --------- --------
Basic earnings per share $ 2.95 $ .21 $ 3.37 $ .46
========= ========= ========= ========
Diluted earnings per share of common stock:
Diluted earnings per share before cumulative effect
of a change in accounting $ 2.81 $ .20 $ 3.29 $ .45
Cumulative effect of a change in accounting -- -- (.06) --
--------- -------- --------- --------
Diluted earnings per share $ 2.81 $ .20 $ 3.23 $ .45
========= ========= ========= ========
Number of shares used to compute earnings per share:
Basic 23.2 22.9 23.2 22.9
Diluted 24.4 23.6 24.2 23.6
Dividends paid per share of common stock $ .125 $ .125 $ .25 $ .25
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
2
<PAGE> 3
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
June 30, December 31,
ASSETS 1999 1998
------- -----------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 54.5 $ 14.4
Accounts receivable, net 135.4 70.8
Inventories 116.2 113.9
Deferred income taxes 23.7 24.6
Prepaid expenses 6.9 11.0
------ ------
Total current assets 336.7 234.7
Property, net 239.4 443.5
Investment in equity affiliates 238.0 19.8
Goodwill, net 83.6 81.5
Deferred charges and other assets 15.3 22.5
------ ------
Total assets $913.0 $802.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 15.9 $ 50.9
Accounts payable 147.2 129.1
Accrued expenses 72.5 76.0
Current portion of long-term debt .3 .8
------ ------
Total current liabilities 235.9 256.8
Long-term debt 126.7 135.4
Deferred income taxes 75.5 32.8
Postretirement benefits other than pensions 83.8 85.1
Other non-current liabilities 82.3 77.8
Minority interest in consolidated subsidiary 5.7 --
------ ------
Total liabilities 609.9 587.9
Stockholders' equity:
Preferred stock, 10.0 shares authorized, no shares issued -- --
Common stock, $.10 par, authorized 100.0 shares;
issued 28.0 shares in 1999 and 1998 2.8 2.8
Other stockholders' equity 300.3 211.3
------ ------
Total stockholders' equity 303.1 214.1
------ ------
Total liabilities and stockholders' equity $913.0 $802.0
====== ======
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
3
<PAGE> 4
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
Six Months Ended,
June 30,
-----------------
1999 1998
------ -----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $78.1 $10.6
Adjustments to reconcile net income to net
cash used by operating activities:
Gain on formation of joint ventures (92.9) --
Employee separation and plant phase-out 2.4 --
Depreciation and amortization 25.2 29.9
Loss (income) from equity affiliates 3.6 (5.4)
Provision for deferred income taxes 45.8 .7
Change in assets and liabilities:
Accounts receivable (89.0) 27.3
Inventories (9.7) 9.4
Accounts payable 52.5 (19.8)
Realization of retained working capital of
contributed PVC business 53.1 --
Accrued expenses and other (15.1) (5.0)
----- -----
Net cash provided by operating activities 54.0 47.7
INVESTING ACTIVITIES
Cash paid for businesses acquired (27.0) (39.6)
Cash received in conjunction with OxyVinyls formation, net of
formation costs paid 71.9 --
Distributions from (to) equity affiliates 1.9 (1.3)
Purchases of property (22.2) (16.0)
----- -----
NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 78.6 (9.2)
FINANCING ACTIVITIES
Decrease in short-term debt (36.9) (12.9)
Repayment of long-term debt (2.0) (.3)
Dividends (5.9) (5.8)
Proceeds from issuance of common stock 5.7 .1
----- -----
Net cash used by financing activities (39.1) (18.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .6 .1
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40.1 (28.0)
CASH AND CASH EQUIVALENTS AT JANUARY 1 14.4 49.1
----- -----
CASH AND CASH EQUIVALENTS AT JUNE 30 $54.5 $21.1
===== =====
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
4
<PAGE> 5
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Millions, Shares in Thousands)
<TABLE>
<CAPTION>
COMMON COMMON ACCUMULATED
SHARES ADDITIONAL STOCK OTHER NON-
COMMON HELD COMMON PAID-IN RETAINED HELD IN OWNER EQUITY
SHARE IN TOTAL STOCK CAPITAL EARNINGS TREASURY CHANGES
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE JANUARY 1, 1998 27,877 4,700 $223.8 $2.8 $295.8 $73.3 $(118.0) $(30.1)
Non-owner equity changes:
Net income 5.8 5.8
Other non-owner equity changes:
Translation adjustment 2.2 2.2
----
Total non-owner equity changes 8.0
Stock based compensation and exercise
of options 97.0 (29.0) (1.1) (2.6) 1.4 0.1
Cash dividends (2.9) (2.9)
-----------------------------------------------------------------------------
BALANCE MARCH 31, 1998 27,974 4,671 $227.8 $2.8 $293.2 $76.2 $(116.6) $(27.8)
=============================================================================
Non-owner equity changes:
Net income 4.8 4.8
Other non-owner equity changes: -
Translation adjustment (2.4) (2.4)
-----
Total non-owner equity changes (2.4)
Stock based compensation and exercise
of options 2 .9 0.9 (0.1) 0.1
Cash dividends (2.9) (2.9)
-----------------------------------------------------------------------------
BALANCE JUNE 30, 1998 27,974 4,673 $228.2 $2.8 $294.1 $78.1 $(116.7) $(30.1)
=============================================================================
BALANCE JANUARY 1, 1999 27,974 4,622 $214.1 $2.8 $296.1 $75.4 $(115.1) $(45.1)
Non-owner equity changes:
Net income 9.6 9.6
Other non-owner equity changes: -
Translation adjustment 1.5 1.5
----
Total non-owner equity changes 11.1
Stock based compensation and exercise
of options (161.0) 2.1 (2.8) 4.8 0.1
Cash dividends (2.9) (2.9)
-----------------------------------------------------------------------------
BALANCE MARCH 31, 1999 27,974 4,461 $224.4 $2.8 $293.3 $82.1 $(110.3) $(43.5)
==============================================================================
Non-owner equity changes:
Net income 68.5 68.5
Other non-owner equity changes: -
Translation adjustment 4.7 4.7
----
Total non-owner equity changes 73.2
Stock based compensation and exercise
of options 1.0 (278) 8.5 0.5 7.9 0.1
Cash dividends (3.0) (3.0)
-----------------------------------------------------------------------------
BALANCE JUNE 30, 1999 27,975 4,183 $303.1 $2.8 $293.8 $147.6 $(102.4) $(38.7)
=============================================================================
</TABLE>
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
5
<PAGE> 6
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE A- BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited condensed consolidated financial statements of The
Geon Company (Company or Geon) have been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair financial presentation have been included.
Operating results for the three and six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1998. Earnings of equity affiliates have been reclassified from the
1998 presentation and are included in operating income. Certain other amounts
for 1998 have been reclassified to conform to the 1999 interim period
presentation.
On April 30, 1999, the Company completed transactions with Occidental Chemical
Corporation (OxyChem) which included the formation of Oxy Vinyls, LP
(OxyVinyls), a limited partnership in which Geon has 24% ownership, the
formation of a small powder compounding partnership which is 90% owned by
Geon and the acquisition by Geon of OxyChem's compounding and film operations.
Substantially all of Geon's Resin and Intermediates segment's (see
description of segments in the following paragraph) operating assets and
liabilities were contributed to OxyVinyls in this transaction.
Geon's operations are primarily located in the United States and Canada in two
business segments. The "Performance Polymers and Services" (PP&S) segment
includes polyvinyl chloride (PVC) compounds, including two 50% owned compound
joint ventures, specialty resins, plastisol formulators, analytical testing
services performed by Polymer Diagnostics Inc., and Decillion, a 40% owned
joint venture with Owens Corning, Inc. After April 30, 1999, the PP&S segment
also includes the powder compounding joint venture and the acquired compound
and engineered film businesses related to the OxyChem transaction. Prior to the
formation of OxyVinyls, the "Resin and Intermediates" segment included the
consolidated results of the Company's suspension and mass resin and vinyl
chloride monomer (VCM) operations, which, as described above and in Note E,
were substantially contributed to OxyVinyls on April 30, 1999. After April 30,
1999, the R&I segment includes Geon's 24% interest in OxyVinyls, accounted for
under the equity method of accounting. Also included in the R&I segment are
the Company's 50% equity holding in the Sunbelt chlor-alkali joint venture and
the Company's 37.4% holding in Australian Vinyls Corporation (AVC), an
Australian PVC operation. See Note I for further discussion of the Company's
two business segments.
NOTE B - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
There are pending or threatened against the Company or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to employment, commercial, product liability and
environmental matters, which seek remedies or damages. The Company believes that
any liability that may finally be determined will not have a material adverse
effect on the Company's consolidated financial position.
The Company has accrued for environmental liabilities based upon estimates
prepared by its environmental engineers and consultants to cover probable future
environmental expenditures related to previously contaminated sites. The accrual
totaling approximately $44 million at June 30, 1999, represents the Company's
best estimate for the remaining remediation costs based upon information and
technology currently available. Depending upon the results of future testing and
the ultimate remediation alternatives to be undertaken at these sites, it is
possible that the ultimate costs to be incurred could be more than the accrual
6
<PAGE> 7
recorded by as much as $14 million. The Company's estimate of the liability may
be revised as new regulations, technologies or additional information is
obtained. Additional information related to the Company's environmental
liabilities is included in Note L to the Consolidated Financial Statements
included in the Company's 1998 Annual Report on Form 10K.
NOTE C - INVENTORIES
- --------------------
Components of inventories at June 30, 1999 and December 31, 1998, are as
follows:
<TABLE>
<CAPTION>
June 30, December 31,
(Dollars in millions) 1999 1998
----------------- -----------------
<S> <C> <C>
Finished products and in-process inventories $73.3 $94.3
Raw materials and supplies 53.8 34.2
---- ----
127.1 128.5
LIFO Reserve (10.9) (14.6)
------ ------
$116.2 $113.9
===== =====
</TABLE>
NOTE D - CHANGE IN ACCOUNTING METHOD
- ------------------------------------
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." The SOP required that
unamortized start-up costs be written off at the time of adoption and future
start-up costs be expensed as incurred. The Company's portion of unamortized
start-up costs related to the Sunbelt chlor-alkali joint venture totaled $1.5
million, net of an income tax benefit, and was written off as the cumulative
effect of a change in accounting on January 1, 1999.
