UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
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)
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Registrant's telephone number, including area code: (423) 229-2000
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date.
Number of Shares Outstanding at
Class March 31, 2001
Common Stock, par value $0.01 per share 77,008,700
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
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PAGE 1 OF 62 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 29
TABLE OF CONTENTS
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ITEM PAGE
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PART I. FINANCIAL INFORMATION
1. Financial Statements 3-13
2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 14-25
PART II. OTHER INFORMATION
1. Legal Proceedings 26-27
6. Exhibits and Reports on Form 8-K 27
SIGNATURES
Signatures 28
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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)
FIRST QUARTER
2001 2000
Sales $ 1,344 $ 1,217
Cost of sales 1,112 967
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Gross profit 232 250
Selling and general administrative expenses 98 80
Research and development costs 38 38
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Operating earnings 96 132
Interest expense, net 35 32
Other (income) charges, net 6 (2)
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Earnings before income taxes 55 102
Provision for income taxes 18 34
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Net earnings $ 37 $ 68
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Basic earnings per share $ .48 $ .88
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Diluted earnings per share $ .48 $ .88
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COMPREHENSIVE INCOME
Net earnings $ 37 $ 68
Other comprehensive loss (7) (1)
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Comprehensive income $ 30 $ 67
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RETAINED EARNINGS
Retained earnings at beginning of period $ 2,266 $ 2,098
Net earnings 37 68
Cash dividends declared (34) (33)
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Retained earnings at end of period $ 2,269 $ 2,133
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The accompanying notes are an integral part of these financial statements.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in millions)
MARCH 31, DECEMBER 31,
2001 2000
ASSETS
Current assets
Cash and cash equivalents $ 45 $ 101
Trade receivables, net of allowance of $16 695 650
Miscellaneous receivables 88 87
Inventories 644 580
Other current assets 107 105
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Total current assets 1,579 1,523
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Properties
Properties and equipment at cost 9,030 9,039
Less: Accumulated depreciation 5,185 5,114
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Net properties 3,845 3,925
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Goodwill, net of accumulated amortization of $31 and $28 341 345
Other intangibles, net of accumulated amortization of $25 and $20 272 277
Other noncurrent assets 480 480
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Total assets $ 6,517 $ 6,550
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LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 951 $ 1,152
Borrowings due within one year 75 106
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Total current liabilities 1,026 1,258
Long-term borrowings 2,114 1,914
Deferred income taxes 600 607
Postemployment obligations 841 829
Other long-term liabilities 125 130
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Total liabilities 4,706 4,738
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Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares
authorized; shares issued - 84,847,066 and 84,739,902) 1 1
Paid-in capital 103 100
Retained earnings 2,269 2,266
Other comprehensive loss (124) (117)
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2,249 2,250
Less: Treasury stock at cost (7,996,790 shares) 438 438
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Total shareowners' equity 1,811 1,812
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Total liabilities and shareowners' equity $ 6,517 $ 6,550
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The accompanying notes are an integral part of these financial statements.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in millions)
FIRST QUARTER
2001 2000
Cash flows from operating activities
Net earnings $ 37 $ 68
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Adjustments to reconcile net earnings to net cash provided
by (used in) operating activities, net of effect of acquisitions
Depreciation and amortization 104 96
Provision (benefit) for deferred income taxes (4) 18
Increase in receivables (47) (19)
Increase in inventories (54) (44)
Decrease in employee benefit liabilities and
incentive pay (71) (23)
Increase (decrease) in liabilities excluding borrowings,
employee benefit liabilities and incentive pay (80) 32
Other items, net (9) 14
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Total adjustments (161) 74
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Net cash provided by (used in) operating activities (124) 142
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Cash flows from investing activities
Additions to properties and equipment (55) (34)
Acquisitions, net of cash acquired -- (45)
Additions to capitalized software (8) (4)
Other investments (6) (16)
Proceeds from sales of assets -- 10
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Net cash used in investing activities (69) (89)
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Cash flows from financing activities
Net increase in commercial paper and other short-term borrowings 169 30
Repayment of long-term borrowings -- (127)
Dividends paid to shareowners (34) (34)
Treasury stock purchases -- (57)
Other items 2 1
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Net cash provided by (used in) financing activities 137 (187)
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Net change in cash and cash equivalents (56) (134)
Cash and cash equivalents at beginning of period 101 186
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Cash and cash equivalents at end of period $ 45 $ 52
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The accompanying notes are an integral part of these financial statements.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The accompanying unaudited interim consolidated financial statements have been prepared by the Company in accordance and consistent with the accounting policies stated in the Company's 2000 Annual Report on Form 10-K and should be read in conjunction with the consolidated financial statements appearing therein. In the opinion of the Company, all normally recurring adjustments necessary for a fair presentation have been included in the unaudited interim consolidated financial statements. The unaudited interim consolidated financial statements are based in part on estimates made by management.
2. INVENTORIES
MARCH 31, DECEMBER 31,
(Dollars in millions) 2001 2000
At FIFO or average cost (approximates current cost)
Finished goods $ 550 $ 482
Work in process 165 125
Raw materials and supplies 231 248
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Total inventories 946 855
Reduction to LIFO value (302) (275)
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Total inventories at LIFO value $ 644 $ 580
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Inventories valued on the LIFO method were approximately 70% of total inventories in each of the periods.
3. PAYABLES AND OTHER CURRENT LIABILITIES
MARCH 31, DECEMBER 31,
(Dollars in millions) 2001 2000
Trade creditors $ 477 $ 526
Accrued payrolls, vacation, and variable-incentive compensation 117 201
Accrued taxes 127 95
Deferred gain on currency options -- 68
Other 230 262
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Total $ 951 $1,152
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. BORROWINGS
MARCH 31, DECEMBER 31,
(Dollars in millions) 2001 2000
SHORT-TERM BORROWINGS
Notes payable $ 69 $ 101
Other 6 5
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Total short-term borrowings 75 106
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LONG-TERM BORROWINGS
6 3/8% notes due 2004 500 500
7 1/4% debentures due 2024 496 496
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 297 297
Commercial paper 600 400
Other 21 21
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Total long-term borrowings 2,114 1,914
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Total borrowings $2,189 $2,020
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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. For the Credit Facility, the rate for such fees was 0.125% and 0.085% as of March 31, 2001, and March 31, 2000, respectively for the Credit Agreement, the rate for such fees was 0.125% as of March 31, 2001. 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.
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 are classified as long-term borrowings as the Company has the ability to refinance such borrowings long term. As of March 31, 2001 and March 31, 2000, the effective interest rates for the Company's commercial paper borrowings were 5.84% and 6.12%, respectively.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. EARNINGS AND DIVIDENDS PER SHARE
FIRST QUARTER
(In millions) 2001 2000
Shares used for earnings per share calculation:
--Basic 76.7 77.5
--Diluted 77.1 77.6
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Certain shares underlying options outstanding during the first quarters of 2001 and 2000 were excluded from the computation of diluted earnings per share because the options' exercise prices were greater than the average market price of the common shares. Excluded were options to purchase 2,322,784 shares of common stock at a range of prices from $49.25 to $74.25 and 4,527,246 shares of common stock at a range of prices from $42.13 to $74.25 outstanding at March 31, 2001 and 2000, 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. Options to purchase a total of 574,000 shares will become exercisable through October 19, 2001, if both the stock price and time vesting conditions are met. The options will be cancelled and forfeited on October 19, 2001 as to any shares for which the applicable stock price target is not met. At March 31, 2001, 149,240 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 third quarter 1997 were excluded from diluted earnings per share calculations because the stock price vesting conditions to exercise had not been met as to any of the shares as of March 31, 2001.
The Company declared cash dividends of $0.44 per share in the first quarter 2001 and the first quarter 2000.
6. 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 specialty resins and colorants used in the production of consumer and industrial coatings and reinforced fiberglass plastics.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and other intangible assets of approximately $190 million, which represents the excess of cost over the fair value of net tangible assets acquired, 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, the consolidated pro forma results for 2000 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.
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, the consolidated pro forma results for 2000 would not be materially different from reported results.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN TRADING
Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") 133, as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities," which requires that all derivative instruments be reported on the balance sheet at fair value and establishes criteria for designation and effectiveness of hedging relationships. Instruments with a fair market value of $33 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. Previously deferred gains of $68 million from the settlement of currency options were reclassified from other current liabilities. These amounts resulted in an after-tax credit of $58 million to other comprehensive income, a component of shareholders' equity, and an after-tax gain of $4 million included in net earnings as of January 1, 2001.
At March 31, 2001 the remaining mark-to-market gains and losses from hedging activities included in other comprehensive income totaled $27 million. This balance is expected to be reclassified into earnings during 2001. The mark-to-market gains or losses on non-qualifying, excluded, and ineffective portions of hedges are recognized in cost of sales or other income and charges immediately. Such amounts did not have a material impact on earnings during the first quarter 2001.
The Company is exposed to market risk, such as changes in currency exchange rates, raw material and energy costs, and interest rates. To manage the volatility relating to these exposures, the Company nets the exposures on a consolidated basis to take advantage of natural offsets. For the residual portion, the Company uses various derivative financial instruments pursuant to the Company's policies for hedging practices. Such instruments are 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. Designation is performed on a specific exposure basis to support hedge accounting. The changes in fair value of these hedging instruments are offset in part or in whole by corresponding changes in the cash flows of the underlying exposures being hedged. The Company does not currently utilize fair value hedges and does not hold or issue derivative financial instruments for trading purposes.
CURRENCY RATE HEDGING
The Company manufactures and sells its products in a number of countries throughout the world and, as a result, is exposed to movements in foreign currency exchange rates. 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 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). These contracts are designated cash flow hedges. The mark-to-market gain or loss on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings. The mark-to-market gains or losses on non-qualifying, excluded, and ineffective portions of hedges are recognized in cost of sales or other income and charges immediately.
COMMODITY HEDGING
Raw materials and energy sources used by the Company are subject to price volatility caused by weather, supply conditions, economic variables, and other unpredictable factors. To mitigate short-term fluctuations in market prices for propane and natural gas, the Company enters into forwards and options contracts. These contracts are designated as cash flow hedges. The mark-to-market gain or loss
on qualifying hedges is included in other comprehensive income to the extent effective, and reclassified into cost of sales in the period during which the hedged transaction affects earnings.
OTHER INSTRUMENTS
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. These instruments are typically 100% effective. As a result, there is no current impact to earnings due to hedge ineffectiveness. These instruments are recorded on the balance sheet at fair value, but the impact was not material to the income statement. No cash flow hedges were discontinued during the quarter ended March 31, 2001.
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. 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, $58 million was paid during 2000, and $3 million was paid in first quarter 2001. As of March 31, 2001, a balance of $4 million remains to be paid and is included in other current liabilities in the Consolidated Statements of Financial Position.
9. SEGMENT INFORMATION
The Company's products and operations are managed and reported in two operating segments--Chemicals and Polymers. As previously announced, Eastman is pursuing a plan to separate into two independent public companies by the end of 2001--a specialty chemicals and plastics company which will be named Eastman Company, and a yet unnamed PET plastics and acetate fibers company. The Eastman Company would include coatings, adhesives, and inks; specialty polymers and plastics; 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 plastics and acetate fibers company would include Eastman's EASTAPAK polyethylene terephalate ("PET") polymers for container plastics; acetate fibers; and polyethylene products. The planned spin-off and related management changes will result in certain specialty plastics products, primarily copolyesters and cellulosic plastics, moving from the Polymers segment to the Chemicals segment, effective in 2001. The Chemicals and Polymers segments will be restated to reflect these changes effective with the second quarter 2001.
FIRST QUARTER
(Dollars in millions) 2001 2000
SALES
Chemicals $ 637 $ 556
Polymers 707 661
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Consolidated Eastman total $1,344 $1,217
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OPERATING EARNINGS
Chemicals $ 22 $ 55
Polymers 74 77
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Consolidated Eastman total $ 96 $ 132
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MARCH 31, DECEMBER 31,
2001 2000
ASSETS
Chemicals $3,200 $3,260
Polymers 3,317 3,290
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Consolidated Eastman total $6,517 $6,550
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EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. LEGAL MATTERS
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 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. For further information concerning certain pending legal matters, see "Part II. Other Information Item 1. Legal Proceedings".
11. COMMITMENTS
In 1999, the Company entered into an agreement that allows it to sell undivided interests in certain domestic trade accounts receivable under a planned continuous sale program to a third party. Under this agreement, receivables sold to the third party totaled $200 million at March 31, 2001 and December 31, 2000. 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 $3 million in each of the first quarters 2001 and 2000. Average monthly proceeds from collections reinvested in the continuous sale program were approximately $220 million in each of the first quarters 2001 and 2000.
