-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, O66OZW50yFxciLmpv1sK4YtrNHjcNeBHQ8Wz+6q/m22UkGujrzxZ4S8OxaiOGkpl O95DSN8L3BlPCBrIq+GlrA== 0000950152-99-002852.txt : 19990402 0000950152-99-002852.hdr.sgml : 19990402 ACCESSION NUMBER: 0000950152-99-002852 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 8 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: GEON CO CENTRAL INDEX KEY: 0000897547 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 341730488 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-11804 FILM NUMBER: 99580985 BUSINESS ADDRESS: STREET 1: ONE GEON CTR CITY: AVON LAKE STATE: OH ZIP: 44012 BUSINESS PHONE: 4409301001 MAIL ADDRESS: STREET 1: ONE GEON CENTER CITY: AVON LAKE STATE: OH ZIP: 44012 10-K405 1 THE GEON COMPANY 10-K405 1 ================================================================================ - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998. COMMISSION FILE NUMBER 1-11804 THE GEON COMPANY (Exact name of registrant as specified in its charter) DELAWARE 34-1730488 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) One Geon Center, Avon Lake, Ohio 44012-0122 (Address of principal executive offices) (Zip-Code) Registrant's telephone number, including area code (440) 930-1000 Securities registered pursuant to Section 12(b) of the Act: ----------------------------------------------------------- Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- Common Stock, par value $.10 per share New York Stock Exchange 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, and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value of the voting stock, consisting solely of common stock, held by non-affiliates of the registrant as of March 15, 1999 was approximately $555.6 million. On such date, 23,477,835 of such shares of the registrant's common stock were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for the 1999 Annual Meeting of Stockholders are incorporated by reference into Part III. The Exhibit Index is located herein beginning at sequential page I-1. - -------------------------------------------------------------------------------- ================================================================================ 2 ITEM 1. DESCRIPTION OF THE BUSINESS. GENERAL The Geon Company, together with its subsidiaries (the Company), is the world's largest manufacturer and marketer of polyvinyl chloride (PVC) compounds, the largest North American manufacturer of PVC dispersion resins, and a leading North American producer of PVC resins. PVC is the world's second most widely used plastic. It is an attractive alternative to traditional materials such as glass, metal and wood and other plastic materials because of its versatility, durability and cost competitiveness. PVC's largest applications are associated with infrastructure development; building products and consumer durable goods. The Company also produces vinyl chloride monomer (VCM), an intermediate precursor to PVC. The Company's operations are located primarily in the United States and Canada in two business segments. The "Performance Polymers and Services" (PP&S) segment includes PVC compounds, two compounding joint ventures, specialty resins, plastisol formulators and analytical testing services. During 1998, the Company acquired three plastisol (see "Products" below) formulator businesses, Plast-o-meric, Inc., the Wilflex Division of Flexible Products Company and Adchem, Inc. These acquisitions added a total of approximately 300 employees at 5 locations. Geon is the only specialty resin producer with downstream integration into plastisol formulators. In addition, PP&S includes the newly formed "Decillion" joint venture with Owens Corning that will market and manufacture material systems based on a unique technology for reinforced thermoplastic polymers. Geon owns 40% of the joint venture. The "Resin and Intermediates" (R&I) segment includes suspension and mass resins, vinyl chloride monomer (VCM), 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. As of December 31, 1998, the Company's North American nameplate commodity suspension/mass PVC resin capacity was approximately 2.6 billion pounds, or approximately 18% of total U.S. and Canadian PVC capacity. On December 22, 1998, the Company entered into agreements to form a PVC partnership and a Compounding partnership with Occidental Chemical Corporation (OxyChem). The Company will contribute a substantial portion of the assets and liabilities of its R&I business segment to the PVC partnership, which will operate a business that produces and markets PVC suspension and mass resins, VCM and chlor-alkali products. In exchange, Geon will receive a 24% interest in the PVC partnership and the PVC partnership will assume certain liabilities and obligations of Geon. The Company's equity holdings in the Sunbelt chlor-alkali venture and the Australian resin operations (AVC) will not be contributed to the PVC partnership. The Compounding partnership will operate a powder/dry blend compounding business and will be 90% owned by Geon. In conjunction with the transactions, Geon will realize $110 million through retention of certain working capital and distribution of cash from the PVC partnership. OxyChem will also transfer to Geon a PVC flexible film and pellet compounding plant in Burlington, New Jersey and a specialty pellet compound business primarily located in Pasadena, Texas. The formation of the partnerships is subject to certain conditions, including approval of the Company's stockholders. PRODUCTS The Company's PP&S products include PVC compounds, specialty resins, and plastisol formulations. In addition, the Company offers its analytical, testing and problem-solving capabilities to customers and suppliers through its subsidiary, Polymer Diagnostics Inc. With the acquisitions of three formulator businesses in 1998, the Company added urethane powder coatings, vinyl plastisol inks used in ink transfers and polymer additives, such as blowing agents and pigments, to its products. PVC compounds are made by combining vinyl resin with additives. Depending upon the additives used, the compound can be either rigid and impact-resistant or soft and flexible. PVC compounds are fabricated by customers of the Company through extrusion, calendaring, injection-molding or blow-molding. Flexible PVC compounds are used for wire and cable insulation, automotive interior and exterior trim, packaging and medical devices. The Company also manufactures plastisizers which add the property of flexibility to PVC. Rigid extrusion PVC compounds are commonly used in window frames, vertical blinds and construction applications. Injection-molding PVC compounds are used in specialty parts like business machine components, appliance parts and bottles. The Company's development of PVC compounds that can be injection-molded into thin-walled complex parts or that have other unique characteristics has opened new applications and markets for PVC. Specialty resins are much finer in particle size than suspension resins and when compounded with plasticizers they take on soft, flexible characteristics. They are used primarily in wire 2 3 and metal coatings, vinyl flooring, vinyl wall coverings and automotive interiors, as well as in consumer products such as toys. The Company supports its PP&S products by providing service to customers through enhanced customer support. The Company's sales force works with engineering and marketing experts of original equipment to create new uses for PVC products and to replace more costly plastics and other traditional materials such as wood, glass or aluminum through the development of cost-effective solutions that meet specific customer needs. In addition, the Company uses a combination of material science, computer-aided design and prototype part production capabilities to assist customers in the development and application of new uses for higher-performance PVC compounds. The Company's R&I products include PVC suspension and mass resins and VCM. PVC suspension and mass resins, named for the different processes used to produce them, are powders that cannot be used without the addition of ingredients to form a vinyl compound. Suspension/mass resins can be further categorized as general purpose and special purpose resins. General purpose resins comprise the largest portion of resins by volume and are typically used in rigid applications such as pipe and exterior siding. Special purpose resins are a broad category of resins possessing unique characteristics such as color and clarity and are used in a wide variety of applications such as film, medical and automotive products. Geon's PVC resin production supplies the Company's compounding operations. In addition, the Company sells PVC resin to third party trade customers. VCM produced by the Company is used primarily internally in the production of PVC resin. The Company supplies approximately one-third of its chlorine requirements through the Sunbelt joint venture arrangement with Olin Corporation. Additional financial information related to business segments and geographic regions is included in Note Q to the Consolidated Financial Statements. COMPETITION The Company competes with major U.S. chemical manufacturers and diversified companies, some of which have greater financial resources than the Company. Competition in the industry is based upon factors, the importance of which vary depending on the specific characteristics of the product and the applicable market, ranging from price and availability to product performance and customer and technical support. With respect to the R&I segment, the Company competes primarily with seven major North American PVC producers: Borden Chemicals and Plastics Limited Partnership; CONDEA Vista Chemical Company (a subsidiary of RWE-DEA Hamburg, Germany); Formosa Plastics Corporation U.S.A. (a subsidiary of Formosa Plastic Group, Taipei, Taiwan); Georgia Gulf Corporation; Occidental Chemical Corporation (a subsidiary of Occidental Petroleum Corporation), Shintech, Inc. (a subsidiary of Shin Etsu Chemical Co., Ltd., Tokyo, Japan) and The Westlake Group. The key competitive factors are price, product availability and performance. In 1998, the eight largest resin producers (one of which is the Company) accounted for approximately 90% of the total estimated resin capacity. None of the producers had more than 20% of total resin capacity. Because there is no single PVC compound market, the manner in which the Company competes varies from market to market, although in each market the Company competes primarily on the basis of product consistency and customer service in addition to price. In certain PVC compound markets, such as pipe fittings, wire and cable, and bottles, the Company competes with other PVC resin manufacturers. In the markets for higher performance PVC compounds, such as extrusion and injection molding compounds for business equipment, appliances, telecommunications and construction, the Company competes less with traditional PVC manufacturers and more with other non-PVC plastic manufacturers, such as General Electric Company, Bayer AG and The Dow Chemical Company. Manufacturing margins and prices in these markets tend to be higher and more stable than PVC resin and other compound markets, although such areas have higher support costs comprised of sales, marketing, technical service, customer support and research and development. Competitors in the specialty resin market include many of the PVC resin competitors discussed under R&I competition above. Plastisol formulator competition is characterized by a large number of formulators, many of them independent, non-public companies. Approximately 5-10 of these formulators, including Geon, account for the majority of formulator sales in North America. RAW MATERIALS The Company produces the majority of the VCM it requires for the manufacture of PVC at its plant in LaPorte, Texas. In April 1996, the Company expanded the capacity of the LaPorte facility by 800 million pounds, bringing its capacity to 2.4 billion pounds. In addition, the Company has a long-term Canadian VCM 3 4 supply contract providing substantially all VCM requirements for the Company's Canadian PVC resin production located in Scotford, Alberta. The Canadian supply contract remains effective through 2000. The two principal raw materials used by the Company to manufacture VCM are ethylene and chlorine. The majority of the Company's ethylene requirements are provided under three long-term supply agreements with the largest having an initial term through December 31, 2005. The other significant long-term supply agreements expire at the end of 2003 and 2005. The Company has over 95% of its anticipated ethylene requirements under contract for 1999. The Company sources its chlorine requirements three ways: (1) Sunbelt chlor-alkali joint venture participation; (2) agreement with Bayer Corporation for hydrogen chloride; and (3) third party purchases. The Company has a 50% participation in a chlor-alkali plant under a joint venture agreement with Olin Corporation. The plant, which began operations in the fourth quarter of 1997, has a capacity of 250,000 tons. A future plant expansion to a capacity of 400,000 tons can be accommodated. Further, the Company has an agreement with Bayer Corporation under which a pipeline transports by-product anhydrous hydrogen chloride from Bayer's plant to Geon's nearby LaPorte, Texas plant. This anhydrous hydrogen chloride is converted to chlorine for use in the VCM production process. This pipeline became fully operational in October 1998 and provides for delivery of anhydrous hydrogen chloride sufficient to provide 250,000 tons of chlorine. The remainder of the Company's chlorine requirements are purchased from third parties through long-term supply agreements (other than those discussed above) and on the spot-market. The Company's primary long-term chlorine supply agreements are with three different domestic suppliers which expire through 2005. These supply agreements generally contain volume commitments and various pricing mechanisms which management believes provide a cost-effective sourcing of chlorine. Historically, chlorine and ethylene have been produced in the United States at a lower cost than elsewhere in the world. This cost advantage has resulted in U.S. producers of PVC having lower raw material costs than their counterparts in many other parts of the world. In addition to the raw materials for VCM, the Company purchases a variety of additives to manufacture its compound products. These materials generally have adequate alternative sources of supply and are not purchased under multi-year contracts. In conjunction with the formation of the joint venture with OxyChem, Geon will enter into a resin and VCM supply agreement with the PVC partnership under which it will purchase a substantial portion of its PVC resin and all of Geon's VCM requirements. The agreements will have an initial term of 15 years with renewal options. The supply agreement will assure availability of supply, technical development and support and competitively priced PVC resin and VCM. The PVC resin supply contract includes price formulas that have market and cost based features. The Company believes that the pricing under the PVC resin supply contract approximates the market price that would be available to a purchaser of similar volumes for similar transactions with third parties. RESEARCH AND DEVELOPMENT The Company has developed substantial research and development capability. The Company's efforts are devoted to (i) providing support to its manufacturing plants for cost reduction, productivity and quality improvement programs, (ii) providing quality technical services to assure the continued success of its products for its customers' applications, (iii) providing technology for improvements to its products, processes and applications, and (iv) developing new products to satisfy defined market needs. The Company operates a research and development center in Avon Lake, Ohio. The laboratory is equipped with modern analytical, synthesis, polymer characterization and testing equipment and pilot plants and polymer compounding operations which simulate the production facilities for rapid translation of new technology into new products. Expenditures for Company sponsored product research and product development in 1998, 1997 and 1996 were $15.0 million, $17.1 million and $17.5 million, respectively. Expenditures in 1999 are projected to remain at approximately the same level as in 1998. EMPLOYEES As of December 31, 1998, the Company had approximately 2,400 full-time employees of whom approximately 180 employees are covered by collective bargaining agreements which expire in July 2000, November 2000 and July 2001. The bargaining unit employees are employed at the Company's plant in Kentucky and the acquired Synergistics plants located in Canada. The Company considers its employee relations to be good. 4 5 ENVIRONMENTAL, HEALTH AND SAFETY 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. The Company endeavors to ensure the safe and lawful operation of its facilities in manufacturing and distribution of products and believes it is in compliance in all material respects with applicable laws and regulations. The Company maintains a disciplined environmental and occupational 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 ensure compliance with applicable environmental, health and safety laws and regulations. This is an effort which has required and may continue to require process or operational modifications and the installation of pollution control devices and cleanups. The Company's capital expenditures related to the limiting and monitoring of hazardous and non-hazardous wastes totaled $4 million, $4 million and $3 million in 1998, 1997, and 1996, respectively. In addition, the Company estimates capital expenditures for future environmental improvement programs to approximate $3 million to $5 million in 1999. The projected future capital expenditures are associated with a wide variety of environmental projects such as compliance with anticipated new regulations, achievement of internal company programs and improved operating efficiencies, and expenditures to remediate the acquired facilities to the historical environmental operating practices of Geon. The primary areas for future environmental capital expenditures can be broadly categorized as solid waste, air quality, waste water and ground water improvements. Expenditures for remediating various sites were $5.3 million, $5.0 million and $6.1 million in 1998, 1997 and 1996, respectively. Expenditures in 1999 for remediation of these sites are projected to be $5 million to $7 million. The Company has been notified by the U.S. Environmental Protection Agency, a state environmental agency, or a private party that it may be a potentially responsible party (PRP) in connection with seven active and inactive non-Company owned sites. While government agencies frequently claim PRPs are jointly and severally liable at these sites, in the Company's experience, interim and final allocation of liability costs are generally made based on the relative contribution of waste. The Company believes that it has potential continuing liability with respect to only four such sites. In addition, the Company initiates corrective and preventive environmental projects of its own to ensure safe and lawful activities at its operations. The Company believes that compliance with current governmental regulations at all levels will not have a material adverse effect on its financial condition. Based on estimates prepared by the Company's environmental engineers and consultants, the Company, at December 31, 1998, had accruals totaling $45.9 million to cover probable future environmental expenditures related to previous contaminated sites. The accrual 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 undertaken at these sites, it is possible that the ultimate costs to be incurred could be more than recorded at December 31, 1998 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. Of the $45.9 million accrued for future environmental expenditures, $17.3 million is attributable to future remediation expenditures at the Calvert City, Kentucky, site and less than $.5 million is attributable to off-site environmental remediation liabilities, including the four sites mentioned above. The remaining amount is primarily attributable to other environmental remediation projects at nine other Company-owned facilities. At Calvert City, consent orders have been signed with both the U.S. Environmental Protection Agency and the Commonwealth of Kentucky Department of Environmental Protection which provide for a site-wide remediation program primarily to remove ethylene dichloride (EDC) from groundwater, the cost of which has been accrued. Environmental expense incurred was $2.4 million in each of the years ended December 31, 1998 and 1997 and $4.2 million for the year ended December 31, 1996. The Company participates in the EPA Compliance Audit Program (CAP) under Section 8(e) of the Toxic Substances Control Act. That section requires reporting of information indicating a substantial risk of injury to health or the environment from a chemical substance or mixture. Under the CAP, the Company conducts an audit of its files and reports any information that should have been reported previously. The total potential maximum liability of the Company and its subsidiaries under the CAP is $1 million. The first part of the CAP required reporting of substantial risk information concerning health effects. The remaining part of the CAP involves substantial risk information concerning the environment. The Company will perform its 5 6 obligations under the environmental portion of the CAP after the EPA issues guidance concerning the kinds of environmental information that it believes are reportable. The Company does not believe that its portion of any civil penalties arising from this portion of the CAP will exceed $.2 million. The risk of additional costs and liabilities is inherent in certain plant operations and certain products produced at the Company's plants, as is the case with other companies involved in the PVC industry. There can be no assurance that additional costs and liabilities will not be incurred by the Company in the future. It is also possible that other developments, such as increasingly strict environmental, safety and health laws, regulations and enforcement policies thereunder and claims for damages to property or persons resulting from plant emissions or products, could result in additional costs and liabilities to the Company. A number of foreign countries and domestic local communities have enacted, or have under consideration, laws and regulations relating to the use and disposal of plastic materials. Widespread adoption of such laws and regulations, or public perception, may have an adverse impact on plastic materials. Although many of the Company's major markets are in durable, longer-life applications which could reduce the impact of any such environmental regulation, there is no assurance that possible future legislation or regulation would not have an adverse effect on the Company's business. The Company does not believe that there are any new laws which will have a material impact on the industry or the Company's capital expenditures, cash flow or liquidity. The Company conducts a comprehensive occupational safety and health program. Industry data shows that the Company's safety record is among the best in the chemical industry. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS The foregoing "Description of the Business" section contains statements concerning trends and other forward-looking information affecting or relating to the Company and its industry that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements based on a variety of factors which are discussed on page F-24 under the caption " Cautionary Note on Forward-Looking Statements". 6 7 ITEM 2. PROPERTIES. CORPORATE HEADQUARTERS: Avon Lake, Ohio PERFORMANCE POLYMERS AND SERVICES FACILITIES:
SPECIALTY PLASTISOL VINYL COMPOUNDING DISPERSION RESIN FORMULATORS SERVICES - ----------------------------------------------------------------------------------------------------------------------- Avon Lake, Ohio Henry, Illinois Kennesaw, Georgia Avon Lake, Ohio Conroe, Texas Pedricktown, New Jersey North Baltimore, Ohio Farmingdale, New Jersey Sullivan, Missouri Lindsay, Ontario, Canada Sussex, Wisconsin Long Beach, California Waukesha, Wisconsin Louisville Kentucky Niagara Falls, Ontario, Canada Orangeville, Ontario, Canada Plaquemine, Louisiana St. Remi de Naperville, Quebec, Canada Terre Haute, Indiana Valleyfield, Quebec, Canada Newton-Aycliffe, England (joint venture) Singapore (joint venture)
RESIN AND INTERMEDIATES FACILITIES: Deer Park, Texas LaPorte, Texas Louisville, Kentucky Niagara Falls, Ontario, Canada Pedricktown, New Jersey Scotford, Alberta, Canada McIntosh, Alabama (joint venture) Melbourne, Victoria, Australia (joint venture) ITEM 3. LEGAL PROCEEDINGS. In addition to the matters regarding the environment described above under the heading "Environmental, Health and Safety", there are pending or threatened against the Company various claims, lawsuits and administrative proceedings, all arising from the ordinary course of business with respect to commercial, product liability and environmental matters, which seek remedies or damages. The Company believes that any liability that may be finally determined should not have a material effect on the Company's financial condition. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None. 7 8 EXECUTIVE OFFICERS OF THE COMPANY. (INCLUDED PURSUANT TO INSTRUCTION 3 TO PARAGRAPH (B) OF ITEM 401 OF REGULATION S-K) Executive officers of the Company are elected by and serve at the discretion of the Board of Directors. Except as otherwise noted in biographies below, the executive officers of the Company were elected to their respective positions immediately following the formation of the Company in 1993. Their ages and positions are as follows:
NAME AGE POSITION WITH COMPANY - ---- --- --------------------- William F. Patient 64 Chairman of the Board and Chief Executive Officer Thomas A. Waltermire 49 President and Chief Operating Officer Donald P. Knechtges 57 Senior Vice President, Business and Technology Development V. Lance Mitchell 39 Vice President and General Manager, Compounds Clarence J. Nosal 61 Vice President and General Manager, Intermediates Gregory L. Rutman 56 Vice President, General Counsel and Secretary W. David Wilson 45 Vice President and Chief Financial Officer
WILLIAM F. PATIENT Mr. Patient received a degree in Chemical Engineering from Washington University, St. Louis. Mr. Patient joined the B.F.Goodrich Company (BFG) in 1989 as Senior Vice President of BFG and as President of BFG's Geon Vinyl Division. Prior to joining BFG, Mr. Patient had been associated with Borg-Warner Chemicals since 1962, most recently as Vice President. Since the IPO, Mr. Patient has served as the Chairman of the Board and Chief Executive Officer of the Company. THOMAS A. WALTERMIRE Mr. Waltermire received a B.S. in Biology from Ohio State University in 1971 and an M.B.A. from Harvard University in 1974. Mr. Waltermire joined BFG in June 1974. In April 1993, he became Senior Vice President and Treasurer of the Company, and in October 1993 became Chief Financial Officer. In May 1997, he was appointed Chief Operating Officer, and in February 1998 Mr. Waltermire was named President and Chief Operating Officer. DONALD P. KNECHTGES Mr. Knechtges received a B.A. in Chemistry from Marietta College in 1963 and a B.S. in Chemical Engineering from Case Institute of Technology in 1965. Mr. Knechtges joined BFG as an engineer in June 1965 and became Senior Vice President, Commercial in December 1991. In August 1995, Mr. Knechtges was named Senior Vice President, Business and Technology Development. V. LANCE MITCHELL Mr. Mitchell received a B.S. in Marketing in 1982 from Bowling Green State University. Mr. Mitchell joined BFG as a Product Manager in 1989. Since then he has served as a Market Development Manager, Regional Sales Manager, Extrusion Business Director and Compound Business Director. In May 1997, he was named Vice President and General Manager, Compounds. CLARENCE J. NOSAL Mr. Nosal received a B.S. in Mechanical Engineering from the United States Naval Academy in 1961 and an MBA from Golden Gate University in 1967. Mr. Nosal joined BFG in 1979 as a Plant Manager. In 1988 he was named Vice President of Operations for the Geon Vinyl Division of BFG, and after the initial public offering (IPO) in April 1993, he became Vice President and General Manager, Intermediates. 8 9 GREGORY L. RUTMAN Mr. Rutman received an A.B. in Business Management from Baldwin-Wallace College in 1964 and a J.D. degree from Cleveland Marshall College of Law in 1969. In 1987, he completed the Executive Program at the Darden Graduate School of Business Administration, University of Virginia. Mr. Rutman joined BFG in October 1974. From 1985 until the IPO, he functioned as Staff Vice President of BFG and Counsel to the BFG Geon Vinyl Division. Since the IPO, he has served as Vice President, General Counsel, Secretary and Assistant Treasurer of the Company. W. DAVID WILSON Mr. Wilson received an A.B. in history from DePauw University in 1975, and a Masters Degree in International Management from The American Graduate School of International Management (Thunderbird) in 1977. Mr. Wilson joined BFG in 1978 and served in a variety of financial management positions within the Chemical Group. He was named controller of the Geon Vinyl Division in 1985 and later became Director of Marketing. He served as General Manager for Auseon Limited, Geon's wholly-owned Australian subsidiary, and Director of Business Management for Geon's Resin Division before being named Vice President and Chief Financial Officer in May 1997. 9 10 PART II - -------------------------------------------------------------------------------- ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS. The Company's common stock, $.10 par value per share, is reported on the New York Stock Exchange under the trading symbol "GON". The information appearing in the table on page F-23 of this filing under the caption "Quarterly Data (Unaudited)", is incorporated herein by reference thereto. At March 15, 1999, the Company had approximately 7,000 individual stockholders. ITEM 6. SELECTED FINANCIAL DATA. The information required by this item appears on page F-23 of this filing under the caption "Selected Financial Data", and is incorporated herein by reference thereto. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The information required by this item appears under the caption "Management's Analysis" on pages F-3, F-4, F-6, F-8 and F-10 of this filing and is incorporated herein by reference thereto. Such information contains statements concerning trends and other forward-looking information affecting or relating to the Company and its industry that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements based on a variety of factors which are discussed on page F-24 of this filing under the caption "Cautionary Note On Forward-Looking Statements" and such factors are incorporated herein by reference thereto. ITEM 7A. QUANTITATIVE AND QUALITATIVE INFORMATION ABOUT MARKET RISK The information required by this item is included on page F-6 under the caption "Market Risk Disclosures", and is incorporated herein by reference thereto. Such information contains statements concerning trends and other forward-looking information affecting or relating to the Company and its industry that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from such statements based on a variety of factors which are discussed on page F-24 of this filing under the caption "Cautionary Note On Forward-Looking Statements" and such factors are incorporated herein by reference thereto. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. The information required by this item appears on pages F-5, F-7, F-9 and F-11 through F-24 of this filing and is incorporated herein by reference thereto. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. 10 11 PART III - -------------------------------------------------------------------------------- ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. The information regarding the Directors of the Company is incorporated by reference to the information to be contained in the Proxy Statement to be filed with respect to the 1999 Annual Meeting of Stockholders. If such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period. Information concerning executive officers of the Company is contained in Part I of this Report under the heading "Executive Officers of the Company". ITEM 11. EXECUTIVE COMPENSATION. The information regarding executive compensation is incorporated by reference to the information to be contained in the Proxy Statement to be filed with respect to the 1999 Annual Meeting of Stockholders. If such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT. The information regarding security ownership of certain beneficial owners and management is incorporated by reference to the information to be contained in the Proxy Statement to be filed with respect to the 1999 Annual Meeting of Stockholders. If such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. The information regarding certain relationships and related transactions is incorporated by reference to the information to be contained in the Proxy Statement to be filed with respect to the 1999 Annual Meeting of Stockholders. If such Proxy Statement is not filed within 120 days after the end of the fiscal year covered by this Form 10-K, such information will be filed as part of an amendment to this Form 10-K not later than the end of the 120-day period. 11 12 PART IV - -------------------------------------------------------------------------------- ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K. (a)(1) and (2) and (d) - The response to these portions of Item 14 are submitted as a separate section of this Report beginning on page F-1 of this Report. (a)(3) and (c) - An index of Exhibits filed as part of this Report is located beginning on page I-1 of this Report. (b) Reports on Form 8-K Filed in the Fourth Quarter of 1998: o Form 8-K filed on November 20, 1998, announcing the consolidation of the Company's compounding operations. o Form 8-K filed on December 18, 1998, announcing the formation of a joint venture with Owens Corning. o Form 8-K filed on December 23, 1998, announcing the signing of a definitive agreement with Occidental Chemical Corporation to form PVC and compounding joint ventures. 12 13 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on March 31, 1999. THE GEON COMPANY By: /s/ Gregory L. Rutman ---------------------- Gregory L. Rutman Vice President, General Counsel and Secretary Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities indicated on March 31, 1999.