NOTE E - TRANSACTIONS WITH OXYCHEM
- ----------------------------------
On April 30, 1999, the Company completed the previously announced transactions
with OxyChem, which included the formation of OxyVinyls, a manufacturer and
marketer of PVC resins and caustic soda. OxyVinyls is the largest producer of
PVC resins in North America.
Geon contributed to OxyVinyls five PVC suspension and mass resin plants and one
VCM plant as well as related assets and all of the outstanding capital stock of
LaPorte Chemicals Corporation, a subsidiary of The Geon Company. In exchange,
Geon received a 24% interest in OxyVinyls and OxyVinyls assumed certain
liabilities and obligations of Geon, including agreements under which Geon
leased a portion of a VCM plant located in LaPorte, Texas, as well as certain
industrial revenue bond debt of Geon. OxyChem contributed to OxyVinyls one PVC
plant, one VCM plant, a 50% interest in OxyMar, a Texas general partnership that
operates a VCM plant, and a chlor-alkali chemical complex, together with related
assets. In exchange, OxyChem received a 76% interest in OxyVinyls, and OxyVinyls
assumed certain liabilities and obligations of OxyChem, including certain OxyMar
debt. For accounting purposes, Geon's contribution to OxyVinyls is treated as a
sale of 76% of its PVC business net assets to OxyChem. Geon accounts for its 24%
interest in OxyVinyls under the equity method of accounting.
In other transactions, Geon and OxyChem formed a small powder compounding
partnership, PVC Powder Blends, LP (Powder Blends), through contribution of net
assets by both Geon and OxyChem. Powder Blends manufactures and markets PVC
powder compounds and is 90% owned by Geon. OxyChem also transferred to Geon for
7
<PAGE> 8
$27 million a PVC engineered film and pellet compounding plant located in
Burlington, New Jersey, and its specialty pellet compound business located in
Pasadena, Texas, in addition to inventory and other assets. Powder Blends and
the PVC engineered film and specialty pellet compounding businesses are referred
to collectively as the "Acquired Businesses." The Acquired Businesses have been
accounted for as a purchase and Geon has recorded the net assets of these
businesses at their estimated fair value. The purchase price allocations
reflected in these financial statements are preliminary. The consolidated
financial statements include the operations of these Acquired Businesses
subsequent to April 30, 1999, with a minority interest reflecting the OxyChem's
10% ownership in Powder Blends.
In conjunction with the joint venture transaction, Geon will realize
approximately $104 million through retention of certain working capital from
its businesses contributed to OxyVinyls and the distribution of cash from
OxyVinyls. This $104 million is comprised of cash received from OxyChem of $77.5
million and retained working capital of $62.3 million less $27 million paid by
Geon to OxyChem for the purchase of the Acquired Businesses and $9.0 million
representing Geon's incremental share of OxyVinyls incremental financing.
The Company has recognized a pre-tax gain of $92.9 million as a result of these
transactions, representing the excess of the fair value received (including the
realization of the $104 million in cash and retained working capital) over the
book value of the 76% and 10% of Geon's net assets contributed to OxyVinyls and
Powder Blends, respectively. This gain is preliminary, subject to, among other
things, the finalization of the fair values of the net assets contributed to the
respective partnerships. This gain is net of certain one-time costs directly
related to the transactions. The following details the computation of the gain:
(Dollars in millions)
<TABLE>
<CAPTION>
<S> <C>
Geon's proportionate share of the estimated fair value of OxyVinyls $250.6
Cash received 77.5
------
328.1
Net book value of net assets contributed by Geon (211.4)
------
116.7
Ownership percentage sold to OxyChem 76%
------
Pre-tax gain on formation of OxyVinyls, before transaction related
costs $ 88.7
======
Fair value of assets contributed to Powder Blends by OxyChem $ 36.0
Geon's ownership 90%
------
32.4
Less 10% of the net book value of Geon net assets contributed (1.9)
======
Pre-tax gain on formation of Powder Blends, before transaction
related costs $ 30.5
======
Pre-tax gain on purchase of net assets of Acquired Businesses
representing the preliminary estimate of fair value received in
excess of amount paid $ 5.7
======
Total pre-tax gain before transaction related costs $124.9
Less costs directly associated with the transactions
(32.0)
------
Total pretax gain $ 92.9
======
</TABLE>
8
<PAGE> 9
The costs incurred which are directly associated with the formation of OxyVinyls
and the acquisition of the Acquired Businesses include a one-time payment
(to be paid in the third quarter of 1999) of $5.9 million to Geon
employees that will be transferring to OxyVinyls, professional fees (legal,
accounting, and consulting) of $11.6 million ($6.0 million paid in the last
half of 1998 and $5.6 million paid in the first half of 1999), pension and
post-retirement curtailment and special termination benefits of $9.0 million,
(to be funded through increased annual contributions to the pension and post-
retirement plans over approximately ten years) and the write-off
of capitalized software costs specifically related to the management information
systems of Geon's PVC business of $5.5 million.
In conjunction with the transactions above, Geon entered into PVC resin and VCM
supply agreements with OxyVinyls under which Geon will purchase a substantial
portion of its PVC resin and VCM. The agreements have an initial term of 15
years with renewal options. The Company has also entered into various service
agreements with the partnerships.
The following table sets forth the impact on certain unaudited pro forma
financial information for the Company assuming that the transactions with
OxyChem occurred as of the beginning of 1999 and 1998. This pro forma financial
information may not be indicative of the actual impact on the results of
operations of Geon had the transactions occurred as of the dates assumed or the
impact of the transactions on future results of operations.
<TABLE>
<CAPTION>
Increase (decrease) in
(Dollars in millions, except per share data) reported amounts
Six months ended June 30,
---------------------
1999 1998
---------------------
<S> <C> <C>
Sales $(130.0) $(229.1)
Net income before cumulative effect of a change in
accounting (7.1) 11.3
Net Income (7.1) 11.3
Basic earnings per share:
Earnings per share before cumulative effect of a
change in accounting $ (0.31) 0.49
Earnings per share (0.31) 0.49
Diluted earnings per share:
Earnings per share before cumulative effect of a
change in accounting $ (0.29) 0.48
Earnings per share (0.29) 0.48
</TABLE>
The 1998 pro forma amounts exclude the pre-tax gain of $92.9 million recorded on
the closing of the transactions in the second quarter of 1999 as it is a non-
recurring item resulting from the transactions.
9
<PAGE> 10
NOTE F - EQUITY INVESTMENT
- --------------------------
The Company's 24% interest in OxyVinyls is accounted for under the equity
method. The following table presents summarized financial information of
OxyVinyls (100 %) as of June 30, 1999 and for the period from its formation on
April 30, 1999 through June 30, 1999.
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
Current assets $ 364.8
Noncurrent assets 1,002.0
--------
Total assets 1,366.8
--------
Current liabilities 230.4
Noncurrent liabilities 174.2
--------
Total liabilities 404.6
--------
Partnership capital $ 962.2
========
Net sales $ 225.0
Partnership loss as reported by OxyVinyls (0.7)
Geon's share of OxyVinyls loss (24%) $ (0.2)
Amortization of imbedded goodwill by Geon 0.3
--------
Partnership income as recorded by Geon $ 0.1
========
</TABLE>
In the second quarter of 1999, OxyVinyls recorded a charge of approximately
$3.2 million pre-tax, related to the restructuring /formation of its
operations. Geon's share of this charge was $0.8 million pre-tax.
NOTE G - COMPOUND RESTRUCTURING
- -------------------------------
In the second quarter of 1999, the Company recorded compound restructuring
costs of $1.9 million ($0.6 million of which is recorded as additional
depreciation expense) in connection with the consolidation of the Company's
compounding manufacturing operations which was announced and began in the
fourth quarter of 1998. This plan included the closing of two manufacturing
plants and the partial closing of production lines at other manufacturing
plants. The total restructuring costs in the second quarter of 1999 include
accelerated depreciation of $0.6 million on software assets at the affected
sites which were taken out of service during the second quarter of 1999,
additional estimated demolition costs of $0.8 million and $0.5 million of
professional and consulting fees incurred in connection with the consolidation
of the compounding operations. The Company previously recorded $14.6 million
related to this plan of consolidation in the fourth quarter of 1998 and $1.7
million in the first quarter of 1999. The Company previously announced that it
expected to record additional costs of approximately $6.0 in the second quarter
of 1999 versus the $1.9 million noted above. The previous disclosure included
an accrual of $4.0 million for the Conroe, Texas powder compounding operation
which was anticipated to be closed following the consumation of the
transactions with OxyChem. The Conroe facility continues to manufacture powder
compound due to strong product demand which requires the production capacity
of the Conroe facility. No new date for discontinuation of the Conroe
operations has been set. As a result, the anticipated restructuring costs
related to the closing of the Conroe facility and the planned elimination of 70
positions have not been recognized. The revised plan of consolidation includes
the elimination of approximately 180 positions which were accrued for in the
fourth quarter 1998 charge. As of June 30, 1999, 99 of these 180 individuals
were terminated. The Company expects all remaining sites and production lines
to be closed by the end of 1999, with the exception of one line that is
expected to be closed in the first quarter of 2000.
