-----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, Nf3MYgcBLxwJ2HI5pgcPYSN+hbMrXwczmugC+0r2PYe6j9bZQRF1cb5IcsZXl7nX XCNaUsFe53KJbq26v1kbgg== 0000100790-99-000008.txt : 19990326 0000100790-99-000008.hdr.sgml : 19990326 ACCESSION NUMBER: 0000100790-99-000008 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990325 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNION CARBIDE CORP /NEW/ CENTRAL INDEX KEY: 0000100790 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 131421730 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-01463 FILM NUMBER: 99572711 BUSINESS ADDRESS: STREET 1: 39 OLD RIDGEBURY RD CITY: DANBURY STATE: CT ZIP: 06817-0001 BUSINESS PHONE: 2037942000 MAIL ADDRESS: STREET 1: 39 OLD RIDGEBURY RD CITY: DANBURY STATE: CT ZIP: 06817-0001 FORMER COMPANY: FORMER CONFORMED NAME: UNION CARBIDE CORP DATE OF NAME CHANGE: 19890806 FORMER COMPANY: FORMER CONFORMED NAME: UNION CARBIDE & CARBON CORP DATE OF NAME CHANGE: 19710317 10-K 1 ANNUAL REPORT ON FORM 10-K Securities and Exchange Commission, Washington, D.C. 20549 Annual Report on Form 10-K for the year ended December 31, 1998. Filed pursuant to Section 13 of the Securities Exchange Act of 1934. Commission file number 1-1463 Union Carbide Corporation 1998 10-K Union Carbide Corporation Tel. (203) 794-2000 39 Old Ridgebury Road State of incorporation: New York Danbury, Connecticut 06817-0001 IRS identification number: 13-1421730 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock ($1 par value) New York Stock Exchange Chicago Stock Exchange, Incorporated The Pacific Stock Exchange Incorporated Share Purchase Rights Plan New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No 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] At February 28, 1999, 132,990,557 shares of common stock were outstanding. Non-affiliates held 132,302,868 of those shares. The aggregate market value of the non-affiliate shares was $5.821 billion. Documents incorporated by reference: Annual report to stockholders for the year ended December 31, 1998 (Parts I and II) Proxy statement for the annual meeting of stockholders to be held on April 28, 1999 (Part III) Table of Contents Part I Item 1: Business 1 Item 2: Properties 3 Item 3: Legal Proceedings 5 Item 4: Submission of Matters to a Vote of Security Holders 5 Part II Item 5: Market for Registrant's Common Equity and Related Stockholder Matters 6 Item 6: Selected Financial Data 6 Item 7: Management's Discussion and Analysis of Financial Condition and Results of Operations 6 Item 7a: Quantitative and Qualitative Disclosures About Market Risk 6 Item 8: Financial Statements and Supplementary Data 6 Item 9: Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 6 Part III Item 10: Directors and Executive Officers of the Registrant 7 Item 11: Executive Compensation 8 Item 12: Security Ownership of Certain Beneficial Owners and Management 8 Item 13: Certain Relationships and Related Transactions 8 Part IV Item 14: Exhibits, Financial Statement Schedules and Reports on Form 8-K 9 Signatures 12 Exhibit Index 13 Cautionary statement: All statements in this Annual Report on Form 10-K that do not reflect historical information are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 (as amended). Forward-looking statements include statements concerning plans; objectives; strategies; anticipated future events or performance; sales; cost, expense and earnings expectations; the Year 2000 issue; the euro; interest rate and currency risk management; the chemical markets in 1999 and beyond; cost reduction targets; the corporation's share price; earnings and profitability targets; development, production and acceptance of new products and process technologies; ongoing and planned capacity additions and expansions; joint ventures; Management's Discussion & Analysis; and any other statements that do not reflect historical information. These include statements incorporated herein by reference to the 1998 annual report to stockholders. Such forward-looking statements are subject to risks and uncertainties. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include the supply/demand balance for the corporation's products; customer inventory levels; competitive pricing pressures; feedstock availability and costs; changes in industry production capacities and operating rates; currency exchange rates; interest rates; global economic conditions, particularly in Asia and Latin America; disruption in transportation facilities; competitive technology positions; failure by the corporation to achieve technology objectives, achieve cost reduction targets or complete projects on schedule and on budget; and inability to obtain new customers or retain existing ones. Some of these factors are discussed further in Part I, Item 1: Business. Definition of Terms: See page 48 of the 1998 annual report to stockholders. Terms defined there are used herein. Printed on Recycled, Recyclable Paper Part I Item 1. Business General-Union Carbide operates in two business segments of the chemicals and plastics industry, Specialties & Intermediates and Basic Chemicals & Polymers. Specialties & Intermediates converts basic and intermediate chemicals into a diverse portfolio of chemicals and polymers serving industrial customers in many markets. This segment also provides technology services, including licensing, to the oil and gas and petrochemicals industries. The Basic Chemicals & Polymers segment converts hydrocarbon feedstocks, principally liquefied petroleum gas and naphtha, into ethylene or propylene used to manufacture polyethylene, polypropylene, ethylene oxide and ethylene glycol for sale to third-party customers, as well as propylene, ethylene, ethylene oxide and ethylene glycol for consumption by the Specialties & Intermediates segment. The profitability of the Basic Chemicals & Polymers segment of the chemicals and plastics industry is highly cyclical, whereas that of the Specialties & Intermediates segment is less cyclical. Consequently, Union Carbide's results are subject to the swings of the business cycle in both the highly volatile Basic Chemicals & Polymers segment and the less volatile Specialties & Intermediates segment. In addition to its business segments, the corporation's Other segment includes its noncore operations and financial transactions other than derivatives designated as hedges, which are included in the same segment as the item being hedged. See pages 1, 4, 5, and "Results of Operations" on pages 7 through 13 of the 1998 annual report to stockholders for further information about Union Carbide's businesses, and Note 6 on pages 30 and 31 of the 1998 annual report to stockholders for financial information about Union Carbide's business segments. Union Carbide does not produce against a backlog of firm orders; production is geared primarily to the level of incoming orders and to projections of future demand. Inventories of finished products, work in process and raw materials are maintained to meet delivery requirements of customers and Union Carbide's production schedules. At year-end 1998, 11,627 people were employed in the manufacturing facilities, laboratories and offices of the corporation and its consolidated subsidiaries around the world. Raw Materials, Products and Markets-See information herein and in the 1998 annual report to stockholders on pages 4 and 5. All products and services are marketed throughout the world by the corporation's direct sales force, and where appropriate, augmented by a network of Union Carbide authorized distributors. Union Carbide believes it has contracts or commitments for, or readily available sources of, hydrocarbon feedstocks and fuel supplies to meet its anticipated needs in all major product areas. The corporation's operations are dependent upon the availability of hydrocarbon feedstocks and fuels which are purchased from diverse domestic and international sources, including independent oil and gas producers as well as integrated oil companies. The availability and price of hydrocarbon feedstocks, energy and finished products are subject to plant interruptions and outages and to market and political conditions in the U.S. and elsewhere. Operations and products at times may be adversely affected by legislation, government regulations, shortages, or international or domestic events. The business segments of Union Carbide are not dependent to a significant extent upon a single customer or a few customers. Patents; Trademarks; Research and Development-Union Carbide owns a large number of United States and foreign patents that relate to a wide variety of products and processes, has pending a substantial number of patent applications throughout the world and is licensed under a number of patents. These patents expire at various times over the next 20 years. Such patents and patent applications in the aggregate are material to Union Carbide's competitive position. No one patent is considered to be material; however, the patent portfolio relating to the UNIPOL process technology is, in the aggregate, considered to be material to the Specialties & Intermediates segment and the corporation as a whole. Union Carbide also has a large number of trademarks. The UNION CARBIDE, UCAR and UNIPOL trademarks are material; no other single trademark is material. - 1 - Part I (Cont.) Essentially all of Union Carbide's research and development activities are company-sponsored. The principal research and development facilities of Union Carbide are indicated in the discussion of Properties (Item 2) of this Form 10-K report. In addition to the facilities specifically indicated there, product development and process technology laboratories are maintained at some plants. Union Carbide expensed $143 million in 1998, $157 million in 1997, and $159 million in 1996 on company-sponsored research activities to develop new products, processes, or services, or to improve existing ones. Certain of Union Carbide's joint ventures conduct research and development within their business fields. Environment-See Costs Relating to Protection of the Environment on pages 13 and 14 of the 1998 annual report to stockholders and Note 17 on pages 42 and 43 thereof. Insurance-Union Carbide's policy is to obtain public liability and other insurance coverage at terms and conditions and at a cost that management considers fair and reasonable. Union Carbide's management believes it has a prudent risk management policy in effect and it periodically reviews its insurance coverage as to scope and amount and makes adjustments as deemed necessary. There is no assurance, however, that Union Carbide will not incur losses beyond the limits, or outside the coverage, of its insurance. Such insurance is subject to substantial corporate retentions. Competition-Each of the major product and service areas in which Union Carbide participates is highly competitive. In some instances competition comes from manufacturers of the same products as those produced by Union Carbide and in other cases from manufacturers of different products which may serve the same markets as those served by Union Carbide's products. Some of Union Carbide's competitors, such as companies principally engaged in petroleum operations, have more direct access to hydrocarbon feedstocks and some have greater financial resources than Union Carbide. The Specialties & Intermediates segment is characterized by differentiated products and is less subject to external changes in supply/demand relationships than the Basic Chemicals & Polymers segment. In the Specialties & Intermediates segment, competition is based primarily on product functionality and quality, with the more unique products commanding significant price premiums. Products manufactured by the Specialties & Intermediates segment may compete with a few competitors in many products to many competitors in selected products. In all, approximately 40 other major specialty chemical companies manufacture products competitive with those of the Specialties & Intermediates segment. The Basic Chemicals & Polymers segment is characterized by large volume commodity products and is subject to external changes in supply/demand relationships, including changes in the strength of the overall economy, customer inventory levels, industry manufacturing capacity and operating rates and raw material feedstock costs. Participants in this segment compete for business primarily on the basis of price and efficient delivery systems. The Basic Chemicals & Polymers segment competes with at least 12 other major producers of basic chemicals. See pages 4 and 5 of the 1998 annual report to stockholders for information about each segment's principal products. Union Carbide is a major marketer of petrochemical products throughout the world. Products that the corporation markets are largely produced in the United States, while products marketed by the corporation's joint ventures are principally produced outside the United States. Competitive products are produced throughout the world. Union Carbide's international operations face competition from local producers and global competitors and a number of risks inherent in carrying on business outside the United States, including regional and global economic conditions, risks of nationalization, expropriation, restrictive action by local governments and changes in currency exchange rates. See Note 6 on pages 30 and 31 of the 1998 annual report to stockholders for a summary of business and geographic segment information. - 2 - Part I (Cont.) Item 2. Properties In management's opinion, current facilities, together with planned expansions, will provide adequate production capacity to meet Union Carbide's planned business activities. Capital expenditures are discussed on pages 16 and 17 of the 1998 annual report to stockholders. Listed below are the principal manufacturing facilities operated by Union Carbide worldwide. Research and engineering facilities are noted within each of the domestic and international descriptions below. Most of the domestic properties are owned in fee. Union Carbide maintains numerous domestic sales offices and warehouses, the majority of which are leased premises, whose lease terms are scheduled to expire in five years or less. All principal international manufacturing properties are owned or held under long-term leases. International administrative offices, technical service laboratories, sales offices and warehouses are owned in some instances and held under relatively short-term leases in other instances. The corporation's headquarters is located in Danbury, Connecticut and is leased. Principal domestic manufacturing facilities and the principal products manufactured there are as follows: Location City Principal Product(s) Specialties & Intermediates Segment California Torrance Latexes Georgia Tucker Latexes Illinois Alsip Latexes Louisiana Greensburg Hydroxyethyl cellulose derivatives Louisiana Norco (Cypress Plant) Polypropylene catalysts Louisiana Taft Acrolein and derivatives, acrylic monomers, caprolactone, UV-curing resins, cycloaliphatic epoxides, glycol ethers, ethyleneamines, surfactants, ethanolamines, oxo alcohols Louisiana Taft (Star Plant) Polyethylene catalysts New Jersey Bound Brook Polyethylene compounds New Jersey Edison Lanolin and glucose derivatives New Jersey Somerset Latexes Puerto Rico Bayamon Latexes Texas Garland Latexes Texas Seadrift Ethanolamines, glycol ethers, ethylene- propylene rubber, polyethylene compounds for wire & cable, polyethylene catalysts Texas Texas City Organic acids and esters, alcohols, aldehydes, ketones, vinyl acetate, solution vinyl resins, heat transfer fluids West Virginia Institute Caprolactone derivatives, polyethylene glycol, hydroxyethyl cellulose, polyethylene oxide, surfactants, ethylidene norbornene, glutaraldehyde, ethylene oxide catalysts, acetone and derivatives West Virginia South Charleston Alkyl alkanolamines, miscellaneous specialty products, polyalkylene glycols, surfactants, specialty ketones, polyvinyl acetate resins, heat transfer fluids, aircraft deicing fluids, polyethylene catalysts Basic Chemicals & Polymers Segment Louisiana Norco (Cypress Plant) Polypropylene Louisiana Taft Ethylene oxide and glycol, olefins Louisiana Taft (Star Plant) Polyethylene Texas Seadrift Ethylene oxide and glycol, olefins, polyethylene, polypropylene Texas Texas City Olefins - 3 - Part I (Cont.) Research and development for the Specialties & Intermediates segment is carried on at technical centers in Bound Brook, Edison and Somerset, New Jersey; Tarrytown, New York; Cary, North Carolina; Houston and Texas City, Texas; and South Charleston, West Virginia. Research and development for the Basic Chemicals & Polymers segment is carried on at technical centers in Bound Brook and Somerset, New Jersey; Houston, Texas; and South Charleston, West Virginia. Process and design engineering for both segments is conducted at technical centers in South Charleston, West Virginia and in Houston, Texas, in support of domestic and foreign projects. Principal international manufacturing facilities and the principal products manufactured there are as follows: Country City Principal Product(s) Specialties & Intermediates Segment Belgium Vilvoorde Lanolin derivatives Belgium Zwijndrecht Hydroxyethyl cellulose Brazil Aratu Hydroxyethyl cellulose Brazil Cabo Vinyl acetate Brazil Cubatao Polyethylene Ecuador Guayaquil Latex Indonesia Jakarta Latex Malaysia Seremban Latex People's Republic of China Guangdong Latex, hydroxyethyl cellulose derivatives People's Republic of China Shanghai Latex Philippines Batangas Latex Sri Lanka Colombo Latex Thailand Rayong Latex United Arab Emirates Dubai Latex United Kingdom Wilton Glycol ethers, ethanolamines Basic Chemicals & Polymers Segment Canada Prentiss Ethylene glycol United Kingdom Wilton Ethylene oxide and glycol Research and development for the Specialties & Intermediates segment is carried on at international facilities in Zwijndrecht, Belgium; Cubatao, Brazil; Montreal East, Canada; Jurong, Singapore; and Meyrin (Geneva), Switzerland. Principal locations of the corporation's partnerships and corporate investments carried at equity and the principal products manufactured by those entities are as follows: Specialties and Intermediates: UOP LLC - a joint venture with Allied Signal Inc., accounted for as a partnership, which is a leading worldwide supplier of process technology, catalysts, molecular sieves and adsorbents to the petrochemical and gas- processing industries. UOP LLC has manufacturing facilities in Mobile, Alabama; Des Plaines and McCook, Illinois; Shreveport, Louisiana; Tonawanda, New York; Leverkusen, Germany; Reggio di Calabria, Italy; and Brimsdown, United Kingdom. UOP has several joint ventures with manufacturing sites in Hiratsuka and Yokkaichi, Japan and Shanghai, China. Research and development is performed at locations in Des Plaines, Illinois and Mobile, Alabama. Nippon Unicar Company Limited - a Japan-based producer of polyethylene and specialty polyethylene compounds and specialty silicone products. This joint venture with Tonen Chemical Corporation has manufacturing facilities in Kawasaki and Komatsu, Japan. - 4 - Part I (Cont.) Aspell Polymeres SNC - a France-based producer of polyethylene and specialty polyethylene compounds. This partnership with Elf Atochem S.A., a subsidiary of Elf Aquitaine, has a manufacturing facility in Gonfreville, France. World Ethanol Company - a U.S.-based partnership with Archer Daniels Midland Company that supplies ethanol worldwide. This partnership has manufacturing facilities in Texas City, Texas and Peoria, Illinois. Univation Technologies, LLC - a U.S.-based joint venture, accounted for as a partnership, with Exxon Chemical Company, a division of Exxon Corporation, for the licensing of polyethylene technology and research, development and commercialization of process technology and single site and other advanced catalysts for the production of polyethylene. The venture is also the sales agent for licensing of Union Carbide's UNIPOL technology. The company's headquarters is located in Houston, Texas. Research and development and engineering are performed at locations in Bound Brook, New Jersey; Baytown, Texas; Houston, Texas; and South Charleston, West Virginia. A catalyst manufacturing facility is located in Mont Belvieu, Texas. Asian Acetyls, Co. Ltd. - a South Korea-based producer of vinyl acetate monomers used in the production of emulsion resins by customers in the coatings and adhesives industries. This corporate joint venture with BP Chemicals and Samsung Fine Chemicals Company has a manufacturing facility in Ulsan, South Korea. Basic Chemicals and Polymers: Polimeri Europa S.r.l. - a Europe-based producer of olefins and polyethylene resins. This corporate joint venture with EniChem S.p.A. of Italy operates facilities at Brindisi, Ferrara, Gela, Priolo and Ragusa, Italy; Dunkirk, France; and Oberhausen, Germany. The venture is headquartered in Milan, Italy. EQUATE Petrochemical Company K.S.C. - a corporate joint venture with Petrochemical Industries Company and Boubyan Petrochemical Company, which manufactures ethylene, polyethylene and ethylene glycol at its world-scale petrochemicals complex in Shuaiba, Kuwait. Petromont and Company, Limited Partnership - a Canada-based olefins and polyethylene resins producer owned jointly with Ethylec Inc. This partnership has manufacturing facilities at Montreal and Varennes, Quebec, Canada. Alberta & Orient Glycol Company Limited - a corporate joint venture with Mitsui & Co., Ltd., Japan, and Far Eastern Textile Ltd., Taiwan. This Canada- based producer of ethylene glycol has a manufacturing facility in Prentiss, Alberta, Canada. Item 3. Legal Proceedings See Note 17 of Notes to Financial Statements on pages 42 and 43 of the 1998 annual report to stockholders. On November 23, 1998, the West Virginia Division of Environmental Protection issued a Proposed Order to the corporation alleging violations of hazardous waste regulations at the corporation's South Charleston, West Virginia plant. The Proposed Order seeks a civil penalty of $359,200. The corporation is contesting the alleged violations and proposed penalty. Item 4. Submission of Matters to a Vote of Security Holders The corporation did not submit any matters to a stockholder vote during the last quarter of 1998. - 5 - Part II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters Market and dividend information for the corporation's common stock is contained on pages 18, 19 and 45 of the 1998 annual report to stockholders. Information about the stock exchanges where the stock is traded in the United States is listed on page 46 of the 1998 annual report to stockholders. The declaration of dividends is a business decision made from time to time by the Board of Directors based on the corporation's earnings and financial condition and other factors the Board considers relevant. The number of stockholders of record of the corporation's common stock is contained on page 1 of the 1998 annual report to stockholders. Item 6. Selected Financial Data Information pertaining to consolidated operations is included under the captions "From the Income Statement" and "From the Balance Sheet" and dividend information is included under the caption "Other Data" in the Selected Financial Data on pages 18 and 19 of the 1998 annual report to stockholders. Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations See the information in the 1998 annual report to stockholders on pages 7 through 17. Item 7a. Quantitative and Qualitative Disclosures About Market Risk Information pertaining to Quantitative and Qualitative Disclosures About Market Risk is included under the caption "Interest Rate and Currency Risk Management" and "Foreign Operations" in Management's Discussion and Analysis on pages 8 and 9 of the 1998 annual report to stockholders. Item 8. Financial Statements and Supplementary Data The consolidated balance sheet of Union Carbide Corporation and subsidiaries at December 31, 1998 and 1997 and the consolidated statements of income, stockholders' equity and cash flows for each of the years in the three-year period ended December 31, 1998, together with the report thereon of KPMG LLP dated January 22, 1999, are contained on pages 20 through 44 of the 1998 annual report to stockholders. Quarterly income statement data are contained on page 45 of the 1998 annual report to stockholders. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Union Carbide has not had any disagreements covered by this item with KPMG LLP, its independent auditors. - 6 - Part III Item 10. Directors and Executive Officers of the Registrant For background information on the Directors of Union Carbide Corporation whose terms are expected to continue after the annual meeting of stockholders and persons nominated to become Directors, see pages 7 through 10 of the proxy statement for the annual meeting of stockholders to be held on April 28, 1999. The principal executive officers of the corporation are as follows. Data is as of March 25, 1999. Year First Name Age Position Elected William H. Joyce 63 Chairman of the Board, President and Chief Executive Officer 1993 Joseph S. Byck 57 Vice-President 1991 Bruce D. Fitzgerald 59 Vice-President, General Counsel and Secretary 1999 James F. Flynn 56 Vice-President 1993 Malcolm A. Kessinger 55 Vice-President 1991 Lee P. McMaster 56 Vice-President 1993 Joseph C. Soviero 60 Vice-President 1993 Roger B. Staub 64 Vice-President 1993 John K. Wulff 50 Vice-President, Chief Financial Officer and Controller 1988 There are no family relationships between any officers or directors of the corporation. There is no arrangement or understanding between any officer and any other person pursuant to which the officer was elected an officer. An officer is elected by the Board of Directors to serve until the next annual meeting of stockholders and until his successor is elected and qualified. The table on the next page gives a summary of the positions held during at least the past five years by each officer. Each of the officers has been employed by the corporation for the past five years. - 7 - Part III (Cont.) Name Position Years Held William H. Joyce Chairman of the Board, President and Chief Executive Officer 1996 to present President and Chief Executive Officer 1995 to 1995 President and Chief Operating Officer 1993 to 1995 Joseph S. Byck Vice-President 1991 to present Bruce D. Fitzgerald Vice-President, General Counsel and Secretary 1999 to present Deputy General Counsel 1987 to 1998 James F. Flynn Vice-President 1993 to present Malcolm A. Kessinger Vice-President 1991 to present Lee P. McMaster Vice-President 1993 to present Joseph C. Soviero Vice-President 1993 to present Roger B. Staub Vice-President 1993 to present John K. Wulff Vice-President, Chief Financial Officer and Controller 1996 to present Vice-President, Controller and Principal Accounting Officer 1989 to 1996 See "Section 16(a) Beneficial Ownership Reporting Compliance" on page 21 of the proxy statement for the annual meeting of stockholders to be held on April 28, 1999. Item 11. Executive Compensation See pages 17 through 19 of the proxy statement for the annual meeting of stockholders to be held on April 28, 1999. Item 12. Security Ownership of Certain Beneficial Owners and Management See pages 20 and 21 of the proxy statement for the annual meeting of stockholders to be held on April 28, 1999. Item 13. Certain Relationships and Related Transactions See page 10 of the proxy statement for the annual meeting of stockholders to be held on April 28, 1999. - 8 - Part IV Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K UNION CARBIDE CORPORATION (a) The following documents are filed as part of this report: 1. The consolidated financial statements set forth on pages 20 through 43 and the Independent Auditors' Report set forth on page 44 of the 1998 annual report to stockholders are incorporated by reference in this Annual Report on Form 10-K. 2. The Report on Schedule of KPMG LLP appears on page 10 of this Annual Report on Form 10-K. 3. The following schedule should be read in conjunction with the consolidated financial statements incorporated by reference in Item 8 of this Annual Report on Form 10-K. Schedules other than those listed have been omitted because they are not applicable. Page in this Form 10-K Report Valuation and Qualifying Accounts (Schedule II), three years ended December 31, 1998 11 (b) The corporation filed the following reports on Form 8-K for the three months ended December 31, 1998. 1. Form 8-K dated September 18, 1998, contained the corporation's Computation of Ratio of Earnings to Fixed Charges for the six months ended June 30, 1998 and the years ended December 31, 1997, 1996, 1995, 1994 and 1993 and the corporation's press release dated September 18, 1998. 2. Form 8-K dated December 8, 1998, contained the corporation's press release dated December 8, 1998. (c) Exhibits-See Exhibit Index on pages 13 through 16 for exhibits filed with this Annual Report on Form 10-K. - 9 - Part IV (Cont.) Report of Independent Auditors The Board of Directors Union Carbide Corporation Under date of January 22, 1999, we reported on the consolidated balance sheets of Union Carbide Corporation 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 years in the three-year period ended December 31, 1998, as contained on pages 20 through 43 in the 1998 annual report to stockholders. These consolidated financial statements and our report thereon are incorporated by reference in the Annual Report on Form 10-K for the year 1998. In connection with our audits of the aforementioned consolidated financial statements, we also have audited the related financial statement schedule as listed in Item 14(a)3. This financial statement schedule is the responsibility of the corporation's management. Our responsibility is to express an opinion on this financial statement schedule based on our audits. In our opinion, such financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein. KPMG LLP Stamford, Conn. January 22, 1999 - 10 - Part IV (Cont.) Schedule II-Valuation and Qualifying Accounts
Union Carbide Corporation and Consolidated Subsidiaries Deductions Items determined to be uncollectible, Additions less recovery Balance at Charged to Reclassified of amounts Balance at beginning costs and from other previously end of of period expenses accounts written off period Millions of dollars, year ended December 31, 1998 Allowance for doubtful accounts $11 $ 3 $ 8 $ - $22 Millions of dollars, year ended December 31, 1997 Allowance for doubtful accounts $10 $ 3 $ - $ 2 $11 Millions of dollars, year ended December 31, 1996 Allowance for doubtful accounts $11 $ 1 $ - $ 2 $10
