-----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, MdPUDmXOpQLYiu45c/X8FyLAYYld1bLqDNbEWQ9PA+mLlEVwrwNj7qalb02Jk6lk 27lB1OANqW7S4WKGF3yPrg== 0000950117-98-000584.txt : 19980323 0000950117-98-000584.hdr.sgml : 19980323 ACCESSION NUMBER: 0000950117-98-000584 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980320 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: WITCO CORP CENTRAL INDEX KEY: 0000107889 STANDARD INDUSTRIAL CLASSIFICATION: INDUSTRIAL ORGANIC CHEMICALS [2860] IRS NUMBER: 131870000 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-04654 FILM NUMBER: 98570388 BUSINESS ADDRESS: STREET 1: ONE AMERICAN WAY CITY: GREENWICH STATE: CT ZIP: 06831 BUSINESS PHONE: 2035522000 MAIL ADDRESS: STREET 1: ONE AMERICAN LANE CITY: GREENWICH STATE: CT ZIP: 06831 FORMER COMPANY: FORMER CONFORMED NAME: WITCO CHEMICAL CORP DATE OF NAME CHANGE: 19851117 FORMER COMPANY: FORMER CONFORMED NAME: WITCO CHEMICAL CO INC DATE OF NAME CHANGE: 19681203 10-K405 1 WITCO CORPORATION 10K ________________________________________________________________________________ SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997 COMMISSION FILE NO. 1-4654 ------------------------ WITCO CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) ------------------------ DELAWARE 13-1870000 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.) INCORPORATION OR ORGANIZATION) ONE AMERICAN LANE 06831-2559 GREENWICH, CONNECTICUT (ZIP CODE) (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (203) 552-2000 ------------------------ SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED - ----------------------------------------------------------------------- ------------------------ Common Stock -- $5 Par Value New York Stock Exchange Rights to Purchase Series A Participating New York Stock Exchange Cumulative Preferred Stock
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] As of February 27, 1998, the aggregate market value of the voting stock held by non-affiliates of the Registrant, based on the closing price on February 27, 1998, on the New York Stock Exchange for the Registrant's Common Stock, was $2.25 billion. There were 57,461,622 shares of the Registrant's Common Stock outstanding on February 27, 1998. DOCUMENTS INCORPORATED BY REFERENCE Portions of Registrant's definitive Proxy Statement for its April 22, 1998 Annual Meeting of Shareholders are incorporated by reference into Part III. ________________________________________________________________________________ PART I ITEM 1 -- BUSINESS (A) GENERAL DEVELOPMENT OF BUSINESS Witco Corporation (the 'Company' or 'Witco'), established in 1920, is a global manufacturer and marketer of specialty chemical products for use in a wide variety of industrial and consumer applications. Most of the Company's products are sold to industrial customers for use as additives, ingredients or intermediates which impart particular characteristics to such customers' end products. On December 31, 1997, the Company had approximately 5,970 employees worldwide. On October 19, 1995, Witco completed the acquisition of OSi Specialties Holding Company ('OSi Specialties' or 'OSi'), an entity engaged in the manufacture of silicone surfactants, amine catalysts, organofunctional silanes and specialty fluids with manufacturing and blending facilities in West Virginia, Europe, South America and Asia. In 1995, the Company completed the disposition of its Battery Parts and Carbon Black operations. These dispositions completed the Company's previously announced plan to dispose of all of the businesses of the Company's Diversified Products segment. In September 1995, Witco announced its intention to divest its Lubricants Group. In November 1996, the Company disposed of its grease gun and motor oil portions of its Lubricants business. The Company completed the divestiture of its Lubricants Group by disposing of its refinery in Bradford, Pennsylvania in the first quarter of 1997 and its Golden Bear Division in the third quarter of 1997. On December 12, 1996, the Company announced a restructuring plan to be implemented over a three year period (1997-1999). The plan is intended to improve profitability, increase productivity and maximize shareholder value. The plan's goals are to reduce fixed costs by 20% and variable costs by 5 to 10%. Cost savings run rates are anticipated to be 50%, 90% and 100% at the end of 1997, 1998 and 1999, respectively. As a part of the plan, the Company is undertaking a $600 million three-year capital spending plan for new capacity, modernization, environmental and safety compliance and information systems. The Company intends to reduce the number of its manufacturing facilities by either selling or closing principal manufacturing facilities, while consolidating related distribution, research and development and administrative centers. During 1997, in connection with the divestiture of the Lubricants Group and the 1995 and 1996 restructuring plans, the Company closed or sold 11 manufacturing facilities, 28 warehouses and terminals, 6 sales offices, 4 administrative offices and 3 research and development facilities and reduced its workforce by approximately 730 employees. At December 31, 1997, Witco conducted manufacturing operations at 38 plants worldwide, conducted sales activities at 49 sites worldwide, was engaged in research and development activities at 23 locations worldwide and conducted administrative functions at 19 offices worldwide. In connection with the Company's 1996 restructuring plan, on January 28, 1997, the Company announced the reorganization of its business into four groups: Oleochemicals & Derivatives, Polymer Chemicals, Performance Chemicals and OrganoSilicones. The Oleochemicals & Derivatives Group, which contains the Oleochemical assets of the former Oleo/Surfactants Group, produces basic oleochemicals (fatty acids and plastic lubricants) and oleochemical derivatives. The Polymer Chemicals Group includes assets of the former Polymer Additives Group and certain assets of the former Resins Group. This group focuses on the production of additives and initiators in addition to metal organics, coatings and adhesives. The Performance Chemicals Group consists of the former Petroleum Specialties Group, certain assets of the old Oleo/Surfactants and Resins Groups and Baxenden, a joint venture headquartered in the United Kingdom. This group focuses on producing petroleum specialties, sulfonation and ethoxylation products, and urethane chemicals. The OrganoSilicones Group, which consists of the former OSi Specialties Group, produces silanes, specialty fluids and urethane additives. The Company was incorporated in 1958 under the laws of Delaware as Witco Chemical Company, Inc., at which time it succeeded by merger to the business of Witco Chemical Company, an Illinois corporation formed in 1920. Its executive offices are located at One American Lane, Greenwich, Connecticut 06831-2559, telephone (203) 552-2000. 1 (B) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS Reference is made to Note 18 of Notes to Financial Statements. See Item 8 -- Financial Statements and Supplementary Data following Part IV of this report. (C) NARRATIVE DESCRIPTION OF BUSINESS As of December 31, 1997, the Company's operations were divided among four business groups: the Oleochemicals & Derivatives Group, the Polymer Chemicals Group, the Performance Chemicals Group and the OrganoSilicones Group. OLEOCHEMICALS & DERIVATIVES GROUP The Oleochemicals & Derivatives Group is an integrated producer of chemicals based on natural fats and oils. Witco is one of North Americas largest fatty acid producers, and a global leader in quaternary fatty amines, amphoteric and specialty cationic surfactants and ethoxylated specialties. The group supplies a myriad of industries, including personal care, home care and fabric conditioning ingredients, paper, textiles, rubber, coatings and plastic. Oleochemicals modify surfaces either as direct lubricants, emulsifiers or as components of ingredients that modify surfaces. Examples of diverse applications of fatty acids include acting as lubricants in plastics, components of personal care products such as soaps, creams and lotions; and acting as curing systems for rubber. Oleochemical derivatives are value added analogs of fatty acids produced through creative chemistry, modifying molecules to provide specialized solutions to customer performance requirements. Witco is one of the world's largest producers of quaternary fatty amines, which are used as laundry softeners, in personal care as hair conditioners and in many other applications. Amphoteric surfactants combine detergency with natural mildness, making them ideal for shampoos, dishwashing detergents, and many other skin care, personal care and detergent products. Ethoxylated specialties, based on mono/diglycerides, like amphoteric surfactants, are based on natural compounds that clean without irritating the skin. They are used to make shampoos, body gels and similar products richer and creamier. POLYMER CHEMICALS GROUP Witco's Polymer Chemicals Group is a worldwide supplier of additives and catalysts for the polymer industry. It manufactures stabilizers, lubricants, plasticizers, and peroxide catalysts used in the manufacture of polyvinyl chloride ('PVC') resin for such applications as pipes, fittings, siding and packaging materials. The Group is also a supplier of lubricants, antioxidants and peroxide catalysts to polyolefin/polystyrene manufacturers. These resins are used extensively in a broad spectrum of applications ranging from packaging film to small appliance housings. The Group is a global producer of aluminum alkyls, used as cocatalysts in the production of polyolefins (including polyethylene and polypropylene, which are among the world's largest volume plastics used in packaging, cars, furniture and appliances) and produces organotin compounds for the production of PVC stabilizers and biocides for marine paints. The Polymer Chemicals Group also manufactures environmentally friendly epoxy resins and hardening agents, complete resin systems that add durability and adhesion to coatings and adhesives, and hot melt and epoxy adhesives used in applications such as shoes, textiles, automotive body components and wire encapsulation. PERFORMANCE CHEMICALS GROUP The Company's Performance Chemicals Group consists of five business units: Refined Products, Petroleum Additives, Industrial Surfactants, Urethane Chemicals and Baxenden, a 53.5% owned subsidiary of the Company. 2 Refined Products The Refined Products business is engaged in the manufacture and marketing of a wide range of high purity hydrocarbon products, including white oils, petrolatums, microcrystalline waxes, cable compounds, and refrigeration oils, serving numerous global markets predominantly requiring food grade quality. The business' product lines serve as lubricants, emollients, moisture barriers, plasticizers and carriers and are characterized by their chemical inertness and high quality. The Refined Products business serves five major market segments: polystyrene, other polymers, personal care, refrigeration oils and telecommunication cables, as well as additional minor markets. Petroleum Additives The Petroleum Additives business is a major manufacturer and marketer of sulfonates, primarily used as performance additives in transport and industrial lubricant applications, and as heavy fuel additives. The Witco sulfonate product line includes low based and overbased calcium sulfonates, overbased magnesium sulfonates, low based barium sulfonates and sodium sulfonates. These sulfonates are oil soluble surfactants, and their properties include detergency to help lubricants keep car, truck and ship engines clean with minimal wear; emulsification and corrosion protection for metalworking fluids; and corrosion protection for heavy fuels used in power generation. The Petroleum Additives business is globally managed. Manufacturing plants are located in North America and Europe, and an established distribution network services South America and the Asia Pacific region. The bulk of the sulfonate product line is marketed directly through Witco's own sales force. Many of the business customers are supplied and serviced on a global basis. Industrial Surfactants The Industrial Surfactants business manufactures and sells a broad line of surfactants to a range of industries, primarily agriculture, oil field, emulsion (water based) polymers, paints and coatings; and also to personal care, soap and detergent, and textile markets. Surfactants change the surface tension (spreadability) of liquids. In agricultural applications, surfactants separate pesticides into small particles, thereby increasing their efficacy via dispersion and penetration; in the oil field, surfactants are used as demulsifiers which aid in the clean separation of oil from water. Surfactants are also used in personal care products, and in soaps and detergents, to improve penetration and cleaning capability. Urethane Chemicals The Urethane Chemicals business is comprised of three product groupings that offer technologically advanced materials to a diverse and global customer base: Fomrez'r' saturated polyester polyols, Witcobond'r' polyurethane dispersions, and Witcothane'r' polyurethane systems. Polyester polyols are employed in industrial applications such as flexible foam for seating, thermoplastic urethanes for structural parts, adhesives and coatings. The polyurethane dispersions are sold to a larger and more diverse customer base primarily for coating applications such as flooring, fiberglass reinforcement and textiles. Polyurethane systems are used primarily by the shoe sole industry, and is a highly service intensive business. Baxenden Baxenden, a 53.5% owned Witco subsidiary (partner Croda Inc. at 46.5%) is engaged in the manufacture and marketing of isocyanate derivatives, polyesters and specialty polymer systems used in a wide range of applications. The major markets served by Baxenden are automotive, construction, surface coatings, leather and textile finishers. Sub-markets include coatings, adhesives, sealants, glastomers and insulation for the above markets. Baxenden is focused on specialty polymer and resin chemistry and novel curing mechanisms for such polymers. The core technology will be isocyanate and acrylic chemistry but will include novel polyesters and esterification processes. 3 ORGANOSILICONES GROUP The OrganoSilicones Group manufactures and sells over 500 silicone-based chemical intermediate products to manufacturers of fiberglass, reinforced plastics, polyurethane foam, textiles, coatings, automotives, adhesives, rubber, pharmaceuticals, thermoplastics, sealants and agricultural, electrical and personal care products throughout the world. In 1958, The OrganoSilicones Group (while part of Union Carbide Corp.) invented the use of silicone surfactants in the manufacture of urethane foam. This fundamental technological advance facilitated a lower-cost, continuous manufacturing method, resulting in accelerated growth in the urethane foam industry. The OrganoSilicones Group was also a pioneer in the silanes industry, and was instrumental in developing key technology for the reinforcement of plastics. Regardless of form, most silicones share a combination of properties, including electrical resistance, ability to maintain performance across a broad range of temperatures, resistance to aging, water repellence, lubricating characteristics and relative chemical and physiological inertness. The versatility of silicone-based intermediates has led to a wide variety of applications across a broad spectrum of industries in all major countries. Examples of the OrganoSilicones Group's products include catalysts, surfactants, coupling agents, process aids and other silicone-based specialty chemicals. Catalysts promote the process of urethane foam and polymer formation. Surfactants promote the mixing of reactants, control cell size and stabilize urethane foam. Surfactants also serve as wetting agents in a broad spectrum of applications and are used in personal care products (hair conditioning) and coatings (for flow control and leveling) and agriculture (netting). Coupling agents bond inorganic and organic materials and enhance the physical, mechanical and adhesion properties of a variety of products, including fiberglass, sealants, rubber and coatings. Process aides include foam control agents, which inhibit foam formation or reduce foam in such diverse applications as antacid tablets, fountain soda and pulp and paper processing. Raw Materials The principal raw materials for the OrganoSilicones Group products are trichlorosilane, polyether fluids and dimethyl siloxane hydrolyzate. The OrganoSilicones Group purchases, in the aggregate, more than 40% of its raw materials from Dow Corning Corporation and Union Carbide Corporation under various long-term agreements, which terms expire at various times through 2000. The Group purchases other raw materials from a variety of domestic and international suppliers, and these products are readily available from other suppliers. DIVESTITURE OF LUBRICANTS BUSINESS In September 1995, Witco announced its intention to divest its Lubricants Group. In 1996, Witco sold its Kendall/Amalie, private label grease and grease gun manufacturing businesses. In the first quarter of 1997, Witco sold its Bradford, PA refinery. Witco discontinued its operation as a supplier of specialty naphthenic oils, which had been marketed to the rubber, plastics, ink and agricultural industries, and asphalt and specialty road and surface treatment products, which had been sold primarily for highway construction and maintenance, when it completed the divestiture of its Lubricants Group by disposing of its Golden Bear Division in the third quarter of 1997. INTERNATIONAL OPERATIONS Sales of Witco's continuing non-U.S. operations were $905 million, or 41.4% of total sales for continuing operations, for the year ended December 31, 1997. Witco's manufacturing and producing operations outside the United States are in Belgium, Brazil, Canada, Denmark, England, France, Germany, Hong Kong, Indonesia, Italy, Korea, Malaysia, Mexico, the Netherlands, Singapore, Spain and Thailand. 4 PATENTS AND TRADEMARKS The Company owns and controls patents, trade secrets, trademarks, trade names, copyrights and confidential information, which in the aggregate, are of material importance to its business. However, the Company is not materially dependent upon any single patent or trademark. The Company's trademarks are registered in the United States and in a number of foreign countries, with renewable terms of registration expiring generally between 1998 and 2007. The Company intends to renew in a timely fashion those trademarks that are renewable and deemed important to its continuing business operations. Additionally, the Company currently has approximately 2,200 patents and pending patent applications worldwide related to its continuing business operations. The Company intends to continue to file patent applications on new and emerging technologies. BACKLOG The nature of the business conducted by each of the Company's four business groups is such that customer orders are usually filled within 30 days. Accordingly, backlog is not significant to the Company's business. RESEARCH AND DEVELOPMENT The Company is actively engaged in research and development programs designed to develop new products, manufacturing processes, systems and technologies to enhance existing products and processes. The Company believes its investments in research and development have been an important factor in establishing and maintaining its competitive position. Witco expended approximately $71.8 million in 1997, $73.1 million in 1996 and $52.9 million in 1995 on research and development of new products and services for its continuing operations, and for improvements and new applications of existing products and services for its continuing operations. During 1997, the Company consolidated its U.S. research and development facilities into three primary locations. ENVIRONMENTAL MATTERS The industries in which Witco operates have experienced increased operating costs and capital investments due to statutes and regulations at the federal, state and local levels for the protection of the environment and the health and safety of employees and others. Witco believes that expenditures for compliance with these statutes and regulations will continue to have a significant impact upon the conduct of its business. The trend for greater environmental awareness and more stringent environmental regulations is likely to continue and while Witco cannot accurately predict how this trend will affect future operations and earnings, Witco does not believe its costs will vary significantly from those of its competitors in the chemical industry. The Company evaluates and reviews environmental reserves for future remediation and other costs on a quarterly basis to determine appropriate reserve amounts. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation efforts. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative clean-up methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology, and the identification of additional environmental sites. Reserves for environmental remediation and compliance costs at December 31, 1997 amounted to $186.6 million (including $55.3 million associated with environmental expenses of the Lubricants Group and $64.7 million associated with plants either to be, or which have already been, shut down or sold as part of the 1996 and 1995 restructuring plans), which reflects management's assessment of future remediation and compliance costs in light of currently available information. Remediation expenditures charged to those reserves were $36.8 million in 1997 and include expenditures currently mandated as well as those not initiated by any regulatory authority or third party. The Company anticipates 1998 expenditures to be approximately $36.5 million. 5 Capital expenditures for air, water and solid waste control equipment and facilities amounted to $37.4 million in 1997. The Company estimates that approximately $26.0 million will be expended on similar capital projects in 1998. The Company is continuing its efforts to reduce hazardous waste and emissions generated by its operations. Through improved operating efficiencies, installation of additional environmental control equipment and utilization of the latest innovations in waste treatment technology, management believes that direct recurring operating costs associated with managing hazardous substances and pollution can be maintained at or slightly above current levels. Such costs amounted to approximately $40.7 million in 1997. YEAR 2000 ISSUES Reference is made to the Capital Investments and Commitments section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. See Item 7 -- 'Management's Discussion and Analysis of Financial Condition and Results of Operations.' (D) FINANCIAL INFORMATION REGARDING FOREIGN AND DOMESTIC OPERATIONS AND EXPORT SALES Witco's foreign subsidiaries generally manufacture products similar to the principal products manufactured domestically. Manufacturing is conducted by subsidiaries in Belgium, Brazil, Canada, Denmark, England, France, Germany, Italy, Mexico, the Netherlands, Singapore and Spain. In addition, the Company operates producing and other facilities in Korea, Hong Kong, Malaysia, Thailand and Indonesia. In accord with normal market conditions, sales made outside the United States are generally made on longer terms of payment than would be normal within the United States. Foreign operations are subject to certain risks inherent in carrying on international business, including currency devaluations and controls, export and import restrictions, inflationary factors, product supply, economic controls, nationalization and expropriation. The likelihood of such occurrences varies from country to country and is not predictable. However, the Company's primary foreign operations are based in Western Europe and other stable areas, and, therefore, the Company does not believe these risks will have a significant impact upon the Company. Reference is made to Note 18 of Notes to Financial Statements. See Item 8 -- Financial Statements and Supplementary Data following Part IV of this report. ITEM 2 -- PROPERTIES At December 31, 1997, Witco conducted manufacturing and other operations at 41 principal facilities worldwide, of which 21 are in the United States and 20 are in other countries. Of these principal facilities, 6 are utilized for Oleochemicals & Derivatives product manufacturing; 8 are utilized for Polymer Chemicals product manufacturing; 15 are utilized for Performance Chemicals product manufacturing; 4 are utilized for OrganoSilicones product manufacturing; and 8 are utilized for administrative and research purposes. All of the facilities are in good operating condition. 6 PRINCIPAL MANUFACTURING PLANTS AND OTHER IMPORTANT PHYSICAL PROPERTIES RELATED TO CONTINUING OPERATIONS -- LOCATIONS BY INDUSTRY SEGMENT (OWNED IN FEE EXCEPT WHERE PARENTHETICAL DATES REFER TO LEASE EXPIRATION) OLEOCHEMICALS & DERIVATIVES GROUP United States Mapleton, Illinois Memphis, Tennessee Janesville, Wisconsin International Flimby, England Steinau, Germany Granollers, Spain POLYMER CHEMICALS GROUP United States Mapleton MOP, Illinois Taft, Louisiana Brooklyn, New York* Marshall, Texas International Bergkamen, Germany (2091) Gambolo, Italy Cuatitlan, Mexico Singapore PERFORMANCE CHEMICALS GROUP United States Chicago, Illinois* Perth Amboy, New Jersey Houston, Texas Fort Worth, Texas* Gretna, Louisiana Harahan, Louisiana* Petrolia, Pennsylvania* Trainer, Pennsylvania* International West Hill, Canada Amsterdam, the Netherlands Haarlem, the Netherlands Koog aan de Zaan, the Netherlands Soro, Denmark (2005) Accrington, England Droitwich, England 7 ORGANOSILICONES GROUP United States Sistersville, West Virginia International Antwerp, Belgium (2019) Itatiba, Brazil Termoli, Italy - ------------ * Manufacturing plants, for which public announcements have been made regarding the Company's intention to close or sell as part of its asset consolidation plan. OTHER FACILITIES United States Greenwich, Connecticut (2014) World Headquarters -- Principal Executive, Administrative and Sales Office Tarrytown, New York (2007) Research Dublin, Ohio Research Oakland, New Jersey Research S. Charleston, West Virginia (1997*) Administrative, Research and Sales Office International Paris, France (1999) Administrative and Sales Office Singapore (1999) Administrative, Research and Sales Office Principal European Executive and Administrative Office, Research and Sales Office Meyrin, Switzerland (2007)
- ------------ * The Company is presently negotiating a new lease arrangement. In addition, the Company operates production and other facilities in Korea, Hong Kong, Malaysia, Thailand and Indonesia. ITEM 3 -- LEGAL PROCEEDINGS The Company is a potentially responsible party ('PRP') or a defendant in a number of governmental (federal, state and local) and private actions associated with the release, or suspected release, of contaminants into the environment. As a PRP, the Company may be liable for costs associated with the investigation and remediation of environmental contamination, as well as various penalties and damages to persons, property and natural resources. As of December 31, 1997, the Company was a PRP, or a defendant, in connection with 59 sites at which it is likely to incur environmental response costs as a result of actions brought against the Company pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act ('CERCLA'), the federal Resource Conservation and Recovery Act ('RCRA') or similar state or local laws. With 22 exceptions, all of these sites involve one or more other PRPs, and in most cases there are numerous other PRPs in addition to the Company. CERCLA, RCRA and the state counterparts to these federal laws authorize governments to investigate and remediate actual or suspected damage to the environment caused by the release, or suspected release, of hazardous substances into the environment, or to order the responsible parties to investigate and/or remediate such environmental damage. The Company evaluates and reviews environmental reserves for future remediation and other costs on a quarterly basis to determine appropriate reserve amounts. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation efforts. 8 Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative cleanup methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology and the identification of additional environmental sites. The Company is a defendant in six similar actions arising out of the Company's involvement in the polybutylene resin manufacturing business in the 1970's. Five of the following cases are currently pending in California state courts and one is pending in Texas state court; East Bay Municipal Utility District v. Mobil Oil Corporation, et al., filed in November 1993, and pending in Superior Court for the County of San Mateo, California; City of Santa Maria v. Shell Oil Company, et al., filed in May 1994, and pending in Superior Court for the County of San Luis Obispo, California; Nipomo Community Services District v. Shell Oil Company, et al., filed in May 1995, and pending in Superior Court for the County of Santa Barbara, California; Alameda County Water District v. Mobil Oil Corporation, et al., filed in April 1996, and Marin Municipal Water District v. Shell Oil Company, et al., filed in May 1996, both pending in Superior Court for the County of San Mateo; and City of Austin v. Shell Oil Company, et al. filed in June 1996, and pending in the District Court of Travis County, Texas. The actions generally allege that the Company and several other defendants negligently misrepresented the performance of polybutylene pipe and fittings installed in water distribution systems. Other allegations in the California and Texas actions include breach of the California Unfair Practices Act and the Texas Deceptive Practices Act, respectively; breach of warranty, fraud and strict liability. It is possible that the Company may be named as a defendant in future actions arising out of its past involvement in the polybutylene resin manufacturing business. On September 30 , 1997, the U.S. Environmental Protection Agency ('EPA') filed an Administrative Complaint with the Regional Hearing Clerk, U.S. EPA, Region III alleging violations of the Clean Water Act at the Company's Petrolia, Pennsylvania facility. In its complaint, EPA proposed that a penalty of $125,000 be assessed against the Company. The Company and EPA have agreed in principle to settle the matter for $100,000, however, negotiations concerning the terms of a settlement agreement are ongoing. The Company is not a party to any legal proceedings, including environmental matters, which it believes will have a material adverse effect on its consolidated financial position or liquidity. However, the Company's operating results or cash flow could be materially affected in future periods by the resolution of these contingencies. ITEM 4 -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of security holders, through the solicitation of proxies or otherwise, during the fourth quarter ended December 31, 1997. 9 EXECUTIVE OFFICERS OF THE COMPANY The following sets forth information regarding executive officers of the Company as of February 27, 1998, and is included in Part I in accordance with Instruction 3 of Item 401(b) of Regulation S-K.