10
<PAGE> 11
The activity related to the fourth quarter 1998 and first half of 1999 charges
for the consolidation of the Company's compounding operations are as follows:
<TABLE>
<CAPTION>
Fourth First Second
Quarter Quarter Quarter
1998 1999 1999 Nature of Expense
------------ ----------- ---------- ---------------------------------
<S> <C> <C> <C> <C>
Total charges relating to:
Employee separation and plant phase-out:
Asset write-offs $5.3 $0.4 $ - Non-cash
Employee separation 5.0 0.2 - Cash
Site closure costs:
Demolition 3.3 - 0.8 Cash
Legal and professional fees 1.0 0.5 0.5 Cash
------------ ----------- ----------
14.6 1.1 1.3
Depreciation and amortization expense:
Accelerated depreciation - 0.6 0.6 Non-cash, included in
depreciation and amortization
expense
------------ ----------- ----------
Total charges 14.6 1.7 1.9
------------ ----------- ----------
Activity related to the charges:
Fourth Quarter 1998:
Assets written off (5.3) - - Non-cash
Legal and professional fees paid (0.7) - - Cash
------------ ----------- ----------
8.6 - -
First Quarter 1999:
Assets written off - (0.4) - Non-cash
Employee separation paid (0.5) - - Cash
Accelerated depreciation - (0.6) - Non-cash
Legal and professional fees paid - (0.5) - Cash
------------ ----------- ----------
Restructuring accruals at March 31, 8.1 0.2 -
1999
Second Quarter 1999:
Employee separation paid (1.8) (0.2) - Cash
Accelerated depreciation - - (0.6) Non-cash, included in
depreciation and amortization
expense
Legal and professional costs paid (0.3) - (0.1) Cash
------------ ----------- ----------
Restructuring accruals at June 30, 1999 $6.0 $ - $1.2
============ =========== ==========
</TABLE>
11
<PAGE> 12
NOTE H - SUBSEQUENT EVENTS
- --------------------------
The Geon Company on July 7,1999, pursuant to a previously announced tender
offer, through its wholly owned subsidiary (TGC Acquisition Corporation)
acquired 13,715,221 shares or approximately 87.9 percent of the outstanding
shares of O'Sullivan Corporation (O'Sullivan), a Virginia corporation, for
$12.25 per share. Geon plans to proceed with the acquisition of the remaining
shares at a special meeting of O'Sullivan's remaining shareholders scheduled
for August 23,1999, for the purpose of approving a merger with TGC Acquisition
Corporation. O'Sullivan financial results will be included in Geon's
consolidated results of operations beginning July 8, 1999.
The acquisition will initially be financed with a combination of available
cash on hand and borrowings under existing revolving credit facilities. These
credit facilities are unsecured and provide for revolving credit of up to $250
million for general corporate purposes. These facilities expire in May 2000
($150 million) and December 2001 ($100 million). Geon also utilized $25 million
of O'Sullivan's acquired cash to reduce the financing of the transaction. Geon
anticipates that the short-term borrowings will be repaid with cash generated
through operations and other sources which may include future refinancing.
O'Sullivan, which had sales of $163 million in 1998, is a leading producer of
engineered polymer films for the automotive and industrial markets. O'Sullivan
has developed particular strengths in engineered vinyl film products.
In addition on July 1, the Company acquired privately held Acrol Holdings
Limited (Acrol), headquartered in Widnes, England. Acrol is the United Kingdom's
leading formulator of vinyl plastisols, which are plasticized compounds used in
applications such as automotive interiors, wallcoverings, and metal and fabric
coatings. Acrol is also is a leading distributor of compounding additives, and
manufactures a range of specialty polymer-coated textiles. Geon anticipates that
Acrol's 1999 sales will be approximately $17 million.
12
<PAGE> 13
NOTE I - SEGMENT INFORMATION
The Company operates primarily in two business segments, the Performance
Polymers & Services segment (PP&S) and the Resin and Intermediates (R&I)
segment. Inter-segment sales are accounted for at prices that generally
approximate those for similar transactions with unaffiliated customers. The
elimination of inter-segment sales is primarily for sales from the R&I segment
to the PP&S segment, and is included in the Other segment. Certain other
corporate expenses and eliminations are also included in the Other segment.
<TABLE>
<CAPTION>
TOTAL PP&S R&I OTHER
------ ------ ------ -------
<S> <C> <C> <C> <C>
QUARTER ENDED JUNE 30, 1999:
Net Sales $296.9 $261.0 $ 45.6 $ (9.7)
Operating income (loss) 24.2 28.6 (3.8) (0.6)
Employee separation and plant phase-out 1.3 1.3 -- --
Other restructuring costs - accelerated depreciation 0.6 0.6 -- --
Restructuring costs incurred by OxyVinyls 0.8 -- 0.8 --
------ ------ ------ ------
Operating income (loss) before restructuring costs 26.9 30.5 (3.0) (0.6)
Depreciation and amortization (before restructuring) 9.6 7.0 2.6 --
====== ====== ====== ======
Operating income (loss) before depreciation, amortization
and restructuring costs $ 36.5 $ 37.5 $ (0.4) $ (0.6)
====== ====== ====== ======
Total assets $913.0 $585.6 $243.9 $ 83.5
Investment in equity affiliates included in assets 238.0 4.9 233.1 --
Capital expenditures 12.0 10.6 1.4 --
Earnings (loss) of equity affiliates included in operating
income (2.1) 0.1 (2.2) --
QUARTER ENDED JUNE 30, 1998:
Net Sales $330.7 $215.3 $152.8 $(37.4)
Operating income (loss) 14.7 28.4 (13.3) (0.4)
Depreciation and amortization 15.4 7.6 7.7 0.1
------ ------ ------ ------
Operating income (loss) before depreciation and
amortization $ 30.1 $ 36.0 $ (5.6) $ (0.3)
====== ====== ====== ======
Total assets $848.9 $490.7 $373.5 $(15.3)
Capital expenditures 9.8 4.0 5.8 --
Investment in equity affiliates included in assets 24.4 3.0 21.4 --
Earnings of equity affiliates included in operating income 2.3 0.2 2.1 --
</TABLE>
13
<PAGE> 14
<TABLE>
<CAPTION>
TOTAL PP&S R&I OTHER
------- ---------- --------- ----------
<S> <C> <C> <C> <C>
SIX MONTHS ENDED JUNE 30, 1999:
Net Sales $622.7 $478.6 $186.8 $(42.7)
Operating income (loss) 46.0 51.4 (4.9) (0.5)
Employee separation and plant phase-out 2.4 2.4 -- --
Other restructuring costs - accelerated depreciation 1.2 1.2 -- --
Restructuring costs incurred by OxyVinyls 0.8 -- 0.8 --
------ ------ ------ ------
Operating income (loss) before restructuring costs 50.4 55.0 (4.1) (0.5)
Depreciation and amortization (before restructuring) 24.0 13.9 10.1 --
------ ------ ------ ------
Operating income (loss) before depreciation, amortization
and restructuring costs
$ 74.4 $ 68.9 $ 6.0 $ (0.5)
====== ====== ====== ======
Capital expenditures 22.2 18.2 4.0 --
Earnings (loss) of equity affiliates included in operating
income (3.6) 0.1 (3.7) --
SIX MONTHS ENDED JUNE 30, 1998:
Net Sales $655.2 $415.7 $315.0 $(75.5)
Operating income (loss) 27.4 45.0 (16.8) (0.8)
Depreciation and amortization 29.9 14.5 15.2 0.2
------ ------ ------ ------
Operating income (loss) before depreciation and
amortization $ 57.3 $ 59.5 $ (1.6) $ (0.6)
====== ====== ====== ======
Capital expenditures 16.0 6.6 9.4 --
Earnings of equity affiliates included in operating income 5.4 0.3 5.1 --
</TABLE>
14
<PAGE> 15
NOTE J. WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
- ----------------------------------------------------------------------
<TABLE>
<CAPTION>
Quarter ended Six months ended
June 30, June 30,
--------------------------------------------------
(in millions) 1999 1998 1999 1998
--------------------------------------------------
<S> <C> <C> <C> <C>
Weighted-average shares - Basic:
Weighted-average shares outstanding 23.7 23.3 23.6 23.3
Less unearned portion of restricted stock
awards included in outstanding shares (.5) (.4) (.4) (.4)
--------------------------------------------------
23.2 22.9 23.2 22.9
--------------------------------------------------
Weighted-average shares - Diluted:
Weighted-average shares outstanding 23.7 23.3 23.6 23.3
Plus dilutive impact of stock options and
stock awards .7 .3 .6 .3
--------------------------------------------------
24.4 23.6 24.2 23.6
==================================================
</TABLE>
15
<PAGE> 16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note E, the joint venture transactions with OxyChem were
completed on April 30, 1999, and the newly formed partnerships began operations.
As a result, on April 30, 1999, Geon's North American commodity PVC/VCM
operations included in the R&I business segment were contributed to OxyVinyls in
exchange for a 24% interest in the joint venture. Financial results through
April 30, 1999 include the consolidation of the commodity PVC/VCM operations,
after which the earnings of OxyVinyls are reported as earnings from equity
affiliates in the R&I business segment.
In addition, as discussed in Note E, Geon and OxyChem also formed the PVC Powder
Blends, LP partnership which is 90% owned by Geon. The operations of this
partnership are consolidated into Geon, with the 10% OxyChem ownership recorded
as a minority interest. Also in conjunction with the joint venture transactions,
the Company acquired from OxyChem a PVC engineered flexible vinyl film business
and a specialty PVC compound business that is included in the Company's
consolidated results.
SECOND QUARTER 1999 RESULTS OF OPERATIONS - TOTAL COMPANY:
Overall, sales in the second quarter of 1999 declined by $33.8 million to
$296.9 million as compared to the same period in 1998. The reduction in sales
attributable to the contribution of the Company's PVC/VCM operations to
OxyVinyls on April 30,1999, thus eliminating the sales of these operations from
consolidated sales for May and June of 1999(net of related inter-business sales
eliminations) was approximately $80 million which was partially offset by sales
of acquired plastisol formulator businesses, businesses acquired in the
transactions with OxyChem and sales growth in specialty resins and vinyl
compounds. Similarly, year-to-date sales decreased $32.5 million, largely the
result of the same factors impacting the quarter. Operating income before
special items, was $26.9 million for the quarter, an increase of $12.2 million
over the same period a year ago. Both business segments reported increases in
operating income before special items in the quarter versus last year.
