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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
----------------------
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED JUNE 30, 1999. COMMISSION FILE NUMBER 1-11804
THE GEON COMPANY
(Exact name of Registrant as specified in its charter)
DELAWARE 34-1730488
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
One Geon Center, Avon Lake, Ohio 44012
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (440) 930-1000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports) and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
As of July 31, 1999 there were 23,725,620 shares of common stock outstanding.
There is only one class of common stock.
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Part I. Financial Information
Item 1. Financial Statements
THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
Three Months Ended Six Months Ended
June 30, June 30,
1999 1998 1999 1998
-------- -------- -------- -------
Sales $ 296.9 $ 330.7 $ 622.7 $ 655.2
Operating costs and expenses:
Cost of sales 239.0 285.3 503.7 568.7
Selling and administrative 20.1 17.6 41.8 34.6
Depreciation and amortization 10.2 15.4 25.2 29.9
Employee separation and plant phase-out 1.3 -- 2.4 --
Income (loss) from equity affiliates (2.1) 2.3 (3.6) 5.4
--------- -------- -------- -------
Operating income 24.2 14.7 46.0 27.4
Interest expense (3.6) (3.8) (7.2) (7.6)
Interest income .3 .3 .6 .9
Other income (expense), net (1.8) (3.0) (2.2) (2.7)
Gain on formation of joint ventures 92.9 -- 92.9 --
--------- -------- -------- -------
Income before income taxes and cumulative effect of
a change in accounting for start-up costs 112.0 8.2 130.1 18.0
Income tax expense (43.5) (3.4) (50.5) (7.4)
--------- -------- -------- -------
Income, before cumulative effect of a change
in accounting 68.5 4.8 79.6 10.6
Cumulative effect of a change in accounting for
start-up costs, net of income tax benefit of $0.9 million -- -- (1.5) --
--------- -------- -------- -------
Net income $ 68.5 $ 4.8 $ 78.1 $ 10.6
========= ======== ======== =======
Basic earnings per share of common stock:
Basic earnings per share before cumulative effect
of a change in accounting $ 2.95 $ .21 $ 3.43 $ .46
Cumulative effect of a change in accounting -- -- (.06) --
--------- --------- --------- --------
Basic earnings per share $ 2.95 $ .21 $ 3.37 $ .46
========= ========= ========= ========
Diluted earnings per share of common stock:
Diluted earnings per share before cumulative effect
of a change in accounting $ 2.81 $ .20 $ 3.29 $ .45
Cumulative effect of a change in accounting -- -- (.06) --
--------- -------- --------- --------
Diluted earnings per share $ 2.81 $ .20 $ 3.23 $ .45
========= ========= ========= ========
Number of shares used to compute earnings per share:
Basic 23.2 22.9 23.2 22.9
Diluted 24.4 23.6 24.2 23.6
Dividends paid per share of common stock $ .125 $ .125 $ .25 $ .25
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(IN MILLIONS, EXCEPT PER SHARE DATA)
June 30, December 31,
ASSETS 1999 1998
------- -----------
Current assets:
Cash and cash equivalents $ 54.5 $ 14.4
Accounts receivable, net 135.4 70.8
Inventories 116.2 113.9
Deferred income taxes 23.7 24.6
Prepaid expenses 6.9 11.0
------ ------
Total current assets 336.7 234.7
Property, net 239.4 443.5
Investment in equity affiliates 238.0 19.8
Goodwill, net 83.6 81.5
Deferred charges and other assets 15.3 22.5
------ ------
Total assets $913.0 $802.0
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Short-term bank debt $ 15.9 $ 50.9
Accounts payable 147.2 129.1
Accrued expenses 72.5 76.0
Current portion of long-term debt .3 .8
------ ------
Total current liabilities 235.9 256.8
Long-term debt 126.7 135.4
Deferred income taxes 75.5 32.8
Postretirement benefits other than pensions 83.8 85.1
Other non-current liabilities 82.3 77.8
Minority interest in consolidated subsidiary 5.7 --
------ ------
Total liabilities 609.9 587.9
Stockholders' equity:
Preferred stock, 10.0 shares authorized, no shares issued -- --
Common stock, $.10 par, authorized 100.0 shares;
issued 28.0 shares in 1999 and 1998 2.8 2.8
Other stockholders' equity 300.3 211.3
------ ------
Total stockholders' equity 303.1 214.1
------ ------
Total liabilities and stockholders' equity $913.0 $802.0
====== ======
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(DOLLARS IN MILLIONS)
Six Months Ended,
June 30,
-----------------
1999 1998
------ -----
OPERATING ACTIVITIES
Net income $78.1 $10.6
Adjustments to reconcile net income to net
cash used by operating activities:
Gain on formation of joint ventures (92.9) --
Employee separation and plant phase-out 2.4 --
Depreciation and amortization 25.2 29.9
Loss (income) from equity affiliates 3.6 (5.4)
Provision for deferred income taxes 45.8 .7
Change in assets and liabilities:
Accounts receivable (89.0) 27.3
Inventories (9.7) 9.4
Accounts payable 52.5 (19.8)
Realization of retained working capital of
contributed PVC business 53.1 --
Accrued expenses and other (15.1) (5.0)
----- -----
Net cash provided by operating activities 54.0 47.7
INVESTING ACTIVITIES
Cash paid for businesses acquired (27.0) (39.6)
Cash received in conjunction with OxyVinyls formation, net of
formation costs paid 71.9 --
Distributions from (to) equity affiliates 1.9 (1.3)
Purchases of property (22.2) (16.0)
----- -----
NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 78.6 (9.2)
FINANCING ACTIVITIES
Decrease in short-term debt (36.9) (12.9)
Repayment of long-term debt (2.0) (.3)
Dividends (5.9) (5.8)
Proceeds from issuance of common stock 5.7 .1
----- -----
Net cash used by financing activities (39.1) (18.9)
EFFECT OF EXCHANGE RATE CHANGES ON CASH .6 .1
----- -----
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 40.1 (28.0)
CASH AND CASH EQUIVALENTS AT JANUARY 1 14.4 49.1
----- -----
CASH AND CASH EQUIVALENTS AT JUNE 30 $54.5 $21.1
===== =====
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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THE GEON COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (UNAUDITED)
(Dollars in Millions, Shares in Thousands)
COMMON COMMON ACCUMULATED
SHARES ADDITIONAL STOCK OTHER NON-
COMMON HELD COMMON PAID-IN RETAINED HELD IN OWNER EQUITY
SHARE IN TOTAL STOCK CAPITAL EARNINGS TREASURY CHANGES
-----------------------------------------------------------------------------
BALANCE JANUARY 1, 1998 27,877 4,700 $223.8 $2.8 $295.8 $73.3 $(118.0) $(30.1)
Non-owner equity changes:
Net income 5.8 5.8
Other non-owner equity changes:
Translation adjustment 2.2 2.2
----
Total non-owner equity changes 8.0
Stock based compensation and exercise
of options 97.0 (29.0) (1.1) (2.6) 1.4 0.1
Cash dividends (2.9) (2.9)
-----------------------------------------------------------------------------
BALANCE MARCH 31, 1998 27,974 4,671 $227.8 $2.8 $293.2 $76.2 $(116.6) $(27.8)
=============================================================================
Non-owner equity changes:
Net income 4.8 4.8
Other non-owner equity changes: -
Translation adjustment (2.4) (2.4)
-----
Total non-owner equity changes (2.4)
Stock based compensation and exercise
of options 2 .9 0.9 (0.1) 0.1
Cash dividends (2.9) (2.9)
