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1999
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
- --- OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended December 31, 1999
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
--------------------------------------
For the transition period from to
Commission file number 1-8142
ENGELHARD CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 22-1586002
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
101 WOOD AVENUE, ISELIN, NJ 08830
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code (732) 205-5000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
- ----------------------------------- -----------------------------------------
Common Stock, par value $1 per share New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes |X|. No |_| .
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. Yes |X|.
Number of shares of common stock outstanding as of March 23, 2000 - 125,590,728.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates certain information by reference to the Proxy Statement
for the 2000 Annual Meeting of Shareholders.
1
Table of Contents
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Item Page
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Part I
1. Business
(a) General development of business 3
(b) Segment and geographic area data 3-7, 55-59
(c) Description of business 3-7, 55-59
2. Properties 9-10
3. Legal Proceedings 10-11
4. Submission of Matters to a Vote of 11
Security Holders
Part II
5. Market for Registrant's 12
Common Equity and Related
Stockholder Matters
6. Selected Financial Data 13,66
7. Management's Discussion and 13-26
Analysis of Financial Condition
and Results of Operations
8. Financial Statements and 27-65
Supplementary Data
9. Changes in and Disagreements with 66
Accountants on Accounting and Financial
Disclosure
Part III
10. Directors and Executive Officers of 67-68
the Registrant
11. Executive Compensation 68
12. Security Ownership of Certain 68
Beneficial Owners and Management
13. Certain Relationships and Related 68
Transactions
Part IV
14. Exhibits, Financial Statement 69-108
Schedules, and Reports on Form 8-K
2
PART I
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Item 1. Business
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Engelhard Corporation (which together with its Subsidiaries, is
collectively referred to as the Company) was formed under the laws of Delaware
in 1938 and became a public company in 1981. The Company's principal executive
offices are located at 101 Wood Avenue, Iselin, NJ, 08830 (telephone number
(732) 205-5000).
The Company develops, manufactures and markets technology-based performance
products and engineered materials for a wide spectrum of industrial customers.
It also provides services to precious and base-metal customers.
The Company employed approximately 6,420 people as of January 1, 2000 and
operates on a worldwide basis with corporate, operating headquarters, principal
manufacturing facilities and mineral reserves in the United States with other
operations conducted in the Asia-Pacific region, Canada, the European Community,
the Russian Federation, South Africa and South America.
The Company's businesses are organized into five reportable segments -
Environmental Technologies, Process Technologies, Specialty Pigments and
Additives, Paper Pigments and Additives and Industrial Commodities Management.
The following information on the Company is included in Note 16, "Business
Segment and Geographic Area Data", of the Notes to Consolidated Financial
Statements: net sales to external customers, operating earnings/(losses), net
interest expense, depreciation, depletion and amortization, equity in earnings/
(losses) of affiliates, total assets, equity investments and capital
expenditures.
ENVIRONMENTAL TECHNOLOGIES
The Environmental Technologies segment consists of Automotive Emission
Systems and Emission and Performance Systems, serving the automotive, off-road
vehicle, light and heavy duty truck, aircraft, power generation and process
industries.
Environmental technology catalysts are used in applications such as the
abatement of carbon monoxide, oxides of nitrogen and hydrocarbons from gasoline,
diesel and alternate fueled vehicle exhaust gases to meet emission control
standards. These catalysts also are used for removal of odors, fumes and
pollutants generated by a variety of process industries, including but not
limited to the painting of automobiles, appliances and other equipment; printing
processes; the manufacture of nitric acid and tires; the curing of polymers; and
power generation sources.
The Company also participates in the manufacture and supply of automotive
emission-control catalysts through affiliates serving the Asia-Pacific region:
N.E. Chemcat Corporation (Japan) - 38.8% owned; and Heesung-Engelhard (South
Korea) - 49% owned, both of which also produce other catalysts and products.
3
The products of the Environmental Technologies segment compete in the
marketplace on the basis of cost and value performance. No single competitor is
dominant in the markets in which the Company operates.
The manufacturing operations of the Environmental Technologies segment are
carried out in the United States, Germany, India, South Africa, South America
and the United Kingdom with equity investments located in the United States and
South Korea. The products are sold principally through the Company's sales
organizations or those of its equity investments, supplemented by independent
distributors and representatives.
The principal raw materials used by the Environmental Technologies segment
include precious metals, procured by the Industrial Commodities Management
segment, and a variety of minerals and chemicals that are generally readily
available.
As of January 1, 2000, the Environmental Technologies segment had
approximately 1,630 employees worldwide.
PROCESS TECHNOLOGIES
The Process Technologies segment consists of the Chemical Catalysts,
Petroleum Catalysts and Polyolefins Catalysts businesses. The Chemical Catalysts
business consists of chemical catalyst products, serving the chemical,
petrochemical, pharmaceutical and food processing industries. The Petroleum
Catalysts business consists of a variety of petroleum refining catalyst
products, serving the petroleum refining industries. The Polyolefins Catalysts
business consists of polymerization catalyst products serving the chemical
industry.
The principal products of the Chemical Catalysts business consist of
catalysts and sorbents used in the production of a variety of products or
intermediates, including synthetic fibers, fragrances, antibiotics, vitamins,
plastics, detergents, fuels and lube oils, solvents, oleochemicals and edible
products. These catalysts are used in both batch and continuous operations, that
in many cases, require special catalysts for each application. Chemical
catalysts are based on the Company's proprietary technology and often are
developed in close cooperation with specific customers. Sorbents are used to
purify and decolorize naturally occurring fats and oils for manufacture into
shortenings, margarines and cooking oils.
The products of the Chemical Catalysts business compete in the marketplace
on the basis of cost and value performance. No single competitor is dominant in
the markets in which the Company operates.
The manufacturing operations of the Chemical Catalysts business are carried
out in the United States, Italy and The Netherlands. The products are
sold principally through the Company's sales organizations supplemented by
independent representatives.
The principal raw materials used by the Chemical Catalysts business include
metals, procured by the Industrial Commodities Management segment and third
parties, and a variety of minerals and chemicals that are generally readily
available.
4
The principal products of the Petroleum Catalysts business are zeolitic
cracking catalysts widely used by refiners to provide economies in petroleum
processing. The Company offers a full line of fluid catalytic cracking (FCC)
catalysts, many of which are based on patented technology. These catalysts can
be used to separately control selectivity and cracking activity, which enables
catalyst formulations to be tailored to meet specific refiners' needs.
Other catalyst products of the Petroleum Catalysts business are used in
reforming, hydrotreating, isomerization and selective hydrogenation processes in
petroleum refineries to meet increasingly stringent fuel quality requirements.
The products of the Petroleum Catalysts business compete in the marketplace
on the basis of cost and value performance. No single competitor is dominant in
the markets in which the Company operates.
The manufacturing operations of the Petroleum Catalysts business are
carried out in the United States. The products are sold principally
through the Company's sales organizations supplemented by independent
distributors and representatives.
The principal raw materials used by the Petroleum Catalysts business
include kaolin, supplied by the Paper Pigments and Additives segment, and a
variety of minerals and chemicals which are generally readily available.
The principal products of the Polyolefins Catalysts business are
polymerization catalysts used in the production of polypropylene and
polyethylene. These catalysts can be used to control characteristics of the end
product to obtain desired properties.
The products of the Polyolefins Catalysts business compete in the market
place on the basis of cost and value performance. No single competitor is
dominant in the markets in which the Company operates.
The manufacturing operations of the Polyolefins Catalysts business are
carried out in the United States. The products are sold principally through the
Company's sales organizations supplemented by independent distributors and
representatives.
The principal raw materials are chemicals which are generally readily
available.
As of January 1, 2000 the Process Technologies segment had approximately
1,665 employees worldwide. Most hourly employees are covered by collective
bargaining agreements. Employee relations have generally been good.
5
SPECIALTY PIGMENTS AND ADDITIVES
The Specialty Pigments and Additives segment provides innovative functional
products, services and solutions to customers' problems in a broad array of
markets, including coatings, plastics, cosmetics and construction. The segment's
products create value for customers by improving the look, performance and
overall cost of their products. The Company applies its technical competencies
in mineral beneficiation, material science, surface chemistry and optical
physics to kaolin, attapulgite, mica and other naturally-occurring materials to
produce performance additives, specialty pigments and effect pigments as well as
specialty films.
Minerals-based performance additives are used principally as extender
pigments for a variety of purposes in the manufacture of plastic, rubber, ink,
ceramic, adhesive products and paint. Principal products include Satintone
(trademark) products, ASP (trademark) pigments and Translink (trademark) surface
modified reinforcements. The segment produces a variety of organic and inorganic
color and pearlescent and natural pearl special-effect pigments for a wide range
of applications, serving the automotive, cosmetic and industrial segments.
Additionally, the segment also produces gellants and sorbents with an
assortment of uses, as well as Metamax (trademark) for the concrete industry.
The products of the Specialty Pigments and Additives segment compete with
those of other minerals and effect pigment manufacturers on the basis of cost
and value performance. No single competitor is dominant in the markets in which
the Company competes.
Specialty Pigments and Additives' manufacturing operations are carried out
in the United States and in South Korea. Subsidiary sales and distribution
centers are located in France, Hong Kong, Japan, Mexico, The Netherlands, and
Turkey. Products are sold through the Company's sales organization supplemented
by independent distributors and representatives.
The principal raw materials used by the Specialty Pigments and Additives
segment include kaolin, attapulgite and mica, which are mined from mineral
reserves owned or leased by the Company, and a variety of other minerals and
chemicals which are readily available.
As of January 1, 2000 the Specialty Pigments and Additives segment had
approximately 1,090 employees worldwide. Most hourly employees are covered by
collective bargaining agreements. Employee relations have generally been good.
PAPER PIGMENTS AND ADDITIVES
The Paper Pigments and Additives segment provides kaolin-based performance
products used as coating and extender pigments by papermakers to improve the
opacity, brightness, gloss and printability of their products. This segment is
also the internal supply source of specialized mineral-based products and
precursors for Engelhard's catalyst and specialty pigment businesses.
Products for the paper market include Miragloss (trademark), Miraclipse
(trademark) and Mirafilm (trademark), a family of pigments for coating
applications requiring superior gloss, opacity and brightness; Digitex
(trademark) used in inkjet printing applications; Luminex (trademark) pigments,
a high brightness material for high-quality paper coating: Ansilex (registered
trademark) pigments that provide the desired opacity, brightness, gloss and
printability in paper products; Nuclay (registered trademark) specialized
coating pigment for lightweight publication papers; Exsilon (registered
trademark) structured pigments that improve the printability of lightweight
coated paper and carbonless forms; and Spectrafil (registered trademark)
pigments for newsprint and groundwood specialty markets.
6
The products of the Paper Pigments and Additives segment compete with those
of other kaolin manufacturers, as well as those of producers of precipitated
calcium carbonate and ground calcium carbonate, on the basis of cost and value
performance. No single competitor is dominant in the markets in which the
Company competes.
Paper Pigments and Additives' manufacturing operations are carried out in
the United States and Finland. An equity investment is located in the Ukraine.
Products are sold through the Company's sales organization or those of its
equity investment, supplemented by independent distributors and representatives.
The Principal raw materials of the Paper Pigments and Additives segment is
crude kaolin, which is mined from owned or leased property by the Company to
produce high quality kaolin products for paper coating and further processed
filling applications.
As of January 1, 2000 the Paper Pigments and Additives segment has
approximately 1,220 employees worldwide. Most hourly employees are covered by
collective bargaining agreements. Employee relations have generally been good.
INDUSTRIAL COMMODITIES MANAGEMENT
The Industrial Commodities Management segment is a distribution and
materials services business that purchases and sells precious metals, base
metals and related products and services. It does so under a variety of pricing
and delivery arrangements structured to meet the logistical, financial and price
risk management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metal refining and
produces salts and solutions.
The Industrial Commodities Management segment is responsible for procuring
precious and base metals to meet the requirements of the Company's operations
and its customers. Supplies of newly-mined platinum group metals are obtained
primarily from South Africa and the Russian Federation and to a lesser extent
from the United States and Canada, the only four regions that are known
significant sources. Most of these platinum group metals are obtained pursuant
to a number of contractual arrangements with different durations and terms. Gold
and silver are purchased from various sources. In addition, in the normal course
of business, certain customers and suppliers deposit significant quantities of
precious metals with the Company under a variety of arrangements. Equivalent
quantities of precious metals are returnable as product or in other forms.
The Industrial Commodities Management segment also engages in precious and
base metal sourcing with industrial consumers, dealers, central banks, miners
and refiners. It also participates in refining of precious metals and the
production of salts and solutions. Offices are located in the United States,
Italy, Japan, Peru, the Russian Federation, Switzerland and the United Kingdom.
As of January 1, 2000 the Industrial Commodities Management segment had
approximately 120 employees worldwide.
MAJOR CUSTOMERS
For the years ended December 31, 1999, 1998 and 1997, Ford Motor Company, a
customer of the Environmental Technologies and Industrial Commodities Management
segments, accounted for more than 10% of the Company's net sales. Sales to this
customer include both fabricated products and precious metals and were therefore
significantly influenced by fluctuations in precious-metal prices, as was the
quantity and type of metal purchased. In such cases, market price fluctuations,
quantities and types purchased can result in material variations in sales
reported, but do not usually have a direct or significant effect on earnings.
7
RESEARCH AND PATENTS
The Company currently employs approximately 515 scientists, technicians and
auxiliary personnel engaged in research and development in the field of
chemistry and metallurgy. These activities are conducted in the United States
and abroad. Research and development expense was $77.9 million in 1999, $69.8
million in 1998 and $61.4 million in 1997.
Research facilities include fully staffed instrument analysis laboratories,
which the Company maintains in order to achieve the high level of precision
necessary for its various business groups and to assist customers in
understanding how Engelhard's products and services add value to their
businesses.
The Company owns or is licensed under numerous patents secured over a
period of years. It is the policy of the Company to normally apply for patents
whenever it develops new products or processes considered to be commercially
viable and, in appropriate circumstances, to seek licenses when such products or
processes are developed by others. While the Company deems its various patents
and licenses to be important to certain aspects of its operations, it does not
consider any significant portion or its business as a whole to be materially
dependent on patent protection.
ENVIRONMENTAL MATTERS
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing environmental investigations
and cleanup plans at several currently or formerly owned and/or operated sites,
including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The Company is
continuing to investigate contamination at Plainville under a 1993 agreement
with the United States Environmental Protection Agency (EPA) and is awaiting
approval of a decommissioning plan by the State of Massachusetts under authority
delegated by the Nuclear Regulatory Commission. Investigation of the
environmental status at the Salt Lake City site continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at the Attapulgus site, under a 1994 consent order with the Georgia
Department of Natural Resources, Environmental Protection Division, is complete.
In addition, seven sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many cases,
the dollar amount of the claim is unspecified and claims have been asserted
against a number of other entities for the same relief sought from the Company.
Based on existing information, the Company believes that it is a de minimis
contributor of hazardous substances at a number of the sites referenced above.
Subject to the reopening of existing settlement agreements for extraordinary
circumstances or natural resource damages, the Company has settled a number of
other cleanup proceedings. The Company has also responded to information
requests from EPA and state regulatory authorities in connection with other
Superfund sites.
8
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1999 and 1998 were $31.3 million and
$39.5 million, respectively, including $0.8 million and $1.2 million,
respectively, for Superfund sites. These amounts represent those costs that the
Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 55% of what it believes are the reasonably possible environmental
cleanup-related costs of a noncapital nature. The estimate of reasonably
possible costs is less certain than the probable estimate upon which the accrual
is based.
During the past three-year period, cash payments for environmental cleanup-
related matters were $2.4 million, $4.1 million and $6.0 million for 1999, 1998
and 1997, respectively. The amounts accrued in connection with environmental
cleanup-related matters were not significant over this time period.
For the past three-year period, environmental-related capital projects have
averaged less than 10% of the Company's total capital expenditure
programs, and the expense of environmental compliance (e.g. environmental
testing, permits, consultants and in-house staff) was not material.
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations. Based
on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup-related matters are
projected to be $5.0 million for 2000, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, Management believes
that environmental cleanup-related reserves at December 31, 1999 are reasonable
and adequate and that environmental matters are not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on the
Company's operating results or cash flows.
Item 2. Properties
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The Company leases a building on approximately seven acres of land with a
combined area of approximately 271,000 square feet in Iselin, NJ. This building
serves as the principal executive and administrative office of the Company and
its operating segments. The Company owns approximately 15 acres of land and
three buildings with a combined area of approximately 150,000 square feet in
Iselin, NJ. These buildings serve as the major research and development
facilities for the Company's operations. The Company also owns research
facilities in Gordon, GA; Union, NJ; Buchanan and Ossining, NY; Beachwood, OH;
Pasadena, TX and DeMeern, The Netherlands.
The Environmental Technologies segment owns and operates plants located in
Huntsville, AL; Santa Barbara, CA; East Windsor, CT; Daytona and Deerfield
Beach, FL; Wilmington, MA; Hiram, OH; Warwick, RI; Duncan, SC; Nienburg,
Germany; Madras, India; Port Elizabeth, South Africa; Indiatuba, Brazil and
Coleford, United Kingdom.
9
The Process Technologies segment owns and operates plants located in
Attapulgus and Savannah, GA; Elyria, OH; Erie, PA; Seneca, SC; Pasadena, TX;
Salt Lake City, UT; Rome, Italy; and DeMeern, The Netherlands.
The Specialty Pigments and Additives segment owns and operates attapulgite
processing plants in Quincy, FL near the area containing its attapulgite
reserves, plus a mica mine and processing facilities in Hartwell, GA. Management
believes that the Company's attapulgite and mica reserves will be sufficient to
meet its needs for the foreseeable future. The segment also owns and operates
color, pearlescent pigment and film manufacturing facilities in Sylmar, CA;
Louisville, KY; Eastport, ME; Peekskill, NY; Elyria, OH; Charleston, SC; and
Inchon, South Korea.
The Paper Pigments and Additives segment owns and operates five kaolin
mines and five milling facilities in Middle Georgia which serve an 85 mile
network of pipelines to three processing plants. It also owns land containing
kaolin, and leases on a long-term basis kaolin mineral rights to additional
acreage. In addition, the Company owns sales and manufacturing facilities in
Helsinki, Kotka and Rauma, Finland and Tokyo, Japan. Management believes that
the Company's crude kaolin will be sufficient to meet its needs for the
foreseeable future.
The Industrial Commodities Management segment's operations are conducted at
leased facilities in Iselin and Carteret, NJ; Lincoln Park, MI; Tokyo, Japan;
Moscow, Russia; Zug, Switzerland; and London, United Kingdom. In addition, the
segment's operations are conducted at owned facilities in Beachwood, OH;
Anaheim, CA; Seneca, SC; Rome, Italy and Lima, Peru.
Management believes that the Company's processing and refining facilities,
plants and mills are suitable and have sufficient capacity to meet its normal
operating requirements for the foreseeable future.
Item 3. Legal Proceedings
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Various lawsuits, claims and proceedings are pending against the Company.
The Company and certain of its present and former officers have agreed to a
Stipulation of Settlement ("Stipulation") of a class action filed in November
1995 that alleged misstatements and omissions in connection with press releases
issued in 1995 concerning the Company's PremAir(registered trademark) catalyst
systems. In the settlement, which was approved by the Court on December 8, 1998,
in exchange for the dismissal of the complaint against all defendants, the
Company will pay no more than $5.5 million of a maximum settlement amount of
$21.5 million. The balance of the settlement amount will be paid by insurance
carried by the Company for such purposes. Because the final settlement amount
will depend on the number of eligible shares of the Company's common stock for
which claims are submitted, the amounts to be paid by the Company and the
insurer could be less, but in no event more, than the above-stated amounts. This
matter, if resolved in accordance with the Stipulation, will not have a material
adverse effect on the operating results of the Company.
10
The Company is one of a number of defendants in numerous proceedings that
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to "toxic" substances purportedly supplied by the Company and other
defendants. The Company is also subject to a number of environmental
contingencies (See note 18 "Environmental Costs," for further detail) and is a
defendant in a number of lawsuits covering a wide range of other matters. In
some of these matters, the remedies sought or damages claimed are substantial.
While it is not possible to predict with certainty the ultimate outcome of these
lawsuits or the resolution of the environmental contingencies, Management
believes, after consultation with counsel, that resolution of these matters is
not expected to have a material adverse effect on financial condition. These
matters, if resolved in a manner different from management's current
expectations, could have a material adverse effect on the Company's operating
results or cash flows.
In July 1996, the Securities and Exchange Commission (SEC) issued a
formal order of investigation concerning the sale of Engelhard stock by certain
of the Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company provided
documents to the SEC, and witnesses were examined by the SEC staff during 1996.
In 1998, Management learned that Engelhard and several other companies
operating in Japan had been victims of a fraudulent scheme involving base-metal
inventory held in third-party warehouses in Japan. The inventory loss was
approximately $40 million in 1997 and $20 million in 1998. The Company is
vigorously pursuing various recovery actions. These actions include negotiations
with the various third parties involved and, in several instances, the
commencement of litigation. In the first quarter of 1998, Engelhard recorded a
receivable from the insurance carriers and third parties involved for
approximately $20 million. This amount represents Management's and counsel's
best estimate of the minimum probable recovery from the various insurance
policies and other parties involved in the fraudulent scheme.
The Company is involved in a value-added tax dispute in Peru, which
Management believes has a maximum financial exposure of approximately $30
million. On December 2, 1999, Engelhard Peru, S.A., a wholly-owned subsidiary,
was denied refund claims of approximately $27 million. The Peruvian tax
authority also determined that Engelhard Peru, S.A. is liable for the return of
approximately $17 million in refunds previously paid and payment of fines
totaling approximately $41 million. Engelhard Peru, S.A. is contesting these
determinations vigorously, and Management believes, based on consultation with
counsel, that Engelhard Peru, S.A. is entitled to all refunds claimed and is not
liable for these additional taxes or fines. However, even if the matter is
subsequently resolved against Engelhard Peru, S.A., Management believes the
maximum financial exposure is limited to the aggregate value of all assets of
Engelhard Peru, S.A., including unpaid refunds, which is approximately $30
million.
Item 4. Submission of Matters to a Vote of Security Holders
- ------ ---------------------------------------------------
Not applicable.
11
PART II
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Market for Registrant's Common Equity
Item 5. and Related Stockholder Matters
- ------ -------------------------------------
As of March 23, 2000, there were 6,294 holders of record of the Company's
common stock, which is traded on the New York Stock Exchange (ticker symbol
"EC"), as well as on the London and Swiss stock exchanges.
