1998
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1998
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 1-8142
ENGELHARD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-1586002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 WOOD AVENUE, ISELIN, NJ 08830
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (732) 205-5000
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 $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X|. No |_| .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K/A.
Number of shares of common stock outstanding as of April 30, 1999 - 143,644,464.
Aggregate market value of common stock held by non-affiliates as of April 30,
1999 - $1,874,637,361.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Proxy Statement
for the 1999 Annual Meeting of Shareholders.
1
Table of Contents
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Item Page
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Part I
1. Business
(a) General development of business 3
(b) Segment and geographic area data 3-7, 63-67
(c) Description of business 3-7, 63-67
2. Properties 9-10
3. Legal Proceedings 10-11
4. Submission of Matters to a Vote of 11
Security Holders
Part II
5. Market for Registrant's 12
Common Equity and Related
Stockholder Matters
6. Selected Financial Data 13, 74
7. Management's Discussion and 13-35
Analysis of Financial Condition
and Results of Operations
8. Financial Statements and 36-73
Supplementary Data
9. Changes in and Disagreements with 74
Accountants on Accounting and Financial
Disclosure
Part III
10. Directors and Executive Officers of 75-76
the Registrant
11. Executive Compensation 76
12. Security Ownership of Certain 76
Beneficial Owners and Management
13. Certain Relationships and Related 76
Transactions
Part IV
14. Exhibits, Financial Statement 77-113
Schedules, and Reports on Form 8-K
2
PART I
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Item 1. Business
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Engelhard Corporation (which together with its Subsidiaries, is
collectively referred to as the Company) was formed under the laws of Delaware
in 1938 and became a public company in 1981. The Company's principal executive
offices are located at 101 Wood Avenue, Iselin, NJ, 08830 (telephone number
(732) 205-5000).
The Company develops, manufactures and markets technology-based performance
products and engineered materials for a wide spectrum of industrial customers.
It also provides services to precious and base-metal customers.
The Company employed approximately 6,425 people as of January 1, 1999 and
operates on a worldwide basis with corporate, operating headquarters, principal
manufacturing facilities and mineral reserves in the United States with other
operations conducted in the Asia-Pacific region, Canada, the European Community,
the Russian Federation, South Africa and South America.
The Company's businesses are organized into five segments - Environmental
Technologies, Process Technologies, Paper Pigments and Additives, Specialty
Pigments and Additives and Industrial Commodities Management.
The following information on the Company is included in Note 15, "Business
Segment and Geographic Area Data", of the Notes to Consolidated Financial
Statements. Sales to external customers, operating earnings/(losses), interest
expense, depreciation, depletion and amortization, equity in earnings (losses)
of affiliates, total assets, equity investments and capital expenditures.
ENVIRONMENTAL TECHNOLOGIES
The Environmental Technologies segment consists of Automotive Emission
Systems and Emission and Performance Systems, serving the automotive, off-road
vehicle, light and heavy duty truck, aircraft, power generation and process
industries.
Environmental technology catalysts are used in applications such as the
abatement of carbon monoxide, oxides of nitrogen and hydrocarbons from gasoline,
diesel and alternate fueled vehicle exhaust gases to meet emission control
standards. These catalysts also are used for removal of odors, fumes and
pollutants generated by a variety of process industries, including but not
limited to the painting of automobiles, appliances and other equipment; printing
processes; the manufacture of nitric acid and tires; the curing of polymers; and
power generation sources. In 1997, the Company dissolved its Metreon joint
venture, formed in 1995 with W. R. Grace, to develop and market metallic
substrate catalytic converters for cars. Also in 1997, the Company purchased the
assets of W. R. Grace's Camet Metal Monolith business, which manufactures and
markets pre-coated catalyzed metal monoliths for mobile-source applications as
well as stationary nitrogen oxides and carbon dioxide emission-control products.
3
The Company also participates in the manufacture and supply of automotive
emission-control catalysts through affiliates serving the Asia-Pacific region:
N.E. Chemcat Corporation (Japan) - 38.8% owned; and Heesung-Engelhard (South
Korea) - 49% owned, both of which also produce other catalysts and products.
The products of the Environmental Technologies segment compete in the
marketplace on the basis of cost and value performance. No single competitor is
dominant in the markets in which the Company operates.
The manufacturing operations of the Environmental Technologies segment are
carried out in the United States, Germany, India, South Africa and the United
Kingdom with equity investments located in the United States and South Korea.
The products are sold principally through the Company's sales organizations or
those of its equity investments, supplemented by independent distributors and
representatives.
The principal raw materials used by the Environmental Technologies segment
include precious metals, procured by the Industrial Commodities Management
segment, and a variety of minerals and chemicals that are generally readily
available.
As of January 1, 1999, the Environmental Technologies segment had
approximately 1,525 employees worldwide.
PROCESS TECHNOLOGIES
The Process Technologies segment consists of the Chemical Catalysts and
Petroleum Catalysts businesses. The Chemical Catalysts business consists of
chemical and polymerization catalyst products, serving the chemical,
petrochemical, pharmaceutical and food processing industries. The Petroleum
Catalysts business consists of a variety of petroleum refining catalyst
products, serving the petroleum refining industries.
The Chemical Catalysts products consist of catalysts and sorbents used in
the production of a variety of products or intermediates, including synthetic
fibers, fragrances, antibiotics, vitamins, polymers, plastics, detergents, fuels
and lube oils, solvents, oleochemicals and edible products. These catalysts are
used in both batch and continuous operations, that in many cases, require
special catalysts for each application. Chemical catalysts are based on the
Company's proprietary technology and often are developed in close cooperation
with specific customers. Sorbents are used to purify and decolorize naturally
occurring fats and oils for manufacture into shortenings, margarines and cooking
oils.
On May 1, 1998, the Company acquired the chemical catalysts businesses of
Mallinckrodt Inc. for approximately $210 million in cash. The acquired
businesses produce custom and licensed polymerization catalysts, base-metal
catalysts, precious-metal catalysts, and maleic-anhydride catalysts and expanded
the Company's existing Chemical Catalysts businesses.
The products of the Chemical Catalysts business compete in the marketplace
on the basis of cost and value performance. No single competitor is dominant in
the markets in which the Company operates.
4
The manufacturing operations of the Chemical Catalysts business are carried
out in the United States, Belgium, Italy and The Netherlands. The products are
sold principally through the Company's sales organizations supplemented by
independent representatives.
The principal raw materials used by the Chemical Catalysts business include
metals, procured by the Industrial Commodities Management segment and third
parties, and a variety of minerals and chemicals that are generally readily
available.
The principal products of the Petroleum Catalysts business are zeolitic
cracking catalysts widely used by refiners to provide economies in petroleum
processing. The Company offers a full line of fluid catalytic cracking (FCC)
catalysts, many of which are based on patented technology. These catalysts can
be used to separately control selectivity and cracking activity, which enables
catalyst formulations to be tailored to meet specific refiners' needs.
Other catalyst products of the Petroleum Catalysts business are used in
reforming, hydrotreating, isomerization and selective hydrogenation processes in
petroleum refineries to meet increasingly stringent fuel quality requirements.
Silica gel absorbents are used in air drying and natural gas treating.
The products of the Petroleum Catalysts business compete in the marketplace
on the basis of cost and value performance. No single competitor is dominant in
the markets in which the Company operates.
The manufacturing operations of the Petroleum Catalysts business are
carried out in the United States and Germany. The products are sold principally
through the Company's sales organizations supplemented by independent
distributors and representatives.
The principal raw materials used by the Petroleum Catalysts business
include kaolin, supplied by the Paper Pigments and Additives segment, and a
variety of minerals and chemicals which are generally readily available.
As of January 1, 1999 the Process Technologies segment had approximately
1,875 employees worldwide. Most hourly employees are covered by collective
bargaining agreements. Employee relations have generally been good.
PAPER PIGMENTS AND ADDITIVES
The Paper Pigments and Additives segment serves customers in the worldwide
paper industry. The products impart performance characteristics, including
opacity, brightness, gloss and printability to paper products.
Products for the paper market include Miragloss (trademark) pigments for
coating applications requiring superior gloss and brightness; Luminex
(registered trademark) pigments, a high brightness material for high-quality
paper coating: Ansilex (trademark) pigments that provide the desired opacity,
brightness, gloss and printability in paper products; Nuclay (trademark)
specialized coating pigment for lightweight publication papers; Exsilon
(trademark) structured pigments that improve the printability of lightweight
coated paper and carbonless forms; and Spectrafil (trademark) pigments for
newsprint and groundwood specialty markets.
5
The products of the Paper Pigments and Additives segment compete with those
of other kaolin manufacturers, as well as those of producers of precipitated
calcium carbonate and ground calcium carbonate, on the basis of cost and value
performance. No single competitor is dominant in the markets in which the
Company competes.
Paper Pigments and Additives' manufacturing operations are carried out in
the United States, Finland and Japan. An equity investment is located in the
Ukraine. Products are sold through the Company's sales organization or those of
its equity investment, supplemented by independent distributors and
representatives.
The principal raw materials used by the Paper Pigments and Additives
segment include kaolin, which is mined from owned or leased property by the
Company, and a variety of other minerals and chemicals which are readily
available.
As of January 1, 1999 the Paper Pigments and Additives segment had
approximately 1,050 employees worldwide. Most hourly employees are covered by
collective bargaining agreements. Employee relations have generally been good.
SPECIALTY PIGMENTS AND ADDITIVES
The Specialty Pigments and Additives segment provides functional additives
to customers in a broad array of markets including coatings, plastics, cosmetics
and construction. In addition, the segment provides iridescent films used in a
variety of creative, decorative and packaging applications. The segment's
products create value for customers by improving the look, performance and cost
of their products. The Company applies its technical competencies in mineral
beneficiation, material science, surface chemistry and optical physics to
kaolin, attapulgite, mica and other naturally-occurring materials to produce
performance additives, specialty pigments and effect pigments as well as
specialty films.
Minerals-based performance additives are used principally as extender
pigments for a variety of purposes in the manufacture of plastic, rubber, ink,
ceramic, adhesive products and paint. Principal products include Satintone
(trademark) products, ASP (trademark) pigments and Translink (trademark) surface
modified reinforcements. The segment produces a variety of organic and inorganic
color and pearlescent and natural pearl special-effect pigments for a wide range
of applications. Additionally, the segment also produces gellants and sorbents
with an assortment of uses, as well as Metamax (trademark) for the concrete
industry.
The products of the Specialty Pigments and Additives segment compete with
those of other minerals and effect pigment manufacturers on the basis of cost
and value performance. No single competitor is dominant in the markets in which
the Company competes.
Specialty Pigments and Additives' manufacturing operations are carried out
in the United States and in South Korea. Subsidiary sales and distribution
centers are located in France, Hong Kong, Japan, Mexico, The Netherlands and
Turkey. Products are sold through the Company's sales organization supplemented
by independent distributors and representatives.
6
The principal raw materials used by the Specialty Pigments and Additives
segment include attapulgite and mica, which are mined from mineral reserves
owned or leased by the Company, and a variety of other minerals and chemicals
which are readily available.
As of January 1, 1999 the Specialty Pigments and Additives segment had
approximately 1,325 employees worldwide. Most hourly employees are covered by
collective bargaining agreements. Employee relations have generally been good.
INDUSTRIAL COMMODITIES MANAGEMENT
The Industrial Commodities Management segment purchases and sells precious
metals, base metals and related products. It does so under a variety of pricing
and delivery arrangements structured to meet the logistical, financial and price
risk management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metals refining and
produces salts and solutions.
The Industrial Commodities Management segment is responsible for procuring
precious and base metals to meet the requirements of the Company's operations
and its customers. Supplies of newly mined platinum group metals are obtained
primarily from South Africa and the Russian Federation and to a lesser extent
from the United States and Canada, the only four regions that are known
significant sources. Most of these platinum group metals are obtained pursuant
to a number of contractual arrangements with different durations and terms. Gold
and silver are purchased from various sources. In addition, in the normal course
of business, certain customers and suppliers deposit significant quantities of
precious metals with the Company under a variety of arrangements. Equivalent
quantities of precious metals are returnable as product or in other forms.
The Industrial Commodities Management segment also engages in precious and
base metal dealing with industrial consumers, dealers, central banks, miners and
refiners. It also participates in refining of precious metals and the production
of salts and solutions. Offices are located in the United States, Italy, Japan,
Peru, the Russian Federation, Switzerland and the United Kingdom.
As of January 1, 1999 the Industrial Commodities Management segment had
approximately 125 employees worldwide.
MAJOR CUSTOMERS
For the years ended December 31, 1998 and 1997, Ford Motor Company, a
customer of the Environmental Technologies and Industrial Commodities Management
segments, accounted for 18% and 12%, respectively, of the Company's net sales.
For the year ended December 31, 1996, Engelhard-CLAL, a related party and a
customer of the Environmental Technologies and Industrial Commodities Management
segments, accounted for 16% of the Company's net sales. Sales to these customers
include both fabricated products and precious metals and were therefore
significantly influenced by fluctuations in precious-metal prices, as was the
quantity and type of metal purchased. In such cases, market price fluctuations,
quantities and types purchased can result in material variations in sales
reported, but do not usually have a direct or significant effect on earnings.
7
RESEARCH AND PATENTS
The Company currently employs approximately 475 scientists, technicians and
auxiliary personnel engaged in research and development in the field of
chemistry and metallurgy. These activities are conducted in the United States
and abroad. Research and development expense was $69.8 million in 1998, $61.4
million in 1997 and $56.5 million in 1996.
Research facilities include fully staffed instrument analysis laboratories,
which the Company maintains in order to achieve the high level of precision
necessary for its various business groups and to assist customers in
understanding how Engelhard's products and services add value to their
businesses.
The Company owns or is licensed under numerous patents secured over a
period of years. It is the policy of the Company to normally apply for patents
whenever it develops new products or processes considered to be commercially
viable and, in appropriate circumstances, to seek licenses when such products or
processes are developed by others. While the Company deems its various patents
and licenses to be important to certain aspects of its operations, it does not
consider any significant portion or its business as a whole to be materially
dependent on patent protection.
ENVIRONMENTAL MATTERS
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing, environmental investigations
and cleanup plans at several currently or formerly owned and/or operated sites,
including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The Company is
continuing to investigate contamination at Plainville under a 1993 agreement
with the United States Environmental Protection Agency (EPA) and is awaiting
approval of a decommissioning plan by the State of Massachusetts under authority
delegated by the Nuclear Regulatory Commission. Investigation of the
environmental status at the Salt Lake City site continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at the Attapulgus site, under a 1994 consent order with the Georgia
Department of Natural Resources, Environmental Protection Division, is complete
pending final Department approval.
In addition, seven sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many cases,
the dollar amount of the claim is unspecified and claims have been asserted
against a number of other entities for the same relief sought from the Company.
Based on existing information, the Company believes that it is a de minimis
contributor of hazardous substances at a number of the sites referenced above.
Subject to the reopening of existing settlement agreements for extraordinary
circumstances or natural resource damages, the Company has settled a number of
other cleanup proceedings. The Company has also responded to information
requests from EPA and state regulatory authorities in connection with other
Superfund sites.
8
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1998 and 1997 were $39.5 million and
$43.6 million, respectively, including $1.2 million and $3.8 million,
respectively, for Superfund sites. These amounts represent those costs which the
Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 55% of what it believes are the reasonably possible environmental
cleanup related costs of a noncapital nature. The estimate of reasonably
possible costs is less certain than the probable estimate upon which the accrual
is based.
During the past three-year period, cash payments for environmental cleanup
related matters were $4.1 million, $6.0 million and $7.0 million for 1998, 1997
and 1996, respectively. The amounts accrued in connection with environmental
cleanup related matters were not significant over this time period.
For the past three-year period, environmental related capital projects have
averaged less than 10 percent of the Company's total capital expenditure
programs, and the expense of environmental compliance (e.g. environmental
testing, permits, consultants and in-house staff) was not material.
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations. Based
on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup related matters are
projected to be $8.0 million for 1999, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, management believes
that environmental cleanup related reserves at December 31, 1998 are reasonable
and adequate and that environmental matters are not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on the
Company's operating results or cash flows.
Item 2. Properties
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The Company leases a building on approximately seven acres of land with a
combined area of approximately 271,000 square feet in Iselin, NJ. This building
serves as the principal executive and administrative offices of the Company and
its operating segments. The Company owns approximately 15 acres of land and
three buildings with a combined area of approximately 150,000 square feet in
Iselin, NJ. These buildings serve as the major research and development
facilities for the Company's operations. The Company also owns research
facilities in Gordon, GA; Union, NJ; Buchanan and Ossining, NY; Beachwood, OH;
Hannover, Germany; and DeMeern, The Netherlands.
The Environmental Technologies segment owns and operates plants located in
Huntsville,AL; Santa Barbara, CA; East Windsor, CT; Daytona, Deerfield Beach,
and Miami, FL; Wilmington, MA; Hiram, OH; North Kingston and Warwick, RI;
Duncan, SC; Nienburg, Germany; Madras, India; Port Elizabeth, South Africa; and
Coleford, United Kingdom.
9
The Process Technologies segment owns and operates plants located in
Attapulgus and Savannah, GA; Jackson, MS; Elyria, OH; Erie, PA; Seneca, SC;
Pasadena, TX; Salt Lake City, UT; Nienburg, Germany; Rome, Italy; and DeMeern,
The Netherlands. In addition, the segment owns mines in Mississippi and leases a
mine in Arizona.
The Paper Pigments and Additives segment owns and operates five kaolin
mines and five milling facilities in Middle Georgia which serve an 85 mile
network of pipelines to three processing plants. It also owns land containing
kaolin, and leases on a long-term basis kaolin mineral rights to additional
acreage. In addition, the Company owns sales and manufacturing facilities in
Helsinki, Kotka and Rauma, Finland and Tokyo, Japan. Management believes that
the Company's crude kaolin will be sufficient to meet its needs for the
foreseeable future.
The Specialty Pigments and Additives segment owns and operates attapulgite
processing plants in Quincy, FL near the area containing its attapulgite
reserves, plus a mica mine and processing facilities in Hartwell, GA. Management
believes that the Company's attapulgite and mica reserves will be sufficient to
meet its needs for the foreseeable future. The segment also owns and operates
color, pearlescent pigment and film manufacturing facilities in Sylmar, CA;
Louisville, KY; Eastport, ME; Roselle Park, NJ; Peekskill, NY; Elyria, OH;
Charleston, SC; and Inchon, South Korea.
The Industrial Commodities Management segment's operations are conducted at
leased facilities in Iselin and Carteret, NJ; Lincoln Park, Michigan; Tokyo,
Japan; Moscow, Russia; Zug, Switzerland; and London, United Kingdom. In
addition, the segment's operations are conducted at owned facilities in
Beachwood, OH; Anaheim, CA; Seneca, SC; Rome, Italy and Lima, Peru.
Management believes that the Company's processing and refining facilities,
plants and mills are suitable and have sufficient capacity to meet its normal
operating requirements for the foreseeable future.
Item 3. Legal Proceedings
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Various lawsuits, claims and proceedings are pending against the Company.
During 1998, 1997 and 1996, the Company provided $2.4 million, $2.8 million and
$4.3 million, respectively, for existing legal proceedings.
The Company and certain of its present and former officers have agreed to a
Stipulation of Settlement ("Stipulation") of a class action filed in November
1995 which alleged misstatements and omissions in connection with press releases
issued in 1995 concerning the Company's PremAir(trademark) catalyst systems. In
the settlement, which was approved by the Court on December 8, 1998, in exchange
for the dismissal of the complaint against all defendants, the Company will pay
no more than $7.2 million of a maximum settlement amount of $21.5 million. The
balance of the settlement amount will be paid by insurance carried by the
Company for such purposes. Because the final settlement amount will depend on
the number of eligible shares of the Company's common stock for which claims are
submitted, the amounts to be paid by the Company and the insurer could be less,
but in no event more, than the above-stated amounts. This matter, if resolved in
accordance with the Stipulation of settlement, will not have a material adverse
effect on the operating results of the Company.
10
The Company is one of a number of defendants in numerous proceedings which
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to talc, asbestos or other "toxic" substances purportedly supplied by
the Company and other defendants. The Company is also subject to a number of
environmental contingencies and is a defendant in a number of lawsuits covering
a wide range of other matters. In some of these matters, the remedies sought or
damages claimed are substantial. While it is not possible to predict with
certainty the ultimate outcome of these lawsuits or the resolution of the
environmental contingencies, management believes, after consultation with
counsel, that resolution of these matters is not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from management's current expectations, could have a material adverse
effect on the operating results or cash flows. See Note 17 of the Notes to
Consolidated Financial Statements for information regarding environmental
cleanup costs.
In July 1996, the Securities and Exchange Commission ("SEC") issued a
formal order of investigation concerning the sales of Engelhard stock by certain
of the Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company provided
documents to the SEC and witnesses were examined by the SEC staff during 1996.
In 1998, management learned that Engelhard and several other companies
operating in Japan had been victims of a fraudulent scheme involving base-metal
inventory held in third-party warehouses in Japan. The inventory loss was
approximately $40 million in 1997 and $20 million in 1998. The Company is
vigorously pursuing various recovery actions. These actions include negotiations
with the various third parties involved and in several instances the
commencement of litigation. In the first quarter of 1998, Engelhard recorded a
receivable from the insurance carriers and third parties involved for
approximately $20 million. This amount represents management's and counsel's
best estimate of the minimum probable recovery from the various insurance
policies and other parties involved in the fraudulent scheme.
In February 1999, the Peruvian taxing authority made public an
investigation of the country's gold industry stemming from suspected evasion of
value-added tax payments. Engelhard Peru, S.A., a purchaser and exporter of
gold, has paid the tax to its vendors for each purchase and then claimed a
refund from the Peruvian taxing authority after export. Engelhard typically
would post a one-month letter of credit to obtain a prompt refund. Engelhard's
refund claims for November and December of 1998 and January of 1999 were
approximately $10 million per month. Engelhard has received the refunds for
November and December, but, at the request of the government, the letters of
credit, in the amount of $20 million, have been extended until July 1999 while
the industry investigation is conducted. The refund for January 1999 is going
through the claim procedure and remains unpaid, and the related January letter
of credit in the amount of $10 million, has also been extended until July 1999.
The January letter of credit becomes effective upon receipt of the January
refund by Engelhard. Management believes, based upon consultation with counsel,
that all appropriate tax payments have been made and that the Company is
entitled to all refunds claimed. However, if the resolution of this matter
differs from management's belief, the maximum financial exposure is
approximately $30 million.
Item 4. Submission of Matters to a Vote of Security Holders
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Not applicable.
11
PART II
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Market for Registrant's Common Equity
Item 5. and Related Stockholder Matters
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As of April 30, 1999, there were 6,752 holders of record of the Company's
common stock, which is traded on the New York Stock Exchange (ticker symbol
"EC"), as well as on the London and Swiss stock exchanges.
The range of market prices and cash dividends paid for each quarterly
period were as follows:
NYSE Cash
market price dividends paid
High Low per share
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1999
First quarter $20 13/16 $16 1/2 $0.10
Second quarter 20 11/16 16 1/4 -
(through May 12, 1999)
1998
First quarter $20 $16 1/2 $0.10
Second quarter 22 13/16 18 13/16 0.10
Third quarter 21 1/2 17 5/16 0.10
Fourth quarter 21 11/16 15 3/4 0.10
1997
First quarter $23 3/4 $18 3/4 $0.09
Second quarter 22 1/4 18 5/8 0.09
Third quarter 22 15/16 19 9/16 0.10
Fourth quarter 21 5/8 17 1/16 0.10
12
Item 6. Selected Financial Data
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Selected Financial Data
($ in millions, except per share amounts)
OPERATING RESULTS 1998 1997 1996 1995 1994
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OPERATING RESULTS
Net sales $4,174.6 $3,630.7 $3,184.4 $2,840.1 $2,385.8
Net earnings(1) 187.1 47.8 150.4 137.5 118.0
Basic earnings per share(2) 1.30 0.33 1.05 0.96 0.82
Diluted earnings per share(2) 1.29 0.33 1.03 0.94 0.82
Total assets $2,866.3 $2,586.3 $2,490.5 $1,943.3 $1,777.8
Long-term debt 497.4 373.6 375.1 211.5 111.8
Shareholders' equity 901.6 785.3 833.2 737.7 614.7
Cash dividends paid per share(2) 0.40 0.38 0.36 0.35 0.30
Return on average shareholders' equity 22.2% 5.9% 19.2% 20.3% 20.6%
Unless otherwise indicated, all per-share amounts are presented as basic earnings per share, as calculated
under SFAS No. 128, "Earnings Per Share".
(1) Results in 1998 include an after-tax gain of $4.9 million ($0.03 per share) on the sale of inventory
accounted for under the LIFO method. Results in 1997 include special and other charges of $117.7
million ($0.82 per share) for a variety of events (including restructuring actions and a loss from
the base-metal fraud in Japan). In addition, 1997 results include an after-tax gain of $2.0 million
($0.01 per share) on the sale of inventory accounted for under the LIFO method. Results in 1996
include an after-tax gain of $3.3 million ($0.02 per share) on the sale of inventory accounted for
under the LIFO method. Results in 1994 include a special credit of $5.0 million ($0.03 per share)
representing the reversal of excess restructuring reserves and a net charge of $5.3 million ($0.04
per share) for a change in the Company's estimate of compensation expense relating to stock awards.
(2) Reflects the three-for-two stock split as of June 30, 1995.
Management's Discussion and Analysis
Item 7. of Financial Condition and Results of Operations
- ------ ------------------------------------------------
Management's Discussion and Analysis of Financial Condition
and Results of Operations
Unless otherwise indicated, all per-share amounts are presented as basic
earnings per share, as calculated under SFAS No. 128,"Earnings per Share."
Results of Operations
Net earnings in 1997 include special and other charges of $117.7 million ($0.82
per share) for a variety of events, including restructuring actions and a loss
from the base-metal fraud in Japan (see Note 18 of the Notes to Consolidated
Financial Statements for detail).
13
The information in the discussion of each segment's results is derived directly
from that segment's internal financial reporting system used for Management
purposes. Items allocated to the segment's results include various corporate
overhead charges such as expenses for information technology, research and
development, and site management. Unallocated items include interest expense,
royalty income, sale of inventory accounted for under the LIFO method, special
and other charges and other miscellaneous Corporate items (see Note 15 of the
Notes to Consolidated Financial Statements for further detail on Engelhard's
segment reporting).