-----------------------------------------------------------------------------
BALANCE JUNE 30, 1998 27,974 4,673 $228.2 $2.8 $294.1 $78.1 $(116.7) $(30.1)
=============================================================================
BALANCE JANUARY 1, 1999 27,974 4,622 $214.1 $2.8 $296.1 $75.4 $(115.1) $(45.1)
Non-owner equity changes:
Net income 9.6 9.6
Other non-owner equity changes: -
Translation adjustment 1.5 1.5
----
Total non-owner equity changes 11.1
Stock based compensation and exercise
of options (161.0) 2.1 (2.8) 4.8 0.1
Cash dividends (2.9) (2.9)
-----------------------------------------------------------------------------
BALANCE MARCH 31, 1999 27,974 4,461 $224.4 $2.8 $293.3 $82.1 $(110.3) $(43.5)
==============================================================================
Non-owner equity changes:
Net income 68.5 68.5
Other non-owner equity changes: -
Translation adjustment 4.7 4.7
----
Total non-owner equity changes 73.2
Stock based compensation and exercise
of options 1.0 (278) 8.5 0.5 7.9 0.1
Cash dividends (3.0) (3.0)
-----------------------------------------------------------------------------
BALANCE JUNE 30, 1999 27,975 4,183 $303.1 $2.8 $293.8 $147.6 $(102.4) $(38.7)
=============================================================================
See Accompanying Notes to Unaudited Condensed Consolidated Financial Statements
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
----------------------------------------------------------------
NOTE A- BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited condensed consolidated financial statements of The
Geon Company (Company or Geon) have been prepared in accordance with generally
accepted accounting principles for interim financial information, the
instructions to Form 10-Q, and Article 10 of Regulation S-X. Accordingly, they
do not include all of the information and footnotes required by generally
accepted accounting principles for complete financial statements. In the opinion
of management, all adjustments (consisting of normal recurring accruals)
considered necessary for a fair financial presentation have been included.
Operating results for the three and six-month period ended June 30, 1999 are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1999. The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates. For
further information, refer to the consolidated financial statements and notes
thereto included in the Company's annual report on Form 10-K for the year ended
December 31, 1998. Earnings of equity affiliates have been reclassified from the
1998 presentation and are included in operating income. Certain other amounts
for 1998 have been reclassified to conform to the 1999 interim period
presentation.
On April 30, 1999, the Company completed transactions with Occidental Chemical
Corporation (OxyChem) which included the formation of Oxy Vinyls, LP
(OxyVinyls), a limited partnership in which Geon has 24% ownership, the
formation of a small powder compounding partnership which is 90% owned by
Geon and the acquisition by Geon of OxyChem's compounding and film operations.
Substantially all of Geon's Resin and Intermediates segment's (see
description of segments in the following paragraph) operating assets and
liabilities were contributed to OxyVinyls in this transaction.
Geon's operations are primarily located in the United States and Canada in two
business segments. The "Performance Polymers and Services" (PP&S) segment
includes polyvinyl chloride (PVC) compounds, including two 50% owned compound
joint ventures, specialty resins, plastisol formulators, analytical testing
services performed by Polymer Diagnostics Inc., and Decillion, a 40% owned
joint venture with Owens Corning, Inc. After April 30, 1999, the PP&S segment
also includes the powder compounding joint venture and the acquired compound
and engineered film businesses related to the OxyChem transaction. Prior to the
formation of OxyVinyls, the "Resin and Intermediates" segment included the
consolidated results of the Company's suspension and mass resin and vinyl
chloride monomer (VCM) operations, which, as described above and in Note E,
were substantially contributed to OxyVinyls on April 30, 1999. After April 30,
1999, the R&I segment includes Geon's 24% interest in OxyVinyls, accounted for
under the equity method of accounting. Also included in the R&I segment are
the Company's 50% equity holding in the Sunbelt chlor-alkali joint venture and
the Company's 37.4% holding in Australian Vinyls Corporation (AVC), an
Australian PVC operation. See Note I for further discussion of the Company's
two business segments.
NOTE B - COMMITMENTS AND CONTINGENCIES
- --------------------------------------
There are pending or threatened against the Company or its subsidiaries various
claims, lawsuits and administrative proceedings, all arising from the ordinary
course of business with respect to employment, commercial, product liability and
environmental matters, which seek remedies or damages. The Company believes that
any liability that may finally be determined will not have a material adverse
effect on the Company's consolidated financial position.
The Company has accrued for environmental liabilities based upon estimates
prepared by its environmental engineers and consultants to cover probable future
environmental expenditures related to previously contaminated sites. The accrual
totaling approximately $44 million at June 30, 1999, represents the Company's
best estimate for the remaining remediation costs based upon information and
technology currently available. Depending upon the results of future testing and
the ultimate remediation alternatives to be undertaken at these sites, it is
possible that the ultimate costs to be incurred could be more than the accrual
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recorded by as much as $14 million. The Company's estimate of the liability may
be revised as new regulations, technologies or additional information is
obtained. Additional information related to the Company's environmental
liabilities is included in Note L to the Consolidated Financial Statements
included in the Company's 1998 Annual Report on Form 10K.
NOTE C - INVENTORIES
- --------------------
Components of inventories at June 30, 1999 and December 31, 1998, are as
follows:
June 30, December 31,
(Dollars in millions) 1999 1998
----------------- -----------------
Finished products and in-process inventories $73.3 $94.3
Raw materials and supplies 53.8 34.2
---- ----
127.1 128.5
LIFO Reserve (10.9) (14.6)
------ ------
$116.2 $113.9
===== =====
NOTE D - CHANGE IN ACCOUNTING METHOD
- ------------------------------------
Effective January 1, 1999, the Company adopted Statement of Position (SOP) 98-5,
"Reporting on the Costs of Start-up Activities." The SOP required that
unamortized start-up costs be written off at the time of adoption and future
start-up costs be expensed as incurred. The Company's portion of unamortized
start-up costs related to the Sunbelt chlor-alkali joint venture totaled $1.5
million, net of an income tax benefit, and was written off as the cumulative
effect of a change in accounting on January 1, 1999.
