-----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, RAlTJXxogpKnRlGi8N3LHaqbYvDz33ezThO0anTXEMpQHOVDTqizHazPFtPA48w3 c2Uen3Tw+C6/qWQQyOkKuA== 0000914039-97-000067.txt : 19970312 0000914039-97-000067.hdr.sgml : 19970312 ACCESSION NUMBER: 0000914039-97-000067 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970311 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: DEXTER CORP CENTRAL INDEX KEY: 0000028582 STANDARD INDUSTRIAL CLASSIFICATION: PAINTS, VARNISHES, LACQUERS, ENAMELS & ALLIED PRODUCTS [2851] IRS NUMBER: 060321410 STATE OF INCORPORATION: CT FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-05542 FILM NUMBER: 97554249 BUSINESS ADDRESS: STREET 1: ONE ELM ST CITY: WINDSOR LOCKS STATE: CT ZIP: 06096 BUSINESS PHONE: 2036279051 MAIL ADDRESS: STREET 1: ONE ELM ST CITY: WINDSOR LOCKS STATE: CT ZIP: 06096 10-K 1 FORM 10-K 1 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K [x] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the fiscal year ended DECEMBER 31, 1996 or [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ----------------------- to ----------------------- Commission file number 1-5542 - -------------------------------------------------------------------------------- THE DEXTER CORPORATION (Exact name of registrant as specified in its charter) CONNECTICUT 06-0321410 -------------------------------- ----------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) ONE ELM STREET WINDSOR LOCKS, CONNECTICUT 06096 ------------------------------------------ ----------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 860-292-7675
Securities registered pursuant to Section 12(b) of the Act: NAME OF EACH EXCHANGE ON TITLE OF EACH CLASS WHICH REGISTERED - --------------------------- ------------------------ COMMON STOCK, PAR VALUE $1 NEW YORK STOCK EXCHANGE
Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X. No __. Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (sec.229.405 of this chapter) 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] Aggregate market value of the registrant's common stock as of February 28, 1997, held by nonaffiliates of the registrant was $690,046,300. The number of shares of the registrant's common stock, $1 par value, outstanding at February 28, 1997 was 23,391,400. PORTIONS OF THE FOLLOWING DOCUMENTS ARE INCORPORATED BY REFERENCE: The Dexter Corporation's 1996 Annual Report to Shareholders (Parts I, II and IV). Proxy Statement accompanying the notice, dated March 11, 1997, of the annual meeting of The Dexter Corporation's shareholders to be held on April 24, 1997 (Parts I and III). ================================================================================ 2 TABLE OF CONTENTS
PAGE ITEM NUMBER ---- ------ PART I 1 . Business..................................................................... 1 2 . Properties................................................................... 3 3 . Legal Proceedings............................................................ 4 4 . Submission of Matters to a Vote of Security Holders.......................... 4 4 a. Executive Officers of the Registrant......................................... 5 PART II 5 . Market for the Registrant's Common Equity and Related Stockholder Matters.... 6 6 . Selected Financial Data...................................................... 6 7 . Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................... 6 8 . Financial Statements and Supplementary Data.................................. 7 9 . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................... 7 PART III 10 . Directors and Executive Officers of the Registrant........................... 8 11 . Executive Compensation....................................................... 8 12 . Security Ownership of Certain Beneficial Owners and Management............... 8 13 . Certain Relationships and Related Transactions............................... 8 PART IV 14 . Exhibits, Financial Statement Schedules, and Reports on Form 8-K............. 9
This Form 10-K is printed on recycled paper. 3 PART I As used herein, the term "Dexter" and the term "Company" shall mean The Dexter Corporation and its consolidated subsidiaries unless the context otherwise indicates, the term "1996 Annual Report" shall mean the Company's 1996 Annual Report to Shareholders, and the term "Proxy Statement" shall mean the Proxy Statement accompanying Dexter's notice, dated March 11, 1997, of the annual meeting of Dexter's shareholders to be held on April 24, 1997. The 1996 Annual Report is filed as an exhibit to this report. Portions of the 1996 Annual Report and Proxy Statement are incorporated herein by reference as hereinafter stated. ITEM 1 BUSINESS GENERAL Founded in 1767 and incorporated in the state of Connecticut in 1914, The Dexter Corporation is a specialty materials company principally serving the worldwide aerospace, electronics, food packaging, and medical markets with products based on proprietary technologies. For a description of the development of the Company's business, reference the section entitled To Our Shareholders, Employees and Customers on pages 5 through 7 of the 1996 Annual Report, which are incorporated herein by reference. For an analysis of operations of the business of Dexter, see pages 25 through 33 of the 1996 Annual Report which are incorporated herein by reference, which include Segment Information on pages 28, 29, 30 and 31, and International Operations information on pages 32 and 33. Also, see Acquisitions and Divestitures information and Events, Trends and Vulnerabilities on pages 34 and 35 of the 1996 Annual Report which are incorporated herein by reference. The financial information in the hereinafter mentioned pages and sections should be read in conjunction with the Financial Statements contained on pages 20 through 24, Quarterly Financial Information on page 24, Analysis of Operations contained on pages 25 through 33, Analysis of Financial Condition and Operations contained on pages 34 and 35, and Analysis of Financial Position contained on pages 35 through 43 of the 1996 Annual Report. SEGMENT INFORMATION AND PRODUCTS For information on the Company's segment information and products, see the sections, excluding picture captions, entitled Polymer Technology on pages 9 and 10, Nonwovens Technology on page 13, and Biotechnology on page 14, and refer to Market Segment Data on pages 28 and 29 of the 1996 Annual Report which are incorporated herein by reference. Information previously classified in the Automotive market has been restated and is now included in the "Other" category. SUPPLIERS Dexter buys materials for its products from many suppliers and is not dependent on any one supplier or group of suppliers for any significant raw materials purchased. The materials bought include natural fibers such as hemp and wood; synthetic fibers such as glass, rayon and polyester; basic chemical materials (many of which are derived from petroleum products) for the manufacture of synthetic resins; resins produced by others, including polypropylene; rubber, solvents, additives and pigments; highly purified chemicals and products collected from natural sources for Life Technologies' products; and magnetic materials. For further discussion of raw materials, see Events, Trends and Vulnerabilities on pages 34 and 35 of the 1996 Annual Report which is incorporated herein. CUSTOMERS In 1996, no single customer accounted for more than 5 percent of consolidated revenues, and the ten largest customers accounted for less than 20 percent. Dexter has no single customer contract for the sale of its products which it deems to be material to its business as a whole. 1 4 SALES AND MARKETING Dexter's customers for most specialty material products are principally industrial manufacturers who convert or incorporate Dexter's products into their own final product. Biotechnology products are marketed directly to research laboratories, pharmaceutical and biotechnology companies, and other customers. Most of the Company's products are sold by its own sales force of which approximately 252 were directly engaged in field sales in 1996, 241 in 1995, and 229 in 1994. The remaining products are sold through agents or distributors. In general, each of the Company's product lines has its own sales force. Management believes that product research and development, close customer relations and strong technical service are important factors in Dexter's growth over the years. BACKLOG Dexter continues to maintain a backlog of orders. Such backlog was approximately $76 million at December 31, 1996 and $73 million at December 31, 1995 and typically represents less than two months sales for businesses where backlog is applicable. The Company expects substantially all of the December 31, 1996 backlog to be shipped in 1997. Backlog was significant in all markets except at Life Technologies, Inc. (LTI), which is part of the medical market, where backlog is not considered to be relevant to the business. Although backlog orders are reasonably firm, they may be subject to cancellation or delay and amounts are not necessarily indicative of future sales volume or profitability. COMPETITION No company is known to compete with Dexter in all of its major businesses, but in each market, competition is offered by a number of companies, including firms substantially larger and with greater financial resources than Dexter. Dexter's management believes that Dexter is an important factor in each of its markets. All market segments are diverse and highly competitive and emphasize the quality of their products. The businesses of the Company are characterized by technological innovation and the continued introduction of new products and services. Dexter continues to experience competition from imports in several of its domestic markets. For further discussion on competition, see Events, Trends and Vulnerabilities on pages 34 and 35 of the 1996 Annual Report, which is incorporated herein by reference. RESEARCH AND DEVELOPMENT Dexter engages in research and development with respect to new product development and product applications primarily for its own use, with only minor contract services provided for others. The total number of employees engaged in research and development and the expenditures related thereto by market segment are set forth on page 29 of the 1996 Annual Report which is incorporated herein by reference. ENVIRONMENTAL REGULATION The Company is subject to federal, state and other legal requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment. The Company does not believe that the continuing cost of complying with such regulations and other costs related to environmental matters will have a material adverse effect on the Company's financial position, results of operations or cash flows. Capital expenditures for environmental control were $1 million for 1996 and are estimated to range from $1 - $2 million for 1997. For further discussion of other current environmental matters, see Events, Trends and Vulnerabilities on pages 34 and 35 and Environmental Liabilities footnote on page 41 of the 1996 Annual Report which are incorporated herein. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K, on page 6, for information on administrative proceedings arising under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. 2 5 EMPLOYEES Approximately 1,700 of the Company's 4,600 employees (see page 18 of the 1996 Annual Report which is incorporated herein by reference) are employed outside the United States. There has not been a significant work stoppage in recent years and management believes employee relations are good. GEOGRAPHIC INFORMATION For information regarding geographic operations, see Geographic Data on pages 32 and 33, Events, Trends and Vulnerabilities on pages 34 and 35, and the Currency Exchanges Effects footnote on page 41 of the 1996 Annual Report which are incorporated herein by reference. ITEM 2 PROPERTIES For certain information on properties, see the sections entitled Property, Plant and Equipment on pages 36 and 37, the Leases footnote on page 37, and Division and Subsidiary Headquarters on the inside back cover of the 1996 Annual Report, all of which are incorporated herein by reference. The executive office of Dexter, located in Windsor Locks, Connecticut, is owned by the Company. In addition, the following general descriptions of Dexter's properties, including the locations of principal facilities, are presented by division. The company considers its facilities to be adequate and suitable for their current use. The capacity utilization percentage for Dexter's production facilities in 1996 was approximately 79%. There were no material leases under which properties described below was held. During 1996, the Aerospace Materials division operated three principal facilities owned by the Company totaling approximately 354,000 square feet. These facilities are located in Pittsburg, California; Waukegan, Illinois; and Bassano, Italy. The Aerospace Materials division capacity utilization percentage was approximately 71%. The Electronic Materials division, in 1996, operated six production facilities and laboratories in the United States, Germany and Japan, of which four are owned (approximately 447,000 square feet) and two are leased (approximately 62,000 square feet). These facilities of the Electronic Materials division, which are in excess of 25,000 square feet, are located in Olean, New York; Industry, California; Londonderry, New Hampshire; Lowell, Massachusetts; Munich, Germany; and Yokohama-Shi, Japan. The Electronic Materials division capacity utilization percentage in 1996 was approximately 70%. During 1996, the Magnetic Materials division operated five principal facilities, of which three are owned (approximately 205,000 square feet) and two are leased (approximately 90,000 square feet). These facilities, which are in excess of 25,000 square feet, are located in Fremont, California; Richardson, Texas; Elk Grove Village, Illinois; Seabrook, New Hampshire; and Hicksville, New York. The Magnetic Materials division capacity utilization percentage in 1996 was approximately 55%. During 1996, the Packaging Products division operated five principal production facilities and laboratories located in Birmingham, Alabama; Hayward, California; Tournus, France; Deeside, Wales; and Gruningen, Switzerland totaling approximately 375,000 square feet. All facilities are owned by the Company except the Birmingham plant, which has been capitalized as a lease-purchase financed by industrial development bonds. The Packaging Products division has offices and a laboratory located in Waukegan, Illinois (approximately 31,000 square feet), which the Company owns. The Packaging Products division also manages the operation of a multi-division production facility located in Singapore of approximately 92,000 square feet. This production facility is owned by the Company. The Packaging Products division had a capacity utilization percentage of approximately 82% in 1996. The Nonwovens division, in 1996, operated production facilities in Windsor Locks, Connecticut (approximately 842,000 square feet); Chirnside, Scotland (approximately 202,000 square feet) and Stalldalen, Sweden (approximately 452,000 square feet), which the Company owns. The Nonwovens division also leases a production facility in Radcliffe, England totaling approximately 175,000 square feet. The Nonwovens division has a distribution facility located in Windsor Locks, Connecticut of approximately 250,000 square feet which is leased. The cogeneration facility located in Windsor Locks, Connecticut 3 6 (approximately 42,000 square feet) is owned by the Company. The capacity utilization percentage for the Nonwovens division production facilities in 1996 was approximately 86%. Dexter S.A., located in Tournus, France operated a production facility of approximately 162,000 square feet with a capacity utilization percentage of approximately 55% in 1996. This facility is owned by the Company. During 1996, Life Technologies, Inc. operated production facilities in ten plants. Four are owned by Life Technologies, Inc. (approximately 281,000 square feet), and six are leased facilities (approximately 140,000 square feet). Life Technologies, Inc. has offices (approximately 45,000 square feet) and research and development facilities (approximately 30,000 square feet) in Gaithersburg, Maryland, which it leases. In addition, Life Technologies, Inc. leases twelve distribution centers and warehouses which total approximately 114,000 square feet and owns two distribution centers and warehouses which total approximately 40,000 square feet. Life Technologies, Inc. facilities in excess of 25,000 square feet are located in Gaithersburg, Maryland; Frederick, Maryland; Grand Island, New York; Auckland, New Zealand; and Paisley, Scotland. At December 31, 1996, Life Technologies, Inc. had a capital lease in the amount of $4.7 million for a parcel of land on which they are constructing a new corporate R&D center and other administrative offices, including their headquarters, located in Rockville, Maryland. The capacity utilization percentage at Life Technologies, Inc. production facilities in 1996 was approximately 85%. Dexter and Solvay S.A., of Belgium, operate an equally owned international joint venture. The joint venture operates an owned production and distribution facility in Grand Prairie, Texas (approximately 90,000 square feet). The joint venture also operates an owned production and laboratory facility in Mansfield, Texas (approximately 140,000 square feet). Additionally, the joint venture operates an owned Automotive Applications Development Center facility in Auburn Hills, Michigan (approximately 47,000 square feet). During the fourth quarter of 1995 the Company announced it intended to sell its 50% interest in D & S Plastics International. In the second quarter 1996, the Company sold its acoustic materials business located in Kansas City, Missouri and its small powder coatings business located in Birmingham, Alabama. ITEM 3 LEGAL PROCEEDINGS The Company is not involved in any pending or threatened legal proceedings other than ordinary routine litigation incidental to its business. The Company believes that none of these legal proceedings will have a material adverse effect on the Company's financial condition, results of operations, or cash flows. See Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, of this Form 10-K, on page 6, for information on administrative proceedings arising under the Comprehensive Environmental Response, Compensation and Liability Act of 1980. ITEM 4 SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the security holders during the fourth quarter of fiscal year 1996. 4 7 ITEM 4A EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers of The Dexter Corporation, together with the offices in The Dexter Corporation presently held by them, their other business experience since January 1, 1992, and their ages, are as follows:
OTHER BUSINESS EXPERIENCE NAME TITLE SINCE 1/1/92 AGE - ------------------------- ------------------------------- ------------------------------- --- K. Grahame Walker Chairman, President and Chief President and Chief Executive 59 Executive Officer (since 1993) Officer Bruce H. Beatt Vice President, General Counsel General Counsel and Secretary 44 and Secretary (since 1992) Ronald C. Benham Vice President; Senior Division Senior Division President, 54 President, Dexter Electronic Dexter Electronic Materials Materials Division (since 1992) Division Kathleen Burdett Vice President and Chief Vice President and Controller 41 Financial Officer (since 1995) T. Daniel Clark Vice President; Senior Division Vice President, Corporate 55 President, Dexter Packaging Development Products Division (since 1994) George Collin Controller (since 1995) Vice President-Administration, 47 Dexter Automotive Materials Division; Vice President- Operations, D & S Plastics International R. Barry Gettins, Ph.D. Senior Vice President, Vice President; Senior Division 55 Operations Development (since President, Dexter Nonwovens 1996) Division David G. Gordon Vice President; Senior Division President, D & S Plastics 45 President, Dexter Nonwovens International Division (since 1996) Lawrence D. McClure Vice President, Human Resources Vice President, Organization 48 (since 1995) Capabilities, Aetna Life & Casualty Company; Vice President, Human Resources, Pratt & Whitney, a division of United Technologies Corporation John D. Thompson Senior Vice President, Vice President, Corporate 47 Strategic and Business Services; Vice President, Development (since 1995) Financial Services; Vice President and Treasurer
The following changes in executive officers occurred during 1996: Effective in April 1996, the following changes in executive officers occurred: R. Barry Gettins, Ph.D., was appointed Senior Vice President, Operations Development and David G. Gordon was appointed a Vice President of the Company and Senior Division President of the Dexter Nonwovens Division. Pursuant to the Bylaws of the Company, each officer holds his/her office until death, resignation, removal from office or the election or appointment of his/her successor. The Bylaws provide that the Board of Directors shall elect a President and a Secretary each year at its first meeting following the annual meeting of shareholders and may at that time elect other officers of the Company, and it is expected that the Board of Directors will so act at its meeting scheduled for April 24, 1997. No family relationships exist between any of the executive officers of Dexter. 5 8 PART II ITEM 5 MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS For information regarding the market for the registrant's common stock and related stockholder matters, see Summary of Financial Data on pages 18 and 19, Statement of Financial Position on pages 22 and 23, Statement of Changes in Shareholders' Equity on page 24, Shareholders' Equity, Preferred Stock and Stock Compensation Plans footnotes on page 42, Stock Plan footnote and discussion of Stock Option Plans on pages 42 and 43, and Shareholder/Investor Information on the inside back cover of the 1996 Annual Report which are incorporated herein by reference. ITEM 6 SELECTED FINANCIAL DATA For information regarding selected financial data, see the Summary of Financial Data on pages 18 and 19 of the 1996 Annual Report which is incorporated herein by reference. For a discussion of this Financial Data, see the Quarterly Financial Information on page 24, Analysis of Operations on pages 25 through 27, Market Segment Data on pages 28 and 29, Life Technologies, Inc. on pages 30 and 31, and Analysis of Financial Condition and Operations on pages 34 and 35 of the 1996 Annual Report which are incorporated herein by reference. ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS For information required by this item, see the Management Statement on page 17 and the Summary of Financial Data on pages 18 and 19 of the 1996 Annual Report which are incorporated herein by reference. For information concerning results of operations, see Analysis of Operations on pages 25 through 27, Market Segment Data on pages 28 and 29, Life Technologies, Inc. and D & S Plastics International on pages 30 and 31, and Geographic Data on pages 32 and 33 of the 1996 Annual Report which are incorporated herein by reference. For information on liquidity, reference the Events, Trends and Vulnerabilities and Liquidity footnotes in Analysis of Financial Condition and Operations on pages 34 and 35, respectively, the Working Capital discussion on page 35, the Short-term Debt, the Property, Plant and Equipment, and the Long-term Debt footnotes on pages 36, 37, and 40, respectively, of the 1996 Annual Report which are incorporated herein by reference. For information on capital resources, reference the Liquidity discussion in Analysis of Financial Condition and Operations on page 35, the Short-term Debt, the Property, Plant and Equipment, the Long-term Debt, and Shareholders' Equity footnotes on pages 36, 37, 40, and 42, respectively, of the 1996 Annual Report which are incorporated herein by reference. For the discussion of legal proceedings pertaining to the Company, see Item 3, Legal Proceedings on page 4 of this Form 10-K, and page 37 of the 1996 Annual Report which is incorporated herein by reference. For information on environmental matters, see the Environmental Liabilities footnote on page 41 of the 1996 Annual Report which is incorporated herein by reference. Pursuant to authority granted under the "Comprehensive Environmental Response, Compensation and Liability Act of 1980" (CERCLA), the U.S. Environmental Protection Agency (USEPA) has issued a National Priority List of sites at which action is to be taken to mitigate the risk of release of hazardous substances into the environment. The Company is engaged in continuing negotiations with the USEPA and state authorities with regard to 19 of the over twelve hundred sites on the National Priority List. Due to the uncertainty of the remedial measures to be adopted at various sites and the fact that imposition of joint and several liability is possible under CERCLA, the liability of the Company with respect to any site at which remedial measures have not been completed cannot be established with certainty. Nevertheless, based upon the information available at this time, the Company believes it has properly provided for its best estimate of the liabilities and that the outcome of these matters will not have a material adverse effect upon its financial condition, results of operations or cash flows in the future. 6 9 ITEM 8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Reference is made to the Summary of Financial Data contained on pages 18 and 19, Financial Statements contained on pages 20 through 24, Quarterly Financial Information on page 24, Analysis of Operations contained on pages 25 through 33, Analysis of Financial Condition and Operations contained on pages 34 and 35, and Analysis of Financial Position contained on pages 35 through 43 of the Company's 1996 Annual Report which are incorporated herein by reference. ITEM 9 CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Within 24 months prior to the date of the most recent financial statements referred to above in Item 8, no Form 8-K under the Securities Exchange Act of 1934, as amended, reporting a change in accountants, has been required to be filed. FORWARD-LOOKING STATEMENTS With the exception of historical information, the matters discussed or incorporated by reference in this Report on Form 10-K and in the Company's 1996 Annual Report are forward-looking statements that involve risks and uncertainties. These forward-looking statements include, but are not limited to, statements about (i) meeting the Company's published financial goals, (ii) future growth in the Company's revenues and earnings and (iii) improvements in the markets served by the Company. Actual results could differ materially from such forward-looking statements because of, among other things, the following factors: unit volume growth below the Company's targeted range, the impact of competitive products and pricing, changes in the prices of raw materials, fluctuations in foreign currency rates, changes in laws and regulations, and other risks identified in the Company's 1996 Annual Report in the section entitled Events, Trends and Vulnerabilities on pages 34 and 35. 7 10 PART III ITEM 10 DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT For information regarding directors of the Company, see the section entitled "Election of Directors" on pages 3 through 6, inclusive, of the Proxy Statement, which is incorporated herein by reference. Information regarding executive officers of the Company is included as Item 4a of Part I as required by Instruction 3 of Item 401(b) of Regulation S-K. For information required by Item 405 of Regulation S-K, see the section entitled "Certain Transactions and Legal Matters" on page 6 of the Proxy Statement, which is incorporated herein by reference. ITEM 11 EXECUTIVE COMPENSATION For information required by this item, see the section entitled "Compensation of Executive Officers" on pages 7 through 14, inclusive, of the Proxy Statement, which is incorporated herein by reference. ITEM 12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT For information regarding the beneficial ownership of shares of Common Stock of the Company by certain persons, see the section entitled "Share Ownership" on pages 1 and 2 of the Proxy Statement, which is incorporated herein by reference. ITEM 13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS For information regarding certain relationships and related transactions of directors, see the section entitled "Election of Directors" on pages 3 through 6, inclusive, of the Proxy Statement, which is incorporated herein by reference. No other member of executive management or other individual as outlined in Item 404 of Regulation S-K was otherwise directly or indirectly involved in relationships or related transactions with the registrant in which the executive officer or other individual had a material interest. D & S Plastics International, a 50 percent owned subsidiary, borrowed up to $4.3 million in 1996 and $4.7 million in 1995 from the Company under a revolving line of credit to finance short-term working capital needs. The line of credit was at current market interest rates and was repaid at December 31, 1996. At December 31, 1995, $4.3 million was outstanding. At December 31, 1996, the Company held $4.7 million in short-term investments at a 5.3% interest rate for D & S Plastics International. The Company has recorded these investments in current assets, and notes payable and interest payable to D & S Plastics International in current liabilities. Life Technologies, Inc., a majority-owned subsidiary, borrowed up to $3.1 million in 1994 from the Company under a revolving line of credit to finance short-term working capital needs. The line of credit was at current market interest rates and was repaid at December 31, 1994. During 1996 and 1995, no borrowings occurred. 8 11 PART IV ITEM 14 EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements: The response to this item is set forth commencing on page F-1 of this report. 2. Financial Statement Schedule: The response to this item is set forth commencing on page F-1 of this report. 3. Exhibits: Exhibit 3A -- Restated Certificate of Incorporation of The Dexter Corporation, filed with the Secretary of the State of Connecticut on June 26, 1990, was filed as Exhibit 3A-2 with the registrant's Quarterly Report on Form 10-Q (File No. 1-5542) for the quarter ended June 30, 1990, and is hereby incorporated herein by reference. Exhibit 3B -- Bylaws of The Dexter Corporation, as amended April 25, 1991, were filed as Exhibit 3B with the registrant's report on Form 10-Q (File No. 1-5542) for the quarter ended March 31, 1991, and is hereby incorporated herein by reference. Exhibit 4A -- The Rights Agreement dated as of August 23, 1996, between the registrant and ChaseMellon Shareholder Services, L.L.C. was filed as Exhibit 4 to Form 8-K (File No. 1-5542), which was filed with the Securities and Exchange Commission on September 9, 1996, and is hereby incorporated herein by reference. Exhibit 4B -- Note Agreement, dated July 24, 1990, between the registrant and The Prudential Insurance Company of America was filed as Exhibit 4C with the registrant's Quarterly Report on Form 10-Q (File No. 1-5542) for the quarter ended June 30, 1990, and is hereby incorporated herein by reference. Exhibit 4B(1) -- Amendment, dated November 14, 1991, to the Note Agreement, dated July 24, 1990, was filed as Exhibit 4C(1) with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1991, and is hereby incorporated herein by reference. Exhibit 4B(2) -- Amendment, dated February 9, 1993, to the Note Agreement, dated July 24, 1990, was filed as Exhibit 4C(2) with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1992, and is hereby incorporated herein by reference. Exhibit 4B(3) -- Amendment, dated September 30, 1993, to the Note Agreement, dated July 24, 1990, was filed as Exhibit 4C(3) with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1993, and is hereby incorporated herein by reference. Exhibit 4C -- Note Agreement, dated November 14, 1991, between the registrant and The Prudential Insurance Company of America, was filed as Exhibit 4D with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1993, and is hereby incorporated herein by reference. Exhibit 4C(1) -- Amendment, dated February 9, 1993, to the Note Agreement, dated November 14, 1991, was filed as Exhibit 4C(2) with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1992, and is hereby incorporated herein by reference.