SIGNATURE TITLE - --------- ----- /s/ William F. Patient Chairman of the Board, Chief Executive - -------------------------- Officer and Director (Principal Executive William F. Patient Officer) /s/ Thomas A. Waltermire President and Chief Operating Officer - -------------------------- and Director Thomas A. Waltermire /s/ W. David Wilson Vice President and Chief Financial Officer - ------------------------- (Principal Financial Officer) W. David Wilson /s/ Gregory P. Smith Corporate Controller (Principal Accounting - ------------------------- Officer) Gregory P. Smith /s/ James K. Baker Director /s/ D. Larry Moore Director - ------------------------- -------------------------- James K. Baker D. Larry Moore /s/ J. A. Fred Brothers Director /s/ John D. Ong Director - ------------------------- -------------------------- J. A. Fred Brothers John D. Ong /s/ Gale Duff-Bloom Director /s/ R. Geoffrey P. Styles Director - ------------------------- -------------------------- Gale Duff-Bloom R. Geoffrey P. Styles /s/ J. Douglas Campbell Director /s/ Farah M. Walters Director - ------------------------- -------------------------- J. Douglas Campbell Farah M. Walters
13 14 ANNUAL REPORT ON FORM 10-K ITEM 14(a)(1) AND (2) AND (d) INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1998 THE GEON COMPANY F-1 15 ITEM 14(a)(1) AND (2) and (d). THE GEON COMPANY AND SUBSIDIARIES INDEX OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES The following consolidated financial statements of The Geon Company and subsidiaries for the year ended December 31, 1998, are incorporated by reference in Item 8.
Page ---- Consolidated statements of income - Years ended December 31, 1998, 1997 and 1996. F-5 Consolidated balance sheets - December 31, 1998 and 1997 F-7 Consolidated statements of cash flows - Years ended December 31, 1998, 1997 and 1996. F-9 Consolidated statements of stockholders' equity - Years ended December 31, 1998, 1997 and 1996. F-11 Notes to consolidated financial statements - December 31, 1998. F-12 to F-22 Quarterly Data (Unaudited) F-23 Report of Independent Auditors F-24
The following consolidated financial statement schedule of the Registrant and its subsidiaries is included in Item 14(d) Schedule II Valuation and qualifying accounts -Years ended December 31, 1998, 1997 and 1996 F-25
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. F-2 16 THE GEON COMPANY AND SUBSIDIARIES MANAGEMENT'S ANALYSIS - CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- 1998 RESULTS OF OPERATIONS -TOTAL COMPANY In 1998, the Company had record sales of $1.284 billion. Operating income, before a special charge for employee separation and plant phase-out costs, was $51.9 million and income from equity affiliates totaled $3.7 million. Operating income, before special charges, decreased $15.1 million from 1997 due to a decline in industry polyvinyl chloride (PVC) resin margins. Partially offsetting the lower PVC industry resin margins were the improved operating results of the Performance Polymers and Services (PP&S) business, including the acquisitions of Synergistics Industries Limited in the fourth quarter of 1997 and three plastisol formulators in the summer of 1998. The Performance Polymers and Services business represented 65% of 1998 consolidated sales versus 49% in 1997. In 1998, selling and administrative expenses increased $33.2 million over 1997. Approximately 70% of this change relates to the acquisitions. Approximately one-third of the remaining increase relates to incentive compensation plans which are tied to Company performance. The balance is associated with new business development, marketing and costs associated with redirecting the business focus toward growing the PP&S business segment. Interest expense in 1998 was $4.1 million above 1997 due to higher average short-term borrowings which financed the acquisitions discussed below. The Company's income tax rate for 1998 was 41.5% compared with 35.0% in 1997. The increase primarily resulted from the effects of non-deductible goodwill from recent acquisitions and a favorable adjustment recorded in 1997 for prior years income tax liabilities. Other expense, net, decreased from $5.9 million in 1997 to $2.6 million in 1998, primarily as a result of fluctuations in the Canadian and Australian exchange rates. PERFORMANCE POLYMERS & SERVICE BUSINESS (PP&S) PP&S 1998 sales were $839 million, an increase of 38%, or $232 million, over 1997. This growth primarily resulted from additional sales volumes from the acquisitions of Synergistics in late 1997 and the formulator businesses in 1998. This growth was partially offset by lower average selling prices of approximately 3.5% resulting from downward pressure caused by lower material costs. The margin of average selling price over material costs increased by 16% in 1998 over 1997. This increase was primarily due to lower resin costs and the realization of cost savings in purchased raw materials resulting from synergies created by the recent business acquisitions. Cash plant conversion costs, as a percentage of sales, increased 3 percentage points due to a changing mix of products with the business acquisitions, excess compounding capacity and lower average selling prices. In the fourth quarter of 1998, a $14.6 million special charge was recognized related to a plan to consolidate the Company's compounding manufacturing operations. The consolidation involves the closure of two plants and other production lines. As part of the compound consolidation plan, additional costs estimated to be $7.5 million are expected in the first quarter of 1999 and upon formation of the powder compound joint venture at which time the Company will close its Conroe, Texas facility. The consolidation is projected to be completed by mid-1999 and result in savings estimated at $6 million in 1999 and $14 million annually thereafter. See Note O to the Consolidated Financial Statements for a further discussion of this charge. RESIN & INTERMEDIATES BUSINESS (R&I) Based on the Society of Plastics Industry's (SPI) December 1998 data, North American (U.S. and Canada) producer shipments of PVC resins (including exports) are estimated to have increased 4% over 1997. In 1998, based on SPI data, export shipments are estimated to have decreased 3% over 1997. Domestic shipments increased approximately 5% over last year. Capacity utilization (shipments/capacity) for North America is estimated at 92% of effective capacity (85% of nameplate) in 1998. North American capacity increased 6% over 1997. The Company believes that average industry margins for the largest PVC resin market applications decreased approximately 2.0 cents per pound in 1998 as compared with 1997. This decrease was the result of lower average selling prices of approximately 34%, which were partially offset by lower average feedstock costs. Industry margins over feedstock costs in 1998 set an historic low for the third consecutive year and were approximately 4.5 cents per pound (30%) below the level set in 1992, the last industry trough. R&I 1998 sales were $578 million, a decrease of $240 million or 29% from 1997. Approximately $51 million of this decline resulted from the contribution of the Company's Australian resin operations to the Australian joint venture in 1997, which eliminated those revenues from consolidated sales in 1998. The balance of the decline is primarily due to lower PVC resin selling prices. The Company's resin exports represented 4% of total volume in 1998 versus 3% in 1997. PVC resin volumes were flat with last year. The Company's average resin selling price decreased 22%, somewhat less than the industry average due to Geon's product mix. R&I had a business loss (operating loss plus income from equity affiliates) of $36.4 million in 1998, generally resulting from the historic low industry margins noted above. The business loss represented a decrease in earnings of approximately $57 million from 1997, excluding the impact of the 1997 employee separation and plant phase out charge. This decrease was due to lower margins of approximately $50 million on total resin volume, costs associated with the second quarter 1998 maintenance shutdown of the LaPorte, Texas VCM plant of $3.5 million, and annual increases in plant and administrative costs. Beginning in the fourth quarter of 1998, the Company began purchasing anhydrous hydrogen chloride from Bayer by pipeline, which ultimately will provide approximately one-third of the chlorine requirements at Geon's LaPorte, Texas VCM plant. The arrangement provides the R&I business with a cost competitive source of chlorine. F-3 - -------------------------------------------------------------------------------- 17 THE GEON COMPANY AND SUBSIDIARIES MANAGEMENT'S ANALYSIS - CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- 1997 RESULTS OF OPERATIONS - TOTAL COMPANY In 1997, the Company had strong shipments of both resin and compound. Operating income, before a special charge for employee separation costs, increased $37.1 million or 124% over 1996, despite lower industry PVC margins. This improvement was the result of the Company's efforts to grow and expand its Performance Polymers and Services business segment. In addition, the Company further reduced the material and operating costs of its resin operations with the April 1996 start-up of the LaPorte, Texas VCM plant expansion. The acquisition of Synergistics was completed and Synergistics became part of Geon's consolidated operations effective October 31, 1997. Because Synergistics' results were included with the Company's for only two months, the impact on 1997 earnings was not significant. In the second quarter of 1997, a pre-tax charge of $15 million was recorded to cover costs associated with a voluntary early retirement program covering 74 employees. At December 31, 1998, excluding future payments to be made as part of the funding of the Company's pension plans, $3.0 million remains accrued and will be paid by mid-1999. See Note O to the Consolidated Financial Statements for further discussion of this charge. Other expense, net, in 1997 included foreign currency losses of $2.2 million, primarily resulting from the weakening of the Australian dollar. In 1996, the Company had currency gains of $1.6 million resulting from fluctuations in both Australian and Canadian currencies. In addition in 1997, other expense, net, included a discount on the sale of receivables of $5.0 million, compared with $2.4 million in 1996. The increase was the result of higher average receivables sold in 1997. Income tax expense in 1997 was 35% of pre-tax income versus 41.1% in 1996. Excluding a favorable adjustment in 1997 related to prior years tax liabilities, the 1997 income tax expense was 40.9%, approximating the previous year. PERFORMANCE POLYMERS & SERVICES BUSINESS (PP&S) PP&S 1997 sales were $607 million, an increase of 13% or $70 million over 1996. Approximately 50% of this growth is attributable to the additional sales of Synergistics. Higher shipment volumes, excluding Synergistics, increased revenues by approximately 8%, accounting for the remaining sales growth. On average, selling prices were flat from 1996 to 1997. Margins (weighted-average unit selling price over average material costs) declined approximately 7%, primarily as a result of higher costs for PVC resin, a key raw material in the production of PVC compounds. 1997 weighted-average unit plant cash conversion costs were flat with 1996. RESIN & INTERMEDIATES BUSINESS (R&I) Based on the SPI's December 1997 data, North American producer shipments of PVC resins (including exports) are estimated to have increased 6% over 1996. In 1997, based on SPI data, export shipments are estimated to have increased 33% over 1996. Domestic shipments increased approximately 3% over last year. Capacity utilization for North America was estimated at 94% of effective capacity (87% of nameplate) in 1997. North American capacity increased 7% over 1996. The Company believes that average industry margins for the largest PVC resin market applications decreased approximately 1.0 cent per pound in 1997 as compared with 1996. This decrease was the result of higher average feedstock costs of approximately 20%, only partially offset by higher average selling prices. In 1997, ethylene costs on average were approximately 15% higher than in 1996. Average chlorine costs increased one-third over 1996 levels. R&I sales were $818 million, an increase of $57 million, or 7%, from 1996. A 7% increase in average unit selling price of suspension resin and an increase of 8% in the volume of suspension resin sold resulted in approximately $92 million of additional revenue. This was partially offset by a decline in VCM sales as a result of increased internal VCM consumption, combined with a $24 million decrease in consolidated sales as a result of the contribution of the Company's Australian resin operation to the Australian joint venture in August 1997, eliminating those revenues from consolidated sales in the period of September through December of 1997. The Company's export sales declined from 11% to 4% of R&I sales as a result of increased domestic demand and an increase in the volume of VCM and resin consumed by the Company's PP&S business. R&I had business income of $20.4 in 1997, excluding the impact of the employee separation charge. In 1996, the business loss was $15.5 million. The margin of the average selling price of suspension resin over the Company's cost of materials increased by 8% from 1996, primarily as a result of lower VCM costs. Reduced VCM costs resulted from the expansion of the LaPorte, Texas facility in mid-1996 and lower cost chlorine purchased from the jointly owned Sunbelt chlor-alkali plant which began operations in November 1997. This suspension resin margin improvement increased R&I business income by approximately $22 million, including the effect of R&I sales to PP&S at market prices. The remaining improvement in business income is attributable primarily to the increase in sales volumes. PVC plant cash conversion costs were flat from 1996 to 1997. F-4 - -------------------------------------------------------------------------------- 18 THE GEON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME - -------------------------------------------------------------------------------- In millions, except per share data
Year Ended December 31, 1998 1997 1996 ------------------------------------------- SALES $1,284.4 $1,250.0 $1,144.4 OPERATING COSTS AND EXPENSES: Cost of sales 1,092.6 1,079.6 1,008.1 Selling and administrative 82.0 48.8 52.3 Depreciation and amortization 57.9 54.6 54.1 Employee separation and plant phase-out 14.6 15.0 -- ------------------------------------------- 1,247.1 1,198.0 1,114.5 ------------------------------------------- OPERATING INCOME 37.3 52.0 29.9 Income (loss) from equity affiliates 3.7 (.3) 1.0 Interest expense (16.0) (11.9) (10.8) Interest income 1.2 .7 1.4 Other expense, net (2.6) (5.9) (.8) ------------------------------------------- INCOME BEFORE INCOME TAXES 23.6 34.6 20.7 Income tax expense (9.8) (12.1) (8.5) ------------------------------------------- NET INCOME $ 13.8 $ 22.5 $ 12.2 =========================================== EARNINGS PER COMMON SHARE: Basic $ .60 $ .98 $ .51 Diluted $ .58 $ .95 $ .50 WEIGHTED AVERAGE SHARES USED TO COMPUTE EARNINGS PER SHARE: Basic 22.9 22.9 23.9 Diluted 23.6 23.6 24.6 - ----------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements F-5 - -------------------------------------------------------------------------------- 19 THE GEON COMPANY AND SUBSIDIARIES MANAGEMENT'S ANALYSIS - CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- The consolidated balance sheet at December 31, 1998, reflects the strong financial position of The Geon Company. ASSETS Total assets were $802.0 million at December 31, 1998, or 8% below 1997. The change in assets is primarily related to (a) lower receivables from lower PVC resin selling prices and an increase in receivables sold (b) lower inventories primarily reflecting lower feedstock costs and (c) purchases of property below depreciation. These decreases were partially offset by the addition of assets associated with 1998 acquired businesses of $66.4 million at December 31, 1998. The investment in equity affiliates includes the Company's 50% participation in the Sunbelt chlor-alkali joint venture and an Australian joint venture with Orica Limited (formerly ICI Australia). The Australian joint venture commenced operations in August 1997, with the Company contributing most of the assets of its Australian PVC subsidiary in exchange for a 37.4% ownership interest. Also, the Company holds a 50% participation in two compounding joint ventures located in the United Kingdom and Singapore. Further, in December 1998, the Company announced that it would hold a 40% ownership in a start-up joint venture with Owens Corning to market and manufacture material systems based on a unique technology for reinforced thermoplastic materials. LIABILITIES AND EQUITY The three plastisol formulator acquisitions in 1998, as well as the Synergistics acquisition in 1997, were funded with variable-rate short-term credit facilities. At December 31, 1998, the Company had short-term bank debt of $50.9 million. At December 31, 1998, the Company had outstanding $125 million in debentures issued in 1995 and maturing in 10 and 20 years from issuance. The debentures have received investment-grade credit ratings. In addition, the Company has available unsecured lines of credit and overdraft facilities totaling $296 million. Other non-current liabilities include most of the Company's accrued environmental liabilities, as well as pension accruals. The stronger U.S. dollar against the Canadian and Australian dollar resulted in unrecognized translation losses included in other equity of $8.8 million for the year. In 1998, the Company returned $11.7 million to its stockholders in the form of dividends. MARKET RISK DISCLOSURES The Company is exposed to market risk from changes in interest rates on debt obligations. The Company's long-term debt at December 31, 1998 consists entirely of fixed rate obligations. To manage such risk, the Company periodically enters into interest rate exchange contracts which generally convert fixed-rate obligations to floating rates. No such exchange contracts were outstanding at December 31, 1998. Cash principal payments required under these obligations are 1999 - $.8 million, 2000 - $1.8 million, 2001 - $.3 million, 2002 - $.5 million, 2003 - $.8 million, and $132.0 million thereafter. Weighted-average interest rates on this debt are 7.0% for 1999 through 2001, 6.9% for 2002 through 2003 and 7.1% thereafter. The Company's short-term debt consists entirely of floating rate obligations. At December 31, 1998, the Company's short-term debt is denominated in Canadian dollars and has a floating rate of 5.1% based on the lenders reference rate. To manage risk associated with floating rate debt, the Company has an interest rate cap agreement expiring in July 1999, which limits the interest rate on up to $85 million of floating rate borrowings to 9%. The fair value of this contract at December 31, 1998 is not significant. The Company is also exposed to market risk from changes in foreign currency exchange rates, primarily from its operations in Canada and Australia where assets and liabilities are denominated in Canadian and Australian dollars, respectively. To manage such risk, the Company periodically enters into foreign currency forward exchange contracts to mitigate the impact of temporary fluctuations in exchange rates. At December 31, 1998, the Company had a foreign currency forward exchange contract to exchange $16.9 million U.S. dollars for $27.0 million Australian dollars. This contract was terminated in January 1999. The Company does not expect foreign currency denominated assets and liabilities at December 31, 1998 to have a significant impact on earnings or cash flows. ENVIRONMENTAL MATTERS The Company generates both hazardous and non-hazardous wastes, the treatment, storage, transportation and disposal of which are regulated by various governmental agencies. The Company has been designated a potentially responsible party by the U.S. Environmental Protection Agency in connection with one plant and various other sites. The Company also has reportable environmental contamination at certain owned plant sites in the United States and Canada. The Company has accrued $46 million to cover future environmental remediation expenditures and does not believe any of the matters either individually or in the aggregate will have a material adverse effect on its capital expenditures, earnings, cash flow or liquidity. Capital expenditures related to the limiting and monitoring of hazardous and non-hazardous wastes amounted to $4 million, $4 million and $3 million for 1998, 1997 and 1996, respectively. The Company estimates capital expenditures during 1999 of approximately $3 million to $5 million. Expenditures related to the remediation of previously contaminated sites are projected to be $25 million to $30 million over the next five years. The risk of additional costs and liabilities is inherent in certain plant operations and certain products produced at the Company's plants, as is the case with other companies involved in the PVC industry. For additional discussion, refer to Note L to the Consolidated Financial Statements. PENDING TRANSACTIONS WITH OCCIDENTAL CHEMICAL CORPORATION On December 22, 1998, the Company entered into agreements with Occidental Chemical Corporation (OxyChem) to form two limited partnerships and acquire certain businesses from OxyChem. Most significantly, Geon and OxyChem would contribute their PVC resin operations to a PVC partnership in which the Company would have a 24% ownership interest. The Company anticipates closing the transaction early in the second quarter of 1999. For a further discussion of the transaction see Notes C and F to the Consolidated Financial Statements. F-6 - -------------------------------------------------------------------------------- 20 THE GEON COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS - -------------------------------------------------------------------------------- In millions, except per share data
December 31, - ---------------------------------------------------------------------------------------------------------------------------- 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------- ASSETS CURRENT ASSETS Cash and cash equivalents $ 14.4 $ 49.1 Accounts receivable 70.8 110.8 Inventories 113.9 122.4 Deferred income tax assets 24.6 20.7 Prepaid expenses 11.0 10.5 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT ASSETS 234.7 313.5 Property, net 443.5 456.6 Investment in equity affiliates 19.8 20.6 Goodwill, net 81.5 63.6 Deferred charges and other non-current assets 22.5 18.6 ============================================================================================================================ TOTAL ASSETS $ 802.0 $ 872.9 ============================================================================================================================ LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Short-term bank debt $ 50.9 $ 90.4 Accounts payable 129.1 159.1 Accrued expenses 76.0 63.3 Current portion of long-term debt .8 .8 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT LIABILITIES 256.8 313.6 Long-term debt 135.4 136.4 Deferred income tax liabilities 32.8 35.8 Post-retirement benefits other than pensions 85.1 86.2 Other non-current liabilities including pensions 77.8 77.1 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 587.9 649.1 - ---------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Preferred stock, 10.0 shares authorized; no shares issued -- -- Common stock, $0.10 par, authorized 100.0 shares; issued 28.0 and 27.9 in 1998 and 1997, respectively 2.8 2.8 Additional paid-in capital 296.1 295.8 Retained earnings 75.4 73.3 Common stock held in treasury, 4.6 shares in 1998 and 4.7 shares in 1997 (115.1) (118.0) Accumulated other non-owner equity changes (45.1) (30.1) - ---------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 214.1 223.8 ============================================================================================================================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 802.0 $ 872.9 ============================================================================================================================
See Notes to Consolidated Financial Statements F-7 - -------------------------------------------------------------------------------- 21 THE GEON COMPANY AND SUBSIDIARIES MANAGEMENT'S ANALYSIS - CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- Net cash provided by operating and investing activities in 1998 and 1997, before the business acquisitions, is as follows:
Change (In millions) 1998 1997 1998 vs. 1997 ---------------------------------------------------------------- Net cash provided by operating activities $110.0 $98.0 $12.0 Net cash used by investing activities (98.3) (115.3) 17.0 Business acquisitions, net of cash acquired 57.1 82.2 (25.1) ---------------------------------------------------------------- Net cash used by investing activities, excluding net cash paid for acquisitions (41.2) (33.1) (8.1) ---------------------------------------------------------------- Net cash provided by operating and investing activities before business acquisitions $ 68.8 $ 64.9 $ 3.9 ================================================================
The 1998 net cash provided by operating and investing activities, before business acquisitions, was $3.9 million higher than in 1997 and was achieved despite low industry PVC resin margins and an operating loss in the Resin & Intermediates business segment. Operating activities in 1998 provided cash of $110.0 million, or $12.0 million higher than in 1997. Operating working capital decreased $34.5 million from 1997 and was offset by a decrease in net income of $13.1 million, after adjusting for the effects of the following non-cash charges: depreciation and amortization, employee separation, plant phase-out and deferred income tax provision. Other operating uses of cash in 1998 included the LaPorte maintenance shutdown of $6.0 million and severance and other payments of $4.0 made in connection with the employee separation program announced in 1997. Cash used in investing activities included purchases of property of $40.7 million, a decrease of $10.2 million from 1997. Investing activities in 1997 also included the repayment of prior-year advances to equity affiliates. In 1997, net cash used by operating and investing activities was $17.3 million and included the acquisition of Synergistics at a net investment of $82.2 million. Excluding the Synergistics acquisition, net cash provided by operating and investing activities was $64.9 million, an increase of $73.5 million over 1996. Operating activities provided $98.0 million of cash, an increase of $13.4 million over 1996. This increase was primarily due to earnings $23.3 million higher than in 1996 after adjusting net income for depreciation and amortization, employee separation, plant phase-out and deferred income tax provision. This was partially offset by an increase in 1997 of operating working capital of $9.6 million, or an increased usage from 1996 of $28.3 million. Cash used in investing activities in 1997, excluding business acquisitions, decreased by $60.1 million as a result of a $22.5 million decrease in purchases of property as well as the repayment in 1997 of prior-year advances to equity affiliates. Financing activities in 1998 primarily reflected the reduction of short-term debt and the payment of dividends. In 1997, financing activities included an increase in short-term debt as a result of the acquisition of Synergistics, dividend payments and the repurchase of 200,000 shares of common stock. The Company believes it has sufficient funds to support dividends, debt service requirements and normal capital and operating expenditures under its existing working capital facilities and other available permitted borrowings. Certain factors that may affect these forward-looking comments are discussed on page F-24. Under an August 1996 Board of Directors resolution, the Company is authorized to repurchase an additional 1.7 million shares of Geon common stock. INFLATION The Company employs a number of strategies to mitigate the impact of inflation on financial results. A considerable amount of capital spending is directed toward cost reduction and productivity improvement projects. Moreover, through its research and development efforts, the Company is continually exploring ways to reduce the cost of existing products and to develop new products with improved performance characteristics that will command premium prices. The Company is also reviewing and re-engineering its administrative activities on an ongoing basis in order to streamline operations and reduce costs. F-8 - -------------------------------------------------------------------------------- 22 THE GEON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS - -------------------------------------------------------------------------------- In millions