NOTE E - TRANSACTIONS WITH OXYCHEM
- ----------------------------------
On April 30, 1999, the Company completed the previously announced transactions
with OxyChem, which included the formation of OxyVinyls, a manufacturer and
marketer of PVC resins and caustic soda. OxyVinyls is the largest producer of
PVC resins in North America.
Geon contributed to OxyVinyls five PVC suspension and mass resin plants and one
VCM plant as well as related assets and all of the outstanding capital stock of
LaPorte Chemicals Corporation, a subsidiary of The Geon Company. In exchange,
Geon received a 24% interest in OxyVinyls and OxyVinyls assumed certain
liabilities and obligations of Geon, including agreements under which Geon
leased a portion of a VCM plant located in LaPorte, Texas, as well as certain
industrial revenue bond debt of Geon. OxyChem contributed to OxyVinyls one PVC
plant, one VCM plant, a 50% interest in OxyMar, a Texas general partnership that
operates a VCM plant, and a chlor-alkali chemical complex, together with related
assets. In exchange, OxyChem received a 76% interest in OxyVinyls, and OxyVinyls
assumed certain liabilities and obligations of OxyChem, including certain OxyMar
debt. For accounting purposes, Geon's contribution to OxyVinyls is treated as a
sale of 76% of its PVC business net assets to OxyChem. Geon accounts for its 24%
interest in OxyVinyls under the equity method of accounting.
In other transactions, Geon and OxyChem formed a small powder compounding
partnership, PVC Powder Blends, LP (Powder Blends), through contribution of net
assets by both Geon and OxyChem. Powder Blends manufactures and markets PVC
powder compounds and is 90% owned by Geon. OxyChem also transferred to Geon for
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$27 million a PVC engineered film and pellet compounding plant located in
Burlington, New Jersey, and its specialty pellet compound business located in
Pasadena, Texas, in addition to inventory and other assets. Powder Blends and
the PVC engineered film and specialty pellet compounding businesses are referred
to collectively as the "Acquired Businesses." The Acquired Businesses have been
accounted for as a purchase and Geon has recorded the net assets of these
businesses at their estimated fair value. The purchase price allocations
reflected in these financial statements are preliminary. The consolidated
financial statements include the operations of these Acquired Businesses
subsequent to April 30, 1999, with a minority interest reflecting the OxyChem's
10% ownership in Powder Blends.
In conjunction with the joint venture transaction, Geon will realize
approximately $104 million through retention of certain working capital from
its businesses contributed to OxyVinyls and the distribution of cash from
OxyVinyls. This $104 million is comprised of cash received from OxyChem of $77.5
million and retained working capital of $62.3 million less $27 million paid by
Geon to OxyChem for the purchase of the Acquired Businesses and $9.0 million
representing Geon's incremental share of OxyVinyls incremental financing.
The Company has recognized a pre-tax gain of $92.9 million as a result of these
transactions, representing the excess of the fair value received (including the
realization of the $104 million in cash and retained working capital) over the
book value of the 76% and 10% of Geon's net assets contributed to OxyVinyls and
Powder Blends, respectively. This gain is preliminary, subject to, among other
things, the finalization of the fair values of the net assets contributed to the
respective partnerships. This gain is net of certain one-time costs directly
related to the transactions. The following details the computation of the gain:
(Dollars in millions)
Geon's proportionate share of the estimated fair value of OxyVinyls $250.6
Cash received 77.5
------
328.1
Net book value of net assets contributed by Geon (211.4)
------
116.7
Ownership percentage sold to OxyChem 76%
------
Pre-tax gain on formation of OxyVinyls, before transaction related
costs $ 88.7
======
Fair value of assets contributed to Powder Blends by OxyChem $ 36.0
Geon's ownership 90%
------
32.4
Less 10% of the net book value of Geon net assets contributed (1.9)
======
Pre-tax gain on formation of Powder Blends, before transaction
related costs $ 30.5
======
Pre-tax gain on purchase of net assets of Acquired Businesses
representing the preliminary estimate of fair value received in
excess of amount paid $ 5.7
======
Total pre-tax gain before transaction related costs $124.9
Less costs directly associated with the transactions
(32.0)
------
Total pretax gain $ 92.9
======
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The costs incurred which are directly associated with the formation of OxyVinyls
and the acquisition of the Acquired Businesses include a one-time payment
(to be paid in the third quarter of 1999) of $5.9 million to Geon
employees that will be transferring to OxyVinyls, professional fees (legal,
accounting, and consulting) of $11.6 million ($6.0 million paid in the last
half of 1998 and $5.6 million paid in the first half of 1999), pension and
post-retirement curtailment and special termination benefits of $9.0 million,
(to be funded through increased annual contributions to the pension and post-
retirement plans over approximately ten years) and the write-off
of capitalized software costs specifically related to the management information
systems of Geon's PVC business of $5.5 million.
In conjunction with the transactions above, Geon entered into PVC resin and VCM
supply agreements with OxyVinyls under which Geon will purchase a substantial
portion of its PVC resin and VCM. The agreements have an initial term of 15
years with renewal options. The Company has also entered into various service
agreements with the partnerships.
The following table sets forth the impact on certain unaudited pro forma
financial information for the Company assuming that the transactions with
OxyChem occurred as of the beginning of 1999 and 1998. This pro forma financial
information may not be indicative of the actual impact on the results of
operations of Geon had the transactions occurred as of the dates assumed or the
impact of the transactions on future results of operations.
Increase (decrease) in
(Dollars in millions, except per share data) reported amounts
Six months ended June 30,
---------------------
1999 1998
---------------------
Sales $(130.0) $(229.1)
Net income before cumulative effect of a change in
accounting (7.1) 11.3
Net Income (7.1) 11.3
Basic earnings per share:
Earnings per share before cumulative effect of a
change in accounting $ (0.31) 0.49
Earnings per share (0.31) 0.49
Diluted earnings per share:
Earnings per share before cumulative effect of a
change in accounting $ (0.29) 0.48
Earnings per share (0.29) 0.48
The 1998 pro forma amounts exclude the pre-tax gain of $92.9 million recorded on
the closing of the transactions in the second quarter of 1999 as it is a non-
recurring item resulting from the transactions.
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NOTE F - EQUITY INVESTMENT
- --------------------------
The Company's 24% interest in OxyVinyls is accounted for under the equity
method. The following table presents summarized financial information of
OxyVinyls (100 %) as of June 30, 1999 and for the period from its formation on
April 30, 1999 through June 30, 1999.
(Dollars in millions)
Current assets $ 364.8
Noncurrent assets 1,002.0
--------
Total assets 1,366.8
--------
Current liabilities 230.4
Noncurrent liabilities 174.2
--------
Total liabilities 404.6
--------
Partnership capital $ 962.2
========
Net sales $ 225.0
Partnership loss as reported by OxyVinyls (0.7)
Geon's share of OxyVinyls loss (24%) $ (0.2)
Amortization of imbedded goodwill by Geon 0.3
--------
Partnership income as recorded by Geon $ 0.1
========
In the second quarter of 1999, OxyVinyls recorded a charge of approximately
$3.2 million pre-tax, related to the restructuring /formation of its
operations. Geon's share of this charge was $0.8 million pre-tax.
