-----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, UyTwp998JwCKw/DusH76ueO/XrXwM0bQXAVB7fDSWZklA5vpZaNV/oAU5EXamStW DnKKY4GJb1jEmQw+Cl57rg== 0000950144-98-002381.txt : 19980309 0000950144-98-002381.hdr.sgml : 19980309 ACCESSION NUMBER: 0000950144-98-002381 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980306 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: EASTMAN CHEMICAL CO CENTRAL INDEX KEY: 0000915389 STANDARD INDUSTRIAL CLASSIFICATION: PLASTICS, MATERIALS, SYNTH RESINS & NONVULCAN ELASTOMERS [2821] IRS NUMBER: 621539359 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-12626 FILM NUMBER: 98559196 BUSINESS ADDRESS: STREET 1: PO BOX 511 CITY: KINGSPORT STATE: TN ZIP: 37662 BUSINESS PHONE: 6152292000 MAIL ADDRESS: STREET 1: P O BOX BOX 511 B-54D CITY: KINGSPORT STATE: TN ZIP: 37662 10-K405 1 EASTMAN CHEMICAL COMPANY 1 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 1997 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 1-12626 EASTMAN CHEMICAL COMPANY (Exact name of registrant as specified in its charter) DELAWARE 62-1539359 (State or other jurisdiction of (I.R.S. employer incorporation or organization) identification no.) 100 N. EASTMAN ROAD KINGSPORT, TENNESSEE 37660 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (423) 229-2000 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, par value $0.01 per share New York Stock Exchange (including rights to purchase shares of Common Stock or Participating Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None - ------------------------------------------------------------------------------- PAGE 1 OF 112 TOTAL SEQUENTIALLY NUMBERED PAGES EXHIBIT INDEX ON PAGE 65 2 Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes___X____ No________ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] The aggregate market value (based upon the closing price on the New York Stock Exchange on January 30, 1998) of the voting stock held by nonaffiliates was approximately $4,654,265,390 as of January 31, 1998, using beneficial ownership rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude stock that may be beneficially owned by directors, executive officers, or 10% shareowners, some of whom might not be held to be affiliates upon judicial determination. At January 31, 1998, 78,445,546 shares of Common Stock of the registrant were outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's definitive Proxy Statement relating to the 1998 Annual Meeting of Shareowners (the "1998 Proxy Statement"), to be filed with the Securities and Exchange Commission, are incorporated by reference in Part III, Items 10-12 of this Annual Report on Form 10-K as indicated herein. FORWARD-LOOKING STATEMENTS Forward-looking statements appear throughout this report. These statements relate to planned capacity increases and capital spending; expected tax rates and depreciation; environmental matters; the year 2000 issue; legal proceedings; the Asian financial crisis; supply and demand, volume, price, margin, and sales and earnings expectations and strategies for individual products, businesses, and segments as well as for the whole of Eastman Chemical Company; cost reduction targets; and development, production, commercialization, and acceptance of new products and technologies. These plans and expectations are based upon certain underlying assumptions, including those mentioned within the text of this report. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions, and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward- looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or are unrealized. 2 3 TABLE OF CONTENTS
- --------------------------------------------------------------------------------------------------------- ITEM PAGE - --------------------------------------------------------------------------------------------------------- PART I 1. Business 4 - 14 Executive Officers of the Company 15 2. Properties 16 3. Legal Proceedings 17 4. Submission of Matters to a Vote of Security Holders 17 PART II 5. Market for the Registrant's Common Stock and Related Shareowner Matters 18 6. Selected Financial Data 19 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 20-30 8. Financial Statements and Supplementary Data 31-59 9. Changes in and Disagreements With Accountants on Accounting and Financial Disclosure 60 PART III 10. Directors and Executive Officers of the Registrant 61 11. Executive Compensation 61 12. Security Ownership of Certain Beneficial Owners and Management 61 13. Certain Relationships and Related Transactions 61 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 62 SIGNATURES Signatures 63-64
3 4 PART I ITEM 1. BUSINESS GENERAL Eastman Chemical Company ("Eastman" or the "Company") is a leading international chemical company with a broad portfolio of plastic, chemical, and fiber products. The Company manufactures and sells polyester plastics such as polyethylene terephthalate ("PET"), a plastic widely used in beverage and food containers; coatings and paint raw materials; industrial and fine chemicals; and acetate tow. The Company believes it has a competitive advantage in several product areas due to its high level of manufacturing integration, the use of state of the art process technologies and its operating efficiencies due to its large-scale plants. In 1997 the Company had sales of $4.68 billion, operating earnings of $506 million, net earnings of $286 million, and basic earnings per share of $3.66. The Company began business in 1920 for the purpose of producing chemicals for Eastman Kodak Company's ("Kodak") photographic business. As of December 31, 1993, the Company became an independent entity when Eastman Kodak Company spun off its chemical business. Today, the Company is one of the largest chemical producers in the United States and a leader in the application of several manufacturing technologies. The Company pioneered the application of coal gasification technology for the production of chemicals (also referred to as "chemicals from coal technology") and currently operates one of the largest coal gasification facilities in the United States, thereby reducing the Company's dependence on petrochemicals in the manufacture of acetate tow, certain plastics, and other chemicals. The Company is also a leader in the manufacture of oxo chemicals that are used in the production of numerous coatings and resin intermediates, the manufacture of fine chemicals used in photographic and other custom chemicals, and the application of advanced environmental waste management practices for chemical manufacturing operations. The Company is a world leader in developing end-use applications for and recycling of a wide variety of polyester plastics, including PET and other flexible packaging materials. The Company categorizes its business into three segments, Specialty and Performance, Core Plastics, and Chemical Intermediates. See Part II--Item 8--Financial Statements and Supplementary Data--Note 15 to the Consolidated Financial Statements. The Specialty and Performance segment includes plastic, chemical, and fiber products primarily sold in diverse markets to customers that base their buying decisions principally on a product's performance attributes. The Core Plastics segment includes the Company's major plastics products, EASTAPAK polymers polyester packaging plastic, TENITE, EASTACOAT, MXSTEN and TENITE HIFOR polyethylenes, as well as cellulose esters and polyesters. These container and packaging products share similar physical characteristics and compete based on price and integrated manufacturing capabilities. The Chemical Intermediates segment contains industrial intermediate chemical products that are sold to customers operating in mature markets in which multiple sources of supply exist. Proprietary products and low-cost manufacturing positions are the foundation of the Chemical Intermediates segment. Eastman's strategy is to manage the mix between Specialty and Performance, Core Plastics, and Chemical Intermediates products to fully utilize its plants and obtain optimum profitability. The Company has the capability to produce a wide range of products within its manufacturing plant capacities and change product mix depending on customer demand and the Company's strategy. 4 5 The following table summarizes the Company's recent financial performance and identifiable assets by industry segment.
SEGMENT FINANCIAL SUMMARY (Dollars in millions) 1997 1996 1995 SALES Specialty and Performance $ 2,607 $ 2,657 $ 2,647 Core Plastics 1,338 1,409 1,685 Chemical Intermediates 733 716 708 ------- ------- ------- Total $ 4,678 $ 4,782 $ 5,040 ======= ======= ======= OPERATING EARNINGS (LOSS) Specialty and Performance $ 416(1) $ 519 $ 433 Core Plastics (56)(1) (1) 347 Chemical Intermediates 146(1) 145 184 ------- ------- ------- Total $ 506 $ 663 $ 964 ======= ======= ======= ASSETS Specialty and Performance $ 3,019 $ 2,887 $ 2,776 Core Plastics 2,188 1,854 1,598 Chemical Intermediates 571 525 498 ------- ------- ------- Total $ 5,778 $ 5,266 $ 4,872 ======= ======= =======
(1) Operating earnings for 1997 reflect the effect of a $62 million ($40 million after tax) charge for partial settlement/curtailment of pension and other postemployment benefit liabilities. This charge was allocated to segments as follows: Specialty and Performance, $34 million; Core Plastics, $18 million; and Chemical Intermediates, $10 million. See Note 14 to Consolidated Financial Statements. BUSINESS STRATEGY Eastman's business strategy is to achieve consistent, profitable growth as a highly integrated, international supplier of a diversified portfolio of plastics, chemicals, and fibers. Specifically, the Company's strategic intent is "To Be The World's Preferred Chemical Company." The following are the key elements the Company employs to achieve this strategy: Proprietary Products and Core Competencies The Company has developed its broad chemical product line through the application of three major areas of technical strength referred to by the Company as technology core competencies: polymer technology, organic chemistry technology, and cellulose technology. The polymer core competence includes polyester, polyolefin, and other polymer technologies, and forms the technical basis of the Company's polyester and polyethylene product lines. The organic chemistry core competence includes coal gasification for chemicals, oxo chemistry, and complex organic chemistry technologies, and forms the basis of the Company's fine chemical and intermediate chemical product lines. The cellulose core competence includes cellulose conversion to acetate fibers and plastic manufacturing technologies, and forms the basis of the Company's acetate fibers and cellulose plastic product lines. The Company has developed or acquired proprietary technologies and know-how with respect to each of these core competencies. The Company's ongoing product development strategy is to build on existing technology core competencies and develop new technology core competencies. 5 6 Manufacturing Integration and Scale The Company's strategy is to continue to use integration of its manufacturing plants to develop a competitive advantage. This integration provides the Company with cost efficient and flexible manufacturing operations. The Company's major manufacturing plants are highly integrated. Intermediate chemicals produced at one plant are frequently distributed between plants to produce other plastics and chemicals. Starting with a limited number of basic raw materials, primarily coal, ethane and propane, cellulose, ethylene glycol, paraxylene and other basic chemicals, the Company uses its integrated manufacturing capabilities to produce more than 400 major products. Through its development of highly integrated manufacturing, Eastman has the capability to safely and efficiently operate large-scale chemical plants, including one of the world's largest integrated chemical plants in Kingsport, Tennessee. The Company's development efforts include the continual improvement of these operations to achieve capacity increases and other earnings enhancement projects with relatively low capital expenditures. Quality Management Quality Management is a fundamental set of operating and management principles that are an extension of the philosophy of the Company's founder, George Eastman. During the last fourteen years, the Company has further developed these principles into its current Quality Policy. This policy states the Company's goal to be the leader in quality and value of products and services, by focusing on customers, process control, continual improvement, and innovation. The Company's highly integrated manufacturing operations support the Company's total quality policy by providing internal control of intermediate raw material processes. The Company's success in fostering this total quality policy is evidenced by the U.S. Commerce Department's selection of the Company as the recipient of the 1993 Malcolm Baldrige National Quality Award in the large manufacturing category. The Company has 12 quality system registrations to the international quality standard, ISO 9000. Ten of these are in North America and two are in the United Kingdom. Approximately three-fourths of 1997 sales were from products manufactured in ISO 9000 registered quality systems. Expansion in International Markets Approximately 41% of the Company's customers representing 39% of the Company's sales were outside the United States in 1997. This growth in worldwide sales over the past few years and achievement of satisfactory returns is primarily due to its efficient large-scale plants in the United States and increasing expansion of manufacturing facilities in strategic global locations. The Company has facilities in Hartlepool and Workington, England, for the manufacture of polyester, used to produce film, bottles, and other packaging. The Workington site also produces acetate tow. In addition, the Company's operations include a polyester manufacturing facility in Toronto, Canada; EASTAPAK polymers plants in Cosoleacaque, Veracruz, Mexico and San Roque, Spain; and facilities in the United Kingdom and Hong Kong for the manufacture of fine chemicals. The Company is increasing its international manufacturing presence by targeting a higher percentage of its annual capital expenditures for markets outside the United States. The Company is building EASTAPAK polymers plants in the Netherlands and Argentina, with operational dates of 1998. Construction is also underway on an additional plant in the Netherlands to produce purified terephthalic acid ("PTA"), a key raw material for the production of EASTAPAK polymers, with an operational date of 1998. A newly constructed facility located in Kuantan, Malaysia, will produce 30,000 metric tons of copolyester when it becomes operational in 1998. In addition, the Company has begun construction of a new oxo chemicals manufacturing complex in Singapore, with production expected in early 1999, and is studying the feasibility of forming a joint venture in Nanjing, People's Republic of China, to produce hydrocarbon tackifying resins. The Company has increased its international sales and distribution infrastructure during the past several years to position it for worldwide sales growth. In particular, from 1990 through 1997, the Company increased personnel outside the United States from approximately 500 to nearly 1,800 employees. During the same time period, the number of Company sales offices outside the United States increased from 25 to 36 in a total of 32 6 7 countries. For financial information about foreign and domestic operations and export sales, see Part II--Item 8--Financial Statements and Supplementary Data--Note 15 to Consolidated Financial Statements. The Company's current and future business expansions in international markets are dependent on projected regional economic conditions. Generally, the Company uses its international marketing organizations to sell into international markets. After achieving sufficient sales levels and developing an understanding of the markets and earnings potential, the Company may invest in manufacturing capacity appropriate to serve the region, taking into account the projected future business conditions in the region. See Part II--Item 7--"Management's Discussion and Analysis of Financial Condition and Results of Operations-Results of Operations--Summary by Customer Location" for a discussion of certain risks to which the Company is subject as a result of its operating in international markets. Strategic Market Orientation The Company's organization is aligned to focus on strategic markets. The Company believes that its market focus helps sustain earnings during economic downturns and allows it to focus on growth. Employee Ownership and Incentives The Company believes that employee stock ownership will be a significant factor in achieving its goal of consistent, profitable growth. The Eastman Employee Stock Ownership Plan ("ESOP") is intended to foster employee ownership throughout the Company, and stock ownership guidelines have been established for the Company's directors and approximately 600 key Company managers. All Eastman employees have placed at risk approximately 5% of their overall pay under the Eastman Performance Plan, an annual incentive plan that rewards employees based on the Company's achieved return on capital in relation to its cost of capital. A certain portion of the incentive pay (approximately 5% of eligible employees' annual pay in 1997, 1996, and 1995) has been made in the form of a contribution by the Company of Eastman common stock under the ESOP. An additional portion of management compensation is tied to Company performance under the Eastman Annual Performance Plan. For further information concerning the Company's ESOP and incentive pay plans, see Part II--Item 8--Financial Statements and Supplementary Data--Note 8 to Consolidated Financial Statements and Part III--Item 11--Executive Compensation. INDUSTRY SEGMENTS SPECIALTY AND PERFORMANCE SEGMENT The key product groupings and primary markets in the Specialty and Performance segment are summarized as follows:
Product Groupings Primary Markets - ------------------------------------------- ---------------------------------------------------------- Fibers Filters and Fabrics Coatings, inks, and resins Coatings, inks and paints Fine chemicals Photographic and custom chemicals Pharmaceutical and agricultural intermediates Performance chemicals Additives for fibers and plastics, semi-conductors Adhesives and sealants Food and beverages Nutrition, cosmetics, construction Textiles Specialty plastics Medical, electronics, recreation, consumer durables Plastic packaging
7 8 Fibers The Company is one of the world's largest suppliers of cellulose acetate tow, a product developed by the Company in the 1950's that is used by our customers primarily in the manufacture of cigarette filters. With approximately 400 million pounds of annual capacity at its plants in Kingsport, Tennessee, and Workington, England, the Company accounts for approximately 30% of the annual worldwide production of acetate tow, and sells to all major cigarette producers throughout the world. The two primary raw materials used in the manufacture of acetate tow are cellulose (from wood pulp) and acetic anhydride. The Company has developed the world's only commercial coal gasification facility to produce the latter. This facility reduces the Company's dependency on petrochemicals otherwise required for the manufacture of acetate tow. Competition for sales of acetate tow is based on price, product quality, and reliability of supply. The Company believes that it enjoys a low-cost position for raw materials as a result of its coal gasification technology, efficient integrated manufacturing processes, and overall size. Growth in the acetate tow market is directly related to the level of filtered cigarette consumption, which continues to increase worldwide despite declining levels of cigarette consumption in North America. Historically, worldwide industry sales volume growth has averaged between 2% - 3% per year. In 1995 and 1996 worldwide growth in the market for acetate tow, led primarily by sales to China, resulted in higher levels of capacity utilization for both the Company and the industry. During 1997, industry capacity utilization declined somewhat due to new domestic production facilities beginning operation in China, resulting in lower sales of and lower operating earnings for acetate tow. The Company expects very modest growth in worldwide demand for acetate tow over the long term. Acetate yarn is produced by the Company for the textile industry. Product price, quality, and service are the primary factors influencing customer-purchasing decisions. This product line utilizes the Company's basic cellulose technology core competence along with its large cellulose acetate manufacturing position to compete effectively. The market for acetate yarn has experienced essentially no growth during recent years, and, in fact, declined somewhat during 1997. The Company has focused its efforts on improving its operating efficiencies to maintain its product quality and cost position. Fibers products accounted for approximately 28% of 1997 Specialty and Performance segment sales. Coatings, inks, and resins The Company supplies a wide variety of raw materials and intermediate products to the coatings, inks, and resins markets, including solvents, alcohols, glycols, and resins. All of the Company's coatings, inks, and resins products are currently produced in the United States with a majority of 1997 sales being in the United States and the remainder worldwide. Most of the products in this area are olefin or cellulose derivatives and utilize the Company's proprietary oxo chemistry technology or chemicals-from-coal technology. Products include mixed cellulose esters, of which the Company is the world's only manufacturer. Competitive suppliers of products into the coatings, inks, and resins markets compete based on price, breadth of product line, reliability of supply, and customer service. The Company believes it has a competitive advantage due to the efficiency of its proprietary oxo chemistry technology and chemicals-from-coal technology, the breadth of its product line, and its system of distribution. Products sold in these markets accounted for approximately 26% of 1997 Specialty and Performance segment sales. 8 9 Specialty plastics Specialty plastics are produced by the Company for value-added end uses, such as toothbrushes, eyeglass frames, medical devices, electrical connectors, tools, appliance housings, food and medical packaging, heavy-gauge sheeting, and fabricated boxes. The plastics supplied for these end uses include polyethylene, polyester/copolyesters, cellulosics, and alloys of two or more plastics combined to provide specific performance characteristics. The Company's strategy for these products is to identify and serve selected niche markets that offer the potential for attractive returns. Suppliers of specialty plastics products compete based on price, product performance, reliability of supply, product differentiation, and customer service. The Company believes it has a competitive advantage due to its product performance, its systems of marketing and distribution, and efficiency of its specialized copolyester chemistry and cellulose technology. Specialty plastics accounted for approximately 19% of 1997 Specialty and Performance segment sales. Fine chemicals Fine chemicals produced by Eastman are used in the manufacture of a wide variety of products such as photographic products, home care products, and custom chemicals. The Company is a leading producer of custom chemicals used in the manufacture of pharmaceuticals and agricultural chemicals, and of other products synthesized to customer specifications. Technical competence and efficiency are major competitive elements in the fine chemicals industry. The Company believes it has a competitive advantage because of its competency in complex multi-step organic chemistry and the breadth of services offered in custom manufacturing (i.e., regulatory compliance and process design and optimization). During 1997, fine chemicals accounted for approximately 15% of Specialty and Performance segment sales. Performance chemicals Eastman produces a variety of additives for fibers and plastics, raw materials for adhesives and sealants, food and beverage ingredients, and other performance products. Fiber and plastic additives are used to impart specialized processing and performance characteristics to polymers used in the production of a range of fibers and plastics products. The Company produces raw materials for adhesives that are used in hot-melt and pressure-sensitive applications. Eastman is a manufacturer of natural and synthetic food-grade antioxidants that are used to enhance the stability and extend the shelf life of many products containing oils and fats. Eastman is the only U.S. producer of sorbates that are used as food and cosmetic preservatives because of their antimicrobial action. The Company also manufactures many other performance products for use in nutrition, cosmetic, textile and construction applications. The Company believes it has a competitive advantage in many of the markets in which these performance products are sold. Many proprietary products with highly recognized trade names deliver to customers high quality and unique performance attributes. Competitors and competitive conditions vary depending on the market segment. During 1997, performance chemicals accounted for approximately 12% of Specialty and Performance segment sales. 9 10 CORE PLASTICS SEGMENT The key product groupings and the primary markets in the Core Plastics segment are summarized as follows:
Product Groupings Primary Markets - --------------------------------- ------------------------------------------- Container plastics Soft drink, food and water containers Flexible plastics Packaging Photographic Fibers
Container plastics The Company is the world's leading supplier of polyester plastics, including EASTAPAK polymers (PET), for packaging applications, with the majority of its sales concentrated in North America, Europe, and Latin America. The market for polyester plastics has experienced significant growth in recent years due to the substitution of these plastics for other packaging materials used in soft drink, food, and water containers. Industry estimates indicate that PET consumption grew worldwide from 2.3 billion pounds per year in 1989 to approximately 8.9 billion pounds per year in 1997. Capital expansion projects currently underway in the Netherlands and Argentina will add approximately 600 million pounds of additional PET capacity by the end of 1998. Overcapacity worldwide continues to pressure PET selling prices. Competition for the large volume PET market is based largely on price and service. Management believes that the Company's large-scale operations, vertical integration, and manufacturing expertise provide it with a competitive advantage by allowing the Company to position itself as a price-competitive, consistently reliable source of supply across a broad product line. In addition, the Company has developed proprietary polyester polymers that enable it to respond to specific customer design and performance requirements, and is a leader in the manufacture of recycled-content PET. Container plastics products accounted for approximately 62% of 1997 Core Plastics segment sales. Flexible plastics The Company manufactures a variety of plastics including polyethylene, cellulose esters, and polyesters for applications such as film, extrusion coating, fibers, tape, industrial strapping, and injection molding. The polyethylene product line includes low density, linear low density, and medium/high density polymers. The markets for these polyethylene products are characterized generally as large volume with a large number of customers and suppliers. The Company competes based on its integrated manufacturing capabilities and, in some of these market areas, on the basis of unique product characteristics. Several of the Company's competitors are larger, with some having a higher degree of vertical integration. As a result of the Company's position in the overall polyethylene market, the strategy is to focus on selected markets based on the Company's ability to produce high quality performance polymers. In addition to polyethylenes, the Company's strong core competency in cellulose esters and polyesters allows it to offer a wide range of differentiated high performance polymers in selected fiber and film markets. Flexible plastics accounted for approximately 38% of 1997 Core Plastics segment sales. 10 11 CHEMICAL INTERMEDIATES SEGMENT The key product grouping and the primary markets in the Chemical Intermediates segment are summarized as follows:
Product Groupings Primary Markets - ---------------------------------- ------------------------------------------- Industrial intermediates Industrial additives Agricultural chemicals Pharmaceuticals Vinyl compounding Wood and metal coatings Artificial sweeteners
Industrial Intermediates Industrial intermediate chemicals are produced based on the Company's oxo chemistry technology and chemicals-from-coal technology. These products include basic acetyl, oxo chemicals, and plasticizers, and are marketed to customers producing esters, polymers, industrial additives, agricultural chemicals, industrial intermediates, monomers and polymers, medical delivery equipment, and pharmaceuticals. In 1997 approximately 76% of these products were sold in the United States with the remainder sold internationally. Volume growth rates of these chemicals tend to follow the growth in the world economy. Competition in the market for industrial intermediate chemicals is based on price, customer relationships, and reliability of supply. The Company's large-scale integrated manufacturing provides the Company with a low-cost position in several of these products. In addition, the Company is able to provide its customers with a reliable source of supply through an extensive distribution network. RAW MATERIALS The Company purchases substantially all of its key raw materials under long-term contracts, generally of three to five years initial duration with renewal provisions. Most of those agreements do not require the Company to buy materials if its operations are shut down or if the Company's demand is otherwise reduced. Key raw materials purchased include cellulose, ethylene glycol, paraxylene, purified terephthalic acid ("PTA"), coal, ethane, and propane. The Company has multiple suppliers for most key raw materials and uses quality management principles, such as the establishment of long-term relationships with suppliers and ongoing performance assessment and benchmarking, as part of the total supplier selection process. CAPITAL EXPENDITURES Total capital expenditures were $749 million in 1997, $789 million in 1996, and $446 million in 1995. Eastman anticipates that total capital expenditures in 1998 will be between $550 and $600 million. Efficiency of capital utilization is a key initiative of the Company. The Company uses alliances and joint ventures, where appropriate, to provide additional capital expansion. During 1997, 1996, and 1995, the Company made capital expenditures of $70 million, $51 million, and $39 million, respectively, related to environmental improvements. The Company estimates that such capital expenditures will be approximately $49 million and $86 million for 1998 and 1999, respectively. Future expenditures will be dependent in part upon implementation of government environmental regulations. DISPOSITIONS As previously reported, in February 1995 Eastman sold its Kingsport, Tennessee compounded polypropylene product line. In addition, the Company ceased production of natural source vitamin E in 1995 and of pigmented inks in 1996, and sold the food-grade distilled monoglycerides, powder coatings, and adhesives businesses in 1996 and its polyols business in 1997. The effect of these divestitures and product discontinuances on financial position and results of operations has not been, and is not expected to be, material. 11 12 EMPLOYEE RELATIONS The Company employs approximately 16,100 men and women worldwide. None of the employees in the United States and approximately 2% of the total worldwide labor force are represented by labor unions. The Company believes that its employee relations are excellent. CUSTOMER RELATIONS Eastman has an extensive customer base and, while it is not dependent on any one customer or group of customers, loss of certain top customers could adversely affect the Company until such business is replaced. The Company has approximately 5,300 customers worldwide and the top 100 customers account for approximately 60% of the Company's business. Eastman's largest customer is Kodak, which accounted for approximately 5% of total sales in 1997. The Company has received numerous preferred-supplier awards and is the sole supplier to several major customers. The Company strives to be the preferred supplier to customers in the markets it serves. COMPETITION The Company's competitive environment varies among markets. Some of the Company's competitors are larger in size and capital base than the Company. Major competitors of the Company in its key markets are summarized as follows:
