1
Exhibit 13
The Geon Company - 1997 Annual Report
Leadership,
Growth & Innovation
in Polymers
[THE GEON COMPANY LOGO]
2
ABOUT THE COMPANY
The Geon Company, headquartered in Avon Lake, Ohio, is the world's largest
manufacturer and marketer of polyvinyl chloride (PVC) compounds and a leading
North American producer of PVC resins. With the 1997 acquisition of Synergistics
Industries Limited, the Company has 17 manufacturing plants in the United States
and Canada, as well as joint ventures in Europe, Australia, Singapore and the
United States. Since Geon became an independent enterprise in 1993, our
employees have dedicated themselves to creating the benchmark company within the
chemical industry. We have achieved much of this goal through leadership in
technology, operational safety, environmental performance, manufacturing
productivity and by delivering value to our customers.
ABOUT THIS ANNUAL REPORT
In prior annual reports, we have highlighted different aspects of Geon such
as our markets, our business teams, our manufacturing facilities, and our
environmental and safety performance. This year, our theme is Geon's strategic
focus on growth and cost reduction. The success of our strategy hinges on the
efforts of all 2,000 of our employees and their drive to make Geon the best in
our industry.
GEON AT A GLANCE
- ---------------------------------------------------------------------------------------------------------------
VINYL SUSPENSION/ SPECIALTY
CHLORIDE MASS DISPERSION
PRODUCTS RAW MATERIALS MONOMER RESINS RESINS
- ---------------------------------------------------------------------------------------------------------------
LOCATIONS McIntosh, Alabama LaPorte, Texas Deer Park, Texas Henry, Illinois
Chlor-alkali joint Henry, Illinois Pedricktown,
venture with Olin Louisville, Kentucky New Jersey
Corporation Niagara Falls, Ontario,
Orangeville, Ontario, Canada
Canada Pedricktown, New Jersey
Plasticizers Scotford, Alberta,
St. Remi de Napierville, Canada
Quebec, Canada Altona, Victoria,
Plasticizers Australia(J.V.)*
- ---------------------------------------------------------------------------------------------------------------
CAPACITIES 250,000 TONS CHLORINE 2.4 BILLION POUNDS 2.6 BILLION POUNDS 220 MILLION
50 MILLION POUNDS PER YEAR PER YEAR POUNDS
PLASTICIZERS PER YEAR PER YEAR
- ---------------------------------------------------------------------------------------------------------------
APPLICATIONS Chlorine-Feedstock Feedstock Water & drainage piping Floorings
& MARKETS for VCM for PVC House siding Coatings
Plasticizers-Additives polymerization Medical tubing / bags
for flexible compounds Packaging
Windows
Calendered goods
- ---------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------
COMPOUNDS SERVICE
- ---------------------------------------------------------------------------
LOCATIONS Avon Lake, Ohio Avon Lake, Ohio
Conroe, Texas Polymer
Farmington, New Jersey Diagnostics, Inc.
Lindsay, Ontario, Canada
Long Beach, California
Louisville, Kentucky
Niagara Falls, Ontario, Canada
Orangeville, Ontario, Canada
Plaquemine, Louisiana
St. Remi de Napierville, Quebec,
Canada
Terre Haute, Indiana
Valleyfield, Quebec, Canada
Mentone, Victoria, Australia(J.V.)*
Newton Aycliffe, England (J.V.)*
Singapore (J.V.)*
- ---------------------------------------------------------------------------
CAPACITIES 1.1 BILLION POUNDS PER YEAR
- ---------------------------------------------------------------------------
APPLICATIONS Appliance housings & components Analytical
& MARKETS Computer enclosures services &
Electrical enclosures testing
Pipe fittings
Vertical blinds
Windows
Wire & cable insulation & jacketing
Weatherstripping
Automotive components
- ---------------------------------------------------------------------------
*J.V.=Joint Venture
3
The Geon Company
Year Ended December 31
----------------------------------
(Dollars in Millions, Except Per Share Data) 1997 1996 1995
- -----------------------------------------------------------------------------------------
Sales ............................................... $1,250.0 $1,144.4 $1,267.8
Employee separation and plant phase-out ............. 15.0 - 63.9
Operating income .................................... 52.0 29.9 63.3
Net income .......................................... 22.5 12.2 32.2
Capital expenditures ................................ 50.9 73.4 70.0
Depreciation and amortization ....................... 53.3 54.1 56.6
Total debt .......................................... 227.6 156.8 147.2
Average equity market value ......................... 494.7 580.2 680.9
Stockholders' equity ................................ 223.8 222.4 208.9
Earnings per share, basic ........................... $ .98 $ .51 $ 1.28
Common shares outstanding (in millions, year-end) ... 23.2 23.3 24.7
Number of employees (year-end) ...................... 2,010 1,683 1,725
Employee and management stock ownership ............. 14% 12% 8%
Stockholders (estimated as of December 31) .......... 7,000 7,000 7,000
1997 SALES
BY GEOGRAPHIC REGION
$ MILLIONS
[PIE CHART]
CANADA $246.6 20%
NA EXPORT $36.2 3%
AUSTRALIA $51.5 4%
US $915.7 75%
1997 SALES BY PRODUCT
$ MILLIONS
[PIE CHART]
PERFORMANCE POLYMERS & SERVICES 49%
$606.7
- COMPOUNDS
- SPECIALTY DISPERSION RESINS
- SYNERGISTICS
VCM $7.4
OTHER $82.1
SUSPENSION/MASS RESINS $553.8 44%
GEON SALES AND SHIPMENTS
[LINE CHART]
Index, 1992 = 100
$ Millions In Pounds
Dollars Total Shipments, Resins & Compounds, North America
1992 894.3 100
1993 972.5 100
1994 1,208.6 110
1995 1,267.8 106
1996 1,144.4 122
1997 1,250.0 133
GEON SALES PER EMPLOYEE
[LINE CHART]
Pounds Shipped Per Employee
Index, 1992 = 100
1992 100
1993 115
1994 136
1995 137
1996 162
1997 178
1
4
The Geon Company
TO OUR STOCKHOLDERS:
[PHOTO]
William F. Patient, left, and Thomas A. Waltermire
1997 was a defining year in which we took some critical steps to position Geon
for the 21st century. We have been laying the groundwork for these actions ever
since Geon became an independent company in 1993. Now, with 1997 complete, we
look back with satisfaction at Geon's improved financial results in the face of
very competitive market conditions -- and ahead with anticipation at our
significant potential for earnings growth.
A YEAR OF HARD-WON EARNINGS IMPROVEMENT
We achieved 1997 sales of $1.25 billion and net income of $31.7 million, or
$1.38 per share basic, before a previously announced charge for employee
separation costs. In 1996, sales totaled $1.1 billion and net income was $12.2
million, or $0.51 per share basic. We are especially pleased with the impressive
gains in net income and earnings per share.
These results were achieved despite the fact that polyvinyl chloride (PVC)
resin margins sank to historic lows for the second consecutive year. Industry
resin cash margins (the difference between the market price for pipe PVC resin
and market prices for the key raw materials used to produce PVC resin) fell
roughly 1.0 cent per pound year over year. Each 1.0 cent-per-pound change
impacts earnings by roughly $0.50 per share.
In the face of tough industry conditions, Geon increased earnings $0.87 per
share before a special charge. This accomplishment stemmed, in part, from past
cost reduction efforts such as the LaPorte vinyl chloride monomer (VCM) plant
expansion, as well as sales growth and improved profit performance in compounds
and specialty dispersion resins.
2
5
Overall, Geon shipments of resins and compounds combined increased 7
percent in 1997. Industrywide, North American resin shipments grew approximately
6 percent including exports, or 3 percent excluding exports. With industry
capacity increasing approximately 7 percent, overall capacity utilization did
not improve, leading to further reduction in industry cash margins. Most PVC
industry market segments experienced good growth: pipe, 3 percent; siding, 6
percent; and windows, 12 percent.
As we do each year, we established Company income improvement goals,
excluding the impact of cash margins, and we slightly exceeded our $50 million
target for 1997. We have set another goal of $60 million in improved Geon
earnings power through 2000.
A NEW STRUCTURE FOR A NEW FUTURE
In 1997, we implemented a new operating strategy for Geon, with the
formation of separate operating units focused on key market segments and the
appointment of general managers to lead them. This structure allows us to
readily add new business units and to focus on cost reduction and growth. With
more functional responsibility, the general managers already are helping to
drive change and provide more direct accountability for results. (Details of our
strategic planning can be found on pages 6 and 7.)
In February 1998, Chief Operating Officer Tom Waltermire was named
president, and the Board of Directors nominated him for election to the board at
the annual stockholders' meeting on May 7, 1998. David Wilson was appointed vice
president and chief financial officer in mid-1997.
In May 1997, we announced a voluntary early retirement program. As a
result, 73 individuals from our headquarters and research and development staffs
elected to retire by the end of 1998. To cover these costs, we took a one-time
pre-tax charge of $15 million in the second quarter. Savings will reach $11
million annually by 1999.
SEEKING NEW APPROACHES TO REWARD OUR STOCKHOLDERS
In the years immediately following Geon's inception, we focused primarily
on what we called "fixing the business": making the hard choices necessary to
improve the profitability of our resin and compound operations. Having achieved
substantial cost reductions and sales growth, we were able, as promised, to earn
improved operating returns for our stockholders even at the bottom of a
protracted margin trough.
Yet, we know we need to do more to grow and create substantial stockholder
value. Two important decisions emerged from our planning:
- OUR VALUE-ADDED MARKET SEGMENTS -- COMPOUNDS AND SPECIALTY DISPERSION
RESINS -- SHOULD BE EXPANDED THROUGH TOP-LINE GROWTH AND ACQUISITIONS.
The acquisition of Synergistics Industries Limited in fourth-quarter 1997
was a major first step in executing our strategy. Through this $86.5 million
transaction, our compound operation grew nearly 50 percent. This acquisition
will be immediately accretive to earnings in 1998, before any merger synergies
are achieved.
Synergistics operates six plants, with shipments almost equally split
between Canada and the United States. The company brings important non-PVC
products that fit well with Geon's market strengths.
We created another value-added business opportunity in 1997: Polymer
Diagnostics, Inc., which allows clients to take advantage of our
state-of-the-art research and testing facilities. We will market these
capabilities to a wide range of clients who need our testing and problem-solving
skills in polymer sciences.
"We take our commitment
to create stockholder value very personally. The belief
and pride that stem from this commitment are driving the
changes you see at Geon."
3
6
TO OUR STOCKHOLDERS: continued
"We are confident that the
changes we are implementing
will make Geon an even
more attractive and desirable
investment opportunity
in the future."
- GEON'S PVC/VCM OPERATIONS MUST FOCUS ON OPERATIONAL EXCELLENCE WHILE
BECOMING MORE BACKWARD INTEGRATED.
Prior to 1997, we made substantial improvements in our PVC resin operations
to become a very cost-competitive player within the industry. Yet, we know that
for resins to remain cost competitive, we need to lower our acquisition costs
for chlorine and ethylene, the key raw materials used to produce PVC. In 1997,
we took major steps to create more raw material integration.
Our 50/50 chlor-alkali joint venture with Olin Corporation, which started
up in the fourth quarter of 1997, will supply about 35 percent of our chlorine
needs at below-market costs. In addition, we recently reached agreement with
Bayer Corporation to take byproduct hydrogen chloride by pipeline from Bayer's
Baytown, Texas, plant. With startup of this arrangement in third-quarter 1998,
we will have about 65 percent of our chlorine needs supplied at near-integrated
economics, at a substantially lower investment.
Effective ethylene sourcing is equally critical. We are exploring a range
of strategic alternatives to realize our objective: integrated ethylene
economics at the lowest possible capital investment.
STRIDES IN EFFICIENCY, INNOVATION AND SAFETY
Geon marked some additional milestones in 1997:
- Geon 2000, our SAP information system, came online within budget and on
time with enhanced customer service and manufacturing controls.
- Once again, Geon employees demonstrated their commitment by turning in
one of the strongest safety and environmental performances in our industry. The
details, highlighted on pages 16 and 17, showcase their achievements.
WITH BEST WISHES
In January 1998, Ed Martinelli, senior vice president for corporate
development, retired after a 34-year career with Geon. As a prominent
contributor to Geon's growth and success, Ed will be missed for his operational
expertise, dedication and vast experience.
Harry Hammerly, a member of our Board of Directors since 1994, has elected
to retire, effective with our 1998 annual stockholder meeting. Harry has
provided invaluable guidance to our Company, and we are grateful for his many
contributions.
LOOKING AHEAD
For Geon and our stockholders, the future holds exciting possibilities. We
have placed Geon on sound footing by cutting costs, improving productivity and
upgrading our systems. Our new structure gives us greater focus and a better
foundation for growth. We are confident that our performance in 1998 and beyond
will steadily improve.
Expansion of our value-added operation will continue through internal
growth and acquisitions.
Resins will benefit from further productivity gains and cost reductions
such as the chlor-alkali joint venture.