12. SUBSEQUENT EVENTS
ACQUISITION OF CERTAIN BUSINESSES OF HERCULES INCORPORATED
On May 1, 2001, the Company announced that it has completed the asset acquisition of the hydrocarbon resins and select portions of the rosin-based resins business from Hercules Incorporated ("Hercules") for approximately $244 million. Hercules facilities acquired are located in the United States, the Netherlands, England, and Mexico. Additionally, certain operating assets acquired will be operated under contract with Hercules at shared facilities in the United States. Revenues from the acquired businesses as reported by Hercules were approximately $290 million for 2000.
The transaction, which was financed with commercial paper borrowings and short-term notes payable, will be accounted for as a purchase. The purchase price will be allocated based on fair values of assets acquired and liabilities assumed, pending the completion of an independent appraisal.
13. RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the FASB issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140, which replaces SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," addresses certain issues not previously addressed in SFAS 125. SFAS 140 is effective for transfers and servicing occurring after March 31, 2001, and, for certain provisions, fiscal years ending after December 15, 2000. The Company does not expect the adoption of SFAS 140 to have a significant impact on Eastman's consolidated financial statements.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the Company's Consolidated Financial Statements and Management's Discussion and Analysis contained in the 2000 Annual Report on Form 10-K and the unaudited interim consolidated financial statements included elsewhere in this report. All references to earnings per share contained in this report are diluted earnings per share unless otherwise noted.
RESULTS OF OPERATIONS
SUMMARY OF CONSOLIDATED RESULTS
Significantly higher sales revenue for the first quarter 2001 reflects sales volume attributable to acquisitions in the coatings, adhesives, specialty polymers, and inks product lines and increased selling prices for EASTAPAK polyethylene terephalate ("PET") polymers. Sales revenue increased 10% including acquisitions made during the last year and was level excluding acquisitions.
Sales volume increased slightly including acquisitions and declined slightly excluding acquisitions. The lack of volume growth without acquisitions resulted from a slowing of economic demand in North America and Asia. Foreign currency exchange rates had a negative impact on U.S. dollar sales revenues for the first quarter 2001, particularly the decline in the value of the euro.
Overall for the Company, selling prices increased in line with raw materials and energy cost increases. Margins improved for EASTAPAK PET polymers for container plastics as selling prices increased more than raw materials and energy costs. However, for most other product lines, selling prices increased less than raw materials and energy costs. The first quarter was positively impacted by an after-tax gain of $4 million resulting from the mark-to-market of foreign exchange and commodity hedges outstanding on January 1, 2001 in connection with the implementation of Statement of Financial Accounting Standard ("SFAS") 133, as amended by SFAS 138, "Accounting for Derivative Instruments and Hedging Activities."
Diluted earnings per share for the first quarter 2001 were $0.48 compared with $0.88 in the first quarter 2000.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
SALES $1,344 $1,217 10%
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Sales volume attributable to acquisitions and increases in selling prices and volumes for EASTAPAK PET polymers more than offset the impact of decreased volumes for other product lines resulting from weak economic conditions. Sales increased in all regions, except for Asia Pacific, driven by higher selling prices for EASTAPAK PET polymers and volume attributable to acquisitions. Foreign currency exchange rates had a slightly negative impact on U.S. dollar sales revenues, particularly in Europe.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
GROSS PROFIT $ 232 $ 250 (7)%
As a percentage of sales 17.3% 20.5%
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Significant factors that negatively affected gross profit for the first quarter included overall lower sales volume (excluding acquisitions), higher distribution costs, and product mix. Increases for propane, paraxylene, and natural gas accounted for approximately $75 million of the increase in costs after the impact of the Company's commodity hedging program, but overall selling prices increased in line with raw materials costs. Margins improved for EASTAPAK PET polymers for container plastics as capacity utilization rates increased globally and selling prices more than offset raw materials and energy cost increases. Gross profit was positively affected by a pre-tax gain of $7 million resulting from the mark-to-market of foreign exchange and commodity hedges outstanding on January 1, 2001 in connection with the implementation of SFAS 133.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 98 $ 80 23%
As a percentage of sales 7.3% 6.6%
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Selling and general administrative expenses for recently acquired businesses, costs related to ShipChem, and costs associated with the previously announced planned spin-off were factors which contributed to the increase in selling and general administrative expenses.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
RESEARCH AND DEVELOPMENT COSTS $ 38 $ 38 --%
As a percentage of sales 2.8% 3.1%
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
GROSS INTEREST COSTS $ 37 $ 35
LESS CAPITALIZED INTEREST 1 2
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INTEREST EXPENSE 36 33 9%
INTEREST INCOME 1 1
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NET INTEREST EXPENSE $ 35 $ 32 9%
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Higher interest expense in the first quarter 2001 reflects decreased capitalized interest and higher average commercial paper borrowings.
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
OTHER (INCOME) CHARGES, NET $ 6 $ (2) (400)%
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Other income and charges include royalty income, gains and losses on asset sales, results from equity investments, foreign exchange transactions, and other items. First quarter 2001 results reflect foreign exchange losses, partially offset by results from equity investments and other items. First quarter 2000 included a non-operating gain from an investment held by Genencor International, Inc. ("Genencor"), a charge for litigation, and other items.
EARNINGS
FIRST QUARTER
(Dollars in millions, except per share amounts) 2001 2000 CHANGE
Operating earnings $ 96 $132 (27)%
Net earnings 37 68 (46)
Earnings per share
--Basic .48 .88 (45)
--Diluted .48 .88 (45)
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SUMMARY BY OPERATING SEGMENT
The Company's products and operations are managed and reported in two operating segments--Chemicals and Polymers. As previously announced, Eastman is pursuing a plan to separate into two independent public companies by the end of 2001--a specialty chemicals and plastics company which will be named Eastman Company, and a yet unnamed PET plastics and acetate fibers company. The Eastman Company would include coatings, adhesives, and inks; specialty polymers and plastics; performance chemicals and intermediates products; Eastman's digital business investments including ShipChem, Inc. ("ShipChem"); and Eastman's investment in Genencor. The PET plastics and acetate fibers company would include Eastman's EASTAPAK PET polymers for container plastics; acetate fibers; and polyethylene products. In preparation for the planned spin-off and related management changes, certain specialty plastics products, primarily copolyesters and cellulosic plastics, will be moved from the Polymers segment to the Chemicals segment, effective in 2001. The Chemicals and Polymers segments will be restated to reflect these changes effective with the second quarter 2001.
CHEMICALS SEGMENT
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
Sales $637 $556 15%
Operating earnings 22 55 (60)
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For the first quarter 2001, sales revenue for the Chemicals segment was sharply higher mainly due to increased volumes associated with acquisitions and overall increased selling prices driven by higher raw materials and energy costs.
Sales revenue for coatings, adhesives, specialty polymers, and inks products increased sharply in the first quarter 2001 mainly due to substantially higher sales volumes resulting from acquisitions and moderately higher selling prices which were driven by higher raw materials and energy costs. For performance chemicals and intermediates products, sales revenue declined moderately due to significantly lower volumes for oxo derivative products which were partially offset by solidly higher selling prices driven by higher raw materials and energy costs. For fine chemicals, selling prices declined slightly in the first quarter 2001, and lower sales volumes reflected the discontinuation of certain product lines prior to 2001.
Operating earnings for the Chemicals segment were substantially lower as selling price increases were not sufficient to cover higher raw materials and energy costs. Other factors negatively impacting operating earnings included overall lower sales volumes (excluding the effect of acquisitions), higher distribution costs, and product mix.
POLYMERS SEGMENT
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
Sales $707 $661 7%
Operating earnings 74 77 (4)
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Sales revenue for the Polymers segment increased moderately as significantly higher selling prices and volumes for EASTAPAK PET polymers were partially offset by lower sales volumes for fibers and polyethylene products.
Sales revenue for EASTAPAK PET polymers for container plastics increased substantially due to both higher selling prices and volumes. Sales revenue for fibers products declined mainly due to lower volumes resulting from the timing of sales to Asia. Overall, specialty plastics revenues decreased due to lower volumes for polyethylene products. However, revenue increased for the non-polyethylene products in specialty plastics.
Margins for EASTAPAK PET polymers for container plastics improved as capacity utilization rates increased globally and selling price increases more than offset raw materials and energy cost increases. However, operating earnings for the Polymers segment overall were lower as selling price increases for polyethylene were not sufficient to cover higher raw materials and energy costs. Operating earnings were also negatively impacted by lower volumes for fibers products.
(For supplemental analysis of Chemicals and Polymers segment results and the impact of recent acquisitions on revenue and volume, see Exhibits 99.01 and 99.02 to this Form 10-Q.)
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
FIRST QUARTER
(Dollars in millions) 2001 2000 CHANGE
United States and Canada $796 $747 6%
Europe, Middle East, and Africa 313 235 34
Latin America 120 102 18
Asia Pacific 115 133 (14)
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Sales in the United States and Canada for first quarter 2001 were $796 million, up 6% from 2000 first quarter sales of $747 million. The increase was primarily attributable to higher volumes resulting from the McWhorter acquisition and increased selling prices in a number of product lines, including EASTAPAK PET polymers.
Sales outside the United States and Canada for first quarter 2001 were $548 million, up 17% from 2000 first quarter sales of $470 million due to higher sales volume and prices, and were 41% of total sales in the first quarter 2001 compared with 39% for the first quarter 2000. Volume growth resulting from acquisitions substantially increased sales in Europe. Revenues for Europe were also positively impacted by strong volume growth in EASTAPAK PET polymers and coatings products for the automotive market, and overall higher selling prices. Higher sales volumes and selling prices for EASTAPAK PET polymers resulted in increased sales for Latin America. The timing of fibers sales resulted in lower sales in Asia Pacific.
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
CASH FLOW
FIRST QUARTER
(Dollars in millions) 2001 2000
Net cash provided by (used in)
Operating activities $(124) $ 142
Investing activities (69) (89)
Financing activities 137 (187)
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Net change in cash and cash equivalents $ (56) $(134)
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Cash and cash equivalents at end of period $ 45 $ 52
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Cash used in operating activities for the first quarter 2001 reflects an increase in working capital related to a decrease in trade payables, the payment of certain employee incentive compensation, a build-up of inventories related to a planned shutdown for plant maintenance, and higher receivables related to the increase in sales revenue. In first quarter 2000, cash flows from operations were positively impacted by a deferred gain on currency options settled in that quarter. Cash used in investing activities reflects higher expenditures for capital additions in 2001 and the acquisition of Sokolov in first quarter 2000. Cash provided by financing activities in the first quarter 2001 reflects an increase in commercial paper and other short-term borrowings for general operating purposes and, in first quarter 2000, a repayment of borrowings associated with acquisitions.
Available cash will be used to fund dividends, maintain a strong balance sheet including the repayment of debt, weighed against share repurchases.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 2001, the Company estimates that depreciation will be about $375 million and that capital expenditures will be approximately $300 million. Long-term commitments related to planned capital expenditures are not material. The Company had various purchase commitments at March 31, 2001, for materials, supplies, and energy incident to the ordinary conduct of business. These commitments, over a period of several years, approximate $1.4 billion.
LIQUIDITY
On July 13, 2000, Eastman entered into an $800 million revolving credit facility (the "Credit Facility"), and on December 8, 2000, Eastman entered into a short-term $150 million credit agreement (the "Credit Agreement"). 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 rate for such fees on the Credit Facility was 0.125% and 0.085% as of March 31, 2001, and March 31, 2000, respectively; the rate for such fees on the Credit Agreement was 0.125% as of March 31, 2001. 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.
Eastman utilizes commercial paper, generally with maturities of 90 days or less, to meet its liquidity needs. Because the Credit Facility that provides liquidity support for the commercial paper expires in July 2005, the commercial paper borrowings at March 31, 2001, are classified as long-term borrowings as the Company has the ability to refinance such borrowings long term. As of March 31, 2001, the Company's commercial paper outstanding balance was $600 million at an effective interest rate of 5.84%. At March 31, 2000, the Company's commercial paper outstanding balance was $502 million at an effective interest rate of 6.12%.
The Company has an effective registration statement on file with the Securities and Exchange Commission to issue up to $1 billion of debt or equity securities. No securities have been sold from this shelf registration.