Year Ended December 31, ----------------------------------------------------- 1998 1997 1996 ----------------------------------------------------- OPERATING ACTIVITIES Net income $ 13.8 $ 22.5 $ 12.2 Adjustments to reconcile net income to net cash provided by operating activities: Employee separation and plant phase-out 14.6 15.0 -- Depreciation and amortization 57.9 54.6 54.1 Provision for deferred income taxes (1.0) 6.3 8.8 Changes in assets and liabilities: Operating working capital: Accounts receivable 50.7 (2.8) 30.1 Inventories 16.5 (4.3) (12.0) Accounts payable (32.7) (2.5) .6 - ---------------------------------------------------------------------------------------------------------------------------- Total operating working capital 34.5 (9.6) 18.7 - ----------------------------------------- -------------------------------------------------------------------------------- Accrued expenses (2.3) (6.0) (2.5) Income taxes payable/receivable, net 3.3 4.2 (2.1) Other (10.8) 11.0 (4.6) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 110.0 98.0 84.6 INVESTING ACTIVITIES Business acquisitions, net of cash acquired (57.1) (82.2) -- Purchases of property (40.7) (50.9) (73.4) Investment in and advances to equity affiliates (.5) 17.8 (19.8) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY OPERATING AND INVESTING ACTIVITIES 11.7 (17.3) (8.6) FINANCING ACTIVITIES (Decrease) increase in short-term debt (34.4) 72.0 9.8 Repayment of long-term debt (.9) (4.0) (.7) Net proceeds from issuance of common stock 1.8 .3 .4 Repurchase of common stock -- (4.1) (32.4) Dividends (11.7) (11.6) (12.1) - ---------------------------------------------------------------------------------------------------------------------------- NET CASH (USED) PROVIDED BY FINANCING ACTIVITIES (45.2) 52.6 (35.0) Effect of exchange rate changes on cash (1.2) (4.1) .4 - ---------------------------------------------------------------------------------------------------------------------------- (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (34.7) 31.2 (43.2) Cash and cash equivalents at beginning of year 49.1 17.9 61.1 - ---------------------------------------------------------------------------------------------------------------------------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 14.4 $ 49.1 $ 17.9 - ----------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements F-9 - -------------------------------------------------------------------------------- 23 THE GEON COMPANY AND SUBSIDIARIES MANAGEMENT'S ANALYSIS - YEAR 2000 COMPLIANCE - -------------------------------------------------------------------------------- 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 approximately 90% of the current 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. The Company's Y2K efforts are being carried out by Geon's Y2K compliance team under the leadership of the Manager of Technical Support. The Manager of Technical Support 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; however investigation in this area continues. In February 1997, Geon completed the installation of a new integrated commercial business information system which is Y2K compliant and will support 90% 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. 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. 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, throughout 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, Geon received assurances from 75% of its raw material suppliers that they are or would be Y2K compliant by July 1999. Geon has maintained ongoing correspondence with its suppliers regarding Y2K issues and placed particular emphasis on determining the Y2K readiness of its critical suppliers. Due to the uncertainties associated with Y2K problems, Geon is in the process of developing 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 its 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 expects to develop a plan that outlines how one facility can compensate for any disruption at another facility due to Y2K problems. Completion. The Company's Y2K compliance team expects Geon's internal systems and processes to be Y2K compliant by July 1999. 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 $.3 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. F-10 - -------------------------------------------------------------------------------- 24 THE GEON COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - -------------------------------------------------------------------------------- In millions, except per share data; Shares in thousands
Accumulated Common Common Other Shares Additional Stock Non-Owner Common Held in Common Paid-In Retained Held in Equity Shares Treasury Total Stock Capital Earnings Treasury Changes - ------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1995 27,877 3,197 $208.9 $2.8 $273.9 $ 62.3 $ (86.6) $(43.5) Non-owner equity changes: Net income 12.2 12.2 Translation adjustment .5 .5 Adjustment of minimum pension liability 16.4 16.4 -------- Total non-owner equity changes 29.1 Stock-based compensation and exercise of options (107) 3.0 (3.7) 3.3 3.4 Adjustment related to step-up in tax basis 25.9 25.9 Repurchase of common shares 1,469 (32.4) (32.4) Cash dividends ($.50 per share) (12.1) (12.1) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1996 27,877 4,559 222.4 2.8 296.1 62.4 (115.7) (23.2) Non-owner equity changes: Net income 22.5 22.5 Translation adjustment (8.3) (8.3) Adjustment of minimum pension liability 1.0 1.0 -------- Total non-owner equity changes 15.2 Stock-based compensation and exercise of options (59) 1.9 (.3) 1.8 .4 Repurchase of common shares 200 (4.1) (4.1) Cash dividends ($.50 per share) (11.6) (11.6) - ------------------------------------------------------------------------------------------------------------------------------- BALANCE DECEMBER 31, 1997 27,877 4,700 223.8 2.8 295.8 73.3 (118.0) (30.1) Non-owner equity changes: Net income 13.8 13.8 Translation adjustment (8.8) (8.8) Adjustment of minimum pension liability (6.6) (6.6) -------- Total non-owner equity changes (1.6) Stock-based compensation and exercise of options 97 (78) 3.6 .3 2.9 .4 Cash dividends ($.50 per share) (11.7) (11.7) =============================================================================================================================== BALANCE DECEMBER 31, 1998 27,974 4,622 $214.1 $2.8 $296.1 $ 75.4 $(115.1) $(45.1) ===============================================================================================================================
See Notes to Consolidated Financial Statements F-11 - -------------------------------------------------------------------------------- 25 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE A. THE COMPANY The Geon Company (Company or Geon), together with its subsidiaries, is the world's largest manufacturer and marketer of polyvinyl chloride (PVC) compounds and a leading North American producer of PVC resins. Geon's operations are primarily located in the United States and Canada in two business segments. The "Performance Polymers and Services" segment includes PVC compounds, including two joint ventures, specialty resins, plastisol formulators and analytical testing services. The "Resin and Intermediates" segment includes suspension and mass resins, vinyl chloride monomer (VCM), a precursor to PVC, the Company's 50% equity holding in Sunbelt chlor-alkali joint venture and the Company's 37.4% holding in Australian Vinyls Corporation (AVC), an Australian PVC operation. Sales include exports from North America of $45.7 million, $36.2 million and $85.7 million in 1998, 1997 and 1996, respectively. As described in Note C, on December 22, 1998, the Company entered into agreements to form a PVC partnership and a compounding partnership with Occidental Chemical Corporation (OxyChem). The Company will contribute a substantial portion of the assets and liabilities of its Resin and Intermediates segment to the PVC partnership, which will operate a business that produces and markets PVC suspension and mass resins, VCM and chlor-alkali products. The Company's equity holdings in Sunbelt and AVC will not be contributed to the PVC partnership. The compounding partnership will operate a powder/dry blend compounding business. In conjunction with the transactions, Geon will realize $110 million through retention of certain working capital and distribution of cash from the PVC partnership. OxyChem will also transfer to Geon a PVC flexible film and pellet compounding plant in Burlington, New Jersey and a specialty pellet compound business primarily located in Pasadena, Texas. The formation of the partnerships is subject to certain conditions, including approval of the Company's stockholders. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of the Company and its subsidiaries. All majority owned affiliates are consolidated. Investments in affiliates where Company ownership is 50 percent or less are accounted for under the equity method. Intercompany transactions are eliminated. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with a maturity of less than three months to be cash equivalents. INVENTORIES Inventories are stated at the lower of cost or market. Most domestic inventories are valued by the last-in, first-out (LIFO) cost method. Inventories not valued by the LIFO method are valued principally by the average cost method. PROPERTY AND DEPRECIATION Property, plant and equipment is recorded at cost, net of depreciation and amortization computed principally using the straight-line method over the estimated useful life of the assets, ranging from three to 15 years for machinery and equipment and up to 40 years for buildings. Computer software is amortized over periods not exceeding ten years. Property, plant and equipment is generally depreciated on accelerated methods for income tax purposes. Repairs and maintenance costs are expensed as incurred, except for costs associated with periodic plant turnaround (maintenance shutdown) costs which are deferred and amortized over approximately two years, the period benefited. At December 31, 1998 and 1997, unamortized turnaround costs were $4.3 million and $1.9 million, respectively. Amortization expense related to deferred plant turnaround costs totaled $3.6 million, $4.5 million and $4.1 million in 1998, 1997 and 1996, respectively. GOODWILL The excess of the purchase price paid over the fair value of the net assets of businesses acquired is recorded as goodwill and amortized over a thirty-five year period on a straight-line basis. Goodwill and other long-lived assets are reviewed for impairment. When undiscounted cash flows are not sufficient to recover the assets' carrying amount, an impairment loss is charged to expense in the period identified. Measurement of impairment is based upon discounted cash flows, asset appraisals or market values of similar assets. At December 31, 1998 and 1997, accumulated amortization totaled $2.4 million and $.3 million, respectively. Amortization expense was $2.1 million and $.3 million in 1998 and 1997, respectively. FINANCIAL INSTRUMENTS The fair values of cash equivalents and short-term bank debt approximate their carrying amount because of the short maturity of those instruments. The fair values of long-term debt and debentures are estimated based on the present value of the underlying cash flows discounted at the Company's estimated borrowing rate. At December 31, 1998 and 1997, the fair value of long-term debt, including debentures, approximates its carrying value. F-12 - -------------------------------------------------------------------------------- 26 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The Company periodically enters into interest rate exchange and foreign currency contracts. Interest rate exchange contracts are generally used to convert fixed-rate to floating-rate debt in order to take advantage of lower floating rates. Foreign currency contracts are used to minimize the impact of temporary fluctuations in exchange rates. These contracts generally do not qualify as hedges; accordingly, these contracts are carried at market value, with resulting gains and losses recognized immediately in other income. At December 31, 1998, the Company had outstanding a foreign currency forward exchange contract to exchange approximately $16.9 million U.S. dollars for $27.0 million Australian dollars. The fair value of this contract, which was terminated in January 1999, was approximately $(.3) at December 31, 1998. The Company also has an interest rate cap agreement which limits the interest rate on up to $85 million of floating rate debt to a maximum rate of 9%. This cap agreement expires in July 1999. The fair value of this contract at December 31, 1998 is not significant. REVENUE RECOGNITION The Company recognizes revenues at the point of passage of title, which is at the time of shipment. ENVIRONMENTAL COSTS The Company expenses, on a current basis, recurring costs associated with managing hazardous substances and pollution in ongoing operations. Costs associated with the remediation of environmental contamination are accrued when it becomes probable that a liability has been incurred and the Company's proportionate share of the amount can be reasonably estimated. RESEARCH AND DEVELOPMENT EXPENSE Research and development costs, which were $15.0 million, $17.1 million and $17.5 million in 1998, 1997 and 1996, respectively, are charged to expense as incurred. FOREIGN CURRENCY TRANSLATION Income statement items are translated at average currency exchange rates. Transaction gains and losses are included in determining net income. All balance sheet accounts of foreign subsidiaries and equity investees are translated at the exchange rate at the end of the period. The Company's share of the resulting translation adjustment is recorded as part of the other component of stockholders' equity. The cumulative unrecognized translation adjustment loss was $35.7 million, $26.9 million and $18.6 million at December 31, 1998, 1997 and 1996, respectively. STOCK OPTIONS The Company accounts for stock options in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees." CHANGE IN ACCOUNTING METHOD Effective January 1, 1998, the Company adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Software Developed or Obtained for Internal Use." The SOP requires the capitalization of certain costs to develop or obtain internal use software. The adoption of this SOP did not have a material impact in 1998. RECENTLY ISSUED ACCOUNTING STANDARDS In April 1998, the American Institute of Certified Public Accountants issued SOP 98-5, "Reporting on the Costs of Start-up Activities." The SOP is effective beginning January 1, 1999, and requires that unamortized start-up costs be written off at the time the SOP is adopted and future start-up costs be expensed as incurred. Unamortized start-up costs totaling $1.5 million, net of income tax benefit, will be written off as the cumulative effect of a change in accounting as of January 1, 1999. In June 1998, the Financial Accounting Standards Board (FASB) issued Statement No. 133, "Accounting for Derivative Financial Instruments and Hedging Activities," which is required to be adopted beginning in the year 2000. Because of the Company's minimal use of derivatives, the adoption of this Statement is not expected to have a material impact on the earnings or the financial position of the Company. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATION Certain amounts for 1997 and 1996 have been reclassified to conform to the 1998 presentation. NOTE C. JOINT VENTURE FORMATION On December 22, 1998, the Company entered into agreements with OxyChem to form two limited partnerships. Under these agreements, Geon will contribute to the PVC partnership five PVC suspension and mass resin plants and one VCM plant as well as related assets. In exchange, Geon will receive a 24% interest in the PVC partnership and the PVC partnership will assume certain liabilities and obligations of Geon related to agreements under which Geon currently leases a portion of a VCM plant located in LaPorte, Texas, as well as certain industrial revenue bond debt of Geon. OxyChem will contribute to the PVC partnership 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 will receive a 76% interest in the PVC partnership, and the PVC partnership will assume certain liabilities and obligations of OxyChem, including certain OxyMar debt. F-13 - -------------------------------------------------------------------------------- 27 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Geon will contribute to the compounding partnership substantially all of its powder/dry blend compounding assets, located at Plaquemine, Louisiana, and its powder compound business. In exchange, Geon will receive a 90% interest in the compounding partnership, and the compounding partnership will assume certain liabilities and obligations of Geon. OxyChem will contribute to the compounding partnership substantially all of its compounding assets located at Pasadena, Texas. In exchange, OxyChem will receive a 10% interest in the compounding partnership, and the partnership will assume certain liabilities and obligations of OxyChem. In conjunction with the Joint Venture transactions, Geon will realize $110 million through retention of certain working capital and the distribution of cash from the PVC partnership. OxyChem will also transfer to Geon a PVC flexible film and pellet compounding plant located in Burlington, New Jersey, and its specialty pellet compound business located in Pasadena, Texas, in addition to inventory, customer lists, contracts and other associated rights. In addition, Geon will enter into a resin and VCM supply agreement with the PVC partnership under which it will purchase a substantial portion of its PVC resin and VCM. The agreements will have an initial term of 15 years with renewal options. The Company will also enter into various service agreements with the partnerships. The Company will account for its interest in the PVC partnership as an equity investment. The compounding partnership will be consolidated. The formation of the partnerships is subject to certain conditions, including approval of the Company's stockholders. NOTE D. BUSINESS ACQUISITIONS During 1998, the Company completed the acquisitions of three custom formulators of vinyl plastisols for a combined purchase price of $57.1 million, net of cash acquired. The acquisitions were accounted for under the purchase method of accounting and, accordingly, the assets acquired and liabilities assumed are recorded at their estimated fair values on the acquisition date. The excess of the purchase price over the estimated fair value of net assets acquired totaled approximately $24 million and has been recorded as goodwill. The purchase price allocations reflected in these financial statements are preliminary and will be finalized in 1999. The acquisitions were financed with the Company's existing short-term credit facilities. The Company's 1998 results of operations include the operations of two of these acquired companies from June 1, 1998 and the third from September 1, 1998. On October 31, 1997, the Company acquired Synergistics Industries Limited (Synergistics) of Mississauga, Ontario, Canada for approximately $87 million. The acquisition was also accounted for under the purchase method of accounting and the excess of the purchase price over the estimated fair value of net assets acquired of approximately $64 million has been recorded as goodwill. If these acquisitions had occurred at the beginning of 1997, after adjusting for goodwill amortization, interest on acquisition debt and other pro forma adjustments, the Company's sales, operating income and net income for 1997 would have increased by approximately $312.0 million, $26.2 million and $3.1 million, respectively. Sales, operating income and net income for 1998 would have increased by approximately $52.2 million, $4.7 million and $1.7 million, respectively. Basic and diluted earnings per share would have increased by approximately $.08 for 1998 and $.14 for 1997. NOTE E. FINANCING ARRANGEMENTS Aggregate maturities of long-term debt during the five years subsequent to December 31, 1998 are: 1999--$0.8 million; 2000--$1.8 million; 2001--$0.3 million; 2002--$0.5 million; and 2003--$0.8 million. Interest paid amounted to $14.5 million, $12.5 million and $10.9 million during 1998, 1997 and 1996, respectively. At December 31, long-term debt consists of the following:
(In millions) 1998 1997 - ------------------------------------------------------------ 6.875% Debentures (maturing 2005) $ 75.0 $ 75.0 7.500% Debentures (maturing 2015) 50.0 50.0 6.66% Industrial revenue bonds related to LaPorte facility (maturing 2009) 7.6 7.8 Other 3.6 4.4 - ------------------------------------------------------------ 136.2 137.2 Less current portion .8 .8 ============================================================ $135.4 $136.4 ============================================================
At December 31, 1998, the Company had the following unsecured lines of credit, all of which are short-term except for the revolving credit facility, which expires in the year 2000.
Number of Permitted (Dollars in millions) Lines Borrowings ----------------------------------------------------------- U.S. (including the $100 revolving credit facility) 5 $230.0 Canada (includes acquisition facility) 4 66.0 ----------------------------------------------------------- $296.0 ===========================================================
At December 31, 1998, approximately $250.1 million of the credit and overdraft facilities was available. The weighted-average interest rate on short-term borrowings was 5.1% at December 31, 1998 and 4.1% at December 31, 1997. The Company's bank agreements contain restrictive covenants and require the maintenance of certain financial ratios. F-14 - -------------------------------------------------------------------------------- 28 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE F. LEASING ARRANGEMENTS The Company leases warehouse space, machinery and equipment, automobiles and railcars under operating leases with remaining terms up to twelve years. Rent expense amounted to $32.2 million, $32.1 million and $23.8 million during 1998, 1997 and 1996, respectively. The Company leases a VCM production facility and related equipment under operating leases that expire in 2001. Under the terms of the lease agreements, the Company has options to renew the lease for five one-year periods and may purchase the VCM facility and equipment at a predetermined price at any time during the lease term. The agreements provide for a guaranteed residual value of approximately $150 million at termination. Under the terms of the transaction agreements with OxyChem (see Note C), the PVC partnership will assume the Company's obligation under these leases. The future minimum lease payments under noncancelable operating leases with initial lease terms in excess of one year at December 31, 1998, are as follows: 1999--$27.1 million; 2000--$21.9 million; 2001--$179.4 million; 2002--$2.9 million; 2003--$2.3 million; and thereafter--$10.6 million. NOTE G. SALE OF ACCOUNTS RECEIVABLE The Company has an agreement with a bank to sell an undivided interest in certain trade accounts receivable under which, on an ongoing basis, a maximum of $85.0 million can be sold from a designated pool subject to limited recourse. Payments are collected from the sold accounts receivable; the collections are reinvested in new accounts receivable for the buyers; and a yield based on defined short-term market rates is transferred to the buyers. Buyers have collection rights to recover payments from the receivables in the designated pool. Sales of accounts receivable averaged $78.4 million, $79.9 million and $40.5 million in 1998, 1997 and 1996, respectively. Accounts receivable at December 31, 1998 and 1997 are net of $85.0 million and $60.0 million, respectively, representing the interests in receivables sold under these agreements. The discount from the Company's sale of receivables is included in "Other expense, net" in the Consolidated Statements of Income. NOTE H. INVENTORIES
December 31, (In millions) 1998 1997 - ------------------------------------------------------------ At FIFO or average cost, which approximates current costs: Finished products and in process $ 94.3 $107.8 Raw materials and supplies 34.2 48.7 - ------------------------------------------------------------ 128.5 156.5 Reserve to reduce certain inventories to LIFO basis (14.6) (34.1) ============================================================ $113.9 $122.4 ============================================================
Approximately 56% and 62% of the pre-LIFO inventory amounts have been valued by the LIFO method at December 31, 1998 and 1997, respectively. The decrease in the LIFO reserve from December 31, 1997 to December 31, 1998 is attributable to deflation in the Company's material costs. NOTE I. PROPERTY
December 31, (In millions) 1998 1997 - ------------------------------------------------------------ Land and land improvements $ 32.3 $ 31.5 Buildings 216.5 206.6 Machinery and equipment 956.4 935.2 - ------------------------------------------------------------ 1,205.2 1,173.3 Less accumulated depreciation and 761.7 716.7 amortization ============================================================ $ 443.5 $ 456.6 ============================================================
Capital expenditures for 1997 and 1996 include $2.4 million and $1.1 million, respectively, of capitalized interest costs. No interest was capitalized in 1998. NOTE J. OTHER BALANCE SHEET LIABILITIES
(In millions) Non-current Accrued Expenses Liabilities - ----------------------------------------------------------- December 31, December 31, 1998 1997 1998 1997 - ----------------------------------------------------------- Employment costs $25.5 $23.9 $ 5.6 $ 4.6 Environmental 5.5 7.3 40.4 43.7 Plant utilities 1.4 1.4 1.8 3.2 Taxes, other than 15.1 13.1 -- -- income Post-retirement 7.7 7.7 -- -- benefits Pension 2.4 -- 23.0 20.1 Employee separation and plant phase-out 9.2 2.8 -- -- Other 9.2 7.1 7.0 5.5 =========================================================== $76.0 $63.3 $77.8 $ 77.1 ===========================================================
NOTE K. EMPLOYEE BENEFIT PLANS PENSION BENEFIT PLANS In 1998, the Company adopted FASB Statement No. 132, "Employers' Disclosure about Pensions and Other Post-retirement Benefits". This Statement addresses disclosures only and did not change the Company's recognition and measurement of pension and post-retirement obligations. The Company has two defined benefit pension plans covering substantially all domestic employees. The plan covering salaried employees (salaried plan) generally provides benefit payments using a formula that is based on employee compensation and length of service. The plan covering union wage employees (wage plan) generally provides benefit payments of stated amounts for each year of service. Annual contributions to the plans are sufficient to satisfy legal requirements. Plan assets consist principally of corporate and government obligations and funds invested in equities. In addition to funded pension plans, the Company has three unfunded nonqualified pension plans which provide supplemental pension benefits for senior executives. F-15 - -------------------------------------------------------------------------------- 29 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- The following table sets forth as of December 31, 1998 and 1997 the status of the Company's funded defined benefit pension plans. The plan assets relate only to these funded plans. Accordingly, the table excludes the accumulated benefit obligation and benefit payments for unfunded non-qualified plans.