Geon employees and board members now own 14 percent of the outstanding
shares of Geon stock. We take our commitment to create stockholder value very
personally. The belief and pride that stem from this commitment are driving the
changes you see at Geon.
We are confident these changes will make Geon an even more attractive and
desirable investment opportunity in the future.
Sincerely,
/s/ William F. Patient
William F. Patient
Chairman of the Board and
Chief Executive Officer
/s/ Thomas A. Waltermire
Thomas A. Waltermire
President and Chief Operating Officer
March 2, 1998
4
7
The Geon Company
A SKILLED LEADERSHIP TEAM
CHARTS GEON'S GROWTH
Geon is committed to creating additional stockholder value through growth and
cost reduction. A team of senior leaders from all segments of the business has
developed a plan and is charged with delivering on this pledge.
[PHOTO]
/s/ Louis M. Maresca
Louis M. Maresca, Vice President and
General Manager, Resins
[PHOTO]
/s/ V. Lance Mitchell
V. Lance Mitchell, Vice President and
General Manager, Compounds
[PHOTO]
/s/ Gregory L. Rutman
Gregory L. Rutman, Vice President,
General Counsel and Secretary
[PHOTO[
/s/ W. David Wilson
W. David Wilson, Vice President and
Chief Financial Officer
[PHOTO]
/s/ A. Kim Aagaard
A. Kim Aagaard, President and Chief Executive
Officer, Synergistics Industries Limited
[PHOTO]
/s/ Clarence J. Nosal
Clarence J. Nosal, Vice President and
General Manager, Intermediates
[PHOTO]
/s/ Donald P. Knechtges
Donald P. Knechtges, Senior Vice President,
Business and Technology Development
[PHOTO]
/s/ Denis Belzile
Denis Belzile, General Manager,
Specialty Dispersion Resins
5
8
The Geon Company
FROM THE BEGINNING: ESTABLISHING THE FOUNDATION
Geon is spun off from The BFGoodrich Company as an independent company in 1993
COMPANY COMMITMENTS
- - Shut down older, inefficient facilities
- - Improve operating efficiencies to benchmark levels
- - Reduce overhead
- - Improve cash flow
- - Reward stockholders
ACTIONS
- - Eliminated high-cost capacity
- - Simplified business with redesigned and streamlined product line requiring
fewer raw materials
- - Reduced production downtimes and increased run rates
- - Reduced raw material costs
- Sunbelt chlor-alkali joint venture with Olin Corporation, started up
in fourth-quarter 1997, initially will provide 35 percent of Geon's
chlorine needs
- 800-million-pound expansion of LaPorte, Texas, plant, completed in
1996, eliminates most of Geon's need to purchase VCM at market prices
- - Rewarded employee performance and productivity increases
- Gainsharing and Success Sharing plans continue as meaningful
incentives
- - Repurchased more than 16 percent of outstanding shares
RESULTS
- - Increased resin capacity: more than 600 million pounds since 1992
- - Increased earnings capacity: more than $135 million at constant 1992
margins through productivity, growth, quality and cost reductions
- - Near doubling of shipments per employee since 1992
- - Reduction in head count: more than 40 percent since 1990 (prior to
Synergistics Industries Limited acquisition)
- - Increased returns to stockholders: through dividends and share repurchases,
more than 115 percent of net income, or more than $6 per share, since 1993
- - Benefits from Olin joint venture and Bayer Corporation agreement, which
will:
- Allow Company to source 65 percent of its chlorine needs at
below-market cost levels by third-quarter 1998
- Meet nearly 85 percent of Geon's chlorine needs after a potential Olin
joint venture plant expansion
- - Significant savings from LaPorte plant expansion
- - Alignment of employees' interests with those of stockholders:
- More than 50 percent of Success Sharing and management incentive
payouts in 1997 in restricted stock
- Employee share ownership increased to 14 percent
6
9
TOWARD THE NEXT CENTURY: CREATING GROWTH AND VALUE
COMPANY COMMITMENTS
- - Develop the next phase of Geon's strategy, with a focus on:
- Top-line growth in the value-added, differentiated operations,
including compounds and specialty dispersion resins
- Greater stockholder value through earnings growth
- Stronger integration in the resin and raw material operations
- Benchmark performance in PVC resins and compounds, with a goal of
another $60 million in operating income improvements through 2000
- Leadership in: value to customers, safety and environmental
performance, operational excellence, rewards to stockholders
ACTIONS
- - Restructuring
- Reorganized management structure around core units, enabling Company
to integrate new opportunities and acquisitions more easily
- Appointed general managers of units and gave them more functional
responsibility
- Appointed a president and chief operating officer
- Planned headquarters staff reduction of 15 percent by the close of
1998 to simplify business and lower cost structure
- - Realizing growth opportunities
- Acquired Synergistics Industries Limited, Canadian manufacturer of
plastic compounds and liquid plasticizers
- Formed Polymer Diagnostics, Inc. to expand Geon's industry-leading
testing and research capabilities
EXPECTED RESULTS
- - Company's strategic focus clearly established as a service and technology
leader in polymers
- - Benefits from Synergistics acquisition, which will:
- Contribute to earnings growth
- Complement Geon's product offerings
- Boost Geon's market strength in non-PVC products
- - Growth in more profitable differentiated operations; improved productivity
and cost competitiveness in resin operations
- - Earnings growth to reward stockholders
- - New ventures and acquisitions
- - Global opportunities, broadly based in compounding
7
10
The Geon Company
PERFORMANCE POLYMERS
AND SERVICES: NEW OPPORTUNITIES, VALUE-ADDED GROWTH
"Geon is the
largest merchant
compounder in the world.
We believe we have
the people, the systems
and the technology
to be the clear leader
globally."
-- V. Lance Mitchell, Vice President and
General Manager, Compounds
[PHOTO]
Geon's performance polymers and services units are composed of Geon's
compounding operations; Synergistics Industries Limited, the compounder we
acquired late in 1997; specialty dispersion resins; and Polymer Diagnostics,
Inc., the business venture we formed to market our internal research and testing
capabilities. These units provide technology and services -- the "value-added"
element -- to customers. They offer Geon the opportunity to increase earnings
through top-line growth.
COMPOUNDS: INNOVATION AND IMPROVEMENT
Geon has long been recognized as a leader in polyvinyl chloride (PVC)
compounding. From the 1950s, when Geon technologies produced some of the first
rigid compound formulations for pipe and siding, through the 1990s, when Geon
demonstrated the ability to mold PVC into complex parts for appliances and
business equipment, the Company has been at the forefront of most new compound
applications.
Compounding occurs when vinyl resin, a free-flowing powder, is mixed with
additives. The resulting compound can then be processed into useful products.
Depending upon which additives are used, vinyl compounds can be tough and
impact-resistant or soft and flexible.
Compounds have always been a critical component of Geon's overall business,
but in the late 1980s and earlier this decade, we were not achieving the
financial return expected from this value-added segment. So we focused our
efforts, streamlining our product line, improving manufacturing rates, reducing
production downtimes and eliminating high-cost capacity. As a result of these
efforts, since 1992:
- Sales per manufacturing employee have grown by 120 percent.
- Product quality complaints have decreased 65 percent.
- Shipments have increased an annual average of 5 percent.
- The number of discrete product offerings has decreased 41 percent.
- The number of raw materials purchased for manufacturing has decreased 40
percent.
8
11
Encouraged by our progress, we made some strategic decisions in 1997 to
accelerate our growth. We devised a new management structure and appointed a
general manager of compounds. A dedicated business team now has full-time
responsibility for compounds and the supporting functional areas. This
restructuring increases accountability and aligns costs more closely with the
compound operations.
ACQUISITION BRINGS GROWTH,
NEW SYNERGIES
A second strategic shift involves acquisition. In the fourth quarter of
1997, Geon acquired Synergistics Industries Limited, a manufacturer of a broad
line of plastic compounds and liquid plasticizers, for approximately $86.5
million. Synergistics, which in 1997 achieved record full-year sales of $240
million split equally between the United States and Canada, will operate
initially as a wholly owned subsidiary of Geon. The acquisition is expected to
be accretive to earnings in 1998.
Synergistics has six manufacturing plants and about 500 employees in the
United States and Canada. In addition to vinyl compounds, Synergistics brings to
Geon some new products, including cross-linked polyethylene, thermoplastic
elastomers and plasticizers.
[PHOTO]
Clockwise, from bottom:
David J. DiRienzo, Senior Manager, Engineering; John F. Dresch, Director -
Commercial; Phillip Donataccio, Director, Compound Manufacturing Operations;
David C. Honeycutt, Manager, Marketing Communications; Cynthia G. Tomasch,
Manager of Financial Analysis - Manufacturing and Distribution
9
12
The Geon Company
PERFORMANCE POLYMERS
AND SERVICES: NEW OPPORTUNITIES, VALUE-ADDED GROWTH
The combination of Synergistics' expertise with Geon's strengths in
specific markets should allow for rapid growth of these product offerings.
Moving forward, additional synergies can be expected from this pairing of two
complementary companies.
With the addition of Synergistics, Geon's compound capacity jumped nearly
50 percent. We also added capacity of 50 million pounds of plasticizer, an
important raw material in flexible PVC compounds.
SPECIALTY DISPERSION RESINS: TECHNOLOGY LEADERSHIP AND GROWTH
Our specialty dispersion resin unit provides uniquely performing products
and technology for the coatings, automotive and foam markets. This unit is
positioned to be an important contributor to our earnings growth.
Specialty dispersion resins are much finer in particle size than suspension
resins. When compounded with plasticizers (to produce plastisols), they take on
soft, flexible characteristics. They are used primarily in wire and metal
coatings, vinyl flooring, carpet backing, wall coverings and automotive
interiors, as well as in consumer goods such as toys.
[PHOTO]
Clockwise, from bottom:
Christopher J. Mohn, Director, Corporate Analysis; Joel A. Simmons, Manager,
Human Resources - Compounds; Ashok C. Shah, Director, Compound Technology;
Gregory P. Smith, Corporate Controller; Jean M. Miklosko, Treasurer
10
13
Specialty dispersion resins stand as an example of Geon's technology
leadership in providing products with unique benefits in processing
characteristics and performance.
Geon ranks as the largest among six North American producers with a market
share of approximately 28 percent. Focusing on operational excellence, Geon's
specialty dispersion resin unit has made significant improvements the last five
years in manufacturing and customer service performance as well as in product
quality. On-time shipments have increased and quality performance has improved.
Since 1992, production per manufacturing employee has increased 70 percent.
Geon's strategic objectives through the end of the century include becoming
the preferred North American supplier of specialty dispersion resins through
excellence in service, product consistency and application performance,
technology and innovation. Internally, we have acknowledged the importance of
this market by establishing a separate unit headed by a general manager.
POLYMER DIAGNOSTICS:
A NEW BUSINESS VENTURE
Looking beyond PVC resins and compounds, Geon found a new way to provide an
important service in 1997 when we formed Polymer Diagnostics, Inc., a wholly
owned subsidiary offering analytical, testing and problem-solving capabilities
to customers, suppliers, academic institutions and other clients in the area of
polymer sciences. Polymer Diagnostics illustrates Geon's entrepreneurial spirit
and benefits clients, who can take advantage of our state-of-the-art research
and testing facilities and collaborate with leading scientists and engineers in
the field of polymers.
As an example, a retail supplier of consumer products asked Polymer
Diagnostics to compare one of the supplier's household items to a competing
brand. Through testing and analysis, Polymer Diagnostics found that the client's
product was superior, but posed some cost challenges. On the strength of these
findings, the client made changes to stave off the competitive threat.
LOOKING FORWARD
Geon is strongly committed to its differentiated and value-added units,
which are key to earnings improvement. While continuing to drive toward lower
costs and higher productivity, we will seek growth opportunities, including
additional acquisitions.
"Synergistics and Geon
are natural partners.
This combination will
benefit all of our customers and stockholders."
-- A. Kim Aagaard, President and Chief Executive
Officer, Synergistics Industries Limited
[PHOTO]
"We have built a larger, more profitable
specialty dispersion resin unit that
firmly establishes
Geon's reputation
in the marketplace."
-- Denis Belzile, General Manager,
Specialty Dispersion Resins
[PHOTO]
11
14
The Geon Company
SUSPENSION/MASS RESINS
AND INTERMEDIATES: LOWERING COSTS, CREATING GROWTH
"The last five years have dramatically
demonstrated the importance of
being both a low-cost producer of
PVC and an integrated
manufacturer back
to key raw materials."
-- Louis M. Maresca, Vice President and
General Manager, Resins
[PHOTO]
Geon's suspension/mass resin and intermediates units, including the joint
venture with Olin Corporation, are driven largely by cost and productivity.
Because the largest PVC processors buy resin, then sell products in price-driven
markets such as pipe and siding, being a low-cost supplier is a competitive
necessity.
PVC RESINS: ACHIEVING LOWER COSTS
AND CREATING GROWTH
If 1996 was a challenging year for resins, then 1997 reinforced the tough
nature of this competitive business. Even so, Geon made significant strides
toward the goal of being a very cost-competitive supplier of PVC resins.
