1
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
FORM 8-K
Current Report
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
Date of Report (Date of earliest event reported) April 30, 1999
THE GEON COMPANY
(Exact name of Registrant as specified in its charter)
Delaware
(State or other jurisdiction of incorporation)
1-11804 34-1730488
(Commission file number) (I.R.S. Employer Identification No.)
One Geon Center Avon Lake, Ohio 44012
-------------------------------------------------
(Address of principal executive offices ) (Zip Code)
(440) 930-1001
(Registrant's telephone number, including area code)
Not Applicable
(Former name or former address, if changed since last report)
2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS.
On April 30, 1999, The Geon Company (Geon or the Company) formed two
partnerships (Partnerships) with Occidental Chemical Corporation (OxyChem),
named Oxy Vinyls, LP (OxyVinyls or PVC Partnership) and PVC Powder Blends, LP
(PVC Powder Blends or Compounding Partnership). OxyVinyls is owned 24% by Geon
and 76% by OxyChem. The partnership combines the polyvinyl chloride (PVC) resin
and vinyl chloride monomer (VCM) businesses and related operations of both
companies, and also includes OxyChem's Houston Chlor-Alkali complex. OxyVinyls
will be North America's largest and the world's third largest PVC producer. PVC
Powder Blends is owned 90% by Geon and 10% by OxyChem. The Compounding
Partnership will manufacture dry-blend compounds.
In conjunction with the formation of the Partnerships Geon realized
approximately $104 million in cash and working capital retention and transferred
$189 million of debt obligations to OxyVinyls, and OxyChem transferred its PVC
flexible film and specialty pellet compound businesses located in Burlington,
New Jersey and Pasadena, Texas to the Company (Related Transactions).
1
3
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Audited Combined Financial Statements of the OxyChem
Transferred Businesses
Report of Independent Public Accountants
Combined Balance Sheets as of December 31, 1998 and 1997
Combined Statements of Operations and Invested Capital for
the years ended December 31, 1998, 1997 and 1996
Combined Statements of Cash Flows for the years ended
December 31, 1998, 1997 and 1996
Notes to Combined Financial Statements
(b) Unaudited Pro Forma Condensed Consolidated Financial
Statements of The Geon Company
Introduction
Unaudited Pro Forma Condensed Consolidated Balance Sheet
as of December 31, 1998
Notes to Unaudited Pro Forma Condensed Consolidated
Balance Sheet as of December 31, 1998
Unaudited Pro Forma Condensed Consolidated Statement of
Income for the Year Ended December 31, 1998
Notes to Unaudited Pro Forma Condensed Consolidated
Statement of Income for the Year Ended December 31, 1998
EXHIBITS
10.1 Master Transaction Agreement *
10.2 Limited Partnership Agreement of Oxy Vinyls, LP
10.3 Asset Contribution Agreement - PVC Partnership (Geon)
10.4 Parent Agreement (Oxy Vinyls, LP)
10.5 Parent Agreement (PVC Powder Blends, LP) and Business Opportunity
Agreement
23 Consent of Independent Public Accountants
99 Press Release
* Incorporated by reference to the corresponding Exhibit filed with the
registrant's Special Meeting Proxy Statement dated March 29, 1999.
2
4
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
THE GEON COMPANY
(Registrant)
By: \S\GREGORY L. RUTMAN
-------------------------------
Gregory L. Rutman
Secretary
Dated May 13, 1999
3
5
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors,
Occidental Chemical Corporation:
We have audited the accompanying combined balance sheets of the OxyChem
Transferred Businesses, as defined in Note 1, as of December 31, 1998 and 1997,
and the related combined statements of operations and invested capital and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of Occidental Chemical Corporation'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 financial position of the OxyChem Transferred
Businesses as of December 31, 1998 and 1997, and the related combined statements
of operations and invested capital and cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles.
Arthur Andersen LLP
Dallas, Texas,
April 30, 1999
4
6
OXYCHEM TRANSFERRED BUSINESSES
COMBINED BALANCE SHEETS
December 31, 1998 and 1997
(Amounts in thousands)
1998 1997
-------- --------
CURRENT ASSETS:
Cash $ 18 $ 18
Trade receivables 13,574 26,903
Other receivables 18,064 487
Inventories 69,973 76,019
Prepaid expenses 4,101 2,691
-------- --------
Total current assets 105,730 106,118
EQUITY INVESTMENT -- 9,300
PROPERTY, PLANT AND EQUIPMENT, net 623,831 606,199
OTHER ASSETS 17,684 12,949
-------- --------
TOTAL ASSETS $747,245 $734,566
======== ========
CURRENT LIABILITIES:
Current maturities of long-term debt $ 209 $ 209
Accounts payable 58,960 52,588
Accrued liabilities 30,281 27,233
-------- --------
Total current liabilities 89,450 80,030
EQUITY INVESTMENT 25,632 --
LONG-TERM DEBT, net of unamortized discount
and current maturities 21,968 21,997
DEFERRED CREDITS AND OTHER LIABILITIES 33,855 33,486
INVESTED CAPITAL 576,340 599,053
-------- --------
TOTAL LIABILITIES AND INVESTED CAPITAL $747,245 $734,566
======== ========
The accompanying notes are an integral part of these combined financial
statements.
5
7
OXYCHEM TRANSFERRED BUSINESSES
COMBINED STATEMENTS OF OPERATIONS AND INVESTED CAPITAL
For the years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
1998 1997 1996
--------- --------- ---------
NET SALES $ 839,805 $ 993,612 $ 956,911
OPERATING COSTS AND EXPENSES:
Costs of sales (711,002) (817,918) (752,738)
Selling, general and administrative and
other operating expenses (45,670) (84,199) (49,559)
Loss from equity investments (35,347) (22,267) (7,586)
--------- --------- ---------
OPERATING INCOME 47,786 69,228 147,028
Interest expense (1,807) (1,821) (1,841)
Other expense, net (4,772) (3,912) (3,166)
--------- --------- ---------
INCOME BEFORE TAXES 41,207 63,495 142,021
Provision for income taxes (17,391) (24,796) (55,502)
--------- --------- ---------
NET INCOME 23,816 38,699 86,519
MINIMUM PENSION LIABILITY ADJUSTMENT -- -- 222
--------- --------- ---------
COMPREHENSIVE INCOME 23,816 38,699 86,741
INCREASE (DECREASE) IN INVESTED CAPITAL (46,529) 5,945 (43,778)
INVESTED CAPITAL, beginning of year 599,053 554,409 511,446
--------- --------- ---------
INVESTED CAPITAL, end of year $ 576,340 $ 599,053 $ 554,409
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
6
8
OXYCHEM TRANSFERRED BUSINESSES
COMBINED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1998, 1997 and 1996
(Amounts in thousands)
1998 1997 1996
---- ---- ----
CASH FLOW FROM OPERATING ACTIVITIES:
Net income $ 23,816 $ 38,699 $ 86,519
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization of assets 43,087 34,498 29,878
Unfunded losses from equity investee 35,347 22,267 7,586
Reserve for asset impairment -- 32,800 --
Other noncash charges to income 4,937 10,626 3,452
Changes in operating assets and liabilities:
Decrease (increase) in receivables (4,248) (8,235) 16,619
Decrease (increase) in inventories 6,046 (4,275) 980
Decrease (increase) in prepaid expenses (1,410) (1,812) 1,177
Increase (decrease) in accounts payable
and accrued liabilities 9,414 (3,570) 3,174
Other operating, net (8,827) (3,972) (3,350)
--------- --------- ---------
Net cash provided by operating activities 108,162 117,026 146,035
CASH FLOW FROM INVESTING ACTIVITIES:
Capital expenditures (61,364) (122,711) (102,011)
--------- --------- ---------
Net cash used by investing activities (61,364) (122,711) (102,011)
CASH FLOW FROM FINANCING ACTIVITIES:
Principal payments on long-term debt and
capital lease liability (269) (263) (243)
Increase (decrease) in invested capital (46,529) 5,945 (43,778)
--------- --------- ---------
Net cash provided (used) by financing activities (46,798) 5,682 (44,021)
--------- --------- ---------
Change in cash -- (3) 3
Cash - beginning of period 18 21 18
--------- --------- ---------
Cash - end of period $ 18 $ 18 $ 21
========= ========= =========
The accompanying notes are an integral part of these combined financial
statements.
