1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K/A
Amendment No. 1
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
------------ ------------
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $0.01 per share New York Stock Exchange
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
Securities registered pursuant to Section 12(g) of the Act: None
2
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EXPLANATORY NOTE: This Amendment No. 1 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 2000, which was filed with the Securities and
Exchange Commission on March 2, 2001, is filed to correct typographical errors
in 2000 operating earnings and pension expense reported in Part II, Item 8,
Footnotes 14 and 18 to the Consolidated Financial Statements.
FOOTNOTE 14:
Net pension cost reported in Footnote 14 as originally filed and as amended is
presented below:
AS ORIGINALLY FILED:
Eastman's worldwide net pension cost was $75 million, $58 million, and $93
million in 2000, 1999, and 1998, respectively.
AS AMENDED:
Eastman's worldwide net pension cost was $32 million, $58 million, and $93
million in 2000, 1999, and 1998, respectively.
FOOTNOTE 18:
Operating earnings reported in Footnote 18 as originally filed and as amended
are presented below:
AS ORIGINALLY FILED:
(Dollars in millions) 2000
OPERATING EARNINGS
Chemicals $ 232
Polymers 326
-----
Consolidated Eastman total $ 558
=====
AS AMENDED:
(Dollars in millions) 2000
OPERATING EARNINGS
Chemicals $ 232
Polymers 330
-----
Consolidated Eastman total $ 562
=====
Except for Footnote 18, all other references to operating earnings contained in
the Annual Report on Form 10-K as originally filed are correct.
32
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Eastman Chemical Company
Date: April 30, 2001 By: /s/ Mark W. Joslin
-------------------------------
Mark W. Joslin
Vice President and Controller
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM PAGE
Management's responsibility for financial statements 35
Report of independent accountants 36
Consolidated statements of earnings, comprehensive income, and retained earnings 37
Consolidated statements of financial position 38
Consolidated statements of cash flows 39-40
Notes to consolidated financial statements 41-71
34
5
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the
accompanying consolidated financial statements of Eastman Chemical
Company and subsidiaries appearing on pages 37 through 71. Eastman has
prepared these consolidated financial statements in accordance with
accounting principles generally accepted in the United States of
America, and the statements of necessity include some amounts that are
based on management's best estimates and judgments.
Eastman's accounting systems include extensive internal controls
designed to provide reasonable assurance of the reliability of its
financial records and the proper safeguarding and use of its assets.
Such controls are based on established policies and procedures, are
implemented by trained, skilled personnel with an appropriate
segregation of duties, and are monitored through a comprehensive
internal audit program. The Company's policies and procedures prescribe
that the Company and all employees are to maintain the highest ethical
standards and that its business practices throughout the world are to
be conducted in a manner that is above reproach.
The consolidated financial statements have been audited by
PricewaterhouseCoopers LLP, independent accountants, who were
responsible for conducting their audits in accordance with auditing
standards generally accepted in the United States of America. Their
report is included herein.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of
nonmanagement Board members. The independent accountants and internal
auditors have full and free access to the Audit Committee. The Audit
Committee meets periodically with PricewaterhouseCoopers LLP and
Eastman's director of internal auditing, both privately and with
management present, to discuss accounting, auditing, policies and
procedures, internal controls, and financial reporting matters.
/s/ Earnest W. Deavenport, Jr. /s/ James P. Rogers
------------------------------ ----------------------------
Earnest W. Deavenport, Jr. James P. Rogers
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 25, 2001
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of
Eastman Chemical Company
In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 14(a)(1) on page 34 present
fairly, in all material respects, the financial position of Eastman
Chemical Company and its subsidiaries at December 31, 2000 and 1999,
and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2000 in conformity
with accounting principles generally accepted in the United States of
America. 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 auditing standards generally
accepted in the United States of America, 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.
As discussed in Note 1 to the consolidated financial statements, on
January 1, 1999, the Company adopted AICPA Statement of Position 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use."
/s/ PricewaterhouseCoopers LLP
-------------------------------------------
PRICEWATERHOUSECOOPERS LLP
Atlanta, Georgia
January 25, 2001, except as to Note 23, for which the date is
February 5, 2001
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in millions, except per share amounts)
2000 1999 1998
Sales $ 5,292 $ 4,590 $ 4,481
Cost of sales 4,226 3,768 3,546
------- ------- -------
Gross profit 1,066 822 935
Selling and general administrative expenses 346 355 316
Research and development costs 149 187 185
Write-off of acquired in-process research and development 9 25 --
Employee separations and pension settlement/curtailment -- 53 --
------- ------- -------
Operating earnings 562 202 434
Interest expense, net 135 121 91
Gain recognized on initial public offering of equity investment (38) -- --
Other (income) charges, net 13 9 (17)
------- ------- -------
Earnings before income taxes 452 72 360
Provision for income taxes 149 24 111
------- ------- -------
Net earnings $ 303 $ 48 $ 249
======= ======= =======
Basic earnings per share $ 3.95 $ .61 $ 3.15
======= ======= =======
Diluted earnings per share $ 3.94 $ .61 $ 3.13
======= ======= =======
COMPREHENSIVE INCOME
Net earnings $ 303 $ 48 $ 249
Other comprehensive income (loss) (63) (36) 19
------- ------- -------
Comprehensive income $ 240 $ 12 $ 268
======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of year $ 2,098 $ 2,188 $ 2,078
Net earnings 303 48 249
Cash dividends declared (135) (138) (139)
------- ------- -------
Retained earnings at end of year $ 2,266 $ 2,098 $ 2,188
======= ======= =======
The accompanying notes are an integral part of these financial statements.
37
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
DECEMBER 31,
2000 1999
ASSETS
Current assets
Cash and cash equivalents $ 101 $ 186
Trade receivables, net of allowance of $16 and $13 650 572
Miscellaneous receivables 87 59
Inventories 580 485
Other current assets 105 187
------- -------
Total current assets 1,523 1,489
------- -------
Properties
Properties and equipment at cost 9,039 8,820
Less: Accumulated depreciation 5,114 4,870
------- -------
Net properties 3,925 3,950
------- -------
Goodwill, net of accumulated amortization of $28 and $14 335 271
Other intangibles, net of accumulated amortization of $20 and $6 277 175
Other noncurrent assets 490 418
------- -------
Total assets $ 6,550 $ 6,303
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 1,152 $ 1,009
Borrowings due within one year 106 599
------- -------
Total current liabilities 1,258 1,608
Long-term borrowings 1,914 1,506
Deferred income tax credits 607 485
Postemployment obligations 829 789
Other long-term liabilities 130 156
------- -------
Total liabilities 4,738 4,544
------- -------
Commitments and contingencies
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 84,739,902 and 84,512,004) 1 1
Paid-in capital 100 95
Retained earnings 2,266 2,098
Other comprehensive loss (117) (54)
------- -------
2,250 2,140
Less: Treasury stock at cost (7,996,790 and 6,421,790 shares) 438 381
------- -------
Total shareowners' equity 1,812 1,759
------- -------
Total liabilities and shareowners' equity $ 6,550 $ 6,303
======= =======
The accompanying notes are an integral part of these financial statements.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
2000 1999 1998
Cash flows from operating activities
Net earnings $ 303 $ 48 $ 249
----- ----- -----
Adjustments to reconcile net earnings to net cash provided
by operating activities, net of effect of acquisitions
Depreciation and amortization 418 383 351
Gain recognized on initial public offering of
equity investment (38) -- --
Write-off of impaired assets -- 54 33
Write-off of acquired in-process research and
development 9 25 --
Provision (benefit) for deferred income taxes 64 (18) 66
(Increase) decrease in receivables (1) 163 19
(Increase) decrease in inventories (43) 63 19
Increase (decrease) in employee benefit liabilities
and incentive pay 28 (69) 57
Increase (decrease) in liabilities excluding
borrowings, employee benefit liabilities, and
incentive pay 9 115 (35)
Other items, net 82 (20) (28)
----- ----- -----
Total adjustments 528 696 482
----- ----- -----
Net cash provided by operating activities 831 744 731
----- ----- -----
Cash flows from investing activities
Additions to properties and equipment (226) (292) (500)
Acquisitions, net of cash acquired (261) (381) (32)
Additions to capitalized software (21) (24) --
Other investments (30) -- --
Capital advances to suppliers -- (21) (21)
Proceeds from sales of investments 12 -- --
Proceeds from sales of fixed assets 61 -- --
Other items -- 3 8
----- ----- -----
Net cash used in investing activities (465) (715) (545)
----- ----- -----
39
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
(Dollars in millions)
2000 1999 1998
Cash flows from financing activities
Proceeds from borrowings 208 348 (66)
Repayment of borrowings (471) (34) --
Dividends paid to shareowners (135) (138) (138)
Treasury stock purchases (57) (51) --
Other items 4 3 18
----- ----- -----
Net cash provided by (used in) financing activities (451) 128 (186)
----- ----- -----
Net change in cash and cash equivalents (85) 157 --
Cash and cash equivalents at beginning of year 186 29 29
----- ----- -----
Cash and cash equivalents at end of year $ 101 $ 186 $ 29
===== ===== =====
The accompanying notes are an integral part of these financial statements.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of Eastman Chemical Company and
subsidiaries ("Eastman" or the "Company") are prepared in conformity
with accounting principles generally accepted in the United States of
America and of necessity include some amounts that are based upon
management estimates and judgments. Future actual results could differ
from such current estimates. The Consolidated Financial Statements
include assets, liabilities, revenues, and expenses of all wholly-owned
subsidiaries. Eastman accounts for joint ventures and investments in
minority-owned companies where it exercises significant influence on
the equity basis. Intercompany transactions and balances are eliminated
in consolidation.