Key Market Major Competitors - ------------------------------------------- -------------------------------------------------------------- Fibers Courtaulds, Daicel, Celanese, Mitsubishi, Novaceta, Rhone-Poulenc, Teijin Coatings, inks, and resins BASF, Exxon, Celanese, S. C. Johnson, Lonza, Oxychem, Shell, Union Carbide Fine chemicals DSM, LaPorte, Lonza Performance chemicals AlliedSignal, ARCO, Clariant, Daicel, Dow, Exxon, Hercules, Nutrinova, Rexene, Rhone-Poulenc, UOP Specialty plastics BASF, Bayer, Dow, DuPont, GE, Hoechst A.G., Phillips, Akzo Nobel, AtoHaas, ICI, Geon, Shell Container plastics Hoechst Celanese, DuPont, Shell, Wellman, Nan Ya Flexible plastics Chevron, Dow, Exxon, Hoechst Celanese, Mobil, Quantum, Shell, Union Carbide Industrial intermediates BASF, BP, Dow, Exxon, Celanese Ltd., Rhone-Poulenc, Union Carbide
RESEARCH AND DEVELOPMENT The Company directs its research and development programs toward four objectives: 1) continually improving product quality by improvement in manufacturing technology and processes; 2) lowering manufacturing costs through process improvement; 3) conducting exploratory research to develop new product lines and markets; and 4) developing new products and processes that are compatible with the Company's commitment to RESPONSIBLE CARE (see "Environmental" section on next page). 12 13 Major achievements in research and development during the last several years include the chemicals-from-coal technology, enhancements of the oxo chemistry technology, and polyester application development and manufacturing technology. The Company has developed wastewater treatment technology and technology to improve PET recycling. Eastman has developed technology that provides a faster, lower-cost route to production of EpB oxirane, a building block chemical used in many other chemicals. In addition, the Company has commercialized a group of new, higher-value polyolefins with increased tear strength and impact performance--MXSTEN and TENITE HIFOR. The Company's research and development expenditures during the past five years have averaged approximately 4% of sales annually with 1997, 1996, and 1995 expenditures totaling $191 million, $184 million, and $176 million, respectively. Expenditures for 1998 are anticipated to be within the 1996-1997 range. PATENTS AND TRADEMARKS The Company owns or licenses a large number of U.S. and non-U.S. patents that relate to a wide variety of products and processes. Company patents expire at various times during the next several years. The Company also owns or licenses trademarks in the U.S. and in foreign countries on major product segments. While these patents, licenses, and trademarks are considered important, the Company does not consider its business as a whole to be materially dependent upon any one particular patent, patent license, or trademark. SEASONALITY Seasonality is not a significant factor for the Company, although the Specialty and Performance segment experiences some seasonal effects during the winter months because of reduced demand for paint products, and the Core Plastics segment experiences reduced demand for soft-drink containers during the first and third quarters. MARKETING AND DISTRIBUTION The Company markets products through a worldwide sales organization with 36 sales offices outside the United States in 32 countries. A majority of sales are direct; however, some sales are made through indirect selling channels. Products are shipped to customers directly from the Company's plants as well as from distribution centers, with the method of shipment generally determined by the customer. ENVIRONMENTAL The Company is actively engaged in the ongoing development and enhancement of products that are environmentally responsible, such as waterborne products and recyclable plastics. In addition, the Company is an active participant in RESPONSIBLE CARE, a chemical industry initiative that focuses on improving performance in areas including community awareness and emergency response, pollution prevention, process safety, distribution, employee health and safety, and product stewardship. Health, safety, and environmental considerations are a priority in the Company's planning for all existing and new products and processes. The Health, Safety & Environmental and Public Policy Committee of Eastman's Board of Directors reviews the Company's policies and practices concerning health, safety, and the environment, and its processes for complying with related laws and regulations, and monitors significant related matters. The Company's policy is to operate its plants and facilities in a manner that protects the environment and the health and safety of its employees and the public. The Company has made and intends to continue to make expenditures for environmental protection and improvement in a timely manner consistent with the foregoing policies and with the technology available. In some cases, applicable environmental regulations, such as those adopted under the federal Clean Air Act and the Resource Conservation and Recovery Act, and related actions of regulatory agencies, determine the timing and amount of environmental costs incurred by the Company. 13 14 The Company's commitment to environmental stewardship has earned favorable recognition. In late 1997, Eastman was recognized by the Chemical Manufacturers Association for its 1996 energy efficiency efforts. In 1996, Tennessee Eastman Division's wastewater treatment facility received the Operational Excellence Award from the Kentucky-Tennessee Water Environment Association and the national George F. Burke, Jr. Award from the Water Environment Association for operation safety. During 1995 Eastman received environmental awards from the Chemical Manufacturers Association, the Kentucky-Tennessee Water Environment Association, the League of Women Voters of the Texas Education Fund, and the Tennessee Association of Business. Certain of the Company's manufacturing sites generate hazardous and nonhazardous wastes, of which the treatment, storage, transportation, and disposal are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs relating to environmental remediation and closure/postclosure pursuant to the federal Resource Conservation and Recovery Act. Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, the Company does not believe its liability for these environmental matters, individually or in the aggregate, will be material to Eastman's consolidated financial position, results of operations, or competitive position. The Company's policy is to record such liabilities when loss amounts are probable and can be reasonably estimated. The Company's environmental protection and improvement cash expenditures were approximately $220 million, $175 million, and $150 million in 1997, 1996, and 1995, respectively, including investments in construction, operations, and development. The Company does not expect future environmental capital expenditures arising from requirements of recently promulgated environmental laws and regulations to materially increase the Company's planned level of capital expenditures for environmental control facilities. BACKLOG During 1997, the Company's backlog of firm orders averaged between $200 million and $400 million, representing two to four weeks' sales. The Company adjusts its inventory policy to control the backlog of products dependent on customers' needs. In areas where the Company is the single source of supply, or competitive forces or customers' needs dictate, the Company may carry additional inventory to reduce backlog. Backlog is also affected by utilization of a given product manufacturing capacity. 14 15 EXECUTIVE OFFICERS OF THE COMPANY Certain information about the Company's executive officers is provided below: Earnest W. Deavenport, Jr., age 59, is Chairman of the Board and Chief Executive Officer of the Company. He joined the Company in 1960. Mr. Deavenport was named President of the Company in 1989 and also served as Group Vice President of Kodak from 1989 through 1993. R. Wiley Bourne, Jr., age 60, is Vice Chairman of the Board and Executive Vice President of the Company, responsible for all business organizations. He joined the Company in 1959, was named Executive Vice President in 1989, and also served as a Vice President of Kodak from 1986 through 1993. Dr. James L. Chitwood, age 54, is Senior Vice President of the Company, responsible for operations outside North America. Dr. Chitwood joined the Company in 1968, was named Senior Vice President of the Company in 1989, and Group Vice President, Specialty Business Group in 1991. Dr. Chitwood was appointed Senior Vice President with responsibility for Company business organizations in October 1994 and assumed his current responsibilities in 1996. He also served as a Vice President of Kodak from 1984 through 1993. Harold L. Henderson, age 62, joined the Company in 1997 as Senior Vice President and General Counsel. Mr. Henderson served previously as chief legal officer of The Firestone Tire & Rubber Company from 1980 to 1985 and of RJR Nabisco, Inc. from 1985 to 1989. He was a consultant, commercial real estate developer, and private investor from 1989 through 1996. Tom O. Nethery, age 59, is Senior Vice President of the Company, responsible for functional organizations. Mr. Nethery joined the Company in 1960 and was named Senior Vice President, Manufacturing of the Company in 1989. He was named Group Vice President, Industrial Business Group in 1991 and was appointed to his current position in October 1994. Mr. Nethery also served as a Vice President of Kodak from 1989 through 1993. H. Virgil Stephens, age 60, is Senior Vice President and Chief Financial Officer of the Company. Mr. Stephens joined the Company in 1979. In 1988, Mr. Stephens was named Vice President, Financial and Information Services, became Vice President and Chief Financial Officer in 1993, and was appointed to his current position in 1996. Mr. Stephens has announced his retirement effective April 1, 1998. Darryl K. Williams, age 55, is Senior Vice President, Technology and Quality, of the Company. Mr. Williams joined the Company in 1965. He was appointed president of Eastman Chemical Japan Ltd. in 1992, was named Vice President, Asia Pacific Regional Support Services in 1993, was appointed Vice President, Asia Pacific Sales in 1994, and was named Senior Vice President, Technology in 1996. He assumed his current position in 1998. Betty W. DeVinney, age 53, is Vice President, Communications and Public Affairs. Mrs. DeVinney joined the Company in 1973. In 1991, she became Manager, Employment, was named Manager, Community Relations in 1995 and was appointed Manager, Corporate Relations in 1997. She assumed her current position in 1998. Patrick R. Kinsey, age 52, is Vice President and Comptroller of the Company. Mr. Kinsey joined the Company in 1967, was named Director, Internal Auditing in 1993 and became Director, Corporate Financial Reporting in 1996. He assumed his current position in 1998. B. Fielding Rolston, age 56, is Vice President, Human Resources and Health, Safety, Environment, and Security of the Company. Mr. Rolston joined the Company in 1964 and was appointed Vice President, Customer Service and Materials Management of the Company in 1987. He assumed his current position in 1998. Allan R. Rothwell, age 50, assumed his current position as Vice President, Corporate Development and Strategy in 1997. In addition to his current responsibilities, Mr. Rothwell will assume the position of Senior Vice President and Chief Financial Officer on April 1, 1998, upon the retirement of Mr. Stephens. Mr. Rothwell joined the Company in 1969 and was appointed Business Director, Industrial Intermediates in 1993. In 1994, he became Vice President and General Manager, Container Plastics. 15 16 ITEM 2. PROPERTIES PROPERTIES A summary of the Company's principal manufacturing sites and the key products produced at each site is shown in the table below. Eastman's plants generally are well maintained, are in good operating condition, and are suitable and adequate for their use. Utilization of these facilities may vary with product mix, and economic, seasonal, and other business conditions, but none of the principal plants are substantially idle. The Company's plants, including approved expansions, generally have sufficient capacity for existing needs and expected near-term growth.
Location Unit Key Products - ---------------------------- ---------------------------------------- ---------------------------------------- Batesville, AR Arkansas Eastman Fine Chemicals Columbia, SC Carolina Eastman Polyester Polymers Cosoleacaque, Mexico Eastman Chemical Industrial de Mexico Polyester Polymers Hartlepool, England Eastman Chemical Ectona, Ltd. Polyester Polymers Hong Kong Eastman Chemical Hong Kong, Ltd. Fine Chemicals Kingsport, TN Tennessee Eastman Acetate Tow Coatings and Paint Raw Materials Polyester Polymers Fine Chemicals Kuantan, Malaysia* Eastman Chemical Malaysia SDN BHD Copolyester Plastics Llangefni, Wales Eastman Chemical (UK) Limited Fine Chemicals Longview, TX Texas Eastman Oxo Chemicals Plastics Rochester, NY Distillation Products Division Monoglycerides and Antioxidants Roebuck, SC ABCO Industries, Inc. Waterborne Polymers Textile Chemicals Rotterdam, Netherlands* Eastman Chemical Netherlands B.V. Polyester Polymers San Roque, Spain Eastman Chemical Espana, S.A. Polyester Polymers Singapore* Eastman Chemical Singapore Pte. Ltd. Oxo Chemicals Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Polyester Polymers Workington, England Eastman Chemical Ectona, Ltd. Acetate Tow Polyester Polymers Zarate, Argentina* Eastman Chemical Argentina S.A. Polyester Polymers *Under construction
The Company has a 50% interest in Primester, a joint venture which manufactures cellulose ester at its Kingsport, Tennessee plant. The production of cellulose ester is an intermediate step in the manufacture of acetate tow and other cellulose-based products. The Company also has a 50% interest in Genencor International, a joint venture which develops, manufactures and markets industrial enzymes and other fine and specialty chemicals at numerous international locations. The Company has distribution facilities at all of its plant sites. In addition, the Company conducts manufacturing operations at three other sites and operates 81 stand-alone distribution facilities in 18 countries. Corporate headquarters are in Kingsport, Tennessee. The Company's regional headquarters are in Coral Gables, Florida; The Hague, Netherlands; Singapore; and Kingsport, Tennessee. Technical service is provided to the Company's customers from technical service centers in Kingsport, Tennessee; Kirkby, England; Osaka, Japan; and Singapore. Customer service centers are located in Kingsport, Tennessee; Rotterdam, Netherlands; Coral Gables, Florida; and Singapore. 16 17 ITEM 3. LEGAL PROCEEDINGS LEGAL PROCEEDINGS In May 1997 the Company received notice from the Tennessee Department of Environment and Conservation ("TDEC") alleging that the manner in which hazardous waste was fed into certain boilers at the Tennessee Eastman facility in Kingsport, Tennessee violated provisions of the Tennessee Hazardous Waste Management Act. Based upon subsequent communications with the TDEC and the U.S. Environmental Protection Agency, the Company believes that these agencies may be contemplating enforcement proceedings which, if commenced, could result in monetary sanctions in excess of the $100,000 threshold of Regulation S-K, Item 103, Instruction 5.C. under the Securities Exchange Act of 1934 for reporting such contemplated proceedings in this Report. The Company's operations are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, patent, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any of such pending matters, including the TDEC allegations described in the preceding paragraph, will have a material adverse effect on the Company's financial position, or results of operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of the Company's shareowners during the fourth quarter of 1997. - -------------------------------------- RESPONSIBLE CARE is a registered service mark of the chemical industry. EASTAPAK, TENITE, EASTACOAT, MXSTEN, SPECTAR, and TENITE HIFOR are trademarks of Eastman Chemical Company. 17 18 PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREOWNER MATTERS The Company's Common Stock is traded on the New York Stock Exchange (the "NYSE") under the symbol "EMN." The following table presents the high and low sales prices of the Common Stock on the NYSE and the cash dividends per share declared by the Company's Board of Directors for each quarterly period of 1996 and 1997.
CASH DIVIDENDS HIGH LOW DECLARED 1996 1st Quarter 76 1/4 60 1/8 $ .42 2nd Quarter 69 1/4 59 3/4 .42 3rd Quarter 62 3/8 50 3/4 .44 4th Quarter 58 1/2 52 .44 1997 1st Quarter 57 53 1/2 $ .44 2nd Quarter 64 1/2 50 3/4 .44 3rd Quarter 64 57 3/8 .44 4th Quarter 65 3/8 56 1/4 .44
- ---------- As of January 31, 1998 there were 78,445,546 shares of the Company's Common Stock issued and outstanding, which shares were held by approximately 86,700 shareowners of record. These shares include 184,557 shares held by the Company's charitable foundation. The Company has declared a cash dividend of $0.44 per share during the first quarter of 1998, and currently anticipates continuing to pay quarterly cash dividends. Quarterly dividends on Common Stock, if declared by the Company's Board of Directors, are usually paid on or about the first business day of the month following the end of each quarter. The payment of dividends is a business decision to be made by the Board of Directors from time to time based on the Company's earnings, financial position and prospects, and such other considerations as the Board considers relevant. Accordingly, the Company's dividend policy may change at any time. The Company did not sell any equity securities during the fourth quarter of 1997 in transactions not registered under the Securities Act of 1933. For information concerning issuance of shares, a warrant to purchase shares, a warrant to purchase shares, and option grants in 1997 under compensation and benefit plans and to the Company's charitable foundation, see Part II--Item 8--Financial Statements and Supplementary Data -- Notes 7 and 8 to Consolidated Financial Statements. 18 19 ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1997(1) 1996 1995 1994 1993(2) SUMMARY OF OPERATING DATA Sales $ 4,678 $ 4,782 $ 5,040 $ 4,329 $ 3,903 Operating earnings 506 663 964 636 451 Earnings from continuing operations before income taxes and cumulative effect of changes in accounting principle 446 607 899 550 439 Earnings from continuing operations 286 380 559 336 267 Discontinued operations, net of taxes - - - - (20) Cumulative effect of changes in accounting principle, net of taxes - - - - (456) Net earnings (loss) 286 380 559 336 (209) Basic earnings per share(3) 3.66 4.84 6.84 4.06 2.47 Diluted earnings per share(3) 3.63 4.79 6.78 4.04 2.46 STATEMENT OF FINANCIAL POSITION DATA Current assets $ 1,490 $ 1,345 $ 1,487 $ 1,248 $ 1,057 Properties at cost 8,104 7,530 6,791 6,389 6,390 Accumulated depreciation 4,223 4,010 3,742 3,483 3,331 Total assets 5,778 5,266 4,872 4,395 4,341 Current liabilities 954 787 873 793 462 Long-term borrowings 1,714 1,523 1,217 1,195 1,801 Total liabilities 4,025 3,627 3,344 3,100 3,280 Total shareowners' equity 1,753 1,639 1,528 1,295 1,061 Dividends declared per common share 1.76 1.72 1.64 1.60 -
- ------------ (1) Operating data for 1997 includes the effect of a $62 million ($40 million after tax) charge for partial settlement/curtailment of pension and other postemployment benefit liabilities. See Note 14 to Consolidated Financial Statements. (2) The summary of operating data for 1993 presents the historical combined results of the Company as the wholly owned worldwide chemical business of Kodak before the spin-off at midnight December 31, 1993 as if it had operated as an independent stand-alone entity. Earnings per share for 1993 are presented on a pro forma basis and are based on pro forma earnings from continuing operations of $204 million. Historical earnings per share data for 1993 is not presented because the Company was not a publicly held company before the spin-off and such data is not meaningful because of the significant change in capitalization as a result of the spin-off. (3) Earnings per share for prior years have been restated to conform to requirements of the new accounting standard effective for periods ending after December 15, 1997. 19 20 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are basic earnings per share unless otherwise noted. MAJOR FACTORS AFFECTING EARNINGS 1997 COMPARED WITH 1996 Lower selling prices for the Company's core plastics Overall increased sales volumes Lower purchased raw materials costs Lower variable-incentive compensation Charge resulting from partial settlement/curtailment of pension and other postemployment benefit liabilities RESULTS OF OPERATIONS EARNINGS
(Dollars in millions, except per share amounts) 1997 1996 CHANGE 1995 Operating earnings $ 506 $ 663 (24)% $ 964 Net earnings 286 380 (25) 559 Earnings per share (1) --Basic 3.66 4.84 (24) 6.84 --Diluted 3.63 4.79 (24) 6.78
(1) Earnings per share for prior years have been restated to conform to requirements of the new accounting standard effective for periods ending after December 15, 1997.
CHANGES IN EARNINGS PER SHARE 1997 1996 CHANGE Earnings per share $3.66 $4.84 $ (1.18) ======= Operations Selling price $ (2.18) Volume and mix .20 Raw materials, energy, and supplies 1.14 Variable-incentive pay .37 Early retirement charge (1) (.51) Other (.27) ------- Change from operations (1.25) Other Interest expense, net (.16) Other income/charges .12 Effective tax rate change .09 Fewer shares outstanding .02 ------- Total change $(1.18) ======
(1) Charge resulting from partial settlement/curtailment of pension and other postemployment benefit liabilities. See Note 14 to Consolidated Financial Statements. 20 21 1997 COMPARED WITH 1996 The Company's 1997 net earnings reflect returns of 17% on equity and 10% on capital. Sales volumes improved 6% overall due to good demand and new capacity. However, earnings reflect the significant negative impact of lower EASTAPAK polymers prices which resulted from excess industry capacity, and substantially lower acetate tow volume caused by excess industry capacity and customer inventory reductions, mainly in China. Lower costs were experienced for major raw materials including paraxylene, purified terephthalic acid ("PTA"), and propane feedstock. Productivity gains realized from the Company's Advantaged Cost 2000 program and a gain from damages awarded for patent infringement positively impacted net earnings. Operating earnings for 1997 reflect a $62 million ($40 million after tax) charge for partial settlement/curtailment of pension and other postemployment benefit liabilities arising from the retirement of approximately 1,700 employees. The large number of retirements was not the result of special payments or incentives. Preproduction costs related to start-up of new manufacturing facilities had a moderately negative effect on earnings. The Company's financial results were not materially affected by the Asian financial crisis in 1997. SUMMARY BY INDUSTRY SEGMENT SPECIALTY AND PERFORMANCE SEGMENT
(Dollars in millions) 1997 1996 CHANGE 1995 Sales $ 2,607 $ 2,657 (2)% $ 2,647 Operating earnings 416(1) 519 (20) 433
(1) Specialty and Performance segment operating earnings for 1997 reflect an allocation of $34 million of the $62 million charge for partial settlement/curtailment of pension and other postemployment benefit liabilities. See Note 14 to Consolidated Financial Statements. 1997 COMPARED WITH 1996 The effect of strong volume improvement for specialty plastics and moderately higher volume for fine chemicals, coatings, inks, and resins products was offset by overall lower selling prices, a shift in the mix of products sold, and declines in unit volumes for performance chemicals and fibers. Improved volumes for plastic esters were driven by good demand for auto coatings, particularly in developing international regions. Increased sales volumes for specialty plastics, including TENITE cellulosics and SPECTAR copolymer, reflected new customer applications and regional growth. Performance chemicals results reflected lower unit volumes due to divestiture of several product lines in 1996. Demand for acetate tow declined due to new industry capacity and customer reductions in inventories, mainly in China. The primary factors affecting operating earnings were significantly lower volumes for acetate tow, overall lower selling prices, unfavorable foreign currency effects, and the effect of the early retirement charge, partially offset by lower raw materials costs, lower variable-incentive pay, and productivity gains. CORE PLASTICS SEGMENT
(Dollars in millions) 1997 1996 CHANGE 1995 Sales $ 1,338 $ 1,409 (5)% $1,685 Operating earnings (loss) (56) (1) (1) - 347
(1) Core Plastics segment operating loss for 1997 reflects an allocation of $18 million of the $62 million charge for partial settlement/curtailment of pension and other postemployment benefit liabilities. See Note 14 to Consolidated Financial Statements. 21 22 1997 COMPARED WITH 1996 The decline in container plastics selling prices, which began in 1996 as a result of industry overcapacity, moderated somewhat by the end of 1997 as prices showed some recovery and stabilization. Volumes for container plastics showed significant improvement, primarily as a result of new capacities in Spain and Mexico and continued strong demand. Lower volumes for flexible plastics reflected limited availability of ethylene supply prior to the midyear completion of a new ethylene pipeline. Improved selling prices for flexible plastics resulted from strong market demand. Operating earnings declined primarily due to substantially lower selling prices for EASTAPAK polymers, start-up costs for new manufacturing sites, unfavorable currency effects, and the effect of the early retirement charge, partially offset by improved selling prices for flexible plastics, an increase in overall unit volumes, lower raw materials costs, lower variable-incentive pay, and productivity improvements. CHEMICAL INTERMEDIATES SEGMENT
(Dollars in millions) 1997 1996 CHANGE 1995 Sales $ 733 $ 716 2% $ 708 Operating earnings 146(1) 145 1 184
(1) Chemical Intermediates segment operating earnings for 1997 reflect an allocation of $10 million of the $62 million charge for partial settlement/curtailment of pension and other postemployment benefit liabilities. See Note 14 to Consolidated Financial Statements. 1997 COMPARED WITH 1996 Sales in the Chemical Intermediates segment were slightly higher than 1996, with increased sales volume partially offset by overall lower selling prices and unfavorable currency exchange rates. Operating earnings reflect lower raw materials costs and lower variable-incentive pay, offset partially by overall lower selling prices, unfavorable currency exchange rates, and the effect of the early retirement charge. (For supplemental analysis of Specialty and Performance, Core Plastics, and Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-K). SUMMARY BY CUSTOMER LOCATION SALES BY REGION
(Dollars in millions) 1997 1996 CHANGE 1995 United States and Canada $ 3,051 $ 3,183 (4)% $ 3,390 Europe, Middle East, and Africa 780 745 5 825 Asia Pacific 506 548 (8) 557 Latin America 341 306 11 268 ------- ------- ------- Total $ 4,678 $4,782 $ 5,040 ======= ====== =======
1997 COMPARED WITH 1996 Sales in the United States for 1997 were $2.875 billion, down 4% from 1996 sales of $2.990 billion. Decreased sales were attributable to lower selling prices, primarily for EASTAPAK polymers. 22 23 Sales outside the United States in 1997 were relatively unchanged from 1996 and were 39% of total sales compared to 37% of total sales in 1996. Higher sales volume driven by new capacities in Mexico and Spain was mostly offset by unfavorable currency effects and overall lower selling prices. Decreased sales in Asia Pacific reflect a decline in sales of acetate tow. With a substantial portion of 1997 sales to customers outside the United States and approximately 10% of its products manufactured outside the United States, Eastman is subject to the risks associated with operating in international markets. To mitigate its exchange rate risks, the Company frequently seeks to negotiate payment terms in U.S. dollars. In addition, where it deems such actions advisable, the Company engages in foreign currency hedging transactions and requires letters of credit and prepayment for shipments where its assessment of individual customer and country risks indicates their use is appropriate. Foreign currency hedging transactions mitigated the impact of foreign currency transaction and remeasurement losses. However, the change in exchange rates when compared to 1996 negatively impacted net earnings by approximately $35 million. See Note 10 to Consolidated Financial Statements and Market Risk discussion. SUMMARY OF CONSOLIDATED RESULTS
(Dollars in millions) 1997 1996 CHANGE 1995 SALES $4,678 $4,782 (2)% $5,040
Sales volume in 1997 improved 6% overall, but generally lower selling prices, a shift in mix of products sold, and unfavorable currency effects resulted in sales declining 2%.
(Dollars in millions) 1997 1996 CHANGE 1995 GROSS PROFIT $1,096 $1,179 (7)% $1,504 As a percentage of sales 23.4% 24.7% 29.8%
Gross profit decline was principally attributable to lower selling prices, partially offset by overall lower purchased raw materials costs, lower variable-incentive compensation, and productivity gains.
(Dollars in millions) 1997 1996 CHANGE 1995 SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 337 $ 332 2% $ 364 As a percentage of sales 7.2% 6.9% 7.2%
Selling and general administrative expenses were up slightly in 1997 due to a variety of general business activities relating to new business formations and globalization strategies, increased advertising and outside professional services, and higher compensation costs, partially offset by a reduction in labor hours and lower variable-incentive costs.
(Dollars in millions) 1997 1996 CHANGE 1995 RESEARCH AND DEVELOPMENT COSTS $ 191 $ 184 4% $ 176 As a percentage of sales 4.1% 3.8% 3.5%
Increased research and development costs resulted from increased level of activity, partially offset by lower variable-incentive costs.
(Dollars in millions) 1997 1996 CHANGE 1995 INTEREST COSTS $ 128 $ 95 $ 88 LESS CAPITALIZED INTEREST 41 28 9 ------- ------- ------- NET INTEREST EXPENSE $ 87 $ 67 30% $ 79 ======= ======= =======
23 24 Interest costs increased due to an increase in borrowings and higher overall effective interest rates. The increase in capitalized interest was directly related to the major capital investment program which peaked in 1997.