7
9
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) BASIS OF PRESENTATION AND DESCRIPTION OF THE TRANSFERRED BUSINESSES -
On June 24, 1998, Occidental Chemical Corporation (together with its
wholly-owned subsidiaries, "OxyChem") signed a letter of intent with The Geon
Company (together with its wholly-owned subsidiaries, "Geon") to effect, among
other things, the proposed formation by Geon and OxyChem of two separate limited
partnerships, focusing on the suspension/mass polyvinyl chloride ("PVC") and
vinyl chloride monomer ("VCM") businesses, together with OxyChem's Houston
Chlor-Alkali Complex and the powder/dry blend compound business, respectively,
and the transfer of a compound and flexible film plant and a pellet compound
business by OxyChem to Geon, as well as certain related supply arrangements. The
formation of each entity will involve the contribution by both Geon and OxyChem
of such assets, together with certain related assets and liabilities as well as
the transfer of related employees. All of the foregoing transactions shall be
referred to collectively hereinafter as the "Proposed Transactions."
OxyChem's transfers to the Proposed Transactions include the following:
1. OxyChem and Geon will form a limited partnership (the
"PVC Partnership") to which OxyChem will contribute its PVC
and VCM facilities in Pasadena, Texas, and Deer Park, Texas,
as well as a fifty percent investment interest in OxyMar, a
partnership which manufactures VCM at its plant in Ingleside,
Texas. OxyMar is owned by an OxyChem affiliate, Oxy VCM, Inc.
Additionally, OxyChem will contribute its Houston Chlor-Alkali
Complex facilities to the PVC Partnership.
2. OxyChem and Geon will also form a limited partnership
(the "Compounding Partnership") to which OxyChem will
contribute its powder compound business and related assets at
its Pasadena, Texas, facility.
3. OxyChem's specialty cube or pellet compound business
being constructed and installed at its Pasadena, Texas, plant
("Pasadena Subject Business"), and its Burlington, New Jersey,
plant, which manufactures flexible film and compound (the
"Burlington Plant"), will be conveyed to Geon.
In return for the contributions and transfers of assets mentioned
above, OxyChem will acquire a 76% controlling interest in the PVC Partnership
and a 10% non-controlling interest in the Compounding Partnership. Under the
Proposed Transactions, the PVC Partnership and the Compounding Partnership will
also assume certain liabilities of OxyChem.
The accompanying combined financial statements include the assets and
liabilities and results of operations of OxyChem's contributions to the PVC
Partnership and the Compounding Partnership as well as the Pasadena Subject
Business, the Burlington Plant and Oxy VCM, Inc. (collectively, the "OxyChem
Transferred Businesses"). The OxyChem Transferred Businesses are represented by
OxyChem and Oxy VCM, Inc., which are indirect subsidiaries of Occidental
Chemical Holding Corporation ("OCHC"). OCHC is an indirect subsidiary of
Occidental Petroleum Corporation ("OPC"). Certain amounts in the accompanying
combined financial statements have been allocated in a consistent manner in
order to depict the financial position, results of operations and cash flows of
the OxyChem Transferred Businesses on a stand alone basis. OxyChem's management
believes these allocations are reasonable. Consequently, the financial position,
results of operations, and cash flows may not be indicative of what would have
been reported if the OxyChem Transferred Businesses had been one or more
separate, stand-alone entities or had been operated as a part of the Proposed
Transactions during the periods presented.
8
10
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(1) BASIS OF PRESENTATION AND DESCRIPTION OF THE TRANSFERRED BUSINESSES -
(continued)
Certain assets and liabilities of the OxyChem Transferred Businesses
will be retained by OPC or OxyChem after closing of the Proposed Transactions.
The retained assets and liabilities include certain trade receivables and
finished goods inventory, long-term debt, property tax, and other liabilities.
The amount of assets and liabilities that would have been retained was
approximately $7 million and $47 million, respectively, at December 31, 1998.
The OxyChem Transferred Businesses operate as OxyChem and enter into
operating and sales contracts administered by OxyChem. These include national
sales agreements as well as purchase and energy agreements.
(2) SIGNIFICANT ACCOUNTING POLICIES -
Principles of combination -
The combined financial statements include the assets and liabilities
and results of operations of the OxyChem Transferred Businesses. All material
intercompany accounts and transactions between the OxyChem Transferred
Businesses have been eliminated.
Risks and uncertainties -
The process of preparing financial statements in conformity with
generally accepted accounting principles requires the use of estimates and
assumptions regarding certain types of assets, liabilities, revenues and
expenses. Such estimates primarily relate to unsettled transactions and events
as of the date of the financial statements. Accordingly, upon settlement, actual
results may differ from estimated amounts, generally not by material amounts.
OxyChem's management believes that these estimates and assumptions, as well as
any allocations, provide a reasonable basis for the fair presentation of the
OxyChem Transferred Businesses' combined financial position and results of
operations.
Since the OxyChem Transferred Businesses' major products are
commodities, significant changes in the prices of chemical products could have a
significant impact on the OxyChem Transferred Businesses' results of operations
for any particular period.
Revenue recognition -
Revenue from product sales is recognized upon shipment of product to
the customer.
Environmental liabilities and costs -
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Reserves for estimated costs that relate
to existing conditions caused by past operations and that do not contribute to
current or future revenue generation are recorded when environmental remedial
efforts are probable and the costs can be reasonably estimated. In determining
the reserves, OPC uses the most current information available, including similar
past experiences, available technology, regulations in effect, the timing of
remediation and cost-sharing arrangements. The environmental reserves are based
on management's estimate of the most likely cost to be incurred and are reviewed
periodically and adjusted as additional or new information becomes available.
9
11
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(2) SIGNIFICANT ACCOUNTING POLICIES - (continued)
Equity investment -
The OxyChem Transferred Businesses' fifty percent interest in OxyMar is
accounted for on the equity method. At December 31, 1998 and 1997, the
historical underlying equity in net assets of OxyMar exceeded the OxyChem
Transferred Businesses' investment in OxyMar by $8.3 million and $8.8 million,
respectively. The investment deficiency is being amortized on a straight-line
basis into income over 25 years. The following table presents summarized
financial information of OxyMar as of December 31, 1998 and 1997, and for the
years ended December 31, 1998, 1997 and 1996 (in thousands).
