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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Transition period from
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Commission file number 1-12825
MORTON INTERNATIONAL, INC.
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<S> <C>
Incorporated in the State of Indiana IRS Employer Identification
No. 36-4140798
</TABLE>
Principal Executive Offices:
100 North Riverside Plaza, Chicago, Illinois 60606-1596
Telephone Number: (312) 807-2000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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<S> <C>
Common Stock, par value New York Stock Exchange
$1.00 per share
Common Stock Purchase Rights New York Stock Exchange
</TABLE>
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. [ ]
Aggregate market value of registrant's voting stock held by non-affiliates,
based upon the closing price of said stock on the New York Stock
Exchange-Composite Transaction Listing on August 27, 1998 ($23 per share):
$2,835,858,140.
Number of shares of Common Stock outstanding as of August 27, 1998:
123,979,931.
DOCUMENTS INCORPORATED BY REFERENCE
1. Portions of Annual Report to Shareholders for the fiscal year ended June
30, 1998: Parts I, II
and IV.
2. Portions of definitive Proxy Statement dated September 11, 1998: Parts
III and IV.
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PART I
ITEM 1. BUSINESS*
GENERAL DEVELOPMENT OF BUSINESS
Effective April 30, 1997, Morton International, Inc. ("Old Morton")
contributed its salt and specialty chemicals businesses to a newly-created
subsidiary, New Morton International, Inc. ("New Morton"), all the outstanding
common stock of which was then spun off on a share-for-share basis to the
shareholders of Old Morton. Immediately thereafter, New Morton's corporate name
was changed to Morton International, Inc. ("the Company" or "Morton"), and Old
Morton's automotive safety products business was combined with the businesses of
Autoliv AB, a Swedish corporation, through the formation of a new Delaware
holding company, Autoliv, Inc.
BUSINESS SEGMENTS
The Company operates in two business segments: Specialty Chemicals and Salt,
manufacturing and marketing a wide range of products for industrial and consumer
use in the United States ("U.S.") and internationally. The Company's
international business is subject to those risks inherent in carrying on
business outside of the U.S., including currency fluctuations, possible
nationalization, expropriation, price controls or other restrictive government
action.
SPECIALTY CHEMICALS
The Specialty Chemicals segment manufactures a wide variety of high
technology and specialized chemical products for a multitude of customer
applications. It conducts chemical operations directly and through direct or
indirect subsidiaries and joint venture arrangements. Specialty chemical
products are marketed throughout the world directly to customers and indirectly
through distributors and agents. Western Europe and North America are the major
geographic markets served. The four Specialty Chemicals groups are described
below.
ADHESIVES & POLYMERS
A major product line for this group is adhesives used for flexible
packaging, extrudable specialties and industrial applications. Laminating
adhesives are used primarily in food packaging to bond paper, film, or foil.
Extrudable specialty products are used in the coextrusion process to manufacture
multi-layer plastic film, sheet and bottles. Industrial adhesives are used for
bonding rigid substrates, such as rubber to metal or panels used in
construction.