ENVIRONMENTAL TECHNOLOGIES
The Environmental Technologies segment develops and markets sophisticated
technologies and systems to control emissions from mobile and stationary
sources. These technologies enable customers to cost-effectively meet stringent
environmental regulations.
1998 Performance
Sales increased 9% to $558.5 million, and operating earnings increased 22% to
$83.5 million.
Discussion
The segment's operating earnings grew at a greater rate than sales as a result
of three key factors:
1) sale of higher-value, more sophisticated emission-control technologies
required to meet stricter environmental regulations;
2) lower manufacturing and overall operating costs; and
3) the absence of losses from the portion of the stationary-source,
emission-control business related to capital equipment, which was sold in
February 1998.
More than 80% of the segment's sales and more than 90% of its operating earnings
came from technologies to control emissions from mobile sources, including
gasoline- and diesel-powered passenger cars, sport utility vehicles, trucks,
buses and off-road vehicles. Sales and operating earnings from these
technologies increased 12% and 13%, respectively. Continuing demand for the more
sophisticated emission-control technologies drove sales increases in both Europe
and North America. In Europe, the volume increase resulted from greater share
with major European automakers. In North America, a major volume gain resulted
from increased shipments to General Motors for their redesigned full-size
trucks.
Outlook
The Company expects demand for environmental technologies to increase, driven by
tightening air-emission standards worldwide. In 1998, for example, the
California Air Resources Board (CARB)--a leader for the world's clean-air
initiatives--enacted more stringent regulations for passenger cars, light
trucks, minivans and sport utility vehicles for the 2004 model year. Compliance
with stricter standards will likely require more sophisticated catalyst systems,
which plays to Engelhard's technology strength. Additionally, the U.S.
Environmental Protection Agency has accelerated the effective date for stricter
diesel truck regulations to 2002 from 2004, driving development of new catalyst
systems for diesel engine manufacturers. Beginning in 1999, the Company expects
new sales of its diesel retrofit systems for several major urban bus programs.
14
The Company is bolstering manufacturing capacity in emerging markets where the
phase-out of leaded fuels is driving catalyst demand. Engelhard Environmental
Systems, Ltd., a joint venture of Engelhard and UCAL Fuel Systems Ltd., opened
India's first emission-catalyst plant in June 1998. The Company also broke
ground for a plant in Brazil, which will supply a major automaker's South
American operations beginning in mid-1999.
Some automakers continue to emphasize the environmental benefits of their
vehicles. For example, Volvo announced that it will include Engelhard's
proprietary PremAir (registered trademark) catalyst system on the Volvo S80
luxury sedan beginning in late 1999. When applied to an automobile's radiator,
PremAir converts ground-level ozone into oxygen.
ENVIRONMENTAL TECHNOLOGIES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 10% to $512.4 million, and operating earnings increased 27% to
$68.3 million.
Sales from mobile-source, emission-control technologies grew 16%, while
operating earnings increased 43%. Earnings growth outpaced the sales increase
due to the sale of higher-value, more sophisticated emission-control
technologies required to meet stricter environmental regulations, improved
utilization of existing manufacturing capacity and other productivity
improvements. New volume from several European automakers provided the majority
of the sales growth.
1996 compared with 1995
Sales increased 31% to $465.7 million, and operating earnings increased 63% to
$53.9 million.
Sales from mobile-source, emission-control technologies grew 24%, while
operating earnings grew 73%. The increases were driven by demand for the more
sophisticated new technologies needed to meet stricter environmental
regulations. Share growth at Ford Motor Company in North America and new
customers in Europe provided the majority of the sales increase.
PROCESS TECHNOLOGIES
The Process Technologies segment helps customers make their processes more
productive, efficient, environmentally sound and safer. The segment supplies
advanced chemical and polymerization catalysts, sorbents and separation
products. In addition, the segment's advanced cracking and hydroprocessing
technologies enable petroleum refiners to more efficiently produce gasoline,
transportation fuels and heating oils.
1998 Performance
Sales increased 19% to $533.3 million, and operating earnings increased 41% to
$78.5 million.
Discussion
Sales and earnings growth were driven by the May 1998 acquisition of the
catalyst businesses of Mallinckrodt Inc., which accounted for $67.7 million in
sales and $16.2 million in operating earnings in 1998. The operating earnings
increase also reflects a lower overall cost structure for the petroleum
15
catalysts business. The lower cost structure resulted from the mid-1998 shutdown
of a manufacturing facility in The Netherlands, manufacturing efficiencies and
reduced administrative expenses. The plant shutdown reduced fixed costs by $4.0
million in 1998. The manufacturing efficiencies accounted for $6.0 million,
while the reduced administrative expenses totaled $3.0 million. Global
customer needs for fluid catalytic cracking (FCC) catalysts are now being met
from expanded facilities in North America.
The acquisition broadened and strengthened the segment's existing product
offering and gave it a position in the high-growth polymerization catalyst
market segment. This business is now a major producer of custom and licensed
catalysts for the manufacture of polypropylene, one of the fastest growing
segments of the polyolefin market. The polypropylene market segment is expected
to grow about 6% per year compared with growth rates of about 3%-5% for other
polymerization catalyst market segments. This portion of the business had enough
new commitments to justify significant expansions shortly following the
acquisition. These expansions will increase capacity by about 20%.
Excluding the results of the acquisition, operating earnings for the segment
would have increased 12%, largely due to the improved performance from petroleum
catalysts, which more than offset declines from petrochemical catalysts. Overall
competitive weakness in the chemical industry reduced demand for petrochemical
catalysts.
Outlook
The Company expects earnings growth opportunities for chemical catalysts to be
driven by:
1) a favorable comparison from the full-year inclusion of results from the
acquired Mallinckrodt businesses; and
2) anticipated strong demand for polypropylene catalysts.
The Company expects new capacity to be on stream by mid-year, and, based on
continuing indications of growing demand, is planning to add even more capacity
in the second half of the year. The Company anticipate weakness in the chemical
industry to continue to negatively affect demand for petrochemical catalysts. As
a result, the business intends to focus on aggressively controlling operating
costs.
Lower spreads between light and heavy crude oils flattened demand for FCC
catalysts in recent years. Petroleum refiners use FCC catalysts to break down
crude oil in gasoline and other transportation and heating fuels. Refining
lighter crudes requires a reduced quantity of catalysts as well as less
sophisticated catalyst technology. As a result, competing technologies have
become less differentiated. The Company expects demand for FCC catalysts to be
relatively flat for several years. To generate value, this business expects to
aggressively manage costs, maintain positive price momentum, capitalize on
opportunities inherent in process technology proprietary to Engelhard and pursue
select growth opportunities worldwide.
PROCESS TECHNOLOGIES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 3% to $447.5 million, and operating earnings decreased 5% to
$55.6 million.
16
Operating earnings from increased sales of chemical catalysts were offset by a
$6 million decline in operating earnings from petroleum catalysts, primarily the
result of continuing losses from European FCC catalyst operations. Sales of
petroleum catalysts were flat. The segment's sales gain reflects higher sales of
chemical catalysts driven by new alliances and the trend toward decaptivation --
producing catalysts for customers who formerly made their own. Alliances and
decaptivation accounted for more than two thirds of the sales increase.
1996 compared with 1995
Sales increased 7% to $433.3 million, and operating earnings increased 14% to
$58.6 million.
Strong economic conditions in the chemical industry and success in new business
programs led to sales and operating earnings increases. Volumes were up for all
product lines, most notably for catalysts used to make PTA (the main component
for polyester), catalysts used to make PVC intermediates, and products to remove
lead from drinking water. Collectively, these product lines accounted for about
25% of the segment's sales increase. Volume increases in petroleum catalysts
were offset by lower pricing due to excess capacity in the FCC catalyst
industry.
PAPER PIGMENTS AND ADDITIVES
The Paper Pigments and Additives segment provides primarily kaolin-based
performance products used as coating and extender pigments by papermakers to
improve the opacity, brightness, gloss and printability of their products.
1998 Performance
Sales decreased 1% to $239.4 million, and operating earnings increased 6% to
$35.8 million.
Discussion
Operating earnings were up despite relatively flat sales as a result of ongoing
productivity initiatives, which accounted for substantially all of the increase.
The flat sales reflected an overall slowdown in the paper industry and reduced
demand resulting from some paper makers switching to a process that does not
require Kaolin-based pigments. Regionally, sales varied, with North American
sales down 10% from the prior year and Europe up 7%. Asia-Pacific volume grew
modestly, but prices there declined about 4%. The business launched Digitex
(trademark) paper pigment, which enables large-scale commercial ink jet printers
to economically produce large, colorful graphics like those on billboards and
bus advertisements. The market's initial reception was positive, although
shipments primarily were for trial and testing purposes.
Outlook
The Company expects paper industry conditions to remain depressed. The Company
believes recovery in 1999 will be gradual if it occurs at all. Unused industry
capacity could again impact pricing. In the face of these market conditions, the
segment intends to focus on aggressive cost reductions, sale of higher-value-add
products and continued introduction of new products. The segment is targeting
increased sales of newly introduced Digitex (trademark) pigments as well as
engineered pigments.
PAPER PIGMENTS AND ADDITIVES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 2% to $242.0 million, and operating earnings decreased 19% to
$33.9 million.
17
Lower pricing was the primary factor in the operating earnings decline despite a
slight sales increase. The industry sought to address overcapacity issues by
lowering prices to boost manufacturing volume. Earnings also were adversely
affected by sales of lower margin products to certain customers in Asia and
unscheduled maintenance costs.
1996 compared with 1995
Sales decreased 1% to $237.6 million, and operating earnings decreased 13% to
$41.9 million.
Lower operating earnings resulted from reduced demand, which resulted from
depressed economic conditions in the paper industry. However, new performance
products developed and marketed during 1996 improved Engelhard's results
compared with much of the industry. Among these new products was Luminex
(registered trademark), a pigment bright enough to compete with more costly
products and several other pigments that work better on high-speed papermaking
machines. These pigments are based on a new, patented manufacturing process.
SPECIALTY PIGMENTS AND ADDITIVES
The Specialty Pigments and Additives segment provides functional additives to
customers in a broad array of markets, including coatings, plastics, cosmetics
and construction. The segment also provides iridescent films used in a variety
of creative, decorative and packaging applications. The segment's products help
customers improve the look, performance and overall cost of their products.
1998 Performance
Sales of $349.0 million were flat, and operating earnings decreased 35% to $42.0
million.
Discussion
Sales were flat as the impact of the economic downturn in the Asia-Pacific
region and lower selling prices offset increases in sales of pearlescent
pigments and attapulgite-based products. The economic crisis in Asia-Pacific
began in 1997 and continued throughout 1998. Sales in Asia of pearlescent
pigments and specialty-mineral products decreased 24% to $33.1 million.
Competitive pressures in the Company's color and pearlescent pigment businesses
drove prices down about 1.5%. The Company expects prices to continue at the same
level through 1999. Overall, sales of pearlescent pigments rose 1% to $139.1
million, on the strength of increased demand from the cosmetics and industrial
market segments. Sales of attapulgite-based products increased 15% to $32.2
million, reflecting the full-year inclusion of results from the acquisition of
certain assets of Floridin, which occurred in June 1997.
A number of factors resulted in reduced operating earnings. First, reduced sales
in Asia lowered earnings by $6.8 million, primarily in the industrial and
automotive segments served by the specialty pigments and specialty minerals
businesses. Second, operating earnings were reduced by another $4.9 million as a
result of a sales shift to less sophisticated color products, which was driven
by customer consolidations and vertical integration of a portion of the customer
base, particularly in the ink market segment. Third, operating earnings were
affected by price decreases of about 5%, which resulted from competitive
pressure in the specialty pigments business. Fourth, operating earnings were
adversely affected by $7.5 million as a result of an inventory-reduction program
18
completed in 1998. All other sales volume increases resulted in an earnings
increase of $1.0 million, due mostly to increased pearlescent pigment sales
outside the Asia-Pacific region. In addition, operating earnings from
attapulgite-based products were up $2.9 million, reflecting full-year benefit of
the Floridin acquisition.
Benefits of cost reduction and productivity initiatives resulted in savings of
$8.0 million in manufacturing costs, which partially was offset by operating
cost increases of $6.0 million and non-recurring items totaling $2.0 million.
Outlook
The segment intends to focus on aggressive cost management and implementation of
productivity improvements. The Company expects any improvement in economic
conditions in Asia will be slow. The segment has planned new product
introductions to the cosmetics and personal care markets as well as new product
launches in the specialty-mineral and optical-effect film businesses. The
segment is targeting increased sales of new glass-flake effect pigments across
multiple market segments, including: custom car finishes; motorcycles, gel coats
for automobiles, boats and personal watercraft; and plastic items such as toys
and skis.
SPECIALTY PIGMENTS AND ADDITIVES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 34% to $349.0 million, and operating earnings rose 64% to $64.3
million.
Sales and operating earnings growth were driven by the successful integration of
Mearl Corporation, which was acquired in May 1996. Full-year, pretax benefit of
the acquisition totaled $29.1 million. Capitalizing on cost, technology and
market-channel synergies, Engelhard continued to build its leadership in
pearlescent and color pigments, particularly in the automotive and cosmetics
industries. In 1997, Engelhard introduced a unique product line called Cellini
(trademark) which combines pearlescent and organic pigments. These unique
products better position Engelhard to capitalize on the growing, high-fashion
trend toward bright, vibrant color.
1996 compared with 1995
Sales increased 59% to $260.5 million, and operating earnings increased 64% to
$39.1 million.
Sales growth was driven by performance additives and color pigments and addition
of pearlescent pigment sales resulting from the acquisition of Mearl in May
1996. These factors contributed $15.2 million in operating earnings.
INDUSTRIAL COMMODITIES MANAGEMENT
The Industrial Commodities Management segment purchases and sells precious
metals, base metals and related products. It does so under a variety of pricing
and delivery arrangements structured to meet the logistical, financial and price
risk management requirements of Engelhard, its customers and suppliers.
Additionally, it offers related services for precious-metals refining and
produces salts and solutions.
19
1998 Performance
Sales increased 20% to $2,346.8 million and operating earnings increased 8% to
$48.4 million.
Discussion
Sales for this segment include all sales of metals to industrial customers plus
purchases for refining, which are resold to the market at the conclusion of the
refining process. The significant increase resulted primarily from higher
palladium and rhodium volumes and prices. Changes in metal sales amounts are not
necessarily indicative of changes in earnings because of the mix of potential
arrangements with customers and other factors that may affect dealing and
refining revenues. Operating earnings in 1998 were affected by lower margins
earned on metal sales. As described in Note 1 to the Consolidated Financial
Statements, the lower margins on Industrial Commodities Management sales are
driven by including precious metals in both sales and cost of sales for certain
transactions. Sales growth outpaced operating earnings as the result of higher
prices for certain platinum group metals.
Both 1998 and 1997 operating earnings benefited greatly from volatility in
platinum group metals. This volatility resulted primarily from the variability
of shipments from Russia, which impacted both spot prices and the relationship
of the spot price to forward prices. The situation was exacerbated by the
continually increasing demand for platinum, palladium and rhodium in the
manufacture of various products, including jewelry and automotive catalysts.
Volatility not only increases the spreads on dealing transactions, but also
provides opportunities to benefit from strong and prudent physical positions.
The increase in 1998 was partially offset by a decrease in pretax earnings from
Japanese base-metal dealing.
It should be noted that customers often supply the precious metals for
manufactured products. In those cases, precious-metal values are not included as
sales. The mix of such arrangements and the extent of market-price fluctuation
can significantly affect the level of reported sales, but do not usually have a
material effect on earnings. Precious metals are considered as sales if the
metal was supplied by Engelhard. Purchase of metal generally is hedged (see Note
1 to the Consolidated Financial Statements.)
Outlook
While a sustainable level of base business is anticipated, market volatility,
such as described above, cannot be assured. The benefits of such volatility
represent an upside opportunity for this segment above its sustainable base
business.
INDUSTRIAL COMMODITIES MANAGEMENT--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 18% to $1,954.0 million and operating earnings increased 111% to
$44.9 million.
Strong increases in both sales and operating earnings were driven by unusually
high volatility in the platinum-group-metals markets. Refining operations,
although down slightly, also benefited from increased activity generated by the
market volatility.
20
1996 compared with 1995
Sales increased 39% to $1,659.1 million and operating earnings increased 8% to
$21.3 million.
Improvement was driven by strong performance in the precious-metals refining and
salts and solutions product lines.
SPECIAL AND OTHER CHARGES
In response to weak results of certain operations, and as a result of the
base-metal fraud in Japan, Engelhard recorded, in the fourth quarter of 1997,
special and other charges of $149.6 million ($117.7 million after tax). The
following table sets forth the impact of the special and other charges in the
1997 Consolidated Statement of Earnings:
FINANCIAL IMPACT
Special and Other Charges
-------------------------
(in millions, except per
share amounts)
Cost of sales $ (6.1)
Selling, administrative and other expenses (12.7)
Special charge (86.0)
--------
Operating loss (104.8)
Equity in losses of affiliates (44.8)
--------
Loss before income taxes (149.6)
Income tax benefit 31.9
--------
Net loss $(117.7)
========
Basic loss per share $ (0.82)
========
The 1997 special and other charges are described below:
* The Process Technologies segment incurred charges of $35.4 million
primarily related to the closure and subsequent sale of a petroleum
catalysts facility in The Netherlands used for the manufacture of fluid
catalytic cracking (FCC) catalysts. Management approved a plan to improve
the profitability of this business, primarily by lowering its cost
structure and optimizing its manufacturing resources. The most significant
action resulted in the 1998 sale of the FCC catalysts facility in The
Netherlands. There was no gain or loss on the sale of the facility as the
sales price approximated the carrying value as adjusted by the special and
other charges. This decision was driven by industry overcapacity and the
determination that Engelhard's European customers could be served more
efficiently by North American FCC catalysts operations. As a result,
Engelhard provided for employee severance obligations of $6.4 million
covering 90 site employees, plant closure and other miscellaneous costs of
$1.7 million and asset write-downs of $27.3 million consisting of $22.1
million to reduce the carrying value of the facility to an estimate of fair
value based on appraisals performed by third parties, a $2.7 million
reserve for obsolete inventory, and $2.5 million to write-off intangible
assets related to production technology which could no longer be utilized.
These actions are expected to be substantially complete by the end of 1999.
21
Management anticipated annual pretax savings of $11 million, consisting of:
Cash savings of $7 million due to the elimination of Terneuzen-based
operating staff and non-Terneuzen-based-support staff involved in research
and development and sales and marketing.
Non-cash savings of $4 million due to the elimination of depreciation
charges related to fixed assets written off.
The actual pretax savings realized during 1998 were $7 million - $5 million
in cash savings and $2 million in non-cash savings. During 1999, management
expects to realize the full pretax savings of $11 million.
* The Environmental Technologies segment incurred charges of $29.6 million
related to the sale of the stationary-source, emission-control capital
equipment business. Management approved a plan to sell this business based
on unfavorable market growth projections, combined with low technological
barriers to enter this market. Management believes that this strategy will
allow Engelhard to concentrate on its core competency--catalyst technology.
Revenue and operating loss for the capital equipment business were $21.6
million and $6.4 million, respectively, for the year ended December 31,
1997 and $40.3 million and zero, respectively, for the year ended December
31, 1996. Engelhard continues to sell catalysts for stationary-source
pollution abatement. Engelhard provided for losses on contracts and
warranty costs of $7.9 million and reduced the carrying value of goodwill
and other assets by $21.7 million to an estimate of fair value based on
negotiations with third parties. This write-down consisted of the write-off
of goodwill of $15.0 million, a reserve for uncollectable accounts
receivable of $4.2 million and a reserve for obsolete inventory of $2.5
million. The sale was completed in February 1998 and there was no gain or
loss on the sale of the business as the sales price approximated the
carrying value as adjusted by the special and other charges. These actions
are expected to be substantially complete by the end of 1999.
Management anticipated annual pretax savings of $6 million, consisting of:
Cash savings of $5 million due to the elimination of losses generated by
the capital equipment business.
Non-cash savings of $1 million due to the elimination of amortization
charges related to goodwill written off.
The actual pretax savings realized during 1998 were $6 million - $5 million
in cash savings and $1 million in non-cash savings.
* The Specialty Pigments and Additives segment wrote off assets of
approximately $0.8 million.
* Japan base-metal fraud of $39.0 million which is discussed in Note 18 to
the Consolidated Financial Statements.
* Engelhard recorded equity in losses of affiliates of $44.8 million as
follows:
* Engelhard-CLAL continued to face pressures of declining demand for French
manufactured jewelry, generally due to the availability of inexpensive
high-quality costume jewelry, and increased competition from other
22
international fabricators of precious-metal products with lower cost
structures. In response to these economic pressures and market conditions,
Engelhard and its partner, FIMALAC, agreed to rationalize certain
operations, determined that related assets were impaired and reduced those
assets to their estimated realizable value. The impact to Engelhard of
these actions was approximately $30.9 million, the components of which
were: a valuation allowance provided on deferred tax assets of $14.3
million, employee severance of $10.5 million, write off of production
equipment of $4.3 million and inventory obsolescence reserves of $1.8
million. In addition, Engelhard wrote off goodwill of $9.0 million related
to its investment in the joint venture based on the expected future
undiscounted cash flows. While market conditions continue to reflect the
circumstances noted in 1997, as a result of the actions taken by
Engelhard-CLAL, operating results turned marginally positive in 1998.
Engelhard-CLAL management expects that these actions will be substantially
completed during 1999.
Management anticipated annual pretax savings of $2 million due to the
elimination of the losses from this joint venture. The actual pretax
savings realized during 1998 were $2 million.
* In 1997, Engelhard reached an agreement with its partner, ICC Technologies,
to restructure Engelhard/ICC, a joint venture in desiccant-based,
climate-control systems. As a result of this restructuring, Engelhard
subsequently acquired 100% of Engelhard Hexcore L.P., the portion of the
former joint venture that focuses on manufacturing and marketing
desiccant-coated rotors and related products, and sold its interest in
Fresh Air Solutions L.P. which comprised the remainder of the joint
venture. Goodwill of $4.9 million related to Fresh Air Solutions L.P. was
written off as a loss on sale. Management believes that this reorganization
will allow greater concentration on core competencies. This action had been
completed prior to the end of 1998.
Management anticipated annual pretax savings of $5 million due to the
elimination of the losses from this joint venture. The actual pretax
savings realized during 1998 were $5 million.
In summary, the activities covered by these charges yielded pretax savings of
approximately $20 million as a result of lower manufacturing costs for the FCC
catalysts business and the elimination of operating losses for the former
stationary-source, emission-control capital equipment business and the equity
investments, and yielded annual cash savings of approximately $10 million as a
result of lower employee and plant operating costs for the FCC catalysts
business, capital equipment business and the Engelhard/ICC joint venture.
Pre-1997 Charges
The pre-1997 restructuring charges are related to:
* The restructuring of administrative operations at corporate headquarters
and the process technologies organization;
* The transfer of Attapulgite operations from Engelhard's Attapulgus, GA
facility to the acquired Quincy, FL site and the associated closing of the
Attapulgus operations;
23
* The closure of the Plainville, MA site and the subsequent disposal upon the
completion of environmental remediation activities;
* The shutdown of operations at an Engelhard facility in Newark, NJ and the
subsequent disposal of the facility;
* The shutdown of certain operations of the Union, NJ facility and relocation
of certain other operations to other underutilized Engelhard facilities.
The employee severance costs associated with the pre-1997 restructuring charges
are primarily related to the restructuring of administrative operations and the
transfer of Attapulgite operations. The severance costs associated with these
actions have been paid over extended periods as certain agreements negotiated
with severed employees provided for payments to be spread over several years.
The pre-1997 restructuring charges originally provided for employee severance
obligations for 1,863 corporate and site employees. The remaining severance
obligation as of December 31, 1998 is primarily attributable to 43 employees.
Additionally, regulatory delays in the consummation of Engelhard's acquisition
of the Quincy, FL attapulgite operation and inherent delays in the completion of
environmental remediation activities at Plainville, MA have extended the payment
periods for those severance costs. Costs of retention of employees for the
longer than expected periods prior to termination have been expensed as
incurred. The remaining severance accrual of $3.6 million at December 31, 1998
is principally for long-term severance payments related to the Union facility
and for severance costs for employees remaining at the Plainville, MA site until
its closure.
Non-separation related costs associated with the pre-1997 restructuring charges
are primarily for costs associated with the shut down of the Union and Newark,
NJ sites, the Attapulgus, GA attapulgite operations, as well as non-
environmental shut-down costs at the Plainville, MA site. These shut down
costs approximated $15 million during the three year period ended December 31,
1998. The remaining accrual of $2.9 million is primarily for shut-down costs to
be incurred until closure of the Plainville and Union facilities. The timeframe
for final closure of the Plainville facility is pending government approval of
environmental cleanup plans at the site. Additionally, negotiations have begun
for the sale of a portion of the Union facility which, if consummated, will
complete the closure process for that site.
The actions related to the Plainville, MA site and the Union, NJ site are
expected to be substantially complete by the end of 2000. Pending resolution of
the matters discussed above, Engelhard believes remaining reserves related to
pre-1997 restructuring activities are adequate for remaining activities under
those plans. No significant incremental savings from the pre-1997 restructurings
were achieved in 1998.
24
The following table sets forth the components of Engelhard's reserves for
restructuring and exit costs:
Restructuring Reserves Separations Other Total
(in millions) Pre-1997 1997 Pre-1997 1997 Pre-1997 1997
-------- ---- -------- ---- -------- ----
Balance at December 31, 1995 $13.7 $ - $ 18.8 $ - $ 32.5 $ -
Cash spending (7.4) - (10.6) - (18.0) -
Asset write-offs - - (1.0) - (1.0) -
-------------- --------------- ---------------
Balance at December 31, 1996 6.3 - 7.2 - 13.5 -
Cash spending (1.7) - (6.5) - (8.2) -
Provision - 6.6 - 10.1 - 16.7
-------------- --------------- ---------------
Balance at December 31, 1997 4.6 6.6 0.7 10.1 5.3 16.7
Cash spending (1.0) (3.7) 2.2 (8.0) 1.2 (11.7)
Asset write offs - - - (1.9) - (1.9)
-------------- --------------- ---------------
Balance at December 31, 1998 $ 3.6 $ 2.9 $ 2.9 $ 0.2 $ 6.5 $3.1
============== =============== ===============
The non-separation related cash spending for pre-1997 restructuring and exit
cost liabilities for each of the three years ended December 31, 1998, 1997, and
1996 consisted primarily of costs associated with the shut-down of the Union and
Newark, NJ sites, the Attapulgus, GA site and the Plainville, MA site. The
Newark, NJ site was sold in 1998 and had a carrying value of $4.8 million in
1993. The proceeds received in 1998 of $7.1 million related to this facility
have been netted against $4.9 million of cash expenditures in the above
presentation. The remaining balance in the pre-1997 restructuring reserves
consist of shut-down costs for the Union, NJ, Attapulgus, GA and Plainville, MA
sites.