TRANSLATION OF NON-U.S. CURRENCIES
Eastman uses the local currency as the "functional currency" to
translate the accounts of all consolidated entities outside the United
States where cash flows are primarily denominated in local currencies.
The effects of translating those operations that use the local currency
as the functional currency are included as a component of comprehensive
income and shareowners' equity. The effects of remeasuring those
operations where the U.S. dollar is used as the functional currency and
all transaction gains and losses are reflected in current earnings.
REVENUE RECOGNITION
In 2000, the Company implemented Staff Accounting Bulletin ("SAB") 101,
"Revenue Recognition in Financial Statements" which specifies the
criteria that must be met before revenue is realized or realizable and
earned. In accordance with SAB 101, the Company recognizes revenue when
persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the price to the customer is fixed or
determinable, and collectibility is reasonably assured. Appropriate
accruals for discounts, volume incentives, and other allowances are
recorded as reductions in sales. The implementation of SAB 101 did not
have a material impact on sales, operating earnings, or net earnings
for 2000 or prior years.
SHIPPING AND HANDLING FEES AND COSTS
Shipping and handling fees related to sales transactions are billed to
customers and are recorded as sales revenue. Shipping and handling
costs incurred are recorded in cost of sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits, and readily
marketable securities with original maturities of three months or less.
ACCOUNTS RECEIVABLE SALES
Under a planned continuous sale program agreement entered into in 1999,
the Company sells to a third party undivided interests in certain
domestic accounts receivable. Undivided interests in designated
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
receivable pools are sold to the purchaser with recourse limited to the
receivables purchased. The Company's retained interests in the
designated receivable pools are measured at fair value, based on
expected future cash flows, using management's best estimates of
returns and credit losses commensurate with the risks involved. The
Company's retained interests in receivables sold are recorded as trade
receivables in the Consolidated Financial Statements. Fees paid by the
Company under this agreement are based on certain variable market rate
indices and are included in other (income) charges, net, in the
Consolidated Financial Statements.
INVENTORIES
Inventories are valued at cost, which is not in excess of market. The
Company determines the cost of most raw materials, work in process, and
finished goods inventories in the United States by the last-in,
first-out ("LIFO") method. The cost of all other inventories, including
inventories outside the United States, is determined by the first-in,
first-out ("FIFO") or average cost method.
PROPERTIES
The Company records properties at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are capitalized. When
Eastman retires or otherwise disposes of assets, it removes the cost of
such assets and related accumulated depreciation from the accounts. The
Company records any profit or loss on retirement or other disposition
in earnings.
DEPRECIATION
Depreciation expense is calculated based on historical cost and the
estimated useful lives of the assets (buildings and building equipment
20 to 50 years; machinery and equipment 3 to 33 years), generally using
the straight-line method. For U.S. assets acquired before January 1,
1992, the Company generally uses accelerated methods to calculate the
provision for depreciation.
AMORTIZATION OF GOODWILL AND OTHER INTANGIBLES
Goodwill and other intangibles are amortized on a straight-line basis
over the expected useful lives of the underlying assets, generally from
5 to 40 years.
IMPAIRED ASSETS
The Company reviews the carrying values of long-lived assets,
identifiable intangibles, and goodwill for impairment whenever events
or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. An impairment loss for an asset to be
held and used is recognized when the fair value of the asset, generally
based on discounted estimated future cash flows, is less than the
carrying value of the asset. An impairment loss for assets to be
disposed of is recognized when the fair value of the asset, less costs
to dispose, is less than the carrying value of the asset.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its exposures to fluctuations in foreign currency, raw
materials and energy costs, and interest rates. Such instruments are
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
used to mitigate the risk that changes in exchange rates or raw
materials and energy costs will adversely affect the eventual dollar
cash flows resulting from the hedged transactions.
The Company enters into forward exchange contracts to hedge certain
firm commitments denominated in foreign currencies and currency options
to hedge probable anticipated, but not yet committed, export sales and
purchase transactions expected within no more than 2 years and
denominated in foreign currencies (principally the British pound,
French franc, German mark, Italian lira, Canadian dollar, euro, and the
Japanese yen). To mitigate short-term fluctuations in market prices for
propane and natural gas (major raw materials and energy used in the
manufacturing process), the Company enters into forwards and options
contracts. From time to time, the Company also utilizes interest rate
derivative instruments, primarily swaps, to hedge the Company's
exposure to movements in interest rates.
The Company's forwards and options contracts are accounted for as
hedges because the derivative instruments are designated and effective
as hedges and reduce the Company's exposure to identified risks. Gains
and losses resulting from effective hedges of existing assets,
liabilities, firm commitments, or anticipated transactions are deferred
and recognized when the offsetting gains and losses are recognized on
the related hedged items and are reported as a component of operating
earnings.
Deferred currency option premiums are generally included in other
noncurrent assets and are amortized over the life of the contract. The
related obligation for payment is generally included in other
liabilities and is paid in the period in which the options are
exercised or expire and forward exchange contracts mature.
On January 1, 2001, the Company adopted Statement of Financial
Accounting Standard ("SFAS") 133, as amended by SFAS 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities." The adoption of SFAS 133, as amended by SFAS 138, has not
had a material impact on the results of operations. Instruments with a
fair value of approximately $30 million, previously not required to be
recorded and primarily pertaining to the Company's raw materials and
energy cost hedging program, were recognized as miscellaneous
receivables in the Consolidated Statement of Financial Position on
January 1, 2001. In addition, previously deferred gains of
approximately $70 million from the settlement of currency options were
reclassified from other current liabilities. These amounts resulted in
an after-tax credit to other comprehensive income of approximately $62
million on January 1, 2001.
INVESTMENTS
The Company includes in other noncurrent assets its investments in
joint ventures which are managed as integral parts of the Company's
operations and accounted for on the equity basis. Eastman carries
certain investments at negative values, based on its intention to fund
its share of deficits in such investments, and includes such negative
carrying values in other long-term liabilities. The Company includes
its share of earnings and losses of such joint ventures in other income
and charges.
Marketable securities held by the Company and accounted for by the
cost method, currently common or preferred stock, are deemed by
management to be available-for-sale and are reported at fair value,
with net unrealized gains or losses reported as a component of other
comprehensive income in shareowners' equity. Realized gains and losses
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are included in earnings and are derived using the specific
identification method for determining the cost of securities. The
Company includes these investments in other noncurrent assets.
Other equity investments, for which fair values are not readily
determinable, are carried at historical cost and are included in other
noncurrent assets.
EARNINGS PER SHARE
Basic earnings per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted earnings
per share include the effect of dilutive stock options outstanding
during the year.
INCOME TAXES
Deferred income taxes, reflecting the impact of temporary differences
between the assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes, are based on tax laws
currently enacted.
STOCK-BASED COMPENSATION
Compensation cost attributable to stock option and similar plans is
recognized based on the difference, if any, between the quoted market
price of the stock on the date of grant over the amount the employee is
required to pay to acquire the stock (intrinsic value method). Such
amount, if any, is accrued over the related vesting period, as
appropriate.
COMPENSATED ABSENCES
The Company accrues compensated absences and related benefits as
current charges to earnings.
COMPUTER SOFTWARE COSTS
Certain costs, including internal payroll costs, incurred in connection
with the development or acquisition of software for internal use are
capitalized. Capitalized software costs are amortized on a
straight-line basis over three years, the expected useful life of such
assets, beginning when the software project is substantially complete
and placed in service.
ENVIRONMENTAL COSTS
The Company accrues environmental costs when it is probable that the
Company has incurred a liability and the amount can be reasonably
estimated. Estimated costs associated with closure/postclosure are
accrued over the facilities' estimated remaining useful lives. Accruals
for environmental liabilities are included in other long-term
liabilities at undiscounted amounts and exclude claims for recoveries
from insurance companies or other third parties. Environmental costs
are capitalized if they extend the life of the related property,
increase its capacity, and/or mitigate or prevent future contamination.
The cost of operating and maintaining environmental control facilities
is charged to expense.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPREHENSIVE INCOME
Components of other comprehensive income (loss) include cumulative
translation adjustments, additional minimum pension liabilities, and
unrecognized gains or losses on investments. Amounts of other
comprehensive income (loss) are presented net of applicable taxes.
Because cumulative translation adjustments are considered a component
of permanently invested unremitted earnings of subsidiaries outside the
United States, no taxes are provided on such amounts.
RECLASSIFICATIONS
The Company has reclassified certain 1999 and 1998 amounts to conform
to the 2000 presentation.
2. INVENTORIES
DECEMBER 31,
(Dollars in millions) 2000 1999
At FIFO or average cost (approximates current cost)
Finished goods $ 482 $ 404
Work in process 125 128
Raw materials and supplies 248 210
----- -----
Total inventories 855 742
Reduction to LIFO value (275) (257)
----- -----
Total inventories at LIFO value $ 580 $ 485
===== =====
Inventories valued on the LIFO method were approximately 70% of total
inventories in each of the periods.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
(Dollars in millions) 2000 1999
Balance at beginning of year $ 8,820 $ 8,594
Additions
Capital expenditures 226 292
Acquisitions 253 101
Deductions (260) (167)
------- -------
Balance at end of year $ 9,039 $ 8,820
======= =======
Properties
Land $ 64 $ 61
Buildings and building equipment 846 884
Machinery and equipment 7,985 7,685
Construction in progress 144 190
------- -------
Balance at end of year $ 9,039 $ 8,820
======= =======
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
(Dollars in millions) 2000 1999
Balance at beginning of year $ 4,870 $ 4,560
Provision for depreciation 382 368
Deductions (138) (58)
------- -------
Balance at end of year $ 5,114 $ 4,870
======= =======
Construction-period interest of $340 million and $336 million, reduced
by accumulated depreciation of $171 million and $157 million, is
included in cost of properties at December 31, 2000 and 1999,
respectively.