- 11 - Signatures Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the corporation has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Union Carbide Corporation March 25, 1999 /s/ John K. Wulff by: John K. Wulff Vice-President, Chief Financial Officer and Controller Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the corporation and in the capacities indicated on March 25, 1999. /s/William H. Joyce /s/C. Fred Fetterolf /s/Ronald L. Kuehn, Jr. William H. Joyce C. Fred Fetterolf Ronald L. Kuehn, Jr. Director, Chairman of Director Director the Board, President and Chief Executive Officer /s/John K. Wulff /s/Rainer E. Gut /s/Rozanne L. Ridgway John K. Wulff Rainer E. Gut Rozanne L. Ridgway Vice-President, Chief Director Director Financial Officer and Controller /s/Vernon E. Jordan, Jr. /s/James M. Ringler Vernon E. Jordan, Jr. James M. Ringler Director Director /s/Robert D. Kennedy /s/Paul J. Wilhelm Robert D. Kennedy Paul J. Wilhelm Director Director - 12 - Exhibit Index Exhibit No. 3.1 Amended and Restated Certificate of Incorporation as filed June 25, 1998 (See Exhibit 3 of the corporation's June 30, 1998 Form 10-Q). 3.2 By-Laws of the corporation, amended as of December 3, 1996 (See Exhibit 3.2.1 of the corporation's 1996 Form 10-K). 4.1 Indenture dated as of June 1, 1995, between the corporation and the Chase Manhattan Bank (formerly Chemical Bank), Trustee (See Exhibit 4.1.2 to the corporation's Form S-3 effective October 13, 1995, Reg. No. 33-60705). 4.2 The corporation will furnish to the Commission upon request any other debt instrument referred to in item 601(b)(4)(iii) (A) of Regulation S-K. 4.3.1 Rights Agreement, dated as of July 26, 1989, as amended and restated as of May 27, 1992, between the corporation and Chase Mellon Shareholder Services Inc. (successor to Manufacturers Hanover Trust Company), as Rights Agent (See Exhibit 4(a) to the corporation's Form 8 filed with the Commission on June 1, 1992, file number 1-10297). 4.3.2 Amendment to Rights Agreement, dated as of December 3, 1996, between the corporation and Chase Mellon Shareholder Services Inc. as Successor Rights Agent (See Exhibit 99.1 of the corporation's Form 8-K dated December 3, 1996). 10.1 Indemnity Agreement dated as of December 8, 1997, between the corporation and James F. Flynn. The Indemnity Agreement filed with the Commission is substantially identical in all material respects, except as to the parties thereto and dates thereof, with Indemnity Agreements between the corporation and each other person who is a director or executive officer of the corporation (See Exhibit 10.1 of the corporation's 1997 Form 10-K). 10.2.1 1988 Union Carbide Long-Term Incentive Plan. 10.2.2 Amendment to the 1988 Union Carbide Long-Term Incentive Plan effective June 1, 1989 (See Exhibit 10.14.2 of the corporation's 1994 Form 10-K). 10.2.3 Amendment to the 1988 Union Carbide Long-Term Incentive Plan effective August 1, 1989 (See Exhibit 10.14.3 of the corporation's 1994 Form 10-K). 10.2.4 Resolutions adopted by the Board of Directors of the corporation on February 26, 1992, with respect to stock options granted under the 1988 Union Carbide Long-Term Incentive Plan (See Exhibit 10.2.4 of the corporation's 1997 Form 10-K). 10.2.5 Resolutions adopted by the Compensation and Management Development Committee of the Board of Directors of the corporation on June 30, 1992, with respect to the 1988 Union Carbide Long-Term Incentive Plan (See Exhibit 10.2.5 of the corporation's 1997 Form 10-K). 10.2.6 Amendment to the 1988 Union Carbide Long-Term Incentive Plan effective October 1, 1997 (See Exhibit 10.2.6 of the corporation's 1997 Form 10-K). 10.3.1 1983 Union Carbide Bonus Deferral Program (See Exhibit 10.4.1 of the corporation's 1996 Form 10-K). 10.3.2 Amendment to the 1983 Union Carbide Bonus Deferral Program effective January 1, 1992 (See Exhibit 10.3.2 of the corporation's 1997 Form 10-K). 10.4.1 1984 Union Carbide Cash Bonus Deferral Program (See Exhibit 10.5.1 of the corporation's 1996 Form 10-K). 10.4.2 Amendment to the 1984 Union Carbide Cash Bonus Deferral Program effective January 1, 1986 (See Exhibit 10.5.2 of the corporation's 1996 Form 10-K). - 13 - Exhibit Index (Cont.) Exhibit No. 10.4.3 Amendment to the 1984 Union Carbide Cash Bonus Deferral Program effective January 1, 1992 (See Exhibit 10.4.3 of the corporation's 1997 Form 10-K). 10.5.1 Equalization Benefit Plan for Participants of the Retirement Program Plan for Employees of Union Carbide Corporation and its Participating Subsidiary Companies (See Exhibit 10.6.1 of the corporation's 1996 Form 10-K). 10.5.2 Amendment to the Equalization Benefit Plan effective January 1, 1994 (See Exhibit 10.18.2 of the corporation's 1994 Form 10-K). 10.6.1 Supplemental Retirement Income Plan (See Exhibit 10.7.1 of the corporation's 1996 Form 10-K). 10.6.2 Amendment to the Supplemental Retirement Income Plan effective January 1, 1994 (See Exhibit 10.19.3 of the corporation's 1994 Form 10-K). 10.6.3 Amendment to the Supplemental Retirement Income Plan effective January 1, 1995 (See Exhibit 10.18.3 of the corporation's 1995 Form 10-K). 10.7 Union Carbide Non-Employee Directors' Compensation Deferral Plan effective February 1, 1997 (See Exhibit 10.7 of the corporation's 1997 Form 10-K). 10.8 Severance Compensation Agreement, dated February 10, 1998, between the corporation and Ron J. Cottle. The Severance Compensation Agreement filed with the Commission is substantially identical in all material aspects, except as to the parties thereto and dates thereof, with Agreements between the corporation and other officers and employees of the corporation (See Exhibit 10.8 of the corporation's 1997 Form 10-K). 10.9 Resolution adopted by the Board of Directors of the corporation on November 30, 1988, with respect to an executive life insurance program for officers and certain other employees. 10.10 1997 Union Carbide Variable Compensation Plan effective July 1, 1997 (See Exhibit 10.10 of the corporation's 1997 Form 10-K). 10.11.1 Union Carbide Corporation Benefits Protection Trust, amended and restated effective August 29, 1997 (See Exhibit 10.11.1 of the corporation's 1997 Form 10-K). 10.11.2 Amendment to the Union Carbide Corporation Benefits Protection Trust effective November 1, 1997 (See Exhibit 10.11.2 of the corporation's 1997 Form 10-K). 10.12 Resolutions adopted by the Board of Directors of the corporation on February 24, 1988, with respect to the purchase of annuities to cover liabilities of the corporation under the Equalization Benefit Plan for Participants of the Retirement Program Plan for Employees of Union Carbide Corporation and its Participating Subsidiary Companies and the Supplemental Retirement Income Plan (See Exhibit 10.25 of the corporation's 1994 Form 10-K). 10.13 Resolutions adopted by the Board of Directors of the corporation on June 28, 1989, with respect to the purchase of annuities to cover liabilities of the corporation under the Supplemental Retirement Income Plan (See Exhibit 10.26 of the corporation's 1994 Form 10-K). 10.14.1 Union Carbide Corporation Non-Employee Directors' Retirement Plan (See Exhibit 10.27 of the corporation's 1994 Form 10-K). 10.14.2 Amendment to the Union Carbide Corporation Non-Employee Directors' Retirement Plan effective May 1, 1997 (See Exhibit 10.14.2 of the corporation's 1997 Form 10-K). 10.15.1 1994 Union Carbide Long-Term Incentive Plan (See Exhibit 10.28 of the corporation's 1994 Form 10-K). - 14 - Exhibit Index (Cont.) Exhibit No. 10.15.2 Amendment to the 1994 Union Carbide Long-Term Incentive Plan effective October 1, 1997 (See Exhibit 10.15.2 of the corporation's 1997 Form 10-K). 10.16.1 Amendment and Restatement to Union Carbide Compensation Deferral Program effective October 1, 1995 (See Exhibit 10.28 of the corporation's 1995 Form 10-K). 10.16.2 Amendment to Union Carbide Compensation Deferral Program effective January 1, 1995 (See Exhibit 10.17.2 of the corporation's 1996 Form 10-K). 10.16.3 Amendment to Union Carbide Compensation Deferral Program effective December 31, 1996 (See Exhibit 10.17.3 of the corporation's 1996 Form 10-K). 10.17 Excess Long-Term Disability Plan effective January 1, 1994 (See Exhibit 10.30 of the corporation's 1994 Form 10-K). 10.18 1995 Union Carbide Performance Incentive Plan (See Appendix A of the corporation's proxy statement for the annual meeting of stockholders held on April 26, 1995). 10.19.1 1997 Union Carbide Long-Term Incentive Plan (See Appendix A of the corporation's proxy statement filed with the Commission March 12, 1997, file number: 001-01463). 10.19.2 Amendment to the 1997 Union Carbide Long-Term Incentive Plan effective April 23, 1997 (See Exhibit 10.19.2 of the corporation's 1997 Form 10-K). 10.20 1997 Stock Option Plan for Non-Employee Directors of Union Carbide Corporation (See Appendix B of the corporation's proxy statement filed with the Commission March 12, 1997, file number: 001-01463). 10.21 1997 Union Carbide Corporation EPS Incentive Plan (See Exhibit 10.21 of the corporation's 1997 Form 10-K). 10.22 The Mid-Career Hire Plan for Employees of Union Carbide Corporation and Its Participating Subsidiary Companies, effective December 3, 1996 (See Exhibit 10.22 of the corporation's 1997 Form 10-K). 10.23.1 Completion Guarantee dated September 15, 1996 by the corporation and its partner, Petrochemical Industries Company K.S.C., for the benefit of certain banks with respect to construction of a petrochemicals complex in Kuwait (See Exhibit 10.1 of the corporation's Form 10-Q for the quarter ended September 30, 1996). 10.23.2 Definitions Agreement dated September 15, 1996 among the corporation and various parties relating to Exhibit 10.23.1 (See Exhibit 10.2 of the corporation's Form 10-Q for the quarter ended September 30, 1996). 13 The corporation's 1998 annual report to stockholders (such report, except for those portions which are expressly referred to in this Form 10-K, is furnished for the information of the Commission and is not deemed "filed" as part of the Form 10-K). 21 Subsidiaries of the corporation. 23 Consent of KPMG LLP. 27.1 Financial Data Schedule for the year ended December 31, 1998. 27.2 Restated Financial Data Schedule for the years ended December 31, 1997 and 1996. -16- 27.3 Restated Financial Data Schedule for the three months ended March 31, 1997, the six months ended June 30, 1997 and the nine months ended September 30, 1997. Wherever an exhibit listed above refers to another exhibit or document (e.g., "See Exhibit 6 of . . ."), that exhibit or document is incorporated herein by such reference. A copy of any exhibit listed above may be obtained on written request to the Secretary's Department, Union Carbide Corporation, 39 Old Ridgebury Road, Danbury, CT 06817-0001. The charge for furnishing any exhibit is 25 cents per page plus mailing costs. - 16 - UC-1729 Printed in USA EX-10.2.1 2 1988 UNION CARBIDE LONG-TERM INCENTIVE PLAN Exhibit 10.2.1 1988 UNION CARBIDE LONG-TERM INCENTIVE PLAN 1988 UNION CARBIDE LONG-TERM INCENTIVE PLAN Section 1: Purpose. The purpose of the 1988 Union Carbide Long-Term Incentive Plan (hereinafter referred to as the "Plan") is to (a) provide incentives and rewards to those employees who are in a position to contribute to the long-term growth and profitability of the Corporation; (b) assist the Corporation and its subsidiaries and affiliates in attracting, retaining, and motivating employees with experience and ability; and (c) make the Corporation's compensation program competitive with those of other major employers. Section 2: Administration. The Plan shall be administered by a Committee of the Board of Directors (hereinafter referred to as the "Committee") appointed by the Board. Members of the Committee are not eligible to participate in the Plan and no member may have been eligible within one year prior to serving on the Committee. The Committee shall interpret the Plan, establish administrative regulations to further the purpose of the Plan, authorize awards to eligible participants and take any other action necessary for the proper operation of the Plan. All decisions and acts of the Committee shall be final and binding upon all participants. The Committee may set the option price, the number of options to be awarded and the number of shares to be awarded out of the total number of shares available for award, and delegate to the Chief Executive Officer of the Corporation the right to allocate awards among Employees who are not officers or directors of the Corporation within the meaning of the Exchange Act, such delegation to be subject to such terms and conditions as the Committee in its discretion shall determine. Section 3: Participation. This Plan is for Union Carbide Corporation and its subsidiaries and affiliates. Any Employee of Union Carbide Corporation or a subsidiary or affiliate serving in a managerial, administrative, or professional position which is recommended to, and authorized by, the Committee shall be eligible to participate in the Plan. Section 4: Awards. Awards under this Plan may be stock option awards, stock appreciation rights, exercise payment rights, grants of stock, or performance awards. The total number of shares of stock (including Restricted Stock, if any) optioned or granted under this Plan during the five year period of the Plan shall not exceed 15,000,000 shares. No participant may be granted, in the aggregate, awards which would result in the participant receiving more than 10% of the maximum number of shares available for award under the Plan. Solely for the purpose of computing the total number of shares of stock optioned or granted under this Plan, there shall not be counted any shares which have been forfeited and any shares covered by an option which, prior to such computation, has terminated in accordance with its terms or has been cancelled by the Participant or the Corporation. In the event of any change in the outstanding shares of the Corporation by reason of any stock split, stock dividend, recapitalization, merger, consolidation, combination or exchange of shares or other similar corporate change or in the event of any special distribution to the stockholders, the Committee shall make such equitable adjustments in the number of shares and prices per share applicable to options then outstanding and in the number of shares which are available thereafter for Stock Option Awards or other awards, both under the Plan as a whole and with respect to individuals, as the Committee determines are necessary and appropriate. Any such adjustment shall be conclusive and binding for all purposes of the Plan. Section 5: Stock Options. 5.1: The Corporation may award options to purchase common stock or Restricted Stock of the Corporation (hereinafter referred to as "Stock Option Awards") to such eligible Employees as the Committee, or the Chief Executive Officer of the Corporation, if the Committee in its discretion delegates the right to allocate awards pursuant to Section 2, authorizes and under such terms as the Committee establishes. The Committee shall determine with respect to each Stock Option Award whether a participant is to receive an Incentive Stock Option or a Non-Qualified Stock Option. 5.2: The option price of each share of stock subject to a Stock Option Award shall be the closing price of the common stock of the Corporation on the date the award is authorized as reported in the New York Stock Exchange-Composite Transactions. 5.3: A stock option by its terms shall not be transferable by the participant other than by will or the laws of descent and distribution, shall be of no more than 10 years' duration, and shall be exercisable only after the earlier of: (i) such period of time as the Committee shall determine but in no event less than one year following the date of grant of such award; (ii) the participant's death; (iii) the participant's Retirement; or (iv) a Change in Control of the Corporation, but only to the extent permitted under Section 5.5. An option is exercisable during a participant's lifetime only by the participant or the participant's legal guardian or legal representative. An option is only exercisable by a participant while the participant is in active employment with the Corporation except (i) during a nine-month period commencing on the date of a participant's death, (ii) in the case of a participant's Retirement, (iii) during a three-year period commencing on the date of a participant's termination of employment by the Corporation other than for cause, but only to the extent permitted under Section 5.5, (iv) during a three-year period commencing on the date of termination, by the participant or the Corporation, of employment after a Change in Control of the Corporation, unless such termination of employment is for cause, but only to the extent permitted under Section 5.5, or (v) if the Committee decides that it is in the best interest of the Corporation to permit individual exceptions. An option may not be exercised pursuant to this paragraph after the expiration date of the option. 5.4: An option may be exercised with respect to part or all of the shares subject to the option by giving written notice to the Corporation of the exercise of the option. The option price for the shares for which an option is exercised shall be paid on or within ten business days after the date of exercise in cash, in whole shares of common stock of the Corporation owned by the participant prior to exercising the option, or in a combination of cash and such shares of common stock. The value of any share of common stock delivered in payment of the option price shall be its Market Price on the date the option is exercised. 5.5: Clause (iv) of the first sentence and clauses (iii) and (iv) of the third sentence of Section 5.3 herein shall not apply to a stock option held by a 'disqualified individual' within the meaning of Section 280G(c) of the Code who is a party to an employment contract with the Corporation that grants such person severance benefits in the event that the employment is terminated subsequent to a change in control of the Corporation, or who is entitled to receive benefits pursuant to a severance plan in the event that the participant's employment is terminated after a change in control to the extent that the exercise of the option would cause such person to incur the tax prescribed in Section 4999 of the Code on 'excess parachute payments' within the meaning of Section 280G(b) of the Code. 5.6: In order to enable the Corporation to meet any applicable federal, state or local withholding tax requirements arising as a result of the exercise of a stock option, a participant shall pay the Corporation the amount of tax to be withheld or may elect to satisfy such obligation as follows: (i) in the case of a participant who is subject to Section 16(b) of the Exchange Act and who does not make an election under Section 83(b) of the Code, by delivering to the Corporation whole shares of common stock of the Corporation which were delivered to the participant pursuant to the exercise of the option for which the tax is being withheld, other shares of common stock of the Corporation owned by the participant prior to exercising the option, or a combination of cash and such shares of common stock, or (ii) in the case of all other participants, by having the Corporation withhold shares that otherwise would be delivered to the participant pursuant to the exercise of the option for which the tax is being withheld, by delivering to the Corporation other shares of common stock of the Corporation owned by the participant prior to exercising the option, or by making a payment to the Corporation consisting of a combination of cash and such shares of common stock. Such an election shall be subject to the following: (a) the election shall be made in such manner as may be prescribed by the Committee and the Committee shall have the right, in its discretion, to disapprove such election; (b) the election shall he made prior to the date to be used to determine the tax to be withheld and shall be irrevocable; (c) if the participant is a person subject to Section 16 of the Exchange Act, the election shall not be made within six months after the grant of the option, except that this limitation shall not apply in the event that the participant dies or becomes disabled prior to the expiration of such six month period, and shall be made either at least six months prior to the date to be used to determine the tax to be withheld or during a ten day period of the same type as is described in Section 6.5 hereof. The value of any share of common stock to be withheld by the Corporation or delivered to the Corporation pursuant to this Section 5.6 shall be the Market Price on the date to be used to determine the amount of tax to be withheld. 5.7: The Committee may, in its discretion, grant to holders of stock options the right to receive with respect to each share covered by an option payments of amounts equal to the regular cash dividends paid to holders of the Company's common stock during the period that the option is outstanding (such payments are hereinafter referred to as "Dividend Payments"). 5.8: The aggregate fair market value of all shares of stock with respect to which Incentive Stock Options are exercisable for the first time by a participant in any one calendar year, under this Plan or any other stock option plan maintained by the Corporation (or by any subsidiary or parent of the Corporation), shall not exceed $100,000. The fair market value of such shares of stock shall be the mean of the high and low prices of the common stock of the Corporation as reported in the New York Stock Exchange - Composite Transactions on the date the related stock option is granted (or on the next preceding day such stock was traded on a stock exchange included in the New York Stock Exchange - Composite Transactions if it was not traded on any such exchange on the date the related stock option is granted). Section 6: Stock Appreciation Rights. 6.1: The Committee may, in its discretion, grant stock appreciation rights to Employees who have received a Stock Option Award. The stock appreciation rights may relate to such number of shares, not exceeding the number of shares that the Employee may acquire upon exercise of a related stock option, as the Committee determines in its discretion. Upon exercise of a stock option by an Employee, the stock appreciation rights relating to the shares covered by such exercise shall terminate. Upon termination or expiration of a stock option, any unexercised stock appreciation rights related to that option shall also terminate. Upon exercise of stock appreciation rights, such rights and the related option to the extent of an equal number of shares shall terminate. 6.2: The Committee at its discretion may revoke at any time any unexercised stock appreciation rights granted to an Employee under this Plan, without compensation to such Employee. Revocation of an Employee's stock appreciation rights under this section shall not affect any related stock options granted to the Employee under this Plan. 6.3: Upon an Employee's exercise of some or all of the Employee's stock appreciation rights, the Employee shall receive an amount equal to the value of the Stock Appreciation for the number of rights exercised, payable in cash, common stock, Restricted Stock, or a combination thereof, at the discretion of the Committee. 6.4: The Committee shall have the discretion either to determine the form in which payment of a stock appreciation right will be made, or to consent to or disapprove the election of the Employee to receive cash in full or partial settlement of the right. Such consent or disapproval may be given at any time before or after the election to which it relates. Notwithstanding the foregoing provision, if an Employee exercises a stock appreciation right during the 60-day period commencing on the date of a Change in Control of the Corporation, the form of payment of such stock appreciation right shall be cash provided that such stock appreciation right was granted at least six months prior to the date of exercise, and shall be common stock if such stock appreciation right was granted six months or less prior to the date of exercise. Provided, however, that the previous sentence shall not apply to a 'disqualified individual' within the meaning of Section 280G(c) of the Code who is a party to an employment contract with the Corporation that grants such person severance benefits in the event that his employment is terminated subsequent to a Change in Control of the Corporation or who is entitled to receive benefits pursuant to a severance plan in the event that his employment is terminated after a Change in Control of the Corporation, to the extent that the exercise of the stock appreciation right would cause such participant to incur the tax prescribed in Section 4999 of the Code on 'excess parachute payments' within the meaning of Section 280G(b) of the Code. 6.5: Except in the case of a stock appreciation right that was granted at least six months prior to exercise and that is exercised for cash during the 60-day period commencing on the date of a Change in Control of the Corporation, any election by the Employee to receive cash in full or partial settlement of the stock appreciation right, as well as any exercise by the Employee of the Employee's stock appreciation right for such cash, shall be made only during the period beginning on the third business day following the date of release of the quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date. 6.6: Settlement for exercised stock appreciation rights may be deferred by the Committee in its discretion to such date and under such terms and conditions as the Committee may determine. 6.7: A stock appreciation right is only exercisable during the period when the stock option to which it is related is also exercisable. Section 7: Exercise Payments. 7.1: The Committee may, in its discretion, grant to holders of stock options the right to receive Exercise Payments relating to such number of shares covered by the holder's stock options as the Committee determines in its discretion. Exercise Payments shall be reduced by the total amount which may have been received as Dividend Payments pursuant to Section 5.7 with respect to the stock option that is being exercised. 7.2: At the discretion of the Committee, the Exercise Payment may be made in cash, common stock, Restricted Stock, or a combination thereof; provided, however, Exercise Payments may be made in cash to participants subject to Section 16(b) of the Exchange Act only if they exercise the related stock option during a period beginning on the third business day following the date of release of the quarterly or annual summary statements of sales and earnings and ending on the twelfth business day following such date. Exercise Payments shall be paid within 20 business days following the exercise of a related stock option; provided, however, that payment may be deferred by the Committee in its discretion to such date and under such terms and conditions as the Committee may determine. 7.3: Exercise Payments shall be paid only upon the exercise of related stock options which are exercised by the holder while an active Employee; provided, however, that in the case of an option holder's death or Retirement, Exercise Payments will be paid if such related stock options are exercised within nine months after death or three months after Retirement, as the case may be, but before the expiration of the stock option's term. Section 8: Grants of Stock. 8.1: The Committee may grant, either alone or in addition to other awards granted under the Plan, shares of stock or Restricted Stock to such eligible Employees as the Committee, or the Chief Executive Officer of the Corporation, if the Committee in its discretion delegates the right to allocate awards pursuant to Section 2, authorizes and under such terms as the Committee establishes. The Committee, in its discretion, may also make a cash payment to a participant granted shares of stock or Restricted Stock under the Plan to allow such Participant to satisfy tax obligations arising out of receipt of the stock or Restricted Stock. Section 9: Performance Awards. 9.1: The Committee may grant, either alone or in addition to other awards granted under the Plan, awards of stock and other awards that are valued in whole or in part by reference to, or are otherwise based on, the market value of the common stock, Restricted Stock or other securities of the Corporation ("Performance Awards") to such eligible Employees as the Committee, or the Chief Executive officer of the Corporation, if the Committee in its discretion delegates the right to allocate awards pursuant to Section 2, authorizes and under such terms as the Committee establishes. Performance Awards may be paid in common stock, Restricted Stock or other securities of the Company, cash or any other form of property as the Committee shall determine. Performance Awards shall entitle the participant to receive an award if the measures of performance established by the Committee are met. The measures of performance shall be established by the Committee in its absolute discretion. 9.2: The Committee shall determine the times at which Performance Awards are to be made and all conditions of such awards. 9.3: The participant shall not be permitted to sell, assign, transfer, pledge or otherwise encumber shares received pursuant to this Section 9 prior to the date on which any applicable restriction or performance period established by the Committee lapses. Section 10: General Provisions. 10.1: Any assignment or transfer of any awards without the written consent of the Corporation shall be null and void. 10.2: Nothing contained herein shall require the Corporation to segregate any monies from its general funds, or to create any trusts, or to make any special deposits for any immediate or deferred amounts payable to any participant for any year. 10.3: Participation in this Plan shall not affect the Corporation's right to discharge a participating Employee. 10.4: Restricted Stock may not be sold or transferred by the participant until any restrictions that have been established by the Committee have lapsed. 10.5: The participant shall have, with respect to Restricted Stock, all of the rights of a stockholder of the Corporation, including the right to vote the shares and the right to receive any dividends, unless the Committee shall otherwise determine. 10.6: Upon a participant's termination of employment during the period any restrictions are in effect, all Restricted Stock shall be forfeited without compensation to the participant unless the Committee decides that it is in the best interest of the Corporation to permit individual exceptions. Section 11: Definitions. 11.1: A 'Change in Control of the Corporation' shall be deemed to occur in the event that any of the following circumstances have occurred: (i) if a change in control of the Corporation would be required to be reported in response to Item 1(a) of the Current Report on Form 8-X, as in effect on the date hereof, pursuant to Sections 13 or 15(d) of the Exchange Act whether or not the Corporation is then subject to such reporting requirement; (ii) any 'person' or 'group' within the meaning of Sections 13(d) and 14(d) (2) of the Exchange Act (x) becomes the 'beneficial owner' as defined in Rule 13d-3 under the Exchange Act of more than 35% of the then outstanding voting securities of the Corporation, otherwise than through a transaction or transactions arranged by, or consummated with the prior approval of, the Board or (y) acquires by proxy or otherwise the right to vote for the election of directors, for any merger or consolidation of the Corporation or for any other matter or question, more than 35% of the then outstanding voting securities of the Corporation, otherwise than through an arrangement or arrangements consummated with the prior approval of the Board; (iii) if during any period of twenty-four consecutive months (not including any period prior to the adoption of this section), Present Directors and/or New Directors cease for any reason to constitute a majority of the Board. For purposes of this subsection (iii), 'Present Directors' shall mean individuals who at the beginning of such consecutive twenty-four month period were members of the Board and 'New Directors' shall mean any director whose election by the Board or whose nomination for election by the Corporation's stockholders was approved by a vote of at least two- thirds of the Directors then still in office who were Present Directors or New Directors; or (iv) any 'person' or 'group' within the meaning of Sections 13(d) and 14(d) (2) of the Exchange Act that is the 'beneficial owner' as defined in Rule 13d-3 under the Exchange Act of 20% or more of the then outstanding voting securities of the Corporation commences soliciting proxies. 11.2: "Code" means the Internal Revenue Code of 1986, as now or hereafter amended. 11.3: "Employee" means all employees of the Corporation or of a subsidiary or affiliate of the Corporation participating in the Plan, including officers of the Corporation, as well as officers of the Corporation who are also directors of the Corporation. However, an individual who is a member of the Committee shall not be an "employee" for purposes of this Plan. 11.4: "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. 11.5: "Exercise Payment" is a payment upon the exercise of a stock option of an amount determined by the Committee in its discretion, which amount shall not be greater than 60% of the excess of the Market Price over the option price of the stock acquired upon the exercise of the option. 11.6: "Incentive Stock Option" means any stock option granted pursuant to this Plan which is designated as such by the Committee and which complies with Section 422A of the Code. 11.7: "Market Price" is the mean of the high and low prices of the common stock of the Corporation as reported in the New York Stock Exchange- Composite Transactions on the date the option or stock appreciation right is exercised (or on the next preceding day such stock was traded on a stock exchange included in the New York Stock Exchange-Composite Transactions if it was not traded on any such exchange on the date the option or stock appreciation right is exercised), except that in the case of a stock appreciation right that is exercised for cash during the first three days of the ten-day period set forth in Section 6.5, "Market Price" is the highest daily closing price of the common stock of the Corporation as reported in the New York Stock Exchange-Composite Transactions during such ten-day period. Notwithstanding the foregoing provisions, if a stock appreciation right is exercised during the 60-day period commencing on the date of a change in control of the Corporation, the Market Price for purposes of determining the stock appreciation shall be the highest of (1) the market price of the common stock of the Corporation, as determined under the preceding sentence; (2) the highest market price of a share of the common stock of the Corporation during the period commencing on the ninetieth day preceding the date of exercise of the stock appreciation right and ending on the date of exercise of the stock appreciation right; (3) the highest price per share of common stock of the Corporation shown on Schedule 13D or an amendment thereto filed pursuant to Section 13(d) of the Securities Exchange Act of 1934 by any person holding 35% of the combined voting power of the Corporation's then outstanding voting securities; or (4) the highest price paid or to be paid per share of common stock of the Corporation pursuant to a tender or exchange offer as determined by the Committee. Provided, however, that the previous sentence shall not apply to a 'disqualified individual' within the meaning of Section 280G(c) of the Code if the exercise of the stock appreciation right would cause such participant to incur the tax prescribed in Section 4999 of the Code on 'excess parachute payments' within the meaning of Section 280G(b) of the Code. 11.8: "Non-Qualified Stock Option" means any stock option granted pursuant to this Plan which is not an Incentive Stock Option. 11.9: "Retirement" shall mean retirement from employment by the Corporation or a subsidiary or affiliate with the right to receive immediately a non-actuarially reduced pension under the Corporation's Retirement Program. 11.10: "Restricted Stock" means stock of the Corporation subject to restrictions on the transfer of such stock, conditions of forfeitability of such stock, or any other limitations or restrictions as determined by the Committee. 