1998 1997 1996
---- ---- ----
Net sales $ 257,344 $ 334,983 $ 273,651
Costs and expenses 328,906 380,373 289,691
----------- ----------- ---------
Net loss $ (71,562) $ (45,390) $ (16,040)
=========== =========== =========
Current assets $ 35,055 $ 49,874
Noncurrent assets $ 393,113 $ 414,331
Current liabilities $ 78,362 $ 52,653
Noncurrent liabilities $ 384,378 $ 375,342
Partners' equity $ (34,572) $ 36,210
As of December 31, 1998, OPC unconditionally provides guarantees of
$192.5 million of the OxyMar partnership obligations, which includes bonds and a
revolving credit line.
Income taxes -
The OxyChem Transferred Businesses have been included in the
consolidated U.S. federal income tax return and in certain unitary state income
tax returns of OPC. A portion of the income tax provision for these returns is
allocated to the OxyChem Transferred Businesses on the basis of a tax sharing
arrangement with OPC using net income determined on a separate tax return basis.
Income tax provisions under the tax sharing arrangement are calculated using the
applicable U.S. federal statutory rate and a unitary state effective rate (based
on unitary state income taxes incurred by OPC and subsidiaries).
The OxyChem Transferred Businesses also record state income tax
provisions for operations required to be reported in separate tax returns. The
difference between the provision for income taxes at the U.S. federal statutory
rate and the effective tax rate is primarily due to state income taxes.
Liabilities for current and/or deferred income taxes have been and remain the
responsibility of OPC and, accordingly, have been included in the Combined
Balance Sheets as invested capital.
Fair value of financial instruments -
The fair value of on-balance sheet financial instruments approximates
carrying value.
10
12
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(2) SIGNIFICANT ACCOUNTING POLICIES - (continued)
Asset impairment -
During 1997, OxyChem decided to sell the Burlington Plant after
determining it to be a non-strategic asset. OxyChem estimated its fair value
based on discussions with prospective buyers adjusted for selling costs. OxyChem
reduced its carrying value by $32.8 million to record the assets held for sale
at fair value. The charge for this write-down is included in selling, general
and administrative and other operating expenses in the accompanying Combined
Statement of Operations and Invested Capital. Management believes there will be
no additional write-down resulting from the sale of the Burlington Plant to
Geon.
(3) RECEIVABLES -
As of December 31, 1998 and 1997, the OxyChem Transferred Businesses
transferred, with limited recourse, to an OPC affiliate certain trade
receivables under a revolving sale program in connection with the ultimate sale
for cash of an undivided ownership interest in such receivables by the
affiliate. The net receivables transferred amounted to approximately $98 million
and $85 million as of December 31, 1998 and 1997, respectively. The OxyChem
Transferred Businesses transferred the receivables to the affiliate in a noncash
transaction that was reflected as a reduction in invested capital. OPC retained
collection responsibility with respect to the receivables sold. An interest in
newly created receivables is transferred monthly, net of collections made from
customers. Fees related to the sales of receivables under this program, which
are allocated from OPC to the OxyChem Transferred Businesses, were $4.8 million,
$3.9 million and $3.2 million for 1998, 1997 and 1996, respectively, and are
included in other expense, net.
(4) INVENTORIES -
Inventories are valued at the lower of cost or market. The last-in,
first-out (LIFO) cost method was used in determining the costs of raw materials
and finished goods. Materials and supplies inventories were determined using the
weighted-average-cost method. Inventories consisted of the following as of
December 31 (in thousands):
1998 1997
---- ----
Raw materials $ 12,135 $ 15,667
Materials and supplies 17,687 16,153
Finished goods 38,428 48,073
----------- -----------
68,250 79,893
LIFO/lower of cost or market reserve 1,723 (3,874)
----------- -----------
Inventories at lower of cost or market $ 69,973 $ 76,019
=========== ===========
11
13
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(5) PROPERTY, PLANT AND EQUIPMENT -
Property additions and major renewals and improvements are capitalized
at cost. Depreciation is primarily provided using the units-of-production method
based on estimated total productive life.
Interest costs incurred in connection with major capital expenditures
which extend longer than one year are capitalized and amortized over the lives
of the related assets. Capitalized interest is calculated based on the average
borrowing rate of OPC and allocated to the OxyChem Transferred Businesses.
Interest allocated and capitalized was approximately $1 million, $6 million and
$2 million for the years ended December 31, 1998, 1997 and 1996, respectively.
Property, plant and equipment consists of the following as of December
31 (in thousands):
1998 1997
---- ----
Land and land improvements $ 21,133 $ 19,272
Buildings 49,784 46,034
Machinery and equipment 791,120 665,001
Construction in progress 88,107 169,877
----------- -----------
950,144 900,184
Accumulated depreciation (326,313) (293,985)
----------- -----------
Property, plant and equipment, net $ 623,831 $ 606,199
=========== ===========
(6) OTHER ASSETS -
Other assets, net of any accumulated amortization, consist of the
following as of December 31 (in thousands):
1998 1997
---- ----
Deferred start-up costs $ 4,052 $ 3,710
Asbestos and lead abatement 6,572 6,197
Other 7,060 3,042
----------- -----------
$ 17,684 $ 12,949
=========== ===========
Deferred start-up costs are amortized over a period of 10 years. Other
amortizable assets are written off to income over the estimated periods to be
benefited.
In April 1998, the American Institute of Certified Public Accountants
issued Statement of Position 98-5, "Reporting on the Costs of Start-Up
Activities" (SOP 98-5), which requires that costs of start-up activities,
including organizational costs, be expensed as incurred. The initial application
of the statement will result in a charge to income for any costs of start-up
activities that have not yet been fully amortized. OPC will implement SOP 98-5
effective January 1, 1999.
12
14
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(7) ACCRUED LIABILITIES -
Accrued liabilities consist of the following as of December 31 (in
thousands):
1998 1997
---- ----
Turnaround maintenance $ 11,758 $ 7,307
Property taxes 14,355 13,052
Other 4,168 6,874
----------- -----------
$ 30,281 $ 27,233
=========== ===========
Maintenance turnarounds are generally performed every 2 to 5 years.
OxyChem utilizes an accrual methodology under which it estimates the projected
cost of a turnaround and accrues the cost equally over the years between
turnarounds. Turnaround costs charged to operations for the years ended December
31, 1998, 1997 and 1996 were $7.7 million, $8.0 million, and $7.3 million,
respectively.
(8) LONG-TERM DEBT -
Long-term debt, including current maturities, at December 31 consisted
of the following (in thousands):
1998 1997
---- ----
Pollution control and solid waste disposal
revenue bonds, 6 to 7%, due through 2020 $ 23,875 $ 24,084
Unamortized discount (1,698) (1,878)
----------- -----------
$ 22,177 $ 22,206
=========== ===========
Minimum principal payments on long-term debt subsequent to 1998 are as
follows (in thousands):
1999 $ 209
2000 218
2001 218
2002 218
2003 237
Thereafter 22,775
----------
$ 23,875
==========
Unamortized discount is being amortized to interest expense over the
lives of the related issues.