Depreciation expense was $382 million, $368 million, and $351 million
for 2000, 1999, and 1998, respectively.
4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES
Eastman owns 25 million shares, or approximately 40%, of the
outstanding common shares of Genencor International, Inc., ("Genencor")
a company engaged in the discovery, development, manufacture, and
marketing of biotechnology products for the industrial chemicals,
agricultural, and health care markets. Prior to its initial public
offering in July, 2000, Genencor was a joint venture in which the
Company owned a 50% interest. This investment is accounted for under
the equity method and is included in other noncurrent assets. At
December 31, 2000 and 1999, Eastman's investment in Genencor was $209
million and $157 million, respectively.
Eastman has a 50% interest in and serves as the operating partner in
Primester, a joint venture engaged in the manufacture of cellulose
esters at its Kingsport, Tennessee plant, accounted for by the equity
method. The Company guarantees a portion of the principal amount of the
joint venture's third-party borrowings; however, management believes,
based on current facts and circumstances and the structure of the
venture, that the likelihood of a payment pursuant to such guarantee is
remote. At December 31, 2000 and 1999, Eastman had a negative
investment in the joint venture of $41 million for both periods,
representing the recognized portion of the venture's accumulated
deficits and the debt guarantee that it has a commitment to fund, as
necessary. Such amounts are included in other long-term liabilities.
The Company provides certain utilities and general plant services to
the joint venture. In return for Eastman providing those services, the
joint venture paid Eastman a total of $39 million in three equal
installments in 1991, 1992, and 1993. Eastman is amortizing the
deferred credit to earnings over a 10-year period.
Eastman has entered into an agreement with a supplier that guarantees
the Company's right to buy a specified quantity of a certain raw
material annually through 2007 at prices determined by the pricing
formula specified in the agreement. In return, the Company paid a total
of $239 million to the supplier through December 31, 2000 and 1999. The
Company defers and amortizes those costs over the 15-year period during
which the product is received. The Company began amortizing those costs
in 1993 and has recorded accumulated amortization of $128 million and
$112 million at December 31, 2000 and 1999, respectively.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES AND OTHER CURRENT LIABILITIES
DECEMBER 31,
(Dollars in millions) 2000 1999
Trade creditors $ 526 $ 373
Accrued payrolls, vacation, and variable-incentive compensation 201 143
Accrued taxes 95 112
Deferred gain on currency options 72 --
Accrued restructuring charge 7 65
Other 251 316
------ ------
Total $1,152 $1,009
====== ======
6. BORROWINGS
DECEMBER 31,
(Dollars in millions) 2000 1999
SHORT-TERM BORROWINGS
Commercial paper $ -- $ 398
Notes payable 101 125
Other 5 76
------ ------
Total short-term borrowings 106 599
------ ------
LONG-TERM BORROWINGS
6 3/8% notes due 2004 500 500
7 1/4% debentures due 2024 497 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 296 297
Commercial paper 400 --
Other 21 13
------ ------
Total long-term borrowings 1,914 1,506
------ ------
Total borrowings $2,020 $2,105
====== ======
Eastman has access to an $800 million revolving credit facility (the
"Credit Facility") expiring in July 2005, and to a short-term $150
million credit agreement (the "Credit Agreement") expiring in June
2001. Although the Company does not have any amounts outstanding under
the Credit Facility or the Credit Agreement, any such borrowings would
be subject to interest at varying spreads above quoted market rates,
principally LIBOR. The Credit Facility and the Credit Agreement require
facility fees on the total commitment that vary based on Eastman's
credit rating. The annual rate for such fees was 0.125% in 2000, and,
for the Credit Facility, was 0.085% in 1999. The Credit Facility and
the Credit Agreement contain a number of covenants and events of
default, including the maintenance of certain financial ratios. Eastman
was in compliance with all such covenants for all periods.
47
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Eastman utilizes commercial paper, generally with maturities of 90 days
or less, to meet its liquidity needs. Because the Credit Facility which
provides liquidity support for the commercial paper expires in July
2005, the commercial paper borrowings at December 31, 2000 are
classified as long-term borrowings as the Company has the ability to
refinance such borrowings long term. As of December 31, 2000 and
December 31, 1999, the effective interest rates for the Company's
commercial paper borrowings were 7.12% and 6.30%, respectively.
7. SHAREOWNERS' EQUITY
(Dollars in millions) 2000 1999 1998
Common stock at par value $ 1 $ 1 $ 1
------------ ------------ ------------
Paid-in capital
Balance at beginning of year 95 94 77
Additions 5 1 17
------------ ------------ ------------
Balance at end of year 100 95 94
------------ ------------ ------------
Retained earnings 2,266 2,098 2,188
------------ ------------ ------------
Accumulated other comprehensive income (loss)
Balance at beginning of year (54) (18) (37)
Change in cumulative translation adjustment (66) (46) 24
Change in unfunded minimum pension liability 4 7 (5)
Change in unrecognized gain or loss on investment (1) 3 --
------------ ------------ ------------
Balance at end of year (117) (54) (18)
------------ ------------ ------------
Treasury stock at cost (438) (381) (331)
------------ ------------ ------------
Total $ 1,812 $ 1,759 $ 1,934
============ ============ ============
Shares of common stock issued(1)
Balance at beginning of year 84,512,004 84,432,114 84,144,672
Issued for employee compensation and
benefit plans 227,898 79,890 287,442
------------ ------------ ------------
Balance at end of year 84,739,902 84,512,004 84,432,114
============ ============ ============
(1) Includes shares held in treasury.
The Company has authority to issue 400 million shares of all classes of
stock, of which 50 million may be preferred stock, par value $0.01 per
share, and 350 million may be common stock, par value $0.01 per share.
The Company declared dividends of $1.76 per share in 2000, 1999, and
1998.
48
19
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company established a benefit security trust in 1997 to provide a
degree of financial security for unfunded obligations under certain
plans. The Company has contributed to the trust a warrant to purchase
up to one million shares of common stock of the Company for par value.
The warrant is exercisable by the trustee if the Company does not meet
certain funding obligations, which obligations would be triggered by
certain occurrences, including a change in control or potential change
in control, as defined, or failure by the Company to meet its payment
obligations under covered unfunded plans. Such warrant is excluded from
the computation of diluted earnings per share because the conditions
upon which the warrant is exercisable have not been met.
The additions to paid-in capital for the three years are the result of
exercises of stock options by employees and the issuance of shares to
the Employee Stock Ownership Plan to settle Eastman Performance Plan
obligations.
The Company repurchased 1,575,000 shares of Eastman common stock at a
cost of approximately $57 million, or an average price of approximately
$36 per share, in 2000; 1,094,800 shares at a cost of approximately $50
million, or an average price of approximately $46 per share, in 1999;
and no shares in 1998. Repurchased common shares may be used to meet
common stock requirements for benefit plans and other corporate
purposes.
Treasury stock at a cost of approximately $33 million (536,188 shares)
and $1 million (18,018 shares) were reissued in 1998 and 1997,
respectively. The Company's charitable foundation held 158,424 shares
of Eastman common stock at December 31, 2000, December 31, 1999, and
December 31, 1998.
For 2000, 1999, and 1998, respectively, the weighted average number of
common shares outstanding used to compute basic earnings per share was
76.8 million, 78.2 million, and 78.9 million and for diluted earnings
per share was 77.0 million, 78.4 million, and 79.5 million, reflecting
the effect of dilutive options outstanding. Excluded were options to
purchase 3,899,076 shares of common stock at a range of prices from
$45.34 to $74.25; 2,331,341 shares of common stock at a range of prices
from $48.44 to $74.25; and 994,503 shares of common stock at a range of
prices from $56.88 to $74.25, outstanding at the end of 2000, 1999, and
1998, respectively.
In 1999, several key executive officers were awarded performance-based
stock options to further align their compensation with the return to
Eastman's shareowners and to provide additional incentive and
opportunity for reward to individuals in key positions having direct
influence over corporate actions that are expected to impact the market
price of Eastman's stock. A total of 574,000 shares will become
exercisable through October 19, 2001, if both the stock price and time
vesting conditions are met. At December 31, 2000 and December 31, 1999,
respectively, 149,240 shares and 45,920 shares underlying such options
were included in diluted earnings per share calculations as a result of
the stock price conditions for vesting being met.
Additionally, 200,000 shares underlying an option issued to the Chief
Executive Officer in 1997 were excluded from diluted earnings per share
calculations because the stock price conditions to exercise had not
been met as to any of the shares as of December 31, 2000, 1999, and
1998.
49
20
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. IMPAIRMENT OF ASSETS
In 1999, the Company recorded pre-tax charges to earnings of $10
million for the write-off of construction in progress related to an
epoxybutene ("EpB") plant project which was terminated and determined
to have no future value. These charges were recorded in Cost of Sales
for the Chemicals segment.