The non-separation restructuring and exit cost provision made in 1997 consists
primarily of costs associated with the shutdown of the facilities to be closed
in connection with the Process Technologies and Environmental Technologies
actions discussed above, and certain warranty obligations associated with the
sold Environmental Technologies business. Non-separation related cash spending
related to these liabilities for the year ended December 31, 1998 consisted of
payments related to the completion of the shutdown of the facilities and the
satisfaction of any warranty obligations.
Acquisitions and Partnerships
Other Party Business Arrangement Transaction Date Business Opportunity
- ----------- -------------------- ---------------- --------------------
Mallinckrodt Inc. Acquired the chemical May 1998 Strategic expansion of chemical
catalysts businesses catalysts business.
of Mallinckrodt Inc.
("Mallinckrodt businesses")
Semo Chemical Acquired the pearlescent January 1998 Asian expansion in automotive
Company pigments business and cosmetics pigment markets.
Mearl Corporation Acquired business May 1996 Rationalization of costs and
expansion of pigments markets.
25
GROSS PROFIT
Gross profit as a percentage of sales was 16% in 1998 compared to 17% in 1997.
The decrease was driven by the lower margins earned on metal sales by the
Industrial Commodities Management segment. Sales from this segment increased 20%
in 1998 to $2,346.8 million and provided a gross profit of 4% while 1998 sales
from all other segments increased by 9% and provided a gross profit of 31%. As
described in Note 1 to the Consolidated Financial Statements, the lower margins
on Industrial Commodities Management sales are driven by including precious
metals in both sales and cost of sales for certain transactions.
SELLING, ADMINISTRATIVE AND OTHER EXPENSES
Selling, administrative and other expenses of $337.6 million in 1998 were up
from $327.8 million in 1997 and $255.5 million in 1996. The 1998 amount reflects
the acquisition of the Mallinckrodt businesses in May 1998. The 1997 amount
reflects a full year of Mearl (acquired in May 1996), the impact of the special
and other charges (see Note 3, "Special and Other Charges" to the Notes to
Consolidated Financial Statements for detail), a 1996 insurance recovery ($5.7
million after tax or $0.04 per share) and general growth in the Company's
businesses due to new programs and strategic alliances. Selling, administrative
and other expenses as a percentage of sales were 8% in 1998 compared to 9% in
1997. The decrease was driven by higher metal sales by the Industrial
Commodities Management segment. See "Gross Profit" above. Some metal sales from
this segment do not generate proportionate increases in underlying selling and
administrative expenses. See Note 1, "Summary of Significant Accounting
Policies" to the Consolidated Financial Statements.
EQUITY EARNINGS/LOSSES
Equity in earnings of affiliates was $10.1 million in 1998, compared with equity
in losses of affiliates of $47.8 million in 1997 and $5.0 million in 1996. The
1997 loss reflects the 1997 special and other charges of $44.8 million related
to Engelhard-CLAL and Engelhard/ICC (see Note 3, "Special and Other Charges" to
the Notes to Consolidated Financial Statements for detail). The increase was
also partially attributable to Engelhard-CLAL's improved operating results and
the absence of losses from Engelhard/ICC.
GAIN ON SALE OF INVESTMENT
In 1996, the Company sold its share of Heraeus Engelhard Electrochemistry
Corporation, a marketer of electrochemical products. The Company realized a gain
of $2.4 million ($1.5 million after tax or $0.01 per share) on the sale.
INTEREST
Interest expense was $58.9 million in 1998, compared with $52.8 million in 1997
and $45.0 million in 1996. The 1998 increase primarily reflects the incremental
financing costs associated with acquiring the Mallinckrodt businesses in May
1998. Excluding the impact of financing the acquisition of the Mallinckrodt
businesses, interest expense would have decreased in the current year primarily
due to lower interest rates and a decrease in average debt balances. Higher
interest expense in 1997 and 1996 was primarily due to higher average debt
balances as a result of acquisitions and investments.
The Company capitalized interest of $1.9 million in 1998, $0.7 million in 1997
and $0.9 million in 1996.
Interest income, included as a component of net sales, was $2.3 million in 1998,
$1.1 million in 1997 and $1.8 million in 1996.
26
TAXES
Income tax expense was $73.5 million in 1998, $38.0 million in 1997 and $59.5
million in 1996. The effective income tax rate was 28.2% in 1998, 29.7% in 1997
(excluding the valuation allowance associated with the 1997 special and other
charges) and 28.3% in 1996. The effective income tax rate was 44.3% in 1997
including the special and other charges.
The effective tax rate in 1998 includes a $7.1 million reduction of a valuation
allowance created in 1997 for certain capital loss carryforwards. In 1998,
capital gains were realized on the disposal of certain capital assets. The
Company also anticipates additional capital gains in 1999 sufficient to fully
utilize this benefit.
At year-end 1998, the net deferred tax asset was $106.0 million, primarily for
accrued postretirement and postemployment benefit obligations, the 1997 special
and other charges, the environmental clean-up reserve and other accruals.
Management believes the Company will generate sufficient taxable income and
employ tax planning strategies to ensure deferred tax benefits are realized.
FINANCIAL CONDITION AND LIQUIDITY
Working capital was $89.5 million at December 31, 1998, compared with $15.0
million last year. The increase was primarily due to an increase in accounts
receivable combined with changes in metal related assets and liabilities. The
current ratio was 1.1, compared with 1.0 in 1997. The year-end market value of
the Company's precious-metal inventories exceeded carrying cost by $85.8
million, compared with $49.7 million last year. The increase in excess value
reflects higher market values which more than offset the impact of slightly
reduced levels of this inventory accounted for under the LIFO method. (See Note
4, "Inventories" of the Notes to Consolidated Financial Statements.
The Company's total debt increased to $752.4 million at December 31, 1998,
compared with $622.9 million last year, primarily due to the acquisition of the
Mallinckrodt businesses in May 1998. The ratio of total debt to total capital
was 45% at December 31, 1998, compared with 44% last year.
The Company currently has one $600 million, five-year committed credit facility
with a group of major U.S. and overseas banks. Additional unused, uncommitted
lines of credit available exceeded $670 million at year-end 1998.
In July 1998, the Company filed a shelf registration for $300 million. The net
proceeds from offerings under the shelf registration are expected to be used to
retire short-term debt and for general corporate purposes. The Company
anticipates issuing $100 million of bonds under the shelf registration by
mid-1999.
Operating activities provided net cash of $176.7 million in 1998, compared with
$196.5 million in 1997 and $24.8 million in 1996. The variance in cash flows
from operating activities primarily occurred in the Industrial Commodities
Management segment (ICM) and reflects changes in metal positions used to
facilitate both supplier and customer requirements. ICM routinely enters into a
variety of arrangements for the sourcing of industrial commodities. Generally,
all such transactions are hedged on a daily basis (see Note 1, "Summary of
Significant Accounting Policies" of the Notes to Consolidated Financial
Statements). Hedging is accomplished primarily through forward, future and
option contracts. Hedged metal obligations (metal sold not yet purchased but
27
fully hedged) are considered financing activities and reflect the fair value of
the derivative instruments. These transactions generally cover the sourcing
requirements of ICM. ICM works to ensure that Engelhard and its customers have
an uninterrupted source of industrial commodities utilizing supply contracts and
commodities markets around the world.
The cash provided from operations other than the change in metal related assets
and liabilities, exceeded $200 million in 1998 and 1997 and approximated $145
million in 1996.
The variance in cash flows from investing activities is primarily due to the
acquisition of the Mallinckrodt businesses in May 1998, partially offset by
proceeds received from the sale and leaseback of the Company's principal
executive and administrative offices in December 1998.
The variance in cash flows from financing activities is primarily due to the
issuance in June 1998 of $120 million of Engelhard's 6.95% bonds due 2028
related to the acquisition of the Mallinckrodt businesses.
Management believes that existing sources of capital, together with cash flows
from operations, will be sufficient to meet foreseeable cash flow requirements.
MARKET RISK SENSITIVE TRANSACTIONS
The Company is exposed to market risks arising from adverse changes in interest
rates, foreign currency exchange rates, and commodity prices. In the normal
course of business, the Company uses a variety of techniques and instruments,
including derivatives, as part of its overall risk management strategy.
Engelhard enters into derivative agreements with a diverse group of major
financial and other institutions with individually determined credit limits to
reduce the risk of nonperformance by counterparties.
INTEREST RATE RISK
Engelhard uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined here
as the potential change in the fair value of debt resulting from an adverse
movement in interest rates. The fair value of the Company's total debt was
$750.0 million at December 31, 1998 and $633.5 million at December 31, 1997
based on average market quotations of price and yields provided by investment
banks. A 100 basis point increase in interest rates could result in a reduction
in the fair value of total debt of $23.0 million at December 31, 1998 compared
with $13.9 million at December 31, 1997.
Also, the Company uses interest rate derivatives to help achieve its fixed and
floating rate debt objectives. As of December 31, 1998, the Company had two
forward treasury lock agreements with a total notional value of $100 million,
both of which were settled in March 1999. As of December 31, 1997, the Company
had forward starting swaps with a total notional value of $120 million, each
with a start date of April 30, 1998 and termination date of April 30, 2008.
These contracts hedged a debt issuance of $120 million in June 1998.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company uses a variety of strategies, including foreign currency forward
contracts, to minimize or eliminate foreign currency exchange rate risk
associated with substantially all of its foreign currency transactions,
including metal-related transactions denominated in other than U.S. dollars. In
selected circumstances, the Company may enter into foreign currency forward
contracts to hedge the U.S. dollar value of its foreign investments.
28
Engelhard uses sensitivity analysis to assess the market risk associated with
its foreign currency transactions. Market risk is defined here as the potential
change in fair value resulting from an adverse movement in foreign currency
exchange rates. A 10% adverse movement in foreign currency rates could result in
a net loss of $7.3 million in 1998 compared with $4.7 million in 1997 on the
Company's foreign currency forward contracts; however, since the Company limits
the use of foreign currency derivatives to the hedging of contractual foreign
currency payables and receivables, this loss in fair value for those instruments
would generally be offset by a gain in the value of the underlying payable or
receivable.
A 10% adverse movement in foreign currency rates could result in an unrealized
loss of $61.4 million in 1998 compared with $61.3 million in 1997 on its net
investment in foreign subsidiaries and affiliates; however, since Engelhard
views these investments as long term, the Company would not expect such a loss
to be realized in the near term.
COMMODITY PRICE RISK
Generally, all industrial commodity transactions are hedged on a daily basis
using forward, future or option contracts to substantially eliminate the
exposure to price risk. In addition, all industrial commodity transactions are
marked-to-market daily. In limited and closely monitored situations, for which
exposure levels have been set by senior management, the Company holds
significant unhedged industrial commodity positions that are subject to future
market fluctuations. Such positions may include varying levels of derivative
commodity instruments.
The Company has performed a "value-at-risk" analysis on all of its commodity
assets and liabilities. The "value-at-risk" calculation is a statistical model
that uses historical price and volatility data to predict market risk on a
one-day interval with a 95% confidence level. While the "value-at-risk" models
are relatively sophisticated, the quantitative information generated is limited
by the historical information used in the calculation. For example, the
volatility in the platinum and palladium markets in 1998 and 1997 was greater
than historical norms. Therefore, the Company uses this model only as a
supplement to other risk management tools and not as a substitute for the
experience and judgment of senior management and dealers who have extensive
knowledge of the markets and adjust positions and revise strategies as the
markets change. Based on the "value-at-risk" analysis, the maximum potential
one-day loss in fair value was approximately $2.7 million as of December 31,
1998 compared with $1.1 million as of December 31, 1997.
CAPITAL EXPENDITURES, COMMITMENTS AND CONTINGENCIES
Capital projects are designed to maintain capacity, expand operations, improve
efficiency or protect the environment. Capital expenditures amounted to $116.5
million in 1998, $136.9 million in 1997 and $128.2 million in 1996. Capital
expenditures in 1999 are expected to approximate 1998 spending. For information
about commitments and contingencies, see Note 17, "Environmental Costs," and
Note 18, "Litigation and Contingencies," of the Notes to Consolidated Financial
Statements.
DIVIDENDS AND CAPITAL STOCK
The annualized common stock dividend rate at the end of 1998 and 1997 was $0.40
per share. In the third quarter of 1997, the Board of Directors approved an
11.1% increase in the common stock dividend, raising the level to $0.10 per
share effective September 30, 1997.
29
In the first quarter of 1996, the Board approved the purchase of five million
shares of the Company's common stock. At December 31, 1998, 435,000 shares had
been purchased under this plan.
YEAR 2000 UPDATE
The ability of computers, software or any equipment utilizing microprocessors to
properly recognize and process data at the turn of the century is commonly
referred to as a Y2K compliance issue. To address this issue, Engelhard has
developed a worldwide Y2K readiness plan that is divided into phases. The phases
are as follows:
* Inventory -- understanding what applications are in the portfolio
* Assessment -- determining what, if any, Y2K shortcomings each application
has
* Remediation -- fixing or replacing each application to make it Y2K
compliant
* Testing -- conducting thorough Y2K scenarios to ensure that the fixing of
each application is complete
The entire company has completed the inventory and assessment stages.
Engelhard's major corporate-wide applications, such as order processing,
financials, metals trading, human resources and payroll, are all complete,
including testing.
Engelhard has approached its Y2K compliance issue by categorizing its
dependencies into two sections: Internal IT systems, and External systems of
suppliers and customers. Generally, internal systems identified as non-Y2K
compliant will be replaced or modified by reprograming, upgrading or other
means. Many of the internal non-compliant systems were targeted for replacement
for reasons other than Y2K issues as the benefits of newer technology had
already created an economic business case for action. The cost of these
replacement solutions will be capitalized as permitted by applicable accounting
standards whereas the cost of modification solutions will generally be expensed
as repairs. External systems will be monitored with the cooperation of
Engelhard's suppliers and customers.
Internal IT systems -- includes internal applications software such as finance,
manufacturing and logistics. All internal IT systems have been inventoried and
assessed for Y2K compliance.
An estimate of completion for individual business unit systems is as follows:
Approximate % Completion of Key Applications
Actual Plan
------ --------------
3/99 6/99 9/99
---- ---- ----
Environmental Technologies 70 95 100
Process Technologies 90 100 100
Paper, Pigments and Additives 80 100 100
Specialty Pigments and Additives 70 90 100
Industrial Commodities Management 90 100 100
Corporate and Other 90 100 100
30
The projects which are either complete or still underway have been primarily
internally planned and staffed. The only major project which used external help
in assessment, remediation, and testing was the Company's corporate order
processing system (CSS), for which Engelhard engaged MCI Systemhouse. This is
now complete.
A core team in corporate headquarters, including a representative from internal
audit, has been given the responsibility to assess Y2K project progress during
remediation. They also conduct reviews at the end of each major project to
validate Y2K concurrence, according to a pre-determined checklist.
There has been little in the way of deferral of projects due to Y2K efforts. In
fact, the two major system implementations at corporate (PeopleSoft for Human
Resources and Oracle for Accounts Receivable) were Y2K compliance driven. Both
are now complete.
There have been no Y2K problems to date. In particular, orders which have been
placed with Y2K delivery have experienced no problem.
Internal Non-IT systems--includes embedded chip technology such as programmable
logic controllers and related hardware/software; and personal computers and
related software. Engelhard's programmable logic controllers and related
hardware/software have been inventoried and assessed for Y2K compliance.
Engelhard anticipates that all non-compliant equipment software will be replaced
or upgraded by mid-1999. Engelhard believes that all of its "critical" personal
computers and related software are Y2K compliant. All of Engelhard's other
personal computers and related software are in the process of being remediated
and tested. Engelhard believes that any non-compliant hardware/software will be
replaced or upgraded by mid-1999.
External systems--includes systems of customers and suppliers. Engelhard is in
the process of understanding the extent to which it is vulnerable to the Y2K
issues of its customers and suppliers. Engelhard has identified and contacted
third parties who would have a significant negative impact on operations if not
Y2K compliant. Engelhard has assessed the status of these third parties and has
developed requisite action plans where necessary. There can be no assurance that
the Y2K compliance issues of these customers and suppliers will not have a
material adverse affect on operating results or cash flows of Engelhard.
Engelhard's assessment of its suppliers regarding their Y2K readiness, including
both domestic and international, includes comprehensive surveys of all vendors
and individual assessments of key ones. The surveys are complete and revealed no
major problems. The individual assessments are ongoing through 1999, and will
include face-to-face reviews if appropriate. In Engelhard's communication with
its customers regarding their inquiries to the Company, Engelhard has replied,
with a standard written response which gives assurance that the Company is
taking the appropriate steps to be Y2K compliant before January 1, 2000.
The estimated total cost of implementing Y2K solutions is approximately $13.1
million. The total amount expended through December 31, 1998 was $10.6 million,
with an additional $0.3 million expended in the first quarter of 1999. With
regard to the $10.9 million expended to date, approximately $6.4 million has
been expensed and $4.5 million capitalized in accordance with applicable
accounting standards. The remaining Y2K expenditures are estimated to be
incurred by the end of 1999, of which approximately $1.3 million will be
expensed.
31
The dates on which Engelhard plans to complete any necessary Y2K modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
The failure to correct a material Y2K compliance problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have a material adverse impact on the operations
of Engelhard. Engelhard believes that, with the implementation of new business
systems and completion of the Y2K project as scheduled, the possibility of
significant interruptions of normal operations is reduced.
While Engelhard feels its does not have significant exposure with respect to its
major systems in dealing with Y2K, it has begun to assess areas in which a
contingency plan is prudent in the event of an unforeseen problem.
To that end, each business has identified the key systems that require a
contingency plan to be developed. Going forward, the milestones through 1999
are:
Establish business/site teams to develop plans and
procedures to address identified critical components 6/30
Develop contingency plans 6/30
Publish recommendations relative to year end 1999 activities 7/31
Test contingency plans where possible 8/31
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the euro. The euro is traded on currency
exchanges and may be used in business transactions. The conversion to the euro
will eliminate currency exchange rate risk between the member countries.
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legacy currencies will be withdrawn from circulation. Engelhard's operating
subsidiaries affected by the euro conversion have established plans to address
the issues raised by the currency conversion. These issues include, among
others, the need to adapt computer and financial systems, business processes and
equipment, to accommodate euro-denominated transactions and the impact of one
common currency on pricing. Since financial systems and processes currently
accommodate multiple currencies, the plans contemplate conversion by mid-2001 if
not already addressed in conjunction with Y2K remediation. Engelhard does not
expect the system and equipment conversion costs to be material. Due to numerous
uncertainties, Engelhard cannot reasonably estimate the effects one common
currency will have on pricing and the resulting impact, if any, on its financial
condition or results of operations.
JAPAN FRAUD UPDATE
In 1998, management learned that Engelhard and several other companies operating
in Japan had been victims of a fraudulent scheme involving base-metal inventory
held in third-party warehouses in Japan. The inventory loss was approximately
$40 million in 1997 and $20 million in 1998. The Company is vigorously pursuing
32
various recovery actions. These actions include negotiations with the various
third parties involved and in several instances the commencement of litigation.
In the first quarter of 1998, Engelhard recorded a receivable from the insurance
carriers and third parties involved for approximately $20 million. This amount
represents management's and counsel's best estimate of the minimum probable
recovery from the various insurance policies and other parties involved in the
fraudulent scheme.
STOCKHOLDER RIGHTS PLAN
On October 1, 1998, the Board of Directors of the Company adopted a Stockholder
Rights Plan declaring a dividend distribution of one Right for each outstanding
share of common stock, $1.00 par value, of the Company. The distribution is
payable to stockholders of record on November 13, 1998. Each Right entitles the
registered stockholders to purchase from the Company one one-thousandth of a
share of Series A Junior Participating Preferred Stock at a price of $100 per
one one-thousandth of a share (subject to adjustment).
Subject to certain exceptions, the Rights may not be exercised until 10 days
after a person or group acquires 15% or more of the Company's common stock, or
announces a tender offer that, if consummated, would result in such person or
group owning 15% or more of the Company's common stock. If a person or group
acquires 15% or more of the Company's common stock, each holder of a Right
(other than the acquirer) will have the right to receive common stock (or, in
certain circumstances, cash, property, or other securities of the Company)
having a value equal to two times the purchase price of the Right. In the event
that the Company is acquired in a merger or other business combination
transaction, or 50% or more of the Company's assets or earning power is sold or
transferred, each holder of a Right will have the right to receive common stock
of the acquiring company having a value equal to two times the purchase price of
the Right.
Subject to certain exceptions, if 15% or more of the Company's common stock is
acquired, the Board of Directors may exchange the Rights (other than the
acquirer's Rights which will have become void), in whole or in part, at an
exchange ratio of one share of common stock (or a fraction of a share of
Preferred Stock having the same market value) per Right (subject to adjustment).
The Rights will expire on October 1, 2008, unless exchanged or redeemed prior to
that date. The Company may redeem the Rights at a price of $.001 per Right at
any time prior to the tenth day following a public announcement that a person or
group has acquired 15% or more of the Company's common stock (for further
details on the Company's Stockholder Rights Plan, see Form 8-K which was filed
with the SEC on October 29, 1998).
OTHER MATTERS
The Company adopted Statement of Financial Accounting Standards No. 131
"Disclosures about Segments of an Enterprise and Related Information" in the
fourth quarter of 1998. This Statement establishes standards for the way in
which public business enterprises report information about operating segments in
annual financial statements and requires that those enterprises report selected
information about those operating segments in interim reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS 131 did not have an
effect on the financial position or results of operations of the Company.
33
The Company adopted Statement of Financial Accounting Standards No. 132
"Employers' Disclosures about Pensions and Other Postretirement Benefits" in the
fourth quarter of 1998. This statement revises employers' disclosures about
pension and other postretirement benefit plans. It does not change the
measurement or recognition of those plans. The adoption of SFAS 132 did not have
an effect on the financial position or results of operations of the Company.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 is effective for the Company on January 1,
2000. The Company will adopt SFAS 133 by the first quarter of 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings, comprehensive income or
statement of financial position.
SUBSEQUENT EVENT
In the fourth quarter of 1998, Minorco announced that it was merging with Anglo
American Corporation of South Africa Limited and that it would sell all the
shares of common stock of Engelhard owned by Minorco and its affiliates,
approximately 46 million shares.
On March 2, 1999, Engelhard announced that Minorco would sell 26 million shares
in this offering and it also agreed to purchase approximately 18 million of its
shares owned by Minorco. Engelhard will purchase those shares for the price, net
of the underwriting commission, received by Minorco in this offering. However,
if that net price is more than $18.90 per share, Engelhard will purchase those
18 million shares for $18.90 per share. If the underwriters do not exercise all
of their overallotment option granted to them by Minorco for up to 2 million
shares, Engelhard will purchase those remaining shares at the same price that it
will purchase the 18 million shares. The 20 million shares, which includes the
additional 2 million shares related to the overallotment option, represent
approximately 14% of Engelhard's total shares outstanding. Minorco has agreed to
compensate Engelhard for its costs and other expenses relating to this offering
and its purchase of the shares.
Engelhard plans to initially finance the purchase with short-term debt and
intends to take steps to reduce its total debt going forward. Engelhard does not
believe the financing of the purchase will have any material impact on its
liquidity. Engelhard anticipates issuing $100 million of bonds by mid-1999 to
retire a portion of the short-term debt. Engelhard is reviewing its portfolio to
identify non-core assets and businesses for potential sale and exploring ways to
further reduce operating expenses. Engelhard expects the buy-back to increase
its earnings per share. If Engelhard had purchased the 20 million shares from
Minorco on January 1, 1999 at a price of $18.90 per share, it is estimated that
Engelhard's first quarter 1999 earnings per share would have increased by
approximately $.02 per share on both a basic and diluted basis.
Engelhard's purchase of shares and the secondary offering are expected to be
completed during the second quarter of 1999.
In October 1998, Standard & Poor's and Moody's Investors Service each placed its
ratings of Engelhard Corporation debt on credit watch. The rating action was
prompted by Engelhard's announcement that it had hired financial advisors to
help the Company explore its strategic alternatives after Minorco announced that
34
it will be divesting its 31.8% interest in Engelhard Corporation. In March 1999,
Moody's Investors Service confirmed the A3 ratings on Engelhard's senior
unsecured debt and confirmed the Company's commercial paper rating at Prime-2.
In addition, in March 1999 Standard & Poor's announced that ratings on Engelhard
remain on credit watch, with the implications being revised to "negative" from
"developing". If the transaction is consummated as described above, Standard &
Poor's indicated that it would lower its corporate credit and senior unsecured
debt ratings to single-'A' minus from single-'A' and its commercial paper
ratings to A-'2' from A-'1'. These rating actions followed the March 2, 1999
announcement discussed above.
FORWARD-LOOKING STATEMENTS
This document contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information which are based on forecasts of future results
and estimates of amounts not yet determinable. These statements also relate to
the future prospects, developments and business strategies. These forward-
looking statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will" and similar terms and phrases, including references
to assumptions. These forward-looking statements involve risks and uncertainties
that may cause Engelhard's actual future activities and results of operations to
be materially different from those suggested or described in this document.
These risks include: competitive pricing or product development activities;
Engelhard's ability to achieve and execute internal business plans; global
economic trends; worldwide political instability and economic growth; markets,
alliances and geographic expansions developing differently than anticipated;
fluctuations in the supply and prices of precious and base metals; government
legislation and/or regulation (particularly on environmental issues);
technology, manufacturing and legal issues; the impact of "Year 2000"; and the
impact of any economic downturns and inflation, including the recent weaknesses
in the currency, banking and equity markets of countries in the Asia/Pacific
region. Investors are cautioned not to place undue reliance upon these
forward-looking statements, which speak only as of their dates. Engelhard
disclaims any obligation to update or revise any forward-looking statements,
whether as a result of new information, future events or otherwise.