SERVED IN PRESENT POSITION PRIOR BUSINESS EXPERIENCE NAME AND PRESENT TITLE SINCE (WITHIN LAST FIVE YEARS) AGE - --------------------------------------------- --------- ------------------------------------------------ --- Peter J. Biancotti .......................... 1997 Vice President and Controller 1983 to 1997. 54 Vice President, Business Assurance E. Gary Cook ................................ 1996 President and COO of Albemarle 53 President and CEO Corporation -- March 1994 to June 1996. Senior Vice President -- Chemicals of Ethyl Corp. -- January 1992 to March 1994. Bruce G. Davis .............................. 1995 Vice President Purchasing and Logistics, 49 Vice President, Global Purchasing and Standard Products -- 1993 to 1995. Logistics Brian J. Dick ............................... 1997 Assistant Controller 1995 to 1997. Controller, 41 Vice President and Controller Formica Corporation prior to 1995. Camillo J. DiFrancesco ...................... 1996 Vice President of Investor Relations -- March 48 Senior Vice President and Chief Financial 1996 to September 1996. Vice President and Officer CFO, OSi Specialties, Inc. -- July 1993 to March 1996. Ronald Edelstein ............................ 1995 Vice President, Information Systems -- April 48 Chief Information Officer, Vice 1992 to December 1995. President -- Information Systems Nirmal Jain ................................. 1997 Group Vice President, Polymer Chemicals -- 1996 60 Group Vice President, Special Projects to 1997. Group Vice President Additives --1993 to 1996. Gerald Katz ................................. 1996 Senior Vice President of Corporate 60 Senior Vice President Performance Chemicals Development -- 1995 to 1996. Group Vice President and Senior Managing Director, Witco Europe -- 1992 to 1994. Patrick C. Mackey ........................... 1997 Director, Integrated Operations and Human 51 Group Vice President, Polymer Chemicals Resources (Global Nylon) Du Pont Corporation. Dustan E. McCoy ............................. 1996 Vice President, General Counsel and Corporate 48 Senior Vice President, General Counsel and Secretary -- April 1993 to October 1996. Corporate Secretary Associate General Counsel, Ashland, Inc. -- 1990 to 1993. Eric R. Myers ............................... 1996 Vice President of Investor Relations -- 51 Group Vice President, Corporate September 1996 to November 1996. Vice Restructuring/Implementation President and General Manager, Lubricants Business -- May 1993 to September 1996. Edward Pollak ............................... 1997 Vice President -- International, OSi 63 Vice President, Asia/Pacific Specialties -- 1994 to 1997. Senior Vice President, Olin Corporation prior to December 1993. James M. Rutledge ........................... 1990 45 Vice President and Treasurer Roger L. Sharp .............................. 1997 Senior Vice President, Global Operations -- 1996 55 Executive Vice President and Chief of to 1997. Vice President of Operations (Global Global Operations Nylon) Du Pont Corporation -- prior to September 1996.
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SERVED IN PRESENT POSITION PRIOR BUSINESS EXPERIENCE NAME AND PRESENT TITLE SINCE (WITHIN LAST FIVE YEARS) AGE - --------------------------------------------- --------- ------------------------------------------------ --- Frederick A. Shinners ....................... 1996 Group Vice President of 55 Group Vice President, Managing Director, Oleochemicals/Surfactants -- June 1994 to Europe December 1996. Vice President and General Manager of GE Silicones -- August 1990 to June 1994 Georg Urban. ................................ 1996 Managing Director of Witco's European 51 Group Vice President, Oleochemicals & surfactants business -- 1993 to 1996. Derivatives David N. Verner ............................. 1996 Vice President, Urethane Additives business 50 Group Vice President, OrganoSilicones unit -- October 1995 to April 1996. Vice President, Urethane Additives, OSi Specialties, Inc. -- July 1993 to October 1995.
PART II ITEM 5 -- MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS Witco's Common Stock is listed on the New York Stock Exchange. The following table reflects the high and low sales prices, as reported on such exchange for each quarterly period during the past two years:
1997 1996 ---------------- ---------------- QUARTER HIGH LOW HIGH LOW - --------------------------------------------- ------ ------ ------ ------ First........................................ $34.88 $29.44 $36.25 $29.13 Second....................................... $38.38 $33.25 $37.38 $31.88 Third........................................ $47.63 $38.00 $34.63 $28.13 Fourth....................................... $45.50 $38.00 $33.50 $29.50
The approximate number of holders of record of the Company's Common Stock as of February 27, 1998, was 4,162. Dividends on the Common Stock have been declared quarterly during the past two years as follows:
PER SHARE ------------ QUARTER 1997 1996 - ---------------------------------------------------------------------- ---- ---- First................................................................. $.28 $.28 Second................................................................ $.28 $.28 Third................................................................. $.28 $.28 Fourth................................................................ $.28 $.28
ITEM 6 -- SELECTED FINANCIAL DATA The data for this item are submitted as a separate section following Part IV of this report. ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The data for this item are submitted as a separate section following Part IV of this report. ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The consolidated financial statements and supplementary data of the Company and its subsidiaries are included in a separate section following Part IV of this report. ITEM 9 -- CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 11 PART III ITEM 10 -- DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS (a) Identification of Directors Reference is made to pages 3 through 7 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998. (b) Identification of Executive Officers Reference is made to Part I of this Form 10-K. (c) Business Experience Reference is made to pages 3 through 7 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998 and Part I of this Form 10-K. COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT Reference is made to page 11 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998. ITEM 11 -- EXECUTIVE COMPENSATION Reference is made to the information set forth under the captions 'Compensation of Directors' and 'Executive Compensation' on pages 8 and 13, respectively, of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998. ITEM 12 -- SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information with respect to beneficial ownership of the Company's voting securities, and rights thereto, reference is made to the information set forth under the captions 'Ownership of Securities by Directors and Officers' and 'Security Ownership of Certain Beneficial Owners' on pages 10 and 11, respectively, of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998. ITEM 13 -- CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS (a) Transactions with Management and Others Reference is made to the information set forth under the caption 'Compensation of Directors' and 'Transactions with Management' on pages 8 and 21, respectively, of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998. (b) Certain Business Relationships Reference is made to the information set forth under the captions 'Certain Business Relationships' on page 9 and 'Compensation Committee Interlocks and Insider Participation' on page 9 of the Proxy Statement to be filed pursuant to Regulation 14A no later than March 31, 1998. 12 PART IV ITEM 14 -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (a) 1 and 2 -- The response to this portion of Item 14 is submitted as a separate section of this report. (a) 3 -- Exhibits:
EXHIBIT NO. - ------- 3(i) -- Restated Certificate of Incorporation.(1) 3(ii) -- By-laws, as amended.(1) 4 -- Instruments defining the rights of security holders, including indentures. (i) -- Rights Agreement dated as of March 2, 1995, between Witco Corporation and First Chicago Trust Company of New York.(2) (iii) -- Pursuant to Regulation S-K, Item 601(b)(4)(iii), no debt or other security instrument represents 10% of the total assets of the Registrant, and accordingly such instruments are not filed herewith. Registrant agrees to furnish a copy of any such agreement to the Commission upon request. 10 -- Material Contracts. (i) -- 1. Agreement and Plan of Merger dated as of September 10, 1995, among Witco Corporation, Witsel Corporation and OSi Specialties Holding Company.(3) -- 2. Amendment dated as of October 18, 1995, to the Agreement and Plan of Merger dated as of September 10, 1995, among Witco Corporation, Witsel Corporation and OSi Specialties Holding Company.(4) -- 3. Credit Agreement dated as of October 18, 1995.(5) -- 4. Amended and Restated Credit Agreement dated as of October 11, 1996.(6) -- 5. Amendment No. 1 to Amended and Restated Credit Agreement dated as of December 23, 1996.(7) -- 6. Credit Agreement dated as of March 31, 1997.(8) (iii)(A) -- Executive Compensation Plans and Arrangements Required to be Filed: -- 1. 1986 Stock Option Plan for Employees, as amended.(9) -- 2. 1989 Stock Option Plan for Employees.(10) -- 3. 1992 Stock Option Plan for Employees.(11) -- 4. 1995 Stock Option Plan for Employees.(12) -- 5. Amendment No. 1 to 1995 Stock Option Plan for Employees.(13) -- 6. Consultancy Agreement Between the Company and William Wishnick.(14) -- 7. Employment Agreement, dated June 12, 1996, by and between Witco Corporation and E. Gary Cook.(15) -- 8. Witco Corporation 1994 Deferred Compensation Plan.(16) -- 9. Witco Corporation Deferred Compensation Plan. -- 10. Supplemental Executive Retirement Plan of Witco Corporation as amended and restated effective December 5, 1995.(17) 11 -- Statement re Computation of Per Share Earnings.(18) 21 -- Subsidiaries of the Registrant. 23 -- Consent of Independent Auditors. 24 -- Power of Attorney.(19) 27.1 -- Financial Data Schedule (with restated quarterly information for the periods ended March 31, June 30 and September 30, 1997). 27.2 -- Restated Financial Data Schedule (with restated information for all 1996 periods). 27.3 -- Restated Financial Data Schedule (with restated information for the year ended December 31, 1995).
(b) Reports on Form 8-K. (i) No reports on Form 8-K were filed during the quarter ended December 31, 1997. (c) The Exhibits filed with this report are listed in response to Item 14(a)3. (d) The response to this portion of Item 14 is submitted as a separate section of this report. (footnotes on next page) 13 (footnotes from previous page) (1) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 1994, and such Exhibit is hereby incorporated by reference. (2) This Exhibit was included as an exhibit to the Registration Statement on Form 8-A filed with the Securities and Exchange Commission on March 3, 1995, and such Exhibit is hereby incorporated by reference. (3) This Exhibit was included as Exhibit 2(a) to Form 8-K filed with the Securities and Exchange Commission on September 25, 1995, and such Exhibit is hereby incorporated by reference. (4) This Exhibit was included as Exhibit 2(c) to Form 8-K filed with the Securities and Exchange Commission on October 31, 1995, and such Exhibit is hereby incorporated by reference. (5) This Exhibit was included as an exhibit to the Form 8-K filed with the Securities and Exchange Commission on October 31, 1995, and such Exhibit is hereby incorporated by reference. (6) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended September 30, 1996, and such Exhibit is hereby incorporated by reference. (7) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1996, and such Exhibit is hereby incorporated by reference. (8) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended March 31, 1997, and such Exhibit is hereby incorporated by reference. (9) The 1986 Stock Option Plan, as amended, was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-10715, Post-Effective Amendment No. 1 to Form S-8 effective October 3, 1988, and Post-Effective Amendment No. 2 to Form S-8 effective June 23, 1992. Such Exhibit is incorporated herein by reference. (10) The 1989 Stock Option Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-30995 effective October 2, 1989, and Post-Effective Amendment No. 1 to Form S-8 effective June 23, 1992, and such Exhibit is hereby incorporated by reference. (11) The 1992 Stock Option Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-48806, effective June 23, 1992, and such Exhibit is hereby incorporated by reference. (12) The 1995 Stock Option Plan was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-60755, effective June 30, 1995, and such Exhibit is hereby incorporated by reference. (13) Amendment No. 1 to the 1995 Stock Option Plan for employees was filed as an Exhibit to the Registration Statement on Form S-8, registration number 33-05509, effective June 7, 1996, and such Exhibit is hereby incorporated by reference. (14) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1992, and such Exhibit is hereby incorporated by reference. (15) This Exhibit was included as an exhibit to the quarterly report on Form 10-Q for the quarter ended September 30, 1996, and such Exhibit is hereby incorporated by reference. (16) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1994, and such Exhibit is hereby incorporated by reference. (17) This Exhibit was included as an exhibit to the annual report on Form 10-K for the fiscal year ended December 31, 1995, and such Exhibit is hereby incorporated by reference. (18) The required Statement re: Computation of Per Share Earnings appears in Note 10 of Notes to Financial Statements. (19) The Power of Attorney appears on the Signature Page. 14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on the 20th day of March, 1998. WITCO CORPORATION By /s/ E. GARY COOK ................................... E. GARY COOK CHAIRMAN OF THE BOARD, PRESIDENT AND CHIEF EXECUTIVE OFFICER POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints E. GARY COOK, CAMILLO J. DIFRANCESCO, or DUSTAN E. MCCOY, acting severally, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any or all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. 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 registrant and in the capacities and on the dates indicated.
NAME TITLE DATE - ------------------------------------------ -------------------------------------------- ------------------- PRINCIPAL EXECUTIVE OFFICER: /s/ E. GARY COOK Chairman of the Board, President and Chief March 20, 1998 ......................................... Executive Officer E. GARY COOK PRINCIPAL FINANCIAL OFFICER: /s/ CAMILLO J. DIFRANCESCO Senior Vice President and Chief Financial March 20, 1998 ......................................... Officer CAMILLO J. DIFRANCESCO DIRECTORS: /s/ E. GARY COOK Director March 20, 1998 ......................................... E. GARY COOK /s/ DONALD L. BLANKENSHIP Director March 20, 1998 ......................................... DONALD L. BLANKENSHIP /s/ BRUCE R. BOND Director March 20, 1998 ......................................... BRUCE R. BOND /s/ SIMEON BRINBERG Director March 20, 1998 ......................................... SIMEON BRINBERG
15
NAME TITLE DATE - ------------------------------------------ -------------------------------------------- ------------------- /s/ WILLIAM G. BURNS Director March 20, 1998 ......................................... WILLIAM G. BURNS /s/ LOUISE GOESER Director March 20, 1998 ......................................... LOUISE GOESER /s/ WILLIAM R. GRANT Director March 20, 1998 ......................................... WILLIAM R. GRANT /s/ RICHARD M. HAYDEN Director March 20, 1998 ......................................... RICHARD M. HAYDEN /s/ HARRY G. HOHN Director March 20, 1998 ......................................... HARRY G. HOHN /s/ NICHOLAS PAPPAS Director March 20, 1998 ......................................... NICHOLAS PAPPAS /s/ DAN J. SAMUEL Director March 20, 1998 ......................................... DAN J. SAMUEL /s/ BRUCE F. WESSON Director March 20, 1998 ......................................... BRUCE F. WESSON /s/ WILLIAM WISHNICK Director March 20, 1998 ......................................... WILLIAM WISHNICK
16 ANNUAL REPORT ON FORM 10-K ITEM 6, ITEM 7, ITEM 8, ITEM 14(A)(1) AND (2) AND ITEM 14(D) INDEX OF FINANCIAL STATEMENTS YEAR ENDED DECEMBER 31, 1997 WITCO CORPORATION GREENWICH, CONNECTICUT INDEX ANNUAL REPORT ON FORM 10-K ITEM 6, ITEM 7, ITEM 8, ITEM 14(A)(1) AND (2), AND ITEM 14(D) DECEMBER 31, 1997
PAGE NO. -------- ITEM 6 -- SELECTED FINANCIAL DATA...................................................................... 1 ITEM 7 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS........ 2 ITEM 8 -- FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA -- SEE ITEM 14(A)(1) AND (2) BELOW.