Certain of the pollution control revenue bonds are secured by the
equipment purchased with the proceeds of the bond financing.
At December 31, 1998, $8 million of the long-term debt was guaranteed
by OPC.
13
15
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(9) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS -
Effective January 1, 1998, OPC adopted the provisions of SFAS No. 132
"Employers' Disclosures about Pensions and Other Postretirement Benefits." This
statement standardized the disclosure requirements for pensions and other
postretirement benefits and amends SFAS No. 87 "Employers' Accounting for
Pensions," SFAS No. 88 "Employers' Accounting for Settlements and Curtailments
of Defined Benefit Pension Plans" and SFAS No. 106 "Employers' Accounting for
Postretirement Benefits Other Than Pensions". The provisions of SFAS No. 132 are
disclosure oriented and do not change the measurement or recognition of the
plans. Accordingly, the implementation of SFAS No. 132 did not have an impact on
the OxyChem Transferred Businesses' combined financial position or results of
operations. The prior disclosures for 1997 have been changed to conform to the
new disclosure requirements.
The OxyChem Transferred Businesses participate in various defined
contribution retirement plans sponsored by OPC for its salaried, domestic union
and nonunion hourly, and certain foreign national employees that provide for
periodic contributions by the OxyChem Transferred Businesses based on
plan-specific criteria, such as base pay, age level, and/or employee
contributions. The OxyChem Transferred Businesses contributed and expensed
approximately $5 million under the provisions of these plans in each of the
years 1998, 1997 and 1996.
OPC provides medical and dental benefits and life insurance coverage
for certain active, retired and disabled employees and their eligible
dependents. Beginning in 1993, certain salaried participants pay for all medical
cost increases in excess of increases in the consumer Price Index (CPI). The
benefits generally are funded by OPC as the benefits are paid during the year.
The cost of providing these benefits is based on claims filed and insurance
premiums paid for the period.
The OxyChem Transferred Businesses' retirement and postretirement
defined benefit plans are accrued based on various assumptions and discount
rates, as described below. The actuarial assumptions used could change in the
near term as a result of changes in expected future trends and other factors
which, depending on the nature of the changes, could cause increases or
decreases in the liabilities accrued.
Retirement plans -
Pension costs for the OxyChem Transferred Businesses' defined benefit
pension plans, determined by independent actuarial valuations, are generally
funded by payments to trust funds, which are administered by independent
trustees. The following table sets forth the components of the net periodic
benefit costs for the OxyChem Transferred Businesses' defined benefit pension
plans for the years ended December 31 (in thousands):
1998 1997 1996
---- ---- ----
Service cost - benefits earned during the period $ 426 $ 435 $ 427
Interest cost on projected benefit obligation 1,024 981 901
Expected return on plan assets (1,233) (1,031) (924)
Net amortization and deferral (30) (21) (21)
--------- -------- ---------
Net periodic benefit cost $ 187 $ 364 $ 383
========= ======== =========
In 1996, the OxyChem Transferred Businesses recorded adjustments to
invested capital of $222,000 to reflect the net-of-tax difference between the
additional liability required under pension accounting provisions and the
corresponding intangible asset.
14
16
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(9) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS - (continued)
Retirement plans - (continued)
The following table sets forth the reconciliation of the beginning and
ending balances of the benefit obligation for the OxyChem Transferred
Businesses' defined pension plans (in thousands):
1998 1997
---- ----
Changes in benefit obligation:
Benefit obligation - beginning of year $ 14,246 $ 13,100
Service cost - benefits earned during the period 426 435
Interest cost on projected benefit obligation 1,024 981
Actual loss 649 220
Benefits paid (540) (490)
----------- -----------
Benefit obligation - end of year $ 15,805 $ 14,246
=========== ===========
The following table sets forth the reconciliation of the beginning and
ending balances of the fair value of plan assets for OxyChem Transferred
Businesses' defined benefit pension plans (in thousands):
1998 1997
---- ----
Changes in plan assets:
Fair value of plan assets - beginning of year $ 15,556 $ 13,396
Actual return on plan assets 2,045 2,575
Employer contribution 452 75
Benefits paid (540) (490)
----------- -----------
Fair value of plan assets - end of year $ 17,513 $ 15,556
=========== ===========
The weighted average discount rate used in determining the actuarial
present value of the projected benefit obligations was 7 percent in 1998 and 7.5
percent in 1997. The weighted average rate of increase in future compensation
levels used in determining the actuarial present value of the projected benefit
obligations was approximately 5 percent in both 1998 and 1997. The expected
weighted average long-term rate of return on assets was 8 percent in both 1998
and 1997.
The following table sets forth the funded status and amounts recognized
in the OxyChem Transferred Businesses' combined balance sheets for the defined
pension plans at December 31 (in thousands):
1998 1997
---- ----
Funded status $ 1,708 $ 1,309
Unrecognized net transition obligation (62) (83)
Unrecognized prior service cost 1 1
Unrecognized net gain (1,483) (1,328)
-------------- -------------
Net amount recognized $ 164 $ (101)
============== =============
Prepaid benefit cost $ 164 $ -
Accrued benefit liability - (101)
-------------- -------------
Net amount recognized $ 164 $ (101)
============== =============
15
17
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(9) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS - (continued)
Postretirement benefits -
To reflect the OxyChem Transferred Businesses' participation in the OPC
plan, the net periodic postretirement benefit costs and the postretirement
benefit obligations are based on an allocation of the OPC actuarial study using
participant counts and demographic information for the OxyChem Transferred
Businesses for each of the years presented in the tables below. This allocation
excludes amounts attributable to salaried retirees and surviving spouses because
nonunion retiree information is not maintained for such participants by plant
location.
The postretirement benefit obligation as of December 31, 1998 and 1997
was determined by application of the terms of medical and dental benefits and
life insurance coverage, including the effect of established maximums on covered
costs, together with relevant actuarial assumptions and health care cost trend
rates projected at a CPI increase of 2.5 percent and 3 percent as of December
31, 1998 and 1997, respectively (beginning in 1993, participants other than
certain union employees pay for all medical cost increases in excess of
increases in the CPI). For certain union employees, the health care cost trend
rates were projected at annual rates ranging ratably from 8 percent in 1998 to 5
percent through the year 2004 and level thereafter. A one percent increase or a
one percent decrease in these assumed health care cost trend rates would result
in an increase of $1 million or a reduction of $1 million, respectively, in the
postretirement benefit obligation as of December 31, 1998. The annual service
and interest costs would not be materially affected by these changes. The
weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7 percent in 1998 and 7.5 percent in 1997.
The plans are unfunded.