NOTE G - COMPOUND RESTRUCTURING
- -------------------------------
In the second quarter of 1999, the Company recorded compound restructuring
costs of $1.9 million ($0.6 million of which is recorded as additional
depreciation expense) in connection with the consolidation of the Company's
compounding manufacturing operations which was announced and began in the
fourth quarter of 1998. This plan included the closing of two manufacturing
plants and the partial closing of production lines at other manufacturing
plants. The total restructuring costs in the second quarter of 1999 include
accelerated depreciation of $0.6 million on software assets at the affected
sites which were taken out of service during the second quarter of 1999,
additional estimated demolition costs of $0.8 million and $0.5 million of
professional and consulting fees incurred in connection with the consolidation
of the compounding operations. The Company previously recorded $14.6 million
related to this plan of consolidation in the fourth quarter of 1998 and $1.7
million in the first quarter of 1999. The Company previously announced that it
expected to record additional costs of approximately $6.0 in the second quarter
of 1999 versus the $1.9 million noted above. The previous disclosure included
an accrual of $4.0 million for the Conroe, Texas powder compounding operation
which was anticipated to be closed following the consumation of the
transactions with OxyChem. The Conroe facility continues to manufacture powder
compound due to strong product demand which requires the production capacity
of the Conroe facility. No new date for discontinuation of the Conroe
operations has been set. As a result, the anticipated restructuring costs
related to the closing of the Conroe facility and the planned elimination of 70
positions have not been recognized. The revised plan of consolidation includes
the elimination of approximately 180 positions which were accrued for in the
fourth quarter 1998 charge. As of June 30, 1999, 99 of these 180 individuals
were terminated. The Company expects all remaining sites and production lines
to be closed by the end of 1999, with the exception of one line that is
expected to be closed in the first quarter of 2000.
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The activity related to the fourth quarter 1998 and first half of 1999 charges
for the consolidation of the Company's compounding operations are as follows:
Fourth First Second
Quarter Quarter Quarter
1998 1999 1999 Nature of Expense
------------ ----------- ---------- ---------------------------------
Total charges relating to:
Employee separation and plant phase-out:
Asset write-offs $5.3 $0.4 $ - Non-cash
Employee separation 5.0 0.2 - Cash
Site closure costs:
Demolition 3.3 - 0.8 Cash
Legal and professional fees 1.0 0.5 0.5 Cash
------------ ----------- ----------
14.6 1.1 1.3
Depreciation and amortization expense:
Accelerated depreciation - 0.6 0.6 Non-cash, included in
depreciation and amortization
expense
------------ ----------- ----------
Total charges 14.6 1.7 1.9
------------ ----------- ----------
Activity related to the charges:
Fourth Quarter 1998:
Assets written off (5.3) - - Non-cash
Legal and professional fees paid (0.7) - - Cash
------------ ----------- ----------
8.6 - -
First Quarter 1999:
Assets written off - (0.4) - Non-cash
Employee separation paid (0.5) - - Cash
Accelerated depreciation - (0.6) - Non-cash
Legal and professional fees paid - (0.5) - Cash
------------ ----------- ----------
Restructuring accruals at March 31, 8.1 0.2 -
1999
Second Quarter 1999:
Employee separation paid (1.8) (0.2) - Cash
Accelerated depreciation - - (0.6) Non-cash, included in
depreciation and amortization
expense
Legal and professional costs paid (0.3) - (0.1) Cash
------------ ----------- ----------
Restructuring accruals at June 30, 1999 $6.0 $ - $1.2
============ =========== ==========
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NOTE H - SUBSEQUENT EVENTS
- --------------------------
The Geon Company on July 7,1999, pursuant to a previously announced tender
offer, through its wholly owned subsidiary (TGC Acquisition Corporation)
acquired 13,715,221 shares or approximately 87.9 percent of the outstanding
shares of O'Sullivan Corporation (O'Sullivan), a Virginia corporation, for
$12.25 per share. Geon plans to proceed with the acquisition of the remaining
shares at a special meeting of O'Sullivan's remaining shareholders scheduled
for August 23,1999, for the purpose of approving a merger with TGC Acquisition
Corporation. O'Sullivan financial results will be included in Geon's
consolidated results of operations beginning July 8, 1999.
The acquisition will initially be financed with a combination of available
cash on hand and borrowings under existing revolving credit facilities. These
credit facilities are unsecured and provide for revolving credit of up to $250
million for general corporate purposes. These facilities expire in May 2000
($150 million) and December 2001 ($100 million). Geon also utilized $25 million
of O'Sullivan's acquired cash to reduce the financing of the transaction. Geon
anticipates that the short-term borrowings will be repaid with cash generated
through operations and other sources which may include future refinancing.
O'Sullivan, which had sales of $163 million in 1998, is a leading producer of
engineered polymer films for the automotive and industrial markets. O'Sullivan
has developed particular strengths in engineered vinyl film products.
In addition on July 1, the Company acquired privately held Acrol Holdings
Limited (Acrol), headquartered in Widnes, England. Acrol is the United Kingdom's
leading formulator of vinyl plastisols, which are plasticized compounds used in
applications such as automotive interiors, wallcoverings, and metal and fabric
coatings. Acrol is also is a leading distributor of compounding additives, and
manufactures a range of specialty polymer-coated textiles. Geon anticipates that
Acrol's 1999 sales will be approximately $17 million.
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NOTE I - SEGMENT INFORMATION
The Company operates primarily in two business segments, the Performance
Polymers & Services segment (PP&S) and the Resin and Intermediates (R&I)
segment. Inter-segment sales are accounted for at prices that generally
approximate those for similar transactions with unaffiliated customers. The
elimination of inter-segment sales is primarily for sales from the R&I segment
to the PP&S segment, and is included in the Other segment. Certain other
corporate expenses and eliminations are also included in the Other segment.