The range of market prices and cash dividends paid for each quarterly
period were as follows:
NYSE Cash
market price dividends paid
High Low per share
--------- --------- --------------
1999
First quarter $20 13/16 $16 1/2 $0.10
Second quarter 23 11/16 16 1/4 0.10
Third quarter 23 18 3/16 0.10
Fourth quarter 19 1/4 16 5/16 0.10
1998
First quarter $20 $16 1/2 $0.10
Second quarter 22 13/16 18 13/16 0.10
Third quarter 21 1/2 17 5/16 0.10
Fourth quarter 21 11/16 15 3/4 0.10
12
Item 6. Selected Financial Data
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Selected Financial Data
($ in millions, except per share amounts)
OPERATING RESULTS 1999 1998 1997 1996 1995
- ----------------- ---- ---- ---- ---- ----
OPERATING RESULTS
Net sales $4,404.9 $4,174.6 $3,630.7 $3,184.4 $2,840.1
Net earnings(1) 197.5 187.1 47.8 150.4 137.5
Basic earnings per share(2) 1.49 1.30 0.33 1.05 0.96
Diluted earnings per share(2) 1.47 1.29 0.33 1.03 0.94
Total assets $2,904.0 $2,866.3 $2,586.3 $2,490.5 $1,943.3
Long-term debt 499.5 497.4 373.6 375.1 211.5
Shareholders' equity 764.4 901.6 785.3 833.2 737.7
Cash dividends paid per share(2) 0.40 0.40 0.38 0.36 0.35
Return on average shareholders' equity 23.7% 22.2% 5.9% 19.2% 20.3%
Unless otherwise indicated, all per-share amounts are presented as basic earnings per share, as calculated
under SFAS No. 128, "Earnings Per Share".
(1) Results in 1999 include an after-tax gain of $2.2 million ($0.02 per share) on the sale of inventory accounted for under
the LIFO method and net after-tax gains of $5.3 million ($0.04 per share) on sales of investments and land. Results in 1998 include
an after-tax gain of $4.9 million ($0.03 per share) on the sale of inventory accounted for under the LIFO method. Results in 1997
include special and other charges of $117.7 million ($0.82 per share) for a variety of events (including restructuring actions and a
loss from the base-metal fraud in Japan). In addition, 1997 results include an after-tax gain of $2.0 million ($0.01 per share) on
the sale of inventory accounted for under the LIFO method. Results in 1996 include an after-tax gain of $3.3 million ($0.02 per
share) on the sale of inventory accounted for under the LIFO method.
(2) Reflects the three-for-two stock split as of June 30, 1995.
Management's Discussion and Analysis
Item 7. of Financial Condition and Results of Operations
- ------ ----------------------------------------------------------
Unless otherwise indicated, all per-share amounts are presented as basic
earnings per share, as calculated under SFAS No. 128, "Earnings per Share."
Net earnings in 1997 include special and other charges of $117.7 million
($0.82 per share) for a variety of events, including restructuring actions and a
loss from the base-metal fraud in Japan (see Note 19, "Litigation and
Contingencies," for further detail).
The information in the discussion of each segment's results is derived
directly from that segment's internal financial reporting system used for
Management purposes. Items allocated to each segment's results include the
majority of corporate overhead charges. Unallocated items include net interest
expense, royalty income, sale of inventory accounted for under the LIFO method,
special and other charges and other miscellaneous Corporate items (see Note 16,
"Business Segment and Geographic Area Data," for further detail).
13
Environmental Technologies
The Environmental Technologies segment predominantly develops and markets
sophisticated emission-control technologies and systems that enable customers to
cost-effectively meet stringent environmental regulations.
1999 Performance
Sales increased 6% to $584.8 million and operating earnings increased 15% to
$102.4 million.
Discussion
The majority of this segment's sales and operating earnings are derived from
technologies to control pollution from mobile sources, including gasoline
and diesel-powered passenger cars, sport-utility vehicles, trucks, buses and
off-road vehicles. Sales and earnings increases were driven by strength in
auto-emission catalysts for North America and a surge in volume of diesel-engine
retrofit kits. These increases were partly offset by costs related to the
start-up of new manufacturing plants in India and Brazil.
Operating earnings also were favorably impacted by reduced material costs
resulting from supply-chain management initiatives.
Sales volumes for auto catalysts were up sharply in North America as the
business benefited from general strength in the auto industry and increased
volumes with General Motors and Honda.
Sales of retrofit equipment for heavy-duty diesel engines also were up,
primarily due to increased demand from bus fleet operators. In October, Hong
Kong's largest bus operator announced that it would retrofit 1,800 of its
vehicles with Engelhard's advanced catalytic converters.
Outlook
This segment expects growth in sales and operating earnings to continue as
emission-control regulations become stricter around the world and address a much
broader range of emission sources. Demand for automotive catalysts is expected
to increase in response to the Company's development of several new
technologies. Demand also is expected to accelerate for advanced catalytic
converters for diesel engines utilized in retrofitting bus fleets. Programs are
underway in Paris, London, Hong Kong and a number of other cities.
Sales of advanced catalysts for medium- and heavy-duty diesel trucks are
expected to expand beginning in the second half of 2002 as new regulations begin
to take effect. The Company expects sales to start in the second half of 2002
for engines going into the California market. The medium- and heavy-duty engine
sector will have new U.S. regulations beginning in 2004.
In addition to emission-control technologies, Engelhard expects broader
commercialization of its proprietary PremAir (registered trademark) catalyst
system, which destroys ozone already in the ambient air regardless of the
source. In December 1999, Volvo began installing PremAir-coated radiators on
their S80 luxury sedans. That marked the first large-scale commercial use of the
ozone-destruction technology. In early 2000, Volvo announced that it would
also be using PremAir technology on its S70 line of station wagons, and Nissan
announced that PremAir would be part of their Sentra CA, a super-low emissions
vehicle for the California market.
The segment also anticipates growth from non-mobile applications of its
technology. For example, sales to the power industry are expected to grow as
demand for electricity increases and deregulation drives competition.
14
The segment is building a base for future regional growth. Last June,
Engelhard formed a joint venture with SINOPEC in China for the manufacture and
sale of auto catalysts. SINOPEC is China's largest state petroleum company.
China already requires catalysts on new cars in Beijing and Shanghai and is
expected to implement national standards in 2000. Also in 2000, Engelhard will
start up a manufacturing facility in Brazil and expand one in India.
Environmental Technologies - Prior-Year Comparisons
1998 compared with 1997
Sales increased 6% to $549.6 million and operating earnings increased 26% to
$89.0 million.
Sales and operating earnings from catalysts to control emissions from
mobile sources increased as a result of continuing demand for more sophisticated
technologies needed to meet stricter environmental regulations. Operating
earnings also benefited from lower manufacturing and operating costs and
elimination of losses from the portion of the stationary-source business related
to capital equipment, which was sold in February 1998.
1997 compared with 1996
Sales increased 7% to $516.7 million and operating earnings increased 18%
to $70.4 million.
Automotive catalyst sales and operating earnings grew as new business was
gained from European automakers. Sales of catalytic converters for diesel-engine
retrofits and thermal coatings for aircraft and power-generating turbine engines
also increased. Operating earnings benefited from improved utilization of
existing manufacturing capacity and other productivity improvements
PROCESS TECHNOLOGIES
The Process Technologies segment enables customers to make their processes
more productive, efficient, environmentally sound and safer through the supply
of advanced chemical and polymerization-process catalysts and sorbents. In
addition, the segment's advanced cracking and hydroprocessing technologies
enable petroleum refiners to more efficiently produce gasoline, transportation
fuels and heating oils.
1999 Performance
Sales increased 3% to $515.3 million and operating earnings increased 12%
to $81.9 million.
Discussion
Sales growth was due to the full-year inclusion of results from
the catalyst businesses of Mallinckrodt Inc., which Engelhard acquired in May
1998. Excluding these results, net sales for the segment would have declined
slightly, primarily due to lower demand for petrochemical catalysts and
petroleum cracking catalysts.
Continued weakness in the petrochemical and petroleum refining industries
held back sales of catalyst products intended for these markets. Partially
offsetting this weakness were increased sales of catalysts used to make
polypropylene. New capacity for these catalysts was brought on line in 1999,
enabling Engelhard to take advantage of the strong demand for its new Lynx 1000
(registered-trademark) polypropylene catalysts. Lynx 1000 catalysts are used to
produce polypropylene, which is used in a wide range of products, including car
battery cases, carpets, toys and automobile bumpers.
Reduced costs from supply-chain management initiatives and productivity
improvements throughout the segment were the primary drivers of operating
earnings growth. In addition, inclusion of the full-year impact of the mid-1998
shutdown of a manufacturing facility in The Netherlands lowered operating costs.
15
Outlook
Sales and earnings growth in this segment is expected to come from custom
process catalysts, strong demand for polypropylene catalysts and recovery
in petrochemical and petroleum refining catalyst volumes. Additional earnings
growth is expected from continued cost management and productivity improvements.
New capacity for polypropylene catalysts was added in late 1999, and additional
capacity is expected to be on stream in late 2000.
Overall, weakness in the chemical industry and flat demand for petroleum
cracking catalysts is expected to continue for much of 2000. In the petroleum
refining industry, narrow price spreads between light and heavy crude oils
(despite the recent rise in price for crude overall), industry consolidations
and more efficient refining operations are the primary factors influencing
cracking catalyst demand. The segment will continue to aggressively manage costs
and emphasize high-value products and services. Included in the segment's
anticipated new product offerings are catalysts that enable utilization of
previously unusable natural gas and catalysts capable of significantly improving
petroleum-refining yields.
PROCESS TECHNOLOGIES--PRIOR-YEAR COMPARISONS
1998 compared with 1997
Sales increased 21% to $501.3 million and operating earnings increased 56% to
$73.1 million.
Sales and earnings growth were driven by the May 1998 acquisition of the
catalyst businesses of Mallinckrodt Inc., which accounted for $67.7 million in
sales and $16.2 million in operating earnings. Earnings also benefited from
lower costs in the petroleum catalysts business arising from the mid-1998
shutdown of a manufacturing facility in The Netherlands, manufacturing
efficiencies and reduced administrative expenses.
1997 compared with 1996
Sales increased 3% to $413.1 million and operating earnings decreased 12% to
$46.8 million.
Increased sales and earnings from chemical catalysts were offset by a decline
in operating earnings from petroleum catalysts, primarily the result of losses
from European operations. Sales of petroleum catalysts were flat.
SPECIALTY PIGMENTS AND ADDITIVES
The Specialty Pigments and Additives segment provides innovative functional
products, services and solutions to customers' problems in a broad array of
markets, including coatings, plastics, cosmetics and construction. The segment's
products help customers improve the look, performance and overall cost of their
products.
1999 Performance
Sales increased 4% to $362.7 million and operating earnngs increased 40% to
$58.9 million.
Discussion
Strong worldwide demand, including a rebound in the Asia-Pacific region,
drove sales increases for several of the segment's major product lines,
including effect pigments, specialty kaolin-based products and iridescent films.
The cosmetics, industrial, agricultural, construction, coatings and decorative
markets all contributed to the growth. These sales increases were partially
offset by a decrease in sales of color pigments, due to product-supply issues
associated with the start-up of a new manufacturing process designed to lower
costs.
16
The record sales growth in most business segments, combined with
savings from supply-chain management initiatives and productivity improvements,
led to significantly increased operating earnings. Costs also were improved
versus 1998 when inventory reductions negatively impacted results.
Outlook
Sales growth is expected from continued new product offerings and
applications. These include Reflecks (trademark) pigments to create sparkling
multicolor effects and Desert Reflections (trademark) pigments to create
color-changing effects in cosmetic and personal care products. Iridescent films
are being developed for new applications in packaging, textiles and marine gel
coats. The segment also will continue to focus on lowering supply-chain costs
and improving productivity.
SPECIALTY PIGMENTS AND ADDITIVES--PRIOR-YEAR COMPARISONS
1998 compared with 1997
Sales of $349.0 million were flat and operating earnings decreased 35% to
$42.0 million.
An economic downturn in the Asia-Pacific region, lower pricing and
unfavorable color-pigment manufacturing costs and mix offset increases in sales
of pearlescent pigments and attapulgite-based products. In addition, earnings
were impacted by costs associated with an inventory-reduction program.
1997 compared with 1996
Sales increased 34% to $349.0 million and operating earnings increased 64% to
$64.2 million.
Sales and operating earnings growth were driven by the successful
integration of Mearl Corporation, acquired in May 1996. Full-year, pretax
benefit of the acquisition totaled $29.1 million.
PAPER PIGMENTS AND ADDITIVES
The Paper Pigments and Additives segment provides kaolin-based performance
products used as coating and extender pigments by papermakers to improve the
opacity, brightness, gloss and printability of their products. This segment is
also the internal supply source of specialized mineral-based products and
precursors for Engelhard's catalyst and specialty pigment businesses.
1999 Performance
Sales to the paper industry decreased 1% to $236.1 million and operating
earnings decreased 22% to $28.0 million.
Discussion
Overall market conditions in the paper industry remained weak
through most of the year, leading to sales and earnings declines. Depressed
pricing and a less-favorable product mix also negatively affected operating
earnings. Towards the end of the year, some moderate volume recovery was
experienced in the high-end market - - which includes lightweight, coated papers
- -- and in certain Asia-Pacific markets (excluding Japan).
Outlook
Slow or minimal growth is expected to continue for the paper industry. This
segment intends to continue its aggressive cost-reduction and productivity
improvement efforts. The segment also will emphasize high-value products, like
its newly introduced Digitex (trademark) pigments for commercial ink-jet
printing and Miragloss (trademark) engineered pigments, in order to improve
product mix.
17
PAPER PIGMENTS AND ADDITIVES--PRIOR-YEAR COMPARISONS
1998 compared with 1997
Sales decreased 1% to $239.4 million, while operating earnings increased 6% to
$35.8 million.
Flat sales reflected an overall slowdown in the paper industry, while
operating earnings increased as a result of ongoing productivity improvement
initiatives.
1997 compared with 1996
Sales increased 2% to $242.0 million, while operating earnings decreased 19% to
$33.8 million.
Operating earnings declined despite a slight sales increase primarily due
to lower pricing. Overcapacity in the industry led to price declines as
suppliers sought to boost manufacturing volumes.
INDUSTRIAL COMMODITIES MANAGEMENT
The Industrial Commodities Management segment is a distribution and
materials services business that purchases and sells precious metals, base
metals and related products and services. It does so under a variety of pricing
and delivery arrangements structured to meet the logistical, financial and
price risk management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metal refining and
produces salts and solutions.
1999 Performance
Sales increased 11% to $2,608.6 million, while operating earnings decreased 18%
to $39.6 million.
Discussion
Sales for this segment include all sales of metals to industrial
customers plus purchases for refining, which are resold to the market at the
conclusion of the refining process. The sales increase resulted primarily from
higher volumes, as well as higher palladium and rhodium prices. Changes in metal
sales amounts are not necessarily indicative of changes in earnings because of
the mix of potential arrangements with customers and other factors that may
affect sourcing and refining revenues.
Customers often supply the precious metals for manufactured products. In
those cases, precious-metal values are not included in sales. The mix of such
arrangements and the extent of market-price fluctuation can significantly affect
the level of reported sales but do not usually have a material effect on
earnings. Precious metals are considered as sales if the metal was supplied by
Engelhard. Purchase of metal generally is hedged (see Note 1, "Summary of
Significant Accounting Policies").
Operating earnings decreased due to significantly lower volatility in
platinum group metals during the first half of 1999 as compared with high
volatility in 1998. Variability of shipments from Russia contributed to high
volatility in 1998. Volatility not only increases the spreads on dealing
transactions, but also provides opportunities to benefit from strong and prudent
physical positions.
Outlook
While a growing, sustainable level of base business is anticipated,
market volatility cannot be assured. The benefits of such volatility represent
an upside opportunity for this segment and are expected during 2000.
18
Industrial Commodities Management -- Prior-Year Comparisons
1998 compared with 1997
Sales increased 20% to $2,346.8 million and operating earnings increased 8% to
$48.5 million.
Sales and earnings increases resulted primarily from higher palladium and
rhodium volumes and prices and from volatility in platinum group metals.
Operating earnings were held back somewhat by lower margins earned on metal
sales.
1997 compared with 1996
Sales increased 18% to $1,954.0 million and operating earnings increased 111% to
$44.9 million.
Strong increases in both sales and operating earnings were driven by
unusually high volatility in platinum group metals. Refining operations,
although down slightly, also benefited from increased activity generated by the
market volatility.
Acquisitions and Partnerships
Other Party Business Arrangement Transaction Date Business Opportunity
- ----------- -------------------- ---------------- --------------------
ISP Acquired the effect- March 1999 Strategic expansion
pigment product line of effect-pigments line
of ISP
Mallinckrodt Inc. Acquired the chemical May 1998 Strategic expansion of chemical
catalyst businesses catalyst business.
of Mallinckrodt Inc.
("Mallinckrodt businesses")
Semo Chemical Acquired the pearlescent January 1998 Strategic Asian expansion into
Company pigments business effect-pigments markets.
CONSOLIDATED GROSS PROFIT
Gross profit as a percentage of sales was 14.6% in 1999, compared with 15.5%
in 1998 and 16.5% in 1997. The decrease was driven by the lower margins earned
on metal sales by the Industrial Commodities Management segment. Sales from this
segment increased 11% in 1999 to $2,608.6 million and provided a gross profit of
3%, while 1999 sales from all other reportable segments increased 4% and
provided a gross profit of 32%. As described in Note 1 to the Consolidated
Financial Statements, the lower margins on Industrial Commodities Management
sales are driven by including precious metals in both sales and cost of sales
for certain transactions.
19
SELLING, ADMINISTRATIVE AND OTHER EXPENSES
Selling, administrative and other expenses were $325.3 million in 1999,
compared with $337.6 million in 1998 and $327.8 million in 1997. The 1998 amount
reflects the acquisition of the Mallinckrodt businesses in May 1998. The 1997
amount reflects a full year of Mearl (acquired in May 1996), the impact of the
special and other charges (see Note 4, "Special and Other Charges," for further
detail), a 1996 insurance recovery ($5.7 million after-tax or $0.04 per share)
and general growth in the Company's businesses due to new programs and strategic
alliances. Selling, administrative and other expenses as a percentage of sales
were 7.4% in 1999, compared with 8.1% in 1998 and 9.0% in 1997. The decrease was
driven by higher metal sales by the Industrial Commodities Management segment.
See "Gross Profit" above. Some metal sales from this segment do not generate
proportionate increases in underlying selling and administrative expenses. See
Note 1, "Summary of Significant Accounting Policies," for further detail.
EQUITY EARNINGS/LOSSES
Equity in earnings of affiliates was $16.3 million in 1999, compared with
equity earnings of $10.1 million in 1998 and an equity loss of $47.8 million in
1997. The increase in 1999 is primarily due to higher equity earnings from
Heesung-Engelhard, an environmental catalyst joint venture; higher equity
earnings from N.E. Chemcat Corporation, a 38.8% owned, publicly traded Japanese
corporation that is a leading producer of automotive and chemical catalysts; and
the absence of losses from Acreon Catalyse, a hydroprocessing joint venture sold
in the first quarter of 1999. The 1997 loss reflects the 1997 special and other
charges of $44.8 million related to Engelhard-CLAL and Engelhard/ICC.
GAIN ON SALE OF INVESTMENTS AND LAND
In the first quarter of 1999, the Company sold its investment in Acreon
Catalyse, a hydroprocessing joint venture. The Company recorded a gain of $1.0
million ($0.6 million after-tax or less than $0.01 per share on a diluted
basis).
In the second quarter of 1999, the Company sold its metal plating business
and recorded a gain of $9.3 million ($5.7 million after-tax or $0.04 per share
on a diluted basis).
In the second quarter of 1999, the Company reduced the carrying value of
its investment in Engelhard Highland Private Ltd., an India-based venture, to
its estimated net realizable value of $1.0 million. Accordingly, the Company
recorded a loss of $4.6 million ($2.8 million after-tax or $0.02 per share on a
diluted basis).
In the third quarter of 1999, the Company sold its Mearlcrete concrete
foaming agent business. The Company recorded a gain of $1.1 million ($0.7
million after-tax or less than $0.01 per share on a diluted basis).
In the third quarter of 1999, the Company sold land and certain mineral
rights located in Talladega County, Alabama. The Company recorded a gain of $1.8
million ($1.1 million after-tax or $0.01 per share on a diluted basis).
20
INTEREST
Net interest expense was $56.6 million in 1999, compared with $58.9 million
in 1998 and $52.8 million in 1997. Lower net interest expense in 1999 was
primarily due to settlement of treasury lock positions that were entered into to
hedge anticipated long-term borrowings, which reduced net interest expense by
$7.1 million. Excluding this reduction, net interest expense would have
increased primarily due to increased borrowings related to a major share
repurchase in May 1999 and an increase in interest rates. The increase in 1998
from 1997 primarily reflects the incremental financing costs associated with
acquiring the Mallinckrodt businesses in May 1998. Excluding the impact of
financing the acquisition of the Mallinckrodt businesses, net interest expense
would have decreased in 1998 primarily due to lower interest rates and a
decrease in average debt balances.
The Company capitalized interest of $2.6 million in 1999, $1.9 million in
1998 and $0.7 million in 1997.
Interest income was $2.9 million in 1999, $2.3 million in 1998 and
$1.1 million in 1997.
TAXES
Income tax expense was $86.7 million in 1999, compared with $73.5 million in
1998 and $38.0 million in 1997. The effective income tax rate was 30.5% in 1999,
28.2% in 1998 and 44.3% in 1997.
The 1997 effective tax rate included the impact of valuation allowances
established against deferred tax assets arising from special charges recorded
in that year. In turn, the 1998 effective tax rate reflected the reversal of
certain of those valuation allowances.
At year-end 1999, the net deferred tax asset was $100.0 million, primarily
for accrued postretirement and postemployment benefit obligations and the
environmental clean-up reserve. Management believes the Company will generate
sufficient taxable income and employ tax planning strategies to ensure deferred
tax benefits are realized.