The following table sets forth the components of the allocated net
periodic benefit costs for the OxyChem Transferred Businesses' defined
postretirement benefit plans for the years ended December 31 (in thousands):
1998 1997 1996
---- ---- ----
Service cost - benefits earned during the period $ 403 $ 428 $ 443
Interest cost on accumulated benefit obligation 1,351 1,306 1,322
Net amortization and deferral (83) - -
--------- ------ ---------
Allocated net periodic benefit cost $ 1,671 $ 1,734 $ 1,765
========= ======== =========
The following table sets forth the reconciliation of the beginning and
ending balances of the allocated benefit obligation for the OxyChem Transferred
Businesses' defined postretirement benefit plans (in thousands):
1998 1997
---- ----
Changes in allocated benefit obligation:
Allocated benefit obligation - beginning of year $ 18,177 $ 18,086
Service cost - benefits earned during the period 403 428
Interest cost on projected benefit obligation 1,351 1,306
Actual (gain) loss 991 (884)
Benefits paid (697) (759)
----------- -----------
Allocated benefit obligation - end of year $ 20,225 $ 18,177
=========== ===========
16
18
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(9) RETIREMENT PLANS AND POSTRETIREMENT BENEFITS - (continued)
Postretirement benefits - (continued)
The following table sets forth the funded status and amounts recognized
in the OxyChem Transferred Businesses' combined balance sheets for the defined
postretirement benefit plans at December 31 (in thousands):
1998 1997
---- ----
Funded status $ (20,225) $ (18,177)
Unrecognized net gain (1,502) (2,576)
--------------- -------------
Net amount recognized $ (21,727) $ (20,753)
=============== =============
Accrued benefit liability $ (21,727) $ (20,753)
-------------- -------------
Net amount recognized $ (21,727) $ (20,753)
============== =============
(10) COMMITMENTS AND CONTINGENCIES -
At December 31, 1998, future operating lease commitments for railcars
with terms greater than one year are as follows (in thousands):
1999 $ 8,065
2000 8,401
2001 7,905
2002 7,812
2003 6,027
Thereafter 90,028
-----------
Total minimum lease payments $ 128,238
===========
Rental expense for railcars was approximately $17 million for 1998, $15
million for 1997, and $16 million for 1996.
Lawsuits -
OxyChem has been named as defendant or as a potentially responsible
party with regard to the OxyChem Transferred Businesses in a number of lawsuits,
claims and proceedings, including governmental proceedings under the
Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA")
and corresponding state acts. OxyChem has accrued reserves with regard to the
OxyChem Transferred Businesses at the most likely cost to be incurred, if any.
In management's opinion, after taking into account reserves and indemnities, it
is unlikely that any of the foregoing matters will have a material adverse
effect upon the combined financial position or results of operations of the
OxyChem Transferred Businesses.
17
19
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(10) COMMITMENTS AND CONTINGENCIES - (continued)
Other -
The OxyChem Transferred Businesses have entered into an agreement
providing for the following minimum future payments to purchase brine, a raw
material, as of December 31, 1998 (in thousands).
1999 $ 850
2000 820
2001 790
2002 760
2003 730
2003 through 2014 5,726
-----------
$ 9,676
===========
Payments under this agreement were $880,000, $909,000 and $939,000 in
1998, 1997 and 1996, respectively.
The OxyChem Transferred Businesses have certain other commitments to
purchase electrical power, raw materials and other potential obligations, all in
the ordinary course of business.
(11) RELATED PARTY TRANSACTIONS -
OPC utilizes a centralized cash management system for its operations,
including the OxyChem Transferred Businesses. Cash distributed to or advanced
from OPC has been reflected in invested capital in the accompanying Combined
Balance Sheets. In addition, settlements of transactions with other OPC
affiliates are recorded through invested capital.
OPC provided certain corporate, general and administrative services to
the OxyChem Transferred Businesses, including legal, financial, marketing, sales
and customer service, technical, executive and other services. Charges for these
services were allocated based on ratios in a reasonable and consistent manner
and by the estimated costs of specific functions performed by OPC and affiliates
for the OxyChem Transferred Businesses. OxyChem's management believes the
allocations, which totaled $41.7 million in 1998, $41.9 million in 1997 and
$41.6 million in 1996, are reasonable. Such amounts are included in selling,
general and administrative and other operating expenses.
The OxyChem Transferred Businesses were also allocated research and
development costs by OxyChem, which are charged to operations as incurred. These
charges, which are included in selling, general and administrative and other
operating expenses in the accompanying Combined Statements of Operations and
Invested Capital, were $2.6 million, $2.5 million and $1.6 million for 1998,
1997 and 1996, respectively.
The OxyChem Transferred Businesses sell to other OxyChem facilities and
affiliated businesses of OPC. These sales, reflected at market prices and
included in the accompanying Combined Statements of Operations and Invested
Capital, were approximately $49 million, $69 million and $68 million for 1998,
1997 and 1996, respectively.
18
20
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(11) RELATED PARTY TRANSACTIONS - (continued)
The OxyChem Transferred Businesses purchase VCM from OxyMar under the
terms of a VCM purchase agreement between OxyChem and OxyMar that runs for the
life of the OxyMar partnership. Purchases are at market prices and totaled
approximately $96 million, $83 million and $69 million in 1998, 1997 and 1996,
respectively. Accounts payable as of both December 31, 1998 and 1997 include
approximately $8 million and $7 million, respectively, payable to OxyMar.
The OxyChem Transferred Businesses purchase ethylene at market prices
from an affiliate of OxyChem. These purchases totaled approximately $88 million
in 1998, $136 million in 1997, and $99 million in 1996.
See Note 3 regarding the transfer of receivables to an affiliate.
(12) SUMMARIZED FINANCIAL INFORMATION -
The following is summarized financial information (in millions) for (1)
the business to be contributed by Oxychem to the PVC Partnership and (2) the
business to be contributed by OxyChem to the Compounding Partnership combined
with the Pasadena Subject Business and the Burlington Plant which are to be
acquired by Geon. As the Compounding Partnership, Pasadena Subject Business
and the Burlington Plant will be controlled and consolidated by Geon, they
have been combined in the presentation below. Net sales of resins by the PVC
Partnership to the Compounding Partnership have been eliminated in combining
the OxyChem Transferred Businesses.
OxyChem
Compounding Partnership Transferred
PVC Pasadena and Businesses
Partnership(1) Burlington(2) Eliminations Combined
-------------- ------------- ------------ --------
December 31, 1998
Current assets $ 68 $ 38 $ 106
Current liabilities (74) (15) (89)
--------- --------- ---------
Working capital (6) 23 17
Noncurrent assets 626 15 641
Noncurrent liabilities (69) (13) (82)
--------- --------- ---------
Invested capital $ 551 $ 25 $ 576
========= ========= =========
December 31, 1997
Current assets $ 73 $ 33 $ 106
Current liabilities (69) (11) (80)
--------- --------- ---------
Working capital 4 22 26
Noncurrent assets 626 2 628
Noncurrent liabilities (41) (14) (55)
--------- --------- ---------
Invested capital $ 589 $ 10 $ 599
========= ========= =========
19
21
OXYCHEM TRANSFERRED BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
December 31, 1998, 1997 and 1996
(12) SUMMARIZED FINANCIAL INFORMATION - (continued)
OxyChem
Compounding Partnership Transferred
PVC Pasadena and Businesses
Partnership(1) Burlington(2) Eliminations Combined
-------------- ------------- ------------ --------
For the year ended December 31, 1998
Net sales $ 726 $ 167 $ (53) $ 840
Operating income 37 11 48
Net income 18 6 24
Loss from equity investment (35) - (35)
Depreciation and amortization 41 2 43
For the year ended December 31, 1997
Net sales $ 883 $ 178 $ (67) $ 994
Operating income (loss) 98 (29) 69
Net income (loss) 57 (18) 39
Loss from equity investment (22) - (22)
Depreciation and amortization 32 2 34
For the year ended December 31, 1996
Net sales $ 849 $ 165 $ (57) $ 957
Operating income 139 8 147
Net income 83 4 87
Loss from equity investment (8) - (8)
Depreciation and amortization 28 2 30
20
22
ITEM 7B.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS OF THE GEON
COMPANY
The unaudited pro forma condensed consolidated financial statements of Geon
reflect the formation of the Partnerships and Related Transactions as if they
had been completed on December 31, 1998 for pro forma balance sheet data
purposes and on January 1, 1998, for pro forma income statement data purposes.