(Dollars in millions) 1997 1996 CHANGE 1995 OTHER INCOME, NET $ 27 $ 11 >100% $ 14
In 1997 the Company recognized increased income from Genencor International, a joint venture that develops, manufactures, and markets industrial enzymes and other fine and specialty chemicals. Also in 1997 the Company realized a gain from an award of damages for patent infringement. In 1996 the Company recognized a gain from the sale of the Company's food emulsifier business. All years include royalty and interest income, the effect of foreign currency transactions and translation, and income (loss) from joint ventures and equity investments.
(Dollars in millions) 1997 1996 CHANGE 1995 PROVISION FOR INCOME TAXES $ 160 $ 227 (30)% $ 340 Effective tax rate 35.8% 37.4% 37.8%
The reduction in effective tax rate for 1997 resulted primarily from increased tax benefits attributable to export sales and the recognition of tax benefits attributable to foreign operations. 1996 COMPARED WITH 1995 Eastman posted sales in 1996 of $4.782 billion, down 5% compared with 1995. Sales decreased 7% because of lower selling prices, offset 2% because of volume gains. The Company had net earnings of $380 million in 1996, compared with $559 million for 1995 -- a 32% decrease. The factors contributing to the earnings decline were lower selling prices for the Company's core plastics, EASTAPAK polymers and polyethylene, preproduction and start-up costs at new EASTAPAK polymers plants, and higher labor rates. Currency fluctuations had a minor negative effect on earnings in 1996. Positive impacts on overall earnings included higher overall sales volumes, lower variable-incentive compensation, and lower costs for paraxylene, certain other raw materials, and energy, partially offset by higher propane costs. The Specialty and Performance segment reported sales of $2.657 billion for 1996, essentially level with 1995. The operating earnings for 1996 were $519 million, up 20% from 1995. This increase was primarily a result of lower operating costs reflecting overall lower raw materials costs, divestiture and discontinuance of certain businesses and product lines, favorable product mix changes, and lower variable-incentive compensation. Improved pricing, particularly for acetate tow and acetate yarn, also contributed to the increase in earnings. Sales of coatings, inks, and resins products increased because of higher volumes, partially offset by decreased prices. Fibers sales increased primarily because of price increases at the beginning of 1996 and slight volume gains. Fine chemicals products sales were down primarily because of lower volumes. Specialty plastics products sales were essentially level with 1995, with volume increases offset by price decreases. Sales of performance chemicals products decreased because of lower volumes, partially offset by higher prices, and as a result of the divestiture and discontinuance of certain businesses and product lines in late 1995 and early 1996. The Core Plastics segment reported sales of $1.409 billion for 1996, down 16% from 1995. The sales decrease in the Core Plastics segment was attributed primarily to lower EASTAPAK polymers selling prices, partially offset by increased volumes. The segment operating loss of $1 million was attributed primarily to lower EASTAPAK polymers and polyethylene selling prices. Other factors contributing to the overall decrease in segment operating earnings were increased preproduction and start-up costs for new EASTAPAK polymers manufacturing facilities and increased propane costs, which impacted primarily polyethylene and to a lesser extent EASTAPAK polymers. 24 25 The Chemical Intermediates segment reported sales of $716 million for 1996, up 1% from 1995. The slight increase in sales was attributed primarily to higher volumes, partially offset by lower selling prices for certain industrial intermediates. Chemical Intermediates segment operating earnings for 1996 were $145 million, down 21% from 1995. Decreased operating earnings were attributed primarily to lower selling prices for certain industrial intermediates products, particularly n-butyraldehyde products and their derivatives, and higher propane feedstock costs. Sales in the United States in 1996 were $2.990 billion, down 6% compared with 1995 sales of $3.168 billion. Decreased sales were attributed to lower selling prices, partially offset by modest volume gains. Sales to customers outside the United States in 1996 were down 4% compared with 1995 and were 37% of total sales, same as 1995. Decreased sales in Europe, Middle East, and Africa were primarily attributed to lower EASTAPAK polymers selling prices, partially offset by higher volumes. Increased sales in Latin America resulted primarily from higher EASTAPAK polymers volumes, partially offset by lower selling prices. 25 26 LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
FINANCIAL INDICATORS 1997 1996 1995 Ratio of earnings to fixed charges 3.7x 6.1x 9.7x Current ratio (1) 1.6x 1.7x 1.7x Percent of long-term borrowings to total capital (1) 49% 48% 44% Percent of floating-rate borrowings to total borrowings (1) 12% 21% 2%
- ------------- (1) At end of year.
CASH FLOW (Dollars in millions) 1997 1996 1995 Net cash provided by (used in) Operating activities $ 698 $ 746 $ 838 Investing activities (745) (809) (524) Financing activities 52 (13) (304) -------- -------- ------- Net change in cash and cash equivalents $ 5 $ (76) $ 10 ======== ======== ======= Cash and cash equivalents at end of period $ 29 $ 24 $ 100 ======== ======== =======
Cash provided by operations has declined over the periods presented mainly due to lower net earnings reflecting business conditions previously discussed. Cash used in investing activities peaked in 1996 due to significant global expansion activities underway at that time. Cash related to financing activities reflects significant treasury stock purchases in 1995 and 1996, proceeds received in 1997 from a $300 million issuance of 7.60% debentures due February 1, 2027, and the payment of dividends in all years presented. For additional analysis, see also the Consolidated Statements of Cash Flows. CAPITAL EXPENDITURES AND OTHER COMMITMENTS Eastman anticipates total capital expenditures in 1998 will be between $550 million and $600 million and depreciation expense is expected to be approximately $350 million. Long-term commitments related to capital expenditures are not material. The Company had various purchase commitments at the end of 1997 for materials, supplies, and energy incident to the ordinary conduct of business. These commitments total approximately $800 million. Eastman has other long-term commitments relating to joint venture agreements as described in Note 4 to Consolidated Financial Statements. LIQUIDITY Eastman has access to an $800 million revolving credit facility (the "Credit Facility") expiring in December 2000. Although the Company does not have any amounts outstanding under the Credit Facility, any such borrowings would be subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility also requires a facility fee on the total commitment that varies based on Eastman's credit rating. The annual rate for such fee was 0.075% in 1997, 1996, and 1995. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. Eastman was in compliance with all such covenants for all periods. Eastman utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Company's commercial paper, supported by the Credit Facility, is classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings long-term. As of December 31, 1997, the Company's commercial paper outstanding balance was $213 million, at interest rates ranging between 6.10% and 6.90%. At December 31, 1996, a total of $295 million of commercial paper was outstanding, at interest rates ranging between 5.50% and 6.15%. In 1997 Eastman issued $300 million of 7.60% debentures due February 1, 2027, and used the proceeds to repay commercial paper borrowings outstanding at that time. 26 27 In 1995 the Company repurchased 3,308,200 shares of common stock at a cost of $200 million. In February 1996 the Company announced plans to repurchase up to $400 million of additional common stock. In 1996 the Company acquired 2,486,300 shares at a cost of $161 million under the announced repurchase program, and during the first quarter 1997 acquired an additional 140,801 shares at a cost of $8 million. There were no share repurchases during the remainder of the year. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes. The partial settlement/curtailment of pension and other postemployment benefit liabilities which occurred in 1997 will result in funding which the Company plans to make in 1998. Existing sources of capital, together with cash flows from operations, are expected to be sufficient to meet foreseeable cash flow requirements.
DIVIDENDS 1997 1996 1995 Cash dividends declared per share $ 1.76 $ 1.72 $ 1.64
ENVIRONMENTAL Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, of which the treatment, storage, transportation, and disposal are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure/postclosure under the federal Resource Conservation and Recovery Act. Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, the Company does not believe its liability for these environmental matters, individually or in the aggregate, will be material to Eastman's consolidated financial position, results of operations, or competitive position. Eastman's environmental protection and improvement cash expenditures were approximately $220 million in 1997, $175 million in 1996, and $150 million in 1995, including investments in construction, operations, and development. The Company does not expect future environmental capital expenditures arising from requirements of recently promulgated environmental laws and regulations to materially increase the Company's planned level of capital expenditures for environmental control facilities. INFLATION In recent years inflation has not had a material adverse impact on Eastman's costs, primarily because of price competition among suppliers of raw materials. However, changes in raw materials prices, particularly petroleum derivatives, could have a significant impact on costs, which the Company may or may not be able to reflect fully in its pricing structure. MARKET RISK The Company is exposed to changes in financial market conditions in the normal course of its business due to its use of certain financial instruments as well as transacting in various foreign currencies and funding of foreign operations. To mitigate the Company's exposure to these market risks, Eastman has established policies, procedures, and internal processes governing its management of financial market risks and the use of financial instruments to manage its exposure to such risks. The Company is exposed to changes in interest rates primarily as a result of its borrowing activities, which include short-term commercial paper and long-term borrowings used to maintain liquidity and fund its business operations. The Company continues to utilize U.S. dollar-denominated commercial paper to fund seasonal working capital requirements. The nature and amount of the Company's long-term and short-term debt may vary as a result of future business requirements, market conditions, and other factors. 27 28 The Company's operating cash flows denominated in foreign currencies are exposed to changes in foreign exchange rates. The Company continually evaluates its foreign currency exposure based on current market conditions and the locations in which the Company conducts business. In order to mitigate the effect of foreign currency risk, the Company enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies and currency options to hedge probable anticipated but not yet committed export sales and purchase transactions expected within no more than 5 years and denominated in foreign currencies. The gains and losses on these contracts offset changes in the value of related exposures. It is the Company's policy to enter into foreign currency transactions only to the extent considered necessary to meet its objectives as stated above. The Company does not enter into foreign currency transactions for speculative purposes. The Company determines its market risk utilizing sensitivity analysis, which measures the potential losses in fair value resulting from one or more selected hypothetical changes in interest rates and/or foreign currency exchange rates. The market risk associated with the fair value of interest-rate-sensitive instruments assuming an instantaneous parallel shift in interest rates of 10% is approximately $100 million and an additional $10 million for each one percentage point change in interest rates thereafter. This exposure is primarily related to long-term debt with fixed interest rates. The market risk associated with foreign currency-sensitive instruments utilizing a modified Black-Scholes option pricing model and a 10% adverse move in the U.S. dollar relative to each foreign currency hedged by the Company is approximately $70 million and an additional $6 million for a one percentage point change in foreign currency exchange rates. Further adverse movements in foreign currencies would create losses in fair value; however, such losses would not be linear to that disclosed above. This exposure, which is primarily related to foreign currency options purchased by the Company to manage fluctuations in foreign currencies, is limited to the dollar value of option premiums payable by the Company for the related financial instruments. Furthermore, since the Company utilizes currency-sensitive derivative instruments for hedging anticipated foreign currency transactions, a loss in fair value for those instruments is generally offset by increases in the value of the underlying anticipated transactions. YEAR 2000 ISSUE The year 2000 issue is the result of computer programs written using two digits rather than four to define the applicable year. Without corrective action, programs with time-sensitive software could potentially recognize a date ending in "00" as the year 1900 rather than the year 2000, causing many computer applications to fail or create erroneous results. Assessment and remediation of the Company's business computer systems, manufacturing control systems, and other embedded-chip devices for compliance with the year 2000 is underway or in some cases completed. As a result of modifications or upgrades planned or already completed, the Company believes that the year 2000 issue will not pose significant problems for the Company's business, operations, or operating systems. The Company expects that any additional modifications or upgrades of software or hardware required for year 2000 compatibility will be accomplished using existing resources and will not have a material impact on the Company's financial position or results of operations in future periods. The Company has identified and is contacting customers, suppliers, and other critical business partners to determine if entities with which the Company transacts business have an effective plan in place to address the year 2000 issue. Contingency plans will be developed as needed. HOLSTON DEFENSE CORPORATION Holston Defense Corporation, a wholly owned subsidiary of the Company, has managed the government-owned Holston Army Ammunition Plant in Kingsport, Tennessee since 1942 under contract with the Department of Army. The current contract expires December 31, 1998. Holston Defense Corporation has been notified that it is not a participant in the bidding process for the contract period beginning after December 31, 1998. In the event that Holston Defense Corporation's management of the ammunition plant is terminated, payments to Holston Defense Corporation's employees, additional funding of pension and other postretirement benefits, and other termination costs could result. The Company expects that substantially all of these costs and payments would be ultimately reimbursed by the Department of Army, although delays in reimbursement may require the Company to advance funds to pay such costs. Any unreimbursable amounts charged to future earnings should not have a material adverse effect on the Company, although earnings in a particular quarter could be negatively impacted. See Note 17 to Consolidated Financial Statements. 28 29 RECENTLY ISSUED ACCOUNTING STANDARDS In June 1997 the FASB issued two new Statements: SFAS No. 130, "Reporting Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." SFAS No. 130 requires all items recognized as components of other comprehensive income to be reported in the financial statements. SFAS No. 131 requires enterprises to report selected information about operating segments and related disclosures about products and services, geographic areas, and major customers. The Company will provide additional reporting as required by the new standards beginning in 1998. The Company believes that no significant changes to current segment reporting will be required by the new standard. OUTLOOK In 1998 the Company expects higher sales compared to 1997, driven by good demand and strong volume growth for products in all three segments as a result of new applications and new production capacity. However, EASTAPAK polymers and ethylene and propylene derivatives such as oxo chemicals and polyethylene may face price and margin pressure as a result of additional industry capacity. Significant SPECTAR copolymer volume growth is expected due to strong demand and added production capacity in Malaysia. Volume growth is expected for the coatings line, driven by good demand for auto coatings and architectural coatings. Acetate tow volume is expected to stabilize as new industry capacity is absorbed and customer inventory reductions are completed, but price and margin pressure will result from the new capacities. Modest growth in sales revenue is expected for fine chemicals based on increased volumes of pharmaceutical and agrochemical intermediates and the impact of new Epoxybutene-based derivatives. Strong revenue growth is expected for performance chemicals due to new capacities for EASTOTAC resins and EASTOBRITE optical brighteners. Within the Core Plastics segment, demand for EASTAPAK polymers is expected to continue to grow as new applications are developed. Increased revenues and operating earnings are expected for container plastics products, driven by additional available capacity, reduced costs, and stable pricing. Recently introduced polyethylene performance polymers, MXSTEN and TENITE HIFOR, are expected to provide more profitable and less cyclical niche markets as they gain market acceptance. Within the Chemical Intermediates segment, a recently completed U.S. oxo plant expansion is expected to produce continued volume gains. The Company does not expect to have significant credit or business exposure relating to the Asian financial crisis. The Company is prepared to take the necessary steps through its capital spending program and its Advantaged Cost 2000 initiative to maintain the financial flexibility necessary to realize its full potential to create value. The 1998 target for the Company's Advantaged Cost 2000 initiative is $100 million in labor and material productivity gains. In 1998 the Company expects a 20% reduction in capital spending, and depreciation expense is expected to be approximately $350 million. The above-stated expectations, other forward-looking statements in this report, and other statements of the Company relating to matters such as cost reduction targets; planned capacity increases and capital spending; the year 2000 issue; the Asian financial crisis; expected tax rates and depreciation; and supply and demand, unit volume, price, margin, and sales and earnings expectations and strategies for individual products, businesses, and segments, as well as for the whole of the Company, are based upon certain underlying assumptions. These assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions, and other factors and are subject to risks and uncertainties inherent in projecting future conditions and results. The forward-looking statements in this Management's Discussion and Analysis are based upon the following assumptions and those mentioned in the context of the specific statements: relatively stable economic business conditions in North America, improving business conditions in Europe, and continued growth in Latin America, supporting continued good overall demand for the Company's products; no significant impact on results of operations due to the Asian financial crisis; no significant decline in overall selling prices, except for fibers; continued demand growth worldwide for EASTAPAK polymers; continued capacity additions within the PET industry worldwide; capacity additions within the ethylene industry worldwide; realization of recent 29 30 EASTAPAK polymers price increases; stabilization of acetate tow demand and volume; relatively stable prices for and availability of key purchased raw materials; good market reception of new polyethylene products; availability of announced manufacturing capacity increases; and labor and material productivity gains sufficient to meet targeted cost structure reductions. Actual results could differ materially from current expectations if one or more of these assumptions prove to be inaccurate or are unrealized. - ------------------------------------ EASTAPAK, SPECTAR, MXSTEN, TENITE and TENITE HIFOR are trademarks of Eastman Chemical Company. 30 31 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE Management's responsibility for financial statements 32 Report of independent accountants 33 Consolidated statements of earnings and retained earnings 34 Consolidated statements of financial position 35 Consolidated statements of cash flows 36 Notes to consolidated financial statements 37-59
31 32 MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS Management is responsible for the preparation and integrity of the accompanying consolidated financial statements of Eastman Chemical Company and subsidiaries appearing on pages 34 through 59. Eastman has prepared these consolidated financial statements in accordance with generally accepted accounting principles, and the statements of necessity include some amounts that are based on management's best estimates and judgments. Eastman's accounting systems include extensive internal controls designed to provide reasonable assurance of the reliability of its financial records and the proper safeguarding and use of its assets. Such controls are based on established policies and procedures, are implemented by trained, skilled personnel with an appropriate segregation of duties, and are monitored through a comprehensive internal audit program. The Company's policies and procedures prescribe that the Company and all employees are to maintain the highest ethical standards and that its business practices throughout the world are to be conducted in a manner that is above reproach. The consolidated financial statements have been audited by Price Waterhouse LLP, independent accountants, who were responsible for conducting their audits in accordance with generally accepted auditing standards. Their report is included herein. The Board of Directors exercises its responsibility for these financial statements through its Audit Committee, which consists entirely of nonmanagement Board members. The independent accountants and internal auditors have full and free access to the Audit Committee. The Audit Committee meets periodically with Price Waterhouse LLP and Eastman's director of internal auditing, both privately and with management present, to discuss accounting, auditing, policies and procedures, internal controls, and financial reporting matters. /s/ Earnest W. Deavenport, Jr. /s/ H. Virgil Stephens - ------------------------------ --------------------------- Earnest W. Deavenport, Jr. H. Virgil Stephens Chairman of the Board and Senior Vice President and Chief Executive Officer Chief Financial Officer January 27, 1998 32 33 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareowners of Eastman Chemical Company In our opinion, the accompanying consolidated financial statements listed in the index appearing under Item 14(a)(1) on page 62 present fairly, in all material respects, the financial position of Eastman Chemical Company and subsidiaries at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. /s/ Price Waterhouse LLP - ------------------------------- PRICE WATERHOUSE LLP New York, New York January 27, 1998 33 34 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS (DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
1997 1996 1995 Sales $ 4,678 $ 4,782 $ 5,040 Cost of sales 3,582 3,603 3,536 ------- ------- ------- Gross profit 1,096 1,179 1,504 Selling and general administrative expenses 337 332 364 Research and development costs 191 184 176 Early retirement charge 62 -- -- ------- ------- ------- Operating earnings 506 663 964 Interest expense, net 87 67 79 Other income, net 27 11 14 ------- ------- ------- Earnings before income taxes 446 607 899 Provision for income taxes 160 227 340 ------- ------- ------- Net earnings $ 286 $ 380 $ 559 ======= ======= ======= Basic earnings per share $ 3.66 $ 4.84 $ 6.84 ======= ======= ======= Diluted earnings per share $ 3.63 $ 4.79 $ 6.78 ======= ======= ======= Retained earnings at beginning of year $ 1,929 $ 1,684 $ 1,258 Net earnings 286 380 559 Cash dividends declared (137) (135) (133) ------- ------- ------- Retained earnings at end of year $ 2,078 $ 1,929 $ 1,684 ======= ======= =======
The accompanying notes are an integral part of these financial statements. 34 35 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF FINANCIAL POSITION (DOLLARS IN MILLIONS)
DECEMBER 31, 1997 1996 ASSETS Current assets Cash and cash equivalents $ 29 $ 24 Receivables 793 744 Inventories 511 465 Other current assets 157 112 --------- --------- Total current assets 1,490 1,345 --------- --------- Properties Properties and equipment at cost 8,104 7,530 Less: Accumulated depreciation 4,223 4,010 --------- --------- Net properties 3,881 3,520 --------- --------- Other noncurrent assets 407 401 --------- --------- Total assets $ 5,778 $ 5,266 ========= ========= LIABILITIES AND SHAREOWNERS' EQUITY Current liabilities Payables and other current liabilities $ 954 $ 787 -------- -------- Total current liabilities 954 787 Long-term borrowings 1,714 1,523 Deferred income tax credits 397 348 Postemployment obligations 724 722 Other long-term liabilities 236 247 --------- --------- Total liabilities 4,025 3,627 --------- --------- Shareowners' equity Common stock ($0.01 par - 350,000,000 shares authorized; shares issued -- 84,144,672 and 83,386,459) 1 1 Paid-in capital 77 37 Retained earnings 2,078 1,929 Other (37) 31 ---------- --------- 2,119 1,998 Less: Treasury stock at cost (5,889,311 and 5,766,528 shares) 366 359 --------- --------- Total shareowners' equity 1,753 1,639 --------- --------- Total liabilities and shareowners' equity $ 5,778 $ 5,266 ========= =========
The accompanying notes are an integral part of these financial statements. 35 36 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN MILLIONS)
1997 1996 1995 Cash flows from operating activities Net earnings $ 286 $ 380 $ 559 --------- --------- --------- Adjustments to reconcile net earnings to net cash provided by operating activities Depreciation 327 314 308 Provision (benefit) for deferred income taxes 7 8 (11) (Increase) decrease in receivables (53) 66 (90) (Increase) decrease in inventories (65) 10 (108) Increase (decrease) in employee benefit liabilities and incentive pay 134 (69) 179 Increase in liabilities excluding borrowings, employee benefit liabilities, and incentive pay 60 31 18 Other items, net 2 6 (17) --------- --------- ---------- Total adjustments 412 366 279 --------- --------- --------- Net cash provided by operating activities 698 746 838 --------- --------- --------- Cash flows from investing activities Additions to properties and equipment (749) (789) (446) Acquisitions and investments in joint ventures - (26) (56) Proceeds from sales of assets 20 43 9 Capital advances to suppliers (21) (37) (39) Other items 5 - 8 --------- --------- --------- Net cash used in investing activities (745) (809) (524) ---------- --------- --------- Cash flows from financing activities Proceeds from long-term borrowings 295 - - Net increase (decrease) in commercial paper borrowings (82) 273 22 Repayment of borrowings (22) - (2) Dividends paid to shareowners (138) (134) (133) Treasury stock purchases (8) (161) (200) Other items 7 9 9 --------- --------- --------- Net cash provided by (used in) financing activities 52 (13) (304) --------- --------- --------- Net change in cash and cash equivalents 5 (76) 10 Cash and cash equivalents at beginning of year 24 100 90 --------- --------- --------- Cash and cash equivalents at end of year $ 29 $ 24 $ 100 ========= ========= =========
The accompanying notes are an integral part of these financial statements. 36 37 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SIGNIFICANT ACCOUNTING POLICIES FINANCIAL STATEMENT PRESENTATION The consolidated financial statements of Eastman Chemical Company and subsidiaries ("Eastman" or the "Company") are prepared in conformity with generally accepted accounting principles and of necessity include some amounts that are based upon management estimates and judgments. Future actual results could differ from such current estimates. The Consolidated Financial Statements include assets, liabilities, revenues, and expenses of all wholly owned subsidiaries. Eastman accounts for joint ventures and investments in minority-owned companies where it exercises significant influence on the equity basis. Intercompany transactions and balances are eliminated in consolidation. TRANSLATION OF NON-U.S. CURRENCIES Eastman uses the local currency as the "functional currency" to translate the accounts of all consolidated entities outside the United States where cash flows are primarily denominated in local currencies. The effects of translating those operations that use the local currency as the functional currency are included as a separate component of shareowners' equity. The effects of remeasuring those operations where the U.S. dollar is used as the functional currency and all transaction gains and losses are reflected in current earnings. REVENUE RECOGNITION Sales are recognized when products are shipped and the earnings process is complete. Appropriate accruals for discounts, volume rebates, and other allowances are recorded as reductions in sales. CASH AND CASH EQUIVALENTS Cash and cash equivalents include cash, time deposits, and readily marketable securities with original maturities of 3 months or less. INVENTORIES Inventories are valued at cost, which is not in excess of market. The Company determines the cost of most raw materials, work in process, and finished goods inventories by the last-in, first-out (LIFO) method. The cost of all other inventories, including inventories outside the United States, is determined by the first-in, first-out (FIFO) or average cost method. PROPERTIES The Company records properties at cost. Maintenance and repairs are charged to earnings; replacements and betterments are capitalized. When Eastman retires or otherwise disposes of assets, it removes the cost of such assets and related accumulated depreciation from the accounts. The Company records any profit or loss on retirement or other disposition in earnings. DEPRECIATION Depreciation expense is calculated based on historical cost and the estimated useful lives of the assets (buildings and building equipment 20 to 50 years; machinery and equipment 3 to 33 years), generally using the straight-line method. For U.S. assets acquired before January 1, 1992, the Company generally uses accelerated methods to calculate the provision for depreciation. 37 38 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS IMPAIRED ASSETS The Company reviews the carrying values of long-lived assets and intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Measurement of any impairment would include a comparison of discounted estimated future operating cash flows to the net carrying value of the related assets. DERIVATIVE FINANCIAL INSTRUMENTS Derivative financial instruments are used by the Company in the management of its foreign currency exposures. The purpose of the Company's foreign currency hedging activities is to protect the Company from the risk that changes in exchange rates will adversely affect the eventual dollar cash flows resulting from such transactions. The Company enters into forward exchange contracts to hedge certain firm commitments denominated in foreign currencies and currency options to hedge probable anticipated but not yet committed export sales and purchase transactions expected within no more than 5 years and denominated in foreign currencies (principally the German mark, French franc, and Japanese yen). The Company's forward and option contracts are accounted for as hedges because the derivative instruments are designated and effective as hedges and reduce the Company's exposure to foreign currency risks. Gains and losses resulting from effective hedges of existing assets, liabilities, firm commitments, or anticipated transactions are deferred and recognized when the offsetting gains and losses are recognized on the related hedged items and are reported as a component of operating earnings. Deferred premiums and the related obligation for payment are generally included in other noncurrent assets and liabilities, respectively, and are paid in the period in which the options are exercised or expire and forward exchange contracts mature. INVESTMENTS The Company includes in other noncurrent assets its investments in joint ventures, which are managed as integral parts of the Company's operations and accounted for on the equity basis. Eastman carries certain investments at negative values, based on its intention to fund its share of deficits in such investments, and includes such negative carrying values in other long-term liabilities. The Company includes its share of earnings and losses of such joint ventures in other income and charges. EARNINGS PER SHARE Basic earnings per share reflect reported earnings divided by the weighted average number of common shares outstanding. Diluted earnings per share include the effect of dilutive stock options outstanding during the year. Prior earnings per share amounts have been restated to conform to requirements of the new accounting standard effective for periods ending after December 15, 1997. INCOME TAXES Deferred income taxes, reflecting the impact of temporary differences between the assets and liabilities recognized for financial reporting purposes and amounts recognized for tax purposes, are based on tax laws currently enacted. STOCK-BASED COMPENSATION Compensation cost attributable to stock option and similar plans is recognized based on the difference, if any, between the quoted market price of the stock on the date of grant over the amount the employee is required to pay to acquire the stock (intrinsic value method). Such amount, if any, is accrued over the related vesting period, as appropriate. 38 39 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMPENSATED ABSENCES The Company accrues compensated absences and related benefits as current charges to earnings. ENVIRONMENTAL COSTS The Company accrues environmental costs when it is probable that the Company has incurred a liability and the amount can be reasonably estimated. Estimated costs associated with closure/postclosure are accrued over the facilities' estimated remaining useful lives. Accruals for environmental liabilities are included in other long-term liabilities at undiscounted amounts and exclude claims for recoveries from insurance companies or other third parties. Environmental costs are capitalized if they extend the life of the related property, increase its capacity, and/or mitigate or prevent future contamination. The cost of operating and maintaining environmental control facilities is charged to expense. RECLASSIFICATIONS The Company has reclassified certain 1996 and 1995 amounts to conform to the 1997 presentation. 2. INVENTORIES
DECEMBER 31, (Dollars in millions) 1997 1996 At FIFO or average cost (approximates current cost) Finished goods $ 436 $ 426 Work in process 140 133 Raw materials and supplies 211 214 --------- --------- Total inventories at FIFO or average cost 787 773 Reduction to LIFO value (276) (308) --------- --------- Total inventories at LIFO value $ 511 $ 465 ========= =========
Inventories valued on the LIFO method were approximately 75% of total inventories in 1997 and 1996. 3. PROPERTIES AND ACCUMULATED DEPRECIATION PROPERTIES AT COST