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* THIS FORM 10-K CONTAINS STATEMENTS WHICH ARE NOT HISTORICAL FACTS BUT
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES THAT COULD CAUSE
THE COMPANY'S RESULTS TO DIFFER MATERIALLY FROM WHAT IS PROJECTED, INCLUDING THE
FOLLOWING: HIGHER RAW MATERIAL COSTS OR OTHER EXPENSES; A MAJOR LOSS OF
CUSTOMERS; INCREASED COMPETITIVE PRICING PRESSURE ON THE COMPANY'S BUSINESSES;
FAILURE TO DEVELOP OR COMMERCIALIZE SUCCESSFULLY NEW PRODUCTS OR TECHNOLOGIES;
THE OUTCOME OF PENDING AND FUTURE LITIGATION AND GOVERNMENTAL PROCEEDINGS;
CHANGES IN LAWS AND REGULATIONS, INCLUDING ENVIRONMENTAL; PLANT DISRUPTIONS OR
SHUTDOWNS DUE TO ACCIDENTS, NATURAL ACTS OR GOVERNMENTAL ACTION; UNANTICIPATED
WEATHER CONDITIONS; PRODUCT SPILLS OR LIABILITY ISSUES; AND OTHER DIFFICULTIES
IN IMPROVING MARGINS OR FINANCIAL PERFORMANCE. IN ADDITION, THE COMPANY'S
FORWARD-LOOKING STATEMENTS COULD BE AFFECTED BY GENERAL INDUSTRY AND MARKET
CONDITIONS AND GROWTH RATES, GENERAL DOMESTIC AND INTERNATIONAL ECONOMIC
CONDITIONS INCLUDING CURRENCY EXCHANGE RATE FLUCTUATIONS AND OTHER FACTORS. THE
COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY FORWARD- LOOKING
STATEMENTS WHETHER AS A RESULT OF NEW INFORMATION OR FUTURE EVENTS.
1
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ITEM 1. BUSINESS* --(Continued)
Other major product lines manufactured by this group include thermoplastic
polyurethanes, water-based polymers and automotive adhesives.
CHEMICAL SPECIALTIES
This group manufactures liquid dye markers added to petroleum products for
identification purposes and other dyes and coloring products used in printing
and writing inks. In fiscal 1998, Morton signed an exclusive licensing agreement
with Boston Advanced Technologies. This gave Morton's dye business the
technology to introduce a new marker system that includes portable testing
equipment for detecting markers in fuel samples.
Other major product lines include sodium borohydride, a reducing agent used
principally as a bleaching chemical in paper manufacturing; polysulfide polymers
used in the production of sealants, rubber products, coatings and solid rocket
fuel; heat stabilizers and lubricants used in rigid polyvinyl chloride ("PVC")
applications in the construction industry, principally for pipe and siding;
industrial biocides for the protection of plastic products; and metalorganics
used in solar cells of satellites, high-speed chips for cellular phones and
light-emitting diodes for commercial lighting.
Another business in this group is Advanced Materials which uses the chemical
vapor deposition process to manufacture crystalline substrates for lenses used
in lasers and optical devices, as well as silicon carbide for semiconductor
processing equipment, wear parts, reflective optics and computer hard drive
heads and disks.
COATINGS
This group manufactures and markets a wide range of automotive, commercial
and industrial coatings products, including customized performance liquid
coatings, principally used on plastic components and parts in automotive
markets; protective and decorative powder coatings employed on metal, wood and
plastic substrates in commercial and automotive markets; coil coatings,
extrusion coatings and other general industrial coatings for application to
aluminum and steel substrates; and conventional and durable highway marking
coatings products and application equipment. In the fourth quarter of fiscal
year 1998, the Company announced its plans to divest two product lines: highway
marking and injected colorants for plastic.
ELECTRONIC MATERIALS
This group manufactures chemicals for the electronics market, principally
dry film photoresists sold to printed circuit board manufacturers and used to
create circuit patterns on copper-clad laminate by means of a photo-imaging
process. Electronic Materials also makes both dry film and liquid photoimageable
solder masks to protect finished circuit boards, as well as a broad line of
ancillary process chemicals and equipment. In fiscal 1998, Electronic Materials
acquired Surface Tek, Inc., a privately held manufacturer of process chemicals
and control equipment used to manufacture printed circuit boards. This purchase
allows Morton to offer a more comprehensive line of products and processes to
its electronic materials customers.
SALT
The Company's Salt segment produces and sells salt, principally in the U.S.,
Canada and France, under (respectively) the MORTON, WINDSOR and Salins du Midi
trademarks, for human and animal consumption, water conditioning and highway ice
control, as well as for industrial and chemical uses. Sales are made through the
Company sales force, as well as through independent distributors, agents and
brokers. The Company also has strong positions in Italy and Spain.