In 1999, the Company entered into an agreement that allows the Company to sell undivided interests in certain domestic trade accounts receivable under a planned continuous sale program to a third party. Under this agreement, receivables sold to the third party totaled $200 million at March 31, 2001, and December 31, 2000. Undivided interests in designated receivable pools were sold to the purchaser with recourse limited to the receivables purchased. Fees to be paid by the Company under this agreement are based on certain variable market rate indices. For additional information concerning this agreement, see Note 11 to the Consolidated Financial Statements.
In July 2000, the Company completed the acquisition of McWhorter for approximately $200 million in cash and the assumption of approximately $155 million in debt, of which $141 million was subsequently repaid. This transaction was funded with available cash and commercial paper borrowings.
As of February 21, 2000, the Company acquired 76% of the shares of Sokolov. During the second quarter 2000, the Company acquired an additional 21% of the shares resulting in 97% ownership of Sokolov as of December 31, 2000. These transactions, for cash consideration totaling approximately $46 million (net of $3 million cash acquired) and the assumption of $21 million of Sokolov debt, which was subsequently repaid, were financed with available cash and commercial paper borrowings.
During 2000, the Company repaid $125 million of Lawter notes, $21 million of debt assumed in the Sokolov acquisition, and $141 million of debt assumed in the McWhorter acquisition. Additional indebtedness of $208 million, primarily in the form of short-term notes payable, was incurred during 2000 for general operating purposes, and approximately $184 million of such borrowings were repaid during 2000. Interest rates for these notes range from 6.33% to 7.40%.
The Company is currently authorized to repurchase up to $400 million of its common stock. During 2000, 1,575,000 shares of common stock at a total cost of approximately $57 million, or an average price of approximately $36 per share, were repurchased under this authorization. No shares were repurchased during the first quarter 2001. A total of 2,669,800 shares of common stock at a cost of approximately $107 million, or an average price of approximately $40 per share, has been repurchased under the authorization. Repurchased shares may be used to meet common stock requirements for compensation and benefit plans and other corporate purposes.
On May 1, 2001, the Company announced that it has completed the asset acquisition of the hydrocarbon resins and select portions of the rosin-based resins business from Hercules Incorporated ("Hercules") for approximately $244 million. Hercules facilities acquired are located in the United States, the Netherlands, England, and Mexico. Additionally, certain operating assets acquired will be operated under contract with Hercules at shared facilities in the United States. The transaction, which was financed with commercial paper borrowings and short-term notes payable, will be accounted for as a purchase.
As part of its previously announced business portfolio changes, which included plans to divest or restructure a portion of its fine chemicals business, Eastman announced on April 16, 2001, it is restructuring its fine chemicals business and will retain ownership of its Arkansas facility and will continue operating the Tennessee portion of this business, while continuing to evaluate options regarding its facilities in Wales and Hong Kong.
The Company anticipates that no contribution to its defined benefit pension plan will be required for 2001.
Available sources of capital, together with cash flows from operations, are expected to be sufficient to meet foreseeable cash flow requirements.
DIVIDENDS
The Company declared cash dividends of $0.44 per share in the first quarter 2001 and the first quarter 2000.
RECENTLY ISSUED ACCOUNTING STANDARDS
In September 2000, the Financial Accounting Standards Board ("FASB") issued SFAS 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." SFAS 140, which replaces SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," addresses certain issues not previously addressed in SFAS 125. SFAS 140 is effective for transfers and servicing occurring after March 31, 2001, and, for certain provisions, fiscal years ending after December 15, 2000. The Company does not expect the adoption of SFAS 140 to have a significant impact on Eastman's consolidated financial statements.
OUTLOOK
For 2001, the Company:
- Expects the global macroeconomic environment and slower Gross
Domestic Product ("GDP") growth will continue to have a
negative effect on the Company's volume growth and earnings;
- Anticipates that raw materials and energy costs will be lower
in the second and third quarters than the first quarter, as
the cost of propane comes down in the marketplace;
- Expects a planned maintenance shutdown in the coal gas
facility in the second quarter will result in lower production
quantities and higher maintenance costs, negatively impacting
unit manufacturing costs in the second quarter;
- Expects that EASTAPAK PET polymer margins will improve due to
increases in selling prices which are expected to exceed raw
materials and energy cost increases. Additionally, the Company
expects that EASTAPAK PET polymer sales volumes will be higher
in the second quarter than the first quarter, although the
increase is expected to be dampened by pre-buying that
occurred at the end of the first quarter and the cooler
weather in April in Europe and North America;
- Expects earnings in the second quarter to be higher than the
first quarter 2001 as a result of announced selling price
increases effective in the second quarter, lower raw materials
and energy costs, and a lower cost structure, including
efficiency gains resulting from the continued digitization of
the Company's business;
- Expects earnings for second and third quarters 2001 to improve
sequentially over the first quarter 2001;
- Expects demand for chemicals to be seasonally up in second
quarter 2001 but down year over year net of acquisitions;
- Expects annual worldwide PET volume growth of 10% and expects
the supply and demand balance for EASTAPAK PET polymers for
container plastics to improve. The Company expects its
EASTAPAK PET polymers for container plastics volume growth to
be in line with worldwide industry demand and margins to
improve in second quarter;
- Expects to eliminate additional labor and non-labor costs
during 2001, raising the total cost reduction goal from $200
million at year-end 2000 to $300 million by year-end 2001;
- Expects that costs for upgrading Eastman's enterprise resource
planning software system from SAP R2 to SAP R3 to continue
during 2001 as implementation is planned to be essentially
completed in all regions by year-end 2001;
- Expects to further integrate recent acquisitions into the
Company's processes during 2001 and that margins from the
acquired assets will improve during the year as integration
efforts progress;
- Expects to continue to recognize costs throughout 2001 related
to ShipChem as it builds capability to add new customers;
- Expects to restructure its fine chemicals business and that
such restructuring could result in a charge to earnings
related to potential loss on sale of assets for a number of
sites or other restructuring costs related to fine chemical
product lines not divested;
- Anticipates that its capital expenditures for 2001 will be
approximately $300 million;
- Anticipates available cash will be used to fund dividends,
maintain a strong balance sheet including the repayment of
debt, weighed against share repurchases.
Based upon the expectations described above, as of April 26, 2001 (the date of its first quarter 2001 sales and earnings press release) the Company anticipated that the second quarter 2001 earnings per share would be approximately $0.68 per share.
By the end of the fourth quarter 2001, the Company expects to become two independent public companies, a specialty chemicals and plastics company which will be named Eastman Company, and a yet unnamed PET plastics and acetate fibers company, through a spin-off in the form of a tax-free stock dividend. Although many issues are pending in connection with the planned spin-off, the Company:
- Expects to continue the $0.44 quarterly dividend until the
spin-off;
- Expects that, immediately after the spin-off, Eastman
shareowners will own shares in both of the new entities;
- Expects that Eastman's Chairman of the Board and Chief
Executive Officer, Mr. Earnest W. Deavenport, Jr., will retire
after the spin-off is complete, and that Eastman's other
leadership and Board of Directors will be divided between the
two new companies;
- Expects that upon the completion of the spin-off at the end of
2001, Mr. J. Brian Ferguson, President of Eastman's Chemicals
Group, will become Chief Executive Officer of Eastman Company,
and Mr. Allan R. Rothwell, President of Eastman's Polymers
Group, will become Chief Executive Officer of the new PET
plastics and acetate fibers company.
- Expects Eastman Company to own approximately 70% of Eastman
Chemical Company's plant, property and equipment assets
throughout the world, with the PET plastics and acetate
fibers company expected to own the remaining 30%. The asset
allocation was measured based on net book value of the assets
as of December 31, 2000. A more complete breakdown is filed
as Exhibit 99.03 to this Form 10-Q;
- Expects that the asset allocation will enable each of the new
companies to maximize growth and efficiency, maintain the
value inherent in their current production facilities, provide
flexibility to focus on independent strategies for the future,
and retain the strengths of vertical integration;
- Expects the division of administrative and support services
to follow approximately the 70/30 asset allocation.
Beyond 2001, the Company:
- Expects the separation of Eastman Company from the PET
plastics and acetate fibers company will allow the two
companies to concentrate their respective efforts and
resources on specific strategies to create shareowner value,
providing shareowners with ownership interests in two highly
focused entities;
- Believes that Eastman Company will be a world leader in the
specialty chemicals and plastics industry, with a strong focus
on providing customer solutions; that this company will
experience accelerated growth through increased management
focus and execution of appropriate strategies; and that market
transparency and value recognition for the technology and
services businesses that will become part of this company,
such as ShipChem and Genencor, will be enhanced;
- Believes that the PET plastics and acetate fibers company will
be a world market and cost position leader in PET plastics and
acetate fibers, and that consistently strong cash flows and
the integrated polyethylene business will allow this company
to remain financially strong throughout business cycles;
- Expects that the Board of Directors for each new company will
determine its own company's dividend policy, but anticipates
that the initial combined dividend of the two new companies
will be equal to Eastman's current dividend;
- Anticipates the capital structure of each new company will be
appropriate for the company's financial profile and that each
company will maintain investment-grade ratings.
FORWARD-LOOKING STATEMENTS
The expectations under "Outlook" and certain other statements in this report may be forward-looking in nature as defined in the Private Securities Litigation Reform Act of 1995. These statements and other written and oral forward-looking statements made by the Company from time to time relate to such matters as planned capacity increases and utilization; capital spending; expected depreciation and amortization; environmental matters; legal proceedings; effects of hedging raw material and energy costs and foreign currencies; global and regional economic conditions, and their effect on manufacturing and chemical industries and on Eastman; raw material and energy costs; overall demand for chemicals, fibers, and plastics; future earnings from recently acquired businesses and assets; supply and demand, volume, price, cost, margin, and sales and earnings and cash flow expectations and strategies for individual products, businesses, and segments as well as for the whole of Eastman Chemical Company; cash requirements and uses of available cash; cost reduction targets; development, production, commercialization, and acceptance of new products, services, and technologies; acquisitions and dispositions of certain businesses and assets, and product portfolio changes; and the planned separation of Eastman's current businesses into two independent companies by the end of 2001.
These plans and expectations are based upon certain underlying assumptions, including those mentioned within the text of the specific statements. Such assumptions are in turn based upon internal estimates and analyses of current market conditions and trends, management plans and strategies, economic conditions, and other factors. These plans and expectations and the assumptions underlying them are necessarily subject to risks and uncertainties inherent in projecting future conditions and results. Actual results could differ materially from expectations expressed in the forward-looking statements if one or more of the underlying assumptions and expectations proves to be inaccurate or is unrealized. In addition to the factors discussed in this report, the following are some of the important factors that could cause the Company's actual results to differ materially from those projected in any such forward-looking statements:
- The Company has announced that it will separate into two independent companies by the end of the fourth quarter, 2001, through a spin-off in the form of a tax-free stock dividend. The separation of Eastman's business into two companies--a specialty chemicals and plastics company which will be named Eastman Company, and a yet unnamed PET plastics and acetate fibers company--is expected to allow the two companies to concentrate their respective efforts and resources on strategies specific to each business, providing shareowners with ownership interests in two highly focused entities. There can be no assurance that any or all of such goals or expectations will be realized.
- The planned spin-off remains subject to governmental and other approvals, including shareowner approval, if any, and other customary conditions. While it is Eastman's expectation that the Internal Revenue Service ("IRS") will agree that the spin-off as structured will be tax-free, there can be no assurance that such determination will be reached by the IRS.
- The Company has manufacturing and marketing operations throughout the world, with over 40% of the Company's revenues attributable to sales outside the United States. Economic factors, including foreign currency exchange rates, could affect the Company's revenues, expenses, and results. Although the Company utilizes risk management tools, including hedging, as appropriate, to mitigate market fluctuations in foreign currencies, any changes in strategy in regard to risk management tools can also affect revenues, expenses, and results, and there can be no assurance that such measures will result in cost savings or that all market fluctuation exposure will be eliminated. In addition, changes in laws, regulations, or other political factors in any of the countries in which the Company operates could affect business in that country or region, as well as the Company's results of operations.
- The Company has made and may continue to make acquisitions,
divestitures, and investments, and enter into alliances, as
part of its growth strategy. The completion of such
transactions are subject to the timely receipt of necessary
regulatory and other consents and approvals needed to complete
the transactions which could be delayed for a variety of
reasons, including the satisfactory negotiation of the
transaction documents and the fulfillment of all closing
conditions to the transactions. Additionally, after completion
of the transactions, there can be no assurance that such
transactions will be successfully integrated on a timely and
cost-efficient basis or that they will achieve projected
operating earnings targets.