9 12 Exhibit 4C(2) -- Amendment, dated September 30, 1993, to the Note Agreement, dated November 14, 1991, was filed as Exhibit 4D(2) with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1993, and is hereby incorporated herein by reference. Exhibit 4D -- Master Shelf Agreement, dated September 30, 1993, between the registrant and The Prudential Insurance Company of America, as amended and restated on December 17, 1993, was filed as Exhibit 4E with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1993, and is hereby incorporated herein by reference. Exhibit 10A -- The Dexter Corporation's 1979 Stock Option Plan, as amended, was filed as Exhibit 4.3 to Post-Effective Amendment No. 4 to the registrant's Registration Statement on Form S-8 (File No. 2-63959) dated March 29, 1983, and is hereby incorporated herein by reference. Exhibit 10B -- Agreement, dated December 15, 1989, between the registrant and K. Grahame Walker was filed as Exhibit 10B with the registrant's quarterly report on Form 10-Q (File No. 1-5542) for the quarter ended March 31, 1991, and is hereby incorporated herein by reference. Omitted pursuant to the Instruction to item 601(10)(iii) of Regulation S-K and Rule 12b-31 under the Securities Exchange Act of 1934 are copies of eight other agreements between the registrant and the following named officers, each of which agreements is substantially identical to Exhibit 10B in all material respects except as to the individual party thereto and the identification of his/her position with the registrant: Bruce H. Beatt, Kathleen Burdett, George Collin, Horst Geldmacher, Dr. R. Barry Gettins, Lawrence D. McClure, Dale J. Ribaudo, and John D. Thompson. Exhibit 10C -- Agreement, dated December 20, 1991, between the registrant and Ronald C. Benham was filed as Exhibit 10C with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1992, and is hereby incorporated herein by reference. Omitted pursuant to the Instruction to Item 601(10)(iii) of Regulation S-K and Rule 12b-31 under the Securities Exchange Act of 1934 are copies of nine other agreements between the registrant and the following officers and key employees, each of which agreements is substantially identical to Exhibit 10C in all material respects except as to the individual party thereto and the identification of his position with the registrant: John B. Blatz, T. Daniel Clark, David G. Gordon, Richard B. Hurley, John B. Lockwood, Jeffrey W. McClelland, T. James Rudd, Edward J. Scannell and David Woodhead. Exhibit 10D -- The Dexter Corporation's Executive Supplemental Retirement Plan, as amended and restated and effective January 1, 1989, was filed as Exhibit 10F(1) to the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1991, and is hereby incorporated herein by reference. Exhibit 10D(1) -- Amendment, dated October 22, 1993, to The Dexter Corporation's Executive Supplemental Retirement Plan, was filed as Exhibit 10D(2) with the registrant's quarterly report on Form 10-Q (File No. 1-5542) for the quarter ended September 30, 1993, and is hereby incorporated herein by reference.
10 13 Exhibit 10E -- The Dexter Corporation's 1987 Interim Stock Option Plan, was filed as Exhibit 28(a) to the registrant's Registration Statement on Form S-8 (File No. 33-27597) dated March 17, 1989, and is hereby incorporated herein by reference. Exhibit 10F -- The Dexter Corporation's 1988 Stock Option Plan, was filed as Exhibit 28(d) to the registrant's Registration Statement on Form S-8 (File No. 33-27597) dated March 17, 1989, and is hereby incorporated herein by reference. Exhibit 10G -- The Dexter Corporation's Executive Deferred Compensation Benefit Plan, as amended. Exhibit 10H -- The Dexter Corporation's Amended and Restated Retirement Equalization Plan was filed as Exhibit 10H with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1993, and is hereby incorporated herein by reference. Exhibit 10I -- The Dexter Corporation's Transferred Executives' Supplemental Retirement Program, as amended and restated, was filed as Exhibit 10J with the registrant's report on Form 10-K (File No. 1-5542) for the fiscal year ended December 31, 1993, and is hereby incorporated herein by reference. Exhibit 10J -- The Dexter Corporation's 1994 Long-Term Incentive Plan was filed as Exhibit 10K with the registrant's quarterly report on Form 10-Q (File No. 1-5542) for the quarter ended March 31, 1994, and is hereby incorporated herein by reference. Exhibit 10K -- The Dexter Corporation's 1994 Stock Plan for Outside Directors was filed as Exhibit 10L with the registrant's quarterly report on Form 10-Q (File No. 1-5542) for the quarter ended March 31, 1994, and is hereby incorporated herein by reference. Exhibit 10L -- The Dexter Corporation's 1996 Non-Employee Director's Stock Plan was filed as Exhibit 10L with the registrant's quarterly report on Form 10-Q (File No. 1-5542) for the quarter ended March 31, 1996, and is hereby incorporated herein by reference. Exhibit 10M -- The Dexter Corporation's Senior Management Executive Incentive Plan was filed as Exhibit 10M with the registrant's quarterly report on Form 10-Q (File No. 1-5542) for the quarter ended March 31, 1996, and is hereby incorporated herein by reference. Exhibit 13 -- The Dexter Corporation's 1996 Annual Report to Shareholders. Exhibit 21 -- Subsidiaries of the Registrant. Exhibit 23 -- Consent of Certified Public Accountants. Exhibit 27 -- Financial Data Schedule Long-term debt of the registrant or various of its subsidiaries is outstanding under numerous instruments. No such instrument authorizes an amount of securities thereunder in excess of 10% of the total assets of the registrant and its subsidiaries on a consolidated basis. The registrant agrees that it will furnish a copy of any such instrument to the Securities and Exchange Commission upon its request.
(b) Reports on Form 8-K No reports on Form 8-K were filed during the last quarter of the period covered by this report. 11 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. Dated March 11, 1997 THE DEXTER CORPORATION (Registrant) By: /s/ Kathleen Burdett ------------------------------------ Kathleen Burdett Vice President and Chief Financial Officer 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 indicated on March 11, 1997:
NAME CAPACITY DATE - ----------------------------------- ------------------------------------- --------------- /s/ K. Grahame Walker Chairman; Director March 11, 1997 - ----------------------------------- (principal executive officer) K. Grahame Walker /s/ Kathleen Burdett Vice President and March 11, 1997 - ----------------------------------- Chief Financial Officer Kathleen Burdett (principal financial officer) /s/ George Collin Controller March 11, 1997 - ----------------------------------- (principal accounting officer) George Collin /s/ Charles H. Curl Director March 11, 1997 - ----------------------------------- Charles H. Curl /s/ Henrietta Holsman Fore Director March 11, 1997 - ----------------------------------- Henrietta Holsman Fore /s/ Bernard M. Fox Director March 11, 1997 - ----------------------------------- Bernard M. Fox /s/ Robert M. Furek Director March 11, 1997 - ----------------------------------- Robert M. Furek /s/ Martha Clark Goss Director March 11, 1997 - ----------------------------------- Martha Clark Goss /s/ Edgar G. Hotard Director March 11, 1997 - ----------------------------------- Edgar G. Hotard /s/ Peter G. Kelly Director March 11, 1997 - ----------------------------------- Peter G. Kelly /s/ Jean-Francois Saglio Director March 11, 1997 - ----------------------------------- Jean-Francois Saglio /s/ Glen L. Urban Director March 11, 1997 - ----------------------------------- Glen L. Urban /s/ George M. Whitesides Director March 11, 1997 - ----------------------------------- George M. Whitesides
12 15 INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
PAGE ----------- Report of Independent Accountants.............................................. F-2 1996 ANNUAL FINANCIAL STATEMENTS REPORT PAGE - ------------------------------------------------------------------------------- ----------- Summary of Financial Data.................................................... 18-19 Statement of Income.......................................................... 20 Statement of Cash Flows...................................................... 21 Statement of Financial Position.............................................. 22-23 Statement of Changes in Shareholders' Equity................................. 24 Analysis of Operations....................................................... 25-33 Analysis of Financial Condition and Operations............................... 34-35 Analysis of Financial Position............................................... 35-43 FINANCIAL STATEMENT SCHEDULE - ------------------------- Schedule II Valuation and Qualifying Accounts............................... F-3
------------------------------------------ Schedules other than those listed above are omitted for the reason that the information required on such schedules is contained in the Company's 1996 Annual Report to Shareholders, elsewhere in Form 10-K or they are not required or are not applicable. F-1 16 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Dexter Corporation We have audited the consolidated financial statements and the financial statement schedule of The Dexter Corporation listed in the index on page F-1 of this Form 10-K. These financial statements and financial statement schedule are the responsibility of The Dexter Corporation's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Dexter Corporation as of December 31, 1996, 1995 and 1994, and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. In 1996, the Corporation, as more fully described in the accompanying financial review, adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, and SFAS No. 123, Accounting for Stock-Based Compensation. In 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Springfield, Massachusetts February 4, 1997 F-2 17 SCHEDULE II THE DEXTER CORPORATION VALUATION AND QUALIFYING ACCOUNTS FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994 (IN THOUSANDS)
COLUMN C COLUMN B ADDITIONS COLUMN E ---------- ---------- ---------- COLUMN A BALANCE AT CHARGED TO COLUMN D BALANCE AT - ------------------------------------------------------- BEGINNING COSTS AND ---------- END OF DESCRIPTION OF PERIOD EXPENSES DEDUCTIONS PERIOD - ------------------------------------------------------- ---------- ---------- ---------- ---------- 1996 Environmental Reserve.................................. $ 17,140 $ 804 $ 16,336 Restructuring Reserve.................................. 1,791 106 1,685 Allowance for Doubtful Accounts........................ 5,851 $2,360 1,591 6,620 ------- ------ ------ ------- $ 24,782 $2,360 $2,501 $ 24,641 ======= ====== ====== ======= 1995 Environmental Reserve.................................. $ 20,292 $3,152 $ 17,140 Restructuring Reserve.................................. 6,294 4,503 1,791 Allowance for Doubtful Accounts........................ 4,994 $1,819 962 5,851 ------- ------ ------ ------- $ 31,580 $1,819 $8,617 $ 24,782 ======= ====== ====== ======= 1994 Environmental Reserve.................................. $ 22,766 $2,474 $ 20,292 Restructuring Reserve.................................. 10,735 4,441 6,294 Allowance for Doubtful Accounts........................ 4,428 $1,482 916 4,994 ------- ------ ------ ------- $ 37,929 $1,482 $7,831 $ 31,580 ======= ====== ====== =======
F-3 EX-10.G 2 EXECUTIVE DEFERRED COMPENSATION BENEFIT PLAN 1 EXHIBIT 10G THE DEXTER CORPORATION EXECUTIVE DEFERRED COMPENSATION BENEFIT PLAN ARTICLE 1 INTRODUCTION 1.1 Effective Dates. This Executive Deferred Compensation Benefit Plan (the "Plan") was originally effective as of December 27, 1985, was subsequently amended as of December 27, 1985 and February 26, 1988, and is hereby amended and restated as of January 1, 1996. 1.2 Purpose. The purpose of this Plan is to provide a means whereby The Dexter Corporation may improve the financial security of a select group of management employees of the Company who render valuable services to the Company that constitute an important contribution towards the Company's continued growth and success, by providing the potential for additional retirement income and death benefits. 1.3 Rights. The rights of Employees who participate in the Plan are set forth herein. By signing a Deferral Agreement, an Employee agrees to be bound by the terms hereof. ARTICLE 2 DEFINITIONS Except as otherwise provided, the following terms have the definitions hereinafter indicated whenever used in this Plan with initial capital letters: Administrator. "Administrator" means the Chief Executive Officer of the Company. Assigned Policy. "Assigned Policy" means any policy of life insurance on the life of a Participant or former Participant, including any certificate of life insurance issued under a master contract, purchased and owned by the Company as a basis to measure and recover the cost of benefits (in whole or in part) with respect to another Participant under the Plan, a list of which policies is maintained by the Company. Beneficiary. "Beneficiary" means the person or persons designated by the Employee as the recipient of a benefit, on the Beneficiary Designation Form attached hereto as Exhibit A, in accordance with the terms of this Plan. Company. "Company" means The Dexter Corporation, a Connecticut corporation, all of its wholly-owned and majority-owned subsidiaries, and any affiliated organization so designated by The Dexter Corporation whether now existing or hereafter formed. Deferral. "Deferral" means the Deferral Units, the receipt of which a Participant elected to defer by signing a Deferral Agreement. Deferral Agreement. "Deferral Agreement" means the written agreement entered into by the Company and an Eligible Employee pursuant to which the Eligible Employee makes a Deferral under the Plan. Deferral Period. "Deferral Period" means (i) for Participants who are not eligible to retire at their Normal Retirement Date within the seven consecutive Plan Years immediately following an election to defer compensation, the four consecutive Plan Years commencing the first day of the first Plan Year immediately following an election to defer compensation hereunder, or (ii) for Participants who are eligible to retire at their Normal Retirement Date within the seven consecutive Plan Years immediately following an election to defer compensation, the number of consecutive Plan Years, up to four, elected by the Participant and commencing the first day of the first Plan Year immediately following an election to defer compensation hereunder. Deferral Unit. "Deferral Unit" means an amount of a Participant's compensation equal to $5,000. 2 Disabled. "Disabled" means a condition which qualifies a Participant to receive long-term disability benefits under the Company's long-term disability plan or policy then in effect. Early Retirement. "Early Retirement" means termination of a Participant's employment with the Company, for reasons other than death, on or after the first day of the first month after the date the Participant attains age fifty-five (55), but prior to the date the Participant attains age sixty-five (65). Eligible Employee. "Eligible Employee" means a key management Employee who is selected by the Administrator to participate in the Plan. Employee. "Employee" means any person employed by the Company on a regular full-time salaried basis, including officers of the Company. Gross Cash Value. "Gross Cash Value" means the amount of money that a Policy owner would receive as a refund if the Policy owner cancels the coverage and surrenders the Policy to the Insurer plus the amount of any Policy loans outstanding on the Policy. Hardship. "Hardship" means, in the sole and absolute determination of the Administrator, a severe financial hardship to the Participant resulting from a sudden and unexpected illness or accident of the Participant or of a dependent of the Participant, loss of the Participant's property due to casualty or other similar extraordinary and unforeseeable circumstances arising as a result of events beyond control of the Participant. In no event shall a Hardship be considered to exist to the extent it can be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant's assets, to the extent that such liquidation would not itself cause a Hardship, or by the cessation of deferrals of compensation under any plan of the Company, including the Plan, nor shall a Hardship be found to exist on account of the need to send a Participant's child to college or the desire to purchase a home. Individual Policy. "Individual Policy" means any policy of life insurance on the life of a Participant, including any certificate of life insurance issued under a master contract, purchased and owned by the Company as a basis to measure and recover the cost of benefits with respect to that Participant under the Plan, a list of which policies is set forth on a list maintained by the Company. Insurer. "Insurer" means such insurance company as the Company may from time to time utilize to provide insurance coverage on the lives of Participants or former Participants. Insurer Ledger Projection. "Insurer Ledger Projection" means the Insurer's assessment of policy values for all years of a Policy given current rate assumptions and a specified transaction pattern. Marginal Tax Rate. "Marginal Tax Rate" means the rate of United States federal taxes on the Company's net income, in the year a benefit under the Plan must be calculated, as determined by the Administrator in its sole and absolute discretion. The Administrator may estimate the Marginal Tax Rate in order to make a benefit distribution or for other purposes under the Plan. Normal Retirement. "Normal Retirement" means termination of a Participant's employment with the Company, for reasons other than death, on or after the first day of the first month after the date the Participant attains age sixty-five (65). Optional Benefit. "Optional Benefit" means the retirement benefit pursuant to Section 5.2(b). In order to receive the Optional Benefit, a Participant must have elected such Optional Benefit in his Deferral Agreement. Participant. "Participant" means an Eligible Employee who has filed a completed and executed Deferral Agreement with the Administrator prior to December 31, 1995, and is participating in the Plan. Plan. "Plan" means The Dexter Corporation Executive Deferred Compensation Benefit Plan, as amended from time to time. Plan Year. "Plan Year" means the calendar year beginning January 1 and ending December 31. Policy. "Policy" means any Individual Policy or Assigned Policy. 2 3 Retirement. "Retirement" means Early Retirement or Normal Retirement, as the case may be. Termination Benefit. "Termination Benefit" means the benefit a Participant receives if he ceases to be an Employee, for any reason other than death or Retirement, as provided in Section 5.4. Termination Rate. "Termination Rate" means the interest rate, for the appropriate periods involved, as determined by the Administrator, in its sole and absolute discretion, and shall be calculated using either (i) Moody's Intermediate Bond Index BAA or (ii) Treasury 90-day rates. ARTICLE 3 DETERMINATION OF BENEFITS AND CLAIMS PROCEDURE The Administrator shall make all determinations concerning rights to benefits under the Plan. All claims for benefits under the Plan by an Eligible Employee shall be made in writing to the Administrator. If the Administrator believes that the claim should be denied, the Administrator shall notify the claimant in writing of the denial of the claim within ninety (90) days after the Administrator's receipt thereof. Such notice shall (i) set forth the specific reason or reasons for the denial, making reference to the pertinent provisions of the Plan on which the denial is based; (ii) describe any additional material or information that should be received before the claim may be acted upon favorably and explain the reason why such material or information, if any, is needed; and (iii) inform the claimant of his right pursuant to this Article 3 to request review of the decision by the Administrator. A claimant who believes that he has submitted all available and relevant information may appeal the denial of a claim to the Administrator by submitting thereto a written request for review within sixty (60) days after the date on which such denial is received. Such period may be extended by the Administrator for good cause shown. The person making the request for review may examine the Plan and the request for review may discuss any issues relevant to the claim. The Administrator shall decide whether or not to grant the claim within sixty (60) days after receipt of the request for review, but this period may be extended by the Administrator for up to an additional sixty (60) days in special circumstances. The Administrator's decision shall be in writing, shall include specific reasons for the decision, shall refer to pertinent provisions of the Plan on which the decision is based, and shall be final and binding on all persons. ARTICLE 4 PARTICIPATION 4.1 Election to Defer. An Eligible Employee may elect to participate in the Plan, effective as of the first day of a Plan Year, by filing a completed and fully executed Deferral Agreement with the Administrator, or a person designated by the Administrator, prior to commencement of such Plan Year. Said Deferral Agreement shall not be amended, modified, or revoked during the Deferral Period to which it relates other than by termination of service pursuant to Section 5.4 or an Emergency Benefit pursuant to Section 5.5. Pursuant to a Deferral Agreement, an Eligible Employee shall designate irrevocably the number of Deferral Units which shall be deferred annually over the Deferral Period; provided, however, that such Deferral must be equal to the initial four (4) annual premiums on a Policy and that a Participant shall not defer any additional amounts. Notwithstanding any other provision of this Section, an Eligible Employee may not elect to participate in the Plan, and shall not otherwise become a Participant in the Plan, unless a completed and fully executed Deferral Agreement has been filed by him with the Administrator, or a person designated by the Administrator, prior to December 31, 1995. 4.2 Amount of Deferral. A Participant may elect to defer from one (1) to five (5) Deferral Units for each Plan Year during each Deferral Period. 4.3 Reduction in Compensation. The compensation of the Participant for each of the Plan Years in a Deferral Period shall be reduced by an amount equal to the Deferral Units which the Participant elects to defer in the Deferral Agreement. The Company shall automatically deduct a pro rata portion of the amount of such reduction in compensation from each paycheck delivered to the Participant. 3 4 4.4 Deferral When Disabled. If a Participant should become Disabled during a Deferral Period, the Company shall make such Participant's Deferrals for him during the time he is Disabled, and such Participant shall not be required to make any Deferrals while Disabled. The Company shall recover from any Policy on the life of such Participant that has been purchased by the Company all amounts paid pursuant to the preceding sentence at the beginning of the fourth year following the end of a Deferral Period. If a Participant ceases to be Disabled during a Deferral Period, then such Participant shall be required to commence making Deferrals from the date he ceases to be Disabled. Such Participant shall not, however, be required to pay any of, or reimburse the Company for, the Deferrals made for him during the period in which he was Disabled. 4.5 Company Payments. The Company, in its sole discretion, may make one or more Deferrals on behalf of a Participant, and such Participant shall not be required to make such Deferrals. Except as hereinafter provided to the contrary, a Deferral so made shall be treated as a "Deferral" for all purposes of the Plan as if made by the Participant pursuant to an election to defer compensation. In such case, the Deferral Agreement shall specify the Deferral Period and the amount of Deferral paid or to be paid by the Company. Company-paid Deferrals will be reimbursed to the Company upon payment of Deferrals pursuant to the Plan unless the Participant is an Employee at the time of such payment or unless this provision is waived in writing by the Administrator at the time such Deferral is made. ARTICLE 5 BENEFITS 5.1 Payment of Deferral. As soon as practicable after the beginning of the fourth calendar year following the end of a Deferral Period, the Company shall pay to the Participant in a lump sum an amount equal to all of his Deferral Units deferred over such Deferral Period without interest. Notwithstanding the preceding sentence, a Participant may irrevocably elect prior to the beginning of a Deferral Period to defer payment of such lump sum amount to a specified date later than the date on which he would receive such amount if no election were made. 5.2 Retirement Benefit. In connection with a Participant's Retirement, the Company shall pay to such Participant the following amounts: (a) Individual Policies. (i) Initial Payment. With respect to a Participant whose employment with the Company terminates, for reasons other than death, on or after the date the Participant attains the age of fifty-five (55) and whose retirement benefit is measured by one or more Individual Policies, the Company shall pay to such Participant, within twelve (12) months following the date the Participant attains the age of sixty-five (65) (or upon the date of the Participant's Early Retirement, if such Early Retirement is elected by a Participant and approved by the Administrator on account of Hardship, or such other immediate and compelling reason as the Administrator in his sole discretion shall determine), an amount, if any, equal to the following: (A) the cumulative amount of the Gross Cash Value of any Individual Policy on the life of the Participant then in effect, less (B) the cumulative amount of all premiums paid on any such Individual Policy, less (C) the cumulative interest expense on all loans under any such Individual Policy, plus (D) the cumulative Federal tax benefit to the Company derived from the deductibility of the interest expense on all loans under any such Individual Policy, divided by (E) one (1) minus the Marginal Tax Rate. (ii) Annual Payments. Within thirty (30) days after each anniversary of the payment to be made pursuant to Section 5.2(a)(i), the Company shall pay to a Participant an amount, if any, equal to the following: 4 5 (A) the annual increase in the Gross Cash Value of any Individual Policy on the life of the Participant then in effect, less (B) the annual amount of all premiums paid on any such Individual Policy, less (C) the annual interest expense on all loans under any such Individual Policy, plus (D) the annual Federal tax benefit to the Company derived from the deductibility of the interest expense on all loans under any such Individual Policy, divided by (E) one (1) minus the Marginal Tax Rate. The annual payments under this Section 5.2(a)(ii) shall automatically terminate upon the death of any Participant who has not elected the Optional Benefit in his Deferral Agreement. (b) Assigned Policies. (i) Initial Payment. With respect to a Participant whose employment with the Company terminates, for reasons other than death, on or after the date the Participant attains the age of fifty-five (55) and whose retirement benefit is measured by one or more Assigned Policies, the Company shall pay, within twelve (12) months following the date of the Participant attains the age of sixty-five (65) (or Early Retirement, if such Early Retirement is elected by a Participant and approved by the Administrator on account of Hardship, or such other immediate and compelling reason as the Administrator in his sole discretion shall determine), an amount, if any, determined in accordance with Section 5.2(a)(i) above but substituting the term "Assigned Policies" for the term "Individual Policies"; provided, however, that if the person whose life is insured under any such Assigned Policy ("Covered Person") should die before such Participant, then the amount of the benefit shall be actuarially determined, based upon the most current Insurer Ledger Projection, as though the Covered Person is still alive. (ii) Annual Payments. Within thirty (30) days after each anniversary of the payment to be made pursuant to Section 5.2(b)(i) relating to an Assigned Policy, the Company shall pay to a Participant an amount, if any, determined in accordance with Section 5.2(a)(ii) above but substituting the term "Assigned Policies" for the term "Individual Policies"; provided, however, that (A) if the Covered Person under any such Assigned Policy should die before such Participant, then the amount of the benefit shall be actuarially determined, based upon the most current Insurer Ledger Projection, as though the Covered Person is still alive, and (B) if such Participant has elected the Optional Benefit in his Deferral Agreement, he shall receive only fourteen such annual payments. Should a Participant who has elected the Optional Benefit in his Deferral Agreement die before receiving all of said fourteen payments, any remaining payments shall be made to the Beneficiary of such deceased Participant. (c) Changes in Tax Law. Notwithstanding any other provisions of this Section 5.2, if the tax deductibility of interest paid by the Company on Policy loans is eliminated by change in law or regulation (or interpretation thereof), then a Participant shall receive only a Termination Benefit pursuant to Section 5.4(c). 5.3 Death Benefit. (a) Except as otherwise set forth in Section 5.3(b), within one hundred eighty (180) days after the Administrator receives notice of the death of a Participant, whether during employment or after Retirement, the Company shall pay a death benefit to the Participant's Beneficiary in an amount, if any, equal to the following: (i) the death benefit provided under any Individual Policy on the life of the Participant then in effect, less (ii) the outstanding principal amount of any loans on any such Individual Policy, divided by (iii) one (1) minus the Marginal Tax Rate. Notwithstanding the preceding sentence, the amount of the death benefit shall not be increased by one (1) minus the Marginal Tax Rate if the Company is required to recognize as income for Federal tax 5 6 purposes the receipt of the death benefit provided under the Policy. The payment of the death benefit shall be in a lump sum, unless the Participant has elected in his Deferral Agreement to have the Company pay his Beneficiary in five annual installments with interest accruing on the unpaid amount at the Termination Rate. (b) There shall be no death benefit for any Participant who has elected the Optional Benefit in his Deferral Agreement. 5.4 Termination Benefit. (a) Termination of Employees with Individual Policies. (i) If a Participant who has one or more Individual Policies on his life shall cease to be an Employee for any reason other than death or Retirement within seven (7) years after the commencement date of a Deferral Period, the Company shall pay such Participant, within three (3) months following the termination of his employment, an amount equal to the greater of (A) the amount, if any, he would have received under Section 5.2(a)(i) if he had retired on the date he ceases to be an Employee, or (B) such Participant's total amount of Deferral Units plus interest at the Termination Rate calculated in arrears. (ii) If a Participant who has one or more Individual Policies on his life shall cease to be an Employee for any reason other than death or Retirement seven (7) or more years after the commencement date of a Deferral Period, the Company shall pay to such Participant, within three (3) months following the termination of his employment, the amount, if any, he would have received under Section 5.2(a)(i) if he had retired on the date he ceases to be an Employee. (b) Termination of Employees with Assigned Policies. (i) If a Participant who has been assigned one or more Assigned Policies shall cease to be an Employee for any reason other than death or Retirement within seven (7) years after the commencement date of a Deferral Period, the Company shall pay such Participant, within three (3) months following the termination of his employment, an amount equal to the greater of (A) the amount, if any, he would have received under Section 5.2(b)(i) if he had retired on the date he ceases to be an Employee or (B) such Participant's total amount of Deferral Units plus interest at the Termination Rate calculated in arrears. (ii) If a Participant who has been assigned one or more Assigned Policies shall cease to be an Employee for any reason other than death or Retirement seven (7) or more years after the commencement date of a Deferral Period, the Company shall pay to such Participant, within three (3) months following the termination of his employment, the amount, if any, he would have received under Section 5.2(b)(i) if he had retired on the date he ceases to be an Employee. (c) Termination due to Change in Tax Laws. If the tax deductibility of interest paid by the Company on Policy loans is eliminated by change in law or regulation (or interpretation thereof), then the Company shall pay, within three (3) months of such event, (i) the amount, if any, determined in accordance with Section 5.4(a) in respect to a Participant who has one or more Individual Policies on his life, and (b) the amount, if any, determined in accordance with Section 5.4(b) in respect to a Participant who been assigned has one or more Assigned Policies. 