11.11: "Stock Appreciation" shall be based on the excess of the Market Price of the common stock over the option price of the related option stock, as determined by the Committee. Section 12: Amendment, Suspension, or Termination. 12.1: The Board of Directors may suspend, terminate, or amend the Plan, including but not limited to such amendments as may be necessary or desirable resulting from changes in the federal income tax laws and other applicable laws, but may not, without approval by the holders of a majority of all outstanding shares entitled to vote on the subject at a meeting of stockholders of Union Carbide Corporation, increase the total number of shares of stock that may be optioned or granted under this Plan. 12.2: This Plan is intended to comply with the requirements of Rule 16b-3 under the Exchange Act, as applicable during the term of the Plan. Should the requirements of Rule 16b-3 change, the Board of Directors may amend this Plan to comply with the requirements of that rule or its successor provision or provisions. Section 13: Effective Date and Duration of the Plan. This Plan shall be effective following approval by the stockholders of the Corporation. No award shall be granted under this Plan for any year commencing on or after January l, 1994. EX-10.9 3 RESOLUTION OF EXECUTIVE LIFE INSURANCE Exhibit 10.9 RESOLUTIONS ADOPTED BY THE BOARD OF DIRECTORS OF UNION CARBIDE CORPORATION ON NOVEMBER 30, 1988 WITH RESPECT TO AN EXECUTIVE LIFE INSURANCE PROGRAM FOR OFFICERS AND CERTAIN OTHER EMPLOYEES RESOLVED, that the proper officers of the Corporation be, and they hereby are, authorized to adopt an executive life insurance program for officers and certain other employees effective on or after January 1, 1989 providing for the following: a death benefit during active employment equal to one or two times such employee's current salary and a post-retirement death benefit equal to one or two times salary depending upon the organizational position occupied by the participant immediately prior to retirement with the death benefit adjusted periodically to reflect increases in the employee's salary; the payment by the employee of that portion of the annual premium for the insurance policy issued pursuant to the program equal to the amount that such employee would have paid under the Corporation's basic life insurance program; the payment by the Corporation of the balance of the premium; and the right of the Corporation, evidenced by a written agreement between the Corporation and the employee, to recoup its premium payments (i) out of the death benefits under the policy in the event the employee dies while an employee of the Corporation(ii) from the cash value in the policy after the employee attains age 65 or 10 years have elapsed since issuance of the policy, whichever is later, or (iii) by surrender of the policy or through reimbursement by the employee in the event the employee's participation in the program ceases for some other reason. EX-13 4 1998 ANNUAL REPORT TO STOCKHOLDERS Exhibit 13 Union Carbide Corporation 1998 Annual Report (The cover) Union Carbide Corporation 1998 Annual Report (Inside front cover) Table of Contents Financial Highlights/At a Glance 1 Summary comparison of 1998 and 1997 results Chairman's Letter 2 Bill Joyce on performance in 1998, strategic objectives and long-term outlook Principal Products & Services 4 Description of the Specialties & Intermediates and Basic Chemicals & Polymers segments Chemical Glossary 6 Chemicals and polymers used in Carbide's businesses Management's Discussion & Analysis 7 Results of Operations 16 Liquidity, Capital Resources and Other Financial Data 17 Debt Ratios Selected Financial Data 18 Summary financial history of the past 11 years Financial Statements 20 Consolidated Balance Sheet 21 Consolidated Statement of Income 22 Consolidated Statement of Stockholders' Equity 24 Consolidated Statement of Cash Flows 25 Notes to Financial Statements 44 Management's Statement of Responsibility for Financial Statements 44 Independent Auditors' Report Quarterly Data 45 Summary comparison of quarterly 1998 and 1997 results Corporate Information 46 Important dates, names, addresses, telephone numbers and other information Directors and Corporate Officers 47 List of directors, corporate officers and other senior management Union Carbide Around the World 48 List of worldwide locations Definition of Terms 48 Definition of nonchemical terms Cautionary statement: All statements in this annual report that do not reflect historical information are forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995 (as amended). Forward- looking statements include statements concerning plans; objectives; strategies; anticipated future events or performance; sales; cost, expense and earnings expectations; the Year 2000 issue; the euro; interest rate and currency risk management; the chemical markets in 1999 and beyond; cost reduction targets; the corporation's share price; earnings and profitability targets; development, production and acceptance of new products and process technologies; ongoing and planned capacity additions and expansions; joint ventures; Management's Discussion & Analysis; and any other statements that do not reflect historical information. Such forward-looking statements are subject to risks and uncertainties. Important factors that could cause actual results to differ materially from those discussed in such forward-looking statements include the supply/demand balance for the corporation's products; customer inventory levels; competitive pricing pressures; feedstock availability and costs; changes in industry production capacities and operating rates; currency exchange rates; interest rates; global economic conditions, particularly in Asia and Latin America; disruption in transportation facilities; competitive technology positions; failure by the corporation to achieve technology objectives, achieve cost reduction targets or complete projects on schedule and on budget; and inability to obtain new customers or retain existing ones. Financial Highlights
Dollar amounts in millions (except per share figures) 1998 1997 % Change For the Year Net sales $5,659 $6,502 (13) Operating profit 803 1,045 (23) Income before cumulative effect of change in accounting principle 403 676 (40) Per common share - basic 2.98 5.02 (41) Per common share - diluted 2.91 4.53 (36) Net income - common stockholders 403 652 (38) Per common share - basic 2.98 4.89 (39) Per common share - diluted 2.91 4.41 (34) Cash dividends on common stock 122 100 22 Per common share 0.90 0.7875 14 Capital expenditures 782 755 4 At Year-End Total assets $7,291 $6,964 5 Total debt 2,222 1,887 18 Stockholders' equity 2,449 2,348 4 Per common share 18.46 17.15 8 Common shares outstanding (thousands) 132,686 136,944 (3) Common stockholders of record 45,775 47,713 (4) Employees 11,627 11,813 (2)
At a Glance Union Carbide Corporation is a worldwide chemicals and polymers company. The company possesses many of the industry's most advanced process and catalyst technologies and some of the most cost-efficient, large-scale production facilities in the world. In addition to its consolidated operations, the corporation participates in partnerships and corporate joint ventures whose combined net sales totaled approximately $4.1 billion in 1998. Union Carbide operates two business segments: Specialties & Intermediates, which accounted for 73 percent of customer revenues in 1998, produces a broad range of products, including specialty polyolefins used in wire and cable insulation; surfactants for industrial cleaners; catalysts for the manufacture of polymers; acrolein and derivatives; water-soluble polymers; cellulose-, glucose- and lanolin-based materials for personal care products; specialty coatings; acrylic and vinyl acrylic latex used in paints and adhesives; solvents; vinyl acetate monomer, and ethylene oxide derivatives. This segment also licenses olefins-based technologies and offers other specialized technology licensing and services. Basic Chemicals & Polymers converts various hydrocarbon feedstocks, principally liquefied petroleum gases and naphtha, into the basic building- block chemicals ethylene and propylene (also known as olefins), which are in turn converted to polyethylene (the world's most widely used plastic), polypropylene (one of the world's fastest-growing plastics), and ethylene oxide and ethylene glycol (used to make polyester fiber, film and resin, and automotive antifreeze). This segment provides ethylene, propylene, ethylene oxide and ethylene glycol to the Specialties & Intermediates segment. Union Carbide's leading end markets as a percentage of sales are: Paints, coatings and adhesives 22 Packaging and consumer plastics 18 Wire and cable 14 Textile 7 Household and personal care 7 Automotive, including antifreeze 5 Agriculture and food 4 Oil and gas 3 Industrial cleaners 2 - 1 - (Contained in the left hand margin is a picture of William H. Joyce, Chairman, President and Chief Executive Officer.) Chairman's Letter The year just ended was a tough one to be in the chemical business. The cyclical downturn already under way as the year began accelerated faster in 1998 than many had anticipated. At year-end 1998, prices of commodity chemicals and plastics had fallen more than 30 percent from the beginning of the year. Margins for those products declined during the year, and so did earnings. By year-end, average commodity chemical margins had shrunk to levels not seen since 1993, the trough of the last chemical industry business cycle. Asia's already foundering economies curtailed chemical exports to that key market in 1998, further aggravating the global supply/demand imbalance. A strong dollar only worsened the export picture. Union Carbide's results reflected the problems. Net sales declined 13 percent from the prior year, to $5.7 billion. Net income available to common stockholders declined 38 percent, to $403 million, and diluted earnings per share fell 34 percent, to $2.91. After strong, double-digit earnings improvement in the early through mid- 90s, growth of our Specialties & Intermediates (S&I) segment lost momentum. Segment earnings from operations showed little improvement in 1998, due mainly to the Asian crisis. This greatly affected Wall Street's outlook for our stock. Although Carbide stock substantially under-performed the major stock averages, its performance, virtually flat for the year, exceeded the S&P chemicals index, which fell 8.3 percent. No one can say for certain when chemical markets will recover. But in the meantime, Carbiders will be working hard to repeat the dramatic turnaround they achieved in the early 90s, when Wall Street was similarly pessimistic about Carbide's prospects going into the low point of the last chemical business cycle. Throughout all of our businesses, Carbide people concentrated on increasing volume and cutting costs. For several years our performance exceeded everyone's expectations and our stock performance led the Dow industrials. Although times have been hard lately across the industry, none of us is satisfied with Carbide's performance in recent years. We are also convinced that Carbide has the potential, and the means, for substantial improvement. First, we have all the capacity we need for rapid volume growth. We've added nearly 6 billion pounds of capacity since 1994, much of it underused last year. Moreover, it is highly cost-effective capacity based on Carbide's proprietary process technologies and should make a substantial contribution to results when operating rates return to normal. With this extra capacity already in hand, Carbiders know that we need to outsell and outperform competitors and to convince customers that, in Carbide, they have the industry's most efficient and reliable supplier. Intensified Focus on Cost Reduction In addition to growth potential, we also believe that our intensified focus on cost reduction should enable Carbide's earnings to begin their recovery even before the chemical business cycle turns up. Carbide people have exceeded our cost reduction expectations in virtually every year since we began to implement our profit improvement initiatives, and they did so again in 1998. Our cost reduction and profit improvement program is well ahead of schedule on the way to our $1.1 billion savings target by the year 2000. Our redoubled efforts to control expenses should see more of those savings reach the bottom line, and we continue to look for new opportunities to raise the target. Carbide will be operating in a very tough business environment for the next year or two. Although we've not abandoned our Year 2000 earnings target of $4.00 per share, reaching it will be a considerable challenge. And barring some dramatic upturn in world chemical markets, which few expect to happen soon, Carbide does not expect to earn the target $4.00 in 1999. But we'll be in a much better position to make the most of the difficult conditions we anticipate, having dealt with several issues and projects whose costs were a further drain on 1998 earnings. For one, our new ethylene propylene rubber (EPR) facility, which had been out of service for the year for major engineering modifications, was up and running at year-end. Given the facility's unique competitive advantages, we expect EPR sales to grow rapidly and the business to begin generating operating profits by year-end. Our Taft olefins facility, which was out of service for much of the second half of 1998 to complete an expansion and scheduled maintenance, should be operating for the full year in 1999. And we believe we have the operating problems behind us that extended startup and curtailed production at our EQUATE joint venture in Kuwait. Earnings should also benefit in 1999 from a decline in costs for implementing Powernet, our information technology initiative under way for the past several years. In addition to correcting Year 2000 systems problems, Powernet will improve efficiency and reduce costs by integrating planning, order entry, procurement, production, distribution and financial systems across the global enterprise. By year-end 1998, Powernet was operational at all major domestic locations. - 2 - Our Powernet systems conversion appears to be the most comprehensive such change attempted by any chemical company. When fully operational, it should enable us to provide a level of service to customers impossible to achieve before Powernet and unsurpassed in our industry. The Next Peak Looking past the cyclical trough, our improved cost base, along with highly competitive new facilities, should enable earnings to reach new highs in the next cyclical peak. The new facilities, including our share of joint ventures, will increase our capacity about 50 percent compared with the 1995 peak. Our ethylene and polyethylene projects in Alberta are moving ahead on target. Our 1.3 billion-pound-capacity UNIPOL polyethylene plant at Prentiss, Alberta, is scheduled for completion in 2000. With its large size, leading- edge process technology and access to low-cost ethylene from the 2.8 billion- pound-capacity facility we are building nearby with NOVA Chemicals Ltd., the Prentiss plant should be a highly competitive supplier in its North American target markets. Construction of our joint venture petrochemical complex in Malaysia is scheduled for completion in late 2001. We expect the venture, with Petroliam Nasional Berhad, the national oil company of Malaysia, to be Southeast Asia's most competitively advantaged producer of a broad range of chemicals, with the potential for excellent returns when growth resumes in the region. Prospects for the venture, recently named the OPTIMAL Group, are further enhanced as other companies have canceled or postponed their own Southeast Asian chemical projects that would not have had OPTIMAL's feedstock or other advantages. Given OPTIMAL's strengths and the favorable competitive environment we expect, we remain confident that our Asian joint venture is the right one in the right place at the right time. We are also enthusiastic about the progress of Univation Technologies, LLC, our polyolefins technology joint venture with Exxon Chemical Company. The venture has announced that, since its inception in 1997, five companies worldwide have selected the UNIPOL Process for polyethylene and two for polypropylene. And some of the polyethylene projects include the venture's proprietary metallocene catalysis and capacity expansion technologies. Advanced catalysts such as metallocenes offer polyethylene producers extraordinary control of the molecular architecture of their products and the ability to meet the needs of almost any plastics market with the right cost and combination of toughness and other properties. The ability to tailor polymers for a range of new uses opens new markets and new opportunities for growth. We were pleased in November to have the Court of Appeal of England affirm the proprietary nature of Union Carbide's "condensing mode" technology, which is employed in our UNIPOL polyethylene process to significantly boost reactor performance. The favorable ruling affirms that UNIPOL remains the industry's leading polyethylene technology. So despite the hard times in 1998, in many areas we made progress that should ensure a more productive and profitable future. Yet all of us in the chemical business and, we believe, most stockholders, understand that progress means little in our business unless accompanied by progress in safety and environmental performance. Carbide registered some gains in 1998 and substantially improved over performance of the early 90s. But we would have liked to have done better. For the seventh year in a row, there were no major process incidents at any of our facilities. While the number of accidental releases matched our lowest on record, the volume of material in those incidents was unacceptably high. Tragically, we also suffered a fatality, our first at a U.S. facility in more than six years, when an employee at our plant in Taft, La., died from nitrogen asphyxiation. We are giving high priority under our RESPONSIBLE CARE commitment to improving our personnel safety performance and reducing the volume and number of accidental releases. We take our health, safety and environmental responsibilities seriously and I am pleased to report that Carbide received an Environmental Partnership award in 1998 from the U.S. Environmental Protection Agency for our work with Federal and state environmental protection agencies to clean up a Superfund site in Marietta, Ohio. Finally, I would like to note two changes in the composition of our board of directors. Joseph E. Geoghan, who was also vice president, general counsel and secretary, retired at year-end 1998 after a distinguished 41-year career with Union Carbide. Joe is a supremely capable corporate lawyer whose devoted service to Carbide and wise counsel to management will be sorely missed. I am pleased to welcome Paul J. Wilhelm, president of the U.S. Steel Group of USX Corporation and a USX director, who was elected to the Carbide board, effective Dec. 1, 1998. William H. Joyce February 25, 1999 - 3 - Principal Products & Services Specialties & Intermediates Union Carbide's Specialty Polymers and Products group manufactures and markets numerous specialty products. Many of its technologies are targeted for sharply defined market segments. Specialty Polymers and Products - - Specialty Industrial Products produces acrolein and derivatives, important in a range of products from biocides to animal feed supplements; ethylidene norbornene (ENB), used in the production of ethylene propylene rubber for roofing and automotive parts; and specialty ketones, used as solvents and intermediates in herbicide, drug and vitamin manufacture. - - Performance Polymers produces POLYOX water-soluble resins, used in personal care products, drug formulations, inks, textiles and plastics. The business also produces polyvinyl acetate resins, used in such widely diverse applications as chewing gum, molded automotive body parts, bathroom fixtures, business-machine housings, coatings and adhesives. - - Coating Materials produces, among other products, UCAR solution vinyl resins, used in coatings for beverage and food cans, bottle caps and closures; in maintenance coatings used on bridges, storage tanks and oceangoing vessels; in printing inks for vinyl shower curtains, wallpaper and furniture; and in magnetic recording tape. Products also include CELLOSIZE hydroxyethyl cellulose thickeners, used in interior and exterior paints and personal care products; TONE caprolactone-based materials, used in fabric coatings, orthopedic cast and splint materials, automotive primers and topcoats and biodegradable bags for compostable materials; cycloaliphatic epoxides for electric utility equipment such as insulators and transformers; CYRACURE products for ultraviolet-cured coatings and inks; and FLEXOL plasticizers, made from soybean and linseed oils, used to keep plastic products soft and pliable. - - Amerchol Corporation, a Union Carbide subsidiary, manufactures and sells a wide variety of cellulose-, glucose- and lanolin-based materials for shampoos, skin lotions and other personal care products. UCAR Emulsion Systems makes products used in interior and exterior house paints, adhesives and sealants. They include UCAR POLYPHOBE rheology modifiers, used to thicken coatings, and UCAR latex products, used as binders and to improve exterior durability, scrub and stain resistance and adhesion. Specialty Polyolefins manufactures a variety of performance polyolefin products marketed worldwide. Chief among these are polyolefin-based compounds for high-performance insulation, semiconductives and jacketing systems for power distribution, telecommunications and flame-retardant wire and cable. Other Specialty Polyolefins products are used in adhesives, laminating film and flexible tubing. UNIPOL Systems develops and licenses UNIPOL Process technology - the industry's most versatile method of manufacturing polyethylene and polypropylene - for producers worldwide. The business also develops new process technology for the manufacture of other olefins-based polymers, such as ethylene propylene rubber, which it produces and markets to rubber products manufacturers, and sells catalysts to UNIPOL Process licensees worldwide. Licensing of the UNIPOL PE and PP Processes, as well as the development of new polyethylene technologies, such as metallocene catalysts and Super Condensed Mode Technology, is handled through Univation Technologies, LLC, a joint venture of Union Carbide and Exxon Chemical Company. Industrial Performance Chemicals manufactures and sells a broad range of ethylene oxide derivatives and formulated glycol products for specialty applications. These include CARBOWAX polyethylene glycols, nontoxic, biodegradable, water-soluble products with a wide range of applications in the pharmaceutical, personal care, household, textile-processing, wood preservation, ceramic and industrial markets; ethanolamines, for detergents, personal care products such as bath soap, agricultural products and natural gas conditioning and refining; ethyleneamines, for fuel, lubricant and motor- oil additives, adhesives, corrosion inhibitors, cleaning materials and many industrial uses; TRITON and TERGITOL specialty and commodity surfactants, for use in institutional, industrial and household cleaning products; formulations for personal care products, and in industrial processes for textiles, paper, paints and coatings and many other products; UCON fluids and lubricants, for use in brake fluids and fire-resistant hydraulic fluids, used in heavy-duty machinery and off-highway equipment and in automotive air conditioning systems with non-ozone-depleting coolants; alkyl alkanolamines for water-treating chemicals, surfactants, fabric softeners, pharmaceuticals, and natural-gas and boiler-water conditioning; and gas-treating - 4 - chemicals, including SELEXOL and UCARSOL solvents, used to lower corrosion rates and increase efficiency in removing carbon dioxide and sulfur derivatives from natural and refinery gases. Formulated glycol products include UCAR aircraft and runway deicing and anti-icing fluids, which remove or prevent formation of ice, snow and frost on aircraft and runway surfaces; UCARTHERM heat-transfer fluids, which help to distribute heat and cooling effects and inhibit corrosion in heating, ventilation and refrigeration systems; and NORKOOL industrial products, used as coolants, corrosion inhibitors and cleaners in gas compressor stations, generators and large engines. Solvents, Intermediates and Monomers supplies one of the chemical industry's broadest product lines to the paints and coatings markets and also serves the cosmetics and personal care, adhesives, household and institutional products, pharmaceuticals and agricultural markets. Products include oxo aldehydes, acids and alcohols, used as chemical intermediates and industrial solvents and in herbicides, plasticizers, paint dryers, jet-turbine lubricants, lube oil additives, perfumes and food and feed preservatives; esters, which serve as solvents in industrial coatings and printing inks and in the manufacturing processes for pharmaceuticals and polymers; CARBITOL and CELLOSOLVE solvents, used in high-technology coatings applications such as primers and industrial finishes for the automotive, packaging and furniture markets, as jet-fuel additives and grease cutters for household and industrial cleaners and in UCON and EMKADIXOL brake fluids; ketones, including methyl isobutyl ketone, used as solvents for vinyl resins, industrial lacquers and pharmaceuticals and as intermediates for dyes and rubbers chemicals; monomers, such as vinyl acetate, and acrylic esters, widely used in the production of latex paints, paper coatings, adhesives, textile binders and floor and shoe polishes; alcohols, such as ethanol and isopropanol, used as solvents and intermediates in materials used to produce coatings, inks, herbicides, petroleum additives and synthetic lubricants, and also widely used as solvents for personal care products such as perfumes, deodorants and hair sprays, and in the preparation of mouthwashes, detergents, disinfectants and polishes; and the UNICARB System, a pollution-reducing technology that can cut costs and reduce volatile organic compounds (VOCs) in spray-applied coatings by up to 80 percent. Basic Chemicals & Polymers Union Carbide's Hydrocarbons group manufactures about two thirds of the company's ethylene requirements and almost one third of its propylene requirements. Ethylene and propylene are the key raw materials for many of Union Carbide's businesses. Union Carbide is the world's leading producer of ethylene oxide and ethylene glycol, supplied by the Ethylene Oxide/Glycol group. Ethylene oxide is a chemical intermediate primarily used in the manufacture of ethylene glycol, polyethylene glycol, glycol ethers, ethanolamines, surfactants and other performance chemicals and polymers; di- and triethylene glycol, used in natural gas-drying and other moisture-removing applications and as softeners for paper, cork, glue and bookbinding; and tetraethylene glycol, for removing impurities from raw materials used in making plastics, synthetic rubber and dyes. Ethylene glycol is used extensively in the production of polyester fiber, resin and film, automotive antifreeze and engine coolants, and aircraft anti-icing and deicing fluids. Union Carbide is a leading manufacturer of polyethylene, the world's most widely used plastic. UNIPOL Polymers produces and markets linear low-, medium- and high-density polyethylenes, used in high-volume applications such as housewares, milk and water bottles, grocery sacks, trash bags, packaging, water and gas pipe, and FLEXOMER very low-density resins, used as an impact modifier in other polymers and to produce flexible hose and tubing, frozen- food bags and stretch wrap. Carbide's Polypropylene Resins business manufactures and sells polypropylene, one of the world's largest-volume, fastest-growing plastics. End-use applications include carpeting and upholstery, apparel, packaging films, food containers such as dairy products cups, housewares and appliances, heavy-duty tapes and ropes, and automobile interior trim and panels. For a summary of business and geographic segment data, see Note 6 to the consolidated financial statements and Management's Discussion & Analysis, beginning on page 7. For a summary of the corporation's joint ventures, see Note 9 to the consolidated financial statements and Management's Discussion & Analysis on pages 10 through 13. - 5 - Chemical Glossary Alcohols - Chemicals, such as butanol, ethanol and isopropanol, that serve as solvents and intermediates for the manufacture of personal care products, pharmaceuticals, paints and coatings, herbicides, petroleum additives and synthetic lubricants. Biocides - Chemicals used to control or inhibit the growth of bacteria, algae, fungi and mold. Chemical Intermediates - Chemicals formed or introduced as an intermediate step between the starting material and the final product in chemical processing. Examples are: - - Acrolein, used to make biocides, animal feed supplements and coatings resins. - - Esters, made by reacting alcohols and acids, used primarily as solvents in paints and coatings, ink and pharmaceuticals. - - Ethanolamines, reaction products of ethylene oxide and ammonia, used in detergents and other cleaning materials, in personal care products, agricultural products and for removal of sulfur and other impurities from natural gases. - - Ethyleneamines, made from ethylene oxide or ethylene dichloride, used in many industrial products, including fuel, lubricant and motor oil additives, adhesives, wet-strength paper resins and paints. Ethylene Glycol - Chemical made from ethylene oxide and water, used to make polyester resins, film and fiber, automotive antifreeze and engine coolants, and aircraft deicing/ anti-icing fluids. Ethylene Oxide - Chemical made from ethylene and oxygen. It combines with other chemicals to produce a wide range of products, such as ethylene glycol, water-soluble polymers for personal care products and surfactants for detergents and cleaning products. Glycol Ethers - Solvents used in higher-technology coating applications, such as finishes for the automotive market, and in noncoating applications, such as hard-surface cleaners, military jet fuels and brake fluids. Ketones - Chemicals, such as acetone, used as solvents for resins, lacquers and pharmaceuticals, and as intermediates for resins, dyes and rubber chemicals. Monomer - Chemical that can be converted into a polymer. For example, ethylene is a monomer that is made into polyethylene. Olefins - Generic name for unsaturated hydrocarbons made from components of petroleum or natural gas. Examples are: - - Ethylene and Propylene, chemicals derived from natural gases or petroleum components, and the starting materials from which most of Union Carbide's chemicals and polymers are made. Oxo Alcohols, Aldehydes and Acids - Chemicals Carbide manufactures via its LP OXO Process, such as butanol and propionic acid, which are used as chemical intermediates and industrial solvents. Polymers - Chains or networks of linked monomers. Plastics are polymers. Examples are: - - Polyethylene, the world's most widely used plastic, made by the reaction of ethylene and, optionally, other olefins. It is used in hundreds of consumer and industrial products, including grocery and trash bags, waste containers, housewares, bottles, drums, food packaging and wire and cable insulation and jacketing. Union Carbide produces most of its polyethylene via UNIPOL Process technology, developed by the corporation in the early 1970s, which is licensed to polyethylene makers around the world. - - Polypropylene, a fast-growing, high-volume plastic made from the reaction of propylene and, optionally, other olefins. The broad range of applications includes lawn furniture, carpet fiber and backing, food containers, toys, appliance housings and binding materials. Much of Union Carbide's production is via the UNIPOL PP Process, also licensed around the world. Solvents - Chemicals used to dissolve or absorb other chemicals. For example, ketones, esters, alcohols and glycol ethers are effective solvents commonly used in paints and coatings. Surfactants - Chemicals that increase the cleaning and wetting properties of household and industrial cleaners and detergents. They are used also in textile and paper processing, paints, agricultural products, cosmetics, shampoos and other personal care products. Carbide makes most of its surfactants from ethylene oxide and alcohols. - 6 - Management's Discussion & Analysis Results of Operations
Millions of dollars (except per share figures), for the year ended December 31, 1998 1997 1996 Net sales $5,659 $6,502 $6,106 Operating profit(a) 803 1,045 921 Interest expense 114 79 76 Income before provision for income taxes 689 966 845 Income before cumulative effect of change in accounting principle 403 676 593 Net income 403 659 593 Net income - common stockholders 403 652 583 Per share - basic Income before cumulative effect of change in accounting principle $ 2.98 $ 5.02 $ 4.43 Net income - common stockholders 2.98 4.89 4.43 Per share - diluted Income before cumulative effect of change in accounting principle 2.91 4.53 3.90 Net income - common stockholders 2.91 4.41 3.90 (a) See Note 6 to the financial statements for a discussion of the special items included in operating profit.