2
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ITEM 1. BUSINESS* --(Continued)
Table salt is sold under the MORTON, WINDSOR and LA BALEINE brands and under
private labels. Sales of MORTON brand table salt in the U.S. are approximately
equal to the aggregate sales of all other table salts. Salt for water
conditioning is sold principally for residential use and, to a lesser extent,
for municipal and industrial use. Salt is also sold for use in food and meat
processing, animal feed mix and in a wide variety of chemical applications. Salt
for ice control on streets and highways is sold primarily to government
agencies, with some being sold for consumer use in North America under the
SAFE-T-SALT brand.
Morton gained its strong presence in Europe with the acquisition of Salins
du Midi in fiscal 1997. Salins du Midi's LA BALEINE consumer salt brand has a
recognition and reputation in France comparable to MORTON in the United States
and WINDSOR in Canada.
COMPETITION
The majority of the Specialty Chemicals segment's business is highly
competitive. The Company is the market leader in most of its product lines and
is subject to significant competition from other manufacturers around the globe.
Principal methods of competition include technical service for specialized
customer requirements, price and quality.
All areas in which the Salt segment operates are highly competitive.
Although the Company is a major factor in the salt industry, its market share
varies widely, depending on the geographic area and the type of product
involved. This segment uses price, quality, service, product performance, and
technical, advertising and promotional support as its principal methods of
competition.
RESEARCH AND DEVELOPMENT
Expenses incurred for research and development activities related to Company
businesses were $60.9 million, $58.8 million and $60.2 million for fiscal years
1998, 1997 and 1996, respectively.
ENVIRONMENTAL PROTECTION
Federal, state and local environmental laws and regulations are increasing
in number, complexity and stringency. Public perception of risk to health,
safety and the environment has become a driving force behind many new
regulations. It is the Company's policy to comply with these requirements, and
the Company believes that as a general matter its policies, practices and
procedures are properly designed to prevent unreasonable risk of environmental
damage, and of resulting financial liability, in connection with its businesses.
Some risk of environmental damage is, however, inherent in particular operations
and products of the Company, as it is with other companies engaged in similar
businesses. In addition, some risk of financial liability can result from rare
instances of aberrant environmental conduct at the plant level. See Item 3,
Legal Proceedings, EPA INQUIRY--MOSS POINT PLANT, below.
The Company is and has been engaged in the handling, manufacture, use and
disposal of many substances which are classified as hazardous or toxic by one or
more regulatory agencies. The Company believes that its handling, manufacture,
use and disposal of such substances have generally been in accord with
environmental laws and regulations. It is possible, however, that future
knowledge or other developments, such as improved capability to detect
substances in the environment, increasingly strict environmental laws and
standards and enforcement policies thereunder, could bring into question the
Company's handling, manufacture, use or disposal of such substances.
Among other environmental requirements, the Company is subject to the
federal Superfund law, and similar state laws, under which the Company has been
named a potentially responsible party and under which it may be liable for
cleanup costs associated with approximately 60 inactive waste disposal sites.
The
3
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ITEM 1. BUSINESS* --(Continued)
Company's cleanup expenditures totaled approximately $3.1 million in fiscal
1998. Although, under some court interpretations of these laws, there is a
possibility that a responsible party might have to bear more than its
proportional share of the cleanup costs if it is unable to obtain appropriate
contribution from other responsible parties, the Company has not had to bear
significantly more than its proportional share, taken as a whole, in multiparty
situations.
Although the level of future expenditures for environmental matters cannot
be determined with any degree of certainty, based on the facts presently known
to it, management does not believe that such costs should have a material effect
upon the Company's financial position, results of operations or liquidity.
Capital expenditures related to environmental matters were $5.6 million for
fiscal 1998 and are estimated at $8.1 million for fiscal 1999.