ITEM 14(A)(1) AND (2) AND ITEM 14(D) The following consolidated financial statements of Witco Corporation and subsidiary companies, for the year ended December 31, 1997, are included in Item 8:
PAGE NO. -------- Report of Independent Auditors.................................................................... F-1 Consolidated Balance Sheets -- December 31, 1997 and 1996......................................... F-2 Consolidated Statements of Operations -- Years Ended December 31, 1997, 1996 and 1995............. F-3 Consolidated Statements of Cash Flows -- Years Ended December 31, 1997, 1996 and 1995............. F-4 Consolidated Statements of Shareholders' Equity -- Years Ended December 31, 1997, 1996 and 1995... F-5 Notes to Financial Statements..................................................................... F-6 Quarterly Financial Data (unaudited).............................................................. F-23
The following consolidated financial statement schedule of Witco Corporation and subsidiary companies is included in Part IV, Item 14(d):
PAGE NO. -------- Schedule II -- Valuation and Qualifying Accounts.................................................. S-1
All other schedules (Nos. I, III, IV and V) for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions or are inapplicable, and therefore have been omitted. Financial statements (and summarized financial information) of 50% or less owned persons accounted for by the equity method have been omitted because they do not, considered individually or in the aggregate, constitute a significant subsidiary. WITCO CORPORATION AND SUBSIDIARY COMPANIES FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA
(in millions of dollars except per share data) 1997(a)(g) 1996(b) 1995(c)(d) 1994(e) 1993(f) - ---------------------------------------------------------------------------------------------------------------------------- SELECTED STATEMENT OF OPERATIONS DATA Net sales $2,187.4 $2,263.3 $1,985.1 $1,841.4 $1,763.1 Gross profit 558.0 503.0 416.3 407.1 381.3 Operating income (loss) from continuing operations 205.0 (262.1) 201.3 173.4 76.1 Income (loss) from continuing operations before income taxes and cumulative effect of accounting change 152.7 (325.8) 169.1 149.8 47.2 Income (loss) from continuing operations before cumulative effect of accounting change 90.1 (247.2) 100.3 94.4 25.1 Income (loss) from discontinued operations -- net of income taxes (benefit) 10.0 (67.9) 4.1 12.7 (5.3) Cumulative effect of accounting change -- net of income tax benefit (5.2) - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 94.9 $ (315.1) $ 104.4 $ 107.1 $ 19.8 ============================================================================================================================= Per common share -- basic: (h) Income (loss) from continuing operations $ 1.58 $ (4.37) $ 1.78 $ 1.74 $ 0.62 Income (loss) from discontinued operations 0.17 (1.20) 0.07 0.23 (0.11) Cumulative effect of accounting change (0.09) - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1.66 $ (5.57) $ 1.85 $ 1.97 $ 0.51 ============================================================================================================================= Per common share -- diluted: (h) Income (loss) from continuing operations $ 1.55 $ (4.37) $ 1.77 $ 1.69 $ 0.56 Income (loss) from discontinued operations 0.17 (1.20) 0.07 0.22 (0.10) Cumulative effect of accounting change (0.09) - - - - - ----------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 1.63 $ (5.57) $ 1.84 $ 1.91 $ 0.46 ============================================================================================================================= SELECTED BALANCE SHEET DATA Working capital $ 221.3 $ 243.2 $ 249.6 $ 551.6 $ 451.2 Property, plant and equipment expenditures (including acquisitions) $ 201.6 $ 161.2 $ 343.0 $ 107.4 $ 103.7 Property, plant and equipment -- net $ 780.4 $ 735.4 $ 789.8 $ 720.0 $ 696.5 Total assets $2,297.7 $2,391.7 $2,750.6 $1,919.3 $1,839.0 Long-term debt $ 645.1 $ 700.8 $ 683.8 $ 346.5 $ 496.3 Total shareholders' equity $ 644.3 $ 627.9 $1,004.1 $ 940.0 $ 713.4 Book value per common share $ 11.20 $ 11.05 $ 17.78 $ 16.73 $ 14.12 - ----------------------------------------------------------------------------------------------------------------------------- SELECTED OTHER FINANCIAL DATA Number of shareholders (record holders) -- at year end 4,194 4,563 4,990 5,194 5,253 Weighted average number of common shares outstanding (in thousands) -- basic 57,130 56,591 56,312 54,812 49,055 Weighted average number of common shares outstanding (in thousands) -- diluted 58,042 56,591 56,656 56,507 55,035 Dividends paid per share -- common stock $ 1.12 $ 1.12 $ 1.12 $ 1.03 $ 0.94 Dividends declared per share -- common stock $ 1.12 $ 1.12 $ 1.12 $ 1.06 $ 0.96 Market price to the nearest dollar, per common share on New York Stock Exchange (high-low) $ 47-30 $ 37-28 $ 36-24 $ 35-24 $ 32-24 =============================================================================================================================
(a) Includes restructuring charges of $13.0 ($8.0 after-tax or $.14 per common share) primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes gains of $1.0 ($0.6 after-tax or $.01 per common share) as a result of settlements with certain of the Company's insurers, net of related legal and other costs and $2.0 ($1.2 after-tax or $.02 per common share) from the disposition of businesses. (b) Includes a restructuring charge of $345.1 ($239.3 after-tax or $4.23 per common share) which includes severance and related costs of $104.5, a write-down of property, plant and equipment of $96.9, environmental closure costs of $53.3, a write-down of goodwill and intangibles of $40.0, demolition costs of $26.2 and other costs of $24.2. Also includes other non-recurring charges of $91.0 ($71.3 after-tax or $1.26 per common share) which include provisions for litigation of $34.7, environmental remediation costs of $30.1 and other matters of $26.2. Also includes a gain of $4.3 ($2.6 after-tax or $.05 per common share) as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (c) Includes gains of $55.1 ($33.7 after-tax or $.59 per common share) as a result of settlements with certain of the Company's insurers, net of related legal and other costs and $54.0 ($33.0 after-tax or $.58 per common share) from the disposition of businesses. Also includes a restructuring charge of $33.8 ($20.6 after-tax or $.36 per common share) related to a write-down of property, plant and equipment of $21.8 and other costs of $12.0. Also includes $18.1 ($11.0 after-tax or $.20 per common share) related to provisions for environmental remediation costs and litigation. (d) Includes the results of operations of OSi Specialties for the three months ended December 31, 1995. (e) Includes a gain of $5.1 ($3.1 after-tax or $.05 per common share) from the disposition of businesses. (f) Includes a charge of $68.9 ($42.0 after-tax or $.76 per common share) for environmental remediation costs, disposition of a business, work force reduction and other matters. (g) Pursuant to Emerging Issues Task Force No. 97-13 issued on November 20, 1997, the Company has changed its accounting policy in the fourth quarter of 1997 regarding the accounting for costs associated with projects that combine business process reengineering and information technology transformation. Previously, substantially all direct costs relating to these projects were capitalized, including the portion related to business process reengineering. Under the consensus, all future costs for the business process reengineering component must be expensed as incurred with the unamortized balance of these costs as of September 30, 1997 of $5.2 (net of income taxes), or $.09 per common share, written-off as a cumulative catch-up adjustment in the fourth quarter of 1997. (h) In 1997, the Financial Accounting Standards Board issued Statement No. 128 'Earnings Per Share.' Statement No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effect of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented under the requirements of Statement No. 128. 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- LIQUIDITY AND FINANCIAL RESOURCES Certain statements made in this 'Management's Discussion and Analysis of Financial Condition and Results of Operations' section are 'forward looking statements' that involve certain risks and uncertainties. The factors that could cause actual results to differ materially from those presented herein include, without limitation, the Company's ability to generate appropriate cash flows, the cost and timing of the implementation of certain capital improvements, the cost and timing associated with the planned reduction in production facilities and workforce, the Company's ability to effectively divest certain assets, the cost of environmental remediation and compliance efforts, technological or competitive changes in any of the Company's businesses, inability to reach agreement with third parties on planned business arrangements, certain global and regional economic conditions and other factors listed from time to time in the Company's Securities and Exchange Commission filings. Cash flow from operations is a major source of liquidity for the Company. Over the past three years, cash generated through operations was approximately $603 million, which was sufficient to support the Company's internal capital investment program. Additionally, the Company was able to repay approximately $83 million of its outstanding debt in 1997, primarily with proceeds received from dispositions. Additional details regarding operating, investing and financing activities can be found in the Consolidated Statements of Cash Flows. During 1997, the Company embarked on a three-year restructuring program that is intended to improve profitability, increase productivity and maximize shareholder value. The Company recognized cost savings associated with the plan during 1997 and estimates annual savings to be approximately $200 million by the end of 1999. During the fourth quarter of 1996, the Company recorded an after-tax charge of $310.6 million associated with the restructuring plan and other initiatives of which approximately $130 million will require cash expenditures. As of December 31, 1997, approximately $44.1 million has been spent associated with the restructuring plan and other initiatives with the balance to be expended primarily in 1998 and 1999. The principal actions in the restructuring involve the closure or sale of fifteen production facilities and consolidation of support infrastructure. This will result in the elimination of approximately 1,800 positions worldwide by 1999 (see Note 2 of Notes to Financial Statements). During the fourth quarter of 1995, a restructuring plan was initiated which addressed the shut-down of five facilities (two in Performance Chemicals, two in Oleochemicals & Derivatives and one in Polymer Chemicals). Four of the five facilities have been shut-down with the remaining facility scheduled to close in 1998. On March 31, 1997, the Company entered into a new five year credit agreement with various banks in the amount of $500 million ($490 million available at December 31, 1997). This agreement replaced the existing $375 million credit facility. The new facility contains various covenants which are customary in agreements of this nature. Borrowings on this facility are at various rate options to be determined at the time of the borrowing. The Company plans to utilize the facility periodically for its various operating requirements and planned capital investment program. It is the Company's belief that annual cash flows from operations, along with the flexibility provided by the new credit agreement, will be sufficient to fund, for the foreseeable future, capital investments, dividend payments, commitments on environmental remediation projects, and operating requirements. As the Company continues to focus on global expansion, it has, through certain of its international subsidiaries, arrangements with various banks for lines of credit. At December 31, 1997, these lines of credit aggregated $37.6 million, of which $1.4 million was utilized. The Company has also entered into certain long-term hedging arrangements primarily denominated in German marks and French francs to protect against possible adverse currency exchange rate fluctuations as related to its net investment in foreign subsidiaries. The Company utilizes forward contracts to hedge foreign currency risk on trade accounts receivable and payables. These forward contracts are generally outstanding for 30 to 90 days and are primarily denominated in German marks, Italian lire, Swiss and French francs, and British pounds (see Note 16 of Notes to Financial Statements for additional details). Currently, the Company's primary international operations are based in Western Europe. Although there are certain risks inherent in carrying on international business, including currency devaluations and controls, export and import restrictions, inflationary factors, product supply, economic controls, and nationalization and appropriation, the Company does not believe these factors will significantly affect its operations. The Company periodically evaluates, and periodically reviews with the Finance Committee of the Board of Directors, its liquidity requirements, capital needs and availability of external funds. As a result of this process, the Company has in the past and may in the future seek to restructure indebtedness, raise additional capital or take such other steps to increase or manage its liquidity and financial resources. CAPITAL INVESTMENTS AND COMMITMENTS Consistent with the 1996 restructuring plan, the Company is committed to improving operating efficiencies and intends to invest approximately $415 million of internally generated funds primarily over the next two years. Expenditures will be allocated to increase production capacity to support growth; modernize plants and replace capacity at closed facilities; improve environmental, safety and other items; and upgrade the worldwide information systems. 2 - -------------------------------------------------------------------------------- Total capital expenditures for 1997 were $201.6 million. Over the past three years, the Company has invested $478.6 million on its capital investment program, including $449.5 million for continuing operations. The Company intends to spend approximately $265 million and $150 million in 1998 and 1999, respectively. The Company is currently in the process of addressing date sensitive systems issues associated with the year 2000. In connection with the Company's 1996 restructuring initiative, the Company began a worldwide business system redesign and implementation project (Project 'EDGE' ) which is expected to be completed in mid-1999. It is anticipated that these new systems, which are Year 2000 compliant, will replace substantially all of the Company's business computer programs. The remaining business application programs will be made compliant through the efforts of internal resources and third party vendors. The cost of becoming Year 2000 compliant for these additional business application programs is not expected to be material to the Company's future cash flow or results of operations. The majority of the business applications addressed through the EDGE Project are scheduled to be completed by July 1999, with a few software programs scheduled to be replaced near the end of that year. The Company is also identifying and prioritizing critical suppliers and customers and will follow up with them concerning their plans and progress in addressing the Year 2000 problem. The total costs associated with Project EDGE are expected to be approximately $78 million (including $60 million of capital expenditures), of which $31 million has been incurred ($22 million capitalized and $9 million expensed) through December 31, 1997. The Company has ascertained that failure to alleviate the Year 2000 problems within its application systems could result in possible system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities. These problems could be substantially alleviated with manual processing. However, this would cause delays and possible lost production days. The Company is currently evaluating the Year 2000 readiness of its equipment with a comprehensive inventory of monitoring and control devices for plants, safety systems and other similar operating installations. Work plans detailing the tasks and resources required to insure equipment Year 2000 readiness by the end of 1998 are expected to be in place by the end of the first quarter 1998. Based on a preliminary review, the Company does not expect costs associated with equipment upgrades and modifications to have a material effect on its future cash flow or results of operations. ENVIRONMENTAL MATTERS The Company operates in an industry subject to extensive regulations related to the protection of the environment and the health and safety of employees and others. Domestic operations are subject to a myriad of environmental statutes and regulations at the federal, state and local levels. The Company's international production facilities operate in an environmental regulatory framework in which governmental authorities typically are granted broad discretionary powers which require manufacturing facilities to obtain operating permits to continue operations. The Company believes that expenditures for compliance with these statutes, regulations and permits will continue to have a significant impact upon the conduct of its business. The trend toward greater environmental awareness and more stringent environmental regulations is likely to continue, and while the Company cannot accurately predict how this will affect future operations and earnings, the Company does not believe its costs will vary significantly from those of its competitors. Consistent with the Company's concern for the protection and improvement of the environment worldwide, the Company continually monitors the environmental impact of past and present operating practices in light of changing environmental standards. Where remedial action is indicated, the Company assesses the probability and scope of potential remediation costs. To determine the appropriate reserve amounts, management reviews, on a quarterly basis, currently available information pertaining to each environmental site. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative cleanup methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology, and the identification of additional environmental sites. As a result, as remediation efforts proceed at existing sites and new sites are assimilated into the review process, charges against income for environmental reserves could have a material effect on results of operations or cash flows in a particular quarter or year. However, such charges are not expected to have a material adverse effect on the Company's consolidated financial position or liquidity. Over the past three years, the Company has spent approximately $58.9 million on capital environmental expenditures. In fiscal years 1997, 1996 and 1995, approximately $37.4 million, $12.6 million and $8.9 million, respectively were expended on environmental capital projects. Capital projects for environmental purposes are estimated to be approximately $26 million for 1998. Reserves for environmental remediation and compliance costs at December 31, 1997 are $186.6 million, including $55.3 million associated with environmental expenses of the Lubricants Group and $64.7 million associated with plants to either be, or which have already been, shut-down or sold as part of the 1996 and 1995 restructuring plans. Remediation expenditures charged to environmental reserves were $36.8 million in 1997 and include expenditures currently mandated as well as those not initiated by any regulatory authority or third party. The Company anticipates 1998 remediation expenditures to approximate $36.5 million. 3 - -------------------------------------------------------------------------------- The Company is continuing its efforts to reduce hazardous waste and emissions generated by its operations. Through improved operating efficiencies, installation of additional environmental control equipment and utilization of the latest innovations in waste treatment technology, management believes that direct recurring operating costs associated with managing hazardous substances and pollution can be maintained at or slightly above current levels. Such costs amounted to approximately $40.7 million in 1997. CONTINGENCIES The Company is a potentially responsible party ('PRP') or a defendant in a number of governmental (federal, state and local) and private actions associated with the release, or suspected release, of contaminants into the environment. As a PRP, the Company may be liable for costs associated with the investigation and remediation of environmental contamination, as well as various penalties, and damages to persons, property and natural resources. The Company is not a party to any legal proceedings or environmental matters which it believes will have a material adverse effect on its con-solidated financial position or liquidity. It is possible, however, that future cash flow or results of operations for any particular quarterly or annual period, could be materially affected by such legal proceedings or environmental matters. However, the Company does not expect the results of such proceedings or environmental matters to materially affect its competitive position (see Note 17 of Notes to Financial Statements). INCOME TAXES For information regarding income tax matters, see Note 13 of Notes to Financial Statements. DISCONTINUED OPERATIONS On September 11, 1995, the Company announced its intention to divest its Lubricants Group. This divestiture was completed in 1997 (see Note 19 of Notes to Financial Statements). RESULTS OF CONTINUING OPERATIONS 1997 VS. 1996 The Company reported income from continuing operations before cumulative effect of accounting change of $90.1 million in 1997 compared to a loss of $247.2 million in 1996. The inclusion of several non-recurring items in both years affect comparison. The following table shows the effect of these non-recurring items on continuing operations before cumulative effect of accounting change. SUMMARY OF NON-RECURRING ITEMS
(millions of dollars except per share data) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- PRE-TAX AFTER-TAX INCOME Pre-Tax After-Tax Income INCOME INCOME (LOSS) Income Income (Loss) (LOSS) (LOSS) PER SHARE* (Loss) (Loss) Per Share* - --------------------------------------------------------------------------------------------------------------------------- Continuing operations excluding non- recurring items before cumulative effect of accounting change $162.7 $96.3 $1.66 $ 106.0 $ 60.8 $ 1.07 Restructuring charges (a) (13.0) (8.0) (.14) (345.1) (239.3) (4.23) Other charges (b) - - - (91.0) (71.3) (1.26) Insurance settlements (c) 1.0 0.6 .01 4.3 2.6 .05 Gain on disposition of businesses (d) 2.0 1.2 .02 - - - - --------------------------------------------------------------------------------------------------------------------------- Continuing operations before cumulative effect of accounting change $152.7 $90.1 $1.55 $(325.8) $(247.2) $(4.37) ===========================================================================================================================
* Diluted basis (a) The year ended December 31, 1997 includes restructuring charges of $13.0 ($8.0 after-tax or $.14 per common share) primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. In addition, the year ended December 31, 1996 includes a restructuring charge of $345.1 ($239.3 after-tax or $4.23 per common share) which includes severance and related costs of $104.5, a writedown of property, plant and equipment of $96.9, environmental closure costs of $53.3, a writedown of goodwill and intangibles of $40.0, demolition costs of $26.2 and other costs of $24.2. (b) The year ended December 31, 1996 includes other non-recurring charges of $91.0 ($71.3 after-tax or $1.26 per common share) which include provisions for litigation of $34.7, environmental remediation costs of $30.1 and other matters of $26.2. (c) The years ended December 31, 1997 and 1996 include a gain of $1.0 ($0.6 after-tax or $.01 per common share) and $4.3 ($2.6 after-tax or $.05 per common share), respectively, as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (d) The year ended December 31, 1997 includes a gain of $2.0 ($1.2 after-tax or $.02 per common share) from the disposition of businesses. Consolidated net sales from continuing operations decreased $75.9 million to $2.2 billion in 1997 compared to 1996. This decrease was primarily due to the comparatively stronger U.S. dollar which had an $84.9 million adverse effect on current year net sales. The impact of a more favorable product mix partially offset the effect of the stronger U.S. dollar and a 4% decline in volume. The favorable mix was a result of a year long focus on sales initiatives that fostered greater sales of higher margin products. Volume was down from 1996 primarily as a result of a first quarter fire and its lingering residual effects at the Company's Petrolia, Pennsylvania plant, and the exiting/divesting of non- strategic, non-specialty products and product lines. 4 - -------------------------------------------------------------------------------- Income from continuing operations, excluding non-recurring items before cumulative effect of accounting change, of $96.3 million in 1997 was up $35.5 million, or 58%, compared to 1996. Approximately 75% of the increase in income was attributable to an improvement in gross margin which rose 2.8 percentage points to 25.5%. This increase was attributable to lower material costs and restructuring related reductions in manufacturing costs, including depreciation expense. Also contributing to the increase in income was a decrease in net interest expense due to a reduction in bank debt and a decline in operating expenses which was achieved despite the inclusion of higher costs associated with performance based compensation plans. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130 and No. 131, Reporting Comprehensive Income and Disclosures about Segments of an Enterprise and Related Information, respectively, both of which are required to be adopted for fiscal years beginning after December 15, 1997 (see Note 1 of Notes to Financial Statements). SEGMENT INFORMATION The Company's operating income from continuing operations for 1997 and 1996 included non-recurring items in both years which affect the comparison. Excluding these items, operating income was $215.0 million in 1997 and $169.7 million in 1996. The following tables show the effect of these non-recurring items on operating income from continuing operations by industry segment.
OLEOCHEMICALS PERFORMANCE POLYMER ORGANO- CORPORATE & (millions of dollars) & DERIVATIVES CHEMICALS CHEMICALS SILICONES UNALLOCATED TOTAL - ----------------------------------------------------------------------------------------------------------------------------- 1997 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) from continuing operations excluding non-recurring items $18.9 $ 79.8 $75.0 $72.6 $ (31.3) $215.0 Restructuring charges (0.6) (10.0) (0.9) - (1.5) (13.0) Insurance settlements - - - - 1.0 1.0 Gain on disposition of businesses 3.3 0.1 (1.4) - - 2.0 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) from continuing operations $21.6 $ 69.9 $72.7 $72.6 $ (31.8) $205.0 ============================================================================================================================= Oleochemicals Performance Polymer Organo- Corporate & (millions of dollars) & Derivatives Chemicals Chemicals Silicones Unallocated Total - ----------------------------------------------------------------------------------------------------------------------------- 1996 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) from continuing operations excluding non-recurring items $ 16.4 $ 69.2 $ 51.9 $58.4 $ (26.2) $ 169.7 Restructuring charges (10.7) (237.8) (43.2) - (53.4) (345.1) Other charges (0.7) (33.6) (7.4) - (49.3) (91.0) Insurance settlements - - - - 4.3 4.3 - ----------------------------------------------------------------------------------------------------------------------------- Operating income (loss) from continuing operations $ 5.0 $(202.2) $ 1.3 $58.4 $(124.6) $(262.1) =============================================================================================================================
OLEOCHEMICALS & DERIVATIVES Segment 1997 net sales of $413.3 million were $11.5 million, or 3%, lower than the prior year. A 4% increase in volume bolstered current year net sales, while a $14.0 million adverse impact of a comparatively stronger U.S. dollar and the lowering of glycerine sales prices due to soft market conditions, accounted for the decline in net sales. Operating income for this segment, excluding non-recurring items from both years, rose from $16.4 million in 1996 to $18.9 million in 1997. The 15% increase was attributable to comparatively strong fourth quarter results which were mainly due to higher sales volume and cost savings associated with closing the segment s Newark, New Jersey facility in 1996. The segment was impacted throughout the year with a soft glycerine market causing sales prices to drop below 1996 levels and higher costs associated with performance based compensation plans. The segment benefited from savings in manufacturing costs resulting from the consolidation of its Oleochemicals-Basics operations into one facility and lower operating costs achieved through cost improvement initiatives. PERFORMANCE CHEMICALS Performance Chemicals' 1997 net sales of $781.8 million declined $62.9 million, or 7%, from 1996. This decrease was a result of an 8% decline in volume, which was primarily due to a fire at the segment's Petrolia, Pennsylvania plant and the exiting/divesting of certain products and product lines, and a comparatively stronger U.S. dollar which had an $18.5 million adverse effect on net sales. 5 - -------------------------------------------------------------------------------- Segment 1997 operating income, excluding non-recurring items from both years, was $79.8 million, representing an increase of $10.6 million, or 15%, compared to 1996. This increase was a result of lower material costs, restructuring driven reductions in manufacturing and operating costs, including depreciation, and a continued focus on selling higher margin products. These positive factors were partially offset by the aforementioned decline in shipment volume, higher costs associated with performance based compensation plans and the adverse effect of the comparatively stronger U.S. dollar. POLYMER CHEMICALS Polymer Chemicals' net sales for 1997 of $519.8 million represented a decrease of $14.1 million, or 3%, compared to 1996. Although the segment benefited from a more favorable product mix, attributable to the exiting/divesting of low margin products and product lines, and replacing much of the lost revenue with business that generated higher margins, a $33.9 million adverse effect of the comparatively stronger U.S. dollar and a 2% drop in volume caused net sales to decline. Operating income for Polymer Chemicals, excluding non-recurring items from both years, was up 45% to $75.0 million in 1997 compared to 1996. This $23.1 million increase was attributable to the combination of lower material costs, a reduction in manufacturing costs and a more favorable product sales mix. The reduction in manufacturing costs was a result of restructuring related initiatives which centered around savings attributable to new service agreements, lower personnel costs and asset consolidation at the segment's Bergkamen, Germany facility. Partially offsetting the impact that these positive factors had on operating income were the adverse effect of the comparatively stronger U.S. dollar and higher costs associated with performance based compensation plans. ORGANOSILICONES Net sales for OrganoSilicones for 1997 of $472.5 million were $24.6 million, or 5%, greater than 1996. The net sales increase was a result of an 8% increase in volume and a more favorable product mix, which was partially offset by an $18.4 million negative impact caused by the comparatively stronger U.S. dollar. OrganoSilicones' 1997 operating income of $72.6 million was $14.2 million greater than 1996. This 24% increase was primarily attributable to the aforementioned increase in shipment volume and more favorable product sales mix, combined with restructuring driven reductions in costs. The major restructuring initiative was the silanes expansion at the Termoli, Italy plant which generated savings by providing the capability to manufacture materials which had previously been purchased and improving manufacturing processes. These favorable factors were partially offset by higher costs associated with performance based compensation plans. 1996 VS. 1995 The Company reported a loss from continuing operations in 1996 of $247.2 million compared to income of $100.3 million in 1995. The inclusion of several non-recurring items in both periods affect comparison. The following table shows the effect of these non-recurring items on continuing operations.