Year-to-date operating income, before special items was $50.4 million, an 85%
increase over 1998.
Selling and administrative expenses for the second quarter increased by $2.5
million or 14% from 1998. The acquired businesses and increased costs associated
primarily with new business development resulted in a 26% increase in selling
and administration expense. This increase was partially offset by a reduction in
selling and administrative expenses associated with the R&I segment upon
formation of OxyVinyls. Year-to-date selling and administrative expenses
increased 21% over 1998 primarily as a result of acquisitions.
Special items recorded in the second quarter of 1999 included a $1.9 million
pre-tax charge ($1.1 million after-tax) consisting of $1.3 million employee
separation and plant phase-out plus $0.6 million of accelerated depreciation
associated with the compound manufacturing asset rationalization, see Note G
for further discussion. Second quarter results also included Geon's share or a
$0.8 million pre-tax ($0.5 million after-tax) charge recognized by OxyVinyls
related to the start-up of operations (see Note F). In addition, the Company
recognized a pre-tax gain of $92.9 million ($56.8 million after tax) related to
the transactions with OxyChem, for more information refer to Note E. In
addition to the items discussed above, year-to-date special items impacting net
income include a first quarter charge related to the compound manufacturing
asset rationalization of $1.7 million pre-tax ($1.0 million after-tax) and a
charge related to the change in accounting for Sunbelt's start-up costs of $2.4
million pre-tax ($1.5 million after-tax).
16
<PAGE> 17
Other expense declined both for second quarter and year-to-date from 1998 to
1999, due primarily to a reduction in foreign currency losses. The effective
income tax rate for the second quarter and year-to-date was 39% in 1999 versus
41% for 1998, reflecting the effect of a change in foreign versus domestic
earnings and the effect of permanent differences such as non-deductible goodwill
on the lower pre-tax earnings in 1998.
Net income for the quarter was $13.3 million, excluding special items, nearly
three times the net income for the corresponding period in 1998 of $4.8
million. Year-to-date net income, before special items was $25.4 million
compared to $10.6 million in 1998.
Performance Polymers & Services (PP&S)
- --------------------------------------
PP&S sales for the second quarter of 1999 were $261.0 million, an increase of
$45.7 million or 21% over 1998. Sales volumes increased approximately 28%,
primarily the result of acquired businesses. This volume growth was partially
offset by selling prices that averaged 6% below the same period last year. For
the first half of 1999, sales were $478.6 million, an increase of $62.9 million
over 1998. The additional volume of acquired businesses accounts for the
majority of this increase. Average selling prices for the first half of 1999
were approximately 6% lower than 1998.
Operating income for the second quarter, before the restructuring costs of $1.9
million, was $30.5 million, an increase of $2.1 million or 7% over last year.
PP&S second quarter 1999 sales margins over raw materials were comparable with
second quarter 1998, but down approximately 4% as compared to the first
quarter of 1999, as a result of rising raw material costs, changes in product
mix and the acquired businesses from OxyChem which consisted of a
proportionately lower sales mix. Average plant conversion costs per sales unit
decreased approximately one percentage point from the same period last year as
a result improved operating efficiencies and the higher sales volumes.
Resin and Intermediates (R&I)
- -----------------------------
The year-to-year comparison of operating results in the R&I segment is impacted
by the formation of OxyVinyls on April 30, 1999 and the resulting changes in the
business' structure. With the formation of OxyVinyls, Geon's exposure to the PVC
and chlor-alkali industries changed significantly. The Company now owns 24% of
OxyVinyls, a 4.2 billion pound PVC producer, compared with its previous
ownership of 100% of 2.4 billion pounds PVC capacity prior to formation. This
effectively reduces the Company's exposure to PVC industry fluctuations to
approximately half of the pre-OxyVinyls exposure. However, the Company's
exposure to fluctuations in caustic soda was increased from approximately
150,000 tons to 380,000 tons with the formation of OxyVinyls. Also, for two
months in 1999, the Company's interest in OxyVinyls is reported under the equity
method of accounting, whereas prior to this, the Company's PVC/VCM business was
consolidated.
The R&I segment loss for the second quarter and first half of 1999 was $3.0
million and $4.1 million, excluding Geon's share of the restructuring charge
recognized by OxyVinyls of $0.8 million pre-tax, versus a $13.3 million loss in
the second quarter and a $16.8 million loss in the first half of 1998. The
earnings improvement is primarily the result of improved PVC industry margins
which more than offset the lower earnings from chlorine and caustic soda as
chlor-alkali industry pricing is in a cyclical trough.
Equity affiliates included in the R&I segment are Sunbelt, Australian Vinyls
Corporation in Australia, and, as of April 30, 1999, OxyVinyls. The second
quarter and year-to-date 1999 loss from equity affiliates of $1.3 million and
$2.8 million, respectively, (excluding the $0.8 million special charge
recognized by OxyVinyls) are primarily the result of the effect of the low
chionne and caustic soda price on Sunbelt's earnings, partially offset by
earnings of AVC and OxyVinyls.
17
<PAGE> 18
CAPITAL RESOURCES AND LIQUIDITY
Net cash used by operating and investing activities was $19.1 million,
excluding the impact on cash of the OxyChem transactions. For the same
period in 1998, operating and investing activities used $9.2 million
of cash.
The transactions with OxyChem generated cash of $98.0 million in the first
half of 1999, consisting of cash received upon the formation of OxyVinyls
of $77.5 million, cash paid for the Acquired Businesses of $27.0 million,
collection of $53.1 million of the $62.3 million of R&I working capital
retained upon formation of OxyVinyls, and cash payments by Geon for certain
costs directly related to the OxyChem transactions. The Company expects to
pay $5.9 million for special benefits to former employees who accepted
positions with OxyVinyls. In addition, the Company paid $6.0 million of
costs directly associated with OxyVinyls formation during the last half of 1998.
Operations provided $0.9 million of cash in 1999, excluding collection of
retained R&I working capital, compared with $47.7 million in 1998. The decrease
in cash provided is primarily the result of increased operating working capital
of $46.2 million in the first half of 1999 as compared to a $16.9 million
increase in the first half of 1998. This increase in operating working capital
in 1999 resulted from a reduction in the sale of receivables of $30 million, as
well as a seasonal increase in operating working capital. Other operating uses
of cash in 1999 include approximately $3.5 million of vacation and other
benefits paid to former Geon employees who are now with OxyVinyls, $3.4 million
of cash payments associated with the compound restructuring and the final
payments for early retirement benefits related to the Company's 1997 voluntary
retirement program totaling $2.7 million. Loss (income) from equity affiliates
was a source of cash in the first half of 1999, primarily as a result of
non-cash operating losses of Sunbelt, compared with non-cash income in 1998.
Investing activities, excluding items related to OxyChem transactions included
$22.2 million in property additions compared with $16.0 million in 1998. This
increase over 1998 is largely attributable to the expansion and modernization of
the Henry, Illinois, specialty resin plant that was announced in the fourth
quarter of 1998. Total capital expenditures in 1999 are expected to be $55 to
$60 million. In addition, net distributions from equity affiliates provided
$1.9 million of cash in the first half of 1999, compared with a use of
cash of $1.3 million in 1998.
Cash used in financing activities in the first half of 1999 primarily reflects
the use of cash generated from the OxyChem transactions to repay short-term
borrowings. In addition, the Company paid dividends of $5.9 and repaid $2.0
million of long-term debt. Approximately $1.7 million of long-term debt was
repaid prior to its scheduled maturity date to facilitate the transactions with
OxyChem.
As discussed in Note H to the Condensed Consolidated Financial Statements, the
Company completed the acquisitions of O'Sullivan and Acrol in July 1999. The
financing for these acquisitions was obtained through a combination of
short-term borrowings, cash on hand, and $25 million of cash acquired with
O'Sullivan. Geon anticipates that the short-term borrowings will be repaid with
cash generated through operations and other sources The Company believes it has
sufficient funds to support dividends, debt service requirements, normal capital
and operating expenditures, and expenditures related to expansion of its Henry,
Illinois plant, based on projected operations, existing working capital
facilities and other available permitted borrowings.
YEAR 2000 (Y2K)
State of Readiness. Since 1997, the Company has been actively involved in
surveying, assessing, and correcting Year 2000 ("Y2K") problems with its
information technology structure. Geon's information technology structure
includes, among others, commercial business information systems, manufacturing
information systems, desktop computing networks, and data and communication
networks. Geon implemented a new integrated commercial business information
system in 1997 which is Y2K compliant and will support the majority of the
Company's operations. Following the assessment of its information technology
structure, Geon identified its systems that it believed may be vulnerable to
Y2K failures and established a program to assess Y2K issues.
18
<PAGE> 19
The Company's process for evaluating Y2K issues associated with its information
technology structure includes completion of a comprehensive inventory of systems
which may be vulnerable to Y2K failure; assessment of the business criticality
of the inventoried systems; testing of systems determined to be critical to
operations; and remediation of those systems found to be noncompliant.
The Company's Y2K efforts are being carried out by Geon's Y2K compliance team
under the leadership of the Director of Information Systems and Technology
Operations who has assembled a group of seven individuals to oversee the
implementation of Geon's Y2K program and has appointed a person at each of
Geon's facilities, including those newly acquired, to address Y2K issues. The
Y2K compliance team maintains a reporting structure to ensure that progress is
made on Y2K issues and to ensure the reliability of risk and cost estimates
relating to Y2K problems.
The most critical non-information technology systems, such as automated process
control equipment, are relatively new and are being upgraded and maintained with
the help of Geon's various suppliers. To date, Geon's investigation of these
systems has not revealed any Y2K problems.