FINANCIAL CONDITION AND LIQUIDITY
Working capital was ($67.5) million at December 31, 1999, compared with
$89.5 million last year. The decrease was primarily due to an increase in
short-term borrowings to fund a major share repurchase in May 1999 (see Note 2,
"Significant Shareholder Transaction," for further detail). The current ratio
was 1.0, compared with 1.1 in 1998. The year-end market value of the Company's
precious-metal inventories exceeded carrying cost by $115.3 million, compared
with $85.8 million last year. The increase in excess value reflects higher
market values that more than offset the impact of slightly reduced levels of
this inventory accounted for under the LIFO method (See Note 5, "Inventories,"
for further detail.)
The Company's total debt increased to $951.5 million at December 31, 1999,
compared with $752.4 million last year, primarily due to the share repurchase in
May 1999. The ratio of total debt to total capital increased to 55% at December
31, 1999 from 45% at December 31, 1998, due to increased short-term borrowings
to fund the share repurchase and the resulting reduction in shareholders'
equity.
The Company currently has a $600 million, five-year committed credit
facility and a $350 million, one-year committed credit facility with a group of
major U.S. and overseas banks. Additional unused, uncommitted lines of credit
exceeded $660 million at December 31, 1999.
21
In July 1998, the Company filed a shelf registration for $300 million. The
Company currently has no plans to issue debt under the shelf registration.
Operating activities provided net cash of $349.0 million in 1999, compared
with $176.7 million in 1998 and $196.5 million in 1997. The variance in cash
flows from operating activities primarily occurred in the Industrial Commodities
Management segment (ICM) and reflects changes in metal positions used to
facilitate both supplier and customer requirements. ICM routinely enters into a
variety of arrangements for the sourcing of industrial commodities. Generally,
all such transactions are hedged on a daily basis (see Note 1, "Summary of
Significant Accounting Policies," for a complete description). Hedging is
accomplished primarily through forward, future and option contracts. Hedged
metal obligations (metal sold not yet purchased but fully hedged) are considered
financing activities and reflect the fair value of the derivative instruments.
These transactions generally cover ICM'S sourcing requirements. ICM works to
ensure that the Company and its customers have an uninterrupted source of
industrial commodities, primarily platinum group metals, utilizing supply
contracts and commodities markets around the world.
The cash provided from operations other than the change in metal-related
assets and liabilities exceeded $220 million in 1999, 1998 and 1997.
The variance in cash flows from investing activities is primarily due to
the acquisition of the Mallinckrodt businesses in May 1998, partially offset by
proceeds received from the sale and leaseback of the Company's principal
executive and administrative offices in December 1998.
The variance in cash flows from financing activities was impacted by
increased short-term borrowings to fund the share repurchase in May 1999.
Management believes that existing sources of capital, together with cash
flows from operations, will be sufficient to meet foreseeable cash flow
requirements.
MARKET RISK SENSITIVE TRANSACTIONS
The Company is exposed to market risks arising from adverse changes in
interest rates, foreign currency exchange rates, and commodity prices. In the
normal course of business, the Company uses a variety of techniques and
instruments, including derivatives, as part of its overall risk management
strategy. Engelhard enters into derivative agreements with a diverse group of
major financial and other institutions with individually determined credit
limits to reduce the risk of nonperformance by counterparties.
INTEREST RATE RISK
Engelhard uses sensitivity analysis to assess the market risk of its
debt-related financial instruments and derivatives. Market risk is defined here
as the potential change in the fair value of debt resulting from an adverse
movement in interest rates. The fair value of the Company's total debt was
$931.0 million at December 31, 1999 and $750.0 million at December 31, 1998
based on average market quotations of price and yields provided by investment
banks. A 100 basis point increase in interest rates could result in a reduction
in the fair value of total debt of $21.8 million at December 31, 1999 compared
with $23.0 million at December 31, 1998.
22
Also, the Company uses interest rate derivatives to help achieve its fixed
and floating-rate debt objectives. The Company entered into two forward treasury
lock agreements with a total notional value of $100 million during 1999, which
were settled in September and October of 1999. As of December 31, 1998, the
Company had two forward treasury lock agreements with a total notional value of
$100 million, both of which were settled in March 1999. As of December 31, 1997,
the Company had forward starting swaps with a total notional value of $120
million, each with a start date of April 30, 1998 and termination date of April
30, 2008. These contracts hedged a debt issuance of $120 million in June 1998.
FOREIGN CURRENCY EXCHANGE RATE RISK
The Company uses a variety of strategies, including foreign currency
forward contracts, to minimize or eliminate foreign currency exchange rate risk
associated with substantially all of its foreign currency transactions,
including metal-related transactions denominated in other than U.S. dollars. In
selected circumstances, the Company may enter into foreign currency forward
contracts to hedge the U.S. dollar value of its foreign investments.
Engelhard uses sensitivity analysis to assess the market risk associated
with its foreign currency transactions. Market risk is defined here as the
potential change in fair value resulting from an adverse movement in foreign
currency exchange rates. A 10% adverse movement in foreign currency rates could
result in a net loss of $9.1 million in 1999 compared with $7.3 million in 1998
on the Company's foreign currency forward contracts. However, since the Company
limits the use of foreign currency derivatives to the hedging of contractual
foreign currency payables and receivables, this loss in fair value for those
instruments generally would be offset by a gain in the value of the underlying
payable or receivable.
A 10% adverse movement in foreign currency rates could result in an
unrealized loss of $79.4 million in 1999 compared with $61.4 million in 1998 on
its net investment in foreign subsidiaries and affiliates. However, since
Engelhard views these investments as long term, the Company would not expect
such a loss to be realized in the near term.
COMMODITY PRICE RISK
In closely monitored situations, for which exposure levels have been set by
senior management, the Company holds significant unhedged industrial commodity
positions that are subject to future market fluctuations. Such positions may
include varying levels of derivative commodity instruments. All industrial
commodity transactions are monitored and marked-to-market daily, as necessary.
All other industrial commodity transactions are hedged on a daily basis, using
forward, future, option or swap contracts to substantially eliminate the
exposure to price risk.
The Company has performed a "value-at-risk" analysis on all of its
commodity assets and liabilities. The "value-at-risk" calculation is a
statistical model that uses historical price and volatility data to predict
market risk on a one-day interval with a 95% confidence level. While the
"value-at-risk" models are relatively sophisticated, the quantitative
information generated is limited by the historical information used in the
calculation. For example, the volatility in the platinum and palladium markets
in 1999 and 1998 was greater than historical norms. Therefore, the Company uses
this model only as a supplement to other risk management tools and not as a
substitute for the experience and judgement of senior management and dealers who
have extensive knowledge of the markets and adjust positions and revise
strategies as the markets change. Based on the "value-at-risk" analysis, the
maximum potential one-day loss in fair value was approximately $3.9 million as
of December 31, 1999 compared with $2.7 million as of December 31, 1998.
23
CAPITAL EXPENDITURES, COMMITMENTS AND CONTINGENCIES
Capital projects are designed to maintain capacity, expand operations,
improve efficiency or protect the environment. Capital expenditures amounted to
$102.0 million in 1999, $116.5 million in 1998 and $136.9 million in 1997.
Capital expenditures in 2000 are expected to be approximately $125.0 million.
For information about commitments and contingencies, see Note 18, "Environmental
Costs," and Note 19, "Litigation and Contingencies".
DIVIDENDS AND CAPITAL STOCK
The annualized common stock dividend rate at the end of 1999 and 1998 was
$0.40 per share. In the third quarter of 1997, the Board of Directors approved
an 11.1% increase in the common stock dividend, raising the level of the
quarterly dividend to $0.10 per share effective September 30, 1997.
YEAR 2000 UPDATE
The ability of computers, software or any equipment utilizing
micropropcessors to properly recognize and process data at the turn of the
century is commonly referred to as a Y2K compliance issue. To address this
issue, the Company developed a worldwide Y2K readiness plan related to its
internal IT systems, internal non-IT systems, and external systems of its
suppliers and customers.
The Company approached its Y2K compliance issue by categorizing its
dependencies into two sections: Internal IT systems, consisting of IT and non-IT
systems;and External systems of suppliers and customers. Generally, internal
systems identified as non-Y2K compliant were replaced or modified by
reprogramming, upgrading or other means. Many of the internal non-compliant
systems were targeted for replacement for reasons other than Y2K issues as the
benefits of newer technology already had created an economic business case for
action. The costs of these replacement solutions were capitalized as permitted
by applicable accounting standards, whereas the costs of modification solutions
were expensed as repairs. External systems were monitored with the cooperation
of the Company's suppliers and customers.
Internal IT systems included internal applications software such as
finance, manufacturing and logistics. All internal IT systems, including all of
the key applications of the Company's individual business units, were
inventoried and assessed for Y2K compliance.
Internal non-IT systems included embedded chip technology such as
programmable logic controllers and related hardware/software and personal
computers and related software. These systems were inventoried and assessed for
Y2K compliance.
External systems included systems of customers and suppliers. The Company
identified and contacted customers and suppliers who would have a significant
negative impact on operations if not Y2K compliant. In addition, the Company
assessed the status of these customers and suppliers and developed contingency
plans where necessary. The Company's assessment of its suppliers, including both
domestic and international, regarding their Y2K readiness included
comprehensive surveys of all vendors and individual assessments of key ones. The
surveys were completed and revealed no major problems.
During the rollover period from December 31, 1999 to January 1, 2000, the
Company's worldwide operations continued to function as normal. There were no
business interruptions or problems with the Company's products, and no customer
or supplier issues were noted. As a result, the Company did not have to use any
of the contingency plans that were in place for any Y2K issues. The Company does
not anticipate any problems in the future relating to the Y2K issue.
24
The estimated total cost of implementing Y2K solutions was approximately
$11.5 million. Approximately $7.0 million was expensed and $4.5 million was
capitalized in accordance with applicable accounting standards. The total costs
of addressing the Company's Y2K readiness issues were not material to the
Company's financial condition or results of operations. In addition, no projects
that were material to the financial condition or results of operations of the
Company were deferred or delayed as a result of the Y2K project.
EURO
On January 1, 1999, 11 of 15 member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency - the euro. The euro is traded on currency
exchanges and may be used in business transactions. The conversion to the euro
will eliminate currency exchange rate risk between the member countries.
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legacy currencies will be withdrawn from circulation. Engelhard's operating
subsidiaries affected by the euro conversion have established plans to address
any issues. These include, among others, the need to adapt computer and
financial systems, business processes and equipment to accommodate
euro-denominated transactions and the impact of one common currency on pricing.
Since financial systems and processes currently accommodate multiple currencies,
the plans contemplate conversion by mid-2001 if not already addressed in
conjunction with Y2K remediation. Engelhard does not expect the system and
equipment conversion costs to be material. Due to numerous uncertainties,
Engelhard cannot reasonably estimate the effects one common currency will have
on pricing and the resulting impact, if any, on financial condition or results
of operations.
SPECIAL AND OTHER CHARGES
See Note 4, "Special and Other Charges," for a discussion of the Company's
special and other charges.
JAPAN FRAUD UPDATE/PERU UPDATE
See Note 19, "Litigation and Contingencies," for a discussion of Japan and Peru.
OTHER MATTERS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 is effective for the Company on
January 1, 2001. The Company will adopt SFAS 133 by the first quarter of 2001.
SFAS 133 requires that all derivative instruments be recorded on the balance
sheet at their fair value. The Company has not yet determined the impact that
the adoption of SFAS 133 will have on its earnings, comprehensive income or
statement of financial position.
25
FORWARD-LOOKING STATEMENTS
This document contains forward looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. These statements relate to
analyses and other information that are based on forecasts of future results and
estimates of amounts not yet determinable. These statements also relate to the
future prospects, developments and business strategies. These forward-looking
statements are identified by their use of terms and phrases such as
"anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan,"
"predict," "project," "will" and similar terms and phrases, including references
to assumptions. These forward-looking statements involve risks and uncertainties
that may cause Engelhard's actual future activities and results of operations to
be materially different from those suggested or described in this document.
These risks include: competitive pricing or product development activities;
Engelhard's ability to achieve and execute internal business plans; global
economic trends; worldwide political instability and economic growth; markets,
alliances and geographic expansions developing differently than anticipated;
fluctuations in the supply and prices of precious and base metals; government
legislation and/or regulation (particularly on environmental issues);
technology, manufacturing and legal issues; and the impact of any economic
downturns and inflation. Investors are cautioned not to place undue reliance
upon these forward-looking statements, which speak only as of their dates.
Engelhard disclaims any obligation to update or revise any forward-looking
statements, whether as a result of new information, future events or otherwise.
26
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
Year ended December 31 (in thousands, except per share amounts) 1999 1998 1997
----------- ------------ ------------
Net sales $ 4,404,942 $ 4,174,553 $ 3,630,653
Cost of sales 3,763,818 3,527,624 3,030,717
----------- ------------ ------------
Gross profit 641,124 646,929 599,936
Selling, administrative and other expenses 325,309 337,556 327,820
Special charge - - 86,000
----------- ------------ ------------
Operating earnings 315,815 309,373 186,116
Equity in earnings/(losses) of affiliates 16,266 10,077 (47,833)
Gain on sale of investments and land 8,592 - 305
Interest expense, net (56,555) (58,887) (52,776)
----------- ------------ ------------
Earnings before income taxes 284,118 260,563 85,812
Income tax expense 86,656 73,479 38,034
----------- ----------- ------------
Net earnings $ 197,462 $ 187,084 $ 47,778
=========== ============ ============
Basic earnings per share $ 1.49 $ 1.30 $ 0.33
Diluted earnings per share $ 1.47 $ 1.29 $ 0.33
=========== ============ ============
Average number of shares outstanding - basic 132,432 144,157 144,270
=========== ============ ============
Average number of shares outstanding - diluted 134,590 145,366 145,937
=========== ============ ============
See accompanying Notes to Consolidated Financial Statements.
27
ENGELHARD CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31 (in thousands) 1999 1998
- -------------------------- ---------------------------
Assets
Cash $ 54,375 $ 22,339
Receivables, net of allowances of
$5,217 and $7,038, respectively 394,338 376,826
Committed metal positions 467,768 541,224
Inventories 359,153 349,752
Other current assets 112,690 69,826
---------------------------
Total current assets 1,388,324 1,359,967
Investments 182,184 156,727
Property, plant and equipment, net 871,900 876,461
Intangible assets, net 325,544 326,253
Other noncurrent assets 136,011 146,911
---------------------------
Total assets $2,903,963 $2,866,319
===========================
Liabilities and Shareholders' Equity
Short-term borrowings $ 452,029 $ 255,002
Accounts payable 246,016 227,535
Hedged metal obligations 497,800 552,690
Other current liabilities 259,996 235,218
---------------------------
Total current liabilities 1,455,841 1,270,445
Long-term debt 499,466 497,393
Other noncurrent liabilities 184,266 196,924
---------------------------
Total liabilities 2,139,573 1,964,762
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, no par value, 5,000 shares
authorized and unissued - -
Common stock, $1 par value, 350,000 shares
authorized and 147,295 shares issued 147,295 147,295
Retained earnings 1,000,473 853,249
Treasury stock, at cost, 21,414 and 4,008
shares, respectively (352,282) (65,013)
Accumulated other comprehensive loss (31,096) (33,974)
---------------------------
Total shareholders' equity 764,390 901,557
---------------------------
Total liabilities and shareholders' equity $2,903,963 $2,866,319
===========================
See accompanying Notes to Consolidated Financial Statements.
28
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Year ended December 31 (in thousands) 1999 1998 1997
-------------------------------------------
Cash flows from operating activities
Net earnings $197,462 $187,084 $ 47,778
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation and depletion 98,328 88,374 78,485
Amortization of intangible assets 13,296 12,557 9,581
Gain on sale of investments and land (8,592) - (305)
Special charge - - 86,000
Equity results, net of dividends (13,835) (8,055) 51,636
Net change in assets and liabilities
Metal related 83,033 (71,859) (29,763)
All other (20,685) (31,389) (46,864)
-------------------------------------------
Net cash provided by operating activities 349,007 176,712 196,548
-------------------------------------------
Cash flows from investing activities
Capital expenditures (101,957) (116,460) (136,945)
Proceeds from sale of investments and land 12,764 1,018 2,458
Proceeds from sale and leaseback - 67,168 -
Acquisitions and other investments (3,142) (244,780) (37,409)
Other 368 5,850 8,691
-------------------------------------------
Net cash used in investing activities (91,967) (287,204) (163,205)
-------------------------------------------
Cash flows from financing activities
Increase/(decrease) in short-term borrowings 102,825 5,349 (55,493)
(Decrease)/increase in hedged metal obligations (79,525) 39,743 55,403
Proceeds from issuance of long-term debt 100,773 115,605 555
Repayment of long-term debt (4,500) - (2,051)
Purchase of treasury stock (298,032) (8,411) -
Stock bonus and option plan transactions 7,455 11,021 13,329
Dividends paid (52,658) (57,842) (54,851)
-------------------------------------------
Net cash (used in)/provided by financing activities (223,662) 105,465 (43,108)
Effect of exchange rate changes on cash (1,342) (1,399) (1,153)
-------------------------------------------
Net increase/(decrease) in cash 32,036 (6,426) (10,918)
Cash at beginning of year 22,339 28,765 39,683
-------------------------------------------
Cash at end of year $ 54,375 $ 22,339 $ 28,765
===========================================
See accompanying Notes to Consolidated Financial Statements.
29
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Accumulated
other Total
Common Retained Treasury Comprehensive comprehensive shareholders'
(in thousands, except per share amounts) stock earnings stock income/(loss) income/(loss) equity
- -------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 $147,295 $730,313 $(56,479) $ 12,027 $833,156
Comprehensive income/(loss):
Net earnings 47,778 $ 47,778 47,778
-------
Other comprehensive loss:
Foreign currency translation adjustments (54,152)
-------
Other comprehensive loss (54,152) (54,152) (54,152)
-------
Comprehensive loss (6,374)
=======
Dividends ($0.38 per share) (54,851) (54,851)
Stock bonus and option plan transactions 2,842 10,487 13,329
----------------------------------------------------------------------------
Balance at December 31, 1997 147,295 726,082 (45,992) (42,125) 785,260
Comprehensive income/(loss):
Net earnings 187,084 187,084 187,084
-------
Other comprehensive income/(loss):
Foreign currency translation adjustments 12,067
Minimum pension liability adjustment (3,916)
-------
Other comprehensive income 8,151 8,151 8,151
-------
Comprehensive income 195,235
=======
Dividends ($0.40 per share) (57,842) (57,842)
Treasury stock acquired (8,411) (8,411)
Adoption of Rabbi Trust (3,603) (20,103) (23,706)
Stock bonus and option plan transactions 1,528 9,493 11,021
----------------------------------------------------------------------------
Balance at December 31, 1998 147,295 853,249 (65,013) (33,974) 901,557
Comprehensive income/(loss):
Net earnings 197,462 197,462 197,462
-------
Other comprehensive income/(loss):
Foreign currency translation adjustments (18)
Minimum pension liability adjustment 2,896
-------
Other comprehensive income 2,878 2,878 2,878
-------
Comprehensive income 200,340
=======
Dividends ($0.40 per share) (52,658) (52,658)
Treasury stock acquired (298,032) (298,032)
Stock bonus and option plan transactions 2,420 10,763 13,183
----------------------------------------------------------------------------
Balance at December 31, 1999 $147,295 $1,000,473 $(352,282) $(31,096) $764,390
============================================================================
See accompanying Notes to Consolidated Financial Statements.
30
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the accounts of
Engelhard Corporation and its wholly owned subsidiaries (collectively referred
to as Engelhard or the Company). All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior-year amounts have
been reclassified to conform with the current-year presentation.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
CASH AND CASH EQUIVALENTS
Cash equivalents include all investments purchased with an original
maturity of three months or less and have virtually no risk of loss in value.
INVENTORIES
Inventories are stated at the lower of cost or market. The elements of cost
include direct labor and materials, variable overhead and the full absorption of
fixed manufacturing overhead. The cost of precious-metal inventories is
determined using the last-in, first-out (LIFO) method of inventory valuation.
The cost of other inventories is principally determined using either the average
cost or the first-in, first-out (FIFO) method.
PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment are stated at cost. Depreciation of buildings
and equipment is provided primarily on a straight-line basis over the estimated
useful lives of the assets. Buildings and building improvements are depreciated
over 20 years, while machinery and equipment are depreciated based on lives
varying from 3 to 10 years. Depletion of mineral deposits and mine development
are provided under the units of production method. When assets are sold or
retired, the cost and related accumulated depreciation are removed from the
accounts, and any gain or loss is included in earnings.
INTANGIBLE ASSETS
Identifiable intangible assets, such as patents and trademarks, are amortized
using the straight-line method over their estimated useful lives. Goodwill is
amortized over periods up to 40 years using the straight-line method. The
Company recorded amortization expense of $13.3 million in 1999, $12.6 million in
1998 and $9.6 million in 1997. Accumulated amortization amounted to $46.7
million and $34.8 million at December 31, 1999 and December 31, 1998,
respectively. Included in intangible assets is net goodwill that amounted to
$290.1 million and $300.0 million at December 31, 1999 and December 31, 1998,
respectively. The Company continually evaluates the reasonableness of its
amortization of intangibles. In addition, if it becomes probable that expected
future undiscounted cash flows associated with intangible assets are less than
their carrying value, the assets are written down to their fair value.
31
COMMITTED METAL POSITIONS AND HEDGED METAL OBLIGATIONS
The Company routinely enters into a variety of arrangements for the
sourcing of industrial commodities. These arrangements are spread among a number
of counterparties, which are generally major industrial companies or highly
rated financial or other institutions. The conduct of this business is closely
monitored.
In closely monitored situations, for which exposure levels have been set by
senior management, the Company holds significant unhedged industrial commodity
positions that are subject to future market fluctuations. Such positions may
include varying levels of derivative commodity instruments. All industrial
commodity transactions are monitored and marked-to-market daily, as necessary.
All other industrial commodity transactions are hedged on a daily basis, using
forward, future, option or swap contracts to substantially eliminate the
exposure to price risk.
Committed metal positions (non-inventory metal purchases) and hedged metal
obligations (metal sold not yet purchased but fully hedged) are carried at fair
value. Fair value is generally based on listed market prices. If listed market
prices are not available or if liquidating the Company's positions would
reasonably be expected to impact market prices, fair value is determined based
on other relevant factors, including dealer price quotations and price
quotations in different markets, including markets located in different
geographic areas. Any change in value, realized or unrealized, is recognized in
gross profit in the period of the change.