- The Company has made and may continue to make strategic
e-business investments, including formation of joint ventures
and investments in other e-commerce businesses, in order to
build Eastman's E-business capabilities. There can be no
assurance that such investments will achieve their objectives
or that they will be beneficial to the Company's results of
operations.
- During 2001, the Company will be integrating recent
acquisitions into the Company's processes and SAP R3 to enable
cost-saving and synergy opportunities. There can be no
assurance that such cost-saving and synergy opportunities will
be realized or that the integration efforts will be completed
as planned.
- The Company owns assets in the form of equity in other
companies, including joint ventures, e-commerce investments,
and Genencor. Such investments, some of which are minority
investments in companies which are not managed or controlled
by the Company, are subject to all of the risks associated
with changes in value of such investments including: dilution
of the Company's ownership interest due to subsequent
financings at lower per share prices; declines in the market
value of such investments due to the investee's inability to
obtain additional financing on favorable terms; and declines
in the market valuation of those companies whose shares are
publicly traded.
- The Company has undertaken and will continue to undertake
productivity and cost reduction initiatives and organizational
restructurings to improve performance and generate cost
savings. There can be no assurance that these will be
completed as planned, beneficial, or that estimated cost
savings from such activities will be realized.
- In addition to cost reduction initiatives, the Company is
striving to improve margins on its products through price
increases, where warranted and accepted by the market;
however, the Company's earnings could be negatively impacted
should such increases be unrealized, not be sufficient to
cover increased raw materials and energy costs, or have a
negative impact on demand and volume.
- The Company is reliant on certain strategic raw materials for
its operations and utilizes risk management tools, including
hedging, as appropriate, to mitigate short-term market
fluctuations in raw materials and energy costs. There can be
no assurance, however, that such measures will result in cost
savings or that all market fluctuation exposure will be
eliminated.
- The Company's competitive position in the markets in which it
participates is, in part, subject to external factors. For
example, supply and demand for certain of the Company's
products is driven by end-use markets and worldwide capacities
which, in turn, impact demand for and pricing of the Company's
products.
- The Company has an extensive customer base; however, loss of
certain top customers could adversely affect the Company's
financial condition and results of operations until such
business is replaced.
- Limitation of the Company's available manufacturing capacity
due to significant disruption in its manufacturing operations
could have a material adverse affect on revenues, expenses,
and results.
- The Company's facilities and businesses are subject to complex
health, safety, and environmental laws and regulations, which
require and will continue to require significant expenditures
to remain in compliance with such laws and regulations
currently and in the future. The Company's accruals for such
costs and associated liabilities are believed to be adequate,
but are subject to changes in estimates on which the accruals
are based. The estimates depend on a number of factors
including those associated with ongoing operations and
remedial requirements. Ongoing operations can be affected by
unanticipated government enforcement action, which in turn is
influenced by the nature of the allegation
and the complexity of the site. Likewise, changes in chemical control
regulations and testing requirements can increase costs or result in
product deselection. Remedial requirements at contaminated sites are
dependent on the nature of the remedy, the outcome of discussions with
regulatory agencies and other potentially responsible parties at
multi-party sites, and the number and financial viability of other
potentially responsible parties.
- 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. The Company believes amounts reserved are adequate for such
pending matters; however, results of operations could be affected by
significant litigation adverse to the Company.
The foregoing list of important factors does not include all such factors nor necessarily present them in order of importance. This disclosure, including that under "Outlook" and "Forward-Looking Statements," and other forward-looking statements and related disclosures made by the Company in this filing and elsewhere from time to time, represent management's best judgment as of the date the information is given. The Company does not undertake responsibility for updating any of such information, whether as a result of new information, future events, or otherwise. You are advised, however, to consult any further public Company disclosures (such as in our filings with the Securities and Exchange Commission or in Company press releases) on related subjects.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
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 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. 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., Ralston Purina
Company, McKee Foods Corporation, and Nabisco, Inc; 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.
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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits filed as part of this report are listed in the Exhibit Index appearing on page 29.
(b) Reports on Form 8-K
On February 5, 2001, the Company filed a report on Form 8-K concerning its plans to separate into two independent public companies by the end of 2001--a specialty chemicals and plastics company, and a PET plastics and acetate fibers company.
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: May 7, 2001 By: /s/ James P. Rogers
-------------------------------
James P. Rogers
Senior Vice President and
Chief Financial Officer
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EXHIBIT INDEX
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------------------- -----------
3.01 Amended and Restated Certificate of Incorporation of Eastman Chemical
Company (incorporated herein by reference to Exhibit 3.01 to Eastman
Chemical Company's Registration Statement on Form S-1, File No. 33-72364,
as amended)
3.02 Amended and Restated Bylaws of Eastman Chemical Company, as amended
October 5, 2000 (incorporated herein by reference to Exhibit 3.02 to
Eastman Chemical Company's Quarterly Report on Form 10-Q for the quarter
ended September 30, 2000)
4.01 Form of Eastman Chemical Company Common Stock certificate as amended
February 1, 2001 31-32
4.02 Stockholder Protection Rights Agreement dated as of December 13, 1993,
between Eastman Chemical Company and First Chicago Trust Company of New
York, as Rights Agent (incorporated herein by reference to Exhibit 4.4 to
Eastman Chemical Company's Registration Statement on Form S-8 relating to
the Eastman Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman Chemical Company
and The Bank of New York, as Trustee (the "Indenture") (incorporated
herein by reference to Exhibit 4(a) to Eastman Chemical Company's current
report on Form 8-K dated January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated herein by
reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated herein by
reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of the Indenture
(incorporated herein by reference to Exhibit 4(a) to Eastman Chemical
Company's Current Report on Form 8-K dated June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated herein by
reference to Exhibit 4(b) to the June 8-K)
4.08 Form of 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.08 to Eastman Chemical Company's Annual Report on
Form 10-K for the year ended December 31, 1996 (the "1996 10-K"))
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EXHIBIT INDEX (CONTINUED)
EXHIBIT SEQUENTIAL
NUMBER DESCRIPTION PAGE NUMBER
------- ------------------------------------------------------------------------- -----------
4.09 Officer's Certificate pursuant to Sections 201 and 301 of the Indenture
related to 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.09 to the 1996 10-K)
4.10 $200,000,000 Accounts Receivable Securitization agreement dated April 13,
1999 (amended April 11, 2000), between the Company and Bank One, NA, as
agent. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, in lieu of
filing a copy of such agreement, the Company agrees to furnish a copy of
such agreement to the Commission upon request.
4.11 Credit Agreement, dated as of July 13, 2000 (the "Credit Agreement")
among Eastman Chemical Company, the Lenders named therein, and Citibank,
N.A. as Agent (incorporated herein by reference to Exhibit 4.11 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the quarter ended June
30, 2000.
*10.01 Eastman Chemical Company Benefit Security Trust dated
December 24, 1997, as amended February 1, 2001 33 - 58
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 59
99.01 Operating Segment Information (Sales Revenue Change, Volume Effect and
Price Effect) 60
99.02 Acquisition Information (Sales Revenue and Volume Growth Comparison --
With and Without Acquisitions) 61
99.03 Summary of Plant, Property and Equipment Asset Allocation 62
between Eastman Company and the PET Plastics & Acetate
Fibers Company
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EXHIBIT 4.01
EASTMAN
COMMON STOCK
NUMBER [PHOTO] SHARES
EASTMAN CHEMICAL COMPANY
INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE
This Certifies that CUSIP 277432 10 0
SEE REVERSE FOR CERTAIN DEFINITIONS
is the owner of
FULLY PAID AND NON-ASSESSABLE SHARES OF THE COMMON STOCK OF
Eastman Chemical Company transferable upon the books of the corporation by the
[SEAL] owner hereof in person or by duly authorized attorney upon surrender of this
certificate properly endorsed. This certificate is not valid until countersigned
by the transfer agent and registered by the registrar.
Witness the seal of the corporation and the signatures of its duly authorized
officers.
Dated
COUNTERSIGNED AND REGISTERED:
AMERICAN STOCK TRANSFER & TRUST COMPANY /s/
(NEW YORK, NY) Chairman and Chief Executive Officer
BY TRANSFER AGENT /s/
AND REGISTRAR Secretary
AUTHORIZED SIGNATURE
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AS OF FEBRUARY 1, 2001 THE SUCCESSOR RIGHTS AGENTS IS
AMERICAN STOCK TRANSFER & TRUST COMPANY.
EASTMAN CHEMICAL COMPANY
Until the Separation Time (as defined in the Rights Agreement referred to below), this certificate also evidences and entitles the holder hereof to certain Rights as set forth in a Rights Agreement, dated as of December 13, 1993 (as such may be amended from time to time, the "Rights Agreement"), between Eastman Chemical Company (the "Company") and First Chicago Trust Company of New York, as Rights Agent, the terms of which are hereby incorporated herein by reference and a copy of which is on file at the principal executive offices of the Company. Under certain circumstances, as set forth in the Rights Agreement, such Rights may be redeemed, may be exchanged for shares of Common Stock or other securities or assets of the Company or a Subsidiary of the Company, may expire, may become void (if they are "Beneficially Owned" by an "Acquiring Person" or an Affiliate or Associate thereof, as such terms are defined in the Rights Agreement, or by any transferee of any of the foregoing) or may be evidenced by separate certificates and may no longer be evidenced by this certificate. The Company will mail or arrange for the mailing of a copy of the Rights Agreement to the holder of this certificate without charge within five days after the receipt of a written request therefor.
The Corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights.
This certificate and the shares represented hereby are issued and shall be subject to the Certificate of Incorporation of Eastman Chemical Company as the same has been and shall be amended from time to time, to all of which provisions the holder, by acceptance hereof, assents.
The following abbreviations, when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations:
TEN COM -as tenants in common UNIF GIFT MIN ACT- ...........Custodian..........
(Cust) (Minor)
TEN ENT -as tenants by the entireties under Uniform Gifts to Minors
Act.......................
JT TEN -as joint tenants with right of (State)
survivorship and not as tenants
in common
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Additional abbreviations may also be used though not in the above list.
FOR VALUE RECEIVED, __________ HEREBY SELL, ASSIGN AND TRANSFER UNTO
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
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_________________________________________________________________________ SHARES OF THE CAPITAL STOCK REPRESENTED BY THE WITHIN CERTIFICATE, AND DO HEREBY IRREVOCABLY CONSTITUTE AND APPOINT _____________________________________________
DATED, __________________________
SIGNATURE GUARANTEED:
EXHIBIT 10.01
EASTMAN CHEMICAL COMPANY
BENEFIT SECURITY TRUST
THIS TRUST AGREEMENT is made this 24th day of December, 1997, by and between Eastman Chemical Company ("Company"), and Wachovia Bank, N.A., as Trustee ("Trustee").
W I T N E S S E T H:
WHEREAS, Company has adopted certain nonqualified deferred compensation plans and severance agreements listed on Appendix A attached hereto and made a part hereof (collectively, the "Plans", and each such plan and severance agreement may be referred to herein as a "Plan"); and
WHEREAS, Company wishes to establish a trust (hereinafter called "Trust") and to contribute to the Trust assets that shall be held therein, subject to the claims of Company's creditors in the event of Company's Insolvency, as herein defined, until paid to Plan participants and their beneficiaries in such manner and at such times as specified in the Plans; and
WHEREAS, it is the intention of the parties that this Trust shall constitute an unfunded arrangement and shall not affect the status of the Plans as unfunded plans maintained for the purpose of providing deferred compensation for a select group of management or highly compensated employees for purposes of Title I of the Employee Retirement Income Security Act of 1974;
NOW, THEREFORE, the parties do hereby establish this Trust and agree that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company hereby deposits with Trustee in trust Fifteen Thousand Dollars ($15,000.00), which shall become the principal of the Trust to be held, administered and disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust shall be irrevocable once executed by the Company and Trustee, except as provided in Section 12 of this Trust Agreement.
(c) The Trust is intended to be a grantor trust, of which Company is the grantor, within the meaning of subpart E, part I, subchapter J, chapter 1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held separate and apart from other funds of Company and shall be used exclusively for the uses and purposes of Plan participants and general creditors as herein set forth. Plan participants and their beneficiaries shall have no preferred claim on, or any beneficial ownership interest in, any assets of the Trust. Any rights created under the Plans and this Trust Agreement shall be mere unsecured contractual rights of Plan participants and their beneficiaries against Company. Any assets held by the Trust will be subject to the claims of Company's general creditors under federal and state law in the event of Insolvency, as defined in Section 3(a) herein.
(e) The funding of the Trust shall be governed by the following terms and conditions.