Union Carbide operates in two business segments. Specialties & Intermediates (S&I) converts basic and intermediate chemicals into a diverse portfolio of chemicals and polymers serving industrial customers in many markets. This segment also provides technology services, including licensing, to the oil and petrochemicals industries. Basic Chemicals & Polymers (BC&P) converts hydrocarbon feedstocks, principally liquefied petroleum gas and naphtha, into ethylene or propylene used to manufacture polyethylene, polypropylene, ethylene oxide and ethylene glycol for sale to third-party customers, as well as ethylene, propylene, ethylene oxide and ethylene glycol for consumption by the S&I segment. In comparison to those of S&I, the revenues and operating profit of BC&P tend to be more cyclical and very sensitive to a number of external variables, including overall economic demand, hydrocarbon feedstock costs, industry capacity increases and plant operating rates. In addition to its business segments, the corporation's Other segment includes its noncore operations and financial transactions other than derivatives designated as hedges, which are included in the same segment as the item being hedged. Summary 1998 Compared with 1997 The corporation's 1998 earnings reflected a difficult environment for the chemical industry coupled with the continuing decline of the Asian economy. On a consolidated basis, net sales declined 13.0 percent as the result of a 10.1 percent decline in average selling prices and a 3.1 percent decline in customer volume. Average customer selling prices dropped 22.3 percent in the BC&P segment, reflecting a deteriorating supply/demand balance in polyethylene, polypropylene and ethylene oxide/glycol. Average selling prices in S&I dropped 5.2 percent, due in part to weakness in Asian markets. Volumes declined in both segments as a result of extended plant shutdowns associated with planned multiyear olefins unit turnarounds and expansion, distribution disruptions in the U.S. Gulf Coast region early in 1998 and declining Asian demand. Fixed cost per pound of products sold (fixed manufacturing and distribution costs, plus research and development and selling, administration and other expenses, divided by customer volume) increased from a decade low of 10.8 cents in the prior year to 11.5 cents in the current year, primarily the result of lower volumes and higher fixed costs related to the extended plant shutdowns and the implementation of the corporation's information technology infrastructure system in 1998. Partnership income declined $100 million due to the recognition of $53 million of before-tax ($38 million after-tax) losses in the third quarter associated with Aspell Polymeres SNC, the corporation's joint venture in France; a decline in UOP LLC's (UOP) earnings, related to reduced oil and petrochemical projects within some of the oil markets in Asia, Russia and the Middle East; and reduced Petromont and Company, Limited Partnership, (Petromont) earnings due to declining polyethylene prices. Operating profit benefited from a $189 million before-tax ($115 after-tax) net gain from two favorable litigation settlements related to the UNIPOL Systems business. Net income was reduced by a $69 million decline in earnings of the corporation's corporate investments carried at equity caused by declining basic chemical prices in Asia and Europe, as well as startup difficulties experienced by EQUATE Petrochemical Company (EQUATE). - 7 - 1997 Compared with 1996 On a consolidated basis, average selling prices increased 1.2 percent and customer volume increased 5.1 percent, while fixed cost per pound sold declined to 10.8 cents, the lowest of the decade. Average selling prices benefited from increased ethylene glycol prices in the first nine months of 1997 and improved polyethylene pricing in the first half of 1997, partly offset by the impact of a stronger U.S. dollar against foreign currencies and increased competition in pricing, primarily in the solvents, intermediates and monomers (SIM) product lines. Volume increases resulted from stronger demand in both segments, partially offset by rail distribution problems in the U.S. Gulf Coast region, particularly toward the last half of 1997. BC&P's customer unit variable margin (sales less variable manufacturing and distribution costs divided by customer volume) benefited from a reduction in raw material costs from prior year levels. This was somewhat offset by higher raw material costs for S&I products, most significantly ethylene oxide, transferred from the BC&P segment at approximate market value, and higher energy costs. Partnership income remained strong, excluding certain costs, principally research and development, assumed by the corporation's technology venture, Univation Technologies, LLC (Univation). Additionally, the improved earnings from our equity companies represented increases in earnings of Polimeri Europa S.r.l. (Polimeri Europa) partially offset by increased preoperating expenses associated with EQUATE. In 1996 the corporation's earnings were adversely impacted by declines in selling prices, particularly for ethylene glycol, polyethylene and vinyl acetate monomer, and by high raw material and energy costs. These factors had a significant impact on BC&P's operating profit and limited S&I operating profit growth. Sales volumes experienced their largest increase in the past decade, while productivity, as measured by fixed cost per pound of products sold, also improved. Partnerships reported strong profits, while equity company results declined due to the preoperating costs of EQUATE and increased raw material costs for Polimeri Europa. Interest Expense Interest expense increased from $79 million in 1997 to $114 million in 1998, due to an increase in debt levels from 1997 to 1998 coupled with a reduction in capitalized interest associated with the corporation's capital program. Interest expense increased $3 million, from $76 million in 1996 to $79 million in 1997. This increase reflected the effect of a full year's interest expense associated with the 7.75 percent debentures due in 2096 and an increase in short-term debt, partially offset by an increase in capitalized interest associated with the corporation's capital program. Provision for Income Taxes The effective tax rate was 31.5 percent in 1998 compared with 28.9 percent and 27.9 percent in 1997 and 1996, respectively. The corporation's effective tax rate increased in 1998 as a result of higher tax rates associated with the corporation's two favorable litigation settlements related to the UNIPOL Systems business. Excluding these settlements, the effective tax rate would have been 28.6 percent. The corporation's effective tax rate is less than the statutory Federal income tax rate principally because of research and experimentation and foreign sales corporation tax credits. Corporate Matters Interest Rate and Currency Risk Management The corporation selectively uses financial instruments to manage its exposure to market risk related to changes in foreign currency exchange rates and interest rates. The corporation does not hold derivative financial instruments for trading purposes. See Notes 1 and 10 to the consolidated financial statements for more information about these instruments. At Dec. 31, 1998, the corporation held open foreign currency forward contracts and purchased options with net notional amounts of $419 million and an unrecognized net loss of $1 million ($185 million and an unrecognized net loss of $2 million, respectively, at Dec. 31, 1997). - 8 - The corporation used sensitivity analysis to evaluate the potential effect of movements in foreign currency exchange rates and interest rates on the consolidated financial statements. Based on this analysis, a hypothetical 10 percent weakening in the U.S. dollar across all currencies would have resulted in a $7 million net loss at Dec. 31, 1998 (no income statement effect at Dec. 31, 1997). Alternatively, a hypothetical 10 percent strengthening in the U.S. dollar across all currencies would have resulted in a $10 million net loss at Dec. 31, 1998 ($3 million net gain at Dec. 31, 1997). These gains and losses would generally be offset by fluctuations in underlying currency transactions. The corporation held long-term debt of $1,814 million, of which $125 million was variable-rate debt, at Dec. 31, 1998 ($1,463 million and $15 million, respectively, at Dec. 31, 1997). At Dec. 31, 1998 and 1997, a hypothetical 10 percent increase or decrease in market interest rates would not have materially affected interest expense or cash flows related to variable-rate debt. A 10 percent increase in market interest rates would have decreased the net fair market value of fixed-rate debt instruments by $96 million at Dec. 31, 1998 ($94 million at Dec. 31, 1997), and a 10 percent decrease in market interest rates would have increased the net fair market value of fixed-rate debt instruments by $108 million at Dec. 31, 1998 and 1997. Foreign Operations A portion of the financial results of each of the corporation's segments is derived from activities conducted outside the U.S. and denominated in currencies other than the U.S. dollar. Because the financial results of the corporation are reported in U.S. dollars, they are affected by changes in the value of the various foreign currencies in relation to the U.S. dollar. Exchange rate risks are lessened, however, by the diversity of the corporation's foreign operations and the fact that international activities are not concentrated in any single non-U.S. currency. In addition, the effects of a strengthening U.S. dollar could cause pricing pressures on worldwide chemical markets that could result in declines in the corporation's sales volumes. The corporation is subject to other risks customarily associated with doing business in foreign countries, including local labor and economic conditions, unfavorable changes in foreign tax laws and possible controls on repatriation of earnings and capital. Future losses associated with such risks, if any, cannot be predicted. European Monetary Union On Jan. 1, 1999, eleven European Union member countries established fixed conversion rates among their existing currencies (legacy currencies) and one common currency, the euro. The euro is now trading on currency exchanges and can be used in business transactions. Beginning in January 2002, euro- denominated bills and coins will be issued, and legacy currencies will be withdrawn from circulation. The corporation's European and other international financial systems and processes were euro-ready on Jan. 1, 1999, and the corporation anticipates that its domestic financial systems and processes will be euro-ready by the end of 1999. The corporation is still in the process of evaluating the potential effects of the euro conversion, and does not expect the euro to have a material effect on its industry segment businesses, consolidated results of operations or financial condition. Outlook-Corporate In 1997, the corporation adopted an incentive plan designed to grant awards to a limited number of senior managers if the corporation were to achieve $4.00 or more diluted earnings per share performance during 1999 and 2000. While no actual level of earnings can be predicted, it is not likely that the goal of $4.00 per diluted share is attainable in 1999. There is also increasing uncertainty as to whether the goal is attainable in 2000. The corporation regularly reviews its assets with the objective of maximizing the deployment of resources in core operations. In this regard, UCC continues to consider strategies and/or transactions with respect to certain noncore assets and other assets not essential to the operation of the business that, if implemented, could result in material nonrecurring gains or losses. (Included on pages 8 and 9 are four bar charts which provide the following data: (1) Fixed Cost per Pound - cents/pound Specialties & Basic Chemicals & Consolidated Intermediates Polymers Total 1991 20.6 9.2 15.5 1992 19.0 7.7 13.8 1993 17.5 7.5 12.9 1994 15.0 7.0 11.4 1995 15.8 7.2 11.9 1996 14.7 6.7 11.0 1997 14.2 6.8 10.8 1998 14.7 7.5 11.5 (2) Employee Productivity Number of Thousands of Pounds Employees Per Employee 1991 16,705 665 1992 15,075 794 1993 13,051 916 1994 12,004 1,064 1995 11,521 1,128 1996 11,745 1,230 1997 11,813 1,286 1998 11,627 1,266 (3) Volume - millions of pounds Specialties & Basic Chemicals & Consolidated Intermediates Polymers Total 1991 6,144 4,958 11,102 1992 6,458 5,510 11,968 1993 6,454 5,502 11,956 1994 7,093 5,680 12,773 1995 7,112 5,878 12,990 1996 7,743 6,706 14,449 1997 8,264 6,923 15,187 1998 8,101 6,614 14,715 (4) Unit Variable Margin - cents/pounds Specialties & Intermediates Including the OrganoSilcon Specialties & business sold Basic Chemicals & Intermediates in 1993 Polymers 1991 24.5 27.1 11.8 1992 25.0 27.8 7.7 1993 25.7 27.2 6.6 1994 24.6 - 8.5 1995 26.8 - 16.4 1996 24.7 - 11.0 1997 22.9 - 13.9 1998 24.3 - 9.6 ) - 9 - Specialties & Intermediates
Millions of dollars, except as indicated 1998 1997 1996 Segment revenues $4,139 $4,453 $4,286 Cost of sales, exclusive of depreciation and amortization 3,007 3,358 3,131 Gross margin 1,132 1,095 1,155 Depreciation and amortization 247 214 188 Partnership income 27 116 134 Operating profit $ 833 $ 667 $ 742 Income from corporate investments carried at equity $ 1 $ 6 $ 9 Customer volume (millions of pounds) 8,101 8,264 7,743 Unit variable margin (cents/pound) 24.3 22.9 24.7 Fixed cost per pound of products sold (cents/pound) 14.7 14.2 14.7 Capital expenditures $ 438 $ 458 $ 522 Investments, advances and acquisitions 42 50 38 Segment assets 4,493 4,146 3,892
1998 Compared with 1997 During 1998, S&I segment revenues declined 7.1 percent on a 5.2 percent decline in average selling prices and a 2.0 percent decline in volume. Average selling prices declined for almost all of S&I's products as a result of worldwide competitive pricing pressure, particularly on sales in weakening Asian markets. Volume decreased most significantly in the SIM product lines, due largely to reduced Asian demand. This decline was somewhat offset by increased domestic shipments of industrial performance chemicals and UCAR emulsion systems products. The S&I unit variable margin increased principally due to declines in raw material costs. However, fixed cost per pound of products sold increased over 1997 reflecting the combined effect of reduced volumes and increased fixed costs associated with the extended plant shutdowns and costs associated with the corporation's information technology project. Increased depreciation and amortization are principally the result of depreciation associated with capital projects completed during 1998. Included in Operating profit for 1998 were two favorable litigation settlements related to the UNIPOL Systems business representing a total of $189 million before-tax ($115 after-tax), which occurred in the second half of the year. 1997 Compared with 1996 The increase in sales of 3.9 percent was the result of a 6.7 percent increase in volume partially offset by lower average selling prices. Average selling price reductions were due in part to a strengthening of the U.S. dollar against currencies such as the German Deutschemark and the Japanese yen, as well as by increased competition in SIM product lines. Additionally, shipments for this segment's products were negatively affected by rail problems in the U.S. Gulf Coast region in the second half of 1997. Unit variable margin declines resulted from an increase in the cost of raw materials and energy. A decline in research and development expenditures was mainly attributable to costs assumed by the corporation's technology venture, Univation. Increased depreciation and amortization expense reflected the associated depreciation of projects completed in 1997. Included in 1997's Operating profit is a charge of $12 million for the write-off of certain equipment associated with the corporation's ethylene propylene rubber (EPR) project. Specialties & Intermediates Joint Ventures The most significant joint ventures included in the S&I segment are: UOP LLC (UOP) - a domestic joint venture, accounted for as a partnership, with AlliedSignal Inc. for the worldwide supply of process technology, catalysts, molecular sieves and adsorbents to the petrochemical and gas-processing industries. In addition to its domestic operations, UOP has facilities in Germany, Italy and the United Kingdom. - 10 - Joint Ventures - Specialties & Intermediates
UCC's Combined Proportionate Share(a) Millions of dollars 1998 1997 1996 1998 1997 1996 Net sales $2,060 $2,246 $2,238 $1,032 $1,109 $1,082 Cost of sales 1,345 1,395 1,456 663 567 680 Depreciation 119 90 86 54 51 39 Income from operations 231 340 322 122 175 187 Interest expense 43 42 31 16 15 12 Provision for income taxes 48 76 63 24 38 32 Net Income $ 141 $ 224 $ 227 $ 81(b) $ 122 $ 143 UCC share of dividends & distributions $ 105 $ 107 $ 101 Total assets $1,981 $1,837 $1,769 $ 881 $ 820 $ 757 Total third-party debt 616 588 577 268 249 212 Net Assets $ 474 $ 451 $ 561 $ 298 $ 277 $ 263 (a) Includes U.S. Generally Accepted Accounting Principles adjustments made by the corporation, such as goodwill and related amortization, and adjustments needed to conform the accounting policies of the joint ventures to those of UCC. (b) Excluding the $53 million loss associated with Aspell in the third quarter.
Nippon Unicar Company Limited (NUC) - a Japanese corporate joint venture with Tonen Chemical Corporation to produce polyethylene and specialty polyethylene compounds and specialty silicone products. Aspell Polymeres SNC (Aspell) - a French partnership with Elf Atochem S.A., a subsidiary of Elf Aquitaine, to produce polyethylene and specialty polyethylene compounds. World Ethanol Company (World Ethanol)- a domestic partnership with Archer Daniels Midland Company, to supply ethanol worldwide. Univation Technologies, LLC (Univation) - a domestic joint venture, accounted for as a partnership, with Exxon Chemical Company, a division of Exxon Corporation, for the licensing of polyethylene technology and research, development and commercialization of process technology and single site and other advanced catalysts for the production of polyethylene. The venture is also the sales agent for licensing of Union Carbide's UNIPOL technology. Asian Acetyls Co., Ltd. (ASACCO) - a South Korean corporate joint venture with BP Chemicals and Samsung Fine Chemicals Company to produce vinyl acetate monomers used in the production of emulsion resins by customers in the coatings and adhesives industries. 1998 Compared with 1997 The corporation's share of S&I partnership income decreased $89 million from 1997. The decrease is primarily related to the recognition of $53 million of losses associated with Aspell in the third quarter of 1998. Additionally, 1998 included declining earnings from UOP, primarily related to unfavorable market conditions in Asia, Russia and the Middle East, and a full twelve months of operating costs, principally related to research and development, associated with Univation, compared with only eight months in 1997. Income from the corporation's S&I corporate investments carried at equity decreased $5 million principally due to reduced earnings at NUC. 1997 Compared with 1996 The corporation's share of S&I partnership income decreased $18 million in 1997 from the prior year. The decline resulted from the assumption of certain costs, principally research and development, by Univation, and decreased earnings of World Ethanol, mainly attributable to lower prices and volumes caused by a different mix of ethanol sales in 1997. Income from corporate investments carried at equity decreased $3 million principally the result of reduced earnings at NUC. Outlook - Specialties & Intermediates Looking ahead to the first quarter of 1999, the corporation anticipates that this segment will continue to be negatively affected by weak pricing, particularly in Asia. This effect may be mitigated by seasonal improvement in volumes, continued low raw material cost and improved licensing results. Results from the corporation's S&I joint ventures will continue to be affected by declines in UOP's earnings due to continuing difficulties in Asia, Russia and the Middle East. - 11 - Basic Chemicals & Polymers
Millions of dollars, except as indicated 1998 1997 1996 Segment revenues $1,802 $2,420 $2,125 Cost of sales, exclusive of depreciation and amortization 1,550 1,816 1,739 Gross margin 252 604 386 Depreciation and amortization 142 126 124 Partnership income 6 17 10 Operating profit $ 20 $ 386 $ 162 (Loss) from corporate investments carried at equity $ (67) $ (3) $ (25) Customer volume (millions of pounds) 6,614 6,923 6,706 Unit variable margin (cents/pound) 9.6 13.9 11.0 Fixed cost per pound of products sold (cents/pound) 7.5 6.8 6.7 Capital expenditures $ 344 $ 297 $ 199 Investments, advances and acquisitions 69 18 225 Segment assets 2,596 2,540 2,328
1998 Compared with 1997 During 1998, the BC&P segment was negatively affected by overall deterioration of the supply/demand balance for basic chemicals. Average customer selling prices declined 22.3 percent. Prices for ethylene glycol, polyethylene and polypropylene declined throughout 1998 to levels below those of the prior cyclical trough in 1993. Customer volume declined 4.5 percent, in part due to distribution disruptions in the first half of the year and extended ethylene plant shutdowns for multiyear maintenance, at the corporation's Taft, La., and Texas City, Tex., facilities, and an expansion, at Taft, La., all in the second half of the year. Unit variable margin declined as average selling prices fell at a faster rate than the cost of raw materials. The increase in this segment's fixed cost per pound of products sold reflects the combined effect of reduced customer volumes and higher costs associated with the extended plant shutdowns and the implementation of the corporation's information technology infrastructure system. The increase in depreciation and amortization is the result of depreciation associated with capital projects completed during 1998. 1997 Compared with 1996 Increases in sales resulted from a 9.2 percent increase in average customer selling prices coupled with a 3.2 percent increase in customer volume. The increase in average customer selling prices reflected the strong increase in ethylene glycol pricing during the first three quarters of 1997 and improved polyethylene pricing throughout the first half of the year. In addition, this segment's cost of sales and unit variable margin benefited from reduced average feedstock costs in 1997 versus 1996. Basic Chemicals & Polymers Joint Ventures The most significant joint ventures included in the BC&P segment are: Alberta & Orient Glycol Company Limited (A&OG) - a Canadian corporate joint venture with Mitsui & Co., Ltd., Japan, and Far Eastern Textile Ltd., Taiwan, to produce ethylene glycol. EQUATE Petrochemical Company K.S.C. (EQUATE) - a corporate joint venture in Kuwait with Petrochemical Industries Company and Boubyan Petrochemical Company to manufacture ethylene, polyethylene and ethylene glycol. Petromont and Company, Limited Partnership (Petromont) - a Canadian partnership with Ethylec Inc. to produce olefins and polyethylene resins. Polimeri Europa S.r.l. (Polimeri Europa) - an Italian corporate joint venture with EniChem S.p.A. to produce olefins and polyethylene resins. This joint venture also has facilities in France and Germany. 1998 Compared with 1997 BC&P's partnership income declined $11 million from 1997 due to the decline in earnings of Petromont resulting from declining worldwide average chemical selling prices. Lower earnings for this segment's corporate investments carried at equity in 1998 are mainly attributable to declining worldwide average basic chemical selling prices particularly in Asia and Europe. Additionally, EQUATE experienced startup difficulties during its first full year of operations, including an interruption in the supply of electric power from a government-owned power station. Depreciation within the joint ventures more than doubled in 1998 due to the startup of the EQUATE facility. - 12 - Joint Ventures - Basic Chemicals & Polymers
UCC's Proportionate Combined Share(a) Millions of dollars 1998 1997 1996 1998 1997 1996 Net sales $1,996 $2,078 $1,930 $ 984 $1,038 $ 965 Cost of sales 1,597 1,661 1,575 790 855 798 Depreciation 253 102 126 113 46 51 Income from operations 50 219 96 36 68 30 Interest expense 206 70 67 86 35 34 Provision for income taxes 27 49 20 12 18 11 Net Income (loss) $ (182) $ 100 $ 9 $ (61) $ 14 $ (15) UCC share of dividends & distributions $ 18 $ 19 $ 40 Total assets $3,724 $3,980 $3,536 $1,725 $1,797 $1,650 Total third-party debt 1,474 1,595 1,197 691 744 561 Net Assets $ 639 $ 985 $ 972 $ 326 $ 413 $ 432 (a) Includes U.S. Generally Accepted Accounting Principles adjustments made by the corporation, such as goodwill and related amortization, and adjustments needed to conform the accounting policies of the joint ventures to those of UCC.