35
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31 (in thousands, except per share amounts) 1998 1997 1996
----------- ----------- ------------
Net sales $ 4,174,553 $ 3,630,653 $ 3,184,431
Cost of sales 3,527,624 3,030,717 2,671,377
----------- ------------ ------------
Gross profit 646,929 599,936 513,054
Selling, administrative and other expenses 337,556 327,820 255,460
Special charge - 86,000 -
----------- ------------ ------------
Operating earnings 309,373 186,116 257,594
Equity in earnings (losses) of affiliates 10,077 (47,833) (5,008)
Gain on sale of investment - 305 2,378
Interest expense (58,887) (52,776) (45,009)
----------- ------------ ------------
Earnings before income taxes 260,563 85,812 209,955
Income tax expense 73,479 38,034 59,508
----------- ----------- ------------
Net earnings $ 187,084 $ 47,778 $ 150,447
=========== ============ ============
Basic earnings per share $ 1.30 $ 0.33 $ 1.05
Diluted earnings per share $ 1.29 $ 0.33 $ 1.03
=========== ============ ============
Average number of shares outstanding - basic 144,157 144,270 143,810
=========== ============ ============
Average number of shares outstanding - diluted 145,366 145,937 145,724
=========== ============ ============
See accompanying Notes to Consolidated Financial Statements.
36
ENGELHARD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (in thousands) 1998 1997
- -------------------------- ---------------------------
Assets
Cash $ 22,339 $ 28,765
Receivables, net of allowances of
$7,038 and $4,931, respectively 376,826 323,330
Committed metal positions 541,224 502,494
Inventories 349,752 356,403
Other current assets 69,826 44,180
---------------------------
Total current assets 1,359,967 1,255,172
Investments 156,727 160,082
Property, plant and equipment, net 876,461 788,178
Intangible assets, net 326,253 214,929
Other noncurrent assets 146,911 167,962
---------------------------
Total assets $2,866,319 $2,586,323
===========================
Liabilities and Shareholders' Equity
Short-term borrowings $ 255,002 $ 249,368
Accounts payable 227,535 180,499
Hedged metal obligations 552,690 572,266
Other current liabilities 235,218 238,003
---------------------------
Total current liabilities 1,270,445 1,240,136
Long-term debt 497,393 373,574
Other noncurrent liabilities 196,924 187,353
---------------------------
Total liabilities 1,964,762 1,801,063
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, no par value, 5,000 shares
authorized and unissued - -
Common stock, $1 par value, 350,000 shares
authorized and 147,295 shares issued 147,295 147,295
Retained earnings 853,249 726,082
Treasury stock, at cost, 4,008 and 2,803
shares, respectively (65,013) (45,992)
Accumulated other comprehensive loss (33,974) (42,125)
---------------------------
Total shareholders' equity 901,557 785,260
---------------------------
Total liabilities and shareholders' equity $2,866,319 $2,586,323
===========================
See accompanying Notes to Consolidated Financial Statements.
37
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in thousands) 1998 1997 1996
--------------------------------------------
Cash flows from operating activities
Net earnings $187,084 $ 47,778 $ 150,447
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation, depletion and amortization 100,931 88,066 74,871
Gain on sale of investments - (305) (2,378)
Special charge - 86,000 -
Equity results, net of dividends (8,055) 51,636 7,523
Net change in assets and liabilities
Metal related (71,859) (29,763) (121,270)
All other (31,389) (46,864) (84,434)
--------------------------------------------
Net cash provided by operating activities 176,712 196,548 24,759
--------------------------------------------
Cash flows from investing activities
Capital expenditures, net (116,460) (136,945) (128,195)
Proceeds from sale of investment 1,018 2,458 1,391
Proceeds from sale and leaseback 67,168 - -
Acquisition of businesses and investments (244,780) (37,409) (287,675)
Other 5,850 8,691 4,931
--------------------------------------------
Net cash used in investing activities (287,204) (163,205) (409,548)
--------------------------------------------
Cash flows from financing activities
Increase (decrease) in short-term borrowings 5,349 (55,493) 121,419
Increase in hedged metal obligations 39,743 55,403 159,286
Proceeds from issuance of long-term debt 115,605 555 250,164
Repayment of long-term debt - (2,051) (100,786)
Purchase of treasury stock (8,411) - (7,357)
Stock bonus and option plan transactions 11,021 13,329 13,903
Dividends paid (57,842) (54,851) (51,773)
--------------------------------------------
Net cash provided by (used in) financing activities 105,465 (43,108) 384,856
Effect of exchange rate changes on cash (1,399) (1,153) (407)
--------------------------------------------
Net decrease in cash (6,426) (10,918) (340)
Cash at beginning of year 28,765 39,683 40,023
--------------------------------------------
Cash at end of year $ 22,339 $ 28,765 $ 39,683
============================================
See accompanying Notes to Consolidated Financial Statements.
38
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
other Total
Common Retained Treasury Comprehensive comprehensive shareholders'
(in thousands, except per share amounts) stock earnings stock income/(loss) income/(loss) equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 $147,295 $625,787 $(57,173) $ 21,833 $737,742
Comprehensive income/(loss):
Net earnings 150,447 150,447 150,447
-------
Other comprehensive loss:
Foreign currency translation adjustments (9,806)
-------
Other comprehensive loss (9,806) (9,806) (9,806)
-------
Comprehensive income 140,641
=======
Dividends ($0.36 per share) (51,773) (51,773)
Treasury stock acquired (7,357) (7,357)
Stock bonus and option plan transactions 5,852 8,051 13,903
----------------------------------------------------------------------------
Balance at December 31, 1996 147,295 730,313 (56,479) 12,027 833,156
Comprehensive income/(loss):
Net earnings 47,778 47,778 47,778
-------
Other comprehensive loss:
Foreign currency translation adjustments (54,152)
-------
Other comprehensive loss (54,152) (54,152) (54,152)
-------
Comprehensive loss (6,374)
=======
Dividends ($0.38 per share) (54,851) (54,851)
Stock bonus and option plan transactions 2,842 10,487 13,329
----------------------------------------------------------------------------
Balance at December 31, 1997 147,295 726,082 (45,992) (42,125) 785,260
Comprehensive income/(loss):
Net earnings 187,084 187,084 187,084
-------
Other comprehensive income/(loss):
Foreign currency translation adjustments 12,067
Minimum pension liability adjustment (3,916)
-------
Other comprehensive income 8,151 8,151 8,151
-------
Comprehensive income 195,235
=======
Dividends ($0.40 per share) (57,842) (57,842)
Treasury stock acquired (8,411) (8,411)
Adoption of Rabbi Trust (3,603) (20,103) (23,706)
Stock bonus and option plan transactions 1,528 9,493 11,021
----------------------------------------------------------------------------
Balance at December 31, 1998 $147,295 $853,249 $(65,013) $(33,974) $901,557
============================================================================
See accompanying Notes to Consolidated Financial Statements.
39
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Engelhard Corporation and its wholly-owned subsidiaries (collectively referred
to as Engelhard or the Company). All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior year amounts have
been reclassified to conform with the current year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents include all investments purchased with an original maturity of
three months or less, and have virtually no risk of loss in value.
INVENTORIES
Inventories are stated at the lower of cost or market. The elements of cost
include direct labor and materials, variable overhead and the full absorption of
fixed manufacturing overhead. The cost of precious-metals inventories is
determined using the last-in, first-out (LIFO) method of inventory valuation.
The cost of other inventories is principally determined using either the average
cost or the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant, and equipment are stated at cost. Depreciation of buildings and
equipment are provided primarily on a straight-line basis over the estimated
useful lives of the assets. Buildings and building improvements are depreciated
over 20 years, while machinery and equipment is depreciated based on lives
varying from 3 to 10 years. Depletion of mineral deposits and mine development
are provided under the units of production method. When assets are sold or
retired, the cost and related accumulated depreciation is removed from the
accounts and any gain or loss is included in earnings.
INTANGIBLE ASSETS
Identifiable intangible assets such as patents and trademarks are amortized
using the straight-line method over their estimated useful lives. Goodwill is
amortized over periods up to 40 years using the straight-line method. The
Company recorded amortization expense of $12.6 million in 1998, $9.6 million in
1997, and $6.3 million in 1996. The accumulated amortization amounted to $34.8
million and $22.2 million at December 31, 1998 and December 31, 1997,
respectively. Included in intangible assets, is net goodwill which amounted to
$300.0 million and $209.4 million at December 31, 1998 and December 31, 1997,
respectively. The increase in net goodwill was primarily the result of the
acquisition of the Mallinckrodt businesses in May 1998. The Company continually
evaluates the reasonableness of its amortization of intangibles. In addition, if
it becomes probable that expected future undiscounted cash flows associated with
intangible assets are less than their carrying value, the assets are written
down to their fair value.
40
COMMITTED METAL POSITIONS AND HEDGED METAL OBLIGATIONS
The Company routinely enters into a variety of arrangements for the sourcing of
industrial commodities. These arrangements are spread among a number of
counterparties, which are generally major industrial companies or highly rated
financial or other institutions. The conduct of this business is closely
monitored.
Generally, all industrial commodity transactions are hedged on a daily basis,
using forward, future, option or swap contracts to substantially eliminate the
exposure to price risk. In addition, all industrial commodity transactions are
marked-to-market daily. In limited and closely monitored situations, for which
exposure levels have been set by senior management, the Company holds
significant unhedged industrial commodity positions that are subject to future
market fluctuations. Such positions may include varying levels of derivative
commodity instruments.
Committed metal positions (non-inventory metal purchases) and hedged metal
obligations (metal sold not yet purchased but fully hedged) are carried at fair
value. Fair value is generally based on listed market prices. If listed market
prices are not available or if liquidating the Company's positions would
reasonably be expected to impact market prices, fair value is determined based
on other relevant factors, including dealer price quotations and price
quotations in different markets, including markets located in different
geographic areas. Any change in value, realized or unrealized, is recognized in
gross profit in the period of the change.
ENVIRONMENTAL COSTS
In the ordinary course of business, like most other industrial companies, the
Company is subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, and has made provisions for the estimated
financial impact of environmental cleanup related costs. The Company's policy is
to accrue environmental cleanup related costs of a noncapital nature when those
costs are believed to be probable and can be reasonably estimated. Environmental
clean-up costs are deemed probable when litigation has commenced or a claim or
an assessment has been asserted or, based on available information, commencement
of litigation or assertion of a claim or an assessment is probable and based on
available information, it is probable that the outcome of such litigation, claim
or assessment will be unfavorable. The quantification of environmental exposures
requires an assessment of many factors, including changing laws and regulations,
advancements in environmental technologies, the quality of information available
related to specific sites, the assessment stage of each site investigation,
preliminary findings and the length of time involved in remediation or
settlement. For certain matters, the Company expects to share costs with other
parties. The Company does not include anticipated recoveries from insurance
carriers or other third parties in its accruals for environmental liabilities.
REVENUE RECOGNITION
Revenues are recognized on sales of product at the time the goods are shipped or
when title has passed to the customer. In limited situations, revenue is
recognized on a bill and hold basis as title passes to the customer before
shipment of goods. These bill and hold sales meet the criteria for revenue
recognition. Sales recognized on a bill and hold basis were approximately $10.8
million in 1998, $2.6 million in 1997 and $4.1 million in 1996.
41
The metal component of product sales is recognized at contract price on the date
of title transfer. For all other commodity related activities, an unrealized
gain or loss is recorded based on changes in the market value of the Company's
positions.
SALES AND COST OF SALES
Some of the Company's businesses use precious metals in their manufacturing
processes. Precious metals are included in sales and cost of sales if the metal
has been supplied by the Company. Often, customers supply the precious metals
for the manufactured product. In those cases, precious-metals values are not
included in sales or cost of sales. The mix of such arrangements and the extent
of market price fluctuations can significantly affect the level of reported
sales but do not usually have a material effect on earnings.
In addition, sales and purchases of precious metals to/from industrial and
refining customers are transacted through the Company's dealing operations and
are recorded in sales and cost of sales. Secondarily, and usually as a
consequence of the above transactions, the Company also engages in
precious-metals dealing with other counterparties. In these cases, the
precious-metals values are generally included in sales and cost of sales only to
the extent that the Company has added value by changing the physical form of the
metal.
Income Taxes
Deferred income taxes reflect the differences between the assets and liabilities
recognized for financial reporting purposes and amounts recognized for tax
purposes. Deferred taxes are based on tax laws as currently enacted.
EQUITY METHOD OF ACCOUNTING
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for using the equity method. Accordingly, the Company's share of
the earnings of these companies is included in consolidated net income.
Investments in other companies are carried at cost.
DERIVATIVE INSTRUMENTS
Engelhard enters into foreign exchange contracts as a hedge against monetary
assets and/or liabilities which are denominated in currencies other than the
functional currency of the entity holding those assets or liabilities. The
ultimate maturities of the contracts are timed to coincide with the expected
liquidation of the underlying monetary balances. Gains and losses on the
ultimate settlement of the contracts are offset against the losses and gains
realized on those underlying monetary accounts.
Interest rate swaps and similar arrangements are used by Engelhard to lock in
interest rates and/or convert floating rates to fixed and vice versa. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the underlying debt agreements.
The use of derivative commodity instruments is discussed above under "Committed
Metal Positions and Hedged Metal Obligations." To the extent that the maturities
of these instruments are mismatched, Engelhard may be exposed to cash interest
rates. This exposure is mitigated through use of Eurodollar futures which are
marked to market daily along with the underlying commodity instruments.
42
STOCK OPTION PLANS
The Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" in 1997. In conjunction with the
adoption, the Company will continue to apply the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" with pro-forma disclosure of net income and
earnings per share as if the fair value based method prescribed by SFAS 123 had
been applied. In general, no compensation cost related to these plans is
recognized in the consolidated statements of earnings.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and were $69.8
million in 1998, $61.4 million in 1997 and $56.5 million in 1996. These costs
are included within selling, administrative and other expenses in the Company's
consolidated statements of earnings.
FOREIGN CURRENCY TRANSLATION
The functional currency for the majority of the Company's foreign operations is
the applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The resulting
translation adjustments are recorded as a component of shareholders' equity.
Gains or losses resulting from foreign currency transactions are included in the
Company's consolidated statements of earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 is effective for the Company on January 1,
2000. The Company will adopt SFAS 133 by the first quarter of 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings, comprehensive income or
statement of financial position.
2. ACQUISITIONS
On May 1, 1998, the Company acquired the chemical catalyst businesses of
Mallinckrodt Inc. for approximately $210 million in cash. The Company financed
the acquisition with a combination of commercial paper and bank borrowings. The
purchase price exceeded the preliminary assessment of the fair value of net
assets acquired by approximately $90 million, which is being amortized on a
straight-line basis over 40 years. The results of the Mallinckrodt businesses
are included in the accompanying financial statements from the date of
acquisition: For the year ended December 31, 1998, the acquisition increased net
sales by $67.7 million; operating earnings by $16.2 million; and earnings per
share by $0.04. Earnings per share include the impact of higher interest expense
related to the acquisition.
43
The following summarized unaudited pro forma financial information of the
Company assumes the acquisition had occurred on January 1 of each year:
Pro Forma Information
(in millions except per share amounts) 1998 1997
- -------------------------------------- -------- --------
Net sales $4,203.8 $3,717.6
Net earnings 188.9 47.9(1)
Basic earnings per share 1.31 0.33(1)
Diluted earnings per share 1.30 0.33(1)
(1) The 1997 pro forma balances include special and other charges of $149.6
million ($117.7 million after tax or $0.82 per share).
The 1997 amounts above include the Mallinckrodt businesses actual results in
1997. The 1998 amounts above include the Mallinckrodt businesses results for the
first four months of 1998 prior to the acquisition, and the eight months in 1998
postacquisition. The pro forma amounts are based upon certain assumptions and
estimates, and do not reflect any benefit economies that might be achieved from
combined operations. The pro forma results do not necessarily represent results
that would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.
On May 31, 1996, the Company acquired the Mearl Corporation (Mearl). Mearl
manufactured and supplied the automotive, cosmetics and industrial markets with
pearlescent pigments, and also manufactured and supplied iridescent film and
other products to a variety of markets. The transaction was accounted for as a
purchase. The purchase price was $272.7 million in cash, financed primarily with
long-term debt. The purchase price exceeded the fair value of net assets
acquired by $153.5 million, which is being amortized on a straight-line basis
over 35 years. The results of operations of Mearl, integrated into the Specialty
Pigments and Additives segment, are included in the accompanying consolidated
financial statements from the date of acquisition.
3. SPECIAL AND OTHER CHARGES
In response to weak results of certain operations, and as a result of the base-
metal fraud in Japan, Engelhard recorded, in the fourth quarter of 1997, Special
and Other Charges of $149.6 million ($117.7 million after tax). The following
table sets forth the impact of the special and other charges in the 1997
Consolidated Statement of Earnings:
FINANCIAL IMPACT Special and Other Charges
(in millions, except per share amounts) -------------------------
Cost of sales $ (6.1)
Selling, administrative and other expenses (12.7)
Special charge (86.0)
--------
Operating loss (104.8)
Equity in losses of affiliates (44.8)
--------
Loss before income taxes (149.6)
Income tax benefit 31.9
--------
Net loss $(117.7)
========
Basic loss per share $ (0.82)
========
44
The 1997 special and other charges are described below:
* The Process Technologies segment incurred charges of $35.4 million
primarily related to the closure and subsequent sale of a petroleum
catalysts facility in The Netherlands used for the manufacture of fluid
catalytic cracking (FCC) catalysts. Management approved a plan to improve
the profitability of this business, primarily by lowering its cost
structure and optimizing its manufacturing resources. The most significant
action resulted in the 1998 sale of the FCC catalysts facility in The
Netherlands. There was no gain or loss on the sale of the facility as the
sales price approximated the carrying value as adjusted by the special and
other charges. This decision was driven by industry overcapacity and the
determination that Engelhard's European customers could be served more
efficiently by North American FCC catalysts operations. As a result,
Engelhard provided for employee severance obligations of $6.4 million
covering 90 site employees, plant closure and other miscellaneous costs of
$1.7 million and asset write-downs of $27.3 million consisting of $22.1
million to reduce the carrying value of the facility to an estimate of fair
value based on appraisals performed by third parties, a $2.7 million
reserve for obsolete inventory, and $2.5 million to write-off intangible
assets related to production technology which could no longer be utilized.
These actions are expected to be substantially complete by the end of 1999.
* The Environmental Technologies segment incurred charges of $29.6 million
related to the sale of the stationary-source, emission-control capital
equipment business. Management approved a plan to sell this business based
on unfavorable market growth projections, combined with low technological
barriers to enter this market. Management believes that this strategy will
allow Engelhard to concentrate on its core competency--catalyst technology.
Revenue and operating loss for the capital equipment business were $21.6
million and $6.4 million, respectively, for the year ended December 31,
1997 and $40.3 million and zero, respectively, for the year ended December
31, 1996. Engelhard continues to sell catalysts for stationary-source
pollution abatement. Engelhard provided for losses on contracts and
warranty costs of $7.9 million and reduced the carrying value of goodwill
and other assets by $21.7 million to an estimate of fair value based on
negotiations with third parties. This write-down consisted of the write-off
of goodwill of $15.0 million, a reserve for uncollectable accounts
receivable of $4.2 million and a reserve for obsolete inventory of $2.5
million. The sale was completed in February 1998 and there was no gain or
loss on the sale of the business as the sales price approximated the
carrying value as adjusted by the special and other charges. These actions
are expected to be substantially complete by the end of 1999.
* The Specialty Pigments and Additives segment wrote off assets of
approximately $0.8 million.
* Japan base-metal fraud of $39.0 million (see Note 18--"Litigation and
Contingencies" of the Notes to Consolidated Financial Statements of the
1998 Form 10-K for further detail).
* Engelhard recorded equity in losses of affiliates of $44.8 million as
follows:
45
o Engelhard-CLAL continued to face pressures of declining demand for
French manufactured jewelry, generally due to the availability of
inexpensive high-quality costume jewelry, and increased competition
from other international fabricators of precious-metal products with
lower cost structures. In response to these economic pressures and
market conditions, Engelhard and its partner, FIMALAC, agreed to
rationalize certain operations, determined that related assets were
impaired and reduced those assets to their estimated realizable value.
The impact to Engelhard of these actions was approximately $30.9
million, the components of which were: a valuation allowance provided
on deferred tax assets of $14.3 million, employee severance of $10.5
million, write off of production equipment of $4.3 million and
inventory obsolescence reserves of $1.8 million. In addition,
Engelhard wrote off goodwill of $9.0 million related to its investment
in the joint venture based on the expected future undiscounted cash
flows. While market conditions continue to reflect the circumstances
noted in 1997, as a result of the actions taken by Engelhard-CLAL,
operating results turned marginally positive in 1998. Engelhard-CLAL
management expects that these actions will be substantially completed
during 1999.
o In 1997, Engelhard reached an agreement with its partner, ICC
Technologies, to restructure Engelhard/ICC, a joint venture in
desiccant-based, climate-control systems. As a result of this
restructuring, Engelhard subsequently acquired 100% of Engelhard
Hexcore L.P., the portion of the former joint venture that focuses on
manufacturing and marketing desiccant-coated rotors and related
products, and sold its interest in Fresh Air Solutions L.P., which
comprised the remainder of the joint venture. Goodwill of $4.9 million
related to Fresh Air Solutions L.P. was written off as a loss on sale.
Management believes that this reorganization will allow greater
concentration on core competencies. This action had been completed
prior to the end of 1998.
Pre-1997 Charges
- ----------------
The pre-1997 restructuring charges are related to:
* The restructuring of administrative operations at corporate headquarters
and the process technologies organization;
* The transfer of Attapulgite operations from the Company's Attapulgus, GA
facility to the acquired Quincy, FL site and the associated closing of the
Attapulgus operations;
* The closure of the Plainville, MA site and the subsequent disposal upon the
completion of environmental remediation activities;
* The shutdown of operations at a Company facility in Newark, NJ and the
subsequent disposal of the facility;
* The shutdown of certain operations of the Union, NJ facility and relocation
of certain other operations to other underutilized Company facilities.
46
The employee severance costs associated with the pre-1997 restructuring charges
are primarily related to the restructuring of administrative operations and the
transfer of Attapulgite operations. The severance costs associated with these
actions have been paid over extended periods as certain agreements negotiated
with severed employees provided for payments to be spread over several years.
The pre-1997 restructuring charges originally provided for employee severance
obligations for 1,863 corporate and site employees. The remaining severance
obligation as of December 31, 1998 is primarily attributable to 43 employees.
Additionally, regulatory delays in the consummation of the Company's acquisition
of the Quincy, FL attapulgite operation and inherent delays in the completion of
environmental remediation activities at Plainville, MA. have extended the
payment periods for those severance costs. Costs of retention of employees for
the longer than expected periods prior to termination have been expensed as
incurred. The remaining severance accrual of $3.6 million at December 31, 1998
is principally for long-term severance payments related to the Union facility
and for severance costs for employees remaining at the Plainville, MA site until
its closure.
Non-separation related costs associated with the pre-1997 restructuring charges
are primarily for costs associated with the shut down of the Union and Newark,
NJ sites, the Attapulgus, GA attapulgite operations, as well as non-
environmental shut-down costs at the Plainville, MA site. These shut down
costs approximated $15 million during the three year period ended December 31,
1998. The remaining accrual of $2.9 million is primarily for shut-down costs to
be incurred until closure of the Plainville and Union facilities. The timeframe
for final closure of the Plainville facility is pending government approval of
environmental cleanup plans at the site. Additionally, negotiations have begun
for the sale of a portion of the Union facility which, if consummated, will
complete the closure process for that site.
The actions related to the Plainville, MA site and the Union, NJ site are
expected to be substantially complete by the end of 2000.
Pending resolution of the matters discussed above, the Company believes
remaining reserves related to pre-1997 restructuring activities are adequate for
remaining activities under those plans.
47
The following table sets forth the components of Engelhard's reserves for
restructuring and exit costs:
RESTRUCTURING RESERVES
(in millions) Separations Other Total
Pre-1997 1997 Pre-1997 1997 Pre-1997 1997
-------- ---- -------- ---- -------- ----
Balance at December 31, 1995 $13.7 $ - $ 18.8 $ - $ 32.5 $ -
Cash spending (7.4) - (10.6) - (18.0) -
Asset write-offs - - (1.0) - (1.0) -
-------------- --------------- ---------------
Balance at December 31, 1996 6.3 - 7.2 - 13.5 -
Cash spending (1.7) - (6.5) - (8.2) -
Provision - 6.6 - 10.1 - 16.7
-------------- --------------- ---------------
Balance at December 31, 1997 4.6 6.6 0.7 10.1 5.3 16.7
Cash spending (1.0) (3.7) 2.2 (8.0) 1.2 (11.7)
Asset write offs - - - (1.9) - (1.9)
-------------- --------------- ---------------
Balance at December 31, 1998 $ 3.6 $ 2.9 $ 2.9 $ 0.2 $ 6.5 $ 3.1
============== =============== ===============
The non-separation related cash spending for pre-1997 restructuring and exit
cost liabilities for each of the three years ended December 31, 1998, 1997, and
1996 consisted primarily of costs associated with the shut-down of the Union and
Newark, NJ sites, the Attapulgus, GA site and the Plainville, MA site. The
Newark, NJ site was sold in 1998 and had a carrying value of $4.8 million in
1993. The proceeds received in 1998 of $7.1 million related to this facility
have been netted against $4.9 million of cash expenditures in the above
presentation. The remaining balance in the pre-1997 restructuring reserves
consist of shut-down costs for the Union, NJ, Attapulgus, GA and Plainville, MA
sites.
The non-separation restructuring and exit cost provision made in 1997 consists
primarily of costs associated with the shutdown of the facilities to be closed
in connection with the Process Technologies and Environmental Technologies
actions discussed above, and certain warranty obligations associated with the
sold Environmental Technologies business. Non-separation related cash spending
related to these liabilities for the year ended December 31, 1998 consisted of
payments related to the completion of the shutdown of the facilities and the
satisfaction of any warranty obligations.