To run the resin operations more effectively, we restructured in 1997 into
separate business units. Employees from functional areas such as manufacturing,
sales, and research and development are now focused within the new resin
organization.
We continue to target a customer base that will grow faster than the
market. We have aligned with some of the best processors in our industry, and we
are matching our customers with our plant capabilities to improve logistics
costs. By increasing our productivity through debottlenecking, we are expanding
our resin capacity in low-cost increments to meet our customers' growing needs.
With an emphasis on operational excellence in every phase of the resin
business, Geon has achieved substantial cost improvements. Our new SAP
information system (see page 18) is a valuable tool in our drive for added
efficiencies. By increasing inventory turns, improving product quality,
increasing reactor productivity, controlling logistics and utility costs, and
improving customer forecasts, we have made benchmark improvements despite
intensely competitive business conditions.
These efforts, built on five years of hard work, have yielded major
improvements in resins. Since 1992:
- Shipments have grown an average 6 percent per year versus market growth
of 5 percent.
- Productivity per manufacturing employee has increased 122 percent.
- Inventory turns have improved 15 percent.
Despite these achievements, PVC industry supply/demand conditions continue
to intensify the competitive nature of this business. The 1997 addition of
approximately 7 percent to North American capacity more than offset industrywide
growth in demand of roughly 6 percent. A 6 percent increase in
12
15
capacity is anticipated in 1998. With interest rates expected to remain low, and
building and construction to be at levels similar to those in 1997, North
American PVC demand is projected to grow 4 to 5 percent in 1998.
Recent trends have seen approximately 5 percent of North America's PVC
resin production shipped to Southeast Asia. Historically, Geon has not exported
significantly to this region. The current economic crisis in the region,
however, is expected to cause a slowdown in 1998 exports and a more competitive
PVC market globally, creating pressure on operating rates and margins.
INTERMEDIATES: PROVIDING LOW-COST VCM AND RAW MATERIALS
Like the other areas, intermediates was reorganized under a general manager
in 1997; it now includes our vinyl chloride monomer (VCM) licensing group.
1997 was the first full year of operation following the 800-million-pound
expansion of Geon's LaPorte, Texas, VCM plant. VCM made at LaPorte is a
low-cost, high-quality raw material that is polymerized into PVC at Geon's North
American resin plants. Since startup in 1996, the expanded plant has
demonstrated its leadership in VCM technology by attaining design throughput
rates and excellent raw material conversion efficiencies. LaPorte is an industry
benchmark -- the largest and, we believe, the lowest-cost VCM plant in the
world.
[PHOTO]
Clockwise, from bottom:
Anne L. Selcer, Manager, Human Resources - Intermediates; David D. Quester,
Director of Manufacturing Operations; Robert M. Rosenau, Business Director -
Suspension/Mass Resins; Jeffrey J. Gilgenbach, Controller - Intermediates; James
J. Schonaerts, Director, Feedstocks and Purchasing; Timothy G. Manning, Plant
Manager - LaPorte
13
16
The Geon Company
SUSPENSION/MASS RESINS
AND INTERMEDIATES: LOWERING COSTS, CREATING GROWTH
The LaPorte expansion, which brought the plant's total capacity to 2.4
billion pounds, reduces Geon's raw material costs because it enables us to
produce more VCM at below-market prices. The annual benefit of the LaPorte
expansion, based on average VCM market prices of the last three years, is
approximately $35 million.
Geon has long recognized the importance of trimming raw material costs so
we can realize our goal of being the low-cost provider in the PVC industry.
Having achieved full integration in VCM, we have been working toward integrated
economics in chlorine and ethylene as well.
In the last two years, fully integrated producers attained attractive
margins on chlorine and ethylene. Some industry observers believe this situation
exacerbated the over-supply in VCM/PVC, driving margins well below the last
trough in 1992-93. Fully integrated margins, however, were above those in
1992-93.
What does this mean for Geon? It reinforces our strategy of integration in
chlorine and ethylene to achieve a competitive cost position. We believe,
however, that we would do a disservice to our stockholders if we rushed into
backward integration. We
[PHOTO]
Clockwise, from bottom:
Barry M. Hendrix, Director, Sales - Resin; J. Philip Allison, Director,
International Resin Sales - EDC/VCM Marketing and Distribution; Ashok K.
Mendiratta, Director, Technology - Resin; Robert F. Kissling, Manager, Human
Resources - Resin; John L. Rastetter, Director, Planning/Business Development
14
17
need to capture the value of integration through either advantageous long-term
contracts or integration opportunities at better-than-industry capital
investments.
CHLORINE: INTEGRATED ECONOMICS, LOW CAPITAL INVESTMENT
An important step toward integration is the 250,000-ton chlor-alkali plant
in McIntosh, Alabama, under the Sunbelt Chlor-Alkali Partnership, a 50/50 joint
venture agreement between Geon and Olin Corporation. Startup occurred in
November 1997. The plant, which uses an innovative membrane cell technology, is
believed to be a benchmark in capital cost per electrical chemical unit. The
plant will supply approximately one-third of Geon's chlorine needs; Olin will
market the caustic soda. A future plant expansion to 400,000 tons can be readily
accommodated.
Geon also has an agreement with Bayer Corporation under which Bayer will
build and operate a 17-mile pipeline to transport byproduct anhydrous hydrogen
chloride from its Baytown, Texas, plant to Geon's nearby LaPorte plant. Geon is
building an oxychlorination facility that will use hydrogen chloride to produce
VCM, instead of using elemental chlorine. Startup is expected in the third
quarter of 1998.
The Bayer initiative, combined with the eventual expansion of the Olin
joint venture, positions Geon with integrated chlorine economics capable of
supplying approximately 85 percent of current needs. If both these projects had
been in place in 1995, the average yearly benefit would have equaled
approximately $ 0.67 per share -- and that gain would have been realized with
the lowest capital investment in the industry.
ETHYLENE: SEEKING FAVORABLE TERMS
As one of the largest merchant consumers of ethylene on the Gulf Coast,
Geon has always been an efficient buyer. For some time, we have been exploring
other options in ethylene. Economic integration in ethylene is important to us,
but we will carefully assess our needs and evaluate our options so that we find
the right opportunity for Geon.
A COMPANYWIDE COMMITMENT
We are confident that we can reduce costs and continue the cost-effective
growth of Geon's resin operations. We are becoming a stronger integrated, more
cost-competitive player, and we will add sales, capacity and value at low cash
costs. In this way, we will improve our competitiveness and fulfill our promise
to deliver earnings growth and value to our stockholders.
"We are in business
not to market VCM,
but to provide
the lowest-cost
raw materials to Geon's
resin and compound operations."
-- Clarence J. Nosal, Vice President and
General Manager, Intermediates
[PHOTO]
15
18
The Geon Company
SAFETY AND ENVIRONMENT: AN EXCELLENT SAFETY PERFORMANCE,
A "BEST-EVER" ENVIRONMENTAL YEAR
"We are steadfast
in our determination
to be the benchmark
company in the chemical
industry for safety
and environmental
performance."
-- Edward L. Beeler, Director,
Environmental, Health and Safety
[PHOTO]
It's no accident that Geon people post industry-leading safety and environmental
performances year after year. Geon has always placed a premium on operating
injury-free, curbing chemical emissions and reducing waste. Once again in 1997,
our employees displayed their extraordinary dedication by recording superb
results in these vital areas.
We do not exaggerate when we lay claim to being the benchmark company in
the chemical industry for safety and the environment. We are proud of our record
and determined to maintain our leadership position.
A BANNER SAFETY YEAR FOR PLANTS
With just 10 recordable injuries companywide, Geon employees equaled their
best-ever year for injury prevention, which was 1995.
Our plants had an exceptional year. While all 10 recordables in 1995
occurred at the plants, only six of the 1997 recordables were plant-related. The
year ended with no recordable injuries at our Deer Park, Henry, Pedricktown,
Plaquemine and Terre Haute facilities.
Given this superior performance, it's no surprise that a record 11 plants
met performance criteria for the Chairman's Safety Award. To qualify for this
Company honor, a site must have had no lost-time injury, defined as an
on-the-job injury that requires an employee to be away from the workplace at
least one day; a recordable injury rate consistent with Geon's challenging
targets; and no serious incidents such as fires or explosions.
The only shadow over Geon's 1997 safety performance was the first lost-time
injury in our North American operations in almost 31/2 years. It occurred in
June at One Geon Center headquarters. This incident ended a record period --
more than 14 million working hours -- without a lost-time injury in North
America.
Six of our plants continued in 1997 to compile remarkable track records for
operating without a lost-time injury. Deer Park has recorded no lost-time
injuries in the last 12 years, or 2.4 million working hours. The Henry and Terre
Haute plants have experienced 91/2 years
1997 GEON EMPLOYEE
SAFETY PERFORMANCE
[BAR CHART]
Incidence Rate (1)
TOTAL RECORDABLES LOST TIME
CMA companies over 2 million
hours/year 1.99 0.35
Geon (2) 0.47 0.05
(1) Injuries per 200,000 hours (or 100 employees/year)
(2) Full-year 1997 Geon statistics
16
19
each, or 3.7 million and 1.7 million working hours, respectively, without a
lost-time injury. Others with outstanding histories are Louisville at 8 1/2
years, or 4.1 million working hours; Pedricktown, 8 years, or 4 million working
hours; and Long Beach, 7 1/2 years, or 0.9 million hours, without a lost-time
injury.
A STAR IN LAPORTE'S CROWN
LaPorte distinguished itself in a unique way: It became the first Geon
plant to achieve STAR certification from the U.S. Occupational Safety and Health
Administration (OSHA) through participation in OSHA's Voluntary Protection
Program.
Of all the work sites across the country, only about 330 hold STAR
certification, OSHA's highest-level safety designation. To attain this select
status, LaPorte voluntarily underwent a rigorous, week-long safety audit, during
which it demonstrated compliance with 19 difficult elements comprising OSHA's
model worker safety plan. In September, the assistant secretary of labor
formally awarded STAR certification -- on LaPorte's first try.
A YEAR FOR ENVIRONMENTAL SUPERLATIVES
It's difficult to overstate Geon's environmental successes in 1997. We had
our best year ever in terms of reportable chemical releases and permit
exceedances, which we reduced by a full 50 percent in our North American
operations.
GEON PLANT EMISSIONS (1)
[LINE CHART]
In Pounds
REPORTING YEAR Water Off-site(2) Air
1987 13.17 43.94 42.89
1988 15.52 51.61 27.88
1989 14.56 5.39 20.87
1990 11.41 8.69 15.80
1991 10.57 7.46 22.72
1992 5.92 6.60 15.84
1993 2.95 21.23 14.80
1994 0.12 9.41 17.47
1995 1.05 1.94 18.55
1996 2.11 1.66 14.09
1997 1.73 2.32 13.80
(1) SARA Title III Emissions
(2) Landfill and others
Eight sites operated with no exceedances or releases. In this elite
category are the Avon Lake Technology Center and the Avon Lake, Long Beach,
Louisville, Niagara Falls, Pedricktown, Plaquemine and Terre Haute plants.
Pedricktown passed the four-year mark for perfect compliance.
Continued recycling and solid waste reduction initiatives at all Geon
plants diverted wastes from landfill disposal and produced significant savings
for the Company. In 1996, these combined efforts eliminated 14.5 million pounds
of material from landfills and yielded savings of $700,000. We do not yet have
comparable figures for 1997, but we believe we have sustained this positive
trend.
Worthy of mention is LaPorte, which achieved a 40 percent reduction in
wastewater treatment plant solid waste generation and a greater than 20 percent
reduction in overall waste.
Eight plants and the Avon Lake Technology Center met criteria for Geon's
W.C. Holbrook Environmental Award of Excellence. To qualify, a site must
demonstrate compliance with the national emission standard for hazardous air
pollutants for vinyl chloride, prevent exceedances/releases and meet specified
targets for waste reduction.
EMPLOYEES WIN RECOGNITION FOR GEON
Agencies, governmental organizations, trade associations and safety
councils honored Geon last year for commendable environmental and safety
performance in 1996. Among the highlights:
- For the ninth consecutive year, Geon received the Conrail Diamond Drop
Award for flawless shipping. This award recognizes companies that shipped at
least 1,000 rail cars of hazardous material during the year without a
shipper-caused release. Geon is the only shipper in the nation to be honored
every year since the award's inception.
- The Vinyl Institute presented a special award to Deer Park for 10
consecutive years of perfect compliance with national emission standards for
vinyl chloride.
- For minimizing air pollutant emissions, the Henry, LaPorte, Louisville,
Niagara Falls and Pedricktown plants earned the Vinyl Institute's Environmental
Achievement Award. Safety Performance Awards went to LaPorte, Pedricktown and
Scotford for outstanding worker safety records.
17
20
The Geon Company
GEON 2000: THE GEON 2000 INFORMATION SYSTEM:
ON TIME, ON BUDGET -- AND ONLINE
"So successful were
we in carrying out this project across our
organization that
Geon's implementation
is viewed as benchmark
by the industry."