The Unaudited Pro Forma Condensed Consolidated Statement of Income includes
amounts derived from the audited consolidated statement of income of Geon for
the year ended December 31, 1998 and the audited combined statement of
operations of the OxyChem Transferred Businesses for the year ended December 31,
1998. The Unaudited Pro Forma Condensed Consolidated Balance Sheet includes
amounts derived from the audited consolidated balance sheet of Geon and the
audited combined balance sheet of the OxyChem Transferred Businesses as of
December 31, 1998. OxyChem's transfer of its PVC flexible film and specialty
pellet compound businesses to Geon and OxyChem's business contributed to the
Compounding Partnership are collectively referred to as the "Acquired
Businesses" in the accompanying Unaudited Pro Forma Condensed Consolidated
Financial Statements.
For accounting purposes, Geon's interest in the PVC Partnership is reflected on
the equity basis. Geon's majority ownership of the Compounding Partnership
requires the assets and liabilities contributed by OxyChem to the Compounding
Partnership to be valued at their estimated fair value in Geon's consolidated
financial statements. OxyChem's transfer of its PVC flexible film and specialty
pellet compound businesses to Geon requires the assets and liabilities
transferred to be valued at their estimated fair value in Geon's consolidated
financial statements. Certain pro forma adjustments result from a preliminary
determination of purchase accounting adjustments and are based upon information
provided by management of OxyChem and certain assumptions that management of
Geon considers reasonable under the circumstances. Consequently, the amounts
reflected in Geon's Unaudited Pro Forma Condensed Consolidated Financial
Statements are subject to change.
The contributions by Geon to the PVC Partnership and the Compounding Partnership
will trigger the recognition of an after-tax gain (estimated to be $53 million
on a pro forma basis) in the second quarter of 1999. Such contributions include,
for accounting purposes, a sale to OxyChem of 76% of Geon's PVC business
contributed to the PVC Partnership and a sale to OxyChem of 10% of Geon's
compounding business contributed to the Compounding Partnership. The resultant
gain represents the excess of fair value (including the realization of a net
$104 million in cash and working capital retention benefits from the PVC
Partnership) over book value for the 76% and 10% of Geon's PVC and Compounding
Contributed Businesses, respectively.
21
23
In the Unaudited Pro Forma Condensed Consolidated Financial Statements, the
following components comprise the net cash and working capital retention
benefits:
$ MILLIONS
---------------------------------------------------------------------------
ESTIMATED AMOUNTS
PER THE DEFINITIVE
PROXY STATEMENT REALLOCATION REDUCTION REVISED
Working capital of Geon's PVC Contributed
Business retained by Geon $ 70 $ (8) $ 62
Cash realized from the PVC Partnership to Geon
76 8 $ (6) 78
Purchase price paid by Geon to OxyChem for the
PVC flexible film and specialty pellet
compound businesses
(27) (27)
Geon's share of the PVC Partnership's
incremental financing (9) (9)
---------------------------------------------------------------------------
$ 110 $ 0 $ (6) $ 104
===========================================================================
The $6 million reduction in the net cash and working capital retention benefits
result from the contribution of $4 million of additional debt and lease
obligations plus $2 million which represents Geon's funding of a portion of the
LaPorte plant maintenance shutdown scheduled for the second quarter of 1999
after formation of the PVC Partnership.
The Unaudited Pro Forma Condensed Consolidated Financial Statements of Geon and
the accompanying notes should be read in conjunction with the audited
consolidated financial statements of Geon as of and for the year ended December
31, 1998 and the audited combined financial statements of the OxyChem
Transferred Businesses as of and for the year ended December 31, 1998 which are
included herein.
The Unaudited Pro Forma Condensed Consolidated Financial Statements of Geon do
not purport to be indicative of what Geon's financial condition or results of
operations would have been had the formation of the Partnerships and Related
Transactions in fact been consummated as of the assumed dates and for the
periods presented, nor are they indicative of the results of operations or
financial condition for any future period or date. The pro forma adjustments
reflected in the Unaudited Pro Forma Condensed Consolidated Financial Statements
to give effect to the formation of the Partnerships and Related Transactions,
are based on available information and certain assumptions that Geon believes
are reasonable in the circumstances.
22
24
The Geon Company
Unaudited Pro Forma Condensed Consolidated Balance Sheet
December 31, 1998
(In millions)
ACQUIRED
INVESTMENT BUSINESS
IN PVC PURCHASE
DEDUCT PARTNERSHIP ADD ACCOUNTING
GEON PVC AND ACQUIRED AND OTHER PRO
HISTORICAL BUSINESS ADJUSTMENTS BUSINESSES ADJUSTMENTS FORMA
---------------------------------------------------------------------------------
(a)
ASSETS
Current assets:
Cash and cash equivalents $ 14.4 $ 0.1 $ 14.3
Accounts receivable 70.8 24.1 $ 24.1 (m) $ 0.3 $ 18.1 (e) 89.2
Inventories 113.9 39.6 3.0 (m) 34.8 1.0 (e) 113.1
Other current assets 35.6 3.6 2.2 34.2
-----------------------------------------------------------------------------------
Total current assets 234.7 67.4 27.1 37.3 19.1 250.8
Property, plant and equipment (net) 443.5 222.1 (6.0)(b) 15.5 1.5 (e) 232.4
Other non-current assets:
Investments, goodwill and other assets 123.8 4.8 0.2 119.2
Investment in PVC Partnership 202.9 (c) 202.9
-----------------------------------------------------------------------------------
$ 802.0 $ 294.3 $224.0 $ 53.0 $ 20.6 $ 805.3
===================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Short term debt including current $ 51.7 $ 0.2 $(78.0)(i) $ 27.0 (f) $ 0.5
maturities
Accounts payable 129.1 63.8 $ 13.6 78.9
Accrued expenses 76.0 17.4 18.0 (b) 1.4 (0.5)(k) 97.7
15.7 (m) 4.5 (e)
-----------------------------------------------------------------------------------
Total current liabilities 256.8 81.4 (44.3) 15.0 31.0 177.1
Non-current liabilities:
Long-term debt 135.4 9.6 125.8
Deferred income taxes 32.8 27.7 (d) 6.2 (l) 66.7
Other liabilities 162.9 1.9 0.6 (m) 13.0 (5.0)(k) 164.9
(4.7)(n)
Minority interest 3.6 (g) 3.6
-----------------------------------------------------------------------------------
Total liabilities 587.9 92.9 (20.7) 28.0 35.8 538.1
Total stockholders' equity 214.1 201.4 244.7 (o) 25.0 9.8 (h) 267.2
(25.0)(j)
-----------------------------------------------------------------------------------
Total liabilities and stockholders' equity $ 802.0 $ 294.3 $224.0 $ 53.0 $ 20.6 $ 805.3
===================================================================================
23
25
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET
(a) Reflects the historical cost of the assets and liabilities of the Geon
PVC Business. The Geon PVC Business refers to Geon's suspension and mass
resin business including certain assets and liabilities, described in
note (m) below, which will be retained by Geon.