Change (In millions) 1998 1997 1998 vs. 1997 -------------------------------------------------------------- CHANGE IN PLAN ASSETS: Plan assets - beginning of $241.8 $215.0 $ 26.8 the year Actual return on plan assets 15.3 33.5 (18.2) Company contributions 5.7 11.0 (5.3) Benefits paid (18.9) (17.7) (1.2) -------------------------------------------------------------- Plan assets - end of the year 243.9 241.8 2.1 -------------------------------------------------------------- Accumulated benefit obligation 263.2 256.7 6.5 (ABO) -------------------------------------------------------------- Plan assets less than ABO $ 19.3 $ 14.9 $ 4.4 --------------------------------------------------------------
At December 31, 1998, the accumulated benefit obligation liability related to these funded pension plans was 93% funded. The use of a 0.2% lower interest rate to discount future pension obligations at December 31, 1998 as compared to 1997 increased the ABO by approximately $7.0 million. Discount rate assumptions change with fluctuations in current investment returns. Over the last three years, the Company's contributions have totaled $28.7 million, or $5.1 million above the normal pension expense for the same period. Annual pension expense for funded and unfunded defined benefit pension plans, including a charge of $10.7 million in 1997 related to a voluntary retirement program, included the following components:
(In millions) 1998 1997 1996 ------------------------------------------------------------ Service cost for benefits earned $ 3.9 $ 4.1 $ 4.0 Interest cost 20.1 19.5 18.8 Curtailment loss and special termination benefits -- 10.7 -- Expected return on plan assets (22.5) (19.6) (16.9) Amortization of unrecognized losses, transition obligation and prior service cost 2.6 3.8 5.8 ============================================================ Pension expense, net $ 4.1 $ 18.5 $ 11.7 ============================================================
The tables below show the change in the combined projected benefit obligation (PBO) and the combined funded status of both the funded and unfunded defined benefit pension plans. The PBO includes the impact of projected future salary increases.
Change (In millions) 1998 1997 1998 vs. 1997 -------------------------------------------------------------- CHANGE IN BENEFIT OBLIGATION (PBO): Benefit obligation- beginning of year $294.1 $265.9 $ 28.2 Service cost 3.9 4.1 (.2) Interest Cost 20.1 19.5 .6 Benefits paid (19.9) (17.7) (2.2) Curtailment and special termination benefits - 10.7 (10.7) Change in discount rate and other 3.9 11.6 (7.7) ------------------------------------------------------------ Benefit obligation - end of year (PBO) 302.1 $294.1 8.0 Less projected salary increases (31.1) (29.1) (2.0) ------------------------------------------------------------ Accumulated benefit obligation (ABO) $271.0 $265.0 $ 6.0 ------------------------------------------------------------ FUNDED STATUS OF THE PLANS: Plan assets less than PBO $ 58.2 $ 52.3 $ 5.9 Unamortized balances: Transitional liability (4.4) (5.6) 1.2 Prior service cost (3.9) (5.0) 1.1 Net actuarial loss (44.8) (35.3) (9.5) Adjustments required to recognize minimum liability 20.3 13.7 6.6 ------------------------------------------------------------ Accrued pension cost - all plans 25.4 20.1 5.3 ------------------------------------------------------------ Accrued pension cost- salaried plan 24.6 19.4 5.2 Prepaid pension cost- wage plan (8.2) (7.6) (.6) Accrued pension cost- unfunded plans $ 9.0 $ 8.3 $ .7 ============================================================
The combined PBO includes the PBO of unfunded plans of $10.2 million and $9.7 million at December 31, 1998 and 1997, respectively. The ABO of these unfunded plans was $9.1 million and $8.3 million at December 31,1998 and 1997 , respectively. The remaining PBO relates to the Company's two funded pension plans. The salaried plan had, at December 31, 1998 and 1997, a PBO and ABO exceeding the fair value of the assets related to the Plan. At December 31, 1998 the PBO, ABO and fair value of related assets for this plan were $268.8 million, $240.0 million and $215.4 million, respectively. At December 31, 1997, the PBO, ABO and fair value of plan assets of this plan were $260.2 million, $232.5 million and $213.1 million, respectively. F-16 - -------------------------------------------------------------------------------- 30 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Major assumptions used in accounting for the Company's defined benefit pension plans are as follows:
1998 1997 - ---------------------------------------------------- Discount rate for obligations 7.0% 7.2% Rate of increase in compensation levels 4.0%-7.0% 4.0%-7.0% Expected long-term rate of return on plan assets 9.5% 9.5% - ----------------------------------------------------
A charge of $10.7 million for curtailment and special termination benefits was recorded in 1997 relating to a voluntary retirement program. The charge is included in the employee separation charge of $15.0 million recognized in the consolidated statement of income. The Company had recorded an intangible asset of $6.5 million and $8.6 million related to both funded and unfunded pension plans as of December 31, 1998 and 1997, respectively. At December 31, 1998 and 1997, the Company's accumulated other non-owner equity changes includes $8.9 million and $2.3 million, respectively related to adjustment of the minimum pension liability of its pension plans. The Company reports other non-owner equity changes net of the related income tax expense or benefit in the Consolidated Statements of Stockholders' Equity. The income tax (expense) benefit related to the adjustment of the minimum pension liability was $3.6 million, $(.5) million and $(8.8) million in 1998, 1997 and 1996, respectively. RETIREMENT SAVINGS PLAN The Company maintains a voluntary retirement savings plan (RSP) for most employees. Under provisions of the RSP, eligible employees can receive Company matching contributions up to the first 6% of their eligible earnings. For 1998, 1997 and 1996, Company contributions amounted to $5.4 million, $4.7 million and $4.7 million, respectively. In addition, the Company makes profit-sharing payments to the RSP for those employees not covered by management incentive compensation plans. In 1998, 1997 and 1996, these profit-sharing payments totaled $1.5 million, $.8 million and $1.0 million, respectively. POST-RETIREMENT BENEFIT PLANS The Company sponsors several unfunded defined benefit post-retirement plans that provide certain health care and life insurance benefits to eligible employees. The health care plans are contributory, with retiree contributions adjusted periodically, and contain other cost-sharing features such as deductibles and coinsurance. The life insurance plans are generally non-contributory. Below is a reconciliation of the plans' combined benefit obligations and funded status for December 31, 1998 and 1997:
(In millions) 1998 1997 - ----------------------------------------------------------- Benefit obligation - beginning of year $94.5 $91.5 Service cost .4 .4 Interest cost 6.5 6.5 Participant contributions .5 .6 Change in discount rates and 2.1 1.7 other Curtailment and special termination benefits -- 1.4 Benefits paid (8.2) (7.6) - ----------------------------------------------------------- Benefit obligation - end of year 95.8 94.5 Unrecognized loss (3.0) (.6) =========================================================== Accrued post-retirement benefit liability $92.8 $93.9 ===========================================================
The annual post-retirement benefit expense for each of the years ended December 31 included the following components:
(In millions) 1998 1997 1996 - ----------------------------------------------------------- Service cost for benefits earned $ .4 $ .4 $ .4 Interest cost 6.5 6.5 6.5 =========================================================== Postretirement expense, net $6.9 $6.9 $6.9 ===========================================================
The average assumed rate of increase in the per capita cost of covered benefits is 7.5% for 1998 and is assumed to decrease gradually to 5% in 2004 and thereafter. A change in the assumed health care cost trend rates of 1% in each year would increase or decrease the benefit obligation as of December 31, 1998 by approximately $5.0 million and the aggregate of the service and interest cost components of net periodic post-retirement benefit cost for 1998 by $.4 million. The discount rates used in determining the benefit obligation at December 31, 1998 and 1997 were 7.0% and 7.2%, respectively. F-17 - -------------------------------------------------------------------------------- 31 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- NOTE L. COMMITMENTS ENVIRONMENTAL The Company has been notified by the U.S. Environmental Protection Agency, a state environmental agency, or a private party that it may be a potentially responsible party (PRP) in connection with seven active and inactive non-Company owned sites. While government agencies frequently claim PRPs are jointly and severally liable at these sites, in the Company's experience, interim and final allocation of liability costs are generally made based on the relative contribution of waste. The Company believes that it has potential continuing liability with respect to only four such sites. In addition, the Company initiates corrective and preventive environmental projects of its own to ensure safe and lawful activities at its operations. The Company believes that compliance with current governmental regulations at all levels will not have a material adverse effect on its financial condition. Based on estimates prepared by the Company's environmental engineers and consultants, the Company, at December 31, 1998, had accruals totaling $45.9 million to cover probable future environmental expenditures related to previous contaminated sites. The accrual 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 undertaken at these sites, it is possible that the ultimate costs to be incurred could be more than the accrual at December 31, 1998 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. Of the $45.9 million accrued for future environmental expenditures, $17.3 million is attributable to future remediation expenditures at the Calvert City, Kentucky, site and less than $.5 million is attributable to off-site environmental remediation liabilities, including the four sites mentioned above. The remaining amount is primarily attributable to other environmental remediation projects at nine other Company-owned facilities. At Calvert City, consent orders have been signed with both the U.S. Environmental Protection Agency and the Commonwealth of Kentucky Department of Environmental Protection which provide for a site-wide remediation program primarily to remove ethylene dichloride (EDC) from groundwater, the cost of which has been accrued. Environmental expense incurred was $2.4 million in each of the years ended December 31, 1998 and 1997 and $4.2 million for the year ended December 31, 1996. GUARANTEES The Company has a 50% participation in a joint venture operating a chlor-alkali plant. The Company has guaranteed $97.5 million of the joint venture's outstanding senior secured notes, maturing in 2017. OTHER The Company and its subsidiaries have commitments for a substantial portion of its key raw material feedstocks and energy incidental to the ordinary course of business. The Company is also, from time to time, subject to routine litigation incidental to its business. The Company believes that any liability that may finally be determined would not have a material adverse effect on its financial condition. NOTE M. OTHER EXPENSE, NET
(In millions) 1998 1997 1996 - ----------------------------------------------------------- Currency exchange gain (loss) $ 2.9 $(2.2) $ 1.6 Foreign currency exchange contract (1.1) -- -- Discount on sale of trade receivables (4.6) (5.0) (2.4) Other income, net .2 1.3 -- =========================================================== $(2.6) $(5.9) $ (.8) ===========================================================
NOTE N. INCOME TAXES Income (loss) before income taxes consists of the following:
(In millions) 1998 1997 1996 ----------------------------------------------------------- Domestic $ 5.1 $24.9 $(8.9) Foreign 18.5 9.7 29.6 =========================================================== $23.6 $34.6 $20.7 ===========================================================
A summary of income tax expense (benefit) is as follows:
(In millions) 1998 1997 1996 ----------------------------------------------------------- Current: Federal $ .2 $ .4 $(10.4) State .6 (1.1) -- Foreign 10.0 6.5 10.1 ----------------------------------------------------------- Total current 10.8 5.8 (.3) Deferred: Federal 2.0 6.9 8.8 State (.4) 1.8 (.4) Foreign (2.6) (2.4) .4 ----------------------------------------------------------- Total deferred (1.0) 6.3 8.8 =========================================================== Total tax expense $ 9.8 $12.1 $ 8.5 ===========================================================
The income tax rate for financial reporting purposes varied from the federal statutory rate as follows:
1998 1997 1996 ----------------------------------------------------------- Federal statutory income tax rate 35.0% 35.0% 35.0% Increase (decrease): State tax, net of federal benefit .8 1.5 (1.5) Goodwill 2.6 - - Differences in rates of foreign operations 1.5 2.0 .8 Foreign withholding accrued on unremitted earnings - 1.1 4.7 Adjust prior year's income tax liability - (5.9) -- Other, net 1.6 1.3 2.1 =========================================================== Effective income tax rate 41.5% 35.0% 41.1% ===========================================================
F-18 - -------------------------------------------------------------------------------- 32 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Significant components of the Company's deferred tax liabilities and assets at December 31 are as follows:
(In millions) 1998 1997 ---------------------------------------------------------- Deferred tax liabilities: Tax over book depreciation $110.2 $ 97.6 Equity investments 4.8 - Other, net 14.1 16.7 ---------------------------------------------------------- Total deferred tax liabilities 129.1 114.3 ---------------------------------------------------------- Deferred tax assets: Post-retirement benefits other than 32.5 32.9 pensions Employment cost and pension 14.4 9.3 Environmental 14.6 16.7 Net operating loss carryforward 26.4 13.6 LIFO inventory 4.7 5.0 Intangibles 3.7 4.0 Alternative minimum tax credit carryforward 5.5 3.9 Foreign tax credit carryforward 6.4 6.0 Foreign tax valuation allowance (6.4) (6.0) State taxes .6 .5 Other, net 18.5 13.3 ---------------------------------------------------------- Total deferred tax assets 120.9 99.2 ---------------------------------------------------------- Net deferred tax liabilities $ 8.2 $ 15.1 ==========================================================
SFAS No. 109, "Accounting for Income Taxes," requires that deferred tax assets be reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax assets will not be realized. As realization of the foreign tax credit carryforwards is considered uncertain, a valuation allowance has been recorded. The Company believes that the timing of the reversal of its deferred tax liabilities, principally relating to accelerated depreciation, will be sufficient to fully recognize its remaining deferred tax assets. In particular, the turnaround of the largest deferred tax asset, related to accounting for postretirement benefits other than pensions, will occur over an extended period of time and, as a result, will be realizable for tax purposes over those future periods. During 1996, the Company finalized the effects of the step-up in the tax basis of its assets as a result of formation and recorded adjustments to deferred taxes and equity of $25.9 million. The Company has provided for U.S. federal and foreign withholding tax on $30.0 million or 19% of foreign subsidiaries' undistributed earnings as of December 31, 1998. Regarding the undistributed earnings on which no federal and foreign withholding has been provided, earnings are intended to be reinvested indefinitely. It is not practical to determine the amount of income tax liability that would result had such earnings been actually repatriated. On repatriation, certain foreign countries impose withholding taxes. The amount of foreign withholding taxes that would be payable on remittance of the entire amount of undistributed earnings would approximate $8.6 million. During 1998, 1997 and 1996, the Company paid income taxes net of refunds of $7.8 million, $1.9 million and $2.2 million, respectively. The Company has a net operating loss carryforward of approximately $75.5 million, of which $11.7 million will expire in 2011, $20.7 million will expire in 2012 and the remaining $43.1 million will expire in 2018. In addition, the Company has foreign tax carryforwards of $6.4 million, which will expire from 1999 through 2003 and an alternative minimum tax credit carryforward of $5.5 million. NOTE O. EMPLOYEE SEPARATION AND PLANT PHASE-OUT --------------------------------------- CHARGES In the fourth quarter of 1998, the Company recorded employee separation and plant phase out charges of $14.6 million relating to the Company's consolidation of its compounding operations. This plan of consolidation includes the closing of two manufacturing plants and the partial closing of production lines at other manufacturing plants. The affected facilities are those of the former Synergistics operations that Geon acquired in the fourth quarter of 1997. The manufacturing of products made at such sites will be transferred to other plants utilizing existing capacity. This consolidation resulted in the write-off of software, machinery and equipment and, at the affected sites, employee separation costs related to the elimination of approximately 250 positions, and charges related to other costs associated with the plant sites consisting primarily of demolition and lease termination costs. The charges taken in the fourth quarter of 1998 and those anticipated to be taken in the first quarter of 1999 related to the elimination of 250 positions include termination costs (severance benefits and outplacement services). The costs associated with services rendered by the employees through the date of termination will be charged to operations as incurred. The fourth quarter 1998 activity relating to the accrual for the consolidation of the compound operations consisted of payments of $.7 million and charges totaling $14.6 million as follows: (a) the non-cash write-off of fixed assets with a net book value of $5.3 million. Such fixed assets will be demolished by June 1999. (b) employee separation costs of $5.0 million of which cash payments of $.7 million were made as of December 31, 1998, and the remaining cash payments will be made through mid-2000. No employee terminations occurred through December 31, 1998. Termination of 180 individuals is expected to be completed by mid-1999 in connection with the elimination of the 250 positions described above; and (c) other site closure costs of $4.3 million consisting of $3.3 million of accrued demolition costs and $1.0 million of incurred legal and professional fees. The Company also anticipates incurring, in the first quarter of 1999 and upon formation of the powder compound joint venture, estimated costs totaling $7.5 million relating to the completion of the compound consolidation plan. The amounts expected to be incurred are as follows: (a) accelerated depreciation of $1.4 million and related disposition costs of $2.0 million related to certain compounding operating assets which were identified at the end of the fourth quarter of 1998 as assets to be taken out of service by the end of the second quarter of 1999, (b) $2.0 million of disposition costs, which will be expensed as incurred, consisting of moving and relocation costs and the cost of archiving and converting files from computers and software disposed as part of the consolidation of the compound operations, (c) lease termination costs of $1 million, and (d) costs associated with exiting the Conroe, Texas, powder compounding facility, which will be closed subject to the consummation of the joint venture transactions, totaling $4.0 million. The cost 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 in connection with the elimination of the 250 positions discussed above. These terminations are expected to be completed by mid-1999. All sites and production lines in the plan are projected to be closed by mid-1999. The consolidation is expected to produce total cost savings of $6 million in 1999 and $14 million annually thereafter. F-19 - -------------------------------------------------------------------------------- 33 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- In 1997, the Company recorded a $15.0 million before tax charge, primarily for employee separation costs related to 74 position reductions at its headquarters. Approximately $8.0 million of the $15.0 million charge will be funded as part of the Company's funded pension plans. The remaining $7.0 million represents cash payments for enhanced pension benefits and separation costs. Through December 31, 1998, the Company has paid $4.0 million of the enhanced pension benefits and separation costs and expects to pay the remaining $3.0 million in the first half of 1999. NOTE P. STOCK OPTION AND STOCK INCENTIVE PLANS The Company's incentive stock plans provide for the awarding or granting of options to purchase common stock of the Company. Generally, options granted become exercisable at the rate of 35% after one year, 70% after two years and 100% after three years. Certain options granted under the Company's long-term incentive plan are exercisable after six years, with accelerated vesting based upon achievement of target stock prices. In addition, some options are fully exercisable after grant. The term of each option cannot extend beyond ten years from the date of grant. Certain options carry with them limited stock appreciation rights exercisable in the event of a change in control. All options under the plans have been granted at 100% of market (as defined) on the date of the grant. In addition, certain senior level executives received special awards in connection with the formation of the Company and the initial public offering (IPO) of stock on April 29, 1993, which included stock options with rights to purchase 1.2 million shares. These awards became exercisable four years after grant date. The Company also has a stock plan for non-employee directors under which options are granted. During 1998, the Company issued 1.1 million stock options under a three year long-term incentive plan. Two-thirds of these options become exercisable after six years, with accelerated vesting if target stock prices are met. The remainder of these options are exercisable only if the target stock prices are met. A summary of stock option activity follows: Weighted (In thousands except per share data) Average Shares Exercise Price - ------------------------------------------------------- Outstanding at January 1, 1996 2,055 $20.27 Issued 284 25.98 Exercised 21 18.57 Forfeited 3 26.85 - ------------------------------------------------------- Outstanding at January 1, 1997 2,315 20.97 Issued 318 20.07 Exercised 51 20.51 Forfeited 48 23.91 - ------------------------------------------------------- Outstanding at January 1, 1998 2,534 20.81 Issued 1,462 20.98 Exercised 126 18.94 Forfeited 62 24.87 - ------------------------------------------------------- Outstanding at December 31, 1998 3,808 20.87 - ------------------------------------------------------- Exercisable at December 31, 1998 2,146 20.70 Exercisable at December 31, 1997 2,048 20.35 Exercisable at December 31, 1996 853 21.57 - ------------------------------------------------------- At December 31, 1998: Exercisable options: Exercise price: $14.92-$22.00 1,477 18.10 Exercise price: $22.01-$30.125 669 26.37 Unexercisable options: Exercise price: $14.92-$22.00 1,198 20.57 Exercise price: $22.01-$30.12 464 23.05 ======================================================= At December 31, 1998, the weighted average remaining life for options with an exercise price of $22.00 or less was 6.12 years. Options with an exercise price of more than $22.00 had a remaining life of 7.17 years. Under the Company's incentive programs, senior executives and other key employees are also eligible to receive annual bonus awards, consisting of stock or a combination of both stock and cash. Under these plans, performance measures are established and used to determine the payout, if any. The Company granted 0.1 million shares of stock under these annual incentive stock plans in each of the past three years. These annual stock awards are restricted with the restriction generally lapsing over one to three years with some subject to acceleration based on the Company's stock price performance. At December 31, 1998, restricted shares totaling 0.4 million were outstanding, including restricted stock issued at the time of the IPO. In addition, under the Company's Long-Term Incentive Plan, certain senior executives are eligible to receive stock awards based upon performance measures over a three year period. In 1998, 0.1 million shares were issued related to the three year period ended December 31, 1997. The Company applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its incentive plans. Accordingly, no compensation cost has been recognized for its fixed option plans because the exercise price of the Company's stock options equals the market price of the underlying stock on the date of grant. Had the compensation cost for the stock options granted been determined based upon the fair value at the grant date, consistent with the fair value method of FASB Statement No. 123, "Accounting for Stock-Based Compensation," the Company's net earnings and earnings per share would have been reduced by $1.9 F-20 - -------------------------------------------------------------------------------- 34 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- million in 1998 ($.08 per share); $2.1 million ($.09 per share) in 1997 and $0.7 million ($.03 per share) in 1996 on a diluted basis. The weighted average fair value of stock options granted per share was $6.53, $6.23 and $8.02 for 1998, 1997 and 1996, respectively. The fair value of the stock options at the grant date was estimated using the Black-Scholes option pricing model with an assumed risk free interest rate of 4.8%, 5.4% and 5.7%, an assumed dividend yield of 2.5%, 2.5% and 2.0%, and stock price volatility of 29.9%, 28.5% and 29.8% for 1998, 1997 and 1996, respectively. A seven year weighted average life was used for all periods. The compensation cost recognized related to the stock portion of the annual incentive plans, three year incentive plan and amortization of restricted stock awarded at the IPO amounted to $4.9 million, $2.3 million and $3.0 million in 1998, 1997 and 1996, respectively. The weighted average fair value per share of restricted stock and stock awards under the Long-Term Incentive Plan on the grant date was $20.75, $19.88 and $26.38 for 1998, 1997 and 1996, respectively. At December 31, 1998, approximately 1.0 million shares were reserved for future issuance upon exercise of stock options granted or were available for future grants under the Company's incentive plans. NOTE Q. SEGMENT INFORMATION The Company operates primarily in two business segments, the Performance Polymers and Services (PP&S) segment, and the Resin and Intermediates (R&I) segment. The accounting policies of each business segment are consistent with those described in the "Summary of Significant Accounting Policies". Inter-segment sales are accounted for at prices which generally approximate those for similar transactions with unaffiliated customers. The elimination of inter-segment sales revenue is primarily for sales from the R&I segment to the PP&S segment and is included in the Other segment. Certain other corporate expenses and eliminations are also included in the Other segment. The total Company business earnings comprise operating income plus income from equity affiliates. Business segment assets consist primarily of customer receivables, inventories, net property and goodwill. Cash, sales of accounts receivable and certain other assets not identified with a specific segment are included in the Other segment. ($ in millions) TOTAL PP&S R&I Other - ------------------------------------------------------------------------- YEAR ENDED DECEMBER 31, 1998: Net sales $1,284.4 $839.2 $577.7 $(132.5) Business earnings (loss) 41.0 79.2 (36.4) (1.8) Employee separation and plant phase out 14.6 14.6 - - - ------------------------------------------------------------------------- Business earnings (loss) before employee separation and plant phase out 55.6 93.8 (36.4) (1.8) Depreciation and amortization 57.9 28.6 28.8 .5 - ------------------------------------------------------------------------- Business earnings (loss) before depreciation, amortization and employee separation and plant phase out 113.5 122.4 (7.6) (1.3) - ------------------------------------------------------------------------- Total assets 802.0 463.4 347.8 (9.2) Capital expenditures 40.7 21.7 18.8 .2 ========================================================================= YEAR ENDED DECEMBER 31, 1997: Net sales $1,250.0 $606.7 $817.7 $(174.4) Business earnings (loss) 51.7 44.7 16.4 (9.4) Employee separation and plant phase out 15.0 2.9 4.0 8.1 - ------------------------------------------------------------------------- Business earnings (loss) before employee separation and plant phase out 66.7 47.6 20.4 (1.3) Depreciation and amortization 54.6 25.9 28.7 -- - ------------------------------------------------------------------------- Business earnings (loss) before depreciation, amortization and employee separation and plant phase out 121.3 73.5 49.1 (1.3) - ------------------------------------------------------------------------- Total assets 872.9 497.7 380.0 (4.8) Capital expenditures 50.9 26.7 24.2 - ========================================================================= YEAR ENDED DECEMBER 31, 1996: Net sales $1,144.4 $537.1 $761.1 $(153.8) Business earnings (loss) 30.9 46.8 (15.5) (.4) Depreciation and amortization 54.1 25.5 28.6 -- - ------------------------------------------------------------------------- Business earnings (loss) before depreciation and amortization 85.0 72.3 13.1 (.4) - ------------------------------------------------------------------------- Total assets 736.9 353.4 396.4 (12.9) Capital expenditures 73.4 38.9 34.5 - ========================================================================= The PP&S segment includes the 1997 acquisition of Synergistics and the acquisitions of three plastisol formulators in 1998. F-21 - -------------------------------------------------------------------------------- 35 THE GEON COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- Earnings (loss) of equity affiliates are included in the related business segment earnings (loss) and the investment in equity affiliates is included in related business segment assets. Amounts related to equity affiliates included in the business segment information are as follows:
($ in millions) 1998 1997 1996 - --------------------------------------------------------------------- Earnings (loss) of equity affiliates: PP&S $ .5 $ .2 $1.0 R&I 3.2 (.5) - - --------------------------------------------------------------------- Total 3.7 (.3) 1.0 - --------------------------------------------------------------------- Investment in equity affiliates: PP&S 3.2 2.7 1.2 R&I 16.6 17.9 .1 - --------------------------------------------------------------------- Total 19.8 20.6 1.3 =====================================================================
The Company's sales are principally to customers in the United States and Canada, and the majority of the Company's assets are located in these countries. Below is a summary of sales based on the country from which the sales originated and assets by location.