In first quarter 1999, the Company announced a phase-out of operations
at Distillation Products Industries in Rochester, New York. In 1999,
the Company recorded pre-tax charges to earnings of $9 million for
costs associated with employee termination benefits and the write-down
of plant and equipment used at the site. In 2000, the Company recorded
an additional pre-tax charge of $5 million for costs associated with
exiting this site. It is expected that property and equipment used at
this site will be disposed of during 2001. These charges were recorded
in Cost of Sales for the Chemicals segment.
During the fourth quarter 1999, the Company decided to discontinue
production at its sorbates facilities in Chocolate Bayou, Texas. The
projected economic performance and cash flows for this product line
were determined to be insufficient for remaining in this business. In
1999, the Company recorded a pre-tax charge to earnings of $17 million
for the write-down of plant and equipment used at the site. In 2000,
the Company recorded additional pre-tax charges of $8 million for costs
associated with exiting this business. It is expected that property and
equipment used at this site will be disposed of during 2001. These
charges were recorded in Cost of Sales for the Chemicals segment.
In the fourth quarter 1999, the Company recorded pre-tax charges to
earnings of $16 million for the write-off of construction in progress
related to a purified terephthalic acid ("PTA") plant project. This
project was terminated due to unfavorable market conditions and
unsuccessful discussions with several potential buyers of this product.
A significant portion of the construction in progress was determined to
have no alternative use and no future value. This charge was recorded
in Cost of Sales for the Polymers segment.
In the fourth quarter 1998, the Company recorded a pre-tax charge to
earnings of $20 million for the write-down of property, plant and
equipment used in the production of CHDA, a product sold in the
Chemicals segment. Based on responses from customers surveyed in the
fourth quarter 1998, market outlook and estimated future cash flows for
this product declined significantly. The carrying values of assets
related to CHDA production were written down to fair market value based
on estimated discounted future cash flows. The charge was recorded in
Cost of Sales for the Chemicals segment.
The Company also recorded in the fourth quarter 1998 a pre-tax charge
to earnings of $12 million for the write-off of construction in
progress related to an EASTOTAC expansion project and an EpB plant
project. Process improvements leading to increased EASTOTAC
manufacturing capacity at the existing Longview, Texas plant and a
planned joint venture in China lead to cancellation of the EASTOTAC
expansion project. A portion of work done to date on an EpB plant
project had no future value. The EASTOTAC expansion project and EpB
plant project costs were written off and recorded in Cost of Sales for
the Chemicals segment.
9. ACQUISITIONS
MCWHORTER TECHNOLOGIES, INC.
In July 2000, the Company completed its acquisition of McWhorter
Technologies, Inc. ("McWhorter") for approximately $200 million in cash
and the assumption of $155 million in debt. McWhorter manufactures
50
21
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
specialty resins and colorants used in the production of consumer and
industrial coatings and reinforced fiberglass plastics.
This transaction, which was funded through available cash and
commercial paper borrowings, was accounted for by the purchase method
of accounting and, accordingly, the results of operations of McWhorter
for the period from the acquisition date are included in the
accompanying consolidated financial statements. Assets acquired and
liabilities assumed were recorded at their fair values. Goodwill of
approximately $87 million, which represents the excess of cost over the
estimated fair value of net tangible assets acquired, and other
intangible assets of approximately $103 million for technology and
trademarks, customer lists, and workforce are being amortized on a
straight-line basis over 11-40 years. Acquired in-process research and
development of approximately $9 million was written off after
completion of purchase accounting. Assuming this transaction had been
made at January 1, 2000 and 1999, the consolidated proforma results for
2000 and 1999 would not be materially different from reported results.
CHEMICKE ZAVODY SOKOLOV
As of February 21, 2000, the Company acquired 76% of the shares of
Chemicke Zavody Sokolov ("Sokolov"), a manufacturer of waterborne
polymer products, acrylic acid, and acrylic esters located in the Czech
Republic. During the second quarter 2000, the Company acquired an
additional 21% of the shares resulting in 97% ownership of Sokolov.
These transactions, for cash consideration totaling approximately $46
million (net of $3 million cash acquired) and the assumption of $21
million of Sokolov debt, were financed with available cash and
commercial paper borrowings. Efforts will continue to accumulate
additional shares as they become available from the remaining minority
shareholders.
The acquisition of Sokolov was accounted for by the purchase method of
accounting and, accordingly, the results of operations of Sokolov for
the period from February 21, 2000 are included in the accompanying
consolidated financial statements. Assets acquired and liabilities
assumed have been recorded at their fair values. The minority interest,
which is included in other long-term liabilities in the Consolidated
Statements of Financial Position, is not significant. Assuming this
transaction had been made at January 1, 2000 and 1999, the consolidated
proforma results for 2000 and 1999 would not be materially different
from reported results.
LAWTER INTERNATIONAL, INC.
In June 1999, the Company completed its acquisition of Lawter
International, Inc. ("Lawter") for approximately $370 million (net of
$41 million cash acquired) and the assumption of $145 million in debt.
Lawter develops, produces, and markets specialty products for the inks
and coatings market.
This transaction, which was funded through available cash and
commercial paper borrowings, was accounted for by the purchase method
of accounting. Assets acquired and liabilities assumed have been
recorded at their fair values. Goodwill of approximately $253 million,
which represents the excess of cost over the estimated fair value of
net tangible assets acquired, and other intangible assets of
approximately $202 million for technology and trademarks, in-process
research and development, customer lists, and workforce, are being
amortized on a straight-line basis over 5-40 years. Acquired in-process
research and development of approximately $25 million was written off
during 1999 after completion of purchase accounting. Assuming this
transaction had been made at January 1, 1999, the consolidated proforma
results for 1999 would not be materially different from reported
results.
51
22
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLAN
Eastman's 1997 Omnibus Long-Term Compensation Plan (the "1997 Omnibus
Plan"), which is substantially similar to and intended to replace the
1994 Omnibus Long-Term Compensation Plan (the "1994 Omnibus Plan"),
provides for grants to employees of nonqualified stock options,
incentive stock options, tandem and freestanding stock appreciation
rights, performance shares, and various other stock and stock-based
awards. Certain of these awards may be based on criteria relating to
Eastman performance as established by the Compensation and Management
Development Committee of the Board of Directors. No new awards have
been made under the 1994 Omnibus Plan following the effectiveness of
the 1997 Omnibus Plan. Outstanding grants and awards under the 1994
Omnibus Plan are unaffected by the replacement of the 1994 Omnibus Plan
with the 1997 Omnibus Plan. The 1997 Omnibus Plan provides that options
can be granted through April 30, 2002, for the purchase of Eastman
common stock at an option price not less than 50% of the per share fair
market value on the date of the stock option's grant. Substantially all
grants awarded under the 1994 Omnibus Plan and under the 1997 Omnibus
Plan have been at option prices equal to the fair market value on the
date of grant. Options typically become exercisable 50% one year after
grant and 100% after two years and expire 10 years after grant. There
is a maximum of 7 million shares of common stock available for option
grants and other awards during the term of the 1997 Omnibus Plan. The
maximum number of shares of common stock with respect to one or more
options and/or SARs that may be granted during any one calendar year
under the 1997 Omnibus Plan to the Chief Executive Officer or to any of
the next four most highly compensated executive officers (each, a
"Covered Employee") is 200,000. The maximum fair market value of any
awards (other than options and SARs) that may be received by a Covered
Employee during any one calendar year under the 1997 Omnibus Plan is
equal to the fair market value of 100,000 shares of common stock as of
December 31 of the preceding year.
DIRECTOR LONG-TERM COMPENSATION PLAN
Eastman's 1999 Director Long-Term Compensation Plan (the "Director
Plan") which is substantially similar to and intended to replace the
1994 Director Long-Term Compensation Plan, provides for grants of
nonqualified stock options and restricted shares to nonemployee members
of the Board of Directors. No new awards have been made under the 1994
Director Long-Term Compensation Plan, following the effectiveness of
the 1999 Director Plan. Outstanding grants and awards under the 1994
Director Long-Term Compensation Plan are unaffected by the replacement
of the 1994 Director Plan with the 1999 Director Plan. Shares of
restricted stock are granted upon the first day of the directors'
initial term of service and nonqualified stock options and shares of
restricted stock are granted each year following the annual meeting of
shareowners. The Director Plan provides that options can be granted
through the later of May 1, 2003, or the date of the annual meeting of
shareowners in 2003 for the purchase of Eastman common stock at an
option price not less than the stock's fair market value on the date of
the grant. The options vest in 50% increments on the first two
anniversaries of the grant date. The maximum number of shares of common
stock that shall be available for grant of awards under the Director
Plan during its term is 60,000.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Eastman's 1996 Nonemployee Director Stock Option Plan provides for
grants of nonqualified stock options to nonemployee members of the
Board of Directors in lieu of all or a portion of each member's annual
retainer. The Nonemployee Director Stock Option Plan provides that
options may be granted for the purchase of Eastman common stock at an
option price not less than the stock's fair market value on the date of
grant. The options become exercisable six months after the grant date.
The maximum number of shares of Eastman common stock available for
grant under the Plan is 150,000.
52
23
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
STOCK OPTION BALANCES AND ACTIVITY
The Company applies intrinsic value accounting for its stock option
plans. If the Company had elected to recognize compensation expense
based upon the fair value at the grant dates for awards under these
plans, the Company's net earnings and earnings per share would be
reduced to the unaudited pro forma amounts indicated below.