ENVIRONMENTAL COSTS
In the ordinary course of business, like most other industrial companies,
the Company is subject to extensive and changing federal, state, local and
foreign environmental laws and regulations and has made provisions for the
estimated financial impact of environmental cleanup-related costs. The Company's
policy is to accrue environmental cleanup-related costs of a noncapital nature
when those costs are believed to be probable and can be reasonably estimated.
Environmental cleanup costs are deemed probable when litigation has commenced or
a claim or an assessment has been asserted, or, based on available information,
commencement of litigation or assertion of a claim or an assessment is probable,
and, based on available information, it is probable that the outcome of such
litigation, claim or assessment will be unfavorable. The quantification of
environmental exposures requires an assessment of many factors, including
changing laws and regulations, advancements in environmental technologies, the
quality of information available related to specific sites, the assessment stage
of each site investigation, preliminary findings and the length of time involved
in remediation or settlement. For certain matters, the Company expects to share
costs with other parties. The Company does not include anticipated recoveries
from insurance carriers or other third parties in its accruals for environmental
liabilities.
REVENUE RECOGNITION
Revenues are recognized on sales of product at the time the goods are
shipped or when title has passed to the customer. In limited situations, revenue
is recognized on a bill-and-hold basis as title passes to the customer before
shipment of goods. These bill-and-hold sales meet the criteria for revenue
recognition. Sales recognized on a bill-and-hold basis were approximately $12.9
million in 1999, $10.8 million in 1998 and $2.6 million in 1997.
The metal component of product sales is recognized at contract price on the
date of title transfer. For all other commodity-related activities, an
unrealized gain or loss is recorded based on changes in the market value of the
Company's positions.
32
SALES AND COST OF SALES
Some of the Company's businesses use precious metals in their manufacturing
processes. Precious metals are included in sales and cost of sales if the metal
has been supplied by the Company. Often, customers supply the precious metals
for the manufactured product. In those cases, precious-metals values are not
included in sales or cost of sales. The mix of such arrangements and the extent
of market-price fluctuations can significantly affect the level of reported
sales, but do not usually have a material effect on earnings.
In addition, sales and purchases of precious metals to/from industrial and
refining customers are transacted through the Company's sourcing operations and
are recorded in sales and cost of sales. Secondarily, and usually as a
consequence of the above transactions, the Company also engages in
precious-metals sourcing with other counterparties. In these cases, the
precious-metals values are generally included in sales and cost of sales only to
the extent that the Company has added value by changing the physical form of the
metal.
Income Taxes
Deferred income taxes reflect the differences between the assets and
liabilities recognized for financial reporting purposes and amounts recognized
for tax purposes. Deferred taxes are based on tax laws as currently enacted.
EQUITY METHOD OF ACCOUNTING
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for using the equity method. Accordingly, the Company's share of
the earnings of these companies is included in consolidated net income.
Investments in other companies are carried at cost.
DERIVATIVE INSTRUMENTS
The Company enters into foreign exchange contracts as a hedge against monetary
assets and/or liabilities that are denominated in currencies other than the
functional currency of the entity holding those assets or liabilities. The
ultimate maturities of the contracts are timed to coincide with the expected
liquidation of the underlying monetary balances. Gains and losses on the
ultimate settlement of the contracts are offset against the losses and gains
realized on those underlying monetary accounts.
Interest rate swaps, treasury locks and similar arrangements are used by
the Company to lock in interest rates and/or convert floating rates to fixed and
vice versa. The differential to be paid or received is accrued as interest rates
change and is recognized over the life of the underlying debt agreements.
The use of derivative commodity instruments is discussed above under "Committed
Metal Positions and Hedged Metal Obligations." To the extent that the maturities
of these instruments are mismatched, the Company may be exposed to cash interest
rates. This exposure is mitigated through use of Eurodollar futures that are
marked-to-market daily along with the underlying commodity instruments.
33
STOCK OPTION PLANS
The Company adopted Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" ("SFAS 123") in 1997. In conjunction
with the adoption, the Company will continue to apply the intrinsic value based
method of accounting prescribed by Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" with pro-forma disclosure of net
income and earnings per share as if the fair value based method prescribed by
SFAS 123 had been applied. In general, no compensation cost related to these
plans is recognized in the consolidated statements of earnings.
RESEARCH AND DEVELOPMENT COSTS
Research and development costs are charged to expense as incurred and were
$77.9 million in 1999, $69.8 million in 1998 and $61.4 million in 1997. These
costs are included within selling, administrative and other expenses in the
Company's consolidated statements of earnings.
FOREIGN CURRENCY TRANSLATION
The functional currency for the majority of the Company's foreign
operations is the applicable local currency. The translation from the applicable
foreign currencies to U.S. dollars is performed for balance sheet accounts using
current exchange rates in effect at the balance sheet date and for revenue and
expense accounts using a weighted average exchange rate during the period. The
resulting translation adjustments are recorded as a component of shareholders'
equity. Gains or losses resulting from foreign currency transactions are
included in the Company's consolidated statements of earnings.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 is effective for the Company on January 1,
2001. The Company will adopt SFAS 133 by the first quarter of 2001. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings, comprehensive income or
statement of financial position.
2. SIGNIFICANT SHAREHOLDER TRANSACTION
In May 1999, the Company purchased approximately 18 million of its shares
owned by Minorco, representing approximately 13% of the Company's total shares
outstanding. The remainder of Minorco's stake (28 million shares) was sold in a
secondary public offering. Minorco also compensated the Company for costs and
other expenses related to the secondary offering and the purchase of the shares.
The Company financed the purchase with short-term debt.
34
3. ACQUISITIONS AND DIVESTITURES
During 1999, the Company sold its hydroprocessing joint venture, its metal
plating business, its Mearlcrete concrete foaming agent business, and certain
land and mineral rights located in Talladega County, Alabama. These sales
resulted in gains of $13.2 million ($8.1 million after-tax or $0.06 per share on
a diluted basis). In addition, the Company reduced the carrying value of its
investment in Engelhard Highland Private Ltd. to its estimated net realizable
value of $1.0 million and accordingly recorded a loss of $4.6 million ($2.8
million after-tax or $0.02 per share on a diluted basis).
In March 1999, the Company acquired the effect-pigment product line of ISP
for approximately $11.5 million. This acquisition expanded the Company's effect-
pigments line. The excess of the purchase price over the fair value of net
assets acquired has been recorded as goodwill and is being amortized on a
straight-line basis over 20 years. The results of operations of this product
line, integrated into the Specialty Pigments and Additives segment, are included
in the accompanying consolidated financial statements from the date of
acquisition. Pro forma information is not provided since the impact of the
acquisition does not have a material effect on the Company's results of
operations, cash flows or financial position.
On May 1, 1998, the Company acquired the chemical catalyst businesses of
Mallinckrodt Inc. for approximately $210 million in cash. The Company financed
the acquisition with a combination of commercial paper and bank borrowings. The
purchase price exceeded the assessment of the fair value of net assets acquired
by approximately $90 million, which is being amortized on a straight-line basis
over 40 years. The results of operations of the Mallinckrodt businesses,
integrated into the Process Technologies segment, are included in the
accompanying consolidated financial statements from the date of acquisition.
In January 1998, the Company acquired the pearlescent pigment business of
Semo Chemical Company for approximately $13.5 million. This acquisition expanded
the Company's effect-pigments business. The excess of the purchase price over
the fair value of net assets acquired has been recorded as goodwill and is being
amortized on a straight-line basis over 25 years. The results of operations of
this business, integrated into the Specialty Pigments and Additives segment, are
included in the accompanying consolidated financial statements from the date of
acquisition.
35
4. SPECIAL AND OTHER CHARGES
The Company recorded a $9.1 million restructuring charge in 1999 relating
to severance costs of $5.4 million and asset impairments of $3.7 million. These
severance costs were associated with a restructuring of the Company's business
groups in an effort to eliminate certain redundant positions and for severance
at three of the Company's manufacturing facilities. The employee severance
charges related to the elimination of 72 positions. The Company has paid
severance costs of approximately $3.4 million through December 31, 1999 and
expects the remaining amount to be paid by December 2000. The balance of $3.7
million relates to asset write-offs and closure costs at the Company's Salt Lake
City facility of approximately $2.3 million, as well as an impairment to
goodwill of $1.4 million associated with the Sensor Technology business unit.
The Company sold its Sensor Technology business in February 2000. The proceeds
of $6.5 million approximated the carrying value.
The Company's pre-1997 restructuring charge included a $5.0 million
impairment to the carrying value of land at the Salt Lake City facility and $3.8
million for environmental remediation costs for the Harvard-Denison site in
Cleveland, OH. The Company has received offers from independent parties to
purchase the land at the Salt Lake City facility and is currently negotiating a
purchase and sale contract. It also has been independently appraised to
substantiate the value of these offers. In 1999, the Company restored the
carrying value of this land to its original book value of $5.0 million. As a
result, the Company recorded a special credit of $5.0 million in 1999. With
regard to the Harvard-Denison site, the Company believes the site qualifies for
the government's Formerly Utilized Sites Remedial Action Program (FUSRAP), and,
as a result, the government would be responsible for future remediation.
Accordingly, the Company reversed $3.8 million as a special credit in 1999.
In response to weak results of certain operations, and as a result of the
base-metal fraud in Japan (see Note 19, "Litigation and Contingencies", for
further detail), the Company recorded, in the fourth quarter of 1997, special
and other charges of $149.6 million ($117.7 million after-tax). The following
table sets forth the impact of the special and other charges in the 1997
Consolidated Statement of Earnings:
FINANCIAL IMPACT Special and
(in millions, except per share amounts) Other Charges
-------------
Cost of sales $ (6.1)
Selling, administrative and other expenses (12.7)
Special charge (86.0)
-------------
Operating loss (104.8)
Equity in losses of affiliates (44.8)
-------------
Loss before income taxes (149.6)
Income tax benefit 31.9
-------------
Net loss $ (117.7)
-------------
Basic loss per share $ (0.82)
-------------
36
The 1997 special and other charges are described below:
The Process Technologies segment incurred charges of $35.4 million
primarily related to the closure and subsequent sale of a petroleum catalysts
facility in The Netherlands used for the manufacture of fluid catalytic cracking
(FCC) catalysts. Management approved a plan to improve the profitability of this
business, primarily by lowering its cost structure and optimizing its
manufacturing resources. The most significant action resulted in the 1998 sale
of the FCC catalysts facility in The Netherlands. There was no gain or loss on
the sale of the facility as the sales price approximated the carrying value as
adjusted by the special and other charges. This decision was driven by industry
overcapacity and the determination that Engelhard's European customers could be
served more efficiently by North American FCC catalysts operations. As a result,
Engelhard provided for employee severance obligations of $6.4 million covering
90 site employees, plant closure and other miscellaneous costs of $1.7 million
and asset write-downs of $27.3 million consisting of $22.1 million to reduce the
carrying value of the facility to an estimate of fair value based on appraisals
performed by third parties, a $2.7 million reserve for obsolete inventory, and
$2.5 million to write-off intangible assets related to production technology
that could no longer be utilized. These actions were completed in 1999.
The Environmental Technologies segment incurred charges of $29.6 million
related to the sale of the stationary-source, emission-control capital equipment
business. Management approved a plan to sell this business based on unfavorable
market growth projections, combined with low technological barriers to enter
this market. Management believes that this strategy will allow Engelhard to
concentrate on its core competency--catalyst technology. Revenue and operating
loss for the capital equipment business were $21.6 million and $6.4 million,
respectively, for the year ended December 31, 1997 and $40.3 million and zero,
respectively, for the year ended December 31, 1996. Engelhard continues to sell
catalysts for stationary-source pollution abatement. Engelhard provided for
losses on contracts and warranty costs of $7.9 million and reduced the carrying
value of goodwill and other assets by $21.7 million to an estimate of fair value
based on negotiations with third parties. This write-down consisted of the
write-off of goodwill of $15.0 million, a reserve for uncollectable accounts
receivable of $4.2 million and a reserve for obsolete inventory of $2.5 million.
The sale was completed in February 1998, and there was no gain or loss on the
sale of the business as the sales price approximated the carrying value as
adjusted by the special and other charges. These actions were completed in 1999.
However, Management provided additional reserves in 1999 to cover higher-than-
originally-anticipated warranty costs associated with the stationary-source,
emission-control capital equipment business. It is currently estimated that
these claims will be resolved in future years.
The Specialty Pigments and Additives segment wrote off assets of approximately
$0.8 million.
Japan base-metal fraud of $39.0 million (see Note 19, "Litigation and
Contingencies," for further detail).
37
Engelhard recorded equity in losses of affiliates of $44.8 million as follows:
Engelhard-CLAL continued to face pressures of declining demand for French
manufactured jewelry, generally due to the availability of inexpensive
high-quality costume jewelry and increased competition from other international
fabricators of precious-metal products with lower cost structures. In response
to these economic pressures and market conditions, Engelhard and its partner,
FIMALAC, agreed to rationalize certain operations, determined that related
assets were impaired and reduced those assets to their estimated realizable
value. The impact to Engelhard of these actions was approximately $30.9 million,
the components of which were: a valuation allowance provided on deferred tax
assets of $14.3 million, employee severance of $10.5 million, write-off of
production equipment of $4.3 million and inventory obsolescence reserves of $1.8
million. In addition, Engelhard wrote off goodwill of $9.0 million related to
its investment in the joint venture based on expected future undiscounted cash
flows. As a result of the actions taken by Engelhard-CLAL, operating results
turned marginally positive in 1998 and improved further in 1999. The actions
described above were completed prior to the end of 1999.
In 1997, Engelhard reached an agreement with its partner, ICC Technologies,
to restructure Engelhard/ICC, a joint venture in desiccant-based,
climate-control systems. As a result of this restructuring, Engelhard
subsequently acquired 100% of Engelhard Hexcore L.P., the portion of the former
joint venture that focuses on manufacturing and marketing desiccant-coated
rotors and related products, and sold the majority of its interest in Fresh Air
Solutions L.P., which comprised the remainder of the joint venture. Goodwill of
$4.9 million related to Fresh Air Solutions L.P. was written off as a loss on
sale. Management believes this reorganization will allow greater concentration
on core competencies. This action was completed prior to the end of 1998.
The pre-1997 restructuring charges are related to:
The restructuring of administrative operations at corporate headquarters
and the process technologies organization;
The transfer of attapulgite operations from the Company's Attapulgus, GA
facility to the acquired Quincy, FL site and the associated closing of the
Attapulgus, GA attapulgite operations;
The closure of the Plainville, MA site and the subsequent disposal of the
facility upon the completion of environmental remediation activities;
The shutdown of operations at a Company facility in Newark, NJ and the
subsequent disposal of the facility;
The shutdown of certain operations of the Union, NJ facility and relocation
of certain other operations to other underutilized Company facilities.
38
The employee severance costs associated with the pre-1997 restructuring
charges are primarily related to the restructuring of administrative operations
and the transfer of attapulgite operations. The severance costs associated with
these actions have been paid over extended periods as certain agreements
negotiated with severed employees provided for payments to be spread over
several years. The pre-1997 restructuring charges originally provided for
employee severance obligations for 1,863 corporate and site employees. The
remaining severance obligation as of December 31, 1999 is primarily attributable
to 20 employees. Additionally, regulatory delays in the consummation of the
Company's acquisition of the Quincy, FL attapulgite operation and inherent
delays in the completion of environmental remediation activities at Plainville,
MA have extended the payment periods for those severance costs. Costs of
retention of employees for the longer-than-expected periods prior to termination
have been expensed as incurred. The remaining severance accrual of $1.2 million
at December 31, 1999 is principally for long-term severance payments related to
the Union, NJ facility and for severance costs for employees remaining at the
Plainville, MA site until its closure.
Non-separation-related costs associated with the pre-1997 restructuring
charges are primarily for costs associated with the shutdown of the Union and
Newark, NJ sites, the Attapulgus, GA attapulgite operations, as well as
non-environmental shutdown costs at the Plainville, MA site. These shutdown
costs approximated $6 million during the three-year period ended December 31,
1999. The remaining accrual of $1.1 million is primarily for shutdown costs to
be incurred until closure of the Plainville and Union facilities. The timeframe
for final closure of the Plainville facility is pending government approval of
environmental cleanup plans. Additionally, negotiations are continuing for the
sale of a portion of the Union, NJ facility that, if consummated, will complete
the closure process for that site.
The actions related to the Plainville, MA site and the Union, NJ site are
expected to be substantially complete by the end of 2000.
Pending resolution of the matters discussed above, the Company believes
remaining reserves related to pre-1997 restructuring activities are adequate for
remaining activities under those plans.
39
The following table sets forth the components of Engelhard's reserves for
restructuring and exit costs:
RESTRUCTURING RESERVES Separations Other Total
(in millions) Pre-1997 1997 1999 Pre-1997 1997 1999 Pre-1997 1997 1999
-------------------------- ---------------------------- -------------------------
Balance at December 31, 1996 $ 6.3 $ -- $ -- $ 7.2 $ -- $ -- $13.5 $ -- $ --
Cash spending, net (1.7) -- -- (6.5) -- -- (8.2) -- --
Provision -- 6.6 -- -- 10.1 -- -- 16.7 --
--------------------------------------------------------------------------------------
Balance at December 31, 1997 4.6 6.6 -- 0.7 10.1 -- 5.3 16.7 --
Cash spending, net (1.0) (3.7) -- 2.2 (8.0) -- 1.2 (11.7) --
Asset write-offs -- -- -- -- (1.9) -- -- (1.9) --
--------------------------------------------------------------------------------------
Balance at December 31, 1998 3.6 2.9 -- 2.9 0.2 -- 6.5 3.1 --
Cash spending, net (0.3) (0.2) (3.4) (2.0) (0.9) -- (2.3) (1.1) (3.4)
Provision (reversal) (2.1) (2.7) 5.4 0.2 4.6 0.9 (1.9) 1.9 6.3
--------------------------------------------------------------------------------------
Balance at December 31, 1999 $1.2 $-- $2.0 $1.1 $3.9 $0.9 $2.3 $3.9 $2.9
======================================================================================
The non-separation-related cash spending for pre-1997 restructuring and
exit-cost liabilities for each of the three years ended December 31, 1999, 1998
and 1997 consisted primarily of costs associated with the shutdown of the Union
and Newark, NJ sites, the Attapulgus, GA attapulgite operations and the
Plainville, MA site. The Newark, NJ site was sold in 1998 and had a carrying
value of $4.8 million in 1993. The proceeds received in 1998 of $7.1 million
related to this facility have been netted against $4.9 million of cash
expenditures in the above presentation. The remaining balance in the pre-1997
restructuring reserves consists of shutdown costs for the Union, NJ,
Attapulgus, GA attapulgite operations and Plainville, MA sites.
The non-separation restructuring and exit-cost provision made in 1997
consists primarily of costs associated with the shutdown of the facilities to be
closed in connection with the Process Technologies and Environmental
Technologies actions discussed above and certain warranty obligations
associated with the sold Environmental Technologies business. Non-separation
related cash spending associated with these liabilities for the year ended
December 31, 1999 consisted of payments concerning completion of the shutdown of
the facilities and the satisfaction of any warranty obligations.
The non-separation restructuring and exit-cost provision made in 1999
consists primarily of costs associated with the shutdown of the Salt Lake City
facility and the impairment of goodwill associated with the Sensor Technology
business unit.
40
5. INVENTORIES
Inventories consist of the following:
INVENTORIES
(in millions) 1999 1998
------------------------
Raw materials $ 84.2 $ 76.3
Work in process 53.0 54.9
Finished goods 195.7 189.7
Precious metals 26.3 28.9
------------------------
Total inventories $359.2 $349.8
========================
All precious-metals inventories are stated at LIFO cost. The market value
of the precious-metals inventories exceeded cost by $115.3 million and $85.8
million at December 31, 1999 and 1998, respectively. Net earnings include
after-tax gains of $2.2 million in 1999, $4.9 million in 1998 and $2.0 million
in 1997 from the sale of inventory accounted for under the LIFO method.
In the normal course of business, certain customers and suppliers deposit
significant quantities of precious metals with the Company under a variety of
arrangements. Equivalent quantities of precious metals are returnable as product
or in other forms.
6. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
PROPERTY, PLANT AND EQUIPMENT
(in millions) 1999 1998
---------------------
Land $ 30.4 $ 26.1
Buildings and building improvements 213.2 210.6
Machinery and equipment 1,438.5 1,323.7
Construction in progress 67.1 124.2
Mineral deposits and mine development 80.4 79.7
---------------------
1,829.6 1,764.3
Accumulated depreciation and depletion 957.7 887.8
---------------------
Property, plant and equipment, net $ 871.9 $ 876.5
=====================
Mineral deposits and mine development consist of industrial mineral reserves
such as kaolin, attapulgite and mica. The Company does not own any mining
reserves or conduct any mining operations with respect to platinum, palladium or
other metals.
In December 1998, the Company entered into a sale-leaseback transaction for
property that serves as the principal executive and administrative office of
the Company and its operating businesses. The gain on the transaction was
approximately $15.3 million and is being amortized over the 20-year term of
the lease.
The Company capitalized interest of $2.6 million in 1999, $1.9 million in 1998
and $0.7 million in 1997.
41
7. INVESTMENTS
The Company has investments in affiliates that are accounted for on the equity
method. The more significant of these investments are Engelhard-CLAL and N.E.
Chemcat Corporation (N.E. Chemcat). Engelhard-CLAL, a 50% joint venture,
manufactures and markets certain products containing precious metals. N.E.
Chemcat is a 38.8% owned, publicly traded Japanese corporation and a leading
producer of automotive and chemical catalysts, electronic chemicals and other
precious-metals-based products.
At December 31, 1999 and 1998, the quoted market value of the Company's
investment in N.E. Chemcat was approximately $105 million and $66 million,
respectively. The valuation represents a mathematical calculation based on the
closing quotation published by the Tokyo over-the-counter market and is not
necessarily indicative of the amount that could be realized upon sale. The
quoted market value of the Company's investment in N.E. Chemcat exceeded the
actual investment by $9.8 million as of December 31, 1999. Due to the weakness
of the Japanese equity markets in 1998, the Company's actual investment in N.E.
Chemcat exceeded the quoted market value by $3.7 million as of December 31,
1998.
In the first quarter of 1999, the Company sold its investment in Acreon
Catalyse, a hydroprocessing joint venture. The Company recorded a gain of $1.0
million ($0.6 million after-tax).