5.5 Emergency Benefit. If the Administrator, upon written petition of the Participant, determines, in its sole discretion, that the Participant has suffered a Hardship, the Company shall pay to the Participant, as soon as practicable following such determination, an amount, not in excess of such Participant's Deferral Units, necessary to meet the Hardship. The amount of the benefits otherwise payable under Sections 5.1, 5.2, 5.3, and 5.4 shall thereafter be actuarially adjusted to reflect the early payment of such emergency benefit. The finding of Hardship by the Administrator shall immediately revoke a Participant's Deferral Agreement. 5.6 Protective Provisions. Each Participant shall cooperate with the Company by furnishing any and all information requested by the Company in order to facilitate the payment of benefits under the Plan, taking such physical examination as the Company may deem necessary and taking such other reasonable action as may be requested by the Company. If a Participant refuses to cooperate, the Company shall have no further 6 7 obligation to the Participant or Beneficiary under the Plan, other than payment to such Participant of the aggregate amount of his Deferral Units theretofore made pursuant to the Plan. If a Participant commits suicide during the first twenty-four (24) months after the effective date of an election to defer under the Plan, or should the Insurer decline payment to the Company under the Policy due to any material misstatement of information or nondisclosure of medical history on the part of the Participant, the Administrator may, in its sole and absolute discretion, direct the Company to pay to the Beneficiary of such Participant, as the only Death Benefit payable under the Plan, a lump sum amount equal to such Participant's Deferral Units plus interest at the Termination Rate calculated in arrears, if such Deferral Units have not already been paid to the Participant pursuant to Section 5.1 above; provided, however, that if such Deferral Units have already been paid to the Participant pursuant to Section 5.1 above, no Death Benefit shall be payable under the Plan. 5.7 Withholding; Unemployment Taxes. To the extent required by the law in effect at the time payments are made, the Company shall withhold from payments made hereunder the taxes required to be withheld by the Federal or any State or local government. ARTICLE 6 BENEFICIARY DESIGNATION Each Participant shall have the right, at any time, to designate any person or persons as Beneficiary or Beneficiaries to whom payment under this Plan shall be made in the event of the Participant's death. Each Beneficiary designation shall become effective only when filed in writing with the Administrator during the Participant's lifetime on a form prescribed by the Administrator. The filing of a new Beneficiary designation form will cancel all Beneficiary designations previously filed. The spouse of a married Participant domiciled in a community property jurisdiction shall join in any designation of a Beneficiary or Beneficiaries other than the spouse. If a Participant fails to designate a Beneficiary as provided above, or if all designated Beneficiaries predecease the Participant or die prior to complete distribution of the Participant's benefits, then the Administrator shall direct the distribution of such benefits to the Participant's estate. ARTICLE 7 AMENDMENT AND TERMINATION OF PLAN The Administrator, in its sole and absolute discretion, may at any time (i) amend the Plan in whole or in part or (ii) terminate the Plan. If the Plan is terminated within the seven years after the effective date of a Participant's Deferral Agreement, such Participant shall have the right to receive a lump sum equal to the Termination Benefit pursuant to Section 5.4(a)(i); provided, however, that Deferrals shall not be deducted from a Participant's Compensation on and after the effective date of termination of the Plan. If the Plan is terminated seven or more years after the effective date of a Participant's Deferral Agreement, such Participant shall have the right to receive a lump sum equal to the Termination Benefit pursuant to Section 5.4(b)(ii). ARTICLE 8 UNSECURED GENERAL CREDITOR; NONASSIGNABILITY 8.1 Unsecured General Creditor. Participants and their Beneficiaries, heirs, and successors shall have no legal or equitable right, interest or claim in or to any specific property or assets of the Company, nor shall they be beneficiaries of, or have any right, interest or claim in or to any Policy or Policies or the proceeds therefrom. Such Policies shall be and remain the general, unpledged, unrestricted assets of the Company. Such Policies or other assets of the Company shall not be held under any trust for the benefit of Participants, their Beneficiaries, heirs, or successors, or held in any way as collateral security for the fulfilling of the obligations of the Company under this Plan; provided, however, that in order to assure payment under the Plan, the Company may establish one or more grantor trusts so long as such trusts will in no way result in the Plan being other than "unfunded," as that term is used in Sections 201(2), 301(a)(3), 401(a)(1) and 7 8 4021(a)(6) of the Employee Retirement Income Security Act of 1974 with respect to unfunded plans maintained primarily for the purpose of providing deferred compensation for a select group of management or highly compensated employees. The Company's obligation under the Plan shall be merely that of an unfunded and unsecured promise of the Company to pay money in the future. Neither this Plan nor the making of payments under or purchases of Policies by the Company hereunder shall be construed to create any obligation upon the Company to continue the purchases of such Policies. 8.2 Nonassignability. Neither a Participant nor any other person shall have any right to commute, sell, assign, transfer, pledge, anticipate, mortgage or otherwise encumber, hypothecate or convey in advance of actual receipt the amounts, if any, payable hereunder, or any part thereof, or interest therein, which are, and all rights to which are, expressly declared to be unassignable and non-transferrable. No part of the amounts payable shall, prior to actual payment, be subject to seizure or sequestration for the payment of any debts, judgments, alimony, or separate maintenance owed by a Participant, or any other person, nor be transferrable by operation of law in the event of a Participant's or any other person's bankruptcy or insolvency. ARTICLE 9 MISCELLANEOUS 9.1 No Contract of Employment. Nothing contained herein shall be construed to be a contract of employment for any term of years, or as conferring upon any Employee the right to continue in the employ of the Company in any capacity. It is expressly understood by the parties hereto that this Agreement relates to the deferral of compensation for the Employee's services, payable after termination of such Employee's employment with the Company and is not intended to be an employment contract. 9.2 Notice. Any notice, consent, or demand required or permitted to be given under the provisions of this Plan shall be in writing, and shall be signed by the party giving or making the same. If such notice, consent, or demand is mailed to a party hereto, it shall be sent by United States mail, postage prepaid, addressed to such party's last known address as shown on the records of the Company. The date of such mailing shall be deemed the date of notice, consent, or demand. Either party may change the address to which notice is to be sent by giving notice of the change of address in the manner aforesaid. 9.3 Governing Law. This Plan shall be governed by and construed in accordance with the laws of the State of Connecticut, excluding its laws relating to conflicts of laws, to the extent the laws of the State of Connecticut are not preempted by applicable Federal law. 9.4 Gender, Singular and Plural. All pronouns and any variations thereof shall be deemed to refer to the masculine, feminine, or neuter, as the identity of that person or persons may require. As the context may require, the singular may be read as the plural and the plural as the singular. 9.5 Captions. The captions of the articles, sections, and paragraphs of this Plan are for convenience only and shall not control or affect the meaning or construction of any of its provisions. 9.6 Validity. In the event any provision of this Plan is held invalid, void, or unenforceable, the same shall not affect, in any respect whatsoever, the validity of any other provision of this Plan. 9.7 Conflicting Provisions. In the event of a conflict between the provisions of this Plan and the provisions of any collateral assignment, beneficiary designation or other document related to a Policy, if any, the provisions of the Plan shall prevail as between the parties hereto. No such party shall assert or enforce any right which it may have in a Policy, if any, the beneficiary designation thereunder, or other document which is inconsistent with the rights established by this Plan. Furthermore, this Plan supersedes any and all prior agreements, whether written or unwritten, between the Company and any Participant concerning the provision of deferred compensation other than one or more qualified plans of the Company covering the Participant. 8 9 IN WITNESS WHEREOF, the Company has executed this amended and restated Plan effective as of January 1, 1996, such execution first having been duly authorized by the Company's Compensation & Organization Committee of the Board of Directors. THE DEXTER CORPORATION By: /s/ K. GRAHAME WALKER ----------------------------------- Title: Chairman and Chief Executive Officer 9 10 FIRST AMENDMENT TO THE DEXTER CORPORATION EXECUTIVE COMPENSATION BENEFIT PLAN EFFECTIVE NOVEMBER 1, 1996 1. The definition of "Administrator" in Article 2 of The Dexter Corporation Executive Deferred Compensation Plan (the "Plan") is hereby amended to read in its entirety as follows: Administrator. "Administrator" means the Vice President, Human Resources of the Company. 2. Article 7 of the Plan is hereby amended to replace "Administrator" with "Chief Executive Officer of the Company" in the first sentence thereof. THE DEXTER CORPORATION By: /s/ K. GRAHAME WALKER ------------------------------------ Administrator of The Dexter Corporation Executive Deferred Compensation Benefit Plan Date: January 1, 1997 11 SECOND AMENDMENT TO THE DEXTER CORPORATION EXECUTIVE DEFERRED COMPENSATION BENEFIT PLAN EFFECTIVE JANUARY 1, 1997 1. The definition of "Marginal Tax Rate" in Article 2 of The Dexter Corporation Executive Deferred Compensation Plan (the "Plan") is hereby amended to read in its entirety as follows: Marginal Tax Rate. "Marginal Tax Rate" means the rate of United States federal taxes and applicable state taxes on the Company's net income, in the year a benefit under the Plan must be calculated, as determined by the Administrator in its sole and absolute discretion. The Administrator may estimate the Marginal Tax Rate in order to make a benefit distribution or for other purposes under the Plan. THE DEXTER CORPORATION By: /s/ LAWRENCE D. MCCLURE ------------------------------------ Lawrence D. McClure Administrator of The Dexter Corporation Executive Deferred Compensation Benefit Plan Date: January 1, 1997 EX-13 3 1996 ANNUAL REPORT TO SHAREHOLDERS 1 EXHIBIT 13 THE DEXTER CORPORATION'S 1996 ANNUAL REPORT TO SHAREHOLDERS 2 TO OUR SHAREHOLDERS, EMPLOYEES AND CUSTOMERS [PHOTO OF K. GRAHAME WALKER] OVERVIEW 1996 was a good year for shareholders of The Dexter Corporation. The share price rose by 35% while maintaining a relatively high dividend yield of almost 3%. The strength of the corporation's business positions provides confidence for continued growth of shareholder value. A clear and steady commitment to the three key objectives that drive shareholder value was maintained throughout the year. These are stated in full on page 4 and summarized as follows: - - CONSISTENT STRONG GROWTH OF NET INCOME AND EARNINGS PER SHARE In 1996 net income from operations grew by 18% to a record $47.7 million. At $2.02 from operations, earnings per share grew by 21% and were also a record. Owing to a $.04 per share one time only gain from a transaction by Life Technologies, the company reported 1996 earnings per share of $2.06, a gain of 23% over the previous year. - - CONTINUOUS IMPROVEMENT OF THE PROPRIETARY TECHNOLOGY BASE The company strengthened its focus on proprietary technology for both the short and long term. New products were created, new patents were awarded, and several key partnerships designed to sustain growth were formed. - - HIGHER OPERATING PROFITABILITY AND CASH FLOW Gross margin improved by 2.7 points to 34.5% of net sales and cash flow strengthened to $37.5 million in 1996. In summary, the company achieved these objectives -- which remain in place and unaltered for the future. 5 3 EARNINGS GROWTH Growth of earnings was certainly supported by an overall reduction in the cost of raw materials, particularly for wood pulp which is used in certain nonwoven materials. Nevertheless, the cost of many of the more specialty raw materials used throughout the corporation continued to rise. While vigorously competitive market dynamics inhibited opportunities for selling price increases, several important increases were awarded based on the value placed by customers on Dexter products. There were also price decreases, leveraged by certain raw material cost declines. The net consequence of these movements benefitted earnings. Continued improvement in operational efficiencies throughout the corporation was also a contributor to earnings growth. Credit must go to the extraordinary personal effort and contribution of all employees. It was their innovation, discipline, commitment to the customer and straightforward hard work that made the company's strong results possible. Although net sales of $1.1 billion in 1996 were a record, sales growth was very modest at 1%. This was due partly to divestitures, partly to a recessionary year for the electronics industry, and partly to an excessive worldwide inventory of beer, beverage and food cans for which the company supplies coatings. On the other hand the aerospace market, as expected, began to strengthen in the latter part of the year, and the demand for several nonwoven products improved substantially. While divestitures masked the consolidated sales performance for Dexter's wholly owned operating divisions, the steady growth of Life Technologies' sales was enhanced by acquisitions. Nevertheless, the percentage earnings per share growth from operations both with and without Life Technologies was identical at 21%. A trend of recovery for the electronics market became evident during the fourth quarter and 1997 is expected to be a good growth year. The excess worldwide inventory of metal cans is expected to become balanced with demand in the early part of 1997, and Dexter has enhanced its position by the acquisition of a specialty can coatings manufacturer in Europe. The global aerospace market will continue to strengthen, and new nonwoven product sales are growing. Life Technologies confidently expects another excellent year. Stronger sales growth is therefore anticipated in 1997 which, in combination with improving operating margins, is expected to leverage continued good growth of earnings. MARKETING DEXTER'S TECHNOLOGY LEADERSHIP Technology leadership is fundamental to the corporation's success. We believe that technology leadership is the principal driver of earnings growth. Dexter is consequently committed to being the technology leader in each of its served market segments and overall spends 4.7% of net sales to maintain that position. However, it is how that technology is marketed that will determine the ultimate benefit to shareholders. 6 4 Dexter has therefore increased its marketing strengths. We remain intent on listening to our customers, and we use technology leadership positions to create co-development programs. IMPROVED PROFITABILITY AND CASH FLOW Throughout 1996 the corporation exercised tight controls on discretionary expense and capital expenditures and effectively implemented programs to increase margins. These controls recognized the need to improve profitability and return on investment. All capital expenditures are evaluated for their ability to improve the return to shareholders and are allocated for their contribution to sustained earnings growth. Excluding Life Technologies, which is undergoing an extensive infrastructure rebuild, capital expenditures were restricted to projects that would drive profits in addition to pro-active investments to fulfill the company's commitment to health, safety and the environment. Again, excluding Life Technologies, capital expenditures were well below depreciation. Apart from the positive effect of divestitures, operating cash flow improved substantially as a result of improved profitability and progress in reducing working capital. Efforts directed at improving Dexter's own process technologies also played an important role in lowering cost. Further reduction of working capital, expressed as a percent of net sales, will be accomplished in 1997 consequent to disciplined implementation of a corporationwide initiative. STRUCTURED AND MANAGED FOR SUSTAINED EARNINGS GROWTH As The Dexter Corporation looks forward to 1997 and beyond, it is from the vantage point of a more tightly focused and effective operating company that has a clear commitment to consistent growth in shareholder value. The company has good businesses that are performing well under experienced management teams. Attractive market opportunities have been identified and Dexter has built the infrastructure, the technology and the talent to convert these opportunities into sustained earnings growth. That objective was underscored by the election of two new directors in 1996. During her distinguished career, Henrietta Holsman Fore accumulated extensive experience in Asia while building her own successful company. Edgar Hotard has demonstrated his considerable skills in a specialty materials environment for many years as president of Praxair, Inc. There were also two important senior management changes in 1996. Dr. Barry Gettins was appointed senior vice president, operations development where he is supporting all Dexter divisions in their pursuit of operational improvements to reduce costs and improve profits. David Gordon was appointed to Dr. Gettins' former position of senior division president for the Dexter Nonwovens Division and was elected a vice president of the corporation. Mr. Gordon returned to the Nonwovens Division after five years as president of D & S Plastics International, the success of which illustrates his leadership and marketing skills. Dexter is a corporation that knows its strengths, knows what it needs to improve, knows where it is going, and knows what it takes to get there. We expect that 1997 will be another good year for shareholders. /s/ K. Grahame Walker K. Grahame Walker Chairman and Chief Executive Officer February 4, 1997 7 5 POLYMER TECHNOLOGY THE FORMULATION AND PROCESSING OF SPECIALTY COATINGS, ENCAPSULANTS AND ADHESIVES PRIMARILY FOR THE ELECTRONICS, FOOD PACKAGING AND AEROSPACE MARKETS. TECHNOLOGY LEADERSHIP All but two of Dexter's businesses are based upon polymer chemistry. Each of these businesses uses proprietary technology to formulate specialty compounds creating high value solutions for customer-specific applications. Because these solutions drive increased profitability, Dexter invests considerable resources to establish and maintain a leadership position in the areas of polymer chemistry that are important to its served markets. ELECTRONICS MARKET The continuous design trend for electronic devices to become smaller, faster and lighter creates a continual need for new technologies that will deliver the required performance attributes. Dexter Electronic Materials Division uses leading edge technology to convert this challenge into opportunity. Technology leadership generates a steady flow of high value products that create a competitive advantage in the marketplace. It frequently positions Dexter as the supplier of choice and establishes partnership relationships with key customers to co-develop total packaging solutions. By being early to market with the newest materials that deliver real value to the customer as new or high technology applications evolve, Dexter reinforces its position as a technical and market leader. ELECTRONIC MATERIALS ELECTRONIC PACKAGING PRODUCTS Hysol(R) epoxy molding compounds and coating powders for microelectronic, electronic and electrical market segments. ASSEMBLY AND ADVANCED PRODUCTS Hysol(R) liquid encapsulants and conductive materials for microelectronic, optoelectronic and electronic/electrical device market segments. PRINTED WIRING BOARD PRODUCTS Process chemistries, photoimageable solder masks and electrolytically refined solder for the fabrication of printed wiring boards. MAGNETIC MATERIALS Permag(R) custom-designed and fabricated permanent magnets and assemblies, and ferrite cores. 9 6 POLYMER TECHNOLOGY AEROSPACE MARKET Dexter is well established as the global technology leader in its served market segments -- particularly for applications involving high service temperatures, lightweight structural components and specialty surface finishing. Products are custom formulated and based on proprietary technology to meet demanding engineering specifications. Dexter Aerospace Materials Division is frequently the supplier of choice, and with superior technology, often enjoys sole source positions. The expected upturn in commercial build rates in 1997 will provide Dexter with increased benefits from its investments made in the aerospace materials business. FOOD PACKAGING MARKET Technology change -- predominantly related to health and the environment, total applied cost and product performance -- is a major driver of the can coating business. Dexter Packaging Products Division adds value by helping customers replace solvent-based coatings with water-based chemistries or solventless powder coatings. These are two areas in which Dexter is the clear market leader. Technology excellence is also critical for meeting the demanding cost and performance requirements of the can-making industry. Dexter has been successful in replacing three-coat applications with two, maintaining the rigorous product consistency required by can lines that spray 3,000 cans per minute, and introducing new products formulated to cope with the complexities of sophisticated can designs. AEROSPACE MATERIALS Adhesives and Structural Materials Advanced technology, high-performance products formulated to provide more reliable and stronger joining techniques than mechanical fastening, as well as superior structural bonding and unique systems for composite assembly. Aerospace Coatings Comprehensive primer and topcoat systems for protection and decoration on all exterior and interior applications requiring advanced, qualified technology. FOOD PACKAGING MATERIALS Can Coatings Protective coatings for the interior surface of beer, beverage and food cans; internal and external coatings for easy-open ends; internal coatings for glass container closure. OTHER MATERIALS Coatings for Other Markets Dexter produces new generation, environmentally compliant waterborne automotive interior coatings and several products sold into other specialty markets. These include waterborne protective coatings for graphic art applications, coatings for sporting goods and the wood furniture industries, and waterborne coatings for the cosmetic and glass bottle market. Distributor Programs Dexter Distributor Programs services approximately 200 industrial distributors worldwide with Hysol(R) adhesive and Frekote(R) release products for use in the aerospace, automotive and other specialty markets. 10 7 NONWOVENS TECHNOLOGY The proprietary formulation and manufacture of long-fiber, wet-formed and hydroentangled materials primarily for the food packaging and medical markets. TECHNOLOGY LEADERSHIP Dexter's proprietary technology is a combination of five technical core competencies. These competencies are points of differentiation that can be combined to create innovative product solutions for existing and new customers. A history of commercializing new nonwoven structures positions Dexter Nonwovens Division as the supplier of choice for partnering with customers on joint development initiatives. FOOD PACKAGING MARKET Dexter is the global market share leader in wet-formed nonwovens for food packaging and invests continually to maintain that leadership. The company has demonstrated the differentiating value of proprietary technology by introducing new processes and products. The textilization process allows consumer marketing companies to impart its brand identity into tea bag paper. Innovation in casing base materials allows Dexter customers to produce highly technical products for meat packers around the world. MEDICAL MARKET Medical is a large, global market with a high technology content. Dexter offers the widest range of wet-formed nonwoven medical fabrics in the world. The materials deliver the required technology at the optimized cost critical to health care providers. Dexter utilizes a hydroentanglement technology to manufacture Hydraspun(R) fabrics, soft-yet-strong barrier materials for surgical procedures. These fabrics are also absorbent and chemical-free making them ideal for premoistened hygiene wipes. FOOD PACKAGING MATERIALS Infusion and Casing Products Long-fiber products deliver critical performance characteristics for applications such as tea bags, coffee filters and meat casings. MEDICAL MATERIALS Specialty Nonwovens Products Wet-formed and hydroentangled nonwovens are used for sterilization wraps, surgical gowns, operating room table and patient drapes, and hygiene wipes. OTHER MATERIALS Specialty Nonwovens Products Dexter is a major supplier of wallcover backings for specific commercial and high-end residential applications, materials used in automotive headliners, and filtration media for vacuum bags. Cogeneration Dexter's 56 megawatt plant supplies steam and hot water to the Dexter Nonwovens operation in Connecticut at 150% of the fuel efficiency available from conventional power plants. Excess power is sold to local utilities. 13 8 BIOTECHNOLOGY The development and manufacture of precise, reproducible biological and biochemical products for life sciences research and commercial applications. TECHNOLOGY LEADERSHIP Dexter is the majority owner of Life Technologies, Inc. (LTI), a leading developer, manufacturer and supplier of consumable biological and biochemical materials selling over 3,000 products to over 20,000 customers worldwide. The company spends between 6 and 7% of net sales on R & D in order to generate a steady stream of high value, new products. Earnings growth in 1996 was a result of positioning LTI as the high technology, prime vendor worldwide and expanding partnerships with industrial, pharmaceutical and biotechnology customers while continuing to focus on the still rapidly growing research segment. MEDICAL MARKET The company's technology leadership in genetic research, the so-called "Expression Highway," has led to a better understanding of molecular cell biology disease processes, aging and many other critical-to-life areas. LTI products are central to advancing the international human genome project, the study of several diseases, and to the development of improved techniques for rapidly developing medical areas such as bone marrow transplant. In the commercial arena LTI supports industrial research as well as the large scale manufacture of genetically engineered health care products. Recently the company has begun to develop customized kits which help biotechnology companies to produce results faster. The company's work with Genzyme Tissue Repair is an excellent example of partnering with a customer to provide revolutionary new solutions to important medical problems -- in this instance, a cell therapy treatment for damaged cartilage in knee injuries. LTI sells two main product lines, GIBCO and BRL, into two market segments. LTI's largest market segment includes life sciences researchers such as the National Institutes of Health and universities worldwide. LTI's fastest growing segment is comprised of pharmaceutical and biotechnology companies that research, develop and produce therapeutics and vaccines. 14 9 MANAGEMENT STATEMENT The management of The Dexter Corporation has prepared the financial statements and review contained on pages 18 through 43 in conformity with generally accepted accounting principles. Dexter's management is responsible for the integrity and objectivity of this annual report, including the financial statements, charts, tables and other supplementary information. The financial statements and review are presented on the accrual basis of accounting and, accordingly, include some amounts based on judgment. Information included on these pages is an integral part of the statement of financial position and related statements of income, cash flows and changes in shareholders' equity which have been audited by Coopers & Lybrand L.L.P. Dexter has a clearly stated business ethics policy and code of conduct which require employees to maintain high standards in their conduct of company affairs. The company's accounting and control systems are designed to provide reasonable assurance that financial records accurately reflect the transactions of The Dexter Corporation and that the company's assets are protected from unauthorized use, in accordance with established policies and procedures, as implemented by qualified personnel. We modify and improve our systems in response to changes in business conditions and operations, the advice of independent certified public accountants, and the recommendations of our own internal auditors and other independent experts on procedures and controls. There are no known significant accounting control weaknesses. Coopers & Lybrand L.L.P., independent certified public accountants, are engaged to perform quarterly reviews and annual audits. Their audits are conducted in accordance with generally accepted auditing standards which include consideration of the company's internal control structure. The Audit Committee of the Board of Directors, made up entirely of outside directors, meets regularly both separately and jointly with the independent certified public accountants, internal auditors and management to review accounting policies, adequacy of controls, quality of financial reporting, and the scope and results of audits. Both the internal auditors and the independent accountants have free and direct access to the Audit Committee without the presence of management. A company with a good reputation is not only a good supplier, customer and citizen but a good employer. Dexter has enjoyed a reputation based on integrity for over two centuries. We are all the guardians of that reputation, and that responsibility requires vigilance.