SUMMARY OF NON-RECURRING ITEMS (millions of dollars except per share data) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- PRE-TAX AFTER-TAX INCOME Pre-Tax After-Tax Income INCOME INCOME (LOSS) Income Income (Loss) (LOSS) (LOSS) PER SHARE* (Loss) (Loss) Per Share* - ---------------------------------------------------------------------------------------------------------------------------- Continuing operations excluding non- recurring items $ 106.0 $ 60.8 $ 1.07 $111.9 $ 65.2 $1.15 Restructuring charges (a) (345.1) (239.3) (4.23) (33.8) (20.6) (.36) Other charges (b) (91.0) (71.3) (1.26) (18.1) (11.0) (.19) Insurance settlements (c) 4.3 2.6 .05 55.1 33.7 .59 Gain on disposition of businesses (d) - - - 54.0 33.0 .58 - ---------------------------------------------------------------------------------------------------------------------------- Continuing operations $(325.8) $(247.2) $(4.37) $169.1 $100.3 $1.77 ============================================================================================================================
* Diluted basis (a) The year ended December 31, 1996 includes a restructuring charge of $345.1 ($239.3 after-tax or $4.23 per common share) which includes severance and related costs of $104.5, a writedown of property, plant and equipment of $96.9, environmental closure costs of $53.3, a writedown of goodwill and intangibles of $40.0, demolition costs of $26.2 and other costs of $24.2. In addition, the year ended December 31, 1995, includes a restructuring charge of $33.8 ($20.6 after-tax or $.36 per common share) related to a writedown of property, plant and equipment of $21.8 and other costs of $12.0. (b) The year ended December 31, 1996 includes other non-recurring charges of $91.0 ($71.3 after-tax or $1.26 per common share) which include provisions for litigation of $34.7, environmental remediation costs of $30.1 and other matters of $26.2. In addition, the year ended December 31, 1995, includes other non-recurring charges of $18.1 ($11.0 after-tax or $.19 per common share) related to provisions for environmental remediation costs and litigation. (c) The years ended December 31, 1996 and 1995 include a gain of $4.3 ($2.6 after-tax or $.05 per common share) and $55.1 ($33.7 after-tax or $.59 per common share), respectively as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (d) The year ended December 31, 1995 includes a gain of $54.0 ($33.0 after-tax or $.58 per common share) from the disposition of businesses. 6 - -------------------------------------------------------------------------------- Consolidated 1996 net sales from continuing operations of $2.3 billion were 14% greater than 1995. The increase was attributable to the inclusion of OrganoSilicones in 1996 for a full year which more than covered the loss in sales resulting from the disposition of businesses in 1996 and 1995. Consolidated net sales, adjusted to exclude sales attributable to OrganoSilicones for the first nine months of 1996 and dispositions for both years, rose 1% over 1995. This increase was driven by higher sales prices, partially offset by the unfavorable impact of a comparatively stronger U.S. dollar, while volume was essentially unchanged. Income from continuing operations, excluding non-recurring items, was $60.8 million in 1996 compared to $65.2 million in 1995. The decline was mainly attributable to higher interest expense, the loss of earnings attributable to the sale of businesses and lower interest income which was largely offset by the inclusion of a full year of OrganoSilicones higher margin operations. Higher interest expense was attributable to financing the acquisition of OrganoSilicones and the assumption of OrganoSilicones debt, while the decline in interest income was due to a reduction in funds available for short-term investing resulting from the acquisition of OrganoSilicones and payment of bank loans. Other major income and expense categories appearing on the Consolidated Statements of Operations, adjusted for the acquisition and dispositions, were comparable to 1995 on a percentage of net sales basis. SEGMENT INFORMATION A comparison of operating income from continuing operations for 1996 and 1995 is affected by the inclusion of non-recurring items in both years. Operating income from continuing operations, excluding non-recurring items, was $169.7 million in 1996 compared to $144.0 million in 1995. The following tables show the effect of these non-recurring items on operating income from continuing operations by industry segment.
OLEOCHEMICALS PERFORMANCE POLYMER ORGANO- CORPORATE & (millions of dollars) & DERIVATIVES CHEMICALS CHEMICALS SILICONES UNALLOCATED TOTAL - ------------------------------------------------------------------------------------------------------------------------------ 1996 - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations excluding non-recurring items $ 16.4 $ 69.2 $ 51.9 $58.4 $ (26.2) $ 169.7 Restructuring charges (10.7) (237.8) (43.2) - (53.4) (345.1) Other charges (0.7) (33.6) (7.4) - (49.3) (91.0) Insurance settlements - - - - 4.3 4.3 - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations $ 5.0 $(202.2) $ 1.3 $58.4 $(124.6) $(262.1) ============================================================================================================================== Oleochemicals Performance Polymer Organo- Corporate & (millions of dollars) & Derivatives Chemicals Chemicals Silicones Unallocated Total - ------------------------------------------------------------------------------------------------------------------------------ 1995 - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations excluding non-recurring items $ 14.7 $ 80.4 $ 49.2 $ 7.4 $(7.7) $144.0 Restructuring charges (10.2) (17.2) (5.0) - (1.4) (33.8) Other charges - (0.4) (11.9) - (5.8) (18.1) Insurance settlements - - - - 55.1 55.1 Gain on disposition of businesses - - - - 54.0 54.0 - ------------------------------------------------------------------------------------------------------------------------------ Operating income from continuing operations $ 4.5 $ 62.8 $ 32.3 $ 7.4 $94.2 $201.2 ==============================================================================================================================
OLEOCHEMICALS & DERIVATIVES Segment 1996 net sales of $424.7 million were $4.3 million behind 1995. The 1% decline was mainly attributable to a 4% decline in volume and the comparatively stronger U.S. dollar, which was partially offset by the positive effect of a more favorable product mix. 7 - -------------------------------------------------------------------------------- Oleochemicals & Derivatives' operating income, excluding non-recurring items, was $16.4 million in 1996 compared to $14.7 million in 1995. The major factor contributing to the segment's improvement in operating income was a reduction in manufacturing costs resulting from the closure of its Newark, New Jersey plant. The production from this facility was transferred to the Company's Memphis, Tennessee plant. Efficiencies were achieved which enabled this plant to absorb the additional production without a substantial increase in costs. PERFORMANCE CHEMICALS The segment's 1996 net sales of $844.7 million were 3% ahead of 1995. Higher unit sales prices, due to a more favorable product mix and increased prices in certain business sectors, offset a 3% decline in volume and the impact of a comparatively stronger U.S. dollar against key global currencies. Operating income, excluding non-recurring items, was $69.2 million in 1996 compared to $80.4 million in 1995. Although sales were up over the prior year, operating income declined primarily as a result of the segment being burdened throughout 1996 with increased depreciation and manufacturing costs attributable to the under-utilization of manufacturing capacity associated with the 1995 expansion at facilities in the U.S. and Holland. Lower than anticipated demand precluded recovery of these costs. Higher costs associated with the severity of the 1996 winter weather and increased utility rates in the United States also adversely affected operating income. POLYMER CHEMICALS Net sales for the Polymer Chemicals segment of $533.9 million were flat compared to 1995. Higher sales prices, a more favorable product mix and a 1% increase in volume aided by an upturn in the construction and automotive markets, offset the adverse effect of a comparatively stronger U.S. dollar. Polymer Chemicals' 1996 operating income, excluding non-recurring items, rose from $49.2 million in 1995 to $51.9 million in 1996. Although segment sales were flat with 1995, operating income rose 5% primarily due to increased sales of higher margin products in the construction and automotive markets. Lower manufacturing costs, achieved through productivity improvement initiatives, also contributed to the increase in operating income in 1996. ORGANOSILICONES Segment 1996 operating income included a full year of operations as compared to three months in 1995. OrganoSilicones added $447.9 million to net sales in 1996 compared to $101.3 million in 1995. The segment's 1996 operating income of $58.4 million was $51.0 million greater than the income reported in 1995. Sales for the fourth quarter, the comparable period of ownership, were up 10% over 1995 due to greater volume and a more favorable product mix. Operating income for this comparable period increased from $7.4 million to $13.0 million as a result of efficiencies and reductions in non-manufacturing costs achieved primarily through acquisition related synergies. OUTLOOK In December of 1996, the Company announced a three-year restructuring plan, and certain cost reduction goals which included lower manufacturing costs and reduced general and administration expenses. The Company has met its initial goal of achieving 50% of its three-year savings objectives, on a run rate basis, by the end of 1997. The capital spending portion of the plan, however, is somewhat behind schedule, primarily as a result of an increased emphasis on proper scope definition and enhanced upfront planning. Management, however, remains optimistic that the Company will meet the overall goals of the three-year restructuring plan. The Company will continue to aggressively pursue implementation of the restructuring plan and, following its completion, the Company believes it will achieve its long-term financial goals; revenues between $2.8 to $3.0 billion within five years; gross margins to reach the mid 30% range; operating margins in the mid-teens; earnings per share growth sufficient to maintain return on equity greater than 20%; debt to total capitalization of 30-45%; and, a return on capital employed greater than the Company's cost of capital so that shareholder value will increase. Statements made in this 'Outlook' section are 'forward looking statements' that involve certain risks and uncertainties. The factors that could cause actual results to differ materially from those presented herein include, without limitation, the Company's ability to generate appropriate cash flows, the cost and timing of the implementation of certain capital improvements, the cost and timing associated with the planned reduction in production facilities and workforce, the impact of cost savings initiatives, the Company's ability to effectively divest certain assets, the cost of environmental remediation and compliance efforts, technological or competitive changes in any of the Company's businesses, inability to reach agreement with third parties on planned business arrangements, certain global and regional economic conditions and other factors listed from time to time in the Company's other Securities and Exchange Commission filings. 8 - -------------------------------------------------------------------------------- REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS Board of Directors and Shareholders Witco Corporation We have audited the accompanying consolidated balance sheets of Witco Corporation and Subsidiary Companies as of December 31, 1997 and 1996, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1997. Our audits also included the financial statement schedule listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Witco Corporation and Subsidiary Companies at December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein. As discussed in Note 1 to the financial statements, in 1997 the Company adopted the provisions of Emerging Issues Task Force Issue No. 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.' /s/ ERNST & YOUNG LLP Stamford, Connecticut February 2, 1998 F-1 WITCO CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED BALANCE SHEETS
(in thousands except per share data) December 31 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Current assets Cash and cash equivalents $ 96,383 $ 59,201 Accounts and notes receivable, less allowance of $12,649 and $14,201 383,758 390,288 Inventories 235,334 284,500 Deferred income taxes 47,036 92,490 Prepaid 27,128 26,947 - --------------------------------------------------------------------------------------------------------------------------- Total current assets 789,639 853,426 - --------------------------------------------------------------------------------------------------------------------------- Property, plant and equipment, less accumulated depreciation of $766,241 and $761,926 780,390 735,392 Goodwill and other intangible assets, less accumulated amortization of $157,703 and $133,625 621,619 653,733 Deferred income taxes 6,981 16,438 Deferred costs and other assets 99,023 72,976 Net assets of discontinued operations - 59,740 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $2,297,652 $2,391,705 =========================================================================================================================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Notes and loans payable $ 52,834 $ 94,929 Accounts payable and other current liabilities 515,531 515,344 - --------------------------------------------------------------------------------------------------------------------------- Total current liabilities 568,365 610,273 - --------------------------------------------------------------------------------------------------------------------------- Long-term debt 645,101 700,820 Deferred credits and other liabilities 439,906 452,747 Shareholders' equity $2.65 cumulative convertible preferred stock, par value $1 per share: authorized -- 14 shares, issued and outstanding -- 6 shares 6 6 Common stock, par value $5 per share: authorized -- 100,000 shares, issued 57,503 and 56,763 shares 287,516 283,818 Capital in excess of par value 157,980 138,453 Equity adjustments: Foreign currency translation (27,381) 11,989 Pensions and other (3,971) (6,423) Retained earnings 230,832 200,022 Treasury stock, at cost -- 15 shares (702) - - --------------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 644,280 627,865 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,297,652 $2,391,705 ===========================================================================================================================
See accompanying notes. F-2 WITCO CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data) For the years ended December 31 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- Net sales $2,187,402 $2,263,327 $1,985,077 Cost of goods sold 1,629,405 1,760,320 1,568,822 - --------------------------------------------------------------------------------------------------------------------------- Gross profit 557,997 503,007 416,255 Operating expenses Selling expense 105,684 106,261 83,829 General and administrative expenses 144,684 152,186 121,425 Research and development 71,756 73,088 52,907 Other expenses (income) -- net 17,830 88,400 (76,998) Restructuring charges 13,044 345,130 33,842 - --------------------------------------------------------------------------------------------------------------------------- Total operating expenses 352,998 765,065 215,005 - --------------------------------------------------------------------------------------------------------------------------- Operating income (loss) from continuing operations 204,999 (262,058) 201,250 Other expense (income) -- net Interest expense 53,004 69,334 43,689 Interest income (4,733) (9,114) (15,104) Other expense -- net 4,029 3,531 3,525 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting change 152,699 (325,809) 169,140 Income taxes (benefit) 62,621 (78,635) 68,794 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before cumulative effect of accounting change 90,078 (247,174) 100,346 Income from discontinued operations net of income taxes of $ - , $283 and $3,034 - 340 4,099 Estimated income (loss) on disposal -- net of income taxes (benefit) of $5,824 and $(43,612) 9,990 (68,253) - - --------------------------------------------------------------------------------------------------------------------------- Income (loss) from discontinued operations 9,990 (67,913) 4,099 - --------------------------------------------------------------------------------------------------------------------------- Income (loss) before cumulative effect of accounting change 100,068 (315,087) 104,445 - --------------------------------------------------------------------------------------------------------------------------- Cumulative effect of accounting change -- net of income tax benefit of $3,319 (5,191) - - - --------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ 94,877 $ (315,087) $ 104,445 =========================================================================================================================== Net income (loss) per common share -- basic Income (loss) from continuing operations before cumulative effect of accounting change $ 1.58 $ (4.37) $ 1.78 Income (loss) from discontinued operations .17 (1.20) .07 Cumulative effect of accounting change (.09) - - - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE -- BASIC $ 1.66 $ (5.57) $ 1.85 =========================================================================================================================== Net income (loss) per common share -- diluted Income (loss) from continuing operations before cumulative effect of accounting change $ 1.55 $ (4.37) $ 1.77 Income (loss) from discontinued operations .17 (1.20) .07 Cumulative effect of accounting change (.09) - - - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) PER COMMON SHARE -- DILUTED $ 1.63 $ (5.57) $ 1.84 ===========================================================================================================================
See accompanying notes. F-3 WITCO CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars) For the years ended December 31 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income (loss) $ 94,877 $(315,087) $ 104,445 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization 110,872 128,793 119,571 Provision (benefit) for deferred income taxes 46,612 (159,311) (6,884) Pension cost 14,640 15,154 10,130 Gain on disposition of businesses (2,007) - (54,079) Estimated (gain) loss on disposal of Lubricants Group (15,814) 111,865 - Provision for environmental remediation and compliance - 30,077 15,348 Provision for litigation - 34,733 9,500 Restructuring charges - 345,130 33,842 Cumulative effect of a change in accounting 8,510 - - Changes in operating assets and liabilities: Accounts and notes receivable 996 13,089 (26,609) Inventories 27,207 36,672 (12,849) Prepaid and other current assets (5,773) 4,956 9,866 Accounts payable and other current liabilities 13,758 (76,286) (41,709) Other (12,746) 17,515 (25,652) - -------------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 281,132 187,300 134,920 ========================================================================================================================== INVESTING ACTIVITIES Expenditures for property, plant and equipment (201,609) (161,163) (115,845) Proceeds from dispositions 84,011 136,941 146,026 Acquisitions of businesses, net of cash acquired - - (481,431) Other 9,368 1,769 (2,443) - -------------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (108,230) (22,453) (453,693) ========================================================================================================================== FINANCING ACTIVITIES Dividends paid (63,872) (63,351) (63,026) Payments on borrowings (196,326) (526,378) (367,541) Proceeds from borrowings 112,898 335,565 681,551 Proceeds from exercise of stock options 19,227 7,084 6,523 Other (695) - - - -------------------------------------------------------------------------------------------------------------------------- Net cash (used in) provided by financing activities (128,768) (247,080) 257,507 ========================================================================================================================== EFFECTS OF EXCHANGE RATE CHANGES ON CASH AND CASH EQUIVALENTS (6,952) (2,560) 8,087 - -------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 37,182 (84,793) (53,179) - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at beginning of year 59,201 143,994 197,173 - -------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents at end of year $ 96,383 $ 59,201 $ 143,994 ==========================================================================================================================
See accompanying notes. F-4 WITCO CORPORATION AND SUBSIDIARY COMPANIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands of dollars) - ----------------------------------------------------------------------------------------------------------------------------------- Capital in Foreign Treasury Preferred Common Excess of Currency Retained Stock at Stock Stock Par Value Translation Pensions Other Earnings Cost Total - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 $ 7 $281,561 $127,643 $ (1,481) $(2,446) $ - $ 537,199 $(2,477) $940,006 Net income 104,445 104,445 Cash dividends declared: Preferred stock (18) (18) Common stock (63,089) (63,089) Common stock issued: Employee plans 607 3,535 2,380 6,522 Conversions 5 (102) 97 - Equity adjustments 18,703 (2,452) 16,251 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1995 7 282,173 131,076 17,222 (4,898) - 578,537 - 1,004,117 Net loss (315,087) (315,087) Cash dividends declared: Preferred stock (18) (18) Common stock (63,410) (63,410) Common stock issued: Employee plans 1,319 5,814 7,133 Conversions (1) 30 (25) 4 Restricted stock 296 1,588 1,884) - Equity adjustments (5,233) 359 (4,874) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 6 283,818 138,453 11,989 (4,539) (1,884) 200,022 - 627,865 Net income 94,877 94,877 Cash dividends declared: Preferred stock (16) (16) Common stock (64,051) (64,051) Common stock issued: Employee plans 3,527 18,520 22,047 Conversions 28 (28) - Restricted stock 143 1,035 (97) 871 1,952 Equity adjustments (39,370) 2,549 $(36,821) Purchases of treasury stock (1,573) (1,573) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE AT DECEMBER 31, 1997 $ 6 $287,516 $157,980 $(27,381) $(1,990) $(1,981) $ 230,832 $ (702) $644,280 ====================================================================================================================================