(1) The Company may at any time or from time to time make contributions to the Trust, provided that such contributions are approved by the Board of Directors of the Company in a resolution validly adopted by the Board that expressly authorizes such contributions. Notwithstanding the foregoing, assets contributed to the Trust (other than the assets described on Appendix C) must be (i) in the opinion of the Trustee, liquid or easily liquidated; and (ii) in the case of equity securities, traded on a national securities exchange or on the NASDAQ National Market System. Debt securities must be at least "investment grade", as that term is commonly used by debt rating agencies.
(2) Upon the creation of this Trust, the Company shall convey to the Trustee a deed of trust with respect to those parcels of real property described on Appendix C attached hereto (the "Deed of Trust") and a warrant to purchase common stock of the Company described on Appendix C attached hereto (the "Warrant"). Such Deed of Trust and Warrant (together with any additional security interests granted to the Trustee by the Company hereafter and any security which is substituted for such Deed of Trust, Warrant or future security interests) may be referred to herein as the "Security Interests." The real property with respect to which the Deed of Trust is granted and the unissued Company common stock which is subject to issuance under the Warrant (together with any additional real, personal or intangible property as to which the Trustee is given a security interest and any real, personal or intangible property which is substituted for the property described on Appendix C), may be referred to herein as the "Underlying Property".
(3) Within five (5) business days after the first to occur of (i) the date the Company has knowledge of a Potential Change in Control (and for this purpose, "knowledge" shall mean that the Chief Executive Officer, Chief Financial Officer or General Counsel has actual knowledge of such event); (ii) the date the Company experiences a Change in Control; (iii) the date the Company receives a Notice or Notices of Plan Payment Default that are not postponed under Section 1(f)(4) pending the final resolution of independent judicial or arbitration proceedings; or (iv) the date the Trustee issues a final
Notice of Plan Payment Default following the final resolution of the
independent judicial or arbitration proceedings described in Section
1(f)(4), the Company shall transfer to the Trustee cash or other liquid
funds acceptable to the Trustee in the amount of the Value of the
Benefit Obligations as most recently determined by the Trustee in its
sole and absolute discretion or its agents under Section 2(b) of this
Trust, as well as the Expected Trust Expenses, and immediately upon
such transfer the Trustee shall release and convey to the Company any
and all interest which the Trustee has in the Security Interests and
the Underlying Property. If the Company fails to make such transfer of
cash or other liquid funds within the period prescribed by the
preceding sentence, then the Trustee shall exercise the Warrant and
shall foreclose on the Deed of Trust and any other Security Interests
without further notice to the Company. Each of the events described in
clauses (i) through (iv) of the first sentence of this paragraph shall
be referred to herein as a "Triggering Event."
(4) The Company shall have the right at any time to
purchase from the Trustee (i) the Deed of Trust; (ii) the Warrant
and/or any Company common stock issued pursuant to the Warrant; and
(iii) any other Underlying Property then held by the Trustee for then
fair market value of the Deed of Trust, the Warrant, Company common
stock issued pursuant to the Warrant, or other Underlying Property (as
determined by the Trustee in its sole discretion), as applicable, upon
such terms and conditions as are determined reasonable by the Trustee
in its sole and absolute discretion, provided, however, that the
consideration paid to the Trust shall either be cash or property which
meets the conditions of the second sentence of Section 1(e)(1).
(5) If the event which caused the Company to transfer cash or other liquid funds to the Trustee was a Potential Change in Control, and the conditions which created the Potential Change in Control cease to exist (other than by consummation of a Change in Control), then the Company shall have the right at any time thereafter to cause the Trustee to return to the Company any and all cash or other assets then held by the Trustee, upon the reconveyance to the Trustee of the Security Interests in the Underlying Property or by giving the Trustee security acceptable to the Trustee in an amount not less than the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, as well as the Expected Trust Expenses.
(6) If the Company funds the Trust on a discretionary basis (i.e., such funding was not required by a Triggering Event), then, at any time when the aggregate fair market value (as determined by the Trustee in its sole and absolute discretion) of all property held by the Trustee (excluding the value of the Deed of Trust, the Warrant and any other Security Interests) exceeds the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, as well as the
Expected Trust Expenses, then upon the written request of the Company the Trustee shall release and convey to the Company any and all interest which the Trustee has in the Security Interests and the Underlying Property. At any time thereafter, the Company shall have the right to cause the Trustee to return to the Company (i) cash or other assets then held by the Trustee in an amount equal to the lesser of (A) the current fair market value (as determined by the Trustee in its sole and absolute discretion) of the Security Interests previously released to the Company, or (B) the fair market value (as determined by the Trustee in its sole and absolute discretion) of the Security Interests previously released to the Company at the time of their previous release to the Company, in either case by reconveying to the Trustee the Security Interests previously released to the Company; or (ii) any and all cash or other assets then held by the Trustee, by giving the Trustee security acceptable to the Trustee in an amount not less than the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, as well as the Expected Trust Expenses.
(7) Prior to a Triggering Event, the Company shall not be required to make any contributions to the Trust except as expressly provided in Section 1(e)(2)(i.e., initial funding of the Trust). No later than forty-five (45) days after the end of each calendar year following the occurrence of a Triggering Event, and regardless of whether the Trustee exercises any Security Interest under this Section 1, the Company shall transfer to the Trustee cash or other liquid funds acceptable to the Trustee in the amount of A minus B, where A equals the Value of the Benefit Obligations as most recently determined by the Trustee in its sole and absolute discretion or its agents under Section 2(b) of this Trust, as well as the Expected Trust Expenses, and B equals the fair market value (as determined by the Trustee in its sole and absolute discretion) of the cash and liquid assets of the Trust as of the last day of such calendar year.
(f) Special Determinations Concerning Plan Payment Default.
(1) A "Claim of Plan Payment Default" means a written notice from any Trust Beneficiary to the Trustee that (i) one or more payment(s) have not been made on a timely basis to a participant or beneficiary under any Plan; or (ii) if the Company or Trustee has engaged a paying agent to make payments under one or more Plans, that Company has not transferred funds to such paying agent on a timely basis to enable the paying agent to make all payments then due under the Plans for which the paying agent has responsibility.
(2) A "Notice of Plan Payment Default" means a written
notice from the Trustee to the Company given by facsimile not more than
ten (10) business days after its receipt of a Claim of Plan Payment
Default which the Trustee has determined to be accurate, or, if the
Trustee has not been able to determine the accuracy of such claim, that
appears to the Trustee to have been made in good faith, stating that
(i) the Company is not in compliance with the terms of one or
more of the Plans, specifying the Plan(s) involved, the participants or beneficiaries involved, the payments not made on a timely basis, and the actions necessary to cure such default, or (ii) if the Company or the Trustee has engaged a paying agent to make payments under one or more of the Plans, the Company has not transferred funds to such paying agent on a timely basis to enable the paying agent to make all payments then due under the Plans for which the paying agent has responsibility, and the actions necessary to cure such default.
(3) A "Plan Payment Default" shall mean (i) that one or more payment(s) have not been made on a timely basis to a Participant or beneficiary under any Plan; or (ii) if the Company or Trustee has engaged a paying agent to make payments under one or more of the Plans, that the Company has not transferred funds to such paying agent on a timely basis to enable the paying agent to make all payments then due under the Plans for which the paying agent has responsibility. Notwithstanding the foregoing, a "Plan Payment Default" shall not be deemed to occur if the Company makes an incorrect Plan payment to a Participant or beneficiary, but the payment is at least ninety percent (90%) of what is ultimately determined by the Trustee to be the correct amount; provided, further that this exception shall no longer apply with respect to a given Participant or beneficiary if the Company makes three incorrect underpayments to such Participant or beneficiary.
(4) Not more than ten (10) business days after the Trustee's receipt of a Claim of Plan Payment Default which the Trustee has determined to be accurate, or, if the Trustee has not been able to determine the accuracy of such claim, that appears to the Trustee to have been made in good faith, the Trustee shall issue by facsimile a Notice of Plan Payment Default to the Company. The Company's responses to such Notice shall be one of the following:
(A) If the Company does not respond by facsimile to such Notice within five (5) business days after such Notice was sent to and received by the Company, then the Trustee shall exercise the Warrant and foreclose on the Deed of Trust and any other Security Interests.
(B) The Company may cure in full such Plan Payment Default within five (5) business days after such Notice was sent to and received by the Company, and in such event the Trustee shall not exercise the Warrant or foreclose upon the Security Interests unless and until the Trustee determines in its sole discretion that the Company's actions did not constitute a full and complete cure under the circumstances. What constitutes a full and complete cure under the circumstances shall be determined by the Trustee in its sole discretion. If the Trustee determines in its sole discretion that the Company's actions did not constitute a full and complete cure under the circumstances, then the Trustee shall exercise the Warrant and foreclose upon the Deed of Trust and any other Security Interests without further notice to the Company.
(C) The Company may respond to such Notice within five
(5) business days of receipt of such Notice by sending to the
Trustee by facsimile a notice signed by the Chief Executive
Officer, Chief Financial Officer or General Counsel of the
Company which (i) affirms that the Company has a good faith
belief that Plan Payment Default in question was permitted
under the applicable Plan; (ii) sets forth the basis for such
good faith belief; and (iii) represents that independent
judicial or arbitration proceedings are pending concerning the
Plan Payment Default, or will be instituted by the Company in
no less than thirty (30) calendar days, seeking to resolve
whether or not a Plan Payment Default was permitted under the
terms of the applicable Plan. If the Trustee receives such a
notice within such time period, then the Trustee shall not
exercise the Warrant or foreclose upon the Deed of Trust or
other Security Interests unless and until (i) the Trustee
determines in its sole and absolute discretion that the issue
of the Plan Payment Default has been finally resolved
adversely to the Company in such independent proceedings; (ii)
after making the determination referred to in clause (i), the
Trustee gives the Company by facsimile a final Notice of Plan
Payment Default; and (iii) such final Notice of Plan Payment
Default gives the Company a period of five (5) business days
after such final Notice was received by the Company to make a
full and complete cure of such Plan Payment Default. If the
Trustee determines in its sole and absolute discretion that
the Company's actions do not constitute a full and complete
cure under the circumstances, then the Trustee shall exercise
the Warrant and foreclose upon the Deed of Trust and any other
Security Interests without further notice to the Company.
(D) Notwithstanding paragraph (f)(4)(C) above, the Trustee shall have the right at all times to determine in its sole and absolute discretion the independence of the judicial or arbitration proceeding described in paragraph (f)(4)(C) above, the finality of such judicial or arbitration proceeding, and the meaning of any such judicial or arbitration proceeding. In addition, if the Trustee determines that the issue of the Plan Payment Default has been finally resolved adversely to the Company in such independent proceedings, then in its final Notice of Plan Payment Default to the Company the Trustee shall require that the Company pay directly to the affected Trust Beneficiaries within five (5) business days of the date the final Notice of Plan Payment Default is received by the Company, the reasonable attorneys fees and expenses incurred by such affected Trust Beneficiaries in pursuing such judicial or arbitration proceedings, and the Company's cure of the Plan Payment Default shall not be full and complete unless such payment is made to the affected Trust Beneficiaries within such period.
(g) As an alternative to exercising the Warrant or foreclosing upon the Deed of Trust or other Security Interests under paragraphs (e) or (f) above, the Trustee may sell or assign the Warrant, the Deed of Trust, and any other Security Interests for adequate consideration (as determined by the Trustee) to one or more persons other than the Company or any subsidiary of the Company, provided that prior to such sale or assignment the Trustee (i) gives the Company at least five (5) business days prior written notice of such sale or assignment and offers the Company the opportunity to purchase the Warrant, the Deed of Trust, or other Security Interests, as applicable, on the same terms and conditions as are being offered by such proposed third party purchaser, and (ii) gives the Company five (5) business days to accept such offer in writing
(h) Each participant in a Plan listed on Appendix A, and each beneficiary of such participant (to the extent such beneficiary has become entitled to payments from a Plan) shall be referred to herein as a "Trust Beneficiary." Upon direction from the Company, the Trustee shall create (1) a separate sub-trust for each Trust Beneficiary of the Class I and Class III Plans listed on Appendix A, (2) a separate sub-trust for each of the Class II Plans listed on Appendix A; and (3) a separate sub-trust (to be known as the "Expense Sub-Trust") to hold Trust funds to be used to pay Trust administration and Trustee fees and expenses. Each time the Company transfers property to the Trust (other than a Security Interest), Company shall identify the specific sub-trust to which such property shall be credited. Thereafter all income and appreciation from such property shall also be credited to such sub-trust. Notwithstanding the foregoing, to the extent the Trust is funded as a result of a Triggering Event, then (A) if the then existing assets of the Trust, together with the assets added as a result of a Triggering Event, are less than the Value of the Benefit Obligations for all of the Plans as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, together with the Expected Trust Expenses, then the assets added as a result of the Triggering Event shall be allocated among the Plans and the Expense Sub-Account in such a manner that the funding percentage of each Plan and the Expense Sub-Account relative to each Plan's then Benefit Obligations and the Expected Trust Expenses, and after such allocation, is as equal as possible among the Plans and the Expense Sub-Account; and (B) if the then existing assets of the Trust, together with the assets added as a result of a Triggering Event, are more than the Value of the Benefit Obligations for all of the Plans as most recently determined by the Trustee in its sole and absolute discretion under Section 2(b) of this Trust, together with the Expected Trust Expenses, then (i) the assets added as a result of the Triggering Event shall first be allocated to the Class II Plans identified on Appendix A (i.e., the defined benefit pension-type plans) until the funding percentage for each such Class II Plan is 125% of the then Benefit Obligation for each such Plan, (ii) the assets added as a result of the Triggering Event shall next be allocated to the Expense Sub-Account until the funding percentage for the Expense Sub-Account is 125% of the then Expected Trust Expenses, and (iii) any remaining assets added as a result of the Triggering Event shall then be allocated among all of the Plans identified on Appendix A and the Expense Sub-Account in proportion to the Value of each Plan's then Benefit Obligation and the Expected Trust Expenses.