-- Kenneth M. Smith,
Chief Information Officer
[PHOTO]
The Geon 2000 information system with SAP computer software technology was
installed companywide in 1997. Although we are still learning the full
capabilities of the system, we can point to many practical benefits for Geon and
our customers:
- When a customer calls with an order, we now can readily determine whether
we have the product in stock and, if not, when we can make it. Based on
inventory and production schedules, we can promise a very reliable delivery
date.
- Customer Operations can measure and report on-time deliveries each month,
which helps us improve customer service.
- In the resin supply chain, we can track and see the consequences of
production schedule breaks, which we have reduced to no more than a handful a
month.
- In compounds, SAP has played a key role in improved inventory planning,
order execution and distribution.
- SAP has had a tangible impact on Geon's ability to reduce freight costs.
We installed the SAP system in resins and intermediates in November 1996.
Compounds followed in February 1997. Implementation was seamless, allowing our
employees to continue working throughout the transition period. No customer or
manufacturing disruptions occurred as implementation took place on time and
within budget.
So successful were we in carrying out this project across our organization
that Geon's implementation is viewed as benchmark by the industry.
The SAP project stands as a shining example of Geon's ability to assemble a
cross-functional team from all levels of the organization to address a critical
issue. These dedicated people deserve our thanks for working long hours under
considerable pressure to ensure that the job was done right.
Now, our entire organization is linked on a real-time basis for faster
response. SAP is helping us serve our customers better, reduce our operating and
working capital costs, and run our business more efficiently.
The SAP system is the most visible component of our entire Geon 2000
initiative. More than just an information system, Geon 2000 was conceived as a
fundamental transformation in the way we do business. As a tool in this
re-engineering of our business processes, SAP is proving its worth daily.
We are nowhere near to tapping the system's full potential, so employee
training will remain a priority. We made an excellent start and now SAP and Geon
2000 are helping us serve our customers reliably and run our business smoothly.
18
21
The Geon Company and Subsidiaries
FINANCIAL SUMMARY
TABLE OF CONTENTS
Management's Analysis-Income...........20
Consolidated Statements of Income......21
Management's Analysis-Balance Sheets...22
Consolidated Balance Sheets............23
Management's Analysis-Cash Flows.......24
Consolidated Statements of Cash Flows..25
Consolidated Statements of Stockholders'
Equity........................26
Notes to Consolidated Financial
Statements....................27
Quarterly Data.........................35
Selected Six-Year Financial Data.......36
Report of Independent Auditors.........37
Corporate Information..................38
GEON EARNINGS AND NORTH AMERICAN
INDUSTRY RESIN MARGINS'
[LINE CHART]
Earnings before interest,
tax, depreciation, amortization
and employee separation and plant North American industry
phase-out costs resin margins
--------------- -------------
$ Millions Cents Per Pound
1992 54.0 4.0
1993 85.7 3.8
1994 163.5 6.9
1995 183.4 8.7
1996 89.7 1.2
1997 119.8 0.4
CAPTIAL EXPENDITURES
AND DEPRECIATION
[LINE CHART]
$ Millions
Capital Expenditures Depreciation
1992 72.2 58.9
1993 44.6 60.3
1994 61.5 58.2
1995 70.0 56.6
1996 73.4 54.1
1997 50.9 53.0
COMMON STOCK QUARTERLY PRICE RANGE
[BAR CHART]
High Low
1993
2nd 20.875 18.25
3rd 24.25 17.75
4th 24.0 19.125
1994
1st 30.0 23.25
2nd 30.875 25.625
3rd 30.125 25.25
4th 31.625 25.50
1995
1st 30.0 26.0
2nd 29.75 23.50
3rd 31.375 25.125
4th 26.75 23.375
1996
1st 28.375 24.375
2nd 28.75 22.5
3rd 25.125 18.125
4th 23.50 18.125
1997
1st 23.25 18.625
2nd 23.125 20.125
3rd 20.813 18.50
4th 24.188 20.375
19
22
The Geon Company and Subsidiaries
MANAGEMENT'S ANALYSIS - STATEMENTS OF INCOME
In 1997, the Company achieved new records in both resin and compound
shipments. Operating income, before a special charge for employee separation
costs, increased $37.1 million, or 124% over 1996 despite lower industry resin
margins (selling prices less the cost of key raw materials) in 1997 versus last
year. This improvement is the result of the Company's efforts to grow and expand
its value-added market segments, which consist of compounds and specialty
dispersion resins. In addition, the Company has further reduced the material and
operating costs of its resin operations with the April 1996 startup of its
LaPorte, Texas, vinyl chloride monomer (VCM) plant facility expansion and other
improvements. The acquisition of Synergistics Industries Limited (Synergistics)
was completed and became part of Geon's consolidated operations effective
October 31, 1997. While Synergistics had a strong two months of operations, its
impact on 1997 earnings was not significant, as a result of accounting
adjustments. We are confident that Synergistics will be accretive to earnings in
1998.
1997 INDUSTRY CONDITIONS - The Company believes that, based on the Society of
Plastics Industry's (SPI) December 1997 data, North American (U.S. and Canada)
producer shipments of polyvinyl chloride (PVC) resins (including exports) are
estimated to have increased 6% over 1996. In 1997, based on SPI data, export
shipments are estimated to have increased 33% over 1996. Domestic shipments
increased approximately 3% over last year.
Capacity utilization (shipments/capacity) for North America is estimated at
94% of effective capacity (88% of nameplate) in 1997. North American capacity
increased 7% over 1996.
The Company believes that average industry operating spreads for the
largest PVC resin market applications decreased approximately 1.0 cent per pound
in 1997 as compared with 1996. This decrease was the result of higher average
feedstock costs of approximately 20%, only partially offset by higher average
selling prices. In 1997, ethylene costs on average were approximately 15% higher
than in 1996. Average chlorine costs increased approximately one-third over 1996
levels.
1997 RESULTS OF OPERATIONS - The Company had sales of $1.25 billion for 1997, an
increase of 9% from 1996. The Company's unit shipment growth exceeded the
industry with increases in resin and compound of 7% and 17%, respectively. The
compound shipments increased 7%, excluding Synergistics. The Company's export
shipments in 1997 of both resin and VCM decreased from 1996 levels 24% and 88%,
respectively.
In 1997, the Company had operating income of $52 million and net income of
$22.5 million. Despite improved earnings, the Company continues to focus on cost
reductions and recorded a second-quarter pre-tax charge of $15 million ($9.2
million after tax) to cover costs associated with a voluntary early retirement
program. Construction was completed and a jointly owned chlor-alkali plant
commenced operations in November 1997. The plant will produce approximately
one-third of Geon's chlorine requirements at producer economics. During the
year, the Company further improved its resin production per unit of capacity and
compound manufacturing output per line hour. Further, the Company is pursuing
increased revenues in value-added market segments, which resulted in the
acquisition of Synergistics for approximately $86.5 million. In 1997,
employment, excluding the Synergistics acquisition, declined by 8%.
1996 INDUSTRY CONDITIONS - Total shipments were 11% higher than in 1995. The
effective capacity utilization rate in 1996 was 95%, or 1% higher than in 1995.
The 1996 average resin spreads were approximately 6.5 cents per pound below
1995.
1996 RESULTS OF OPERATIONS - The Company had sales of $1.14 billion for 1996, a
decrease of 10% from 1995. The Company's unit shipment growth exceeded the
industry with increases in resin and compound of 14% and 11%, respectively. The
unit sales growth was more than offset by decreases in resin selling prices.
Also, the VCM volume being exported substantially decreased from 1995.
In 1996, the Company had operating income of $29.9 million, down from
$127.2 million in 1995, excluding the 1995 special charge primarily associated
with the compound manufacturing reconfiguration. This decline in operating
income primarily resulted from the severe drop in industry resin spreads. The
lower 1996 resin spreads, as compared with 1995, decreased resin operating
income by approximately $110 million. During 1996, employment levels declined by
2%.
20
23
The Geon Company and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
Year Ended December 31,
--------------------------------------------------
(In Millions, Except Per Share Data) 1997 1996 1995
- --------------------------------------------------------------------------------------------------------------------
SALES $1,250.0 $1,144.4 $1,267.8
OPERATING COSTS AND EXPENSES:
Cost of sales .............................................. 1,133.6 1,061.8 1,090.2
Selling and administrative ................................. 49.4 52.7 50.4
Employee separation and plant phase-out .................... 15.0 -- 63.9
- --------------------------------------------------------------------------------------------------------------------
1,198.0 1,114.5 1,204.5
- --------------------------------------------------------------------------------------------------------------------
OPERATING INCOME .............................................. 52.0 29.9 63.3
Interest expense .............................................. (11.9) (10.8) (6.2)
Interest income ............................................... .7 1.4 1.8
Other (expense) income, net ................................... (6.2) .2 (6.5)
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES .................................... 34.6 20.7 52.4
Income tax expense ............................................ (12.1) (8.5) (20.2)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME .................................................... $ 22.5 $ 12.2 $ 32.2
====================================================================================================================
EARNINGS PER COMMON SHARE
Basic ...................................................... $ .98 $ .51 $ 1.28
- --------------------------------------------------------------------------------------------------------------------
Diluted .................................................... $ .95 $ .50 $ 1.24
====================================================================================================================
Weighted average shares used to compute earnings per share:
Basic ...................................................... 22.9 23.9 25.2
Diluted .................................................... 23.6 24.6 25.9
- --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
21
24
The Geon Company and Subsidiaries
MANAGEMENT'S ANALYSIS - BALANCE SHEETS
The consolidated balance sheet at December 31, 1997, reflects the solid
financial position of The Geon Company.
ASSETS - Total assets increased by 18% to $872.9 million at December 31, 1997.
The change in assets is primarily related to the acquisition of Synergistics.
Other assets include the intangibles associated with the Synergistics
acquisition and the Company's equity investments. Included in the equity
investments is the Company's 50% participation in a chlor-alkali joint venture
and an Australian joint venture with Orica Limited (formerly ICI Australia). The
Australian joint venture commenced operations in August 1997, with the Company
contributing most of the assets of its Australian PVC subsidiary in exchange for
a 37% ownership interest.
LIABILITIES AND EQUITY - The Synergistics acquisition was funded with a
variable-rate short-term credit facility. At December 31, 1997, $83.9 million
was outstanding under this agreement. The Company intends to refinance the
Synergistics short-term credit facility with long-term debt prior to the
expiration of this credit agreement in June 1998. At December 31, 1997, the
Company had outstanding $125 million in debentures issued in 1995 and maturing
in 10 and 20 years from issuance. The debentures have received investment-grade
credit ratings. In addition, the Company has available unsecured lines of credit
and overdraft facilities totaling $193 million. Other non-current liabilities
include most of the Company's accrued environmental liabilities, including those
associated with Synergistics, as well as pension accruals. The stronger U.S.
dollar against the Canadian and Australian dollar resulted in unrecognized
translation losses included in other equity of $8.3 million. In 1997, the
Company returned $11.6 million to its stockholders in the form of dividends and
repurchased 0.2 million shares.
ENVIRONMENTAL MATTERS - The Company generates both hazardous and non-hazardous
wastes, the treatment, storage, transportation and disposal of which are
regulated by various governmental agencies. The Company has been designated a
potentially responsible party by the U.S. Environmental Protection Agency in
connection with one plant and various other sites. The Company has accrued $51
million to cover future environmental remediation expenditures and does not
believe any of the matters either individually or in the aggregate will have a
material adverse effect on its capital expenditures, earnings, cash flow or
liquidity. Included in the $51 million accrual are the estimated future costs to
remediate Synergistics' facilities to Geon's historical environmental operating
practices. Capital expenditures related to the limiting and monitoring of
hazardous and non-hazardous wastes amounted to $4 million, $3 million and $7
million for 1997, 1996 and 1995, respectively. The Company estimates capital
expenditures during 1998 of approximately $3 million to $5 million. Expenditures
related to the remediation of previously contaminated sites are projected to be
$25 million to $30 million over the next five years. The risk of additional
costs and liabilities is inherent in certain plant operations and certain
products produced at the Company's plants, as is the case with other companies
involved in the PVC industry. For additional discussion of environmental
matters, refer to Note K of the Notes to Consolidated Financial Statements.
YEAR 2000 - The Company has nearly completed the conversion of its primary
commercial and financial information systems to an enterprise-wide system which
is year 2000 compliant. The Company is continuing to evaluate other systems and
processes and may incur internal staff costs as well as consulting and other
expenses to upgrade or replace these systems. Future expenditures, beyond those
which the Company would incur in the normal course of maintaining and upgrading
its systems, are not projected to be material. Certain factors that may affect
these forward-looking comments are discussed on page 37.