EMPLOYEES
The number of employees of the Company at June 30, 1998 was approximately
10,600, compared to 10,500 at June 30, 1997.
RAW MATERIALS
The Company's businesses use many raw materials in the manufacture of their
products, nearly all of which are generally available from a large number of
qualified suppliers. Peaks in worldwide demand have had an impact on raw
material costs and availability, particularly with single or sole sourced
supplies. The Company's businesses, however, have not experienced significant or
long-term difficulty in obtaining raw materials.
SEASONALITY; BACKLOG
Sales of highway ice control salt are quite seasonal, and vary with winter
weather conditions in areas where that product is used. In keeping with industry
practice, significant amounts of ice control salt are stockpiled both by the
Salt segment and by its customers to meet estimated requirements for the next
season.
Sales of products by the Specialty Chemicals segment do not exhibit
significant seasonal fluctuations. There are no material backlogs in the
Company's businesses.
PATENTS AND TRADEMARKS
The Company's businesses conduct comprehensive research and development
programs to enable them to maintain their competitive position. The Company owns
approximately 1,950 U.S. and foreign patents, which expire on varying dates
through the year 2018.
The Company's businesses are engaged in research and development and own
patents and patent applications in the fields of photochemicals for the printed
circuit board industry, sodium borohydride reducing and bleach generating agents
and other products, industrial biocides, heat stabilizers for PVC, asphalt
additives, chemically vapor deposited lenses, source chemicals for use in
metalorganic chemical vapor deposition, polysulfide polymers, sealants and other
polymers, specialty and powder coatings, adhesives, dyes, salt and brine
products. The Company believes that its present commercial position in these
fields is enhanced by the patents it owns as well as the technical expertise,
know-how, and trade secrets it has developed.
The Company has about 2,000 U.S. and foreign trademarks and trademark
applications which are generally renewable while the marks remain in use.
4
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ITEM 1. BUSINESS* --(Continued)
CUSTOMERS
Neither the Specialty Chemicals segment nor the Salt segment is dependent
upon any single customer, or any single group of customers, the loss of any one
of which would have a material adverse effect on such business segment.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Financial information about industry segments for the three fiscal years in
the period ended June 30, 1998 is included on page 37 of the Company's Annual
Report to Shareholders for fiscal 1998, and is incorporated herein by reference.
ITEM 2. PROPERTIES
The Company leases its corporate headquarters in Chicago, Illinois. The
principal properties of its business segments include manufacturing, mining,
office, research and warehousing facilities, most of which are owned and the
remainder leased, at the following domestic and foreign locations:
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UNITED WESTERN
STATES EUROPE CANADA JAPAN OTHER TOTAL
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SPECIALTY CHEMICALS
ADHESIVES & POLYMERS GROUP...................... 5 9 1 1 2 18
CHEMICAL SPECIALTIES GROUP...................... 10 2 1 1 -- 14
COATINGS GROUP.................................. 17 3 1 1 -- 22
ELECTRONIC MATERIALS GROUP...................... 4 4 -- 1 1 10
SALT.............................................. 14 13 7 -- 3 37
</TABLE>
The Company considers its facilities to be generally well maintained and
suitably equipped in accordance with the requirements of each of its business
segments.
Rock salt and brine well reserves vary, but all salt production locations
have sufficient reserves to satisfy anticipated production requirements for the
foreseeable future. Salt reserves for solar evaporation facilities are regarded
as unlimited.
With respect to the Salt Group, total salt production in fiscal 1998 was
approximately 15.4 million tons.