(Dollars in millions) 1997 1996 1995 Balance at beginning of year $ 7,530 $ 6,791 $ 6,389 Additions 749 796 464 Deductions (175) (57) (62) ---------- --------- --------- Balance at end of year $ 8,104 $ 7,530 $ 6,791 ========= ========= ========= Properties at end of year Land $ 42 $ 41 $ 36 Buildings and building equipment 702 640 600 Machinery and equipment 6,757 6,315 5,819 Construction in progress 603 534 336 --------- --------- --------- Total $ 8,104 $ 7,530 $ 6,791 ========= ========= =========
39 40 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ACCUMULATED DEPRECIATION
(Dollars in millions) 1997 1996 1995 Balance at beginning of year $ 4,010 $ 3,742 $ 3,483 Provision for depreciation 327 314 308 Deductions (114) (46) (49) --------- --------- --------- Balance at end of year $ 4,223 $ 4,010 $ 3,742 ========= ========= =========
Construction-period interest of $295 million, $257 million, and $229 million, reduced by accumulated depreciation of $125 million, $111 million, and $97 million, is included in cost of properties at December 31, 1997, 1996, and 1995, respectively. 4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES Eastman has a 50% interest in Genencor International, a joint venture engaged in developing, manufacturing, and marketing industrial enzymes and other fine and specialty chemicals, accounted for under the equity method and included in other noncurrent assets. At December 31, 1997 and 1996, Eastman's equity in the joint venture was $142 million and $138 million, respectively. The Company guarantees a portion of the joint venture's third-party borrowings. Such guarantees are not considered material to Eastman. Management believes, based on current facts and circumstances and the joint venture's financial position, that the likelihood of a payment pursuant to such guarantee is remote. Eastman has a 50% interest in and serves as the operating partner in Primester, a joint venture formed in 1991 to construct and operate a production facility, accounted for under the equity method. The Company guarantees a portion of the principal amount of the joint venture's third-party borrowings; however, management believes, based on current facts and circumstances and the structure of the venture, that the likelihood of a payment pursuant to such guarantee is remote. At December 31, 1997 and 1996, Eastman had a negative investment in the joint venture of $42 million and $44 million, respectively, representing the recognized portion of the venture's accumulated deficits and the debt guarantee that it has a commitment to fund, as necessary. Such amounts are included in other long-term liabilities. The Company provides certain utilities and general plant services to the joint venture. In return for Eastman providing those services, the joint venture paid Eastman a total of $39 million in three equal installments in 1991, 1992, and 1993. Eastman is amortizing the deferred credit to earnings over a 10-year period. Eastman has entered into an agreement with a supplier that guarantees the Company's right to buy a specified quantity of a certain raw material annually through 2007 at prices determined by the pricing formula specified in the agreement. In return, the Company will pay a total of $239 million to the supplier through 1999 ($196 million and $175 million of which have been paid through December 31, 1997 and 1996, respectively). The Company defers and amortizes those costs over the 15-year period during which the product is received. The Company began amortizing those costs in 1993 and has recorded accumulated amortization of $79 million and $64 million at December 31, 1997 and 1996, respectively. 40 41 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 5. PAYABLES AND OTHER CURRENT LIABILITIES
DECEMBER 31, (Dollars in millions) 1997 1996 Trade creditors $ 281 $ 312 Accrued payrolls and vacation 99 101 Accrued variable-incentive compensation 92 137 Accrued pension liabilities 140 - Accrued taxes 95 79 Other 247 158 --------- --------- Total $ 954 $ 787 ========= =========
6. LONG-TERM BORROWINGS
DECEMBER 31, (Dollars in millions) 1997 1996 6 3/8% notes due 2004 $ 500 $ 499 7 1/4% debentures due 2024 495 495 7 5/8% debentures due 2024 200 200 7.60% debentures due 2027 296 - Commercial paper and other 223 329 --------- --------- Total $ 1,714 $ 1,523 ========= =========
Eastman has access to an $800 million revolving credit facility (the "Credit Facility") expiring in December 2000. Although the Company does not have any amounts outstanding under the Credit Facility, any such borrowings would be subject to interest at varying spreads above quoted market rates, principally LIBOR. The Credit Facility also requires a facility fee on the total commitment that varies based on Eastman's credit rating. The annual rate for such fee was 0.075% in 1997, 1996, and 1995. The Credit Facility contains a number of covenants and events of default, including the maintenance of certain financial ratios. Eastman was in compliance with all such covenants for all periods. Eastman utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. The Company's commercial paper, supported by the Credit Facility, is classified as long-term borrowings because the Company has the ability and intent to refinance such borrowings long-term. As of December 31, 1997, the Company's commercial paper outstanding balance was $213 million, at interest rates ranging between 6.10% and 6.90%. At December 31, 1996, a total of $295 million of commercial paper was outstanding, at interest rates ranging between 5.50% and 6.15%. The 7 5/8% debentures may be redeemed June 15, 2006, at the option of their registered holders, at 100% of the principal amount plus accrued interest to that date. During first quarter 1997 the Company issued $300 million of 7.60% debentures due February 1, 2027, and used the proceeds to repay previously outstanding commercial paper borrowings outstanding at that time. 41 42 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 7. SHAREOWNERS' EQUITY
(Dollars in millions) 1997 1996 1995 Common stock at par value $ 1 $ 1 $ 1 ------------- ------------- -------------- Paid-in capital Balance at beginning of year 37 30 22 Additions 40 7 8 ------------- ------------- -------------- Balance at end of year 77 37 30 ------------- ------------- -------------- Retained earnings 2,078 1,929 1,684 ------------- ------------- -------------- Other Balance at beginning of year 31 13 14 Change in cumulative translation adjustment (52) 18 (1) Change in unfunded minimum pension liability (16) -- -- -------------- ------------- -------------- Balance at end of year (37) 31 13 -------------- ------------- -------------- Treasury stock at cost (366) (359) (200) -------------- ------------- --------------- Total $ 1,753 $ 1,639 $ 1,528 ============= ============= ============== Shares of common stock issued Balance at beginning of year 83,386,459 83,250,683 83,067,368 Issued for employee compensation and benefit plans 758,213 135,776 183,315 ------------- ------------- -------------- Balance at end of year 84,144,672 83,386,459 83,250,683 ============= ============= ==============
The Company has authority to issue 400 million shares of all classes of stock, of which 50 million may be preferred stock, par value $0.01 per share, and 350 million may be common stock, par value $0.01 per share. Eastman has issued no shares of preferred stock. The Company declared dividends of $1.76 per share in 1997, $1.72 per share in 1996, and $1.64 per share in 1995. The Company established a benefit security trust in the fourth quarter, 1997, to provide a degree of financial security for unfunded obligations under certain plans. The Company has contributed to the trust a warrant to purchase up to one million shares of common stock of the Company for par value. The warrant is exercisable by the trustee if the Company does not meet certain funding obligations, which obligations would be triggered by certain occurrences, including a change in control or potential change in control, as defined, or failure by the Company to meet its payment obligations under covered unfunded plans. Such warrant is excluded from the computation of diluted earnings per share because the conditions upon which the warrant is exercisable have not been met. The additions to paid-in capital for the three years are the result of exercises of stock options by employees and the issuance of shares to the Employee Stock Ownership Plan to settle Eastman Performance Plan obligations. The Company repurchased 140,801 shares of Eastman common stock at a cost of $8 million, 2,486,300 shares at a cost of $161 million, and 3,308,200 shares at a cost of $200 million, in 1997, 1996, and 42 43 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1995, respectively. Repurchased common shares may be used to meet common stock requirements for benefit plans and other corporate purposes. Treasury stock at a cost of approximately $1 million (18,018 shares) and $2 million (27,972 shares) was reissued in 1997 and 1996, respectively. The Company's charitable foundation held 184,557 shares, 202,575 shares, and 230,547 shares of Eastman common stock at December 31, 1997, 1996, and 1995, respectively. For 1997, 1996, and 1995, respectively, the weighted average number of common shares outstanding used to compute basic earnings per share was 78.1 million, 78.5 million, and 81.7 million and for diluted earnings per share was 78.8 million, 79.3 million, and 82.4 million, reflecting the effect of dilutive options outstanding. Certain options outstanding at the end of 1997, 1996, and 1995, respectively, were excluded in the computation of diluted earnings per share because the options' exercise prices were greater than average market price of the common shares. Excluded were options to purchase 790,324 shares of common stock at a range of prices from $59.00 to $74.25; 566,490 shares of common stock at a range of prices from $57.125 to $74.25; and 489,942 shares of common stock at a range of prices from $63.1875 to $68.9375 outstanding at the end of 1997, 1996, and 1995, respectively. 8. STOCK OPTION AND COMPENSATION PLANS OMNIBUS PLAN Eastman's 1997 Omnibus Long-Term Compensation Plan (the "1997 Omnibus Plan"), which is substantially similar to and intended to replace the 1994 Omnibus Long-Term Compensation Plan (the "1994 Omnibus Plan"), provides for grants to employees of nonqualified stock options, incentive stock options, tandem and freestanding stock appreciation rights, performance shares, and various other stock and stock-based awards. Certain of these awards may be based on criteria relating to Eastman performance as established by the Compensation and Management Development Committee of the Board of Directors. No new awards have been made under the 1994 Omnibus Plan following the effectiveness of the 1997 Omnibus Plan. Outstanding grants and awards under the 1994 Omnibus Plan are unaffected by the replacement of the 1994 Omnibus Plan with the 1997 Omnibus Plan. The 1997 Omnibus Plan provides that options can be granted through April 30, 2002, for the purchase of Eastman common stock at an option price not less than 50% of the per share fair market value on the date of the stock option's grant. Substantially all grants awarded under the 1994 Omnibus Plan and under the 1997 Omnibus Plan have been at option prices equal to the fair market value on the date of grant. Options generally become exercisable 50% one year after grant and 100% after two years and expire up to ten years after grant. There is a maximum of 7 million shares of common stock available for option grants and other awards during the term of the 1997 Omnibus Plan. The maximum number of shares of common stock with respect to one or more options and/or SARs that may be granted during any one calendar year under the 1997 Omnibus Plan to the Chief Executive Officer or to any of the next four most highly compensated executive officers (each, a "Covered Employee") is 200,000. The maximum fair market value of any awards (other than options and SARs) that may be received by a Covered Employee during any one calendar year under the 1997 Omnibus Plan is equal to the fair market value of 100,000 shares of common stock as of December 31 of the preceding year. DIRECTOR LONG-TERM COMPENSATION PLAN Eastman's 1994 Director Long-Term Compensation Plan (the "Director Plan") provides for grants of nonqualified stock options and restricted shares to nonemployee members of the Board of Directors upon the first day of the directors' initial term of service. The Director Plan provides that options can be granted through December 31, 1998, for the purchase of Eastman common stock at an option price not less than the stock's fair market value on the date of the grant. The options vest in 50% increments on the first two anniversaries of the grant date. 43 44 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NONEMPLOYEE DIRECTOR STOCK OPTION PLAN Eastman's 1996 Nonemployee Director Stock Option Plan provides for grants of nonqualified stock options to nonemployee members of the Board of Directors in lieu of all or a portion of each member's annual retainer. The Nonemployee Director Stock Option Plan provides that options may be granted for the purchase of Eastman common stock at an option price not less than the stock's fair market value on the date of grant. The options become exercisable 6 months after the grant date. The maximum number of shares of Eastman common stock available for grant under the Plan is 150,000. STOCK OPTION BALANCES AND ACTIVITY The Company applies intrinsic value accounting for its stock option plans. If the Company had elected to recognize compensation expense based upon the fair value at the grant dates for awards under these plans consistent with the methodology prescribed by SFAS No. 123, the Company's net earnings and basic earnings per share would be reduced to the unaudited pro forma amounts indicated below:
(Dollars in millions, except for per share amounts) 1997 1996 1995 Net earnings As reported $ 286 $ 380 $ 559 Pro forma $ 285 $ 375 $ 558 Basic earnings per share As reported $ 3.66 $ 4.84 $ 6.84 Pro forma $ 3.65 $ 4.78 $ 6.82
44 45 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The fair value of each option is estimated on the grant date using the Black-Scholes option-pricing model, which requires input of highly subjective assumptions. Some of these assumptions used for grants in 1997, 1996, and 1995, respectively, include: average expected volatility of 21.61%, 25.23%, and 26.07%; average expected dividend yield of 2.92%, 2.56%, and 2.83%; and average risk-free interest rates of 6.14%, 5.76%, and 6.37%. An expected option term of 6 years for all periods was developed based on historical grant information. The expected term for reloads was considered as part of this calculation and is equivalent to the remaining term of the original grant at the time of reload. Because the Company's stock had been traded for a period less than the baseline expected term assumption, previous years' calculations have used monthly volatility factors for five peer companies. The Company's volatility is now considered consistent with the peer group; therefore, for 1997 and subsequent years, the Company's volatility factors will be utilized. For valuation purposes, an average volatility factor based on the calendar-year quarter in which the options were granted was utilized. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. A summary of the status of the Company's stock option plans is presented below:
1997 1996 1995 ------------------------ ----------------------- ------------------------ WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE ------- -------------- ------- -------------- ------- --------------- Outstanding at beginning of year 3,216,437 $ 47 2,850,532 $ 45 2,492,745 $ 41 Granted 623,735 60 542,591 55 566,679 62 Exercised 123,964 40 176,686 40 208,892 40 Forfeited or canceled - - - - - - ---------- ------ ---------- ------ ---------- ------- Outstanding at end of year 3,716,208 $ 50 3,216,437 $ 47 2,850,532 $ 45 ========= ========= ========= Options exercisable at year-end 2,842,573 2,461,995 1,406,400 ========= ========= ========= Weighted-average fair value of options granted during the year $14.65 $14.66 $ 17.60 Available for grant at end of year 8,766,755 2,384,543 2,915,741 ========= ========= =========
45 46 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following table summarizes information about stock options outstanding at December 31, 1997:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ----------------------------------------------------- -------------------------------- NUMBER WEIGHTED-AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE --------------- ----------- ----------------- ---------------- ----------- ---------------- $31-$40 357,357 3.4 years $34 357,357 $34 43-44 1,692,686 6.1 43 1,692,686 43 48-63 1,103,017 8.1 57 254,690 53 64-74 563,148 7.4 65 537,840 65 --------- ---------- $31-$74 3,716,208 6.6 $50 2,842,573 $47 ========= ==========
EMPLOYEE STOCK OWNERSHIP PLAN The Company sponsors a defined contribution employee stock ownership plan (the "ESOP"), which is a qualified plan under Section 401(a) of the Internal Revenue Code. Eastman anticipates that it will direct a portion of the compensation of all U.S. employees to the ESOP. The Company also sponsors an employee stock ownership plan, which is substantially similar to the ESOP, for its international employees. Allocated shares in the ESOP totaled 2,289,826, 1,887,003, and 1,488,436 as of December 31, 1997, 1996, and 1995, respectively. Compensation expense is measured based on the fair value of the shares contributed to or committed to be contributed to the ESOP. The shares are allocated to participant accounts and held by the ESOP until distributed to the employees at a future date, such as on the date of termination or retirement. Dividends on shares held by the ESOP are charged to retained earnings. All shares held by the ESOP are treated as outstanding in computing earnings per share. EASTMAN PERFORMANCE PLAN The Eastman Performance Plan (the "EPP") places a portion of each employee's annual compensation at risk and provides a lump-sum payment to plan participants based on the Company's financial performance. Certain portions of such payments, which are approved annually by Eastman's Board of Directors, are directed to the Company's ESOP. Charges under the EPP were $81 million, $131 million, and $229 million for 1997, 1996, and 1995, respectively. Of these amounts, approximately $36 million in each year was directed to the Company's ESOP. ANNUAL PERFORMANCE PLAN Eastman's managers and executive officers participate in an Annual Performance Plan (the "APP"), which places a portion of annual cash compensation at risk based upon Company performance as measured by specified annual goals. Charges under the APP for 1997, 1996, and 1995 were $11 million, $6 million, and $10 million, respectively. 46 47 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 9. INCOME TAXES Components of earnings before income taxes and the provision for U.S. and other income taxes follow:
(Dollars in millions) 1997 1996 1995 Earnings (loss) before income taxes United States $ 541 $ 679 $ 825 Outside the United States (95) (72) 74 ---------- ---------- --------- Total $ 446 $ 607 $ 899 ========= ========= ========= Provision (benefit) for income taxes United States Current $ 134 $ 190 $ 291 Deferred 14 19 (12) Non-United States Current 6 4 30 Deferred (8) (12) 2 State and other Current 13 25 30 Deferred 1 1 (1) --------- --------- --------- Total $ 160 $ 227 $ 340 ========= ========= =========
Differences between the provision for income taxes and income taxes computed using the U.S. federal statutory income tax rate follow:
(Dollars in millions) 1997 1996 1995 Amount computed using the statutory rate $ 156 $ 212 $ 315 State income taxes 9 17 19 Foreign rate variance (4) 13 3 Foreign sales corporation benefit (8) (14) (14) Other 7 (1) 17 --------- --------- --------- Provision for income taxes $ 160 $ 227 $ 340 ========= ========= =========
47 48 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The significant components of deferred tax assets and liabilities follow:
DECEMBER 31, (Dollars in millions) 1997 1996 Deferred tax assets Postemployment obligations $ 292 $ 263 Payroll and related items 51 49 Inventories 17 13 Deferred revenue 19 21 Miscellaneous reserves 40 33 Preproduction and start-up costs 8 18 Other 36 17 --------- --------- Total $ 463 $ 414 ========= ========= Deferred tax liabilities Depreciation $ 728 $ 677 Other 30 25 --------- --------- Total $ 758 $ 702 ========= =========
Unremitted earnings of subsidiaries outside the United States totaling $25 million at December 31, 1997, are considered to be reinvested indefinitely. If remitted, they would be substantially free of additional tax. It is not practicable to determine the deferred tax liability for temporary differences related to those unremitted earnings. Current income taxes payable totaling $53 million and $34 million are included in current liabilities at December 31, 1997 and 1996, respectively. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 1997 DECEMBER 31, 1996 RECORDED FAIR RECORDED FAIR (Dollars in millions) AMOUNT VALUE AMOUNT VALUE Long-term borrowings $ 1,714 $ 1,800 $ 1,523 $ 1,515 Foreign exchange contracts 62 149 74 63
Eastman uses the following methods and assumptions in estimating its fair-value disclosures for financial instruments: Long-term borrowings The Company has based the fair value for fixed-rate borrowings on current interest rates for comparable securities. The Company's floating-rate borrowings approximate fair value. 48 49 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Foreign exchange contracts The Company estimates the fair value of its foreign exchange contracts based on dealer-quoted market prices of comparable instruments. Other financial instruments Because of the nature of all other financial instruments, recorded amounts approximate fair value. In the judgment of management, exposure to third-party guarantees is remote and the potential earnings impact pursuant to such guarantees is insignificant. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING Eastman had currency options with maturities of not more than 5 years to exchange various foreign currencies for U.S. dollars in the aggregate notional amount of $1.275 billion and $1.536 billion at December 31, 1997 and 1996, respectively. The net unrealized gain (loss) deferred on such options was $87 million and $(11) million as of December 31, 1997 and 1996, respectively. Those amounts, based on dealer-quoted prices, represent the estimated gain (loss) that would have been recognized had those hedges been liquidated at estimated market value on the last day of each year presented. The Company is exposed to credit loss in the event of nonperformance by counterparties on foreign exchange contracts but anticipates no such nonperformance. The Company minimizes such risk exposure by limiting the counterparties to major international banks and financial institutions. Concentrations of credit risk with respect to trade accounts receivable are generally diversified because of the large number of entities constituting the Company's customer base and their dispersion across many different industries and geographies. 11. COMMITMENTS LEASE COMMITMENTS Eastman leases facilities, principally property, machinery, and equipment, under cancelable, noncancelable, and month-to-month operating leases. Future lease payments, reduced by sublease income, follow:
(Dollars in millions) Year ending December 31, 1998 $ 61 1999 49 2000 28 2001 24 2002 18 2003 and beyond 63 ------- Total minimum payments required $ 243 =======
If certain operating leases are terminated by the Company, it guarantees a portion of the residual value loss, if any, incurred by the lessors in disposing of the related assets. Management believes, based on current facts and circumstances and current values of such equipment, that a material payment pursuant to such guarantees is remote. 49 50 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS RENTAL EXPENSE
(Dollars in millions) 1997 1996 1995 Gross rentals $ 81 $ 66 $ 60 Less: Sublease income 1 2 12 --------- --------- --------- Total $ 80 $ 64 $ 48 ========= ========= =========
CAPITAL EXPENDITURES AND OTHER COMMITMENTS Eastman anticipates total capital expenditures in 1998 will be between $550 million and $600 million and depreciation expense is expected to be approximately $350 million. The Company had various purchase commitments at the end of 1997 for materials, supplies, and energy incident to the ordinary conduct of business. These commitments total approximately $800 million. Eastman has other long-term commitments relating to joint venture agreements as described in Note 4. 12. RETIREMENT PLANS Eastman maintains defined benefit plans that provide eligible employees with retirement benefits calculated based on years of service and generally on the employees' final average compensation as defined in the plans. Benefits are paid to employees by insurance companies or from trust funds. Plan contributions are made as permitted by laws and regulations. Pension coverage for employees of Eastman's international operations is provided, to the extent deemed appropriate, through separate plans. The Company systematically provides for obligations under such plans by depositing funds with trustees, under insurance policies, or by book reserves. Total pension funds and accruals for non-U.S. plans less pension prepayments and deferred charges exceed the actuarially computed value of vested benefits under such plans as of the beginning of 1997 and 1996. Eastman participated in Kodak's U.S. defined benefit pension plans covering substantially all U.S. employees prior to the spin-off. In connection with the spin-off, Eastman assumed the share of Kodak's U.S. defined benefit pension plan obligations relating primarily to active employees as of the date of the spin-off, while Kodak retained responsibility for pension obligations of substantially all retired U.S. employees. The components of net periodic pension cost for Eastman's U.S. defined benefit pension plans follow:
(Dollars in millions) 1997 1996 1995 Service cost $ 49 $ 49 $ 35 Interest cost 103 92 76 Return on plan assets (137) (175) (116) Net amortization 39 87 39 --------- --------- --------- Total U.S. pension cost $ 54 $ 53 $ 34 ========= ========= =========
Eastman's worldwide net pension cost was $59 million, $57 million, and $38 million in 1997, 1996, and 1995, respectively. See Note 14 for discussion of partial settlement/curtailment of pension and other postemployment benefit liabilities. 50 51 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The status of the Company's U.S. defined benefit pension plans follows:
DECEMBER 31, (Dollars in millions) 1997 1996 Vested benefit obligation $ 978 $ 1,029 ========= ========= Accumulated benefit obligation $ 1,081 $ 1,119 ========= ========= Projected benefit obligation $ 1,345 $ 1,410 Market value of assets 857 1,210 --------- --------- Projected benefits in excess of plan assets 488 200 Unrecognized net loss (226) (70) Unrecognized net transition asset 35 57 Unrecognized prior service cost (49) (30) --------- --------- Accrued pension cost $ 248 $ 157 ========= =========
The plans' assets are principally listed stocks. The assumptions used to develop the projected benefit obligation for the Company's U.S. pension plans follow:
DECEMBER 31, 1997 1996 Discount rate 7.25% 7.75% Salary increase rate 4.00% 4.00% Long-term rate of return on plan assets 9.50% 9.50%
13. OTHER POSTEMPLOYMENT COSTS Eastman provides life insurance and health care benefits for eligible retirees, and health care benefits for retirees' eligible survivors. In general, Eastman provides those benefits to retirees eligible under the Company's U.S. pension plans. Eastman and Kodak agreed that Kodak would retain the postretirement health and life insurance benefit obligations of substantially all U.S. retirees at the date of the spin-off. As a result, Eastman has no liability recorded for expected postretirement health and life insurance benefit costs for substantially all of its employees who retired through year-end 1993 while Eastman was a wholly owned business of Kodak. 51 52 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The following tables set forth the status of the Company's U.S. plans at December 31, 1997 and 1996:
DECEMBER 31, 1997 HEALTH LIFE (Dollars in millions) CARE INSURANCE TOTAL Accumulated postretirement benefit obligation Retirees $ 300 $ 52 $ 352 Fully eligible active plan participants 55 - 55 Other active plan participants 136 41 177 --------- -------- -------- Total accumulated postretirement benefit obligation 491 93 584 Plan assets at fair value 27 6 33 --------- -------- -------- Accumulated postretirement benefit obligation in excess of plan assets $ 464 $ 87 551 ========= ======== Unrecognized prior service cost 49 Unrecognized net loss 98 -------- Accrued postretirement benefit cost $ 502 ======== DECEMBER 31, 1996 HEALTH LIFE (Dollars in millions) CARE INSURANCE TOTAL Accumulated postretirement benefit obligation Retirees $ 87 $ 15 $ 102 Fully eligible active plan participants 93 - 93 Other active plan participants 198 113 311 --------- -------- -------- Total accumulated postretirement benefit obligation 378 128 506 Plan assets at fair value 20 5 25 --------- -------- -------- Accumulated postretirement benefit obligation in excess of plan assets $ 358 $ 123 481 ========= ======== Unrecognized net loss 6 -------- Accrued postretirement benefit cost $ 475 ========
52 53 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The net periodic postretirement benefit cost follows:
HEALTH LIFE (Dollars in millions) CARE INSURANCE TOTAL 1997 Service cost $ 6 $ 3 $ 9 Interest cost 31 7 38 Return on plan assets (1) (3) (4) --------- -------- -------- Net periodic postretirement benefit cost $ 36 $ 7 $ 43 ========= ======== ======== 1996 Service cost $ 7 $ 5 $ 12 Interest cost 25 9 34 Return on plan assets (1) - (1) --------- -------- -------- Net periodic postretirement benefit cost $ 31 $ 14 $ 45 ========= ======== ======== 1995 Service cost $ 8 $ 3 $ 11 Interest cost 27 8 35 Return on plan assets (1) - (1) --------- -------- -------- Net periodic postretirement benefit cost $ 34 $ 11 $ 45 ========= ======== ========
To estimate the Company's postretirement benefit cost, health care costs were assumed to increase 8.00% for 1998, with the rate of increase declining to 5.00% by 2002 and thereafter. The discount rate and salary increase rate were assumed to be 7.25% and 4.00% at December 31, 1997, 7.75% and 4.00% at December 31, 1996, and 7.25% and 4.00% at December 31, 1995. If the health care cost trend rates were increased by one percentage point, the Company's accumulated postretirement health care benefit obligation as of December 31, 1997, would increase by $75 million, while the net periodic postretirement health care benefit cost would increase by $8 million. See Note 14 for discussion of partial settlement/curtailment of pension and other postemployment benefit liabilities. A few of Eastman's non-U.S. operations have supplemental health benefit plans for certain retirees, the cost of which is not significant to the Company. 14. EARLY RETIREMENT CHARGE In fourth quarter 1997 the Company recorded a $62 million ($40 million after tax) charge for the partial settlement/curtailment of pension and other postemployment benefit liabilities. The charge resulted from the early retirement of approximately 1,700 employees, a majority of whom chose to take their retirement benefits as a lump sum. No special payments or incentives were offered. 53 54 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 15. SEGMENT INFORMATION INDUSTRY SEGMENTS Eastman is an international chemical company that manufactures and sells a broad range of products. The Company categorizes its business into three segments: Specialty and Performance, Core Plastics, and Chemical Intermediates. The Company believes no significant changes to current reporting will be required as a result of SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," which is effective for 1998. The Specialty and Performance segment contains products that are sold to customers that base their buying decisions principally on product performance attributes. The major products in this segment include specialty plastics, coatings and paint raw materials, fine chemicals, performance chemicals, and fibers. Targeted markets for this segment are diverse and include medical, electronics, pharmaceutical, agricultural, recreation, consumer durables, photographic, additives for fibers and plastics, adhesives, sealants, food and beverages, nutrition, cosmetics, textiles, construction, coatings, inks, paints, filters, and specialty plastic applications. Competitive factors for this segment include price, reliability of supply, customer service, environmental responsibility, and technical competence. Coatings and paint raw materials are sold primarily to North American industrial concerns. The principal markets for Eastman's fine chemicals are largely U.S. photographic, agricultural, and pharmaceutical companies. Acetate tow is sold worldwide to the tobacco industry for use in cigarette filters. The operations of Holston Defense Corporation are included in the Specialty and Performance segment and do not have a significant impact on the financial position or results of operations of the Company. The Core Plastics segment includes the Company's two major plastics products, EASTAPAK polymers and TENITE polyethylene, as well as cellulose esters and polyesters. These container and packaging products share similar physical characteristics and compete based on price and integrated manufacturing capabilities. Polyester plastics are sold to soft-drink and other packaging manufacturers principally in North America, Europe, and Latin America. Polyethylene is sold generally to North American industries. The Chemical Intermediates segment contains industrial intermediate chemicals that are produced based on the Company's oxo chemistry technology and chemicals-from-coal technology and are sold to customers operating in mature markets in which multiple sources of supply exist. They are sold generally in large volume mostly to North American industries, with increasing focus in Southeast Asia. These products are targeted at markets for industrial additives, agricultural chemicals, esters, pharmaceuticals, and vinyl compounding. Competitive factors include price, reliability of supply, and integrated manufacturing capability. Favorable cost position, proprietary products, and improving standards of living worldwide are key value drivers for this segment. 54 55 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 1997 1996 1995 SALES Specialty and Performance $ 2,607 $ 2,657 $ 2,647 Core Plastics 1,338 1,409 1,685 Chemical Intermediates 733 716 708 --------- --------- --------- Total $ 4,678 $ 4,782 $ 5,040 ========= ========= ========= OPERATING EARNINGS (LOSS) Specialty and Performance $ 416(1) $ 519 $ 433 Core Plastics (56)(1) (1) 347 Chemical Intermediates 146(1) 145 184 --------- --------- --------- Total $ 506 $ 663 $ 964 ========= ========= ========= ASSETS Specialty and Performance $ 3,019 $ 2,887 $ 2,776 Core Plastics 2,188 1,854 1,598 Chemical Intermediates 571 525 498 --------- --------- --------- Total $ 5,778 $ 5,266 $ 4,872 ========= ========= ========= DEPRECIATION EXPENSE Specialty and Performance $ 172 $ 174 $ 178 Core Plastics 123 109 96 Chemical Intermediates 32 31 34 --------- --------- --------- Total $ 327 $ 314 $ 308 ========= ========= ========= CAPITAL EXPENDITURES Specialty and Performance $ 227 $ 302 $ 176 Core Plastics 390 388 215 Chemical Intermediates 132 99 55 --------- --------- --------- Total $ 749 $ 789 $ 446 ========= ========= =========
(1)Operating earnings for 1997 reflect the $62 million ($40 million after tax) charge for partial settlement/curtailment of pension and other postemployment benefit liabilities. The charge was allocated to segments as follows: Specialty and Performance, $34 million; Core Plastics, $18 million; and Chemical Intermediates, $10 million. See Note 14 for a discussion of the charge. 55 56 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS GEOGRAPHIC SEGMENTS Sales are reported in the geographic area where they originate. Transfers among geographic areas are made on a basis intended to reflect the market value of the products, recognizing prevailing market prices and distributor discounts. Export sales to unaffiliated customers from the United States were $626 million in 1997, $687 million in 1996, and $698 million in 1995.