($ in millions) 1998 1997 1996 - --------------------------------------------------------------------- Net sales: United States $1,004.7 $952.7 $869.4 Canada 279.7 246.2 200.0 Other - 51.1 75.0 - --------------------------------------------------------------------- Long-lived assets: United States $ 421.3 $381.5 $387.4 Canada 105.5 141.7 73.7 Other 18.1 17.5 18.3 =====================================================================
NOTE R. WEIGHTED-AVERAGE SHARES USED IN COMPUTING EARNINGS PER SHARE
($ in millions) 1998 1997 1996 - --------------------------------------------------------------------- Weighted-average shares - Basic: Weighted-average shares outstanding 23.3 23.3 24.2 Less unearned portion of restricted stock awards included in outstanding shares (.4) (.4) (.3) - --------------------------------------------------------------------- 22.9 22.9 23.9 - --------------------------------------------------------------------- Weighted-average shares - Diluted: Weighted-average shares outstanding 23.3 23.3 24.2 Plus dilutive impact of stock options and stock awards .3 .3 .4 - --------------------------------------------------------------------- 23.6 23.6 24.6 =====================================================================
F-22 - -------------------------------------------------------------------------------- 36 THE GEON COMPANY AND SUBSIDIARIES OTHER DATA - --------------------------------------------------------------------------------
QUARTERLY DATA (UNAUDITED) (In millions, except per share data) - ------------------------------------------------------------------------------------------------------------------------------------ 1998 QUARTERS 1997 Quarters - ------------------------------------------------------------------------------------------------------------------------------------ FOURTH THIRD SECOND FIRST Fourth Third Second First --------------------------------------------------------------------------------------- SALES $301.2 $328.0 $330.7 $324.5 $312.3 $303.7 $333.0 $301.0 EMPLOYEE SEPARATION AND PLANT PHASE OUT 14.6 -- -- -- -- -- 15.0 -- OPERATING INCOME (LOSS) (1.2) 16.5 12.4 9.6 11.4 18.3 14.5 7.8 NET INCOME (LOSS) (3.0) 6.2 4.8 5.8 3.5 10.6 6.1 2.3 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) PER SHARE: BASIC $ (.13) $ .27 $ .21 $ .25 $ .15 $ .47 $ .27 $ .10 DILUTED (.13) .26 .20 .25 .15 .45 .26 .10 DIVIDEND PAID PER COMMON SHARE .125 .125 .125 .125 .125 .125 .125 .125 COMMON STOCK PRICE HIGH $ 24-1/4 $ 26 $ 24-5/8 $ 23-1/2 $ 24-3/16 $ 20-13/16 $ 23-1/8 $ 23-1/4 LOW 16-1/4 17-7/16 19-1/4 19-15/16 20-3/8 18-1/2 20-1/8 18-5/8
1998: Fourth quarter results include an after tax charge of $8.9 million ($14.6 million before tax) for costs related to plant closings. 1997: Second quarter results include an after tax charge of $9.2 million ($15.0 million before tax) for employee separation costs.
SELECTED FINANCIAL DATA (In millions, except per share data) - ----------------------------------------------------------------------------------------------------------------------------------- STATEMENT OF OPERATIONS DATA Year Ended December 31, - ----------------------------------------------------------------------------------------------------------------------------------- (1)Pro Forma (Unaudited) Historical 1998 1997 1996 1995 1994 1993 1992 1993 1992 - ----------------------------------------------------------------------------------------------------------------------------------- SALES $1,284.4 $1,250.0 $1,144.4 $1,267.8 $1,208.6 $972.5 $894.3 $982.8 $969.9 Employee separation and plant phase-out 14.6 15.0 -- 63.9 -- 9.7 14.4 9.7 16.0 Operating income (loss) 37.3 52.0 29.9 63.3 102.1 14.5 (22.9) 18.6 (19.3) Income (loss) before extraordinary item and cumulative effect of a change in accounting 13.8 22.5 12.2 32.2 57.9 2.2 (22.1) 6.0 (15.0) Extraordinary loss on early extinguishment of debt -- -- -- -- (1.3) -- -- -- -- Cumulative effect of change in method of accounting -- -- -- -- -- (1.1) (57.5) (1.1) (70.4) NET INCOME (LOSS) 13.8 22.5 12.2 32.2 56.6 1.1 (79.6) 4.9 (85.4) - ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS (LOSS) PER SHARE: BEFORE EXTRAORDINARY ITEM AND CHANGE IN METHOD OF ACCOUNTING $.60 $.98 $.51 $1.28 $2.11 $.08 $(.84) Extraordinary loss -- -- -- -- (.05) -- -- Change in method of accounting -- -- -- -- -- (.04) (2.19) NET INCOME (LOSS) .60 .98 .51 1.28 2.06 .04 (3.03) - --------------------------------------------- -------- ------- ------- ----------------- ------- -------- ------ --------- DILUTED EARNINGS (LOSS) PER SHARE: BEFORE EXTRAORDINARY ITEM AND CHANGE IN METHOD OF ACCOUNTING $.58 $.95 $.50 $1.24 $2.08 $.08 $(.84) Extraordinary loss -- -- -- -- (.05) -- -- Change in method of accounting -- -- -- -- -- (.04) (2.19) NET INCOME (LOSS) .58 .95 .50 1.24 2.03 .04 (3.03) DIVIDENDS PER COMMON SHARE .50 .50 .50 .50 .50 .375 --
- ------------------------------------------------------------------------------------------------------------------- BALANCE SHEET DATA, AT DECEMBER 31 - ------------------------------------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 1993 1992 ------------------------------------------------------------------------ Total assets $802.0 $872.9 $736.9 $752.0 $791.7 $721.2 $686.9 Long-term debt 135.4 136.4 137.2 137.9 93.0 88.3 18.7
(1) On February 11, 1993, the Company was formed as a wholly owned subsidiary of The BFGoodrich Company (BFG) in preparation for the IPO of its common stock on April 29, 1993. BFG transferred to the Company substantially all of the operating assets and liabilities of its Geon Vinyl Division, other than the net assets of the chlor-alkali, ethylene and utility operations of BFG located principally at Calvert City, Kentucky (Calvert Facilities), in exchange for the Company's common stock. The historical results for 1993 and 1992 include the results of operations associated with the Calvert Facilities through February 28, 1993. The cost of VCM consumed from the Calvert Facilities was recorded at historical intercompany cost through April 29, 1993. The pro forma results for 1993 and 1992 exclude the results of operations associated with the Calvert Facilities. The data is also presented as if the Company purchased the VCM associated with the Calvert Facilities at market prices rather than historical intercompany costs. Subsequent to the initial public offering of the Company's common stock on April 29, 1993, purchases of VCM from BFG were at market prices. The pro forma results also include the cost associated with certain May 1993 bank arrangements, as if they had occurred at the beginning of 1993. The historical results include the following business acquisitions from the acquisition date indicated forward: Synergistics Industries Limited from October 31, 1997; Plast-O-Meric, Inc., and the Wilflex Division of Flexible Products Company, from June 1, 1998 and Adchem, Inc. from September 1, 1998. F-23 - -------------------------------------------------------------------------------- 37 THE GEON COMPANY AND SUBSIDIARIES REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- TO THE STOCKHOLDERS AND BOARD OF DIRECTORS OF THE GEON COMPANY: We have audited the accompanying consolidated balance sheets of The Geon Company and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended December 31, 1998. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedule, which appear on pages F-5, F-7, F-9, F-11 through F-22 and F-25, are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule 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 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Geon Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. /s/ Ernst & Young LLP Cleveland, Ohio January 28, 1999 CAUTIONARY NOTE ON FORWARD-LOOKING STATEMENTS This Annual Report contains statements concerning trends and other forward-looking information affecting or relating to the Company and its industry, including, but not limited to, statements concerning future development of the Company's business following the completion of the proposed transactions with OxyChem, the future operations of the proposed joint venture entities, and the synergies expected to result therefrom, that are intended to qualify for the protections afforded "forward-looking statements" under the Private Securities Litigation Reform Act of 1995. Actual results may 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 and chlor-alkali industries; (3) fluctuations in raw material prices and supply, in particular fluctuations outside the normal range of industry cycles; (4) unanticipated delays in achieving or inability to achieve cost reduction and employee productivity goals; (5) 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 the proposed transactions; (11) unanticipated costs or difficulties related to completion of the proposed transactions or the operation of the joint venture entities; and (12) unanticipated delays in completing, or inability to complete, the proposed transactions; (13) lack of day to day operating control, including procurement or raw material feedstock, of the proposed 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; (15) partial control over investment decisions and dividend distribution policy of the proposed resin partnership. F-24 - -------------------------------------------------------------------------------- 38 SCHEDULE II THE GEON COMPANY AND SUBSIDIARIES SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996 (Dollars in millions)
Charged Charged Balance at to Costs to Other Other Balance at Beginning and Accounts Other Additions End of of Period Expenses (C) Deductions (D) Period --------- -------- -------- ---------- --------- ---------- Year Ended December 31, 1998 Reserves for doubtful accounts $ 3.9 $ .2 $ (.2) $ (.1) (A) $ 0.7 $ 4.5 Accrued liabilities for environmental matters 51.0 2.4 (2.2) (5.3) (B) -- 45.9 Year Ended December 31, 1997 Reserves for doubtful accounts $ 2.7 $ (.7) $ -- $ (.1) (A) $ 2.0 $ 3.9 Accrued liabilities for environmental 27.2 2.4 -- (3.6) (B) 25.0 51.0 matters Year Ended December 31, 1996 Reserves for doubtful accounts $ 2.1 $ .7 $ -- $ (.1) (A) $ -- $ 2.7 Accrued liabilities for environmental 29.1 4.2 -- (6.1) (B) -- 27.2 matters
Notes: ------ (A) - Accounts charged off (B) - Represents cash payments during the year (C) - Translation adjustments (D) - Represents the additional reserves related to businesses acquired on the date of acquisition. F-25 39 THE GEON COMPANY INDEX TO EXHIBITS (Item 14(a)(3))
Exhibit Description Page ------- ----------- ---- 2 Master Transaction Agreement dated December 22, 1998 between The Geon Company and Occidental Chemical Company (e) 3(i) Restated Certificate of Incorporation (c) 3(ii) Amended and Restated By-Laws (a) 4 Instruments defining rights of security holders, including indentures: (c) 4.1 Specimen Common Stock Certificate (c) 4.2 Rights Agreement, dated May 28, 1993, between the Company and Bank of New York, as Rights Agent (c) 4.3 Indenture dated as of December 1, 1995 between the Company and NBD Bank, Trustee (c) 10 Material Contracts: 10.1 Incentive Stock Plan, as amended and restated through November 4, 1998 (1) 10.2 1995 Incentive Stock Plan, as amended and restated through November 4, 1998 (1) 10.3 1998 Interim Stock Award Incentive Stock Plan, as amended and restated through November 4, 1998 (1) 10.4 Benefit Restoration Plan (Section 415) (1) (c) 10.5 Benefit Restoration Plan (Section 401(a)(17)) (1) (c) 10.6 Senior Executive Management Incentive Plan (1) (c) 10.7 Non-Employee Directors Deferred Compensation Plan effective December 9, 1993, as amended (1) 10.8 Form of Management Continuity Agreement (1) (c) 10.9 U.S. $130 million Credit Agreement dated as of August 16, 1994 among the Company and Citibank, N.A. as Agent and NationsBank of North Carolina, N.A. as Co-Agent (c) 10.9a Amendment to the aforesaid Credit Agreement (c) 10.9b Amendment Number 2 to the aforesaid Credit Agreement (c) 10.9c Amendment Number 3 to the aforesaid Credit Agreement (c) 10.10 U.S. $85 million Third Amended and Restated Trade Receivables Purchase and Sale Agreement among the Company, CIESCO, L.P., Corporate Receivables Corporation and Citicorp N.A., Inc. as Agent, dated July 31,1997 (d) 10.11 Second Amended and Restated Lease Dated December 19, 1996 between 1994 VCM Inc. and the Company (c)
I-1 40
Exhibit Description Page ------- ----------- ---- 10.12 Second Amended and Restated Participation Agreement Dated December 19, 1996 among the Company, 1994 VCM Inc., State Street Bank and Trust Company of Connecticut, National Association and Citibank, N.A. as Agent. (c) 10.13 Amended and Restated Instrument Guaranty dated as of December 19, 1996 (c) 10.14 Amended and Restated Plant Services Agreement between the Company and The B.F. Goodrich Company (c) 10.15 Amended and Restated Assumption of Liabilities and indemnification Agreement dated March 1, 1993 and amended and rested April 27, 1993 (c) 10.16 CDN $135 Million Credit Agreement Between 1250828 Ontario Inc. and Canadian Imperial Bank of Commerce, dated October 27, 1997 (d) 10.16a Guaranty related to aforesaid Credit Agreement, dated October 27, 1997 (d) 10.16b Guaranty related to aforesaid Credit Agreement, dated October 30, 1997 (d) 10.17 Partnership Agreement, by and between 1997 Chloralkali Venture Inc., and Olin Sunbelt, Inc. (b) 10.17a Amendment to aforesaid Partnership Agreement (Section 5.03 of Article 5) (d) 10.18b Amendment to aforesaid Partnership Agreement (Addition of Section 1.12) (d) 10.17 Chlorine Sales Agreement, by and between Sunbelt Chlor Alkali Partnership and the Company (b) 10.19 Intercompany Guarantee Agreement between the Company on the one hand and Olin Corporation and Sunbelt Chlor Alkali Partnership on the other hand (b) 10.20 Rate Swap Transaction as amended between the Company and NationsBank, N.A. (b) 10.21 Guarantee by the Company of the Series G Sunbelt Chlor Alkali Partnership Guaranteed Secured Senior Notes Due 2017, dated December 22.1997 (d) 21 Subsidiaries 23 Consent of Independent Auditors 27 Financial Data Schedule
------------------------------------------------------------------- (1) Indicates management contract or compensatory plan, contract or arrangement in which one or more directors or executive officers of the Registrants may be participants. (a) Incorporated by reference to the corresponding Exhibit filed with the Registrant's Form 10-Q for the Quarter Ended June 30, 1996 (b) Incorporated by reference to the corresponding Exhibit filed with the Registrant's Form 10-Q for the Quarter Ended September 30, 1996 (c) Incorporated by reference to the corresponding Exhibit filed with the Registrants Form 10K for the Year Ended December 31, 1996. (d) Incorporated by reference to the corresponding Exhibit filed with the Registrants Form 10K for the Year Ended December 31, 1997. (e) Incorporated by reference to the corresponding Exhibit filed with the Special Meeting Proxy dated March 30, 1999 I-2 EX-10.1 2 EXHIBIT 10.1 1 EXHIBIT 10.1 THE GEON COMPANY INCENTIVE STOCK PLAN (1993 Plan) (as amended and restated through November 4, 1998) PURPOSE The purpose of the Incentive Stock plan (the "Plan") is to promote the interests of the stockholders by furthering the long-term performance of The Geon Company (the "Company") and to enable the Company to be competitive in encouraging key employees who perform services of special importance to the management, operation and the development of the business of the Company or its subsidiaries, to remain in its service, to attract others to it, and to provide such employees with an additional incentive to contribute to the prosperity of the Company and its stockholders. INCENTIVES Incentives under the plan may be granted in any one or a combination of (a) stock options which may consist of (i) Incentive Stock Options (or other statutory stock options) and/or (ii) Non-Qualified Stock Options; (b) Stock Appreciation Rights; (c) Limited Stock Appreciation Rights; and (d) stock awards which may consist of (i) Restricted Stock and/or Performance Incentive Stock (together "Incentives"). All incentives shall be subject to the terms and conditions set forth herein and to such other terms and conditions as may be established in the manner prescribed by the Board of Directors. ADMINISTRATION To the extent permitted by law the Board may delegate any or all of its powers under this Plan to a committee (the "Committee") of not less than two Directors, who are not Officers or employees of the Company, and who are not eligible to participate in the Plan and have not participated in the Plan for at least one year. The Board or the Committee may delegate to the chief executive officer of the Company its duties under the Plan, with respect to not more than 10% of the shares authorized under this Plan, pursuant to such conditions or limitations as the Board or Committee may establish, except that only the Board or the Committee may select participants and grant options, appreciation rights and stock awards to participants who are subject to Section 16 of the Securities Exchange Act of 1934, as amended. The Board, the Committee or the chief executive officer, as the case may be, shall be referred to as the "Granting Authority." -1- 2 ELIGIBILITY Regular key employees of the Company and its subsidiaries, including officers whether or not Directors, shall be eligible to participate in the Plan. Directors who are not regular employees are not eligible. Participation in the Plan shall be limited to those key employees of the Company selected by the Granting Authority. STOCK OPTIONS The Granting Authority may in its discretion from time to time grant to eligible employees options to purchase, except as provided below, at a cash price not less than 100% of the fair market value on the date of the grant (the "option price"), treasury stock or authorized but unissued common stock of the Company, subject to the conditions set forth in this Plan. Within 60 days of the Company's initial public offering, the board or the Committee may grant options to purchase common stock of the Company at less than 100% of the fair market value to Company employees who hold stock options from The B.F. Goodrich Company in substitution for such options in compliance with Section 424 of the Internal Revenue Code of 1986, as amended (the "Internal Revenue Code") on condition that (i) the eligible employees surrender all their then unexercised stock options issued by The B.G. Goodrich Company; (ii) the excess of the aggregate fair market value of all stock subject to the option immediately before such substitution over the aggregate option price of such stock; and (iii) the new options do not provide the participant any additional benefits than the surrendered options. The Granting Authority, at the time of granting to any employee an Incentive under the Plan, may designate options Incentive Stock Options pursuant to Section 422 of the Internal Revenue Code or any other statutory stock option that may be permitted under the Internal Revenue Code from time to time, provided, however that (i) the date on which such options and related appreciation rights shall expire, if not exercised, may not be later than ten years after the date of grant of the option, (ii) in the case of options designated as Incentive Stock Options, the aggregate fair market value of stock optioned to an employee (determined at time of grant) under this plan or any other plan of this Company and its subsidiaries with respect to which incentive stock options are exercisable for the first time by such employee during any calendar year shall be limited to $100,000 (unless such Section 422 limit is revised, then in conformance with such revision) and (iii) in case of any other statutory stock option permitted under the Internal Revenue Code, then in accordance with such provisions as in effect from time to time. Within the foregoing limitations, the Granting Authority shall have the authority in its discretion to specify all other terms and conditions, including but not limited to provisions for the exercise of options in installments, the time limits during which options may be exercised, and in lieu of payment in cash, the exercise in whole or in part of options by tendering common stock of the Company owned by the employee, valued at the fair market value on the date of exercise or other acceptable forms of consideration equal in value to the option price. The Board or Committee may, in its discretion, establish rules or conditions with respect to utilization of common stock for all or part of the option price. Furthermore, the Board or Committee may, in its discretion, establish rules or conditions for the surrendering of a portion of a grant in satisfaction of any withholding tax obligation. -2- 3 APPRECIATION RIGHTS The Granting Authority may, in its discretion, grant Stock Appreciation Rights and Limited Stock Appreciations Rights (as hereinafter described) in connection with any stock option, either at the time of grant of such stock option or any time thereafter during the term of such stock option. Except for the terms of this Plan with respect to Limited Stock Appreciation Rights, each such appreciation right shall be subject to the same terms and conditions as the related stock option and shall be exercisable at such times and to such extent as the Granting Authority shall determine, but only so long as the related option is exercisable. The number of both Stock Appreciation Rights or Limited Stock Appreciation Rights granted shall not exceed the number of shares which may be purchased upon exercise of a related option. The number of both Stock Appreciation Rights and Limited Stock Appreciation Rights shall be reduced not only by the number of appreciation rights exercised but also by the number of shares purchased upon the exercise of a related option. A related stock option shall cease to be exercisable to the extent surrendered for the exercise of an appreciation right. STOCK APPRECIATION RIGHTS Upon surrender to the Company of the unexercised related stock option, or any portion thereof, a Stock Appreciation Right shall entitle the optionee to receive from the Company in exchange therefor (a) a payment in stock as determined below, or (b) to the extent determined by the Granting Authority, the cash equivalent of the fair market value of such payment in stock on the exercise date had the employee been awarded a payment in stock instead of cash, or any combination of stock and cash. The number of shares which shall be issued pursuant to the exercise of Stock Appreciation Rights shall be determined by dividing (1) the total number of Stock Appreciation Rights being exercised multiplied by the amount by which the fair market value of a share of common stock of the Company on the exercise date exceeds the option price of the related option, by (2) the fair market value of a share of common stock of the Company on the exercise date. No fractional shares shall be issued. LIMITED STOCK APPRECIATION RIGHTS The grant of a Limited Stock Appreciation Right will permit a grantee to exercise such right for cash during a sixty-day period commencing on the date on which any of the events described in the definition of Change of Control occurs, each of which events shall hereinafter be known as a "Change in Control Event." Notwithstanding the foregoing, however, if the Change in Control Event occurs within six months after the date on which a Limited Stock Appreciation Right was granted, then the sixty-day period during which such right may be exercised for cash shall commence six months after the date on which the Limited Stock Appreciation Right was granted. The amount of cash received upon the exercise of any Limited Stock Appreciation Right under either of the preceding two sentences shall equal the excess, if any, of the fair market value of a share of the Company's common stock on the date of exercise of the Limited Stock Appreciation Right, over the option price of the stock option to which the Limited Stock Appreciation Right relates. -3- 4 STOCK AWARDS The Granting Authority in lieu of or in addition to granting stock options with or without appreciation rights under this Plan, may make awards ("stock awards") in common stock or denominated in units of common stock. All or part of any stock award may be subject to conditions established by the Granting Authority, which may include, but are not limited to, continuous service with the Company ("Restricted Stock") and attainment of specific performance objectives ("Performance Stock"). Stock awards may include the awarding of additional stock ("Additional Stock") upon attainment of performance objectives. If the common stock is awarded subject to attainment of performance objectives or continued service with the Company, the stock may be registered in the participant's names when initially awarded, but possession of the certificates for the stock, or appropriate book entry, shall be retained by the Company for the benefit of participants, subject to the conditions of the stock awards. In such event, each participant shall have the right to receive all dividends and other distributions made with respect to stock awards registered in his or her name and shall have the right to vote or execute proxies with respect to such registered shares. Stock awards with respect to which the restrictions are not removed in accordance with the provision of the stock awards shall be forfeited and shall revert to the treasury of the Company. ASSIGNABILITY Incentives granted under this Plan shall not be transferable other than by will or the laws of descent and distribution or pursuant to a qualified domestic relations order as defined in the Internal Revenue Code and such Incentive shall be exercisable during the employee's lifetime only by the employee or by the employee's guardian or legal representative or permitted transferee or, in the event of death, by the employee's estate or by a person who acquires the Incentive by bequest or inheritance. CORPORATE REORGANIZATION The number and kind of shares authorized for delivery under this Plan and, if appropriate, the purchase price per share, shall be adjusted appropriately in the event of any stock split, stock dividend, combination of shares, merger, consolidation, reorganization, or other change in the nature of the shares of the Company (any one or more of the foregoing hereinafter a "corporate reorganization"). The determination of what adjustments, if any, are appropriate shall be made by the Board or Committee. -4- 5 CORPORATE REORGANIZATIONS In the event of a dissolution or liquidation of the Company or a merger, consolidation, sale of all or substantially all of its assets, or other corporate reorganization in which the Company is not the surviving corporation or any merger in which the Company is the surviving corporation but the holders of its common stock receive securities of another corporation, any outstanding options hereunder shall terminate, provided that each optionee shall, in such event, have the right immediately prior to such dissolution, liquidation, merger, consolidation, sale of assets or reorganization in which the Company is not the surviving corporation or any merger in which the Company is the surviving corporation but the holders of its common stock receive securities of another corporation, to exercise any unexpired option and/or Stock Appreciation Right in whole or in part without regard to the exercise date contained in such option. Nothing herein contained shall prevent the assumption and continuation of any outstanding option or the substitution of a new option by the surviving corporation. -5- 6 CHANGE IN CONTROL Options and any related appreciation rights that are not exercisable shall become immediately exercisable in the event of a Change in Control. Anything to the contrary notwithstanding, in the event a Change in Control of the Company shall occur, then an interim removal of restrictions on all or a portion of the Performance Stock award and the awarding of Additional Stock, if appropriate, (the "Interim Action") shall be made to each participant within five days following the occurrence of the Change in Control with respect to all outstanding Performance Stock awarded to such