The summarized unaudited financial information below represents an aggregation
of the Company's nonsubsidiary affiliates on a 100% basis, unless
otherwise noted:
FINANCIAL INFORMATION
(unaudited) (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Earnings data:
Revenue $1,561.9 $1,540.7 $1,788.6
Gross profit 153.5 151.8 165.0
Net earnings/(losses) 29.0 14.3 (69.6)(1)
Engelhard's equity in net earnings/(losses)
of affiliates 16.3 10.1 (47.8)(1)
Balance sheet data:
Current assets $ 517.0 $ 530.2
Noncurrent assets 210.5 197.5
Current liabilities 242.0 250.0
Noncurrent liabilities 68.4 89.1
Net assets 417.1 388.6
Engelhard's equity in net assets 180.2 153.6
(1) The 1997 loss includes $39.9 million in special and other charges
related to Engelhard-CLAL (see Note 4, "Special and Other Charges,"
for further detail).
The Company's share of undistributed earnings/losses of affiliated
companies included in consolidated retained earnings was earnings of $40.5
million in 1999 and losses of $5.4 million in 1998 and $14.2 million in 1997.
Dividends from affiliated companies were $2.4 million in 1999, $2.0 million in
1998 and $3.8 million in 1997.
42
8. METAL POSITIONS AND OBLIGATIONS
The following table sets forth the Company's unhedged metal positions included
in Committed Metal Positions on the consolidated balance sheets:
METAL POSITIONS INFORMATION
(in millions) 1999 1998
--------------------------------------
Gross Gross
Position Value Position Value
-------------------------------------
Platinum group metals Long $65.0 Long $17.4
Gold Long 0.2 Flat -
Silver Long 1.6 Flat -
Base metals Long 5.3 Long 4.6
--------------------------------------
Total open metal positions, net $72.1 $22.0
======================================
The net mark-to-market adjustments related to unhedged positions were $8.2
million in 1999. The net market-to-market adjustments related to unhedged
positions were not material in 1998 or 1997.
Derivative commodity and foreign currency instruments used to hedge metal
positions and obligations consist of the following:
METAL HEDGING INSTRUMENTS
(in millions) 1999 1998
----------------------------------------------
Buy Sell Buy Sell
----------------------------------------------
Forward/futures contracts $1,495.6 $1,026.2 $1,270.9 $1,057.4
Eurodollar futures 52.9 66.3 44.5 120.4
Swaps 118.2 177.4 367.2 343.5
Options 90.2 5.4 0.1 -
Yen forwards/futures 77.5 - - 11.6
9. FINANCIAL INSTRUMENTS
The Company's nonderivative financial instruments consist primarily of cash
in banks, temporary investments, accounts receivable and debt. The fair value of
financial instruments in working capital approximates book value. The fair value
of long-term debt was $479.1 million in 1999 and $495.9 million in 1998 based on
current interest rates, compared with a book value of $499.5 million in 1999 and
$497.4 million in 1998.
The Company believes that its financial instruments do not represent a
concentration of credit risk because the Company deals with a variety of major
banks worldwide, and its accounts receivable are spread among a number of major
industries, customers and geographic areas. In addition, a centralized credit
committee reviews significant credit transactions and risk management issues
before the granting of credit, and an appropriate level of reserves is
maintained. For the past three-year period, provisions to these reserves were
not significant.
FOREIGN CURRENCY INSTRUMENTS
Aggregate foreign transaction gains and losses were not significant for any
year presented. The following table sets forth, in U.S. dollars, the Company's
open foreign currency forward contracts used for hedging other than
metal-related transactions (see Note 8, "Metal Positions and Obligations," for
further detail):
43
FOREIGN CURRENCY FORWARD CONTRACTS INFORMATION
(in millions)
1999 1998
---------------------------------------
Buy Sell Buy Sell
---------------------------------------
Deutsche Mark $ - $ 0.3 $ - $34.7
Japanese Yen 10.7 16.1 16.0 19.6
French Franc - - - 5.9
Euro - 50.8 - -
Netherlands Guilder 39.9 21.2 30.1 4.3
Thai Baht - - - 0.2
Peru Soles - 10.0 4.4 9.0
Swedish Krona - 0.7 - 1.2
Italian Lira 2.0 4.8 - 1.9
---------------------------------------
Total open foreign currency
forward contracts $52.6 $103.9 $50.5 $76.8
=======================================
None of these contracts exceeds a year in duration and the net amount of
deferred income and expense on foreign currency forward contracts had no impact
on financial position or results of operations in 1999, 1998 and 1997.
INTEREST RATE INSTRUMENTS
In 1999, the Company entered into two treasury lock agreements that were
settled in September and October of 1999.
In 1998, the Company entered into two treasury lock agreements that were
settled in March 1999.
In 1997, the Company entered into five forward starting swaps commencing in
1998, that were closed concurrent with the debt issuance.
10. SHORT-TERM BORROWINGS AND LONG-TERM DEBT
At December 31, 1999, the Company had unsecured committed revolving credit
agreements for $600 million and $350 million with a group of major North
American banks and foreign banks. The $600 million agreement expires in April
2002 and the $350 million agreement expires in May 2000. In connection with
these credit facilities, the Company has agreed to certain covenants, none of
which is considered restrictive to the operations of the Company. Facility fees
are paid to the bank group for these lines. Renewal of the $350 million
facility is under consideration by management.
At December 31, 1999 and 1998, short-term bank borrowings were $229.9
million and $185.0 million, respectively. Weighted-average interest rates were
5.2%, 5.5% and 5.9% during 1999, 1998 and 1997, respectively. At December 31,
1999 and 1998, long-term debt due within one year was $100.1 million and $5.0
million, respectively.
44
At December 31, 1999 and 1998, commercial paper borrowings were $122.0
million and $65.0 million, respectively. Weighted-average interest rates were
5.1%, 5.5% and 5.8% during 1999, 1998 and 1997, respectively.
Additional unused, uncommitted lines of credit available exceeded $660
million at December 31, 1999. The Company's lines of credit with its banks are
available in accordance with normal terms for prime commercial borrowers and are
not subject to commitment fees or other restrictions.
In July 1998, the Company filed a shelf registration for $300 million. The
Company currently has no plans to issue debt under the shelf registration.
The following table sets forth the components of long-term debt:
DEBT INFORMATION
(in millions) 1999 1998
---------------
Notes, with a weighted-average interest rate of 6.53%,
due 2000 $ 99.9 $ 99.8
Notes acquired, with a weighted-average interest rate
of 12.0%, due 2003-2006 14.1 14.1
7% Notes, due 2001, net of discount 149.6 149.4
7.375% Notes, due 2006, net of discount 99.5 99.5
6.95% Notes, due 2028, net of discount 118.4 118.4
Bank Debt, 7.25%, due 2000-2004 100.8 -
Industrial revenue bonds, 64.5% of prime rate, due 1999 - 4.5
Industrial revenue bonds, 5.375%, due 2006 6.5 6.5
Industrial revenue bonds, variable rate, due 2020 8.6 8.5
Foreign bank loans with a weighted-average interest
rate of 7.0%, due 2000-2001 1.2 0.4
Other, with weighted-average rate of 5.5%, due 2000-2001 1.0 1.3
---------------
599.6 502.4
Amounts due within one year 100.1 5.0
---------------
Total long-term debt $499.5 $497.4
===============
As of December 31, 1999, the aggregate maturities of long-term debt for the
succeeding five years are as follows: $100.1 million in 2000, $156.6 million in
2001, $5.4 million in 2002, $19.9 million in 2003, $79.9 million in 2004 and
$237.7 million thereafter.
Net interest expense was $56.6 million in 1999, compared with $58.9 million
in 1998 and $52.8 million in 1997. Lower net interest expense in 1999 was
primarily due to the settlement of treasury lock positions that were entered
into to hedge anticipated long-term borrowings, which reduced net interest
expense by $7.1 million. Excluding this reduction, net interest expense would
have increased due primarily to increased borrowings related to a major share
repurchase in May 1999 and an increase in interest rates. Interest income was
$2.9 million in 1999, $2.3 million in 1998 and $1.1 million in 1997.
45
11. INCOME TAXES
The components of income tax expense are shown in the following table:
Income Tax Expense
(in millions) 1999 1998 1997
--------------------------------------
Current income tax expense
Federal $45.7 $ 39.5 $27.9
State 4.7 7.9 4.5
Foreign 31.6 22.4 22.7
--------------------------------------
82.0 69.8 55.1
--------------------------------------
Deferred income tax expense
Federal 3.8 1.9 2.9
State (2.1) (1.0) 0.1
Foreign 0.7 8.6 (17.4)
Changes in tax rates 0.3 (0.8) (1.1)
Loss carryforwards/tax credits 2.0 (5.0) (1.6)
--------------------------------------
4.7 3.7 (17.1)
--------------------------------------
Income tax expense $86.7 $ 73.5 $38.0
======================================
The foreign portion of earnings before income tax expense was $109.4
million in 1999, $77.9 million in 1998 and $13.8 million in 1997. Taxes on
income of foreign consolidated subsidiaries and affiliates are provided at the
tax rates applicable to their respective foreign tax jurisdictions.
The following table sets forth the components of the net deferred tax asset
that result from temporary differences between the amounts of assets and
liabilities recognized for financial reporting and tax purposes:
NET DEFERRED INCOME TAX ASSET
(in millions) 1999 1998
----------------------------
Deferred tax assets
Accrued liabilities $ 89.2 $ 77.4
Noncurrent liabilities 73.5 79.4
Tax credits/carryforwards 33.4 38.1
----------------------------
Total deferred tax assets 196.1 194.9
----------------------------
Valuation allowance (17.4) (5.9)
----------------------------
Total deferred tax assets, net of
valuation allowance 178.7 189.0
----------------------------
Deferred tax liabilities
Prepaid pension expense (37.6) (36.4)
Property, plant and equipment (9.8) (15.5)
Other assets (31.3) (31.1)
----------------------------
Total deferred tax liabilities (78.7) (83.0)
----------------------------
Net deferred tax asset $100.0 $106.0
============================
46
In 1999, the Company generated and recorded a deferred tax asset for U.S.
foreign tax credit carryforwards in the amount of $9.9 million and provided a
full valuation allowance against that asset. The Company recorded certain
deferred tax assets created by foreign net operating loss carryforwards in the
aggregate amount of $1.8 million and provided full valuation allowances against
those assets.
As of December 31, 1999, the Company had approximately $12.8 million of
nonexpiring alternative minimum tax credit carryforwards available to offset
future U.S. federal income taxes. The Company also had approximately $5.4
million of foreign investment tax credits available to offset certain future
foreign income taxes. These foreign investment tax credits will expire in 2000.
In addition, the Company had approximately $13.2 million of U.S. foreign tax
credit carryforwards of which $2.0 million will expire in 2002, $1.3 million in
2003 and $9.9 million in 2004. The Company also had approximately $5.5 million
of foreign net operating losses of which $2.7 million will expire in 2003 and
$2.8 million will carry forward indefinitely.
A reconciliation of the difference between the Company's consolidated
income tax expense and the expense computed at the federal statutory rate is
shown in the following table:
CONSOLIDATED INCOME TAX EXPENSE RECONCILIATION
(in millions)
1999 1998 1997
----------------------------------
Income tax expense at federal
statutory rate $ 99.4 $ 91.2 $ 30.0
State income taxes, net of
federal effect 3.8 4.3 1.2
Percentage depletion (12.9) (13.5) (14.0)
Equity earnings (3.1) (1.3) 14.0
Effect of different tax rates
on foreign earnings, net 1.5 2.5 (0.6)
Tax credits/carrybacks (9.7) (1.7) (2.5)
Foreign sales corporation (7.3) (7.4) (6.8)
Non-deductible goodwill 2.0 2.0 2.2
Valuation allowance 11.7 (7.1) 13.0
Other items, net 1.3 4.5 1.5
----------------------------------
Income tax expense $ 86.7 $ 73.5 $ 38.0
==================================
At December 31, 1999, the Company's share of the cumulative undistributed
earnings of foreign subsidiaries was approximately $348.5 million. No provision
has been made for U.S. or additional foreign taxes on the undistributed earnings
of foreign subsidiaries because such earnings are expected to be reinvested
indefinitely in the subsidiaries' operations. It is not practical to estimate
the amount of additional tax that might be payable on these foreign earnings in
the event of distribution or sale; however, under existing law, foreign tax
credits would be available to substantially reduce, or in some cases eliminate,
U.S. taxes payable.
47
12. RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has raw material supply
arrangements with entities in which Anglo American Corporation of South Africa
Limited ("Anglo") has material interests and with Engelhard-CLAL and its
subsidiaries. Anglo, indirectly through Minorco S.A., held a significant
minority interest in the common stock of the Company. In May 1999, Minorco sold
all the shares of common stock of Engelhard that it owned (see Note 2,
"Significant Shareholder Transaction", for further detail). Engelhard-CLAL is a
50% owned joint venture. The Company's transactions with such entities (through
May 1999 for entities in which Anglo had material interests) amounted to:
purchases-from of $41.3 million in 1999, $176.3 million in 1998 and $101.2
million in 1997; sales-to of $24.6 million in 1999, $1.7 million in 1998 and
$42.2 million in 1997; and metal leasing-to of $2.8 million in 1999, $17.5
million in 1998 and $16.3 million in 1997. At December 31, 1999 and 1998,
amounts due to such entities totaled $1.9 million and $8.6 million,
respectively.
13. BENEFITS
The Company has domestic and foreign pension plans covering substantially
all employees. Plans covering most salaried employees generally provide benefits
based on years of service and the employee's final average compensation. Plans
covering most hourly bargaining unit members generally provide benefits of
stated amounts for each year of service. The Company makes contributions to the
plans as required and to such extent contributions are currently deductible for
tax purposes. Plan assets primarily consist of listed stocks, fixed income
securities and cash.
48
The following table sets forth the plans' funded status:
Funded Status
(in millions) 1999 1998
- ------------- ------- -------
Change in projected benefit obligation
Projected benefit obligation at beginning of year $386.1 $328.7
Service cost 12.1 12.1
Interest cost 24.5 23.6
Plan amendments 3.0 6.3
Actuarial (gains)/losses (9.1) 37.9
Benefits paid (29.8) (24.5)
Business combinations - 0.7
Curtailments - (1.0)
Special termination benefits - 0.4
Foreign exchange (4.8) 1.9
------- -------
Projected benefit obligation at end of year $382.0 $386.1
------- -------
Change in plan assets
Fair value of plan assets at beginning of year $375.1 $374.7
Actual return on plan assets 77.0 18.7
Employer contribution 5.7 3.4
Benefits paid (29.8) (24.5)
Business combinations - 0.7
Foreign exchange (5.6) 2.1
------- -------
Fair value of plan assets at end of year $422.4 $375.1
------- -------
Funded status $ 40.4 $ (11.0)
Unrecognized net actuarial loss 23.2 77.5
Unrecognized prior service cost 11.3 10.5
Unrecognized transition asset, net of amortization (1.2) (1.7)
Fourth quarter contribution - 0.2
------- --------
Prepaid pension asset $ 73.7 $ 75.5
======= ========
Amounts recognized in the statement
of financial position consist of:
Prepaid benefit cost $ 75.6 $ 77.3
Accrued benefit liability (5.5) (8.2)
Intangible asset 2.6 2.5
Accumulated other comprehensive loss 1.0 3.9
------- --------
Net amount recognized $ 73.7 $ 75.5
======= ========
The prepaid pension asset balances of $73.7 million and $75.5 million at
December 31, 1999 and December 31, 1998, respectively, are included in other
noncurrent assets in the Company's consolidated balance sheets. The Company
recorded a minimum pension asset adjustment of $2.9 million in 1999 and a
minimum pension liability adjustment of $3.9 million in 1998. These adjustments
were recognized and charged to accumulated other comprehensive loss.
49
The components of net periodic pension expense/(income) for all plans are
shown in the following table:
NET PERIODIC PENSION EXPENSE/(INCOME)
(in millions) 1999 1998 1997
-----------------------------------
Service cost $ 12.1 $ 12.1 $ 10.1
Interest cost 24.5 23.6 22.7
Expected return on plan assets (36.0) (34.7) (32.4)
Amortization of prior service cost 2.2 1.6 0.8
Amortization of transition asset (0.5) (1.0) (3.0)
Recognized actuarial loss 4.3 2.4 1.4
Curtailment gain - (1.0) -
-----------------------------------
Net periodic pension expense/(income) $ 6.6 $ 3.0 $ (0.4)
===================================
The discount rates used in determining the actuarial present value of the
projected benefit obligation are 5.50% to 7.75% in 1999, 6.00% to 6.75% in 1998
and 6.00% to 7.50% in 1997. The expected increase in future compensation levels
was 3.00% to 4.50% in 1999, 3.00% to 4.00% in 1998 and 3.00% to 5.00% in 1997.
The expected long-term rate of return on assets was 8.50% to 10.50% in 1999,
1998 and 1997. The aggregate ABO (Accumulated Benefit Obligation) for those
plans with ABO's in excess of plan assets is $24.8 million in 1999. The
aggregate fair value of assets for those plans with ABO's in excess of plan
assets is $17.9 million in 1999.
The Company also sponsors three savings plans covering certain salaried and
hourly paid employees. The Company's contributions, which may equal up to 50% of
certain employee contributions, were $3.6 million in 1999, $3.2 million in 1998
and $2.9 million in 1997.
The Company also currently provides postretirement medical and life
insurance benefits to certain retirees (and their spouses), certain disabled
employees (and their families) and spouses of certain deceased employees.
Substantially all U.S. salaried employees and certain hourly paid employees are
eligible for these benefits, which are paid through the Company's general health
care and life insurance programs, except for certain medicare-eligible salaried
and hourly retirees who are provided a defined contribution towards the cost of
a partially insured health plan. In addition, the Company provides
postemployment benefits to former or inactive employees after employment but
before retirement. These benefits are substantially similar to the
postretirement benefits, but cover a much smaller group of employees.
50
The following table sets forth the components of the accrued postretirement and
postemployment benefit obligation, all of which are unfunded:
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
(in millions) 1999 1998
- -----------------------------------------------------------------------------
Change in benefit obligation
Benefit obligation at beginning of year $128.1 $111.5
Service cost 3.2 3.0
Interest cost 8.3 8.0
Actuarial (gains)/losses (10.1) 15.3
Business combinations - 0.8
Benefits paid (11.7) (10.5)
------- -------
Benefit obligation at end of year $117.8 $128.1
------- -------
Unrecognized net loss (2.5) (12.5)
Unrecognized prior service cost 27.8 33.2
------- -------
Accrued benefit obligation $143.1 $148.8
======= =======
The postretirement and postemployment benefit balances of $143.1 million
and $148.8 million at December 31, 1999 and December 31, 1998, respectively, are
included in other noncurrent liabilities in the Company's consolidated balance
sheets.
The components of the net expense for these postretirement and
postemployment benefits are shown in the following table:
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS
(in millions) 1999 1998 1997
-----------------------------
Components of net periodic benefit cost
Service cost $3.2 $3.0 $2.3
Interest cost 8.3 8.0 8.5
Net amortization (5.6) (5.8) (6.0)
----- ----- -----
Net periodic benefit cost $5.9 $5.2 $4.8
===== ===== =====
The weighted-average discount rate used in determining the actuarial
present value of the accumulated postretirement and postemployment benefit
obligation for 1999 is 7.75%. The average assumed health care cost trend rate
used for 1999 is 5% to 8%. A 1% increase in the assumed health care cost trend
rate would have increased aggregate service and interest cost in 1999 by $0.7
million and the accumulated postretirement and postemployment benefit obligation
as of December 31, 1999 by $6.0 million. A 1% decrease in the assumed
healthcare cost trend rate would have decreased aggregate service and interest
cost in 1999 by $1.2 million and the accumulated postretirement and
postemployment benefit obligation as of December 31, 1999 by $10.3 million.
51
14. STOCK OPTION AND BONUS PLANS
The Company's Stock Option Plans of 1999 and 1991, as amended (the Key
Option Plans), generally provide for the granting to key employees of options to
purchase an aggregate of 2,500,000 and 16,875,000 common shares, respectively,
at fair market value on the date of grant. No options under the Stock Option
Plans of 1999 and 1991 may be granted after December 16, 2004 and June 30, 2001,
respectively.
In 1993, the Company established the Employee Stock Option Plan of 1993, as
amended, which generally provided for the granting to all employees (excluding
U.S. bargaining unit employees and key employees eligible under the Key Option
Plans) of options to purchase an aggregate of 2,812,500 common shares at fair
market value on the date of grant. No additional options may be granted under
this plan. In 1995, the Company established the Directors Stock Options Plan,
which generally provides for the granting to each nonemployee director the
option to purchase up to 3,000 common shares at the fair market value on the
date of grant. Options under all plans become exercisable in four installments
beginning after one year, and no options may be exercised after 10 years from
the date of grant. Outstanding options may be canceled and reissued under terms
specified in the plan documents.
Had compensation cost for the Company's two stock option plans been
determined based on the fair value at grant date for awards in 1999, 1998 and
1997 consistent with the provisions of Statement of Financial Accounting
Standards No. 123, "Accounting for Stock Based Compensation," the Company's net
earnings and earnings per share would have been as follows:
PRO FORMA INFORMATION
(in millions, except per share data) 1999 1998 1997
-------------------------------
Net earnings--as reported $197.5 $187.1 $47.8
Net earnings--pro forma 189.3 179.4 41.4
Basic earnings per share--as reported 1.49 1.30 0.33
Basic earnings per share--pro forma 1.43 1.24 0.29
Diluted earnings per share--as reported 1.47 1.29 0.33
Diluted earnings per share--pro forma 1.41 1.23 0.28
The pro forma amounts shown above are not representative of the effects on
net earnings or earnings per share in future years because only options granted
after January 1, 1995 have been included in the above numbers, and the full net
earnings effect is recognized over the vesting period, typically four years. The
weighted-average fair value at date of grant for options granted during 1999,
1998 and 1997 was $5.19, $5.07 and $5.74, respectively. Fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for option grants in
1999, 1998 and 1997: dividend yield of 1.8% to 2.3%, expected volatility of 31%
to 33%; risk-free interest rate of 4.5% to 6.5%; and expected life of 4 to
5 years.