(Dollars in millions, except per share amounts) 2000 1999 1998
Net earnings As reported $ 303 $ 48 $ 249
Pro forma $ 294 $ 45 $ 248
Basic earnings per share As reported $3.95 $ .61 $3.15
Pro forma $3.83 $ .58 $3.14
Diluted earnings per share As reported $3.94 $ .61 $3.13
Pro forma $3.82 $ .57 $3.12
The fair value of each option is estimated on the grant date using the
Black-Scholes option-pricing model, which requires input of highly
subjective assumptions. Some of these assumptions used for grants in
2000, 1999, and 1998, respectively, include: average expected
volatility of 26.98%, 25.48%, and 20.87%; average expected dividend
yield of 3.84%, 4.05%, and 3.07%; and average risk-free interest rates
of 6.19%, 5.74%, and 5.48%. An expected option term of six years for
all periods was developed based on historical experience information.
The expected term for reloads was considered as part of this
calculation and is equivalent to the remaining term of the original
grant at the time of reload.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because
changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do
not necessarily provide a reliable single measure of the fair value of
its employee stock options.
A summary of the status of the Company's stock option plans is
presented below:
2000 1999 1998
----------------------- ---------------------- ----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
----------------------- ---------------------- ----------------------
Outstanding at beginning of year 4,784,957 $ 50 3,865,101 $ 51 3,716,208 $ 50
Granted 1,263,051 45 1,019,977 47 479,446 57
Exercised 202,691 35 81,504 39 316,360 42
Forfeited or canceled 43,969 60 18,617 57 14,193 64
----------------------- ---------------------- ---------------------
Outstanding at end of year 5,801,348 $ 50 4,784,957 $ 50 3,865,101 $ 51
========= ========= =========
Options exercisable at year-end 3,967,571 3,400,079 3,267,275
========= ========= =========
Weighted-average fair value of
options granted during the year $ 11.06 $ 9.82 $ 12.40
Available for grant at end of year 6,927,075 7,503,969 8,439,445
========= ========= =========
53
24
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 2000:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------- -------------------------
WEIGHTED-
AVERAGE WEIGHTED- WEIGHTED-
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
PRICES AT 12/31/00 LIFE PRICE AT 12/31/00 PRICE
-------- ----------- ----------- --------- ----------- ---------
$31-$40 253,881 5.9 Years $ 37 163,511 $ 37
42 19,500 8.8 42 9,750 42
43-44 1,428,891 3.1 43 1,416,312 43
45-47 1,774,064 7.6 46 370,663 46
48-63 1,775,694 5.5 56 1,458,017 56
64-74 549,318 8.2 65 549,318 65
--------- ---------
$31-$74 5,801,348 5.8 $ 50 3,967,571 $ 51
========= =========
EASTMAN INVESTMENT AND EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution employee stock ownership
plan (the "ESOP"), a qualified plan under Section 401(a) of the
Internal Revenue Code which is a component of the Eastman Investment
and Employee Stock Ownership Plan ("EIP/ESOP"). Eastman anticipates
that it will make annual contributions for substantially all U.S.
employees equal to 5% of eligible compensation to the ESOP, or for
employees who have five or more prior ESOP contributions, to either the
Eastman Stock Fund or other investment funds within the Eastman
Investment Plan. Through early 2001, the Company sponsored, for its
international employees, an employee stock ownership plan which was
substantially similar to the ESOP. In March 2001, shares in the
international employee stock ownership plan will be distributed to
participants in the plan. Allocated shares in the ESOP totaled
3,075,739, 3,249,519, and 2,626,880 as of December 31, 2000, 1999, and
1998, respectively. Dividends on shares held by the EIP/ESOP are
charged to retained earnings. All shares held by the EIP/ESOP are
treated as outstanding in computing earnings per share.
Charges for contributions to the EIP/ESOP were $34 million, $37
million, and $36 million for 2000, 1999, and 1998, respectively.
Charges related to 1998 were previously reported as part of the Eastman
Performance Plan.
EASTMAN PERFORMANCE PLAN
The Eastman Performance Plan (the "EPP") places a portion of each
employee's annual compensation at risk and provides a lump-sum payment
to plan participants based on the Company's financial performance.
Charges under the EPP were $55 million, $3 million, and $30 million in
2000, 1999, and 1998, respectively.
54
25
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ANNUAL PERFORMANCE PLAN
Through 2000, Eastman's managers and executive officers participated in
an Annual Performance Plan (the "APP"), which placed a portion of
annual cash compensation at risk based upon Company performance as
measured by specified annual goals. Charges under the APP for 2000,
1999, and 1998 were $3 million, $13 million, and $8 million,
respectively.
UNIT PERFORMANCE PLAN
Beginning in 2000, Eastman managers and executive officers began
participating in a new variable compensation plan, the Unit Performance
Plan (the "UPP"), under which a portion of annual cash compensation is
at risk based upon organizational unit performance and the attainment
of individual objectives and expectations. In 2000, the portion of a
participant's targeted pay at risk under the APP and the UPP was equal
to the portion of the targeted pay that was formerly at risk under the
APP prior to the inception of the UPP. Charges under the UPP for 2000
were $7 million.
Beginning in 2001, all Eastman managers and executive officers will
participate in the UPP and not the APP. Accordingly, the portion of
each participant's total pay that was formerly at risk under the APP
will instead be at risk under the UPP.
11. INCOME TAXES
Components of earnings before income taxes and the provision for U.S.
and other income taxes follow:
(Dollars in millions) 2000 1999 1998
Earnings (loss) before income taxes
United States $414 $ 185 $ 463
Outside the United States 39 (113) (103)
---- ----- -----
Total $453 $ 72 $ 360
==== ===== =====
Provision (benefit) for income taxes
United States
Current $ 69 $ 31 $ 35
Deferred 60 (14) 64
Non-United States
Current 9 10 6
Deferred 1 (3) (3)
State and other
Current 4 1 4
Deferred 6 (1) 5
---- ----- -----
Total $149 $ 24 $ 111
==== ===== =====
55
26
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory income tax rate follow:
(Dollars in millions) 2000 1999 1998
Amount computed using the statutory rate $ 158 $ 25 $ 126
State income taxes 6 -- 6
Foreign rate variance 1 7 (3)
Foreign sales corporation benefit (11) (7) (24)
ESOP dividend payout (2) (1) (1)
Other (3) -- 7
----- ---- -----
Provision for income taxes $ 149 $ 24 $ 111
===== ==== =====
The 1998 foreign sales corporation benefit includes $12 million
attributable to amended returns reflecting redetermined foreign sales
corporation results for the years prior to 1998.
The significant components of deferred tax assets and liabilities
follow:
DECEMBER 31,
(Dollars in millions) 2000 1999
Deferred tax assets
Postemployment obligations $299 $285
Payroll and related items 47 40
Deferred revenue 13 15
Miscellaneous reserves 31 51
Preproduction and start-up costs 8 10
Other 45 55
---- ----
Total $443 $456
==== ====
Deferred tax liabilities
Depreciation $824 $775
Inventories 6 5
Purchase accounting adjustments 103 68
Other 62 28
---- ----
Total $995 $876
==== ====
Unremitted earnings of subsidiaries outside the United States totaling
$156 million at December 31, 2000, are considered to be reinvested
indefinitely. If remitted, they would be substantially free of
additional tax. It is not practicable to determine the deferred tax
liability for temporary differences related to those unremitted
earnings.
Current income taxes payable totaling $67 million and $81 million are
included in current liabilities at December 31, 2000 and 1999,
respectively.
56
27
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. FAIR VALUE OF FINANCIAL INSTRUMENTS
DECEMBER 31, 2000 DECEMBER 31, 1999
--------------------- ---------------------
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
Long-term borrowings $1,914 $1,816 $1,506 $1,424
Foreign exchange contracts 2 6 28 87
Commodity derivative contracts -- 30 -- 1
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
LONG-TERM BORROWINGS
The Company has based the fair value for fixed-rate borrowings on
current interest rates for comparable securities. The Company's
floating-rate borrowings approximate fair value.
FOREIGN EXCHANGE CONTRACTS
The Company estimates the fair value of its foreign exchange contracts
based on dealer-quoted market prices of comparable instruments. Eastman
had currency options with maturities of not more than two years to
exchange various foreign currencies for U.S. dollars in the aggregate
notional amount of $44 million and $639 million at December 31, 2000
and 1999, respectively. The net unrealized gain deferred on such
options was $3 million and $59 million as of December 31, 2000 and
1999, respectively. Those amounts, based on dealer-quoted prices,
represent the estimated gain that would have been recognized had those
hedges been liquidated at estimated market value on the last day of
each year presented.
In February 2000, currency options denominated in French franc, German
mark, and Italian lira with a notional amount of $545 million were
effectively settled, resulting in cash proceeds of $106 million. In
October 2000, euro currency options with a notional amount of $208
million were effectively settled resulting in cash proceeds of $24
million. Of these amounts, approximately $53 million, net of premium
amortization, was recognized in earnings during 2000. The balance,
deferred until the underlying hedged transactions are realized, is
recorded in other current liabilities in the Consolidated Statements of
Financial Position. The remaining deferred gain will be recognized over
a period ending fourth quarter 2001.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts but anticipates no such
nonperformance. The Company minimizes such risk exposure by limiting
the counterparties to major international banks and financial
institutions. Concentrations of credit risk with respect to trade
accounts receivable are generally diversified because of the large
number of entities constituting the Company's customer base and their
dispersion across many different industries and geographies.