See accompanying notes. F-5 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES ORGANIZATION: Witco Corporation is a worldwide manufacturer of high quality specialty chemical products. The Company's products are used primarily as intermediates by other manufacturers in industries such as personal care and household products, agricultural, automotive, housing and construction, packaging, food and textiles. ACCOUNTING CHANGES: Pursuant to Emerging Issues Task Force Issue No. 97-13, the Company changed its accounting policy in the fourth quarter of 1997 regarding the accounting for costs associated with projects that combine business process reengineering activities and information technology transformation. Under the consensus, all future costs for business process reengineering must be expensed as incurred and the unamortized balance of these costs as of September 30, 1997 of $5,191 (net of income taxes), or $.09 per common share, were written-off as a cumulative catch-up adjustment in the fourth quarter. The change in accounting method would not have had a material effect on the Statement of Operations for the years ended December 31, 1996 or 1995, if adopted in those periods. In June 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) No. 130 and No. 131, 'Reporting Comprehensive Income' and 'Disclosures about Segments of an Enterprise and Related Information,' respectively, both of which are required to be adopted for fiscal years beginning after December 15, 1997. SFAS No. 130 will require the Company to report in its financial statements all non-owner related changes in equity for the periods being reported. SFAS No. 131 will require the Company to disclose revenues, earnings and other financial information pertaining to the business segments by which the Company is managed, as well as what factors management used to determine these segments. The Company is currently evaluating the effects SFAS No. 130 and No. 131 will have on its financial statement and related disclosures. PRINCIPLES OF CONSOLIDATION AND USE OF ESTIMATES: The consolidated financial statements include the accounts of all majority owned subsidiaries after the elimination of inter-company transactions. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. RECLASSIFICATIONS: Certain prior year amounts have been reclassified to conform with the current year presentation. CASH EQUIVALENTS: Cash equivalents consist of highly liquid investments with a maturity of three months or less when purchased. INVENTORIES: Inventories are stated at the lower of cost or market. Cost is determined on either the Last-In, First-Out (LIFO) or First-In, First-Out (FIFO) basis. PROPERTY, PLANT AND EQUIPMENT: Property, plant and equipment is stated at cost and depreciation is provided principally using the straight-line method based on estimated useful lives. Buildings and improvements and machinery, fixtures and equipment are depreciated over periods not exceeding 25 years and 16 years, respectively. LONG-LIVED ASSETS AND INTANGIBLE ASSETS: SFAS No. 121 'Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of' requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. SFAS No. 121 also addresses the accounting for long-lived assets that are expected to be disposed of. As indicated in Note 2 of Notes to Financial Statements, the Company recognized impairment losses associated with the 1996 and 1995 restructuring plans. Intangible assets primarily include goodwill, the excess of purchase price over the estimated fair value of net assets acquired, and are being amortized over periods not in excess of forty years. The Company periodically evaluates the carrying value of intangible assets in relation to the estimated cash flows of the underlying businesses. An impairment loss may be recognized if the expected cash flow is less than book value. The Company recognized an impairment loss on certain intangible assets, as disclosed in Note 2 of Notes to Financial Statements, as part of the 1996 and 1995 restructuring plans. RESEARCH AND DEVELOPMENT COSTS: The Company's research and development costs are charged to expense as incurred and were $71,756 (1997), $73,088 (1996), and $52,907 (1995). ENVIRONMENTAL REMEDIATION COSTS: Environmental remediation costs are charged to expense if the remediation is the result of past practices or events and the expenditures are not expected to benefit future operations. Projected costs are accrued when it is probable that a liability has been incurred and the amount can be reasonably estimated. Accruals are recorded at undiscounted amounts without regard to any third party recoveries, and are regularly adjusted as environmental assessments and remediation efforts proceed. STOCK BASED COMPENSATION: The Company accounts for stock option grants in accordance with Accounting Principles Board Opinion No. 25, 'Accounting for Stock Issued to Employees,' and, accordingly, recognizes no compensation expense for the stock options granted since the exercise price of the option was the same as the market value of the Company's common stock. As prescribed under SFAS No. 123, 'Accounting for Stock Based Compensation,' the Company has disclosed in Note 11 of Notes to Financial Statements, the pro forma effects on net income (loss) and earnings (loss) per share of recording compensation expense for the fair value of the options granted. F-6 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- INCOME TAXES: Income taxes have been provided using the liability method in accordance with SFAS No. 109 'Accounting for Income Taxes.' COMMON SHARE DATA: In 1997, the Financial Accounting Standards Board issued SFAS No. 128, 'Earnings Per Share.' SFAS No. 128 replaced the calculation of primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options, warrants and convertible securities. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented in accordance with the SFAS No. 128 requirements. NOTE 2 RESTRUCTURING In December 1996, in connection with management's plan to reduce costs and improve operating efficiencies, the Company recorded a restructuring charge of approximately $345,130. The principal actions in the 1996 restructuring plan involve the closure or sale of fifteen production facilities (nine in Performance Chemicals, five in Polymer Chemicals and one in OrganoSilicones) and consolidation of supporting infrastructure. This restructuring, which will result in the elimination of approximately eighteen hundred corporate staff and manufacturing positions, will be completed by 1999. In 1997, the Company recorded additional restructuring charges of $13,044, primarily related to expenditures for equipment, principally at Performance Chemicals sites previously identified for closure, which otherwise would have been capitalized. Also during 1997, the Company sold five plants (four in Performance Chemicals and one in Polymer Chemicals) and shut-down two others (one in OrganoSilicones and one in Polymer Chemicals). Included within this activity were the sale of the Company's Canadian Detergents and Aluminum Chloride businesses and portions of its Anionic Surfactants business for a total of approximately $29,000. The operating results individually and in the aggregate of these dispositions and shut-downs were not significant to the consolidated results of operations. Through 1997, the Company has expended approximately $11,000 for severance costs as a result of the termination of seven hundred thirty-three employees, $10,500 for environmental remediation and compliance, $1,459 for demolition and $3,121 for other. There have not been any significant changes in the overall or component accruals of the 1997 charge as a result of changes in estimates. The year ended December 31, 1995, included a restructuring charge of $33,842 related to the shut-down of five facilities (two in Performance Chemicals, two in Oleochemicals & Derivatives and one in Polymer Chemicals). Four of the five facilities have been shut-down with the remaining facility scheduled to close in 1998. The major components of the restructuring charges are as follows:
============================================================================================== DESCRIPTION 1997 1996 1995 - ---------------------------------------------------------------------------------------------- Equipment expenditures $10,321 $ - $ - Severance and related costs - 104,456 1,900 Write-down of property, plant and equipment -- 96,879 21,840 Environmental remediation and compliance - 53,298 2,090 Write-down of goodwill and intangibles - 40,000 1,856 Demolition costs - 26,200 4,605 Other 2,723 24,297 1,551 - ---------------------------------------------------------------------------------------------- $13,044 $345,130 $33,842 ==============================================================================================
Included within severance and related costs are $35,047 and $13,443 of curtailment charges for pension and other postemployment benefits, respectively. NOTE 3 DISPOSITIONS 1997 and 1996 dispositions relate to the Company's two restructuring initiatives and to discontinued operations. Further detail on these dispositions can be found in Note 2 and Note 19 of Notes to Financial Statements, respectively. On June 30, 1995, the Company sold the operations of its Continental Carbon subsidiary to China Synthetic Rubber Corporation for $121,900, resulting in a gain of $27,073, or $.48 per common share. Continental Carbon manufactures carbon black which is used primarily in the tire and rubber industry. On March 24, 1995, the Company sold the operations of its Battery Parts business to Acro Products, Inc. for $24,100, resulting in a gain of $5,918, or $.10 per common share. Battery Parts manufactures rubber and plastic battery containers, covers and parts and custom injection molded parts. The operating results individually and in the aggregate of the 1995 dispositions were not significant to the consolidated results of operations. F-7 WITCO CORPORATION AND SUBSIDIARY COMPANIES (in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 4 INVENTORIES Inventories are classified as follows: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Raw materials and supplies $ 72,528 $ 99,112 Finished goods 162,806 185,388 - -------------------------------------------------------------------------------- $235,334 $284,500 ================================================================================ Work in progress included above is not significant. Inventories valued on a LIFO basis, at December 31, 1997 and 1996, amounted to $76,615 and $107,524, respectively. Inventories would have been $32,334 and $40,964 higher than reported at December 31, 1997 and 1996, respectively, if the FIFO method (which approximates current cost) had been used by the Company for all inventories. NOTE 5 PROPERTY, PLANT AND EQUIPMENT A summary of property, plant and equipment follows: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Land $ 32,089 $ 34,597 Buildings and improvements 170,115 172,695 Machinery, fixtures and equipment 1,198,692 1,202,449 Assets under construction 145,735 87,577 - -------------------------------------------------------------------------------- 1,546,631 1,497,318 Less accumulated depreciation 766,241 761,926 - -------------------------------------------------------------------------------- $ 780,390 $ 735,392 ================================================================================ Depreciation expense, including amortization of assets under capital lease obligations, from continuing operations amounted to $86,789 (1997), $99,676 (1996), and $81,766 (1995). At December 31, 1997 and 1996, buildings and improvements included approximately $12,500 and $14,500, respectively, related to an office/laboratory facility under a capital lease. NOTE 6 GOODWILL AND OTHER INTANGIBLE ASSETS Goodwill and other intangible assets consist of the following: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Goodwill $649,241 $660,853 Patents and licenses 62,515 59,912 Other 67,566 66,593 - -------------------------------------------------------------------------------- 779,322 787,358 Less accumulated amortization 157,703 133,625 - -------------------------------------------------------------------------------- $621,619 $653,733 ================================================================================ Amortization expense from continuing operations amounted to $24,083 (1997), $29,117 (1996), and $20,805 (1995). NOTE 7 ACCOUNTS PAYABLE AND OTHER CURRENT LIABILITIES Components of accounts payable and other current liabilities consist of the following: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Trade accounts payable $238,212 $155,130 Other accruals 123,305 154,696 Payroll related liabilities 70,870 39,713 Reserves for environmental remediation and compliance 37,372 68,776 Income taxes 21,944 19,347 Reserve for restructuring 19,528 46,244 Reserve for disposition of Lubricants Group 4,300 31,438 - -------------------------------------------------------------------------------- $515,531 $515,344 ================================================================================ F-8 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 8 INDEBTEDNESS On March 31, 1997, the Company entered into a new five year revolving credit agreement totaling $500,000 with various banks, $10,000 of which was utilized at December 31, 1997. Borrowings on this facility are at various rate options to be determined at the time of borrowing. The facility contains covenants which are customary in agreements of this nature. The Company is required to pay a facility fee of .075% per year on the total commitment. On April 2, 1997, the Company's previously existing credit facility of $375,000 was terminated. The interest rates on domestic credit facility borrowings outstanding at December 31, 1997 and 1996, were 6.12% and 5.77%, respectively. The Company has arrangements with various banks for lines of credit for its international subsidiaries aggregating $37,592, of which $1,374 was utilized at December 31, 1997. The weighted average interest rates on international credit facility borrowings outstanding at December 31, 1997 and 1996 were 16.7% and 4.33%, respectively. Principal maturities of long-term debt including capital lease obligations through the year 2002 at December 31, 1997 are $41,460 (1998), $2,241 (1999), $20,181 (2000), $14,863 (2001), and $2,403 (2002). Following is a summary of long-term debt: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- 6.125% notes due 2006 $150,000 $150,000 6.875% debentures due 2026 150,000 150,000 6.60% notes due 2003 165,000 165,000 7.75% debentures due 2023 110,000 110,000 7.325% notes due 1998 40,136 46,242 6.47% bank loan due 2000 17,811 20,976 Capital lease obligation 12,509 14,449 6.30% bank loan due 2001 12,352 14,420 5.85% pollution control revenue bonds due 2023 10,000 10,000 8.20% bank loan due 2006 8,489 9,879 Industrial development revenue bond due 2014 8,500 8,500 Other 1,764 2,723 - -------------------------------------------------------------------------------- 686,561 702,189 Less amounts included in notes and loans payable 41,460 1,369 - -------------------------------------------------------------------------------- $645,101 $700,820 ================================================================================ Following is a summary of interest from continuing operations: ================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Interest expense $53,004 $69,334 $43,689 Capitalized interest 2,413 1,503 1,429 - -------------------------------------------------------------------------------- Total interest incurred $55,417 $70,837 $45,118 - -------------------------------------------------------------------------------- Total interest payments $54,754 $62,593 $47,016 ================================================================================ NOTE 9 SHAREHOLDERS' EQUITY On March 2, 1995, the Board of Directors unanimously approved a Shareholder Rights Plan (the 'Plan'). The Plan was implemented by the issuance of one preferred stock purchase right for each share of common stock outstanding at the close of business on March 2, 1995, or issued thereafter until the rights become exercisable. Each right entitles the holder in certain events to purchase one-one thousandth of a share of participating preferred stock at a purchase price of $110 per share. Each one-one thousandth of a share of participating preferred stock is intended to represent the economic equivalent of one share of common stock. Under the Plan, 300 shares of participating cumulative preferred stock without par value have been authorized. The rights currently are not exercisable. If a person or group acquires more than 15% of the outstanding common stock, or at the Board of Directors election if a tender offer for more than 15% of the outstanding common stock is commenced, or if such person or group acquires the Company in a merger or other business combination, each right (other than those held by the acquiring person) will entitle the holder to purchase stock of the Company or stock or other property of the acquiring person having a value of twice the purchase price. The rights will expire on March 2, 2005, unless redeemed earlier by the Company in whole, but not in part, at a price of $.01 per right. Each share of $2.65 Cumulative Convertible Preferred Stock is entitled to one vote and has a minimum liquidating preference of $66 per share. Each share is subject to redemption at the Company's option at $66 per share and is convertible into 16.8075 shares of the Company's common stock. At December 31, 1997, 103 shares of unissued common stock of the Company were reserved for issuance in accordance with the $2.65 Cumulative Convertible Preferred Stock. F-9 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- The Company has authorized 8,300 shares of series preferred stock, which, when issued, will have such rights, power, and preferences as shall be fixed by the Company's Board of Directors. Quarterly dividends declared of $.28 per share on the Company's common stock amounted to $1.12 for 1997, 1996 and 1995. Common and preferred stock transactions were as follows: ================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------- Convertible preferred stock Outstanding at beginning of year 6 7 7 Conversions - (1) - - -------------------------------------------------------------------------------- Outstanding at end of year 6 6 7 Common stock Issued at beginning of year 56,763 56,435 56,312 Net shares issued under employee plans 705 263 122 Conversions 6 6 1 Restricted stock 29 59 - - -------------------------------------------------------------------------------- Issued at end of year 57,503 56,763 56,435 Treasury stock In treasury at beginning of year - - 165 Purchases of treasury stock 35 - - Net shares issued under employee plans (1) - (159) Conversions - - (6) Net shares issued as restricted stock (19) - - - -------------------------------------------------------------------------------- In treasury at end of year 15 - - ================================================================================ NOTE 10 EARNINGS PER SHARE The following is an illustration of the reconciliation of the numerators and denominators of basic and diluted EPS computations and other related disclosures required by SFAS No. 128.
=============================================================================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------------------- NUMERATOR: Income (loss) from continuing operations $90,078 $(247,174) $100,346 Preferred stock dividends (17) (18) (19) - ------------------------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share -- income (loss) from continuing operations available to common shareholders 90,061 (247,192) 100,327 Effect of dilutive securities: Preferred stock dividends 17 18 19 - ------------------------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share -- income (loss) from continuing operations available to common shareholders after assumed conversions $90,078 $(247,174) $100,346 =============================================================================================================================== DENOMINATOR: Denominator for basic earnings per share -- weighted-average shares 57,130 56,591 56,312 Effect of dilutive securities: Employee stock options 735 - 227 Cumulative convertible preferred stock 106 - 117 Restricted shares 71 - - - ------------------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 912 - 344 - ------------------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share -- adjusted weighted-average shares and assumed conversions 58,042 56,591 56,656 =============================================================================================================================== Basic earnings per share $ 1.58 $ (4.37) $ 1.78 =============================================================================================================================== Diluted earnings per share $ 1.55 $ (4.37) $ 1.77 ===============================================================================================================================
F-10 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- Options to purchase 89 shares at prices ranging from $39.94 to $46.81 per share, and 756 shares at $31.75 per share were outstanding as of December 31, 1997 and 1995, respectively, but were not included in the computation of diluted earnings per share since the options exercise price was greater than the average market price of the common shares creating an antidilutive effect. Due to the antidilutive impact of the Company's 1996 loss from continuing operations, the impact of both options to purchase approximately 2,529 shares of common stock and the conversion of 18 shares of convertible preferred stock have not been included in the computation of diluted earnings per share. NOTE 11 STOCK BASED COMPENSATION PLANS The Company has fixed option plans for certain employees. Under the 1992 Incentive Stock Option Plan, the Company may grant options to its employees for up to 184 and 161 shares of common stock at December 31, 1997 and 1996, respectively. Under the 1995 Incentive Stock Option Plan, the Company may grant options to its employees for up to 477 and 1,183 shares of common stock at December 31, 1997 and 1996, respectively. Under the 1997 Incentive Stock Option Plan, the Company may grant options to its employees for up to 1,828 shares of common stock at December 31, 1997. These plans provide that shares granted come from the Company's authorized but unissued or reacquired common stock. The price of the options granted pursuant to these plans will not be less than 100% of the fair market value of the shares on the date of grant. These options are exercisable in installments within a period not to exceed ten years from the date of grant. The options outstanding at December 31, 1997 and 1996, expire on various dates through December 2007. At December 31, 1997 and 1996, unissued common stock of the Company reserved for issuance in accordance with the stock option plans are 7,921 and 5,627 shares, respectively. In 1997, shareholders approved a Shareholder Value Incentive Plan (the 'SVIP') under which 200 shares of convertible preferred stock may be issued to selected officers and employees. Each share of preferred stock is convertible into common stock at a ten to one ratio if certain performance criteria are achieved by March 4, 2002. In 1997, the Company granted rights to certain officers and employees for 171 shares of convertible preferred stock having no par value under the SVIP. The Company has elected to follow Accounting Principals Board Opinion (APB) No. 25 'Accounting for Stock Issued to Employees' and related interpretations in accounting for its employee stock options. Under APB No. 25, the Company does not recognize compensation expense when the exercise price of the options granted is equal to the market value of the Company's common stock at the date of grant. Statement of Financial Accounting Standard No. 123 'Accounting for Stock Based Compensation' (SFAS No. 123) requires the Company to disclose the pro forma impact on net income (loss) and earnings (loss) per share as if compensation expense associated with employee stock options had been calculated under the fair value method of SFAS No. 123 for employee stock options granted subsequent to December 31, 1994. The fair value of each option grant is estimated on the date of grant using a Black-Scholes option-pricing model with the following weighted-average assumptions used for grants in 1997, 1996 and 1995, respectively; dividend yield of 3%, 4% and 4%; expected volatility of .245, .214 and .215; risk-free interest rates of 5.9%, 6.1% and 6.05%; and weighted-average expected lives of 2.1, 5.5 and 6.5 years. The Company's net income (loss) and net income (loss) per common share have been adjusted to the pro forma amounts indicated below. These pro forma effects may not be representative of the effects on future years because of the subjective assumptions used in the fair value estimate calculated under the Black-Scholes model and that new grants are generally made each year.