TOTAL PP&S R&I OTHER
------ ------ ------ -------
QUARTER ENDED JUNE 30, 1999:
Net Sales $296.9 $261.0 $ 45.6 $ (9.7)
Operating income (loss) 24.2 28.6 (3.8) (0.6)
Employee separation and plant phase-out 1.3 1.3 -- --
Other restructuring costs - accelerated depreciation 0.6 0.6 -- --
Restructuring costs incurred by OxyVinyls 0.8 -- 0.8 --
------ ------ ------ ------
Operating income (loss) before restructuring costs 26.9 30.5 (3.0) (0.6)
Depreciation and amortization (before restructuring) 9.6 7.0 2.6 --
====== ====== ====== ======
Operating income (loss) before depreciation, amortization
and restructuring costs $ 36.5 $ 37.5 $ (0.4) $ (0.6)
====== ====== ====== ======
Total assets $913.0 $585.6 $243.9 $ 83.5
Investment in equity affiliates included in assets 238.0 4.9 233.1 --
Capital expenditures 12.0 10.6 1.4 --
Earnings (loss) of equity affiliates included in operating
income (2.1) 0.1 (2.2) --
QUARTER ENDED JUNE 30, 1998:
Net Sales $330.7 $215.3 $152.8 $(37.4)
Operating income (loss) 14.7 28.4 (13.3) (0.4)
Depreciation and amortization 15.4 7.6 7.7 0.1
------ ------ ------ ------
Operating income (loss) before depreciation and
amortization $ 30.1 $ 36.0 $ (5.6) $ (0.3)
====== ====== ====== ======
Total assets $848.9 $490.7 $373.5 $(15.3)
Capital expenditures 9.8 4.0 5.8 --
Investment in equity affiliates included in assets 24.4 3.0 21.4 --
Earnings of equity affiliates included in operating income 2.3 0.2 2.1 --
13
14
TOTAL PP&S R&I OTHER
------- ---------- --------- ----------
SIX MONTHS ENDED JUNE 30, 1999:
Net Sales $622.7 $478.6 $186.8 $(42.7)
Operating income (loss) 46.0 51.4 (4.9) (0.5)
Employee separation and plant phase-out 2.4 2.4 -- --
Other restructuring costs - accelerated depreciation 1.2 1.2 -- --
Restructuring costs incurred by OxyVinyls 0.8 -- 0.8 --
------ ------ ------ ------
Operating income (loss) before restructuring costs 50.4 55.0 (4.1) (0.5)
Depreciation and amortization (before restructuring) 24.0 13.9 10.1 --
------ ------ ------ ------
Operating income (loss) before depreciation, amortization
and restructuring costs
$ 74.4 $ 68.9 $ 6.0 $ (0.5)
====== ====== ====== ======
Capital expenditures 22.2 18.2 4.0 --
Earnings (loss) of equity affiliates included in operating
income (3.6) 0.1 (3.7) --
SIX MONTHS ENDED JUNE 30, 1998:
Net Sales $655.2 $415.7 $315.0 $(75.5)
Operating income (loss) 27.4 45.0 (16.8) (0.8)
Depreciation and amortization 29.9 14.5 15.2 0.2
------ ------ ------ ------
Operating income (loss) before depreciation and
amortization $ 57.3 $ 59.5 $ (1.6) $ (0.6)
====== ====== ====== ======
Capital expenditures 16.0 6.6 9.4 --
Earnings of equity affiliates included in operating income 5.4 0.3 5.1 --
14
15
NOTE J. WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE:
- ----------------------------------------------------------------------
Quarter ended Six months ended
June 30, June 30,
--------------------------------------------------
(in millions) 1999 1998 1999 1998
--------------------------------------------------
Weighted-average shares - Basic:
Weighted-average shares outstanding 23.7 23.3 23.6 23.3
Less unearned portion of restricted stock
awards included in outstanding shares (.5) (.4) (.4) (.4)
--------------------------------------------------
23.2 22.9 23.2 22.9
--------------------------------------------------
Weighted-average shares - Diluted:
Weighted-average shares outstanding 23.7 23.3 23.6 23.3
Plus dilutive impact of stock options and
stock awards .7 .3 .6 .3
--------------------------------------------------
24.4 23.6 24.2 23.6
==================================================
15
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
As discussed in Note E, the joint venture transactions with OxyChem were
completed on April 30, 1999, and the newly formed partnerships began operations.
As a result, on April 30, 1999, Geon's North American commodity PVC/VCM
operations included in the R&I business segment were contributed to OxyVinyls in
exchange for a 24% interest in the joint venture. Financial results through
April 30, 1999 include the consolidation of the commodity PVC/VCM operations,
after which the earnings of OxyVinyls are reported as earnings from equity
affiliates in the R&I business segment.
In addition, as discussed in Note E, Geon and OxyChem also formed the PVC Powder
Blends, LP partnership which is 90% owned by Geon. The operations of this
partnership are consolidated into Geon, with the 10% OxyChem ownership recorded
as a minority interest. Also in conjunction with the joint venture transactions,
the Company acquired from OxyChem a PVC engineered flexible vinyl film business
and a specialty PVC compound business that is included in the Company's
consolidated results.
SECOND QUARTER 1999 RESULTS OF OPERATIONS - TOTAL COMPANY:
Overall, sales in the second quarter of 1999 declined by $33.8 million to
$296.9 million as compared to the same period in 1998. The reduction in sales
attributable to the contribution of the Company's PVC/VCM operations to
OxyVinyls on April 30,1999, thus eliminating the sales of these operations from
consolidated sales for May and June of 1999(net of related inter-business sales
eliminations) was approximately $80 million which was partially offset by sales
of acquired plastisol formulator businesses, businesses acquired in the
transactions with OxyChem and sales growth in specialty resins and vinyl
compounds. Similarly, year-to-date sales decreased $32.5 million, largely the
result of the same factors impacting the quarter. Operating income before
special items, was $26.9 million for the quarter, an increase of $12.2 million
over the same period a year ago. Both business segments reported increases in
operating income before special items in the quarter versus last year.
Year-to-date operating income, before special items was $50.4 million, an 85%
increase over 1998.
Selling and administrative expenses for the second quarter increased by $2.5
million or 14% from 1998. The acquired businesses and increased costs associated
primarily with new business development resulted in a 26% increase in selling
and administration expense. This increase was partially offset by a reduction in
selling and administrative expenses associated with the R&I segment upon
formation of OxyVinyls. Year-to-date selling and administrative expenses
increased 21% over 1998 primarily as a result of acquisitions.
Special items recorded in the second quarter of 1999 included a $1.9 million
pre-tax charge ($1.1 million after-tax) consisting of $1.3 million employee
separation and plant phase-out plus $0.6 million of accelerated depreciation
associated with the compound manufacturing asset rationalization, see Note G
for further discussion. Second quarter results also included Geon's share or a
$0.8 million pre-tax ($0.5 million after-tax) charge recognized by OxyVinyls
related to the start-up of operations (see Note F). In addition, the Company
recognized a pre-tax gain of $92.9 million ($56.8 million after tax) related to
the transactions with OxyChem, for more information refer to Note E. In
addition to the items discussed above, year-to-date special items impacting net
income include a first quarter charge related to the compound manufacturing
asset rationalization of $1.7 million pre-tax ($1.0 million after-tax) and a
charge related to the change in accounting for Sunbelt's start-up costs of $2.4
million pre-tax ($1.5 million after-tax).
16
17
Other expense declined both for second quarter and year-to-date from 1998 to
1999, due primarily to a reduction in foreign currency losses. The effective
income tax rate for the second quarter and year-to-date was 39% in 1999 versus
41% for 1998, reflecting the effect of a change in foreign versus domestic
earnings and the effect of permanent differences such as non-deductible goodwill
on the lower pre-tax earnings in 1998.