ITEM 3. LEGAL PROCEEDINGS
LITIGATION AND REGULATION
NEW JERSEY DEPARTMENT OF ENVIRONMENTAL PROTECTION V. VENTRON CORPORATION, ET
AL., SUPERIOR COURT OF BERGEN COUNTY, NEW JERSEY, FILED ON MARCH 31, 1976. After
a trial in 1979 and unsuccessful appeals to the Appellate Division and to the
Supreme Court of New Jersey, Ventron Corporation (a corporate predecessor of the
Company) and its co-defendant, Velsicol Chemical Corporation ("Velsicol") were
each held jointly and severally liable for the cost of remediation necessary to
correct mercury-related environmental problems associated with a former mercury
processing plant located adjacent to Berry's Creek in Wood-Ridge, New Jersey.
Subsequent to the liability holding, the Company, Velsicol and the New Jersey
Department of Environmental Protection ("NJDEP") entered into a judicial consent
order under which the Company and Velsicol agreed, subject to certain conditions
and limitations, to share the costs of technical studies to determine the
appropriate remedy for environmental problems associated with the
5
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ITEM 3. LEGAL PROCEEDINGS --(Continued)
former Wood-Ridge operation. Under the terms of the judicial consent order,
NJDEP authorized the Company and Velsicol to perform a remedial
investigation\feasibility study ("RI\FS") of the Wood-Ridge plant site with a
separate and coordinated basin-wide, multi-party approach to be taken to address
the multiple sources of contamination in Berry's Creek. The Wood-Ridge plant
site RI\FS began in early fiscal 1997, and has been estimated to take
approximately 42 months to complete. The timetable for the Berry's Creek RI\FS
is yet to be determined. Because of the absence of site-specific data, the
unique nature of mercury plant wastes, and the complex characteristics of the
Wood-Ridge plant site and Berry's Creek, no reliable estimate can be made of the
Company's liability (or range of exposure) until information sufficient to
permit such determination is available from the investigations and studies
referred to above. The Company's ultimate exposure will also depend upon the
continued participation of Velsicol and on the results of both formal and
informal attempts to spread liability to others believed to share
responsibility. In this vein, the Company and Velsicol filed suit in the United
States District Court for the District of New Jersey in July, 1996 naming as
defendants present and former owners or operators of neighboring industrial
facilities and waste disposal sites, former toll-processing customers of the
mercury plant, and others believed to share responsibility for environmental
problems attributed to the Company and Velsicol and responsible at least in part
for the costs of technical studies and any remedial actions that may be
required. The Company and Velsicol have been able to reach settlements with 50
of the 72 current defendants. These settlements relate to claims associated only
with the Wood-Ridge plant site and not Berry's Creek, with settlement proceeds
totaling approximately $1.5 million expected to be received during the first
quarter of fiscal year 1999. The settling defendants are considered DE MINIMIS,
leaving what the Company considers the major defendants still in the litigation.
With respect to Berry's Creek, it is also anticipated that New Jersey
authorities will employ administrative enforcement mechanisms to influence
potentially responsible parties to join in a coordinated, basin-wide multi-party
RI\FS. The Company is not entitled to indemnity under insurance policies for
environmental cleanup and related expenses resulting from operation of the
Wood-Ridge mercury plant.
EPA INQUIRY--MOSS POINT PLANT. In April, 1996 U.S. EPA Region 4 ("EPA")
notified the Company of possible irregularities in water discharge monitoring
reports ("DMRs") filed by the Company's Moss Point, Mississippi chemicals plant
for the months of January and March, 1995, and in related internal summary
reports for February, 1995. An outside law firm specially retained by the
Company confirmed that DMRs and supporting information for the January-March,
1995 period had in fact been falsified, to misrepresent the test results for
effluent discharged by the plant pursuant to its National Pollution Discharge
Elimination System ("NPDES") permit. Similar falsifications were discovered that
occurred both before and after that period. Other possible environmental
violations at Moss Point were discovered during the review process, each of
which has been investigated through an expansion of the original investigation.
The Company is cooperating with the EPA and the Mississippi state agency, both
of which it has kept informed on a continuing basis. The plant's environmental
coordinator, who admitted responsibility for the falsifications, was discharged.