========================================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------------------ Net income (loss) As reported $94,877 $(315,087) $104,445 Pro forma $87,754 $(317,658) $104,105 Net income (loss) per common As reported $ 1.66 $ (5.57) $ 1.85 share -- basic Pro forma $ 1.54 $ (5.61) $ 1.85 Net income (loss) per common As reported $ 1.63 $ (5.57) $ 1.84 share -- diluted Pro forma $ 1.51 $ (5.61) $ 1.84 ==========================================================================================
Because SFAS No. 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 1999 since certain options granted prior to January 1, 1995, vest over five years. F-11 WITCO CORPORATION AND SUBSIDIARY COMPANIES (in thousands except per share data) - -------------------------------------------------------------------------------- A summary of the Company's stock option activity and related information for the years ended December 31 follows:
1997 1996 1995 ============================================================================================================================= WEIGHTED- Weighted- Weighted- AVERAGE Average Average EXERCISE Exercise Exercise SHARES PRICE Shares Price Shares Price - ----------------------------------------------------------------------------------------------------------------------------- Options outstanding, beginning of year 4,283 $30 2,619 $28 2,054 $27 Granted 1,995 37 2,182 33 879 28 Exercised (705) 28 (267) 25 (300) 20 Forfeited (141) 33 (251) 30 (14) 29 - ----------------------------------------------------------------------------------------------------------------------------- Options outstanding, end of year 5,432 $33 4,283 $30 2,619 $28 Options exercisable at end of year 2,094 $30 1,827 $29 808 $27 Weighted-average fair value of options granted during the year $6.12 $6.35 $5.66 =============================================================================================================================
============================================================================================================================= Options Outstanding Options Exercisable - ----------------------------------------------------------------------------------------------------------------------------- Number Weighted- Number Outstanding at Average Weighted- Exercisable at Weighted- Range of December 31, Remaining Average Exercise December 31, Average Exercise Exercise Prices 1997 Contractual Life Price 1997 Price - ---------------- ------------------------------------------------------------ ------------------------------------------ $21.38 to $33.25 3,516 7.9 years $31 2,086 $30 $35.13 to $46.81 1,916 9.9 years $37 8 $37 - ---------------- ----------------- ------------ 5,432 2,094 =============================================================================================================================
In 1997 and 1996, restricted stock awards were granted to two key employees pursuant to certain employment agreements between the Company and such employees. In 1997, two restricted common stock awards totaling 29 shares were granted and will vest over time through 1999. In 1996, an award of 19 shares of restricted common stock was granted and will vest over time through 1998. As of December 31, 1997, 17 shares have vested for these awards. In 1996, two additional restricted common stock awards totaling 40 shares were granted and will vest if certain performance-based criteria are met. Unless these performance criteria are met, these restricted stock awards shall terminate on either September 9, 2001, or June 13, 2002, according to the terms of the awards. As of December 31, 1997, 13 shares have vested for these awards. The weighted-average fair value of the restricted stock on the date of grant is $36 and $32 with a weighted-average remaining contractual life of 1.4 and 4.6 years for 1997 and 1996, respectively. NOTE 12 OTHER EXPENSE (INCOME) -- NET The components of other expense (income) -- net from continuing operations are as follows:
=============================================================================================== 1997 1996 1995 - ----------------------------------------------------------------------------------------------- Amortization of intangibles $24,083 $29,117 $ 20,805 Provision for litigation - 34,733 - Provision for environmental remediation and compliance - 30,077 13,800 Settlements with certain of the company's insurers (950) (4,316) (55,149) Gain on disposition of businesses (2,007) - (54,079) Other -- net (3,296) (1,211) (2,375) - ----------------------------------------------------------------------------------------------- $17,830 $88,400 $(76,998) ===============================================================================================
F-12 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 13 INCOME TAXES The components of income (loss) from continuing operations before income taxes and cumulative effect of accounting change are: =============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Domestic $ 63,461 $(335,609) $113,308 Foreign 89,238 9,800 55,832 - ------------------------------------------------------------------------------- $152,699 $(325,809) $169,140 =============================================================================== The provision for income taxes (benefit) from continuing operations consists of the following: =============================================================================== 1997 1996 1995 - ------------------------------------------------------------------------------- Current Federal $(13,486) $(14,514) $49,675 State (2,633) 735 8,336 Foreign 32,779 38,564 16,004 Deferred Federal 35,737 (85,750) (6,361) State 5,636 (11,771) (800) Foreign 4,588 (5,699) 2,588 Investment tax credit amortization - (200) (648) - ------------------------------------------------------------------------------- $ 62,621 $(78,635) $68,794 =============================================================================== The effective income tax rate from continuing operations varied from the statutory federal income tax rate as follows:
============================================================================================= 1997 1996 1995 - --------------------------------------------------------------------------------------------- Statutory federal income tax rate 35.0% (35.0)% 35.0% Foreign rate differences 4.0 8.1 - Non-deductible goodwill amortization 3.1 1.8 1.1 State income taxes -- net 2.0 (3.4) 4.5 Research and development tax credits (2.0) - - Foreign sales corporation (1.8) - - Non-deductible goodwill and intangibles write-down - 3.9 - Other 0.7 0.5 0.1 - --------------------------------------------------------------------------------------------- 41.0% (24.1)% 40.7% =============================================================================================
The components of deferred income taxes are as follows:
==================================================================================== 1997 1996 - ------------------------------------------------------------------------------------ Current deferred tax (assets) liabilities: Reserve for environmental remediation and compliance $(13,264) $(27,339) Accrual items (18,362) (19,698) Inventories 8,472 3,905 Reserve for disposition of Lubricants Group (1,683) (12,260) Other -- net (22,199) (37,098) - ------------------------------------------------------------------------------------ $(47,036) $(92,490) ==================================================================================== Non-current deferred tax (assets) liabilities: Depreciation $108,505 $110,396 Reserve for environmental remediation and compliance (56,572) (56,734) Postretirement benefits other than pensions (22,865) (20,469) Net operating loss carry forward (21,684) (21,239) Excess foreign tax credits (9,500) - Other -- net (4,865) (28,392) - ------------------------------------------------------------------------------------ $ (6,981) $(16,438) ====================================================================================
No federal or state income taxes have been provided on approximately $182,000 of unremitted earnings of the Company's international subsidiaries at December 31, 1997. Based on the expected ability to utilize resulting foreign tax credits, no significant tax charges would result if these earnings were repatriated to the United States. F-13 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- At December 31, 1997, non-current deferred tax assets include $21,684 (recorded in connection with purchase accounting associated with the acquisition of OrganoSilicones, formerly OSi Specialties) for a net operating loss carry forward and $9,500 for excess foreign tax credits. The Company has concluded that it is more likely than not that the net operating loss carry forward will be used based upon continued profitability combined with the income generated from existing taxable temporary differences; and that excess foreign tax credits will be utilized based upon the generation of domestic and foreign source income. The Company's federal net operating losses of approximately $55,500 are subject to certain limitations and expire as follows: $8,300 (2008), $32,200 (2009), and $15,000 (2010). The Company's excess foreign tax credits of approximately $9,500 expire in 2002. Cash payments for income taxes amounted to $11,852 (1997), $24,716 (1996), and $59,509 (1995). NOTE 14 PENSION PLANS The Company has various non-contributory defined benefit pension plans covering substantially all of its domestic employees and certain international employees. Benefits are primarily based upon levels of compensation and/or years of service. The Company's funding policy is based upon funding at the minimum annual amounts required by applicable federal laws and regulations plus such additional amounts as the Company may determine to be appropriate from time to time. Plan assets consist of publicly traded securities and investments in commingled funds administered by independent investment advisors. Certain union employees of the Company participate in multi-employer plans and the Company makes contributions primarily based upon hours worked. These plans provide defined benefits to these employees. Employees of international subsidiaries are covered by various pension benefit arrangements, some of which are considered to be defined benefit plans for financial reporting purposes. Assets of the plans are comprised primarily of insurance contracts and equity securities. Benefits under these plans are primarily based upon levels of compensation. Funding policies are based on legal requirements, tax considerations and local practices. Net pension cost includes the following components:
================================================================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- DOMESTIC INTERNATIONAL Domestic International Domestic International - -------------------------------------------------------------------------------------------------------------------------------- Service cost for benefits earned during the period $ 9,015 $ 5,090 $ 10,456 $ 4,600 $ 6,561 $ 3,823 Interest cost on the projected benefit obligation 29,037 7,615 25,997 7,154 24,337 6,478 Actual gain on plan assets (57,292) (7,689) (39,145) (1,046) (63,453) (7,486) Net amortization and deferral 24,718 4,146 9,883 (2,745) 35,206 4,180 Curtailment loss - - 44,547 - - - - -------------------------------------------------------------------------------------------------------------------------------- Total pension cost 5,478 9,162 51,738 7,963 2,651 6,995 Multi-employer plans 559 - 473 - 411 - Other international plans - 221 - 68 - 73 - -------------------------------------------------------------------------------------------------------------------------------- Net pension cost 6,037 9,383 52,211 8,031 3,062 7,068 Less pension cost of discontinued operations 70 - 10,292 - 15 - - -------------------------------------------------------------------------------------------------------------------------------- Net pension cost from continuing operations $ 5,967 $ 9,383 $ 41,919 $ 8,031 $ 3,047 $ 7,068 ================================================================================================================================
The domestic curtailment loss of $44,547 in 1996 is reflected in the Consolidated Statement of Operations as follows: $35,047 is included in the restructuring charge and $9,500 is included in Loss from Discontinued Operations. The weighted-average assumptions used to calculate costs were as follows:
================================================================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- DOMESTIC INTERNATIONAL Domestic International Domestic International - -------------------------------------------------------------------------------------------------------------------------------- Discount rate 7.5% 6.7% 7.0% 7.0% 8.5% 7.1% Rate of increase in compensation level 4.5% 4.0% 4.5% 4.3% 4.5% 4.3% Expected long-term rate of return on assets 10.0% 7.5% 10.0% 7.9% 10.0% 8.0% ================================================================================================================================
In 1997, the discount rate used to calculate domestic pension cost was changed from 7.0% in 1996 to 7.5% in 1997 which decreased pension cost by approximately $2,500. F-14 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- The funded status and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996, for the domestic plans were as follows:
============================================================================================================================ 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- PLANS IN WHICH: Plans in which: - ---------------------------------------------------------------------------------------------------------------------------- ASSETS EXCEED ACCUMULATED Assets Exceed Accumulated ACCUMULATED BENEFITS EXCEED Accumulated Benefits Exceed BENEFITS ASSETS Benefits Assets - ---------------------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefits $(306,647) $ (63,964) $(267,946) $ (82,112) Nonvested benefits (5,581) (10,728) (4,995) (10,341) - ---------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation (312,228) (74,692) (272,941) (92,453) Effect of anticipated future compensation levels (14,216) (24,634) (9,713) (18,224) - ---------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation (326,444) (99,326) (282,654) (110,677) Plan assets at fair value 347,369 37,906 294,264 49,756 - ---------------------------------------------------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 20,925 (61,420) 11,610 (60,921) Unrecognized prior service cost 9,744 5,402 10,764 6,205 Unrecognized net transition (asset) obligation (5,894) 403 (8,522) 286 Unrecognized net loss 8,603 12,214 13,530 12,396 Adjustment required to recognize minimum liability - (8,466) - (13,395) - ---------------------------------------------------------------------------------------------------------------------------- Noncurrent pension asset (liability) $ 33,378 $ (51,867) $ 27,382 $ (55,429) ============================================================================================================================
The assumptions used to calculate December 31, 1997 and 1996, obligations for domestic plans were as follows: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Discount rate 7.25% 7.5% Rate of increase in compensation level 4.50% 4.5% ================================================================================ The revised domestic discount rate of 7.25% resulted in an increase of approximately $15,629 and $11,354 in the 1997 projected and accumulated benefit obligation, respectively. The funded status and amounts recognized in the Company's Consolidated Balance Sheets at December 31, 1997 and 1996, for the international plans were as follows:
============================================================================================================================ 1997 1996 - ---------------------------------------------------------------------------------------------------------------------------- PLANS IN WHICH: Plans in which: - ---------------------------------------------------------------------------------------------------------------------------- ASSETS EXCEED ACCUMULATED Assets Exceed Accumulated ACCUMULATED BENEFITS EXCEED Accumulated enefits Exceed BENEFITS ASSETS Benefits Assets - ---------------------------------------------------------------------------------------------------------------------------- Actuarial present value of: Vested benefits $ (29,926) $ (48,540) $ (34,802) $ (46,579) Nonvested benefits (1,500) (10,139) (1,717) (8,366) - ---------------------------------------------------------------------------------------------------------------------------- Accumulated benefit obligation (31,426) (58,679) (36,519) (54,945) Effect of anticipated future compensation levels (6,671) (22,596) (7,065) (23,822) - ---------------------------------------------------------------------------------------------------------------------------- Projected benefit obligation (38,097) (81,275) (43,584) (78,767) Plan assets at fair value 43,690 5,935 48,819 196 - ---------------------------------------------------------------------------------------------------------------------------- Plan assets in excess of (less than) projected benefit obligation 5,593 (75,340) 5,235 (78,571) Unrecognized prior service cost 2,739 2,605 1,309 14 Unrecognized net transition (asset) obligation (4,501) 2,074 (5,473) 2,711 Unrecognized net loss (gain) (1,822) 4,005 1,963 5,915 - ---------------------------------------------------------------------------------------------------------------------------- Noncurrent pension asset (liability) $ 2,009 $ (66,656) $ 3,034 $ (69,931) ============================================================================================================================
The assumptions used to calculate December 31, 1997 and 1996, obligations for international plans were as follows: ================================================================================ 1997 1996 - -------------------------------------------------------------------------------- Discount rate 6.6% 6.6% Rate of increase in compensation level 3.8% 3.9% ================================================================================ F-15 WITCO CORPORATION AND SUBSIDIARY COMPANIES (in thousands except per share data) - -------------------------------------------------------------------------------- The Company sponsors a defined contribution savings plan, the Witco Corporation Employee Retirement Savings Plan, which is organized under sections 401(k) and 401(a) of the Internal Revenue Code. The Plan allows salary and hourly non-bargaining employees to contribute up to a maximum of 15% of their base pay with the Company providing a matching contribution of fifty cents for each dollar up to 6%. In addition, the Company sponsors the OSi Specialties, Inc. 401(k) Savings and Investment Plan which covers all full time employees of OSi. The Plan allows employees to contribute a maximum of 17.5% of eligible compensation and the Company provides a matching contribution of 50% up to 7.5%. The Plans permit employees to make contributions on both a pre-tax and after-tax basis. Participants are immediately vested in their contributions and become fully vested in the matching contribution upon meeting certain service requirements. Union employees' participation, provisions, contributions and employer match are based upon terms of their respective collective bargaining agreement. The Company's matching contributions were $3,400 (1997), $4,200 (1996) and $3,900 (1995). NOTE 15 POSTRETIREMENT BENEFITS OTHER THAN PENSIONS The Company provides health and life insurance to certain domestic retired employees, most of whom contribute to its cost. Substantially all employees presently become eligible for retiree benefits after reaching retirement age while working for the Company. The cost of the retiree medical plan is provided by retiree contributions that are adjusted annually to reflect current health costs. For domestic employees subject to collective bargaining arrangements, the cost is shared by the Company in accordance with the bargained agreements. Life insurance benefits for certain retired employees are provided with the Company assuming the cost. The Company's policy is to fund the plans at the discretion of management. Postretirement benefit obligations at December 31, 1997 and 1996, are as follows:
============================================================================================ 1997 1996 - -------------------------------------------------------------------------------------------- Accumulated postretirement benefit obligation: Retirees $ 43,394 $31,308 Active plan participants fully eligible for benefits 18,947 20,076 Other active plan participants 7,886 7,362 - -------------------------------------------------------------------------------------------- Total accumulated postretirement benefit obligation 70,227 58,746 Unrecognized net (loss) (10,889) (262) - -------------------------------------------------------------------------------------------- Noncurrent postretirement benefit liability $ 59,338 $58,484 ============================================================================================
Net periodic postretirement benefit costs include the following components:
============================================================================================= 1997 1996 1995 - --------------------------------------------------------------------------------------------- Service cost of benefits earned $ 553 $ 637 $ 486 Interest cost on accumulated postretirement benefits 3,948 3,082 2,938 Curtailment loss - 13,443 - Net amortization 53 21 (747) - --------------------------------------------------------------------------------------------- Net periodic postretirement benefit costs $4,554 $17,183 $2,677 =============================================================================================
For measuring the expected postretirement benefit obligation, a 5.75% and 7% annual rate of increase in the per capita claims cost was assumed for 1997 and 1996, respectively. The rate was assumed to decrease by 1% per year to 4.75% in 1999 and remain at that level thereafter. The discount rate used in determining the accumulated postretirement benefit obligation was 7.25% for 1997 and 7.5% for 1996. The discount rates used in determining the net periodic postretirement benefit costs were 7.5% (1997), 7% (1996) and 8.3% (1995). In 1996, a curtailment charge of $13,443 was recognized in connection with the 1996 restructuring plan. The effect of a 1% increase in the health care cost trend rate would increase the present value of the accumulated postretirement benefit obligation at December 31, 1997, by approximately $7,100 and the net periodic postretirement benefit cost for 1997 by approximately $600. Certain union employees of the Company participate in multi-employer plans that provide defined postretirement health and life insurance benefits. The net periodic postretirement benefit cost for these employees is not distinguishable. The Company's costs associated with these plans on a cash basis is not significant. F-16 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 16 FINANCIAL INSTRUMENTS The Company enters into foreign currency forward and swap contracts to hedge the effect of foreign currency fluctuations on the financial statements. The Company purchases foreign currency forward contracts that are designated and effective as hedges of recorded transactions (principally foreign currency trade receivables and payables) which otherwise would expose the Company to foreign currency risk. Realized and unrealized gains and losses on foreign currency forward contracts (including open, matured and terminated contracts) that are designated and effective as hedges of recorded transactions are recognized in earnings and offset the impact of valuing recorded foreign currency trade payables and receivables. Unrealized gains or losses are cumulatively measured as the differential between the spot exchange rate at the contract's inception and the spot exchange rate as of the balance sheet date. Discounts or premiums (the difference between the current spot exchange rate and the contract exchange rate at the inception of the contract) on foreign currency forward contracts designated and effective as hedges of recorded transactions are amortized over the respective contract's lives. Realized and unrealized gains and losses on foreign currency forward contracts that are not designated and effective as hedges are included in income as other expenses (income) -- net. The net asset or liability representing the fair value of open positions are included in accounts and notes receivables on the Consolidated Balance Sheet. The Company uses foreign currency swap contracts that are designed to reduce its exposure to foreign currency risk from its net investment (including long-term intercompany loans) in its international subsidiaries. For foreign currency swap contracts that are designated and effective as hedges, realized and unrealized gains and losses (including those from open, matured and terminated contracts), net of related taxes, are included in the cumulative translation adjustment account in shareholders equity (the deferral accounting method). Discounts or premiums are amortized over the respective contract lives. The related amounts due to or from counterparties are included in deferred costs and other assets on the Consolidated Balance Sheet. At December 31, 1997 and 1996, the Company had outstanding foreign currency swap contracts with aggregate notional amounts of approximately $247,000 and $253,000 respectively, to hedge its foreign net investments. The swap contracts are primarily in German marks and French francs, which expire in March 2003 and May 1998, respectively. At December 31, 1997 and 1996, the Company had outstanding foreign currency forward contracts with aggregate notional amounts of approximately $287,000 and $137,000 respectively, to hedge foreign currency risk on accounts receivable and payable. These forward contracts are generally outstanding for 30 to 90 days and are primarily denominated in German marks, Italian lire, Swiss and French francs, and British pounds. All contracts have been entered into with major financial institutions. The risk associated with these transactions is the cost of replacing, at current market rates, agreements in the event of default by the counterparties. Management believes the risk of incurring such losses is remote. The following summarizes the major methods and assumptions used in estimating the fair values of financial instruments. CASH AND CASH EQUIVALENTS: The carrying amount approximates fair value due to the short maturity of these instruments. NOTES RECEIVABLE: The fair value is estimated by discounting the future cash flows using the interest rates at which similar loans would be made under current conditions. LONG-TERM DEBT: The fair value for the 6.60% and the 6.125% Notes in addition to the 7.75% and the 6.875% Debentures were based on quoted market values. For all other long-term debt which have no quoted market price, the fair value is estimated by discounting projected future cash flows using the Company's incremental borrowing rate. FOREIGN CURRENCY FORWARD AND SWAP CONTRACTS: The fair value is the amount at which the contracts could be settled based on quotes provided by investment banking firms. FAIR VALUES OF FINANCIAL INSTRUMENTS: The following table presents the carrying amounts and estimated fair values of material financial instruments used by the Company in the normal course of its business. F-17 WITCO CORPORATION AND SUBSIDIARY COMPANIES (in thousands except per share data)
1997 1996 - ------------------------------------------------------------------------------------------------------------------------------- CARRYING Carrying AMOUNT FAIR VALUE Amount Fair Value - ------------------------------------------------------------------------------------------------------------------------------- Cash and cash equivalents $ 96,383 $ 96,383 $ 59,201 $ 59,201 Notes receivable $ 21,008 $ 20,987 $ 24,422 $ 24,449 Long-term debt $645,101 $650,389 $700,820 $666,847 Off-balance sheet financial instruments: Unrealized loss on foreign currency forward and swap contracts $ -- $ (843) $ -- $(35,775) ================================================================================================================================