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated 1997 Sales $3,500 $ 755 $ 423 $4,678 Transfers among geographic areas 798 18 74 $ (890) -- ------ ----- ----- ------- ------ Total sales $4,298 $ 773 $ 497 $ (890) $4,678 ====== ===== ===== ======= ====== Operating earnings (losses) $ 580 $ (51) $ (37) $ 14 $ 506 ====== ===== ===== ======= ====== Assets at end of year $5,628 $ 805 $ 625 $(1,280) $5,778 ====== ===== ===== ======= ====== 1996 Sales $3,674 $ 735 $ 373 $ 4,782 Transfers among geographic areas 785 27 55 $ (867) -- ------ ----- ----- ------- ------ Total sales $4,459 $ 762 $ 428 $ (867) $4,782 ====== ===== ===== ======= ====== Operating earnings (losses) $ 717 $ (36) $ (31) $ 13 $ 663 ====== ===== ===== ======= ====== Assets at end of year $5,076 $ 582 $ 424 $ (816) $5,266 ====== ===== ===== ======= ====== 1995 Sales $3,864 $ 806 $ 370 $5,040 Transfers among geographic areas 806 50 17 $ (873) -- ------ ----- ----- ------- ------ Total sales $4,670 $ 856 $ 387 $ (873) $5,040 ====== ===== ===== ======= ====== Operating earnings $ 881 $ 47 $ 25 $ 11 $ 964 ====== ===== ===== ======= ====== Assets at end of year $4,569 $ 508 $ 324 $ (529) $4,872 ====== ===== ===== ======= ======
56 57 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 16. SUPPLEMENTAL CASH FLOW INFORMATION Cash paid for interest and income taxes is as follows:
(Dollars in millions) 1997 1996 1995 Interest (net of amounts capitalized) $ 88 $ 79 $ 91 Income taxes 131 236 364
Cash flows from operating activities include gains (losses) from equity investments of $11 million, $(3) million, and $(6) million for 1997, 1996, and 1995, respectively. Derivative financial instruments and related gains and losses are included in cash flows from operating activities. The effect on cash of foreign currency transactions and exchange rate changes for all years presented was insignificant. In March 1997 the Company issued 611,962 shares of its common stock with a market value of $34 million to its Employee Stock Ownership Plan as partial settlement of the Company's Eastman Performance Plan payout. This noncash transaction is not reflected in the Consolidated Statements of Cash Flows. The Consolidated Statements of Cash Flows do not separately reflect certain Eastman assets acquired and liabilities assumed through noncash transactions. 17. HOLSTON DEFENSE CORPORATION Holston Defense Corporation ("Holston"), a wholly owned subsidiary of the Company, has, as its sole business, managed the government-owned Holston Army Ammunition Plant in Kingsport, Tennessee (the "Facility") since 1942 under a series of contracts with the Department of Army (the "DOA"). Holston is currently managing the Facility under a contract that expires on December 31, 1998 (the "Contract"), unless such management is otherwise extended by the DOA pursuant to the terms of the Contract or by agreement between the parties. The Contract generally provides for payment of a management fee to Holston and reimbursement by the DOA of defined costs incurred by Holston for the operation of the Facility. Holston's operating results historically have been insignificant to the Company's consolidated sales and earnings. The DOA has undertaken to accept bids from qualified companies to manage the Facility upon termination of the Contract under terms and conditions substantially different from those of the Contract. During fourth quarter 1997 the DOA advised Holston that, because of Holston's position on the DOA's proposed terms and conditions, it was not a qualified participant in the bidding process. The bidding process is still in progress, and its outcome and impact on Holson's continued management of the Facility is currently uncertain. Consequently, management does not believe that it is reasonably assured that Holston will not continue to manage the Facility in some capacity. Pension and other postemployment benefits are currently provided to Holston's present and past employees under the terms of Holston's plans. Termination of Holston's management of the Facility, if it occurs, could result in termination payments to Holston's then-current employees and require additional funding for the acceleration of obligations under the pension and other postretirement benefit plans (such payments and additional funding referred to collectively as "Termination Costs"). Actual Termination Costs would depend upon a number of factors, all of which are not yet known to the Company. If the Company subsequently were to determine that it is probable that it will incur Termination Costs, then the Company would, in accordance with generally accepted accounting principles, be required to recognize the Termination Costs as liabilities, and payments and reimbursements from the DOA, where appropriate, as receivables. While the exact amount of Termination Costs cannot be determined at this time, the Company estimates the range of additional liabilities which it would recognize if Holston's management of the Facility were to terminate on December 31, 1998, without giving effect to any 57 58 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS payment or reimbursement, to be approximately $50 million to $75 million. The difference, if any, between any such liabilities and receivables would result in a charge to then-current earnings. In the event of termination of Holston's management of the Facility, delays in the payment or reimbursement of all or portions of the Termination Costs may require the Company to advance funds to pay such costs. Although the DOA's position with respect to similar contracts is that it has no legal liability for unfunded postretirement benefit costs, other than pension obligations, and the DOA may disagree with the specific amount of other Termination Costs, it is the opinion of the Company and its management, based on the Contract terms, applicable law, and legal and equitable precedents, that substantially all of the Termination Costs would be paid by the DOA or recovered from the government in related proceedings, and that the amounts, if any, not paid or recovered, or the advancement of funds by the Company pending such reimbursement or recovery, should not have a material adverse effect on the consolidated financial position of the Company. 18. ENVIRONMENTAL MATTERS Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes, of which the treatment, storage, transportation, and disposal are regulated by various governmental agencies. In connection with the cleanup of various hazardous waste sites, the Company, along with many other entities, has been designated a potentially responsible party ("PRP") by the U.S. Environmental Protection Agency under the Comprehensive Environmental Response, Compensation and Liability Act, which potentially subjects PRPs to joint and several liability for such cleanup costs. In addition, the Company will be required to incur costs for environmental remediation and closure/postclosure under the federal Resource Conservation and Recovery Act. Because of expected sharing of costs, the availability of legal defenses, and the Company's preliminary assessment of actions that may be required, the Company does not believe its liability for these environmental matters, individually or in the aggregate, will be material to Eastman's consolidated financial position, results of operations, or competitive position. The Company's environmental protection and improvement cash expenditures were approximately $220 million, $175 million, and $150 million in 1997, 1996, and 1995, respectively, including investments in construction, operations, and development. 19. LEGAL MATTERS The Company's operations are parties to or targets of lawsuits, claims, investigations, and proceedings, including product liability, personal injury, patent, commercial, contract, environmental, antitrust, health and safety, and employment matters, which are being handled and defended in the ordinary course of business. While the Company is unable to predict the outcome of these matters, it does not believe, based upon currently available facts, that the ultimate resolution of any of such pending matters will have a material adverse effect on the Company's business, financial position, or results of operations. 58 59 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 20. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts) 1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. (1) Sales $ 1,171 $ 1,208 $ 1,145 $ 1,154 Operating earnings 134 157 148 67 Earnings before income taxes 114 141 148 43 Provision for income taxes 42 51 52 15 Net earnings 72 90 96 28 Basic earnings per share (2) .93 1.15 1.23 .36 Diluted earnings per share (2) .92 1.14 1.22 .35 1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. Sales $ 1,261 $ 1,241 $ 1,167 $ 1,113 Operating earnings 191 190 169 113 Earnings before income taxes 178 177 156 96 Provision for income taxes 66 65 60 36 Net earnings 112 112 96 60 Basic earnings per share (2) 1.41 1.42 1.23 .77 Diluted earnings per share (2) 1.39 1.41 1.22 .77
------------------------- (1) Fourth quarter 1997 operating data reflects a charge of $62 million ($40 million after tax) resulting from partial settlement/curtailment of pension and other postemployment benefit liabilities. See Note 14 for a discussion of the charge. (2) Each quarter is calculated as a discrete period; the sum of the four quarters may not equal the calculated full-year amount. Earnings per share for prior periods have been restated to conform to requirements of the new accounting standard effective for periods ending after December 15, 1997. 59 60 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 60 61 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The material under the heading "Election of Directors -- General" in the 1998 Proxy Statement is incorporated by reference herein in response to this Item. Certain information concerning executive officers of the Company is set forth under the heading "Executive Officers of the Company" in Part I of this Annual Report on Form 10-K. ITEM 11. EXECUTIVE COMPENSATION The material under the headings "Election of Directors -- Compensation of Directors" in the 1998 Proxy Statement is incorporated by reference herein in response to this Item. In addition, the material under the heading "Executive Compensation and Benefits" in the 1998 Proxy Statement is incorporated by reference herein in response to this Item, except for the material under the subheadings " -- Compensation and Management Development Committee Report on Executive Compensation" and " -- Performance Graph," which are not incorporated by reference herein. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The material under the headings "Stock Ownership of Directors and Executive Officers--Common Stock" and "Stock Ownership of Certain Beneficial Owners" in the 1998 Proxy Statement is incorporated by reference herein in response to this Item. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS There are no transactions or relationships since the beginning of the last completed fiscal year required to be reported in response to this Item. 61 62 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated financial statements: Page Management's responsibility for financial statements 32 Report of independent accountants 33 Consolidated statements of earnings and retained earnings 34 Consolidated statements of financial position 35 Consolidated statements of cash flows 36 Notes to consolidated financial statements 37 - 59
2. Financial statement schedules All schedules have been omitted because they are not applicable or because the required information is shown in the financial statements or notes thereto. 3. Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 65. (b) Reports on Form 8-K During the quarter ended December 31, 1997, no reports on Form 8-K were filed. (c) The Exhibit Index and required Exhibits to this report are included beginning at page 65. (d) There are no applicable financial statement schedules required to be filed as part of this report. 62 63 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. Eastman Chemical Company By:/s/ Earnest W. Deavenport, Jr. ------------------------------ Earnest W. Deavenport, Jr. Chairman of the Board and Chief Executive Officer Date: March 6, 1998 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.
SIGNATURE TITLE DATE --------- ----- ---- PRINCIPAL EXECUTIVE OFFICER: /s/ Earnest W. Deavenport, Jr. Chairman of the March 6, 1998 - ------------------------------ Board and Chief Earnest W. Deavenport, Jr. Executive Officer PRINCIPAL FINANCIAL OFFICER: /s/ H. Virgil Stephens Senior Vice President and March 6, 1998 - ------------------------------ Chief Financial Officer H. Virgil Stephens PRINCIPAL ACCOUNTING OFFICER: /s/ Patrick R. Kinsey Vice President and March 6, 1998 - ------------------------------ Comptroller Patrick R. Kinsey
63 64
SIGNATURE TITLE DATE - --------- ----- ---- DIRECTORS: /s/ R. Wiley Bourne, Jr. Vice Chairman March 6, 1998 - ------------------------------ of the Board R. Wiley Bourne, Jr. and Executive Vice President /s/ H. Jesse Arnelle Director March 6, 1998 - ------------------------------ H. Jesse Arnelle /s/ Calvin A. Campbell, Jr. Director March 6, 1998 - ------------------------------ Calvin A. Campbell, Jr. /s/ Jerry E. Dempsey Director March 6, 1998 - ------------------------------ Jerry E. Dempsey /s/ John W. Donehower Director March 6, 1998 - ------------------------------ John W. Donehower /s/ Lee Liu Director March 6, 1998 - ------------------------------ Lee Liu /s/ Marilyn R. Marks Director March 6, 1998 - ------------------------------ Marilyn R. Marks /s/ Gerald B. Mitchell Director March 6, 1998 - ------------------------------ Gerald B. Mitchell /s/ John A. White Director March 6, 1998 - ------------------------------ John A. White
64 65 EXHIBIT INDEX
Exhibit Description Sequential Number Page Number 3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical Company (incorporated herein by reference to Exhibit 3.01 to Eastman Chemical Company's Registration Statement on Form S-1, File No. 33-72364, as amended (the "S-1")) 3.02 Amended and Restated By-laws of Eastman Chemical Company, as amended February 3, 1998 69-78 4.01 Form of Eastman Chemical Company Common Stock certificate (incorporated herein by reference to Exhibit 3.02 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1993 (the "1993 10-K")) 4.02 Stockholder Protection Rights Agreement dated as of December 13, 1993, between Eastman Chemical Company and First Chicago Trust Company of New York, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to Eastman Chemical Company's Registration Statement on Form S-8 relating to the Eastman Investment Plan, File No. 33-73810) 4.03 Indenture, dated as of January 10, 1994, between Eastman Chemical Company and The Bank of New York, as Trustee (the "Indenture") (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company's current report on Form 8-K dated January 10, 1994 (the "8-K")) 4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by reference to Exhibit 4(c) to the 8-K) 4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by reference to Exhibit 4(d) to the 8-K) 4.06 Officers' Certificate pursuant to Sections 201 and 301 of the Indenture (incorporated herein by reference to Exhibit 4(a) to Eastman Chemical Company's Current Report on Form 8-K dated June 8, 1994 (the "June 8-K")) 4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by reference to Exhibit 4(b) to the June 8-K) 4.08 Form of 7.60% Debenture due February 1, 2027 (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1996 (the "1996 10-K")) 4.09 Officer's Certificate pursuant to Sections 201 and 301 of the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by reference to Exhibit 4.09 1996 10-K)
65 66 EXHIBIT INDEX
Exhibit Description Sequential Number Page Number 4.10 Credit Agreement, dated as of December 19, 1995 (the "Credit Agreement") among Eastman Chemical Company, the Lenders named therein, and The Chase Manhattan Bank, as Agent (incorporated herein by reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on Form 10-K for the year ended December 31, 1995 (the "1995 10-K")) *10.01 Eastman Annual Performance Plan, as amended (incorporated herein by reference to Exhibit 10.01 to the 1996 10-K) *10.02 1994 Director Long-Term Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended March 31, 1995) *10.03 1994 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Exhibit 10.03 to Eastman Chemical Company's Registration Statement on Form 10, originally filed on November 26, 1993 (the "Form 10")) *10.04 1996 Non-Employee Director Stock Option Plan, as amended (incorporated herein by reference to Exhibit 10.02 to Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter ended September 30, 1996 (the "September 30, 1996 10-Q")) *10.05 Director Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.05 to the 1996 10-K) *10.06 Executive Deferred Compensation Plan, as amended (incorporated herein by reference to Exhibit 10.06 to the 1996 10-K) *10.07 Form of Executive Severance Agreements (incorporated herein by reference to Exhibit 10.06 to the 1995 10-K) *10.08 Employment Agreement between Eastman Chemical Company and Harold L. Henderson (incorporated herein by reference to Exhibit 10.08 to the 1996 10-K) *10.09 Eastman Excess Retirement Income Plan (incorporated herein by reference to Exhibit 10.10 to the Form 10) *10.10 Eastman Unfunded Retirement Income Plan (incorporated herein by reference to Exhibit 10.11 to the Form 10) *10.11 Eastman Employee Stock Ownership Plan Excess Plan (incorporated herein by reference to Exhibit 10.11 to the 1996 10-K)
66 67 EXHIBIT INDEX
Exhibit Description Sequential Number Page Number *10.12 Eastman 1995-1997 Long-Term Performance Subplan (as amended) of 1994 Omnibus Long-Term Compensation Plan (incorporated by reference to Exhibit 10.05 to the September 30, 1996 10-Q) *10.13 Eastman 1996-1998 Long-Term Performance Subplan (as amended) of 1994 Omnibus Long-Term Compensation Plan (incorporated by reference to Exhibit 10.06 to the September 30, 1996 10-Q) *10.14 Eastman 1997-1999 Long-Term Performance Subplan of 1994 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Exhibit 10.15 to 1996 10-K) *10.15 Eastman 1998-2000 Long-Term Performance Subplan of 1997 Omnibus Long-Term Compensation Plan 79-87 *10.16 1997 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Appendix A to Eastman Chemical Company's definitive 1997 Annual Meeting Proxy Statement filed pursuant to Regulation 14A) *10.17 Award Notice for Price-Vesting Stock Option Granted to CEO under 1997 Omnibus Long- Term Compensation Plan (incorporated herein by reference to Exhibit 10.01 to Eastman Chemical Company's Form 10-Q for the quarter ended September 30, 1997) *10.18 Eastman Chemical Company Benefit Security Trust dated December 24, 1997 88-106 10.19 Contribution Agreement, dated as of December 9, 1993, between Eastman Kodak Company and Eastman Chemical Company (incorporated herein by reference to Exhibit 10.07 to the S-1) 10.20 General Assignment, Assumption and Agreement Regarding Litigation, Claims and Other Liabilities, dated as of December 31, 1993, between Eastman Kodak Company and Eastman Chemical Company (incorporated herein by reference to Exhibit 10.08 to the S-1) 10.21 Tax Sharing and Indemnification Agreement, dated as of December 31, 1993, between Eastman Kodak Company and Eastman Chemical Company (incorporated herein by reference to Exhibit 10.09 to the S-1) 10.22 Intellectual Property Agreement Non-Imaging, dated as of December 31, 1993, between Eastman Kodak Company and Eastman Chemical Company (incorporated herein by reference to Exhibit 10.12 to the S-1)
67 68 EXHIBIT INDEX
Exhibit Description Sequential Number Page Number 10.23 Imaging Chemicals License Agreement, dated as of December 31, 1993, between Eastman Kodak Company and Eastman Chemical Company (incorporated herein by reference to Exhibit 10.13 to the S-1) 12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 107 21.01 Subsidiaries of the Company 108-109 23.01 Consent of Independent Accountants 110 27.01 Financial Data Schedule (for SEC use only) 111 99.01 Supplemental Business Segment Information 112
- ------------------------------ * Management contract or compensatory plan or arrangement filed pursuant to Item 601(b)(10)(iii) of Regulation S-K. 68 EX-3.02 2 EASTMAN CHEMICAL COMPANY AMENDED & RESTATED BYLAWS 1 Exhibit 3.02 EASTMAN CHEMICAL COMPANY BYLAWS AMENDED AND RESTATED AS OF FEBRUARY 3, 1998 SECTION I Capital Stock Section 1.1. Certificates. Every holder of stock in the Corporation shall be entitled to have a certificate signed in the name of the Corporation by the Chairman of the Board of Directors or the Vice Chairman or a Vice President, and by the Treasurer or an Assistant Treasurer or the Secretary or an Assistant Secretary of the Corporation certifying the number of shares in the Corporation owned by such holder. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent, or registrar at the date of issue. Section 1.2. Record Ownership. A record of the name and address of the holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any other person, whether or not it shall have express or other notice thereof, except as required by the laws of the State of Delaware. Section 1.3. Transfer of Record Ownership. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby, which certificate shall be canceled before the new certificate is issued. Section 1.4. Lost Certificates. Any person claiming a stock certificate in lieu of one lost, stolen or destroyed shall give the Corporation an affidavit as to such person's ownership of the certificate and of the facts which go to prove its loss, theft or destruction. Such person shall also, if required by policies adopted by the Board of Directors, give the Corporation a bond, in such form as may be approved by the Corporation, sufficient to indemnify the Corporation against any claim that may be made against it on account of the alleged loss of the certificate or the issuance of a new certificate. Section 1.5. Transfer Agents; Registrars; Rules Respecting Certificates. The Board of Directors may appoint, or authorize any officer or officers to appoint, one or more transfer agents and one or more registrars. The Board of Directors may make such further rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates of the Corporation. Section 1.6. Record Date. The Board of Directors may fix in advance a future date, not exceeding 60 days (nor, in the case of a stockholders' meeting, less than ten days) preceding the date of any meeting of stockholders, payment of dividend or other distribution, allotment of rights, or change, conversion or exchange of capital stock or for the purpose of any other lawful action, as the record date for determination of the stockholders entitled to notice of and to vote at any such meeting and any adjournment thereof, or to receive any such dividend or other distribution or allotment of rights, or to exercise the rights in respect of any such change, conversion or exchange of capital stock, or to participate in any such other lawful action, and in such case such stockholders and only such stockholders as shall be stockholders of record on the date so fixed shall be entitled to such notice of and to vote at such meeting and any adjournment thereof, or to receive such dividend or other distribution or allotment of rights, or to exercise such rights, or to participate in any such other lawful action, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation after any such record date fixed as aforesaid. 69 2 SECTION II Meetings of Stockholders Section 2.1. Annual. The annual meeting of stockholders for the election of directors and the transaction of such other proper business shall be held on the first Thursday in May, unless otherwise specified by resolution adopted by the Board of Directors, and at the time and place, within or without the State of Delaware, as determined by the Board of Directors. Section 2.2. Special. Special meetings of stockholders for any purpose or purposes may be called only by the Board of Directors, pursuant to a resolution adopted by a majority of the members of the Board of Directors then in office. Special meetings may be held at any place, within or without the State of Delaware, as determined by the Board of Directors. The only business which may be conducted at such a meeting, other than procedural matters and matters relating to the conduct of the meeting, shall be the matter or matters described in the notice of the meeting. Section 2.3. Notice. Written notice of each meeting of stockholders, stating the date, time, place and, in the case of a special meeting, the purpose thereof, shall be given as provided by law by the Secretary or an Assistant Secretary not less than ten days nor more than 60 days before such meeting (unless a different time is specified by law) to every stockholder entitled by law to notice of such meeting. Section 2.4. List of Stockholders. A complete list of the stockholders entitled to vote at any meeting of stockholders, arranged in alphabetical order, and showing the address of each stockholder and the number of shares registered in the name of each stockholder, shall be prepared by the Secretary and shall be open to the examination of any stockholder, for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or, if not so specified at the place where the meeting is to be held, for at least ten days before the meeting and at the place of the meeting during the whole time of the meeting. Section 2.5. Quorum. The holders of shares of stock entitled to cast a majority of the votes on the matters at issue at a meeting of stockholders, present in person or represented by proxy, shall constitute a quorum, except as otherwise required by the Delaware General Corporation Law. In the event of a lack of a quorum, the chairman of the meeting or a majority in interest of the stockholders present in person or represented by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum shall be obtained. At any such adjourned meeting at which there is a quorum, any business may be transacted that might have been transacted at the meeting originally called. Section 2.6. Organization and Procedure. (a) The Chairman of the Board, or, in the absence of the Chairman of the Board, the Vice Chairman, or, in the absence of the Vice Chairman, any other person designated by the Board of Directors, shall preside at meetings of stockholders. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary. (b) At each meeting of stockholders, the chairman of the meeting shall fix and announce the date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at the meeting and shall determine the order of business and all other matters of procedure. Except to the extent inconsistent with any such rules and regulations as adopted by the Board of Directors, the chairman of the meeting may establish rules, which need not be in writing, to maintain order for the conduct of the meeting, including, without limitation, restricting attendance to bona fide stockholders of record and their proxies and other persons in attendance at the invitation of the chairman and making rules governing speeches and debates. The chairman of the meeting acts in his or her absolute discretion and his or her rulings are not subject to appeal. 70 3 Section 2.7. Stockholder Nominations and Proposals. (a) No proposal for a stockholder vote shall be submitted by a stockholder (a "Stockholder Proposal") to the Corporation's stockholders unless the stockholder submitting such proposal (the "Proponent") shall have filed a written notice setting forth with particularity (i) the names and business addresses of the Proponent and all Persons (as such term is defined in Article V of the Certificate of Incorporation) acting in concert with the Proponent; (ii) the name and address of the Proponent and the Persons identified in clause (i), as they appear on the Corporation's books (if they so appear); (iii) the class and number of shares of the Corporation beneficially owned by the Proponent and the Persons identified in clause (i); (iv) a description of the Stockholder Proposal containing all material information relating thereto; and (v) such other information as the Board of Directors reasonably determines is necessary or appropriate to enable the Board of Directors and stockholders of the Corporation to consider the Stockholder Proposal. The presiding officer at any stockholders' meeting may determine that any Stockholder Proposal was not made in accordance with the procedures prescribed in these Bylaws or is otherwise not in accordance with law, and if it is so determined, such officer shall so declare at the meeting and the Stockholder Proposal shall be disregarded. (b) Only persons who are selected and recommended by the Board of Directors or the committee of the Board of Directors designated to make nominations, or who are nominated by stockholders in accordance with the procedures set forth in this Section 2.7, shall be eligible for election, or qualified to serve, as directors. Nominations of individuals for election to the Board of Directors of the Corporation at any annual meeting or any special meeting of stockholders at which directors are to be elected may be made by any stockholder of the Corporation entitled to vote for the election of directors at that meeting by compliance with the procedures set forth in this Section 2.7. Nominations by stockholders shall be made by written notice (a "Nomination Notice"), which shall set forth (i) as to each individual nominated, (A) the name, date of birth, business address and residence address of such individual; (B) the business experience during the past five years of such nominee, including his or her principal occupations and employment during such period, the name and principal business of any corporation or other organization in which such occupations and employment were carried on, and such other information as to the nature of his or her responsibilities and level of professional competence as may be sufficient to permit assessment of his or her prior business experience; (C) whether the nominee is or has ever been at any time a director, officer or owner of 5% or more of any class of capital stock, partnership interests or other equity interest of any corporation, partnership or other entity; (D) any directorships held by such nominee in any company with a class of securities registered pursuant to Section 12 of the Securities Exchange Act of 1934, as amended, or subject to the requirements of Section 15(d) of such Act or any company registered as an investment company under the Investment Company Act of 1940, as amended; and (E) whether, in the last five years, such nominee has been convicted in a criminal proceeding or has been subject to a judgment, order, finding or decree of any federal, state or other governmental entity, concerning any violation of federal, state or other law, or any proceeding in bankruptcy, which conviction, order, finding, decree or proceeding may be material to an evaluation of the ability or integrity of the nominee; and (ii) as to the Person submitting the Nomination Notice and any Person acting in concert with such Person, (x) the name and business address of such Person, (y) the name and address of such Person as they appear on the Corporation's books (if they so appear), and (z) the class and number of shares of the Corporation that are beneficially owned by such Person. A written consent to being named in a proxy statement as a nominee, and to serve as a director if elected, signed by the nominee, shall be filed with any Nomination Notice. If the presiding officer at any stockholders' meeting determines that a nomination was not made in accordance with the procedures prescribed by these Bylaws, he shall so declare to the meeting and the defective nomination shall be disregarded. (c) Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation 60 days or more before the date of the stockholders' meeting if such Nomination Notice or Stockholder Proposal is to be submitted at an annual stockholders' meeting (provided, however, that if such annual meeting is called to be held before the date specified in Section 2.1 hereof, such Nomination Notice or Stockholder Proposal shall be so delivered no later than the close of business on the 15th day following the day on which notice of the date of the annual stockholders' meeting was given). 