participant. The Interim Action with respect to each outstanding Performance Stock award shall be calculated (i) based upon the performance objectives attained as of the end of the most recent quarter in the plan cycle related to each such award (the "Determination Date") ending prior to the Change in Control and as if the Determination Date were the end of the last quarter in such plan cycle and (ii) based upon the number of full and partial months through the occurrence of the Change in Control that have elapsed in the plan cycle with respect to each such Performance Stock award. The amount of such Interim Action with respect to each such outstanding Performance Stock award shall be a prorated portion (based upon the number of full and partial months through the occurrence of the Change in Control that have elapsed in the plan cycle related to such award) of the amount of the Performance Stock award that would have been payable to the participant at the end of the relevant plan cycle, calculated assuming attainment of the greater of (i) 100% of the performance objective with respect to such plan cycle or (ii) the actual percentage (annualizing a partial year, if any) of the performance objective attained as of the Determination Date and as if the Determination Date were the end of the plan cycle related to such Performance Stock award. The Interim Action shall not reduce the obligation of the Company to make a final removal of restrictions or award of additional stock ("Final Action") under the terms of the Plan, but any Interim Action made with respect to a Performance Stock award shall be offset against the Final Action, if any, required under the terms of the Plan with respect to such Performance Stock award at the actual end of the plan cycle related to such Performance Stock award. Notwithstanding the foregoing, in no event shall a participant be required to return stock or refund to the Company, or have offset against any other payment due such participant from or on behalf of the Company, all or any portion of an Interim Action. In the event of a Change in Control all restrictions on Restricted Stock shall lapse and the participant shall immediately receive all Restricted Stock free of further restrictions. For purposes of the Plan, a Change in Control shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any -6- 7 acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below; provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; and provided, further, that if at least a majority of the members of the Incumbent Board determines in good faith that a Person has acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the Outstanding Company Voting Securities inadvertently, and such Person divests as promptly as practicable a sufficient number of shares so that such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) less than 20% of the Outstanding Company Voting Securities, then no Change of Control shall have occurred as a result of such Person's acquisition; or (ii) individuals who, as of November 6, 1996, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to November 6, 1996 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially -7- 8 owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. Notwithstanding any other provision of this Plan, during the 60-day period from and after a Change of Control (the "Exercise Period"), unless the Granting Authority shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the stock option is fully exercisable and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the stock option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change of Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the stock option (the "Spread") multiplied by the number of shares of Common Stock granted under the stock option as to which the right granted under this Section shall have been exercised. For purposes of the Plan "Change of Control Price" shall mean the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change of Control or (ii) if the Change of Control is the result of a tender or exchange offer or a Business Combination, the highest price per share of Common Stock paid in such tender or exchange offer or Business Combination; provided, however, that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change of Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. -8- 9 SHARES AVAILABLE FOR INCENTIVES Subject to adjustment as provided in the following paragraph, there is hereby reserved for issuance under the Plan, 2,500,000 shares in 1993, and in each calendar year thereafter one% of the outstanding shares of the Company's Common Stock as of the first business day of each calendar year. The shares available for granting Incentives in any year shall be increased by the number of shares available under the Plan in previous years but not covered by Incentives granted under the Plan in those years plus any shares as to which options or other benefits granted under the Plan have lapsed, expired, terminated, forfeited or been canceled for any reason without being exercised. However, upon surrender of a stock option on exercise of the related appreciation right, the number or shares subject to the surrendered option shall be charged against the maximum number of shares issuable under the Plan and shall not be available for future options. FAIR MARKET VALUE For all purposes of this Plan the fair market value of a share of stock shall be the mean of the high and low prices of the Company's common stock on the relevant date or, if no sale was made on such date, then on the next preceding day on which such a sale was made (a) if the Company's stock is listed on the New York Stock Exchange, as reported on the New York Stock Exchange Composite Transactions listing (or similar report), or (b) if the Company's stock is listed on the NASDAQ National Market System, then as reported on such system, or (c) if not listed on either the New York Stock Exchange or the NASDAQ National Market System, as determined by the Board or Committee. TERMINATION OF EMPLOYMENT Upon the termination of employment of any employee for any reason, his or her options and any related appreciation rights shall terminate at the time with respect to all shares which were not then purchasable by him or her, provided, however, that if the termination of employment is by reason of death, disability or retirement the Board may in its sole discretion provide that such options and related appreciation rights shall not terminate upon death, disability or retirement and may become immediately exercisable or continue to become exercisable in accordance with the terms of the original grant. COMPLIANCE WITH LAW Notwithstanding any other provisions of the Plan, the issuance or delivery of any shares may be postponed for such period as may be required to comply with any applicable requirements of any national securities exchange or any requirements under any other law or regulation applicable to the issuance or delivery of such shares, and the Company shall not be obligated to issue or deliver any such shares if the issuance or delivery thereof shall constitute a violation of any provision of any law or any regulation of any governmental authority or any national securities exchange. -9- 10 EMPLOYMENT Nothing in the Plan or in any agreement entered into pursuant to the Plan shall confer upon any participant the right to continue in the employment of the Company or affect any right which the Company may have to terminate the employment of such participant. GRANTING AUTHORITY'S DETERMINATION The Granting Authority's determinations under the Plan including without limitation, determinations of the participants to receive awards or grants, the form, amount and timing of such awards or grants, the terms and provisions of such awards or grants and the agreements evidencing same, and the establishment of any performance objectives need not be uniform and may be made by it selectively among participants who receive, or are eligible to receive Incentives under the Plan whether or not such participants are similarly situated. INTERPRETATION AND AMENDMENT The Board or Committee shall have the power to interpret the provisions of this Plan and of all Incentives granted hereunder and the Board shall have the power to amend this Plan from time to time, provided, however, that no amendment shall be made without the approval of stockholders which has the effect of increasing the number of shares of stock subject to this Plan (other than in connection with a corporate reorganization), changing the class of employees eligible to participate, reducing the purchase price of shares pursuant to options to an amount less than 100% of the fair market value on the date of grant or extending the time during which options may be granted hereunder, or otherwise materially increasing the benefits accruing to participants under this Plan. The Granting Authority shall have the authority to amend the terms of any Incentive granted by it subject to the foregoing limitations and provided that no such amendment shall deprive any optionee of any rights thereunder without his written consent unless such amendment or rescission is required by law. In furtherance and not in limitation of the authority granted in this paragraph, any interpretation by a majority of the Incumbent Directors then serving on the Committee or the Board as to whether a sale or other disposition of assets by the Company or an acquisition of assets of another corporation constitutes a "sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation" for purposes of clause (iii) of the definition of "Change in Control" above shall be final and binding for all purposes of this Plan and any Incentive hereunder, notwithstanding that the transaction in question was, or is contemplated to be, submitted to stockholders of the Company for their approval and notwithstanding such approval. -10- EX-10.2 3 EXHIBIT 10.2 1 EXHIBIT 10.2 THE GEON COMPANY 1995 INCENTIVE STOCK PLAN (as amended and restated as of November 4, 1998) 1. Purpose. The Geon Company 1995 Incentive Stock Plan (the "Plan") is designed to foster and promote the long-term growth and performance of the Company by enhancing the Company's ability to attract and retain qualified Directors and key employees and motivating Directors and key employees through stock ownership and performance-based incentives. To achieve this purpose, this Plan provides authority for the grant of Stock Options, Director Options, Restricted Stock, Stock Equivalent Units, Stock Appreciation Rights, Performance-Based Stock Awards, and other stock and performance-based incentives. 2. Definitions. (a) "Affiliate" - This term has the meaning given to it in Rule 12b-2 under the Exchange Act. (b) "Award" - The grant of Stock Options, Director Options, Restricted Stock, Stock Equivalent Units, Stock Appreciation Rights, Performance-Based Stock Awards, and other stock and performance-based incentives under this Plan. (c) "Award Agreement" - Any agreement between the Company and a Participant that sets forth terms, conditions, and restrictions applicable to an Award. (d) "Board of Directors " - The Board of Directors of the Company, (e) "Change of Control" - A "Change of Control" means: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below; provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction 1 2 described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; and provided, further, that if at least a majority of the members of the Incumbent Board determines in good faith that a Person has acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the Outstanding Company Voting Securities inadvertently, and such Person divests as promptly as practicable a sufficient number of shares so that such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) less than 20% of the Outstanding Company Voting Securities, then no Change of Control shall have occurred as a result of such Person's acquisition; or (ii) individuals who, as of November 6, 1996, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to November 6, 1996 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the 2 3 Outstanding Company Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (f) "Change of Control Price" - the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change of Control or (ii) if the Change of Control is the result of a tender or exchange offer or a Business Combination, the highest price per share of Common Stock paid in such tender or exchange offer or Business Combination; provided, however, that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change of Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. (g) "Code" - The Internal Revenue Code of 1986, or any law that supersedes or replaces it, as amended from time to time. (h) "Committee" - The Compensation Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors authorizes to administer this Plan. The Committee will be constituted in a manner that satisfies all applicable legal requirements, including satisfying the disinterested administration standard set forth in Rule 16b-3 and the outside director requirement under Section 162(m). (i) "Common Stock" or "stock" - Common Stock, $.10 par value, of the Company, including authorized and unissued shares and treasury shares. (j) "Company" - The Geon Company, a Delaware corporation, and its direct and indirect subsidiaries. 3 4 (k) "Continuing Director" - A Director following a Change of Control who was a Director prior to such Change of Control or who was recommended or elected to succeed a Continuing Director by a majority of the Continuing Directors then in office. (l) "Director" - A director of the Company. (m) "Director Option" - A right to purchase Common Stock granted to a Director pursuant to Section 7. (n) "Exchange Act" - The Securities Exchange Act of 1934, as amended, or any law that supersedes or replaces it, as the same may be amended from time to time. (o) "Fair Market Value" of Common Stock - The Fair Market Value of a share of Common Stock on any particular date means the mean of the high and low prices of the Common Stock on the relevant date or, if no sale was made on such date, then on the next preceding day on which such a sale was made (a) if the Common Stock is listed on the New York Stock Exchange, as reported on the New York Stock Exchange Composite Transactions listing (or similar report), or (b) if the Common Stock is listed on the NASDAQ National Market System, then as reported on such system, or (c) if not listed on either the New York Stock Exchange or the NASDAQ National Market System, as determined by the Board or Committee. (p) "Incentive Stock Option" - A Stock Option that meets the requirements of Section 422 of the Code. (q) "Non-Employee Director" - A Director who is not an employee of the Company. (r) "Notice of Award" - Any notice by the Committee to a Participant that advises the Participant of the grant of an Award or sets forth terms, conditions, and restrictions applicable to an Award. (s) "Participant" - Any person to whom an Award has been granted under this Plan. (t) "Performance-Based Stock Award" - A Stock Award granted to a Participant pursuant to Section 8. (u) "Restricted Stock" - An Award of Common Stock subject to restrictions or risk of forfeiture. (v) "Rule 16b-3" - Rule 16b-3 under the Exchange Act as the same may be amended, modified, superseded or replaced from time to time. 4 5 (w) "Section 162(m) " - Section 162(m) of the Code, together with the regulations promulgated by the Internal Revenue Service thereunder, as the same may be amended, modified, superseded or replaced from time to time. (x) "Stock Appreciation Right" - This tern has the meaning given to it in Section 6(b)(ii). (y) "Stock Award" - This term has the meaning given to it in Section 6(b)(iii). (z) "Stock Equivalent Unit" - An Award that is valued by reference to the value of Common Stock. (aa) "Stock Option" - This term has the meaning given to it in Section 6(b)(iv). 3. Eligibility. All key employees of the Company and its Affiliates, including officers whether or not Directors, are eligible for the grant of Awards (other than Director Options). The selection of key employees to receive Awards (other than Director Options) will be within the discretion of the Committee. More than one Award may be granted to the same key employee. All Non-Employee Directors are eligible for the grant of Director Options, as provided in Section 7. Non-Employee Directors are not, however, eligible for the grant of any Awards other than Director Options. 4. Common Stock Available for Awards; Adjustment. (a) Number of Shares of Common Stock. Subject to adjustment as provided for in Section 4(d), the aggregate number of shares of Common Stock that may be subject to Awards granted under this Plan shall be 2,500,000 shares of Common Stock. The assumption of awards granted by an organization acquired by the Company, or the grant of Awards under this Plan in substitution for any such awards, will not reduce the number of shares of Common Stock available for the grant of Awards under this Plan. Common Stock Subject to an Award that expires or is forfeited, terminated, or canceled will again be available for grant under this Plan, without reducing the number of shares of Common Stock available for grant of Awards under this Plan, except to the extent that the availability of those shares of Common Stock would cause this Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3. Notwithstanding the foregoing, Common Stock subject to awards of Stock Options and Stock Appreciation Rights to Participants who are employees which expire or are forfeited, terminated, or canceled in the same year such Award is granted will, upon such expiration or forfeiture, termination, or cancellation, continue to be counted against the maximum number of shares with respect to which Options and 5 6 Stock Appreciation Rights may be granted under this Plan in such year to such Participants holding the expired or forfeited, terminated or canceled Stock Options or Stock Appreciation Rights. (b) Limitations on Certain Awards. (i) The aggregate number of shares of Common Stock that may be issued upon exercise of Incentive Stock Options is 2,000,000. (ii) The maximum number of shares with respect to which Options (including Incentive Stock Options) and Stock Appreciation Rights may be granted under this Plan in any one fiscal year is (A) 100,000 as to any individual Participant who is an employee (other than the Chief Executive Officer or the Chief Operating Officer of the Company) and (B) 205,000 as to any individual Participant who is the Chief Executive Officer or the Chief Operating Officer of the Company. (iii) The aggregate number of shares of Restricted Stock (other than Restricted Stock which is a Performance-Based Stock Award) that may be awarded under this Plan is 2,000,000. (c) No Fractional Shares. No fractional shares will be issued, and the Committee will determine the manner in which the value of fractional shares will be treated. (d) Adjustment. In the event of any change in the number of shares of Common Stock by reason of a merger, consolidation, reorganization, recapitalization, or similar transaction, or in the event of a stock dividend, stock split, or distribution to stockholders (other than normal cash dividends), the Committee will adjust the number and class of shares that may be issued under this Plan, the number and class of shares subject to outstanding Awards, the exercise price applicable to outstanding Awards, and the Fair Market Value of the shares of Common Stock and other value determinations applicable to outstanding Awards. 6 7 5. Administration. (a) Committee. This Plan will be administered by the Committee. The Committee will, subject to the terms of this Plan, have the authority to: (i) select the eligible employees who will receive Awards, (ii) grant Awards (other than Director Options), (iii) determine the number and types of Awards to be granted to employees, (iv) determine the terms, conditions, vesting periods, and restrictions applicable to Awards (other than Director Options), (v) adopt, alter, and repeal administrative rules and practices governing this Plan, (vi) interpret the terms and provisions of this Plan and any Awards granted under this Plan, (vii) prescribe the forms of any Notices of Award, Award Agreements, or other instruments relating to Awards, and (viii) otherwise supervise the administration of this Plan. Except as provided in the immediately following sentence, all decisions by the Committee will be made with the approval of not less than a majority of its members. In furtherance and not in limitation of the authority granted in clause (vi) of this paragraph, any interpretation by a majority of the Incumbent Directors then serving or the Committee as to whether a sale or other disposition of assets by the Company or an acquisition of assets of another corporation constitutes a "sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation" for purposes of clause (iii) of the definition of "Change of Control" in Section 2(e) hereof shall be final and binding for all purposes of this Plan and any Awards hereunder, notwithstanding that the transaction in question was, or is contemplated to be, submitted to stockholders of the Company for their approval and notwithstanding such approval. (b) Delegation. The Committee may delegate any of its authority to any other person or persons that it deems appropriate, provided the delegation does not cause this Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. (c) Decisions Final. All decisions by the Committee, and by any other person or persons to whom the Committee has delegated authority, will be final and binding on all persons. 7 8 6. Awards. (a) Grant of Awards. The Committee will determine the type or types of Awards to be granted to each Participant and will set forth in the related Notice of Award or Award Agreement the terms, conditions, vesting periods, and restrictions applicable to each Award. Awards may be granted singly or in combination or tandem with other Awards, except to the extent that any grants in combination or tandem would impair the exemption for performance based compensation provided for under Section 162(m). Awards may also be granted in replacement of, or in substitution for, other awards granted by the Company, whether or not granted under this Plan, except that, with respect to Performance-Based Stock Awards, the new Award must also be wholly contingent on the attainment of performance goals established by the Committee; without limiting the foregoing, if a Participant pays all or part of the exercise price or taxes associated with an Award by the transfer of Common Stock or the surrender of all or part of an Award (including the Award being exercised), the Committee may, in its discretion, grant a new Award (which, in the case of Awards intended to replace Performance-Based Stock Awards, must also be wholly contingent on the attainment of performance goals established by the Committee) to replace the shares of Common Stock that were transferred or the Award that was surrendered. The Company may assume awards granted by an organization acquired by the Company or may grant Awards in replacement of, or in substitution for, any such awards. (b) Types of Awards. Awards may include, but are not limited to, the following: (i) Director Option - A right to purchase Common Stock granted to a Director pursuant to Section 7. (ii) Stock Appreciation Right - A right to receive a payment, in cash or Common Shares, equal to the excess of (A) the Fair Market Value of a specified number of shares of Common Stock on the date the right is exercised over (B) the Fair Market Value on the date the right is granted. The right may be conditioned upon the occurrence of certain events, such as a Change of Control of the Company, or may be unconditional, as determined by the Committee. (iii) Stock Award - An Award that is made in Common Stock, Restricted Stock, or Stock Equivalent Units or that is otherwise based on, or valued in whole or in part by reference to, the Common Shares, including Performance-Based Stock Awards. All or any part of any Stock Award may be subject to such conditions, restrictions, and risks of forfeiture, as and to the extent established by the Committee and, with respect to Performance-Based Stock Awards, such conditions and restrictions as may be required under Section 162(m), so that the Performance-Based Stock Awards constitute performance-based compensation thereunder. Stock Awards may be based on the Fair Market Value of the Common Stock, or on other specified values or methods of valuation, as determined by the Committee. 8 9 (iv) Stock Option - A right to purchase a specified number of shares of Common Stock; during a specified period, and at a specified exercise price, all as determined by the Committee. A Stock Option may be an Incentive Stock Option or a Stock Option that does not qualify as an Incentive Stock Option (a "non-qualified Stock Option"). In addition to the terms, conditions, vesting periods, and restrictions established by the Committee, Incentive Stock Options must comply with the requirements of Section 422 of the Code. The exercise price of a Stock Option, including a non-qualified Stock Option, may be no less than the Fair Market Value of the Common Shares on the date the Stock Option is granted. (v) Performance-Based Stock Awards - A Stock Award granted to a Participant pursuant to Section 8. 7. Director Options. (a) Grant of Director Options; Number of Shares of Common Stock. Upon approval of this Plan at the 1995 Annual Meeting of Stockholders, each Non-Employee Director of the Company will receive a Director Option for 5,000 shares of Common Stock on the date of such meeting. Each Non-Employee Director who first becomes a Director at any time thereafter, will receive a Director Option for 5,000 shares of Common Stock on the date that he or she is first elected or appointed as a Non-Employee Director. Each Director who ceases to be an employee of the Company during his or her term in office will receive a Director Option on the date that he or she is first elected as a Director after ceasing to be an employee. Each Non-Employee Director who receives a Director Option under this Plan and continues in office will receive an additional Director Option for 1,000 shares of Common Stock annually on each anniversary date of the date on which the previous Director Option was received. No action by the Committee will be required to effect the grant of these Director Options. Notwithstanding the provisions of Section 14, the number of shares of Common Stock to which the annual Director Options relates may not be amended more than once every six months, other than to comport with changes in the Code, the Employee Retirement Income Security Act, as amended, or the rules thereunder. (b) Exercise Price. The purchase price of the Common Stock subject to each Director Option will be the Fair Market Value of the Common Shares at the date of grant. (c) Date Director Options Become Exercisable. Each Director Option will become exercisable one year after the date of grant or upon the earlier occurrence of a Change of Control. (d) Expiration Date. Unless terminated earlier pursuant to the next sentence, each Director Option will terminate, and the right of the holder to purchase Common Stock upon exercise of the Director Option will expire, at the close of business on the tenth anniversary date 9 10 of the date of grant. Each Director Option will terminate, and the right of the holder to purchase Common Stock upon exercise of the Director Option will expire, upon the completion of a transaction of the type identified in Sections 2(e) (3) and (4), but only if provision satisfactory to the Committee is made for the payment to the holder of the Director Option of the excess of (i) the Fair Market Value of the Common Stock subject to the Director Option immediately prior to the completion of the transaction over (ii) the exercise price. (e) Not Incentive Stock Options. None of the Director Options will be Incentive Stock Options. (f) Continuous Service as a Director. No Director Option may be exercised unless the Non-Employee Director to whom the Director Option was granted has continued to be a Non-Employee Director from the time of grant through the time of exercise, except as provided in this Section 7(f). (i) If the service in office of a Non-Employee Director is terminated due to the death of the Non-Employee Director, the Non-Employee Director's estate, executor, administrator, personal representative, or beneficiary will have the right to exercise the Director Option in whole or in part prior to the earlier of (i) 12 months after the date of the holder's death and (ii) the expiration of the Director Option. (ii) If a Non-Employee Director ceases to be a Non-Employee Director by reason of his employment by the Company, the Director Option granted to that Non-Employee Director will be treated the same as Stock Options held by employees and will continue to be exercisable prior to the expiration of the Director Option, subject to the limitations on exercise following termination of employment established by the Committee pursuant to Section 12. (iii) If the service in office of a Non-Employee Director is terminated for any reason other than those set forth in Sections 7(f)(i) and 7(f)(ii), the holder of the Director Option may exercise the Director Option in whole or in part only with the consent of the Committee. In any such event, the consent of the Committee must be obtained and the Director Option exercised prior to the earlier of (i) three months after the date of the termination of service in office of a Non-Employee Director and (ii) the expiration of the Director Option. 