K. Grahame Walker Kathleen Burdett George Collin Chairman and Chief Executive Officer Vice President and Controller Chief Financial Officer Chief Accounting Officer
February 4, 1997 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders and Board of Directors of The Dexter Corporation: We have audited the accompanying consolidated statement of financial position of The Dexter Corporation as of December 31, 1996, 1995 and 1994 and the related consolidated statements of income, cash flows and changes in shareholders' equity for the years then ended. These financial statements are the responsibility of The Dexter Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above, contained on pages 18 through 43, present fairly, in all material respects, the consolidated financial position of The Dexter Corporation as of December 31, 1996, 1995 and 1994 and the consolidated results of its operations and its cash flows for the years then ended in conformity with generally accepted accounting principles. In 1996, the Corporation, as more fully described in the accompanying financial review, adopted Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of and SFAS No. 123, Accounting for Stock-Based Compensation. In 1994, the Corporation adopted SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. /s/ Coopers & Lybrand L.L.P. Springfield, Massachusetts February 4, 1997 17 10 SUMMARY OF FINANCIAL DATA All share and per share amounts throughout the Financial Statements and Review have been adjusted for a 3-for-2 stock split in 1986.
In thousands of dollars (except per share amounts) 1996 1995 1994 1993 - -------------------------------------------------------------------------------------------------- OPERATING RESULTS Net sales $ 1,100,185 $1,088,905 $ 974,719 $ 887,112 % increase (decrease) 1% 12% 10% (7%) Gross profit 379,205 346,699 316,541 293,345 As % of sales 34.5% 31.8% 32.5% 33.1% LIFO (credit) charge included in cost of sales (4,873) 1,881 2,231 (1,290) Marketing and administrative expenses 223,848 206,708 188,272 175,141 As % of sales 20.3% 19.0% 19.3% 19.7% Research and development expenses 51,504 49,375 46,644 43,803 As % of sales 4.7% 4.5% 4.8% 4.9% Interest expense 20,500 20,931 20,509 18,756 Income before taxes 98,252 79,824 73,612 66,438 As % of sales 8.9% 7.3% 7.6% 7.5% Tax rate 35.5% 35.5% 36.0% 36.5% Income (loss) before minority interests 63,372 51,487 47,112 42,188 As % of sales 5.8% 4.7% 4.8% 4.8% Income (loss) from continuing operations 48,722 40,578 37,898 34,053 As % of sales 4.4% 3.7% 3.9% 3.8% Discontinued operations (loss) gain Cumulative effect of change in accounting principles (9,875) Net income (loss) $ 48,722 $ 40,578 $ 37,898 $ 24,178 As % of sales 4.4% 3.7% 3.9% 2.7% Return on Average shareholders' equity 13.1% 11.4% 11.5% 7.7% Average total capital 10.6% 9.4% 9.2% 7.0% Income (loss) per share Continuing operations $ 2.06 $ 1.67 $ 1.56 $ 1.40 Discontinued operations Cumulative effect of change in accounting principles $ (.41) Net income (loss) $ 2.06 $ 1.67 $ 1.56 $ .99 Cash dividends declared per share $ .88 $ .88 $ .88 $ .88 Rate of dividend payout* 43% 53% 56% 63% * Before cumulative effect of 1993 change in accounting principles - -------------------------------------------------------------------------------------------------- FINANCIAL POSITION Working capital $ 242,929 $ 248,623 $ 209,024 $ 199,146 Property, plant and equipment, net 334,266 325,203 328,935 309,954 Total assets 953,804 934,161 880,609 820,691 Long-term debt 209,952 215,839 225,402 227,307 Shareholders' equity $ 374,115 $ 369,615 $ 343,633 $ 313,295 Percent long-term debt to capital 35.9% 36.9% 39.6% 42.0% Equity per share at year-end $ 15.94 $ 15.26 $ 14.11 $ 12.87 - -------------------------------------------------------------------------------------------------- OTHER DATA Capital expenditures $ 62,277 $ 28,969 $ 45,097 $ 44,784 Depreciation and amortization $ 44,239 $ 43,727 $ 40,923 $ 36,655 Shares outstanding at year-end (000) 23,464 24,220 24,350 24,340 Average shares outstanding (000) 23,687 24,364 24,345 24,325 Market price per share -- high $ 33 5/8 $ 26 7/8 $ 26 $ 28 7/8 -- low $ 23 1/8 $ 20 3/8 $ 19 7/8 $ 20 3/8 -- close $ 31 7/8 $ 23 5/8 $ 21 3/4 $ 23 1/2 Price-earnings ratio range* 16-11 16-12 17-13 21-15 Number of shareholders at year-end 3,100 3,400 3,600 3,900 Number of employees at year-end** 4,600 4,800 4,700 4,700 % payroll and benefits to sales** 23% 24% 25% 25% % raw material costs to sales** 41% 44% 43% 41% * Before cumulative effect of 1993 change in accounting principles ** From continuing operations - -------------------------------------------------------------------------------------------------- INFLATION ADJUSTED DATA Net sales* $ 1,100,185 $1,120,942 $1,031,578 $ 963,312 % (decrease) increase (2%) 9% 7% (9%) Cash dividends declared per share* $ .88 $ .91 $ .93 $ .96 Market price per share - year-end** $ 31 7/8 $ 24 3/8 $ 23 $ 25 1/2 * Stated in average 1996 dollars using the Consumer Price Index. ** Stated in year-end 1996 dollars using the Consumer Price Index. - --------------------------------------------------------------------------------------------------
18 11
THE DEXTER CORPORATION In thousands of dollars (except per share amounts) 1992 1991 1990 1989 1988 1987 1986 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING RESULTS Net sales $ 951,439 $ 937,734 $ 907,946 $ 848,724 $ 827,266 $ 757,710 $ 623,438 % increase (decrease) 1% 3% 7% 3% 9% 22% 4% Gross profit 314,275 309,157 314,449 284,142 269,416 263,120 228,276 As % of sales 33.0% 33.0% 34.6% 33.5% 32.6% 34.7% 36.6% LIFO (credit) charge included in cost of sales 1,626 (173) 1,100 (4,063) 4,193 5,961 (809) Marketing and administrative expenses 188,263 198,334 191,656 168,935 159,448 152,357 136,052 As % of sales 19.8% 21.2% 21.1% 19.9% 19.3% 20.1% 21.8% Research and development expenses 42,216 42,056 39,880 37,359 32,685 28,690 27,340 As % of sales 4.4% 4.5% 4.4% 4.4% 4.0% 3.8% 4.4% Interest expense 18,799 16,800 17,484 10,926 12,178 14,127 12,351 Income before taxes 73,132 11,192 77,407 77,643 71,923 76,858 54,271 As % of sales 7.7% 1.2% 8.5% 9.1% 8.7% 10.1% 8.7% Tax rate 37.7% 109.5% 37.0% 38.0% 38.0% 38.0% 38.0% Income (loss) before minority interests 45,577 (1,059) 48,766 48,139 44,592 47,652 33,649 As % of sales 4.8% (0.1%) 5.4% 5.7% 5.4% 6.3% 5.4% Income (loss) from continuing operations 38,203 (7,119) 42,150 42,977 39,889 43,391 32,251 As % of sales 4.0% (0.8%) 4.6% 5.1% 4.8% 5.7% 5.2% Discontinued operations (loss) gain (4,393) (606) 1,384 Cumulative effect of change in accounting principles Net income (loss) $ 38,203 $ (7,119) $ 42,150 $ 42,977 $ 35,496 $ 42,785 $ 33,635 As % of sales 4.0% (0.8%) 4.6% 5.1% 4.3% 5.6% 5.4% Return on Average shareholders' equity 12.1% (2.2%) 12.6% 13.6% 11.8% 15.5% 13.7% Average total capital 10.0% 0.7% 11.0% 11.6% 10.7% 13.3% 12.2% Income (loss) per share Continuing operations $ 1.58 $ (.29) $ 1.74 $ 1.73 $ 1.61 $ 1.74 $ 1.30 Discontinued operations $ (.18) $ (.02) $ .05 Cumulative effect of change in accounting principles Net income (loss) $ 1.58 $ (.29) $ 1.74 $ 1.73 $ 1.43 $ 1.72 $ 1.35 Cash dividends declared per share $ .88 $ .88 $ .88 $ .82 $ .80 $ .60 $ .56 2/3 Rate of dividend payout* 56% -- 51% 47% 56% 35% 42% * Before cumulative effect of 1993 change in accounting principles - ------------------------------------------------------------------------------------------------------------------------------------ FINANCIAL POSITION Working capital $ 207,146 $ 193,873 $ 215,410 $ 189,006 $ 182,284 $ 181,106 $ 137,980 Property, plant and equipment, net 298,869 299,342 274,147 252,895 186,894 183,972 174,644 Total assets 782,025 784,471 762,383 694,490 626,391 612,517 570,335 Long-term debt 179,024 188,702 160,478 130,834 92,830 106,338 112,553 Shareholders' equity $ 315,614 $ 313,782 $ 343,698 $ 325,281 $ 307,226 $ 293,788 $ 258,843 Percent long-term debt to capital 36.2% 37.6% 31.8% 28.7% 23.2% 26.6% 30.3% Equity per share at year-end $ 12.98 $ 12.99 $ 14.24 $ 13.14 $ 12.36 $ 11.84 $ 10.40 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DATA Capital expenditures $ 51,793 $ 61,749 $ 43,910 $ 33,119 $ 26,145 $ 23,619 $ 23,861 Depreciation and amortization $ 35,672 $ 34,095 $ 30,272 $ 26,243 $ 24,349 $ 22,775 $ 18,482 Shares outstanding at year-end (000) 24,308 24,149 24,136 24,761 24,855 24,821 24,893 Average shares outstanding (000) 24,220 24,145 24,282 24,877 24,842 24,895 24,860 Market price per share -- high $ 28 1/8 $ 26 1/8 $ 24 1/2 $ 34 3/4 $ 28 3/4 $ 32 3/8 $ 23 3/8 -- low $ 20 7/8 $ 18 1/2 $ 18 $ 20 1/8 $ 20 1/4 $ 17 $ 16 7/8 -- close $ 25 7/8 $ 21 5/8 $ 21 $ 21 7/8 $ 22 1/4 $ 23 3/8 $ 22 1/4 Price-earnings ratio range* 18-13 -- 14-10 20-12 20-14 19-10 17-13 Number of shareholders at year-end 4,000 4,300 4,400 4,500 4,400 4,500 4,500 Number of employees at year-end** 4,800 5,600 5,500 5,400 5,400 5,200 5,400 % payroll and benefits to sales** 25% 25% 24% 23% 23% 23% 25% % raw material costs to sales** 42% 41% 42% 46% 45% 43% 42% * Before cumulative effect of 1993 change in accounting principles ** From continuing operations - ------------------------------------------------------------------------------------------------------------------------------------ INFLATION ADJUSTED DATA Net sales* $ 1,063,669 $ 1,080,135 $1,090,129 $ 1,074,135 $1,097,246 $1,046,031 $ 892,063 % (decrease) increase (2%) (1%) 1% (2%) 5% 17% 2% Cash dividends declared per share* $ .98 $ 1.01 $ 1.06 $ 1.04 $ 1.06 $ .83 $ .81 Market price per share - year-end** $ 28 7/8 $ 24 7/8 $ 24 7/8 $ 27 1/2 $ 29 1/4 $ 32 1/8 $ 31 7/8 * Stated in average 1996 dollars using the Consumer Price Index. ** Stated in year-end 1996 dollars using the Consumer Price Index. - ------------------------------------------------------------------------------------------------------------------------------------
19 12
STATEMENT OF INCOME THE DEXTER CORPORATION Years ended December 31 In thousands of dollars -------------------------------------------- (except per share amounts) 1996 1995 1994 - ------------------------------------------------------------------------------------ REVENUES Net sales $ 1,100,185 $1,088,905 $974,719 Equity in net income of affiliates 4,810 1,348 3,836 Other income 7,370 8,791 8,660 -------------------------------------------- 1,112,365 1,099,044 987,215 EXPENSES Cost of sales 720,980 742,206 658,178 Marketing and administrative 223,848 206,708 188,272 Research and development 51,504 49,375 46,644 Interest 20,500 20,931 20,509 Gain on divestiture of product lines (2,719) -------------------------------------------- INCOME BEFORE TAXES 98,252 79,824 73,612 Income taxes 34,880 28,337 26,500 -------------------------------------------- INCOME BEFORE MINORITY INTERESTS 63,372 51,487 47,112 Minority interests 14,650 10,909 9,214 -------------------------------------------- NET INCOME $ 48,722 $ 40,578 $ 37,898 ============================================ NET INCOME PER SHARE $ 2.06 $ 1.67 $ 1.56 DIVIDENDS DECLARED PER SHARE $ .88 $ .88 $ .88
- -------------------------------------------------------------------------------- See accompanying financial review. 20 13 STATEMENT OF CASH FLOWS THE DEXTER CORPORATION
Years ended December 31 ----------------------------------------- In thousands of dollars 1996 1995 1994 - ------------------------------------------------------------------------------------------------- OPERATIONS Net income $ 48,722 $ 40,578 $ 37,898 Noncash items Depreciation 37,312 38,246 34,857 Amortization 6,927 5,481 6,066 Gain on divestiture of product lines (2,719) Income taxes not due/(paid) 9,418 (5,262) 9,508 Minority interests 14,650 10,909 9,214 LIFO inventory (credit) charge (4,873) 1,881 2,231 Equity in net income of affiliates (4,810) (1,348) (3,836) Other 4,075 (1,547) (2,538) Operating working capital decrease (increase) 18,944 (31,512) (12,824) ----------------------------------------- 127,646 57,426 80,576 ----------------------------------------- INVESTMENTS Property, plant and equipment (55,294) (30,235) (45,842) Acquisitions (16,315) (525) (8,767) Joint ventures 10,050 (3,133) 749 Divestitures 34,913 Notes receivable 200 3,150 Proceeds from sale of investments 1,070 1,048 5,658 Purchases of investments (4,970) (771) (6,082) Proceeds from exercise of LTI stock options 1,998 2,990 308 Other (274) 850 (2,308) ----------------------------------------- (28,622) (26,626) (56,284) ----------------------------------------- FINANCING New long-term debt 4,390 Repayment of long-term debt (13,762) (4,260) (4,063) Short-term debt, net (8,371) 8,825 3,806 Dividends paid (20,967) (21,441) (21,421) LTI dividends paid to minority interest shareholders (1,561) (1,374) (1,360) Purchase of treasury stock (26,658) (4,205) Proceeds from exercise of stock options 5,269 754 160 Other 131 (478) 55 ----------------------------------------- (61,529) (22,179) (22,823) ----------------------------------------- INCREASE IN CASH AND SHORT-TERM SECURITIES $ 37,495 $ 8,621 $ 1,469 ========================================= CHANGES IN MAJOR ELEMENTS WHICH (DECREASE) INCREASE OPERATING WORKING CAPITAL Accounts receivable, net $ (3,827) $ 20,085 $ 16,260 Inventories at FIFO (7,912) 10,441 8,100 Prepaid and deferred expenses (3,891) 1,343 (1,699) Accounts payable (62) (6,690) (15,259) Accrued liabilities and expenses (3,252) 6,333 5,422 ----------------------------------------- $ (18,944) $ 31,512 $ 12,824 ========================================= RECONCILIATION OF INCREASE IN CASH AND SHORT-TERM SECURITIES Cash and short-term securities at beginning of year $ 65,542 $ 55,012 $ 52,746 Cash and short-term securities at end of year 103,420 65,542 55,012 ----------------------------------------- Increase in cash and short-term securities per Statement of Financial Position 37,878 10,530 2,266 Currency translation effects (383) 225 (797) Cash included from consolidation of a subsidiary which became majority-owned in 1995 (2,134) ----------------------------------------- $ 37,495 $ 8,621 $ 1,469 ========================================= INTEREST PAID $ 22,403 $ 19,113 $ 20,522 TAXES PAID $ 25,462 $ 33,599 $ 16,992
This Statement of Cash Flows does not reflect the addition of $4.7 million of property, plant and equipment and $4.7 million of debt related to a capital lease for land acquired in 1996 by Life Technologies, Inc., as this was a non-cash transaction. - -------------------------------------------------------------------------------- See accompanying financial review. 21 14 STATEMENT OF FINANCIAL POSITION
December 31 ------------------------------------------ In thousands of dollars 1996 1995 1994 - ----------------------------------------------------------------------------------------- ASSETS Current assets Cash $ 11,837 $ 9,577 $ 10,854 Short-term securities 91,583 55,965 44,158 Accounts receivable, net 178,093 201,389 168,957 Inventories Materials and supplies 58,290 60,099 58,967 In process and finished goods 110,457 121,644 106,703 LIFO reserve (19,836) (24,709) (22,828) ------------------------------------------ 148,911 157,034 142,842 Current deferred tax assets 22,477 20,890 16,122 Prepaid and deferred expenses 7,510 11,866 9,720 ------------------------------------------ 460,411 456,721 392,653 Property, plant and equipment Land 23,273 19,307 18,581 Buildings and improvements 158,635 153,071 143,436 Machinery and equipment 458,069 457,611 429,416 Construction in progress 37,859 12,250 16,911 ------------------------------------------ 677,836 642,239 608,344 Less accumulated depreciation (343,570) (317,036) (279,409) ------------------------------------------ 334,266 325,203 328,935 Investments of wholly owned captive insurance companies 9,875 5,878 7,224 Investment in unconsolidated affiliates 50,025 47,982 49,390 Patents, technology, formulas and covenants 2,313 2,857 4,233 Excess of cost over net assets of businesses acquired 71,906 74,102 74,034 Other assets 25,008 21,418 24,140 ------------------------------------------ $ 953,804 $ 934,161 $ 880,609 ========================================== - -----------------------------------------------------------------------------------------
See accompanying financial review. 22 15 THE DEXTER CORPORATION
December 31 -------------------------------------- In thousands of dollars 1996 1995 1994 - ---------------------------------------------------------------------------------------- LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities Short-term debt $ 5,111 $ 13,598 $ 3,806 Accounts payable 91,855 92,447 82,851 Dividends payable 5,170 5,351 5,357 Accrued and deferred income taxes 36,212 26,622 24,259 Accrued liabilities and expenses 65,479 55,037 60,625 Current environmental liabilities 1,358 1,395 2,660 Current installments of long-term debt 12,297 13,648 4,071 -------------------------------------- 217,482 208,098 183,629 Long-term debt 209,952 215,839 225,402 Deferred items 24,642 23,693 22,316 Long-term deferred income taxes 19,481 21,486 21,517 Deferred tax credits 2,751 3,313 4,005 Long-term environmental liabilities 14,978 15,745 17,632 Minority interests - principally Life Technologies, Inc. 90,403 76,372 62,475 Shareholders' equity Common stock, par value $1 per share (authorized 100,000,000 shares; issued 24,983,907 shares in 1996, 1995 and 1994) 24,984 24,984 24,984 Additional paid-in capital 14,669 12,316 11,979 Retained earnings 375,480 347,544 328,401 Currency translation effects (2,187) 1,614 (7,364) Other equity items (3,158) (2,184) (2,433) Treasury stock, at cost (1,520,261 shares in 1996, 763,782 shares in 1995 and 634,403 shares in 1994) (35,673) (14,659) (11,934) -------------------------------------- Total shareholders' equity 374,115 369,615 343,633 -------------------------------------- $ 953,804 $ 934,161 $ 880,609 ======================================
- -------------------------------------------------------------------------------- See accompanying financial review. 23 16 STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY THE DEXTER CORPORATION
Add'l Currency Other Total In thousands of dollars Common Paid-in Retained Translation Equity Treasury Shareholders' (except per share amounts) Stock Capital Earnings Effects Items Stock Equity - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1993 $24,984 $11,966 $311,928 $ (22,137) $(13,446) $313,295 Net income 37,898 37,898 Dividends - $.88 per share (21,425) (21,425) Currency effects 14,773 14,773 Unrealized loss on investments $(1,468) (1,468) Stock options (11) 192 181 Restricted stock (8) (965) 1,320 347 Pooling tax benefits 32 32 ------------------------------------------------------------------------------------------------ DECEMBER 31, 1994 24,984 11,979 328,401 (7,364) (2,433) (11,934) 343,633 Net income 40,578 40,578 Dividends - $.88 per share (21,435) (21,435) Currency effects 8,978 8,978 Stock purchases (4,205) (4,205) Unrealized gain on investments 1,340 1,340 Stock options (33) 854 821 Pension liability adjustment (473) (473) Restricted stock 338 (618) 626 346 Pooling tax benefits 32 32 ------------------------------------------------------------------------------------------------ DECEMBER 31, 1995 24,984 12,316 347,544 1,614 (2,184) (14,659) 369,615 Net income 48,722 48,722 Dividends - $.88 per share (20,786) (20,786) Currency effects (3,801) (3,801) Stock purchases (26,658) (26,658) Unrealized loss on investments (46) (46) Stock options 1,065 4,704 5,769 Pension liability adjustment 269 269 Restricted stock 1,282 (1,197) 940 1,025 Pooling tax benefits 6 6 ------------------------------------------------------------------------------------------------ DECEMBER 31, 1996 $24,984 $14,669 $375,480 $ (2,187) $(3,158) $(35,673) $374,115 ================================================================================================
- -------------------------------------------------------------------------------- See accompanying financial review. QUARTERLY FINANCIAL INFORMATION (unaudited)
In millions of dollars Market Price -------------------------------------- ----------------------- Net Cost Net Net Income Dividends Quarter Sales of Sales Income per Share per Share High Low - ---------------------------------------------------------------------------------------------------------------------------------- 1994 First $ 233.5 $155.4 $ 9.3 $ .38 $.22 $25 7/8 $23 1/8 Second 247.1 165.4 11.0 .45 .22 25 3/8 22 3/4 Third 243.3 165.6 8.4 .35 .22 26 22 1/2 Fourth 250.8 171.8 9.2 .38 .22 23 1/2 19 7/8 --------------------------------------------------------------------- Year $ 974.7 $658.2 $37.9 $ 1.56 $.88 Close $21 3/4 ====================================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------- 1995 First $ 266.8 $181.1 $10.5 $ .43 $.22 $22 7/8 $20 3/8 Second 283.0 193.1 11.9 .49 .22 25 1/8 21 5/8 Third 268.5 183.9 9.4 .39 .22 25 7/8 23 Fourth 270.6 184.1 8.8 .36 .22 26 7/8 23 1/8 --------------------------------------------------------------------- Year $ 1,088.9 $742.2 $40.6 $ 1.67 $.88 Close $23 5/8 ====================================================================================================== - ---------------------------------------------------------------------------------------------------------------------------------- 1996* First $ 277.2 $182.5 $11.1 $ .46 $.22 $26 1/2 $23 1/8 Second 285.7 187.8 14.4 .61 .22 29 7/8 25 1/4 Third 269.5 177.0 11.8 .50 .22 30 1/2 26 7/8 Fourth 267.8 173.7 11.4 .49 .22 33 5/8 29 3/8 --------------------------------------------------------------------- Year $ 1,100.2 $721.0 $48.7 $ 2.06 $.88 Close $31 7/8 ======================================================================================================
* The second quarter pretax income included a $2.7 million gain on divestiture of product lines, including $2.6 million due to the receipt of proceeds from a note related to the sale of Life Technologies, Inc.'s molecular diagnostic product line in 1990. The net effect of the sale of the company's acoustic materials business and a small powder coatings business in the second quarter had a slightly positive impact on earnings. - -------------------------------------------------------------------------------- 24 17 ANALYSIS OF OPERATIONS 1996 COMPARED WITH 1995 Revenues: Net sales were a record $1.1 billion in 1996, an increase of $11.3 million, or 1%, over 1995 sales. The 1% increase in sales was due to unit volume increases of 3%, selling price increases averaging 1%, a 2% decrease due to the net effect of acquisitions and divestitures, and a 1% decrease due to the effect of lower translation rates on international sales. Equity in net income of affiliates increased $3.5 million to $4.8 million in 1996. This increase was due to the increase in the results of D & S Plastics International. Expenses: Cost of sales decreased as a percentage of sales in 1996, thereby increasing consolidated gross margin by 2.7 percentage points to 34.5% of sales from 31.8% in 1995. Gross margin, excluding Life Technologies, Inc. (LTI), increased 1.6 percentage points, principally resulting from the favorable impact of selling price increases and raw material cost decreases. The remaining improvement was attributable to an increased gross margin on sales of fetal bovine serum and higher gross margin on sales of product in Japan by LTI. Marketing and administrative expenses increased $17.1 million, or 8%, in 1996 compared with 1995, principally due to increased marketing and administrative expenses at LTI, which included the consolidation of results from the fourth quarter 1995 acquisition of a controlling interest in their Japanese subsidiary. Marketing and administrative expenses, excluding LTI, increased 3% in 1996 compared with 1995, due mainly to higher selling and marketing expenses. Research and development expenses increased $2.1 million, or 4%, due to increases at LTI. Interest expense decreased $0.4 million, or 2%, in 1996 compared with 1995, primarily due to lower average long-term borrowing throughout the year. The company does not capitalize interest on facilities under construction. If interest had been capitalized, there would have been no impact on earnings per share in 1996 or 1995. In 1996, there was a gain on divestiture of product lines of $2.7 million. This gain included $2.6 million due to the receipt of proceeds from a note related to the sale of LTI's molecular diagnostic product line in 1990 and the net effect of the sale of the company's acoustic materials business and a small powder coatings business in 1996. Income Taxes: The effective tax rate was 35.5% in 1996 and 1995. Minority Interests: Income attributed to minority interest shareholders increased 34% from 1995 due primarily to increased profits at LTI. Net Income: Net income for the year 1996 was $47.7 million, or $2.02 per share, excluding the net gain from the second quarter 1996 disposal of product lines. This represents an 18% increase in net income and a 21% increase in earnings per share, compared with results for 1995 of $40.6 million, or $1.67 per share. Total earnings for 1996, including the gain on divested product lines, increased 20% to $48.7 million while earnings per share gained 23% to a record $2.06 per share. The 1996 earnings include the favorable effect of selling price increases and lower raw material costs of approximately $.51 per share compared with 1995. This was somewhat offset by the effect of unfavorable currency exchange rates of $.04 per share due to the strengthening of the U.S. dollar against international currencies, a less favorable product mix from wholly owned Dexter businesses, and increased marketing and administrative costs, principally at LTI. 1995 COMPARED WITH 1994 Revenues: Net sales were $1.1 billion in 1995, an increase of $114 million, or 12%, over sales of $975 million for 1994. The 12% increase in sales was due to unit volume increases of 7%, a 3% increase due to the effect of higher translation rates on international sales, price increases averaging 1%, and increased consolidated sales of 1% through acquisition of a controlling interest in a Japanese subsidiary of LTI. Equity in net income of affiliates decreased $2.5 million to $1.3 million in 1995. This decrease was due to a $3 million decrease in results of D & S Plastics International partially offset by improved results at AD Aerospace Finishes VoF of $0.5 million. Expenses: Cost of sales increased as a percentage of sales in 1995 thereby reducing consolidated gross margin by .7 percentage points to 31.8% of sales from 32.5% in 1994. Substantially improved gross margin at LTI improved overall gross margin by 1.3 percentage points. Gross margin, excluding LTI, decreased 2 percentage points and more than offset the favorable impact of LTI. Unprecedented increases in the cost of commodity raw materials, principally wood pulp, solvents, and polypropylene, more than accounted for the margin erosion, excluding LTI. Somewhat offsetting these cost increases were the favorable effects of overall selling price increase, productivity improvements and cost containment. Marketing and administrative expenses increased $18.4 million, or 10%, in 1995 compared with 1994 principally due to increased marketing efforts at LTI and the third quarter consolidation of its subsidiary in Japan. Marketing and administrative costs, excluding LTI, increased less than one-half of one percent over 1994. Overall marketing and administrative costs continued to decrease as a percentage of sales from 19.3% in 1994 to 19% in 1995. Research and development expenses increased $2.7 million, or 6%, due to increases at LTI and in the can coatings business. 25 18 Interest expense increased $0.4 million, or 2%, in 1995 compared with 1994 primarily due to higher average short-term borrowing throughout the year. If interest had been capitalized, there would have been no impact on earnings per share in 1995 or 1994. Income Taxes: The effective tax rate was 35.5% in 1995 compared with 36% in 1994. Minority Interests: Income attributed to minority interest shareholders increased 18% from 1994 due primarily to increased profits at LTI. Net Income: Net income for the year 1995 was $40.6 million, or $1.67 per share, a 7% increase compared with $37.9 million, or $1.56 per share, in 1994. The 1995 net income includes a decrease due to the effect of higher raw material cost, net of selling price increases, of approximately $.43 per share. Somewhat offsetting this negative impact was a $.07 per share increase due to favorable currency translation rates and a $.02 per share increase due to a reduction of the effective income tax rate from 36% in 1994 to 35.5% in 1995. 1994 COMPARED WITH 1993 Revenues: Net sales were $974.7 million in 1994, an increase of $87.6 million, or 10%, over sales of $887.1 million for 1993. The 10% increase in sales was due to unit volume increases. A 1% increase due to the effect of higher currency translation rates on international sales was offset by selling price decreases averaging 1%. Acquisitions and divestitures accounted for a net increase in sales of $1 million. Equity in net income of affiliates increased $1.4 million to $3.8 million in 1994. This increase is due to a $0.7 million increase in the results of D & S Plastics International and a full year of earnings from AD Aerospace Finishes VoF representing a $0.7 million increase in earnings. Expenses: Cost of sales increased as a percent of sales in 1994 thereby reducing consolidated gross margin by .6 percentage points to 32.5% of sales from 33.1% in 1993. Excluding LTI, gross margin remained relatively constant at 27.8% for 1994 compared with 27.9% for 1993. Two-thirds of the total .6 percentage point decrease is due to the unfavorable impact of a LIFO charge of $2.2 million in 1994 compared to $1.3 million of LIFO income in 1993. Gross margin declined in 1994 at LTI due to lower fetal bovine serum unit selling prices and increased unit costs combined with higher royalty expense. Excluding LTI, productivity improvements, reductions in fixed manufacturing costs as a percent of sales and the benefit of lower gas costs for our cogeneration facility almost fully offset the negative impact of selling price reductions on gross margin. Marketing and administrative expenses increased $13.1 million, or 7%, in 1994 compared with 1993 due primarily to increased marketing efforts at LTI and cost associated with 1994 Dexter acquisitions. Marketing and administrative costs decreased as a percentage of sales from 19.7% in 1993 to 19.3% in 1994. Research and development expenses increased $2.8 million, or 6%, due to increases in the food packaging and electronics markets and at LTI. Interest expense increased $1.8 million, or 9%, in 1994 compared with 1993 primarily due to higher long-term borrowings beginning in the fourth quarter of 1993. If interest had been capitalized, there would have been no impact on earnings per share in 1994 and earnings per share would have increased by $.02 in 1993. In 1993, there was a gain on divestiture of product lines of $13 million partially offset by a $12.4 million charge for restructuring businesses and a $1 million provision for estimated environmental costs. Income Taxes: The effective tax rate was 36% in 1994 compared with 36.5% in 1993. Minority Interest: Income attributed to minority interest shareholders increased 13% from 1993 due primarily to increased profits at LTI. Net Income: The year 1994 resulted in net income of $37.9 million, or $1.56 per share, compared with $34.1 million, or $1.40 per share, in 1993 before deducting the $9.9 million, or $.41 per share cumulative effect of accounting principle changes in 1993. The 1994 net income includes a $.04 per share decrease due to the net effect of acquisitions and divestitures, a $.02 per share increase from the effect of changes in currency translation rates, a $.01 per share increase due to the reduction of the effective income tax rate from 36.5% to 36% for the year, and an unfavorable comparison of $.08 per share resulting from a LIFO charge of $.05 per share in 1994 compared with LIFO income of $.03 per share in 1993. Also included in earnings for 1993 was a charge of $.03 per share due to environmental costs and a net favorable impact to earnings from divestitures net of restructuring charges of $.02 per share. - -------------------------------------------------------------------------------- TAXES The effective income tax rate was 35.5% in 1996, 35.5% in 1995 and 36% in 1994. The tax rate is currently expected to approximate 36% in 1997. The income tax rate differs from the statutory U.S. federal income tax rate as shown below:
1996 1995 1994 ------------------------------- U.S. federal rate 35.0% 35.0% 35.0% State taxes, net of federal benefit 1.8 1.7 1.8 Investment and R&E tax credits (0.6) (1.0) (2.2) International taxation differences (2.2) (0.7) (0.8) Other 1.5 0.5 2.2 ------------------------------- Effective income tax rate 35.5% 35.5% 36.0% ===============================
- -------------------------------------------------------------------------------- Investment tax credits are accounted for by the deferred method, which credits the benefit to income over the productive lives of the related assets. Research and experimentation (R&E) tax credits reduce income tax expense in the year earned. Pretax income from international operations amounted to $59.6 million in 1996, $57.3 million in 1995 and $46.4 million in 1994. U.S. and international income and withholding taxes have not been provided on temporary differences related to investments in foreign subsidiaries. These differences principally include unremitted earnings of approximately $193 million, differences between the 26 19 financial reporting amount and the tax basis of investments in foreign subsidiaries and cumulative translation adjustments. The investment in these subsidiaries is considered to be permanent in nature. It is impracticable to estimate the total tax liability, if any, which these differences could cause should such investments cease to be treated as permanently reinvested. - -------------------------------------------------------------------------------- TAXES, OTHER THAN SALES TAXES
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Income taxes Current United States $ 18,188 $ 5,932 $ 3,012 State 3,817 1,691 755 International 18,342 18,752 14,783 ------------------------------------- 40,347 26,375 18,550 ------------------------------------- Deferred United States (5,256) 754 5,298 State (1,069) 348 1,353 International 858 860 1,299 ------------------------------------- (5,467) 1,962 7,950 ------------------------------------- Total income taxes 34,880 28,337 26,500 Payroll taxes 19,819 20,201 18,195 Property taxes 3,841 4,082 3,576 Other taxes 635 624 454 ------------------------------------- Total taxes $ 59,175 $53,244 $48,725 ===================================== - --------------------------------------------------------------------------------
DEFERRED INCOME TAXES The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 1996, 1995 and 1994 are presented below.
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Deferred tax assets: Postretirement health benefits $ 8,972 $ 9,644 $ 9,976 Accrued expenses, not currently deductible 6,395 5,820 6,072 Foreign loss carryforwards 6,099 6,234 5,617 Pension benefits 5,809 4,768 2,649 Inventory, principally valuation reserves 5,685 5,039 4,466 Reserves for insurance 5,632 5,409 4,597 Environmental reserves 5,074 5,164 4,972 Alternative minimum tax credit carryforwards 4,252 3,820 961 Other 11,213 10,953 14,173 ------------------------------------- Gross deferred tax assets $ 59,131 $ 56,851 $ 53,483 ------------------------------------- Deferred tax liabilities: Fixed assets, principally depreciation $(46,560) $(49,828) $(54,182) Other (5,111) (4,839) (1,023) ------------------------------------- Gross deferred tax liabilities $(51,671) $(54,667) $(55,205) ------------------------------------- Net deferred tax asset (liability) before valuation allowance $ 7,460 $ 2,184 $ (1,722) Valuation allowance (3,573) (3,585) (3,121) ------------------------------------- Net deferred tax asset (liability) after valuation allowance $ 3,887 $ (1,401) $ (4,843) ===================================== - --------------------------------------------------------------------------------
Valuation allowances of $3.6 million on December 31, 1996 and 1995, and of $3.1 million on December 31, 1994, reduced the deferred tax asset attributable to foreign loss carryforwards to the amount that, based upon all available evidence, is more likely than not to be realized. Reversal of the valuation allowance is contingent upon the recognition of future taxable income and capital gains in specific foreign countries or changes in circumstances which cause the recognition of the benefits to become more likely than not. The components of deferred taxes at December 31, 1996, 1995 and 1994 are as follows:
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Current deferred tax assets $ 22,477 $ 20,890 $ 16,122 Long-term tax asset 2,483 930 1,965 (included in other assets) Current deferred tax liability (1,592) (1,735) (1,413) (included in accrued and deferred income taxes) Long-term deferred income taxes (19,481) (21,486) (21,517) ------------------------------------- Net deferred tax asset (liability) $ 3,887 $ (1,401) $ (4,843) ===================================== - --------------------------------------------------------------------------------
NET INCOME PER SHARE Net income of $2.06 per share increased 23.4% over net income of $1.67 per share in 1995. Excluding the net gain of $.04 per share from the second quarter 1996 disposal of product lines, net income increased 21% to $2.02 per share compared with 1995. Net income per share is calculated by dividing net income by the weighted average number of shares of common stock outstanding during the year. The decrease in the average number of shares in 1996 resulted from Dexter's purchase of 989,500 shares of its outstanding common stock. This decrease was partially offset by the exercise of stock options. No effect has been given to common stock equivalents related to stock options outstanding or restricted stock, as no material dilutive effect would result from these items. 27 20 MARKET SEGMENT DATA 1996 COMPARED WITH 1995 Sales to the Aerospace market increased $4.4 million, or 10%. Sales increased primarily due to higher sales of aerospace adhesives. Operating income increased $2.4 million primarily due to lower operating losses from aerospace coatings. Operating income in 1995 was reduced by costs associated with the consolidation of the domestic aerospace coatings business and start-up costs of the new coatings facility. Aerospace adhesives also contributed to the increase in operating income in 1996 principally due to sales volume increases. Sales to the Electronics market increased $3.8 million, or 2%, in spite of a recession in the global electronics market during 1996. Operating income decreased $0.6 million, or 3%, in 1996. Costs associated with the write-off of assets and severance related to realigning operations in Europe more than offset improvements in operating income due to stronger volume of magnetic materials products and the favorable impact of cost containment activities. Sales to the Food Packaging market decreased $12.6 million, or 4%. The effect of acquired businesses increased sales by $2.3 million. Net of acquired businesses, sales decreased principally due to lower sales of food and beverage can coatings serving the international markets. Lower currency translation rates on international sales also contributed to this decrease. Operating income decreased $1.9 million, or 6%, in 1996 principally due to lower gross margin on international food and beverage can coatings resulting from sales volume decreases in Europe and selling price decreases in Japan. This decrease was partially offset by lower raw material costs. Sales to the Medical market increased $43.1 million, or 12%. The effect of the consolidation of LTI's Japanese subsidiary increased sales by $9.5 million. Net of this impact, sales increased 9% primarily due to increased sales of products at LTI. Higher sales of medical nonwoven materials also contributed to this increase. Partially offsetting this increase were lower currency translation rates on international sales. Operating income increased $15 million, or 36%, in 1996. Operating income increased at LTI in 1996 primarily due to the favorable impact of higher unit sales and increased gross margin on sales of fetal bovine serum. LTI's operating income in 1996 also included a $2.6 million gain due to the receipt of proceeds from a note related to the sale of its molecular diagnostic product line in 1990. Medical nonwovens also contributed to the increase in operating income, as higher sales combined with lower raw material costs to improve margins. Sales of the "Other" category decreased $27.3 million, or 13%. Net of divested businesses, sales in 1996 increased $1.6 million, or 1%, compared with 1995 sales. Operating income increased $5.5 million, or 36%, in 1996 due to improved results from the company's cogeneration operation in 1996. Higher sales and lower raw material costs from nonwoven specialty materials also contributed favorably to the increase in operating income as did improved results of the company's specialty coatings operation in France. 1995 COMPARED WITH 1994 Sales to the Aerospace market increased $0.6 million, or 1%. Increased sales of aerospace adhesives were mostly offset by decreased sales of aerospace coatings in 1995. Operating losses increased $0.7 million in 1995. Lower aerospace coatings sales volume and increased costs in 1995 due to the consolidation of the domestic aerospace coatings business and start-up of the new coatings facility in Waukegan, Illinois, decreased operating results. Partially offsetting this decrease was increased operating income from aerospace adhesives principally due to higher sales volume. Sales to the Electronics market increased $27.1 million, or 17%. Sales of all products were strong in 1995. Operating income increased $3.8 million, or 25%, in 1995 primarily due to increased gross margin from higher sales volume, partially offset by increased raw material costs as well as higher marketing and administrative costs associated with products in the Electronics market. Sales to the Food Packaging market increased $22.8 million, or 9%. Sales increased primarily due to strong sales of food and beverage can coatings serving the European market, in addition to higher currency translation rates on international sales. Operating income decreased $0.2 million in 1995. This decrease was primarily due to higher raw material costs in both the domestic and European nonwovens and food and beverage can coatings businesses. Increased marketing and research and development costs in the food and beverage can coatings business also had an unfavorable impact on operating income. Partially offsetting these decreases were increased gross margins on European food and beverage can coatings primarily due to sales volume increases and higher currency translation rates on international results. Sales to the Medical market increased $48.7 million, or 15%. The effect of the consolidation of LTI's Japanese subsidiary increased net sales by $4.9 million. Net of this impact, sales increased 14%. Both LTI and medical nonwoven product sales were strong. Higher currency translation rates on international sales also contributed to this increase. Operating income increased $5.8 million, or 16%, in 1995. Operating income increased at LTI in 1995 primarily due to the favorable impact of higher unit sales, a favorable product mix, and increased selling prices. Partially offsetting this increase was lower operating income from medical nonwovens, which decreased slightly in 1995 compared with 1994 despite strong sales as substantially higher raw material costs, particularly in wood pulp were not offset by selling price increases. Sales of the "Other" category increased $15 million, or 8%, primarily due to stronger European nonwoven wallcover and vacuum bag sales in 1995 and higher currency translation rates on international sales. Operating income decreased $4.2 million, or 22% in 1995. This decrease was primarily due to decreased gross margin in the automotive acoustic materials business, which was primarily due to high start-up costs of a new product line in acoustic materials, in addition to increased cost of raw materials compared with 1994. 28 21 MARKET SEGMENT DATA
In thousands of dollars 1996 1995 1994 1993 1992 - --------------------------------------------------------------------------------------------------------------------------------- NET SALES Aerospace $ 49,773 $ 45,387 $ 44,769 $ 41,815 $ 45,998 Electronics 192,262 188,461 161,353 145,359 137,622 Food Packaging 269,561 282,183 259,398 232,164 225,493 Medical 407,385 364,334 315,616 284,733 288,817 Other 181,204 208,540 193,583 183,041 253,509 ------------------------------------------------------------------------------------ Consolidated $1,100,185 $1,088,905 $ 974,719 $ 887,112 $ 951,439 ==================================================================================== Unit Volume and Product Mix Change 3% 7% 10% 1% 3% Field Sales Force 252 241 229 230 242 - --------------------------------------------------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION Aerospace $ 3,098 $ 3,373 $ 3,479 $ 3,414 $ 3,524 Electronics 4,958 4,719 4,627 4,466 4,057 Food Packaging 8,659 9,563 9,114 7,160 6,030 Medical 16,068 13,449 11,606 10,588 9,389 Other 11,085 12,247 11,684 10,717 12,344 General Corporate 371 376 413 310 328 ------------------------------------------------------------------------------------ Consolidated $ 44,239 $ 43,727 $ 40,923 $ 36,655 $ 35,672 ==================================================================================== - --------------------------------------------------------------------------------------------------------------------------------- RESEARCH AND DEVELOPMENT Aerospace $ 4,076 $ 3,973 $ 3,742 $ 3,474 $ 3,480 Electronics 7,089 6,878 6,547 5,496 5,128 Food Packaging 11,735 12,478 10,967 9,898 8,026 Medical 21,652 17,147 17,109 17,052 16,511 Other 6,695 8,632 7,933 7,316 9,071 General Corporate 257 267 346 567 ------------------------------------------------------------------------------------ Consolidated $ 51,504 $ 49,375 $ 46,644 $ 43,803 $ 42,216 ==================================================================================== Laboratory Staff 447 454 452 439 395 - --------------------------------------------------------------------------------------------------------------------------------- DIVESTITURE, RESTRUCTURING & ENVIRONMENTAL Credit/(Charge) Aerospace $ (5,170) $ (1,853) Electronics (1,864) (3,034) Food Packaging (2,234) (1,496) Medical $ 2,569 (2,008) (1,686) Other 150 11,405 10,786 General Corporate (501) (712) ---------- ------------------------------ Consolidated $ 2,719 $ (372) $ 2,005 ========== ============================== - --------------------------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATING INCOME (LOSS) Aerospace $ 833 $ (1,533) $ (844) $ (6,215) $ (1,469) Electronics 18,394 19,038 15,248 10,295 8,699 Food Packaging 29,898 31,809 32,031 28,765 34,667 Medical 56,958 41,979 36,164 36,089 34,306 Other 20,649 15,193 19,407 24,783 28,411 ------------------------------------------------------------------------------------ Consolidated Operating Income 126,732 106,486 102,006 93,717 104,614 Other Income, net 9,897 9,993 9,386 8,586 3,351 Interest Expense (20,500) (20,931) (20,509) (18,756) (18,799) General Corporate Expense (17,877) (15,724) (17,271) (17,109) (16,034) ------------------------------------------------------------------------------------ Consolidated Income before Taxes $ 98,252 $ 79,824 $ 73,612 $ 66,438 $ 73,132 ==================================================================================== - --------------------------------------------------------------------------------------------------------------------------------- CAPITAL EXPENDITURES Aerospace $ 1,254 $ 4,336 $ 8,397 $ 3,062 $ 1,315 Electronics 6,786 3,364 6,370 7,457 4,280 Food Packaging 4,403 3,986 6,239 6,771 13,512 Medical 44,885 12,643 16,536 19,081 22,138 Other 4,929 4,566 7,368 8,292 10,391 General Corporate 20 74 187 121 157 ------------------------------------------------------------------------------------ Consolidated $ 62,277 $ 28,969 $ 45,097 $ 44,784 $ 51,793 ==================================================================================== - --------------------------------------------------------------------------------------------------------------------------------- ASSETS AT YEAR-END Aerospace $ 60,910 $ 64,201 $ 60,753 $ 56,878 $ 50,613 Electronics 108,137 103,571 97,646 87,978 83,628 Food Packaging 177,010 191,107 179,927 158,884 107,669 Medical 313,812 258,084 235,191 218,129 194,197 Other 132,901 180,064 186,384 172,080 199,384 ------------------------------------------------------------------------------------ Consolidated Operating Assets 792,770 797,027 759,901 693,949 635,491 General Corporate* 161,034 137,134 120,708 126,742 146,534 ------------------------------------------------------------------------------------ Consolidated Assets 953,804 934,161 880,609 820,691 782,025 Consolidated Liabilities (579,689) (564,546) (536,976) (507,396) (466,411) ------------------------------------------------------------------------------------ Net Assets $ 374,115 $ 369,615 $ 343,633 $ 313,295 $ 315,614 ====================================================================================
* Corporate assets consist primarily of cash, securities and investments, which include the investment in D & S Plastics International of $41,605 in 1996, $38,709 in 1995, $39,435 in 1994, $37,110 in 1993 and $35,496 in 1992, and, in addition, corporate assets of Life Technologies, Inc. - -------------------------------------------------------------------------------- 29 22 LIFE TECHNOLOGIES, INC. On September 1, 1983, Dexter's GIBCO subsidiary merged with Bethesda Research Laboratories, Inc. (BRL). The resulting free-standing company was renamed Life Technologies, Inc. (LTI) and at December 31, 1996 was owned 53% by Dexter, with the remainder owned by the public. The common stock of LTI is publicly traded on the over-the-counter market under the Nasdaq symbol LTEK. Since 1983, Dexter's proportionate ownership of LTI has decreased from 64% in 1983 to 53% due principally to the effect of the exercise of stock options and the conversion of LTI subordinated debentures held by parties other than Dexter into LTI common stock. LTI is reported as part of the Medical market segment, although LTI, as a publicly owned company, issues its own annual report including audited financial statements. These statements are shown beginning on this page and continuing onto the next page in condensed form. Net sales of LTI increased $37.2 million, or 14%, in 1996. This improvement was due to a $38.9 million, or 17%, increase in sales of product lines other than fetal bovine serum (FBS) and higher FBS sales of $1.5 million. The impact of consolidating the results of LTI's Japanese subsidiary beginning in September 1995 represented approximately 3% of the 14% increase in net sales for 1996. Lower currency translation rates decreased 1996 net sales by $3.2 million compared with 1995. Gross margin for 1996 was 52.5% of net sales compared with 50.1% in 1995. Gross margin improved in 1996, as FBS unit costs decreased at a rate greater than FBS unit selling prices. The FBS cost decline in 1996 caused most of the reduction in the LIFO reserve of $3.3 million compared with a $.3 million increase in 1995. In addition, gross margin increased in Japan, due principally to the consolidation of LTI's Japanese subsidiary. Marketing and administrative expenses increased 16% to $100.5 million in 1996 and represented 32.5% of net sales in 1996 compared with 31.9% of net sales in 1995. This increase is due principally to higher expenses in 1996 resulting from the consolidation of LTI's Japanese subsidiary and increased costs for implementing new management information systems. Research and development expenses increased 20% to $19.1 million and represented 6.2% of net sales in 1996 compared with 5.8% in 1995. Research and development expenses were primarily directed toward developing new products and business solutions for LTI's customers in the life sciences research and industrial bioprocessing areas and toward improved production processes. LTI reported a $2.6 million gain on the disposal of its molecular diagnostics product line which sold in 1990 for book value plus a $2.6 million note receivable. LTI delayed recognition of the gain on this sale until the note was collected because of reasonable doubt as to whether the note might be collected. Pretax income increased 34%. Income taxes were provided at a rate of 36% in 1996 compared with 34.8% in 1995. Net income increased 29% to $28.7 million in 1996 from $22.3 million in 1995. LTI declared quarterly dividends totaling $.15 1/3 per share in 1996 and $.13 1/3 in 1995. Dividends were adjusted for a 3-for-2 stock split effected on August 28, 1996. After the deduction of minority interests, LTI contributed $15.4 million to Dexter's net income, or $.65 per share, in 1996, compared with $12.1 million, or $.50 per share, in 1995. Dexter's portion of LTI shareholders' equity, per share of Dexter, increased to $4.16 at December 31, 1996, up from $3.42 at year-end 1995. At year-end 1996, LTI had $15.3 million in cash and short-term securities, $125.2 million in other current assets and $56.3 million of current liabilities. In 1996, LTI spent $36 million on capital expenditures and was self funding. Capital expenditures in 1997 are expected to range between $30 million and $35 million largely due to the completion of LTI's corporate R&D and administrative office complex in Maryland. It is expected that LTI will be self funding in 1997. - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME
Years ended December 31 -------------------------- In thousands of dollars 1996 1995 - -------------------------------------------------------------------------------- REVENUES Net sales $ 309,455 $272,232 Net royalties 884 67 -------------------------- 310,339 272,299 -------------------------- EXPENSES Cost of sales 147,018 135,784 Marketing and administrative 100,519 86,821 Research and development 19,084 15,871 Gain on product line disposal (2,569) -------------------------- 264,052 238,476 -------------------------- Other income, net 433 1,120 -------------------------- INCOME BEFORE INCOME TAXES 46,720 34,943 Income taxes 16,819 12,160 -------------------------- INCOME BEFORE MINORITY INTERESTS 29,901 22,783 Minority interests 1,201 506 -------------------------- NET INCOME $ 28,700 $ 22,277 ========================== - --------------------------------------------------------------------------------
CONTRIBUTION OF LTI TO DEXTER NET INCOME
In thousands of dollars Years ended December 31 ----------------------- (except per share amounts) 1996 1995 - -------------------------------------------------------------------------------- Net income of LTI $28,700 $22,277 Portion attributable to minority interests 13,341 10,213 ----------------------- Dexter's portion of net income of LTI $15,359 $12,064 ======================= Net income per share of Dexter $ .65 $ .50 - --------------------------------------------------------------------------------
30 23 LIFE TECHNOLOGIES, INC. - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF FINANCIAL POSITION
December 31 ------------------------ In thousands of dollars 1996 1995 - -------------------------------------------------------------------------------- ASSETS Cash and short-term securities $ 15,326 $ 23,201 Accounts receivable, net 54,566 48,722 Inventories 62,320 60,845 Other current assets 8,285 9,254 Property, plant and equipment, net 88,367 51,861 Investments and other assets 11,023 8,671 Excess of cost over net assets of businesses acquired 14,044 6,190 ------------------------ Total assets $253,931 $208,744 ======================== LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 56,301 $ 45,261 Long-term debt 4,668 1,451 Other liabilities 10,043 8,107 Shareholders' equity 182,919 153,925 ------------------------ Total liabilities and shareholders' equity $253,931 $208,744 ======================== - --------------------------------------------------------------------------------
CONTRIBUTION OF LTI TO DEXTER BOOK VALUE
December 31 In thousands of dollars ---------------------- (except per share amounts) 1996 1995 - -------------------------------------------------------------------------------- LTI shareholders' equity $182,919 $153,925 Portion attributable to minority interests 85,328 71,214 ---------------------- Dexter's portion of LTI shareholders' equity $ 97,591 $ 82,711 ====================== Book value per share of Dexter stock $ 4.16 $ 3.42
- -------------------------------------------------------------------------------- CONDENSED STATEMENT OF CASH FLOWS
Years ended December 31 -------------------------- In thousands of dollars 1996 1995 - -------------------------------------------------------------------------------- OPERATIONS Net income $ 28,700 $ 22,277 Noncash items Depreciation and amortization 10,576 7,728 Gain on product line disposal (2,569) Other (3,303) (474) Operating working capital decrease (increase) 6,860 (8,180) -------------------------- 40,264 21,351 -------------------------- INVESTMENTS Property, plant and equipment (36,017) (12,279) Acquisitions and joint ventures (11,704) (825) Proceeds from product line disposal 2,569 Other (30) (28) -------------------------- (45,182) (13,132) -------------------------- FINANCING Dividends paid (3,351) (3,007) Exercise of stock options 1,998 2,990 Short-term borrowings 319 Long-term loan repayments (1,617) -------------------------- (2,651) (17) -------------------------- EFFECT OF TRANSLATION RATE CHANGES ON CASH AND SHORT-TERM SECURITIES (306) (381) -------------------------- (DECREASE) INCREASE IN CASH AND SHORT-TERM SECURITIES (7,875) 7,821 Cash included from consolidation of a subsidiary which became majority-owned in 1995 2,134 -------------------------- TOTAL (DECREASE) INCREASE IN CASH AND SHORT-TERM SECURITIES $ (7,875) $ 9,955 ========================== - --------------------------------------------------------------------------------