4. INVENTORIES
Inventories consist of the following:
INVENTORIES
(in millions) 1998 1997
------------------------
Raw materials $ 76.3 $ 99.2
Work in process 54.9 31.9
Finished goods 189.7 191.8
Precious metals 28.9 33.5
------------------------
Total inventories $349.8 $356.4
========================
48
All precious-metals inventories are stated at LIFO cost. The market value of the
precious-metals inventories exceeded cost by $85.8 million and $49.7 million at
December 31, 1998 and 1997, respectively. Net earnings include after-tax gains
of $4.9 million in 1998, $2.0 million in 1997, and $3.3 million in 1996 from the
sale of inventory accounted for under the LIFO method.
In the normal course of business, certain customers and suppliers deposit
significant quantities of precious metals with the Company under a variety of
arrangements. Equivalent quantities of precious metals are returnable as product
or in other forms.
5. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
PROPERTY, PLANT AND EQUIPMENT
(in millions) 1998 1997
---------------------
Land $ 26.1 $ 38.3
Buildings and building improvements 210.6 232.9
Machinery and equipment 1,323.7 1,196.9
Construction in progress 124.2 111.5
Mineral deposits and mine development 79.7 76.9
---------------------
1,764.3 1,656.5
Accumulated depreciation and depletion 887.8 868.3
---------------------
Property, plant and equipment, net $ 876.5 $ 788.2
=====================
Mineral deposits and mine development consist of industrial mineral reserves
such as kaolin, attapulgite and mica. The Company does not own any mining
reserves or conduct any mining operations with respect to platinum, palladium or
other metals.
In December 1998, the Company entered into a sale-leaseback transaction for
property that served as the principal executive and administrative offices of
the Company and its operating businesses. The gain on the transaction was
approximately $15.3 million and is being amortized over the twenty-year term of
the lease.
The Company capitalized interest of $1.9 million in 1998, $0.7 million in 1997
and $0.9 million in 1996.
6. INVESTMENTS
The Company has investments in affiliates that are accounted for on the equity
method. The more significant of these investments are Engelhard-CLAL and N.E.
Chemcat Corporation (N.E. Chemcat). Engelhard-CLAL, a 50% joint venture,
manufactures and markets certain products containing precious metals. N.E.
Chemcat is a 38.8% owned, publicly-traded Japanese corporation and a leading
producer of automotive and chemical catalysts, electronic chemicals and other
precious-metals-based products.
49
At December 31, 1998 and 1997, the quoted market value of the Company's
investment in N.E. Chemcat was approximately $66 million and $56 million,
respectively. The valuation represents a mathematical calculation based on the
closing quotation published by the Tokyo over-the-counter market and is not
necessarily indicative of the amount that could be realized upon sale. Due to
the recent weakness of the Japanese equity markets, the Company's investment in
N.E. Chemcat exceeded the quoted market values by $3.7 million and $17.9 million
as of December 31, 1998 and 1997, respectively. Management believes this
situation to be temporary.
The summarized unaudited financial information below represents an aggregation
of the Company's nonsubsidiary affiliates on a 100 percent basis, unless
otherwise noted:
FINANCIAL INFORMATION
(unaudited) (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Earnings data:
Revenue $1,540.7 $1,788.6 $1,739.7
Gross profit 151.8 165.0 327.9
Net earnings/(losses) 14.3 (69.6)(1) (5.3)
Engelhard's equity in net earnings/(losses)
of affiliates 10.1 (47.8)(1) (5.0)
Balance sheet data:
Current assets $ 530.2 $ 420.1
Noncurrent assets 197.5 216.5
Current liabilities 250.0 117.4
Noncurrent liabilities 89.1 185.8
Net assets 388.6 333.4
Engelhard's equity in net assets 153.6 156.1
The Company's share of undistributed earnings/losses of affiliated companies
included in consolidated retained earnings were losses of $5.4 million in 1998
and $14.2 million in 1997, compared with earnings of $36.0 million in 1996.
Dividends from affiliated companies were $2.0 million in 1998, $3.8 million in
1997 and $2.5 million in 1996.
(1) The 1997 loss includes $39.9 million in special and other charges related
to Engelhard-CLAL (see Note 3, "Special and Other Charges" of the Notes to
Consolidated Financial Statements for further detail).
7. METAL POSITIONS AND OBLIGATIONS
The following table sets forth the Company's open metal positions included in
Committed Metal Positions on the consolidated balance sheets:
50
METAL POSITIONS INFORMATION
(in millions) 1998 1997
--------------------------------------
Gross Gross
position Value position Value
-------------------------------------
Platinum group metals Long $17.4 Long $16.0
Gold Flat - Short (0.6)
Silver Flat - Short (1.7)
Base metals Long 4.6 Short (0.2)
--------------------------------------
Total open metal positions, net $22.0 $13.5
======================================
The net mark-to-market adjustments related to open positions were not material
in 1998, 1997 or 1996.
Derivative commodity and foreign currency instruments used to hedge metal
positions and obligations consist of the following:
METAL HEDGING INSTRUMENTS
(in millions) 1998 1997
Buy Sell Buy Sell
----------------------------------------------
Forward/futures contracts $1,270.9 $1,057.4 $927.9 $742.5
Eurodollar futures 44.5 120.4 385.0 639.0
Swaps 367.2 343.5 246.9 298.4
Options 0.1 - 42.9 14.6
Yen forwards/futures - 11.6 - 31.1
8. FINANCIAL INSTRUMENTS
The Company's nonderivative financial instruments consist primarily of cash in
banks, temporary investments, accounts receivable and debt. The fair value of
financial instruments in working capital approximates book value. The fair
value of long-term debt was $495.9 million in 1998 and $384.1 million in 1997
based on current interest rates, compared with a book value of $497.4 million in
1998 and $373.6 million in 1997.
The Company believes that its financial instruments do not represent a
concentration of credit risk because the Company deals with a variety of major
banks worldwide, and its accounts receivable are spread among a number of major
industries, customers and geographic areas. In addition, a centralized credit
committee reviews significant credit transactions and risk management issues
before the granting of credit and an appropriate level of reserves is
maintained. For the past three-year period, provisions to these reserves were
not significant.
FOREIGN CURRENCY INSTRUMENTS
Aggregate foreign transaction gains and losses were not significant for any year
presented. The following table sets forth, in U.S. dollars, the Company's open
foreign currency forward contracts used for hedging other than metal-related
transactions (see Note 7, "Metal Positions and Obligations" of the Notes to
Consolidated Financial Statements for foreign currency instruments used to hedge
metal-related transactions):
51
FOREIGN CURRENCY FORWARD CONTRACTS INFORMATION (in millions)
1998 1997
Buy Sell Buy Sell
---------------------------------------
Deutsche Mark $ - $34.7 $ - $ -
Korean Won - - 14.3 -
Japanese Yen 16.0 19.6 - 1.2
French Franc - 5.9 2.4 -
Finnish Markka - - - 1.4
Netherlands Guilder 30.1 4.3 - -
Thai Baht - 0.2 - -
Peru Soles 4.4 9.0 - -
Swedish Krona - 1.2 - -
Italian Lira - 1.9 - 1.4
---------------------------------------
Total open foreign currency
forward contracts $50.5 $76.8 $16.7 $4.0
=======================================
None of these contracts exceeds a year in duration and the net amount of
deferred income and expense on foreign currency forward contracts had no impact
on financial position or results of operations in 1998, 1997 and 1996.
INTEREST RATE INSTRUMENTS
In 1998, the Company entered into two treasury lock agreements which were
settled in March 1999.
In 1997, the Company entered into five forward starting swaps commencing in
1998, which were closed concurrent with the debt issuance.
In 1996, in connection with the $150 million 7% Notes due 2001 and the $100
million 7.375% Notes due 2006, the Company entered into ten forward starting
swaps, which were closed concurrent with the debt issuance. The resulting impact
on the weighted-average interest rate for 1998 and 1997 was not material.
The Company entered into an interest rate swap agreement in 1993 to change
certain fixed rate debt into floating rate debt. The impact of this swap
contract, which terminated in 1996, was to increase interest expense by $0.6
million in 1996.
9. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
At December 31, 1998, the Company had an unsecured committed revolving credit
agreement for $600 million with a group of North American money center banks and
major foreign banks which expires in the year 2002. In connection with its
credit facility, the Company has agreed to certain covenants, none of which is
considered restrictive to the operations of the Company. Facility fees are paid
to the bank group for this line.
At December 31, 1998 and 1997, short-term bank borrowings were $185.0 million
and $164.2 million, respectively. Weighted-average interest rates were 5.5%,
5.9% and 5.7% during 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, long-term debt due within one year was $5.0 million and $0.2 million,
respectively.
52
At December 31, 1998 and 1997, commercial paper borrowings were $65.0 million
and $85.0 million, respectively. Weighted-average interest rates were 5.5%, 5.8%
and 5.5% during 1998, 1997 and 1996, respectively.
Additional unused, uncommitted lines of credit available exceeded $670 million
at December 31, 1998. The Company's lines of credit with its banks are available
in accordance with normal terms for prime commercial borrowers and are not
subject to commitment fees or other restrictions.
The following table sets forth the components of long-term debt:
DEBT INFORMATION
(in millions) 1998 1997
---------------
Notes, with a weighted-average interest rate of 6.53%,
due 2000 $ 99.8 $ 99.7
Notes acquired, with a weighted-average interest rate
of 12.0%, due 2003-2006 14.1 14.1
7% Notes, due 2001, net of discount 149.4 149.2
7.375% Notes, due 2006, net of discount 99.5 99.4
6.95% Notes, due 2028, net of discount 118.4 -
Industrial revenue bonds, 64.5% of prime rate, due 1999 4.5 4.5
Industrial revenue bonds, 5.375%, due 2006 6.5 6.5
Industrial revenue bonds, variable rate, due 2020 8.5 -
Foreign bank loans with a weighted-average interest
rate of 7.0%, due 2000 0.4 0.1
Other, with weighted-average rate of 5.5%, due 1999-2000 1.3 0.3
---------------
502.4 373.8
Amounts due within one year 5.0 0.2
---------------
Total long-term debt $497.4 $373.6
===============
As of December 31, 1998, the aggregate maturities of long-term debt for the
succeeding five years are as follows: $5.0 million in 1999, $101.0 million in
2000, $149.4 million in 2001, zero in 2002, $0.1 million in 2003 and $246.9
million thereafter. See Note 8, "Financial Instruments" of the Notes to
Consolidated Financial Statements for a discussion about interest rate swap
agreements.
Interest expense was $58.9 million in 1998, compared with $52.8 million in 1997
and $45.0 million in 1996. Interest income, included as a component of net
sales, was $2.3 million in 1998, $1.1 million in 1997 and $1.8 million in 1996.
53
10. INCOME TAXES
The components of income tax expense are shown in the following table:
Income Tax Expense
(in millions) 1998 1997 1996
--------------------------------------
Current income tax expense
Federal $39.5 $ 27.9 $21.7
State 7.9 4.5 2.1
Foreign 22.4 22.7 11.0
--------------------------------------
69.8 55.1 34.8
--------------------------------------
Deferred income tax expense
Federal 1.9 2.9 16.6
State (1.0) 0.1 3.0
Foreign 8.6 (17.4) 4.7
Changes in tax rates (0.8) (1.1) -
Loss carryforwards/tax credits (5.0) (1.6) 0.4
--------------------------------------
3.7 (17.1) 24.7
--------------------------------------
Income tax expense $73.5 $ 38.0 $59.5
======================================
The foreign portion of earnings before income tax expense was $77.9 million in
1998, $13.8 million in 1997 and $50.6 million in 1996. Taxes on income of
foreign consolidated subsidiaries and affiliates are provided at the tax rates
applicable to their respective foreign tax jurisdictions.
The following table sets forth the components of the net deferred tax asset
which results from temporary differences between the amounts of assets and
liabilities recognized for financial reporting and tax purposes:
NET DEFERRED INCOME TAX ASSET
(in millions) 1998 1997
----------------------------
Deferred tax assets
Accrued liabilities $ 77.4 $ 48.5
Noncurrent liabilities 79.4 82.4
Tax credits/carryforwards 38.1 32.7
----------------------------
Total deferred tax assets 194.9 163.6
----------------------------
Deferred tax liabilities
Prepaid pension expense (36.4) (38.0)
Property, plant and equipment (15.5) (8.4)
Other assets (31.1) (16.1)
----------------------------
Total deferred tax liabilities (83.0) (62.5)
----------------------------
Valuation allowance (5.9) (13.0)
----------------------------
Net deferred tax asset $106.0 $ 88.1
============================
54
In 1997, the Company recorded special and other charges of $149.6 million. A net
deferred tax asset was provided with respect to this charge. The tax benefit was
net of a valuation allowance against the capital loss carryforwards expected to
be generated by some of these charges. In 1998, the Company disposed of certain
capital assets and thereby realized capital gains. The Company also anticipates
that additional capital gains will be realized in 1999. Therefore, the valuation
allowance recorded in 1997 against the capital loss carryforwards was reduced in
1998 by $7.1 million.
As of December 31, 1998, the Company had approximately $17.6 million of
nonexpiring alternative minimum tax credit carryforwards available to offset
future U.S. federal income taxes. Also, as of December 31, 1998, the Company had
approximately $3.8 million of domestic capital loss carryforwards expiring in
2003 and approximately $5.4 million of foreign investment tax credits expiring
in 2000 available to offset certain future foreign income taxes. Management
believes that the Company will generate sufficient taxable income and employ tax
planning strategies to ensure realization of these tax benefits.
A reconciliation of the difference between the Company's consolidated income tax
expense and the expense computed at the federal statutory rate is shown in the
following table:
CONSOLIDATED INCOME TAX EXPENSE RECONCILIATION
(in millions)
1998 1997 1996
----------------------------------
Income tax expense at federal
statutory rate $ 91.2 $ 30.0 $ 73.5
State income taxes, net of
federal effect 5.1 2.3 3.3
Percentage depletion (13.5) (14.0) (13.4)
Equity earnings (1.3) 14.0 (1.0)
Effect of different tax rates
on foreign earnings, net 4.3 1.4 0.2
Tax credits/carrybacks (2.3) (2.8) (0.8)
Foreign sales corporation (7.4) (6.8) (5.0)
Non-deductible goodwill 2.0 2.2 1.3
Valuation allowance (7.1) 13.0 -
Other items, net 2.5 (1.3) 1.4
----------------------------------
Income tax expense $ 73.5 $ 38.0 $ 59.5
==================================
At December 31, 1998, the Company's share of the cumulative undistributed
earnings of foreign subsidiaries was approximately $259.2 million. No provision
has been made for U.S. or additional foreign taxes on the undistributed earnings
of foreign subsidiaries because such earnings are expected to be reinvested
indefinitely in the subsidiaries' operations. It is not practical to estimate
the amount of additional tax that might be payable on these foreign earnings in
the event of distribution or sale; however, under existing law, foreign tax
credits would be available to substantially reduce, or in some cases eliminate,
U.S. taxes payable.
55
11. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has raw material supply
arrangements with entities in which Anglo American Corporation of South Africa
Limited has material interests and with Engelhard-CLAL and its subsidiaries.
Anglo, indirectly through Minorco S.A., holds a significant minority interest in
the common stock of the Company. Engelhard-CLAL is a 50% owned joint venture.
The Company's transactions with such entities amounted to: purchases-from of
$176.3 million in 1998, $101.2 million in 1997 and $203.2 million in 1996;
sales-to of $1.7 million in 1998, $42.2 million in 1997 and $513.5 million in
1996; and metal leasing-to of $17.5 million in 1998, $16.3 million in 1997 and
$37.7 million in 1996. At December 31, 1998 and 1997, amounts due to such
entities totaled $8.6 million and $5.3 million, respectively. Also, see Note 20,
"Subsequent Event" of the Notes to Consolidated Financial Statements for a
discussion of Engelhard's announcement that it has reached an agreement to
purchase shares of Engelhard stock owned by Minorco.
12. BENEFITS
The Company has domestic and foreign pension plans covering substantially all
employees. Plans covering most salaried employees generally provide benefits
based on years of service and the employee's final average compensation. Plans
covering most hourly bargaining unit members generally provide benefits of
stated amounts for each year of service. The Company makes contributions to the
plans as required and to such extent contributions are currently deductible for
tax purposes. Plan assets primarily consist of listed stocks and fixed income
securities.
56
The following table sets forth the plans' funded status:
Funded Status
(in millions) 1998 1997
- ------------- ------- -------
Change in projected benefit obligation
Projected benefit obligation at beginning of year $328.7 $297.3
Service cost 12.1 10.1
Interest cost 23.6 22.7
Plan amendments 6.3 0.6
Actuarial losses 37.9 20.9
Benefits paid (24.5) (22.3)
Business combinations 0.7 3.2
Curtailments (1.0) -
Special termination benefits 0.4 -
Foreign exchange 1.9 (3.8)
------- -------
Projected benefit obligation at end of year $386.1 $328.7
------- -------
Change in plan assets
Fair value of plan assets at beginning of year $374.7 $329.4
Actual return on plan assets 18.7 62.0
Employer contribution 3.4 7.4
Benefits paid (24.5) (22.3)
Business combinations 0.7 3.2
Foreign exchange 2.1 (5.0)
------- -------
Fair value of plan assets at end of year $375.1 $374.7
------- -------
Funded status $(11.0) $ 46.0
Unrecognized net actuarial loss 77.5 27.2
Unrecognized prior service cost 10.5 5.9
Unrecognized transition asset, net of amortization (1.7) (2.7)
Fourth quarter contribution 0.2 0.2
------- --------
Prepaid pension asset $ 75.5 $ 76.6
======= ========
Amounts recognized in the statement of financial position consist of:
Funded Status
(in millions) 1998 1997
- ------------- ------- -------
Prepaid benefit cost $ 79.8 $ 80.4
Accrued benefit liability (4.3) (3.8)
Intangible asset (2.5) -
Accumulated other comprehensive income (3.9) -
------- --------
Net amount recognized $ 69.1 $ 76.6
======= ========
The prepaid pension asset balances of $75.5 million and $76.6 million at
December 31, 1998 and December 31, 1997, respectively, are included in other
57
noncurrent assets in the Company's consolidated balance sheets. In 1998, the
Company recorded a minimum pension liability adjustment amounting to $3.9
million. This adjustment was recognized and charged to accumulated other
comprehensive income/(loss).
The components of the net pension credit for all plans are shown in the
following table:
NET PERIODIC PENSION CREDIT
(in millions) 1998 1997 1996
-----------------------------------
Service cost $ 12.1 $ 10.1 $ 8.9
Interest cost 23.6 22.7 20.3
Expected return on plan assets (34.7) (32.4) (30.0)
Amortization of prior service cost 1.6 0.8 0.9
Amortization of transition asset (1.0) (3.0) (3.0)
Recognized actuarial loss 2.4 1.4 1.1
Curtailment gain (1.0) - -
-----------------------------------
Net periodic pension expense/(credit) $ 3.0 $ (0.4) $ (1.8)
===================================
The discount rates used in determining the actuarial present value of the
projected benefit obligation are 6.00% to 6.75% in 1998, 6.00% to 7.50% in 1997
and 6.50% to 8.50% in 1996. The expected increase in future compensation levels
was 3.00% to 4.00% in 1998, 3.00% to 5.00% in 1997 and 3.00% to 6.00% in 1996.
The expected long-term rate of return on assets was 8.50% to 10.50% in 1998 and
1997 and 7.50% to 10.50% in 1996. The aggregate ABO (Accumulated Benefit
Obligation) for those plans with ABO's in excess of plan assets is $38.1 million
in 1998. The aggregate fair value of assets for those plans with ABO's in excess
of plan assets is $28.2 million in 1998.
The Company also sponsors three savings plans covering certain salaried and
hourly paid employees. The Company's contributions, which may equal up to 50% of
certain employee contributions, were $3.2 million in 1998, $2.9 million in 1997
and $2.4 million in 1996.
The Company also currently provides postretirement medical and life insurance
benefits to certain retirees (and their spouses), certain disabled employees
(and their families) and spouses of certain deceased employees. Substantially
all U.S. salaried employees and certain hourly paid employees are eligible for
these benefits, which are paid through the Company's general health care and
life insurance programs, except for certain medicare-eligible salaried and
hourly retirees who are provided a defined contribution towards the cost of a
partially insured health plan. In addition, the Company provides postemployment
benefits to former or inactive employees after employment but before retirement.
These benefits are substantially similar to the postretirement benefits but
cover a much smaller group of employees.
58
The following table sets forth the components of the accrued postretirement and
postemployment benefit obligation, all of which are unfunded:
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
(in millions) 1998 1997
- -----------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $111.5 $113.8
Service cost 3.0 2.3
Interest cost 8.0 8.5
Actuarial (gains) losses 15.3 (1.5)
Business combinations 0.8 -
Benefits paid (10.5) (11.6)
------- -------
Benefit obligation at beginning of year $128.1 $111.5
------- -------
Unrecognized net gain (loss) (10.0) 5.9
Unrecognized prior service cost 33.2 39.0
Fourth quarter contribution (2.5) (3.1)
------- -------
Accrued benefit obligation $148.8 $153.3
======= =======
The postretirement and postemployment benefit balances of $148.8 million and
$153.3 million at December 31, 1998 and December 31, 1997, respectively, are
included in other noncurrent liabilities in the Company's consolidated balance
sheets.
The components of the net expense for these postretirement and postemployment
benefits are shown in the following table:
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
(in millions) 1998 1997 1996
-----------------------------
Components of net periodic benefit cost
Service cost $3.0 $2.3 $2.4
Interest cost 8.0 8.5 8.1
Net amortization (5.8) (6.0) (5.5)
----- ----- -----
Net periodic benefit cost $5.2 $4.8 $5.0
===== ===== =====
The weighted-average discount rate used in determining the actuarial present
value of the accumulated postretirement and postemployment benefit obligation
for 1998 is 6.75%. The average assumed health care cost trend rate used for 1998
is 8%, gradually decreasing to 5% by 2005. A 1% increase in the assumed health
care cost trend rate would have increased aggregate service and interest cost in
1998 by $0.8 million and the accumulated postretirement and postemployment
benefit obligation as of December 31, 1998 by $ 6.6 million. A 1% decrease in
the assumed healthcare cost trend rate would have decreased aggregate service
and interest cost in 1998 by $1.3 million and the accumulated postretirement and
postemployment benefit obligation as of December 31, 1998 by $11.1 million.
59
13. STOCK OPTION AND BONUS PLANS
The Company's Stock Option Plans of 1991 and 1981, as amended (the Key Option
Plans) generally provide for the granting to key employees of options to
purchase an aggregate of 16,875,000 and 6,834,375 common shares, respectively,
at fair market value on the date of grant. No options under the Key Option Plans
may be granted after June 30, 2001.
In 1993, the Company established the Employee Stock Option Plan of 1993, as
amended, which generally provided for the granting to all employees (excluding
U.S. bargaining unit employees and key employees eligible under the Key Option
Plans) of options to purchase an aggregate of 2,812,500 common shares at fair
market value on the date of grant. No additional options may be granted under
this plan. In 1995, the Company established the Directors Stock Options Plan,
which generally provides for the granting to each nonemployee director the
option to purchase up to 3,000 common shares at the fair market value on the
date of grant. Options under all plans become exercisable in four installments
beginning after one year, and no options may be exercised after 10 years from
the date of grant. Outstanding options may be canceled and reissued under terms
specified in the plan documents.
Had compensation cost for the Company's two stock option plans been determined
based on the fair value at grant date for awards in 1998, 1997 and 1996
consistent with the provisions of Statement of Financial Accounting Standards
No. 123, "Accounting for Stock Based Compensation," the Company's net earnings
and earnings per share would have been as follows:
PRO FORMA INFORMATION
(in millions, except per share data) 1998 1997 1996
-------------------------------
Net earnings--as reported $187.1 $47.8 $150.4
Net earnings--pro forma 179.4 41.4 145.0
Basic earnings per share--as reported 1.30 0.33 1.05
Basic earnings per share--pro forma 1.24 0.29 1.01
Diluted earnings per share--as reported 1.29 0.33 1.03
Diluted earnings per share--pro forma 1.23 0.28 1.00
The pro forma amounts shown above are not representative of the effects on net
earnings or earnings per share in future years because only options granted
after January 1, 1995 have been included in the above numbers, and the full net
earnings effect is recognized over the vesting period, typically four years. The
weighted-average fair value at date of grant for options granted during 1998,
1997 and 1996 was $5.07, $5.74 and $7.37, respectively. Fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for option grants in
1998, 1997 and 1996: dividend yield of 1.3% to 2.3%, expected volatility of 31%
to 32%; risk free interest rate of 4.5% to 6.5%; and expected life of 4 to
5 years.
60
Stock option transactions under all plans are as follows:
1998 1997 1996
Weighted Average Weighted Average Weighted Average
Number Exercise Price Number Exercise Price Number Exercise Price
of Shares Per Share of Shares Per Share of Shares Per Share
----------------------------- ---------------------------- ---------------------------
Outstanding at beginning of year 11,730,245 $17.93 9,187,945 $17.43 7,901,801 $17.08
Granted 2,903,190 $18.59 2,935,789 $19.13 2,006,572 $21.65
Forfeited (320,162) $20.61 (62,643) $19.04 (351,168) $16.03
Exercised (229,125) $12.67 (330,846) $13.44 (369,260) $11.52
----------- ------ ----------- ------ ---------- ------
Outstanding at end of year 14,084,148 $18.17 11,730,245 $17.93 9,187,945 $17.43
Exercisable at end of year 8,108,731 $17.45 5,850,724 $16.53 4,652,411 $15.55
Available for future grants 3,864,065 6,447,093 9,320,239
The following table summarizes information about fixed-price options outstanding
at December 31, 1998:
Options Outstanding Options Exercisable
- ----------------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise prices at 12/31/98 Life (years) Price at 12/31/98 Price
- ----------------------------------------------------- ----------- ---------
$5.54 to 9.46 497,555 2 $ 7.91 497,555 $ 7.91
11.45 to 19.14 2,058,510 5 16.91 2,058,510 16.91
14.21 to 19.06 2,096,036 6 16.18 2,096,036 16.18
16.83 to 22.38 1,868,448 7 18.99 1,515,040 19.00
19.00 to 23.88 1,910,887 8 21.54 1,164,846 21.53
18.56 to 20.91 2,786,397 9 19.13 749,873 19.31
17.34 to 21.69 2,866,315 10 18.60 26,871 17.56
---------- ------ ----------- ---------
14,084,148 $18.17 8,108,731 $17.45
The Company's Key Employee Stock Bonus Plan, as amended (the Bonus Plan)
provides for the award of up to 15,187,500 common shares to key employees as
compensation for future services, not exceeding 1,518,750 shares in any year
(plus any canceled awards or shares available for award, but not previously
awarded). The Bonus Plan terminates on June 30, 2006. Shares awarded vest in
five annual installments, provided the recipient is still employed by the
Company on the vesting date. Compensation value is measured on the date the
award is granted. In 1998 and 1997, the Company granted 197,000 and 193,000
shares to key employees at a fair value of $17.54 and $20.25, respectively,
per share.