NOTE 17 COMMITMENTS AND CONTINGENCIES OPERATING LEASES: At December 31, 1997, minimum rental commitments related to continuing operations under noncancelable operating leases amounted to $18,848 (1998), $16,501 (1999), $13,182 (2000), $11,634 (2001), $11,193 (2002), and $92,159 (2003 and thereafter). Rental expenses under operating leases from continuing operations were $19,549 (1997), $22,725 (1996) and $16,597 (1995). CAPITAL LEASE: The Company has a capital lease for an office/laboratory facility located in Meyrin, Switzerland. The lease contains purchase options and expires in 2007. Future minimum lease payments at December 31, 1997, were as follows: ================================================================================ 1998 $ 1,809 1999 1,809 2000 1,809 2001 1,809 2002 1,809 2003 and thereafter 9,047 - ------------------------------------------------------------------------------- Total minimum lease payments 18,092 Amounts representing interest (5,583) - ------------------------------------------------------------------------------- Present value of net minimum lease payments 12,509 Current portion (864) - ------------------------------------------------------------------------------- Long-term obligation $11,645 ================================================================================ The lease contains a sublease agreement for one-third of the facility over the length of the lease with the lessee providing a pro rata share of the minimum lease payments. CAPITAL COMMITMENTS: At December 31, 1997, the estimated costs to complete authorized projects under construction related to continuing operations amounts to $225,965. LITIGATION, CLAIMS AND CONTINGENCIES: The Company is a potentially responsible party ('PRP') or a defendant in a number of governmental (federal, state and local) and private actions associated with the release, or suspected release, of contaminants into the environment. As a PRP, the Company may be liable for costs associated with the investigation and remediation of environmental contamination, as well as various penalties and damages to persons, property and natural resources. As of December 31, 1997, the Company was a PRP, or a defendant, in connection with 59 sites at which it is likely to incur environmental response costs as a result of actions brought against the Company pursuant to the federal Comprehensive Environmental Response Compensation and Liability Act ('CERCLA'), the federal Resource Conservation and Recovery Act ('RCRA') or similar state or local laws. With 22 exceptions, all of these sites involve one or more other PRPs, and in most cases there are numerous other PRPs in addition to the Company. CERCLA, RCRA and the state counterparts to these federal laws authorize governments to investigate and remediate actual or suspected damage to the environment caused by the release, or suspected release, of hazardous substances into the environment, or to order the responsible parties to investigate and/or remediate such environmental damage. The Company evaluates and reviews environmental reserves for future remediation and other costs on a quarterly basis to determine appropriate reserve amounts. Inherent in this process are considerable uncertainties which affect the Company's ability to estimate the ultimate costs of remediation efforts. Such uncertainties include the nature and extent of contamination at each site, evolving governmental standards regarding remediation requirements, changes in environmental regulations, widely varying costs of alternative cleanup methods, the number and financial condition of other potentially responsible parties at multi-party sites, innovations in remediation and restoration technology, and the identification of additional environmental sites. F-18 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- At December 31, 1997 and 1996, the Company's reserves for environmental remediation and compliance costs (including $55,309 at December 31, 1997 and $64,224 at December 31, 1996, of both current and long-term environmental liabilities for the Lubricants Group and $64,716 at December 31, 1997 and $77,649 at December 31, 1996, of both current and long-term environmental liabilities for plants to be either sold or closed) amounted to $186,587 and $219,697, respectively, reflecting the Company's estimate of the costs to be incurred over an extended period of time in respect of those matters which are reasonably estimable. At December 31, 1997 and 1996, $149,215 and $150,921, respectively, of the reserves are included in Deferred Credits and Other Liabilities on the Consolidated Balance Sheets. At December 31, 1997, the Company had letters of credit outstanding of approximately $31,500 primarily related to environmental remediation commitments. The Company believes it has provided adequate reserves for these commitments. The Company is a defendant in six similar actions arising out of the Company's involvement in the polybutylene resin manufacturing business in the 1970's. Five of the following cases are currently pending in California state courts and one is pending in Texas state court: East Bay Municipal Utility District v. Mobil Oil Corporation, et al., filed in November 1993, and pending in Superior Court for the County of San Mateo, California; City of Santa Maria v. Shell Oil Company, et al., filed in May 1994, and pending in Superior Court for the County of San Luis Obispo, California; Nipomo Community Services District v. Shell Oil Company, et al., filed in May 1995, and pending in Superior Court for the County of Santa Barbara, California; Alameda County Water District v. Mobil Oil Corporation, et al., filed in April 1996, and Marin Municipal Water District v. Shell Oil Company, et al., filed in May 1996, both pending in superior Court for the County of San Mateo; and City of Austin v. Shell Oil Company, et al., filed in June 1996, and pending in the District Court of Travis County, Texas. The actions generally allege that the Company and several other defendants negligently misrepresented the performance of polybutylene pipe and fittings installed in water distribution systems. Other allegations in the California and Texas actions include breach of the California Unfair Practices Act and the Texas Deceptive Practices Act, respectively; breach of warranty, fraud and strict liability. It is possible that the Company may be named as a defendant in future actions arising out of its past involvement in the polybutylene resin manufacturing business. The Company is not a party to any legal proceedings, including environmental matters, which it believes will have a material adverse effect on its consolidated financial position or liquidity. However, the Company's operating results or cash flow could be materially affected in future periods by the resolution of these contingencies. NOTE 18 OPERATIONS BY INDUSTRY SEGMENT AND GEOGRAPHIC AREA Effective January 1, 1997, the Company realigned its business segments into four groups. Prior year amounts have been reclassified to conform with the current year presentation. The following is a summary of the Company's operations by industry segment and geographic area:
================================================================================================================================ 1997 1996 1995 - -------------------------------------------------------------------------------------------------------------------------------- Net Sales Oleochemicals & derivatives $ 413,268 $ 424,718 $ 429,025 Performance chemicals 781,782 844,651 817,923 Polymer chemicals 519,835 533,948 536,491 OrganoSilicones 472,517 447,929 101,312 Other -- 12,081 100,326 - -------------------------------------------------------------------------------------------------------------------------------- Net sales $2,187,402 $2,263,327 $1,985,077 - -------------------------------------------------------------------------------------------------------------------------------- Operating income Oleochemicals & derivatives $ 21,597 $ 5,041 $ 4,495 Performance chemicals 69,923 (202,175) 62,863 Polymer chemicals 72,721 1,285 32,271 OrganoSilicones 72,634 58,351 7,385 Corporate and unallocated (31,876) (124,560) 94,236 - -------------------------------------------------------------------------------------------------------------------------------- Operating income (loss) from continuing operations 204,999 (262,058) 201,250 - -------------------------------------------------------------------------------------------------------------------------------- Other expense -- net (4,029) (3,531) (3,525) Interest expense -- net (48,271) (60,220) (28,585) - -------------------------------------------------------------------------------------------------------------------------------- Income (loss) from continuing operations before income taxes and cumulative effect of accounting change $ 152,699 $ (325,809) $ 169,140 - -------------------------------------------------------------------------------------------------------------------------------- Assets Oleochemicals & derivatives $ 373,011 $ 352,184 $ 377,586 Performance chemicals 397,299 400,702 481,739 Polymer chemicals 347,025 372,052 458,698 OrganoSilicones 942,454 962,319 966,501 Net assets of discontinued operations -- 59,740 170,426 Corporate 237,863 244,708 295,654 - -------------------------------------------------------------------------------------------------------------------------------- Assets $2,297,652 $2,391,705 $2,750,604 ================================================================================================================================
F-19 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - -------------------------------------------------------------------------------- The following tables present a reconciliation of operating income (loss) from continuing operations on a segment basis detailing unusual or infrequently occurring items which affect comparability between years: - --------------------------------------------------------------------------------
============================================================================================================================== 1997 - ------------------------------------------------------------------------------------------------------------------------------ OLEOCHEMICALS PERFORMANCE POLYMER ORGANO- CORPORATE & & DERIVATIVES CHEMICALS CHEMICALS SILICONES UNALLOCATED TOTAL - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations excluding non-recurring items $18,909 $ 79,841 $75,026 $72,652 $ (31,342) $215,086 Restructuring charges (612) (10,007) (923) (18) (1,484) (13,044) Insurance settlements - - - - 950 950 Gain (loss) on disposition of businesses 3,300 89 (1,382) - - 2,007 - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations $21,597 $ 69,923 $72,721 $72,634 $ (31,876) $204,999 ============================================================================================================================== ============================================================================================================================== 1996 - ------------------------------------------------------------------------------------------------------------------------------ Oleochemicals Performance Polymer Organo- Corporate & & Derivatives Chemicals Chemicals Silicones Unallocated Total - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations excluding non-recurring items $ 16,457 $ 69,217 $ 51,890 $58,351 $ (26,173) $ 169,742 Restructuring charges (10,724) (237,853) (43,178 ) - (53,375) (345,130) Other charges (692) (33,539) (7,427 ) - (49,328) (90,986) Insurance settlements - - - - 4,316 4,316 - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations $ 5,041 $(202,175) $ 1,285 $58,351 $(124,560) $(262,058) ============================================================================================================================== ============================================================================================================================== 1995 - ------------------------------------------------------------------------------------------------------------------------------ Oleochemicals Performance Polymer Organo- Corporate & & Derivatives Chemicals Chemicals Silicones Unallocated Total - ------------------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations excluding non-recurring items $ 14,729 $ 80,467 $ 49,199 $ 7,385 $ (7,816) $143,964 Restructuring charges (10,234) (17,204) (5,028 ) - (1,376) (33,842) Other charges - (400) (11,900 ) - (5,800) (18,100) Insurance settlements - - - - 55,149 55,149 Gain on disposition of businesses - - - - 54,079 54,079 - ------------------------------------------------------------------------------------------------------------------------------ Operating income from continuing operations $ 4,495 $ 62,863 $ 32,271 $ 7,385 $ 94,236 $201,250 ==============================================================================================================================
F-20 WITCO CORPORATION AND SUBSIDIARY COMPANIES NOTES TO FINANCIAL STATEMENTS (in thousands except per share data) - --------------------------------------------------------------------------------
1997 1996 1995 - ------------------------------------------------------------------------------------------------------------------ Depreciation and amortization Oleochemicals & derivatives $ 23,819 $ 24,092 $ 24,693 Performance chemicals 19,971 34,469 34,461 Polymer chemicals 22,685 27,425 26,958 OrganoSilicones 36,980 37,865 9,439 Corporate 7,417 4,942 7,020 - ------------------------------------------------------------------------------------------------------------------ Depreciation and amortization from continuing operations $ 110,872 $ 128,793 $ 102,571 - ------------------------------------------------------------------------------------------------------------------ Capital expenditures (exclusive of acquisitions) Oleochemicals & derivatives $ 37,244 $ 27,928 $ 18,165 Performance chemicals 57,304 36,549 34,601 Polymer chemicals 52,527 25,077 15,885 OrganoSilicones 23,482 40,477 12,400 Discontinued operations - 11,844 17,209 Corporate 31,052 19,288 17,585 - ------------------------------------------------------------------------------------------------------------------ Capital expenditures $ 201,609 $ 161,163 $ 115,845 - ------------------------------------------------------------------------------------------------------------------ Net sales United States $1,415,953 $1,450,996 $1,247,287 Western Europe 748,413 775,078 662,099 Other international 214,485 217,447 163,636 Inter-area elimination (191,449) (180,194) (87,945) - ------------------------------------------------------------------------------------------------------------------ Net sales $2,187,402 $2,263,327 $1,985,077 - ------------------------------------------------------------------------------------------------------------------ Operating income United States $ 101,471 $ (280,774) $ 131,604 Western Europe 94,093 22,153 55,324 Other international 9,435 (3,437) 14,322 - ------------------------------------------------------------------------------------------------------------------ Operating income (loss) from continuing operations $ 204,999 $ (262,058) $ 201,250 - ------------------------------------------------------------------------------------------------------------------ Assets United States $1,554,720 $1,580,470 $1,491,188 Western Europe 615,953 640,265 884,139 Other international 126,979 111,230 204,851 Net assets of discontinued operations (United States) - 59,740 170,426 - ------------------------------------------------------------------------------------------------------------------ Assets $2,297,652 $2,391,705 $2,750,604 ==================================================================================================================
Inter-area sales are accounted for on the same basis used to price sales to similar non-affiliated customers and such sales are eliminated in arriving at consolidated amounts. The Company does not allocate income and expenses that are of a general corporate nature to industry segments in computing operating income. These include general corporate expenses, interest income and expense, and certain other income and expenses not directly attributable to a specific segment. In 1997, corporate and unallocated included charges of $1,485 related to restructuring charges and gains of $950 as a result of settlements with certain of the Company's insurers, net of related legal and other costs. In 1996, corporate and unallocated included charges of $53,375 related to a restructuring of the Company's operations and $49,328 of non-recurring items related to provisions for litigation and other matters. In 1995, corporate and unallocated included income of $55,149 as a result of settlements with certain of the Company's insurers, net of related legal and other costs, in addition to a $54,079 gain on disposition of businesses. Foreign currency translation and transaction gains and losses included in net income are not significant. OrganoSilicones purchases, in the aggregate, approximately 40% of its raw materials from Dow Corning Corporation and Union Carbide Corporation under various long-term agreements, which expire at various times through 2000. F-21 WITCO CORPORATION AND SUBSIDIARY COMPANIES (in thousands except per share data) - -------------------------------------------------------------------------------- NOTE 19 DISCONTINUED OPERATIONS On September 11, 1995, the Company announced its intention to divest its Lubricants Group. These operations are reflected as discontinued operations for all periods presented in the Company's statements of operations. Net sales for discontinued operations amounted to $53,225 (1997), $332,930 (1996) and $373,363 (1995). During 1997, the Company recorded an adjustment of $9,990, or $.17 per common share, reducing the estimated net loss on disposal of $68,253, or $1.21 per common share, recorded in 1996 associated with the divestiture of the Lubricants Group. The adjustment is primarily the result of revised estimates from the sale of the various Lubricants businesses. On July 18, 1997, the Company completed the Lubricant's Group divestiture with the sale of the Golden Bear Division to Golden Bear Acquisition Corporation for approximately $50,000. On February 28, 1997, the Company sold its refinery in Bradford, Pennsylvania to American Refining Group, Inc. for approximately $17,000. On November 1, 1996, the Company sold certain assets of its Kendall/Amalie business and certain assets of its grease and grease gun manufacturing businesses for approximately $120,689. The components of net assets of discontinued operations included in the Company's Consolidated Balance Sheets at December 31, 1996, are as follows: - --------------------------------------------------------------------------------
================================================================== 1996 - ------------------------------------------------------------------ Accounts and notes receivable -- net $19,331 Inventories 10,781 Property, plant and equipment -- net 30,756 Accounts payable and other current liabilities (2,000) Other assets and liabilities -- net 872 - ------------------------------------------------------------------ $59,740 ==================================================================
Additional liabilities of the Lubricants Group which were retained by the Company as of December 31, 1997, amounted to $17,792 and are included in the Accounts Payable and Other Current Liabilities caption of the Company's Balance Sheet including $4,300 related to the reserve for disposition of the business and $13,492 for environmental remediation and compliance costs. Additionally, $41,817 is included in the Deferred Credits and Other Liabilities caption for environmental remediation and compliance costs. F-22 WITCO CORPORATION AND SUBSIDIARY COMPANIES QUARTERLY FINANCIAL DATA (UNAUDITED) (in thousands except per share data)
========================================================================================================================= First Quarter Second Quarter Third Quarter Fourth Quarter ------------------- -------------------- ------------------ -------------------- 1997(A) 1996(E) 1997(B) 1996 1997(C) 1996(F) 1997(D) 1996(G) - ------------------------------------------------------------------------------------------------------------------------- Net sales $568,490 $589,425 $571,437 $571,458 $528,105 $562,049 $519,370 $ 540,395 Gross profit $136,325 $141,080 $147,735 $136,778 $134,946 $124,097 $138,991 $ 101,052 Income (loss) from continuing operations before cumulative effect of accounting change $ 19,939 $ 25,581 $ 23,571 $ 18,519 $ 25,742 $ 11,928 $ 20,826 $(303,202) Income (loss) from continuing operations before cumulative effect of accounting change per share(H)* $ 0.35 $ 0.45 $ 0.41 $ 0.33 $ 0.44 $ 0.21 $ 0.36 $ (5.35) Net income (loss) $ 19,939 $ 25,921 $ 33,561 $(49,734) $ 25,742 $ 11,928 $ 15,635 $(303,202) ==========================================================================================================================
- ------------------------------------------------------------ Full Year -------------------- 1997 1996 - ------------------------------------------------------------ Net sales $2,187,402 $2,263,327 Gross profit $ 557,997 $ 503,007 Income (loss) from continuing operations before cumulative effect of accounting change $ 90,078 $ (247,174) Income (loss) from continuing operations before cumulative effect of accounting change per share(H)* $ 1.55 $ (4.37) Net income (loss) $ 94,877 $ (315,087) - ------------------------------------------------------------
* Diluted basis (A) Includes restructuring charges of $2,158, or $.04 per common share, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $580, or $.01 per common share, as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (B) Includes restructuring charges of $1,964, or $.03 per common share, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. (C) Includes restructuring charges of $1,254, or $.02 per common share, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a gain of $2,334 or $.04 per common share related to the disposition of businesses. (D) Includes restructuring charges of $2,581, or $.04 per common share, primarily related to expenditures for equipment at sites previously identified for closure, which otherwise would have been capitalized. Also includes a loss of $1,110 or $.02 per common share related to the disposition of businesses. (E) Includes a gain of $1,791, or $.03 per common share, as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (F) Includes a gain of $842, or $.02 per common share, as a result of settlements with certain of the Company's insurers, net of related legal and other costs. (G) Includes a restructuring charge of $239,270, or $4.23 per common share, which includes severance and related costs, a write-down of property, plant and equipment, environmental closure costs, a write-down of goodwill and intangibles, demolition costs and other costs. Also includes other non-recurring charges of $71,336, or $1.26 per common share, which include provisions for litigation, environmental remediation costs and other matters. (H) Per share amounts for the quarter are computed independently; and, due to the computation formula, the sum of the quarters may not equal the year-to-date period. F-23 WITCO CORPORATION AND SUBSIDIARY COMPANIES RESPONSIBILITY FOR FINANCIAL STATEMENTS Witco is responsible for the integrity of the financial data reported by it and its subsidiary companies. This requires preparing financial statements and other financial data which fairly reflect Witco's consolidated financial position and results of operations in accordance with generally accepted accounting principles, including certain data that is based on management's best estimates and judgment. In the preparation of its financial data and to safeguard its assets against unauthorized acquisition, use, or disposition, Witco establishes and maintains accounting and reporting systems supported by internal accounting controls. Witco believes that a high level of internal accounting control is maintained by the selection and training of qualified personnel, by appropriate delegation of authority and division of responsibilities, by the establishment and communication of accounting and business policies, and by conducting internal audits including follow-up procedures that require responsive action by management. In establishing systems of internal accounting control, Witco weighs the cost of such systems against the benefits that it believes can be derived. Ernst & Young LLP, independent auditors, are engaged to audit and render an opinion as to whether Witco's financial statements present fairly Witco's consolidated financial position and operating results. Their audits are conducted in accordance with generally accepted auditing standards, and their report is included herein. The Audit Committee of the Board of Directors, consisting of four non-employee directors, reviews Witco's accounting and auditing policies, practices and the services to be performed by the independent auditors. The Audit Committee meets with management, with the internal auditors and with the independent auditors in the exercise of its responsibilities. F-24 SCHEDULE II WITCO CORPORATION AND SUBSIDIARY COMPANIES VALUATION AND QUALIFYING ACCOUNTS (THOUSANDS OF DOLLARS)
COLUMN C COLUMN D COLUMN E ------------------------ ---------- -------- COLUMN A COLUMN B ADDITIONS - ------------------------------------------------- ---------- ------------------------ BALANCE AT CHARGED TO CHARGED TO COLUMN D BALANCE BEGINNING COSTS AND OTHER ---------- AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS DEDUCTIONS OF PERIOD - -------------------------------------------------- ---------- ---------- ---------- ---------- -------- Year ended December 31, 1997: Valuation and qualifying accounts deducted from assets to which they apply: Allowances for doubtful receivables-trade..................... $ 14,201 $4,518 $ -- $6,070(b) $12,649 ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- -------- Year ended December 31, 1996: Valuation and qualifying accounts deducted from assets to which they apply: Allowances for doubtful receivables-trade..................... $ 7,104 $8,235 $ 3,036(a) $4,174(b) $14,201 ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- -------- Year ended December 31, 1995: Valuation and qualifying accounts deducted from assets to which they apply: Allowances for doubtful receivables-trade..................... $ 8,863 $2,615 $ (3,197)(c) $1,177(b) $ 7,104 ---------- ---------- ---------- ---------- -------- ---------- ---------- ---------- ---------- --------