D & S PLASTICS INTERNATIONAL On March 31, 1990, Dexter and Solvay S.A., of Belgium, completed the formation of D & S Plastics International, an equally owned joint venture based in Auburn Hills, Michigan. D & S Plastics is the leading North American supplier of automotive engineered polyolefin materials. These modified olefins are used for front and rear bumper facias, ground-effects packages, air bag covers, and many other exterior and interior automobile components. D & S Plastics' sales have increased from $89.9 million in 1995 to $112.2 million in 1996, an increase of 25%. For the year ended December 31, 1996, D & S Plastics reported net income of $5.8 million compared to a net loss of $1.5 million in 1995. D & S Plastics' results are not consolidated in Dexter's financial statements. Dexter accounts for the results of D & S Plastics under the equity method. Included in Dexter's equity in net income (loss) of affiliates is 50% of D & S Plastics' results. During 1996, D & S Plastics had capital expenditures of $1.6 million and was self funded. In October 1995, the company announced its intention to sell its 50% equity interest in D & S Plastics International. - -------------------------------------------------------------------------------- CONDENSED STATEMENT OF INCOME
Years ended December 31 -------------------------- In thousands of dollars 1996 1995 - -------------------------------------------------------------------------------- Revenues $112,218 $ 89,850 Net income (loss) $ 5,751 $ (1,452) Amount included in Dexter's "Equity in net income (loss) of affiliates" $ 2,876 $ (726) - --------------------------------------------------------------------------------
CONDENSED STATEMENT OF FINANCIAL POSITION
December 31 ----------------------- In thousands of dollars 1996 1995 - -------------------------------------------------------------------------------- ASSETS Current assets $ 40,671 $29,580 Long-term assets 63,670 68,185 ----------------------- Total assets $104,341 $97,765 ======================= LIABILITIES AND SHAREHOLDERS' EQUITY Current liabilities $ 21,131 $20,346 Shareholders' equity 83,210 77,419 ----------------------- Total liabilities and shareholders' equity $104,341 $97,765 ======================= Amount included in Dexter's "Investment in unconsolidated affiliates" $ 41,605 $38,709 - --------------------------------------------------------------------------------
31 24 GEOGRAPHIC DATA Operations outside of North America continue to be important to Dexter, giving geographic diversification to both sales and operating income. 1996 COMPARED WITH 1995 Net sales increased in the Pacific area but decreased in North America and Western Europe. In North America, net sales increased in all major markets, with strong increases in the Aerospace and Medical markets. These increases were more than offset by decreases in the "Other" category, primarily due to divested businesses. Sales outside of North America increased $14.5 million, or 3%, despite lower currency translation rates which decreased net sales $12.7 million. Net sales increased in all markets in which we operate outside of North America except in the Food Packaging market. Sales to the Food Packaging market decreased principally due to sales volume decreases in Europe, selling price decreases in Japan, and lower currency translation rates. Net sales in the Pacific area increased 16%, primarily due to strong sales at LTI mainly due to the consolidation of their Japanese subsidiary resulting from the acquisition of a controlling interest in the third quarter of 1995. Net sales outside of North America were 45% of consolidated net sales in 1996 and 44% in 1995. Export sales decreased $2 million to $69 million and represent 6% of consolidated net sales in 1996. Operating income increased in North America and the Pacific area but decreased in Western Europe. In North America, operating income increased $21.8 million, or 51%. Operating income increased in all markets in North America, principally due to sales volume increases and the favorable impact on operating income of the combination of lower raw material costs and selling price increases. Operating income in North America also included LTI's $2.6 million gain due to the receipt of proceeds from a note related to a prior sale. Operating income in Western Europe decreased $2.5 million, or 5%, principally due to decreases in the Electronics and Food Packaging markets. Sales volume decreases in the Food Packaging market, as well as lower currency translation rates, contributed to this decrease. Costs associated with the write-off of assets and severance and relocation costs also decreased operating income in Western Europe in 1996. Operating income increased 4% in the Pacific area primarily due to increases at LTI in the Medical market. Somewhat offsetting the increases were decreases in the Food Packaging market primarily due to selling price decreases net of raw material cost decreases. Operating income outside of North America was 50% of total operating income in 1996 and 61% in 1995. Total net assets increased 1%, or $4.5 million, in 1996. Corporate assets increased in North America and decreased in Western Europe and the Pacific area principally due to cash and short-term securities. Currency translation rates decreased net assets outside of North America by $3.8 million. Net assets outside of North America were 62% of total net assets in 1996 compared with 61% in 1995. 1995 COMPARED WITH 1994 Net sales increased in all geographic areas. In North America, net sales increased $23.5 million, or 4%. Strong sales increases in North America in the Medical and Electronics markets were partially offset by decreases in the Aerospace and Food Packaging markets, and in the "Other" category. Sales outside of North America increased $90.7 million, or 23%. Higher currency translation rates contributed $31 million, or approximately one-third of the increase. Net sales increased in all markets in which we operate outside of North America. Sales to the Food Packaging market and at LTI in the Medical market were strong in Western Europe. The 34% increase in sales in the Pacific area was primarily due to increases in the Electronics market and from the acquisition of a controlling interest in a Japanese subsidiary by LTI in the Medical market. Net sales outside of North America were 44% of consolidated net sales in 1995 and 40% in 1994. Export sales increased $3 million to $71 million and represent 7% of consolidated net sales in 1995. Operating income increased in Western Europe and the Pacific area and decreased in North America. In North America, operating income decreased in all major markets except the Electronics market. These decreases in operating income were mainly due to lower sales volumes in all markets except the Medical market and the unfavorable impact of higher raw material costs, net of selling price increases. Operating income outside of North America increased $14.3 million, or 28%. The increase in Western Europe was principally due to increases in food and beverage can coatings in the Food Packaging market and at LTI in the Medical market. Operating income increased in the Pacific area primarily due to increases in the Electronics market and at LTI in the Medical market. The acquisition of a controlling interest in a subsidiary by LTI contributed to LTI's increase in the Pacific area. Operating income outside of North America was 61% of total operating income in 1995 and 50% in 1994. Total net assets increased 8%, or $26 million, in 1995. Net assets increased in all geographic areas. Net assets increased 8% in North America, 5% in Western Europe, and 23% in the Pacific area. The increase in assets in the Pacific area was primarily due to the consolidation of LTI's Japanese subsidiary. Currency translation rates increased net assets outside of North America by $9 million. Net assets outside of North America were 61% of total net assets in 1995 and 1994. 32 25 GEOGRAPHIC DATA
In thousands of dollars 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------- NET SALES* North America Total Net Sales $ 682,859 $ 672,386 $ 634,230 $586,868 $ 633,987 Intercompany Sales 81,684 67,982 53,302 40,731 40,589 ---------------------------------------------------------------- Net Sales $ 601,175 $ 604,404 $ 580,928 $546,137 $ 593,398 ================================================================ Western Europe Total Net Sales $ 390,699 $ 392,267 $ 331,397 $290,814 $ 313,970 Intercompany Sales 11,425 11,132 14,513 13,156 16,289 ---------------------------------------------------------------- Net Sales $ 379,274 $ 381,135 $ 316,884 $277,658 $ 297,681 ================================================================ Pacific Area Total Net Sales $ 122,100 $ 104,719 $ 76,907 $ 63,317 $ 60,360 Intercompany Sales 2,364 1,353 ---------------------------------------------------------------- Net Sales $ 119,736 $ 103,366 $ 76,907 $ 63,317 $ 60,360 ================================================================ Consolidated Total Net Sales $1,195,658 $1,169,372 $1,042,534 $940,999 $1,008,317 Intercompany Sales 95,473 80,467 67,815 53,887 56,878 ---------------------------------------------------------------- Net Sales $1,100,185 $1,088,905 $ 974,719 $887,112 $ 951,439 ================================================================
* Intercompany sales between areas are based on estimated market prices or on amounts computed to provide profits to each unit. Excluded from net sales is Dexter's share of the sales of 50% or less owned joint ventures which are accounted for under the equity or cost methods. - -------------------------------------------------------------------------------- OPERATING INCOME North America $ 64,851 $ 43,014 $ 51,555 $ 50,863 $ 57,422 Western Europe 52,031 54,576 45,155 40,298 44,831 Pacific Area 11,300 10,881 6,013 3,080 3,266 Consolidated, net of eliminations $ 126,732 $ 106,486 $ 102,006 $ 93,717 $ 104,614 ================================================================== - ------------------------------------------------------------------------------------------------------------------ NET ASSETS AT YEAR-END North America Operating Assets $ 445,744 $ 440,416 $ 450,478 $ 429,395 $ 423,419 Corporate Assets* 132,245 103,813 97,579 116,041 135,293 Liabilities (435,786) (400,622) (415,330) (411,988) (373,039) ------------------------------------------------------------------ Net Assets $ 142,203 $ 143,607 $ 132,727 $ 133,448 $ 185,673 ================================================================== Western Europe Operating Assets $ 279,514 $ 282,277 $ 257,288 $ 224,634 $ 174,177 Corporate Assets* 26,301 30,236 22,476 10,541 10,202 Liabilities (106,824) (115,634) (92,551) (74,915) (73,059) ------------------------------------------------------------------ Net Assets $ 198,991 $ 196,879 $ 187,213 $ 160,260 $ 111,320 ================================================================== Pacific Area Operating Assets $ 67,512 $ 74,334 $ 52,135 $ 39,920 $ 37,895 Corporate Assets* 2,488 3,085 653 160 1,039 Liabilities (37,079) (48,290) (29,095) (20,493) (20,313) ------------------------------------------------------------------ Net Assets $ 32,921 $ 29,129 $ 23,693 $ 19,587 $ 18,621 ================================================================== Consolidated Operating Assets $ 792,770 $ 797,027 $ 759,901 $ 693,949 $ 635,491 Corporate Assets* 161,034 137,134 120,708 126,742 146,534 Liabilities (579,689) (564,546) (536,976) (507,396) (466,411) ------------------------------------------------------------------ Net Assets $ 374,115 $ 369,615 $ 343,633 $ 313,295 $ 315,614 ==================================================================
* Corporate assets consist primarily of cash, securities and investments, which include the investment in D & S Plastics International of $41,605 in 1996, $38,709 in 1995, $39,435 in 1994, $37,110 in 1993 and $35,496 in 1992, and, in addition, corporate assets of Life Technologies, Inc. - -------------------------------------------------------------------------------- 33 26 ANALYSIS OF FINANCIAL CONDITION AND OPERATIONS PRINCIPLES OF CONSOLIDATION The consolidated financial statements include the accounts of all majority-owned subsidiaries. All consolidated subsidiaries are wholly owned except Life Technologies, Inc. (LTI) (53% owned) and a few other subsidiaries, primarily outside the United States, in which aggregate minority interests are not significant. Intercompany accounts, transactions and profits have been eliminated in the consolidated financial statements. Companies owned 20% to 50% are accounted for by the equity method. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Certain amounts for prior years have been reclassified to conform to and be consistent with the 1996 presentation. ACQUISITIONS AND DIVESTITURES In October 1995, Dexter announced its intention to reduce its future strategic emphasis on the automotive market. Accordingly, the company sold its small powder coatings business located in Birmingham, Alabama in April 1996, and its acoustic materials business located in Kansas City, Missouri in June 1996. The net effect of these divestitures resulted in a small gain of $0.2 million for the company in the second quarter 1996. In addition, as announced, Dexter also holds for sale its 50% equity interest in D & S Plastics International and expects to complete this transaction during 1997. To further strengthen its strategic position as a global supplier to the food packaging industry, Dexter acquired the can coating businesses of Jallut Iberica located in Spain in April 1996 and Kolack A.G. based in Switzerland in January 1997. Both businesses will report into Dexter's wholly owned subsidiary, Vernicolor A.G., located in Switzerland which operates as part of the Dexter Packaging Products Division. In January 1996, Life Technologies, Inc. acquired the remaining 75% of Custom Primers, Inc. located in California. In September 1996, Life Technologies, Inc. acquired an additional 29% ownership in its Japanese joint venture, Life Technologies Oriental, K.K. This additional purchase increased its ownership from 51% to 80%. None of these businesses acquired, divested or to be divested, either individually or in the aggregate, constitute a significant subsidiary of The Dexter Corporation. EVENTS, TRENDS AND VULNERABILITIES Dexter is subject to a multitude of events and trends which influence its business prospects, profitability and liquidity. Many of these events and trends are outside the control of the company. However, the consequent effects need to be managed as part of the ongoing business environment. In 1996, the overall cost of raw materials was reduced from the unprecedented levels experienced in 1995. Approximately 40% of the increase in 1995 raw material costs was recovered in 1996. Aggressive efforts to raise prices and to gain full value for our product offerings improved margins. However, the heightened degree of competition throughout the world makes it increasingly difficult to obtain price increases. Although the overall cost of raw materials has moderated, it is possible that such costs will rise again. This appears unlikely in the short term. However, any substantial increases in future demand for the materials the company purchases, provided no additional production capacity is built, will inevitably support higher levels of cost to Dexter. The company's Life Technologies, Inc. subsidiary is subject to volatility in the cost of fetal bovine serum which stems from a fundamental limit to supply. Further, for less critical applications, additional competition can be expected consequent to the development of substitute products for cell culture which do not depend on traditional raw materials. Unit volume growth of sales was 3% for 1996, below the company's targeted rate of 6%-7%. To the extent that this reduced rate continues or decreases in the future as a result of some weakness in domestic and international economies, revenue and earnings growth may be negatively impacted. The consequences of domestic interest rate changes and tax policy may influence total demand in our served markets. Since approximately 50% of Dexter's profits are derived from products sold outside the United States, any weakening of international currencies against the U.S. dollar could have a negative effect on the company's results. Revenues and profits in the food packaging, electronics and medical markets are the most sensitive to currency rate fluctuations. Geographical expansion will continue to provide opportunities and challenges as we learn how to create profitable growth in developing countries. There will continue to be increasing costs incurred by the need to respond to heightened regulatory pressures. Although we expect such increased costs might be moderate in areas of corporate governance and securities regulation, such increases may continue to be significant in areas of environmental, health, social and administrative regulation. Heightened worldwide environmental concerns have led to greater capital requirements and increased operating expenses. While the company, based on known facts and circumstances, has provided substantial environmental reserves as shown at year end in the Statement of Financial Position, the ultimate cost of compliance and remediation cannot be ascertained and, therefore, there is no assurance that such reserves will prove to be adequate over time. Substantial national and local deficits in several parts of the world may dictate the need for greater tax receipts or significant reductions in government spending. Future increases in taxes by countries, states and localities may be the ultimate outcome of this imbalance. Lower government spending may adversely affect Life Technologies, Inc. by reducing the overall availability of government funding for life science research. Other areas which will no doubt have an important impact on the future of the company will be the increasing rate of technological change, a continued universal move toward higher quality products, shortened product life cycles and further globalization of our customers and competitors. Technology is the lifeblood of the corporation. In order to remain competitive we must successfully introduce new products that not only replace our current products but also those of our competitors, otherwise we are potentially exposed to reduced margins and loss of business. 34 27 The general aging of the U.S. population will create challenges with respect to the availability of employees as well as amplifying trends in increased health care cost. Dexter's ability to hire and retain a qualified work force will be fundamental to our growth and success. Increased training and developmental needs will require additional resources to maintain and improve our overall competencies. The complexities of ever-changing worldwide events and trends including the international political environment, the emergence of the global marketplace, and the advancement of technology generate numerous vulnerabilities and challenges. The company believes that it will face these challenges with continued innovation and increased productivity. LIQUIDITY The company's liquidity is strong and ample lines of credit are available to the company and its subsidiaries. The current ratio (current assets divided by current liabilities) is 2.1 to 1, and the quick ratio (cash, short-term securities and accounts receivable divided by current liabilities) is 1.3 to 1. During 1996, the company's financing and investment needs were met through funds provided from operations. As shown in the Statement of Cash Flows, cash provided from operations of $127.6 million exceeded the sum of investments of $28.6 million and financing activity of $61.5 million, thereby increasing year-end cash and short-term securities by $37.5 million. Excluding LTI, the current ratio is 2.0 to 1 and the quick ratio is 1.3 to 1. Excluding LTI, cash provided from operations of $87.4 million and investments of $14.6 million exceeded cash needed for financing activities of $58.7 million, thereby increasing cash and short-term securities by $43.3 million. Investment activities during 1996 included a net cash increase from acquisitions and divestitures of $18.6 million. The nature of these transactions is described in the acquisitions and divestitures footnote on page 34. Financing activities during 1996 included the company's purchase of 989,500 shares of its outstanding common stock for $26.7 million. The company plans to meet its future working capital, capital expenditure and share repurchase program needs with funds provided from operations, the reduction of short-term securities and proceeds from the sale of its 50% equity interest in D & S Plastics International, and, as needed, short-term and long-term borrowings. - -------------------------------------------------------------------------------- ANALYSIS OF FINANCIAL POSITION WORKING CAPITAL Working capital, including cash and short-term securities, decreased $5.7 million from 1995. Operating working capital decreased $50.5 million to $195.6 million at year-end 1996. The current ratio at December 31, 1996 was 2.1 to 1. The company's target is to have a current ratio of greater than 2 to 1. The company's liquidity is strong, and ample lines of credit are available to the company and its subsidiaries. The sum of cash, short-term securities and accounts receivable exceeded total current liabilities at December 31, 1996. As of year-end 1996, the company has short-term lines of credit in excess of $100 million of which the Board has authorized borrowing only $50 million at any one time. At year-end 1996, nothing was borrowed against these lines of credit. Additionally, there is authorized $50 million in medium-term notes, which were all unissued at year end. As of year-end 1996, the company has seven multi-currency, revolving credit agreements aggregating $50 million. Nothing was borrowed under these agreements at year-end 1996; however, the funds are immediately available should the company so desire. - -------------------------------------------------------------------------------- INCREASE/(DECREASE) IN OPERATING WORKING CAPITAL AND WORKING CAPITAL IN 1996
Business Change in Acquisitions Currency Consolidated Cash and Accounting Divested Translation Account In thousands of dollars Changes Accruals Businesses Effects Balances - --------------------------------------------------------------------------------------------------------------------------------- Accounts receivable, net $ (3,827) $ (8,645) $(7,722) $(3,102) $ (23,296) Inventories at FIFO (7,912) 82 (5,364) 198 (12,996) Prepaid and deferred expenses (3,891) (127) (295) (43) (4,356) Accounts payable (62) (4,349) 4,765 238 592 Accrued liabilities and expenses (3,252) (5,579) (1,340) (234) (10,405) -------------------------------------------------------------------------------------------- Operating working capital (18,944) (18,618) (9,956) (2,943) (50,461) -------------------------------------------------------------------------------------------- Cash 2,669 (409) 2,260 Short-term securities 34,826 792 35,618 LIFO reserve 4,873 4,873 Current deferred tax assets 1,587 1,587 Short-term debt 8,371 116 8,487 Other current liabilities and taxes (8,099) 41 (8,058) -------------------------------------------------------------------------------------------- Working capital $ 18,823 $ (12,158) $(9,956) $(2,403) $ (5,694) ============================================================================================ - ---------------------------------------------------------------------------------------------------------------------------------
35 28 CASH AND SHORT-TERM SECURITIES Cash principally comprises in transit amounts and uncollected funds in the United States and amounts in operating bank accounts in other countries. Short-term securities have maturities of less than 90 days when purchased and represent cash awaiting use in the business, funds available for future investment, and partial offsets of net nonlocal currency exposures relating to current accounts payable and accounts receivable. Short-term securities are held in interest-bearing overnight securities, time deposits, prime commercial paper and other fixed income investments. The carrying value of short-term securities approximates fair value because of the short maturity of these instruments. At December 31, 1996, there were $91.6 million in short-term securities, of which $77.4 million were directly available to Dexter and $14.2 million were maintained separately by Life Technologies, Inc. due to its different shareholder constituency. Of these amounts, $42.9 million for Dexter and $11.4 million for Life Technologies, Inc. were held outside the United States. Of the $42.9 million for Dexter, $17.6 million was held by Dexter's captive insurance companies. ACCOUNTS RECEIVABLE Gross accounts receivable of $186.2 million at December 31, 1996 were reduced by allowances of $8.1 million. Such allowances were $7.5 million at December 31, 1995 and $6.6 million at December 31, 1994. Currency translation effects decreased net accounts receivable by $3.1 million in 1996. Included in accounts receivable are non-trade accounts receivable of $13.2 million in 1996 compared with $25.8 million in 1995 and $18.9 million in 1994. These amounts principally comprise tax receivables and amounts due from affiliates. The collection period for accounts receivable was approximately 57 days at December 31, 1996, 59 days as of December 31, 1995, and 54 days as of December 31, 1994. INVENTORIES Inventories are valued at the lower of cost or market. Inventories located in the United States represented 54% of total inventories. The LIFO (last-in, first-out) method was used for determining the cost of 55% of U.S. inventories in 1996, 63% in 1995 and 62% in 1994. The FIFO (first-in, first-out) method was used for determining the cost of remaining inventories in the United States and the 46% of total inventories which were outside the United States. The reduction in levels of LIFO valued inventories (LIFO liquidation) was not significant in 1996, 1995 or 1994. Inventories at December 31 were:
In thousands of dollars 1996 1995 1994 - ------------------------------------------------------------------------------- Materials and supplies $ 58,290 $ 60,099 $ 58,967 Work-in-process 17,078 17,038 11,319 Finished goods 93,379 104,606 95,384 --------------------------------------------- Total FIFO cost 168,747 181,743 165,670 LIFO reserve (19,836) (24,709) (22,828) --------------------------------------------- $ 148,911 $ 157,034 $ 142,842 ============================================= - -------------------------------------------------------------------------------
Before deducting the LIFO reserve, FIFO inventories decreased $13 million in 1996 to $168.7 million. SHORT-TERM DEBT Short-term borrowings were denominated principally in U.S. dollars, Singapore dollars, Italian lira, Japanese yen, French francs, Deutsche marks, and pound sterling and had maturities of three months or less. The company uses short-term borrowings of less than three-month maturity to partially offset net nonlocal currency exposures relating to current accounts receivable and accounts payable. It can be expected that short-term borrowings will continue to be utilized for this purpose. The $5.1 million short-term borrowings outstanding at year end included $1.3 million of short-term debt of Life Technologies, Inc. The weighted average interest rate on short-term borrowings outstanding was 5.4% at December 31, 1996, 6.1% at December 31, 1995, and 5.3% at December 31, 1994. The company had outstanding letters of credit at December 31, 1996 totaling $9.1 million for liabilities already reflected in the Statement of Financial Position. The company has authorized up to $50 million of commercial paper, none of which was issued during 1996 and all of which was available for issue at December 31, 1996. Available short-term lines of bank credit are in excess of $100 million. ACCRUED LIABILITIES AND EXPENSES Accrued liabilities and expenses at December 31 were:
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Salaries, wages and benefits $17,047 $16,615 $15,352 Pension and profit sharing 12,349 9,082 11,192 Provision for claims and warranties 3,806 3,194 3,872 Customer rebates and volume discounts 3,426 3,551 3,110 Severance and relocation 2,980 593 160 Deferred purchase and construction payments 2,800 182 341 Royalties 2,792 1,964 1,278 Taxes, other than income taxes 2,679 1,975 1,795 Professional services 2,344 1,433 1,661 Restructuring accruals 1,685 1,791 6,294 Interest 1,377 3,280 1,462 Deferred income 868 1,362 3,837 Other, principally accruals for unbilled obligations 11,326 10,015 10,271 ----------------------------------- $65,479 $55,037 $60,625 =================================== - --------------------------------------------------------------------------------