22
25
The Geon Company and Subsidiaries
CONSOLIDATED BALANCE SHEETS
December 31,
-----------------------------
(In Millions, Except Per Share Data) 1997 1996
- -------------------------------------------------------------------------------------------------------------
ASSETS
CURRENT ASSETS
Cash and cash equivalents ................................................... $ 49.1 $ 17.9
Accounts receivable ......................................................... 110.8 72.7
Inventories ................................................................. 122.4 105.1
Deferred income tax assets .................................................. 20.7 18.1
Prepaid expenses ............................................................ 10.5 20.0
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT ASSETS ..................................................... 313.5 233.8
Property, net ............................................................... 456.6 457.2
Deferred charges and other assets ........................................... 102.8 45.9
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS .......................................................... $872.9 $736.9
=============================================================================================================
LIABILITIES
CURRENT LIABILITIES
Short-term bank debt ........................................................ $ 90.4 $ 18.9
Accounts payable ............................................................ 164.7 126.4
Accrued expenses ............................................................ 57.7 57.6
Current portion of long-term debt ........................................... .8 .7
- -------------------------------------------------------------------------------------------------------------
TOTAL CURRENT LIABILITIES ................................................ 313.6 203.6
Long-term debt .............................................................. 136.4 137.2
Deferred income tax liabilities ............................................. 35.8 33.0
Post-retirement benefits other than pensions ................................ 86.2 86.7
Other non-current liabilities including pensions ............................ 77.1 54.0
- -------------------------------------------------------------------------------------------------------------
Total liabilities 649.1 514.5
- -------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Preferred stock, 10.0 shares authorized; no shares issued ................... -- --
Common stock, $0.10 par, authorized 100.0 shares; issued 27.9 shares ........ 2.8 2.8
Additional paid-in capital .................................................. 295.8 296.1
Retained earnings ........................................................... 73.3 62.4
Common stock held in treasury, 4.7 shares in 1997 and 4.6 shares in 1996 .... (118.0) (115.7)
Other ....................................................................... (30.1) (23.2)
- -------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY ............................................... 223.8 222.4
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................ $872.9 $736.9
=============================================================================================================
See Notes to Consolidated Financial Statements
23
26
The Geon Company and Subsidiaries
MANAGEMENT'S ANALYSIS - CASH FLOWS
Net cash used by operating and investing activities was $17.3 million in
1997, and includes the acquisition of Synergistics at a net investment of $82.2
million. Excluding the Synergistics acquisition, net cash provided by net
operating and investing activities was $64.9 million, or an increase of $73.5
million over 1996. This increase was primarily due to higher earnings before
non-cash charges (employee separation and plant phase-out, depreciation and
amortization, and deferred income taxes) of $22.0 million and the repayment of
prior-year advances to equity affiliates. In addition, lower 1997 purchases of
property were offset by changes in operating working capital (accounts
receivable plus inventory less accounts payable).
In 1996, net cash used by operating and investing activities was $8.6
million, or $42.9 million lower than in 1995. The change was primarily due to
lower earnings before non-cash charges, partially offset by a decrease in
operating working capital. At December 31, 1996, operating working capital was
$18.7 million lower than in the previous year. Other uses in 1995 included
higher pension contributions, which totaled $23.6 million.
Financing activities in 1997 primarily reflect the funding of the purchase
price for the Synergistics acquisition and the payment of dividends. During the
three years ended December 31, 1997, the Company repurchased $85.4 million of
common stock. During 1995, the Company issued debentures and prepaid long-term
bank debt.
The Company believes it has sufficient funds to support dividends, debt
service requirements and normal capital expenditures under its existing working
capital facilities and other available permitted borrowings. The Company intends
to refinance the short-term credit facility used to initially fund the
Synergistics acquisition with long-term debt prior to the expiration of the
credit facility in June 1998. Certain factors that may affect these
forward-looking comments are discussed on page 37. Under an August 1996 Board of
Directors resolution, the Company is authorized to repurchase an additional 1.7
million shares of Geon common stock.
INFLATION - The Company employs a number of strategies to mitigate the impact of
inflation on financial results. A considerable amount of capital spending is
directed toward cost reduction and productivity improvement projects. Moreover,
through its research and development efforts, the Company is continually
exploring ways to reduce the cost of existing products and to develop new
products with improved performance characteristics that will command premium
prices. The Company is also reviewing and re-engineering its administrative
activities on an ongoing basis in order to streamline operations and reduce
costs.
24
27
The Geon Company and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31,
------------------------------------------
(In Millions) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income ...................................................................... $22.5 $12.2 $32.2
Adjustments to reconcile net income to net cash provided by operating activities:
Employee separation and plant phase-out ...................................... 15.0 -- 63.9
Depreciation and amortization ................................................ 53.3 54.1 56.6
Provision for deferred income taxes .......................................... 6.3 8.8 1.5
Changes in assets and liabilities:
Accounts receivable ....................................................... (2.8) 30.1 43.1
Inventories ............................................................... (4.3) (12.0) (18.1)
Accounts payable .......................................................... (2.5) .6 (43.3)
Accrued expenses .......................................................... (6.0) (2.5) (3.9)
Income taxes payable/receivable, net ...................................... 4.2 (2.1) (18.0)
Other ..................................................................... 12.3 (4.6) (9.6)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES .................................... 98.0 84.6 104.4
INVESTING ACTIVITIES
Business acquisition, net of cash acquired of $4.3 .............................. (82.2) -- --
Purchases of property ........................................................... (50.9) (73.4) (70.0)
Investment in, advances to or repayments from equity affiliates ................. 17.8 (19.8) (.1)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED) PROVIDED BY OPERATING AND INVESTING ACTIVITIES ............... (17.3) (8.6) 34.3
FINANCING ACTIVITIES
Increase (decrease) in short-term debt .......................................... 72.0 9.8 (1.4)
Proceeds from long-term debt .................................................... -- -- 125.0
Repayment of long-term debt ..................................................... (4.0) (.7) (80.0)
Net proceeds from issuance of common stock ...................................... .3 .4 1.6
Repurchase of common stock ...................................................... (4.1) (32.4) (48.9)
Dividends ....................................................................... (11.6) (12.1) (12.7)
Other ........................................................................... -- -- (5.0)
- ---------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ............................. 52.6 (35.0) (21.4)
Effect of exchange rate changes on cash ......................................... (4.1) .4 .7
- ---------------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................................ 31.2 (43.2) 13.6
Cash and cash equivalents at beginning of year .................................. 17.9 61.1 47.5
- ---------------------------------------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF YEAR ........................................ $49.1 $17.9 $61.1
=================================================================================================================================
See Notes to Consolidated Financial Statements
25
28
The Geon Company and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Common Common
Shares Additional Stock
(Dollars in Millions, Except Per Share Data; Common Held in Common Paid-In Retained Held in
Shares in Thousands) Shares Treasury Total Stock Capital Earnings Treasury Other
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1994 ........................ 27,832 1,513 $240.2 $2.8 $ 266.7 $42.8 $(42.2) $(29.9)
Net income ....................................... 32.2 32.2
Stock-based compensation and exercise of options . 45 (160) 9.0 7.2 4.5 (2.7)
Repurchase of common stock ....................... 1,844 (48.9) (48.9)
Adjustment of minimum pension liability .......... (13.5) (13.5)
Translation adjustment ........................... 2.6 2.6
Cash dividends ($.50 per share) .................. (12.7) (12.7)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1995 ........................ 27,877 3,197 $208.9 $2.8 $273.9 $62.3 $(86.6) $(43.5)
Net income ....................................... 12.2 12.2
Stock-based compensation and exercise of options . (107) 3.0 (3.7) 3.3 3.4
Repurchase of common stock ....................... 1,469 (32.4) (32.4)
Adjustment of minimum pension liability .......... 16.4 16.4
Adjustment related to step-up in tax basis ....... 25.9 25.9
Translation adjustment ........................... .5 .5
Cash dividends ($.50 per share) .................. (12.1) (12.1)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1996 ........................ 27,877 4,559 $222.4 $2.8 $296.1 $62.4 $(115.7) $(23.2)
Net income ....................................... 22.5 22.5
Stock-based compensation and exercise of options . (59) 1.9 (.3) 1.8 .4
Repurchase of common stock ....................... 200 (4.1) (4.1)
Adjustment of minimum pension liability .......... 1.0 1.0
Translation adjustment ........................... (8.3) (8.3)
Cash dividends ($.50 per share) .................. (11.6) (11.6)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE DECEMBER 31, 1997 ........................ 27,877 4,700 $223.8 $2.8 $295.8 $73.3 $(118.0) $(30.1)
====================================================================================================================================
See Notes to Consolidated Financial Statements
26
29
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A. THE COMPANY
The Geon Company (Company or Geon), together with its subsidiaries, is one
of the leading North American producers and marketers of polyvinyl chloride
(PVC) resins and is the largest producer and marketer of PVC compounds. The
Company also produces and markets vinyl chloride monomer (VCM), an intermediate
precursor to PVC. The Company operates primarily in the United States and Canada
in one business segment. Sales include exports from North America of $36.2
million, $85.7 million and $183.0 million in 1997, 1996 and 1995, respectively.
NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its subsidiaries. Intercompany transactions are eliminated.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with a
maturity of less than three months to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. Most domestic
inventories are valued by the last-in, first-out (LIFO) cost method. Inventories
not valued by the LIFO method are valued principally by the average cost method.
PROPERTY AND DEPRECIATION
Property, plant and equipment is recorded at cost, net of depreciation and
amortization computed principally using the straight-line method over the
estimated useful life of the asset, ranging from 3 to 15 years for machinery and
equipment and up to 40 years for buildings. Property, plant and equipment is
generally depreciated on accelerated methods for income tax purposes. Repairs
and maintenance costs are expensed as incurred, except for plant turnaround
costs, which are deferred and amortized over the period benefited. At December
31, 1997, and 1996, unamortized turnaround costs were $1.9 million and $6.4
million, respectively.
GOODWILL
The excess of the purchase price paid over the fair value of the net assets
of businesses acquired is recorded as goodwill and amortized over a 35-year
period on a straight-line basis. Goodwill and other long-lived assets are
reviewed for impairment. Measurement of impairment may be based upon appraisals,
market values of similar assets or discounted cash flows.
FINANCIAL INSTRUMENTS
The fair values of cash equivalents and short-term bank debt approximate
their carrying amount because of the short maturity of those instruments. The
fair values of long-term debt and debentures are estimated based on the present
value of the underlying cash flows discounted at the Company's estimated
borrowing rate. At December 31, 1997 and 1996, the fair value of long-term debt,
including debentures, approximates its carrying value.
The Company periodically enters into interest rate exchange and foreign
currency forward contracts to manage exposure to foreign currency and interest
rate fluctuations. The interest rate exchange agreements generally do not
qualify for hedge accounting treatment and, accordingly, are carried at market
value, with the related gains and losses recognized immediately in income. Gains
and losses on foreign currency contracts qualifying as hedges are deferred and
recognized at the termination or settlement of the underlying hedged item. Gains
and losses on currency contracts that do not qualify for hedge accounting are
recognized immediately in income.
REVENUE RECOGNITION
The Company recognizes revenues at the point of passage of title, which is
generally at the time of shipment.
ENVIRONMENTAL COSTS
The Company expenses, on a current basis, recurring costs associated with
managing hazardous substances and pollution in ongoing operations. Costs
associated with the remediation of environmental contamination are accrued when
it becomes probable that a liability has been incurred and the Company's
proportionate share of the amount can be reasonably estimated.
RESEARCH AND DEVELOPMENT EXPENSE
Research and development costs, which were $17.1 million, $17.5 million and
$18.0 million in 1997, 1996 and 1995, respectively, are charged to expense as
incurred.
FOREIGN CURRENCY TRANSLATION
Income statement items are translated at average currency exchange rates.
Transaction gains and losses are included in determining net income. All balance
sheet accounts of foreign subsidiaries and equity investees are translated at
the current exchange rate as of the end of the period. The Company's share of
the resulting translation adjustment is recorded as part of the other component
of stockholders' equity. The cumulative unrecognized translation adjustment loss
was $27.0 million, $18.6 million and $19.1 million at December 31, 1997, 1996
and 1995, respectively.
27
30
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
EARNINGS PER COMMON SHARE
In 1997, the Company adopted Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share," which replaced the computation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
Earnings per share for all prior periods have been restated to conform with the
new standard.
Basic earnings per share are computed using the weighted average number of
shares of common stock outstanding during the period. Earnings per share on a
diluted basis also reflect the potential dilutive effect of stock options and
restricted stock awards and other incentives.
STOCK OPTIONS
The Company accounts for stock options in accordance with Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees."
AUSTRALIAN JOINT VENTURE
In August 1997, the Company entered into a joint venture resulting from the
merger of its Australian PVC operations with the operations of an unrelated
party. Geon contributed certain net assets, including inventory and property and
equipment, in exchange for 37% ownership in the joint venture. This joint
venture is accounted for under the equity method. Prior to the formation of the
joint venture, Geon's Australian PVC operations had assets of approximately $44
million.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued SFAS
No. 130, "Reporting Comprehensive Income," which requires that an enterprise
classify items of other comprehensive income (such as foreign currency
translation adjustments) in a financial statement and display the accumulated
balance of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of the balance sheet. The
Company will comply with the provisions of this statement upon its required
adoption in 1998.