1997 Compared with 1996 The corporation's share of the net income of BC&P partnerships increased $7 million from 1996 to 1997, due to significant improvement in Petromont earnings. The corporation's share of loss from corporate investments carried at equity declined $22 million from a loss of $25 million in 1996 to a loss of $3 million in 1997, as the result of improved earnings of Polimeri Europa partially offset by increased preoperating expenses of EQUATE. Strong results of our polyolefins partnerships in 1997 were the result of increases in worldwide polymer pricing over the prior year. Joint Venture Commitments EQUATE commenced operations in the fourth quarter of 1997. Preoperating losses of $43 million for development of this world-scale petrochemical complex were recognized by the corporation in 1997 ($23 million in 1996). The corporation has severally guaranteed 45 percent (approximately $562 million at Dec. 31, 1998) of EQUATE's debt and working capital financing needs until certain completion and financial tests are achieved. If these tests are met, a $54 million several guarantee will provide ongoing support thereafter. The corporation has also severally guaranteed certain sales volume targets until EQUATE's sales capabilities are proved. In addition, the corporation has pledged its shares in EQUATE as security for EQUATE's debt. The corporation has political risk insurance coverage for its equity investment and, through March 31, 1999, substantially all of its guarantee of EQUATE's debt. The corporation is in the process of extending the political risk insurance for its debt guarantee through March 31, 2001. Outlook - Basic Chemicals & Polymers The corporation anticipates that adverse market conditions will continue throughout 1999. While the corporation announced price increases in ethylene, polyethylene, polypropylene and ethylene glycol in the first quarter of 1999, it is too early to determine if the increases will be accepted. Variable margins should remain relatively flat, with any price increases offset by raw material cost increases. The corporation anticipates that operating profit will benefit from the absence of costs associated with the Taft, La., and Texas City, Tex., olefins plant turnarounds and the Taft expansion, completed in 1998. The corporation's outlook for its BC&P joint ventures is anticipated to reflect the same market conditions as those of the corporation's BC&P segment. While EQUATE is anticipated to operate at its nameplate capacity, resultant gains are likely to be offset by decreases at Polimeri Europa due to lower European polyethylene pricing. Other
Millions of dollars for the year ended December 31, 1998 1997 1996 Operating profit (loss) $(50) $ (8) $ 17
The Other segment includes the operating profit (loss) of noncore activities and certain financial transactions. Included in 1998 were the net effects of gains and losses from the resolution of certain legal obligations related to discontinued businesses, the writedown of a long-term available-for-sale security and a reclassification, to a discontinued business, of an environmental accrual. Costs Relating to Protection of the Environment Worldwide costs relating to environmental protection continue to be significant, due primarily to stringent laws and regulations and to the corporation's commitment to industry - 13 - initiatives such as RESPONSIBLE CARE, as well as to its own internal standards. In 1998, worldwide expenses related to environmental protection for compliance with Federal, state and local laws regulating solid and hazardous wastes and discharge of materials to air and water, as well as for waste site remedial activities, totaled $91 million. Expenses in 1997 and 1996 were $100 million and $110 million, respectively. In recent years, such environmental expenses have decreased as the corporation has made progress toward completing major remediation projects. In addition, worldwide capital expenditures relating to environmental protection, including those for new capacity and cost reduction and replacement, in 1998 totaled $57 million, compared with $68 million and $43 million in 1997 and 1996, respectively. The corporation, like other companies in the U.S., periodically receives notices from the U.S. Environmental Protection Agency and from state environmental agencies, as well as claims from other companies, alleging that the corporation is a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act and equivalent state laws (hereafter referred to collectively as Superfund) for past and future cleanup costs at hazardous waste sites at which the corporation is alleged to have disposed of, or arranged for treatment or disposal of, hazardous substances. The corporation is also undertaking environmental investigation and remediation projects at hazardous waste sites located on property currently and formerly owned by the corporation pursuant to Superfund, as well as to the Resource Conservation and Recovery Act and equivalent state laws. There are approximately 118 hazardous waste sites at which management believes it is probable or reasonably possible that the corporation will incur liability for investigation and/or remediation costs. The corporation has established accruals for those hazardous waste sites where it is probable that a loss has been incurred and the amount of the loss can reasonably be estimated. The reliability and precision of the loss estimates are affected by numerous factors, such as the stage of site evaluation, the allocation of responsibility among PRPs and the assertion of additional claims. The corporation adjusts its accruals as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made, and to reflect new and changing facts. At Dec. 31, 1998, the corporation's accruals for environmental remediation totaled $220 million ($264 million in 1997). Approximately 53 percent of the accrual (55 percent in 1997) pertains to estimated future expenditures for site investigation and cleanup, and approximately 47 percent (45 percent in 1997) pertains to estimated expenditures for closure and postclosure activities. See Note 17 to the financial statements for a discussion of the environmental sites for which the corporation has remediation responsibility. In addition, the corporation had environmental loss contingencies of $121 million at Dec. 31, 1998. Estimates of future costs of environmental protection are necessarily imprecise, due to numerous uncertainties. These include the impact of new laws and regulations, the availability and application of new and diverse technologies, the identification of new hazardous waste sites at which the corporation may be a PRP and, in the case of Superfund sites, the ultimate allocation of costs among PRPs and the final determination of the remedial requirements. While estimating such future costs is inherently imprecise, taking into consideration the corporation's experience to date regarding environmental matters of a similar nature and facts currently known, the corporation estimates that worldwide expenses related to environmental protection, expressed in 1998 dollars, should average about $110 million annually over the next five years. Worldwide capital expenditures for environmental protection, also expressed in 1998 dollars, are expected to average about $50 million annually over the same period. Management anticipates that future annual costs for environmental protection after 2003 will continue at levels comparable to the five-year average estimates. Subject to the inherent imprecision and uncertainties in estimating and predicting future costs of environmental protection, it is management's opinion that any future annual costs for environmental protection in excess of the five-year average estimates stated here, plus those costs anticipated to continue thereafter, would not have a material adverse effect on the corporation's consolidated financial position. Litigation The corporation and its consolidated subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; and taxes. In some of these legal proceedings and claims, the cost of remedies that may be sought or damages claimed is substantial. While it is impossible at this time to determine with certainty the ultimate outcome of any such legal proceedings and claims, management believes that adequate provisions have been made for probable losses with respect thereto and that such ultimate outcome, after provisions therefor, will not have a material adverse effect on the consolidated financial position of the corporation but could have a material effect on consolidated results of operations in a given quarter or year. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions therefor, they will be charged to income when determinable. - 14 - Accounting Changes 1996 through 1998 Effective Jan. 1, 1998, the corporation adopted Statement of Financial Accounting Standards (Statement) No. 130, "Reporting Comprehensive Income," Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," and Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These Statements address presentation and disclosure matters and therefore had no impact on the corporation's financial position or results of operations. As required by these Statements, the respective reporting disclosures have been reflected in the corporation's 1998 consolidated financial statements. Prior periods have been restated to comply with the provisions of these Statements. In 1997, the corporation adopted Emerging Issues Task Force consensus on Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," requiring companies to expense as incurred costs associated with business process reengineering activities. Effective Oct. 1, 1997, the corporation adopted the provisions of Issue 97-13 as a cumulative effect of a change in accounting principle, reversing $28 million ($17 million, after-tax) of costs previously capitalized from 1995 through the third quarter of 1997. Additionally in 1997, the corporation adopted Statement No. 128, "Earnings Per Share," and Statement No. 129, "Disclosure of Information about Capital Structure." Subsequent to 1998 The corporation prospectively adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," effective Jan. 1, 1999. The effect of this adoption is not expected to be material to the results of operations in the period of adoption. Also effective Jan. 1, 1999, the corporation adopted SOP 98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires the expensing of certain costs, such as preoperating expenses and organizational costs associated with the corporation's startup activities. The effect of adoption is required to be accounted for as a cumulative effect of change in accounting principle. The amount to be recognized as a cumulative effect of change in accounting principle in the first quarter of 1999 is anticipated to be approximately $20 million after-tax. In 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." It requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The corporation is currently evaluating the effect this Statement will have on its financial position and results of operations in the period of adoption and may consider early adoption. Year 2000 Readiness Disclosure Overview The corporation has a comprehensive program to address its systems that may be affected by the Year 2000 problem, including hardware and software, and to assess the readiness of its customers and suppliers. An inventory of potential problems and a prioritization of remedial work is complete. Remediation efforts and further discussions with entities outside the corporation whose Year 2000 activities could impact Union Carbide are under way. Internal Activities Since 1995, the corporation has been working to ready its internal operations and has expended significant funds to replace most of its U.S. office information systems with an integrated, advanced system supported by Systems Applications and Products (SAP) software. This SAP project, implemented during 1998, made most of the corporation's commercial hardware and software Year 2000 ready. At the completion of 1999, all of the corporation's business information systems are expected to be Year 2000 ready. Other systems and equipment scheduled for implementation, remediation, completion or replacement by the end of the third quarter of 1999 include: - - Commercial computer systems in Human Resources; Health, Safety and Environment; Engineering; Research and Development; and other functional areas. - - Process control systems, logic controllers, process and laboratory analyzers, embedded devices, and other business systems including office and medical equipment, building/site systems and applications providing environmental compliance reporting. Remediation in major manufacturing units will be coordinated with planned major maintenance shutdowns. Remediation has already been accomplished at the corporation's Texas City and Taft hydrocarbons units. In a few cases, remediation will be handled in the fourth quarter to coordinate with previously scheduled plant shutdowns. - - International computer infrastructure. Remediation of international commercial applications began in 1997 and was essentially completed during the fourth quarter of 1998. Small applications remediation and international infrastructure will be completed during 1999. - - Domestic infrastructure upgrades to desktop computers and servers. - - Selected subsidiary and Canadian operations. - 15 - External Groups The corporation is reviewing its external relationships to address potential Year 2000 impacts arising from interfaces with customers, suppliers and service providers with whom the corporation has a significant relationship, as well as the corporation's joint ventures. The corporation continues to communicate with its most significant suppliers and customers to assess their ability to meet their sales and purchasing obligations, as well as with its joint ventures to assess their readiness for the Year 2000. Interviews with the 200 most critical suppliers have been completed. In North America, approximately 1,900 inquiries have been answered in writing by our customers and for 62 major customers more extensive information has been received through telephone interviews, personal visits or additional written information. Another 200 inquiries have been similarly addressed outside North America. The corporation's Year 2000 efforts relative to customers and suppliers will continue into the Year 2000. Expenditures Costs for project work are expected to range between $40 and $45 million, with potential contingencies raising the overall funding to between $50 and $60 million. Additionally, internal personnel costs are expected to range between $30 and $40 million. All costs are expected to be funded through operations of the corporation. As of Dec. 31, 1998, approximately $12 million and $6 million had been incurred for costs of project work and internal personnel, respectively. Approximately 70 percent of the planned external costs are expected to relate to repairing or upgrading current systems and 30 percent to existing hardware and software replacement. These estimates do not include costs associated with the replacement of most of the corporation's U.S. computer systems with SAP, the environmental reporting project, international information technology infrastructure, or Year 2000 issues which the corporation's joint ventures may incur, all of which are being implemented independently of the corporation's Year 2000 project. It is anticipated that the corporation's share of the cost to address Year 2000 issues of its joint ventures will range between $10 and $15 million. Risks and Contingency Plan Failure to sufficiently remediate the Year 2000 problem in a timely fashion poses substantial risks for the corporation. Reasonable worst-case scenarios include, but are not limited to, manufacturing system malfunctions including shutdowns and failure in the supply chain. The full extent of these risk scenarios is uncertain at this time and will be better defined during 1999. Contingency planning is being initiated in the first quarter, and plans should be in place, as necessary, by the end of the third quarter. Contingency plans will include, but not be limited to, consideration of alternative sources of supply, customer communications and plant and business response plans. The corporation plans to complete its Year 2000 project prior to the new year. However, considerable work remains to be accomplished, and unforeseen difficulties may arise that could adversely affect the corporation's ability to complete systems modifications correctly, on time and/or within cost estimates. In addition, there can be no assurance that customers, suppliers and service providers on whom the corporation relies, as well as the corporation's joint ventures, will resolve their Year 2000 issues accurately, thoroughly and on time. Failure by the corporation or failure by the corporation's customers, suppliers, service providers or joint ventures to complete the Year 2000 project by the new year could have a material adverse affect on future operating results and financial condition of the corporation. Liquidity, Capital Resources and Other Financial Data Cash Flow From Operations Cash flow from operations increased by $21 million to $928 million in 1998, as compared to $907 million in 1997, principally the result of an increase in noncash charges and a reduction in working capital requirements partially offset by a decline in net income. The increase in noncash charges is mainly attributable to increases in joint venture losses, depreciation and amortization and deferred income taxes. Cash Flow Used for Investing Cash flow used for investing includes capital expenditures, investments, advances and acquisitions, and purchases of, and proceeds from, the sale of securities and assets. Capital expenditures increased to $782 million in 1998, from $755 million in 1997 and $721 million in 1996. Major capital projects funded during 1998 and 1997 included work on an olefins expansion, a new butanol unit, a new CARBOWAX polyethylene glycol and TERGITOL surfactants facility and an ethanolamines unit, all at Taft, La.; a new olefins facility being built jointly with NOVA Chemicals Ltd., and a polyolefins project, both in Alberta, Canada; as well as the upgrade of information technology infrastructure. Major capital projects funded during 1996 included an ethylene propylene rubber facility at Seadrift, Tex.; an expansion of ethylene production units at Taft, La., as well as new cogeneration facilities at Texas City, Tex., and Taft, La.; and new information technology infrastructure. Over the past three years, 61 percent of capital expenditures was directed to new capacity, 35 percent to cost reduction and replacement and 4 percent to environmental, safety and health facilities. Of these expenditures, 86 percent were in the U.S. and Puerto Rico. - 16 - Investments and acquisitions in 1996 included the purchases of Shell's polypropylene assets and business and 95 percent of the outstanding shares of Companhia Alcoolquimica Nacional, a Brazilian producer of vinyl acetate monomer. At Dec. 31, 1998, the cost of completing authorized construction projects was estimated to be $1.160 billion, of which $132 million is covered by firm commitments. Future construction expenditures are anticipated to be sourced through operating cash flows and borrowings. In April 1998, the corporation and Petroliam Nasional Berhad (PETRONAS), the national oil company of Malaysia, agreed to form three joint venture companies (the OPTIMAL Group) that will build and operate a 600,000 metric-tons-per-year ethylene plant, a 385,000 metric-tons-per-year ethylene oxide/glycol plant and a multiple specialties and intermediates derivatives plant in Kerteh, Terengganu, Malaysia. The joint ventures' primary marketing focus will be in Southeast Asia. The corporation anticipates funding its approximate $500 million share of the cost of the complex through its 2001 planned startup date with internally generated funds and external debt. Cash Flow Used for Financing Cash flow used for financing includes stockholder and minority interest dividends and funds used to buy back common stock, offset in part by net proceeds from short- and long-term debt and sales of common stock pursuant to the corporation's dividend reinvestment plan, its employee savings and investment programs and its long-term incentive plans. Cash flow used for financing in 1998 totaled $8 million, compared with $132 million in 1997 and $254 million in 1996. Borrowings in 1998 included net proceeds of $248 million from the issuance of 6.25 percent notes due in June 2003 and $110 million net proceeds of floating rate public notes, due in April 2000. The floating rate public notes bear interest at a rate which will be reset quarterly at the three-month London interbank offered rate (LIBOR), plus 0.65 percent. Dividends paid in 1998 totaled $122 million. Included in cash flow used for financing in 1997 were net proceeds of $250 million from the issuance of preferred stock by the corporation's real estate investment trust (REIT) subsidiary. The corporation paid $240 million in cash to redeem the preferred stock shares in the fourth quarter of 1997. Cash dividends paid to preferred shareholders of the REIT during 1997 totaled $25 million. In September 1997, the board of directors declared an increase in the quarterly common stock dividend to $0.225 per share. In October 1997, the trustee of the Employee Stock Ownership Plan (ESOP) exercised its right to convert all shares of the corporation's preferred stock held by the ESOP into the corporation's common stock. This noncash conversion increased the corporation's common stock outstanding at that time by 15.4 million shares. In 1996, the corporation issued $200 million of 7.75 percent debentures maturing in 2096, the proceeds of which were used to finance ongoing share repurchases and to pay down existing short-term debt. During 1998, pursuant to its 60 million share repurchase authorization, the corporation repurchased 6.1 million shares of its common stock for $273 million, at an average effective price of $44.69 per share, bringing the total amount repurchased since the beginning of 1993 to 55.4 million shares for $1.986 billion, at an average effective price of $35.82 per share. The corporation intends to acquire additional shares from time to time at prevailing market prices, at a rate consistent with the combination of corporate cash flow and market conditions. In addition to the above repurchases in 1998, stock was reacquired from employees to satisfy tax withholding requirements on restricted shares issued under employee benefit plans. At Dec. 31, 1998, there were no outstanding borrowings under the existing major bank credit agreement aggregating $1 billion. The corporation has an effective shelf registration statement available covering $390 million of public debt securities at Dec. 31, 1998. Debt Ratios
Total debt outstanding at year-end for each of the past three years was: Millions of dollars 1998 1997 1996 Domestic $2,019 $1,719 $1,492 International 203 168 107 Total $2,222 $1,887 $1,599
Year-end ratios of total debt to total capital were: 1998 1997 1996 Debt ratio 47.2% 44.2% 42.7% Total debt consists of short-term debt, long-term debt and the current portion of long-term debt. Total capital consists of total debt plus minority stockholders' equity in consolidated subsidiaries and stockholders' equity. (Included on page 17 is one bar chart which provides the following data: Shares Repurchased - millions Net of Reissuances Total 1993 1.4 3.8 1994 6.1 11.6 1995 9.3 14.1 1996 8.7 12.8 1997 4.9(a) 7.0 1998 4.3 6.1 (a) Does not include 15.4 million shares issued in connection with the ESOP preferred share conversion. ) - 17 - Selected Financial Data
Union Carbide Corporation and Subsidiaries Dollar amounts in millions (except per share figures) 1998 1997 1996 1995 1994 From the Income Statement Net sales $5,659 $6,502 $6,106 $5,888 $4,865 Cost of sales, exclusive of depreciation and amortization 4,294 4,806 4,568 4,100 3,673 Research and development 143 157 159 144 136 Selling, administration and other expenses 304 324 321 387(f) 290 Depreciation and amortization 389 340 312 306 274 Partnership income (loss) 33(a) 133 144 152 98 Other income (expense) - net 241(b) 37 31 245 (39) Income before interest expense and provision for income taxes 803 1,045 921 1,348 551 Interest expense 114 79 76 89 80 Income (loss) before provision for income taxes - continuing operations 689 966 845 1,259 471 Provision (credit) for income taxes 217 279 236 380 137 Income (loss) from corporate investments carried at equity (66) 3 (16) 47 55 Income (loss) from continuing operations 403 676 593 925 389 Cumulative effect of change in accounting principle - (17) - - - Net income (loss) - common stockholders 403 652 583 915 379 Per common share: Basic - Income (loss) from continuing operations $ 2.98 $ 5.02 $ 4.43 $ 6.65 $ 2.51 - Net income (loss) 2.98 4.89 4.43 6.65 2.51 Diluted - Income (loss) from continuing operations 2.91 4.53 3.90 5.85 2.27 - Net income (loss) 2.91 4.41 3.90 5.85 2.27 From the Balance Sheet Net current assets of continuing operations $ 436 $ 362 $ 595 $ 858 $ 329 Total assets 7,291 6,964 6,546 6,256 5,028 Long-term debt 1,796 1,458 1,487 1,285 899 Other long-term obligations 602 738 811 834 537 Total capital(c) 4,707 4,268 3,742 3,392 2,479 Stockholders' equity 2,449 2,348 2,114 2,045 1,509 Stockholders' equity per common share 18.46 17.15 16.72 15.14 10.45 Other Data Cash dividends on common stock $ 122 $ 100 $ 99 $ 103 $ 113 Cash dividends per common share 0.90 0.7875 0.75 0.75 0.75 Special distribution per common share - - - - - Market price per common share - high(d) 55.75 56.81 49.88 42.75 35.88 Market price per common share - low(d) 36.75 40.50 36.38 25.50 21.50 Common shares outstanding (thousands) 132,686 136,944 126,440 135,108 144,412 Capital expenditures 782 755 721 542 409 Employees - continuing operations 11,627 11,813 11,745 11,521 12,004 Selected Financial Ratios Total debt/total capital 47.2% 44.2% 42.7% 39.0% 38.2% Return on capital(c) 11.2% 19.6% 18.6% 39.2% 18.0% Return on equity(e) 17.2% 30.8% 28.5% 60.6% 26.5% Income from continuing operations/average stockholders' equity 16.8% 30.3% 28.5% 52.1% 26.5% Cash dividends on common stock/income from continuing operations 30.3% 14.8% 16.7% 11.1% 29.0% Union Carbide Corporation and Subsidiaries Dollar amounts in millions (except per share figures) 1993 1992 1991 1990 1989 1988 From the Income Statement Net sales $4,640 $4,872 $4,877 $5,238 $5,613 $5,525 Cost of sales, exclusive of depreciation and amortization 3,589 3,764 3,787 3,876 3,909 3,696 Research and development 139 155 157 157 143 124 Selling, administration and other expenses 340 383 408 466 442 394 Depreciation and amortization 276 293 287 278 261 255 Partnership income (loss) 67 60 (22) 70 82 95 Other income (expense) - net (66) (13) (135) 103 108 (1) Income before interest expense and provision for income taxes 297 324 81 634 1,048 1,150 Interest expense 70 146 228 269 268 172 Income (loss) before provision for income taxes - continuing operations 227 178 (147) 365 780 978 Provision (credit) for income taxes 78 45 (50) 130 257 381 Income (loss) from corporate investments carried at equity 16 (14) (21) (42) 27 33 Income (loss) from continuing operations 165 119 (116) 188 530 608 Cumulative effect of change in accounting principle (97) (361) - - - - Net income (loss) - common stockholders 58 (187) (28) 308 573 662 Per common share: Basic - Income (loss) from continuing operations $ 1.03 $ 0.79 $(1.07) $ 1.34 $ 3.79 $ 4.52 - Net income (loss) 0.37 (1.48) (0.22) 2.19 4.10 4.92 Diluted - Income (loss) from continuing operations 0.97 0.76 (1.07) 1.32 3.63 4.30 - Net income (loss) 0.41 (1.24) (0.22) 2.16 3.92 4.67 From the Balance Sheet Net current assets of continuing operations $ 233 $ 66 $ 209 $ 7 $ 22 $ 14 Total assets 4,689 4,941 6,826 7,389 7,355 7,327 Long-term debt 931 1,113 1,160 2,058 2,060 2,271 Other long-term obligations 378 277 428 357 572 594 Total capital(c) 2,395 2,710 4,694 5,338 5,319 4,805 Stockholders' equity 1,428 1,238 2,239 2,373 2,383 1,836 Stockholders' equity per common share 9.49 9.32 17.55 18.88 16.83 13.34 Other Data Cash dividends on common stock $ 110 $ 114 $ 126 $ 138 $ 140 $ 155 Cash dividends per common share 0.75 0.875 1.00 1.00 1.00 1.15 Special distribution per common share - 15.875 - - - - Market price per common share - high(d) 23.13 17.13(g) 22.63 24.88 33.25 28.38 Market price per common share - low(d) 16.00 10.88(g) 15.13 14.13 22.75 17.00 Common shares outstanding (thousands) 150,548 132,865 127,607 125,674 141,578 137,602 Capital expenditures 395 359 400 381 483 380 Employees - continuing operations 13,051 15,075 16,705 17,722 18,032 17,258 Selected Financial Ratios Total debt/total capital 40.3% 54.3% 52.0% 54.0% 49.9% 56.1% Return on capital(c) 7.7% 6.9% - 8.4% 21.2% 24.5% Return on equity(e) 4.7% (8.4)% (1.2)% 12.9% 31.2% 53.1% Income from continuing operations/average stockholders' equity 12.4% 6.8% - 7.9% 25.1% 39.4% Cash dividends on common stock/income from continuing operations 66.7% 95.8% - 73.4% 26.4% 25.5% (a) Includes $53 million in losses associated with Aspell Polymeres SNC, the corporation's joint venture in France. (b) Other income (expense) - net in 1998 includes $189 million in favorable litigation settlements related to the UNIPOL Systems business. (c) Return on capital is computed by dividing income by beginning-of-year capital. Income consists of income from continuing operations, less preferred dividends, plus after-tax interest cost (net of interest income received from Praxair), plus income attributable to minority interests. Capital consists of total debt plus minority stockholders' equity in consolidated subsidiaries and stockholders' equity, adjusted for the corporation's Praxair-related assets and the cumulative effect of changes in accounting principles. Total debt consists of short-term debt, long- term debt and the current portion of long-term debt. (d) Prices are based on New York Stock Exchange Composite Transactions. (e) Return on equity is computed by dividing Net income (loss) - common stockholders by beginning-of-year stockholders' equity. (f) Selling, administration and other expenses in 1995 include a charge of $68 million for postemployment benefits. (g) In 1992 the corporation spun off Praxair, Inc. The high and low presented in the table for 1992 represent the value of the common stock after the spin-off. The high and low for 1992 before the spin-off were $29.63 and $20.13, respectively.
- 18 and 19 - Financial Statements Consolidated Balance Sheet
Union Carbide Corporation and Subsidiaries Millions of dollars, at December 31, 1998 1997 Assets Cash and cash equivalents $ 49 $ 20 Notes and accounts receivable 933 993 Inventories 667 604 Other current assets 257 249 Total Current Assets 1,906 1,866 Property, plant and equipment 8,409 7,707 Less: Accumulated depreciation 4,228 3,927 Net Fixed Assets 4,181 3,780 Companies carried at equity 624 690 Other investments and advances 141 113 Total Investments and Advances 765 803 Other assets 439 515 Total Assets $7,291 $6,964 Liabilities and Stockholders' Equity Accounts payable $ 264 $ 273 Short-term debt and current portion of long-term debt 426 429 Accrued income and other taxes 110 75 Other accrued liabilities 670 727 Total Current Liabilities 1,470 1,504 Long-term debt 1,796 1,458 Postretirement benefit obligation 450 464 Other long-term obligations 602 738 Deferred credits 488 419 Minority stockholders' equity in consolidated subsidiaries 36 33 Stockholders' equity Common stock Authorized - 500,000,000 shares Issued - 155,052,017 shares (154,609,669 shares in 1997) 155 155 Additional paid-in capital 79 47 Other equity adjustments (2) (3) Accumulated other comprehensive loss (104) (101) Retained earnings 3,357 3,074 Unearned employee compensation - ESOP (67) (80) Treasury stock, at cost - 22,366,017 shares (17,666,164 shares in 1997) (969) (744) Total Stockholders' Equity 2,449 2,348 Total Liabilities and Stockholders' Equity $7,291 $6,964 The Notes to Financial Statements on pages 25 through 43 should be read in conjunction with this statement.