57
28
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMODITY DERIVATIVE CONTRACTS
The Company utilized commodity derivatives to hedge a portion of its
anticipated purchases of propane and natural gas used in the
manufacturing process. The Company estimates fair value of its
commodity derivative contracts based on quotes from market makers of
these instruments. The fair value represents the amount the Company
would expect to receive or pay to terminate the agreements at the
reporting dates.
OTHER FINANCIAL INSTRUMENTS
Because of the nature of all other financial instruments, recorded
amounts approximate fair value. In the judgment of management, exposure
to third-party guarantees is remote and the potential earnings impact
pursuant to such guarantees is insignificant.
13. COMMITMENTS
LEASE COMMITMENTS
Eastman leases facilities, principally property, machinery, and
equipment, under cancelable, noncancelable, and month-to-month
operating leases. Future lease payments, reduced by sublease income,
follow:
(Dollars in millions)
Year ending December 31,
2001 $ 62
2002 53
2003 45
2004 33
2005 30
2006 and beyond 77
-----
Total minimum payments required $ 300
=====
If certain operating leases are terminated by the Company, it
guarantees a portion of the residual value loss, if any, incurred by
the lessors in disposing of the related assets. Management believes,
based on current facts and circumstances and current values of such
equipment, that a material payment pursuant to such guarantees is
remote.
Rental expense, net of sublease income, was approximately $83 million
in 2000, 1999, and 1998.
OTHER COMMITMENTS
The Company had various purchase commitments at the end of 2000 for
materials, supplies, and energy incident to the ordinary conduct of
business. These commitments, over a period of several years,
approximate $1.4 billion. Eastman has other long-term commitments
relating to joint venture agreements as described in Note 4 to
Consolidated Financial Statements.
58
29
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In 1999, the Company entered into an agreement that allows the Company
to sell certain domestic accounts receivable under a planned continuous
sale program to a third party. The agreement permits the sale of
undivided interests in domestic trade accounts receivable. Receivables
sold to the third party totaled $200 million and $150 million at
December 31, 2000 and December 31, 1999, respectively. Undivided
interests in designated receivable pools were sold to the purchaser
with recourse limited to the receivables purchased. Fees paid by the
Company under this agreement are based on certain variable market rate
indices and totaled approximately $12 million and $4 million in 2000
and 1999, respectively. Average monthly proceeds from collections
reinvested in the continuous sale program were approximately $235
million and $225 million in 2000 and 1999, respectively.
14. RETIREMENT PLANS
Eastman maintains defined benefit plans that provide eligible employees
with retirement benefits. Prior to 2000, benefits were calculated using
a traditional defined benefit formula based on age, years of service,
and the employees' final average compensation as defined in the plans.
Effective January 1, 2000, the defined benefit pension plan, the
Eastman Retirement Assistance Plan, was amended. Employees' accrued
pension benefits earned prior to January 1, 2000 are calculated based
on previous plan provisions using the employee's age, years of service,
and final average compensation as defined in the plans. The amended
defined benefit pension plan uses a pension equity formula based on
age, years of service, and final average compensation to calculate an
employee's retirement benefit from January 1, 2000, forward. Benefits
payable will be the combined pre-2000 and post-1999 benefits.
Benefits are paid to employees from trust funds. Contributions to the
plan are made as permitted by laws and regulations.
Pension coverage for employees of Eastman's international operations is
provided, to the extent deemed appropriate, through separate plans. The
Company systematically provides for obligations under such plans by
depositing funds with trustees, under insurance policies, or by book
reserves.
A summary balance sheet of the change in plan assets during 2000 and
1999, the funded status of the plans, amount recognized in the
statement of financial position, and the assumptions used to develop
the projected benefit obligation for the Company's U.S. defined pension
plans are provided in the following tables. Non-U.S. plans are not
material.
SUMMARY BALANCE SHEET
(Dollars in millions) 2000 1999
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 877 $ 1,511
Service cost 29 41
Interest cost 68 87
Plan amendments -- (241)
Actuarial loss (gain) 47 (54)
Curtailments/settlements -- (429)
Benefits paid (101) (38)
------- -------
Benefit obligation, end of year $ 920 $ 877
======= =======
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 911 $ 990
Actual return on plan assets 47 232
Company contributions -- 145
Acquisitions/divestitures/other receipts 5 --
Benefits paid (94) (456)
------ ------
Fair value of plan assets, end of year $ 869 $ 911
====== ======
Benefit obligation in excess of (less than) plan assets $ 51 $ (34)
Unrecognized actuarial (gain) loss (43) 7
Unrecognized prior service cost 128 140
Unrecognized net transition asset 8 12
------ ------
Net amount recognized, end of year $ 144 $ 125
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 144 $ 125
Additional minimum liability 16 23
Accumulated other comprehensive income (loss) (16) (23)
------ ------
Net amount recognized, end of year $ 144 $ 125
====== ======
Eastman's worldwide net pension cost was $32 million, $58 million, and
$93 million in 2000, 1999, and 1998, respectively.
A summary of the components of net periodic benefit cost recognized for
Eastman's U.S. defined benefit pension plans follows:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 2000 1999 1998
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 29 $ 42 $ 47
Interest cost 68 86 93
Expected return on assets (64) (78) (73)
Amortization of:
Transition asset (4) (6) (4)
Prior service cost (12) (5) 5
Actuarial loss 7 14 19
---- ---- ----
Net periodic benefit cost $ 24 $ 53 $ 87
==== ==== ====
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 7.75% 8.15% 6.75%
Expected return on plan assets 9.50% 9.50% 9.50%
Rate of compensation increase 4.25% 4.50% 3.75%
In 1999, the Company recorded a pretax gain of $12 million for the
partial settlement of pension benefit liabilities resulting from a
large number of employee retirements related to a voluntary and
involuntary separation program. In 1998, a partial settlement and
curtailment of pension and other postemployment benefit liabilities
resulted from the expiration of the Holston Defense Corporation
contract. This resulted in recognition of approximately $35 million of
previously unrecognized liabilities, but had no effect on earnings
because the Company also recorded a receivable from the Department of
Army for expected reimbursement of such amounts.
15. POSTRETIREMENT WELFARE PLANS
Eastman provides life insurance and health care benefits for eligible
retirees, and health care benefits for retirees' eligible survivors. In
general, Eastman provides those benefits to retirees eligible under the
Company's U.S. pension plans.
A few of the Company's non-U.S. operations have supplemental health
benefit plans for certain retirees, the cost of which is not
significant to the Company.
The following tables set forth the status of the Company's U.S. plans
at December 31, 2000 and 1999:
SUMMARY BALANCE SHEET
(Dollars in millions) 2000 1999
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 587 $ 617
Service cost 5 7
Interest cost 48 43
Plan participants' contributions -- 1
Actuarial loss (gain) 38 (50)
Benefits paid (33) (31)
------ ------
Benefit obligation, end of year $ 645 $ 587
====== ======
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 2000 1999
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 41 $ 45
Actual return on plan assets 2 --
Company contributions 26 21
Plan participants' contributions -- 1
Benefits paid (32) (26)
------ ------
Fair value of plan assets, end of year $ 37 $ 41
====== ======
Benefit obligations in excess of plan assets $ 608 $ 546
Unrecognized actuarial loss (84) (47)
Unrecognized prior service cost 36 39
------ ------
Net amount recognized, end of year $ 560 $ 538
====== ======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL POSITION
CONSIST OF:
Accrued benefit cost $ 560 $ 538
------ ------
Net amount recognized, end of year $ 560 $ 538
====== ======
A 1% increase in health care cost trend would increase the 2000 service
and interest costs by $2 million, and the 2000 benefit obligation by
$32 million. A 1% decrease in health care cost trend would decrease the
2000 service and interest costs by $2 million, and the 2000 benefit
obligation by $28 million.
The net periodic postretirement benefit cost follows:
SUMMARY OF BENEFIT COSTS
(Dollars in millions) 2000 1999 1998
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 4 $ 7 $ 8
Interest cost 48 42 39
Expected return on assets (2) (2) (2)
Amortization of:
Prior service cost (3) (3) (4)
Actuarial loss 1 2 1
---- ---- ----
Net periodic benefit cost $ 48 $ 46 $ 42
==== ==== ====
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2000 1999 1998
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 7.75% 8.15% 6.75%
Expected return on plan assets 9.50% 9.00% 9.00%
Rate of compensation increase 4.25% 4.50% 3.75%
Health care cost trend
Initial 7.00% 7.00% 7.00%
Decreasing to ultimate trend of 5.00% 5.25% 4.75%
in year 2006 2005 2004
In 1998, a partial settlement and curtailment of pension and other
postemployment benefit liabilities resulted from the December 31, 1998,
expiration of the Holston Defense Corporation contract. This resulted
in recognition of approximately $35 million of previously unrecognized
liabilities, but had no effect on earnings because the Company also
recorded a receivable from the Department of Army for expected
reimbursement of such amounts.
16. EMPLOYEE SEPARATIONS
In the fourth quarter 1999, the Company accrued costs associated with
employee terminations which resulted from voluntary and involuntary
employee separations that occurred during the fourth quarter 1999. The
voluntary and involuntary separations resulted in a reduction of about
1,200 employees. About 760 employees who were eligible for full
retirement benefits left the Company under a voluntary separation
program and approximately 400 additional employees were involuntarily
separated from the Company. Employees separated under these programs
each received a separation package equaling two weeks' pay for each
year of employment, up to a maximum of one year's pay and subject to
certain minimum payments. Approximately $71 million was accrued in 1999
for termination allowance payments associated with the separations, of
which $6 million was paid in 1999 and $58 million was paid during 2000.