61
Compensation expense relating to stock awards was $3.9 million in 1998, $5.2
million in 1997 and $7.0 million in 1996. Shares awarded, net of cancellations,
are included in average shares outstanding.
Engelhard has certain deferred compensation arrangements where shares earned
under the Engelhard stock bonus plan are deferred and placed in a "Rabbi Trust".
Under certain conditions, the plan permits the employees to convert their
deferred stock balance to deferred cash. In the third quarter of 1998, the
Company adopted the provisions of Emerging Issues Task Force ("EITF") 97-14
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested". This EITF requires Engelhard to consolidate into
its financial statements the net assets of the trust. The impact to the third
quarter, 1998 consolidated financial statements was a $20.1 million increase in
treasury stock (measured at historical cost); the recording of a $23.7 million
deferred compensation obligation (measured on the reporting date by fair value
of the Engelhard common stock held in the trust on behalf of the employees); and
a charge to equity for the $3.6 million difference (referred to as the
"transition differential"). After the transition date but prior to final
settlement, increases/decreases in the deferred compensation liability will be
recognized (1) in equity to the extent that the share price change falls within
the transition differential, or (2) in income to the extent that the share
change falls outside the transition differential.
During the fourth quarter of 1998, the Company recognized a charge to expense of
$2.4 million as a result of an increase in the stock price from $17.69 at
September 30, 1998 to $19.50 at December 31, 1998. For the year ended December
31, 1998, the total charge to expense as a result of adopting EITF 97-14 was
$2.4 million. The total value of the Rabbi Trust at December 31, 1998 was $26.1
million.
14. EARNINGS PER SHARE
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
specifies the computation, presentation, and disclosure requirements for
basic and diluted earnings per share (EPS). The following table represents the
computation of basic and diluted EPS as required by SFAS 128.
62
EARNINGS PER SHARE COMPUTATIONS
Year ended December 31 (in thousands, except per share data)
1998 1997 1996
----------------------------------
Basic EPS Computation
Net income applicable to common shares $187,084 $ 47,778 $150,447
----------------------------------
Average number of shares outstanding 144,157 144,270 143,810
----------------------------------
Basic earnings per share $ 1.30 $ 0.33 $ 1.05
==================================
Diluted EPS Computation
Net income applicable to common shares $187,084 $ 47,778 $150,447
----------------------------------
Average number of shares outstanding 144,157 144,270 143,810
Effect of dilutive stock options 818 1,667 1,914
Effect of Rabbi Trust 391 - -
----------------------------------
Total number of shares outstanding 145,366 145,937 145,724
----------------------------------
Diluted earnings per share $ 1.29 $ 0.33 $ 1.03
==================================
Options to purchase additional shares of common stock of 2,886,768 (at a price
range of $19.72 to $23.88), 1,775,827 (at a price range of $20.91 to $23.88),
and 1,757,223 (at a price range of $22.38 to $23.88) were outstanding at the end
of 1998, 1997 and 1996, respectively, but were not included in the computation
of diluted EPS because the options' exercise prices were greater than the
average annual market price of the common shares. Shares held in the Rabbi Trust
were included in basic and diluted shares outstanding until adoption of EITF
97-14 (as of September 30, 1998) at which point they were considered treasury
stock and excluded from basic shares outstanding.
15. BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" in the fourth quarter of 1998. SFAS No. 131 requires a
new basis of determining reportable business segments, i.e., the management
reporting approach. This approach designates the Company's internal
organizational structure as used by management for making operating decisions
and assessing performance, as the source of business segments. On this basis,
the Company has five reportable business segments: Environmental Technologies,
Process Technologies, Paper Pigments and Additives, Specialty Pigments and
Additives, and Industrial Commodities Management. Segment results, as well as
selected geographic data, are presented on this new basis in 1998, as well as
1997 and 1996.
Items that are allocated to the segment results include various corporate
overhead charges such as expenses for information technology, research and
development, and site management. Unallocated items include interest expense,
royalty income, sale of inventory accounted for under the LIFO method, special
and other charges and other miscellaneous Corporate items.
63
The Environmental Technologies segment, located principally in the United
States, Europe and South Africa, develops and markets sophisticated
emission-control technologies and systems that enable customers to cost
effectively meet stringent environmental regulations.
The Process Technologies segment, located principally in the United States and
Europe, enables customers to improve the productivity, efficiency, environmental
compliance and safety of their processes through advanced chemical and
polymerization catalysts, sorbents and separation products and related
manufacturing expertise. In addition, the segment manufactures advanced cracking
and hydroprocessing technologies that enable petroleum refiners to more
efficiently produce gasoline, transportation fuels and heating oils.
The Paper Pigments and Additives segment, located principally in the United
States, Finland and Japan, provides kaolin-based performance products used as
coating and extender pigments by the paper industry. These pigments provide the
opacity, brightness, gloss and printability in paper products.
The Specialty Pigments and Additives segment, located principally in the United
States and South Korea, provides functional additives to customers in a broad
array of markets including coatings, plastics, cosmetics and construction. The
segment also provides iridescent films used in a variety of creative, decorative
and packaging applications. These products help customers improve the look,
performance and overall cost of their products.
The Industrial Commodities Management segment, located principally in the United
States, Europe and Japan, purchases and sells precious metals, base metals and
related products. It does so under a variety of pricing and delivery
arrangements structured to meet the logistical, financial and price risk
management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metals refining and
produces salts and solutions.
Within the "All Other" category, sales to external customers are primarily from
the Engineered Materials business; operating earnings/(losses) are derived
primarily from the Engineered Materials business, the sale of inventory
accounted for under the LIFO method, royalty income and other miscellaneous
income and expense items not related to the reportable segments.
64
The following table presents certain data by business segment:
BUSINESS SEGMENT INFORMATION (in millions)
Paper Specialty
Pigments Pigments Industrial Reportable
Environmental Process and and Commodities Segments All
Technologies Technologies Additives Additives Management Sub-total Other Total
- --------------------------------------------------------------------------------------------------------------------------------
1998
Sales to external customers $558.5 $533.3 $239.4 $349.0 $2,346.8 $4,027.0 $147.6 $4,174.6
Operating earnings 83.5 78.5 35.8 42.0 48.4 288.2 (1)21.2 309.4
Interest expense - - - - - - 58.9 58.9
Depreciation, depletion &
amortization 16.9 24.4 24.6 22.4 1.6 89.9 11.0 100.9
Equity in earnings (losses)
of affiliates (0.5) (1.2) - - - (1.7) 11.8 10.1
Total assets 376.5 (2)595.3 358.3 509.4 611.5 2,451.0 415.3 2,866.3
Equity investments 4.2 0.7 1.3 - - 6.2 147.4 153.6
Capital expenditures 27.5 27.4 27.4 25.6 3.6 111.5 5.0 116.5
- -----------------------------------------------------------------------------------------------------------------------------
1997
Sales to external customers $512.4 $447.5 $242.0 $349.0 $1,954.0 $3,504.9 $125.8 $3,630.7
Operating earnings/(losses) 68.3 55.6 33.9 64.3 44.9 267.0 (1)(80.9) 186.1
Interest expense - - - - - - 52.8 52.8
Depreciation, depletion &
amortization 15.6 19.3 23.5 20.1 1.0 79.5 8.6 88.1
Equity in earnings (losses)
of affiliates 1.1 0.1 (0.6) - - 0.6 (3)(48.4) (47.8)
Total assets(4) 331.3 371.1 348.2 515.4 550.4 2,116.4 469.9 2,586.3
Equity investments 8.8 1.9 1.3 - - 12.0 144.1 156.1
Capital expenditures 28.6 33.6 37.5 21.8 2.7 124.2 12.7 136.9
- -----------------------------------------------------------------------------------------------------------------------------
1996
Sales to external customers $465.7 $433.3 $237.6 $260.5 $1,659.1 $3,056.2 $128.2 $3,184.4
Operating earnings 53.9 58.6 41.9 39.1 21.3 214.8 (1)42.8 257.6
Interest expense - - - - - - 45.0 45.0
Depreciation, depletion &
amortization 14.0 18.9 22.2 14.6 0.6 70.3 4.6 74.9
Equity in earnings (losses)
of affiliates 0.7 0.6 - - - 1.3 (6.3) (5.0)
Total assets 298.1 362.3 328.6 451.1 441.0 1,881.1 609.4 2,490.5
Equity investments 7.6 1.9 1.9 - - 11.4 206.1 217.5
Capital expenditures 35.6 37.6 33.0 9.9 2.1 118.2 10.0 128.2
<FN>
(1) Includes pre-tax gains on the sale of certain inventories accounted for under the LIFO method of $8.2 million in
1998, $3.3 million in 1997 and $5.4 million in 1996. In addition, the 1997 amount includes special and other
charges of $104.8 million.
(2) The total assets of the Process Technologies segment reflect the acquisition of the Mallinckrodt businesses in
May 1998.
</FN>
65
(3) Includes special and other charges of $44.8 million in 1997.
(4) The special and other charges in 1997 reduced total assets by $21.7 million in the Environmental
Technologies segment, $27.3 million in the Process Technologies segment, $0.8 million in the Specialty
Pigments and Additives segment, $39.0 million in Industrial Commodities Management and $44.8 million
in All Other (see Note 3, "Special and Other Charges" of the Notes to Consolidated Financial
Statements).
The following table presents certain data by geographic area:
GEOGRAPHIC AREA DATA (in millions) 1998 1997 1996
- --------------------------------------------------------------------------------
Sales to External Customers:
United States $2,824.1 $2,455.0 $1,910.9
International 1,350.5 1,175.7 1,273.5
- --------------------------------------------------------------------------------
Total consolidated sales to external customers $4,174.6 $3,630.7 $3,184.4
- --------------------------------------------------------------------------------
Property, Plant and Equipment, Net:
United States $ 791.6 $ 718.3 $ 657.7
International 84.9 69.9 87.0
- --------------------------------------------------------------------------------
Total Property, Plant and Equipment, net $ 876.5 $ 788.2 $ 744.7
- --------------------------------------------------------------------------------
The special and other charges in 1997 reduced total assets by $32.6 million in
the United States and by $101.0 million in Europe. The Company's international
operations are predominantly based in Europe.
66
The following table reconciles segment operating earnings with earnings before
income taxes as shown in the Consolidated Statements of Earnings:
SEGMENT RECONCILIATIONS (in millions)
1998 1997 1996
-------------------------------
Total Sales to External Customers:
Total sales for reportable segments $4,027.0 $3,504.9 $3,056.2
Sales for other business units 107.1 113.4 122.3
All other 40.5 12.4 5.9
-------------------------------
Total consolidated sales to external customers $4,174.6 $3,630.7 $3,184.4
===============================
Earnings Before Income Taxes:
Operating earnings for reportable segments $ 288.2 $ 267.0 $ 214.8
Operating earnings for other business units 5.7 4.2 12.1
Special and other charges - (104.8) -
Other operating earnings 15.5 19.7 30.7
-------------------------------
Total operating earnings $ 309.4 $ 186.1 $ 257.6
Interest expense (58.9) (52.8) (45.0)
Equity in earnings (losses) of affiliates 10.1 (3.0) (5.0)
Special and other charges - (44.8) -
Gain on sale of investment - 0.3 2.4
-------------------------------
Earnings before income taxes $ 260.6 $ 85.8 $ 210.0
===============================
Total Assets
Total assets for reportable segments $2,451.0 $2,116.4 $1,881.1
Assets for other business units 27.1 23.3 24.2
Other assets 388.2 446.6 585.2
-------------------------------
Total consolidated assets $2,866.3 $2,586.3 $2,490.5
===============================
For the year ended December 31, 1996, Engelhard-CLAL, a related party and a
customer of the Environmental Technologies and Industrial Commodities Management
segments, accounted for approximately $513 million (16%) of the Company's net
sales.
Ford Motor Company, a customer of the Environmental Technologies and Industrial
Commodities Management segments, accounted for approximately $731 million (18%)
of the Company's net sales in 1998 and approximately $443 million (12%) of the
Company's net sales in 1997.
16. LEASE COMMITMENTS
The Company rents real property and equipment under long-term operating leases.
Future minimum rental payments required under noncancellable operating leases,
having initial or remaining lease terms in excess of one year, are $12.0 million
in 1999, $11.0 million in 2000, $9.8 million in 2001, $9.5 million in 2002, $9.4
million in 2003 and $92.6 million thereafter. Rental/lease expense, including
all leases, amounted to $10.7 million in 1998, $9.2 million in 1997 and $11.8
million in 1996. In December 1998, the Company entered into a sales-leaseback
transaction for property that served as the principal executive and
administrative offices of the Company and its operating businesses. The term of
the lease is twenty years.
67
17. ENVIRONMENTAL COSTS
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing, environmental investigations
and cleanup plans at several currently or formerly owned and/or operated sites,
including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The Company is
continuing to investigate contamination at Plainville under a 1993 agreement
with the United States Environmental Protection Agency (EPA) and is awaiting
approval of a decommissioning plan by the State of Massachusetts under authority
delegated by the Nuclear Regulatory Commission. Investigation of the
environmental status at the Salt Lake City site continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at the Attapulgus site, under a 1994 consent order with the Georgia
Department of Natural Resources, Environmental Protection Division, is complete
pending final Department approval.
In addition, seven sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many cases,
the dollar amount of the claim is unspecified and claims have been asserted
against a number of other entities for the same relief sought from the Company.
Based on existing information, the Company believes that it is a de minimis
contributor of hazardous substances at a number of the sites referenced above.
Subject to the reopening of existing settlement agreements for extraordinary
circumstances or natural resource damages, the Company has settled a number of
other cleanup proceedings. The Company has also responded to information
requests from EPA and state regulatory authorities in connection with other
Superfund sites.
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1998 and 1997 were $39.5 million and
$43.6 million, respectively, including $1.2 million and $3.8 million,
respectively, for Superfund sites. These amounts represent those costs which the
Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 55% of what it believes are the reasonably possible environmental
cleanup related costs of a noncapital nature. The estimate of reasonably
possible costs is less certain than the probable estimate upon which the accrual
is based.
During the past three-year period, cash payments for environmental cleanup
related matters were $4.1 million, $6.0 million and $7.0 million for 1998, 1997
and 1996, respectively. The amounts accrued in connection with environmental
cleanup related matters were not significant over this time period.
For the past three-year period, environmental related capital projects have
averaged less than 10 percent of the Company's total capital expenditure
programs, and the expense of environmental compliance (e.g. environmental
testing, permits, consultants and in-house staff) was not material.
68
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations. Based
on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup related matters are
projected to be $8.0 million for 1999, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, management believes
that environmental cleanup related reserves at December 31, 1998 are reasonable
and adequate and that environmental matters are not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on the
Company's operating results or cash flows.
18. LITIGATION AND CONTINGENCIES
Various lawsuits, claims and proceedings are pending against the Company. During
1998, 1997 and 1996, the Company provided $2.4 million, $2.8 million and $4.3
million, respectively, for existing legal proceedings.
The Company and certain of its present and former officers have agreed to a
Stipulation of Settlement ("Stipulation") of a class action filed in November
1995 which alleged misstatements and omissions in connection with press releases
issued in 1995 concerning the Company's PremAir (trademark) catalyst systems. In
the settlement, which was approved by the Court on December 8, 1998, in exchange
for the dismissal of the complaint against all defendants, the Company will pay
no more than $7.2 million of a maximum settlement amount of $21.5 million. The
balance of the settlement amount will be paid by insurance carried by the
Company for such purposes. Because the final settlement amount will depend on
the number of eligible shares of the Company's common stock for which claims are
submitted, the amounts to be paid by the Company and the insurer could be less,
but in no event more, than the above-stated amounts. This matter, if resolved
in accordance with the Stipulation of settlement, will not have a material
adverse effect on the operating results of the Company.
The Company is one of a number of defendants in numerous proceedings which
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to talc, asbestos or other "toxic" substances purportedly supplied by
the Company and other defendants. The Company is also subject to a number of
environmental contingencies (see Note 17, "Environmental Costs" of the Notes to
Consolidated Financial Statements) and is a defendant in a number of lawsuits
covering a wide range of other matters. In some of these matters, the remedies
sought or damages claimed are substantial. While it is not possible to predict
with certainty the ultimate outcome of these lawsuits or the resolution of the
environmental contingencies, management believes, after consultation with
counsel, that resolution of these matters is not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from management's current expectations, could have a material adverse
effect on the operating results or cash flows.
69
In July 1996, the Securities and Exchange Commission (SEC) issued a formal order
of investigation concerning the sales of Engelhard stock by certain of the
Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company provided
documents to the SEC and witnesses were examined by the SEC staff during 1996.
In 1998, management learned that Engelhard and several other companies operating
in Japan had been victims of a fraudulent scheme involving base-metal inventory
held in third-party warehouses in Japan. The inventory loss was approximately
$40 million in 1997 and $20 million in 1998. The Company is vigorously pursuing
various recovery actions. These actions include negotiations with the various
third parties involved and in several instances the commencement of litigation.
In the first quarter of 1998, Engelhard recorded a receivable from the insurance
carriers and third parties involved for approximately $20 million. This amount
represents management's and counsel's best estimate of the minimum probable
recovery from the various insurance policies and other parties involved in the
fraudulent scheme.
In February 1999, the Peruvian taxing authority made public an investigation of
the country's gold industry stemming from suspected evasion of value-added tax
payments. Engelhard Peru, S.A., a purchaser and exporter of gold, has paid the
tax to its vendors for each purchase and then claimed a refund from the Peruvian
taxing authority after export. Engelhard typically would post a one-month letter
of credit to obtain a prompt refund. Engelhard's refund claims for November and
December of 1998 and January of 1999 were approximately $10 million per month.
Engelhard has received the refunds for November and December, but, at the
request of the government, the letters of credit, in the amount of $20 million,
have been extended until July 1999 while the industry investigation is
conducted. The refund for January 1999 is going through the claim procedure and
remains unpaid, and the related January letter of credit in the amount of $10
million, has also been extended until July 1999. The January letter of credit
becomes effective upon receipt of the January refund by Engelhard. Management
believes, based upon consultation with counsel, that all appropriate tax
payments have been made and that the Company is entitled to all refunds claimed.
However, if the resolution of this matter differs from management's belief, the
maximum financial exposure is approximately $30 million.
70
19. SUPPLEMENTAL INFORMATION
The following table presents certain supplementary information to the
Consolidated Statements of Cash Flows:
SUPPLEMENTARY CASH FLOW INFORMATION
(in millions) 1998 1997 1996
---------------------------
Cash paid during the year for
Interest $ 49.6 $ 43.9 $ 34.2
Income taxes 57.6 29.5 41.3
Change in assets and liabilities -- source (use)
Receivables $ (41.1) $ 43.2 $ (82.1)
Committed metal positions (98.0) (81.6) (64.8)
Inventories 23.9 (36.0) (33.2)
Other current assets (29.5) 24.4 (7.5)
Other noncurrent assets 21.8 (68.8) 0.2
Accounts payable 41.4 17.1 2.7
Accrued liabilities (7.6) 48.2 (23.5)
Noncurrent liabilities (14.1) (23.1) 2.5
---------------------------
Net change in assets and liabilities $(103.2) $(76.6) $(205.7)
===========================
The following table presents certain supplementary information to the
Consolidated Balance Sheets:
SUPPLEMENTARY BALANCE SHEET INFORMATION
(in millions) 1998 1997
------------------
Taxes payable $ 63.9 $ 50.4
Payroll-related accruals 48.7 45.3
Deferred income 17.4 7.1
Interest payable 13.5 12.4
Restructuring reserve 9.6 22.0
Environmental reserve 8.5 10.6
Other 73.6 90.2
------------------
Other current liabilities $235.2 $238.0
==================
20. SUBSEQUENT EVENT
In the fourth quarter of 1998, Minorco announced that it was merging with Anglo
American Corporation of South Africa Limited and that it would sell all the
shares of common stock of Engelhard owned by Minorco and its affiliates,
approximately 46 million shares.
On March 2, 1999, Engelhard announced that Minorco would sell 26 million shares
in this offering and it also agreed to purchase approximately 18 million of its
shares owned by Minorco. Engelhard will purchase those shares for the price, net
of the underwriting commission, received by Minorco in this offering. However,
if that net price is more than $18.90 per share, Engelhard will purchase those
18 million shares for $18.90 per share. If the underwriters do not exercise all
of their overallotment option granted to them by Minorco for up to 2 million
71
shares, Engelhard will purchase those remaining shares at the same price that it
will purchase the 18 million shares. The 20 million shares, which includes the
additional 2 million shares related to the overallotment option, represent
approximately 14% of Engelhard's total shares outstanding. Minorco has agreed to
compensate Engelhard for its costs and other expenses relating to this offering
and its purchase of the shares.
Engelhard plans to initially finance the purchase with short-term debt and
intends to take steps to reduce its total debt going forward. Engelhard does not
believe the financing of the purchase will have any material impact on its
liquidity. Engelhard anticipates issuing $100 million of bonds by mid-1999 to
retire a portion of the short-term debt. Engelhard is reviewing its portfolio to
identify non-core assets and businesses for potential sale and exploring ways to
further reduce operating expenses. Engelhard expects the buy-back to increase
its earnings per share. If Engelhard had purchased the 20 million shares from
Minorco on January 1, 1999 at a price of $18.90 per share, it is estimated that
Engelhard's first quarter 1999 earnings per share would have increased by
approximately $.02 per share on both a basic and diluted basis.
Engelhard's purchase of shares and the secondary offering are expected to be
completed during the second quarter of 1999.
In October 1998, Standard & Poor's and Moody's Investors Service each placed its
ratings of Engelhard Corporation debt on credit watch. The rating action was
prompted by Engelhard's announcement that it had hired financial advisors to
help the Company explore its strategic alternatives after Minorco announced that
it will be divesting its 31.8% interest in Engelhard Corporation. In March 1999,
Moody's Investors Service confirmed the A3 ratings on Engelhard's senior
unsecured debt and confirmed the Company's commercial paper rating at Prime-2.
In addition, in March 1999 Standard & Poor's announced that ratings on Engelhard
remain on credit watch, with the implications being revised to "negative" from
"developing". If the transaction is consummated as described above, Standard &
Poor's indicated that it would lower its corporate credit and senior unsecured
debt ratings to single-'A' minus from single-'A' and its commercial paper
ratings to A-'2' from A-'1'. These rating actions followed the March 2, 1999
announcement discussed above.
72
Report of Independent Accountants
_________________________________
To the Shareholders and Board of Directors of Engelhard Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, shareholders' equity and cash flows,
appearing on pages 32 through 65 present fairly, in all material respects, the
consolidated financial position of Engelhard Corporation and Subsidiaries (the
"Company") as of December 31, 1998 and 1997 and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. 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.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 4, 1999, except
for Note 20, as to which
the date is March 2, 1999
73
First Second Third Fourth
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) quarter quarter quarter quarter
-------------------------------------------------------
1998
Net sales $970.6 $1,074.5 $1,039.5 $1,090.0
Gross profit 149.0 171.8 150.0 176.1
Earnings before income taxes 62.3 73.4 58.3 66.5
Net earnings 43.2 50.9 45.2 47.8
Basic earnings per share 0.30 0.35 0.31 0.33
Diluted earnings per share 0.30 0.35 0.31 0.33
1997
Net sales $884.2 $896.7 $836.1 $1,013.6
Gross profit 141.7 154.5 140.1 163.6
Earnings/(loss) before income taxes 53.8 63.1 54.7 (85.7)
Net earnings/(loss) 37.6 44.2 38.8 (72.8)
Basic earnings/(loss) per share 0.26 0.31 0.27 (0.50)
Diluted earnings/(loss) per share 0.26 0.30 0.27 (0.50)
<FN>
Results in the third and fourth quarters of 1998 include pre-tax gains of $4.0 million ($2.4 million after tax)
and $4.2 million ($2.5 million after tax), respectively, on the sale of inventory accounted for under the LIFO
method. In addition, the effective tax rate for the third quarter of 1998 was reduced to reflect the reversal
of a valuation allowance related to capital loss carryforwards (see Note 10, "Income Taxes" of the Notes to
Consolidated Financial Statements for further detail).
Results in the fourth quarter of 1997 include a pre-tax gain of $3.3 million ($2.0 million after tax) on the
sale of inventory accounted for under the LIFO method.
Results in the fourth quarter of 1997 include special and other charges of $149.6 million ($117.7 million after
tax) for a variety of events (including restructuring actions and a loss from the base-metal fraud in Japan).
Basic and diluted earnings per share amounts are calculated independently for each of the quarters presented.
The sum of the quarters may not equal the full year earnings-per-share amounts.
</FN>
Changes in and Disagreements with
Item 9. Accountants on Accounting and Financial Disclosure
- ------ --------------------------------------------------
Not applicable.
74
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
(a) Directors -
Information concerning directors of the Company is included under the
caption "Election of Directors" and "Information with Respect to Nominees and
Directors Whose Terms Continue" in the Proxy Statement for the 1999 Annual
Meeting of Shareholders and is incorporated herein by reference.
(b) Executive Officers -
ARTHUR A. DORNBUSCH, II Age 55. Vice President, General Counsel and
Secretary of the Company from prior to 1994.
MARK DRESNER Age 47. Vice President of Corporate Communications
effective December 17, 1998. Director of
Corporate Communications from October 1995 to
December 1998. Director of Human Resources for
the Chemical Catalysts Group from August 1994 to
September 1995. Director of Communications prior
thereto.
THOMAS P. FITZPATRICK Age 60. Senior Vice President and Chief Financial
Officer effective May 1, 1997. Partner with
Coopers & Lybrand L.L.P. prior thereto.
JOSEPH E. GONNELLA Age 52. Senior Vice President, Strategy and
Corporate Development effective February 1, 1997.
Group Vice President and General Manager of the
Environmental Technologies Group from August 1994
to January 1997. Business Director of the Mobile
Source business prior thereto.