Net income for the quarter was $13.3 million, excluding special items, nearly
three times the net income for the corresponding period in 1998 of $4.8
million. Year-to-date net income, before special items was $25.4 million
compared to $10.6 million in 1998.
Performance Polymers & Services (PP&S)
- --------------------------------------
PP&S sales for the second quarter of 1999 were $261.0 million, an increase of
$45.7 million or 21% over 1998. Sales volumes increased approximately 28%,
primarily the result of acquired businesses. This volume growth was partially
offset by selling prices that averaged 6% below the same period last year. For
the first half of 1999, sales were $478.6 million, an increase of $62.9 million
over 1998. The additional volume of acquired businesses accounts for the
majority of this increase. Average selling prices for the first half of 1999
were approximately 6% lower than 1998.
Operating income for the second quarter, before the restructuring costs of $1.9
million, was $30.5 million, an increase of $2.1 million or 7% over last year.
PP&S second quarter 1999 sales margins over raw materials were comparable with
second quarter 1998, but down approximately 4% as compared to the first
quarter of 1999, as a result of rising raw material costs, changes in product
mix and the acquired businesses from OxyChem which consisted of a
proportionately lower sales mix. Average plant conversion costs per sales unit
decreased approximately one percentage point from the same period last year as
a result improved operating efficiencies and the higher sales volumes.
Resin and Intermediates (R&I)
- -----------------------------
The year-to-year comparison of operating results in the R&I segment is impacted
by the formation of OxyVinyls on April 30, 1999 and the resulting changes in the
business' structure. With the formation of OxyVinyls, Geon's exposure to the PVC
and chlor-alkali industries changed significantly. The Company now owns 24% of
OxyVinyls, a 4.2 billion pound PVC producer, compared with its previous
ownership of 100% of 2.4 billion pounds PVC capacity prior to formation. This
effectively reduces the Company's exposure to PVC industry fluctuations to
approximately half of the pre-OxyVinyls exposure. However, the Company's
exposure to fluctuations in caustic soda was increased from approximately
150,000 tons to 380,000 tons with the formation of OxyVinyls. Also, for two
months in 1999, the Company's interest in OxyVinyls is reported under the equity
method of accounting, whereas prior to this, the Company's PVC/VCM business was
consolidated.
The R&I segment loss for the second quarter and first half of 1999 was $3.0
million and $4.1 million, excluding Geon's share of the restructuring charge
recognized by OxyVinyls of $0.8 million pre-tax, versus a $13.3 million loss in
the second quarter and a $16.8 million loss in the first half of 1998. The
earnings improvement is primarily the result of improved PVC industry margins
which more than offset the lower earnings from chlorine and caustic soda as
chlor-alkali industry pricing is in a cyclical trough.
Equity affiliates included in the R&I segment are Sunbelt, Australian Vinyls
Corporation in Australia, and, as of April 30, 1999, OxyVinyls. The second
quarter and year-to-date 1999 loss from equity affiliates of $1.3 million and
$2.8 million, respectively, (excluding the $0.8 million special charge
recognized by OxyVinyls) are primarily the result of the effect of the low
chionne and caustic soda price on Sunbelt's earnings, partially offset by
earnings of AVC and OxyVinyls.
17
18
CAPITAL RESOURCES AND LIQUIDITY
Net cash used by operating and investing activities was $19.1 million,
excluding the impact on cash of the OxyChem transactions. For the same
period in 1998, operating and investing activities used $9.2 million
of cash.
The transactions with OxyChem generated cash of $98.0 million in the first
half of 1999, consisting of cash received upon the formation of OxyVinyls
of $77.5 million, cash paid for the Acquired Businesses of $27.0 million,
collection of $53.1 million of the $62.3 million of R&I working capital
retained upon formation of OxyVinyls, and cash payments by Geon for certain
costs directly related to the OxyChem transactions. The Company expects to
pay $5.9 million for special benefits to former employees who accepted
positions with OxyVinyls. In addition, the Company paid $6.0 million of
costs directly associated with OxyVinyls formation during the last half of 1998.
Operations provided $0.9 million of cash in 1999, excluding collection of
retained R&I working capital, compared with $47.7 million in 1998. The decrease
in cash provided is primarily the result of increased operating working capital
of $46.2 million in the first half of 1999 as compared to a $16.9 million
increase in the first half of 1998. This increase in operating working capital
in 1999 resulted from a reduction in the sale of receivables of $30 million, as
well as a seasonal increase in operating working capital. Other operating uses
of cash in 1999 include approximately $3.5 million of vacation and other
benefits paid to former Geon employees who are now with OxyVinyls, $3.4 million
of cash payments associated with the compound restructuring and the final
payments for early retirement benefits related to the Company's 1997 voluntary
retirement program totaling $2.7 million. Loss (income) from equity affiliates
was a source of cash in the first half of 1999, primarily as a result of
non-cash operating losses of Sunbelt, compared with non-cash income in 1998.
Investing activities, excluding items related to OxyChem transactions included
$22.2 million in property additions compared with $16.0 million in 1998. This
increase over 1998 is largely attributable to the expansion and modernization of
the Henry, Illinois, specialty resin plant that was announced in the fourth
quarter of 1998. Total capital expenditures in 1999 are expected to be $55 to
$60 million. In addition, net distributions from equity affiliates provided
$1.9 million of cash in the first half of 1999, compared with a use of
cash of $1.3 million in 1998.
Cash used in financing activities in the first half of 1999 primarily reflects
the use of cash generated from the OxyChem transactions to repay short-term
borrowings. In addition, the Company paid dividends of $5.9 and repaid $2.0
million of long-term debt. Approximately $1.7 million of long-term debt was
repaid prior to its scheduled maturity date to facilitate the transactions with
OxyChem.
As discussed in Note H to the Condensed Consolidated Financial Statements, the
Company completed the acquisitions of O'Sullivan and Acrol in July 1999. The
financing for these acquisitions was obtained through a combination of
short-term borrowings, cash on hand, and $25 million of cash acquired with
O'Sullivan. Geon anticipates that the short-term borrowings will be repaid with
cash generated through operations and other sources The Company believes it has
sufficient funds to support dividends, debt service requirements, normal capital
and operating expenditures, and expenditures related to expansion of its Henry,
Illinois plant, based on projected operations, existing working capital
facilities and other available permitted borrowings.
YEAR 2000 (Y2K)
State of Readiness. Since 1997, the Company has been actively involved in
surveying, assessing, and correcting Year 2000 ("Y2K") problems with its
information technology structure. Geon's information technology structure
includes, among others, commercial business information systems, manufacturing
information systems, desktop computing networks, and data and communication
networks. Geon implemented a new integrated commercial business information
system in 1997 which is Y2K compliant and will support the majority of the
Company's operations. Following the assessment of its information technology
structure, Geon identified its systems that it believed may be vulnerable to
Y2K failures and established a program to assess Y2K issues.