In February 1997, Geon completed the installation of a new integrated
commercial business information system which is Y2K compliant and will support
the majority of Geon's current operations. The purchase and initial
installation of Geon's new commercial business information system cost
approximately $20 million. Currently, the Company is operating one older
information system which has been remediated. As a result of the installation
of the new system and its remediation efforts, Geon has completed all of its
Y2K work with respect to its commercial business information systems, with the
exception of new business acquisitions. The Company is also in the process of
remediating all of its technical infrastructure. The most critical
non-information technology systems include automated process control equipment
and equipment containing embedded chips. These systems are relatively new and
are being upgraded with the help of Geon's various suppliers.
The Company has included the businesses acquired from OxyChem in the evaluation
and remediation of its systems. The recent (July 1999) acquisitions of
O'Sullivan and Acrol were not included in Geon's overall Y2K evaluation
processes. Nevertheless, each of these companies had substantially completed a
Y2K compliance plan prior to acquisition. Geon is in the process of reviewing
and auditing these plans.
19
<PAGE> 20
Below is a summary of Geon's status in each of our primary areas of evaluation.
This summary includes the businesses acquired from OxyChem. The recent
acquisitions of Acrol and O'Sullivan are not included in the summary below;
however, as previously discussed, these companies have substantially completed
Y2K compliance plans prior to acquisition. Geon is in the process of reviewing
and auditing these plans.
The Company has completed the inventory and assessment of each category.
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
EXPECTED
CATEGORY TESTED REMEDIATED COMPLETION
----------------------------------------------------------------------------------------
<S> <C> <C>
APPLICATION SOFTWARE
Commercial 100% 100% Completed
Manufacture 100% 100% Completed
Desktop 100% 100% Completed
Research and Development 100% 100% Completed
----------------------------------------------------------------------------------------
INTEGRATION
Interfaces 100% 100% Completed
Electronic Data Interchange 100% 100% Completed
----------------------------------------------------------------------------------------
INFRASTRUCTURE
Networks, including data
and communications 100% 100% Completed
Hardware 100% 100% Completed
Software 100% 100% Completed
----------------------------------------------------------------------------------------
EXTERNAL ENTITIES
Customers N/A 88% 8/99
Key Suppliers N/A 100% Completed
Service Providers N/A 95% 8/99
----------------------------------------------------------------------------------------
EMBEDDED SYSTEMS
Programmable Logic 100% 100% Completed
Controllers
----------------------------------------------------------------------------------------
</TABLE>
All computing hardware and data networks have been tested and found to be
compliant. Further, the Company has identified approximately 50 personal
computers with key business applications which have been successfully tested.
In addition to internal resources, the Company is utilizing external resources
to implement its Y2K program and to ensure that its risk and cost estimates are
reliable. Geon has contracted with outside consultants to verify Geon's
assessment of its Y2K problems and to assist it with remediation efforts.
The Company relies significantly upon third parties in the operation of its
business. As a result, as part of Geon's Y2K program, the purchasing and
production control department of each operating unit has made, and is making,
efforts to determine and assess the Y2K compliance of third parties with which
Geon does business. In particular, beginning in 1998, Geon contacted and sent
questionnaires to all of its raw material suppliers to obtain information
relating to the status of such suppliers with respect to Y2K issues. Such
inquiries incorporated the guidelines of the Chemical Manufacturers Association
in requesting compliance information. Of its total suppliers, approximately 100
were regarded as critical. Geon has received assurances from 100% of its
critical raw material suppliers that they are Y2K compliant as of July 1999. The
Company is continuing its efforts (follow-up letters, telephone calls, review of
WEB sites, etc.) to determine the status of all remaining non-critical
suppliers' Y2K compliance. The Company's compliance assessment of suppliers
includes service providers for those services determined to be critical to
20
<PAGE> 21
business operations. In those cases where the Company has been unable to obtain
satisfactory assurance of Y2K compliance alternative suppliers are being
pursued and/or inventories will be increased prior to year-end, as deemed
appropriate. The Company has also sent letters to all of its customers and has
received compliance assurances from 88%. Further customer follow-up continues.
Due to the uncertainties associated with Y2K problems, Geon continues to
develop contingency plans in the event that its business or operations are
disrupted on January 1, 2000. As part of this plan, the Company expects to
adjust certain inventory levels and mix of products and raw materials
consistent with good business practice based upon the risks that Geon believes
exist. In addition, Geon is developing a plan that outlines how one facility
can compensate for any disruption at another facility due to Y2K problems.
Completion. Geon's internal systems and processes are considered to be Y2K
compliant as of July 1999, except for the recent acquisitions of O'Sullivan and
Acrol which have substantially completed Y2K compliance plans prior to
acquisition. Geon is in the process of reviewing and auditing these plans.
Cost. The Company anticipates incurring total out-of-pocket expenditures of
approximately $.75 million on Y2K issues. To date, Geon has incurred
out-of-pocket costs of approximately $.5 million on Y2K issues, plus internal
personnel time included in the scope of normal operations. Approximately 85% of
these funds have been expended in connection with remediation, and 15% of these
funds have been expended to replace portions of the information technology
structure. The funds used by Geon to address its Y2K problems are from the
general business budget, and all such costs are expensed as incurred.
Risks. If the Company's suppliers and customers are not Y2K compliant by January
1, 2000, such noncompliance could materially affect Geon's business, results of
operations, and financial condition. Geon may experience some random or
unforeseen supply chain disruptions that may affect its ability to produce and
distribute key products. In addition, the Company's business may be disrupted if
a significant number of its customers are unable to pay for products supplied to
them by Geon. Geon's worst case scenario is the inability of Geon to receive raw
materials or remove products from its facilities. In order for Y2K problems to
have a material effect on Geon, Geon believes that more than one of its
facilities would have to experience significant Y2K problems.
Forward-Looking Statements. The data on which the Company believes it will
complete its Y2K compliance efforts and the expenses related to Geon's Y2K
compliance efforts are based upon management's best estimates, which are based
on assumptions of future events, including the availability of certain
resources, third party modification plans, and other factors. There can be no
assurances that these results and estimates will be achieved, and the actual
results could materially differ from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability of personnel trained in this area and the ability to locate and
correct all relevant computer codes. In addition, there can be no assurances
that the systems or products of third parties on which Geon relies will be
timely converted or that a material failure by a third party, or a conversion
that is incompatible with Geon's systems, would not have a material adverse
effect on Geon.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental laws
and regulations concerning emissions to the air, discharges to waterways, the
release of materials into the environment, the generation, handling, storage,
transportation, treatment and disposal of waste materials or otherwise relating
to the protection of the environment.
21
<PAGE> 22
The Company maintains a disciplined environmental and industrial safety and
health compliance program and conducts internal and external regulatory audits
at its plants in order to identify and categorize potential environmental
exposures and to assure compliance with applicable environmental, health and
safety laws and regulations. This effort has required and may continue to
require process or operational modifications, the installation of pollution
control devices and cleanups. The Company estimates capital expenditures related
to the limiting and monitoring of hazardous and non-hazardous wastes during 1999
to approximate $3 million to $5 million. Certain factors that may affect these
forward-looking comments are discussed under "Cautionary Note on Forward-Looking
Statements".
The Company believes that compliance with current governmental regulations will
not have a material adverse effect on its capital expenditures, earnings, cash
flow or liquidity. At June 30, 1999, the Company had accruals totaling
approximately $44 million to cover potential future environmental remediation
expenditures. Environmental remediation expenditures in 1999 are estimated to
approximate the level of 1998 which totaled $5.3 million.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements concerning trends and other
forward-looking information affecting or relating to the Company and its
industry that are intended to qualify for protection afforded "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the use of foward-looking
terms, such as "may," "intends," "will," "expects," "anticipates,"
"estimates" or the negative thereof or other variations thereon
or comparable terminology. Actual results could differ materially from
such statements for a variety of factors, including but not limited
to (1) unanticipated changes in world, regional, or U.S. PVC consumption
growth rates affecting the Company's markets; (2) unanticipated changes in
global industry capacity or in the rate at which anticipated changes in
industry capacity come online in the PVC, VCM & chlor-alkali industries;
(3) fluctuations in raw material prices and supply, in particular
fluctuations outside the normal range of industry cycles; (4)
unanticipated delays in achieving or inability to achieve cost reduction and
employee productivity goals; (5) inability to achieve, or delays in achieving
savings related to business consolidation and restructuring programs; (6)
unanticipated production outages or material costs associated with scheduled or
unscheduled maintenance programs; (7) the impact on the North American vinyl
markets and supply/demand balance resulting from the economic situation in the
Far East; (8) the ability to obtain financing at anticipated rates; (9)
unanticipated expenditures required in conjunction with year 2000 compliance;
(10) unanticipated delay in realizing, or inability to realize, expected costs
savings from acquisitions; (11) unanticipated costs or difficulties related to
completion of proposed transactions or the operation of the joint venture
entities; (12) inability to complete proposed transactions; (13) lack of day to
day operating control, including procurement of raw material feedstock, of the
resin partnership; (14) lack of direct control over the reliability of delivery
and quality of the primary raw materials (PVC & VCM) utilized in the Company's
products; and (15) partial control over investment decisions and dividend
distribution policy of the resin partnership.
22
<PAGE> 23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest
rates on debt obligations and from changes in foreign currency
exchange rates. Information related to these risks and the
Company's management of the exposure is included in "Management's
Analysis - Consolidated Balance Sheets" in the 1998 Annual Report
on 10K under the caption "Market Risk Disclosures."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on April 19,
1999. As described in the Special Meeting Proxy Statement the
following actions were taken:
a) Stockholders approved the transactions with OxyChem described
in Note E to the Condensed Consolidated Financial Statements
included under Item 1 of this Form 10Q by a vote of
16,242,328 in favor and 155,818 against the proposal.
b) Stockholders approved the adoption of The Geon Company
Incentive Stock Plan by a vote of 11,657,482 in favor and
5,912,112 against the proposal.