71 4 Nomination Notices and Stockholder Proposals shall be delivered to the Secretary at the principal executive office of the Corporation no later than the close of business on the 15th day following the day on which notice of the date of a special meeting of stockholders was given if the Nomination Notice or Stockholder Proposal is to be submitted at a special stockholders' meeting. Section 2.8. Voting. Unless otherwise provided in a resolution or resolutions providing for any class or series of Preferred Stock pursuant to Article IV of the Certificate of Incorporation or by the Delaware General Corporation Law, each stockholder shall be entitled to one vote, in person or by written proxy, for each share held of record by such stockholder who is entitled to vote generally in the election of directors. All elections for the Board of Directors shall be decided by a plurality of the votes cast and all other questions shall be decided by a majority of the votes cast, except as otherwise required by the Delaware General Corporation Law or as provided for in the Certificate of Incorporation or these Bylaws. Abstentions shall not be considered to be votes cast. Section 2.9. Inspectors. The Board of Directors by resolution shall, in advance of any meeting of stockholders, appoint one or more inspectors, which inspector or inspectors may include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives of the Corporation, to act at the meeting and make a written report thereof. One or more persons may be designated by the Board of Directors as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by the Delaware General Corporation Law. SECTION III Board of Directors Section 3.1. Number and Qualifications. The business and affairs of the Corporation shall be managed by or under the direction of its Board of Directors. The number of directors constituting the Board of Directors shall be as authorized from time to time exclusively by a vote of a majority of the members of the Board of Directors then in office. The maximum number of consecutive three-year terms of office that may be served by any director is three, and for purposes of calculating such maximum number of terms there shall not be counted as a three-year term any service during a partial term for which such director is serving or during any initial term; provided, however, that the Board of Directors is authorized in circumstances it deems appropriate to nominate and thereby render eligible a person for a fourth or subsequent consecutive three-year term. Notwithstanding the foregoing, (i) a person who is not serving as a director shall not be eligible for nomination, appointment, or election if such person has or will have reached age 70 on the date of his or her appointment or election; and (ii) any director reaching the age of 70 during any term of office shall continue to be qualified to serve as a director only until the next annual meeting of stockholders following his or her 70th birthday, provided, however, that the Board of Directors is authorized, in circumstances it deems appropriate and by unanimous approval of all of the directors then in office (excepting the director whose qualification is the subject of the action), to render a director then in office eligible to serve until the next annual meeting of stockholders following his or her 71st birthday. Section 3.2. Resignation. A director may resign at any time by giving written notice to the Chairman of the Board, to the Vice Chairman or to the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. 72 5 Section 3.3. Regular Meetings. Regular meetings of the Board of Directors may be held without further notice at such time as shall from time to time be determined by the Board of Directors. Unless otherwise determined by the Board of Directors, the locations of the regular meetings of the Board of Directors shall be in Kingsport, Tennessee. A meeting of the Board of Directors for the election of officers and the transaction of such other business as may come before it may be held without notice immediately following the annual meeting of stockholders. Section 3.4. Special Meetings. Special meetings of the Board of Directors may be called by the Chairman of the Board, or the Vice Chairman or at the request in writing of one third of the members of the Board of Directors then in office. Section 3.5. Notice of Special Meetings. Notice of the date, time and place of each special meeting shall be mailed by regular mail to each director at his designated address at least six days before the meeting; or sent by overnight courier to each director at his designated address at least two days before the meeting (with delivery scheduled to occur no later than the day before the meeting); or given orally by telephone or other means, or by telegraph or telecopy, or by any other means comparable to any of the foregoing, to each director at his designated address at least 24 hours before the meeting; provided, however, that if less than five days' notice is provided and one third of the members of the Board of Directors then in office object in writing prior to or at the commencement of the meeting, such meeting shall be postponed until five days after such notice was given pursuant to this sentence (or such shorter period to which a majority of those who objected in writing agree), provided that notice of such postponed meeting shall be given in accordance with this Section 3.5. The notice of the special meeting shall state the general purpose of the meeting, but other routine business may be conducted at the special meeting without such matter being stated in the notice. Section 3.6. Place of Meetings. The Board of Directors may hold their meetings and have an office or offices inside or outside of the State of Delaware. Section 3.7. Telephonic Meeting and Participation. Any or all of the directors may participate in a meeting of the Board of Directors or any committee thereof by conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at the meeting. Section 3.8. Action by Directors Without a Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee thereof, may be taken without a meeting if all members of the Board or of such committee, as the case may be, consent thereto in writing, and the writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3.9. Quorum and Adjournment. A majority of the directors then holding office shall constitute a quorum. The vote of the majority of the directors present at a meeting at which a quorum is present shall be the act of the Board of Directors. Whether or not a quorum is present to conduct a meeting, any meeting of the Board of Directors (including an adjourned meeting) may be adjourned by a majority of the directors present, to reconvene at a specific time and place. It shall not be necessary to give to the directors present at the adjourned meeting notice of the reconvened meeting or of the business to be transacted, other than by announcement at the meeting that was adjourned; provided, however, notice of such reconvened meeting, stating the date, time, and place of the reconvened meeting, shall be given to the directors not present at the adjourned meeting in accordance with the requirements of Section 3.5 hereof. Section 3.10. Organization. The Chairman of the Board, or, in the absence of the Chairman of the Board, the Vice Chairman, or in the absence of the Vice Chairman, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary of the Corporation shall act as secretary, but in the absence of the Secretary, the presiding officer may appoint a secretary. 73 6 Section 3.11. Compensation of Directors. Directors shall receive such compensation for their services as the Board of Directors may determine. Any director may serve the Corporation in any other capacity and receive compensation therefor. Section 3.12. Presumption of Assent. A director of the Corporation who is present at a meeting of the Board of Directors when a vote on any matter is taken is deemed to have assented to the action taken unless he votes against or abstains from the action taken, or unless at the beginning of the meeting or promptly upon arrival the director objects to the holding of the meeting or transacting specified business at the meeting. Any such dissenting votes, abstentions or objections shall be entered in the minutes of the meeting. SECTION IV Committees Section 4.1. Committees. The Board of Directors may, by resolutions passed by a majority of the members of the Board of Directors, designate members of the Board of Directors to constitute other committees which shall in each case consist of such number of directors, and shall have and may execute such powers as may be determined and specified in the respective resolutions appointing them. Any such committee may fix its rules of procedure, determine its manner of acting and the time and place, whether within or without the State of Delaware, of its meetings and specify what notice thereof, if any, shall be given, unless the Board of Directors shall otherwise by resolution provide. Unless otherwise provided by the Board of Directors or such committee, the quorum, voting and other procedures shall be the same as those applicable to actions taken by the Board of Directors. A majority of the members of the Board of Directors then in office shall have the power to change the membership of any such committee at any time, to fill vacancies therein and to discharge any such committee or to remove any member thereof, either with or without cause, at any time. SECTION V Officers Section 5.1. Designation. The officers of the Corporation shall be a Chairman of the Board, a Vice Chairman, a President of one or more Divisions, Regions, or other functional or operational unit or units of the Corporation, one or more Vice Presidents in such gradations as the Board of Directors may determine, a Treasurer, one or more Assistant Treasurers, a Comptroller, one or more Assistant Comptrollers, a Secretary, and one or more Assistant Secretaries. The Board of Directors may elect or appoint, or provide for the appointment of, such officers or agents as may from time to time appear necessary or advisable in the conduct of the business and affairs of the Corporation. Any number of offices may be held by the same person. Section 5.2. Election Term. At its first meeting after each annual meeting of stockholders, the Board of Directors shall elect the officers or provide for the appointment thereof. Subject to Section 5.3 and Section 5.4 hereof, the term of each officer elected by the Board of Directors shall be until the first meeting of the Board of Directors following the next annual meeting of stockholders and until such officer's successor is chosen and qualified. Section 5.3. Resignation. Any officer may resign at any time by giving written notice to the Secretary. Unless otherwise stated in such notice of resignation, the acceptance thereof shall not be necessary to make it effective; and such resignation shall take effect at the time specified therein or, in the absence of such specification, it shall take effect upon the receipt thereof. 74 7 Section 5.4. Removal. Any officer may be removed at any time with or without cause by the affirmative vote of a majority of the members of the Board of Directors then in office. Any officer appointed by another officer may be removed with or without cause by such officer or the Chief Executive Officer. Section 5.5. Vacancies. A vacancy in any office may be filled for the unexpired portion of the term by the Board of Directors or, in the case of offices held by officers who may be appointed by other officers, by any officer authorized to appoint such officer. Section 5.6. Chief Executive Officer. The Chairman of the Board shall be the Chief Executive Officer of the Corporation. The Chief Executive Officer shall be responsible for carrying out the policies adopted by the Board of Directors. Section 5.7. Chairman of the Board. The Chairman of the Board shall have such powers and perform such duties as may be provided for herein and as may be incident to the office and as may be assigned by the Board of Directors. Section 5.8. Vice Chairman of the Board. The Vice Chairman of the Board shall have such powers and perform such duties as may be provided for herein and as may be assigned by the Board of Directors. Section 5.9. President. Each President of a Division, Region or other functional or operational unit or units shall have such powers and perform such duties as may be provided for herein and as may be assigned by the Chairman of the Board or the Board of Directors. Section 5.10. Vice President. Each Vice President shall have such powers and perform such duties as may be provided for herein and as may be assigned by the Chairman of the Board or the Board of Directors. Section 5.11. Treasurer. The Treasurer shall have charge of all funds of the Corporation and shall perform all acts incident to the position of Treasurer, subject to the control of the Board of Directors. Section 5.12. Comptroller. The Comptroller shall have the custody and operation of the accounting books and records of the Corporation and shall perform all acts incident to the position of Comptroller, subject to the control of the Board of Directors. Section 5.13. Secretary. The Secretary shall keep the minutes, and give notices, of all meetings of stockholders and directors and of such committees as directed by the Board of Directors. The Secretary shall have charge of such books and papers as the Board of Directors may require. The Secretary or any Assistant Secretary is authorized to certify copies of extracts from minutes and of documents in the Secretary's charge and anyone may rely on such certified copies to the same effect as if such copies were originals and may rely upon any statement of fact concerning the Corporation certified by the Secretary (or any Assistant Secretary). The Secretary shall perform all acts incident to the office of Secretary, subject to the control of the Board of Directors. Section 5.14. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers. Assistant Secretaries, Assistant Treasurers and Assistant Comptrollers shall have such powers and perform such duties as usually pertain to their respective offices and as may be assigned by the Board of Directors or an officer designated by the Board of Directors. Section 5.15. Compensation of Officers. The officers of the Corporation shall receive such compensation for their services as the Board of Directors or the appropriate committee thereof may determine. The Board of Directors may delegate its authority to determine compensation to designated officers of the Corporation. 75 8 Section 5.16. Execution of Instruments. Checks, notes, drafts, other commercial instruments, assignments, guarantees of signatures and contracts (except as otherwise provided herein or by law) shall be executed by the Chairman of the Board, the Vice Chairman, any President of a Division, Region or other functional or operational unit or units, any Vice President or other officers or employees or agents, in any such case as the Board of Directors may direct or authorize. Section 5.17. Mechanical Endorsements. The Chairman of the Board, the Vice Chairman, any President of a Division, Region or other functional or operational unit or units, any Vice President or the Secretary may authorize any endorsement on behalf of the Corporation to be made by such mechanical means or stamps as any of such officers may deem appropriate. SECTION VI Indemnification Section 6.1. Indemnification Provisions in Certificate of Incorporation. The provisions of this Section VI are intended to supplement Article VII of the Certificate of Incorporation pursuant to Sections 7.2 and 7.3 thereof. To the extent that this Section VI contains any provisions inconsistent with said Article VII, the provisions of the Certificate of Incorporation shall govern. Terms defined in such Article VII shall have the same meaning in this Section VI. Section 6.2. Indemnification of Employees. The Corporation shall indemnify and advance expenses to its employees to the same extent as to its directors and officers, as set forth in the Certificate of Incorporation and in this Section VI of the Bylaws of the Corporation. Section 6.3. Undertakings for Advances of Expenses. If and to the extent the Delaware General Corporation Law requires, an advancement by the Corporation of expenses incurred by an indemnitee pursuant to clause (iii) of the last sentence of Section 7.1 of the Certificate of Incorporation (hereinafter an "advancement of expenses") shall be made only upon delivery to the Corporation of an undertaking (hereinafter an "undertaking"), by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a "final adjudication") that such indemnitee is not entitled to be indemnified for such expenses under Article VII of the Certificate of Incorporation or otherwise. Section 6.4. Claims for Indemnification. If a claim for indemnification under Section 7.1 of the Certificate of Incorporation is not paid in full by the Corporation within 60 days after it has been received in writing by the Corporation, except in the case of a claim for an advancement of expenses, in which case the applicable period shall be 20 days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim. If successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and in any suit by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking the Corporation shall be entitled to recover such expenses only upon a final adjudication that, the indemnitee has not met the applicable standard of conduct set forth in Section 145 of the Delaware General Corporation Law (or any successor provision or provisions). Neither the failure of the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in Section 145 of the Delaware General 76 9 Corporation Law (or any successor provision or provisions), nor an actual determination by the Corporation (including the Board of Directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to have or retain such advancement of expenses, under Article VII of the Certificate of Incorporation or this Section VI or otherwise, shall be on the Corporation. Section 6.5. Insurance. The Corporation may maintain insurance, at its expense, to protect itself and any director, trustee, officer, employee or agent of the Corporation or another enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the Delaware General Corporation Law. Section 6.6. Severability. In the event that any of the provisions of this Section VI (including any provision within a single section, paragraph or sentence) is held by a court of competent jurisdiction to be invalid, void or otherwise unenforceable, the remaining provisions are severable and shall remain enforceable to the full extent permitted by law. SECTION VII Miscellaneous Section 7.1. Seal. The Corporation shall have a suitable seal, containing the name of the Corporation. The Secretary shall be in charge of the seal and may authorize one or more duplicate seals to be kept and used by any other officer or person. Section 7.2. Waiver of Notice. Whenever any notice is required to be given, a waiver thereof in writing, signed by the person or persons entitled to the notice, whether before or after the time stated therein shall be deemed equivalent thereto. Attendance of a person at a meeting shall constitute a waiver of notice of such meeting, except when the person attends a meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Section 7.3. Voting of Stock Owned by the Corporation. Powers of attorney, proxies, waivers of notice of meeting, consents and other instruments relating to securities owned by the Corporation may be executed in the name of and on behalf of the Corporation by the Chairman of the Board, the Vice Chairman, any Vice President or such officers or employees or agents as the Board of Directors or any of such designated officers may direct. Any such officer may, in the name of and on behalf of the Corporation, take all such action as any such officer may deem advisable to vote in person or by proxy at any meeting of security holders of any corporation in which the Corporation may own securities and at any such meeting shall possess and may exercise any and all rights and powers incident to the ownership of such securities and which, as the owner thereof, the Corporation might have exercised and possessed if present. The Board of Directors may from time to time confer like powers upon any other person or persons. 77 10 SECTION VIII Amendment of Bylaws The Board of Directors shall have power to amend, alter, change, adopt or repeal the Bylaws of the Corporation at any regular or special meeting; provided, however, any action relating to the last sentence of Section 3.1 of these Bylaws concerning the age 70 qualification limitation on Board service shall require the vote of 100 percent of the directors then in office. The stockholders also shall have the power to amend, alter, change, adopt or repeal the Bylaws of the Corporation at any annual or special meeting subject to the requirements of the Certificate of Incorporation. 78 EX-10.15 3 LONG-TERM PERFORMANCE SUBPLAN 1 Exhibit 10.15 LONG-TERM PERFORMANCE SUBPLAN OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN 1998-2000 PERFORMANCE PERIOD EASTMAN CHEMICAL COMPANY Effective January 1, 1998 79 2 LONG-TERM PERFORMANCE SUBPLAN OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN 1998-2000 PERFORMANCE PERIOD TABLE OF CONTENTS
Section Title - ------- ----- Section 1. Background Section 2. Definitions Section 3. Administration Section 4. Eligibility Section 5. Form of Awards Section 6. Size of Awards Section 7. Composition of Peer Group Section 8. Preconditions to Receipt of an Award Section 9. Manner and Timing of Award Payments Section 10. No Rights as Shareowner Section 11. Application of Plan Section 12. Amendments
80 3 EASTMAN CHEMICAL COMPANY LONG-TERM PERFORMANCE SUBPLAN OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN 1998-2000 PERFORMANCE PERIOD Section 1. Background. Under Section 11 of the Eastman Chemical Company 1997 Omnibus Long-Term Compensation Plan (the "Plan"), the "Committee" (as defined in the Plan), may, among other things, award shares of the $.01 par value common stock ("Common Stock") of Eastman Chemical Company (the "Company") to "Employees" (as defined in the Plan), and such awards may take the form of performance shares, which are contingent upon the attainment of certain performance objectives during a specified period, and subject to such other terms, conditions, and restrictions as the Committee deems appropriate. The purpose of this Long-Term Performance Subplan (this "Subplan") is to set forth the terms of the grant of performance shares for the 1998-2000 Performance Period specified herein, effective as of January 1, 1998 (the "Effective Date"). Section 2. Definitions. (a) The following definitions shall apply to this Subplan: (i) "Actual Grant Amount" means the number of shares of Common Stock to which a participant is entitled under this Subplan, calculated in accordance with Section 6 of this Subplan. (ii) "Award Payment Date" means the date the shares of Common Stock covered by an award under this Subplan are delivered to a participant. (iii) "Compared Group" means the Company and the companies in the Peer Group. (iv) "Maximum Deductible Amount" means the maximum amount deductible by the Company under Section 162(a), taking into consideration the limitations under Section 162(m), of the Internal Revenue Code of 1986, as amended, or any similar or successor provisions thereto. (v) "Target Grant Amount" means, with respect to any eligible Employee, the number of shares of Common Stock specified on Exhibit A hereto for the Salary Grade applicable to such Employee. (vi) "Participation Date" means June 30, 1998. (vii) "Peer Group" means the group of companies identified in Exhibit B hereto, with any changes made by the Committee pursuant to Section 7 of this Subplan. (viii) "Performance Period" means January 1, 1998 through December 31, 2000. (ix) "TSR" means total return to shareowners, as reflected by the sum of (A) change in stock price (measured as the difference between (I) the average of the closing prices of a company's common stock on the New York Stock Exchange, or of the last sale prices of such stock on the Nasdaq Stock Market, as applicable, over the first 20 trading days of the period for which such change is being measured and (II) the average of such closing or last sale prices for such stock over the final 20 trading days of the period for which such change is being measured) plus (B) dividends declared, assuming reinvestment of dividends, and expressed as a percentage return on a shareowner's hypothetical investment. (b) Any capitalized terms used but not otherwise defined in this Subplan shall have the respective meanings set forth in the Plan. 81 4 Section 3. Administration. This Subplan shall be administered by the Committee. The Committee shall have authority to interpret this Subplan, to prescribe rules and regulations relating to this Subplan, and to take any other actions it deems necessary or advisable for the administration of this Subplan, and shall retain all general authority granted to it under Section 3 of the Plan. Section 4. Eligibility. The Employees who are eligible to participate in this Subplan are those Employees who, as of the Effective Date, have been designated as "officers" of the Company for purposes of Section 16 of the Exchange Act and those Employees designated by the Company's Chief Executive Officer during 1998, which shall generally include Employees who, as of the Effective Date or the Participation Date, held positions with the Company considered by the Chief Executive Officer to carry responsibilities and functions generally associated with a vice-president-level position. Employees who are promoted during the Performance Period to a position that would meet the above criteria, but who do not hold such position as of the Participation Date, are not eligible to participate in this Subplan; however, the ability of the Chief Executive Officer under this Section 4 to designate eligible Employees at any time during 1998 is intended to allow the participation of Employees who, as of the Participation Date, held positions with the Company that may not have been considered to carry responsibilities and functions generally associated with a vice-president-level position but which positions are or were evaluated during 1998 and determined by the Chief Executive Officer to carry such responsibilities and functions. Section 5. Form of Awards. Subject to the terms and conditions of the Plan and this Subplan, Awards under this Subplan shall be paid in the form of unrestricted shares of Common Stock, except for conversions to cash and deferrals under Section 9 of this Subplan, and except that if a participant is entitled to any fraction of a share of Common Stock, as a result of Section 10 of this Subplan or otherwise, then in lieu of receiving such fraction of a share, the participant shall be paid a cash amount representing the market value, as determined by the Committee, of such fraction of a share at the time of payment. Section 6. Size of Awards. Exhibit A hereto shows by Salary Grade the Target Grant Amount. The Salary Grade to be used in calculating the size of any Award to a participant under this Subplan shall be the higher of (a) the Salary Grade applicable to the position held by the participant on the Participation Date (or, in the case of participants whose employment is terminated prior to the Participation Date, the Effective Date) and (b) the Salary Grade assigned to such position during 1998 as a result of any reevaluation of the Salary Grade appropriate for such position. The Actual Grant Amount shall be determined by comparing the Company's TSR during the Performance Period to the TSRs of the companies in the Peer Group during the Performance Period. Specifically, the Company and each company in the Peer Group shall be ranked by TSR, in descending order, with the company having the highest TSR during the Performance Period being ranked number one. The Company's rank, by TSR, in relation to the Compared Group, shall determine a multiplier to be applied to the Target Grant Amount. Multipliers range from 2.0 (i.e. 200%), if the Company's TSR is ranked number one, to 0.0 (with no shares of Common Stock being delivered to participants under this Subplan), if the Company's rank is lower than company fifteen in the Compared Group. The payout table with multipliers for each TSR rank is shown in Exhibit C. The Actual Grant Amount is determined by applying the multiplier corresponding to the Company's TSR rank (Exhibit C) to the Target Grant Amount. Notwithstanding the foregoing, if the Peer Group produces fewer than 19 distinct TSRs (as a result of the removal of a company from the Peer Group without substitution of a replacement company therefor, as described in Section 7 of this Subplan), then the Committee shall, in its sole discretion, determine the appropriate means of calculating the Actual Grant Amount. Section 7. Composition of Peer Group. The members of the Peer Group identified in Exhibit B hereto have been identified as companies currently relevant for purposes of TSR comparisons under this Subplan. However, the Committee shall have the authority, at any time and from time to time, to determine that any member of the Peer Group is no longer appropriate for inclusion. Circumstances that might require such a determination include, without limitation, the following events: a company's common stock ceasing to be publicly traded on an exchange or on the Nasdaq Stock Market; a company's being a party to a significant merger, acquisition, or other reorganization; or a company's ceasing to operate in the chemical industry. In any case where the Committee determines that a particular company is no longer appropriate for inclusion in the Peer Group, the Committee may designate a replacement company, which shall then be substituted in the Peer Group for the former member. In any 82 5 such case, the Committee shall have authority to determine the appropriate method of calculating the TSR of such former and/or replacement company or companies, whether by complete substitution of the replacement company (and disregard of the former company) over the entire Performance Period or by pro rata calculations for each company or otherwise. Alternatively, in any case where the Committee determines that a particular company is no longer appropriate for inclusion in the Peer Group, the Committee may remove such company from the Peer Group without substituting a replacement company therefor. Section 8. Preconditions to Receipt of an Award. (a) Continuous Employment. Except as specified in paragraph (b) below, to remain eligible for an Award under this Subplan, an eligible Employee must remain continuously employed with the Company or a Subsidiary at all times from the Participation Date (or the Effective Date) through the Award Payment Date. (b) Death, Disability, Retirement, or Termination for an Approved Reason Before the Award Payment Date. If a participant's employment with the Company or a Subsidiary is terminated due to death, disability, retirement, or any approved reason prior to the Award Payment Date, the participant shall receive, subject to the terms and conditions of the Plan and this Subplan, an Award representing a prorated portion of the Actual Grant Amount to which such participant otherwise would be entitled, with the precise amount of such Award to be determined by multiplying the Actual Grant Amount by a fraction, the numerator of which is the number of full calendar months in the Performance Period from the Effective Date through and including the effective date of such termination, and the denominator of which is 36 (the total number of months in the Performance Period). If the effective date of a participant's termination of employment occurs on or after the last business day of a particular calendar month, then such month shall be considered a full calendar month and shall be counted in determining the numerator of the fraction described in the preceding sentence; if the effective date of such termination occurs prior to the last business day of a particular calendar month, then such month shall not be so counted. Section 9. Manner and Timing of Award Payments. (a) Timing of Award Payment. Except for deferrals under Sections 9(b) and 9(c), if any Awards are payable under this Subplan, the payment of such Awards to eligible Employees shall be made as soon as is administratively practicable after the end of the Performance Period. (b) Deferral of Award in Excess of the Maximum Deductible Amount. If payment of the Award would, or could in the reasonable estimation of the Committee, result in the participant's receiving compensation in excess of the Maximum Deductible Amount in a given year, then such portion (or all, as applicable) of the Award as would, or could in the reasonable estimation of the Committee, cause such participant to receive compensation from the Company in excess of the Maximum Deductible Amount shall be converted into the right to receive a cash payment, which shall be deferred until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries. (c) Election to Defer the Award. Any participant in this Subplan may elect to defer the Award until after the participant retires or otherwise terminates employment with the Company and its Subsidiaries under the terms and subject to the conditions of the Eastman Executive Deferred Compensation Plan, as the same now exists or may be amended hereafter (the "EDCP"). If the participant chooses to defer the Award, the Award shall be converted into the right to receive a cash payment. (d) Award Deferral to the EDCP. In the event that all or any portion of an Award is converted into a right to receive a cash payment pursuant to Sections 9(b) or 9(c), an amount representing the Fair Market Value, as of the date the Common Stock covered by the Award otherwise would be delivered to the participant, of the Actual Grant Amount (or the deferred portion thereof) will be credited to the Stock Account of the EDCP, and hypothetically invested in units of Common Stock. Thereafter, such amount shall be treated in the same manner as other investments in the EDCP and shall be subject to the terms and conditions thereof. 