52
Stock option transactions under all plans are as follows:
1999 1998 1997
Weighted Average Weighted Average Weighted Average
Number Exercise Price Number Exercise Price Number Exercise Price
of Shares Per Share of Shares Per Share of Shares Per Share
----------------------------- ---------------------------- ----------------------------
Outstanding at beginning of year 14,084,148 $18.17 11,730,245 $17.93 9,187,945 $17.43
Granted 2,953,721 $18.62 2,903,190 $18.59 2,935,789 $19.13
Forfeited (328,616) $18.83 (320,162) $20.61 (62,643) $19.04
Exercised (236,462) $13.09 (229,125) $12.67 (330,846) $13.44
----------- ------ ----------- ------ ----------- ------
Outstanding at end of year 16,472,791 $18.30 14,084,148 $18.17 11,730,245 $17.93
Exercisable at end of year 10,412,192 $17.99 8,108,731 $17.45 5,850,724 $16.53
Available for future grants 3,738,960 3,864,065 6,447,093
The following table summarizes information about fixed-price options outstanding
at December 31, 1999:
Options Outstanding Options Exercisable
- ----------------------------------------------------- -----------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Exercise prices at 12/31/99 Life (years) Price at 12/31/99 Price
- ----------------------------------------------------- ----------- ---------
$5.54 to 9.46 405,969 2 $ 8.34 405,969 $ 8.34
11.45 to 19.14 4,048,663 5 16.53 4,048,663 16.53
16.83 to 22.38 1,797,570 6 19.02 1,797,570 19.02
19.00 to 23.88 1,840,964 7 21.52 1,541,223 21.51
18.56 to 20.91 2,705,113 8 19.11 1,585,724 19.15
17.34 to 21.69 2,778,599 9 18.63 924,059 18.60
17.81 to 20.97 2,895,913 10 18.60 108,984 19.59
---------- ------ ----------- ---------
16,472,791 $18.30 10,412,192 $17.99
The Company's Key Employee Stock Bonus Plan, as amended (the Bonus Plan),
provides for the award of up to 15,187,500 common shares to key employees as
compensation for future services, not exceeding 1,518,750 shares in any year
(plus any canceled awards or shares available for award but not previously
awarded). The Bonus Plan terminates on June 30, 2006. Shares awarded vest in
five annual installments, provided the recipient is still employed by the
Company on the vesting date. Compensation expense is measured on the date the
award is granted. In 1999 and 1998, the Company granted 270,000 and 197,000
shares to key employees at a fair value of $19.54 and $17.54, respectively,
per share.
53
Compensation expense relating to stock awards was $4.3 million in 1999,
$3.9 million in 1998 and $5.2 million in 1997. Shares awarded, net of
cancellations, are included in average shares outstanding.
Engelhard has certain deferred compensation arrangements where shares
earned under the Engelhard stock bonus plan are deferred and placed in a "Rabbi
Trust". Under certain conditions, the plan permits the employees to convert
their deferred stock balance to deferred cash. In the third quarter of 1998, the
Company adopted the provisions of Emerging Issues Task Force ("EITF") 97-14
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested". This EITF requires Engelhard to consolidate into
its financial statements the net assets of the trust. The impact to the third
quarter, 1998 consolidated financial statements was a $20.1 million increase in
treasury stock (measured at historical cost); the recording of a $23.7 million
deferred compensation obligation (measured on the reporting date by fair value
of the Engelhard common stock held in the trust on behalf of the employees); and
a charge to equity for the $3.6 million difference (referred to as the
"transition differential"). After the transition date but prior to final
settlement, increases/decreases in the deferred compensation liability will be
recognized (1) in equity to the extent that the share price change falls within
the transition differential; or (2) in income to the extent that the share
change falls outside the transition differential.
For the year ended December 31, 1999, the Company recognized income of $0.9
million related to the decrease in the value of its common stock held in a Rabbi
Trust for deferred compensation from $19.50 at December 31, 1998 to $18.875 at
December 31, 1999. For the year ended December 31, 1998, the Company recognized
expense of $2.4 million related to the increase in the value of its common stock
held in a Rabbi Trust for deferred compensation from $17.69 at September 30,
1998 to $19.50 at December 31, 1998. The total value of the Rabbi Trust at
December 31, 1999 was $25.2 million compared to $26.1 million at December 31,
1998.
54
15. EARNINGS PER SHARE
Statement of Financial Accounting Standard No. 128, "Earnings Per Share"
(SFAS 128) specifies the computation, presentation, and disclosure requirements
for basic and diluted earnings per share (EPS). The following table represents
the computation of basic and diluted EPS as required by SFAS 128:
EARNINGS PER SHARE COMPUTATIONS
Year ended December 31 (in thousands, except per share data)
1999 1998 1997
----------------------------------
Basic EPS Computation
Net income applicable to common shares $197,462 $187,084 $ 47,778
----------------------------------
Average number of shares outstanding-basic 132,432 144,157 144,270
----------------------------------
Basic earnings per share $ 1.49 $ 1.30 $ 0.33
==================================
Diluted EPS Computation
Net income applicable to common shares $197,462 $187,084 $ 47,778
----------------------------------
Average number of shares outstanding-basic 132,432 144,157 144,270
Effect of dilutive stock options 823 818 1,667
Effect of Rabbi Trust 1,335 391 -
----------------------------------
Total number of shares outstanding-diluted 134,590 145,366 145,937
----------------------------------
Diluted earnings per share $ 1.47 $ 1.29 $ 0.33
==================================
Options to purchase additional shares of common stock of 4,037,068 (at a
price range of $19.59 to $23.88), 2,886,768 (at a price range of $19.72 to
$23.88), and 1,775,827 (at a price range of $20.91 to $23.88) were outstanding
at the end of 1999, 1998 and 1997, respectively, but were not included in the
computation of diluted EPS because the options' exercise prices were greater
than the average annual market price of the common shares. Shares held in the
Rabbi Trust were included in basic and diluted shares outstanding until adoption
of EITF 97-14 (as of September 30, 1998), at which point they were considered
treasury stock and excluded from basic shares outstanding.
16. BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The Company adopted SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," in the fourth quarter of 1998. SFAS No. 131
requires a new basis of determining reportable business segments, i.e., the
management reporting approach. This approach designates the Company's internal
organizational structure as used by management for making operating decisions
and assessing performance, as the source of business segments. On this basis,
the Company has five reportable business segments: Environmental Technologies,
Process Technologies, Specialty Pigments and Additives, Paper Pigments and
Additives, and Industrial Commodities Management.
Items that are allocated to the segment results include the majority of
corporate overhead charges. Unallocated items include net interest expense,
royalty income, sale of inventory accounted for under the LIFO method, special
and other charges and other miscellaneous Corporate items.
55
The Environmental Technologies segment, located principally in the United
States, Europe and South Africa, predominantly develops and markets
sophisticated emission-control technologies and systems that enable customers to
cost effectively meet stringent environmental regulations.
The Process Technologies segment, located principally in the United States
and Europe, enables customers to make their processes more productive,
efficient, environmentally sound and safer through the supply of advanced
chemical and polymerization-process catalysts and sorbents. In addition, the
segments advanced cracking and hydroprocessing technologies enable
petroleum refiners to more efficiently produce gasoline, transportation fuels
and heating oils.
The Specialty Pigments and Additives segment, located principally in the
United States and South Korea, provides innovative functional products, services
and solutions to customers' problems in a broad array of markets, including
coatings, plastics, cosmetics and construction. The segment's products help
customers improve the look, performance and overall cost of their products.
The Paper Pigments and Additives segment, located principally in the United
States and Finland, provides kaolin-based performance products used as coating
and extender pigments by papermakers to improve the opacity, brightness, gloss
and printability of their products. This segment is also the internal supply
source of specialized mineral-based products and precursors for Engelhard's
catalyst and specialty pigment business.
The Industrial Commodities Management segment, located principally in the
United States, Europe and Japan, is a distribution and materials services
business that purchases and sells precious metals, base metals and related
products and services. It does so under a variety of pricing and delivery
arrangements structured to meet the logistical, financial and price-risk
management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metal refining and
produces salts and solutions.
Within the "All Other" category, sales to external customers are primarily
from the Engineered Materials and the Separation Systems and Ventures
businesses; operating earnings/(losses) are derived primarily from the
Engineered Materials and the Separation Systems and Ventures businesses, the
sale of inventory accounted for under the LIFO method, royalty income and other
miscellaneous income and expense items not related to the reportable segments.
56
The following table presents certain data by business segment:
BUSINESS SEGMENT INFORMATION (in millions)
Specialty Paper
Pigments Pigments Industrial Reportable
Environmental Process and and Commodities Segments All
Technologies Technologies Additives Additives Management Sub-total Other Total
- -------------------------------------------------------------------------------------------------------------------------------
1999
Net sales to external customers $584.8 $515.3 $362.7 $236.1 $2,608.6 $4,307.5 $ 97.4 $4,404.9
Operating earnings 102.4 81.9 58.9 28.0 39.6 310.8 (1) 5.0 315.8
Interest expense, net - - - - - - 56.6 56.6
Depreciation, depletion &
amortization 18.7 28.1 24.8 26.3 1.3 99.2 12.4 111.6
Equity in earnings/(losses)
of affiliates 3.0 - - (0.1) - 2.9 13.4 16.3
Total assets 391.8 558.1 530.2 361.5 565.3 2,406.9 497.1 2,904.0
Equity investments 11.2 - - 1.2 - 12.4 167.8 180.2
Capital expenditures 26.4 32.1 15.9 16.1 1.1 91.6 10.4 102.0
- ------------------------------------------------------------------------------------------------------------------------------
1998
Net sales to external customers $549.6 $501.3 $349.0 $239.4 $2,346.8 $3,986.1 $188.5 $4,174.6
Operating earnings 89.0 73.1 42.0 35.8 48.5 288.4 (1) 21.0 309.4
Interest expense, net - - - - - - 58.9 58.9
Depreciation, depletion &
amortization 16.4 24.4 22.4 24.6 1.6 89.4 11.5 100.9
Equity in earnings/(losses)
of affiliates (0.5) (1.2) - - - (1.7) 11.8 10.1
Total assets 343.4 (2)567.6 509.3 358.3 611.5 2,390.1 476.2 2,866.3
Equity investments 5.2 0.7 - 1.3 - 7.2 146.4 153.6
Capital expenditures 25.2 27.4 25.6 27.4 3.6 109.2 7.3 116.5
- ------------------------------------------------------------------------------------------------------------------------------
1997
Net sales to external customers $516.7 $413.1 $349.0 $242.0 $1,954.0 $3,474.8 $155.9 $3,630.7
Operating earnings/(losses) 70.4 46.8 64.2 33.8 44.9 260.1 (1)(74.0) 186.1
Interest expense, net - - - - - - 52.8 52.8
Depreciation, depletion &
amortization 16.4 19.3 20.1 23.5 1.0 80.3 7.8 88.1
Equity in earnings/(losses)
of affiliates 1.3 0.1 - (0.6) - 0.8 (3)(48.6) (47.8)
Total assets(4) 316.2 355.0 515.3 348.3 584.2 2,119.0 467.3 2,586.3
Equity investments 11.0 1.9 - 1.3 - 14.2 141.9 156.1
Capital expenditures 30.3 33.6 21.8 37.5 2.7 125.9 11.0 136.9
(1) Includes pretax gains on the sale of certain inventories accounted for under the LIFO method of $3.4 million
in 1999, $8.2 million in 1998 and $3.3 million in 1997. In addition, the 1997 amount includes special
and other charges of $104.8 million.
(2) The total assets of the Process Technologies segment reflect the acquisition of the Mallinckrodt businesses in
May 1998.
57
(3) Includes special and other charges of $44.8 million in 1997.
(4) The special and other charges in 1997 reduced total assets by $21.7 million in the Environmental Technologies segment,
$27.3 million in the Process Technologies segment, $0.8 million in the Specialty Pigments and Additives segment, $39.0 million
in Industrial Commodities Management and $44.8 million in All Other (see Note 4, "Special and Other Charges," for further
detail).
The following table presents certain data by geographic area:
GEOGRAPHIC AREA DATA (in millions) 1999 1998 1997
- --------------------------------------------------------------------------------
Net sales to external customers:
United States $2,845.2 $2,824.1 $2,455.0
International 1,559.7 1,350.5 1,175.7
- --------------------------------------------------------------------------------
Total consolidated net sales to
external customers $4,404.9 $4,174.6 $3,630.7
- --------------------------------------------------------------------------------
Property, plant and equipment, net:
United States $ 788.4 $ 791.6 $ 718.3
International 83.5 84.9 69.9
- --------------------------------------------------------------------------------
Total property, plant and equipment, net $ 871.9 $ 876.5 $ 788.2
- --------------------------------------------------------------------------------
The special and other charges in 1997 reduced total assets by $32.6 million
in the United States and by $101.0 million in Europe. The Company's
international operations are predominantly based in Europe.
58
The following table reconciles segment operating earnings with earnings
before income taxes as shown in the Consolidated Statements of Earnings:
SEGMENT RECONCILIATIONS
(in millions)
1999 1998 1997
------------------------------
Net sales to external customers:
Net sales for reportable segments $4,307.5 $3,986.1 $3,474.8
Net sales for other business units 95.0 148.6 143.5
All other 2.4 39.9 12.4
------------------------------
Total consolidated net sales to external customers $4,404.9 $4,174.6 $3,630.7
==============================
Earnings before income taxes:
Operating earnings for reportable segments $ 310.8 $ 288.4 $ 260.1
Operating earnings/(losses) for other
business units (1.7) 2.4 10.7
Special and other charges - - (104.8)
Other operating earnings 6.7 18.6 20.1
------------------------------
Total operating earnings $ 315.8 $ 309.4 $ 186.1
Interest expense, net (56.6) (58.9) (52.8)
Equity in earnings/(losses) of affiliates 16.3 10.1 (3.0)
Special and other charges - - (44.8)
Gain on sale of investments and land 8.6 - 0.3
------------------------------
Earnings before income taxes $ 284.1 $ 260.6 $ 85.8
==============================
Total assets
Total assets for reportable segments $2,406.9 $2,390.1 $2,119.0
Assets for other business units 81.3 83.9 50.5
All other 415.8 392.3 416.8
------------------------------
Total consolidated assets $2,904.0 $2,866.3 $2,586.3
==============================
An unaffiliated customer of the Environmental Technologies and Industrial
Commodities Management segments accounted for approximately $1,007 million of
the Company's net sales in 1999, approximately $731 million of the Company's net
sales in 1998 and approximately $443 million of the Company's net sales in 1997.
17. LEASE COMMITMENTS
The Company rents real property and equipment under long-term operating
leases. Future minimum rental payments required under noncancellable operating
leases, having initial or remaining lease terms in excess of one year, are $17.5
million in 2000, $16.5 million in 2001, $15.4 million in 2002, $13.3 million in
2003, $12.9 million in 2004 and $91.0 million thereafter. Rental/lease expense,
including all leases, amounted to $21.2 million in 1999, $10.7 million in 1998
and $9.2 million in 1997. In December 1998, the Company entered into a
sales-leaseback transaction for property that serves as the principal executive
and administrative offices of the Company and its operating businesses. The term
of the lease is 20 years.
59
18. ENVIRONMENTAL COSTS
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing environmental investigations
and cleanup plans at several currently or formerly owned and/or operated sites,
including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The Company is
continuing to investigate contamination at Plainville under a 1993 agreement
with the United States Environmental Protection Agency (EPA) and is awaiting
approval of a decommissioning plan by the State of Massachusetts under authority
delegated by the Nuclear Regulatory Commission. Investigation of the
environmental status at the Salt Lake City site continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at the Attapulgus site, under a 1994 consent order with the Georgia
Department of Natural Resources, Environmental Protection Division, is complete.
In addition, seven sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many cases,
the dollar amount of the claim is unspecified, and claims have been asserted
against a number of other entities for the same relief sought from the Company.
Based on existing information, the Company believes that it is a de minimis
contributor of hazardous substances at a number of the sites referenced above.
Subject to the reopening of existing settlement agreements for extraordinary
circumstances or natural resource damages, the Company has settled a number of
other cleanup proceedings. The Company has also responded to information
requests from EPA and state regulatory authorities in connection with other
Superfund sites.
The liabilities for environmental cleanup-related costs recorded in the
consolidated balance sheets at December 31, 1999 and 1998 were $31.3 million and
$39.5 million, respectively, including $0.8 million and $1.2 million,
respectively, for Superfund sites. These amounts represent those costs that the
Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 55% of what it believes are the reasonably possible environmental
cleanup-related costs of a noncapital nature. The estimate of reasonably
possible costs is less certain than the probable estimate upon which the accrual
is based.
During the past three-year period, cash payments for environmental cleanup-
related matters were $2.4 million, $4.1 million and $6.0 million for 1999, 1998
and 1997, respectively. The amounts accrued in connection with environmental
cleanup-related matters were not significant over this time period.
For the past three-year period, environmental-related capital projects have
averaged less than 10% of the Company's total capital expenditure
programs, and the expense of environmental compliance (e.g. environmental
testing, permits, consultants and in-house staff) was not material.
60
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations. Based
on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup-related matters are
projected to be $5.0 million for 2000, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, Management believes
that environmental cleanup-related reserves at December 31, 1999 are reasonable
and adequate and that environmental matters are not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on the
Company's operating results or cash flows.
19. LITIGATION AND CONTINGENCIES
Various lawsuits, claims and proceedings are pending against the Company.
The Company and certain of its present and former officers have agreed to a
Stipulation of Settlement ("Stipulation") of a class action filed in November
1995 that alleged misstatements and omissions in connection with press releases
issued in 1995 concerning the Company's PremAir (registered trademark) catalyst
systems. In the settlement, which was approved by the Court on December 8, 1998,
in exchange for the dismissal of the complaint against all defendants, the
Company will pay no more than $5.5 million of a maximum settlement amount of
$21.5 million. The balance of the settlement amount will be paid by insurance
carried by the Company for such purposes. Because the final settlement amount
will depend on the number of eligible shares of the Company's common stock for
which claims are submitted, the amounts to be paid by the Company and the
insurer could be less, but in no event more, than the above-stated amounts. This
matter, if resolved in accordance with the Stipulation, will not have a material
adverse effect on the operating results of the Company.
The Company is one of a number of defendants in numerous proceedings that
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to "toxic" substances purportedly supplied by the Company and other
defendants. The Company is also subject to a number of environmental
contingencies (see Note 18, "Environmental Costs," for further detail) and is a
defendant in a number of lawsuits covering a wide range of other matters. In
some of these matters, the remedies sought or damages claimed are substantial.
While it is not possible to predict with certainty the ultimate outcome of these
lawsuits or the resolution of the environmental contingencies, Management
believes, after consultation with counsel, that resolution of these matters is
not expected to have a material adverse effect on financial condition. These
matters, if resolved in a manner different from Management's current
expectations, could have a material adverse effect on the Company's operating
results or cash flows.
61
In July 1996, the Securities and Exchange Commission (SEC) issued a formal
order of investigation concerning the sale of Engelhard stock by certain of the
Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company provided
documents to the SEC, and witnesses were examined by the SEC staff during 1996.
In 1998, Management learned that Engelhard and several other companies
operating in Japan had been victims of a fraudulent scheme involving base-metal
inventory held in third-party warehouses in Japan. The inventory loss was
approximately $40 million in 1997 and $20 million in 1998. The Company is
vigorously pursuing various recovery actions. These actions include negotiations
with the various third parties involved and, in several instances, the
commencement of litigation. In the first quarter of 1998, Engelhard recorded a
receivable from the insurance carriers and third parties involved for
approximately $20 million. This amount represents Management's and counsel's
best estimate of the minimum probable recovery from the various insurance
policies and other parties involved in the fraudulent scheme.
The Company is involved in a value-added tax dispute in Peru, which
Management believes has a maximum financial exposure of approximately $30
million. On December 2, 1999, Engelhard Peru, S.A., a wholly owned subsidiary,
was denied refund claims of approximately $27 million. The Peruvian tax
authority also determined that Engelhard Peru, S.A. is liable for the return of
approximately $17 million in refunds previously paid and payment of fines
totaling approximately $41 million. Engelhard Peru, S.A. is contesting these
determinations vigorously, and Management believes, based on consultation with
counsel, that Engelhard Peru, S.A. is entitled to all refunds claimed and is not
liable for these additional taxes or fines. However, even if the matter is
subsequently resolved against Engelhard Peru, S.A., Management believes the
maximum financial exposure is limited to the aggregate value of all assets of
Engelhard Peru, S.A., including unpaid refunds, which is approximately $30
million.
62
20. SUPPLEMENTAL INFORMATION
The following table presents certain supplementary information to the
Consolidated Statements of Cash Flows:
SUPPLEMENTARY CASH FLOW INFORMATION
(in millions) 1999 1998 1997
---------------------------
Cash paid during the year for:
Interest $ 58.7 $ 49.6 $ 43.9
Income taxes 65.3 57.6 29.5
Change in assets and liabilities -- source(use):
Receivables $ (18.1) $ (41.1) $ 43.2
Committed metal positions 98.1 (98.0) (81.6)
Inventories (9.7) 23.9 (36.0)
Other current assets (41.5) (29.5) 24.4
Other noncurrent assets (5.7) 21.8 (68.8)
Accounts payable 18.5 41.4 17.1
Accrued liabilities 24.8 (7.6) 48.2
Noncurrent liabilities (4.1) (14.1) (23.1)
---------------------------
Net change in assets and liabilities $ 62.3 $(103.2) $(76.6)
===========================
The following table presents certain supplementary information to the
Consolidated Balance Sheets:
SUPPLEMENTARY BALANCE SHEET INFORMATION
(in millions) 1999 1998
------------------
Taxes payable $ 76.4 $ 63.9
Payroll-related accruals 54.5 48.7
Deferred income 16.8 17.4
Interest payable 12.7 13.5
Restructuring reserve 9.1 9.6
Environmental reserve 5.8 8.5
Other 84.7 73.6
------------------
Other current liabilities $260.0 $235.2
==================
63
Reports of Independent Accountants
__________________________________
To the Shareholders and Board of Directors of Engelhard Corporation:
We have audited the accompanying consolidated balance sheet of Engelhard
Corporation and subsidiaries as of December 31, 1999, and the related
consolidated statements of earnings, shareholders' equity and cash flows for
the year then ended. These consolidated financial statements are the
responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provides a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Engelhard Corporation and
subsidiaries as of December 31, 1999, and the results of their operations and
their cash flows for the year then ended in conformity with accounting
principles generally accepted in the United States.