10 11 8. Performance-Based Stock Awards. (a) Performance-Based Stock Awards. The Committee may, in its discretion, grant Stock Awards valued by reference to shares of Common Stock that are wholly contingent on the attainment of performance goals established by the Committee from time to time. The performance goals will relate to one or more of the following performance measures, as determined by the Committee for each applicable performance period: (i) return to stockholders, (ii) cash flow, (iii) return on equity, (iv) Company created income (for example, income due to Company initiated cost reductions or productivity improvements), (v) sales growth, (vi) earnings and earnings growth, (vii) return on assets, (viii) stock price, (ix) earnings per share, (x) market share, (xi) customer satisfaction, and (xii) safety and/or environmental performance. Any such performance goals and the applicable performance measures will be determined by the Committee at the time of grant and reflected in a written award agreement. The number or value of Performance-Based Stock Awards that will be paid out to any Participant at the end of the applicable performance period, which may be one year or longer as determined by the Committee, will depend on the extent to which the Company attains the established performance goals. (b) Maximum Amount of Performance-Based Stock Awards. No participant who is an employee may be awarded Performance-Based Stock Awards in any one fiscal year in excess of an aggregate of 50,000 shares of Common Stock. The maximum dollar value, based on the Fair Market Value of the number of shares of Common Stock awarded, of any Performance-Based Stock Award to any Participant who is an employee shall not exceed $1,200,000 in any one fiscal year. 9. Deferral of Payment. With the approval of the Committee, the delivery of the Common Stock, cash, or any combination thereof subject to an Award (other than Director Options) may be deferred, either in the form of installments or a single future delivery. The Committee may also permit selected Participants to defer the payment of some or all of their Awards, as well as other compensation, in accordance with procedures established by the Committee to assure that the recognition of taxable income is deferred under the Code. Deferred amounts may, to the extent permitted by the Committee, be credited as cash or Stock Equivalent Units. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents on Stock Equivalent Units. 10. Payment of Exercise Price. The exercise price of a Stock Option, Director Option, and any Stock Award for which the Committee has established an exercise price may be paid in cash, by the transfer of Common Stock, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods, as and to the extent permitted by the Committee. The Committee may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of this Plan. 11 12 In the event shares of Restricted Stock are used to pay the exercise price of a Stock Award, a number of the shares of Common Stock issued upon the exercise of the Award equal to the number of shares of Restricted Stock used to pay the exercise price will be subject to the same restrictions as the Restricted Stock. 11. Taxes Associated with Award. Prior to the payment of an Award, the Company may withhold, or require a Participant to remit to the Company, an amount sufficient to pay any Federal, state, and local taxes associated with the Award. The Committee may, in its discretion and subject to such rules as the Committee may adopt, permit a Participant to pay any or all taxes associated with the Award in cash, by the transfer of Common Stock, by the surrender of all or part of an Award (including the Award being exercised), including Performance-Based Stock Awards, or by a combination of these methods. The Committee may permit a Participant to pay any or all taxes associated with an Incentive Stock Option in cash, by the transfer of Common Stock, or by a combination of these methods. 12. Termination of Employment. Subject to Section 13, if the employment of a Participant terminates for any reason, all unexercised, deferred, and unpaid Awards may be exercisable or paid only in accordance with rules established by the Committee. Subject to the foregoing exception, these rules may provide, as the Committee deems appropriate, for the expiration, continuation, or acceleration of the vesting of all or part of the Awards. 13. Change of Control. In the event of a Change of Control of the Company, unless and to the extent otherwise determined by the Board of Directors, (i) all Stock Appreciation Rights and Stock Options then outstanding will become fully exercisable as of the date of the Change of Control and (ii) all restrictions and conditions applicable to Restricted Stock and other Stock Awards, including Performance-Based Stock Awards, will be deemed to have been satisfied as of the date of the Change of Control. Any such determination by the Board of Directors that is made after the occurrence of a Change of Control will not be effective unless a majority of the Directors then in office are Continuing Directors and the determination is approved by a majority of the Continuing Directors. Notwithstanding any other provision of this Plan, during the 60-day period from and after a Change of Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change of Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the Stock Option (the "Spread") multiplied by the number of shares of Common Stock granted under the Stock Option as to which the right granted under this Section shall have been exercised. 12 13 14. Amendment, Suspension, or Termination of this Plan; Amendment of Outstanding Awards. (a) Amendment, Suspension, or Termination of this Plan. The Board of Directors may amend, suspend, or terminate this Plan at any time. Stockholder approval for any such amendment will be required only to the extent necessary to preserve the exemption provided by Rule 16b-3 for this Plan and Awards granted under this Plan. 13 14 (b) Amendment of Outstanding Awards. The Committee may, in its discretion, amend the terms of any Award (other than a Director Option), including, waiving, in whole or in part, any restrictions or conditions applicable to, or accelerating the vesting of, any Award, prospectively or retroactively, but no such amendment may impair the rights of any Participant without his or her consent or cause Awards intended to qualify as performance based compensation under Section 162(m) to fail to so qualify. 15. Awards to Foreign Nationals and Employees Outside the United States. To the extent that the Committee deems appropriate to comply with foreign law or practice and to further the purpose of this Plan, the Committee may, without amending this Plan, (i) establish special rules applicable to Awards granted to Participants who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Awards to such Participants in accordance with those rules. 16. Nonassignability. Unless otherwise determined by the Committee, (i) no Award granted under this Plan may be transferred or assigned by the Participant to whom it is granted other than by will, pursuant to the laws of descent and distribution, or pursuant to a qualified domestic relations order and (ii) an Award granted under this Plan may be exercised, during the Participant's lifetime, only by the Participant or by the Participant's guardian or legal representative; except that, no Incentive Stock Option may be transferred or assigned pursuant to a qualified domestic relations order or exercised, during the Participant's lifetime, by the Participant's guardian or legal representative. 17. Governing Law. The interpretation, validity, and enforcement of this Plan will, to the extent not governed by the Code or the securities laws of the United States, be governed by the laws of the State of Ohio. 18. Rights of Employees. Nothing in this Plan will confer upon any Participant the right to continued employment by the Company or limit in any way the Company's right to terminate any Participant's employment at will. 19. Effective and Termination Dates. (a) Effective Date. This Plan will become effective on the date it is approved by the stockholders. (b) Termination Date. This Plan will continue in effect until terminated by the Board of Directors. 14 EX-10.3 4 EXHIBIT 10.3 1 EXHIBIT 10.3 THE GEON COMPANY 1998 INTERIM STOCK AWARD PLAN (as amended and restated through November 4, 1998) 1. Purpose. The Geon Company 1998 Interim Stock Award Plan (the "Plan") is designed to foster and promote the long-term growth and performance of the Company by enhancing the Company's ability to attract and retain qualified key employees and motivating key employees through stock ownership and performance-based incentives. To achieve this purpose, this Plan provides authority for the grant of Stock Options, Restricted Stock, Stock Equivalent Units, Stock Appreciation Rights, Performance-Based Stock Awards, and other stock and performance-based incentives. 2. Definitions. (a) "Affiliate" - This term has the meaning given to it in Rule 12b-2 under the Exchange Act. (b) "Award" - The grant of Stock Options, Restricted Stock, Stock Equivalent Units, Stock Appreciation Rights, Performance-Based Stock Awards, and other stock and performance-based incentives under this Plan. (c) "Award Agreement" - Any agreement between the Company and a Participant that sets forth terms, conditions, and restrictions applicable to an Award. (d) "Board of Directors " - The Board of Directors of the Company, (e) "Change of Control" - A "Change of Control" means: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below; provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction 1 2 described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; and provided, further, that if at least a majority of the members of the Incumbent Board determines in good faith that a Person has acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the Outstanding Company Voting Securities inadvertently, and such Person divests as promptly as practicable a sufficient number of shares so that such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) less than 20% of the Outstanding Company Voting Securities, then no Change of Control shall have occurred as a result of such Person's acquisition; or (ii) individuals who, as of November 6, 1996, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to November 6, 1996 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) The approval by the shareholders of the Company of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination") or, if consummation of such Business Combination is subject, at the time of such approval by shareholders, to the consent of any government or governmental agency, the obtaining of such consent (either explicitly or implicitly by consummation); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the 2 3 Outstanding Company Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. (f) "Change of Control Price" - the higher of (i) the highest reported sales price, regular way, of a share of Common Stock in any transaction reported on the New York Stock Exchange Composite Tape or other national exchange on which such shares are listed or on NASDAQ during the 60-day period prior to and including the date of a Change of Control or (ii) if the Change of Control is the result of a tender or exchange offer or a Business Combination, the highest price per share of Common Stock paid in such tender or exchange offer or Business Combination; provided, however, that, in the case of Incentive Stock Options and Stock Appreciation Rights relating to Incentive Stock Options, the Change of Control Price shall be in all cases the Fair Market Value of the Common Stock on the date such Incentive Stock Option or Stock Appreciation Right is exercised. To the extent that the consideration paid in any such transaction described above consists all or in part of securities or other noncash consideration, the value of such securities or other noncash consideration shall be determined in the sole discretion of the Board. (g) "Code" - The Internal Revenue Code of 1986, or any law that supersedes or replaces it, as amended from time to time. (h) "Committee" - The Compensation Committee of the Board of Directors, or any other committee of the Board of Directors that the Board of Directors authorizes to administer this Plan. The Committee will be constituted in a manner that satisfies all applicable legal requirements, including satisfying the disinterested administration standard set forth in Rule 16b-3 and the outside director requirement under Section 162(m). (i) "Common Stock" or "stock" - Common Stock, $.10 par value, of the Company, including authorized and unissued shares and treasury shares. (j) "Company" - The Geon Company, a Delaware corporation, and its direct and indirect subsidiaries. 3 4 (k) "Continuing Director" - A Director following a Change of Control who was a Director prior to such Change of Control or who was recommended or elected to succeed a Continuing Director by a majority of the Continuing Directors then in office. (l) "Director" - A director of the Company. (m) "Exchange Act" - The Securities Exchange Act of 1934, as amended, or any law that supersedes or replaces it, as the same may be amended from time to time. (n) "Fair Market Value" of Common Stock - The Fair Market Value of a share of Common Stock on any particular date means the mean of the high and low prices of the Common Stock on the relevant date or, if no sale was made on such date, then on the next preceding day on which such a sale was made (a) if the Common Stock is listed on the New York Stock Exchange, as reported on the New York Stock Exchange Composite Transactions listing (or similar report), or (b) if the Common Stock is listed on the NASDAQ National Market System, then as reported on such system, or (c) if not listed on either the New York Stock Exchange or the NASDAQ National Market System, as determined by the Board or Committee. (o) "Incentive Stock Option" - A Stock Option that meets the requirements of Section 422 of the Code. (p) "Non-Employee Director" - A Director who is not an employee of the Company. (q) "Notice of Award" - Any notice by the Committee to a Participant that advises the Participant of the grant of an Award or sets forth terms, conditions, and restrictions applicable to an Award. (r) "Participant" - Any person to whom an Award has been granted under this Plan. (s) "Performance-Based Stock Award" - A Stock Award granted to a Participant pursuant to Section 7. (t) "Restricted Stock" - An Award of Common Stock subject to restrictions or risk of forfeiture. (u) "Rule 16b-3" - Rule 16b-3 under the Exchange Act as the same may be amended, modified, superseded or replaced from time to time. (v) "Section 162(m)" - Section 162(m) of the Code, together with the regulations promulgated by the Internal Revenue Service thereunder, as the same may be amended, modified, superseded or replaced from time to time. 4 5 (w) "Stock Appreciation Right" - This term has the meaning given to it in Section 6(b)(ii). (x) "Stock Award" - This term has the meaning given to it in Section 6(b)(iii). (y) "Stock Equivalent Unit" - An Award that is valued by reference to the value of Common Stock. (z) "Stock Option" - This term has the meaning given to it in Section 6(b)(iv). 3. Eligibility. All key employees of the Company and its Affiliates, including officers whether or not Directors, are eligible for the grant of Awards. The selection of key employees to receive Awards will be within the discretion of the Committee. More than one Award may be granted to the same key employee. Non-Employee Directors are not, however, eligible for the grant of any Awards. 4. Common Stock Available for Awards; Adjustment. (a) Number of Shares of Common Stock. Subject to adjustment as provided for in Section 4(d), the aggregate number of shares of Common Stock that may be subject to Awards granted under this Plan shall be 350,000 shares of Common Stock. The assumption of awards granted by an organization acquired by the Company, or the grant of Awards under this Plan in substitution for any such awards, will not reduce the number of shares of Common Stock available for the grant of Awards under this Plan. Common Stock Subject to an Award that expires or is forfeited, terminated, or canceled will again be available for grant under this Plan, without reducing the number of shares of Common Stock available for grant of Awards under this Plan, except to the extent that the availability of those shares of Common Stock would cause this Plan or any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3. Notwithstanding the foregoing, Common Stock subject to awards of Stock Options and Stock Appreciation Rights to Participants who are employees which expire or are forfeited, terminated, or canceled in the same year such Award is granted will, upon such expiration or forfeiture, termination, or cancellation, continue to be counted against the maximum number of shares with respect to which Options and Stock Appreciation Rights may be granted under this Plan in such year to such Participants holding the expired or forfeited, terminated or canceled Stock Options or Stock Appreciation Rights. (b) Limitations on Certain Awards. (i) The aggregate number of shares of Common Stock that may be issued upon exercise of Incentive Stock Options is 280,000. (ii) The maximum number of shares with respect to which Options (including Incentive Stock Options) and Stock Appreciation Rights may be granted under this Plan in any 5 6 one fiscal year is (A) 100,000 as to any individual Participant who is an employee (other than the Chief Executive Officer or the Chief Operating Officer of the Company) and (B) 200,000 as to any individual Participant who is the Chief Executive Officer or the Chief Operating Officer of the Company. (iii) The aggregate number of shares of Restricted Stock (other than Restricted Stock which is a Performance-Based Stock Award) that may be awarded under this Plan is 280,000. (c) No Fractional Shares. No fractional shares will be issued, and the Committee will determine the manner in which the value of fractional shares will be treated. (d) Adjustment. In the event of any change in the number of shares of Common Stock by reason of a merger, consolidation, reorganization, recapitalization, or similar transaction, or in the event of a stock dividend, stock split, or distribution to stockholders (other than normal cash dividends), the Committee will adjust the number and class of shares that may be issued under this Plan, the number and class of shares subject to outstanding Awards, the exercise price applicable to outstanding Awards, and the Fair Market Value of the shares of Common Stock and other value determinations applicable to outstanding Awards. 5. Administration. (a) Committee. This Plan will be administered by the Committee. The Committee will, subject to the terms of this Plan, have the authority to: (i) select the eligible employees who will receive Awards, (ii) grant Awards, (iii) determine the number and types of Awards to be granted to employees, (iv) determine the terms, conditions, vesting periods, and restrictions applicable to Awards, (v) adopt, alter, and repeal administrative rules and practices governing this Plan, (vi) interpret the terms and provisions of this Plan and any Awards granted under this Plan, (vii) prescribe the forms of any Notices of Award, Award Agreements, or other instruments relating to Awards, and (viii) otherwise supervise the administration of this Plan. Except as provided in the immediately following sentence, all decisions by the Committee will be made with the approval of not less than a majority of its members. In furtherance and not in limitation of the authority granted in clause (vi) of this paragraph, any interpretation by a majority of the Incumbent Directors then serving on the Committee as to whether a sale or other disposition of assets by the Company or an acquisition of assets of another corporation constitutes a "sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation" for purposes of clause (iii) of the definition of "Change of Control" in Section 2(e) hereof shall be final and binding for all purposes of this Plan and any Awards hereunder, notwithstanding that the transaction in question was, or is contemplated to be, submitted to stockholders of the Company for their approval and notwithstanding such approval. (b) Delegation. The Committee may delegate any of its authority to any other person or persons that it deems appropriate, provided the delegation does not cause this Plan or 6 7 any Awards granted under this Plan to fail to qualify for the exemption provided by Rule 16b-3 under the Exchange Act. (c) Decisions Final. All decisions by the Committee, and by any other person or persons to whom the Committee has delegated authority, will be final and binding on all persons. 6. Awards. (a) Grant of Awards. The Committee will determine the type or types of Awards to be granted to each Participant and will set forth in the related Notice of Award or Award Agreement the terms, conditions, vesting periods, and restrictions applicable to each Award. Awards may be granted singly or in combination or tandem with other Awards. Awards may also be granted in replacement of, or in substitution for, other awards granted by the Company, whether or not granted under this Plan, except that, with respect to Performance-Based Stock Awards, the new Award must also be wholly contingent on the attainment of performance goals established by the Committee; without limiting the foregoing, if a Participant pays all or part of the exercise price or taxes associated with an Award by the transfer of Common Stock or the surrender of all or part of an Award (including the Award being exercised), the Committee may, in its discretion, grant a new Award (which, in the case of Awards intended to replace Performance-Based Stock Awards, must also be wholly contingent on the attainment of performance goals established by the Committee) to replace the shares of Common Stock that were transferred or the Award that was surrendered. The Company may assume awards granted by an organization acquired by the Company or may grant Awards in replacement of, or in substitution for, any such awards. (b) Types of Awards. Awards may include, but are not limited to, the following: (i) Stock Appreciation Right - A right to receive a payment, in cash or Common Shares, equal to the excess of (A) the Fair Market Value of a specified number of shares of Common Stock on the date the right is exercised over (B) the Fair Market Value on the date the right is granted. The right may be conditioned upon the occurrence of certain events, such as a Change of Control of the Company, or may be unconditional, as determined by the Committee. (ii) Stock Award - An Award that is made in Common Stock, Restricted Stock, or Stock Equivalent Units or that is otherwise based on, or valued in whole or in part by reference to, the Common Shares, including Performance-Based Stock Awards. All or any part of any Stock Award may be subject to such conditions, restrictions, and risks of forfeiture, as and to the extent established by the Committee. Stock Awards may be based on the Fair Market 7 8 Value of the Common Stock, or on other specified values or methods of valuation, as determined by the Committee. (iii) Stock Option - A right to purchase a specified number of shares of Common Stock, during a specified period, and at a specified exercise price, all as determined by the Committee. A Stock Option may be an Incentive Stock Option or a Stock Option that does not qualify as an Incentive Stock Option (a "non-qualified Stock Option"). In addition to the terms, conditions, vesting periods, and restrictions established by the Committee, Incentive Stock Options must comply with the requirements of Section 422 of the Code. The exercise price of an Incentive Stock Option may be no less than the Fair Market Value of the Common Shares on the date the Stock Option is granted. (iii) Performance-Based Stock Awards - A Stock Award granted to a Participant pursuant to Section 7. 7. Performance-Based Stock Awards. (a) Performance-Based Stock Awards. The Committee may, in its discretion, grant Stock Awards valued by reference to shares of Common Stock that are wholly contingent on the attainment of performance goals established by the Committee from time to time. The performance goals will relate to one or more of the following performance measures, as determined by the Committee for each applicable performance period: (i) return to stockholders, (ii) cash flow, (iii) return on equity, (iv) Company created income (for example, income due to Company initiated cost reductions or productivity improvements), (v) sales growth, (vi) earnings and earnings growth, (vii) return on assets, (viii) stock price, (ix) earnings per share, (x) market share, (xi) customer satisfaction, and (xii) safety and/or environmental performance. Any such performance goals and the applicable performance measures will be determined by the Committee at the time of grant and reflected in a written award agreement. The number or value of Performance-Based Stock Awards that will be paid out to any Participant at the end of the applicable performance period, which may be one year or longer as determined by the Committee, will depend on the extent to which the Company attains the established performance goals. (b) Maximum Amount of Performance-Based Stock Awards. No participant who is an employee may be awarded Performance-Based Stock Awards in any one fiscal year in excess of an aggregate of 50,000 shares of Common Stock. The maximum dollar value, based on the Fair Market Value of the number of shares of Common Stock awarded, of any Performance-Based Stock Award to any Participant who is an employee shall not exceed $1,200,000 in any one fiscal year. 8 9 8. Deferral of Payment. With the approval of the Committee, the delivery of the Common Stock, cash, or any combination thereof subject to an Award may be deferred, either in the form of installments or a single future delivery. The Committee may also permit selected Participants to defer the payment of some or all of their Awards, as well as other compensation, in accordance with procedures established by the Committee to assure that the recognition of taxable income is deferred under the Code. Deferred amounts may, to the extent permitted by the Committee, be credited as cash or Stock Equivalent Units. The Committee may also establish rules and procedures for the crediting of interest on deferred cash payments and dividend equivalents on Stock Equivalent Units. 