As of December 31, 2000, a balance of $7 million remains to be paid and
is included in other current liabilities in the Consolidated Statements
of Financial Position.
17. HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly-owned subsidiary of
the Company, managed the government-owned Holston Army Ammunition Plant
in Kingsport, Tennessee (the "Facility") under contract with the
Department of Army ("DOA") from 1949 until expiration of the contract
(the "Contract") on December 31, 1998. The DOA awarded a contract to
manage the Facility to a third party effective January 1, 1999.
The Contract provided for reimbursement of allowable costs incurred by
Holston. During the fourth quarter 1999, the DOA reimbursed
approximately $20 million of previously expensed pension costs. This
reimbursement was credited to earnings in the fourth quarter 1999.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. SEGMENT INFORMATION
The Company's products and operations are managed and reported in two
operating segments--Chemicals and Polymers. Through 1999, the Company's
products and operations were managed and reported in three operating
segments--Specialty and Performance, Core Plastics, and Chemical
Intermediates. Prior year amounts have been reclassified to conform to
the 2000 presentation.
The Chemicals segment includes coatings, adhesives, specialty polymers,
and inks; performance chemicals and intermediates; and fine chemicals.
Targeted markets for this segment are diverse and include household
products, infrastructure/construction, medical, agricultural,
transportation, building, food, textile, packaging, coatings,
adhesives, inks, pharmaceutical, agrochemical, photographic/imaging,
and consumer and industrial. Competitive factors for this segment
include performance, appearance, price, reliability of supply,
integrated manufacturing capability, durability, aesthetics, quality,
customer service, technical competence, and environmental
responsibility.
Coatings, adhesives, specialty polymers, and inks are sold primarily to
North American industrial concerns. Performance chemicals are sold
primarily to North American industries as additives for fibers and
plastics, raw materials for adhesives and sealants, food and beverage
ingredients, and other performance products. This segment's industrial
intermediate chemicals are produced based on the Company's oxo
chemistry technology and chemicals-from-coal technology and are sold to
customers operating in mature markets in which multiple sources of
supply exist. They are sold generally in large volume, mostly to North
American industries with increasing focus in Southeast Asia. These
products are targeted at markets for industrial additives, agricultural
chemicals, esters, pharmaceuticals, and vinyl compounding. The
principal markets for Eastman's fine chemicals are largely U.S.
photographic, agricultural, and pharmaceutical companies.
The Polymers segment includes the Company's major plastics products,
EASTAPAK polymers and TENITE polyethylene, and fiber products. The
container and general film products share similar physical
characteristics and compete primarily based on price and integrated
manufacturing capabilities. Additional competitive factors for this
segment include quality, value, aesthetics, durability, customer
service, clarity, resistance/toughness, flexibility, and chemical
resistance. Targeted markets for this segment include rigid and
flexible plastic packaging, cigarette filters, building, household
products, medical, personal care/consumer, electronic, appliance, and
heavy gage sheeting.
Specialty plastics are sold to selected niche markets primarily in
North America for value-added end uses. Polyester plastics are sold to
soft-drink and other packaging manufacturers principally in North
America, Europe, and Latin America. Polyethylene is sold generally to
North American industries. Acetate tow is sold primarily in North
America, Europe, and Latin America to the tobacco industry for use in
cigarette filters.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Corporate and
certain other costs are allocated to operating segments using
systematic allocation methods consistently applied. Senior management
believes presenting the operating segments' performance with these
costs allocated is appropriate in the circumstances. Non-operating
income and expense, including interest cost, are not allocated to
operating segments.
As previously described, Eastman plans to separate into two independent
public companies by the end of 2001. The planned spin-off and related
management changes have resulted in certain specialty plastics
64
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
products, primarily copolyesters, moving between segments. Beginning
with the second quarter 2001, the Chemicals and Polymers segments will
be restated to reflect these changes. Also as previously described, the
Company continues to pursue the previously announced plan to divest or
otherwise restructure a major portion of its fine chemicals business.
Currently, a number of options are under consideration, some of which
could result in a charge to earnings in the first half of 2001. The
charge would relate to potential loss on sale of assets for a number of
sites or other restructuring costs related to fine chemical product
lines not divested.
(Dollars in millions) 2000 1999 1998
SALES
Chemicals $2,506 $2,106 $1,980
Polymers 2,786 2,484 2,501
------ ------ ------
Consolidated Eastman total $5,292 $4,590 $4,481
====== ====== ======
OPERATING EARNINGS(1)
Chemicals $ 232 $ 132 $ 252
Polymers 330 70 182
------ ------ ------
Consolidated Eastman total $ 562 $ 202 $ 434
====== ====== ======
ASSETS
Chemicals $3,260 $2,938 $2,333
Polymers 3,290 3,365 3,517
------ ------ ------
Consolidated Eastman total $6,550 $6,303 $5,850
====== ====== ======
DEPRECIATION EXPENSE
Chemicals $ 162 $ 139 $ 124
Polymers 220 229 227
------ ------ ------
Consolidated Eastman total $ 382 $ 368 $ 351
====== ====== ======
CAPITAL EXPENDITURES
Chemicals $ 114 $ 156 $ 255
Polymers 112 136 245
------ ------ ------
Consolidated Eastman total $ 226 $ 292 $ 500
====== ====== ======
(1) Operating earnings for 2000 include the effect of nonrecurring charges
for the write-off of in-process research and development related to the
McWhorter acquisition; charges related to phase-out of operations at
Chocolate Bayou, Texas, and Distillation Products Industries in
Rochester, New York; and certain litigation costs. These charges are
reflected in the Chemicals segment.
Operating earnings for 1999 include the effect of a charge for employee
separations; a charge for the write-off of in-process research and
development related to the Lawter acquisition; charges related to
certain discontinued capital projects, underperforming assets, and
phase-out of operations at certain sites; and other items; partially
offset by a gain recognized on the reimbursement of previously expensed
pension costs and a gain on pension settlement. These nonrecurring
items are reflected in segments as follows: Chemicals, $64 million and
Polymers, $53 million.
Operating earnings for 1998 include the effect of charges related to a
fine for violation of the Sherman Act; charges related to certain
underperforming assets and discontinued capital projects; the impact of
a power outage at the Kingsport, Tennessee, manufacturing site; and
other items. These nonrecurring items are reflected in segments as
follows: Chemicals, $47 million and Polymers, $4 million.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in millions) 2000 1999 1998
GEOGRAPHIC INFORMATION
REVENUES
United States $3,016 $2,662 $2,764
All foreign countries 2,276 1,928 1,717
------ ------ ------
Total $5,292 $4,590 $4,481
====== ====== ======
LONG-LIVED ASSETS, NET
United States $3,009 $3,036 $3,088
All foreign countries 916 914 946
------ ------ ------
Total $3,925 $3,950 $4,034
====== ====== ======
Revenues are attributed to countries based on customer location. No
individual foreign country is material with respect to revenues or
long-lived assets.
19. SUPPLEMENTAL CASH FLOW INFORMATION
(Dollars in millions) 2000 1999 1998
Cash paid for interest and income taxes is as follows:
Interest (net of amounts capitalized) $ 156 $ 127 $ 107
Income taxes 90 (4) 80
Details of acquisitions are as follows:
Fair value of assets acquired $ 635 $ 662 $ 42
Liabilities assumed 374 281 10
------ ------ ------
Net cash paid for acquisitions 261 381 32
Cash acquired in acquisitions 4 41 7
------ ------ ------
Cash paid for acquisitions $ 265 $ 422 $ 39
====== ====== ======
Cash flows from operating activities include gains from equity
investments of $15 million, $10 million, and $12 million for 2000,
1999, and 1998, respectively. Derivative financial instruments and
related gains and losses are included in cash flows from operating
activities. The effect on cash of foreign currency transactions and
exchange rate changes for all years presented was insignificant.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In March 1998, the Company issued 536,188 shares of its common stock
with a market value of $35 million to its Employee Stock Ownership Plan
as partial settlement of the Company's Eastman Performance Plan payout.
This noncash transaction is not reflected in the Consolidated
Statements of Cash Flows.
20. ENVIRONMENTAL MATTERS
Certain Eastman manufacturing sites generate hazardous and nonhazardous
wastes, of which the treatment, storage, transportation, and disposal
are regulated by various governmental agencies. In connection with the
cleanup of various hazardous waste sites, the Company, along with many
other entities, has been designated a potentially responsible party
("PRP") by the U.S. Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act,
which potentially subjects PRPs to joint and several liability for such
cleanup costs. In addition, the Company will be required to incur costs
for environmental remediation and closure/postclosure under the federal
Resource Conservation and Recovery Act. Because of expected sharing of
costs, the availability of legal defenses, and the Company's
preliminary assessment of actions that may be required, the Company
does not believe its liability for these environmental matters,
individually or in the aggregate, will be material to Eastman's
consolidated financial position, results of operations, or competitive
position.
The Company's environmental protection and improvement cash
expenditures were approximately $195 million, $220 million, and $190
million in 2000, 1999, and 1998, respectively, including investments in
construction, operations, and development.