Arthur Andersen LLP
New York, New York
March 23, 2000
64
To the Shareholders and Board of Directors of Engelhard Corporation:
In our opinion, the consolidated balance sheet as of December 31, 1998 and
the related consolidated statements of earnings, shareholders' equity and cash
flows for each of the two years in the period ended December 31, 1998, appearing
on pages 27 through 63 present fairly, in all material respects, the financial
position, results of operations and cash flows of Engelhard Corporation and its
subsidiaries at December 31, 1998 and for each of the two years in the period
ended December 31, 1998, in conformity with accounting principles generally
accepted in the United States. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States, which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above. We have not
audited the consolidated financial statements of Engelhard Corporation for any
period subsequent to December 31, 1998.
PricewaterhouseCoopers LLP
New York, New York
February 4, 1999
65
First Second Third Fourth
SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED) quarter quarter quarter quarter
-------------------------------------------------------
1999
Net sales $1,073.3 $1,202.7 $1,016.2 $1,112.7
Gross profit 145.1 172.3 150.6 173.1
Earnings before income taxes 58.3 80.8 73.4 71.6
Net earnings 40.6 56.2 51.0 49.7
Basic earnings per share 0.28 0.42 0.41 0.40
Diluted earnings per share 0.28 0.41 0.40 0.39
1998
Net sales $970.6 $1,074.5 $1,039.5 $1,090.0
Gross profit 149.0 171.8 150.0 176.1
Earnings before income taxes 62.3 73.4 58.3 66.5
Net earnings 43.2 50.9 45.2 47.8
Basic earnings per share 0.30 0.35 0.31 0.33
Diluted earnings per share 0.30 0.35 0.31 0.33
Results in the first quarter of 1999 include a gain of $1.0 million ($0.6 million after-tax) on the sale of
the Company's investment in Acreon Catalyse, and a gain of $1.2 million ($0.7 after-tax) resulting from the
settlement of treasury lock positions.
Results in the second quarter of 1999 include a gain of $9.3 million ($5.7 million after-tax) on the sale of the
Company's metal plating business. In addition, the Company recorded a loss of $4.6 million ($2.8 million after-
tax) as the carrying value of it's investment in Engelhard Highland Private Ltd. venture was reduced to its
estimated net realizable value of $1.0 million.
Results in the third quarter of 1999 include a gain of $1.1 million ($0.7 million after-tax) on the sale of
the Company's Mearlcrete concrete foaming agent business, a gain of $1.8 million ($1.1 million after-tax) on the
sale of land and certain mineral rights located in Talladega County, Alabama and a gain of $3.0 million ($1.9
after-tax) resulting from the settlement of treasury lock positions.
Results in the fourth quarter of 1999 include a gain of $3.4 million ($2.2 million after-tax) on the sale of inventory
accounted for under the LIFO method and a gain of $2.9 million ($1.8 million after-tax) resulting from the settlement of treasury
lock positions.
Results in the third and fourth quarters of 1998 include pre-tax gains of $4.0 million ($2.4 million after-tax) and $4.2
million ($2.5 million after-tax), respectively, on the sale of inventory accounted for under the LIFO method. In addition, the
effective tax rate for the third quarter of 1998 was reduced to reflect the reversal of a valuation allowance related to capital
loss carryforwards (see Note 11, "Income Taxes," for further detail).
Basic and diluted earnings per share amounts are calculated independently for each of the quarters
presented. The sum of the quarters may not equal the full-year earnings per share amounts.
Changes in and Disagreements with
Item 9. Accountants on Accounting and Financial Disclosure
- ------ --------------------------------------------------
Changes in Registrant's Certifying Accountant (incorporated by
reference to Form 8-K filed with the Securities and Exchange
Commission on February 22, 2000).
66
PART III
Item 10. Directors and Executive Officers of the Registrant
- ------- --------------------------------------------------
(a) Directors -
Information concerning directors of the Company is included under the
caption "Election of Directors", "Information with Respect to Nominees and
Directors Whose Terms Continue", "Share Ownership of Directors and Officers",
and "Board of Directors' Meetings, Committees and Fees" in the Proxy Statement
for the 2000 Annual Meeting of Shareholders and is incorporated herein by
reference.
(b) Executive Officers -
ARTHUR A. DORNBUSCH, II Age 56. Vice President, General Counsel and
Secretary of the Company from prior to 1994.
MARK DRESNER Age 48. Vice President of Corporate Communications
effective December 17, 1998. Director of
Corporate Communications from October 1995 to
December 1998. Director of Human Resources for
the Chemical Catalysts Group from August 1994 to
September 1995. Director of Communications prior
thereto.
JOHN C. HESS Age 47. Vice President, Human Resources effective
August 1, 1997. Director of Human Resources for
the Chemical Catalyst Group from November 1995 to
July 1997. Director of Human Resources for
Policies, Plans and Services prior thereto.
PETER B. MARTIN Age 60. Vice President, Investor Relations
effective June 18, 1997. Vice President, Investor
Relations, W.R. Grace & Company prior thereto.
BARRY W. PERRY * Age 53. President and Chief Operating Officer
effective February 1, 1997. Group Vice President
and General Manager of the Pigments and Additives
Group prior thereto. Mr. Perry is also a director
of Arrow Electronics.
PETER R. RAPIN Age 45. Treasurer effective July 8, 1998.
Assistant Treasurer from July 1995 to July 1998.
Director, Banking Services for the Westinghouse
Electric Corporation prior thereto.
ORIN R. SMITH * Age 64. Chairman and Chief Executive Officer of
the Company since January 1995. President and
Chief Executive Officer of the Company prior
thereto. Mr. Smith is also a director of
Ingersoll-Rand Company, Perkin-Elmer Corporation,
Summit Bancorp and Vulcan Materials Company.
Michael A. Sperduto Age 42. Controller of the Company effective
August 5, 1999. Vice President-Finance from
July 8, 1998 to August 1999. Treasurer prior
thereto.
* Also a director of the Company
67
Officers of the Company are elected at the meeting of the Board of
Directors held in May of each year after the annual meeting of shareholders and
serve until their successors shall be elected and qualified and shall serve as
such at the pleasure of the Board.
Item 11. Executive Compensation
- ------- ----------------------
Information concerning executive compensation is included under the
captions "Executive Compensation and Other Information", "Pension Plans,"
"Employment Contracts, Termination of Employment and Change in Control
Arrangements" and the "Performance Graph" of the Proxy Statement for the 2000
Annual Meeting of Shareholders and is incorporated herein by reference.
Security Ownership of Certain
Item 12. Beneficial Owners and Management
- ------- --------------------------------
Information concerning security ownership of certain beneficial owners and
management is included under the captions "Information as to Certain
Shareholders" and "Share Ownership of Directors and Officers" of the Proxy
Statement for the 2000 Annual Meeting of Shareholders and is incorporated herein
by reference.
Certain Relationships
Item 13. and Related Transactions
- ------- ------------------------
Information concerning certain business relationships of nominees for
director and directors and related transactions is included under the caption
"Certain Transactions" of the Proxy Statement for the 2000 Annual Meeting of
Shareholders and is incorporated herein by reference.
68
PART IV
Exhibits, Financial Statement
Item 14. Schedules and Reports on Form 8-K Pages
- ------- --------------------------------- -----
(a) (1) Financial Statements and Schedules
Reports of Independent Accountants 64-65
Consolidated Statements of Earnings for each of the 27
three years in the period ended December 31, 1999
Consolidated Balance Sheets at December 31, 1999 and 1998 28
Consolidated Statements of Cash Flows for each of the 29
three years in the period ended December 31, 1999
Consolidated Statements of Shareholders' Equity for each 30
of the three years in the period ended December 31, 1999
Notes to Consolidated Financial Statements 31-63
(2) Financial Statement Schedules
Consolidated financial statement schedules not filed
herein have been omitted either because they are not
applicable or the required information is shown in the
Notes to Consolidated Financial Statements in this
Form 10-K.
(b) In a report on Form 8-K filed with the Securities and *
Exchange Commission on February 22, 2000, the Company
reported that it changed it's Certifying Accountant.
Exhibits Page
- -------- ----
(3) (a) Certificate of Incorporation of the Company *
(incorporated by reference to Form 10, as
amended on Form 8-K filed with the Securities
and Exchange Commission on May 19, 1981).
(3) (b) By-laws of the Company as amended September 17, 1981 *
(incorporated by reference to Form 10-Q for the
quarter ended September 30, 1981).
(3) (c) Certificate of Amendment to the Restated Certificate *
of Incorporation of the Company (incorporated by
reference to Form 10-K for the year ended December 31,
1987).
* Incorporated by reference as indicated.
69
Exhibits Pages
- -------- -----
(3) (d) Article XVII of the Registrant's By-laws as amended *
on May 2, 1988 (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on
May 21, 1988).
(3) (e) Certificate of Amendment to the Restated Certificate of *
Incorporation of the Company (incorporated by reference
to Form 10-Q for the quarter ended March 31, 1993).
(3) (f) Amendment to the Restated Certificate of Incorporation *
of the Company, filed with the State of Delaware, Office
of the Secretary of State on May 2, 1996 (incorporated
by reference to Form 10-Q filed with the Securities and
Exchange Commission on May 14, 1996).
(3) (g) By-laws of the Company as amended June 12, 1997 *
(incorporated by reference to Form 10-Q filed with the
Securities and Exchange Commission on August 13, 1997).
(3) (h) Article II of the By-laws of the Company as amended *
December 17, 1998 (incorporated by reference to Form S-8
filed with the Securities and Exchange Commission on
January 29, 1999).
(3) (i) Certificate of Designation relating to Series A Junior *
Participating Preferred Stock, filed with the State of
Delaware, Office of the Secretary of State on November 12,
1998.
(10)(a) Form of Agreement of Transfer entered into between *
Engelhard Minerals & Chemicals Corporation and the
Company, dated May 18, 1981 (incorporated by
reference to Form 10, as amended on Form 8 filed
with the Securities and Exchange Commission on
May 19, 1981).
(10)(b) Engelhard Corporation Stock Option Plan of 1981 *
Restated as of December 13, 1989 - conformed copy
includes amendments through February 1995
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(c) Retirement Plan for Directors of Engelhard *
Corporation Effective January 1, 1985 - conformed
copy includes amendments through June 1991
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
* Incorporated by reference as indicated.
70
Exhibits Page
- -------- ----
(10)(d) Deferred Compensation Plan for Key Employees of *
Engelhard Corporation Effective August 1, 1985 -
conformed copy includes amendments through December
1993 (incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996) (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(e) Engelhard Corporation Directors and Executives *
Deferred Compensation Plan (1986-1989) - conformed
copy includes amendments through December 1993
(incorporated by reference to Form 10-K filed
with the Securities and Exchange Commission on
March 22, 1996).
(10)(f) Key Employees Stock Bonus Plan of Engelhard *
Corporation Effective July 1, 1986 - conformed
copy includes amendments through June 1992
(incorporated by reference to Form 10-K filed with
the Securities and Exchange Commission on
March 22, 1996).
(10)(g) Stock Bonus Plan for Non-Employee Directors of *
Engelhard Corporation Effective July 1, 1986 -
conformed copy includes amendments through
June 1992 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(h) Deferred Compensation Plan for Directors of *
Engelhard Corporation Restated as of May 7, 1987 -
conformed copy includes amendments through
December 1993 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
(10)(i) Supplemental Retirement Program of Engelhard *
Corporation as Amended and Restated Effective
January 1, 1989 - conformed copy includes
amendments through November 1994 (incorporated
by reference to Form 10-K filed with the Securities
and Exchange Commission on March 22, 1996).
(10)(j) Engelhard Corporation Directors and Executives *
Deferred Compensation Plan (1990-1993) -
conformed copy includes amendments through
November 1993 (incorporated by reference to Form
10-K filed with the Securities and Exchange
Commission on March 22, 1996).
* Incorporated by reference as indicated.
71
Exhibits Page
- -------- ----
(10)(k) Engelhard Corporation Directors Stock Option *
Plan Effective May 4, 1995 (incorporated by
reference to the 1995 definitive Proxy Statement
filed with the Securities and Exchange Commission on
March 31, 1995).
(10)(l) Form of Agreement With Key Employees in the *
Event of an Acquisition of a Control Interest in
the Company, dated November 2, 1995 (incorporated by
reference to Form 10-K filed with the Securities and
Exchange Commission on March 22, 1996).
(10)(m) Amendments to the Key Employee Stock Bonus Plan of *
Engelhard Corporation adopted March 7, 1996
(incorporated by reference to the 1996 definitive
Proxy Statement filed with the Securities and
Exchange Commission on March 29, 1996).
(10)(n) Amendments to the Stock Bonus Plan for Non-Employee *
Directors of Engelhard Corporation adopted March 7,
1996 (incorporated by reference to the 1996 definitive
Proxy Statement filed with the Securities and Exchange
Commission on March 29, 1996).
(10)(o) Amendment to the Supplemental Retirement Program of *
Engelhard Corporation adopted December 19, 1996
(incorporated by reference to Form 10-K filed with the
Securities and Exchange Commission on March 27, 1997).
(10)(p) Form of Separation Agreement with L. Donald LaTorre, *
formerly a Director, President and Chief Operating
Officer of the Company, dated April 1, 1997
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on May 14,
1997).
(10)(q) Amendment to the Deferred Compensation Plan for Key *
Employees of Engelhard Corporation, adopted April 3,
1997 (incorporated by reference to Form 10-Q filed
with the Securities and Exchange Commission on
May 14, 1997).
(10)(r) Form of Employee Agreement with Orin R. Smith, Chairman *
and Chief Executive Officer of the Company, dated
October 3, 1996 and amended on March 5, 1998
(incorporated by reference to Form 10-K filed with the
Securities and Exchange Commission on March 31, 1998).
(10)(s) Change in Control Agreement dated as of March 17, 1998 *
(incorporated by reference to Form 10-Q filed with the
Securities and Exchange Commission on May 15, 1998).
(10)(t) Change in Control Agreement (incorporated by reference *
to Form 10-Q filed with the Securities and Exchange
Commission on August 13, 1998).
* Incorporated by reference as indicated.
72
Exhibits Page
- -------- ----
(10)(u) Amendment to Key Employees Deferred Compensation Plan, *
effective August 6, 1998 (incorporated by reference
to Form 10-Q filed with the Securities and Exchange
Commission on August 13, 1998).
(10)(v) Amendment to Supplemental Retirement Program of *
Engelhard Corporation, effective June 11, 1998
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on August 13,
1998).
(10)(w) Engelhard Corporation Stock Option Plan of 1991 - *
conformed copy includes amendments through
September 1998.
(10)(x) Rights Agreement, dated as of October 1, 1998 between *
the Company and ChaseMellon Shareholder Services, l.l.c.,
as Rights Agent (incorporated by reference to Form 8-K
filed with the Securities and Exchange Commission on
October 29, 1998).
(10)(y) Amendment to Key Employees Stock Bonus Plan of *
Engelhard Corporation, effective October 1, 1998
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on
November 13, 1998).
(10)(z) Amendment to Supplemental Retirement Program of *
Engelhard Corporation, effective October 1, 1998.
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on
November 13, 1998).
(10)(aa) Amendment to Engelhard Corporation Directors and *
Executives Deferred Compensation Plan (1986-1989),
effective October 1, 1998 (incorporated by reference
to Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1998).
(10)(ab) Amendment to Engelhard Corporation Directors and *
Executives Deferred Compensation Plan (1990-1993),
effective October 1, 1998 (incorporated by reference
to Form 10-Q filed with the Securities and Exchange
Commission on November 13, 1998).
(10)(ac) Amendment to Deferred Compensation Plan For Key *
Employees of Engelhard Corporation, effective
October 1, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
10)(ad) Amendment to Deferred Compensation Plan For *
Directors of Engelhard Corporation, effective
October 1, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
* Incorporated by reference as indicated.
73
Exhibits Pages
- -------- -----
(10)(ae) Amendment to Retirement Plan For Directors of *
Engelhard Corporation, effective October 1, 1998
(incorporated by reference to Form 10-Q filed with
the Securities and Exchange Commission on
November 13, 1998).
(10)(af) Amendment to Stock Bonus Plan For Non-Employee *
Directors of Engelhard Corporation, effective
October 1, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
(10)(ag) Amendment to Deferred Compensation Plan for Key *
Employees of Engelhard Corporation, effective
August 6, 1998 (incorporated by reference to Form
10-Q filed with the Securities and Exchange Commission
on November 13, 1998).
(10)(ah) Stock Purchase and Registration Rights Agreement dated *
as of March 2, 1999 between the Company and Minorco
(incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on March 2, 1999).
(10)(ai) Engelhard Corporation Deferred Stock Plan for Nonemployee *
Directors, effective May 6, 1999 (incorporated by
reference to the 1998 definitive Proxy Statement filed
with the Securities and Exchange Commission on March 31,
1999).
(10)(aj) Credit Agreement dated as of April 10, 1997 (incorporated *
by reference to Form 10-Q filed with the Securities and
Exchange Commission on May 14, 1997).
(10)(ak) Amendment to Key Employees Stock Bonus Plan of Engelhard 77-78
Corporation, effective December 16, 1999.
(10)(al) Amendment to Engelhard Corporation Stock Option Plan of 79-80
1991, effective December 16, 1999.
(10)(am) Amendment to Engelhard Corporation Stock Option Plan of 81-82
1981, effective December 16, 1999.
(10)(an) Engelhard Corporation Stock Option Plan of 1999 for 83-89
Certain Key Employees, effective December 16, 1999.
(12) Computation of the Ratio of Earnings to Fixed Charges. 90-91
(21) Subsidiaries of the Registrant. 92-94
(23) Consent of Independent Accountants. 95-98
(24) Powers of Attorney. 99-108
74
Signatures
----------
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized, in Iselin, New Jersey
on the 28th day of March 2000.
Engelhard Corporation
---------------------
Registrant
/s/Orin R. Smith
---------------------
Orin R. Smith
(Chairman and Chief Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ Orin R. Smith Chairman and Chief Executive March 28, 2000
- ------------------------- Officer & Director
Orin R. Smith (Principal Executive Officer)
/s/ Michael A. Sperduto Controller March 28, 2000
- ------------------------- (Principal Accounting Officer)
Michael A. Sperduto
75
* Director March 28, 2000
- ---------------------------
Linda G. Alvarado
* Director March 28, 2000
- ---------------------------
Marion H. Antonini
* Director March 28, 2000
- --------------------------
William R. Loomis, Jr.
* Director March 28, 2000
- --------------------------
James V. Napier
* Director March 28, 2000
- --------------------------
Norma T. Pace
* Director March 28, 2000
- -------------------------
Barry W. Perry
* Director March 28, 2000
- -------------------------
Reuben F. Richards
* Director March 28, 2000
- -------------------------
Henry R. Slack
* Director March 28, 2000
- -------------------------
Douglas G. Watson
* By this signature below, Arthur A. Dornbusch, II has signed this Form 10-K
as attorney-in-fact for each person indicated by an asterisk pursuant to
duly executed powers of attorney filed with the Securities and Exchange
Commission included herein as Exhibit 24.
/s/ Arthur A. Dornbusch, II March 28, 2000
- ---------------------------
Arthur A. Dornbusch, II
76
EXHIBIT (10)(ak)
AMENDMENT TO KEY EMPLOYEES STOCK BONUS PLAN
OF ENGELHARD CORPORATION
-------------------------------------------
77
AMENDMENT TO
KEY EMPLOYEES STOCK BONUS
PLAN OF ENGELHARD CORPORATION
-----------------------------
The Key Employees Stock Bonus Plan of Engelhard Corporation is amended as
follows, effective as of December 16, 1999, and it shall apply to modify the
vesting schedule of outstanding awards as well as to awards made on or after
such date.
1. Section 3 of the Plan is amended by deleting the first sentence thereof
and substituting the following in its place:
"The Plan shall be administered by a committee (the 'Committee') which
shall be appointed from time to time by the Board of Directors of the
Company, and shall consist of not less than two directors of the Company
who qualify as 'non-employee directors' under Rule 16b-3(b)(3) issued by
the Securities and Exchange Commission."
2. Section 6(a) of the Plan is amended to read in its entirety as
follows:
"(a) Unless otherwise provided by the Committee, an award of Company Common
Stock shall vest in the key employee to whom it is made at the rate of 20%
of the shares covered by such award in five annual installments, beginning
on February 1 of the calendar year next following the date of grant and
continuing on February 1 of each of the following four years, provided and
only to the extent that the key employee remains in the service of the
Company on such vesting dates."
78
EXHIBIT (10)(al)
AMENDMENT TO ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1991
----------------------------------
79
AMENDMENT TO
ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1991
-------------------------
The Engelhard Corporation Stock Option Plan of 1991 (the "Plan") is amended
as follows, effective as of December 16, 1999; provided, however, that the
provisions of paragraphs 2,3,and 4 of this Amendment will apply only to
options granted on or after December 16, 1999.
1. Section 2 of the Plan is amended by deleting the first sentence
thereof and substituting the following in its place:
"The Plan shall be administered by a committee (the 'Committee')which
shall be appointed from time to time by the Board of Directors of the
Company (the 'Board of Directors'), and shall consist of not less than
two directors of the Company who qualify as 'non-employee directors'
under Rule 16b-3(b)(3) issued by the Securities and Exchange
Commission".
2. Section 5(c) of the Plan is amended by deleting the first sentence
thereof.
3. Section 5(d) of the Plan is amended by deleting "which were granted
more than one year before such termination" from clause (i) of the
first paragraph thereof.
4. Section 5(d) of the Plan is amended by deleting ", which were granted
more than one year before his death," from clause (iv) of the first
paragraph thereof.
80
EXHIBIT(10)(am)
AMENDMENT TO ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1981
-----------------------------------
81
AMENDMENT TO
ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1981
-------------------------
The Engelhard Corporation Stock Option Plan of 1981 (the "Plan") is amended as
follows, effective as of December 16, 1999.
1. Section 2 of the Plan is amended by deleting the first sentence
thereof and substituting the following in its place:
"The Plan shall be administered by a committee (the 'Committee')
which shall be appointed from time to time by the Board of Directors
of the Company (the 'Board of Directors'), and shall consist of not
less than two directors of the Company who qualify as 'non-employee
directors' under Rule 16b-3(b)(3) issued by the Securities and
Exchange Commission."
82
EXHIBIT (10)(an)
ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1999
FOR CERTAIN KEY EMPLOYEES
-------------------------
83
ENGELHARD CORPORATION
STOCK OPTION PLAN OF 1999
FOR CERTAIN KEY EMPLOYEES
(Non Section 16(b) Officers)
1. Purposes. This Stock Option Plan (the "Plan") of Engelhard Corporation
(the "Company") is established so that the Company may make available to key
employees the opportunity to acquire ownership of Company stock pursuant to
options constituting non-qualified stock options under the Internal Revenue
Code. It is anticipated that such stock options will materially assist the
Company in providing incentives to key employees for future performance.