The Company held its Annual Meeting of Stockholders on May 6,
1999. As described in the 1999 Proxy Statement, the following
action was taken:
a) The eight nominees for directors were elected. The votes for
directors were as follows:
<TABLE>
<CAPTION>
Number of Shares Number of Share
Voted For Votes Withheld
---------------- ---------------
<S> <C> <C>
James K. Baker 20,361,233 190,134
Gale Duff-Bloom 20,343,173 208,194
J. Douglas Campbell 20,371,764 179,603
D. Larry Moore 20,371,664 179,703
William F. Patient 20,311,987 239,380
R. Geoffrey Styles 20,371,664 179,703
Thomas A. Waltermire 20,355,163 196,204
Farah M. Walters 20,351,564 199,803
</TABLE>
23
<PAGE> 24
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 4.1 - Amendment to Sections 2 and 8 of Article I of the
By-Laws of the Company
(b) Exhibit 10.1 - 1999 Incentive Stock Plan as Amended and Restated on
May 6, 1999
(c) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K
Form 8-K filed on April 1, 1999 announcing the Special Meeting of
Stockholders to be held on April 19, 1999.
Form 8-K filed on April 20, 1999 announcing stockholder approval of
the transactions with OxyChem at a Special Meeting of Stockholders
held on April 19, 1999.
Form 8-K filed on April 28, 1999, announcing the intended retirement
of Geon's Chairman and CEO, William Patient in August 1999,
Form 8-K filed on May 7, 1999, announcing the appointment of Thomas
Waltermire as CEO.
Form 8-K filed on May 13, 1999, providing financial statements of
OxyChem transferred businesses and pro forma financial information of
The Geon Company.
Form 8-K filed on June 2, 1999 announcing an agreement to acquire the
outstanding stock of O'Sullivan Corporation.
Form 8-K filed on June 24, 1999 announcing the passing of the waiting
period under the Hart Scott Rodino Antitrust Improvements Act of 1976
with respect to Geon's intended acquisition of O'Sullivan Corporation.
24
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 16, 1999 THE GEON COMPANY
/s/ W. D. Wilson
Vice President and Chief
Financial Officer,
(Principal Financial Officer)
/s/ G. P. Smith
Corporate Controller and
Assistant Treasurer
(Principal Accounting Officer)
25
<PAGE> 1
EXHIBIT 4.1
THE GEON COMPANY
AMENDMENTS TO BY-LAWS
1. Section 2, Article I, of the By-Laws should be amended to read as follows:
SECTION 2. SPECIAL MEETINGS. Special meetings of the stockholders may be
called by the Board of Directors or the Chief Executive Officer at such times
and at such places either within or without the State of Delaware as may be
stated in the call.
2. Section 8, Article I, of the By-Laws should be amended to read as
follows:
SECTION 8. ACTION BY CONSENT. Any action required or permitted to be
taken at any meeting of stockholders may be taken without a meeting, without
prior notice and without vote, if, prior to such action, a written consent
or consents thereto, setting forth such action is signed by the holders of
record of all the shares of stock of the Corporation, issued and outstanding
and entitled to vote thereon.
<PAGE> 1
EXHIBIT 10.1
THE GEON COMPANY
1999 INCENTIVE STOCK PLAN
(APPROVED BY STOCKHOLDERS APRIL 19, 1999)
(AMENDED AND RESTATED AS OF MAY 6, 1999)
1. PURPOSE. The Geon Company 1999 Incentive Stock Plan (the "Plan") is
designed to foster and promote the long-term growth and performance of the
Company by enhancing the Company's ability to attract and retain qualified
Directors and key employees and motivating Directors and key employees through
stock ownership and performance-based incentives. To achieve this purpose, this
Plan provides authority for the grant of Stock Options, Restricted Stock, Stock
Equivalent Units, Stock Appreciation Rights, Performance-Based Stock Awards, and
other stock and performance-based incentives.
2. DEFINITIONS.
(a) "Affiliate" C This term has the meaning given to it in
Rule 12b-2 under the Exchange Act.
(b) "Award" C The grant of Stock Options, Restricted Stock,
Stock Equivalent Units, Stock Appreciation Rights, Performance-Based Stock
Awards, and other stock and performance-based incentives under this Plan.
(c) "Award Agreement" C Any agreement between the Company and
a Participant that sets forth terms, conditions, and restrictions applicable to
an Award.
(d) "Board of Directors" C The Board of Directors of the
Company,
(e) "Change of Control" CA "Change of Control" means:
(i) The acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person") of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
voting securities of the Company where such acquisition causes
such Person to own 20% or more of the combined voting power of
the then outstanding voting securities of the Company entitled
to vote generally in the election of directors (the
"Outstanding Company Voting Securities"); provided, however,
that for purposes of this subsection (i), the following
acquisitions shall not be deemed to result in a Change of
Control: (i) any acquisition directly from the Company, (ii)
any acquisition by the Company, (iii) any acquisition by any
employee benefit plan (or related trust) sponsored or
maintained by the Company or any corporation controlled by the
Company or (iv) any acquisition by any corporation pursuant to
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<PAGE> 2
a transaction that complies with clauses (i), (ii) and (iii)
of subsection (c) below; provided, further, that if any
Person's beneficial ownership of the Outstanding Company
Voting Securities reaches or exceeds 20% as a result of a
transaction described in clause (i) or (ii) above, and such
Person subsequently acquires beneficial ownership of
additional voting securities of the Company, such subsequent
acquisition shall be treated as an acquisition that causes
such Person to own 20% or more of the Outstanding Company
Voting Securities; and provided, further, that if at least a
majority of the members of the Incumbent Board determines in
good faith that a Person has acquired beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 20% or more of the Outstanding Company Voting
Securities inadvertently, and such Person divests as promptly
as practicable a sufficient number of shares so that such
Person beneficially owns (within the meaning of Rule 13d-3
promulgated under the Exchange Act) less than 20% of the
Outstanding Company Voting Securities, then no Change of
Control shall have occurred as a result of such Person's
acquisition; or
(ii) individuals who, as of November 6, 1996,
constitute the Board (the "Incumbent Board") cease for any
reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a director
subsequent to November 6, 1996 whose election, or nomination
for election by the Company's shareholders, was approved by a
vote of at least a majority of the directors then comprising
the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but
excluding, for this purpose, any such individual whose initial
assumption of office occurs as a result of an actual or
threatened election contest with respect to the election or
removal of directors or other actual or threatened
solicitation of proxies or consents by or on behalf of a
Person other than the Board; or
(iii) The approval by the shareholders of the Company
of a reorganization, merger or consolidation or sale or other
disposition of all or substantially all of the assets of the
Company or the acquisition of assets of another corporation
("Business Combination") or, if consummation of such Business
Combination is subject, at the time of such approval by
shareholders, to the consent of any government or governmental
agency, the obtaining of such consent (either explicitly or
implicitly by consummation); excluding, however, such a
Business Combination pursuant to which (i) all or
substantially all of the individuals and entities who were the
beneficial owners of the Outstanding Company Voting Securities
immediately prior to such Business Combination beneficially
own, directly or indirectly, more than 60% of, respectively,
the then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such
Business Combination (including, without limitation, a
corporation that as a result of such transaction owns the
Company or all or substantially all of the Company's assets
either
2
<PAGE> 3
directly or through one or more subsidiaries) in substantially
the same proportions as their ownership, immediately prior to
such Business Combination of the Outstanding Company Voting
Securities, (ii) no Person (excluding any employee benefit
plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns,
directly or indirectly, 20% or more of, respectively, the then
outstanding shares of common stock of the corporation
resulting from such Business Combination or the combined
voting power of the then outstanding voting securities of such
corporation except to the extent that such ownership existed
prior to the Business Combination and (iii) at least a
majority of the members of the board of directors of the
corporation resulting from such Business Combination were
members of the Incumbent Board at the time of the execution of
the initial agreement, or of the action of the Board,
providing for such Business Combination; or
(iv) approval by the shareholders of the Company of a
complete liquidation or dissolution of the Company.
(f) "Change of Control Price" -- the higher of (i) the highest
reported sales price, regular way, of a share of Common Stock in any transaction
reported on the New York Stock Exchange Composite Tape or other national
exchange on which such shares are listed or on NASDAQ during the 60-day period
prior to and including the date of a Change of Control or (ii) if the Change of
Control is the result of a tender or exchange offer or a Business Combination,
the highest price per share of Common Stock paid in such tender or exchange
offer or Business Combination; provided, however, that, in the case of Incentive
Stock Options and Stock Appreciation Rights relating to Incentive Stock Options,
the Change of Control Price shall be in all cases the Fair Market Value of the
Common Stock on the date such Incentive Stock Option or Stock Appreciation Right
is exercised. To the extent that the consideration paid in any such transaction
described above consists all or in part of securities or other noncash
consideration, the value of such securities or other noncash consideration shall
be determined in the sole discretion of the Board.
(g) "Code" -- The Internal Revenue Code of 1986, or any law
that supersedes or replaces it, as amended from time to time.
(h) "Committee" -- The Compensation Committee of the Board of
Directors, or any other committee of the Board of Directors that the Board of
Directors authorizes to administer this Plan. The Committee will be constituted
in a manner that satisfies all applicable legal requirements, including the
ANon-Employee Director@ standard set forth in Rule 16b-3 and the outside
director requirement under Section 162(m).
(i) "Common Stock" or "stock" -- Common Stock, $.10 par value,
of the Company, including authorized and unissued shares and treasury shares.
(j) "Company" -- The Geon Company, a Delaware corporation, and
its direct and indirect subsidiaries.
3
<PAGE> 4
(k) "Continuing Director" -- A Director following a Change of
Control who was a Director prior to such Change of Control or who was
recommended or elected to succeed a Continuing Director by a majority of the
Continuing Directors then in office.
(l) "Director" -- A director of the Company.
(m) "Exchange Act" C The Securities Exchange Act of 1934, as
amended, or any law that supersedes or replaces it, as the same may be amended
from time to time.
(n) "Fair Market Value" of Common Stock -- The Fair Market
Value of a share of Common Stock on any particular date means the mean of the
high and low prices of the Common Stock on the relevant date or, if no sale was
made on such date, then on the next preceding day on which such a sale was made
(a) if the Common Stock is listed on the New York Stock Exchange, as reported on
the New York Stock Exchange Composite Transactions listing (or similar report),
or (b) if the Common Stock is listed on the NASDAQ National Market System, then
as reported on such system, or (c) if not listed on either the New York Stock
Exchange or the NASDAQ National Market System, as determined by the Board or
Committee.