9. Payment of Exercise Price. The exercise price of a Stock Option and any Stock Award for which the Committee has established an exercise price may be paid in cash, by the transfer of Common Stock, by the surrender of all or part of an Award (including the Award being exercised), or by a combination of these methods, as and to the extent permitted by the Committee. The Committee may prescribe any other method of paying the exercise price that it determines to be consistent with applicable law and the purpose of this Plan. In the event shares of Restricted Stock are used to pay the exercise price of a Stock Award, a number of the shares of Common Stock issued upon the exercise of the Award equal to the number of shares of Restricted Stock used to pay the exercise price will be subject to the same restrictions as the Restricted Stock. 10. Taxes Associated with Award. Prior to the payment of an Award, the Company may withhold, or require a Participant to remit to the Company, an amount sufficient to pay any Federal, state, and local taxes associated with the Award. The Committee may, in its discretion and subject to such rules as the Committee may adopt, permit a Participant to pay any or all taxes associated with the Award in cash, by the transfer of Common Stock, by the surrender of all or part of an Award (including the Award being exercised), including Performance-Based Stock Awards, or by a combination of these methods. The Committee may permit a Participant to pay any or all taxes associated with an Incentive Stock Option in cash, by the transfer of Common Stock, or by a combination of these methods. 11. Termination of Employment. Subject to Section 12, if the employment of a Participant terminates for any reason, all unexercised, deferred, and unpaid Awards may be exercisable or paid only in accordance with rules established by the Committee. Subject to the foregoing exception, these rules may provide, as the Committee deems appropriate, for the expiration, continuation, or acceleration of the vesting of all or part of the Awards. 9 10 12. Change of Control. In the event of a Change of Control of the Company, unless and to the extent otherwise determined by the Board of Directors, (i) all Stock Appreciation Rights and Stock Options then outstanding will become fully exercisable as of the date of the Change of Control and (ii) all restrictions and conditions applicable to Restricted Stock and other Stock Awards, including Performance-Based Stock Awards, will be deemed to have been satisfied as of the date of the Change of Control. Any such determination by the Board of Directors that is made after the occurrence of a Change of Control will not be effective unless a majority of the Directors then in office are Continuing Directors and the determination is approved by a majority of the Continuing Directors. Notwithstanding any other provision of this Plan, during the 60-day period from and after a Change of Control (the "Exercise Period"), unless the Committee shall determine otherwise at the time of grant, an optionee shall have the right, whether or not the Stock Option is fully exercisable and in lieu of the payment of the exercise price for the shares of Common Stock being purchased under the Stock Option and by giving notice to the Company, to elect (within the Exercise Period) to surrender all or part of the Stock Option to the Company and to receive cash, within 30 days of such notice, in an amount equal to the amount by which the Change of Control Price per share of Common Stock on the date of such election shall exceed the exercise price per share of Common Stock under the Stock Option (the "Spread") multiplied by the number of shares of Common Stock granted under the Stock Option as to which the right granted under this Section shall have been exercised. 13. Amendment, Suspension, or Termination of this Plan; Amendment of Outstanding Awards. (a) Amendment, Suspension, or Termination of this Plan. The Board of Directors may amend, suspend, or terminate this Plan at any time. Stockholder approval for any such amendment will be required only to the extent necessary to preserve the exemption provided by Rule 16b-3 for this Plan and Awards granted under this Plan. (b) Amendment of Outstanding Awards. The Committee may, in its discretion, amend the terms of any Award, including, waiving, in whole or in part, any restrictions or conditions applicable to, or accelerating the vesting of, any Award, prospectively or retroactively, but no such amendment may impair the rights of any Participant without his or her consent or cause Awards intended to qualify as performance based compensation under Section 162(m) to fail to so qualify. 14. Awards to Foreign Nationals and Employees Outside the United States. To the extent that the Committee deems appropriate to comply with foreign law or practice and to further the purpose of this Plan, the Committee may, without amending this Plan, (i) establish special rules applicable to Awards granted to Participants who are foreign nationals, are employed outside the United States, or both, including rules that differ from those set forth in this Plan, and (ii) grant Awards to such Participants in accordance with those rules. 10 11 15. Nonassignability. Unless otherwise determined by the Committee, (i) no Award granted under this Plan may be transferred or assigned by the Participant to whom it is granted other than by will, pursuant to the laws of descent and distribution, or pursuant to a qualified domestic relations order and (ii) an Award granted under this Plan may be exercised, during the Participant's lifetime, only by the Participant or by the Participant's guardian or legal representative; except that, no Incentive Stock Option may be transferred or assigned pursuant to a qualified domestic relations order or exercised, during the Participant's lifetime, by the Participant's guardian or legal representative. 16. Governing Law. The interpretation, validity, and enforcement of this Plan will, to the extent not governed by the Code or the securities laws of the United States, be governed by the laws of the State of Ohio. 17. Rights of Employees. Nothing in this Plan will confer upon any Participant the right to continued employment by the Company or limit in any way the Company's right to terminate any Participant's employment at will. 18. Effective and Termination Dates. (a) Effective Date. This Plan will become effective on the date of its adoption by the Board of Directors. (b) Termination Date. This Plan will continue in effect until terminated by the Board of Directors. 11 EX-10.7 5 EXHIBIT 10.7 1 EXHIBIT 10.7 THE GEON COMPANY DEFERRED COMPENSATION PLAN FOR NON-EMPLOYEE DIRECTORS (Effective December 9, 1993) (Amended February 1, 1996, November 6, 1996, and November 4, 1998) ARTICLE I PURPOSE OF THE PLAN The purpose of The Geon Company (the "Company") Deferred Compensation Plan for Non-Employee Directors is to provide any Non-Employee Director of the Company the option to defer receipt of the compensation payable for services as a Director and to build loyalty to the Company through increased ownership in the Company's Common Stock. ARTICLE II DEFINITIONS As used herein, the following words shall have the meaning stated after them unless otherwise specifically provided: 2.1 "Calendar Year" shall mean the twelve month period January 1 through December 31. 2.2 "Change of Control" shall mean: (i) The acquisition by any individual, entity or group (within the meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of 1934, as amended (the "Exchange Act")) (a "Person") of beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of voting securities of the Company where such acquisition causes such Person to own 20% or more of the combined voting power of the then outstanding voting securities of the Company entitled to vote generally in the election of directors (the "Outstanding Company Voting Securities"); provided, however, that for purposes of this subsection (a), the following acquisitions shall not be deemed to result in a Change of Control: (i) any acquisition directly from the Company, (ii) any acquisition by the Company, (iii) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company or (iv) any acquisition by any corporation pursuant to a transaction that complies with clauses (i), (ii) and (iii) of subsection (c) below; provided, further, that if any Person's beneficial ownership of the Outstanding Company Voting Securities reaches or exceeds 20% as a result of a transaction described in clause (i) or (ii) above, and such Person subsequently acquires beneficial ownership of additional voting securities of the Company, such 2 subsequent acquisition shall be treated as an acquisition that causes such Person to own 20% or more of the Outstanding Company Voting Securities; and provided, further, that if at least a majority of the members of the Incumbent Board determines in good faith that a Person has acquired beneficial ownership (within the meaning of Rule 13d-3 promulgated under the Exchange Act) of 20% or more of the Outstanding Company Voting Securities inadvertently, and such Person divests as promptly as practicable a sufficient number of shares so that such Person beneficially owns (within the meaning of Rule 13d-3 promulgated under the Exchange Act) less than 20% of the Outstanding Company Voting Securities, then no Change of Control shall have occurred as a result of such Person's acquisition; or (ii) individuals who, as of November 6, 1996, constitute the Board (the "Incumbent Board") cease for any reason to constitute at least a majority of the Board; provided, however, that any individual becoming a director subsequent to November 6, 1996 whose election, or nomination for election by the Company's shareholders, was approved by a vote of at least a majority of the directors then comprising the Incumbent Board shall be considered as though such individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual or threatened election contest with respect to the election or removal of directors or other actual or threatened solicitation of proxies or consents by or on behalf of a Person other than the Board; or (iii) The consummation of a reorganization, merger or consolidation or sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation ("Business Combination"); excluding, however, such a Business Combination pursuant to which (i) all or substantially all of the individuals and entities who were the beneficial owners of the Outstanding Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than 60% of, respectively, the then outstanding shares of common stock and the combined voting power of the then outstanding voting securities entitled to vote generally in the election of directors, as the case may be, of the corporation resulting from such Business Combination (including, without limitation, a corporation that as a result of such transaction owns the Company or all or substantially all of the Company's assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership, immediately prior to such Business Combination of the Outstanding Company Voting Securities, (ii) no Person (excluding any employee benefit plan (or related trust) of the Company or such corporation resulting from such Business Combination) beneficially owns, directly or indirectly, 20% or more of, respectively, the then outstanding shares of common stock of the corporation resulting from such Business Combination or the combined voting power of the then outstanding voting securities of such -2- 3 corporation except to the extent that such ownership existed prior to the Business Combination and (iii) at least a majority of the members of the board of directors of the corporation resulting from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for such Business Combination; or (iv) approval by the shareholders of the Company of a complete liquidation or dissolution of the Company. 2.3 "Committee" shall mean the Compensation Committee described in Section 8.1 hereof. 2.4 "Common Stock" shall mean the Common Stock, par value $0.10 per share, of the Company. 2.5 "Company" shall mean The Geon Company. 2.6 "Director" shall mean any non-employee director of the Company. ARTICLE III ELECTIONS BY DIRECTORS 3.1 Election to Defer. A Director may elect to defer receipt of the compensation payable to him or her for future services as a Director. Such election shall be made on an election form specified by the Committee ("Election Form"). Such election shall indicate the portion of the Director's compensation to be invested in an interest-bearing account and the portion of such compensation to be invested in Common Stock. 3.2 Effectiveness of Elections. Elections shall be effective and irrevocable upon the delivery of an Election Form to the Committee. Notwithstanding anything to the contrary set forth herein, the effective date of any transaction in which amounts deferred hereunder are invested in Common Stock shall be not less than six months after the date of such election. Subject to the provisions of Article VI, amounts deferred pursuant to such elections shall be distributed at the time and in the manner set forth in such election. 3.3 Amendment and Termination of Elections. A Director may terminate or amend his or her election to defer receipt of compensation by written notice delivered to the Committee six months prior to the commencement of the period with respect to which such compensation will be earned. Amendments which serve only to change the beneficiary designation shall be permitted at any time and as often as necessary. Amounts credited to a Director's Account pursuant to Section 5.2 hereof prior to the effective date of any termination or amendment shall not be affected thereby and shall be paid at the time and in the manner specified in the election form in effect when the deferral occurred. -3- 4 ARTICLE IV COMMON STOCK AVAILABLE UNDER THE PLAN 4.1 Common Stock. The aggregate number of shares of Common Stock that may be granted under this Plan in any fiscal year of the Company during the term of this Plan will be equal to one tenth of one percent (0.1 %) of the number of shares of Common Stock outstanding as of the first day of that fiscal year. 4.2 Adjustment. In the event of any change in the Common Stock of the Company by reason of a merger, consolidation, reorganization, or similar transaction, or in the event of a stock dividend, stock split, or distribution to shareholders (other than normal cash dividends), the Committee will adjust the number and class of shares that may be issued under this Plan, the number and class of shares subject to outstanding deferrals, and the fair market value of the Common Stock, and other determinations applicable to outstanding awards. ARTICLE V ACCOUNTS 5.1 Accounts. The Company shall establish and maintain a Deferred Compensation Account (an "Account") for each Director who elects to defer compensation under the Plan. If the Director elects to have deferred compensation invested in an interest-bearing account, the Company shall credit the Account of the Director with an amount equal to one hundred percent (100%) of the compensation deferred pursuant to this Plan. In the event that a Director elects to have some or all of his or her compensation invested in Common Stock, then the Company shall credit the Account of the Director with an amount equal to one hundred twenty-five percent (125%) of such compensation, in the form of a number of shares of Common Stock, valued at its Fair Market Value. As used herein, the Fair Market Value of Common Stock shall be the average of the high and low prices of the Company's Common Stock as reported on the composite tape for securities listed on the New York Stock Exchange for the date immediately preceding the date of crediting the Account, provided that if no sales of Common Stock were made on said exchange on that date, the Fair Market Value shall be the average of the high and low prices of Common Stock as reported on said composite tape for the preceding day on which sales of Common Stock were made on said Exchange. The Accounts shall be credited as of the date on which the compensation would otherwise have been paid to the Director, if not deferred under the Plan. 5.2 Adjustment of Accounts. As of December 31 of each Calendar Year and on such other dates as the Committee directs, the fair market value of the Account of each Director shall be determined by crediting to the Account an amount equal to the income earned during the Calendar Year, or other appropriate period, the number of shares of Common Stock credited to the Account, and then determining the fair market value of the shares and other amounts credited to the Account. -4- 5 ARTICLE VI PAYMENT OF ACCOUNTS 6.1 Time of Payment. Payment of the amount credited to a Director's Account shall commence upon a date which is not more than thirty days after the earlier of (i) the attainment of the date specified (not younger than age 55) in his Election Form or (ii) upon a Change of Control. 6.2 [WITH RESPECT TO AMOUNTS DEFERRED PRIOR TO JANUARY 1, 1996] Method of Payment. The amount credited to a Director's Deferred Compensation Account shall be paid, in whole or in part, to the Director in a lump sum and/or in annual installments over a period of not more than ten years as specified in each Director's Election Form. Deferred Compensation Accounts shall be paid in kind, in cash, or shares of Common Stock, as credited to the Account. [WITH RESPECT TO AMOUNTS DEFERRED FROM AND AFTER JANUARY 1, 1996] Method of Payment. The amount credited to a Director's Deferred Compensation Account shall be paid, in whole or in part, to the Director in a lump sum and/or in annual installments over a period of not more than ten years as specified in each Director's Election Form. A Director may elect to change his or her original payment period election, as specified in such Director's Election Form; provided, that (i) such change is approved by the Committee, (ii) the election to change is made at least 18 months prior to date specified in the electing Director's Election Form on which payment of the amount credited to the Director's account is to commence, and (iii) a Director may make such an election to change only one time, an such election to change shall apply to all of the Director's Election Forms with respect to amounts deferred under the Plan from and after January 1, 1996. In the event that a Director who makes an election to change is a member of the Committee, such Director shall abstain from the Committee's determination whether or not to approve the change. Deferred Compensation Accounts shall be paid in kind, in cash, or shares of Common Stock, as credited to the Account. 6.3 Hardship Distribution. Prior to the time a Director's Account becomes payable, the Committee, in its sole discretion, may elect to distribute all or a portion of the Director's Account in the event such Director requests a distribution on account of severe financial hardship. For purposes of this Plan, severe financial hardship shall be deemed to exist in the event the Committee determines that a Director needs a distribution to meet immediate and heavy financial needs resulting from a sudden or unexpected illness or accident of the Director or a member of his or her family, loss of the Director's property due to casualty, or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond the control of the Director. A distribution based on financial hardship shall not exceed the amount required to meet the immediate financial need created by the hardship. The amount of a Director's Account shall be reduced by the amount of any hardship distribution to such Director. 6.4 Designation of Beneficiary. Upon the death of a Director, the amount credited to his or her Account shall be paid to the beneficiary or beneficiaries designated by him or her. If there is no designated beneficiary, or no designated beneficiary surviving at a Director's death, -5- 6 payment of a Director's Account shall be made to his or her estate. Beneficiary designations shall be made in writing. A Director may designate a new beneficiary or beneficiaries at any time by notifying the Committee. 6.5 Taxes. In the event any taxes are required by law to be withheld or paid from any payments made pursuant to the Plan, the appropriate amounts shall be deducted from such payments and transmitted to the appropriate taxing authority. ARTICLE VII CREDITORS 7.1 Claims of the Company's Creditors. The rights of a Director or his or her beneficiaries to any payment under the Plan shall be no greater than the rights of an unsecured creditor of the Company. ARTICLE VIII ADMINISTRATION 8.1 Appointment of Committee. The Board of Directors of the Company shall appoint a Committee consisting of not less than three persons to administer the Plan. Members of the Committee shall hold office at the pleasure of the Board of Directors and may be dismissed at any time with or without cause. Such persons serving on the Committee need not be members of the Board of Directors of the Company. 8.2 Powers of the Committee. The Committee shall administer the Plan and resolve all questions of interpretation arising under the Plan with the help of legal counsel, if necessary. Whenever directions, designations, applications, requests or other notices are to be given by a Director under the Plan, they shall be filed with the Committee. The Committee shall have no discretion with respect to Plan contributions or distributions but shall act in an administrative capacity only. Except as provided in the immediately following sentence, all decisions by the Committee will be made with the approval of not less than a majority of its members. In furtherance and not in limitation of the authority granted in clause (vi) of this paragraph, any interpretation by a majority of the Incumbent Directors then serving on the Committee as to whether a sale or other disposition of assets by the Company or an acquisition of assets of another corporation constitutes a "sale or other disposition of all or substantially all of the assets of the Company or the acquisition of assets of another corporation" for purposes of clause (iii) of the definition of "Change of Control" in Section 2.2 hereof shall be final and binding for all purposes of this Plan and any Accounts hereunder, notwithstanding that the transaction in question was, or is contemplated to be, submitted to stockholders of the Company for their approval and notwithstanding such approval -6- 7 ARTICLE IX MISCELLANEOUS 9.1 Term of Plan. The Company reserves the right to amend or terminate the Plan at any time; provided, however, that no amendment or termination shall affect the rights of Directors to amounts previously credited to their Accounts pursuant to Section 5.1 or to future income to be credited to their Accounts pursuant to Section 5.2. 9.2 Assignment. No right or interest of any Director (or any person claiming through or under such Director) in any benefit or payment herefrom other than the surviving spouse of such Director after he or she is deceased, shall be assignable or transferable in any manner or be subject to alienation, anticipation, sale, pledge, encumbrance, or other legal process or in any manner be liable for or subject to the debts or liabilities of such Director. If any Director or any such person (other than the surviving spouse of such Director after he or she is deceased) shall attempt to or shall transfer, assign, alienate, anticipate, sell, pledge, or otherwise encumber his or her benefits hereunder or any part thereof, or if by reason of his or her bankruptcy or other event happening at any time such benefits would devolve upon anyone else or would not be enjoyed by him or her, then the Committee, in its discretion, may terminate his or her interest in any such benefit to the extent the Committee considers necessary or advisable to prevent or limit the effects of such occurrence. Termination shall be effected by filing a written "termination declaration" with the Committee records and making reasonable efforts to deliver a copy to such Director or his or her legal representative. As long as any Director is alive, any benefits affected by the termination may, in the Committee's sole and absolute judgment, be paid to or expended for the benefit of such Director, his or her spouse, his or her children or any other person or persons in fact dependent upon him or her in such a manner as the Committee shall deem proper. Upon the death of any Director, all benefits withheld from him or her and not paid to others in accordance with the preceding sentence shall be distributed to such Director's estate or to his or her creditors and if such Director shall have descendants, including adopted children, then living, distribution shall be made to such Director's then living descendants, including adopted children, per stirpes. 9.3 Effective Date of Plan. The Plan shall be effective as of December 9, 1993, subject to approval by the stockholders of the Company. Any amounts credited to a Director's Deferred Compensation Account prior to such stockholder approval shall be contingent on such approval. -7- EX-21 6 EXHIBIT 21 1 EXHIBIT 21 THE GEON COMPANY SUBSIDIARIES
Jurisdiction of Name Incorporation - ---- --------------- 1997 Chlor-Alkali Venture Inc. Alabama The Geon Company Australia Limited Australia Auseon Limited Australia Australian Vinyls Corporation (1) Australia Flexible Products Company of Australasia, PTY, Ltd. Australia Geon Canada Inc. Canada Synergistics Industries Limited Canada (4) LP Holdings, Inc. Canada Synergistics Industries (CO), Inc. Colorado (5) Geon Development Inc. Delaware Synergistics Chemicals Inc. Delaware (5) La Porte Chemicals Corp. Delaware Lincoln & Southern Railroad Company Delaware Polymer Diagnostics Inc. Delaware Sunbelt Chlor-Alkali Partnership (2) Delaware (3) Synergistics Industries (NJ), Inc. Delaware (5) Wilflex, Inc. Delaware (6) Geon Engineering Vinyls Limited England Hydro Geon (2) England (3) Adchem, Inc. Georgia (6) SPC Geon PTE LTD. (2) Singapore Synergistics Industries (TX), Inc. Texas Inversiones The Geon Company de Venezuela C.A. Venezuela Plast-O-Meric, Inc. Wisconsin
Notes: (1) Owned 37.4% by the Company (2) Owned 50% by the Company. (3) Partnership (4) Effective 1/1/99, this entity was merged into Geon Canada Inc. (5) These U.S. Synergistics companies were merged into the parent (The Geon Company) effective 1/1/99. (6) Adchem, Inc. and Wilflex, Inc., were merged into Plast-O-Meric, Inc. effective 1/1/99. EX-23 7 EXHIBIT 23 1 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3 No. 33-80522) of The Geon Company and in the related prospectus, in the Registration Statement (Form S-8 No. 33-92398) pertaining to The Geon Retirement Savings Plan, in the Registration Statement (Form S-8 No. 33-80262) pertaining to The Geon Company Deferred Compensation Plan for Non-Employee Directors, in the Registration Statement (Form S-8 No. 33-62112) pertaining to The Geon Company Incentive Stock Plan, in the Registration Statement (Form S-8 No. 33-65520) pertaining to The Geon Company Retirement Plus Savings Plan, and in the Registration Statement (Form S-8 No. 33-65518) pertaining to The Geon Company Retirement Plus Savings Plan for Wage Employees of our report dated January 28, 1999, with respect to the consolidated financial statements and schedule of The Geon Company included in this Annual Report (Form 10-K) for the year ended December 31, 1998. /s/ ERNST & YOUNG LLP Cleveland, Ohio March 29, 1999 EX-27 8 EXHIBIT 27
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE CONSOLIDATED BALANCE SHEETS OF THE GEON COMPANY AND SUBSIDIARIES AS OF DECEMBER 31, 1998 AND DECEMBER 31, 1997 AND THE RELATED CONSOLIDATED STATEMENTS OF INCOME FOR THE YEARS THEN ENDED AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 USD YEAR DEC-31-1998 JAN-01-1998 DEC-31-1998 1 14 0 74 4 114 235 1,205 762 802 257 135 0 0 3 211 802 1,284 1,284 1,093 1,247 (1) 0 15 24 10 14 0 0 0 14 .60 .58
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