The Company has been served with federal grand jury subpoenas seeking documents
related to wastewater discharge and groundwater monitoring reporting at Moss
Point and has furnished the requested documents. Administrative or judicial
enforcement proceedings against the Company are expected, but no such
proceedings have yet been instituted. These proceedings may expose the Company
to material fines, penalties and remedial expenses, the amounts of which cannot
presently be determined.
MISCELLANEOUS. The Company is involved in a number of additional pending
legal and administrative proceedings which are not expected, individually or in
the aggregate, to be material to its business or financial position. Certain
governmental agencies have authority to limit or prohibit distribution of some
of the Company's products should they formally conclude that continued
distribution is unsafe to the
6
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ITEM 3. LEGAL PROCEEDINGS --(Continued)
population or the environment. There are currently no challenges pending, the
resolution of which would have a material effect upon the Company's operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT (AS REQUIRED BY INSTRUCTION 3. TO ITEM
401(B) OF REGULATION S-K)
Following is a list of the names and ages of all the Executive Officers of
the Registrant, indicating all positions and offices held by each such person,
and each such person's principal occupations or employment during the past five
years. Each such person has been elected to serve until the next annual election
of officers of the Registrant, which is expected to occur on October 22, 1998,
or until his or her earlier resignation or removal.
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PRINCIPAL POSITIONS AND OFFICES HELD AND
OCCUPATIONS
NAME AND AGE OR EMPLOYMENT DURING PAST FIVE YEARS *
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S. Jay Stewart (60)................ Chairman and Chief Executive Officer since
April 1994. Prior thereto, he served as
President and Chief Operating Officer since
1986.
William E. Johnston (58)........... President and Chief Operating Officer since
October 1995. Before that, he served as
Executive Vice President, Administration.
Walter W. Becky II (55)............ Group Vice President and President, Salt
Group.
Robert P. Edmonston (53)........... Group Vice President and President,
Chemical Specialties since June 1998. Prior
thereto, he served as Vice President,
Performance Chemicals Worldwide.
Daniel D. Feinberg (55)............ Group Vice President and President,
Electronic Materials Group since July 1992.
Prior thereto, he served as Executive Vice
President for the Electronic Materials
Group
James J. Fuerholzer (62)........... Executive Vice President of Portfolio and
Technology Development since June 1998.
Prior thereto, he served as Group Vice
President and President, Adhesives and
Chemical Specialties Group, (from October
1995) and Group Vice President, Morton
Specialty Chemical Products (from 1992).
Stephen A. Gerow (55).............. Group Vice President and President,
Coatings Group.
Raymond P. Buschmann (54).......... Vice President for Legal Affairs, General
Counsel and Secretary since February 1998.
Previously he served as Vice President for
Legal Affairs and General Counsel since
November 1996, as Vice President and
Associate General Counsel since November
1995, and Assistant General Counsel-Chemi-
cals since 1991.
</TABLE>
7
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<TABLE>
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PRINCIPAL POSITIONS AND OFFICES HELD AND
OCCUPATIONS
NAME AND AGE OR EMPLOYMENT DURING PAST FIVE YEARS *
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<S> <C>
Albert E. Greene (61).............. Vice President Regulatory Affairs and
Operations Support since June 1998. He
earlier served in several executive posi-
tions including Vice President, Engineering
and Regulatory Affairs since July 1997;
Vice President Health, Safety and
Environmental Affairs since May 1994 and
Vice President Total Quality Management
since 1991.
Nancy A. Hobor (52)................ Vice President, Communications and Investor
Relations.
Christopher K. Julsrud (50)........ Vice President, Human Resources since 1994.
Prior thereto, he served as Director of
Corporate Compensation and Benefits.
Thomas F. McDevitt (58)............ Vice President Finance and Chief Financial
Officer.
Lewis N. Liszt (56)................ Controller since February 1997. Prior
thereto, he served as Vice President
Management Services from 1994 to 1997, and
Vice President, Financial & Operations
Audit from 1992 to 1994.