In June 1997, the FASB also issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information," which establishes new
standards for the way public business enterprises report information about
operating segments in annual financial statements, and which requires that those
enterprises report selected information about operating segments in interim
financial reports issued to shareholders. It also establishes standards for
related disclosures about products and services, geographic areas and major
customers. The Company is currently studying the effects of adoption of this
statement, which will be effective for the Company beginning on December 31,
1998.
USE OF ESTIMATES
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.
RECLASSIFICATION
Certain amounts for 1996 and 1995 have been reclassified to conform to the
1997 presentation.
NOTE C. BUSINESS ACQUISITION
Effective October 31, 1997, the Company acquired substantially all of the
outstanding capital stock of Synergistics Industries Limited
(Synergistics) of Mississauga, Ontario, Canada, a manufacturer of plastic
compounds and materials. The acquisition is being accounted for under the
purchase method of accounting and, accordingly, the purchase cost of
approximately $86.5 million, including related acquisition costs, has initially
been allocated to assets acquired and liabilities assumed based upon their
estimated fair values. The excess of the purchase price over the estimated fair
value of net assets acquired of $63.6 million has been recorded as goodwill. The
acquisition was initially financed with a short-term credit facility (See
Financing Arrangements). The operating results of Synergistics have been
included in the consolidated statement of income from the date of acquisition.
The following unaudited pro forma information presents a summary of the
consolidated results of operations of the Company and Synergistics as if the
acquisition had occurred at the beginning of 1996, with pro forma adjustments to
reflect the amortization of goodwill, interest expense on acquisition debt and
other adjustments, together with the related income tax effects. The pro forma
financial information is not necessarily indicative of the results of operations
if the acquisition had actually occurred at the beginning of the periods
presented.
(In Millions, Except Per Share Data) 1997 1996
- ----------------------------------------------------------------
Sales .................................... $1,454.0 $1,312.3
Operating income ......................... 70.6 36.8
- ----------------------------------------------------------------
Net income ............................... 23.5 11.9
- ----------------------------------------------------------------
Basic earnings per common share .......... $ 1.03 $ .50
Diluted earnings per common share ........ 1.00 .48
================================================================
28
31
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE D. FINANCING ARRANGEMENTS
Aggregate maturities of long-term debt during the five years subsequent to
December 31, 1997, are as follows: 1998--$0.8 million; 1999--$0.8 million;
2000--$1.8 million; 2001--$0.3 million; and 2002--$0.5 million. Interest paid
amounted to $12.5 million, $10.9 million and $7.6 million during 1997, 1996 and
1995, respectively. At December 31, long-term debt consisted of the following:
(In Millions) 1997 1996
- ----------------------------------------------------------------
6.875% Debentures (maturing 2005) .......... $ 75.0 $ 75.0
7.500% Debentures (maturing 2015) .......... 50.0 50.0
6.660% Industrial revenue bonds
(maturing 2009) ......................... 9.3 9.9
Other ...................................... 2.9 3.0
- ----------------------------------------------------------------
137.2 137.9
- ----------------------------------------------------------------
Less current portion ....................... .8 .7
- ----------------------------------------------------------------
$136.4 $137.2
================================================================
The Company has obtained a variable-rate short-term credit facility to
temporarily fund the acquisition of Synergistics. At December 31, 1997, $83.9
million was outstanding under this agreement. The Company intends to fund the
acquisition with long-term debt prior to the expiration of this credit agreement
in June 1998.
The Company had the following unsecured lines of credit, all of which are
short term except for the revolving credit facility that expires in the year
2000.
Number of Permitted
(Dollars in Millions) Lines Borrowings
- ---------------------------------------------------------------
U.S. (including the $100 revolving
credit facility) ..................... 7 $160
Canada (includes acquisition facility) .. 4 122
- ---------------------------------------------------------------
$282
===============================================================
At December 31, 1997, approximately $193 million of the credit and
overdraft facilities was available. The weighted-average Canadian interest rate
on short-term borrowings was 4.1% at December 31, 1997. The Company's bank
agreements contain restrictive covenants and require the maintenance of
financial ratios. No specific restrictions have been placed on dividends or
share repurchases.
NOTE E. LEASING ARRANGEMENTS
The Company leases warehouse space, a production facility, machinery and
equipment, automobiles and railcars under operating leases with remaining terms
up to 12 years. Rent expense amounted to $32.1 million, $23.8 million and $16.4
million during 1997, 1996 and 1995, respectively. The future minimum lease
payments under non-cancelable operating leases with initial lease terms in
excess of one year at December 31, 1997, are as follows: 1998--$29.2 million;
1999--$26.3 million; 2000--$21.4 million; 2001--$150.4 million; 2002--$6.1
million; thereafter--$65.1 million.
The Company leases a VCM production facility and related equipment under an
operating lease that expires in 2001. Under the terms of the lease, the Company
has options to renew the lease for five one-year periods and may purchase the
VCM facility and equipment at the then- fair value at any time during the lease
term. The lease provides for a substantial residual value guarantee by the
Company at the termination of the lease. During 1996, the Company amended the
lease agreement to include additional equipment for which the Company has also
assumed a $45 million construction performance obligation. Accumulated
construction in process was $38.4 million at December 31, 1997.
NOTE F. SALE OF ACCOUNTS RECEIVABLE
The Company has an agreement with a bank to sell an undivided interest in
certain trade accounts receivable under which, on an ongoing basis, a maximum of
$85.0 million can be sold from a designated pool subject to limited recourse.
Payments are collected from the sold accounts receivable; the collections are
reinvested in new accounts receivable for the buyers; and a yield based on
defined short-term market rates is transferred to the buyers. Buyers have
collection rights to recover payments from the receivables in the designated
pool. Sales of accounts receivable averaged $79.9 million, $40.5 million and
$68.7 million in 1997, 1996 and 1995, respectively. Accounts receivable at
December 31, 1997, and 1996, are net of $60.0 million and $68.1 million,
respectively, representing the interests in receivables sold under these
agreements. The discount from the Company's sale of receivables is included in
"Other expense, net" in the Consolidated Statements of Income.
29
32
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE G. INVENTORIES
December 31,
(In Millions) 1997 1996
- ----------------------------------------------------------------
At FIFO or average cost, which approximates
current costs:
Finished products and in process ........ $107.8 $102.2
Raw materials and supplies .............. 48.7 36.3
- ----------------------------------------------------------------
156.5 138.5
Reserve to reduce certain inventories to
LIFO basis .............................. (34.1) (33.4)
- ----------------------------------------------------------------
$122.4 $105.1
================================================================
Approximately 62% and 67% of the pre-LIFO inventory amounts have been
valued by the LIFO method at December 31, 1997, and 1996, respectively.
NOTE H. PROPERTY
December 31,
(In Millions) 1997 1996
- -----------------------------------------------------------------
Land ..................................... $ 7.9 $ 7.9
Buildings ................................ 151.2 146.4
Machinery and equipment .................. 1,014.2 1,025.6
- -----------------------------------------------------------------
1,173.3 1,179.9
Less accumulated depreciation and
amortization .......................... 716.7 722.7
- -----------------------------------------------------------------
$ 456.6 $ 457.2
=================================================================
Capital expenditures for 1997, 1996 and 1995 include $2.4 million, $1.1
million and $1.6 million, respectively, of capitalized interest costs.
NOTE I. OTHER BALANCE SHEET LIABILITIES
(In Millions) Accrued Expenses Non-Current Liabilities
- ------------------------------------------------------------------------
December 31, December 31,
1997 1996 1997 1996
- ------------------------------------------------------------------------
Employment costs ............ $22.6 $21.0 $ 4.6 $ 5.9
Environmental ............... 7.3 6.0 43.7 21.2
Plant utilities ............. 1.4 1.4 3.2 4.6
Taxes, other than income .... 13.1 10.8 -- --
Post-retirement benefits .... 7.7 7.7 -- --
Pension ..................... -- -- 20.1 16.5
Other ....................... 5.6 10.7 5.5 5.8
- ------------------------------------------------------------------------
$57.7 $57.6 $77.1 $54.0
========================================================================
NOTE J. EMPLOYEE BENEFIT PLANS
PENSION BENEFIT PLANS
The Company has two defined benefit pension plans covering substantially
all domestic employees. The plan covering salaried employees generally provides
benefit payments using a formula that is based on employee compensation and
length of service. The plan covering union wage employees generally provides
benefit payments of stated amounts for each year of service. Annual
contributions to the plans are sufficient to satisfy legal requirements. Plan
assets consist principally of corporate and government obligations and funds
invested in equities. Annual pension expense included the following components:
(In Millions) 1997 1996 1995
- -----------------------------------------------------------------
Service cost for benefits earned ... $ 4.1 $ 4.0 $ 2.8
Interest cost ...................... 19.5 18.8 18.0
Income on plan assets .............. (36.4) (33.4) (33.4)
Net amortization and deferral ...... 20.6 22.3 22.7
- -----------------------------------------------------------------
Pension expense, net ............... $ 7.8 $ 11.7 $ 10.1
=================================================================
The following table sets forth as of December 31, 1997, and 1996, the
status of the Company's funded defined benefit pension plans. This table
excludes accrued pension costs of $8.3 million and $2.9 million for unfunded,
non-qualified pension plans and the related projected benefit obligations (PBO)
of $9.7 million and $4.1 million at December 31, 1997, and 1996, respectively.
Change
1997 vs.
(In Millions) 1997 1996 1996
- -----------------------------------------------------------------
Plan assets at fair value ......... $241.8 $212.2 $29.6
Accumulated benefit obligation
(ABO) .......................... 256.7 234.2 22.5
- -----------------------------------------------------------------
Plan assets less than ABO ......... $ 14.9 $ 22.0 $ 7.1
=================================================================
At December 31, 1997, the plan assets were $241.8 million, which represents
an increase of $29.6 million over year-end 1996. The growth in these assets was
the result of actions taken by the Company and favorable security markets.
Income earned on these assets was $19.6 million, which represents a return of
18% in 1997. The Company also made contributions in 1997 of $11.0 million. Over
the last three years, the Company's contributions have totaled $46.6 million, or
$17.0 million above normal pension expense recognized during this period. From
plan assets, benefit payments of $17.7 million were made in 1997.
30
33
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
Change
1997 vs.
(In Millions) 1997 1996 1996
- ------------------------------------------------------------------
ABO ................................ $256.7 $234.2 $22.5
Effect of projected salary increases 27.7 27.6 .1
- ------------------------------------------------------------------
PBO ................................ $284.4 $261.8 $22.6
- ------------------------------------------------------------------
Plan assets less than PBO .......... $ 42.6 $ 49.6 $ 7.0
Unamortized balances:
Transitional liability .......... (5.6) (6.9) (1.3)
Prior service cost .............. (4.4) (5.7) (1.3)
Net actuarial loss .............. (30.3) (38.0) (7.7)
Adjustments required to recognize
minimum liability ............ 9.5 14.6 5.1
- ------------------------------------------------------------------
Accrued pension cost ............... $ 11.8 $ 13.6 $ 1.8
==================================================================
Major assumptions used in accounting for the Company's defined benefit
pension plans are as follows:
1997 1996 1995
- ----------------------------------------------------------------
Discount rate for
obligations ............ 7.2% 7.5% 7.1%
Rate of increase in
compensation levels .... 4.0%-7.0% 4.0%-7.0% 4.0%-7.0%
Expected long-term rate of
return on plan assets .. 9.5% 9.5% 9.0%
================================================================
A curtailment loss of $10.7 million was recorded in 1997 relating to a
voluntary retirement program. The curtailment loss is included in the employee
separation charge of $15.0 million recognized in the consolidated statement of
income. At December 31, 1997, and 1996, $2.3 million and $3.3 million,
respectively, were recorded as the cumulative additional minimum pension
liability and included in the other component of stockholders' equity as a
reduction.
RETIREMENT SAVINGS PLAN
The Company maintains a voluntary retirement savings plan (RSP) for most
employees. Under provisions of the RSP, eligible employees can receive Company
matching contributions up to the first 6% of their eligible earnings. For 1997,
1996 and 1995, Company contributions amounted to $4.7 million each year. In
addition, the Company makes profit-sharing payments to the RSP for those
employees not covered by management incentive compensation plans. In 1997, 1996
and 1995, these profit-sharing payments totaled $.8 million, $1.0 million and
$2.5 million, respectively.