- ------------ Notes: (a) Amount principally consists of a purchase accounting adjustment of $3.0 million associated with the acquisition of OSi Specialties, Inc. (b) Uncollectible receivables charged against the allowance provided. (c) Amount principally consists of the allowance for doubtful accounts of $2.2 million from the Lubricants Group, which is reflected on the Balance Sheet as net assets of discontinued operations. S-1 EX-10 2 EXHIBIT 10(III)(A)(9) EXHIBIT 10(iii)(A)(9) WITCO CORPORATION DEFERRED COMPENSATION PLAN I. Name and Purpose The Witco Corporation 1994 Deferred Compensation Plan, as amended and restated herein, and renamed the Witco Corporation Deferred Compensation Plan (the "Plan") is intended to provide certain employees of Witco Corporation and its subsidiary companies (Witco Corporation and such subsidiaries being hereinafter collectively called the "Company") with the opportunity to defer some or all of the cash bonus payments otherwise payable to them by the Company. II. Effective Date The Plan shall be effective as of January 1, 1998. III. Participants Each employee of the Company who is a participant in either the Officers Annual Incentive Plan or the Management Incentive Plan (an "Employee") shall be eligible to participate in the Plan. (Any Employee who elects to participate in the Plan is hereinafter called a "Participant".) The Company will establish for each Participant an unfunded deferred compensation account to be maintained in the manner specified in Section V. IV. Election of Deferral A. A participant shall be entitled to defer his or her cash bonus payments otherwise payable to him or her during the period beginning January 1 of each year and ending December 31 of each year by giving irrevocable written notice to the Company which notice must be received by the Company prior to January 1 of the deferral year and be in the form of Exhibit A hereto (and otherwise in accordance with the Plan) setting forth (i) the amount to be deferred, (ii) the period of deferral, (iii) the method of distribution and (iv) the Participant's election as to the amount to be credited with interest and the amount to be converted to phantom shares in the manner described in Section V(C). The amount to be deferred may be expressed as (1) a percentage of the total cash bonus amount, (2) a specified dollar amount or (3) any amount in excess of a specified dollar amount. 2 Participants in this plan who are also participants in the OSi Specialties, Inc. 401(k) Savings and Investment Plan (the "OSi 401(k) Plan") are entitled to defer all or a portion of their cash bonus payments not otherwise included in contributions toward the OSi 401(k) Plan. B. Each such election shall be irrevocable as to the amount, method of distribution and period of deferral, which deferral period may not end earlier than two years after December 31 of the deferral year or later than the later of (i) 15 years after December 31 of the deferral year or (ii) the Employee's Retirement (as determined pursuant to the Witco Corporation Retirement Plan) and which deferral period shall end on December 31 except in the case of Retirement. C. Each such election shall include an election as to the percentage of the amount deferred to be credited with interest at the rate specified in Section V(B) and the amount deferred to be converted to phantom shares of the Company Common Stock as described in Section V(C). V. Deferred Compensation Accounts A. A separate unfunded account shall be established and maintained for each Participant, which account shall reflect amounts deferred pursuant to this Plan and interest credited pursuant to Section (B) below and dividends credited pursuant to Section (C) below. B. The portion of each Participant's account balance to be credited with interest shall be credited monthly with interest as of the end of each calendar month. In the event a Participant's account balance is distributed other than at the end of any calendar month, the Participant shall be credited with interest thereon from the end of the immediately preceding calendar month to the date of distribution. No interest shall be credited to a Participant's account after the distribution in full of such Participant's account balance. Interest to be credited for any period shall be at an annual rate equal to the yield quotation as of the end of the calendar month for the U.S. Treasury 5-year note or an annual rate selected by the Administrator (as defined in Section XIII) in good faith prior to the beginning of any calendar year (the "Interest Rate"). Interest will be computed on the basis of a 360-day year, 30-day month. C. The portion of bonus payments to be deferred in the form of phantom shares of the Company's stock ("Phantom Shares") shall 3 be converted to such Phantom Shares by dividing the dollar amount of the bonus deferred by the closing price per share of the Company's Common Stock on the New York Stock Exchange (the "Exchange") on the last trading day prior to the day on which the bonus would otherwise be paid and shall be credited to the Participant's account balance. Each Participant's account balance shall be credited with additional Phantom Shares on each day that the Company pays a dividend by multiplying the number of Phantom Shares in the Participant's account balance by (i) in the case of a cash dividend, the dividend paid per share of the Company's Common Stock and dividing such product by the closing price per share of the Company's stock on the Exchange on the last trading day prior to such payment date and (ii) in the case of a stock dividend, the number of shares of the Company's Common Stock distributed per share of the Company's Common Stock. D. A Participant shall be entitled to make an election (in the form of Exhibit A hereto) to change the percentage of his or her account balance to be credited with interest and the percentage of his or her account balance to be credited with Phantom Shares. Such election to change may only be effective as of the January 1 following the year in which such election is delivered to the Vice President of Human Resources of the Company or his or her designee at which time the Participant's account balance shall be adjusted to reflect the percentages specified in such election by (i) reducing the balance to be credited with the Interest Rate and converting the amount of the reduction to Phantom Shares by dividing such amount by the closing price per share of the Company's Common Stock on the Exchange on the last trading day prior to such conversion or (ii) increasing the balance to be credited with the Interest Rate and reducing the Phantom Shares by the number of Phantom Shares that is equal to the amount of such increase divided by the closing price per share of the Company's Common Stock on the Exchange on the last trading day prior to such conversion. E. Amounts credited to a Participant's Account shall remain a part of the general funds of the Company and nothing contained in this Plan shall be deemed to create a trust or fund of any kind or create any fiduciary relationship. Nothing contained herein shall be deemed to give any Participant any ownership or other proprietary, security or other rights in any funds, stock or assets owned or possessed by the Company, whether or not earmarked for the Company's own purposes as a reserve or fund to be utilized by the 4 Company for the discharge of its obligations hereunder. To the extent that any person acquires a right to receive payments or distributions from the Company under this Plan, such right shall be no greater than the right of any unsecured creditor of the Company. VI. Method of Distribution of Deferred Compensation A. No distribution of a Participant's account balance may be made except as provided in this Section VI or in Sections VII or VIII. B. Subject to the provisions of Sections VII and VIII, the value of a Participant's account balance shall be payable in cash, at the time selected by the Participant in a lump sum or in installment payments on January 1, or as soon as practicable thereafter, of each year during a period of years (not to exceed fifteen (15) years) specified by the Participant in accordance with the election made pursuant to Section IV(B). Subject to the provisions of Section IV(B), in the event that no election is made with respect to distribution of the Participant's account balance, in the event of termination by Retirement, death, or Disability (as determined pursuant to the Witco Corporation Long Term Disability Plan) such balance shall be payable in a lump sum as soon as reasonably practicable following the date of termination. C. Subject to the provisions of Section IV(B), in the event of termination other than by reason of Retirement, death, or Disability, the value of a Participant's account balance shall be paid in a lump sum as soon as reasonably practicable following the date of termination. D. A Participant may petition the Administrator of this Plan to permit distribution of some or all of the Participant's account balance prior to the time selected by the Participant in accordance with Section IV(B) above in the event of extraordinary personal financial hardship, including but not limited to hardship due to medical emergencies. The determination as to whether the distribution shall be granted will be made upon the review and at the sole discretion of the Administrator. In no case may such distribution occur earlier than the earliest date specified in Section IV(B). The Company shall have no liability for any penalties including but not limited to any tax penalties resulting from such distribution. E. Notwithstanding any other provision contained herein, to the extent that a distribution, as provided herein, would result in liability by 5 the Participant under Section 16(b) of the Securities Exchange Act (the "Exchange Act"), the Committee shall defer such distribution until such time that the distribution would not result in such liability. VII. Distribution Upon Death A Participant may designate one or more persons to whom payments are to be made if the Participant dies before receiving payment of all amounts due hereunder. A designation of beneficiary will be effective only after a signed designation is filed with the Vice President of Human Resources of the Company or his or her designee while the Participant is alive and will cancel all designations of beneficiary signed and filed earlier. If a Participant dies before receiving all amounts credited to his or her account, the unpaid amounts in the Participant's account shall be paid to the Participant's designated beneficiary in a single lump sum or, in the absence of any designation, to the Participant's estate in a single lump sum. VIII. Change in Control A. A change in control ("Change in Control") of Witco Corporation ("Witco") shall be deemed to have occurred if (i) any "person", as such term is defined in Sections 3(a)(9) and 13(d)(3) of the Securities Exchange Act of 1934 (the "Exchange Act"), other than an affiliate or any employee benefit plan sponsored by Witco or an affiliate becomes a "beneficial owner", as such term is used in Rule 13d-3 promulgated under the Exchange Act, of 20% or more of the "Voting Stock" (which means the capital stock of any class or classes of Witco having general voting power under ordinary circumstances, in the absence of contingencies, to elect the directors of such corporation) of Witco; (ii) 33-1/3% of the Board of Directors of Witco consists of individuals other than the members of the Board of Directors on January 1, 1997 (the "Incumbent Directors"); provided, however, that any person becoming a director subsequent to such date whose election or nomination for election was approved by two-thirds (but in no event less than two) of the directors who at the time of such election or nomination comprise the Incumbent Directors (other than an election or nomination of an individual whose initial assumption of office is in connection with an actual or threatened election contest relating to the election of the Incumbent Directors of Witco, which is or would be subject to Rule 14a-11 of Regulation 14A promulgated under the Exchange Act) shall, for purposes of this Plan, be considered an Incumbent Director; (iii) 6 Witco adopts any plan of liquidation providing for the distribution of all or substantially all of its assets; (iv) Witco combines with another company (whether or not Witco is the surviving corporation) and immediately after the combination, the shareholders of Witco immediately prior to the combination (other than shareholders who, immediately prior to the combination, were "affiliates" of such other company (as such term is defined in Rule 12b-2 of the Exchange Act)) do not beneficially own, directly or indirectly, more that 20% of the Voting Stock of the combined company (or any company owning 100% of the stock of the combined company); or (v) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of Witco. B. Notwithstanding any provision of this Plan to the contrary, in the event of a Change in Control, each Participant in the Plan shall receive an automatic lump-sum cash distribution of all amounts accrued in the Participant's account not later than 30 days after the date of the Change in Control. For this purpose, the balance in the portion of a Participant's account invested in Phantom Shares shall be determined by multiplying the number of Phantom Shares by the higher of (i) the highest closing price per share of the Company's Common Stock on the Exchange during the 30 days prior to such Change is Control, or (ii) if the Change in Control of the Company occurs as a result of a tender or exchange offer or consummation of a corporate transaction, then the highest price paid per share of Common Stock pursuant thereto. Any consideration other than cash forming a part of all of the consideration for Common Stock to be paid pursuant to the applicable transaction shall be valued at the valuation price thereon determined by the Administrator. In addition, the Company shall reimburse a Participant for the legal fees and expenses incurred if the Participant is required to seek to obtain or enforce any right to distribution. In the event that it is determined that such Participant is properly entitled to a cash distribution hereunder, such Participant shall also be entitled to interest thereon payable in an amount equivalent to the Interest Rate from the date such distribution should have been made to and including the date it is made. Notwithstanding any provision of this Plan to the contrary, this Section VIII may not be amended after Change in Control occurs without the written consent of a majority in number of Participants. 7 IX. Benefit Plans The bonus amount which a Participant elects to defer under the Plan shall be included as compensation for the purpose of calculating the amount of a Participant's benefits or contributions under a pension plan or retirement plan (qualified under Section 401(a) of the Internal Revenue Code), the amount of life insurance payable under any life insurance plan established or maintained by the Company, or the amount of any disability benefit payments payable under any disability plan established or maintained by the Company, except to the extent specifically limited in any such plan. X. Adjustments in Certain Events In the event of any change in the outstanding common stock of the Company by reason of any stock split, share dividend, recapitalization, merger, consolidation, reorganization, combination, or exchange or reclassification of shares, split-up, split-off, spin-off, liquidation or other similar change in capitalization, or any distribution to common shareholders other than cash dividends, the number of Phantom Shares credited under the Plan shall be automatically adjusted so that the proportionate interest of the Participants shall be maintained as before the occurrence of such event. Such adjustment shall be conclusive and binding for all purposes of the Plan. XI. Participant's Rights Establishment of the Plan shall not be construed as giving any Participant the right to be retained in the Company's service or employ or the right to receive any benefits not specifically provided by this Plan. A Participant shall not have any interest in the bonus deferred or interest or appreciation in Phantom Shares credited to his or her account until such account is distributed in accordance with the Plan. XII. Non-alienability and Non-transferability The rights of a Participant to the payment of deferred compensation as provided in the Plan shall not be assigned, transferred, pledged or encumbered or be subject in any manner to alienation or anticipation. No Participant may borrow against his or her account. No account shall be subject in any manner to anticipation, alienation, sale, transfer, assignment, pledge, encumbrance, charge, garnishment, execution or levy of any kind, whether voluntary or involuntary, including but not limited to any liability for alimony or other payments for the support of a spouse or former spouse, or for any other relative of any Participant. 8 XIII. Administration The Administrator of this Plan shall be the Organization and Compensation Committee of the Board of Directors of Witco except as otherwise determined by such Board of Directors. Such Committee shall consist of Non-Employee Directors as such term is defined in Rule 16(b)-3 and shall have authority to adopt rules and regulations for carrying out the Plan and to interpret, construe and implement the provisions hereof. Any decision or interpretation of any provision of the Plan adopted by such Committee shall be final and conclusive. A Participant who is also a member of the Board of Directors shall not participate in any decision involving any request made by him or relating in any way solely to his right, duties and obligation as a Participant under the Plan. XIV. Amendment and Termination The Plan may, at any time or from time to time, be amended, modified or terminated by the Board of Directors of Witco or the Committee. However, no amendment, modification or termination of the Plan shall, without the consent of a Participant, adversely affect such Participant's rights with respect to amounts then accrued in his or her account. XV. General Provisions A. Controlling Law. The laws of the State of Connecticut shall be controlling in all matters relating to the Plan, including the construction and performance hereof. B. Captions. The captions of Sections and paragraphs of this Plan are for convenience of reference only and shall not control or affect the meaning or construction of any of its provisions. C. Facility of Payment. Any amounts payable hereunder to any person who is under legal disability or who, in the judgment of the Organization and Compensation Committee of the Board of Directors, is unable to properly manage his financial affairs may be paid to the legal representative of such person or may be applied for the benefit of such person in any manner which such Committee may select, and any such payment shall be deemed to be payment for such person's account and shall be a complete discharge of all liability of the Company with respect to the amount so paid. D. Withholding Payroll Taxes. To the extent required by law, the Company shall withhold from any payments made hereunder any 9 taxes required to be withheld for federal, state or local government purposes. E. Administrative Expenses. All expense of administering the Plan shall be borne by the Company and no part thereof shall be charged against any Participant's account or any amounts distributed hereunder. F. Severance Clause. Any provision of this Plan prohibited by the law of any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such prohibition without invalidating the remaining provisions hereof. G. Disclaimer of Liability. Except as otherwise expressly provided herein, no member of the Board of Directors of Witco or the Organization and Compensation Committee and no officer, employee, or agent of the Company, shall have any liability to any person based on or arising out of the Plan. XVI. Unfunded Status of the Plan Any and all payments made to the Participant pursuant to the Plan shall be made only from the general assets of the Company. All accounts under the Plan shall be for bookkeeping purposes only and shall not represent a claim against specific assets of the Company. Nothing contained in this Plan shall be deemed to create a trust of any kind or create any fiduciary relationship. 10 WITCO CORPORATION DEFERRED COMPENSATION PLAN NOTICE OF ELECTION TO: VICE PRESIDENT, HUMAN RESOURCES OF WITCO CORPORATION In accordance with the provisions of the Amended and Restated Witco Corporation Deferred Compensation Plan, I hereby elect to defer the portion of my bonus specified below that may otherwise be payable to me during the period beginning January 1, 1998, and ending December 31, 1998, with such deferral to be for the period specified below. Name of Employee:______________________________________________________________ Social Security Number or Employee Number: ____________________________________ Location: _____________________________________________________________________ THESE ELECTIONS ARE IRREVOCABLE (EXCEPT AS TO B BELOW) AND ARE SUBJECT TO THE TERMS OF THE PLAN. A. Bonus: 1. __________% of Bonus Paid, if any; or 2. $_____________ of Bonus Paid, if any; or 3. Total amount of Bonus Paid, if any, in excess of $_______. B. Account Balance Allocation: 1. Percentage of Account Balance to be credited with Interest ____% 2. Percentage of Account Balance to be held as Phantom Shares of Witco Common Stock ____% C. Deferral Date: 1. _________Until after retirement (or other termination of employment), or 2. __________December 31, ___ (Insert year. May be no earlier than 2000 and no later that 2013). D. Method of Distribution: 1. _________In a lump sum payable as soon as practicable following the Deferral Date as set forth in Section C. 2. __________% payable (enter percentage) in substantially equal annual installments (not to exceed fifteen (15) installments) commencing on the January 1 immediately following the Deferral Date, or as soon as practicable thereafter. 11 WITCO CORPORATION DEFERRED COMPENSATION PLAN BENEFICIARY DESIGNATION FORM I hereby designate the following person as my designated beneficiary under the Plan: Name_________________________________________________ Address______________________________________________ Social Security Number_______________________________ A designation of beneficiary on this form will be deemed a revocation of any prior designation of beneficiary. I hereby specifically reserve the right to change my Designation of Beneficiary at any time by written notice to the Vice President of Human Resources, without notice to or the consent of any beneficiary. Date: ______________________, 1997 ___________________________ Participant Print Name of Employee:_______________________________________ Received on the ____ day of _________________ 1997, on behalf of Witco Corporation By:_______________________________________________________ EX-21 3 EXHIBIT 21 EXHIBIT 21 SUBSIDIARIES OF WITCO CORPORATION(1)(2)(3) AS OF DECEMBER 31, 1997
PERCENTAGE OF VOTING SECURITIES OWNED DIRECTLY OR STATE OR INDIRECTLY BY COUNTY OF WITCO CORPORATION ORGANIZATION ------------------ ---------------- Assured Insurance Company............................................. 100.0% Vermont Baxenden Chemicals Limited............................................ 53.5 United Kingdom Baxenden Scandinavia AS............................................... 53.5 Denmark Enenco, Incorporated(4)............................................... 50.0 New York Firma W/K Witco EPA(4)................................................ 50.0 The Netherlands Jonk BV............................................................... 100.0 The Netherlands Nerap Expeditie BV.................................................... 100.0 The Netherlands OSi Specialties (Australia) Pty Ltd. ................................. 100.0 Australia OSi Specialties (U.K.) Ltd. .......................................... 100.0 United Kingdom OSi Specialties Asia Pacific Inc. .................................... 100.0 Delaware OSi Specialties de Colombia Limitada.................................. 100.0 Colombia OSi Specialties de Mexico S.A. de C.V. ............................... 100.0 Mexico OSi Specialties Holding Company....................................... 100.0 Delaware OSi Specialties Inc. (Chile) Limitada................................. 100.0 Chile OSi Specialties Inc. ................................................. 100.0 Delaware OSi Specialties New Zealand, Inc. .................................... 100.0 Delaware OSi Specialties USA, Inc. ............................................ 100.0 Delaware PT Witco Indonesia.................................................... 100.0 Indonesia Rinol AG(4)........................................................... 4.0 Germany Witco (Europe) S.A. .................................................. 100.0 Switzerland Witco Asia Pacific PTE Ltd. .......................................... 100.0 Singapore Witco Australia Pty Limited........................................... 100.0 Australia Witco Benelux N.V. ................................................... 100.0 Belgium Witco BV.............................................................. 100.0 The Netherlands Witco Canada Inc. .................................................... 100.0 Canada Witco China Limited................................................... 100.0 China Witco Corporation (Malaysia) Sdn Bhd. ................................ 100.0 Malaysia Witco Corporation UK Limited.......................................... 100.0 United Kingdom Witco Deutschland GmbH................................................ 100.0 Germany Witco do Brasil Ltda. ................................................ 100.0 Brazil Witco Dominion Financial Services Company, Ltd. ...................... 100.0 Canada Witco Ecuador S.A. ................................................... 100.0 Ecuador Witco Espana, S.L. ................................................... 100.0 Spain Witco Europe Financial Services Co. .................................. 100.0 Delaware Witco Europe Investment Partners...................................... 100.0 Delaware Witco Financial Services Co. ......................................... 100.0 Ireland Witco Foreign Sales Corporation....................................... 100.0 Barbados Witco GmbH............................................................ 100.0 Germany Witco Grand Banks, Inc. .............................................. 100.0 Canada Witco Handels GmbH.................................................... 100.0 Austria Witco Hong Kong Limited............................................... 100.0 Hong Kong Witco International Corporation....................................... 100.0 New Jersey Witco Investment Holdings BV.......................................... 100.0 The Netherlands Witco Investments BV.................................................. 100.0 The Netherlands
PERCENTAGE OF VOTING SECURITIES OWNED DIRECTLY OR STATE OR INDIRECTLY BY COUNTY OF WITCO CORPORATION ORGANIZATION ------------------ ---------------- Witco Investments SNC................................................. 100.0% France Witco Ireland Investment Company Limited.............................. 100.0 Ireland Witco Italiana SrL.................................................... 100.0 Italy Witco Korea Ltd. ..................................................... 100.0 Korea Witco Mexico S.A. de C.V. ............................................ 100.0 Mexico Witco Polymers and Resins BV.......................................... 100.0 The Netherlands Witco S.A. ........................................................... 100.0 France Witco Singapore Private Limited....................................... 100.0 Singapore Witco Solvay Duromer GmbH(4).......................................... 50.0 Germany Witco Specialties (Thailand) Ltd. .................................... 100.0 Thailand Witco Specialties Italia S.p.A. ...................................... 100.0 Italy Witco Specialties PTE Ltd. ........................................... 100.0 Singapore Witco Surfactants GmbH................................................ 100.0 Germany Witco Taiwan Ltd. .................................................... 100.0 Taiwan Witco Warmtekracht BV................................................. 100.0 The Netherlands
- ------------ Notes: (1) The Company lists the business entities in which it has investments for information purposes only. Such listing is not to be deemed an admission that these business entities are under the control of the Company within the meaning of the General Rules and Regulations under the Securities Exchange Act of 1934. (2) With respect to certain subsidiaries, shares in names of nominees and qualifying shares in names of directors are included in the above percentages. (3) With the exception of the companies covered by footnote (4), the companies named are included in the consolidated financial statements. (4) The Company records in the consolidated financial statements its equity in undistributed earnings (losses) of these unconsolidated entities. EX-23 4 EXHIBIT 23 EXHIBIT 23 CONSENT OF INDEPENDENT AUDITORS We consent to the incorporation by reference in the Registration Statement (Form S-3, No. 33-45865) and the Post-effective Amendment No. 2 to the Registration Statement (Form S-3, No. 33-58066), each pertaining to the issuance of debentures, the Post-effective Amendment No. 1 to the Registration Statement (Form S-3, No. 33-58120), pertaining to the issuance of common stock, the Registration Statement (Form S-3, No. 33-65203), pertaining to the issuance of notes and debentures, the Post-effective Amendment No. 2 to the Registration Statement (Form S-8, No. 33-10715), Post-effective Amendment No. 1 to the Registration Statements (Form S-8, Nos. 33-30995 and 33-45194), each pertaining to stock option plans of Witco Corporation, the Registration Statement (Form S-8, No. 33-48806), pertaining to an employee benefit plan of Witco Corporation, the Registration Statement (Form S-8, No. 33-60755), pertaining to the 1995 Stock Option Plan for Employees of Witco Corporation and its Subsidiaries, the Post-effective Amendment No. 1 to the Registration Statement (Form S-8, No. 333-05509), pertaining to the 1995 Stock Option Plan for Employees of Witco Corporation and its Subsidiaries and the Registration Statement (Form S-8, No. 333-33221) pertaining to the Witco Corporation 1997 Stock Incentive Plan of our report dated February 2, 1998 with respect to the consolidated financial statements and schedule of Witco Corporation and Subsidiary Companies for the year ended December 31, 1997 included in this Annual Report (Form 10K). /s/ ERNST & YOUNG LLP Stamford, Connecticut March 17, 1998 EX-27 5 EXHIBIT 27
5 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1997 DEC-31-1997 DEC-31-1997 DEC-31-1997 MAR-31-1997 JUN-30-1997 SEP-30-1997 DEC-31-1997 38,367 54,543 80,290 96,383 0 0 0 0 430,962 425,450 400,604 396,407 13,373 18,461 17,180 12,649 274,087 249,166 251,894 235,334 837,281 810,598 823,641 789,639 1,481,305 1,500,511 1,516,890 1,546,631 780,745 796,233 806,033 766,241 2,318,235 2,289,039 2,251,400 2,297,652 554,935 511,930 468,234 568,365 693,742 688,635 687,011 645,101 285,097 285,935 287,070 287,516 0 0 0 0 6 6 6 6 336,485 347,522 358,798 356,758 2,318,235 2,289,039 2,251,400 2,297,652 568,490 1,139,927 1,668,032 2,187,402 568,490 1,139,927 1,668,032 2,187,402 432,165 855,867 1,249,026 1,629,405 432,165 855,867 1,249,026 1,629,405 0 0 0 0 871 1,296 1,827 4,518 13,924 27,380 39,552 53,004 34,377 75,018 119,400 152,699 14,438 31,508 50,148 62,621 19,939 43,510 159,097 90,078 0 9,990 9,990 9,990 0 0 0 0 0 0 0 (5,191) 19,939 53,500 79,242 94,877 .35 .94 1.39 1.66 .35 .93 1.37 1.63 12-MOS IS NOT RESTATED
EX-27 6 EXHIBIT 27
5 1,000 3-MOS 6-MOS 9-MOS 12-MOS DEC-31-1996 DEC-31-1996 DEC-31-1996 DEC-31-1996 MAR-31-1996 JUN-30-1996 SEP-30-1996 DEC-31-1996 120,054 119,652 132,092 59,201 0 0 0 0 453,254 435,269 419,462 404,489 8,486 9,809 10,174 14,201 317,205 324,532 332,246 284,500 949,248 939,651 945,055 853,426 1,417,406 1,432,247 1,468,611 1,497,318 596,946 634,349 652,892 761,926 2,784,422 2,750,014 2,745,505 2,391,705 696,626 748,501 725,843 610,273 681,167 678,907 694,154 700,820 282,772 283,247 283,521 283,818 0 0 0 0 7 7 7 6 736,265 666,118 662,805 344,041 2,784,422 2,750,014 2,745,505 2,391,705 589,425 1,160,883 1,722,932 2,263,327 589,425 1,160,883 1,722,932 2,263,327 448,345 883,025 1,320,977 1,760,320 448,345 883,025 1,320,977 1,760,320 0 0 0 0 710 3,351 2,312 8,235 17,669 35,393 53,247 69,334 43,090 75,034 97,659 (325,809) 17,509 30,934 41,631 (78,635) 25,581 44,100 56,028 (247,174) 340 (67,913) (67,913) (67,913) 0 0 0 0 0 0 0 0 25,921 (23,813) (11,885) (315,087) .46 (.42) (.21) (5.57) .46 (.42) (.21) (5.57)
EX-27 7 EXHIBIT 27
5 1,000 12-MOS DEC-31-1995 DEC-31-1995 143,994 0 413,590 7,104 322,898 944,045 1,398,262 586,595 2,772,444 694,465 683,830 282,173 0 7 721,937 2,772,444 1,985,077 2,000,181 1,651,514 1,651,514 0 2,615 43,689 160,804 60,458 100,346 4,049 0 0 104,445 1.85 1.84
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