18
19
The Company's process for evaluating Y2K issues associated with its information
technology structure includes completion of a comprehensive inventory of systems
which may be vulnerable to Y2K failure; assessment of the business criticality
of the inventoried systems; testing of systems determined to be critical to
operations; and remediation of those systems found to be noncompliant.
The Company's Y2K efforts are being carried out by Geon's Y2K compliance team
under the leadership of the Director of Information Systems and Technology
Operations who has assembled a group of seven individuals to oversee the
implementation of Geon's Y2K program and has appointed a person at each of
Geon's facilities, including those newly acquired, to address Y2K issues. The
Y2K compliance team maintains a reporting structure to ensure that progress is
made on Y2K issues and to ensure the reliability of risk and cost estimates
relating to Y2K problems.
The most critical non-information technology systems, such as automated process
control equipment, are relatively new and are being upgraded and maintained with
the help of Geon's various suppliers. To date, Geon's investigation of these
systems has not revealed any Y2K problems.
In February 1997, Geon completed the installation of a new integrated
commercial business information system which is Y2K compliant and will support
the majority of Geon's current operations. The purchase and initial
installation of Geon's new commercial business information system cost
approximately $20 million. Currently, the Company is operating one older
information system which has been remediated. As a result of the installation
of the new system and its remediation efforts, Geon has completed all of its
Y2K work with respect to its commercial business information systems, with the
exception of new business acquisitions. The Company is also in the process of
remediating all of its technical infrastructure. The most critical
non-information technology systems include automated process control equipment
and equipment containing embedded chips. These systems are relatively new and
are being upgraded with the help of Geon's various suppliers.
The Company has included the businesses acquired from OxyChem in the evaluation
and remediation of its systems. The recent (July 1999) acquisitions of
O'Sullivan and Acrol were not included in Geon's overall Y2K evaluation
processes. Nevertheless, each of these companies had substantially completed a
Y2K compliance plan prior to acquisition. Geon is in the process of reviewing
and auditing these plans.
19
20
Below is a summary of Geon's status in each of our primary areas of evaluation.
This summary includes the businesses acquired from OxyChem. The recent
acquisitions of Acrol and O'Sullivan are not included in the summary below;
however, as previously discussed, these companies have substantially completed
Y2K compliance plans prior to acquisition. Geon is in the process of reviewing
and auditing these plans.
The Company has completed the inventory and assessment of each category.
----------------------------------------------------------------------------------------
EXPECTED
CATEGORY TESTED REMEDIATED COMPLETION
----------------------------------------------------------------------------------------
APPLICATION SOFTWARE
Commercial 100% 100% Completed
Manufacture 100% 100% Completed
Desktop 100% 100% Completed
Research and Development 100% 100% Completed
----------------------------------------------------------------------------------------
INTEGRATION
Interfaces 100% 100% Completed
Electronic Data Interchange 100% 100% Completed
----------------------------------------------------------------------------------------
INFRASTRUCTURE
Networks, including data
and communications 100% 100% Completed
Hardware 100% 100% Completed
Software 100% 100% Completed
----------------------------------------------------------------------------------------
EXTERNAL ENTITIES
Customers N/A 88% 8/99
Key Suppliers N/A 100% Completed
Service Providers N/A 95% 8/99
----------------------------------------------------------------------------------------
EMBEDDED SYSTEMS
Programmable Logic 100% 100% Completed
Controllers
----------------------------------------------------------------------------------------
All computing hardware and data networks have been tested and found to be
compliant. Further, the Company has identified approximately 50 personal
computers with key business applications which have been successfully tested.
In addition to internal resources, the Company is utilizing external resources
to implement its Y2K program and to ensure that its risk and cost estimates are
reliable. Geon has contracted with outside consultants to verify Geon's
assessment of its Y2K problems and to assist it with remediation efforts.
The Company relies significantly upon third parties in the operation of its
business. As a result, as part of Geon's Y2K program, the purchasing and
production control department of each operating unit has made, and is making,
efforts to determine and assess the Y2K compliance of third parties with which
Geon does business. In particular, beginning in 1998, Geon contacted and sent
questionnaires to all of its raw material suppliers to obtain information
relating to the status of such suppliers with respect to Y2K issues. Such
inquiries incorporated the guidelines of the Chemical Manufacturers Association
in requesting compliance information. Of its total suppliers, approximately 100
were regarded as critical. Geon has received assurances from 100% of its
critical raw material suppliers that they are Y2K compliant as of July 1999. The
Company is continuing its efforts (follow-up letters, telephone calls, review of
WEB sites, etc.) to determine the status of all remaining non-critical
suppliers' Y2K compliance. The Company's compliance assessment of suppliers
includes service providers for those services determined to be critical to
20
21
business operations. In those cases where the Company has been unable to obtain
satisfactory assurance of Y2K compliance alternative suppliers are being
pursued and/or inventories will be increased prior to year-end, as deemed
appropriate. The Company has also sent letters to all of its customers and has
received compliance assurances from 88%. Further customer follow-up continues.
Due to the uncertainties associated with Y2K problems, Geon continues to
develop contingency plans in the event that its business or operations are
disrupted on January 1, 2000. As part of this plan, the Company expects to
adjust certain inventory levels and mix of products and raw materials
consistent with good business practice based upon the risks that Geon believes
exist. In addition, Geon is developing a plan that outlines how one facility
can compensate for any disruption at another facility due to Y2K problems.
Completion. Geon's internal systems and processes are considered to be Y2K
compliant as of July 1999, except for the recent acquisitions of O'Sullivan and
Acrol which have substantially completed Y2K compliance plans prior to
acquisition. Geon is in the process of reviewing and auditing these plans.
Cost. The Company anticipates incurring total out-of-pocket expenditures of
approximately $.75 million on Y2K issues. To date, Geon has incurred
out-of-pocket costs of approximately $.5 million on Y2K issues, plus internal
personnel time included in the scope of normal operations. Approximately 85% of
these funds have been expended in connection with remediation, and 15% of these
funds have been expended to replace portions of the information technology
structure. The funds used by Geon to address its Y2K problems are from the
general business budget, and all such costs are expensed as incurred.
Risks. If the Company's suppliers and customers are not Y2K compliant by January
1, 2000, such noncompliance could materially affect Geon's business, results of
operations, and financial condition. Geon may experience some random or
unforeseen supply chain disruptions that may affect its ability to produce and
distribute key products. In addition, the Company's business may be disrupted if
a significant number of its customers are unable to pay for products supplied to
them by Geon. Geon's worst case scenario is the inability of Geon to receive raw
materials or remove products from its facilities. In order for Y2K problems to
have a material effect on Geon, Geon believes that more than one of its
facilities would have to experience significant Y2K problems.