Except as specifically otherwise provided in this Trust, (x) all amounts
credited to the sub-trust of an individual Trust Beneficiary of a Class I or
Class III Plan shall be used solely and exclusively to pay to such Trust
Beneficiary the benefits to which such persons are entitled under the Plan(s),
(y) all amounts credited to the sub-trust of a Class II Plan shall be used
solely and exclusively to pay the benefits owing to such Trust Beneficiaries
under such Plan(s); and (z) all amounts credited to the Expense Sub-Account
shall be used solely and exclusively to pay Trust administration and Trustee
fees and expenses (including fees and expenses of any agent of the Trustee). The
Trustee may commingle the property of the separate sub-trusts for administration
and investment purposes, provided that the Trustee maintains sufficient records
to identify the principal and income of the commingled property which is
allocable to each sub-trust, and further provided that under no circumstances
shall the property of a sub-trust be distributed to or used for the benefit of
any other sub-trust.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company has appointed Fidelity Institutional Retirement Services Company as the independent recordkeeper with respect to the Class I and Class III Plans listed on Appendix A. Company has appointed Towers Perrin as the independent actuary with respect to the Class II Plans listed on Appendix A.
The Company may change the recordkeeper or actuary with respect to any
of the Plans before or after a Triggering Event, provided that in all cases
(before or after a Triggering Event), the Steering Committee described in
Section 12 of this Trust consents to the removal of the existing entity
performing such function and the appointment of the new entity performing such
function; and further provided that after a Triggering Event the Trustee also
consents to the removal of the existing entity performing such function and the
appointment of the new entity performing such function. The original or
successor recordkeeper may be referred to herein as "Recordkeeper", and the
original or successor independent actuary may be referred to herein as
"Actuary."
The fees and expenses of such agents shall be deemed to be administrative fees and expenses for purposes of Section 9 of this Trust Agreement.
(b) Prior to a Triggering Event, the Company shall provide to the Trustee and the Steering Committee at least once each calendar year, and more frequently if requested by the Trustee, a report which shows (i) the aggregate amount of the Benefit Obligation for each Plan; (ii) the Security Interests held by the Trustee; and (iii) the fair market value of the aggregate assets held by the Trust and allocable to each Plan (other than the Security Interests or Underlying Property); provided, however, that this shall not be construed to require the Company to contribute additional assets or additional Security Interests to the Trust.
After a Triggering Event, the Company shall provide to the Trustee or its agents such information as the Trustee or its agents may reasonably request in order to determine the Benefit Obligations, the Value thereof, or any aspect concerning the payment thereof. Once the Trustee or its agents has determined the aggregate amount of the Benefit Obligations for each Plan, the Trustee shall promptly provide to the Steering Committee a report with the items of information described in clauses (i) through (iii) of the immediately preceding paragraph.
The Company shall pay all of the expenses, including without limitation attorneys' fees and expenses, incurred by the Trustee or its agents in enforcing in good faith the duties and obligations of the Company as set forth in this Trust Agreement. The Recordkeeper and Actuary shall provide the Trustee with any information within the knowledge of the Recordkeeper or the Actuary concerning the Company, the Plans, the Trust Beneficiaries, the Benefit Obligations, or the Value thereof, which is necessary for the Trustee to discharge its duties hereunder.
(c) Prior to the date a Triggering Event occurs, the Company, either directly or through a paying agent (if one has been appointed) shall make all payments to the Plan participants and their beneficiaries in accordance with the Plans. Once a Triggering Event occurs, the Trustee or the paying agent (if one has been appointed) shall make payments to Plan participants and their beneficiaries in accordance with such information as is available from time to time to the paying agent, the Recordkeeper or the Trustee, and which the Trustee or its agents deems reliable.
(d) The Trustee or the paying agent (if one has been appointed) shall make provision for the reporting and withholding of any federal, state or local taxes that may be required to be withheld with respect to the payment of benefits pursuant to the terms of the Plans and shall pay amounts withheld to the appropriate taxing authorities or determine that such amounts have been reported, withheld and paid by Company.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When Company is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants and their beneficiaries if the Company is Insolvent. Company shall be considered "Insolvent" for purposes of this Trust Agreement if (i) Company is unable to pay its debts as they become due, or (ii) Company is subject to a pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided in Section 1(d) hereof, the principal and income of the Trust shall be subject to claims of general creditors of Company under federal and state law as set forth below.
(1) The Board of Directors and the Chief Executive Officer of Company shall have the duty to inform Trustee in writing of Company's Insolvency. If a person claiming to be a creditor of Company alleges in writing to Trustee that Company has become Insolvent, Trustee shall determine whether Company is Insolvent and, pending such determination, Trustee shall discontinue payment of benefits to Plan participants or their beneficiaries. In making the determination whether Company is Insolvent, Trustee may employ an accounting firm (other than the auditors to the Company) and such other agents as are necessary or appropriate in making such determination. The fees and expenses of such agents shall be deemed to be fees and expenses for purposes of Section 9 of this Trust. The Insolvency of any subsidiary or affiliate of the Company will not in and of itself cause the Company or any other subsidiary or affiliate to be deemed Insolvent.
(2) Unless Trustee has actual knowledge of Company's Insolvency, or has received notice from Company or a person claiming to be a creditor alleging that Company is Insolvent, Trustee shall have no duty to inquire whether Company is Insolvent. Trustee may in all events rely on such evidence concerning Company's solvency as may be furnished to Trustee and that provides Trustee with a reasonable basis for making a determination concerning Company's solvency.
(3) If at any time Trustee has determined that Company is Insolvent, Trustee shall discontinue payments to Plan participants or their beneficiaries and shall hold the assets of the Trust for the benefit of Company's general creditors. Nothing in this Trust Agreement shall in any way diminish any rights of Plan participants or their beneficiaries to pursue their rights as general creditors of Company with respect to benefits due under the Plan(s) or otherwise.
(4) Trustee shall resume the payment of benefits to Plan participants or their beneficiaries in accordance with Section 2 of this Trust Agreement only after Trustee has determined that Company is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the payment of benefits from the Trust pursuant to Section 3(b) hereof and subsequently resumes such payments, the first payment following such discontinuance shall include the aggregate amount of all payments due to Plan participants or their beneficiaries under the terms of the Plan(s) for the period of such discontinuance, plus interest from the date each such payment was due to the date actual payment is made (using an interest rate of eight percent (8%) per annum, compounded monthly), less the aggregate amount of any payments made to Plan participants or their beneficiaries by Company in lieu of the payments provided for hereunder during any such period of discontinuance.
Section 4. Payments to Company.
(a) Except as provided in Section 3 (Company Insolvency), Section
12 (certain actions taken with consent of Trust Representatives) hereof, and
Section 4(b) below, Company shall have no right or power to direct Trustee to
return to Company or to divert to others any of the Trust assets before all
payment of benefits have been made to Plan participants and their beneficiaries
pursuant to the terms of the Plans. This Section shall not prohibit or diminish
the right of the Company to substitute assets of equal fair market value for any
asset then held by the Fund, as permitted in Section 1(e) and Section 5(b)(13).
(b) Notwithstanding paragraph (a) above, if the fair market value of the assets
(excluding the Deed of Trust, the Warrant, the Underlying Property, and any
other Security Interest) in each and every sub-account under this Trust
Agreement (including the Expense Sub-Account) is more than 125% of the most
recent Value of the Benefit Obligations of such sub-account (and, in the case of
the Expense Sub-Account, more than 125% of the most recently determined Expected
Benefit Expenses), then upon written request by the Company, the Trustee shall
deliver all or part of such excess (as requested by the Company) of any
sub-account(s) hereunder to the Company.
Section 5. Authority of Trustee.
In the management, care and disposition of the Trust Fund, the following provisions shall apply:
(a) The Trustee shall have the sole authority to manage, acquire, or dispose of the assets of the Trust. The Company may request that certain general investment guidelines and diversification policies be followed with regard to assets of the Trust, but the decision whether to follow and how to implement such guidelines shall be made solely by the Trustee.
(b) The Trustee shall have the following powers, rights, and duties in addition to those provided elsewhere in this Trust or by law, all of which may be exercised without order or report to any court:
(1) To receive and hold all contributions paid to it under the Plans; provided, however, that the Trustee shall have no duty to determine that the contributions received by it comply with the provisions of the Plans. The Trustee shall be authorized at any time when the Company is obligated to make a contribution to this Trust to use all legal means to compel the Company to make such contribution, and the Company shall pay all of the expenses, including without limitation attorneys' fees and expenses, incurred by the Trustee or its agents in enforcing in good faith the obligation of the Company to make contributions to this Trust when due.
(2) To have the authority to invest and reinvest assets of the Trust in shares of common or preferred stock (including shares of common or preferred stock of the
Company, including the rights to acquire such common or preferred stock), bonds, notes, debentures, short-term securities, mutual funds, certificates of deposits, and other property, real or personal, of any kind; to purchase and sell "put" and "call" options on publicly traded securities; and to acquire, hold, manage, operate, sell, contract to sell, grant options with respect to, convey, exchange, transfer, abandon, lease, manage, and otherwise deal with respect to assets of the Trust.
(3) To borrow from anyone such amount or amounts of money as the Trustee shall consider necessary to carry out the purpose of this Trust and for that purpose to mortgage or pledge all or any part of the Trust.
(4) To retain in cash any portion of the Trust deemed appropriate by the Trustee.
(5) To establish accounts in the commercial department of any bank or other financial institution (including any financial institution which is affiliated with the Company) for payment of benefits or other amounts under the Plans.
(6) To make the payments from the Trust in accordance with the terms of the Plans, as directed by Company, which directions are proper on their face, without inquiring as to whether a payee is entitled to the payment or as to whether a payment is proper, without liability for a payment made in good faith without actual notice or knowledge of the changed condition or status of the payee, and without obligation to search for or ascertain the whereabouts of any payee or distributee of benefits from the Trust.
(7) To compromise, contest, arbitrate, settle, or abandon claims and demands in favor of or against the Trust.
(8) To begin, maintain, defend, compromise, or settle any litigation in connection with the Trust and the administration of the Trust.
(9) To have all rights of an individual owner, including the power to give proxies, to join in or oppose (alone or jointly with others) voting trusts, mergers, consolidations, foreclosure, reorganizations, recapitalizations, or liquidations, and to exercise or sell stock subscription or conversion rights.
(10) To hold securities or other property in the name of the Trustee or its nominee or nominees, or in such other form as it determines best, with or without disclosing the trust relationship, provided the records of the Trustee shall indicate the actual ownership of such securities or other property.
(11) To deposit securities with a clearing corporation; to hold the certificates representing securities, including those in bearer form, in bulk form and to merge such certificates into certificates of the same class of the same issuer which constitute assets of other accounts or owners, without certification as to the ownership attached; and to utilize a book-entry system for the transfer or pledge of securities held by the Trustee or by a clearing corporation, provided that the records of the Trustee shall indicate the actual ownership of the securities and other property of the Trust.
(12) To employ, and to be protected in relying upon, such agents, attorneys, actuaries, and accountants (including any such person who may be retained by Company or the Plans) as are reasonably necessary in managing and protecting the Trust.