(b) Reflects accrual of direct transaction costs related to the formation of
the PVC Partnership to be borne by Geon and the write-off of
non-contributed assets related to Geon's PVC business consisting of
management information systems assets that will no longer be used upon
formation of the PVC Partnership.
(c) Geon's investment in the PVC Partnership is as follows:
Geon's proportionate share of the PVC Partnership fair value $ 232.9
Cash received 78.0
--------
310.9
Net book value of Geon's PVC Business' contributed net assets (185.9)
--------
125.0
Ownership percentage sold to OxyChem 76%
--------
Pre-tax gain before one time charges associated with formation of the PVC
Partnership 95.0
Plus net book value, net of assets and liabilities retained by Geon, of
Geon's PVC Business 185.9
Less cash received (78.0)
--------
Investment in PVC Partnership $ 202.9
========
(d) Represents the income tax effects, computed at an estimated effective tax
rate of 39%, associated with the gain on the contribution of Geon's net
assets to the PVC Partnership and the direct costs related to the
formation of the PVC Partnership.
24
26
(e) Represents adjustments for the Acquired Businesses under the purchase
method of accounting as follows:
TRADE RECEIVABLES (NET)
To reflect trade receivables of the Acquired Businesses which were sold
under a receivable sales agreement. The receivable sales agreement was
terminated as it related to the Acquired Businesses as of the date of
acquisition. $ 18.1
INVENTORIES
To write-up the acquired inventories to fair value. $ 1.0
PROPERTY, PLANT AND EQUIPMENT, NET
To write-up the acquired property, plant and equipment to fair value and
to reflect the write-off of plant and equipment of Geon's Conroe, Texas,
facility. $ 1.5
ACCRUED EXPENSE AND OTHER LIABILITIES
To reflect accrual of costs primarily associated with the demolition of
an idle facility of the Acquired Businesses and the closure of Geon's
Conroe, Texas facility. $ 4.5
(f) Represents the amount payable to OxyChem to affect the acquisition of the
PVC flexible film and specialty pellet compound businesses.
(g) Represents the minority interest liability related to OxyChem's 10%
ownership interest in the Compounding Partnership.
(h) Represents the after-tax effects of the gain on the contribution of
Geon's net assets to the Compounding Partnership.
(i) To reflect the reduction of debt resulting from the $78 million of cash
received from the PVC Partnership.
(j) To eliminate the equity accounts of the Acquired Business under
purchase method of accounting.
(k) To reflect certain obligations of OxyChem which will not be contributed
to the Compounding Partnership or transferred to Geon.
25
27
(l) Represents the income tax effects, computed at an estimated effective tax
rate of 39%, associated with the gain on the contribution of Geon's net
assets to the Compounding Partnership and the purchase price adjustments
relating to the Acquired Businesses. Such gain represents the difference
between the fair value and historical net book value of 10% of Geon's
compounding net assets contributed to the Compounding Partnership.
(m) Reflects the following items which were not contributed to the PVC
Partnership and were retained by the Company: accounts receivable (net of
receivables sold of $34.9 million at December 31, 1998), certain
inventories, and accrued liabilities primarily consisting of sales taxes,
environmental, and employee liabilities.
(n) To reflect the assumption by the PVC Partnership of the Geon corporate
liability for post retirement health care for active employees
transferring employment to the PVC Partnership.
(o) Geon's equity is estimated to increase $43.3 million as a result of the
formation of the PVC Partnership. This increase represents the gain on
Geon's disposition of 76% of its interest in its PVC Business.
Equity after Geon's investment in the PVC Partnership and
adjustments $ 244.7
Equity of the Geon PVC Business on a historical basis (201.4)
---------
Equity increase at formation $ 43.3
=========
26
28
The Geon Company
Unaudited Pro Forma Condensed Consolidated Statement of Income
Year Ended December 31, 1998
(In millions)
ACQUIRED
INVESTMENT BUSINESS
IN PVC PURCHASE
DEDUCT PARTNERSHIP ADD ACCOUNTING
GEON PVC AND ACQUIRED AND OTHER PRO
HISTORICAL BUSINESS ADJUSTMENTS BUSINESSES ADJUSTMENTS FORMA
-------------------------------------------------------------------------------------
Sales $ 1,284.4 $ 577.7 $ 131.7 (g) $ 167.4 $ 1,005.8
Cost of goods sold 1,092.6 564.1 131.7 (g) 146.2 $ 1.0 (k) 814.2
8.6 (b) (1.8)(j)
Depreciation and amortization 57.9 27.5 2.3 0.1 (c) 32.8
Selling, general and administrative
expenses 82.0 21.2 9.4 (b) 7.7 77.9
Employee separation and plant phase out 14.6 14.6(h)
-------------------------------------------------------------------------------------
Operating income (loss) 37.3 (35.1) (18.0) 11.2 0.7 66.3
Interest (expense) (16.0) (1.0) 5.1 (i) (1.8)(d) (11.7)
Interest income 1.2 1.2
Other income (expense), net (2.6) 0.6 (1.2) 1.2 (j) (3.2)
Equity (loss) from equity affiliates 3.7 (5.4)(a) (1.7)
Minority interest (1.3)(e) (1.3)
-------------------------------------------------------------------------------------
Income (loss) before provision for income
taxes 23.6 (35.5) (18.3) 10.0 (1.2) 49.6
(Expense) benefit for income taxes (9.8) 13.8 7.1 (f) (4.2) 0.5 (20.2)
=====================================================================================
Net income (loss) $ 13.8 $ (21.7) $ (11.2) $ 5.8 $ (0.7) $ 29.4
=====================================================================================
Earnings per share of common share:
Basic 0.60 1.28
Diluted 0.58 1.25
Number of share used to compute earnings
per share:
Basic 22.9 22.9
Diluted 23.6 23.6
27
29
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF INCOME (IN
MILLIONS):
(a) To reflect the sum of Geon's 24% share of the pro forma PVC Partnership
loss for the period and the amortization of the difference between the
carrying value of Geon's investment in and its underlying equity in the PVC
Partnership. Geon's share of the loss from the PVC Partnership has also
been adjusted by the amount of supplemental pension benefit costs
associated with former Geon personnel who continue employment with the PVC
Partnership. Such benefits will be paid by Geon.