POST-RETIREMENT BENEFIT PLANS
The Company sponsors several unfunded defined benefit post-
retirement plans that provide certain health care and life insurance benefits to
eligible employees. The health care plans are contributory, with retiree
contributions adjusted periodically, and contain other cost-sharing features
such as deductibles and coinsurance. The life insurance plans are generally
non-contributory. Below is the combined status of the plans at December 31:
(In Millions) 1997 1996
- -----------------------------------------------------------------
Accumulated post-retirement benefit
obligation (APBO):
Retirees ................................. $83.3 $81.4
Fully eligible active plan participants .. 4.4 3.5
Other active plan participants ........... 6.8 6.6
Unrecognized gain (loss) ................. (.6) 2.9
- -----------------------------------------------------------------
$93.9 $94.4
=================================================================
The annual post-retirement benefit expense for each of the years ended
December 31 included the following components:
(In Millions) 1997 1996 1995
- ----------------------------------------------------------------
Service cost for benefits earned .... $ .4 $ .4 $ .3
Interest cost on APBO ............... 6.5 6.5 7.1
- ----------------------------------------------------------------
Post-retirement expense, net ........ $6.9 $6.9 $7.4
Payment of claims ................... $7.4 $7.1 $7.4
================================================================
At December 31, 1997, the average assumed rate of increase in the per
capita cost of covered benefits was 8% for 1998 and is assumed to decrease
gradually to 5% in 2005 and thereafter. An increase in the assumed health care
cost trend rates by 1% in each year would increase the APBO as of December 31,
1997, by $4.3 million, and the aggregate of the service and interest cost
components of net periodic post-retirement benefit cost for 1997 by $0.3
million.
The discount rates used in determining the APBO at December 31, 1997, and
1996, were 7.2% and 7.5%, respectively. The decrease in the discount rate in
1997 from 1996 increased the APBO at December 31, 1997, by $2.8 million.
31
34
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE K. COMMITMENTS
ENVIRONMENTAL
The Company has been notified by the U.S. Environmental Protection Agency,
a state environmental agency or a private party that it may be a potentially
responsible party (PRP) in connection with seven active and inactive
non-Company-owned sites. While government agencies frequently claim PRPs are
jointly and severally liable at these sites, in the Company's experience,
interim and final allocation of liability costs are generally made based on the
relative contribution of waste. The Company believes that it has potential
continuing liability with respect to only four such sites. In addition, the
Company initiates corrective and preventive environmental projects of its own to
ensure safe and lawful activities at its operations. The Company believes that
compliance with current governmental regulations at all levels will not have a
material adverse effect on its financial condition.
Based on estimates prepared by the Company's environmental
engineers and consultants, the Company at December 31, 1997, had accruals
totaling $51.0 million to cover future environmental expenditures related to
previously contaminated sites. Of this accrued amount, $18.2 million is
attributable to future remediation expenditures at the Calvert City, Kentucky,
site and less than $0.1 million is attributable to off-site environmental
remediation liabilities, including the four sites mentioned above. An additional
$25.0 million is attributable to the properties acquired as part of the
Synergistics acquisition, and is related to anticipated costs to remediate these
facilities to Geon's historical environmental operating practices.
The remaining amount is primarily attributable to other environmental
remediation projects at nine other Company-owned facilities. At Calvert City,
consent orders have been signed with both the U.S. Environmental Protection
Agency and the Commonwealth of Kentucky Department of Environmental Protection,
which provide for a sitewide remediation program primarily to remove ethylene
dichloride from groundwater, the cost of which has been accrued. The Company
expended $5.0 million, $6.1 million and $3.0 million during 1997, 1996 and 1995,
respectively, on the remediation of such sites.
GUARANTEES
At December 31, 1997, the Company, through an indemnification agreement
with BFG, is contingently liable through December 31, 2001, with respect to
guarantees of securities of other issuers in the amount of $47.5 million, for
which the Company would be reimbursed by Occidental Chemical Holding Corporation
for any amounts paid under the guarantees.
The Company has a 50% participation in a joint venture operating a
chlor-alkali plant. The Company has guaranteed $97.5 million of the joint
venture's outstanding senior secured notes, maturing in 2017.
OTHER
The Company and its subsidiaries have commitments for a substantial portion
of its key raw material feedstocks and energy incidental to the ordinary course
of business. The Company is also from time to time subject to routine litigation
incidental to its business. The Company believes that any liability that may
finally be determined would not have a material adverse effect on its financial
condition.
NOTE L. OTHER INCOME (EXPENSE), NET
(In Millions) 1997 1996 1995
- ----------------------------------------------------------------
Currency exchange (loss) gain ....... $(2.2) $1.6 $ (.9)
Income from equity affiliates ....... .4 1.0 .1
Discount on sale of trade receivables (5.0) (2.4) (4.5)
Other income (expense), net ......... .6 -- (1.2)
- ---------------------------------------------------------------------------------------------------------------------------
$(6.2) $ .2 $(6.5)
===========================================================================================================================
NOTE M. INCOME TAXES
Income (loss) before income taxes consists of the following:
(In Millions) 1997 1996 1995
- -----------------------------------------------------------------
Domestic ........................... $24.9 $(8.9) $40.1
Foreign ............................ 9.7 29.6 12.3
- -----------------------------------------------------------------
$34.6 $20.7 $52.4
=================================================================
A summary of income tax expense (benefit) is as follows:
(In Millions) 1997 1996 1995
- -----------------------------------------------------------------
Current:
Federal ........................ $ .4 $(10.4) $10.0
State .......................... (1.1) -- 2.0
Foreign ........................ 6.5 10.1 6.7
- -----------------------------------------------------------------
Total current ............... 5.8 (.3) 18.7
Deferred:
Federal ........................ 6.9 8.8 4.0
State .......................... 1.8 (.4) .5
Foreign ........................ (2.4) .4 (3.0)
- -----------------------------------------------------------------
Total deferred .............. 6.3 8.8 1.5
- -----------------------------------------------------------------
Total tax expense ........... $12.1 $ 8.5 $20.2
=================================================================
32
35
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
The income tax rate for financial reporting purposes varied from the
federal statutory rate as follows:
1997 1996 1995
- ---------------------------------------------------------------------------
Federal statutory income tax rate ............ 35.0% 35.0% 35.0%
Increase (decrease):
State tax net of federal benefit .......... 1.5 (1.5) 3.1
Differences in rates of foreign
operations .............................. 2.0 .8 (1.1)
Foreign withholding accrued on
unremitted earnings ..................... 1.1 4.7 2.0
Adjust prior year's income tax liability .. (5.9) -- --
Other, net ................................ 1.3 2.1 (.5)
- ---------------------------------------------------------------------------
Effective income tax rate ................. 35.0% 41.1% 38.5%
===========================================================================
Significant components of the Company's deferred tax liabilities and assets
at December 31 are as follows:
(In Millions) 1997 1996
- ------------------------------------------------------------------
Deferred tax liabilities:
Tax over book depreciation .............. $ 97.6 $ 84.0
Other, net .............................. 16.7 19.1
- ------------------------------------------------------------------
Total deferred tax liabilities ....... 114.3 103.1
- ------------------------------------------------------------------
Deferred tax assets:
Post-retirement benefits other than pensions 32.9 33.1
Employment cost and pension ............. 9.3 5.9
Environmental ........................... 16.7 9.5
Net operating loss carryforward ......... 13.6 8.1
LIFO inventory .......................... 5.0 3.3
Intangibles ............................. 4.0 5.8
Alternative minimum tax credit
carryforward .......................... 3.9 5.9
Foreign tax credit carryforward ......... 6.0 4.3
Foreign tax valuation allowance ......... (6.0) (4.3)
State taxes ............................. .5 2.3
Other, net .............................. 13.3 14.3
- ------------------------------------------------------------------
Total deferred tax assets ............ 99.2 88.2
Net deferred tax liabilities ......... $ 15.1 $ 14.9
==================================================================
SFAS No. 109, "Accounting for Income Taxes," requires that deferred tax
assets be reduced by a valuation allowance if it is more likely than not that
some portion or all of the deferred tax assets will not be realized. As
realization of the foreign tax credit carryforwards is considered uncertain, a
valuation allowance has been recorded. The Company believes that the timing of
the reversal of its deferred tax liabilities, principally relating to
accelerated depreciation, will be sufficient to fully recognize its remaining
deferred tax assets. In particular, the turnaround of the largest deferred tax
asset, related to accounting for post-retirement benefits other than pensions,
will occur over an extended period of time and, as a result, will be realizable
for tax purposes over those future periods.
During 1996 the Company finalized the effects of the step-up in the tax
basis of its assets as a result of formation and recorded adjustments to
deferred taxes and equity of $25.9 million.
The Company has provided for U.S. federal and foreign withholding tax on
$24.1 million, or 19% of foreign subsidiaries' undistributed earnings, as of
December 31, 1997. Regarding the undistributed earnings on which no federal and
foreign withholding has been provided, earnings are intended to be reinvested
indefinitely. It is not practical to determine the amount of income tax
liability that would result had such earnings been actually repatriated. On
repatriation, certain foreign countries impose withholding taxes. The amount of
foreign withholding taxes that would be payable on remittance of the entire
amount of undistributed earnings would approximate $7.3 million.
During 1997, 1996 and 1995, the Company paid income taxes net
of refunds of $1.9 million, $2.2 million and $37.9 million, respectively. The
Company has a net operating loss carryforward of approximately $38.7 million, of
which $12.4 million will expire in 2011 and the remaining $26.3 million will
expire in 2012. In addition, the Company has foreign tax carryforwards of $6.0
million, which will expire from 1999 through 2002, and an alternative minimum
tax credit carryforward of $3.9 million.
NOTE N. EMPLOYEE SEPARATION AND PLANT PHASE-OUT CHARGES
In 1997, the Company recorded a $15.0 million before-tax charge, primarily
for employee separation costs related to position reductions at its
headquarters. Of this, $10.7 million related to enhanced retirement pension
benefits and the balance to employee separation and associated costs. In
addition, in 1995, the Company recorded a $63.9 million before-tax charge,
primarily related to the reconfiguration of the manufacturing of vinyl compound
products.
33
36
The Geon Company and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - CONTINUED
NOTE O. STOCK OPTION AND STOCK INCENTIVE PLANS
The 1995 Incentive Stock Plan provides for the awarding or granting of
options to purchase common stock of the Company. Generally, options granted
become exercisable at the rate of 35% after one year, 70% after two years and
100% after three years. Certain options are fully exercisable after grant. The
term of each option cannot extend beyond 10 years from the date of grant.
Certain options carry with them limited stock appreciation rights exercisable in
the event of a change in control. All options under the plans have been granted
at 100% of market (as defined) on the date of the grant. In addition, certain
senior-level executives received special awards in connection with the formation
of the Company and the initial public offering (IPO) of stock on April 29, 1993,
which included stock options with rights to purchase 1.2 million shares. These
awards became exercisable four years after grant date. The Company also has a
stock plan for non-employee directors under which options are granted.
A summary of stock option activity follows:
Weighted Average
(In Thousands, Except Per Share Data) Shares Exercise Price
- ------------------------------------------------------------------------
Outstanding at January 1, 1995 .......... 1,818 $19.05
Issued .................................. 321 26.73
Exercised ............................... 80 18.34
Canceled ................................ 4 26.40
- ------------------------------------------------------------------------
Outstanding at January 1, 1996 .......... 2,055 20.27
Issued .................................. 284 25.98
Exercised ............................... 21 18.57
Canceled ................................ 3 26.85
- ------------------------------------------------------------------------
Outstanding at January 1, 1997 .......... 2,315 20.97
Issued .................................. 318 20.07
Exercised ............................... 51 20.51
Canceled ................................ 48 23.91
- ------------------------------------------------------------------------
Outstanding at December 31, 1997 ........ 2,534 $20.81
- ------------------------------------------------------------------------
Exercisable at December 31, 1997
Exercise prices: $14.92-$30.13 ....... 2,048 $20.35
Weighted average remaining life ...... 7 years
========================================================================
Under the Company's incentive programs, senior executives and other key
employees are also eligible annually to receive bonus awards, consisting of
stock or a combination of stock and cash. Under these plans, performance
measures are established and used to determine the payout, if any.
At December 31, 1997, restricted shares totaling 0.4 million were
outstanding. The restrictions generally lapse over one to three years, with some
subject to acceleration based on the Company's stock price performance. The
unamortized portion of compensation expense related to these stock awards
included in other component of stockholders' equity was $0.8 million and $1.3
million at December 31, 1997, and 1996, respectively.
The Company applies APB Opinion 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its incentive plans.
Accordingly, no compensation cost has been recognized for its fixed option plans
because the exercise price of the Company's stock options equals the market
price of the underlying stock on the date of grant. Had the compensation cost
for the stock options granted in 1997 and 1996 been determined based upon the
fair value at the grant date, consistent with the fair value method of FASB
Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net
earnings and earnings per share would have been reduced by $2.1 million ($.09
per share) in 1997 and $0.7 million ($.03 per share) in 1996 on a diluted basis.
The impact in 1995 was not material. The fair value of the stock options at the
grant date was estimated using the Black-Scholes option pricing model with an
assumed risk-free interest rate of 5.4% and 5.7%, an assumed dividend yield of
2.5% and 2.0%, and stock price volatility of 28.5% and 29.8% for 1997 and 1996,
respectively. A seven-year weighted average life was used for both 1997 and
1996.