(13) Notwithstanding anything to the contrary in Section 5, (i) all rights associated with assets of the Trust (including but not limited to Company stock held by the Trust) shall be exercised by the Trustee or the person designated by the Trustee, and shall in no event be exercisable by or rest with Plan participants; and (ii) Company shall have the right at any time, and from time to time in its sole discretion, to substitute assets of equal fair market value for any asset held by the Trust; provided, however, that the specific provisions of Section 1(e) (4), (5), and (6) shall override the general provisions of this clause (ii).
(c) Notwithstanding anything to the contrary in this Section 5, at no time before a Triggering Event occurs shall the Trustee be authorized or permitted to sell, assign, convey, exchange, transfer, or abandon the Security Interests or the Underlying Property to any person or entity other than (i) the Company, or (ii) with the consent of the Company, to an affiliate of the Company.
Section 6. Disposition of Income.
During the term of this Trust, all income received by the Trust, net of expenses and taxes, shall be accumulated and reinvested.
Section 7. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments, receipts, disbursements, and all other transactions required to be made, including such specific records as shall be agreed upon in writing between Company and Trustee. Within sixty (60) days following the close of each calendar year and within sixty (60) days after the removal or resignation of Trustee, Trustee shall deliver to Company a written account of its administration of the Trust during such year or during the period from the close of the last preceding year to the date of such removal or resignation, setting forth all investments, receipts, disbursements and other transactions effected by it, including a description of all securities and investments purchased and sold with the cost or net proceeds of such purchases or sales (accrued interest paid or receivable being shown separately), and showing all cash, securities and other property held in the Trust at the end of such year or as of the date of such removal or resignation, as the case may be.
Section 8. Special Provisions.
(a) Trustee shall have, without exclusion, all powers conferred on Trustees by applicable law, unless expressly provided otherwise herein, provided however, that if an insurance policy is held as an asset of the Trust, Trustee shall have no power to name a beneficiary of the policy other than the Trust, to assign the policy (as distinct from conversion of the policy to a different form) other than to a successor Trustee, or to loan to any person the proceeds of any borrowing against such policy.
(b) Notwithstanding any powers granted to Trustee pursuant to this Trust Agreement or to applicable law, Trustee shall not have any power that could give this trust the objective of carrying on a business and dividing the gains therefrom, within the meaning of section 301.7701-2 of the Procedures and Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(c) Should it become necessary for the Trustee (hereinafter called the "Domiciliary Trustee" in this paragraph (c)) to hold property or otherwise take any action in any state in which the Domiciliary Trustee shall be unable to qualify as Trustee, then and in that event, a bank or trust company designated in writing by the Domiciliary Trustee shall serve as the ancillary Trustee in such state.
(d) (i) The Company shall indemnify the Trustee, directly from the Company's own assets (including the proceeds of any insurance policy the premiums of which are paid from the Company's own assets), from and against any and all claims, demands, losses, damages, expenses (including, by way of illustration and not limitation, reasonable attorneys' fees and other legal and litigation costs), judgments and liabilities arising from, out of, or in connection with the administration of the Plans or this Trust, except when determined to be due to the Trustee's negligence or willful misconduct.
(ii) The Trustee shall have no responsibility for: (a) any condition which now exists or may hereafter be found to exist in, under, or about any real estate investment of the Trust or of a corporation, the stock of which is held as an asset of the Trust; or (b) any violation of any applicable environmental or health or safety law, ordinance, regulation or ruling; or (c) the presence, use, generation, storage, release, threatened release, or containment, treatment or disposal of any hazardous or toxic substances or materials including such situations at or activities on any investment of the Trust or of a corporation, the stock of which is held as an asset of the Trust. The Trustee is hereby authorized to pay from the Trust all costs and expenses (including attorneys fees) relating to or connected with any condition, violation, presence or other situation referred to in (a), (b) and (c) above, and notwithstanding anything to the contrary in this Trust Agreement, to the extent permitted by law, Wachovia Bank, N.A. shall be
indemnified from the Trust from all claims, suits, losses and expenses (including attorneys fees) arising therefrom. The authority to pay from the Trust and the right of indemnification set forth in the preceding sentence include and relate to, without limitation, any claims, suits, liabilities, losses and expenses (including attorneys fees) arising from any matters relating to the existence of petroleum including crude oil and any fraction thereof, hazardous substances, pollutants, or contaminants as defined in the Comprehensive Environmental, Responsibility, Compensation, and Liability Act, as amended, 42 U.S.C. Section 9601 et seq., or hazardous wastes as defined in the Resource Conservation and Liability Act, 42 U.S.C. Section 6906 et seq., or as any of the foregoing terms or similar terms may be defined in similar state environmental laws or subsequent federal or state legislation of a similar nature which may be enacted from time to time. This Section 8(d)(ii) shall survive the sale or other disposition of any real estate investment of the Trust and the termination of this Trust Agreement. Nothing in this Section 8(d)(ii) shall be construed to in any way limit the indemnification rights of the Trustee provided for in this Section 8.
(iii) The indemnification provided the Trustee by this
Section 8(d) shall survive termination of this Agreement.
Section 9. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses, including the cost of reasonable fiduciary liability insurance for the members of the Steering Committee. If Company does not pay such fees and expenses on a timely basis, Trustee may withdraw such amounts from the Trust and shall then seek to recover such amounts from Company. If Trustee seeks recovery of such amounts from Company, then Company shall pay all of the expenses, including without limitation attorneys' fees and expenses, incurred by Trustee or its agents in enforcing in good faith the obligations of Company as set forth in this Section 9.
Section 10. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company, which shall be effective one hundred eighty (180) days after receipt of such notice unless Company and Trustee agree otherwise.
(b) With the consent of the Steering Committee, the Trustee may be removed by Company on one hundred eighty (180) days notice or upon shorter notice accepted by Trustee.
(c) If Trustee resigns within five (5) years after a Triggering Event, Company, with the consent of the Steering Committee, shall apply to a court of competent jurisdiction for the appointment of a successor Trustee or for instructions.
(d) Upon resignation or removal of Trustee and appointment of a successor Trustee, all assets shall subsequently be transferred to the successor trustee. The transfer shall be completed within one-hundred eighty (180) days after receipt of notice of resignation, removal or transfer, unless Company extends the time limit.
(e) If Trustee resigns or is removed, a successor shall be appointed, in accordance with Section 11 hereof, by the effective date of resignation or removal under paragraph(s) (a) or (b) of this section. If no such appointment has been made, Trustee or any participant in a Plan may apply to a court of competent jurisdiction for appointment of a successor or for instructions. All expenses of Trustee in connection with the proceeding shall be allowed as administrative expenses of the Trust.
Section 11. Appointment of Successor.
(a) If Trustee resigns or is removed in accordance with Section 10(a) or (b) hereof, Company, with the consent of the Steering Committee, may appoint any third party, such as a bank trust department or other party that may be granted corporate trustee powers under state law, as a successor to replace Trustee upon resignation or removal; provided, however, that such bank or trust company must have shareholder equity of at least $1.0 billion. The appointment shall be effective when accepted in writing by the new Trustee, who shall have all of the rights and powers of the former Trustee, including ownership rights in the Trust assets. The former Trustee shall execute any instrument necessary or reasonably requested by Company or the successor Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of any prior Trustee and may retain or dispose of existing Trust assets, subject to Selections 7 and 8 hereof. The successor Trustee shall not be responsible for and Company shall indemnify and defend the successor Trustee from any claim or liability resulting from any action or inaction of any prior Trustee or from any other past event, or any condition existing at the time it becomes successor Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument executed by Trustee and Company only as follows:
(1) The Trustee obtains an opinion of legal counsel that is independent of the Company (as determined by the Trustee in its sole discretion) that such amendment is being made for the purpose of and only to the extent reasonably necessary to preserve for the Trust Beneficiaries the deferral of federal income
taxation of amounts paid under the Plans until the time such amounts are actually paid to the Trust Beneficiaries; or
(2) The Trustee obtains the written approval of the
Steering Committee, as hereinafter defined. The number of Steering
Committee members shall at any given time be the lesser of (i) eleven
(11); or (ii) the number of employees of the Company who at such time
are owed benefits under all of the Plans (currently or in the future).
The initial members of the Steering Committee, each of which shall be
known as a "Trust Representatives", shall be the persons listed on
Appendix B attached hereto and made a part hereof. A person shall cease
to be a Trust Representative as of the earliest of (A) the date such
person ceases to be entitled to any benefits from any of the Plans, (B)
the date such person delivers written notice to the Trustee that he or
she no longer wishes to serve as a Trust Representative hereunder, (C)
the Trustee determines in its sole discretion that the Trust
Representative, because of mental or physical incapacity certified by
the Trust Representative's primary attending physician, is no longer
able to property serve in such capacity manage his affairs; (D) the
date of the Trust Representative's death; or (E) the fifth anniversary
of the date of the Participant's termination of employment with or
retirement from the Company.
If a vacancy occurs in the Steering Committee for any reason,
then such vacancy shall be filled automatically by the employee of the
Company who is not then a member of the Steering Committee but who has
accrued at such time the greatest present value of Benefit Obligations,
as most recently determined under Section 2(b) of this Trust. If such
vacancy is not filled (by identification of such successor Steering
Committee member and his acceptance of such appointment) within thirty
(30) days after the vacancy occurs, then such vacancy may be filled
either by appointment of a successor Steering Committee member by the
Steering Committee itself, or by application by the Trustee or the
Steering Committee to a court of competent jurisdiction for such an
appointment; and all expenses of the Steering Committee and the Trustee
in connection with such court proceeding shall be allowed as
administrative expenses of the Trust. A successor member of the
Steering Committee shall have all of the powers and duties of an
original member of the Steering Committee.
(b) In addition to consenting to amendments to this Trust Agreement, the Trust Representatives may also consent to (i) the complete revocation of this Trust; and (ii) any changes with respect to the Security Interests.
(c) Unless sooner revoked as provided in Section 12(b) above, the Trust shall not terminate until the date on which Plan participants and their beneficiaries are no longer entitled to benefits pursuant to the terms of the Plan(s). Upon termination of the Trust any assets remaining in the Trust shall be returned to Company.
(d) An action of the Steering Committee shall be valid only if approved in writing by at least two-thirds of the members of the Steering Committee who are serving
at the time of such approval. The Steering Committee shall develop such additional rules and procedures governing its operation as the Steering Committee deems appropriate or advisable.
Section 13. Miscellaneous.
(a) Except to the extent expressly provided otherwise herein, any action permitted or required to be taken the Company under this Trust Agreement shall be exercised by the Board of Directors of the Company or by any person or entity which is authorized by the Board to act for the Board and the Company hereunder. As of the date this Trust Agreement is executed, such delegate is the management committee currently known as the Benefit Plans Committee.
(b) Any provision of this Trust Agreement prohibited by law shall be ineffective to the extent of any such prohibition, without invalidating the remaining provisions hereof.
(c) Benefits payable to Plan participants and their beneficiaries under this Trust Agreement may not be anticipated, assigned (either at law or in equity), alienated, pledged, encumbered or subjected to attachment, garnishment, levy, execution or other legal or equitable process.
(d) Definitions.
(1) "Actuarial Present Value" shall be determined by the Actuary, using the interest rate, mortality tables, and other actuarial assumptions used to determine the value of a lump sum distribution under the tax-qualified defined benefit pension plan maintained by the Company which covers the participants in one or more of the "Class II" plans identified in Appendix A to the Trust, and if no such plan then exists, then "actuarial present value" shall be determined using such interest rates, mortality tables, and other actuarial assumptions which the Actuary determines to be reasonable under the circumstances.
(2) "Actuary." See Section 2(a).
(3) "Benefit Obligations" means, collectively, (a) the obligations owing to the employees and other beneficiaries under the "Class I" plans identified in Appendix A to the Trust; (b) the obligations owing to the employees and other beneficiaries under the "Class II" plans identified in Appendix A to the Trust; and (c) the obligations that would be owed to the employees and other beneficiaries covered by the "Class III" agreements identified in Appendix A to the Trust if all of the conditions for all payments were met.