Such loss is computed as follows:
YEAR ENDED
DECEMBER 31, 1998
-----------------
Pre-tax income (loss) contributed by:
Geon PVC Business $ (35.5)
OxyChem PVC Business 31.1
Pro forma adjustments of the PVC Partnership (19.1)
-----------
(23.5)
Geon's ownership in the PVC Partnership 24%
-----------
Geon's share of the PVC Partnership's losses (5.6)
Amortization of the difference between Geon's investment in and
underlying equity in the PVC Partnership 1.0
Supplemental Pension Benefit Costs (0.8)
-----------
Geon's pro forma equity loss from the PVC Partnership $ (5.4)
===========
28
30
The PVC Partnership Pro Forma adjustments are comprised of the following items:
YEAR ENDED
DECEMBER 31, 1998
-----------------
Adjust PVC and VCM pricing to supply contracts (Represents adjustments to the
historical PVC and VCM pricing of the Geon PVC Business and the OxyChem PVC
Business to reflect the pricing terms of the PVC and VCM supply contracts
between the PVC Partnership and the parent companies)
$ (6.1)
Incremental Depreciation (Represents incremental depreciation on the write-up to
fair value of Geon's PVC assets contributed to the
PVC Partnership.) (9.0)
Interest on PVC Partnership debt (Represents the PVC Partnership's interest
expense relating to the $104 million to be paid to Geon or to finance initial
working capital requirements)
(4.0)
----------
$ (19.1)
==========
(b) Represents overhead and selling, general and administrative costs
historically allocated to the Geon PVC Business that will not be
transferred to the PVC Partnership.
(c) Represents incremental depreciation expense due to the write-up of
property of the Acquired Businesses to fair value under the purchase
method of accounting.
(d) Includes incremental interest expense based on the $27 million payable
to OxyChem for the acquisition of the Acquired Businesses at an
estimated borrowing rate of 6.5%.
(e) Represents the minority interest related to OxyChem's 10% interest in
the Compounding Partnership.
(f) To record the tax effect of the pro forma adjustments using an
estimated income tax rate of 39%.
(g) To adjust for the historical elimination in consolidation of revenue and
cost of sales related to the sale of PVC and VCM from the Geon PVC
Business to the other businesses of Geon.
(h) Reflects a pre-tax employee separation and plant phase out charge of
$14.6 million related to the Company's consolidation of its compounding
operations.
29
31
(i) Reflects the reduction in interest expense associated with the $78
million reduction in debt at an estimated short-term borrowing rate of
6.5%.
(j) Reflects the reversal of costs associated with obligations and assets of
the Acquired Businesses which were not transferred to Geon and adjusts
PVC resin costs to the PVC Partnership's PVC supply contract with OxyChem
as follows:
YEAR ENDED
DECEMBER 31, 1998
-----------------
Adjust PVC resin costs to the supply contract (represents an
adjustment to OxyChem's historical transfer prices to reflect the
pricing terms of its PVC supply contract with the PVC
Partnership) (classified as cost of goods sold) $ 1.8
Reverse OxyChem's allocation of the discount from the sale of receivables
pursuant to a receivables sales agreement, which were terminated and total
trade receivables from customers transferred to the Compounding Partnership
and Geon (classified as other expense)
1.2
----------
$ 3.0
==========
(k) Represents the incremental costs of sales due to the write-up of acquired
inventory to fair value under the purchase method of accounting.
The Unaudited Pro Forma Consolidated Statement of Income does not reflect the
following:
(i) The one time estimated after tax gain of $53 million resulting from
Geon's contributions to the PVC Partnership and the Compounding
Partnership, which for accounting purposes are treated as a sale to
OxyChem of 76% of Geon's PVC Businesses contributed to the PVC
Partnership and a sale to OxyChem of 10% of Geon's Compounding Business
contributed to the Compounding Partnership. The resultant gain represents
the excess of fair value (including cash received of $78 million) over
the book value of the 76% and 10% of Geon's PVC and Compounding
Contributed Businesses, respectively.
30
32
Such gain is net of certain one-time costs directly related to the formation of
the PVC Partnership and Compounding Partnership as follows:
COSTS ATTRIBUTED TO THE FORMATION COSTS ATTRIBUTED TO THE FORMATION
OF THE PVC PARTNERSHIP OF THE COMPOUNDING PARTNERSHIP
--------------------------------- ---------------------------------
One-time benefit payment to be made
to Geon employees that will Conroe, Texas, powder plant closures
become employees of the PVC
Partnership $ (4.0) Asset write-off $ (2.5)
Employee separation (1.5)
-------
Transaction costs (legal, accounting) (9.0) $ (4.0)
=======
Personnel costs (consisting
primarily of pension and
post-retirement benefit (5.0)
curtailment losses)
Write-off of capitalized software
cost specifically related to the
management information systems of
Geon's PVC Business (6.0)
-------
$ (24.0)
=======
(ii) The synergies and the cost of such synergies expected to be realized by
Geon as a result of the formation of the Partnerships and Related
Transactions. Geon expects its share of the synergies and the cost of such
synergies resulting from the PVC Partnership to approximate $20 million
and $4 million, respectively, and the synergies and related costs of the
synergies related to the Compounding Partnership to approximate $7 million
and $3 million, respectively. The synergies are expected to be fully
realized in 2001, and the costs of such synergies are expected to be
incurred in 1999 and 2000. Such synergies, as they relate to the PVC
Partnership, are expected to be realized from cost reductions resulting
from production, logistics, and distribution efficiencies; the
consolidation of production facilities, reductions in executive management
positions and related compensation and benefits; elimination of duplicate
overhead, staffing and information systems costs; the consolidation of
research and development facilities, as well as, legal, environmental,
health and safety and risk management services; and reductions in the cost
of property and liability insurance coverage. The synergies related to the
Compounding Partnership are expected to be realized through the reduction
of excess production capacity, the benefits resulting from the volume
purchasing of materials, and the reduction of selling, general and
administrative costs.
(iii) The charges and expected cost savings associated with the completion of
Geon's consolidation of its compounding operations.
In the first quarter of 1999, the Company will recognize costs totaling $1.7
million relating to the completion of the compound consolidation plan previously
announced in
31
33
November 1998. Such costs consist of $0.6 million of accelerated depreciation on
software assets to be taken out of service in the second quarter of 1999, asset
write-offs of $0.4 million, legal and professional fees of $0.5 million and
employee separation costs of $0.2 million.
The Company anticipates incurring, in the second quarter of 1999 and upon
formation of the powder compound partnership, estimated costs totaling $6.0
million relating to the completion of the compound consolidation plan.
The amounts expected to be incurred are as follows:
accelerated depreciation of $0.6 million and disposition costs of $1.4
million which will be expensed as incurred, and (b) costs associated with
exiting Geon's Conroe, Texas, powder compounding facility, which will be
closed subject to the consummation of the Joint Venture Transactions,
totaling $4.0 million. The costs of closing the Conroe, Texas, facility
primarily represent non-cash write-offs of fixed assets with a net book
value of $2.0 million and other assets with a carrying value of $.5
million, and cash employee separation costs of approximately $1.5 million
relating to the termination of 70 individuals. These terminations are
expected to be completed in the third quarter of 1999.
These costs are in addition to the $14.6 million recorded in the fourth quarter
1998 related to the consolidation of the compounding operations.
The consolidation is projected to produce total cost savings of $6 million in
1999 and $14 million annually thereafter.
32