PROPERTY, PLANT AND EQUIPMENT Capital expenditures on the accrual basis were $62.3 million in 1996, $29 million in 1995 and $45.1 million in 1994. The $62.3 million in 1996 includes a capital lease for $4.7 million at LTI for a parcel of land. Capital expenditures in 1997 are currently estimated to range between $60 million and $70 million. For financial reporting purposes, the company uses the straight-line method of computing depreciation on plant and equipment. This method charges the cost to income evenly over the useful lives of the assets, principally 20 to 45 years for buildings, 16 years for nonwovens related machinery and equipment, and 5 to 15 years for all other machinery and equipment. For tax purposes the company uses shorter lives and accelerated depreciation methods. Capital investment incentive grants are recorded as a reduction of the cost of assets, which spreads the benefits 36 29 over the lives of the related assets through reduced depreciation. Management evaluates, on an ongoing basis, the carrying value of property, plant and equipment and makes a specific provision against the asset when impairment is identified. Property, plant and equipment is written down when the asset has become redundant or the remaining book value exceeds its anticipated future productive asset value as required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which was adopted by the company as of January 1, 1996. Maintenance and repairs are charged to operations as incurred and amounted to $16.3 million in 1996, $17 million in 1995 and $15.3 million in 1994. Betterments and major renewals are capitalized. The cost of assets sold or retired and the related amounts of accumulated depreciation are eliminated from the accounts, and the resulting gains or losses are included in income. The cost and accumulated depreciation of property, plant and equipment at December 31, were as follows:
In thousands of dollars 1996 1995 1994 - ------------------------------------------------------------------------------- Land $ 23,273 $ 19,307 $ 18,581 Buildings and improvements 158,635 153,071 143,436 Machinery and equipment 458,069 457,611 429,416 Construction in progress 37,859 12,250 16,911 --------------------------------------------- Total cost 677,836 642,239 608,344 Less accumulated depreciation (343,570) (317,036) (279,409) ---------------------------------------------- Property, plant and equipment, net $ 334,266 $ 325,203 $ 328,935 ============================================== - --------------------------------------------------------------------------------
Changes in property, plant and equipment for the past three years were as follows:
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- January 1 $ 325,203 $ 328,935 $ 309,954 Capital expenditures 62,277 28,969 45,097 Assets of businesses acquired 562 212 355 Assets of businesses divested (15,140) Write-down of asset values (1,880) (359) Depreciation (37,312) (38,246) (34,857) Currency effects 556 5,333 8,745 --------------------------------------------- December 31 $ 334,266 $ 325,203 $ 328,935 ============================================== - --------------------------------------------------------------------------------
PATENTS, TECHNOLOGY, FORMULAS AND COVENANTS Patents, technology, formulas and covenants not to compete are stated at cost less accumulated amortization of $18.5 million, $18.6 million and $17.2 million at December 31, 1996, 1995 and 1994, respectively. Such items which have been acquired by purchase or merger are capitalized and amortized on a straight-line basis over periods ranging from 5 to 15 years. Research and development costs and any costs associated with internally developed patents, formulas or other proprietary technology are expensed in the year incurred. EXCESS ACQUISITION COST Excess acquisition cost was $71.9 million at year-end 1996 and $74.1 million at year-end 1995. Excess acquisition cost increased $6.1 million due to the net impact of businesses acquired and divested in 1996. This increase was offset by decreases of $4.9 million of amortization of excess acquisition costs and $3.4 million due to currency translation effects. The excess of cost over the net asset value of businesses acquired (goodwill) prior to 1991 is amortized on a straight-line basis over 25 to 40 years. Excess acquisition cost of businesses acquired after 1990 is amortized over periods not exceeding 25 years. Accumulated amortization amounted to $18.8 million, $16.5 million and $12.9 million at December 31, 1996, 1995 and 1994, respectively. Management evaluates, on an ongoing basis, the carrying value of excess acquisition cost and makes a specific provision against the asset when impairment is identified as required by SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which was adopted by the company as of January 1, 1996. When a loss is expected from the proposed sale of a business or product line, a diminution in the value of the excess of cost over the net asset value of the business acquired is identified. In the instance of an ongoing business, such a diminution is recognized when there has been a history of the business' inability to generate operating income after the amortization of goodwill and in management's judgment, the business will not recover from this position in the future. There were no impairment charges in 1996, 1995 or 1994. LEASES The company leases facilities, vehicles, computers and other equipment under long-term operating leases with varying terms and expiration dates. Some leases contain renewal provisions, purchase options and escalation clauses. At December 31, 1996, LTI had a capital lease in the amount of $4.7 million for a parcel of land on which they are constructing a new corporate R&D center and other administrative offices, including their headquarters. Obligations under capital leases were not significant at December 31, 1995 or 1994. Aggregate future minimum lease payments under noncancellable leases as of December 31, 1996, were as follows (in thousands of dollars):
For the years ending Capital Lease Operating Leases - -------------------------------------------------------------------------------- 1997 $ 394 $ 9,648 1998 430 5,546 1999 430 3,642 2000 430 1,994 2001 430 1,365 Later years 7,957 3,830 -------- ------- Total minimum lease payments 10,071 $26,025 Less amount representing ======= interest (5,332) -------- Present value of net minimum lease payments $ 4,739 ======== - --------------------------------------------------------------------------------
Total rent expense incurred under noncancellable leases, net of minor sublease rentals, amounted to $10.9 million in 1996, $11.1 million in 1995, and $10.5 million in 1994. The company has no contingent rentals. LEGAL PROCEEDINGS The company is involved in various environmental and other lawsuits and claims, many of which are covered by insurance. At December 31, 1996, $0.2 million of current and $4.1 million of long-term receivables from third-party insurance companies are included as assets of the company. Equal and offsetting payables to third parties are included as liabilities of the company. Estimated amounts for claims which are probable and are not covered by third-party insurance are properly reflected as liabilities of the company. While the outcome of these lawsuits and claims cannot be forecast with certainty, management believes that such matters should not result in any liability which would have a material adverse effect on the company's financial position, results of operations, or cash flows. 37 30 POSTRETIREMENT BENEFITS The company has pension (defined benefit) or deferred profit sharing (defined contribution) plans for substantially all U.S. employees. Retirement benefits for most employees of international operations are provided by government-sponsored or insured programs and, in certain countries, by defined benefit plans. With respect to its qualified defined benefit pension plans, the company's policy is to fund amounts as are necessary on an actuarial basis to provide for benefits in accordance with the requirements of ERISA for domestic plans and in accordance with local laws and income tax regulations for international plans. The plans covering domestic employees of the company's Aerospace Materials, Electronic Materials, Packaging Products divisions, certain employees of the Magnetic Materials division, and domestic employees of Life Technologies, Inc. provide benefits that are generally based upon the employee's highest average compensation in any consecutive five-year period in the ten years before retirement. In addition to the above qualified plans, the company sponsors an unfunded nonqualified executive supplemental plan for certain key employees that provides an annual benefit equal to 55% of their average compensation during the highest 60 consecutive calendar months of a participant's last ten years before retirement, which benefit is then offset by other benefits payable to the participant. In computing the company's year-end funded status for domestic plans, discount rates of 7%, 6.5% and 8.5% were used in 1996, 1995, and 1994, respectively. The discount rates used in computing the year-end funded status for international plans ranged from 4% to 8.5% in 1996, 4% to 9% in 1995, and 5.5% to 9.75% in 1994. In 1996, there was a net periodic pension cost of $7.8 million for all plans combined, including international plans. Net periodic pension cost was $4.8 million for 1995 and $6.3 million for 1994.
- ----------------------------------------------------------------------------------------------------------------------------------- The funded status of the company's plans are as follows: - ----------------------------------------------------------------------------------------------------------------------------------- DECEMBER 31, 1996 December 31, 1995 December 31, 1994 - ----------------------------------------------------------------------------------------------------------------------------------- Plans Where Plans Where Plans Where Plans Where Plans Where Plans Where Assets Exceed Accumulated Assets Exceed Accumulated Assets Exceed Accumulated Accumulated Benefits Accumulated Benefits Accumulated Benefits In thousands of dollars Benefits Exceed Assets Benefits Exceed Assets Benefits Exceed Assets - ----------------------------------------------------------------------------------------------------------------------------------- Actuarial present value of benefit obligations Vested benefit obligation $ 65,912 $ 7,731 $ 63,864 $ 7,356 $ 41,589 $ 5,512 Accumulated benefit obligation $ 68,701 $ 8,745 $ 66,497 $ 8,768 $ 42,972 $ 6,068 Projected benefit obligation $ 102,560 $ 10,371 $ 99,947 $ 10,743 $ 67,489 $ 7,779 Plan assets at fair value, primarily equity securities and insurance contracts $ 95,386 $ 1,048 $ 83,110 $ 999 $ 69,521 $ 818 --------------------------------------------------------------------------------------------- Projected benefit obligation (in excess of) less than plan assets $ (7,174) $ (9,323) $(16,837) $ (9,744) $ 2,032 $(6,961) Unrecognized net loss (gain) 2,514 1,532 14,811 2,194 (3,091) 836 Unrecognized prior service cost 2,897 1,566 3,265 1,802 3,501 781 Unamortized net (asset) obligation (628) 213 (635) 254 (705) 284 Adjustment required to recognize minimum liability (1,971) (2,732) (606) --------------------------------------------------------------------------------------------- (Accrued pension liability) Prepaid pension cost $ (2,391) $ (7,983) $ 604 $ (8,226) $ 1,737 $(5,666) ============================================================================================= - -----------------------------------------------------------------------------------------------------------------------------------
Net periodic pension cost for 1996, 1995 and 1994 included the following components:
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost $ 6,405 $ 4,276 $ 5,806 Interest cost 7,440 6,429 6,016 Actual return on assets (11,271) (13,678) (152) Net amortization and deferral 5,212 7,725 (5,343) ------------------------------------------ Net periodic pension cost $ 7,786 $ 4,752 $ 6,327 ========================================== - --------------------------------------------------------------------------------
Assumptions used in the accounting for pension cost in 1996, 1995 and 1994 for domestic plans were: 1996 1995 1994 - -------------------------------------------------------------------------------- Discount rate 6.5%* 8.5% 6.75% Average wage increase 4 - 5% 6% 6% Expected long-term rate of return on plan assets 9% 9% 9% * In June of 1996, the company recognized a $1.1 million curtailment gain resulting from the sale of its Automotive businesses. At June 30, 1996 the Dexter Pension Plan was remeasured using a 7.5% discount rate. - -------------------------------------------------------------------------------- Assumptions used in the accounting for pension cost in 1996, 1995 and 1994 for international plans were: 1996 1995 1994 - -------------------------------------------------------------------------------- Discount rate 4 - 9% 5.5 - 9.75% 5.5 - 9% Average wage increase 3 - 7% 4.5 - 7% 4 - 7% Expected long-term rate of return on plan assets 2.5 - 9% 4 - 9% 4 - 9% - -------------------------------------------------------------------------------- The discount rate is the estimated rate at which the obligation for pension benefits could effectively be settled. The method used to develop the estimate for year-end rates in 1996, 1995 and 1994 in the U.S. was to estimate the rate at which AA grade industrial and utility bonds would sell over U.S. government obligations of a duration similar to that of domestic pension plans. Similar methods were used in other countries. 38 31 The average wage increase assumption was reduced from the 6% used in 1995 and 1994 to a range of 4 - 5% in 1996 for computing pension cost for domestic plans. Based on the last several years' experience and our current expectations, this range is believed to be the best estimate of future compensation increases. The average wage increase to be used in the international plans ranges from 2.5% to 7% in 1997. The expected long-term rate of return on plan assets reflects the average rate of earnings that the company estimates will be generated on the assets of the plan over the long term. The rate of return on plan assets in the U.S. was 15.1% in 1996, 22% in 1995 and -0.5% in 1994, and averaged 11.4% over the past five-year period. The 1996 rate of return is not considered indicative of future long-term returns and, therefore, a long-term rate adjustment was not made. We continue to believe 9% is appropriate for a 60% equity and 40% debt securities asset mix over the long term. Rates in other countries are based on expected long-term rates of return attainable there. The provisions of SFAS No. 87, Employers' Accounting for Pensions, require the recognition of an additional minimum liability for each defined benefit plan for which the accumulated benefit obligation exceeds plan assets. This amount has been recorded as a long-term liability with an offsetting intangible asset. Because the asset recognized may not exceed the amount of unrecognized prior service cost and transition obligation on an individual plan basis, the balance, net of tax benefits, is reported as a separate reduction of shareholders' equity at December 31, 1996 and 1995 for certain domestic nonqualified plans as follows: In thousands of dollars 1996 1995 - -------------------------------------------------------------------------------- Minimum liability adjustment $1,489 $2,052 Intangible asset 1,173 1,318 ------------------------ 316 734 Tax benefit 112 261 ------------------------ Pension liability adjustment to shareholders' equity $ 204 $ 473 ======================== - -------------------------------------------------------------------------------- The company sponsors deferred profit sharing plans for substantially all domestic employees not covered under pension plans. Contributions and cost are determined based on a percentage of each covered employee's pay and totaled $7.3 million in 1996, $6.6 million in 1995 and $6.5 million in 1994. In addition to providing pension benefits, certain businesses of Dexter provide some health care and life insurance benefits for retired employees. Such benefits and similar benefits for active employees have been either paid directly or are provided through insurance companies whose premiums are based on the benefits paid during the year. The provisions of SFAS No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions, were implemented using the immediate recognition transition option. SFAS No. 106 requires recognition, during employees' service with the company, of the cost of their retiree health and life insurance benefits. Upon adoption, $23.7 million was funded on March 31, 1993 into trusts for the ultimate benefit of retired employees whose medical costs are covered by those plans. The assets in the trusts established for postretirement benefits other than pensions amounted to $33.7 million at December 31, 1996, $29.1 million at December 31, 1995 and $23.4 million at December 31, 1994 and were invested as follows: In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Equity funds $13,916 $10,492 $ 5,496 Indexed fund 12,675 12,031 10,683 Convertible preferred stocks 6,946 6,237 4,962 Preferred stock fund 1,814 Short-term liquid investment funds 172 352 477 ------------------------------------- $33,709 $29,112 $23,432 ===================================== - -------------------------------------------------------------------------------- The investment objective of the indexed fund is to track the Standard & Poor's 500 and is long-term in nature. The remaining funds, with the exception of the short-term liquid investment funds, are also long-term in nature. The combined results of these funds, which are managed for the company by independent money managers, are expected to achieve returns in excess of 10% over the long term. The components of net periodic postretirement benefit income for the years ended December 31, 1996, 1995 and 1994 are: In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Service cost $ 889 $ 666 $ 878 Interest cost 1,541 1,447 1,488 Actual return on assets (5,386) (6,953) 566 Net amortization and deferral 1,732 4,005 (3,391) -------------------------------------- Net periodic postretirement benefit income $(1,224) $(835) $ (459) ====================================== - -------------------------------------------------------------------------------- The net periodic postretirement benefit income is expected to approximate $1.2 million in 1997. The funded status of the plan at December 31, 1996, 1995 and 1994 is:
In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Accumulated postretirement benefit obligation Retirees and dependents $ 7,668 $ 8,103 $ 7,905 Actives fully eligible 4,685 4,469 4,539 Actives not yet fully eligible 10,839 11,885 7,985 -------------------------------------- Total accumulated postretirement benefit obligation 23,192 24,457 20,429 Plan assets at fair value 33,709 29,112 23,432 -------------------------------------- Accumulated postretirement benefit obligation less than plan assets 10,517 4,655 3,003 Unrecognized net (gain) loss (4,060) (90) 1,111 Unrecognized prior service effect from plan amendment (3,764) (4,838) (5,375) --------------------------------------- Prepaid postretirement benefit cost (accrued postretirement benefit cost) $ 2,693 $ (273) $ (1,261) ======================================= - --------------------------------------------------------------------------------
The discount rates used in determining the accumulated postretirement benefit obligation were 7% at December 31, 1996, 6.5% at December 31, 1995 and 8.5% at December 31, 1994. In June of 1996, the company recognized a $1.6 million curtailment gain resulting from the sale of its Automotive businesses. At June 30, 1996, the accumulated postretirement benefit obligation was remeasured using a 7.5% discount rate. The assumed health care cost trend rate used in measuring the accumulated postretirement benefit obligation was 9% in 1996, declining gradually to 5% in 2007 and remaining level thereafter. If the health care cost trend rate assumptions were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1996 would be increased by $1 million, while the aggregate of the service and interest cost components of the net periodic postretirement benefit cost for 1996 would be increased by $0.1 million. As with pension benefits, the assumptions utilized in these calculations are periodically reviewed and adjusted if deemed appropriate. 39 32 LONG-TERM DEBT Long-term debt at December 31, 1996 consisted of promissory notes, sinking fund debentures, industrial development bonds and a capitalized lease. In 1996, Dexter refinanced 350 million yen debt and borrowed an additional 150 million yen at an all-in-rate of 1.66%. The borrowing of 500 million yen (equivalent to approximately $4.3 million) is scheduled to mature in 1999. In 1996, LTI capitalized a lease for a parcel of land on which a new R&D center and other administrative offices are being constructed. Payments commence in February 1997 and continue for 23 years. The agreement allows LTI to lease the property for 25 years with a 50 year renewal clause. LTI also has an option to purchase the land. In 1995, LTI increased its ownership in its Japanese subsidiary to 51%, and therefore consolidated the subsidiaries' financial statements including its long-term debt. Yen 175 million was repaid in 1996. Yen 75 million is due in 1997. In November 1993, Dexter privately placed with The Prudential Insurance Company of America $35 million, 20-year senior unsecured notes at a rate of 6.21% due in 2013. Required prepayments began in 1994 and are scheduled to continue with installments of $1.75 million per year through the year 2013. In December 1993, Dexter privately placed with The Prudential Insurance Company of America the equivalent of $15 million, 15-year senior unsecured notes denominated in Swiss francs at a rate of 4.86% due in 2008. Required prepayments began in 1994 and are scheduled to continue with installments of Swiss franc 2.2 million per year through the year 1997. The installments decrease to Swiss franc 1.5 million from 1998 through the year 2004 and decrease further to Swiss franc 0.8 million from 2005 through the year 2008. In November 1991, Dexter privately placed with The Prudential Insurance Company of America $50 million, 20-year senior unsecured notes at a rate of 8.96% due in 2011. Required prepayments are scheduled to begin in 1998 in installments of $2.5 million per year through the year 2000. The installments increase to $3.5 million per year from 2001-2010, with a final lump sum payment of $7.5 million due at maturity. In July 1990, Dexter privately placed with The Prudential Insurance Company of America $75 million, 20-year senior unsecured notes at a rate of 9.72% due in 2010. Required prepayments began in 1996 and are scheduled to continue with installments of $5 million per year through maturity. In December 1986, the company sold publicly $50 million, 9.25% sinking fund debentures due in 2016. The sinking fund payments commence in 1997 and are designed to retire 95% of the debt prior to maturity. The company has $50 million of authorized and unissued medium-term notes. Multi-currency, revolving credit agreements maintained with seven banks aggregate another $50 million. This revolving credit is for a three-year evergreen term and carries a commitment fee of 0.08% per annum on the unborrowed portion. At December 31, 1996 there were no borrowings under the revolving credit agreements. Long-term debt represented 35.9% of total capital at December 31, 1996. The weighted average interest rate of long-term debt outstanding at December 31, 1996 was 8.48%. Certain long-term debt agreements include provisions that restrict the amount of dividend increases if consolidated equity falls below $175 million. Consolidated equity at December 31, 1996 was $374 million. There are also provisions placing limits on the amount of additional debt the company may incur without amendment of the agreements. At December 31, 1996 there is approximately $179 million of additional debt allowable under these terms. Life Technologies, Inc. has guaranteed approximately $0.3 million of bank loans to others. At December 31, 1996 and 1995 the fair value of net long-term debt was $218 million and $231 million, respectively, compared with the carrying value of $210 million and $216 million. The fair value of long-term debt is based on quoted market prices for similar issues or on the current rates offered to the company for debt of the same remaining maturities. In 1996, the fair value of long-term debt exceeded the carrying value by $8 million due to the net reduction in interest rates subsequent to the issuance of the long-term debt and the consequent increase in fair value. The company is only obligated to repay the amounts reflected in the carrying value of this debt. - -------------------------------------------------------------------------------- DEBT OUTSTANDING
December 31 ----------------------------------------- In thousands of dollars 1996 1995 1994 - -------------------------------------------------------------------------------- Promissory notes $ 166,110 $ 177,437 $ 176,773 Sinking fund debentures 50,000 50,000 50,000 Industrial development bonds 1,400 2,050 2,700 Capitalized lease 4,739 ----------------------------------------- 222,249 229,487 229,473 Less: Payments due within one year (12,297) (13,648) (4,071) ----------------------------------------- Net long-term debt $ 209,952 $ 215,839 $ 225,402 ========================================= - --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------- DEBT MATURITIES BY CURRENCY AND TYPE Amounts in thousands Multi-currency Promissory Notes ----------------------------------------------------- Industrial Sinking Total Total Weighted Capitalized Development Fund Swiss Japanese U.S. Dollar U.S. Dollar Average Lease Bonds Debentures U.S. Dollar Franc Yen Equivalent Equivalent Interest Rate - ----------------------------------------------------------------------------------------------------------------------------------- 1997 $ 71 $ 700 $ 2,500 $ 6,752 SF 2,180 Y 75,000 $ 9,026 $ 12,297 7.92% 1998 83 500 2,500 9,253 1,454 10,338 13,421 8.49 1999 89 200 2,500 9,250 1,454 500,000 14,650 17,439 6.85 2000 96 2,500 9,250 1,454 10,335 12,931 8.58 2001 103 2,500 10,250 1,454 11,335 13,938 8.62 2002 112 2,500 10,250 1,454 11,335 13,947 8.61 2003 120 2,500 10,250 1,454 11,335 13,955 8.61 2004 130 2,500 10,250 1,454 11,335 13,965 8.61 2005 140 2,500 10,250 727 10,793 13,433 8.76 2006 150 2,500 10,250 727 10,793 13,443 8.76 2007-2020 3,645 25,000 53,750 1,454 54,835 83,480 8.71 -------------------------------------------------------------------------------------------------------- Total $4,739 $ 1,400 $50,000 $149,755 SF15,266 Y575,000 $166,110 $222,249 8.48% ======================================================================================================================= Rates of 5.70- 6.21- 1.66- Interest 7.5% 6.50% 9.25% 9.72% 4.86% 3.20% - -----------------------------------------------------------------------------------------------------------------------------------