83 6 Section 10. No Rights as Shareowner. No certificates for shares of Common Stock shall be issued under this Subplan nor shall any participant have any rights as a shareowner as a result of participation in this Subplan, until the Actual Grant Amount has been determined and such participant has otherwise become entitled to an Award under the terms of the Plan and this Subplan. In particular, no participant shall have any right to vote or to receive dividends on any shares of Common Stock under this Subplan, until certificates for such shares have been issued as described above; provided, however, that if payment of all or any portion of an Award under this Subplan has been deferred pursuant to Section 9 of this Subplan or otherwise, but such Award otherwise has become payable hereunder, then during the period during which payment is deferred, the deferred Award shall be credited with additional units of Common Stock, and (if applicable) fractions thereof, based on any dividends declared on the Common Stock, in accordance with the terms of the EDCP. Section 11. Application of Plan. The provisions of the Plan shall apply to this Subplan, except to the extent that any such provisions are inconsistent with specific provisions of this Subplan. In particular, and without limitation, Section 11 (relating to performance shares), Section 12 (relating to qualification of Awards as "performance-based" under Code Section 162(m)), Section 17 (relating to nonassignability), Section 18 (relating to adjustment of shares available), Section 19 (relating to withholding taxes), Section 20 (relating to noncompetition and confidentiality), Section 21 (relating to regulatory approvals and listings), Section 23 (relating to the governing law), Section 24 (relating to changes in ownership), Section 25 (relating to changes in control), Section 26 (relating to no rights, title, or interest in Company assets), and Section 27 (relating to securities laws) shall apply to this Subplan. Section 12. Amendments. The Committee may, from time to time, amend this Subplan in any manner. 84 7 EXHIBIT A EASTMAN CHEMICAL COMPANY LONG-TERM PERFORMANCE SUBPLAN GRANT TABLE 1998-2000 CYCLE Original on File in Management Compensation 85 8 EXHIBIT B COMPANIES IN THE PEER GROUP Air Products and Chemicals, Inc. ARCO Chemical Company Crompton & Knowles Corporation Dow Chemical Company E. I. du Pont de Nemours and Company H. B. Fuller Company The Geon Company Georgia Gulf Corporation W. G. Grace, Inc. Great Lakes Chemical Corporation M. A. Hanna Company Hercules Chemical Corporation Lyondell Petrochemical Company Millenium Morton International, Inc. Rohm and Haas Company Union Carbide Corporation Wellman, Inc. Witco Corporation 86 9 EXHIBIT C EASTMAN CHEMICAL COMPANY LONG-TERM PERFORMANCE SUBPLAN 1998-2000 PERFORMANCE PERIOD PAYOUT TABLE
Eastman's TSR Payout Multiplier Ranking (Times Target Grant Amount) ------------- --------------------------- 1 2.0 X 2 1.9 X 3 1.8 X 4 1.7 X 5 1.6 X 6 1.5 X 7 1.4 X 8 1.3 X 9 1.2 X 10 1.1 X 11 0.9 X 12 0.7 X 13 0.5 X 14 0.3 X 15 0.1 X 16 0.0 X 17 0.0 X 18 0.0 X 19 0.0 X 20 0.0 X
87 EX-10.18 4 BENEFIT SECURITY TRUST 1 Exhibit 10.18 EASTMAN CHEMICAL COMPANY BENEFIT SECURITY TRUST THIS TRUST AGREEMENT is made this 24th day of December, 1997, by and between Eastman Chemical Company ("Company"), and Wachovia Bank, N.A., as Trustee ("Trustee"). W I T N E S S E T H: WHEREAS, Company has adopted certain nonqualified deferred compensation plans and severance agreements listed on Appendix A attached hereto and made a part hereof (collectively, the "Plans", and each such plan and severance agreement may be referred to herein as a "Plan"); and WHEREAS, Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plans; and WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974; NOW, THEREFORE, the parties do hereby establish this Trust and agree that the Trust shall be comprised, held and disposed of as follows: Section 1. Establishment of Trust. (a) Company hereby deposits with Trustee in trust Fifteen Thousand Dollars ($15,000.00), which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement. (b) The Trust shall be irrevocable once executed by the Company and Trustee, except as provided in Section 12 of this Trust Agreement. (c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly. (d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein. (e) The funding of the Trust shall be governed by the following terms and conditions. (1) The Company may at any time or from time to time make contributions to the Trust, provided that such contributions are approved by the Board of Directors of the Company in a resolution validly adopted by the Board that expressly authorizes such contributions. Notwithstanding the foregoing, assets contributed to the Trust (other than the assets described on Appendix C) must be (i) in the opinion of the Trustee, liquid or easily liquidated; and (ii) in the case of equity securities, traded on a national securities exchange or on the NASDAQ National Market System. Debt securities must be at least "investment grade", as that term is commonly used by debt rating agencies. 88 2 (2) Upon the creation of this Trust, the Company shall convey to the Trustee a deed of trust with respect to those parcels of real property described on Appendix C attached hereto (the "Deed of Trust") and a warrant to purchase common stock of the Company described on Appendix C attached hereto (the "Warrant"). Such Deed of Trust and Warrant (together with any additional security interests granted to the Trustee by the Company hereafter and any security which is substituted for such Deed of Trust, Warrant or future security interests) may be referred to herein as the "Security Interests." The real property with respect to which the Deed of Trust is granted and the unissued Company common stock which is subject to issuance under the Warrant (together with any additional real, personal or intangible property as to which the Trustee is given a security interest and any real, personal or intangible property which is substituted for the property described on Appendix C), may be referred to herein as the "Underlying Property". (3) Within five (5) business days after the first to occur of (i) the date the Company has knowledge of a Potential Change in Control (and for this purpose, "knowledge" shall mean that the Chief Executive Officer, Chief Financial Officer or General Counsel has actual knowledge of such event); (ii) the date the Company experiences a Change in Control; (iii) the date the Company receives a Notice or Notices of Plan Payment Default that are not postponed under Section 1(f)(4) pending the final resolution of independent judicial or arbitration proceedings; or (iv) the date the Trustee issues a final Notice of Plan Payment Default following the final resolution of the independent judicial or arbitration proceedings described in Section 1(f)(4), the Company shall transfer to the Trustee cash or other liquid funds acceptable to the Trustee in the amount of the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion or its agents under Section 2(b) of this Trust, as well as the Expected Trust Expenses, and immediately upon such transfer the Trustee shall release and convey to the Company any and all interest which the Trustee has in the Security Interests and the Underlying Property. If the Company fails to make such transfer of cash or other liquid funds within the period prescribed by the preceding sentence, then the Trustee shall exercise the Warrant and shall foreclose on the Deed of Trust and any other Security Interests without further notice to the Company. Each of the events described in clauses (i) through (iv) of the first sentence of this paragraph shall be referred to herein as a "Triggering Event." (4) The Company shall have the right at any time to purchase from the Trustee (i) the Warrant and/or any Company common stock issued pursuant to the Warrant; and (ii) any other Underlying Property then held by the Trustee for then fair market value of the Warrant, Company common stock issued pursuant to the Warrant, or other Underlying Property (as determined by the Trustee in its sole discretion), as applicable, upon such terms and conditions as are determined reasonable by the Trustee in its sole and absolute discretion, provided, however, that the consideration paid to the Trust shall either be cash or property which meets the conditions of the second sentence of Section 1(e)(1). (5) If the event which caused the Company to transfer cash or other liquid funds to the Trustee was a Potential Change in Control, and the conditions which created the Potential Change in Control cease to exist (other than by consummation of a Change in Control), then the Company shall have the right at any time thereafter to cause the Trustee to return to the Company any and all cash or other assets then held by the Trustee, upon the reconveyance to the Trustee of the Security Interests in the Underlying Property or by giving the Trustee security acceptable to the Trustee in an amount not less than the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, as well as the Expected Trust Expenses. (6) If the Company funds the Trust on a discretionary basis (i.e., such funding was not required by a Triggering Event), then, at any time when the aggregate fair market value (as determined by the Trustee in its sole and absolute discretion) of all property held by the Trustee (excluding the value of the Deed of Trust, the Warrant and any other Security Interests) exceeds the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute 89 3 discretion under Section 2(b) of this Trust, as well as the Expected Trust Expenses, then upon the written request of the Company the Trustee shall release and convey to the Company any and all interest which the Trustee has in the Security Interests and the Underlying Property. At any time thereafter, the Company shall have the right at any time to cause the Trustee to return to the Company (i) cash or other assets then held by the Trustee in an amount equal to the lesser of (A) the current fair market value (as determined by the Trustee in its sole and absolute discretion) of the Security Interests previously released to the Company, or (B) the fair market value (as determined by the Trustee in its sole and absolute discretion) of the Security Interests previously released to the Company at the time of their previous release to the Company, in either case by reconveying to the Trustee the Security Interests previously released to the Company; or (ii) any and all cash or other assets then held by the Trustee, by giving the Trustee security acceptable to the Trustee in an amount not less than the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, as well as the Expected Trust Expenses. (f) Special Determinations Concerning Plan Payment Default. (1) A "Claim of Plan Payment Default" means a written notice from any Trust Beneficiary to the Trustee that (i) one or more payment(s) have not been made on a timely basis to a participant or beneficiary under any Plan; or (ii) if the Company or Trustee has engaged a paying agent to make payments under one or more Plans, that Company has not transferred funds to such paying agent on a timely basis to enable the paying agent to make all payments then due under the Plans for which the paying agent has responsibility. (2) A "Notice of Plan Payment Default" means a written notice from the Trustee to the Company given by facsimile not more than ten (10) business days after its receipt of a Claim of Plan Payment Default which the Trustee has determined to be accurate, or, if the Trustee has not been able to determine the accuracy of such claim, that appears to the Trustee to have been made in good faith, stating that (i) the Company is not in compliance with the terms of one or more of the Plans, specifying the Plan(s) involved, the participants or beneficiaries involved, the payments not made on a timely basis, and the actions necessary to cure such default, or (ii) if the Company or the Trustee has engaged a paying agent to make payments under one or more of the Plans, the Company has not transferred funds to such paying agent on a timely basis to enable the paying agent to make all payments then due under the Plans for which the paying agent has responsibility, and the actions necessary to cure such default. (3) A "Plan Payment Default" shall mean (i) that one or more payment(s) have not been made on a timely basis to a Participant or beneficiary under any Plan; or (ii) if the Company or Trustee has engaged a paying agent to make payments under one or more of the Plans, that the Company has not transferred funds to such paying agent on a timely basis to enable the paying agent to make all payments then due under the Plans for which the paying agent has responsibility. Notwithstanding the foregoing, a "Plan Payment Default" shall not be deemed to occur if the Company makes an incorrect Plan payment to a Participant or beneficiary, but the payment is at least ninety percent (90%) of what is ultimately determined by the Trustee to be the correct amount; provided, further that this exception shall no longer apply with respect to a given Participant or beneficiary if the Company makes three incorrect underpayments to such Participant or beneficiary. (4) Not more than ten (10) business days after the Trustee's receipt of a Claim of Plan Payment Default which the Trustee has determined to be accurate, or, if the Trustee has not been able to determine the accuracy of such claim, that appears to the Trustee to have been made in good faith, the Trustee shall issue by facsimile a Notice of Plan Payment Default to the Company. The Company's responses to such Notice shall be one of the following: (A) If the Company does not respond by facsimile to such Notice within five (5) business days after such Notice was sent to and received by the Company, then the Trustee shall exercise the Warrant and foreclose on the Deed of Trust and any other Security Interests. 90 4 (B) The Company may cure in full such Plan Payment Default within five (5) business days after such Notice was sent to and received by the Company, and in such event the Trustee shall not exercise the Warrant or foreclose upon the Security Interests unless and until the Trustee determines in its sole discretion that the Company's actions did not constitute a full and complete cure under the circumstances. What constitutes a full and complete cure under the circumstances shall be determined by the Trustee in its sole discretion. If the Trustee determines in its sole discretion that the Company's actions did not constitute a full and complete cure under the circumstances, then the Trustee shall exercise the Warrant and foreclose upon the Deed of Trust and any other Security Interests without further notice to the Company. (C) The Company may respond to such Notice within five (5) business days of receipt of such Notice by sending to the Trustee by facsimile a notice signed by the Chief Executive Officer, Chief Financial Officer or General Counsel of the Company which (i) affirms that the Company has a good faith belief that Plan Payment Default in question was permitted under the applicable Plan; (ii) sets forth the basis for such good faith belief; and (iii) represents that independent judicial or arbitration proceedings are pending concerning the Plan Payment Default, or will be instituted by the Company in no less than thirty (30) calendar days, seeking to resolve whether or not a Plan Payment Default was permitted under the terms of the applicable Plan. If the Trustee receives such a notice within such time period, then the Trustee shall not exercise the Warrant or foreclose upon the Deed of Trust or other Security Interests unless and until (i) the Trustee determines in its sole and absolute discretion that the issue of the Plan Payment Default has been finally resolved adversely to the Company in such independent proceedings; (ii) after making the determination referred to in clause (i), the Trustee gives the Company by facsimile a final Notice of Plan Payment Default; and (iii) such final Notice of Plan Payment Default gives the Company a period of five (5) business days after such final Notice was received by the Company to make a full and complete cure of such Plan Payment Default. If the Trustee determines in its sole and absolute discretion that the Company's actions do not constitute a full and complete cure under the circumstances, then the Trustee shall exercise the Warrant and foreclose upon the Deed of Trust and any other Security Interests without further notice to the Company. (D) Notwithstanding paragraph (f)(4)(C) above, the Trustee shall have the right at all times to determine in its sole and absolute discretion the independence of the judicial or arbitration proceeding described in paragraph (f)(4)(C) above, the finality of such judicial or arbitration proceeding, and the meaning of any such judicial or arbitration proceeding. In addition, if the Trustee determines that the issue of the Plan Payment Default has been finally resolved adversely to the Company in such independent proceedings, then in its final Notice of Plan Payment Default to the Company the Trustee shall require that the Company pay directly to the affected Trust Beneficiaries within five (5) business days of the date the final Notice of Plan Payment Default is received by the Company, the reasonable attorneys fees and expenses incurred by such affected Trust Beneficiaries in pursuing such judicial or arbitration proceedings, and the Company's cure of the Plan Payment Default shall not be full and complete unless such payment is made to the affected Trust Beneficiaries within such period. (g) As an alternative to exercising the Warrant or foreclosing upon the Deed of Trust or other Security Interests under paragraphs (e) or (f) above, the Trustee may sell or assign the Warrant, the Deed of Trust, and any other Security Interests for adequate consideration (as determined by the Trustee) to one or more persons other than the Company or any subsidiary of the Company, provided that prior to such sale or assignment the Trustee (i) gives the Company at least five (5) business days prior written notice of such sale or assignment and offers the Company the opportunity to purchase the Warrant, the Deed of Trust, or other Security Interests, as applicable, on the same terms and conditions as are being offered by such proposed third party purchaser, and (ii) gives the Company five (5) business days to accept such offer in writing 91 5 (h) Each participant in a Plan listed on Appendix A, and each beneficiary of such participant (to the extent such beneficiary has become entitled to payments from a Plan) shall be referred to herein as a "Trust Beneficiary." Upon direction from the Company, the Trustee shall create (1) a separate sub-trust for each Trust Beneficiary of the Class I and Class III Plans listed on Appendix A, (2) a separate sub-trust for each of the Class II Plans listed on Appendix A; and (3) a separate sub-trust (to be known as the "Expense Sub-Trust") to hold Trust funds to be used to pay Trust administration and Trustee fees and expenses. Each time the Company transfers property to the Trust (other than a Security Interest), Company shall identify the specific sub-trust to which such property shall be credited. Thereafter all income and appreciation from such property shall also be credited to such sub-trust. Notwithstanding the foregoing, to the extent the Trust is funded as a result of a Triggering Event, then (A) if the then existing assets of the Trust, together with the assets added as a result of a Triggering Event, are less than the Value of the Benefit Obligations for all of the Plans as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, together with the Expected Trust Expenses, then the assets added as a result of the Triggering Event shall be allocated among the Plans and the Expense Sub-Account in such a manner that the funding percentage of each Plan and the Expense Sub-Account relative to each Plan's then Benefit Obligations and the Expected Trust Expenses, and after such allocation, is as equal as possible among the Plans and the Expense Sub-Account; and (B) if the then existing assets of the Trust, together with the assets added as a result of a Triggering Event, are more than the Value of the Benefit Obligations for all of the Plans as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, together with the Expected Trust Expenses, then (i) the assets added as a result of the Triggering Event shall first be allocated to the Class II Plans identified on Appendix A (i.e., the defined benefit pension-type plans) until the funding percentage for each such Class II Plan is 125% of the then Benefit Obligation for each such Plan, (ii) the assets added as a result of the Triggering Event shall next be allocated to the Expense Sub-Account until the funding percentage for the Expense Sub-Account is 125% of the then Expected Trust Expenses, and (iii) any remaining assets added as a result of the Triggering Event shall then be allocated among all of the Plans identified on Appendix A and the Expense Sub-Account in proportion to the Value of each Plan's then Benefit Obligation and the Expected Trust Expenses. Except as specifically otherwise provided in this Trust, (x) all amounts credited to the sub-trust of an individual Trust Beneficiary of a Class I or Class III Plan shall be used solely and exclusively to pay to such Trust Beneficiary the benefits to which such persons are entitled under the Plan(s), (y) all amounts credited to the sub-trust of a Class II Plan shall be used solely and exclusively to pay the benefits owing to such Trust Beneficiaries under such Plan(s); and (z) all amounts credited to the Expense Sub-Account shall be used solely and exclusively to pay Trust administration and Trustee fees and expenses (including fees and expenses of any agent of the Trustee). The Trustee may commingle the property of the separate sub-trusts for administration and investment purposes, provided that the Trustee maintains sufficient records to identify the principal and income of the commingled property which is allocable to each sub-trust, and further provided that under no circumstances shall the property of a sub-trust be distributed to or used for the benefit of any other sub-trust. Section 2. Payments to Plan Participants and Their Beneficiaries. (a) Company has appointed Fidelity Institutional Retirement Services Company as the independent recordkeeper with respect to the Class I and Class III Plans listed on Appendix A. Company has appointed Towers Perrin as the independent actuary with respect to the Class II Plans listed on Appendix A. The Company may change the recordkeeper or actuary with respect to any of the Plans before or after a Triggering Event, provided that in all cases (before or after a Triggering Event), the Steering Committee described in Section 12 of this Trust consents to the removal of the existing entity performing such function and the appointment of the new entity performing such function; and further provided that after a Triggering Event the Trustee also consents to the removal of the existing entity performing such function and the appointment of the new entity performing such function. The original or successor recordkeeper may be referred to herein as "Recordkeeper", and the original or successor independent actuary may be referred to herein as "Actuary." The fees and expenses of such agents shall be deemed to be administrative fees and expenses for purposes of Section 9 of this Trust Agreement. 92 6 (b) Prior to a Triggering Event, the Company shall provide to the Trustee and the Steering Committee at least once each calendar year, and more frequently if requested by the Trustee, a report which shows (i) the aggregate amount of the Benefit Obligation for each Plan; (ii) the Security Interests held by the Trustee; and (iii) the fair market value of the aggregate assets held by the Trust and allocable to each Plan (other than the Security Interests or Underlying Property); provided, however, that this shall not be construed to require the Company to contribute additional assets or additional Security Interests to the Trust. After a Triggering Event, the Company shall provide to the Trustee or its agents such information as the Trustee or its agents may reasonably request in order to determine the Benefit Obligations, the Value thereof, or any aspect concerning the payment thereof. Once the Trustee or its agents has determined the aggregate amount of the Benefit Obligations for each Plan, the Trustee shall promptly provide to the Steering Committee a report with the items of information described in clauses (i) through (iii) of the immediately preceding paragraph. The Company shall pay all of the expenses, including without limitation attorneys' fees and expenses, incurred by the Trustee or its agents in enforcing in good faith the duties and obligations of the Company as set forth in this Section 2(b). The Recordkeeper and Actuary shall provide the Trustee with any information within the knowledge of the Recordkeeper or the Actuary concerning the Company, the Plans, the Trust Beneficiaries, the Benefit Obligations, or the Value thereof, which is necessary for the Trustee to discharge its duties hereunder. (c) Prior to the date a Triggering Event occurs, the Company, either directly or through a paying agent (if one has been appointed) shall make all payments to the Plan participants and their beneficiaries in accordance with the Plans. Once a Triggering Event occurs, the Trustee or the paying agent (if one has been appointed) shall make payments to Plan participants and their beneficiaries in accordance with such information as is available from time to time to the paying agent, the Recordkeeper or the Trustee, and which the Trustee or its agents deems reliable. (d) The Trustee or the paying agent (if one has been appointed) shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plans and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company. Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company is Insolvent. (a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code. (b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below. (1) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. In making the determination whether Company is Insolvent, Trustee may employ an accounting firm (other than the auditors to the Company) and such other agents as are necessary or appropriate in making such determination. The fees and expenses of such agents shall be deemed to be fees and expenses for purposes of Section 9 of this Trust. The Insolvency of any subsidiary or affiliate of the Company will not in and of itself cause the Company or any other subsidiary or affiliate to be deemed Insolvent. 