(o) "Incentive Stock Option" -- A Stock Option that meets the
requirements of Section 422 of the Code.
(p) "Non-Employee Director" -- A Director who is not an
employee of the Company.
(q) "Notice of Award" -- Any notice by the Committee to a
Participant that advises the Participant of the grant of an Award or sets forth
terms, conditions, and restrictions applicable to an Award.
(r) "Participant" -- Any person to whom an Award has been
granted under this Plan.
(s) "Performance-Based Stock Award" -- A Stock Award granted
to a Participant pursuant to Section 7.
(t) "Restricted Stock" -- An Award of Common Stock subject to
restrictions or risk of forfeiture.
(u) "Rule 16b-3" -- Rule 16b-3 under the Exchange Act as the
same may be amended, modified, superseded or replaced from time to time.
(v) "Section 162(m) " -- Section 162(m) of the Code, together
with the regulations promulgated by the Internal Revenue Service thereunder, as
the same may be amended, modified, superseded or replaced from time to time.
4
<PAGE> 5
(w) "Stock Appreciation Right" -- This term has the meaning
given to it in Section 6(b)(ii).
(x) "Stock Award" -- This term has the meaning given to it in
Section 6(b)(iii).
(y) "Stock Equivalent Unit" -- An Award that is valued by
reference to the value of Common Stock.
(z) "Stock Option" -- This term has the meaning given to it in
Section 6(b)(iv).
3. ELIGIBILITY. All key employees of the Company and its Affiliates,
including officers whether or not Directors, and all Non-Employee Directors are
eligible for the grant of Awards, except that Non-Employee Directors shall not
be eligible for the grant of Performance-Based Stock Awards under Section 7. The
selection of Participants to receive Awards will be within the discretion of the
Committee. More than one Award may be granted to the same Participant
4. COMMON STOCK AVAILABLE FOR AWARDS; ADJUSTMENT.
(a) NUMBER OF SHARES OF COMMON STOCK. Subject to adjustment as
provided for in Section 4(d) and subject to this Section 4(a), the aggregate
number of shares of Common Stock that may be subject to Awards granted under
this Plan shall be 1,000,000 shares of Common Stock. The assumption of awards
granted by an organization acquired by the Company, or the grant of Awards under
this Plan in substitution for any such awards, will not reduce the number of
shares of Common Stock available for the grant of Awards under this Plan.
Common Stock subject to an Award that expires or is forfeited,
terminated, or canceled will again be available for grant under this Plan,
without reducing the number of shares of Common Stock available for grant of
Awards under this Plan, except to the extent that the availability of those
shares of Common Stock would cause this Plan or any Awards granted under this
Plan to fail to qualify for the exemption provided by Rule 16b-3. If a
Participant pays all or part of the exercise price of an Award by the transfer
of shares of Common Stock or the surrender (including by attestation) of all or
part of an Award (including the Award being exercised), such number of shares of
Common Stock so transferred, or the number of shares of Common Stock
attributable to the portion of the Award so surrendered, shall also be available
for grant under this Plan. The number of shares of Common Stock attributable to
any Award that is settled in cash without the actual issuance of any shares of
Common Stock shall, upon such settlement, also be available for grant under this
Plan.
(b) LIMITATIONS ON CERTAIN AWARDS. (i) The aggregate number of
shares of Common Stock that may be issued upon exercise of Incentive Stock
Options is 1,000,000.
5
<PAGE> 6
(ii) The maximum number of shares with respect to which Options
(including Incentive Stock Options) and Stock Appreciation Rights may be granted
under this Plan in any period of three fiscal years to any individual
Participant is 250,000.
(iii) The aggregate number of shares of Restricted Stock (other than
Restricted Stock which is a Performance-Based Stock Award) that may be awarded
under this Plan is 200,000.
(iv) The maximum number of shares with respect to which Options,
Stock Appreciation Rights and Restricted Stock may be granted under this Plan in
any one fiscal year to a Non-Employee Director is 10,000.
(v) No Participant who is an employee may be awarded
Performance-Based Stock Awards in any one fiscal year in excess of an aggregate
of 50,000 shares of Common Stock.
(c) NO FRACTIONAL SHARES. No fractional shares will be issued, and
the Committee will determine the manner in which the value of fractional shares
will be treated.
(d) ADJUSTMENT. In the event of any change in the number of shares
of Common Stock by reason of a merger, consolidation, reorganization,
recapitalization, or similar transaction, or in the event of a stock dividend,
stock split, or distribution to stockholders (other than normal cash dividends),
the Committee will adjust the number and class of shares that may be issued
under this Plan, the number and class of shares subject to outstanding Awards,
the exercise price applicable to outstanding Awards, and the Fair Market Value
of the shares of Common Stock and other value determinations applicable to
outstanding Awards.
6
<PAGE> 7
5. ADMINISTRATION.
(a) COMMITTEE. This Plan will be administered by the Committee. The
Committee will, subject to the terms of this Plan, have the authority to: (i)
select the eligible employees and Non-Employee Directors who will receive
Awards, (ii) grant Awards, (iii) determine the number and types of Awards to be
granted to employees and Non-Employee Directors, (iv) determine the terms,
conditions, vesting periods, and restrictions applicable to Awards, (v) adopt,
alter, and repeal administrative rules and practices governing this Plan, (vi)
interpret the terms and provisions of this Plan and any Awards granted under
this Plan, (vii) prescribe the forms of any Notices of Award, Award Agreements,
or other instruments relating to Awards, and (viii) otherwise supervise the
administration of this Plan. All decisions by the Committee will be made with
the approval of not less than a majority of its members. Except as provided in
the immediately following sentence, all decisions by the Committee will be made
with the approval of not less than a majority of its members. In furtherance and
not in limitation of the authority granted in clause (vi) of this paragraph, any
interpretation by a majority of the Incumbent Directors then serving on the
Committee as to whether a sale or other disposition of assets by the Company or
an acquisition of assets of another corporation constitutes a "sale or other
disposition of all or substantially all of the assets of the Company or the
acquisition of assets of another corporation" for purposes of clause (iii) of
the definition of "Change of Control" in Section 2(e) hereof shall be final and
binding for all purposes of this Plan and any Awards hereunder, notwithstanding
that the transaction in question was, or is contemplated to be, submitted to
stockholders of the Company for their approval and notwithstanding such
approval.
(b) DELEGATION. The Committee may delegate any of its authority to
any other person or persons that it deems appropriate, provided the delegation
does not cause this Plan or any Awards granted under this Plan to fail to
qualify for the exemption provided by Rule 16b-3 under the Exchange Act.
(c) DECISIONS FINAL. All decisions by the Committee, and by any
other person or persons to whom the Committee has delegated authority, will be
final and binding on all persons.
7
<PAGE> 8
6. AWARDS.
(a) GRANT OF AWARDS. The Committee will determine the type or types
of Awards to be granted to each Participant and will set forth in the related
Notice of Award or Award Agreement the terms, conditions, vesting periods, and
restrictions applicable to each Award. Awards may be granted singly or in
combination or tandem with other Awards, except to the extent that any grants in
combination or tandem would impair the exemption for performance based
compensation provided for under Section 162(m). Awards may also be granted in
replacement of, or in substitution for, other awards granted by the Company,
whether or not granted under this Plan, except that, with respect to
Performance-Based Stock Awards, the new Award must also be wholly contingent on
the attainment of performance goals established by the Committee; without
limiting the foregoing, if a Participant pays all or part of the exercise price
or taxes associated with an Award by the transfer of Common Stock or the
surrender of all or part of an Award (including the Award being exercised), the
Committee may, in its discretion, grant a new Award (which, in the case of
Awards intended to replace Performance-Based Stock Awards, must also be wholly
contingent on the attainment of performance goals established by the Committee)
to replace the shares of Common Stock that were transferred or the Award that
was surrendered. The Company may assume awards granted by an organization
acquired by the Company or may grant Awards in replacement of, or in
substitution for, any such awards. Except as provided in Section 4(d), and
notwithstanding any other provision of this Plan to the contrary, any reduction
in the exercise price of a Stock Option or Stock Appreciation Right previously
granted under this Plan, whether through amendment, cancellation or replacement
Awards or any other means, shall be subject to, and shall become effective only
upon, approval of the reduction in exercise price by the stockholders of the
Company.
(b) TYPES OF AWARDS. Awards may include, but are not limited to, the
following:
(i) STOCK APPRECIATION RIGHT -- A right to receive a
payment, in cash or Common Shares, equal to the excess of (A) the
Fair Market Value of a specified number of shares of Common Stock on
the date the right is exercised over (B) the Fair Market Value on
the date the right is granted. The right may be conditioned upon the
occurrence of certain events, such as a Change of Control of the
Company, or may be unconditional, as determined by the Committee.
(ii) STOCK AWARD -- An Award that is made in Common
Stock, Restricted Stock, or Stock Equivalent Units or that is
otherwise based on, or valued in whole or in part by reference to,
the Common Shares, including Performance-Based Stock Awards. All or
any part of any Stock Award may be subject to such conditions,
restrictions, and risks of forfeiture, as and to the extent
established by the Committee and, with respect to Performance-Based
Stock Awards, such conditions and restrictions as may be required
under Section 162(m), so that the Performance-Based Stock Awards
constitute performance-based compensation thereunder. Subject to
Section 11 and Section 12 below, all Stock Awards made in Restricted
Stock shall be subject to risk of
8
<PAGE> 9
forfeiture upon termination of employment for any reason for a
period of not less than three years from the date of grant. Stock
Awards may be based on the Fair Market Value of the Common Stock, or
on other specified values or methods of valuation, as determined by
the Committee.