The compensation cost related to the stock portion of the annual incentive
plans, three-year incentive plan and amortization of restricted stock awarded at
the IPO amounted to $2.3 million, $3.0 million and $4.2 million in 1997, 1996
and 1995, respectively.
At December 31, 1997, 3.1 million shares were reserved for future issuance
upon exercise of stock options granted or were available for future grants under
the Company's incentive plans.
34
37
The Geon Company and Subsidiaries
35
QUARTERLY DATA (UNAUDITED)
35
1997 QUARTERS 1996 Quarters
----------------------------------------------------------------------------------------------
(In Millions, Except Per Share Data) FOURTH THIRD SECOND FIRST Fourth Third Second First
- ------------------------------------------------------------------------------------------------------------------------------------
SALES ................................ $312.3 $303.7 $333.0 $301.0 $279.1 $307.8 $311.8 $245.7
Employee separation .................. -- -- 15.0 -- -- -- -- --
Operating income (loss) .............. 11.4 18.3 14.5 7.8 4.6 13.4 18.4 (6.5)
Net income (loss) .................... 3.5 10.6 6.1 2.3 1.6 6.1 10.1 (5.6)
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE:
Basic ............................. $ .15 $ .47 $ .27 $ .10 $ .07 $ .26 $ .41 $ (.23)
Diluted ........................... .15 .45 .26 .10 .07 .25 .40 (.23)
DIVIDEND PAID PER COMMON SHARE ....... .125 .125 .125 .125 .125 .125 .125 .125
COMMON STOCK PRICE
High .............................. $24 3/16 $20 13/16 $ 23 1/8 $23 1/4 $23 1/2 $25 1/8 $28 3/4 $28 3/8
Low ............................... 20 3/8 18 1/2 20 1/8 18 5/8 18 1/8 18 1/8 22 1/2 24 3/8
1997: Second-quarter results include an after-tax charge of $9.2 million ($15.0
million before tax) for employee separation costs.
35
38
The Geon Company and Subsidiaries
SELECTED SIX-YEAR FINANCIAL DATA
Pro Forma
(Unaudited)(1) Historical
(In Millions, Except Per Share Data) 1997 1996 1995 1994 1993 1992 1993 1992
- ------------------------------------------------------------------------------------------------------------------------------------
SALES ....................................... $ 1,250.0 $ 1,144.4 $ 1,267.8 $ 1,208.6 $ 972.5 $ 894.3 $ 982.8 $ 969.9
Employee separation and plant phase-out ..... 15.0 -- 63.9 -- 9.7 14.4 9.7 16.0
Operating income (loss) ..................... 52.0 29.9 63.3 102.1 14.5 (22.9) 18.6 (19.3)
Income (loss) before extraordinary item and
cumulative effect of change in method of
accounting ............................... 22.5 12.2 32.2 57.9 2.2 (22.1) 6.0 (15.0)
Extraordinary loss on early extinguishment
of debt .................................. -- -- -- (1.3) -- -- -- --
Cumulative effect of change in method of
accounting ............................... -- -- -- -- (1.1) (57.5) (1.1) (70.4)
NET INCOME (LOSS) ........................... 22.5 12.2 32.2 56.6 1.1 (79.6) 4.9 (85.4)
- ------------------------------------------------------------------------------------------------------------------------------------
Basic earnings (loss) per share:
Before extraordinary item and change in
method of accounting ..................... $ .98 $ .51 $ 1.28 $ 2.11 $ .08 $ (.84)
Extraordinary loss .......................... -- -- -- (.05) -- (2.19)
Change in method of accounting .............. -- -- -- -- (.04) --
NET INCOME (LOSS)(2) ........................ .98 .51 1.28 2.06 .04 (3.03)
- ------------------------------------------------------------------------------------------------------------------------------------
DILUTED EARNINGS (LOSS) PER SHARE:
BEFORE EXTRAORDINARY ITEM AND CHANGE IN
METHOD OF ACCOUNTING .................. $ .95 $ .50 $ 1.24 $ 2.08 $ .08 $ (.84)
Extraordinary loss ....................... -- -- -- (.05) -- (2.19)
Change in method of accounting ........... -- -- -- -- (.04) --
NET INCOME (LOSS)(3) ........................ .95 .50 1.24 2.03 .04 (3.03)
- ------------------------------------------------------------------------------------------------------------------------------------
DIVIDENDS PER COMMON SHARE .................. .50 .50 .50 .50 .375 --
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA At December 31,
- ------------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992
Total assets ................................ $ 872.9 $ 736.9 $ 752.0 $ 791.7 $ 721.2 $ 686.9
Long-term debt .............................. 136.4 137.2 137.9 93.0 88.3 18.7
(1)On February 11, 1993, the Company was formed as a wholly owned subsidiary of
The BFGoodrich Company (BFG) in preparation for the IPO of its common stock on
April 29, 1993. BFG transferred to the Company substantially all of the
operating assets and liabilities of its Geon Vinyl Division, other than the net
assets of the chlor-alkali, ethylene and utility operations of BFG located
principally at Calvert City, Kentucky (Calvert Facilities), in exchange for the
Company's common stock.
The historical results for 1993 and 1992 include the results of operations
associated with the Calvert Facilities through February 28, 1993. The cost of
VCM consumed from the Calvert Facilities was recorded at historical intercompany
cost through April 29, 1993.
The pro forma results for 1993 and 1992 exclude the results of operations
associated with the Calvert Facilities. The data are also presented as if the
Company purchased the VCM associated with the Calvert Facilities at market
prices rather than at historical intercompany costs. Subsequent to the initial
public offering of the Company's common stock on April 29, 1993, purchases of
VCM from BFG were at market prices. The pro forma results also include the cost
associated with certain May 1993 bank arrangements, as if they had occurred at
the beginning of 1993.
(2)The employee separation and plant phase-out charges reduced basic earnings
per share as follows: 1997--$.40; 1995--$.56; 1993--$.22; 1992--$.36.
(3)The employee separation and plant phase-out charges reduced diluted earnings
per share as follows: 1997--$.39; 1995--$.52; 1993--$.22; 1992--$.36. 36
36
39
The Geon Company and Subsidiaries
REPORT OF INDEPENDENT AUDITORS
TO THE STOCKHOLDERS AND BOARD OF DIRECTORS
OF THE GEON COMPANY:
We have audited the accompanying consolidated balance sheets of The Geon
Company and subsidiaries as of December 31, 1997, and 1996, and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended December 31, 1997. These financial
statements, which appear on pages 21, 23, and 25 through 34, are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of The Geon
Company and subsidiaries at December 31, 1997, and 1996, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997, in conformity with generally accepted
accounting principles.
/s/ Ernst & Young LLP
Cleveland, Ohio
January 29, 1998
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This 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 the protections afforded "forward-looking statements"
under the Private Securities Litigation Reform Act of 1995. 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 industry capacity or in the rate at which anticipated changes in
industry capacity come online in the PVC, VCM and 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) unanticipated production outages; (6) the impact on the North
American vinyl markets and supply/demand balance resulting from the economic
situation in the Far East; (7) the ability to obtain financing at anticipated
rates; and (8) unanticipated expenditures required in conjunction with year 2000
compliance.
37
40
The Geon Company
CORPORATE INFORMATION
- --------------------------------------
EXECUTIVE OFFICERS
WILLIAM F. PATIENT
Chairman of the Board and Chief Executive
Officer
THOMAS A. WALTERMIRE
President and Chief Operating Officer
DONALD P. KNECHTGES
Senior Vice President, Business and
Technology Development
LOUIS M. MARESCA
Vice President and General Manager, Resins
V. LANCE MITCHELL
Vice President and General Manager,
Compounds
CLARENCE J. NOSAL
Vice President and General Manager,
Intermediates
GREGORY L. RUTMAN
Vice President, General Counsel and
Secretary
W. DAVID WILSON
Vice President and Chief Financial Officer
FACILITIES
AVON LAKE, OHIO
Headquarters
Research and Development
Compounds
CONROE, TEXAS
Compounds
DEER PARK, TEXAS
Resins
FARMINGDALE, NEW JERSEY
Compounds
HENRY, ILLINOIS
Resins
LAPORTE, TEXAS
VCM
LINDSAY, ONTARIO, CANADA
Compounds
LONG BEACH, CALIFORNIA
Compounds
LOUISVILLE, KENTUCKY
Resins
Compounds
NIAGARA FALLS, ONTARIO, CANADA
Resins
Compounds
ORANGEVILLE, ONTARIO, CANADA
Compounds
Plasticizers
PEDRICKTOWN, NEW JERSEY
Resins
PLAQUEMINE, LOUISIANA
Compounds
SCOTFORD, ALBERTA, CANADA
Resins
ST. REMI DE NAPIERVILLE, QUEBEC, CANADA
Compounds
Plasticizers
TERRE HAUTE, INDIANA
Compounds
VALLEYFIELD, QUEBEC, CANADA
Compounds
STOCK EXCHANGE LISTING
The Geon Company Common Stock is listed on the New York Stock Exchange. Symbol:
GON.
STOCKHOLDER INQUIRIES
If you have any questions concerning your account as a stockholder, name or
address changes, inquiries regarding dividend checks or stock certificates, or
if you need tax information regarding your account, please contact our transfer
agent:
The Bank of New York
P.O. Box 11258
Church Street Station
New York, New York 10286-1258
Phone: (800) 524-4458
Complimentary copies of Form 10-K and other reports filed with the Securities
and Exchange Commission are available from:
Investor Relations Administrator
The Geon Company
One Geon Center
Avon Lake, Ohio 44012
Phone: (440) 930-1444
ANNUAL MEETING
The annual meeting of stockholders of The Geon Company will be held May 7, 1998,
at 9:00 a.m. at The Forum Conference and Education Center, One Cleveland Center,
1375 East 9th Street, Cleveland, Ohio.
The meeting notice and proxy materials were mailed to stockholders with this
report. The Geon Company urges all stockholders to vote their proxies so that
they can participate in the decisions at the annual meeting.
FINANCIAL INFORMATION
Security analysts and representatives of financial institutions are invited to
contact:
W. David Wilson
Vice President and Chief Financial Officer
The Geon Company
One Geon Center
Avon Lake, Ohio 44012
Phone: (440) 930-3204
Fax: (440) 930-1002
E-mail: wilsonw@geon.com
and
Dennis Cocco
Vice President, Corporate and Investor Affairs
The Geon Company
One Geon Center
Avon Lake, Ohio 44012
Phone: (440) 930-1538
Fax: (440) 930-1428
E-mail: coccod@geon.com
AUDITORS
Ernst & Young LLP
1300 Huntington Building
925 Euclid Avenue
Cleveland, Ohio 44115-1405
MEDIA CONTACT
Dennis Cocco
Vice President, Corporate and Investor Affairs
The Geon Company
One Geon Center
Avon Lake, Ohio 44012
Phone: (440) 930-1538
Fax: (440) 930-1428
E-mail: coccod@geon.com
INTERNET ACCESS
Information on The Geon Company's products and services, as well as on news
releases, EDGAR filings, Form 10-K, 10-Q, etc., is available on the Internet at
http://www.geon.com.
38
41
BOARD OF DIRECTORS
- ---------------------------------
WILLIAM F. PATIENT, 63
Chairman of the Board and Chief Executive
Officer
JAMES K. BAKER, 66
Vice Chairman, Arvin Industries, a worldwide supplier of original equipment and
replacement automotive parts 2, 4*, 5
GALE DUFF-BLOOM, 58
President of Marketing and Company Communications, J.C. Penney Company, Inc., a
major retailer of apparel, jewelry, home furnishings and services through
department stores and catalogs 1, 2*, 5
J.A. FRED BROTHERS, 57
Executive Vice President, Ashland Inc., a diversified company with operations in
specialty chemical production and distribution, motor oil and car care products,
and highway construction 3, 4
J. DOUGLAS CAMPBELL, 56
Retired President and Chief Executive Officer, Arcadian Corporation, the leading
Western Hemisphere producer and marketer of nitrogen chemicals and fertilizers
1, 3, 5
HARRY A. HAMMERLY, 64
Retired Executive Vice President, 3M Company, a worldwide diversified
manufacturer of industrial, commercial, consumer and health care products 1, 2,
4
D. LARRY MOORE, 61
Retired President and Chief Operating Officer, Honeywell, Inc., a global
enterprise providing electronic automation and control systems for homes,
buildings, process control industries and aerospace 1, 2, 3*
JOHN D. ONG, 64
Chairman Emeritus, The BFGoodrich Company, a provider of aircraft components,
systems and services, as well as specialty chemical products 2, 4, 5*
R. GEOFFREY P. STYLES, 67
Retired Vice Chairman, Royal Bank of Canada, Canada's largest bank 1*, 3, 4
1 Audit Committee
2 Compensation Committee
3 Environmental, Health and Safety Committee
4 Financial Policy Committee
5 Nominating and Governance Committee
*Denotes Chairman
42
[THE GEON COMPANY LOGO]
The Geon Company
One Geon Center
Avon Lake, Ohio 44012
(440) 930-1000
www.geon.com