93 7 (2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency. (3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan(s) or otherwise. (4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent). (c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan(s) for the period of such discontinuance, plus interest from the date each such payment was due to the date actual payment is made (using an interest rate of eight percent (8%) per annum, compounded monthly), less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance. Section 4. Payments to Company. (a) Except as provided in Section 3 (Company Insolvency), Section 12 (certain actions taken with consent of Trust Representatives) hereof, and Section 4(b) below, Company shall have no right or power to direct Trustee to return to Company or to divert to others any of the Trust assets before all payment of benefits have been made to Plan participants and their beneficiaries pursuant to the terms of the Plans. This Section shall not prohibit or diminish the right of the Company to substitute assets of equal fair market value for any asset then held by the Fund, as permitted in Section 1(e) and Section 5(b)(13). (b) Notwithstanding paragraph (a) above, if the fair market value of the assets (excluding the Deed of Trust, the Warrant, the Underlying Property, and any other Security Interest) in each and every sub-account under this Trust Agreement (including the Expense Sub-Account) is more than 125% of the most recent Value of the Benefit Obligations of such sub-account (and, in the case of the Expense Sub-Account, more than 125% of the most recently determined Expected Benefit Expenses), then upon written request by the Company, the Trustee shall deliver all or part of such excess (as requested by the Company) of any sub-account(s) hereunder to the Company. Section 5. Authority of Trustee. In the management, care and disposition of the Trust Fund, the following provisions shall apply: (a) The Trustee shall have the sole authority to manage, acquire, or dispose of the assets of the Trust. The Company may request that certain general investment guidelines and diversification policies be followed with regard to assets of the Trust, but the decision whether to follow and how to implement such guidelines shall be made solely by the Trustee. (b) The Trustee shall have the following powers, rights, and duties in addition to those provided elsewhere in this Trust or by law, all of which may be exercised without order or report to any court: 94 8 (1) To receive and hold all contributions paid to it under the Plans; provided, however, that the Trustee shall have no duty to determine that the contributions received by it comply with the provisions of the Plans. The Trustee shall be authorized at any time when the Company is obligated to make a contribution to this Trust to use all legal means to compel the Company to make such contribution, and the Company shall pay all of the expenses, including without limitation attorneys' fees and expenses, incurred by the Trustee or its agents in enforcing in good faith the obligation of the Company to make contributions to this Trust when due. (2) To have the authority to invest and reinvest assets of the Trust in shares of common or preferred stock (including shares of common or preferred stock of the Company, including the rights to acquire such common or preferred stock), bonds, notes, debentures, short-term securities, mutual funds, certificates of deposits, and other property, real or personal, of any kind; to purchase and sell "put" and "call" options on publicly traded securities; and to acquire, hold, manage, operate, sell, contract to sell, grant options with respect to, convey, exchange, transfer, abandon, lease, manage, and otherwise deal with respect to assets of the Trust. (3) To borrow from anyone such amount or amounts of money as the Trustee shall consider necessary to carry out the purpose of this Trust and for that purpose to mortgage or pledge all or any part of the Trust. (4) To retain in cash any portion of the Trust deemed appropriate by the Trustee. (5) To establish accounts in the commercial department of any bank or other financial institution (including any financial institution which is affiliated with the Company) for payment of benefits or other amounts under the Plans. (6) To make the payments from the Trust in accordance with the terms of the Plans, as directed by Company, which directions are proper on their face, without inquiring as to whether a payee is entitled to the payment or as to whether a payment is proper, without liability for a payment made in good faith without actual notice or knowledge of the changed condition or status of the payee, and without obligation to search for or ascertain the whereabouts of any payee or distributee of benefits from the Trust. (7) To compromise, contest, arbitrate, settle, or abandon claims and demands in favor of or against the Trust. (8) To begin, maintain, defend, compromise, or settle any litigation in connection with the Trust and the administration of the Trust. (9) To have all rights of an individual owner, including the power to give proxies, to join in or oppose (alone or jointly with others) voting trusts, mergers, consolidations, foreclosure, reorganizations, recapitalizations, or liquidations, and to exercise or sell stock subscription or conversion rights. (10) To hold securities or other property in the name of the Trustee or its nominee or nominees, or in such other form as it determines best, with or without disclosing the trust relationship, provided the records of the Trustee shall indicate the actual ownership of such securities or other property. (11) To deposit securities with a clearing corporation; to hold the certificates representing securities, including those in bearer form, in bulk form and to merge such certificates into certificates of the same class of the same issuer which constitute assets of other accounts or owners, without certification as to the ownership attached; and to utilize a book-entry system for the transfer or pledge of securities held by the Trustee or by a clearing corporation, provided that the records of the Trustee shall indicate the actual ownership of the securities and other property of the Trust. (12) To employ, and to be protected in relying upon, such agents, attorneys, actuaries, and accountants (including any such person who may be retained by Company or the Plans) as are reasonably necessary in managing and protecting the Trust. 95 9 (13) Notwithstanding anything to the contrary in Section 5, (i) all rights associated with assets of the Trust (including but not limited to Company stock held by the Trust) shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by or rest with Plan participants; and (ii) Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust; provided, however, that the specific provisions of Section 1(e) (4), (5), and (6) shall override the general provisions of this clause (ii). (c) Notwithstanding anything to the contrary in this Section 5, at no time before a Triggering Event occurs shall the Trustee be authorized or permitted to sell, assign, convey, exchange, transfer, or abandon the Security Interests or the Underlying Property to any person or entity other than (i) the Company, or (ii) with the consent of the Company, to an affiliate of the Company. Section 6. Disposition of Income. During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested. Section 7. Accounting by Trustee. Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be. Section 8. Special Provisions. (a) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy. (b) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedures and Administrative Regulations promulgated pursuant to the Internal Revenue Code. (c) Should it become necessary for the Trustee (hereinafter called the "Domiciliary Trustee" in this paragraph (c)) to hold property or otherwise any action in any state in which the Domiciliary Trustee shall be unable to qualify as Trustee, then and in that event, a bank or trust company designated in writing by the Domiciliary Trustee shall serve as the ancillary Trustee in such state. (d) (i) The Company shall indemnify the Trustee, directly from the Company's own assets (including the proceeds of any insurance policy the premiums of which are paid from the Company's own assets), from and against any and all claims, demands, losses, damages, expenses (including, by way of illustration and not limitation, reasonable attorneys' fees and other legal and litigation costs), judgments and liabilities arising from, out of, or in connection with the administration of the Plans or this Trust, except when determined to be due to the Trustee's gross negligence or willful misconduct. 96 10 (ii) The Trustee shall have no responsibility for: (a) any condition which now exists or may hereafter be found to exist in, under, or about any real estate investment of the Trust or of a corporation, the stock of which is held as an asset of the Trust; or (b) any violation of any applicable environmental or health or safety law, ordinance, regulation or ruling; or (c) the presence, use, generation, storage, release, threatened release, or containment, treatment or disposal of any hazardous or toxic substances or materials including such situations at or activities on any investment of the Trust or of a corporation, the stock of which is held as an asset of the 97 11 Trust. The Trustee is hereby authorized to pay from the Trust all costs and expenses (including attorneys fees) relating to or connected with any condition, violation, presence or other situation referred to in (a), (b) and (c) above, and notwithstanding anything to the contrary in this Trust Agreement, to the extent permitted by law, Wachovia Bank, N.A. shall be indemnified from the Trust from all claims, suits, losses and expenses (including attorneys fees) arising therefrom. The authority to pay from the Trust and the right of indemnification set forth in the preceding sentence include and relate to, without limitation, any claims, suits, liabilities, losses and expenses (including attorneys fees) arising from any matters relating to the existence of petroleum including crude oil and any fraction thereof, hazardous substances, pollutants, or contaminants as defined in the Comprehensive Environmental, Responsibility, Compensation, and Liability Act, as amended, 42 U.S.C. Section 9601 et seq., or hazardous wastes as defined in the Resource Conservation and Liability Act, 42 U.S.C. Section 6906 et seq., or as any of the foregoing terms or similar terms may be defined in similar state environmental laws or subsequent federal or state legislation of a similar nature which may be enacted from time to time. This Section 8(d)(ii) shall survive the sale or other disposition of any real estate investment of the Trust and the termination of this Trust Agreement. Nothing in this Section 8(d)(ii) shall be construed to in any way limit the indemnification rights of the Trustee provided for in this Section 8. (iii) The indemnification provided the Trustee by this Section 8(d) shall survive termination of this Agreement. Section 9. Compensation and Expenses of Trustee. Company shall pay all administrative and Trustee's fees and expenses, including the cost of reasonable fiduciary liability insurance for the members of the Steering Committee. If Company does not pay such fees and expenses on a timely basis, Trustee may withdraw such amounts from the Trust and shall then seek to recover such amounts from Company. If Trustee seeks recovery of such amounts from Company, then Company shall pay all of the expenses, including without limitation attorneys' fees and expenses, incurred by Trustee or its agents in enforcing in good faith the obligations of Company as set forth in this Section 9. Section 10. Resignation and Removal of Trustee. (a) Trustee may resign at any time by written notice to Company, which shall be effective one hundred eighty (180) days after receipt of such notice unless Company and Trustee agree otherwise. (b) With the consent of the Steering Committee, the Trustee may be removed by Company on one hundred eighty (180) days notice or upon shorter notice accepted by Trustee. (c) If Trustee resigns within five (5) years after a Triggering Event, Company, with the consent of the Steering Committee, shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions. (d) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within one-hundred eighty (180) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit. (e) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, Trustee or any participant in a Plan may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. Section 11. Appointment of Successor. 98 12 (a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Company, with the consent of the Steering Committee, may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal; provided, however, that such bank or trust company must have shareholder equity of at least $1.0 billion. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer. (b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee. Section 12. Amendment or Termination. (a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company only as follows: (1) The Trustee obtains an opinion of legal counsel that is independent of the Company (as determined by the Trustee in its sole discretion) that such amendment is being made for the purpose of and only to the extent reasonably necessary to preserve for the Trust Beneficiaries the deferral of federal income taxation of amounts paid under the Plans until the time such amounts are actually paid to the Trust Beneficiaries; or (2) The Trustee obtains the written approval of the Steering Committee, as hereinafter defined. The initial members of the Steering Committee, each of which shall be known as a "Trust Representatives", shall be the persons listed on Appendix B attached hereto and made a part hereof. A person shall cease to be a Trust Representative as of the earliest of (A) the date such person ceases to be entitled to any benefits from any of the Plans, (B) the date such person delivers written notice to the Trustee that he or she no longer wishes to serve as a Trust Representative hereunder, provided that such Trust Representative shall simultaneously deliver to the Trustee a written designation of a successor Trust Representative, (C) the Trustee determines in its sole discretion that the Trust Representative, because of mental or physical incapacity certified by the Trust Representative's primary attending physician, is no longer able to properly serve in such capacity manage his affairs; (D) the date of the Trust Representative's death; or (E) the fifth anniversary of the date of the Participant's termination of employment with or retirement from the Company. A person may serve as a successor Trust Representative only if such person is himself or herself a Trust Beneficiary under this Trust and is actively employed by the Company at the time of such appointment. A successor Trust Representative shall take the place of and succeed to all of the powers and duties of the designating Trust Representative (including the power to resign and appoint his own successor Trust Representative). If at any time there are fewer than ten (10) Trust Representatives then serving, then the Trustee may apply to a court of competent jurisdiction for appointment of one or more Trust Representatives; and all expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust. (b) In addition to consenting to amendments to this Trust Agreement, the Trust Representatives may also consent to (i) the complete revocation of this Trust; and (ii) any changes with respect to the Security Interests. (c) Unless sooner revoked as provided in Section 12(b) above, the Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan(s). Upon termination of the Trust any assets remaining in the Trust shall be returned to Company. 99 13 (d) An action of the Steering Committee shall be valid only if approved in writing by at least two-thirds of the members of the Steering Committee who are serving at the time of such approval. Section 13. Miscellaneous. (a) Except to the extent expressly provided otherwise herein, any action permitted or required to be taken by the Company under this Trust Agreement shall be exercised by the management committee currently known as the Benefit Plans Committee. (b) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof. (c) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process. (d) Definitions. (1) "Actuarial Present Value" shall be determined by the Actuary, using the interest rate, mortality tables, and other actuarial assumptions used to determine the value of a lump sum distribution under the tax-qualified defined benefit pension plan maintained by the Company which covers the participants in one or more of the "Class II" plans identified in Appendix A to the Trust, and if no such plan then exists, then "actuarial present value" shall be determined using such interest rates, mortality tables, and other actuarial assumptions which the Actuary determines to be reasonable under the circumstances. (2) "Actuary." See Section 2(a). (3) "Benefit Obligations" means, collectively, (a) the obligations owing to the employees and other beneficiaries under the "Class I" plans identified in Appendix A to the Trust; (b) the obligations owing to the employees and other beneficiaries under the "Class II" plans identified in Appendix A to the Trust; and (c) the obligations that would be owed to the employees and other beneficiaries covered by the "Class III" agreements identified in Appendix A to the Trust if all of the conditions for all payments were met. (4) "Change in Control" means a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of a Current Report on Form 8-K, as in effect on December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"); provided that, without limitation, a Change in Control shall be deemed to have occurred at such time as (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company, or any employee benefit plan(s) sponsored by the Company or any subsidiary of the Company, is or has become the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 19% or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote in the election of directors; provided, however, that the following will not constitute a Change in Control: any acquisition by any corporation if, immediately following such acquisition, more than 75% of the outstanding securities of the acquiring corporation ordinarily having the right to vote in the election of directors is beneficially owned by all or substantially all of those persons who, immediately prior to such acquisition, were the beneficial owners of the outstanding securities of the Company ordinarily having the right to vote in the election of directors, or (ii) individuals who constitute the Board on January 1, 1997 (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof; provided that: any person becoming a director subsequent to January 1, 1997 whose election, or nomination for election by the Company's shareowners, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of the Plan, considered as though such person were a member of the Incumbent Board, or 100 14 (iii) upon approval by the Company's shareowners of a reorganization, merger or consolidation, other than one with respect to which all or substantially all of those persons who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than 75% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or (iv) upon approval by the Company's shareowners of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a subsidiary. (5) "Claim of Plan Payment Default." See Section 1(f)(1). (6) "Deed of Trust." See Section 1(e)(2). (7) "Expected Trust Expenses" shall mean the Actuarial Present Value of the Trust administration and Trustee fees and expenses (including fees and expenses of any agent of the Trustee) which the Trustee reasonably determines are expected to be incurred over the life of the Trust. (8) "Insolvent." See Section 3(a). (9) "Notice of Plan Payment Default." See Section 1(f)(2). (10) "Plan Payment Default." See Section 1(f)(3). (11) A "Potential Change in Control" shall be deemed to have occurred if (a) the Company enters into a definitive agreement, the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control, but only if the Trustee determines, in its sole discretion, that such announcement is credible in the sense that the person making the announcement has or appears to have the reasonable ability to carry out the announced intention, without regard for whether such person's ultimate success in bringing about a Change in Control is reasonably likely, or (c) after the date this Trust is created, any person (other than (i) the Company or any of its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; or (v) a person which is eligible to use Schedule 13G to report its ownership of Company stock to the SEC; provided, however, that the exception under this clause (v) shall lapse as of the day such person ceases to be eligible to use Schedule 13G for such ownership reports) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then-outstanding securities. (12) "Recordkeeper." See Section 2(a). (13) "Security Interest." See Section 1(e)(2) (14) "Steering Committee." See Section 12(a)(2). (15) "Triggering Event." See Section 1(e)(3). (16) "Trust Beneficiary." See Section 1(h). (17) "Trust Representative." See Section 12(a)(2). (18) "Underlying Property." See Section 1(e)(2). 101 15 (19) "Value" means, on any date of determination, (i) with respect to Benefit Obligations described in clause (a) of the definition of "Benefit Obligations" (which are defined contribution, individual account plans), the aggregate amount owed to participants in such Plans as of such date of determination; (ii) with respect to Benefit Obligations described in clause (b) of the definition of "Benefit Obligations" (which are defined benefit pension-type plans), the Actuarial Present Value of the aggregate amount owed to participants in such Plans as of such date of determination; and (iii) with respect to Benefit Obligations with respect to the Plans described in clause (c) of the definition of "Benefit Obligations" (which are individual severance agreements), the aggregate amount that would be owed to the employees and other beneficiaries covered by such agreements if all of the conditions for all payments were met under such agreements as of such date of determination. (20) "Warrant." See Section 1(e)(2). (e) The Trustee may from time to time request that the Chief Executive Officer of the Company, the members of the Company's Benefit Plans Committee, and the members of the Steering Committee provide specimen signatures to the Trustee, and the Trustee shall not be required to take action at the direction of any such parties until the specimen signature for the applicable parties has been delivered. (f) Notices to the Company under this Trust shall be made by facsimile and U.S. mail to: Vice President of Human Resources, Health, Safety, Environment and Security Eastman Chemical Company 100 North Eastman Road Kingsport, Tennessee 37660 Facsimile (423) 229-1351 and Senior Vice President and General Counsel Eastman Chemical Company 100 North Eastman Road Kingsport, Tennessee 37660 Facsimile (423) 229-4137 Notices to the Trustee under this Trust shall be made by facsimile and U.S. mail to Wachovia Bank, N.A. Trust Services Division Attn: Beverley H. Wood 301 North Main Street Winston-Salem, North Carolina 27150-3099 Facsimile (910) 770-4059 The sender of a facsimile letter or other notice or message may show receipt of such facsimile by the recipient by any reasonable means of proof. (g) This Trust Agreement shall be governed by and constructed in accordance with the laws of the State of North Carolina. Section 14. Effective Date. The effective date of this Agreement shall be the date first shown above. 102 16 IN WITNESS WHEREOF, this Trust has been executed by the duly authorized officers of the Company and the Trustee as of the date first shown above. EASTMAN CHEMICAL COMPANY By: /s/ H. V. Stephens ------------------------------------ Title: Senior Vice President and --------------------------------- Chief Financial Officer Attest: /s/ Gary R. Whitaker - -------------------------- Assistant Secretary WACHOVIA BANK, N.A., as Trustee By: /s/ Beverley H. Wood ------------------------------------ Title: Senior Vice President --------------------------------- Attest: /s/ Donna L. Stern - -------------------------- Assistant Secretary 103 17 APPENDIX A PLANS SUBJECT TO THIS TRUST AGREEMENT Class I Plans Executive Deferred Compensation Plan ESOP Excess Plan Class II Plans Unfunded Retirement Income Plan Excess Retirement Income Plan Class III Agreements Severance Agreement (Provided to Wachovia) 104 18 APPENDIX B INITIAL TRUST REPRESENTATIVES WHO ARE MEMBERS OF STEERING COMMITTEE (NAMES HAVE BEEN PROVIDED TO WACHOVIA) 105 19 APPENDIX C SECURITY INTERESTS AND UNDERLYING PROPERTY (SEE ATTACHED DEED OF TRUST AND WARRANT) 106 EX-12.01 5 COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES 1 EXHIBIT 12.01 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES (DOLLARS IN MILLIONS)
1997 1996 1995 1994 1993(1) Earnings from continuing operations before provision for income taxes $ 446 $ 607 $ 899 $ 550 $ 439 Add: Interest expense 87 67 79 87 7 Rental expense (2) 27 22 16 7 11 Amortization of capitalized interest 16 14 13 15 15 -------- -------- --------- -------- --------- Earnings as adjusted $ 576 $ 710 $ 1,007 $ 659 $ 472 ======== ======== ========= ======== ========= Fixed charges: Interest expense $ 87 $ 67 $ 79 $ 87 $ 7 Rental expense (2) 27 22 16 7 11 Capitalized interest 41 28 9 11 24 -------- -------- --------- -------- --------- Total fixed charges $ 155 $ 117 $ 104 $ 105 $ 42 ======== ======== ========= ======== ========= Ratio of earnings to fixed charges 3.7x 6.1x 9.7x 6.3x 11.2x ======== ======== ========= ======== =========
- --------------------------- (1) The historical amounts for 1993 as presented above, were determined during periods when the Company was a wholly owned chemical business of Kodak. If the Company were an independent publicly held entity during 1993, the pro forma ratio of earnings to fixed charges would approximate 3.7x, reflecting the assumption of $1,800 million of new borrowings at a 6% annual interest rate, and adjustments for pension, postretirement and certain other employee benefit costs. These costs were not allocated to the Company by Kodak during 1993 and therefore, are not included in the historical amounts presented above. (2) For all periods presented, the interest component of rental expense is estimated to equal one-third of such expense. 107 EX-21.01 6 SUBSIDIARIES 1 EXHIBIT 21.01 SUBSIDIARIES
JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION ABCO Industries, Incorporated South Carolina Eastman Chemical Argentina S.A. Argentina Eastman Chemical, Asia Pacific Pte. Ltd. Singapore Eastman Chemical Brasileira Ltd. Brazil Eastman Chemical B.V. Netherlands Eastman Chemical Canada, Inc. Canada Eastman Chemical Ectona, Ltd. England Eastman Chemical Espana, Inc. Delaware Eastman Chemical Espana, S.A. Spain Eastman Chemical, Europe, Middle East and Africa, Ltd. Delaware Eastman Chemical Financial Corporation Delaware Eastman Chemical Foreign Sales Corporation Barbados Eastman Chemical Company Foundation, Inc. Tennessee Eastman Chemical Holdings, S.A. de C.V. Mexico Eastman Chemical Hong Kong Limited Hong Kong Eastman Chemical Industrial de Mexico, S.A. de C.V. Mexico Eastman Chemical Japan Limited Japan Eastman Chemical Korea Ltd. Korea Eastman Chemical Ltd. New York Eastman Chemical Latin America, Inc. Delaware Eastman Chemical (Malaysia) Sdn. Bhd. Malaysia Eastman Chemical Mexicana S.A. de C.V. Mexico Eastman Chemical, Netherlands B.V. Netherlands Eastman Chemical S. Com P.A. Spain
108 2 SUBSIDIARIES
JURISDICTION OF INCORPORATION NAME OF SUBSIDIARY OR ORGANIZATION Eastman Chemical Singapore Pte. Ltd. Singapore Eastman Chemical Technology Corporation Delaware Eastman Chemical (UK) Limited United Kingdom Eastman International Management Company Tennessee Enterprise Genetics, Inc. Nevada Hartlepet, Limited United Kingdom Holston Defense Corporation Virginia Mustang Pipeline Company Texas Pinto Pipeline Company of Texas Texas Workington Investments Limited United Kingdom
109 EX-23.01 7 CONSENT OF PRICE WATERHOUSE 1 EXHIBIT 23.01 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (No. 33-73808, No. 33-73810, No. 33-73812 and No. 33-77844) of Eastman Chemical Company of our report dated January 27, 1998 relating to the consolidated financial statements of Eastman Chemical Company appearing on page 33 of this Annual Report on Form 10-K. /s/ Price Waterhouse LLP - --------------------------- PRICE WATERHOUSE LLP New York, New York March 6, 1998 110 EX-27.01 8 FINANCIAL DATA SCHEDULE
5 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FINANCIAL STATEMENTS OF EASTMAN CHEMICAL COMPANY FOR THE TWELVE MONTHS ENDED DECEMBER 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 29 0 793 0 511 1,490 8,104 4,223 5,778 954 1,714 0 0 1 1,752 5,778 4,678 4,678 3,582 3,582 590 0 87 446 160 286 0 0 0 286 3.66 3.63 ASSET VALUES REPRESENT NET AMOUNTS
EX-99.01 9 SUPPLEMENTAL BUSINESS SEGMENT INFORMATION 1 EXHIBIT 99.01 EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES SUPPLEMENTAL BUSINESS SEGMENT INFORMATION 1997 CHANGE FROM 1996
FOURTH QUARTER TWELVE MONTHS % CHANGE % CHANGE --------------------- ------------------------ SALES OPERATING (1)(2) SALES OPERATING (1)(2) REVENUE EARNINGS REVENUE EARNINGS ------- ------------ ------- ------------- SPECIALTY & PERFORMANCE SEGMENT Specialty plastics 14 % -- 5% ++ Performance chemicals (11)% -- (9)% -- Fine chemicals (8)% -- (2)% -- Fibers (16)% -- (12)% -- Coatings, inks & resins 5 % - 5% + Total Segment (3)% (57)% (2)% (20)% === === === === CORE PLASTICS SEGMENT Container plastics 30 % ++ (9)% -- Flexible plastics (8)% ++ 2 % ++ Total Segment 14 % 40% (5)% -% === === === === CHEMICAL INTERMEDIATES SEGMENT Industrial intermediates 8% ++ 2% + Total Segment 8% 38% 2% 1% === === === === TOTAL EASTMAN 4 % (41)% (2)% (24)% === === === ===
(1) 0 = Change of approximately 0 - 2% (+ or -) + = Increase of approximately 2 - 10% ++ = Increase of greater than 10% - = Decrease of approximately 2 - 10% -- = Decrease of greater than 10% Sm = Negligible change in dollar amount Nm = Not meaningful (2) Operating earnings reflect an allocation of the $62 million ($40 million after tax) charge for partial settlement/curtailment of pension and other postemployment benefit liabilities to segments as follows: Specialty and Performance, $34 million; Core Plastics, $18 million; and Chemical Intermediates, $10 million. 112 -----END PRIVACY-ENHANCED MESSAGE-----