(iii) STOCK OPTION -- A right to purchase a specified
number of shares of Common Stock, during a specified period, and at
a specified exercise price, all as determined by the Committee. A
Stock Option may be an Incentive Stock Option or a Stock Option that
does not qualify as an Incentive Stock Option (a "non-qualified
Stock Option"). In addition to the terms, conditions, vesting
periods, and restrictions established by the Committee, Incentive
Stock Options must comply with the requirements of Section 422 of
the Code. The exercise price of a Stock Option, including a
non-qualified Stock Option, may be no less than the Fair Market
Value of the Common Shares on the date the Stock Option is granted.
(v) PERFORMANCE-BASED STOCK AWARDS -- A Stock Award
granted to a Participant pursuant to Section 7.
7. PERFORMANCE-BASED STOCK AWARDS.
The Committee may, in its discretion, grant Stock Awards valued by
reference to shares of Common Stock that are wholly contingent on the attainment
of performance goals established by the Committee from time to time. The
performance goals will relate to one or more of the following performance
measures, as determined by the Committee for each applicable performance period:
(i) return to stockholders, (ii) cash flow, (iii) return on equity, (iv) Company
created income (for example, income due to Company initiated cost reductions or
productivity improvements), (v) sales growth, (vi) earnings and earnings growth,
(vii) return on assets, (viii) stock price, (ix) earnings per share, (x) market
share, (xi) customer satisfaction, and (xii) safety and/or environmental
performance. Any such performance goals and the applicable performance measures
will be determined by the Committee at the time of grant and reflected in a
written award agreement. The foregoing performance goals and performance
criteria shall have any reasonable definitions that the Committee may specify,
which may include or exclude any or all of the following items, as the Committee
may specify: extraordinary, unusual or non-recurring items; effects of
accounting changes; effects of currency fluctuations; effects of financing
activities (e.g., effect on earnings per share of issuing convertible debt
securities); expenses for restructuring or productivity initiatives;
non-operating items; acquisition expenses (e.g., pooling of interests); and
effects of divestitures. Any such performance goals or combination of such goals
may apply to the Participant's Performance-Based Stock Award in its entirety or
to any designated portion or portions of the Performance-Based Stock Award, as
the Committee may specify. The number or value of Performance-Based Stock Awards
that will be paid out to any Participant at the end of the applicable
performance period will depend on the extent to which the Company attains the
established performance goals. No performance period shall be less than one year
long, but the performance period may, in the discretion of the Committee, be
longer than one year.
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<PAGE> 10
8. DEFERRAL OF PAYMENT.
With the approval of the Committee, the delivery of the Common
Stock, cash, or any combination thereof subject to an Award may be deferred,
either in the form of installments or a single future delivery. The Committee
may also permit selected Participants to defer the payment of some or all of
their Awards, as well as other compensation, in accordance with procedures
established by the Committee to assure that the recognition of taxable income is
deferred under the Code. Deferred amounts may, to the extent permitted by the
Committee, be credited as cash or Stock Equivalent Units. The Committee may also
establish rules and procedures for the crediting of interest on deferred cash
payments and dividend equivalents on Stock Equivalent Units.
9. PAYMENT OF EXERCISE PRICE. The exercise price of a Stock Option
and any Stock Award for which the Committee has established an exercise price
may be paid in cash, by the transfer of Common Stock, by the surrender of all or
part of an Award (including the Award being exercised), or by a combination of
these methods, as and to the extent permitted by the Committee. The Committee
may prescribe any other method of paying the exercise price that it determines
to be consistent with applicable law and the purpose of this Plan.
In the event shares of Restricted Stock are used to pay the exercise
price of a Stock Award, a number of the shares of Common Stock issued upon the
exercise of the Award equal to the number of shares of Restricted Stock used to
pay the exercise price will be subject to the same restrictions as the
Restricted Stock,
10. TAXES ASSOCIATED WITH AWARD. Prior to the payment of an Award,
the Company may withhold, or require a Participant to remit to the Company, an
amount sufficient to pay any Federal, state, and local taxes associated with the
Award. The Committee may, in its discretion and subject to such rules as the
Committee may adopt, permit a Participant to pay any or all taxes associated
with the Award in cash, by the transfer of Common Stock, by the surrender of all
or part of an Award (including the Award being exercised), including
Performance-Based Stock Awards, or by a combination of these methods. The
Committee may permit a Participant to pay any or all taxes associated with an
Incentive Stock Option in cash, by the transfer of Common Stock, or by a
combination of these methods.
11. TERMINATION OF EMPLOYMENT. Subject to Section 12, if the
employment of a Participant terminates for any reason, all unexercised,
deferred, and unpaid Awards may be exercisable or paid only in accordance with
rules established by the Committee. Subject to the foregoing exception, these
rules may provide, as the Committee deems appropriate, for the expiration,
continuation, or acceleration of the vesting of all or part of the Awards.
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<PAGE> 11
12. CHANGE OF CONTROL. In the event of a Change of Control of the
Company, unless and to the extent otherwise determined by the Board of
Directors, (i) all Stock Appreciation Rights and Stock Options then outstanding
will become fully exercisable as of the date of the Change of Control and (ii)
all restrictions and conditions applicable to Restricted Stock and other Stock
Awards, including Performance-Based Stock Awards, will be deemed to have been
satisfied as of the date of the Change of Control. Any such determination by the
Board of Directors that is made after the occurrence of a Change of Control will
not be effective unless a majority of the Directors then in office are
Continuing Directors and the determination is approved by a majority of the
Continuing Directors.
Notwithstanding any other provision of this Plan, during the 60-day
period from and after a Change of Control (the "Exercise Period"), unless the
Committee shall determine otherwise at the time of grant, an optionee shall have
the right, whether or not the Stock Option is fully exercisable and in lieu of
the payment of the exercise price for the shares of Common Stock being purchased
under the Stock Option and by giving notice to the Company, to elect (within the
Exercise Period) to surrender all or part of the Stock Option to the Company and
to receive cash, within 30 days of such notice, in an amount equal to the amount
by which the Change of Control Price per share of Common Stock on the date of
such election shall exceed the exercise price per share of Common Stock under
the Stock Option (the "Spread") multiplied by the number of shares of Common
Stock granted under the Stock Option as to which the right granted under this
Section shall have been exercised.
13. AMENDMENT, SUSPENSION, OR TERMINATION OF THIS PLAN; AMENDMENT OF
OUTSTANDING AWARDS.
(a) AMENDMENT, SUSPENSION, OR TERMINATION OF THIS PLAN. The
Board of Directors may amend, suspend, or terminate this Plan at any time.
Stockholder approval for any such amendment will be required only (i) to the
extent necessary to preserve the exemption provided by Rule 16b-3 for this Plan
and Awards granted under this Plan or (ii) if the proposed amendment would
materially increase the benefits accruing to Participants under this Plan.
(b) AMENDMENT OF OUTSTANDING AWARDS. The Committee may, in its
discretion, amend the terms of any Award, including, waiving, in whole or in
part, any restrictions or conditions applicable to, or accelerating the vesting
of, any Award, prospectively or retroactively, but no such amendment may impair
the rights of any Participant without his or her consent or cause Awards
intended to qualify as performance based compensation under Section 162(m) to
fail to so qualify.
14. AWARDS TO FOREIGN NATIONALS AND EMPLOYEES OUTSIDE THE UNITED
STATES. To the extent that the Committee deems appropriate to comply with
foreign law or practice and to further the purpose of this Plan, the Committee
may, without amending this Plan, (i) establish special rules applicable to
Awards granted to Participants who are foreign nationals, are employed outside
the United States, or both, including rules that diff er from those set forth in
this Plan, and (ii) grant Awards to such Participants in accordance with those
rules.
11
<PAGE> 12
15. NONASSIGNABILITY. Unless otherwise determined by the Committee,
(i) no Award granted under this Plan may be transferred or assigned by the
Participant to whom it is granted other than by will, pursuant to the laws of
descent and distribution, or pursuant to a qualified domestic relations order
and (ii) an Award granted under this Plan may be exercised, during the
Participant's lifetime, only by the Participant or by the Participant's guardian
or legal representative; except that, no Incentive Stock Option may be
transferred or assigned pursuant to a qualified domestic relations order or
exercised, during the Participant's lifetime, by the Participant's guardian or
legal representative.
16. GOVERNING LAW. The interpretation, validity, and enforcement of
this Plan will, to the extent not governed by the Code or the securities laws of
the United States, be governed by the laws of the State of Ohio.
17. RIGHTS OF EMPLOYEES. Nothing in this Plan will confer upon any
Participant the right to continued employment by the Company or limit in any way
the Company's right to terminate any Participant's employment at will.
18. EFFECTIVE AND TERMINATION DATES.
(a) EFFECTIVE DATE. This Plan became effective on April 19,
1999, the date the stockholders approved the Plan.
(b) TERMINATION DATE. This Plan will continue in effect until
terminated by the Board of Directors.
12
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS OF THE GEON COMPANY AND SUBSIDIARIES AS OF JUNE 30,
1999 AND DECEMBER 31, 1998 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME FOR
THE THREE AND SIX MONTH PERIODS ENDED JUNE 30, 1999 AND 1998 AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-01-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 55
<SECURITIES> 0
<RECEIVABLES> 138
<ALLOWANCES> 3
<INVENTORY> 116
<CURRENT-ASSETS> 337
<PP&E> 731
<DEPRECIATION> 492
<TOTAL-ASSETS> 913
<CURRENT-LIABILITIES> 236
<BONDS> 127
0
0
<COMMON> 3
<OTHER-SE> 300
<TOTAL-LIABILITY-AND-EQUITY> 913
<SALES> 623
<TOTAL-REVENUES> 623
<CGS> 504
<TOTAL-COSTS> 571
<OTHER-EXPENSES> (87)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 6
<INCOME-PRETAX> 130
<INCOME-TAX> 50
<INCOME-CONTINUING> 80
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 2
<NET-INCOME> 78
<EPS-BASIC> 3.37
<EPS-DILUTED> 3.23
</TABLE>