2. Administration. The Plan shall be administered by a committee (the
"Committee") which shall be appointed from time to time by the Board of
Directors of the Company (the "Board of Directors"), and shall consist of not
less than two directors of the Company who qualify as "non-employee directors"
under Rule 16b-3(b)(3) issued by the Securities and Exchange Commission. The
Committee shall have full power and authority, subject to the terms and
conditions of the Plan, to determine the key employees (excluding key employees
who are officers or directors of the Company for purposes of Section 16(b) of
the Securities Exchange Act of 1934, as amended) to whom awards may be made
under the Plan, the number of such shares to be awarded to each of such key
employees, the applicable terms and conditions of such awards and all other
matters which may arise in the administration of the Plan. The determination of
the Committee concerning any matter arising under or with respect to the Plan or
any awards granted hereunder shall be final, binding and conclusive on all
interested persons. The Committee may as to all questions of accounting rely
conclusively upon any determinations made by the independent auditors of the
Company. Notwithstanding any provision of the Plan to the contrary, the Chief
Executive Officer of the Company shall have the power and authority, subject to
the terms and conditions of the Plan, to make awards under the Plan to key
employees who are not officers or directors of the Company for purposes of
Section 16(b) of the Securities Exchange Act of 1934, as amended; provided,
however, that the authority of the Chief Executive Officer to make such awards
shall be subject to limitations as may be imposed from time to time by the
Committee.
3. Stock Available for Options. There shall be available for option under
the Plan 2,500,000 shares of the Company's Common Stock (the "Stock"), subject
to any adjustments which may be made pursuant to Section 5(f) hereof. Shares of
Stock used for purposes of the Plan may be either authorized and unissued
unissued shares or treasury shares or both. Stock covered by options which have
terminated or expired prior to exercise or have been surrendered and canceled as
contemplated by Section 7(b) hereof shall be available for further option
hereunder.
4. Eligibility. Key Employees of the Company and of any subsidiary
corporation, as defined in Section 424(f) of the Internal Revenue Code of 1986,
as amended (the "Code"), of the Company ("Subsidiary") shall be eligible to
receive options under the Plan, provided that no option may be granted to any
employee of the Company or a Subsidiary who is an officer or director of the
Company for purposes of Section 16(b) of the Securities Exchange Act of 1934, as
amended.
84
5. Terms and Conditions of Options. Each option granted hereunder shall be
in writing, shall be a non-qualified stock option and shall contain such terms
and conditions as the Committee may determine, which terms and conditions need
not be the same in each case or within each type, subject to the following:
(a) Option Price. The price at which each share of Stock covered by an
option granted hereunder may be purchased shall not be less than the
greater of the par value of the Stock or the fair market value thereof
at the time of grant, as determined by the Board of Directors.
(b) Option Period. The period for exercise of an option shall not
exceed ten years from the date the option is granted. Options may be made
exercisable in installments during the option period. Any shares not
purchased on any applicable installment date, if so provided in the related
options, may be purchased thereafter at any time prior to the expiration of
the option period.
In the case of options granted under the Plan which are exercisable in
installments, such options shall become immediately exercisable in full at the
time of a "Change in Control" unless the Committee expressly provides in the
applicable option agreement entered into pursuant to this Plan that an
additional condition or conditions must be satisfied in order for exercisability
of the option to be accelerated, in which event exercisability of any such
options shall be accelerated upon satisfaction of such condition(s), if any,
following the Change in Control. The provisions relating to acceleration of
exercisability of such options need not be the same for all options granted
under the Plan. For this purpose, a "Change in Control" shall mean:
(a) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act of
1934,as amended (the "Exchange Act")) (a "Person"), of beneficial ownership
(within the meaning of Rule 13d-3 promulgated under the Exchange Act) of
20% or more of either (1) the then outstanding shares of common stock of
the Company (the "Outstanding Company Common Stock") or (2) the combined
voting power of the then outstanding voting securities of the Company
entitled to vote generally in the election of directors (the "Outstanding
Company Voting Securities"); provided, however, that the following
acquisitions shall not constitute a Change in Control: (i) any acquisition
directly from the Company (other than by exercise of a conversion
privilege); (ii) any acquisition by the Company or any of itssubsidiaries;
(iii) any acquisition by any employee benefit plan (or related trust)
sponsored or maintained by the Company or any of its subsidiaries; (iv)
any acquisition by any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding shares of
common stock of such corporation and the combined voting power of the then
outstanding voting securities of such corporation entitled to vote
generally inthe election of directors is then beneficially owned, directly
or indirectly, byall or substantially all of the individuals and entities
who were the beneficialowners, respectively, of the Outstanding Company
Common Stock and Company Voting Securities immediately prior to such
acquisition in substantially the same proportions as their ownership,
immediately prior to such acquisition, of the Outstanding Company Common
Stock and Outstanding Company Voting Securities, as the case may be; or (v)
any acquisition by a Person owning more than 25% of the Outstanding Company
Common Stock on the date hereof; or
85
(b) During any period of two consecutive years, individuals who, as
of the beginning of such period, constitute the Board of Directors of the
Company (the "Incumbent Board"), cease for any reason to constitute at
least a majority of the Board of Directors of the Company; provided,
however, that any individual becoming a director subsequent to the
beginning of such period whose election, or nomination for election by the
Company's shareholders, was approved by a vote of at least a majority of
the directors then comprising the Incumbent Board shall be considered as
though such individual were a member of the Incumbent Board, but excluding,
for this purpose, any such individual whose initial assumption of office
occurs as a result of either an actual or threatened election contest (as
such terms are used in Rule 14a-11 of Regulation 14A promulgated under the
Exchange Act); or
(c) approval by the shareholders of the Company of a reorganization,
merger orconsolidation, in each case, with respect of which all or
substantially all of the individuals and entities who were the beneficial
owners, respectively, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities immediately prior to such
reorganization, merger or consolidation, do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding shares of
common stock and the combined voting power of the then outstanding voting
securities entitled to vote generally in the election of directors, as the
case may be, of the corporation resulting from such reorganization, merger
merger or consolidation in substantially the same proportions as their
ownership, immediately prior to such reorganization, merger or
consolidation of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be; or
(d) approval by the shareholders of the Company of (1) a complete
liquidation or dissolution of the Company or (2) a sale or other
disposition of all or substantially all of the assets of the Company,
other than to the corporation, with respect to which following such sale or
other disposition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting power of
the then outstanding voting securities of such corporation entitled to vote
generally in the election of directors is then beneficially owned,
directly or indirectly, by all or substantially all of the individuals and
entities who were the beneficial owners, respectively, of the Outstanding
Company Common Stock and Outstanding Company Voting Securities immediately
prior to such sale or other disposition in substantially the same
proportion as their ownership, immediately prior to such sale or other
disposition, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be.
(c) Exercise of Options. To exercise an option, the holder thereof
shall give notice to the Company specifying the number of shares to be
purchased and accompanied by payment in full of the purchase price
therefor. An option holder shall have none of the rights of a stockholder
until the shares are paid for in full and issued to him. The purchase price
may be paid in whole or in part with shares of Stock having a fair market
value on the exercise date equal to the cash amount for which such shares
are substituted; provided, however, that in no event may any portion of the
purchase price be paid with shares of Stock acquired upon exercise of a
stock option granted under this Plan unless such shares were acquired more
than six months before the applicable date of exercise.
86
Notwithstanding any provision of this Plan to the contrary, the
Committee shall have the authority at any time to accelerate the
exercisability of all or any portion of any option granted under the Plan.
(d) Effect of Termination of Employment or Death. No option may be
exercised after the termination of employment of an optionee, except that:
(i)if such termination is by reason of disability or retirement at normal,
deferred or early retirement age, under any retirement plan maintained by
the Company or any Subsidiary, or for any other reason specifically
approved in advance by the Committee, any options held by the optionee
shall thereupon become exercisable in full, and may be exercised by the
optionee during the period ending on the tenth anniversary of the date of
grant of the option; (ii) if such termination is by action of the Company
or a Subsidiary other than as provided in (i) above and other than
discharge by reason of willful violation of the rules of the Company or
instructions of superior(s), such options shall continue to become
exercisable at the times set forth in the applicable stock option agreement
notwithstanding such termination of employment and such options may be
exercised during the period ending on the later of three months following
the date the options become exercisable in full or such termination of
employment; (iii) in the event of the death of an optionee after the
termination of his employment pursuant to (i) or (ii) above, the person or
persons to whom the optionee's rights are transferred by will or the laws
of descent and distribution may exercise any options which the optionee
could have exercised had he survived for the remainder of the period under
(i) or (ii) above during which the optionee could have exercised the option
if he had survived; and (iv) in the event of thedeath of an optionee while
employed, any options then held by the optionee shall thereupon become
exercisable in full, and the person or persons to whom the optionee's
rights are transferred by will or the laws of descent and distribution
shall have a period ending on the tenth anniversary of the date of grant
of the option to exercise such options. In no event, however, shall any
option be exercisable more than ten years from the date of grant thereof.
Notwithstanding any provision of this Plan to the contrary, the
Committee shall have the authority (which may be exercised at any time)
to extend the period during which any option granted under the Plan may be
exercised; provided, however, that no option may be exercisable for more
than ten years from the date of grant thereof.
Nothing contained in the Plan or any option granted hereunder shall
confer on any employee any right to continue his employment or interfere in
any way with the right of his employer to terminate his employment at any
time.
(e) Nontransferability of the Options. During the optionee's lifetime
his option shall be exercisable only by him. No option shall be
transferable other than by will or the laws of descent and distribution.
(f) Adjustment for Change in Stock Subject to Plan. In the event of a
stock split, stock dividend, combination of shares, recapitalization,
reorganization, merger, consolidation, rights offering, or any other change
change in the corporate structure or shares of the Company, the Board of
Directors shall make such adjustments, if any, as it deems appropriate
for purposes hereof in the number and kind of shares subject to the Plan,
in the number and kind of shares covered by outstanding options, or in
the option prices.
87
(g) Registration, Listing and Qualification of Shares. Each option
shall be subject to the requirement that if at any time the Board of
Directors shall determine that the registration, listing or qualification
of the shares covered thereby upon any securities exchange or under any
federal or state law, or the consent or approval of any governmental
regulatory body is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of share
thereunder, no such option may be exercised unless and until such
registration, listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. Any person exercising an option shall make such representations
and agreements and furnish such information as the Board of Directors may
request to assure compliance with the foregoing or any other applicable
legal requirements.
(h) Tax Withholding. The Committee may establish such rules and
procedures as it considers desirable in order to satisfy an obligation of
the Company or any Subsidiary to withhold Federal income taxes or other
taxes with respect to the exercise of an option under the Plan, including
without limitation rules and procedures permitting an optionee to
elect that the Company withhold shares of Stock otherwise issuable upon
exercise of such option in order to satisfy such withholding obligation.
6. Duration. Unless sooner terminated by the Board of Directors, the
Plan shall terminate on, and no option shall be granted hereunder after
December 16, 2009.
7. (a) Amendment. The Board of Directors may amend or terminate the
Plan at any time; provided, however, that, without the consent of an
affected optionee, no amendment or termination of the Plan may impair the
rights or, in any other manner, adversely affect the rights of such
optionee under any option theretofore granted to him. Notwithstanding the
foregoing, the Committee shall have the right to accept the surrender of
and cancel options issued under the Plan and reissue those options and to
amend the terms of outstanding options under the terms and conditions set
forth herein.
(b) Surrender, Cancellation and Reissue of Options. The Committee,
upon invitation by it duringthe term of this Plan to any holder(s) of
options under the Plan to do so, may accept the surrender of outstanding
options, cancel such options and issue in exchange therefor new options
under this Plan, provided:
(1) the tender of options for surrender is in accordance with such
conditions as the Committee may set forth in its invitation ofr that
surrender;
(2) the number of shares covered by an option issued in exchange
for a surrendered and cancelled option shall not exceed the number of
shares covered by the option surrendered and cancelled;
(3) the exercise price and all other terms of each option issued
in exchange shall comply with the requirements of this Plan for the
issuance of options; and
88
(4) no such invitation for surrender of options shall be made by
the Committee unless it first shall have determined that it is in the
interest of the Company to provide an opportunity for the surrender and
cancellation of outstanding options and the issue of new options in
exchange therefor upon more appropriate terms and conditions, including
exercise price.
(c) Amendments of Outstanding Options. In the event that any
options issued under this Plan shall remain outstanding after Decenber 16,
2009, and if the Committee shall determine that it is in the interest of
the Company to amend the terms and conditions, including exercise price or
prices, of such options, the Committee shall have the right, by written
notice to the holders thereof, to amend the terms and conditions of such
options including exercise price or prices; provided, however, that (i) no
such amendment shall be adverse to the holders of the options, and (ii) the
amended terms of an option, including exercise price or prices, would
have been permitted under this Plan had the Plan been outstanding at the
time of such amendment.
8. Other Actions. This Plan shall not restrict the authority of
the Board of Directors, for proper corporate purposes, to grant or assume
stock options, other than under the Plan, to or with respect to any
employee or other person.
9. Name. This Plan shall be known as the Engelhard Corporation
Stock Option Plan of 1999 for Certain Key Employees.
89
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
90
EXHIBIT 12
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
Years Ended December 31,
----------------------------------------------------------------
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
Earnings from continuing operations
before provision for income taxes $284,118 $260,563 $ 85,812 $209,955 $185,312
Add/(deduct)
Portion of rents representative
of the interest factor 7,000 3,500 3,000 3,900 4,700
Interest on indebtedness 56,555 58,887 52,776 45,009 31,326
Equity dividends 2,431 2,022 3,803 2,515 3,411
Equity in (earnings) losses of affiliates (16,266) (10,077) 47,833 5,008 (695)
--------- -------- -------- --------- ---------
Earnings, as adjusted $333,838 $314,895 $193,224 $266,387 $224,054
========= ======== ======== ========= =========
Fixed Charges
Portion of rents representative
of the interest factor $7,000 $3,500 $3,000 $3,900 $4,700
Interest on indebtedness 56,555 58,887 52,776 45,009 31,326
Capitalized interest 2,580 1,897 651 875 784
-------- ------- ------- ------- --------
Fixed charges $66,135 $64,284 $56,427 $49,784 $36,810
======== ======= ======= ======= ========
Ratio of Earnings to Fixed Charges 5.05 4.90 3.42(A) 5.35 6.09
======== ======= ======= ======= ========
(A) Earnings in 1997 were negatively impacted by special and other charges of $149.6 million for a variety of events.
Without such charges the ratio of earnings to fixed charges would have been 5.28.
91
EXHIBIT 21:
SUBSIDIARIES OF THE REGISTRANT
------------------------------
92
Subsidiaries of the Registrant
------------------------------
Jurisdiction Under Which
Name of Subsidiary/Affiliate Incorporated or Organized
- ---------------------------- -------------------------
Engelhard Industries De Argentina SA Argentina
Engelhard Belgium BVBA Belgium
Engelhard Industries S.A. Belgium
Engelhard Do Brasil Industria E Commercio LTDA Brazil
Engelhard Canada, Ltd. Canada
Engelhard Industries International, Ltd. Canada
Mearl Company Ltd. Canada
Shanghai Engelhard Sinopec Environmental Technologies Ltd China
Engelhard Industries A/S Denmark
Engelhard Industries OY Finland
Engelhard Pigments OY Finland
Engelhard-CLAL SAS France
Engelhard S.A. France
Mearl International France S.A.R.L. France
Engelhard Holdings GmbH Germany
Engelhard Process Chemicals GmbH Germany
Engelhard Technologies GmbH Germany
Engelhard Asia Pacific (China) Ltd. Hong Kong
Engelhard Industries (Asia) Limited Hong Kong
Engelhard Asia Pacific Mauritius Limited India
Engelhard Asia Pacific Enterprises India Private Limited India
Engelhard Highland Private Limited India
Engelhard Environmental Systems India Ltd India
Engelhard Italiana S.P.A. Italy
Engelhard Metals Japan, Ltd. Japan
NE Chemcat Corporation Japan
Engelhard Asia Pacific (Korea) Ltd. Korea
Mearl De Mexico S.A. de C.V. Mexico
Engelhard Industries De Mexico S.A. Mexico
Engelhard Demeern, B.V. The Netherlands
Engelhard Netherlands, B.V. The Netherlands
Engelhard Pigments and Additives Europe, B.V. The Netherlands
Engelhard Terneuzen, B.V. The Netherlands
Engelhard Peru S.A. Peru
Engelhard South Africa Proprietary, Ltd. South Africa
Heesung-Engelhard South Korea
Engelhard Arganda SL Spain
ECT Environmental Technologies AB Sweden
Engelhard Metals A.G. Switzerland
Engelhard Chemcat (Thailand) Ltd. Thailand
Mearl International Turkey Turkey
Dnipro Kaolin Ukraine
Engelhard International, Ltd. United Kingdom
Engelhard Limited United Kingdom
93
Subsidiaries of the Registrant
------------------------------
Jurisdiction Under Which
Name of Subsidiary/Affiliate Incorporated or Organized
- ---------------------------- -------------------------
Engelhard Metals, Ltd. United Kingdom
Engelhard Sales, Ltd. United Kingdom
Engelhard Technologies, Ltd. United Kimgdom
The Sheffield Smelting Co., Ltd. United Kimgdom
Engelhard Export Corporation U.S. Virgin Islands
Corporacion Engelhard De Venezuela CA Venezuela
Engelhard West, Inc. California
EC Delaware Incorporated Delaware
E.I. Corporation Delaware
Engelhard Asia Pacific, Inc. Delaware
Engelhard C Cubed Corporation Delaware
Engelhard DT, Inc. Delaware
Engelhard EM Holding Company Delaware
Engelhard Energy Corporation Delaware
Engelhard Equity Corporation Delaware
Engelhard Financial Corporation Delaware
Engelhard MC, Inc. Delaware
Engelhard Metal Plating Inc. Delaware
Engelhard Pollution Control, Inc. Delaware
Engelhard Power Marketing, Inc. Delaware
Engelhard Sensor Technologies, Inc. Delaware
Engelhard Strategic Investments Incorporated Delaware
Engelhard Supply Corporation Delaware
International Dioxcide, Inc. Delaware
Mustang Property Corporation Delaware
Harshaw Chemical Company New Jersey
Engelhard Metals Holding Corp. California
Mearl, LLC Delaware
Engelhard-CLAL, L.P. Delaware
Engelhard Hexcore, L.P. Delaware
Tickford Engelhard LLC Michigan
Engelhard PM, L.P. Delaware
The names of other subsidiaries have been omitted since such subsidiaries, if
considered in the aggregate as a single subsidiary, would not constitute a
significant subsidiary as that term is defined in Rule 12b-2 (17 CFR 240.12b-2)
promulgated under the Securities Exchange Act of 1934.
94
EXHIBIT 23:
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
95
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the incorporation of our
report dated March 23, 2000, included in Engelhard Corporation and Subsidiaries'
1999 Annual Report on Form 10-K, into the following previously filed
registration statements:
1. Form S-3 of Engelhard Corporation and Subsidiaries
(File No. 333-59719)
2. Form S-8 of Engelhard Corporation and Subsidiaries
(File Nos. 2-72830, 2-81559, 2-84477, 2-89747,
33-28540, 33-37724, 33-40365, 33-40338, 33-43934,
33-65990, 333-02643 and 333-71439)
Arthur Andersen LLP
New York, New York
March 23, 2000
96
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the registration statement
of Engelhard Corporation and Subsidiaries on Form S-8 (File Nos. 2-72830,
2-81559, 2-84477, 2- 89747, 33-28540, 33-37724, 33-40365, 33-40338, 33-43934,
33-65990, 333-02643 and 333-71439) of our report dated February 4, 1999 on our
audits of the consolidated financial statements of Engelhard Corporation and
Subsidiaries, as of December 31, 1998 and 1997, and for each of the two years in
the period ended December 31, 1998 which report is included in this Annual
Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 23, 2000
97
Consent of Independent Accountants
----------------------------------
We consent to the incorporation by reference in the Registration Statement
of Engelhard Corporation and Subsidiaries on Form S-3 (File No. 333-59719) of
our report dated February 4, 1999 on our audits of the consolidated financial
statements of Engelhard Corporation and Subsidiaries as of December 31, 1998 and
1997, and for each of the two years in the period ended December 31, 1998,
which report is included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 23, 2000
98
EXHIBIT 24:
POWERS OF ATTORNEY
------------------
99
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ Linda G. Alvarado
_____________________________
Linda G. Alvarado
100
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ Marion H. Antonini
________________________________
Marion H. Antonini
101
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ William R. Loomis, Jr.
______________________________
William R. Loomis, Jr.
102
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ James V. Napier
______________________________
James V. Napier
103
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ Norma T. Pace
________________________________
Norma T. Pace
104
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ Barry W. Perry
_________________________________
Barry W. Perry
105
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 27, 2000.
/s/ Reuben F. Richards
________________________________
Reuben F. Richards
106
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 23, 2000.
/s/ Henry R. Slack
_______________________________
Henry R. Slack
107
ENGELHARD CORPORATION
Form 10-K
Power of Attorney
WHEREAS, ENGELHARD CORPORATION intends to file with the Securities and
Exchange Commission under the Securities Act of 1934 an Annual Report on Form
10-K for the fiscal year ended December 31, 1999.
NOW, THEREFORE, the undersigned in his/her capacity as a director of
ENGELHARD CORPORATION hereby appoints Arthur A. Dornbusch, II and Orin R. Smith,
or either of them individually, his/her true and lawful attorney to execute in
his/her name, place and stead, in his/her capacity as a director of ENGELHARD
CORPORATION, said Form 10-K and any and all amendments to said Form 10-K and all
instruments necessary or incidental in connection therewith, and to file the
same with the Securities and Exchange Commission. Said attorney shall have full
power and authority to do and perform in the name and on behalf of the
undersigned, in any and all capacities, every act whatsoever necessary or
desirable to be done in the premises, as fully to all intents and purposes as
the undersigned might or could do in person. The undersigned hereby ratifies and
approves the acts of said attorney.
IN WITNESS WHEREOF, the undersigned has executed this instrument on
March 24, 2000.
/s/ Douglas G. Watson
_________________________________
Douglas G. Watson
108