Forward-Looking Statements. The data on which the Company believes it will
complete its Y2K compliance efforts and the expenses related to Geon's Y2K
compliance efforts are based upon management's best estimates, which are based
on assumptions of future events, including the availability of certain
resources, third party modification plans, and other factors. There can be no
assurances that these results and estimates will be achieved, and the actual
results could materially differ from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability of personnel trained in this area and the ability to locate and
correct all relevant computer codes. In addition, there can be no assurances
that the systems or products of third parties on which Geon relies will be
timely converted or that a material failure by a third party, or a conversion
that is incompatible with Geon's systems, would not have a material adverse
effect on Geon.
ENVIRONMENTAL MATTERS
The Company is subject to various federal, state and local environmental laws
and regulations concerning emissions to the air, discharges to waterways, the
release of materials into the environment, the generation, handling, storage,
transportation, treatment and disposal of waste materials or otherwise relating
to the protection of the environment.
21
22
The Company maintains a disciplined environmental and industrial safety and
health compliance program and conducts internal and external regulatory audits
at its plants in order to identify and categorize potential environmental
exposures and to assure compliance with applicable environmental, health and
safety laws and regulations. This effort has required and may continue to
require process or operational modifications, the installation of pollution
control devices and cleanups. The Company estimates capital expenditures related
to the limiting and monitoring of hazardous and non-hazardous wastes during 1999
to approximate $3 million to $5 million. Certain factors that may affect these
forward-looking comments are discussed under "Cautionary Note on Forward-Looking
Statements".
The Company believes that compliance with current governmental regulations will
not have a material adverse effect on its capital expenditures, earnings, cash
flow or liquidity. At June 30, 1999, the Company had accruals totaling
approximately $44 million to cover potential future environmental remediation
expenditures. Environmental remediation expenditures in 1999 are estimated to
approximate the level of 1998 which totaled $5.3 million.
CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS
This Quarterly Report contains statements concerning trends and other
forward-looking information affecting or relating to the Company and its
industry that are intended to qualify for protection afforded "forward-looking
statements" under the Private Securities Litigation Reform Act of 1995.
Forward-looking statements can be identified by the use of foward-looking
terms, such as "may," "intends," "will," "expects," "anticipates,"
"estimates" or the negative thereof or other variations thereon
or comparable terminology. Actual results could differ materially from
such statements for a variety of factors, including but not limited
to (1) unanticipated changes in world, regional, or U.S. PVC consumption
growth rates affecting the Company's markets; (2) unanticipated changes in
global industry capacity or in the rate at which anticipated changes in
industry capacity come online in the PVC, VCM & chlor-alkali industries;
(3) fluctuations in raw material prices and supply, in particular
fluctuations outside the normal range of industry cycles; (4)
unanticipated delays in achieving or inability to achieve cost reduction and
employee productivity goals; (5) inability to achieve, or delays in achieving
savings related to business consolidation and restructuring programs; (6)
unanticipated production outages or material costs associated with scheduled or
unscheduled maintenance programs; (7) the impact on the North American vinyl
markets and supply/demand balance resulting from the economic situation in the
Far East; (8) the ability to obtain financing at anticipated rates; (9)
unanticipated expenditures required in conjunction with year 2000 compliance;
(10) unanticipated delay in realizing, or inability to realize, expected costs
savings from acquisitions; (11) unanticipated costs or difficulties related to
completion of proposed transactions or the operation of the joint venture
entities; (12) inability to complete proposed transactions; (13) lack of day to
day operating control, including procurement of raw material feedstock, of the
resin partnership; (14) lack of direct control over the reliability of delivery
and quality of the primary raw materials (PVC & VCM) utilized in the Company's
products; and (15) partial control over investment decisions and dividend
distribution policy of the resin partnership.
22
23
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk from changes in interest
rates on debt obligations and from changes in foreign currency
exchange rates. Information related to these risks and the
Company's management of the exposure is included in "Management's
Analysis - Consolidated Balance Sheets" in the 1998 Annual Report
on 10K under the caption "Market Risk Disclosures."
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
Not Applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company held a Special Meeting of Stockholders on April 19,
1999. As described in the Special Meeting Proxy Statement the
following actions were taken:
a) Stockholders approved the transactions with OxyChem described
in Note E to the Condensed Consolidated Financial Statements
included under Item 1 of this Form 10Q by a vote of
16,242,328 in favor and 155,818 against the proposal.
b) Stockholders approved the adoption of The Geon Company
Incentive Stock Plan by a vote of 11,657,482 in favor and
5,912,112 against the proposal.
The Company held its Annual Meeting of Stockholders on May 6,
1999. As described in the 1999 Proxy Statement, the following
action was taken:
a) The eight nominees for directors were elected. The votes for
directors were as follows:
Number of Shares Number of Share
Voted For Votes Withheld
---------------- ---------------
James K. Baker 20,361,233 190,134
Gale Duff-Bloom 20,343,173 208,194
J. Douglas Campbell 20,371,764 179,603
D. Larry Moore 20,371,664 179,703
William F. Patient 20,311,987 239,380
R. Geoffrey Styles 20,371,664 179,703
Thomas A. Waltermire 20,355,163 196,204
Farah M. Walters 20,351,564 199,803
23
24
ITEM 5. OTHER INFORMATION:
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K:
(a) Exhibit 4.1 - Amendment to Sections 2 and 8 of Article I of the
By-Laws of the Company
(b) Exhibit 10.1 - 1999 Incentive Stock Plan as Amended and Restated on
May 6, 1999
(c) Exhibit 27 - Financial Data Schedule
(d) Reports on Form 8-K
Form 8-K filed on April 1, 1999 announcing the Special Meeting of
Stockholders to be held on April 19, 1999.
Form 8-K filed on April 20, 1999 announcing stockholder approval of
the transactions with OxyChem at a Special Meeting of Stockholders
held on April 19, 1999.
Form 8-K filed on April 28, 1999, announcing the intended retirement
of Geon's Chairman and CEO, William Patient in August 1999,
Form 8-K filed on May 7, 1999, announcing the appointment of Thomas
Waltermire as CEO.
Form 8-K filed on May 13, 1999, providing financial statements of
OxyChem transferred businesses and pro forma financial information of
The Geon Company.
Form 8-K filed on June 2, 1999 announcing an agreement to acquire the
outstanding stock of O'Sullivan Corporation.
Form 8-K filed on June 24, 1999 announcing the passing of the waiting
period under the Hart Scott Rodino Antitrust Improvements Act of 1976
with respect to Geon's intended acquisition of O'Sullivan Corporation.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
August 16, 1999 THE GEON COMPANY
/s/ W. D. Wilson
Vice President and Chief
Financial Officer,
(Principal Financial Officer)
/s/ G. P. Smith
Corporate Controller and
Assistant Treasurer
(Principal Accounting Officer)
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