JOHN C. HESS Age 46. Vice President, Human Resources effective
August 1, 1997. Director of Human Resources for
the Chemical Catalyst Group from November 1995 to
July 1997. Director of Human Resources for
Policies, Plans and Services prior thereto.
PETER B. MARTIN Age 59. Vice President, Investor Relations
effective June 18, 1997. Vice President, Investor
Relations, W.R. Grace & Company prior thereto.
BARRY W. PERRY * Age 52. President and Chief Operating Officer
effective February 1, 1997. Group Vice President
and General Manager of the Pigments and Additives
Group prior thereto. Mr. Perry is also a director
of Arrow Electronics.
PETER R. RAPIN Age 44. Treasurer effective July 8, 1998.
Assistant Treasurer from July 1995 to July 1998.
Director, Banking Services for the Westinghouse
Electric Corporation prior thereto.
* Also a director of the Company
75
ROBERT J. SCHAFFHAUSER Age 60. Vice President and Chief Technical Officer
effective February 1, 1997. Vice President,
Technology and Corporate Development from January
1995 to January 1997. Vice President, Corporate
Development prior thereto.
ORIN R. SMITH * Age 63. Chairman and Chief Executive Officer of
the Company since January 1995. President and
Chief Executive Officer of the Company prior
thereto. Mr. Smith is also a director of
Ingersoll-Rand Company, Perkin-Elmer Corporation,
Summit Bancorp and Vulcan Materials Company.
MICHAEL A. SPERDUTO Age 41. Vice President-Finance since July 8,
1998. Treasurer prior thereto.
DAVID C. WAJSGRAS Age 38. Controller of the Company effective
September 1, 1997. Chief Financial Officer and
Director of Financial Services with AlliedSignal
Inc. Business Services Group from July 1994 to
August 1997. Business Unit Controller for
AlliedSignal Inc. prior thereto.
* Also a director of the Company
Officers of the Company are elected at the meeting of the Board of
Directors held in May of each year after the annual meeting of shareholders and
serve until their successors shall be elected and qualified and shall serve as
such at the pleasure of the Board.
Item 11. Executive Compensation
- ------- ----------------------
Information concerning executive compensation is included under the caption
"Executive Compensation and Other Information" of the Proxy Statement for the
1999 Annual Meeting of Shareholders and is incorporated herein by reference.
Security Ownership of Certain
Item 12. Beneficial Owners and Management
- ------- --------------------------------
Information concerning security ownership of certain beneficial owners and
management is included under the captions "Information as to Certain
Shareholders" and "Share Ownership of Directors and Officers" of the Proxy
Statement for the 1999 Annual Meeting of Shareholders and is incorporated herein
by reference.
Certain Relationships
Item 13. and Related Transactions
- ------- ------------------------
Information concerning certain business relationships of nominees for
director and directors and related transactions is included under the captions
"Information as to Certain Shareholders", "Agreement with Minorco", "Information
with Respect to Nominees and Directors Whose Terms Continue", "Share Ownership
of Directors and Officers" and "Compensation Committee Interlocks, Insider
Participation and Certain Transactions" of the Proxy Statement for the 1999
Annual Meeting of Shareholders and is incorporated herein by reference.
76
PART IV
Exhibits, Financial Statement
Item 14. Schedules and Reports on Form 8-K Pages
- ------- --------------------------------- -----
(a) (1) Financial Statements and Schedules
Report of Independent Accountants 66
Consolidated Statements of Earnings for each of the 32
three years in the period ended December 31, 1998
Consolidated Balance Sheets at December 31, 1998 and 1997 33
Consolidated Statements of Cash Flows for each of the 34
three years in the period ended December 31, 1998
Consolidated Statements of Shareholders' Equity for each 35
of the three years in the period ended December 31, 1998
Notes to Consolidated Financial Statements 36-65
(2) Financial Statement Schedules
Consolidated financial statement schedules not filed
herein have been omitted either because they are not
applicable or the required information is shown in the
Notes to Consolidated Financial Statement in this
Form 10-K.
(b) In a report on Form 8-K filed with the Securities and *
Exchange Commission on October 29, 1998, the Company
recorded the adoption of its Stockholder Rights Plan.
In a report on Form 8-K filed with the Securities and *
Exchange Commission on March 2, 1999, the Company
reported the Stock Purchase And Registration Rights
Agreement between Engelhard Corporation and Minorco.
Exhibits Page
- -------- ----
(3) (a) Certificate of Incorporation of the Company *
(incorporated by reference to Form 10, as
amended on Form 8-K filed with the Securities
and Exchange Commission on May 19, 1981).
(3) (b) By-laws of the Company as amended September 17, 1981 *
(incorporated by reference to Form 10-Q for the
quarter ended September 30, 1981).
(3) (c) Certificate of Amendment to the Restated Certificate *
of Incorporation of the Company (incorporated by
reference to Form 10-K for the year ended December 31,
1987).
* Incorporated by reference as indicated.
77
Exhibits Pages
- -------- -----
(3) (d) Article XVII of the Registrant's By-laws as amended *
on May 2, 1988 (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on
May 21, 1988).
(3) (e) Certificate of Amendment to the Restated Certificate of *
Incorporation of the Company (incorporated by reference
to Form 10-Q for the quarter ended March 31, 1993).
(3) (f) Amendment to the Restated Certificate of Incorporation *
of the Company, filed with the State of Delaware, Office
of the Secretary of State on May 2, 1996 (incorporated
by reference to Form 10-Q filed with the Securities and
Exchange Commission on May 14, 1996).
(3) (g) By-laws of the Company as amended June 12, 1997 *
(incorporated by reference to Form 10-Q filed with the
Securities and Exchange Commission on August 13, 1997).
(3) (h) Article II of the By-laws of the Company as amended *
December 17, 1998 (incorporated by reference to Form S-8
filed with the Securities and Exchange Commission on
January 29, 1999).
(3) (i) Certificate of Designation relating to Series A Junior 78-84
Participating Preferred Stock, filed with the State of
Delaware, Office of the Secretary of State on November 12,
1998.
(10)(a) Form of Agreement of Transfer entered into between *
Engelhard Minerals & Chemicals Corporation and the
Company, dated May 18, 1981 (incorporated by
reference to Form 10, as amended on Form 8 filed
with the Securities and Exchange Commission on
May 19, 1981).
(10)(b) Engelhard Corporation Stock Option Plan of 1981 *
Restated as of December 13, 1989 - conformed copy
includes amendments through February 1995
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(c) Retirement Plan for Directors of Engelhard *
Corporation Effective January 1, 1985 - conformed
copy includes amendments through June 1991
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
* Incorporated by reference as indicated.
78
Exhibits Page
- -------- ----
(10)(d) Deferred Compensation Plan for Key Employees of *
Engelhard Corporation Effective August 1, 1985 -
conformed copy includes amendments through December
1993 (incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996) (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(e) Engelhard Corporation Directors and Executives *
Deferred Compensation Plan (1986-1989) - conformed
copy includes amendments through December 1993
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(f) Key Employees Stock Bonus Plan of Engelhard *
Corporation Effective July 1, 1986 - conformed
copy includes amendments through June 1992
(incorporated by reference to Form 10-K filed with
the Securities and Exchange Commission on
March 22, 1996).
(10)(g) Stock Bonus Plan for Non-Employee Directors of *
Engelhard Corporation Effective July 1, 1986 -
conformed copy includes amendments through
June 1992 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(h) Deferred Compensation Plan for Directors of *
Engelhard Corporation Restated as of May 7, 1987 -
conformed copy includes amendments through
December 1993 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(i) Supplemental Retirement Program of Engelhard *
Corporation as Amended and Restated Effective
January 1, 1989 - conformed copy includes
amendments through November 1994 (incorporated
by reference to Form 10-K filed with the Securities
and Exchange Commission on March 22, 1996).
(10)(j) Engelhard Corporation Directors and Executives *
Deferred Compensation Plan (1990-1993) -
conformed copy includes amendments through
November 1993 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
* Incorporated by reference as indicated.
79
Exhibits Page
- -------- ----
(10)(k) Engelhard Corporation Directors Stock Option *
Plan Effective May 4, 1995 (incorporated by
reference to the 1995 definitive Proxy Statement
filed with the Securities and Exchange Commission on
March 31, 1995).
(10)(l) Form of Agreement With Key Employees in the *
Event of an Acquisition of a Control Interest in
the Company, dated November 2, 1995 (incorporated by
reference to Form 10-K filed with the Securities and
Exchange Commission on March 22, 1996).
(10)(m) Amendments to the Key Employee Stock Bonus Plan of *
Engelhard Corporation adopted March 7, 1996
(incorporated by reference to the 1996 definitive
Proxy Statement filed with the Securities and
Exchange Commission on March 29, 1996).
(10)(n) Amendments to the Stock Bonus Plan for Non-Employee *
Directors of Engelhard Corporation adopted March 7,
1996 (incorporated by reference to the 1996 definitive
Proxy Statement filed with the Securities and Exchange
Commission on March 29, 1996).
(10)(o) Amendment to the Supplemental Retirement Program of *
Engelhard Corporation adopted December 19, 1996
(incorporated by reference to Form 10-K filed with the
Securities and Exchange Commission on March 27, 1997).
(10)(p) Form of Separation Agreement with L. Donald LaTorre, *
formerly a Director, President and Chief Operating
Officer of the Company, dated April 1, 1997
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on May 14,
1997).
(10)(q) Amendment to the Deferred Compensation Plan for Key *
Employees of Engelhard Corporation, adopted April 3,
1997 (incorporated by reference to Form 10-Q filed
with the Securities and Exchange Commission on
May 14, 1997).
(10)(r) Form of Employee Agreement with Orin R. Smith, Chairman *
and Chief Executive Officer of the Company, dated
October 3, 1996 and amended on March 5, 1998
(incorporated by reference to Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998).
* Incorporated by reference as indicated.
80
Exhibits Page
- -------- ----
(10)(s) Change in Control Agreement dated as of March 17, 1998 *
(incorporated by reference to Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998).
(10)(t) Change in Control Agreement (incorporated by reference *
to Form 10-Q filed with the Securities and Exchange
Commission on August 13, 1998).
(10)(u) Amendment to Key Employees Deferred Compensation Plan, *
effective August 6, 1998 (incorporated by reference
to Form 10-Q filed with the Securities and Exchange
Commission on August 13, 1998).
(10)(v) Amendment to Supplemental Retirement Program of *
Engelhard Corporation, effective June 11, 1998
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on August 13,
1998).
(10)(w) Engelhard Corporation Stock Option Plan of 1991 - 85-93
conformed copy includes amendments through
September 1998.
(10)(x) Rights Agreement, dated as of October 1, 1998 between *
the Company and ChaseMellon Shareholder Services, l.l.c.,
as Rights Agent (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on
October 29, 1998).
(10)(y) Amendment to Key Employees Stock Bonus Plan of *
Engelhard Corporation, effective October 1, 1998
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on
November 13, 1998).
(10)(z) Amendment to Supplemental Retirement Program of *
Engelhard Corporation, effective October 1, 1998.
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on
November 13, 1998).
(10)(aa) Amendment to Engelhard Corporation Directors and *
Executives Deferred Compensation Plan (1986-1989),
effective October 1, 1998 (incorporated by reference
to Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1998).
(10)(ab) Amendment to Engelhard Corporation Directors and *
Executives Deferred Compensation Plan (1990-1993),
effective October 1, 1998 (incorporated by reference
to Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1998).
81
Exhibits Pages
- -------- -----
(10)(ac) Amendment to Deferred Compensation Plan For Key *
Employees of Engelhard Corporation, effective
October 1, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
(10)(ad) Amendment to Deferred Compensation Plan For *
Directors of Engelhard Corporation, effective
October 1, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
(10)(ae) Amendment to Retirement Plan For Directors of *
Engelhard Corporation, effective October 1, 1998
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on
November 13, 1998).
(10)(af) Amendment to Stock Bonus Plan For Non-Employee *
Directors of Engelhard Corporation, effective
October 1, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
(10)(ag) Amendment to Deferred Compensation Plan for Key *
Employees of Engelhard Corporation, effective
August 6, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
(10)(ah) Stock Purchase and Registration Rights Agreement dated *
as of March 2, 1999 between the Company and Minorco
(incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 2, 1999).
(10)(ai) Engelhard Corporation Deferred Stock Plan for Nonemployee *
Directors, effective May 6, 1999 (incorporated by
reference to the 1998 definitive Proxy Statement filed
with the Securities and Exchange Commission on March 31,
1999).
(10)(aj) Credit Agreement dated as of April 10, 1997 (incorporated *
by reference to Form 10-Q filed with the Securities and
Exchange Commission on May 14, 1997).
(12) Computation of the Ratio of Earnings to Fixed Charges. 94-95
(21) Subsidiaries of the Registrant. 96-98
(23) Consent of Independent Accountants. 99-101
(24) Powers of Attorney. 102-113
82
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, in Iselin, New Jersey
on the 18th day of May 1999.
Engelhard Corporation
---------------------
Registrant
/s/Orin R. Smith
---------------------
Orin R. Smith
(Chairman and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Orin R. Smith Chairman and Chief Executive May 18, 1999
- ------------------------- Officer & Director
Orin R. Smith (Principal Executive Officer)
/s/ Thomas P. Fitzpatrick Senior Vice President and May 18, 1999
- ------------------------- Chief Financial Officer
Thomas P. Fitzpatrick (Principal Financial Officer)
/s/ David C. Wajsgras Controller May 18, 1999
- ------------------------- (Principal Accounting Officer)
David C. Wajsgras
83
* Director May 18, 1999
- ---------------------------
Linda G. Alvarado
* Director May 18, 1999
- ---------------------------
Marion H. Antonini
* Director May 18, 1999
- ---------------------------
Anthony W. Lea
* Director May 18, 1999
- --------------------------
William R. Loomis, Jr.
* Director May 18, 1999
- --------------------------
James V. Napier
* Director May 18, 1999
- --------------------------
Norma T. Pace
* Director May 18, 1999
- -------------------------
Barry W. Perry
* Director May 18, 1999
- -------------------------
Reuben F. Richards
* Director May 18, 1999
- -------------------------
Henry R. Slack
* Director May 18, 1999
- -------------------------
Douglas G. Watson
* By this signature below, Arthur A. Dornbusch, II has signed this Form 10-K
as attorney-in-fact for each person indicated by an asterisk pursuant to
duly executed powers of attorney filed with the Securities and Exchange
Commission included herein as Exhibit 24.
/s/ Arthur A. Dornbusch, II May 18, 1999
- ---------------------------
Arthur A. Dornbusch, II
84
EXHIBIT 3(i)
ENGELHARD CORPORATION
CERTIFICATE OF DESIGNATION OF BOARD OF DIRECTORS CLASSIFYING
AND DESIGNATING A SERIES OF PREFERRED STOCK AS
SERIES A JUNIOR PARTICIPATING PREFERRED STOCK
AND FIXING DISTRIBUTION AND
OTHER PREFERENCES AND RIGHTS OF SUCH SERIES
------------------------------------------------------------
78
ENGELHARD CORPORATION
----------
Certificate of Designation of Board of Directors Classifying
and Designating a Series of Preferred Stock as
Series A Junior Participating Preferred Stock
and Fixing Distribution and
Other Preferences and Rights of Such Series
----------
Engelhard Corporation, a Delaware corporation, having its
principal office in the State of New Jersey in the City of Iselin (the
"Company"), hereby certifies that:
Pursuant to authority conferred upon the Board of Directors by
the Restated Certificate of Incorporation ("Charter") and Bylaws of the Company,
the Board of Directors pursuant to resolutions adopted on October 1, 1998 (i)
authorized the creation and issuance of up to 200,000 shares of Series A Junior
Participating Preferred Stock which stock was previously authorized but not
issued and (ii) determined the voting powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions, and terms and conditions of redemption of the
shares of such series and the Dividend Rate payable on such series. Such voting
powers, designations, preferences and relative, participating, optional or other
special rights, qualifications, limitations or restrictions, and terms and
conditions of redemption, number of shares and Dividend Rate are as follows:
Section 1. Number of Shares and Designation. This class of
Preferred Stock shall be designated the Series A Junior Participating Preferred
Stock (the "Series A Preferred Shares") and the number of shares which shall
constitute such series shall be 200,000 shares, no par value. Such number of
shares may be increased or decreased by resolution of the Board of Directors;
provided, that no decrease shall reduce the number of Series A Preferred Shares
to a number less than the number of shares then outstanding plus the number of
shares reserved for issuance upon the exercise of outstanding options, rights or
warrants or upon the conversion of any outstanding securities issued by the
Company convertible into Series A Preferred Shares.
Section 2. Dividend Rights. (1) Subject to the rights of
holders of any shares of any series of Preferred Stock (or any similar stock)
ranking prior and superior to the Series A Preferred Shares with respect to
dividends, the holders of Series A Preferred Shares shall be entitled prior to
the payment of any dividends on shares ranking junior to the Series A Preferred
Shares to receive, when, as and if declared by the Board of Directors out of
funds legally available for the purpose, quarterly dividends payable in cash on
the first day of February, May, August and November in each year (each such date
being referred to herein as a "Quarterly Dividend Payment Date"), commencing on
the first Quarterly Dividend Payment Date after the first issuance of a share or
fraction of a share of Series A Preferred Shares, in an amount per share
79
(rounded to the nearest cent) equal to the greater of (a) $1.00 or (b) subject
to the provision for adjustment hereinafter set forth, 1000 times the aggregate
per share amount of all cash dividends, and 1000 times the aggregate per share
amount (payable in kind) of all non-cash dividends or other distributions (other
than a dividend payable in shares of common stock, par value $1.00 per share, of
the Company (the "Common Stock") or a subdivision of the outstanding shares of
Common Stock (by reclassification or otherwise)) declared on the Common Stock
since the immediately preceding Quarterly Dividend Payment Date, or, with
respect to the first Quarterly Dividend Payment Date, since the first issuance
of any share or fraction of a share of Series A Preferred Shares. In the event
the Company shall at any time (i) declare or pay any dividend on Common Stock
payable in shares of Common Stock, (ii) subdivide the outstanding Common Stock,
or (iii) combine the outstanding Common Stock into a smaller number of shares,
then in each such case the amount to which holders of Series A Preferred Shares
were entitled immediately prior to such event under clause (b) of the preceding
sentence shall be adjusted by multiplying such amount by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
(2) The Company shall declare a dividend or distribution on
the Series A Preferred Shares as provided in subparagraph (1) above immediately
after it declares a dividend or distribution on the Common Stock (other than a
dividend payable in shares of Common Stock); provided that, in the event no
dividend or distribution shall have been declared on the Common Stock during the
period between any Quarterly Dividend Payment Date and the next subsequent
Quarterly Dividend Payment Date, a dividend of $1.00 per share on the Series A
Preferred Shares shall nevertheless be payable on such subsequent Quarterly
Dividend Payment Date.
(3) Dividends shall begin to accrue and be cumulative on
outstanding Series A Preferred Shares from the Quarterly Dividend Payment Date
next preceding the date of issue of such Series A Preferred Shares, unless the
date of issue of such shares is prior to the record date for the first Quarterly
Dividend Payment Date, in which case dividends on such shares shall begin to
accrue from the date of issue of such shares, or unless the date of issue is a
Quarterly Dividend Payment Date or is a date after the record date for the
determination of holders of Series A Preferred Shares entitled to receive a
quarterly dividend and before such Quarterly Dividend Payment Date, in either of
which events such dividends shall begin to accrue and be cumulative from such
Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear
interest. Dividends paid on the Series A Preferred Shares in an amount less than
the total amount of such dividends at the time accrued and payable on such
shares shall be allocated pro rata on a share-by-share basis among all such
shares at the time outstanding. The Board of Directors may fix a record date for
the determination of holders of Series A Preferred Shares entitled to receive
payment of a dividend or distribution declared thereon, which record date shall
be no more than 30 days prior to the date fixed for the payment thereof.
Section 3. Liquidation. (1) Upon any liquidation, dissolution
or winding up of the Company, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Preferred Shares unless, prior
thereto, the holders of shares of Series A Preferred Shares shall have received
$1.00 per share (the "Series A Liquidation Preference"), plus an amount equal to
80
accrued and unpaid dividends and distributions thereon, whether or not declared,
to the date of such payment. Following the payment of the full amount of the
Series A Liquidation Preference, no additional distributions shall be made to
the holders of shares of Series A Preferred Shares unless, prior thereto, the
holders of shares of Common Stock shall have received an amount per share (the
"Common Adjustment") equal to the quotient obtained by dividing (i) the Series A
Liquidation Preference by (ii) 1000 (as appropriately adjusted as set forth in
subparagraph (3) below to reflect such events as stocks splits, stock dividends
and recapitalizations with respect to the Common Stock) (such number in clause
(ii), the "Adjustment Number"). Following the payment of the full amount of the
Series A Liquidation Preference and the Common Adjustment in respect of all
outstanding Series A Preferred Shares and shares of Common Stock, respectively,
holders of Series A Preferred Shares and holders of shares of Common Stock shall
receive their ratable and proportionate share of the remaining assets to be
distributed in the ratio of the Adjustment Number to 1 with respect to the
Series A Preferred Shares and Common Stock, on a per share basis, respectively.
(2) In the event, however, that there are not sufficient
assets available to permit payment in full of the Series A Liquidation
Preference and the liquidation preferences of all other series of Preferred
Stock, if any, which rank on a parity with the Series A Preferred Shares, then
such remaining assets shall be distributed ratably to the holders of such parity
shares in proportion to their respective liquidation preferences. In the event,
however, that there are not sufficient assets available to permit payment in
full of the Common Adjustment, then such remaining assets shall be distributed
ratably to the holders of Common Stock.
(3) In the event the Company shall at any time (i) declare any
dividend on Common Stock payable in shares of Common Stock, (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the Adjustment Number in effect
immediately prior to such event shall be adjusted by multiplying such Adjustment
Number by a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator of which is
the number of shares of Common Stock that were outstanding immediately prior to
such event.
Section 4. No Redemption. The Series A Preferred Shares
shall not be redeemable.
Section 5. Voting Rights. The holders of Series A Preferred
Shares shall have the following voting rights:
(1) Subject to the provision for adjustment hereinafter set
forth, each Series A Preferred Share shall entitle the holder thereof to 1000
votes on all matters voted on at a meeting of the stockholders of the Company.
In the event the Company shall at any time (i) declare or pay any dividend on
Common Stock payable in shares of Common Stock, or (ii) subdivide the
outstanding Common Stock, or (iii) combine the outstanding Common Stock into a
smaller number of shares, then in each such case the number of votes per share
to which holders of Series A Preferred Shares were entitled immediately prior to
such event shall be adjusted by multiplying such number by a fraction, the
numerator of which is the number of shares of Common Stock outstanding
immediately after such event and the denominator of which is the number of
shares of Common Stock that were outstanding immediately prior to such event.
81
(2) Except as otherwise provided herein or by law, the holders
of Series A Preferred Shares and the holders of shares of Common Stock and any
other capital stock of the Company having general voting rights shall vote
together as one voting group on all matters submitted to a vote of stockholders
of the Company.
(3) Except as set forth herein or as otherwise provided by
law, holders of Series A Preferred Shares shall have no special voting rights
and their consent shall not be required (except to the extent they are entitled
to vote with holders of Common Stock as set forth herein) for taking any
corporate action.
Section 6. Certain Restrictions.
(1) Whenever quarterly dividends or other dividends or
distributions payable on the Series A Preferred Stock as provided in Section 2
are in arrears, thereafter and until all accrued and unpaid dividends and
distributions, whether or not declared, on Series A Preferred Shares outstanding
shall have been paid in full, the Company shall not:
(i)declare or pay dividends on, make any other distributions
on, or redeem or purchase or otherwise acquire for consideration any
shares of stock ranking junior (either as to dividends or upon
liquidation, dissolution or winding up) to the Series A Preferred
Shares;
(ii)declare or pay dividends on or make any other
distributions on any shares of stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Shares, except dividends paid ratably on the Series
A Preferred Shares and all such parity stock on which dividends are
payable or in arrears in proportion to the total amounts to which the
holders of all such shares are then entitled;
(iii) redeem or purchase or otherwise acquire for
consideration shares of any stock ranking on a parity (either as to
dividends or upon liquidation, dissolution or winding up) with the
Series A Preferred Shares, provided that the Company may at any time
redeem, purchase or otherwise acquire shares of any such parity stock
in exchange for shares of any stock of the Company ranking junior
(either as to dividends or upon dissolution, liquidation or winding up)
to the Series A Preferred Shares; or
(iv)purchase or otherwise acquire for consideration any shares
of Series A Preferred Shares or any shares of stock ranking on a parity
with the Series A Preferred Shares, except in accordance with a
purchase offer made in writing or by publication (as determined by the
Board of Directors) to all holders of such shares upon such terms as
the Board of Directors, after consideration of the respective annual
dividend rates and other relative rights and preferences of the
respective series and classes, shall determine in good faith will
result in fair and equitable treatment among the respective series or
classes.
82
(2) The Company shall not permit any subsidiary of the Company
to purchase or otherwise acquire for consideration any shares of stock of the
Company unless the Company could, under subparagraph (1) of this Section 6,
purchase or otherwise acquire such shares at such time and in such manner.
Section 7. Reacquired Shares. Any Series A Preferred Shares
purchased or otherwise acquired by the Company in any manner whatsoever shall be
retired and cancelled promptly after the acquisition thereof. All such shares
shall upon their cancellation become authorized but unissued shares of Preferred
Stock and may be reissued as part of a new series of Preferred Stock to be
created by resolution or resolutions of the Board of Directors, subject to the
conditions and restrictions on issuance set forth herein or in the Charter.
Section 8. Merger, Consolidation, etc. In case the Company
shall enter into any merger, consolidation, combination or other transaction in
which the shares of Common Stock are exchanged for or changed into other stock
or securities, cash and/or any other property, then in any such case each Series
A Preferred Share shall at the same time be similarly exchanged or changed into
an amount per share (subject to the provision for adjustment hereinafter set
forth) equal to 1000 times the aggregate amount of stock, securities, cash
and/or any other property (payable in kind), as the case may be, into which or
for which each share of Common Stock is changed or exchanged. In the event the
Company shall at any time (i) declare any dividend on Common Stock payable in
shares of Common Stock, (ii) subdivide the outstanding Common Stock, or (iii)
combine the outstanding Common Stock into a smaller number of shares, then in
each such case the amount set forth in the preceding sentence with respect to
the exchange or change of Series A Preferred Shares shall be adjusted by
multiplying such amount by a fraction, the numerator of which is the number of
shares of Common Stock outstanding immediately after such event and the
denominator of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
Section 9. Ranking. The Series A Preferred Shares shall rank,
with respect to the payment of dividends and distribution of assets, junior to
all series of any other class of the Company's Preferred Stock unless the terms
of any such series shall provide otherwise.