- 20 - Consolidated Statement of Income
Union Carbide Corporation and Subsidiaries Millions of dollars (except per share figures), for the year ended December 31, 1998 1997 1996 Net Sales $5,659 $6,502 $6,106 Cost of sales, exclusive of depreciation and amortization 4,294 4,806 4,568 Research and development 143 157 159 Selling, administration and other expenses 304 324 321 Depreciation and amortization 389 340 312 Partnership income 33 133 144 Net gains from settlements of UNIPOL Systems business litigation 189 - - Other income - net 52 37 31 Income Before Interest Expense and Provision for Income Taxes 803 1,045 921 Interest expense 114 79 76 Income Before Provision for Income Taxes 689 966 845 Provision for income taxes 217 279 236 Income of Consolidated Companies and Partnerships 472 687 609 Minority interest 3 14 - Income (loss) from corporate investments carried at equity (66) 3 (16) Income Before Cumulative Effect of Change in Accounting Principle 403 676 593 Cumulative effect of change in accounting principle - (17) - Net Income 403 659 593 Preferred stock dividends, net of income taxes - 7 10 Net Income - Common Stockholders $ 403 $ 652 $ 583 Earnings Per Common Share Basic - Income Before Cumulative Effect of Change in Accounting Principle $ 2.98 $ 5.02 $ 4.43 Cumulative effect of change in accounting principle - (0.13) - Net Income - Common Stockholders $ 2.98 $ 4.89 $ 4.43 Diluted - Income Before Cumulative Effect of Change in Accounting Principle $ 2.91 $ 4.53 $ 3.90 Cumulative effect of change in accounting principle - (0.12) - Net Income - Common Stockholders $ 2.91 $ 4.41 $ 3.90 Cash Dividends Declared Per Common Share $ 0.90 $ 0.7875 $ 0.75 The Notes to Financial Statements on pages 25 through 43 should be read in conjunction with this statement.
- 21 - Consolidated Statement of Stockholders' Equity
Union Carbide Corporation and Subsidiaries Additional Other Compre- Shares Common Paid-In Equity hensive Millions of dollars (shares in thousands) Common Treasury Stock Capital Adjustments Income Balance at December 31, 1995 154,610 19,502 $ 155 $ 343 $ (5) Put options, net 8 Issued: For the Dividend Reinvestment and Stock Purchase Plan (212) 2 For employee savings and incentive plans (3,942) 17 Common stock repurchase program 12,821 Comprehensive income Net income $ 593 Other comprehensive income (loss), net of income taxes Unrealized losses on securities, net of reclassification adjustments (4) Foreign currency translation adjustments (11) Other comprehensive loss (15) Comprehensive income $ 578 Preferred stock dividends, net of income taxes Cash dividends on common stock Restricted stock - Long-Term Incentive Program (3) Balance at December 31, 1996 154,610 28,169 $ 155 $ 370 $ (8) Put options, net 26 Issued: For the Dividend Reinvestment and Stock Purchase Plan (189) 2 For employee savings and incentive plans (1,979) (66) Common stock repurchase program 7,071 Effect of conversion of preferred shares held by ESOP (15,406) (285) Comprehensive income Net income $ 659 Other comprehensive income (loss), net of income taxes Unrealized gains on securities, net of reclassification adjustments 5 Foreign currency translation adjustments (81) Other comprehensive loss (76) Comprehensive income $ 583 Preferred stock dividends, net of income taxes Cash dividends on common stock Shares allocated to ESOP participants Restricted stock - Long-Term Incentive Program 5 Balance at December 31, 1997 154,610 17,666 $ 155 $ 47 $ (3) Issued: For the Dividend Reinvestment and Stock Purchase Plan 58 (161) 4 For employee savings and incentive plans 384 (1,213) 28 Common stock repurchase program 6,074 Comprehensive income Net income $ 403 Other comprehensive income (loss), net of income taxes Unrealized gains on securities, net of reclassification adjustments 5 Foreign currency translation adjustments (8) Other comprehensive loss (3) Comprehensive income $ 400 Cash dividends on common stock Tax on unallocated ESOP shares Shares allocated to ESOP participants Restricted stock - Long-Term Incentive Program 1 Balance at December 31, 1998 155,052 22,366 $ 155 $ 79 $ (2) Union Carbide Corporation and Subsidiaries Accumulated Unearned Total Other Employee Stock- Comprehensive Retained Compensation Treasury holders' Millions of dollars (shares in thousands) Loss Earnings -ESOP Stock Equity Balance at December 31, 1995 $ (10) $ 2,145 $ - $ (583) $ 2,045 Put options, net 8 Issued: For the Dividend Reinvestment and Stock Purchase Plan 7 9 For employee savings and incentive plans 119 136 Common stock repurchase program (550) (550) Comprehensive income Net income 593 Other comprehensive income (loss), net of income taxes Unrealized losses on securities, net of reclassification adjustments Foreign currency translation adjustments Other comprehensive loss (15) Comprehensive income 578 Preferred stock dividends, net of income taxes (10) (10) Cash dividends on common stock (99) (99) Restricted stock - Long-Term Incentive Program (3) Balance at December 31, 1996 $ (25) $ 2,629 $ - $(1,007) $ 2,114 Put options, net 26 Issued: For the Dividend Reinvestment and Stock Purchase Plan 7 9 For employee savings and incentive plans 66 - Common stock repurchase program (340) (340) Effect of conversion of preferred shares held by ESOP (107) (81) 530 57 Comprehensive income Net income 659 Other comprehensive income (loss), net of income taxes Unrealized gains on securities, net of reclassification adjustments Foreign currency translation adjustments Other comprehensive loss (76) Comprehensive income 583 Preferred stock dividends, net of income taxes (7) (7) Cash dividends on common stock (100) (100) Shares allocated to ESOP participants 1 1 Restricted stock - Long-Term Incentive Program 5 Balance at December 31, 1997 $ (101) $ 3,074 $ (80) $ (744) $ 2,348 Issued: For the Dividend Reinvestment and Stock Purchase Plan 6 10 For employee savings and incentive plans 42 70 Common stock repurchase program (273) (273) Comprehensive income Net income 403 Other comprehensive income (loss), net of income taxes Unrealized gains on securities, net of reclassification adjustments Foreign currency translation adjustments Other comprehensive loss (3) Comprehensive income 400 Cash dividends on common stock (122) (122) Tax on unallocated ESOP shares 2 2 Shares allocated to ESOP participants 13 13 Restricted stock - Long-Term Incentive Program 1 Balance at December 31, 1998 $(104) $ 3,357 $ (67) $ (969) $ 2,449 The Notes to Financial Statements on pages 25 through 43 should be read in conjunction with this statement.
- 22 and 23 - Consolidated Statement of Cash Flows
Union Carbide Corporation and Subsidiaries Increase (decrease) in cash and cash equivalents Millions of dollars, for the year ended December 31, 1998 1997 1996 Operations Income before cumulative effect of change in accounting principle $ 403 $ 676 $ 593 Noncash charges (credits) to net income Depreciation and amortization 389 340 312 Deferred income taxes 118 86 82 Net gains on investing transactions - - (3) Equity in earnings/losses of joint ventures, net of dividends received 156 (10) 13 Other 6 12 3 Increase in working capital(a) (86) (144) (92) Long-term assets and liabilities (58) (53) (47) Cash Flow From Operations 928 907 861 Investing Capital expenditures (782) (755) (721) Investments, advances and acquisitions, excluding cash acquired (111) (68) (263) Proceeds from available-for-sale securities 39 37 29 Purchase of available-for-sale securities (47) (38) (42) Sale of fixed and other assets 11 13 22 Cash Flow Used for Investing (890) (811) (975) Financing Change in short-term debt (3 months or less) (23) 271 96 Proceeds from short-term debt 22 51 21 Repayment of short-term debt (14) - (37) Proceeds from long-term debt 358 14 203 Repayment of long-term debt (4) (30) (10) Issuance of common stock 41 44 129 Purchase of common stock (276) (337) (544) Proceeds from subsidiary preferred stock - 250 - Purchase of subsidiary preferred stock - (240) - Payment of dividends (122) (134) (111) Other 10 (21) (1) Cash Flow Used for Financing (8) (132) (254) Effect of exchange rate changes on cash and cash equivalents (1) (1) (1) Change in cash and cash equivalents 29 (37) (369) Cash and cash equivalents, beginning-of-year 20 57 426 Cash and cash equivalents, end-of-year $ 49 $ 20 $ 57 Cash paid for interest and income taxes: Interest (net of amount capitalized) $ 117 $ 77 $ 66 Income taxes 43 121 169 (a) Net change in certain components of working capital (excluding noncash transactions): (Increase) decrease in current assets Notes and accounts receivable $ 77 $ 53 $ (26) Inventories (63) (63) 43 Other current assets (3) - 25 Increase (decrease) in payables and accruals (97) (134) (134) (Increase) in working capital $ (86) $(144) $ (92) The Notes to Financial Statements on pages 25 through 43 should be read in conjunction with this statement.
- 24 - Notes to Financial Statements Index Page 1 Summary of Significant Accounting Policies 25 2 Supplementary Balance Sheet Detail 27 3 Supplementary Income Statement Detail 28 4 Other Comprehensive Income (Loss) 28 5 Earnings Per Share 29 6 Business and Geographic Segment Information 30 7 Income Taxes 32 8 Leases 33 9 Joint Ventures 34 10 Financial Instruments 35 11 Long-Term Debt 36 12 Minority Interest 36 13 Stockholders' Equity 37 14 Employee Stock Ownership Plan 37 15 Incentive Plans 38 16 Retirement Programs 40 17 Commitments and Contingencies 42 1 Summary of Significant Accounting Policies Nature of Operations - Union Carbide Corporation is engaged in two segments of the chemicals and plastics industry, Specialties & Intermediates and Basic Chemicals & Polymers. See Note 6. Principles of Consolidation - The consolidated financial statements include the accounts of all significant subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Investments in 20 percent- to 50 percent-owned partnerships and corporate investments (joint ventures) are reported under the equity method of accounting. Other investments are generally carried at cost. The consolidated financial statements have been prepared in conformity with generally accepted accounting principles, which require the corporation to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Accounting Changes - 1996 through 1998 Effective Jan. 1, 1998, the corporation adopted Statement of Financial Accounting Standards (Statement) No. 130, "Reporting Comprehensive Income," Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information," and Statement No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits." These Statements address presentation and disclosure matters and therefore had no impact on the corporation's financial position or results of operations. As required by these Statements, the respective reporting disclosures have been reflected in the corporation's 1998 consolidated financial statements. Prior periods have been restated to comply with the provisions of these Statements. In 1997, the corporation adopted Emerging Issues Task Force consensus on Issue 97-13, "Accounting for Costs Incurred in Connection with a Consulting Contract or an Internal Project That Combines Business Process Reengineering and Information Technology Transformation," requiring companies to expense as incurred costs associated with business process reengineering activities. Effective Oct. 1, 1997, the corporation adopted the provisions of Issue 97-13 as a cumulative effect of a change in accounting principle, reversing $28 million ($17 million, after-tax) of costs previously capitalized from 1995 through the third quarter of 1997. Additionally in 1997, the corporation adopted Statement No. 128, "Earnings Per Share," and Statement No. 129, "Disclosure of Information about Capital Structure." Subsequent to 1998 The corporation prospectively adopted Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use," effective Jan. 1, 1999. The effect of this adoption is not expected to be material to the results of operations in the period of adoption. Also effective Jan. 1, 1999, the corporation adopted SOP 98-5, "Reporting on the Costs of Start-Up Activities." This SOP requires the expensing of certain costs, such as preoperating expenses and organizational costs associated with the corporation's startup activities. The effect of adoption is required to be accounted for as a cumulative effect of change in accounting principle. The amount to be recognized as a cumulative effect of change in accounting principle in the first quarter of 1999 is anticipated to be approximately $20 million after-tax. In 1998, the Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." It requires that an entity recognize all derivative instruments as either assets or liabilities in the statement of financial position and measure those instruments at fair value. This Statement is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. The corporation is currently evaluating the effect this Statement will have on its financial position and results of operations in the period of adoption and may consider early adoption. Foreign Currency Translation - Unrealized gains and losses resulting from translating foreign subsidiaries' assets and - 25 - liabilities into U.S. dollars generally are recognized as part of Other comprehensive income (loss), as described in Note 4, and are included in Accumulated other comprehensive loss on the Consolidated Balance Sheet until such time as the subsidiary is sold or substantially or completely liquidated. Translation gains and losses relating to those operations located in Latin American countries where hyperinflation exists and to international operations using the U.S. dollar as their functional currency are included in the Consolidated Statement of Income. As required by Statement No. 52, Brazil was no longer considered a hyperinflationary economy, effective Jan. 1, 1998. Financial Instruments - Financial instruments are used to hedge financial risk caused by fluctuating interest and currency rates. The amounts to be paid or received on interest rate risk instruments that hedge debt, accrue and are recognized over the lives of the instruments. Gains and losses on foreign currency risk instruments used to hedge firm commitments are deferred and recognized as part of the related foreign currency transactions. Gains on foreign currency purchased options used to hedge the identified cash flows of anticipated transactions are deferred and matched against the cash flows of the foreign currency transactions as they occur. Foreign currency instruments that are designated to offset fluctuations in the dollar value of foreign currency accounts receivable and payable and from earnings fluctuations in anticipated foreign currency cash flows are marked to market and the results recognized immediately in Other income-net. Cash Equivalents - The corporation considers as cash equivalents all highly liquid investments that are readily convertible to known amounts of cash and are so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Inventories - Inventories are stated at cost or market, whichever is lower. These amounts do not include depreciation and amortization, the impact of which is not significant to the financial statements. Approximately 65 percent of inventory amounts before application of the LIFO method at Dec. 31, 1998 (67 percent at Dec. 31, 1997) have been valued on the LIFO basis; the "average cost" method is used for the balance. It is estimated that if inventories had been valued at current costs, they would have been approximately $224 million and $348 million higher than reported at Dec. 31, 1998 and 1997, respectively. Fixed Assets - Fixed assets are carried at cost. Expenditures for replacements are capitalized, and the replaced items are retired. Gains and losses from the sale of property are included in income. Depreciation is calculated on a straight-line basis. The corporation and its subsidiaries generally use accelerated depreciation methods for tax purposes where appropriate. Patents, Trademarks and Goodwill - Amounts paid for purchased patents, trademarks and newly acquired businesses in excess of the fair value of the net assets of such businesses have been charged to patents, trademarks and goodwill. The portion of such amounts determined to be attributable to patents is amortized over their remaining lives, while trademarks and goodwill are amortized over the estimated period of benefit, generally 5 to 20 years. Research and Development - Research and development costs are charged to expense as incurred. Depreciation expense applicable to research and development facilities and equipment is included in Depreciation and amortization in the Consolidated Statement of Income ($11 million in 1998, $12 million in 1997 and $11 million in 1996). Income Taxes - Provisions have been made for deferred income taxes based on differences between financial statement and tax bases of assets and liabilities using currently enacted tax rates and regulations. Environmental Costs - Environmental expenditures are expensed or capitalized as appropriate, depending on their future economic benefit. Expenditures relating to an existing condition caused by past operations and having no future economic benefits are expensed. Environmental expenditures include site investigation, physical remediation, operation and maintenance, and legal and administrative costs. Environmental accruals are established for sites where it is probable that a loss has been incurred and the amount of the loss can reasonably be estimated. Where the estimate is a range and no amount within the range is a better estimate than any other amount, the corporation accrues the minimum amount in the range and includes the balance of the range in its reported contingencies. Retirement Programs - The cost of pension benefits under the U.S. Retirement Program is determined by an independent actuarial firm using the projected unit credit actuarial cost method, with an unrecognized net asset at Jan. 1, 1986, amortized over 15 years. Contributions to this program are made in accordance with the regulations of the Employee Retirement Income Security Act of 1974. The cost of postretirement benefits is recognized on the accrual basis over the period in which employees become eligible for benefits. Incentive Plans - The corporation measures compensation cost for the stock purchase plan and the stock option portion of its employee compensation plan using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion 25, and makes pro forma disclosures of net income and earnings per share as if the fair value based method of accounting defined in Statement No. 123 had been applied. Compensation expense is recognized for other stock-based incentives issued under the long-term incentive plan and other programs. Reclassifications - Certain prior year amounts have been reclassified to conform with the current year's presentation. - 26 - 2 Supplementary Balance Sheet Detail
Millions of dollars, at December 31, 1998 1997 Notes and accounts receivable Trade $ 783 $ 826 Other 172 178 955 1,004 Less: Allowance for doubtful accounts 22 11 $ 933 $ 993 Inventories Raw materials and supplies $ 187 $ 135 Work in process 41 62 Finished goods 439 407 $ 667 $ 604 Property, plant and equipment Land and improvements $ 345 $ 328 Buildings 437 407 Machinery and equipment 7,080 6,230 Construction in progress and other 547 742 $8,409 $7,707 Other assets Deferred charges $ 228 $ 223 Insurance recovery receivables 104 147 Long-term receivables 27 49 Patents, trademarks and goodwill 80 96 $ 439 $ 515 Other accrued liabilities Accrued accounts payable $ 314 $ 301 Payrolls 56 55 Environmental remediation costs 60 68 Postretirement benefit obligation 38 34 Employee profit sharing 16 55 Other 186 214 $ 670 $ 727 Other long-term obligations Environmental remediation costs $ 160 $ 196 Product liability costs 107 174 Impairment of unused office space 115 136 Postemployment benefits 63 72 Other 157 160 $ 602 $ 738 Accumulated other comprehensive loss Foreign currency translation adjustments(a) $ (111) $ (103) Unrealized gains on available-for-sale securities, net of tax(b) 7 2 $ (104) $ (101) (a) The corporation does not record deferred income tax on foreign currency translation adjustments. (b) Net of $4 million and $2 million of deferred income tax at Dec. 31, 1998 and 1997, respectively.
- 27 - 3 Supplementary Income Statement Detail
Millions of dollars, for the year ended December 31, 1998 1997 1996 Selling, administration and other expenses Selling $ 99 $124 $130 Administration 107 126 121 Other expenses 98 74 70 $304 $324 $321 Other income (expense) - net Investment and interest income $ 26 $ 27 $ 32 Foreign currency adjustments (20) (8) (7) Other 46 18 6 $ 52 $ 37 $ 31 Interest expense Interest incurred(a) $157 $130 $121 Less: Interest capitalized and other adjustments 43 51 45 $114 $ 79 $ 76 (a) Includes $12 million in 1998, 1997 and 1996, representing the interest component of certain leases.
4 Other Comprehensive Income (Loss) Comprehensive income is defined as any change in the corporation's equity from transactions and other events originating from non-owner sources. For the corporation, those changes are comprised of reported net income, changes in the unrealized appreciation or depreciation of the corporation's available- for-sale securities and changes in unrealized foreign currency translation adjustments. The following summary presents the components of comprehensive income, other than net income:
Income Tax Millions of dollars Pre-Tax Effect After-Tax Balance at December 31, 1995 $ (10) $ - $ (10) Foreign currency translation adjustments (11) - (11) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period (5) (1) (4) Reclassification adjustment for (gains) losses realized in net income - - - Net unrealized losses (16) (1) (15) Balance at December 31, 1996 $ (26) $ (1) $ (25) Foreign currency translation adjustments (81) - (81) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period 8 3 5 Reclassification adjustment for (gains) losses realized in net income - - - Net unrealized losses (73) 3 (76) Balance at December 31, 1997 $ (99) $ 2 $ (101) Foreign currency translation adjustments (8) - (8) Unrealized gains (losses) on securities: Unrealized holding gains (losses) arising during period - - - Reclassification adjustment for (gains) losses realized in net income 7 2 5 Net unrealized losses (1) 2 (3) Balance at December 31, 1998 $ (100) $ 4 $ (104)
- 28 - 5 Earnings Per Share Basic and diluted earnings per share (EPS) are calculated as follows:
Millions of dollars (except share and per share amounts), for the year ended December 31, 1998 1997 1996 Basic - Income before cumulative effect of change in accounting principle $ 403 $ 676 $ 593 Less: Dividends on ESOP shares, pre-tax - (9) (13) Appreciation on ESOP shares redeemed for cash - (23) - Income before cumulative effect of change in accounting principle, adjusted for basic calculation 403 644 580 Cumulative effect of change in accounting principle - (17) - Net income-common stockholders, adjusted for basic calculation $ 403 $ 627 $ 580 Weighted average shares outstanding for basic calculation 135,028,100 128,185,093 131,029,621 Earnings per share - Income before cumulative effect of change in accounting principle $ 2.98 $ 5.02 $ 4.43 Cumulative effect of change in accounting principle - (0.13) - Net income-common stockholders $ 2.98 $ 4.89 $ 4.43 Diluted - Income before cumulative effect of change in accounting principle, adjusted for basic calculation $ 403 $ 644 $ 580 Plus: Dividends on ESOP shares, pre-tax - 9 13 Less: Additional ESOP contribution resulting from assumed conversion of ESOP shares - (1) (1) Income before cumulative effect of change in accounting principle, adjusted for diluted calculation 403 652 592 Cumulative effect of change in accounting principle - (17) - Net income-common stockholders, adjusted for diluted calculation $ 403 $ 635 $ 592 Weighted average shares outstanding for basic calculation 135,028,100 128,185,093 131,029,621 Add: Effect of stock options 3,381,795 4,034,969 4,495,656 Effect of equity put options - - 403 Shares issuable upon conversion of the corporation's convertible ESOP shares - 11,739,036 16,120,754 Weighted average shares outstanding, adjusted for diluted calculation 138,409,895 143,959,098 151,646,434 Earnings per share - Income before cumulative effect of change in accounting principle, adjusted for diluted calculation $ 2.91 $ 4.53 $ 3.90 Cumulative effect of change in accounting principle - (0.12) - Net income-common stockholders, adjusted for diluted calculation $ 2.91 $ 4.41 $ 3.90
- 29 - 6 Business and Geographic Segment Information The corporation has two operating segments, Specialties & Intermediates (S&I) and Basic Chemicals & Polymers (BC&P). The S&I segment includes the corporation's specialty chemicals and polymers product lines, licensing, and solvents and chemical intermediates. The BC&P segment includes the corporation's ethylene and propylene manufacturing operations as well as the production of first-level ethylene and propylene derivatives-polyethylene, polypropylene, ethylene oxide and ethylene glycol. Each operating segment is a strategic business unit that offers products and services with different functionalities. They are managed separately because of the significant differences that exist in their products and services and in the methods required to produce, market and distribute them. In addition to its operating segments, the corporation's Other segment includes its non-core operations and financial transactions other than derivatives designated as hedges, which are included in the same segment as the item being hedged. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. Sales of the BC&P segment include intersegment sales, principally ethylene oxide, which are made at the estimated market value of the products transferred. Administrative costs were allocated between the segments via a formula based on sales in 1998, and a formula based on capital, overhead and sales in 1997 and 1996; no significant difference in allocations between the segments resulted from the change in formula. Other costs and shared assets are principally allocated on the basis of pounds produced, gross fixed asset values or headcount, as appropriate. The corporation evaluates performance based on Income before interest expense and provision for income taxes (operating profit). Sales are attributed to countries based on customer ship-to addresses. Long- lived assets are principally composed of Net Fixed Assets, Companies carried at equity, and certain Other assets. Investments of the corporation are assigned to the country in which the investee has its principal offices. Net sales and long-lived assets by country and geographic area were as follows:
Millions of dollars for the year ended December 31, 1998 1997 1996 Net sales United States, including Puerto Rico $3,355 $3,784 $3,613 Canada 211 247 210 Europe & Middle East 802 924 858 Latin America 408 431 362 Far East & Other 883 1,116 1,063 Total International Operations $2,304 $2,718 $2,493 $5,659 $6,502 $6,106
Millions of dollars at December 31, 1998 1997 1996 Long-lived assets United States, including Puerto Rico $4,290 $4,021 $3,645 Canada 284 201 207 Europe & Middle East 401 456 423 Latin America 91 111 114 Far East & Other 127 122 122 Total International Operations $ 903 $ 890 $ 866 Total long-lived assets 5,193 4,911 4,511 Current and other assets $2,098 $2,053 $2,035 Total Assets $7,291 $6,964 $6,546
- 30 -
Millions of dollars S&I BC&P Other Totals 1998 Net sales $4,139 $1,520 $ - $5,659 Intersegment revenues - 282 - 282 Segment revenues 4,139 1,802 - 5,941 Depreciation and amortization 247 142 - 389 Partnership income 27 6 - 33 Operating profit (loss) 833 20 (50) 803 Interest expense - - 114 114 Income (loss) from corporate investments carried at equity 1 (67) - (66) Segment assets 4,493 2,596 202 7,291 Companies carried at equity 298 326 - 624 Expenditures for segment assets 480 413 - 893 1997 Net sales $4,453 $2,049 $ - $6,502 Intersegment revenues - 371 - 371 Segment revenues 4,453 2,420 - 6,873 Depreciation and amortization 214 126 - 340 Partnership income 116 17 - 133 Operating profit (loss) 667 386 (8) 1,045 Interest expense - - 79 79 Income (loss) from corporate investments carried at equity 6 (3) - 3 Segment assets 4,146 2,540 278 6,964 Companies carried at equity 277 413 - 690 Expenditures for segment assets 508 315 - 823 1996 Net sales $4,286 $1,820 $ - $6,106 Intersegment revenues - 305 - 305 Segment revenues 4,286 2,125 - 6,411 Depreciation and amortization 188 124 - 312 Partnership income 134 10 - 144 Operating profit 742 162 17 921 Interest expense - - 76 76 Income (loss) from corporate investments carried at equity 9 (25) - (16) Segment assets 3,892 2,328 326 6,546 Companies carried at equity 263 432 - 695 Expenditures for segment assets 560 424 - 984
The operating profit of the S&I segment for 1998 includes a nonrecurring net gain of $189 million related to favorable settlements of UNIPOL Systems business litigation in the third and fourth quarters of 1998 and a $53 million reduction in earnings related to losses associated with Aspell Polymeres SNC in the third quarter of 1998. The operating profit of the S&I segment for 1997 includes a $12 million charge for the write-off of certain equipment associated with the corporation's ethylene propylene rubber project. - 31 - 7 Income Taxes The following is a summary of the U.S. and non-U.S. components of Income Before Provision for Income Taxes:
Millions of dollars for the year ended December 31, 1998 1997 1996 U.S. $646 $897 $766 Non-U.S. 43 69 79 $689 $966 $845
The following is an analysis of income tax expense:
1998 1997 1996 Millions of dollars, for the year ended December 31, Current Deferred Current Deferred Current Deferred U.S. Federal income taxes $100 $ 86 $154 $ 80 $107 $ 79 U.S. business and research and experimentation tax credits (27) - (14) - (8) - U.S. state and local taxes based on income 6 31 1 4 1 2 Non-U.S. income taxes 20 1 52 2 54 1 99 118 193 86 154 82 Provision for income taxes $217 $279 $236
The tax effects of temporary differences that gave rise to significant portions of the deferred tax assets and deferred tax liabilities are as follows:
1998 1997 Deferred Deferred Deferred Deferred Millions of dollars, at December 31, Assets Liabilities Assets Liabilities Depreciation and amortization $ - $553 $ - $495 Postretirement and postemployment benefits 215 - 226 - Environmental and litigation costs 81 - 113 - Sale/leaseback and related deferrals 90 - 101 - Other 223 278 174 242 Gross deferred tax assets and liabilities 609 831 614 737 Net deferred tax liability $222 $123
- 32 - Net noncurrent deferred tax liabilities of $347 million ($263 million in 1997) are included in Deferred credits in the Consolidated Balance Sheet. Net current deferred tax assets of $125 million ($135 million in 1997) are included in Other current assets. Net noncurrent deferred tax assets are zero in 1998 ($5 million in 1997 which were included in Other assets). In 1998 there was no benefit from non-U.S. net operating loss carryforwards ($2 million in 1997 which was included in deferred tax assets above). Undistributed earnings of affiliates intended to be reinvested indefinitely amounted to approximately $488 million at Dec. 31, 1998 ($469 million at Dec. 31, 1997). Determination of deferred taxes related to these earnings is not practicable. An analysis of the difference between Provision for income taxes and the amount computed by applying the statutory Federal income tax rate to Income Before Provision for Income Taxes is as follows:
Percentage of Pre-Tax Income For the year ended December 31, 1998 1997 1996 Tax at statutory Federal rate 35.0% 35.0% 35.0% Taxes related to operations outside the U.S. 0.7 (0.7) (1.0) U.S. state and local taxes based on income 3.4 0.3 0.3 Foreign sales corporation (1.5) (2.9) (3.0) Business credits (3.9) (1.5) (0.9) Other, net (2.2) (1.3) (2.5) Consolidated effective income tax rate 31.5% 28.9% 27.9%
8 Leases Leases that meet the criteria for capitalization have been classified and accounted for as capital leases. For operating leases, primarily involving facilities and distribution equipment, the future minimum rental payments under leases with remaining noncancelable terms in excess of one year are:
Millions of dollars for the year ending December 31, 1999 $ 61 2000 57 2001 54 2002 59 2003 58 Subsequent to 2003 140 Total minimum payments 429 Future sublease rentals 75 Net minimum rental commitments $354
The present value of the net minimum rental payments amounts to $275 million, of which $187 million pertains to the corporation's headquarters lease. Total lease and rental payments (net of sublease rental of $9 million in 1998, $21 million in 1997 and $20 million in 1996) were $56 million, $54 million and $53 million for 1998, 1997 and 1996, respectively. - 33 - 9 Joint Ventures The following are financial summaries of 33 percent- to 50 percent-owned joint ventures included in Companies carried at equity. The corporation's most significant joint ventures, classified as partnerships, include UOP LLC; Petromont and Company, Limited Partnership; Aspell Polymeres SNC; World Ethanol Company and Univation Technologies, LLC (formed in 1997).