(4) "Change in Control" means a change in control of the Company of a nature that would be required to be reported (assuming such event has not been "previously reported") in response to Item 1(a) of a Current Report on Form 8-K,
as in effect on December 31, 1996, pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 ("Exchange Act"); provided that, without limitation, a Change in Control shall be deemed to have occurred at such time as (i) any "person" within the meaning of Section 14(d) of the Exchange Act, other than the Company, a subsidiary of the Company, or any employee benefit plan(s) sponsored by the Company or any subsidiary of the Company, is or has become the "beneficial owner," as defined in Rule 13d-3 under the Exchange Act, directly or indirectly, of 19% or more of the combined voting power of the outstanding securities of the Company ordinarily having the right to vote in the election of directors; provided, however, that the following will not constitute a Change in Control: any acquisition by any corporation if, immediately following such acquisition, more than 75% of the outstanding securities of the acquiring corporation ordinarily having the right to vote in the election of directors is beneficially owned by all or substantially all of those persons who, immediately prior to such acquisition, were the beneficial owners of the outstanding securities of the Company ordinarily having the right to vote in the election of directors, or (ii) individuals who constitute the Board on January 1, 1997 (the "Incumbent Board") have ceased for any reason to constitute at least a majority thereof; provided that: any person becoming a director subsequent to January 1, 1997 whose election, or nomination for election by the Company's shareowners, was approved by a vote of at least three-quarters (3/4) of the directors comprising the Incumbent Board (either by a specific vote or by approval of the proxy statement of the Company in which such person is named as a nominee for director without objection to such nomination) shall be, for purposes of the Plan, considered as though such person were a member of the Incumbent Board, or (iii) upon approval by the Company's shareowners of a reorganization, merger or consolidation, other than one with respect to which all or substantially all of those persons who were the beneficial owners, immediately prior to such reorganization, merger or consolidation, of outstanding securities of the Company ordinarily having the right to vote in the election of directors own, immediately after such transaction, more than 75% of the outstanding securities of the resulting corporation ordinarily having the right to vote in the election of directors; or (iv) upon approval by the Company's shareowners of a complete liquidation and dissolution of the Company or the sale or other disposition of all or substantially all of the assets of the Company other than to a subsidiary. Notwithstanding the foregoing, neither the approval by the Board of actions which could result in a Spin-Off, nor the consummation of any Spin-Off, shall constitute a Change in Control under this Trust.
(5) "Claim of Plan Payment Default." See Section 1(f)(1).
(6) "Deed of Trust." See Section 1(e)(2).
(7) "Expected Trust Expenses" shall mean the Actuarial Present Value of the Trust administration and Trustee fees and expenses (including fees and expenses of
any agent of the Trustee) which the Trustee reasonably determines are expected to be incurred over the life of the Trust.
(8) "Insolvent." See Section 3(a).
(9) "Notice of Plan Payment Default." See Section 1(f)(2).
(10) "Plan Payment Default." See Section 1(f)(3).
(11) A "Potential Change in Control" shall be deemed to have occurred if (a) the Company enters into a definitive agreement, the consummation of which would result in the occurrence of a Change in Control, (b) any person (including the Company) publicly announces an intention to take or to consider taking actions which if consummated would constitute a Change in Control, but only if the Trustee determines, in its sole discretion, that such announcement is credible in the sense that the person making the announcement has or appears to have the reasonable ability to carry out the announced intention, without regard for whether such person's ultimate success in bringing about a Change in Control is reasonably likely, or (c) after the date this Trust is created, any person (other than (i) the Company or any or its subsidiaries, (ii) a trustee or other fiduciary holding securities under an employee benefit plan of the Company or any of its subsidiaries, (iii) an underwriter temporarily holding securities pursuant to an offering of such securities, (iv) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company; or (v) a person which is eligible to use Schedule 13G to report its ownership of Company stock to the SEC; provided, however, that the exception under this clause (v) shall lapse as of the day such person ceases to be eligible to use Seclude 13G for such ownership reports) becomes the beneficial owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then-outstanding securities. Notwithstanding the foregoing, neither the announcement by the Board of the exploration of actions which could result in a Spin-Off, nor the approval by the Board of actions which could result in a Spin-Off, nor any other actions by the Company which could result in a Spin-Off, shall constitute a Potential Change in Control under this Trust.
(12) "Recordkeeper." See Section 2(a).
(13) "Security Interest." See Section 1(e)(2)
(13A) "Spin-Off" shall mean any split up of the business of the Company into two or more separate business segments, followed by a spin-off or distribution of one or more of such businesses to the Company's stockowners, whether or not such transactions take the form of a disposition of assets that requires approval of the Company's stockowners as a matter of Delaware law.
(14) "Steering Committee." See Section 12(a)(2).
(15) "Triggering Event." See Section 1(e)(3).
(16) "Trust Beneficiary." See Section 1(h).
(17) "Trust Representative." See Section 12(a)(2).
(18) "Underlying Property." See Section 1(e)(2).
(19) "Value" means, on any date of determination, (i) with respect to Benefit Obligations described in clause (a) of the definition of "Benefit Obligations" (which are defined contribution, individual account plans), the aggregate amount owed to participants in such Plans as of such date of determination; (ii) with respect to Benefit Obligations described in clause (b) of the definition of "Benefit Obligations" (which are defined benefit pension-type plans), the Actuarial Present Value of the aggregate amount owed to participants in such Plans as of such date of determination; and (iii) with respect to Benefit Obligations with respect to the Plans described in clause (c) of the definition of "Benefit Obligations" (which are individual severance agreements), the aggregate amount that would be owed to the employees and other beneficiaries covered by such agreements if all of the conditions for all payments were met under such agreements as of such date of determination.
(20) "Warrant." See Section 1(e)(2).
(e) The Trustee may from time to time request that the chief executive officer of the Company, the members of the Company's Benefit Plans Committee, and the members of the Steering Committee provide specimen signatures to the Trustee, and the Trustee shall not be required to take action at the direction of any such parties until the specimen signature for the applicable parties has been delivered.
(f) Notices to the Company under this Trust shall be made by facsimile and U.S. mail to:
Vice President of Human Resources, Health, Safety, Environment and
Security
100 North Eastman Road
Kingsport, Tennessee 37660
Facsimile (423) 229-1351
and
Senior Vice President and General Counsel
Eastman Chemical Company
100 North Eastman Road
Kingsport, Tennessee 37660
Facsimile (423) 229-4137
Notices to the Trustee under this Trust shall be made by facsimile and U.S. mail to
Wachovia Bank, N.A.
Trust Services Division
Attn: Beverley H. Wood
301 North Main Street
Winston-Salem, North Carolina 27150-3099
Facsimile (910) 770-4059
The sender of a facsimile letter or other notice or message may show receipt of such facsimile by the recipient by any reasonable means of proof.
(g) This Trust Agreement shall be governed by and constructed in accordance with the laws of the State of North Carolina.
Section 14. Effective Date.
The effective date of this Agreement shall be the date first shown above.
IN WITNESS WHEREOF, this Trust has been executed by the duly authorized officers of the Company and the Trustee as of the date first shown above.
EASTMAN CHEMICAL COMPANY
By: /s/ H. V. Stephens
-------------------------------------
Title: Senior Vice President and Chief
Financial Officer
Attest:
/s/ Gary R. Whitaker
-------------------------------
Gary R. Whitaker
Assistant Secretary
WACHOVIA BANK, N.A., as Trustee
By: /s/ Beverley H. Wood
-------------------------------------
Title: Senior Vice President
----------------------------------
Attest:
/s/ Donna L. Stern
-------------------------------
Assistant Secretary
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APPENDIX A
PLANS SUBJECT TO THIS TRUST AGREEMENT
Class I Plans
Executive Deferred Compensation Plan
ESOP Excess Plan
Class II Plans
Unfunded Retirement Income Plan
Excess Retirement Income Plan
Class III Agreements
Severance Agreement
(Provided to Wachovia)
APPENDIX B
INITIAL TRUST REPRESENTATIVES
WHO ARE MEMBERS OF STEERING COMMITTEE
(Names have been provided to Wachovia)
APPENDIX C
SECURITY INTERESTS AND UNDERLYING PROPERTY
(See attached Deed of Trust and Warrant)
EXHIBIT 12.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in millions)
FIRST QUARTER
2001 2000
Earnings from continuing operations before provision
for income taxes $ 55 $102
Add:
Interest expense 36 33
Appropriate portion of rental expense(1) 7 5
Amortization of capitalized interest 4 4
---- ----
Earnings as adjusted $102 $144
==== ====
Fixed charges:
Interest expense $ 36 $ 33
Appropriate portion of rental expense(1) 7 5
Capitalized interest 1 2
---- ----
Total fixed charges $ 44 $ 40
==== ====
Ratio of earnings to fixed charges 2.3x 3.6x
==== ====
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(1) For all periods presented, the interest component of rental expense is estimated to equal one-third of such expense.
EXHIBIT 99.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
OPERATING SEGMENT INFORMATION
(SALES REVENUE CHANGE, VOLUME EFFECT AND PRICE EFFECT)
FIRST QUARTER, 2001
-----------------------------------------
CHANGE IN REVENUE DUE TO
------------------------
REVENUE VOLUME PRICE
% CHANGE EFFECT EFFECT
-------- ------ ------
Chemicals segment
Products:
Coatings, adhesives, specialty polymers
and inks 44% -- --
Fine chemicals (6) -- --
Performance chemicals and intermediates (6) -- --
----------------------------------------
Total Chemicals segment 15% 12% 5%
----------------------------------------
Polymers segment
Products:
Container plastics 24% -- --
Fibers (7) -- --
Specialty plastics (1) -- --
----------------------------------------
Total Polymers segment 7% 2% 7%
----------------------------------------
Total Eastman 10% 7% 6%
========================================
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EXHIBIT 99.02
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
ACQUISITION INFORMATION
(SALES REVENUE AND VOLUME GROWTH COMPARISON -- WITH AND WITHOUT ACQUISITIONS)
FIRST QUARTER, 2001
-------------------------------------------
% GROWTH SALES REVENUE
-------------------------------------------
WITH WITHOUT
ACQUISITIONS ACQUISITIONS(1)
------------ ---------------
Total sales revenue 10% 1%
Segment sales revenue
Chemicals 15 (7)
Polymers 7 7
Regional sales revenue
United States and Canada 6 (4)
Europe, Middle East, and Africa 34 18
Asia Pacific (14) (14)
Latin America 18 18
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FIRST QUARTER, 2001
-------------------------------------------
% GROWTH SALES VOLUME
-------------------------------------------
WITH WITHOUT
ACQUISITIONS ACQUISITIONS(1)
------------ ---------------
Total sales volume 4% (5)%
Segment sales volume
Chemicals 4 (13)
Polymers 4 4
Regional sales volume
United States and Canada (1) (9)
Europe, Middle East, and Africa 31 10
Asia Pacific (14) (14)
Latin America 9 9
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(1) Excludes Sokolov and McWhorter acquisitions.
EXHIBIT 99.03
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
SUMMARY OF PLANT, PROPERTY AND EQUIPMENT ASSET ALLOCATION
BETWEEN EASTMAN COMPANY AND THE PET PLASTICS AND ACETATE FIBERS COMPANY
--------------------------------------------------------------------------------------------------------------
ASSETS OWNED BY ASSETS OWNED BY THE PET PLASTICS
EASTMAN COMPANY AND ACETATE FIBERS COMPANY
--------------------------------------------------------------------------------------------------------------
COATINGS, ADHESIVES, SPECIALTY POLYMERS, AND PET PLANTS:
INKS ACQUIRED SITES:
--------------------------------------------------------------------------------------------------------------
Lawter Jaeger South Carolina Mexico
Argentina Canada
ABCO McWhorter Rotterdam Spain
(including PTA) (Excluding CHDM)
Sokolov Hercules Resins Ectona PET
(United Kingdom)
--------------------------------------------------------------------------------------------------------------
CHEMICAL PLANTS: FIBER PLANTS:
--------------------------------------------------------------------------------------------------------------
Tennessee chemicals, Texas chemicals and Tennessee fibers and Tennessee Primester
excluding coal gas crackers fiber esters joint venture
Singapore Arkansas Tennessee coal gas* Ectona acetate tow
(United Kingdom)
Peboc Hong Kong
--------------------------------------------------------------------------------------------------------------
SPECIALTY POLYMERS PLANTS: POLYETHYLENE PLANTS:
--------------------------------------------------------------------------------------------------------------
Malaysia Hartlepool Texas polyethylene
copolyesters
Spain CHDM* Tennessee CHDM
Tennessee PET and Tennessee
intermediates compounding
South Carolina
compounding *
--------------------------------------------------------------------------------------------------------------
OTHER:
--------------------------------------------------------------------------------------------------------------
Tennessee and Texas
land and infrastructure
--------------------------------------------------------------------------------------------------------------
*Facilities to be operated *Facility to be
by PET Plastics and operated by Eastman
Acetate Fibers Company Company
--------------------------------------------------------------------------------------------------------------
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