Section 10. Amendment. The Charter, including this Certificate
of Designation establishing the rights and preferences of the Series A Preferred
Shares, shall not be amended in any manner which would materially alter or
change the powers, preferences or special rights of the Series A Preferred
Shares so as to affect them adversely without the affirmative vote of the
holders of a majority of the outstanding shares of Series A Preferred Shares,
voting separately as one voting group.
Section 11. Fractional Shares. Series A Preferred Shares may
be issued in fractions of a share which shall entitle the holder, in proportion
to such holder's fractional shares, to exercise voting rights, receive
dividends, participate in distributions and to have the benefit of all other
rights of holders of Series A Preferred Shares.
83
IN WITNESS WHEREOF, the Company has caused this Certificate of
Designation to be signed in its name and on its behalf and attested to by the
undersigned on this 1st day of October, 1998 and the undersigned acknowledges
under the penalties of perjury that this Certificate of Designation is the
corporate act of said Company and that to the best of his knowledge, information
and belief, the matters and facts set forth herein are true in all material
respects.
ENGELHARD CORPORATION
By: /s/ Arthur A. Dornbusch, II
------------------------------
Name: Arthur A. Dornbusch, II
Title: Vice President, General
Counsel and Secretary
Attest:
/s/ Lester Fliegel
- --------------------------
Name: Lester Fliegel
Title: Assistant Secretary
84
EXHIBIT 10(w)
ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1991
-------------------------
85
ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1991
1. Purposes. This Stock Option Plan (the "Plan") of Engelhard
Corporation (the "Company") is established so that the Company may make
available to essential executives the opportunity to acquire ownership of
Company stock pursuant to options constituting incentive or non-qualified stock
options under the Internal Revenue Code. It is anticipated that such stock
options will materially assist the Company in providing incentives to essential
executives for future performance.
2. Administration. The Plan shall be administered by a
committee (the "Committee") which shall be appointed from time to time by the
Board of Directors of the Company (the "Board of Directors"), and shall consist
of not less than two directors of the Company who qualify as "disinterested
persons" under Rule 16b-3(c)(2) issued by the Securities and Exchange
Commission. The Committee shall have full power and authority, subject to the
terms and conditions of the Plan, to determine the essential executives to whom
awards may be made under the Plan, the number of such shares to be awarded to
each of such essential executives, the applicable terms and conditions of such
awards and all other matters which may arise in the administration of the Plan.
The determination of the Committee concerning any matter arising under or with
respect to the Plan or any awards granted hereunder shall be final, binding and
conclusive on all interested persons. The Committee may as to all questions of
accounting rely conclusively upon any determinations made by the independent
auditors of the Company. Notwithstanding any provision of the Plan to the
contrary, the Chief Executive Officer of the Company shall have the power and
authority, subject to the terms and conditions of the Plan, to make awards under
the Plan to executives who are not officers or directors of the Company for
purposes of Section 16(b) of the Securities Exchange Act of 1934, as amended;
provided, however, that the authority of the Chief Executive Officer to make
such awards shall be subject to limitations as may be imposed from time to time
by the Committee.
3. Stock Available for Options. There shall be available for
option under the Plan 5,000,000 shares of the Company's Common Stock (the
"Stock"), subject to any adjustments which may be made pursuant to Section 5(f)
hereof. Shares of Stock used for purposes of the Plan may be either authorized
and unissued shares or treasury shares or both. Stock covered by options which
have terminated or expired prior to exercise or have been surrendered and
cancelled as contemplated by Section 7(b) hereof shall be available for further
option hereunder. Subject to any adjustments which may be made pursuant to
Section 5(f) hereof, the maximum number of shares of Stock with respect to which
options may be granted during a calendar year to any employee under this Plan
shall be 1,000,000 shares.
4. Eligibility. Essential managers and other key employees,
including officers and directors of the Company, and of any subsidiary
corporation, as defined in Section 424(f) of the Internal Revenue Code of 1986,
as amended (the "Code"), of the Company ("Subsidiary"), shall be eligible to
receive options under the Plan, provided that no option may be granted to any
director who is not also an employee of the Company or a Subsidiary.
86
5. Terms and Conditions of Options. Each option granted
hereunder shall be in writing, shall specify its type (incentive stock option or
non-qualified stock option) and shall contain such terms and conditions as the
Committee may determine, which terms and conditions need not be the same in each
case or within each type, subject to the following:
(a) Option Price. The price at which each share of Stock
covered by an option granted hereunder may be purchased shall not be
less than the greater of the par value of the Stock or the fair market
value thereof at the time of grant, as determined by the Board of
Directors.
(b) Option Period. The period for exercise of an option shall
not exceed ten years from the date the option is granted. Options may
be made exercisable in installments during the option period. Any
shares not purchased on any applicable installment date, if so provided
in the related options, may be purchased thereafter at any time prior
to the expiration of the option period. Any option granted before March
7, 1996 which is exercisable in installments shall become immediately
exercisable in full in the event of an "acquisition of a control
interest" in the Company. For purposes of this Plan, an "acquisition of
a control interest" shall occur if: (A) twenty-five percent (25%) or
more of the Company's outstanding securities entitled to vote in
elections of directors ("voting securities") shall be beneficially
owned, directly or indirectly (including options, conversion rights,
warrants, and the like, considered as if exercised), by any person or
group of persons, other than the group owning the same (including their
affiliates and associates) on March 7, 1991; or (B) the majority of the
Board of Directors ceases to consist of the existing membership or
successors nominated by the existing membership or their similar
successors. Any agreement, arrangement or understanding for the purpose
of acquiring, holding, voting or disposing of voting securities owned
by other holders shall, for the purposes of the foregoing definition of
"acquisition of a control interest", be deemed to constitute each party
to such agreement, arrangement or understanding as the owner of such
securities.
In the case of options granted under the Plan on or after
March 7, 1996 which are exercisable in installments, such options shall
become immediately exercisable in full at the time of a "Change in
Control" unless the Committee expressly provides in the applicable
option agreement entered into pursuant to this Plan that an additional
condition or conditions must be satisfied in order for exercisability
of the option to be accelerated, in which event exercisability of any
such options shall be accelerated upon satisfaction of such
condition(s), if any, following the Change in Control. The provisions
relating to acceleration of exercisability of such options need not be
the same for all options granted under the Plan. For this purpose, a
"Change in Control" shall mean:
(a) the acquisition by any individual, entity or
group (within the meaning of Section 13(d)(3) or 14(d)(2) of
the Securities Exchange Act of 1934, as amended (the "Exchange
Act")) (a "Person"), of beneficial ownership (within the
meaning of Rule 13d-3 promulgated under the Exchange Act) of
87
20% or more of either (1) the then outstanding shares of
common stock of the Company (the "Outstanding Company Common
Stock") or (2) the combined voting power of the then
outstanding voting securities of the Company entitled to vote
generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that the
following acquisitions shall not constitute a Change in
Control: (i) any acquisition directly from the Company (other
than by exercise of a conversion privilege); (ii) any
acquisition by the Company or any of its subsidiaries; (iii)
any acquisition by any employee benefit plan (or related
trust) sponsored or maintained by the Company or any of its
subsidiaries; (iv) any acquisition by any corporation with
respect to which, following such acquisition, more than 60%
of, respectively, the then outstanding shares of common stock
of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to
vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Company Voting Securities immediately prior
to such acquisition in substantially the same proportions as
their ownership, immediately prior to such acquisition, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be; or (v) any acquisition
by a Person owning more than 25% of the Outstanding Company
Common Stock on the date hereof; or
(b) During any period of two consecutive years,
individuals who, as of the beginning of such period,
constitute the Board of Directors of the Company (the
"Incumbent Board"), cease for any reason to constitute at
least a majority of the Board of Directors of the Company;
provided, however, that any individual becoming a director
subsequent to the beginning of such period whose election, or
nomination for election by the Company's shareholders, was
approved by a vote of at least a majority of the directors
then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board,
but excluding, for this purpose, any such individual whose
initial assumption of office occurs as a result of either an
actual or threatened election contest (as such terms are used
in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act); or
(c) approval by the shareholders of the Company of a
reorganization, merger or consolidation, in each case, with
respect of which all or substantially all of the individuals
and entities who were the beneficial owners, respectively, of
the Outstanding Company Common Stock and Outstanding Company
Voting Securities immediately prior to such reorganization,
88
merger or consolidation, do not, following such
reorganization, merger or consolidation, beneficially own,
directly or indirectly, more than 60% of, respectively, the
then outstanding shares of common stock and the combined
voting power of the then outstanding voting securities
entitled to vote generally in the election of directors, as
the case may be, of the corporation resulting from such
reorganization, merger or consolidation in substantially the
same proportions as their ownership, immediately prior to such
reorganization, merger or consolidation of the Outstanding
Company Common Stock and Outstanding Company Voting
Securities, as the case may be; or
(d) approval by the shareholders of the Company of
(1) a complete liquidation or dissolution of the Company or
(2) a sale or other disposition of all or substantially all of
the assets of the Company, other than to the corporation, with
respect to which following such sale or other disposition,
more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power
of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is
then beneficially owned, directly or indirectly, by all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company
Common Stock and Outstanding Company Voting Securities
immediately prior to such sale or other disposition in
substantially the same proportion as their ownership,
immediately prior to such sale or other disposition, of the
Outstanding Company Common Stock and Outstanding Company
Voting Securities, as the case may be.
(c) Exercise of Options. Unless the Committee determines
otherwise, no option shall be exercisable until the expiration of at
least one year from the date the option is granted; provided, however,
that (i) an option granted before March 7, 1996 shall become
immediately exercisable in full in the event of an "acquisition of a
control interest" in the Company (as such term is defined in Section
5(b) hereof), whether or not such "acquisition of a control interest"
in the Company occurs prior to the expiration of one year after the
date the option is granted, and (ii) in the case of an option granted
on or after March 7, 1996, such option shall become immediately
exercisable in full as set forth in Section 5(b) hereof, whether or not
the date of such immediate exercisability occurs prior to the
expiration of one year after the date the option is granted. To
exercise an option, the holder thereof shall give written notice to the
Company specifying the number of shares to be purchased and accompanied
by payment in full of the purchase price therefor. An option holder
shall have none of the rights of a stockholder until the shares are
paid for in full and issued to him. The purchase price may be paid in
whole or in part with shares of Stock having a fair market value on the
exercise date equal to the cash amount for which such shares are
substituted; provided, however, that in no event may any portion of the
89
purchase price be paid with shares of Stock acquired upon exercise of a
stock option granted under this Plan unless such shares were acquired
more than thirty days before the applicable date of exercise.
Notwithstanding any provision of this Plan to the contrary,
the Committee shall have the authority at any time to accelerate the
exercisability of all or any portion of any option granted under the
Plan.
(d) Effect of Termination of Employment or Death. No option
may be exercised after the termination of employment of an optionee,
except that: (i) if such termination is by reason of disability or
retirement at normal, deferred or early retirement age, under any
retirement plan maintained by the Company or any Subsidiary, or for any
other reason specifically approved in advance by the Committee, any
options held by the optionee which were granted more than one year
before such termination shall thereupon become exercisable in full, and
(x) in the case of options granted before February 2, 1995, may be
exercised by the optionee for a period of three months after such
termination, and (y) in the case of options granted on or after
February 2, 1995, may be exercised by the optionee during the period
ending on the tenth anniversary of the date of grant of the option;
(ii) if such termination is by action of the Company or a Subsidiary
other than as provided in (i) above and other than discharge by reason
of willful violation of the rules of the Company or instructions of
superior(s), (x) in the case of options granted before August 7, 1997,
any options held by the optionee which are exercisable at the time his
employment terminates may be exercised by him for a period of three
months after such termination, and (y) in the case of options granted
on or after August 7, 1997, such options shall continue to become
exercisable at the times set forth in the applicable stock option
agreement notwithstanding such termination of employment and such
options may be exercised during the period ending on the later of three
months following the date the options become exercisable in full or
such termination of employment; (iii) in the event of the death of an
optionee after the termination of his employment pursuant to (i) or
(ii) above, the person or persons to whom the optionee's rights are
transferred by will or the laws of descent and distribution may
exercise any options which the optionee could have exercised had he
survived for the remainder of the period under (i) or (ii) above during
which the optionee could have exercised the option if he had survived;
and (iv) in the event of the death of an optionee while employed, any
options then held by the optionee, which were granted more than one
year before his death, shall thereupon become exercisable in full, and
the person or persons to whom the optionee's rights are transferred by
will or the laws of descent and distribution shall have (x) in the case
of options granted before February 2, 1995, a period of one year
thereafter to exercise such options, and (y) in the case of options
granted on or after February 2, 1995, a period ending on the tenth
anniversary of the date of grant of the option to exercise such
options. In no event, however, shall any option be exercisable more
than ten years from the date of grant thereof.
90
Notwithstanding any provision of this Plan to the contrary,
the Committee shall have the authority (which may be exercised at any
time) to extend the period during which any option granted under the
Plan may be exercised; provided, however, that no option may be
exercisable for more than ten years from the date of grant thereof.
Nothing contained in the Plan or any option granted hereunder
shall confer on any employee any right to continue his employment or
interfere in any way with the right of his employer to terminate his
employment at any time.
(e) Nontransferability of the Options. During the optionee's
lifetime his option shall be exercisable only by him. No option shall
be transferable other than by will or the laws of descent and
distribution.
(f) Adjustment for Change in Stock Subject to Plan. In the
event of a stock split, stock dividend, combination of shares,
recapitalization, reorganization, merger, consolidation, rights
offering, or any other change in the corporate structure or shares of
the Company, the Board of Directors shall make such adjustments, if
any, as it deems appropriate for purposes hereof in the number and kind
of shares subject to the Plan, in the number and kind of shares covered
by outstanding options, or in the option prices.
(g) Registration, Listing and Qualification of Shares. Each
option shall be subject to the requirement that if at any time the
Board of Directors shall determine that the registration, listing or
qualification of the shares covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval
of any governmental regulatory body is necessary or desirable as a
condition of, or in connection with, the granting of such option or the
purchase of shares thereunder, no such option may be exercised unless
and until such registration, listing, qualification, consent or
approval shall have been effected or obtained free of any conditions
not acceptable to the Board of Directors. Any person exercising an
option shall make such representations and agreements and furnish such
information as the Board of Directors may request to assure compliance
with the foregoing or any other applicable legal requirements.
(h) Incentive Stock Options. Unless otherwise designated by
the Committee, options granted under the Plan shall be deemed to be
options not intended to qualify as "Incentive Stock Options" within the
meaning of Section 422 of the Code. However, the Committee may
designate options granted to an employee as Incentive Stock Options to
the extent that such options and all other incentive stock options (as
defined in Section 422 of the Code) held by the employee and
exercisable for the first time by such employee during any calendar
year (under all plans of the Company and its parent and subsidiary
corporations (as hereinafter defined)) cover shares of the Company
having an aggregate fair market value (determined by the Committee as
of the time the option is granted in such manner as will constitute an
attempt in good faith to meet the applicable requirements of Section
422(b) of the Code) of not more than $100,000. Options deemed to be
Incentive Stock Options hereunder shall comply with the following
91
requirements in addition to the terms and conditions previously set
forth in this Plan. Incentive Stock Options and other stock options
granted under the Plan shall be clearly identified as such. (The terms
"parent" or "subsidiary" corporation as used in this Section 5(h) shall
have the respective meanings set forth in Section 424(e) and (f) of the
Code.)
The additional requirements referred to are the following:
(A) Notwithstanding the provisions of this Plan for
exercise of stock options after the death of the Optionee or
any other provision of this Plan, an Incentive Stock Option
may not in any event be exercised after the expiration of ten
years from the date the Incentive Stock Option is granted.
Each stock option agreement shall so provide with respect to
any and all Incentive Stock Options covered by that agreement.
(B) No Incentive Stock Option shall be granted to an
individual who, at the time the Incentive Stock Option is
granted, owns (within the meaning of Section 422(b)(6) of the
Code) stock possessing more than ten percent of the total
combined voting power of all classes of stock of the Company
or of its parent or subsidiary corporation, if any (a
"10-percent shareholder"), unless, at the time the Incentive
Stock Option is granted, the option price is at least 110
percent of the fair market value of the shares subject to the
Incentive Stock Option and the Incentive Stock Option by its
terms is not exercisable after the expiration of five years
from the date the Incentive Stock Option is granted to such
10-percent shareholder.
(i) Tax Withholding. The Committee may establish such rules
and procedures as it considers desirable in order to satisfy any
obligation of the Company or any Subsidiary to withhold Federal income
taxes or other taxes with respect to the exercise of an option (other
than an Incentive Stock Option) under the Plan, including without
limitation rules and procedures permitting an optionee to elect that
the Company withhold shares of Stock otherwise issuable upon exercise
of such option in order to satisfy such withholding obligation.
6. Duration. Unless sooner terminated by the Board of
Directors, the Plan shall terminate on, and no option shall be granted hereunder
after June 30, 2001.
7. (a) Amendment. The Board of Directors may amend or
terminate the Plan at any time; provided, however, that any such amendment or
termination shall be subject to the approval of the Company's shareholders to
the extent such shareholder approval is required (i) in order to insure that
options granted under the Plan are exempt under Rule 16b-3 promulgated under the
Securities Exchange Act of 1934 or (ii) under Section 422 of the Internal
Revenue Code of 1986, as amended; provided, further, however, that, without the
consent of an affected optionee, no amendment or termination of the Plan may
impair the rights or, in any other manner, adversely affect the rights of such
optionee under any option theretofore granted to him. Notwithstanding the
92
foregoing, the Committee shall have the right to accept the surrender of and
cancel options issued under the Plan and reissue those options and to amend the
terms of outstanding options under the terms and conditions set forth herein.
(b) Surrender, Cancellation and Reissue of Options. The
Committee, upon invitation by it during the term of this Plan to any holder(s)
of options under the Plan to do so, may accept the surrender of outstanding
options, cancel such options and issue in exchange therefor new options under
this Plan, provided:
(1) the tender of options for surrender is in accordance with
such conditions as the Committee may set forth in its invitation for
that surrender;
(2) the number of shares covered by an option issued in
exchange for a surrendered and cancelled option shall not exceed the
number of shares covered by the option surrendered and cancelled;
(3) the exercise price and all other terms of each option
issued in exchange shall comply with the requirements of this Plan for
the issuance of options; and
(4) no such invitation for surrender of options shall be made
by the Committee unless it first shall have determined that it is in
the interest of the Company to provide an opportunity for the surrender
and cancellation of outstanding options and the issue of new options in
exchange therefor upon more appropriate terms and conditions, including
exercise price.
(c) Amendments of Outstanding Options. In the event that any
options issued under this Plan shall remain outstanding after June 30, 2001, and
if the Committee shall determine that it is in the interest of the Company to
amend the terms and conditions, including exercise price or prices, of such
options, the Committee shall have the right, by written notice to the holders
thereof, to amend the terms and conditions of such options including exercise
price or prices; provided, however, that (i) no such amendment shall be adverse
to the holders of the options, and (ii) the amended terms of an option,
including exercise price or prices, would have been permitted under this Plan
had the Plan been outstanding at the time of such amendment.
8. Effectiveness of the Plan. This Plan will not be made
effective unless approved by the holders of not less than a majority of the
outstanding shares of voting stock of the Company represented and entitled to
vote thereon at a meeting thereof duly called and held for such purpose, and no
option granted hereunder shall be exercisable prior to such approval.
9. Other Actions. This Plan shall not restrict the authority
of the Board of Directors, for proper corporate purposes, to grant or assume
stock options, other than under the Plan, to or with respect to any employee or
other person.
10. Name. This Plan shall be known as the Engelhard
Corporation Stock Option Plan of 1991.
93
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
94
EXHIBIT 12
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Years Ended December 31,
----------------------------------------------------------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
Earnings from continuing operations
before provision for income taxes $260,563 $ 85,812 $209,955 $185,312 $157,306
Add/(deduct)
Portion of rents representative
of the interest factor 3,500 3,000 3,900 4,700 4,800
Interest on indebtedness 58,887 52,776 45,009 31,326 21,954
Equity dividends 2,022 3,803 2,515 3,411 3,800
Equity in (earnings) losses of affiliates (10,077) 47,833 5,008 (695) (632)
--------- -------- -------- --------- ---------
Earnings, as adjusted $314,895 $193,224 $266,387 $224,054 $187,228
========= ======== ======== ========= =========
Fixed Charges
Portion of rents representative
of the interest factor $3,500 $3,000 $3,900 $4,700 $4,800
Interest on indebtedness 58,887 52,776 45,009 31,326 21,954
Capitalized interest 1,897 651 875 784 528
-------- ------- ------- ------- --------
Fixed charges $64,284 $56,427 $49,784 $36,810 $27,282
======== ======= ======= ======= ========
Ratio of Earnings to Fixed Charges 4.90 3.42 (A) 5.35 6.09 6.86
======== ======= ======= ======= ========
(A) Earnings in 1997 were negatively impacted by special and other charges of $149.6 million for a variety of events.
Without such charges the ratio of earnings to fixed charges would have been 5.28.
95
EXHIBIT 21:
SUBSIDIARIES OF THE REGISTRANT
------------------------------
96
Subsidiaries of the Registrant
------------------------------
Jurisdiction Under Which
Name of Subsidiary Incorporated or Organized
- ------------------ -------------------------
Engelhard West, Inc. California
Engelhard Canada, Ltd. Canada
Engelhard Industries International, Ltd. Canada
Engelhard Technologies, Ltd. Canada
EC Delaware, Inc. Delaware
EI Corporation Delaware
Engelhard Asia Pacific, Inc. Delaware
Engelhard C Cubed Corporation Delaware
Engelhard DT, Inc. Delaware
Engelhard EM Holding Company Delaware
Engelhard Energy Corporation Delaware
Engelhard Equity Corporation Delaware
Engelhard Financial Corporation Delaware
Engelhard MC, Inc. Delaware
Engelhard Metal Plating, Inc. Delaware
Engelhard Pollution Control, Inc. Delaware
Engelhard Power Marketing, Inc. Delaware
Engelhard Sensor Technologies, Inc. Delaware
Engelhard Strategic Investments, Inc. Delaware
Engelhard Supply Corporation Delaware
International Dioxide, Inc. Delaware
Mustang Property Corporation Delaware
Engelhard Pigments OY Finland
Engelhard Pyrocontrole S.A. France
Engelhard S.A. France
Engelhard Holdings GmbH Germany
Engelhard Process Chemicals GmbH Germany
Engelhard Technologies GmbH Germany
Engelhard Technologies Verwaltsung GmbH Germany
Engelhard Italiana S.P.A. Italy
Engelhard Metals Japan, Ltd. Japan
Engelhard Pigments Japan Japan
Engelhard DeMeern, B.V. The Netherlands
Engelhard Netherlands, B.V. The Netherlands
Engelhard Terneuzen, B.V. The Netherlands
Harshaw Chemical Company New Jersey
Mearl Corporation New Jersey
Engelhard Peru S.A. Peru
Engelhard South Africa, Ltd. South Africa
Engelhard Metals A.G. Switzerland
Engelhard International, Ltd. United Kingdom
Engelhard Limited United Kingdom
Engelhard Metals, Ltd. United Kingdom
Engelhard Sales, Ltd. United Kingdom
Engelhard Technologies, Ltd. United Kingdom
Sheffield Smelting Co., Ltd. United Kingdom
Engelhard Export Corporation U.S. Virgin Islands
97
Subsidiaries of the Registrant
------------------------------
Jurisdiction Under Which
Name of Subsidiary/Affiliate Incorporated or Organized
- ---------------------------- -------------------------
Engelhard-CLAL, Ltd. Partnership Delaware
Engelhard-CLAL SAS France
Engelhard HexCore L.P. Delaware
NE Chemcat Corporation Japan
Tickford Engelhard Michigan
Heesung-Engelhard Corporation South Korea
Acreon Catalysts Texas
Dnipro Kaolin Ukraine
The names of other subsidiaries have been omitted since such subsidiaries, if
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as that term is defined in Rule 12b-2 (17 CFR 240.12b-2)
promulgated under the Securities Exchange Act of 1934.
98
EXHIBIT 23:
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
99
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the registration statements
of Engelhard Corporation and Subsidiaries on Form S-8 (File Nos. 2-72830,
2-81559, 2-84477, 2- 89747, 33-28540, 33-37724, 33-40365, 33-40338 and 33-43934)
of our report dated February 4, 1999 (except for Note 20, as to which the date
is March 2, 1999) on our audits of the consolidated financial statements of
Engelhard Corporation and Subsidiaries, as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998 which report
is included in this Annual Report on Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
New York, New York
May 18, 1999
100
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the Registration Statement
of Engelhard Corporation and Subsidiaries on Form S-3 (File No. 333-73185) of
our report dated February 4, 1999 (except for Note 20, as to which the date is
March 2, 1999) on our audits of the consolidated financial statements of
Engelhard Corporation and Subsidiaries as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, which report is
included in this Annual Report on Form 10-K/A.
PRICEWATERHOUSECOOPERS LLP
New York, New York
May 18, 1999
101
EXHIBIT 24:
POWERS OF ATTORNEY
------------------
102
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 16, 1999.
/s/ Linda G. Alvarado
_____________________________
Linda G. Alvarado
103
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Marion H. Antonini
________________________________
Marion H. Antonini
104
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 16, 1999.
/s/ Anthony W. Lea
________________________________
Anthony W. Lea
105
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ William R. Loomis, Jr.
______________________________
William R. Loomis, Jr.
106
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ James V. Napier
______________________________
James V. Napier
107
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Norma T. Pace
________________________________
Norma T. Pace
108
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Barry W. Perry
_________________________________
Barry W. Perry
109
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Reuben F. Richards
________________________________
Reuben F. Richards
110
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Henry R. Slack
_______________________________
Henry R. Slack
111
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Orin R. Smith
_______________________________
Orin R. Smith
112
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1998.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
February 11, 1999.
/s/ Douglas G. Watson
_________________________________
Douglas G. Watson
113