40 33 ENVIRONMENTAL LIABILITIES Environmental expenditures attributed to ongoing operations of the company are expensed or capitalized as appropriate. Environmental expenditures attributed to previously owned properties and third party off-site facilities are expensed. Liabilities for expenses related to environmental assessments, site remediation and other response activities are expensed and recorded when incurrence of the liability is probable and the costs can be reasonably estimated. Generally, the incurrence of such liability is deemed probable when an environmental condition for which the company is likely to be legally responsible is determined to exist. Probable expenses are estimated, on an ongoing basis, as facts become available which indicate the scope of the condition to be addressed and the likely response measures for addressing it. Due to such factors as the wide discretion of regulatory authorities regarding cleanup levels and uncertain allocation of liability at multiple party sites, estimates made prior to approval of a formal plan of action represent management's best judgment as to estimates of reasonably foreseeable expenses based upon comparison to similar activities at other sites. Environmental reserves at December 31, 1996, with respect to 19 sites, were $16.3 million, including current reserves of $1.3 million, which are expected to be spent in 1997, and long-term reserves of $15 million. Such reserves, which are not discounted, were decreased during 1996 by expenditures of $0.7 million. Additionally, an estimated $2.5 million in 1996, $2.7 million in 1995, and $4.7 million in 1994 of claims payable by third-party insurance companies were included in the reserve at year end. The related receivables from insurance companies of $2.5 million, $2.7 million, and $4.7 million were included as assets of the company at year-end 1996, 1995 and 1994, respectively. Environmental reserves at December 31, 1995 were $17.1 million and at year-end 1994 were $20.3 million. Dexter Environmental Assurance, Ltd. (DEAL), a wholly owned Bermuda company, was established in 1993. In December 1993, a portfolio of environmental reserves totaling $5.9 million was transferred into DEAL to insure all wholly owned domestic operations of Dexter, other than exposures at Windsor Locks, Connecticut, against environmental liabilities arising from occurrences prior to January 1, 1994. In November 1994, a second portfolio of environmental reserves totaling $5 million was transferred into DEAL. With the second transfer, the coverage period was expanded to include occurrences after December 31, 1993 and prior to January 1, 1995 for all wholly owned domestic operations of Dexter. This coverage period has since been expanded to extend through December 31, 1996. MINORITY INTERESTS Minority interests increased by $14 million in 1996 to $90.4 million. At year-end 1995, minority interests were $76.4 million, an increase of $13.9 million from 1994. The increase in 1996 was due principally to $13.3 million of net income attributable to the minority interest shareholders of Life Technologies, Inc., Dexter's 53%-owned subsidiary, and a $1.7 million increase due to the exercise of stock options at LTI. Somewhat offsetting these increases were quarterly cash dividends paid by LTI to minority interest shareholders totaling $1.6 million. The increase in 1995 was principally due to $10.2 million of net income attributable to the minority interest shareholders of LTI and a $2.7 million increase due to the exercise of stock options at LTI. Minority interests also increased $1.9 million in 1995 due to an additional investment in a Japanese subsidiary made by LTI which resulted in a controlling interest. These increases in minority interests were somewhat offset by cash dividends paid by LTI to minority interest shareholders of $1.4 million. Minority interest in LTI's equity represented $85.3 million and $71.2 million at December 31, 1996 and 1995, respectively. CURRENCY EXCHANGE EFFECTS Assets and liabilities of those operations whose functional currency is other than the U.S. dollar are translated at end of period currency exchange rates and fluctuations due to changes in exchange rates are accounted for as a separate component of shareholders' equity, "Currency translation effects". Results of operations are translated at average currency exchange rates during the period. Currency translation effects decreased shareholders' equity in 1996 by $3.8 million, including $3.5 million of translation effects and a $0.3 million related tax effect. This decrease was the result of the net strengthening of the U.S. dollar against currencies of countries in which the company operates. Currency translation effects increased shareholders' equity by $9 million in 1995, of which $9.3 million was from translation effects offset by $0.3 million from a related tax effect. The company utilizes forward exchange contracts to hedge nonlocal currency transactions and commitments. Gains and losses on forward exchange contracts that hedge specific commitments are deferred and recognized in income in the same period as the hedged transaction. Such deferred unrealized gains and losses at December 31, 1996, 1995 and 1994 were not significant. Gains and losses on forward contracts that do not hedge an identifiable commitment are included in income as the gain or loss arises. Forward exchange contracts outstanding at year-end 1996 were short-term in nature and related to nonlocal currency transactions of the company's European and Asian operations. The market risk associated with forward exchange contracts is caused by fluctuations in exchange rates subsequent to entering into the forward exchange contracts. At December 31, 1996, 1995 and 1994, the company, excluding Life Technologies, Inc., had forward exchange contracts outstanding for the purchase and sale of U.S. dollars, Japanese yen, French francs, pound sterling, Italian lira, Deutsche marks, and Spanish peseta. The equivalent U.S. dollar purchase amount was $1 million as of December 31, 1996. There were no purchase amounts outstanding as of December 31, 1995 and 1994. The equivalent U.S. dollar sale amounts were $7.5 million, $7.4 million and $4.6 million as of December 31, 1996, 1995 and 1994, respectively. In addition, Life Technologies, Inc. had forward exchange contracts outstanding for the purchase and sale of U.S. dollars, Dutch guilders, Belgian francs, Swiss francs, Deutsche marks, pound sterling and French francs. The equivalent U.S. dollar purchase amounts were $6.2 million, $10.3 million and $2.1 million as of December 31, 1996, 1995 and 1994. There were no sale amounts outstanding as of December 31, 1996 and 1994. The equivalent U.S. dollar sale amounts were $12.9 million as of December 31, 1995. The company had short-term borrowings at December 31, 1996 of $5.1 million of which $3.8 million related to nonlocal currency transaction exposure management. Currency gains and losses realized on transactions were not significant in 1996, 1995 or 1994. 41 34 SHAREHOLDERS' EQUITY Shareholders' equity increased by $4.5 million in 1996 to $374.1 million representing a book value of $15.94 per share. Net income increased shareholders' equity by $48.7 million. The exercise of stock options along with the impact of restricted stock awards added $6.8 million to shareholders' equity in 1996. Also increasing shareholders' equity was $0.3 million related to the recognition of prior service cost for certain of the company's nonqualified plans. Offsetting these increases were reductions due to the repurchases of the company's outstanding common stock of $26.7 million, dividends declared of $20.8 million and a currency translation impact of $3.8 million resulting from the strengthening of the U.S. dollar in 1996. In 1990, the Board of Directors authorized a repurchase of up to 1,000,000 shares of the company's outstanding common stock. In 1996, the company purchased 829,100 shares of its outstanding common stock at an average cost of $25.80 per share under this plan and in 1995, the company purchased 170,900 shares of its outstanding common stock at an average cost of $24.56 per share. There were no purchases under the 1990 authorization during 1994. In 1996, the Board of Directors authorized the repurchase of an additional 1,000,000 shares of the company's outstanding common stock and the company purchased 160,400 shares of its outstanding common stock at an average cost of $32.54 per share under this plan. The net effect of these repurchases was a reduction to shareholders' equity in 1996 of $26.7 million. At the end of 1996, there were 1,520,261 shares held in treasury compared with 763,782 shares at the end of 1995 and 634,403 shares at the end of 1994. PREFERRED STOCK The company has the following classes of preferred stock, without par value, as of December 31, 1996: CLASS AUTHORIZED AND UNISSUED Preferred Stock 150,000 shares Preferred Stock, Class I 500,000 shares Preferred Stock, Class II 500,000 shares Preferred Stock, Series A 250,000 shares PREFERRED STOCK, SERIES A - PURCHASE RIGHTS In October, 1986, the company issued one preferred stock purchase right for each share of common stock outstanding at November 17, 1986 under a rights plan adopted by the company. The preferred stock purchase right is designed to assure that shareholders receive fair and equitable treatment and full value in the event of a takeover attempt which is not approved by the Board of Directors of the company. The rights expired on November 17, 1996. In anticipation of the expiration of these rights, on August 23, 1996, the company authorized and declared a dividend distribution of one new right for each share of common stock of the company outstanding at the close of business on November 17, 1996 under a new rights plan. Each new right entitles the holder to purchase one two-hundredth of a share of Series A Preferred Stock of the company at a purchase price of $90 per right. The rights will trade with the common stock and not be exercisable or transferable apart from the common stock until 10 days following the acquisition of, or tender offer for, 20% or more of the outstanding shares of the common stock. The new rights plan also provides that if the company merges with or into another entity or sells or otherwise transfers more than 50% of the assets or earning power of the company, the holder of each right shall have the right to receive, upon exercise, shares of common stock having a value equal to two times the exercise price. The rights, which do not have voting privileges, are redeemable under certain circumstances at a redemption price of $.01 per right and will expire, unless earlier redeemed, on August 31, 2006. The company has authorized 250,000 shares of Series A Preferred Stock for issuance upon exercise of the rights. STOCK COMPENSATION PLANS At December 31, 1996, The Dexter Corporation has four stock-based compensation plans, which are described below. The company applies APB Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations in accounting for its plan. Accordingly, no compensation cost has been recognized for its fixed stock option plans. Compensation expense for its restricted stock plan has been adjusted on a quarterly basis to reflect changes in the market price of the stock. The compensation cost that has been charged against income for its restricted stock plan was $1.2 million in 1996 and $0.4 million in 1995. Had compensation cost for the company's four stock-based compensation plans been determined consistent with SFAS No. 123, Accounting for Stock-Based Compensation, the company would have expensed $0.2 million in 1996 and $0.1 million in 1995 for its fixed stock option plans which would have been offset by income of approximately $0.2 million in 1996 for its restricted stock plan with no income impact in 1995 for restricted stock. As such, the net impact of SFAS No. 123 on the company's net income and earnings per share is immaterial. Because the SFAS No. 123 method of accounting has not been applied to options or restricted stock granted prior to January 1, 1995, the resulting compensation cost may not be representative of that to be expected in future years. The weighted average fair value at date of grant for options granted during 1996, 1995 and 1994 was $7.14, $5.34 and $6.01 per option, respectively. The fair value of options at date of grant was estimated using the Black-Scholes model with the following weighted average assumptions: 1996 1995 1994 - -------------------------------------------------------------------------------- Expected life (years) 6 6 6 Interest rate 6.30% 6.26% 6.12% Volatility 22.98% 23.71% 24.74% Dividend yield 2.70% 3.70% 3.70% - -------------------------------------------------------------------------------- STOCK PLAN 1994 LONG-TERM INCENTIVE PLAN In 1994, Dexter established a long-term incentive plan for certain key management personnel of the company. The aggregate number of shares of the company's common stock that may be awarded under the 1994 Long-term Incentive Plan is 1,200,000 shares. Participants are granted restricted stock awards at no cost to the employee. As of the grant date, participants have the rights of shareholders, including the right to receive any cash dividends and the right to vote the shares. These stock awards are subject to forfeiture provisions including the lapse of time and achievement of certain performance targets and have restrictions limiting the sale or transfer of shares during the restriction periods defined in the Plan. The expense relating to this Plan is amortized over the restriction period. The 1994 Plan will terminate on April 28, 2004, after which time no additional grants may be made. The weighted-average fair value at date of grant for restricted stock granted during 1996, 1995 and 1994 was $27.06, $23.06 and $23.81, respectively, which in each case was equal to the market value of the company's common stock at the date of grant. 42 35 1994 LONG-TERM INCENTIVE PLAN DATA
December 31 --------------------------------------- 1996 1995 1994 --------------------------------------- Number of Shares --------------------------------------- Outstanding at beginning of year 138,187 64,250 Awarded 75,500 76,500 64,250 Earned and distributed (1,863) Cancelled (11,200) (700) --------------------------------------- Outstanding at end of year 202,487 138,187 64,250 - --------------------------------------------------------------------------------
STOCK OPTION PLANS 1979 STOCK OPTION PLAN AND DATA The Dexter Corporation 1979 Stock Option Plan permitted the granting of options to purchase a total of 999,999 shares (adjusted for stock splits) of common stock at prices not less than the fair market value of the shares on the date of grant. Such options may be accompanied by stock appreciation rights, which are also issued at fair market value, for up to half the number of shares under option. Options and stock appreciation rights generally become exercisable at the rate of 20% of the shares each year starting two years after the date of grant. The exercise price may be satisfied by surrendering company stock with a like market value. The Plan, as amended, permits no future granting of options under the 1979 Stock Option Plan and expires on May 1, 1997.
December 31 ---------------------------------------------------------------------------- 1996 1995 1994 ---------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price ---------------------------------------------------------------------------- Outstanding at beginning of year 59,575 $22.22 81,150 $20.42 88,266 $19.97 Exercised (42,075) $21.66 (20,975) $15.23 (7,116) $14.77 Expired or cancelled (1,200) $20.83 (600) $23.75 ------- ------- ------ Outstanding and exercisable at end of year 16,300 $23.75 59,575 $22.22 81,150 $20.42 The exercise price for options outstanding at December 31, 1996 was $23.75. - ------------------------------------------------------------------------------------------------------------------------------
1987 INTERIM STOCK OPTION PLAN AND DATA The 1987 Interim Stock Option Plan is intended to be a continuation and extension of The Dexter Corporation 1979 Stock Option Plan with similar terms and conditions, and, as such, stock appreciation rights may accompany the options as in the 1979 Plan. The aggregate number of shares of common stock permitted to be issued under the Plan was 75,000. The 1987 Stock Option Plan consists of one grant which was issued in 1987 at a weighted-average exercise price of $23.75. The Plan, as amended, permits no future granting of options under the 1987 Interim Stock Option Plan and will expire on May 1, 1997.
December 31 ------------------------------------- 1996 1995 1994 ------------------------------------- Number of Shares ------------------------------------- Outstanding at beginning of year 13,350 16,000 16,000 Exercised (6,550) (1,450) Expired or cancelled (600) (1,200) ------------------------------------- Outstanding and exercisable at end of year 6,200 13,350 16,000 - ----------------------------------------------------------------------------------------
1988 STOCK OPTION PLAN AND DATA The 1988 Stock Option Plan provides for the granting of incentive and nonqualified stock options to purchase up to 1,000,000 shares of common stock. No stock appreciation rights may be granted. The option price shall not be less than 100% of the fair market value on the date of grant for incentive stock options and not less than 80% of the market value on the date of grant for nonqualified options. Options generally become exercisable at the rate of 33 1/3% of the shares each year starting one year after the date of grant. Each option granted under the 1988 Plan lapses ten years after the date it was granted, or earlier, as outlined under the provisions of the Plan. There have been no nonqualified options issued under the Plan to date; therefore, no charges against income have been made.
December 31 --------------------------------------------------------------------- 1996 1995 1994 --------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Price Shares Price Shares Price --------------------------------------------------------------------- Outstanding at beginning of year 690,522 $24.01 738,500 $24.21 630,144 $23.99 Granted 49,000 $26.63 31,500 $22.82 157,095 $25.33 Exercised (210,069) $23.17 (19,566) $21.83 (1,718) $21.11 Expired or cancelled (37,212) $26.78 (59,912) $26.54 (47,021) $25.11 -------- ------- ------- Outstanding at end of year 492,241 $24.42 690,522 $24.01 738,500 $24.21 Exercisable options at end of year 385,519 $24.12 535,584 $23.80 466,820 $23.76 Shares available for future grant 202,986 214,774 186,362 The options outstanding at December 31, 1996 had a range of exercise prices of $20.88 - $29.06 and a weighted-average remaining contractual life of approximately 3 1/4 years. - -------------------------------------------------------------------------------------------------------------
43 36 DIVISION AND SUBSIDIARY HEADQUARTERS DEXTER AEROSPACE MATERIALS DEXTER PACKAGING PRODUCTS 2850 Willow Pass Road East Water Street Pittsburg, CA 94565-3299 Waukegan, IL 60085-5652 (510) 458-8000 (847) 623-4200 Jeffrey W. McClelland T. Daniel Clark Division President Senior Division President DEXTER ELECTRONIC MATERIALS DEXTER S.A. 15051 East Don Julian Road B.P. 51 Industry, CA 91746-3398 14 rue Chanay (818) 968-6511 71700 Tournus, France Ronald C. Benham 333-85-40-4545 Senior Division President Gerard R. Mazure Directeur General DEXTER MAGNETIC MATERIALS 48460 Kato Road LIFE TECHNOLOGIES, INC. Fremont, CA 94538-7337 (majority owned) (510) 656-5700 P.O. Box 6482 David Woodhead 9800 Medical Center Drive Division President Rockville, MD 20849-6482 (301) 610-8000 DEXTER NONWOVENS J. Stark Thompson, Ph.D. Two Elm Street President and Chief Executive Windsor Locks, CT 06096-2335 Officer (860) 654-8300 David G. Gordon D & S PLASTICS INTERNATIONAL Senior Division President (equally owned joint venture with Solvay S.A.) 1200 Harmon Road Auburn Hills, MI 48326-1550 (810) 391-9500 Joseph D. Greulich President SHAREHOLDER/INVESTOR INFORMATION THE DEXTER CORPORATION INVESTOR RELATIONS One Elm Street Kathleen Burdett Windsor Locks, CT 06096-2334 Vice President and (860) 292-7675 Chief Financial Officer (860) 292-7673 Facsimile (860) 292-7620 (860) 292-7669 Facsimile STOCK EXCHANGE Listing: New York Stock Exchange John D. Thompson Stock Symbol: DEX Senior Vice President, Strategic and REGISTRAR Business Development ChaseMellon Shareholder (860) 292-7640 Services, L.L.C. (860) 292-7669 Facsimile Ridgefield Park, New Jersey CORPORATE COMMUNICATIONS/ TRANSFER AGENT MEDIA CONTACT ChaseMellon Shareholder Ellen C. Miles Services, L.L.C. Corporate Communications Manager Ridgefield Park, New Jersey and (860) 292-7686 New York, New York (860) 292-7627 Facsimile NOTICE OF ANNUAL MEETING You are cordially invited to attend the annual meeting of shareholders beginning at 10:00 a.m., Thursday, April 24, 1997, at The Hartford Club, 46 Prospect Street, Hartford, Connecticut. NOTICE OF FORM 10-K ANNUAL REPORT The Form 10-K Annual Report of The Dexter Corporation filed with the Securities and Exchange Commission, as well as the Form 10-K Annual Report of Life Technologies, Inc., are available without charge after March 31 of each year to shareholders and prospective investors. Please contact the Corporate Communications Department in Windsor Locks, Connecticut, at (860) 292-7615. SHAREHOLDERS' STOCK SAVINGS PLAN/INQUIRIES Dexter shareholders can reinvest their dividends automatically in additional shares of Dexter common stock at the market price. Participants can also invest up to an additional $3,000 in Dexter shares each quarter through this service. Also, if you have any questions concerning your account as a shareholder, such as name and address changes, inquiries regarding dividend checks, stock certificates, or if you need tax information regarding your account, please contact: ChaseMellon Shareholder Services, L.L.C. Overpeck Centre 85 Challenger Road Ridgefield Park, NJ 07660 (800) 288-9541 TDD SERVICE AVAILABLE Dexter shareholders with hearing or speech disabilities can get information about their accounts through TDD services offered by ChaseMellon Shareholder Services, L.L.C. at (800) 231-5469. EX-21 4 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following table sets forth subsidiaries of The Dexter Corporation which are included in the consolidated financial statements.
PERCENTAGE OF JURISDICTION IN WHICH NAME OWNERSHIP(A) INCORPORATED OR ORGANIZED - --------------------------------------------------------- ------------ -------------------------- C.H. Dexter Ltd.......................................... 100%(C)(B) England Crown Metro Aerospace Coatings, Inc...................... 100% South Carolina DDL Sales Limited........................................ 80%(D)(B) Scotland Dexter Asia Pacific Limited.............................. 100%(C) Hong Kong Dexter Automotive Materials GmbH......................... 100%(E)(B) Germany Dexter ADAF Holdings, Inc................................ 100%(F) Delaware Dexter Environmental Assurance Ltd....................... 100% Bermuda Dexter Europe S.A........................................ 100% Belgium Dexter Holdings.......................................... 100% England Dexter Hysol Aerospace, Inc.............................. 100% Delaware Dexter Hysol Ltd......................................... 100%(C)(B) England Dexter Hysol (Malaysia) Sdn. Bhd......................... 100%(G) Malaysia Dexter International Corporation......................... 100% Connecticut Dexter International (Thailand), Ltd..................... 100% Thailand Dexter Leasing Limited................................... 100%(C)(B) England Dexter Magnetic Materials GmbH........................... 100%(E) Germany Dexter Mexicana S.A. de C.V.............................. 100% Mexico Dexter Midland Coatings Limited.......................... 100%(C)(B) England Dexter Midland Company Limited........................... 70% Japan Dexter Miki, Inc......................................... 70%(G)(B) Japan Dexter Nonwovens A.B..................................... 100% Sweden Dexter Overseas Limited.................................. 100%(C)(B) England Dexter Pacific, Inc...................................... 100% Japan Dexter Packaging Products, S.A........................... 100% Spain Dexter Powders, Inc...................................... 100%(B) Delaware Dexter Products Limited.................................. 100%(C)(B) England Dexter (RPI), Inc........................................ 100% Delaware Dexter S.A............................................... 97% France Dexter S.p.A............................................. 100%(F) Italy Dexter Specialty Materials Hong Kong Limited............. 100%(G)(B) Hong Kong Dexter Speciality Chemicals Limited...................... 100%(C)(B) England Dexter Speciality Materials Limited...................... 100%(C) Scotland Dexter U.K. Limited...................................... 100%(H) England Hysol Limited............................................ 100% Japan Kettlebrook Insurance Company, Ltd....................... 100%(I) Bermuda Life Technologies, Inc................................... 53% Delaware
2 EXHIBIT 21 -- CONTINUED
PERCENTAGE OF JURISDICTION IN WHICH NAME OWNERSHIP(A) INCORPORATED OR ORGANIZED - --------------------------------------------------------- ------------ -------------------------- Permag Corp.............................................. 100% New York Potter Paint Company of Texas, Inc....................... 100% Texas The Dexter GmbH.......................................... 100%(C) Germany The Mogul Corporation (U.K.) Ltd......................... 100%(C)(B) England Vernicolor A.G........................................... 100% Switzerland Windsor Locks Canal Company.............................. 100% Connecticut
- --------------- (A) including directors' qualifying shares (B) inactive (C) owned by Dexter U.K. Limited (D) owned by Dexter Speciality Materials Limited (E) owned by The Dexter GmbH (F) owned by Crown Metro Aerospace Coatings, Inc. (G) owned by Dexter Asia Pacific Limited (H) owned by Dexter Holdings (I) owned 67% by The Dexter Corporation and 33% by Dexter U.K. Limited 3 EXHIBIT 21 -- CONTINUED The following table sets forth subsidiaries of Life Technologies, Inc. (owned 53% by The Dexter Corporation) which are included in the consolidated financial statements.
PERCENTAGE OF JURISDICTION IN WHICH NAME OWNERSHIP INCORPORATED OR ORGANIZED - --------------------------------------------------- ------------ --------------------------- Canadian Life Technologies, Inc.................... 100% Ontario Custom Primers, Inc................................ 100% California Laboratory Services Ltd............................ 100% New Zealand Life Technologies A.G.............................. 100%(B) Switzerland Life Technologies A.S.............................. 100% Denmark Life Technologies Asia Pacific, Inc................ 100% Delaware Life Technologies B.V.............................. 100%(B) Netherlands Life Technologies Foreign Sales Corporation........ 100% U.S. Virgin Islands Life Technologies GIBCO BRL Co., Ltd............... 51% Republic of China (Taiwan) Life Technologies GmbH............................. 100%(B) Germany Life Technologies Holdings, Unlimited.............. 100% Scotland Life Technologies Investment Holdings, Inc......... 100% Delaware Life Technologies Italia S.r.1..................... 100% Italy Life Technologies Ltd.............................. 100%(A) Scotland Life Technologies Ltd.............................. 100% New Zealand Life Technologies Oriental K.K..................... 80% Japan Life Technologies Overseas Ltd..................... 100%(A) Scotland Life Technologies (Pacific) Ltd.................... 100% Hong Kong Life Technologies Pty. Ltd......................... 100% Australia Life Technologies S.A.............................. 100% Spain Life Technologies S.A.R.L.......................... 100%(B) France Life Technologies Sweden AB........................ 100% Sweden Life Technologies Uruguay, S.A..................... 100% Uruguay N.V. Life Technologies S.A......................... 100%(B) Belgium Serum Technologies Holdings, Inc................... 100% Delaware
- --------------- (A) owned by Life Technologies Holdings, Unlimited (B) owned by Life Technologies Overseas Ltd. 4 EXHIBIT 21 -- CONTINUED The following unconsolidated companies owned in part by The Dexter Corporation are accounted for by the equity method. Financial statements of these companies are not required because when considered in the aggregate as a single subsidiary, they would not constitute a significant subsidiary.
PERCENTAGE OF JURISDICTION IN WHICH NAME OWNERSHIP INCORPORATED OR ORGANIZED - --------------------------------------------------------- ------------ -------------------------- Akzo Dexter Aerospace Finishes VoF....................... 40%(A) Netherlands D & S Plastics International............................. 50%(B) Delaware Hysol Indael de Mexico S.A............................... 49%(C) Mexico Lexter S.r.1............................................. 49%(C)(F) Italy Midland-Dexter de Venezuela, S.A......................... 49%(D) Venezuela Research Polymers International Corporation.............. 50%(E) Texas
- --------------- (A) owned by Dexter ADAF Holdings, Inc. (B) owned 70.4% by Research Polymers International Corporation and 14.8% by Dexter (RPI), Inc. (C) owned by The Dexter Corporation (D) owned 13.9% by Dexter U.K. Ltd. and 35.1% by The Dexter Corporation (E) owned by Dexter (RPI), Inc. (F) inactive EX-23 5 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS 1 EXHIBIT 23 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS We consent to the incorporation by reference in the registration statements of The Dexter Corporation on Form S-8 (File Nos. 2-63959, 33-27597, 33-53307, 33-53309, 333-02985 and 333-04081) of our report dated February 4, 1997, on our audits of the consolidated financial statements and financial statement schedule of The Dexter Corporation as of December 31, 1996, 1995, and 1994, and for the years then ended, appearing on page F-2 of The Dexter Corporation's Annual Report on Form 10-K for the year ended December 31, 1996. /s/ Coopers & Lybrand L.L.P. COOPERS & LYBRAND L.L.P. Springfield, Massachusetts March 7, 1997 EX-27 6 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE STATEMENT OF FINANCIAL POSITION AND STATEMENT OF INCOME AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1996 DEC-31-1996 103,420 0 172,288 6,620 148,911 460,411 677,836 343,570 953,804 217,482 209,952 0 0 24,984 349,131 953,804 1,100,185 1,112,365 720,980 720,980 0 0 20,500 98,252 34,880 48,722 0 0 0 48,722 2.06 0
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