21. LEGAL MATTERS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent and intellectual property, commercial, contract,
environmental, antitrust, health and safety, and employment matters,
which are being handled and defended in the ordinary course of
business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts,
that the ultimate resolution of any of such pending matters, including
the sorbates litigation described in the following paragraphs, will
have a material adverse effect on the Company's overall financial
position or results of operations. However, adverse developments could
negatively impact earnings in a particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, the Company entered into
a voluntary plea agreement with the U.S. Department of Justice and
agreed to pay an $11 million fine to resolve a charge brought against
the Company for violation of Section One of the Sherman Act. Under the
agreement, the Company entered a plea of guilty to one count of
price-fixing for sorbates, a class of food preservatives, from January
1995 through June 1997. The plea agreement was approved by the United
States District Court for the Northern District of California on
October 21, 1998. The Company recognized the entire fine in third
67
38
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
quarter 1998 and is paying the fine in installments over a period of
five years. On October 26, 1999, the Company pleaded guilty in a
Federal Court of Canada to a violation of the Competition Act of Canada
and was fined $780,000 (Canadian). The plea admitted that the same
conduct that was the subject of the September 30, 1998 plea in the
United States had occurred with respect to sorbates sold in Canada, and
prohibited repetition of the conduct and provides for future
monitoring. The fine has been paid and was recognized as a charge
against earnings in the fourth quarter 1999.
In addition, the Company, along with other companies, is currently a
defendant in twenty-one antitrust lawsuits brought subsequent to the
Company's plea agreements as putative class actions on behalf of
certain purchasers of sorbates in the United States and Canada. In each
lawsuit, the plaintiffs allege that the defendants engaged in a
conspiracy to fix the price of sorbates and that the class members paid
more for sorbates than they would have paid absent the defendants'
conspiracy. Seven of the lawsuits are pending in California state court
in a consolidated action and allege state antitrust and consumer
protection violations on behalf of classes of indirect purchasers of
sorbates; six of the lawsuits are pending in the United States District
Court for the Northern District of California in a consolidated action
and allege federal antitrust violations on behalf of classes of direct
purchasers of sorbates; two lawsuits were filed in Tennessee state
courts under the antitrust and consumer protection laws of various
states, including Tennessee, on behalf of classes of indirect
purchasers of sorbates in those states; two lawsuits were filed in
Wisconsin State Court under various state antitrust laws on behalf of a
class of indirect purchasers of sorbates in those states; one lawsuit
was filed in Kansas State Court under Kansas antitrust laws on behalf
of a class of indirect purchasers of sorbates in that state; one
lawsuit was filed in New Mexico State Court under New Mexico antitrust
laws on behalf of a class of indirect purchasers of sorbates in that
state; one lawsuit was filed in the Ontario Superior Court of Justice
under the federal competition law and pursuant to common law causes of
action on behalf of a class of direct and indirect purchasers of
sorbates in Canada; and one lawsuit was filed in the Quebec Superior
Court under the federal competition law on behalf of a class of direct
and indirect purchasers of sorbates in the Province of Quebec. The
plaintiffs in most cases seek damages of unspecified amounts,
attorneys' fees and costs, and other unspecified relief; in addition,
certain of the actions claim restitution, injunction against alleged
illegal conduct, and other equitable relief. The Company has reached
settlements in the direct and indirect purchaser class actions pending
in California. The California direct purchaser settlement has received
final court approval; the California indirect purchaser settlement has
yet to be finally approved by the court. One of the two indirect
purchaser actions in Tennessee has been preliminarily approved by the
trial court in Davidson County, Tennessee, and appellate review of that
court's action is presently underway. The Company has also reached
preliminary settlements that would resolve the Wisconsin and New Mexico
indirect purchaser actions; however, these settlements require further
court approval. Each of the remaining class actions is in the
preliminary discovery stage, with no class having been certified to
date.
The Company has also been included as a defendant in two separate
lawsuits concerning sorbates currently pending in the United States
District Court for the Northern District of California, one filed on
behalf of Dean Foods Company, Kraft Foods, Inc. and Ralston Purina
Company, and the other filed on behalf of Conopco, Inc. Both lawsuits
allege that the defendants engaged in a conspiracy to fix the price of
sorbates in violation of Section One of the Sherman Act and that the
plaintiffs were direct purchasers of sorbates from the defendants.
These plaintiffs elected to opt out of the final class action
settlement of the federal direct purchaser cases in California and are
pursuing their claims individually.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company intends to continue vigorously to defend these actions unless they
can be settled on terms acceptable to the parties. These matters could result in
the Company being subject to monetary damages and expenses. The Company
recognized charges to earnings in the fourth quarter 1998, the fourth quarter
1999, and the first and second quarters of 2000 for estimated costs, including
legal fees, related to the pending sorbates litigation described above. The
ultimate outcome of these matters cannot presently be determined, however, and
they may result in greater or lesser liability than that currently provided for
in the Company's financial statements.
ENVIRONMENTAL MATTER
As previously reported, in May 1997, the Company received notice from the
Tennessee Department of Environment and Conservation ("TDEC") alleging that the
manner in which hazardous waste was fed into certain boilers at the Tennessee
Eastman facility in Kingsport, Tennessee violated provisions of the Tennessee
Hazardous Waste Management Act. The Company had voluntarily disclosed this
matter to TDEC in December 1996. Over a three year period, the Company has
provided extensive information relating to this matter to TDEC, the U.S.
Environmental Protection Agency ("EPA"), and the U.S. Department of Justice. On
September 7, 1999, the Company and EPA entered into a Consent Agreement and
Consent Order whereby the Company agreed to pay a civil penalty of $2.75 million
to EPA for an alleged violation concerning monitoring and recordkeeping. The
Company recognized the fine in 1999 and paid the fine in three installments over
a period of one year. Various agencies are continuing to review the information
submitted by the Company.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts)
2000(1) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $ 1,217 $ 1,316 $ 1,387 $ 1,372
Gross profit 250 290 291 235
Operating earnings 132 173 154 103
Earnings before income taxes 102 128 145 78
Provision for income taxes 34 42 48 26
Net earnings 68 86 97 52
Basic earnings per share(3) .88 1.12 1.27 .68
Diluted earnings per share(3) .88 1.12 1.27 .68
1999(2) 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
Sales $ 1,023 $ 1,122 $ 1,190 $ 1,255
Gross profit 194 225 215 188
Operating earnings (loss) 71 96 75 (40)
Earnings before income taxes 37 64 49 (78)
Provision for income taxes 12 21 17 (26)
Net earnings (loss) 25 43 32 (52)
Basic earnings (loss) per share(3) .32 .55 .42 (.67)
Diluted earnings (loss) per share(3) .31 .54 .42 (.67)
(1) Second quarter 2000 includes nonrecurring charges related to
phase-out of operations at Chocolate Bayou, Texas, and
Distillation Products Industries in Rochester, New York, and
certain litigation costs. Third quarter 2000 includes a
nonrecurring gain related to the initial public offering of
shares of Genencor International, Inc., and additional
nonrecurring charges related to phase-out of operations at
Chocolate Bayou, Texas, and the write-off of in-process
research and development related to the McWhorter acquisition.
(2) First quarter 1999 includes charges related to a discontinued
capital project and phase-out of operations at Distillation
Products Industries in Rochester, New York. Third quarter 1999
includes a nonrecurring gain from the sale of assets. Fourth
quarter 1999 includes the effect of a charge for employee
separations; a charge for the write-off of in-process research
and development related to the Lawter acquisition; charges
related to certain discontinued capital projects,
underperforming assets, and phase-out of operations at certain
sites, including the Company's sorbates manufacturing
facilities in Chocolate Bayou, Texas; and other items;
partially offset by a gain recognized on the reimbursement of
previously expensed pension costs and a gain from pension
settlement.
(3) Each quarter is calculated as a discrete period; the sum of
the four quarters may not equal the calculated full-year
amount.
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
23. SUBSEQUENT EVENTS
CREATION OF TWO INDEPENDENT COMPANIES THROUGH SPIN-OFF
The Company reported on February 5, 2001 that its Board of Directors
has authorized management to pursue a plan that would result in Eastman
becoming two independent public companies. Under the plan, Eastman
would separate its business into two companies--a specialty chemicals
and plastics company, and a polyethylene terephthalate ("PET") plastics
and acetate fibers company. The specialty chemicals and plastics
company would include coatings, adhesives, inks, specialty polymers,
and plastics, and performance chemicals and intermediates products,
Eastman's digital business investments including ShipChem, Inc.
("ShipChem"), and Eastman's investment in Genencor International, Inc.
("Genencor"). The PET and acetate fibers company would include
Eastman's PET container plastics, acetate fibers, and polyethylene
products.
The new companies are expected to be launched through a spin-off in the
form of a tax-free stock dividend to be effective by the end of the
fourth quarter 2001, subject to a favorable Internal Revenue Service
ruling that the distribution of shares will be tax-free to shareowners,
final approval of the transaction by the Board of Directors, and other
customary conditions. Immediately after the spin-off, Eastman
shareowners would own shares in both companies. Eastman has not yet
finalized all aspects of the transaction, but expects the capital
structures of the companies to be appropriate for each company's
financial profile and that each company will maintain investment-grade
ratings. Eastman expects to record a one-time charge in connection with
the spin-off.
ACQUISITION OF CERTAIN BUSINESSES OF HERCULES INCORPORATED
As previously reported, the Company has entered into a letter of intent
with Hercules Incorporated ("Hercules") to acquire Hercules'
hydrocarbon resins and select portions of its rosins resins businesses.
These businesses generated approximately $300 million in sales revenue
in 1999. Subject to the negotiation of customary agreements, approval
by the boards of directors of both companies, and regulatory approvals,
the transaction is expected to be completed early in second quarter
2001.
71
42
EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
- --------- ---------------------------------- -----------
23.01 Consent of Independent Accountants 72