Partnerships Millions of dollars 1998 1997 1996 Net sales(a) $1,905 $2,076 $2,109 Cost of sales 1,210 1,242 1,338 Depreciation 116 83 83 Partnership income 154 249 242 UCC share of partnership income $ 33(b) $ 133 $ 144 Current assets $ 799 $ 746 $ 704 Noncurrent assets 937 886 806 Total assets 1,736 1,632 1,510 Current liabilities 430 451 608 Noncurrent liabilities 828 711 385 Total liabilities 1,258 1,162 993 Net assets 478 470 517 UCC equity $ 286 $ 278 $ 251 (a) Includes $140 million net sales to the corporation in 1998 ($208 million in 1997 and $159 million in 1996). (b) Includes $53 million of losses associated with Aspell Polymeres SNC.
The corporation's joint ventures, classified as corporate investments, include Polimeri Europa S.r.l.; EQUATE Petrochemical Company K.S.C.; Nippon Unicar Company Limited; Alberta & Orient Glycol Company Limited; Asian Acetyls Co., Ltd. and several smaller entities.
Corporate Investments Millions of dollars 1998 1997 1996 Net sales(a) $2,151 $2,248 $2,059 Cost of sales 1,732 1,814 1,693 Depreciation 256 109 129 Net income (loss) (195) 75 (6) UCC share of net income (loss) $ (66) $ 3 $ (16) Current assets $1,037 933 $ 877 Noncurrent assets 2,932 3,252 2,918 Total assets 3,969 4,185 3,795 Current liabilities 963 872 888 Noncurrent liabilities 2,371 2,347 1,891 Total liabilities 3,334 3,219 2,779 Net assets 635 966 1,016 UCC equity $ 338 $ 412 $ 444 (a) Includes $157 million net sales to the corporation in 1998 ($156 million in 1997 and $153 million in 1996).
Dividends and distributions received from joint ventures and partnerships aggregated $123 million in 1998 ($126 million in 1997 and $141 million in 1996). - 34 - 10 Financial Instruments Fair values of financial instruments are estimated by using a method that indicates the amount at which the instrument could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. The fair values of the financial instruments included on the Consolidated Balance Sheet were estimated as follows: Cash, Short-Term Receivables and Accounts Payable - At Dec. 31, 1998 and 1997, the carrying amounts approximate fair values because of the short maturity of these instruments. Outstanding foreign currency forward contracts and options used as a means of offsetting fluctuations in the dollar value of other foreign currency accounts receivable and payable and earnings fluctuations from anticipated foreign currency cash flows totaled $220 million at Dec. 31, 1998 ($185 million at Dec. 31, 1997). In addition to the above, at Dec. 31, 1998, the corporation held foreign currency options in the amount of $199 million (U.S. dollar equivalent) to hedge a commitment to lend money to fund construction of operating facilities at specific future dates by one of its foreign subsidiaries. Such commitment is supported by commitments to third parties. The premiums on the options and any gains or losses are being capitalized as part of the intercompany loan and amortized to income as an adjustment to the effective interest yield of such loan over its repayment term. At Dec. 31, 1998, $3 million had been capitalized. Recognized net gains and losses associated with all foreign currency purchased options and forward contracts held during 1998 and 1997, and the average fair market value of those contracts, were not material. These gains and losses were generally offset by changes in the U.S. dollar value equivalents of underlying foreign currency transactions. Investments - The corporation's investments in joint ventures and other businesses generally involve entities for which it is not practicable to determine fair values. Long-Term Receivables - The fair values of long-term receivables are calculated using current interest rates and consideration of underlying collateral where appropriate. The fair values, which approximate the carrying values of $27 million and $49 million, are included in Other assets in the Consolidated Balance Sheet at Dec. 31, 1998 and 1997, respectively. Debt - The corporation uses various types of financial instruments, including interest rate swaps and forward rate agreements, to manage exposure to financial market risk caused by interest rate fluctuations. An interest rate swap held at Dec. 31, 1998 and 1997, had a nominal carrying amount and fair value. Carrying Amounts and Fair Values - The carrying amounts and fair values of the corporation's investments, long-term receivables and debt financial instruments at Dec. 31, 1998 and 1997, are summarized in the table below. Fair values are based on quoted market values, where available, or discounted cash flows (principally long-term debt).
Millions of dollars at December 31, 1998 1997 Carrying Fair Carrying Fair Assets (Liabilities) Amount Value Amount Value Investments and receivables $168 $168 $162 $162 Short- and long-term debt (2,222) (2,266) (1,887) (1,956)
- 35 - 11 Long-Term Debt
Millions of dollars, at December 31, 1998 1997 6.25% Notes due 2003 $ 250 $ - 6.75% Notes due 2003 125 125 6.79% Debentures due 2025(a) 250 250 7.00% Notes due 1999 175 175 7.50% Debentures due 2025 150 150 7.75% Debentures due 2096(b) 200 200 7.875% Debentures due 2023 175 175 8.75% Debentures due 2022(c) 117 117 Floating Rate Public Notes due 2000 110 - Pollution control and other facility obligations 239 242 Other debt - various maturities and interest rates 23 29 1,814 1,463 Less: Payments to be made within 1 year 18 5 $1,796 $1,458 (a) Holders may request redemption of these debentures from the corporation on June 1, 2005. (b) The maturity may be shortened under certain circumstances to preserve the deductibility of interest payments for Federal income tax purposes. (c) Redeemable at the option of the corporation on or after Aug. 1, 2002.
The corporation has a credit agreement with a group of banks permitting the corporation to borrow up to $1 billion at any time through January 2002 with the option, subject to certain conditions, to increase the available credit by $250 million and to extend the maturity date of the agreement to maintain a five year term. The credit agreement permits the corporation to borrow funds under several different programs, including the euro-dollar, Certificate of Deposit (CD), Base Rate or Money Market London Interbank Offered Rate (LIBOR) programs. Maturity dates for these programs range from 30 days to twelve months. The interest rate for each of these programs is contingent on either the euro-dollar, CD rate, Federal funds rate or LIBOR and is determined based on a calculation included in the agreement. The corporation must pay an annual facility fee based on the rating of the corporation's long-term debt securities by either Moody's Investors Service, Inc. or Standard and Poor's Rating Service as indicated in the agreement. As of Dec. 31, 1998, there were no outstanding amounts against this agreement. The corporation intends to refinance the 7.00% Notes maturing in August 1999 either by borrowing under this credit agreement or under a prospective borrowing. Accordingly, such amount has been classified as long-term debt. The corporation has an effective shelf registration statement available covering $390 million of public debt securities at Dec. 31, 1998, which may be used under a medium-term-note program. In 1998, the corporation issued $250 million of 6.25% Notes due in June 2003, and $110 million of floating rate public notes due in April 2000. The floating rate public notes bear interest at a rate which will be reset quarterly at the three-month LIBOR plus 0.65 percent. At Dec. 31, 1998 the interest rate on these notes was 5.84 percent. The corporation's credit agreement and the indentures under which notes and debentures are issued contain covenants normal for these types of instruments. These covenants place certain limits on the corporation's ability to merge with another entity, sell assets, engage in sale-leaseback transactions, incur debt or create liens on assets. In addition, the credit agreement requires the corporation to meet leverage and interest coverage tests. Pollution control and other facility obligations represent state, commonwealth and local governmental bond financing of pollution control and other facilities and are treated for accounting and tax purposes as debt of the corporation. These tax-exempt obligations mature at various dates from 1999 through 2023 and had an average annual effective interest rate of 7.2 percent in 1998 and 1997. The weighted average and effective interest rates in 1998 on the corporation's fixed-rate debt, excluding pollution control and other facility obligations, were 7.5 percent in 1998 (7.7 percent in 1997). The corporation's weighted average interest rate on short-term borrowings outstanding as of Dec. 31, 1998 was 6.0 percent (6.4 percent at Dec. 31, 1997). Payments due on long-term debt in the four years following 1999 are: 2000, $117 million; 2001, $21 million; 2002, $189 million, and 2003, $381 million. 12 Minority Interest In January 1997, a newly formed real estate investment trust subsidiary issued $250 million of preferred stock bearing a current dividend yield of 14 percent for 10 years and 1 percent thereafter. In October 1997, the preferred shares were redeemed for $240 million. - 36 - 13 Stockholders' Equity Subject to the following discussion, each outstanding share of common stock has identical rights in voting on corporate matters, dividends when declared, liquidation and other corporate matters. Each outstanding share of common stock bears one Right entitling its holder, under certain circumstances, to buy a share of common stock at a purchase price of $37.67 (subject to adjustment). The Rights may not be exercised until 10 days after a person or group acquires 20 percent or more of UCC's common stock, or until a date determined by the board of directors following announcement of a tender offer that, if consummated, would result in 20 percent or more ownership of the common stock. Until then, separate Rights certificates will not be issued, nor will the Rights be traded separately from the stock. Should an acquirer become the beneficial owner of 20 percent of the common stock, and under certain additional circumstances, the corporation's stockholders (other than the acquirer) would have the right to buy common stock in Union Carbide Corporation, or in the surviving enterprise if the corporation is acquired, having a value equal to two times the purchase price of the Right then in effect. The Rights will expire on Aug. 31, 1999, unless redeemed prior to that date. The redemption price is $0.01 per Right. Since inception of its share repurchase authorization in 1993 through Dec. 31, 1998, the corporation has repurchased 55.4 million shares (6.1 million shares during 1998) out of a total authorization of 60 million shares, at an average effective price of $35.82 per share. The corporation will continue to acquire additional shares from time to time at prevailing market prices, at a rate consistent with the combination of corporate cash flow and market conditions. In conjunction with the corporation's common stock buyback program, put options were sold in a series of private placements entitling the holders to sell 12.9 million shares of common stock to UCC at specified prices upon exercise of the options. Since inception of this program through Dec. 31, 1998, options representing 9.8 million common shares have expired unexercised, while options representing 3.1 million shares were exercised for $129 million, or an average price of $40.94 per share. There were no options issued during 1998, nor were there any outstanding options at Dec. 31, 1998. Premiums received since inception of the program, which are recorded as Additional paid-in capital, have reduced the average price of repurchased shares to $35.82 per share from $36.07. 14 Employee Stock Ownership Plan The Union Carbide Corporation Employee Stock Ownership Plan (ESOP) is an integral part of the Savings and Investment Program (the Program) for employees. Prior to October 1997, each share of the corporation's preferred stock held by the ESOP was convertible into and had the same voting rights as one share of the corporation's common stock. The annual preferred dividend was $0.794 per share. In October 1997, the trustee of the ESOP exercised its right to convert all outstanding ESOP preferred stock into shares of the corporation's common stock (ESOP shares). As a result of the conversion, the corporation's common stock outstanding at that date was increased by 15.4 million shares. Substantially all full-time employees in the U.S. are eligible to participate in the ESOP through the allocation of ESOP shares equivalent to the corporation's matching contribution of 75 percent of eligible employee contributions to the Program. In addition, eligible employees can receive the equivalent of up to twenty days pay in ESOP shares through the corporation's ESOP profit sharing plan. Common shares held by the ESOP generally are sold in the open market when employees make withdrawals or sell ESOP shares within their account. The cost of the ESOP is recognized as incurred and was $7 million in 1998 ($7 million and $2 million in 1997 and 1996, respectively). The increase in 1998 and 1997 costs, compared to 1996, was principally due to the allocation of more shares to participants through the corporation's ESOP profit sharing plan. At Dec. 31, 1998, 14.6 million common shares held by the ESOP were outstanding, 7.1 million of which were allocated to employees' accounts. During 1998, 1.4 million ESOP shares were allocated to employees' accounts. - 37 - 15 Incentive Plans In 1997, stockholders approved the 1997 Union Carbide Long-Term Incentive Plan for key employees. The Plan provides for granting incentive and nonqualified stock options; exercise payment rights; grants of stock, including restricted stock, and performance awards. Holders of options may be granted the right to receive payments of amounts equal to the regular cash dividends paid to holders of the corporation's common stock during the period an option is outstanding. The number of shares granted or subject to options cannot exceed six million under the Plan. Option prices are equal to the closing price of the corporation's common stock on the date of the grant, as listed on the New York Stock Exchange Composite Transactions. Options generally become exercisable two years after such date. Options may not have a duration of more than ten years. The option price may be settled in cash, common shares of the corporation currently owned by a participant, withholding stock shares from the exercise or a combination of these alternatives. Restricted stock award shares are entitled to vote and dividends are credited to the holder's account, but these shares are generally nontransferable for varying periods after the grant date. Once the vesting conditions are met, the shares become fully transferable. Performance awards may be paid in common stock, cash or other forms of property. No dividend-equivalent payment rights or performance awards were granted in 1998 or 1997. No awards were made in 1998 or 1997, and no further awards can be made, under previous plans. Prior plans still have options outstanding and restricted stock not yet vested, whose terms are generally similar to nonqualified stock options and restricted stock grants under the 1997 plan. Changes in outstanding fixed price options were as follows:
1998 1997 1996 Weighted Weighted Weighted Average Average Average Shares in thousands Shares Exercise Price Shares Exercise Price Shares Exercise Price Outstanding at January 1 12,533 $25.48 12,782 $21.45 13,350 $18.54 Granted 1,472 43.88 1,508 46.31 1,166 45.55 Exercised (1,141) 15.60 (1,717) 13.45 (1,569) 13.05 Canceled or expired (114) 46.21 (40) 38.47 (165) 36.00 Outstanding at December 31 12,750 $28.31 12,533 $25.48 12,782 $21.45 Options exercisable at December 31 9,874 9,889 10,460
Options were exercised during 1998 at prices ranging from $6.70 to $40.38 per share ($6.70 to $45.63 per share during 1997 and $6.70 to $28.63 per share during 1996). - 38 - The following table summarizes information about fixed price option shares outstanding at Dec. 31, 1998:
Weighted Average Shares Remaining Weighted Average Shares in thousands Outstanding Contractual Life Exercise Price Range of Exercise Prices $ 6.70 to $ 9.54 2,296 2.3 years $ 8.38 $11.37 to $16.75 1,908 3.8 years 16.38 $21.63 to $28.63 3,466 5.4 years 24.81 $39.88 to $46.31 5,080(a) 8.6 years 44.18 12,750 (a) At Dec. 31, 1998, 2.204 million options were exercisable at an average price of $43.02.
Had compensation cost related to the fixed price options been recorded at fair value on the dates of grant in accordance with Statement No. 123, the effect on the corporation's net income and EPS amounts would have been as follows:
Millions of dollars (except per share figures) for the year ended December 31, 1998 1997 1996 Net income - common stockholders As reported $ 403 $ 652 $ 583 Pro forma $ 388 $ 639 $ 576 Basic EPS As reported $2.98 $4.89 $4.43 Pro forma $2.87 $4.79 $4.37 Diluted EPS As reported $2.91 $4.41 $3.90 Pro forma $2.80 $4.32 $3.86
The Black-Scholes Option Pricing Model was used to estimate the fair values of options granted during 1998, 1997 and 1996. The assumptions used for these grants included a seven-year average expected life for 1998 (six-year average for 1997 and 1996), and zero-coupon U.S. government risk free interest rates of 4.41%, 5.92%, and 5.95%; current dividend yields of 2.22%, 1.73%, and 1.78%, and volatility of 29.47%, 28.77%, and 28.00% for the years ended Dec. 31, 1998, 1997 and 1996, respectively. The weighted average fair values of options granted during the years 1998, 1997 and 1996 were $15.15, $15.54 and $15.31, respectively. In 1997, the board of directors approved the 1997 Union Carbide Corporation EPS Incentive Plan for a limited number of senior managers. It is designed to grant awards if the corporation achieves $4.00 or more diluted earnings per share performance during 1999 and 2000. The plan requires these senior managers to put an amount equivalent to a portion of one year's annual base pay at risk, up to 100 percent, should diluted earnings per share not equal or exceed $4.00 in the year 2000. The amount at risk will be deducted from compensation over three years and converted to units equivalent to common stock using a $47.75 share price, the closing price of the corporation's common stock on the date the plan was approved by the board of directors. Participants could be awarded up to four times the number of units at risk for each of the years 1999 and 2000, depending on the extent to which the goals of the plan are exceeded. Participants will also be credited with dividend-equivalents in the form of additional units. Awards, if any, under the plan will be in cash and paid in 2002, 2003 and 2004. Failure to meet the requirements of the plan will result in forfeiture of the amounts at risk. - 39 - 16 Retirement Programs The noncontributory defined benefit retirement program of Union Carbide Corporation (U.S. Retirement Program) covers substantially all U.S. employees and certain employees in other countries. Pension benefits are based primarily on years of service and compensation levels prior to retirement. Pension coverage for employees of the corporation's non-U.S. consolidated subsidiaries is provided through separate plans, to the extent deemed appropriate. Obligations under such plans are principally provided for by depositing funds with trustees. The corporation provides health care and life insurance benefits (Other Benefits) for eligible retired employees and their eligible dependents. These benefits are provided through various insurance companies and health care providers. The health care plans are contributory with participants' contributions adjusted annually; the life insurance plans are noncontributory. The corporation's significant retirement programs are its U.S. and Canadian plans. The funded status, actuarial assumptions, health care cost trends, and components of net periodic benefit costs of these plans combined is as follows:
Pension Other Benefits Benefits Millions of dollars, for the year ended December 31, 1998 1997 1998 1997 Change in plan assets Fair value of plan assets, beginning of year $3,769 $3,118 $ 17 $ 17 Actual gain (loss) on plan assets 736 821 6 8 Foreign currency exchange rate changes (12) (6) - - Employer contribution - 10 - - Benefits paid (182) (174) (9) (8) Fair value of plan assets, end of year $4,311 $3,769 $ 14 $ 17 Change in benefit obligation Benefit obligation, beginning of year $3,278 $2,927 $ 503 $ 465 Service cost 60 51 14 14 Interest cost 205 206 30 33 Amendments - 1 (93) 2 Plan participants' contributions - - 22 21 Foreign currency exchange rate changes (7) (3) (1) (1) Actuarial loss 129 278 27 27 Benefits paid(a) (193) (182) (59) (58) Benefit obligation, end of year $3,472 $3,278 $ 443 $ 503 Funded status $ 839 $ 491 $ (429) $ (486) (a) Includes nonfunded plan benefits paid directly by the corporation.
The funded status is composed of the following elements:
Pension Other Benefits Benefits Millions of dollars, at December 31, 1998 1997 1998 1997 Unrecognized net actuarial gain (loss) $ 818 $ 455 $ (34) $ (17) Unrecognized transition asset 29 42 - - Unrecognized prior service (cost) credit (14) (17) 93 29 Prepaid benefit cost 30 27 - - Accrued benefit cost (24) (16) (488) (498) Funded status $ 839 $ 491 $ (429) $ (486)
The Other Benefits benefit obligation is net of $99 million at Dec. 31, 1998 ($131 million at Dec. 31, 1997), which is reimbursed to the corporation in part by previously owned businesses under ongoing benefit-sharing agreements. - 40 - Benefit obligations are valued using the 1994 Uninsured Pensioner Mortality Table. The actuarial assumptions used were as follows:
Pension Other Benefits Benefits At December 31, 1998 1997 1998 1997 Discount rate for determining benefit obligation 6.00% 6.50% 6.00% 6.50% Expected long-term rate of return on plan assets 8.00% 8.00% 8.00% 8.00% Rate of increase in compensation levels 3.25% 3.75% - -
Health care costs are projected to increase as follows:
Medicare Medicare Pre-Medicare Supplement Plan Alternative Plan Immediate 7.50% 8.00% 16.83% Ultimate 5.00% 5.00% 5.00% Year ultimate trend is reached 2004 2004 2017
Pension Benefits Other Benefits Millions of dollars, for the year ended December 31, 1998 1997 1996 1998 1997 1996 Components of net periodic benefit costs Service cost $ 60 $ 51 $ 49 $ 14 $ 14 $ 13 Interest cost 205 206 194 30 33 31 Expected return on plan assets (242) (233) (215) (1) (2) (2) Amortization of transition obligation (12) (12) (12) - - - Amortization of prior service costs 3 3 3 (29) (21) (21) Recognized net actuarial (gain) loss (1) (1) 3 - - - Net periodic benefit costs $ 13 $ 14 $ 22 $ 14 $ 24 $ 21
The accounting for the health care plans anticipates future cost-sharing changes to the written plan that are consistent with the company's expressed intent to control these costs. As of July 1, 1998, the corporation adopted certain amendments which will be effective Jan. 1, 1999 through Jan. 1, 2001. These amendments will encourage retirees to transfer their health care coverage into lower costing plans and usually to choose generic drugs. Effective Jan. 1, 1999, certain retirees will also pay a greater percentage of premium contributions. In addition, the plan provides that the corporation's per individual subsidy for pre-Medicare and Medicare medical coverage is capped at two times its subsidy to the company-sponsored plans in 2000. The corporation funded postretirement benefits for certain retirees who retired prior to Dec. 31, 1988. The funds are invested primarily in common stocks. At Dec. 31, 1998, the effect on the accumulated postretirement benefit obligation of a one-percentage-point change in assumed health care cost trend rates would be as follows:
1998 1997 1 Percentage Point 1 Percentage Point Millions of dollars Increase (Decrease) Increase (Decrease) Effect on total of service and interest cost components $ 3 $( 3) $ 4 $( 3) Effect on post-retirement benefit obligation 28 (30) 33 (30)
Deferred Compensation Plan Since Jan. 1, 1995, the corporation has provided an unfunded, nonqualified deferred compensation plan to certain key employees, offering them an election to defer a portion of their gross pay. The corporation's obligation to employees is adjusted to reflect changes in the market values of employees' investment choices. With limited exceptions, participants' deferred account balances are scheduled for payment at or after full retirement. - 41 - 17 Commitments and Contingencies Purchase Agreements - The corporation has three major agreements for the purchase of ethylene-related products and three other purchase agreements in the U.S. and Canada (two in 1997 and 1996). Total purchases under these agreements were $196 million, $245 million and $233 million in 1998, 1997 and 1996, respectively. The net present value of the fixed and determinable portion of obligations under these purchase commitments at Dec. 31, 1998 (at current exchange rates, where applicable) is presented in the following table:
Millions of dollars for the year ending December 31, 1999 $ 71 2000 39 2001 32 2002 28 2003 19 2004 through 2014 74 Total $263
Environmental - The corporation is subject to loss contingencies resulting from environmental laws and regulations, which include obligations to remove or remediate the effects on the environment of the disposal or release of certain wastes and substances at various sites. The corporation has established accruals in current dollars for those hazardous waste sites where it is probable that a loss has been incurred and the amount of the loss can reasonably be estimated. The reliability and precision of the loss estimates are affected by numerous factors, such as different stages of site evaluation, the allocation of responsibility among potentially responsible parties and the assertion of additional claims. The corporation adjusts its accruals as new remediation requirements are defined, as information becomes available permitting reasonable estimates to be made and to reflect new and changing facts. At Dec. 31, 1998, the corporation had established environmental remediation accruals in the amount of $220 million ($264 million in 1997). These accruals have two components, estimated future expenditures for site investigation and cleanup and estimated future expenditures for closure and postclosure activities. In addition, the corporation had environmental loss contingencies of $121 million at Dec. 31, 1998. The corporation has sole responsibility for the remediation of approximately 37 percent of its environmental sites for which accruals have been established. These sites are well advanced in the investigation and cleanup stage. The corporation's environmental accruals at Dec. 31, 1998, included $169 million for these sites ($197 million at Dec. 31, 1997), of which $65 million ($79 million at Dec. 31, 1997) was for estimated future expenditures for site investigation and cleanup and $104 million ($118 million at Dec. 31, 1997) was for estimated future expenditures for closure and postclosure activities. In addition, $66 million of the corporation's environmental loss contingencies at Dec. 31, 1998, related to these sites. The two sites with the largest total potential cost to the corporation are nonoperating sites. Of the above accruals, these sites accounted for $39 million ($36 million at Dec. 31, 1997), of which $19 million ($17 million at Dec. 31, 1997) was for estimated future expenditures for site investigation and cleanup and $20 million ($19 million at Dec. 31, 1997) was for estimated future expenditures for closure and postclosure activities. In addition, $44 million of the above environmental loss contingencies related to these sites. The corporation does not have sole responsibility at the remainder of its environmental sites for which accruals have been established. All of these sites are in the investigation and cleanup stage. The corporation's environmental accruals at Dec. 31, 1998, included $51 million for estimated future expenditures for site investigation and cleanup at these sites ($67 million at Dec. 31, 1997). In addition, $55 million of the corporation's environmental loss contingencies related to these sites. The largest of these sites is a nonoperating site. Of the above accruals, this site accounted for $10 million ($14 million at Dec. 31, 1997) for estimated future expenditures for site investigation and cleanup. In addition, $3 million of the above environmental loss contingencies related to this site. - 42 - Worldwide expenses related to environmental protection for compliance with Federal, state and local laws regulating solid and hazardous wastes and discharge of materials to air and water, as well as for waste site remedial activities, totaled $91 million in 1998, $100 million in 1997 and $110 million in 1996. Other - The corporation has severally guaranteed 45 percent (approximately $562 million at Dec. 31, 1998) of EQUATE Petrochemical Company's debt and working capital financing needs until certain completion and financial tests are achieved. If these tests are met, a $54 million several guarantee will provide ongoing support thereafter. The corporation has also severally guaranteed certain sales volume targets until EQUATE's sales capabilities are proved. In addition, the corporation has pledged its shares in EQUATE as security for EQUATE's debt. The corporation has political risk insurance coverage for its equity investment and, through March 31, 1999, substantially all of its guarantee of EQUATE's debt. The corporation is in the process of extending the political risk insurance for its debt guarantee through March 31, 2001. The corporation and its consolidated subsidiaries had additional contingent obligations at Dec. 31, 1998, totaling $91 million, of which $55 million related to guarantees of debt. Litigation - The corporation and its consolidated subsidiaries are involved in a number of legal proceedings and claims with both private and governmental parties. These cover a wide range of matters, including, but not limited to: product liability; trade regulation; governmental regulatory proceedings; health, safety and environmental matters; employment; patents; contracts; and taxes. In some of these legal proceedings and claims, the cost of remedies that may be sought or damages claimed is substantial. The corporation has recorded nonenvironmental litigation accruals of $120 million, and related insurance recovery receivables of $104 million. At Dec. 31, 1998, the corporation had net nonenvironmental litigation loss contingencies of $51 million. While it is impossible at this time to determine with certainty the ultimate outcome of any legal proceedings and claims referred to in this note, management believes that adequate provisions have been made for probable losses with respect thereto and that such ultimate outcome, after provisions therefor, will not have a material adverse effect on the consolidated financial position of the corporation, but could have a material effect on consolidated results of operations in a given quarter or year. Should any losses be sustained in connection with any of such legal proceedings and claims in excess of provisions therefor, they will be charged to income when determinable. - 43 - Management's Statement of Responsibility for Financial Statements Union Carbide Corporation's financial statements are prepared by management, which is responsible for their fairness, integrity and objectivity. The accompanying financial statements have been prepared in conformity with generally accepted accounting principles and, accordingly, include amounts that are estimates and judgments. All historical financial information in this annual report is consistent with the accompanying financial statements. The corporation maintains accounting systems, including internal accounting controls monitored by a staff of internal auditors, that are designed to provide reasonable assurance of the reliability of financial records and the protection of assets. The concept of reasonable assurance is based on recognition that the cost of a system must not exceed the related benefits. The effectiveness of those systems depends primarily upon the careful selection of financial and other managers, clear delegation of authority and assignment of accountability, inculcation of high business ethics and conflict-of-interest standards, policies and procedures for coordinating the management of corporate resources and the leadership and commitment of top management. The corporation's financial statements are audited by KPMG LLP, independent certified public accountants, in accordance with generally accepted auditing standards. These standards provide for the auditors to consider the corporation's internal control structure to the extent they deem necessary in order to issue their opinion on the financial statements. The Audit Committee of the board of directors, which consists solely of nonemployee directors, is responsible for overseeing the functioning of the accounting system and related controls and the preparation of annual financial statements. The Audit Committee recommends to the board of directors the selection of the independent auditors, which is submitted to the stockholders for ratification. The Audit Committee periodically meets with the independent auditors, management and internal auditors to review and evaluate their accounting, auditing and financial reporting activities and responsibilities. The independent and internal auditors have full and free access to the Audit Committee and meet with the committee, with and without management present. William H. Joyce John K. Wulff Chairman, President and Vice-President, Chief Financial Chief Executive Officer Officer and Controller Danbury, Conn. Jan. 22, 1999 Independent Auditors' Report KPMG LLP To the Stockholders and Board of Directors of Union Carbide Corporation: We have audited the accompanying consolidated balance sheet of Union Carbide Corporation and subsidiaries as of Dec. 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the years in the three-year period ended Dec. 31, 1998. These consolidated financial statements are the responsibility of the company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Union Carbide Corporation and subsidiaries at Dec. 31, 1998 and 1997, and the results of their operations and their cash flows for each of the years in the three-year period ended Dec. 31, 1998, in conformity with generally accepted accounting principles. KPMG LLP Stamford, Conn. Jan. 22, 1999 - 44 - Quarterly Data
Union Carbide Corporation and Subsidiaries Millions of dollars 1Q 2Q 3Q 4Q Year 1998 Net sales $1,561 $1,459 $1,350 $1,289 $5,659 Cost of sales 1,161 1,087 1,036 1,010 4,294 Gross profit 400 372 314 279 1,365 Depreciation and amortization 95 98 95 101 389 Operating profit 232 203 190(b)(c) 178(b) 803 Net income 142 118 76 67 403 Net income - common stockholders 142 118 76 67 403 1997 Net sales $1,638 $1,666 $1,659 $1,539 $6,502 Cost of sales 1,231 1,220 1,199 1,156 4,806 Gross profit 407 446 460 383 1,696 Depreciation and amortization 82 87 87 84 340 Operating profit 247 291 291 216 1,045 Income before cumulative effect of change in accounting principle 157 191 181 147 676 Cumulative effect of change in accounting principle - - - (17) (17) Net income 157 191 181 130 659 Net income - common stockholders 155 188 179 130 652 (b) Includes $118 million and $71 million in the third and fourth quarters, respectively, of favorable litigation settlements related to the UNIPOL Systems business. (c) Includes $53 million in losses associated with Aspell Polymeres SNC, the corporation's joint venture in France.
Dollars per common share 1Q 2Q 3Q 4Q Year 1998 Basic - Net income - common stockholders $ 1.03 $ 0.87 $ 0.56 $ 0.50 $ 2.98 Diluted - Net income - common stockholders 1.01 0.85 0.55 0.49 2.91 Cash dividends declared 0.2250 0.2250 0.2250 0.2250 0.90 Market price - high(a) 50.3125 55.7500 55.6250 46.2500 55.7500 Market price - low(a) 40.1250 45.3125 36.7500 37.4375 36.7500 1997 Basic - Income before cumulative effect of change in accounting principle $ 1.17 $ 1.46 $ 1.34 $ 1.07 $ 5.02 Cumulative effect of change in accounting principle - - - (0.13) (0.13) Net income - common stockholders 1.17 1.46 1.34 0.94 4.89 Diluted - Income before cumulative effect of change in accounting principle 1.03 1.28 1.18 1.04 4.53 Cumulative effect of change in accounting principle - - - (0.12) (0.12) Net income - common stockholders 1.03 1.28 1.18 0.92 4.41 Cash dividends declared 0.1875 0.1875 0.4125 - 0.7875 Market price - high(a) 49.3750 50.6250 56.8125 50.1250 56.8125 Market price - low(a) 40.5000 42.5000 46.6875 41.4375 40.5000 (a) Prices are based on New York Stock Exchange Composite Transactions.
- 45 - Corporate Information 1999 Annual Meeting The 1999 annual meeting of stockholders will be held on Wednesday, April 28, at the John C. Creasy Health Education Center, 24 Hospital Ave., Danbury, CT 06810, beginning at 10 A.M. A notice of the annual meeting, a proxy statement and a proxy voting card will be mailed to each stockholder in March, together with a copy of this annual report. General Offices The general offices of Union Carbide Corporation are located at 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-2000). Stock Exchanges Union Carbide stock is traded primarily on the New York Stock Exchange (ticker symbol: UK). The stock is also listed on the Chicago and Pacific Stock Exchanges in the U.S. Stock Records and Transfer The corporation acts as its own stock transfer agent through its Shareholder Services Department, which maintains stockholder records, transfers stock and answers questions regarding stockholders' accounts, including dividend reinvestment accounts. Stockholders wishing to transfer stock or to change the name on a stock certificate should contact Shareholder Services for assistance. The registrar is ChaseMellon Shareholder Services. Dividend Reinvestment Stockholders of record may purchase shares directly through Union Carbide's Dividend Reinvestment and Stock Purchase Plan. Under the plan, shares may be purchased from Union Carbide free of commissions and service charges. Requests for a prospectus that explains the plan in detail should be directed to the Shareholder Services Department (Telephone: 800-934-3350). Form 10-K A Form 10-K report for the year ended Dec. 31, 1998, will be available in April 1999. A copy without exhibits may be obtained without charge by writing to Union Carbide Corporation, Bruce D. Fitzgerald, secretary, 39 Old Ridgebury Road, Danbury, CT 06817-0001. Charitable Contributions Booklet Union Carbide annually publishes a booklet that lists organizations receiving charitable, educational, cultural or similar grants of $250 or more from the corporation. The booklet is available on written request to the secretary. RESPONSIBLE CARE Progress Report This report covers health, safety and environmental progress at Union Carbide. Information includes performance data for U.S. and other worldwide locations, RESPONSIBLE CARE goals, and progress Carbide made in 1998 as it completed implementation of RESPONSIBLE CARE management practices. To obtain a copy, write to Union Carbide Corporation, Public Affairs Department, Section L4-505, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 800-552- 5272). Inquiries - - Inquiries from the public about Union Carbide and its products and services should be directed to the Corporate Information Center, Union Carbide Corporation, Section N-0, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-5300). - - Inquiries about stockholder accounts and dividend reinvestment should be directed to Union Carbide Corporation, William H. Smith, manager, Shareholder Services Department, Section G1-328, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-3350). - - Investors, financial analysts and portfolio managers should direct questions about Union Carbide to Union Carbide Corporation, D. Nicholas Thold, director of investor relations, Investor Relations Department, Section E4-286, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-6440). - - Financial journalists should direct questions to Union Carbide Corporation, David N. Kernis, assistant director, communications, Public Affairs Department, Section L4-502, 39 Old Ridgebury Road, Danbury, CT 06817-0001 (Telephone: 203-794-6929). - - Information about Union Carbide also may be found on the company's home page on the Internet at www.unioncarbide.com. Union Carbide's site provides information in five categories: general, financial, business, RESPONSIBLE CARE and recruitment. - 46 - Directors and Corporate Officers Directors C. Fred Fetterolf Retired director, president and chief operating officer of Aluminum Company of America. A UCC director since 1987, he chairs the Health, Safety & Environmental Affairs (HS&EA) Committee and serves on the Audit, Compensation & Management Development and Nominating Committees. Rainer E. Gut Chairman of Credit Suisse Group, Zurich, Switzerland, Credit Suisse First Boston and Credit Suisse. A UCC board member since 1994, he chairs the Finance and Pension Committee and is a member of the Compensation & Management Development and Nominating Committees. Vernon E. Jordan, Jr. Senior partner of Akin, Gump, Strauss, Hauer & Feld LLP. He is chairman of the Nominating Committee and a member of the Executive, Finance & Pension and Public Policy Committees. He has been a board member since 1987. William H. Joyce Chairman, president and chief executive officer of Union Carbide Corporation. A director since 1992, he is chairman of the Executive Committee. Robert D. Kennedy Chairman of UCAR International Inc., and retired chairman and chief executive officer of Union Carbide Corporation. A director since 1985, he serves on the Audit, Executive, Nominating and Public Policy Committees. Ronald L. Kuehn, Jr. Director and chairman, president and chief executive officer of Sonat, Inc. A UCC board member since 1984, he chairs the Compensation & Management Development Committee and serves on the Executive, Finance & Pension and HS&EA Committees. Rozanne L. Ridgway Former assistant secretary of state for Europe and Canada. A director since 1990, she chairs the Public Policy Committee and is a member of the Audit, HS&EA and Nominating Committees. James M. Ringler Director and chairman, president and chief executive officer of Premark International, Inc. He has been a director since 1996 and is chairman of the Audit Committee and a member of the Compensation & Management Development, Finance & Pension and HS&EA Committees. Paul J. Wilhelm President of the U.S. Steel Group of USX Corporation and a director of that corporation. Elected a director in 1998, he serves on the HS&EA and Public Policy Committees. Corporate Officers William H. Joyce Chairman of the Board, President and Chief Executive Officer Joseph S. Byck Vice-President, Strategic Planning, Investor Relations and Public Affairs Bruce D. Fitzgerald Vice-President, General Counsel and Secretary James F. Flynn Vice-President, General Manager, Solvents, Intermediates and Monomers Malcolm A. Kessinger Vice-President, Human Resources Lee P. McMaster Vice-President, General Manager, Specialty Polymers and Products, UCAR Emulsion Systems Joseph C. Soviero Vice-President, Corporate Ventures Roger B. Staub Vice-President, General Manager, UNIPOL Systems John K. Wulff Vice-President, Chief Financial Officer and Controller Other Senior Management Eugene J. Boros Vice-President, Research and Development Ruth E. Bruch Vice-President, Chief Information Officer David L. Brucker Vice-President, Engineering and Operations Graham S. Cattell Vice-President, Engineering Ron J. Cottle Vice-President, Health, Safety and Environment R. Duane Dickson Vice-President, General Manager, Industrial Performance Chemicals John L. Gigerich Vice-President, Purchasing, Information Technology and Supply Chain Management Kevin P. Lynch Vice-President, General Manager, UNIPOL Polymers Philip F. McGovern Vice-President, Tax Daniel C. Scheid Vice-President, General Manager, Ethylene Oxide/Glycol Lee C. Stewart Vice-President and Treasurer Vince F. Villani Vice-President, General Manager, Olefins Donald R. Wood Vice-President, Polypropylene Resins John P. Yimoyines Vice-President, General Manager, Specialty Polyolefins - 47 - Union Carbide Around the World United States & Puerto Rico Alabama* New Jersey California New York* Colorado North Carolina Connecticut Texas* District of Columbia Vermont Georgia West Virginia Illinois* Puerto Rico Louisiana* Canada Alberta* Quebec* Ontario Europe Austria Russia Belgium Spain Czech Republic Sweden France* Switzerland Germany* Turkey Italy* United Kingdom* Poland Latin America Argentina Ecuador Brazil Guatemala Chile Mexico Colombia Peru Costa Rica Venezuela Far East & other Australia Morocco China* Philippines Egypt Singapore Hong Kong South Africa Indonesia South Korea* Japan* Sri Lanka Jordan Taiwan Kuwait* Thailand Malaysia United Arab Emirates *Including joint venture locations. Definition of Terms Unless the context otherwise requires, the terms below refer to the following: Union Carbide Corporation, Union Carbide Corporation, Union Carbide, Carbide, the parent company, and its the corporation, we, our, consolidated subsidiaries the company, UCC Domestic United States and Puerto Rico Domestic operations Operations of Union Carbide in this area, including exports International operations Operations of Union Carbide in areas of the world other than the United States and Puerto Rico Joint ventures Partnerships and corporate investments of Union Carbide Corporation accounted for under the equity method of accounting The use of these terms is for convenience of reference only. The consolidated subsidiaries are separate legal entities that are managed by, and accountable to, their respective boards of directors. CARBITOL, CARBOWAX, CELLOSIZE, CELLOSOLVE, CYRACURE, EMKADIXOL, FLEXOL, FLEXOMER, NEULON, NORKOOL, LP OXO, POLYOX, POLYPHOBE, SELEXOL, TERGITOL, TONE, TRITON, TUFLIN, UCAR, UCARSOL, UCARTHERM, UCON, UCURE, UNICARB, UNIPOL, and UNION CARBIDE are trademarks of Union Carbide. RESPONSIBLE CARE is a registered service mark of the Canadian Chemical Producers Association and the Chemical Manufacturers Association. EQUATE is a trademark of EQUATE Petrochemical Company K.S.C. of Kuwait. - 48 - (Inside back cover) Printed on Recycled, Recylable Paper. Printed in U.S.A. (Back cover) (The back cover depicts a hexagon containing the words "Union Carbide".) Union Carbide Corporation 39 Old Ridgebury Road Danbury, Connecticut 06817-0001 UC-1800 EX-21 5 SUBSIDIARIES OF THE CORPORATION Exhibit 21 Percentage of Voting State or Securities Sovereign Owned By Power of Immediate Name of Company Incorporation Parent Union Carbide Corporation (the "Corporation") New York - % Subsidiaries included in the Consolidated Financial Statements except where noted otherwise: Amerchol Corporation Delaware 100.00 Benefit Capital Management Corporation Delaware 100.00 Calidria Corporation Delaware 100.00 Catalysts, Adsorbents & Process Systems, Inc. Maryland 100.00 Dexter Realty Corporation Ohio 100.00 JWS Hampshire, Inc. Delaware 100.00 KTI Chemicals, Inc. Delaware 100.00 P.T. Union Carbide Indonesia Indonesia 100.00 Prentiss Glycol Company Delaware 100.00 Seadrift Pipeline Corporation Delaware 100.00 South Charleston Sewage Treatment Co. West Virginia 100.00 UCAR Emulsion Systems International, Inc. Delaware 100.00 UCAR Interm, Inc. Delaware 100.00 UCAR Louisiana Pipeline Company Delaware 100.00 UCAR Pipeline Inc. Delaware 100.00 UCAR, Polimeros y Quimicos C.A. Ecuador 100.00 UCAR Resinas Caribe Inc. Delaware 100.00 UCAR Vanor (Proprietary) Limited South Africa 100.00 UCEX (U.K.) Limited England 100.00 Umetco Minerals Corporation Delaware 100.00 Union Carbide Argentina S.A.I.C.S. Argentina 100.00 Union Carbide Asia Limited Hong Kong 100.00 Union Carbide Asia Pacific, Inc. Delaware 100.00 Union Carbide Benelux N.V. Belgium (1) Union Carbide do Brasil S/A Brazil 100.00 Union Carbide Caribe LLC Delaware 100.00 Union Carbide Canada Inc. Canada 100.00 Union Carbide Chemicals and Plastics Technology Corporation Delaware 100.00 Union Carbide Chemicals (Australia) Pty. Ltd. Australia 100.00 Union Carbide Chemicals Korea Limited Korea 100.00 Union Carbide Chemicals (Malaysia) Sdn. Bhd. Malaysia 100.00 Union Carbide Comercial, C.A. Venezuela 100.00 Union Carbide Customer Services Pte. Ltd. Singapore 100.00 Union Carbide Engineering and Hydrocarbons Service Company, Inc. Delaware 100.00 Union Carbide Ethylene Oxide/Glycol Company Delaware 100.00 Union Carbide (Europe) S.A. Switzerland 100.00 Union Carbide Foreign Sales Corporation US Virgin Is. 100.00 Union Carbide Formosa Co., Ltd. Taiwan 100.00 Union Carbide (Guangdong Zhongshan) Company Limited Peoples .Republic of China 75.00 (1) 99.83% of the voting securities of Union Carbide Benelux N.V. is owned by Union Carbide Corporation; and 00.17% by Union Carbide (Europe) S.A. Percentage of Voting State or Securities Sovereign Owned By Power of Immediate Name of Company Incorporation Parent Union Carbide Corporation. (Continued) Union Carbide Imaging Systems, Inc. Delaware 100.00 Union Carbide Inter-America Inc. Delaware 100.00 Union Carbide Inter-America Inc. New Jersey 100.00 Union Carbide Japan K.K. Japan 100.00 Union Carbide Limited England 100.00 Union Carbide Pan America, Inc. Delaware 100.00 Union Carbide Philippines (Far East) Inc. Philippines 100.00 Union Carbide Quimica Ltda. Brazil 100.00 Union Carbide Quimicos y Plasticos, S.A. de C.V. Mexico 100.00 Union Carbide South Africa (Proprietary) Limited South Africa 100.00 Union Carbide Subsidiary C, Inc. Delaware 100.00 Union Carbide Subsidiary L, Inc. Delaware 100.00 Union Carbide Subsidiary M, Inc. Delaware 100.00 Union Carbide Subsidiary Y, Inc. Delaware 100.00 Union Carbide Subsidiary Z, Inc. Delaware 100.00 Union Carbide Thailand Limited Thailand 100.00 Union Carbide Wire & Cable Company, Inc. Delaware 100.00 Union Polymers Sdn. Bhd. Malaysia 60.00 Westbridge Insurance Ltd. Bermuda 100.00 Companies reported in the Consolidated Financial Statements on an Equity in Net Assets Basis included: Asian Acetyls Rep. of Korea 33.00 Alberta & Orient Glycol Company Limited Canada 50.00 ASPELL Polymeres SNC France 50.00 Commercial Alcohols Limited Canada 50.00 Equate Petrochemical Company K.S.C. Kuwait 45.00 Nippon Unicar Company Limited Japan 50.00 Petromont and Company, Limited Partnership Canada 49.95 Petromont Inc. Canada 50.00 Polimeri Europa S.r.l. Italy 50.00 Seadrift Polypropylene Company Texas 50.00 Shawinigan Pipeline Reg'd. Canada 50.00 Union Carbide Lanka Limited Sri Lanka 49.00 UOP LLC New York 50.00 Univation Technology, LLC Delaware 50.00 Union Showa K.K. Japan 50.00 World Ethanol Company Illinois 50.00 * * * * * * * * * * * * The names of the Corporation's other consolidated subsidiaries and companies carried on an equity in net assets basis are not listed. These subsidiaries and companies, if considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. In addition, the Corporation has investments in other subsidiaries and 20-to-50%-owned companies for which financial statements are not submitted because all such subsidiaries and companies, considered in the aggregate as a single subsidiary, would not constitute a significant subsidiary. EX-23 6 CONSENT OF KPMG LLP EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS The Board of Directors Union Carbide Corporation We consent to the incorporation by reference in each of the Registration Statements of Union Carbide Corporation on Form S-3 (Nos. 33-26185, 33-60705 333-17309 and 333-59635), and on Form S-8 (Nos. 2-90419, 33-22125, 33-38714, 33-53573, 33-58931, 333-02829, 333-38493, 333-38495 and 333-74079) of our reports dated January 22, 1999, relating to the consolidated balance sheets of Union Carbide Corporation and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, stockholders' equity and cash flows and related schedule for each of the years in the three-year period ended December 31, 1998, appearing and incorporated by reference in the Annual Report on Form 10-K of Union Carbide Corporation for the year ended December 31, 1998. KPMG LLP Stamford, Connecticut March 25, 1999 EX-27.1 7 FINANCIAL DATA SCHEDULE FOR THE YEAR ENDED 1998
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNION CARBIDE CORPORATION'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000100790 UNION CARBIDE CORPORATION 1,000,000 YEAR DEC-31-1998 DEC-31-1998 49 0 933 0 667 1906 8409 4228 7291 1470 1796 0 0 155 2294 7291 5659 5659 4294 4294 532 0 114 689 217 403 0 0 0 403 2.98 2.91 Other expenses are equal to Research and development of 143 and Depreciation and amortization of 389. The EPS-PRIMARY amount represents Basic earnings per share and the EPS-DILUTED amount represents Diluted earnings per share, computed in accordance with Statement of Financial Accounting Standards No. 128, "Earnings Per Share."
EX-27.2 8 RESTATED FINANCIAL DATA SCHEDULE YTD 1997 AND 1996
5 This schedule contains restated summary financial information extracted from Union Carbide Corporation's Annual Report on Form 10-K for the years ended December 31, 1997 and December 31, 1996, and is qualified in its entirety by reference to such financial statements. 0000100790 UNION CARBIDE CORPORATION 1,000,000 YEAR YEAR DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 20 57 0 0 993 1047 0 0 604 541 1866 1873 7707 7159 3927 3750 6964 6546 1504 1278 1458 1487 0 144 0 0 155 155 2193 1959 6964 6546 6502 6106 6502 6106 4806 4568 4806 4568 497 471 0 0 79 76 966 845 279 236 676 593 0 0 0 0 17 0 659 593 4.89 4.43 4.41 3.90 Other expenses in 1997 are equal to research and development of 157 and depreciation and amortization of 340. Other expenses in 1996 are equal to research and development of 159 and depreciation and amortization of 312. The EPS-PRIMARY amount represents basic earnings per share and the EPS-DILUTED amount represents diluted earnings per share, computed in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
EX-27.3 9 RESTATED FINANCIAL DATA SCHEDULE INTERIM 1997
5 This schedule contains restated summary financial information extracted from Union Carbide Corporation's Quarterly Reports on Form 10-Q for the three months ended March 31, 1997, the six months ended June 30, 1997 and the nine months ended September 30, 1997, and is qualified in its entirety by reference to such financial statements. 0000100790 UNION CARBIDE CORPORATION 1,000,000 3-MOS 6-MOS 9-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 JAN-01-1997 JAN-01-1997 JAN-01-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 175 72 86 0 0 0 1082 1079 1064 0 0 0 553 544 556 2028 1923 1954 7274 7424 7577 3809 3855 3886 6795 6770 6975 1221 1131 1306 1494 1467 1459 140 140 138 0 0 0 155 155 155 1972 2053 2063 6795 6770 6975 1638 3304 4963 1638 3304 4963 1231 2451 3650 1231 2451 3650 122 250 374 0 0 0 19 38 57 228 500 772 66 145 228 157 348 529 0 0 0 0 0 0 0 0 0 157 348 529 1.17 2.63 3.97 1.03 2.31 3.49 Other expenses for the three months ended March 31, 1997 are equal to research and development of 40 and depreciation and amortization of 82. Other expenses for the six months ended June 30, 1997 are equal to research and development of 81 and depreciation and amortization of 169. Other expenses for the nine months ended September 30, 1997 are equal to research and development of 118 and depreciation and amortization of 256. The EPS-PRIMARY amount represents basic earnings per share and the EPS-DILUTED amount represents deiluted earnings per share, computed in accordance with Statement of Financial Accounting Standards No. 128 "Earnings Per Share."
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