Bruce G. Wolfe (55)................ Treasurer
</TABLE>
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* All Company executive officers were also employees of Old Morton; their
positions held prior to April 30, 1997 were with Old Morton and, where
indicated, groups and divisions thereof.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
Information concerning the market for the Company's common equity and
related security holder matters is included on the inside rear cover of the
Company's Annual Report to Shareholders for fiscal 1998, and is incorporated by
reference into this Report.
ITEM 6. SELECTED FINANCIAL DATA
Selected financial data for the ten fiscal years in the period ended June
30, 1998 are included on page 38 of the Company's Annual Report to Shareholders
for fiscal 1998, and are incorporated by reference into this Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Management's Discussion and Analysis of Financial Condition and Results of
Operations for the three fiscal years in the period ended June 30, 1998, is
included on pages 20-23 of the Company's Annual Report to Shareholders for
fiscal 1998, and is incorporated by reference into this Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information appearing under "Management's Discussion and Analysis of
Financial Condition and Results of Operations--Market Risk Exposure" on page 23
of the 1998 Annual Report is incorporated by reference into this Report.
8
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The consolidated balance sheets of the Company as of June 30, 1998 and 1997,
and the consolidated statements of income and cash flows for each of the three
years in the period ended June 30, 1998, and notes to consolidated financial
statements which are included on pages 24-37 of the Company's Annual Report to
Shareholders for fiscal 1998 are incorporated by reference into this Report.
Quarterly results of operations on the inside front cover of the Annual Report
to Shareholders for fiscal 1998 are incorporated by reference into this Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the directors and nominees for directors of the
Company is included on pages 2-6 of the Company's definitive Proxy Statement
dated September 11, 1998, and is incorporated by reference into this Report.
Information concerning the executive officers of the Company is included on
pages 7-8, Part I of this Report.
ITEM 11. EXECUTIVE COMPENSATION
Information concerning executive compensation for fiscal 1998 is included on
pages 8-17 of the Company's definitive Proxy Statement dated September 11, 1998,
and is incorporated by reference into this Report.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Information concerning beneficial ownership of the Company's common stock is
included on page 7 of the Company's definitive Proxy Statement dated September
11, 1998, and is incorporated by reference into this Report.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions is
included on page 8 of the Company's definitive Proxy Statement dated September
11, 1998, under the caption "Compensation Committee Interlocks and Insider
Participation," and is incorporated by reference into this Report.
9
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K
(a) DOCUMENTS FILED AS PART OF THIS REPORT
1. FINANCIAL STATEMENTS
The following consolidated financial statements of the Company included on
pages 24-37 of the Company's Annual Report to Shareholders for the fiscal year
ended June 30, 1998, are incorporated herein by reference:
Consolidated Statements of Income--Years ended June 30, 1998, 1997 and 1996
Consolidated Balance Sheets--June 30, 1998 and 1997
Consolidated Statements of Cash Flows--Years ended June 30, 1998, 1997 and
1996
Notes to Consolidated Financial Statements
2. FINANCIAL STATEMENT SCHEDULES
The following information for the fiscal years 1998, 1997 and 1996 is
submitted herewith:
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Report of Independent Auditors.................................................. F-1
Schedule II--Valuation and Qualifying Accounts.................................. F-2
</TABLE>
All other schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable, and therefore have been omitted.
3. INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
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<S> <C> <C> <C> <C>
(3) Articles of incorporation and by-laws
(a) Amended and Restated Articles of Incorporation of the Incorporated by reference to Exhibit (3)(a) to the
Company Company's Report on Form 10-K for fiscal 1997
(b) By-laws of the Company amended through May 1, 1997 Incorporated by reference to Exhibit (3)(b) to the
Company's Report of Form 10-K for fiscal 1997
(4) Instruments defining the rights of security holders, including
indentures
(a) Rights Agreement dated as of April 24, 1997 between Incorporated by reference to Exhibit 4.1 to
the Company and The First National Bank of Chicago Registration Statement on Form 10 dated as of March
24, 1997
(b) See Exhibits (3)(a) and (3)(b) above
</TABLE>
10
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K --(Continued)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------ ------------------------------------------------------
<S> <C> <C> <C> <C>
(10) Material contracts
(a) * Key Executive Long-Term Incentive Program effective Filed herewith electronically
for fiscal 1999-2001
(b) * Key Executive Annual Bonus Program (Program 1) Filed herewith electronically
effective for fiscal 1999
(c) Staff Executive Annual Bonus Program (Program 2) Filed herewith electronically
effective for fiscal 1999
(d) * 1997 Incentive Plan Incorporated by reference to Exhibit (10) to Company's
Quarterly Report on Form 10-Q for the quarter ended
December 31, 1997
(e) * Form of Nonqualified Stock Option Notice and Grant Incorporated by reference to Exhibit (10)(e) to the
Agreement Company's Report of Form 10-K for fiscal 1997
(f) * Morton Thiokol, Inc. Survivor Income Benefits Plan, Incorporated by reference to Exhibit 10.14 to
amended through March 24, 1983, assumed by the Registration Statement No. 33-28803
Company
(g) * Morton International, Inc. Executive Post-Retirement Incorporated by reference to Exhibit (10)(f) to the
Life Insurance Plan, assumed by the Company Old Morton's Report on Form 10-K for fiscal 1992
(h) * Arrangements whereby the Company compensates its N/A
independent auditors for tax services to certain key
executives, concerning which arrangements there is no
written document
(i) * Form of Employment Agreement between the Company and Incorporated by reference to Exhibit (10)(g) to the
certain of its executive officers, assumed by the Old Morton's Report on Form 10-K for fiscal 1990
Company
(j) ** Executive Employment Agreement, dated April 1, 1994, Incorporated by reference to Exhibit (10)(i) to the
between the Company and S. J. Stewart, assumed by the Old Morton's Report on Form 10-K for fiscal 1994
Company
(k) * Supplemental Executive Retirement Program, assumed by Incorporated by reference to Exhibits 10.15 and 10.16
the Company to Registration Statement No. 33-28803
(l) 1994 Non-Employee Directors Stock Plan, assumed by the Incorporated by reference to Exhibit (10)(k) to the
Company Old Morton's Report on Form 10-K for fiscal 1995
(13) Annual report to security holders
(a) Annual Report to Shareholders of the Company for Filed herewith electronically
fiscal 1998 (financial information only: inside front
cover and pages 20-39)
</TABLE>
11
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K --(Continued)
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION METHOD OF FILING
- --------- ------------------------------------------------------ ------------------------------------------------------
<S> <C> <C> <C> <C>
(21) Subsidiaries of the registrant
(a) Subsidiaries of the Company Filed herewith electronically
(23) Consents of experts and counsel
(a) Consent of Independent Auditors Filed herewith electronically
(27) Financial data schedule for year ended June 30, 1998 Filed herewith electronically
</TABLE>
- ---------
*Exhibits 10(a), (b), (d), (e), (f), (g), (h), (i), and (k) consist of
compensation plans or arrangements in which all of the Company's five most
highly compensated executive officers currently participate, except that only
S. J. Stewart does not participate in Exhibit 10(i) and only W. E. Johnston
participates in Exhibit 10(k). These plans and, where applicable, the
foregoing individuals' current benefits under each (except Exhibit 10(h)) are
described on pages 8-17 of the Company's definitive Proxy Statement dated
September 11, 1998, which descriptions are incorporated herein by reference.
**Description of this employment agreement is set forth on page 16 of the
Company's definitive Proxy Statement dated September 11, 1998, which
description is incorporated herein by reference.
(b) REPORTS ON FORM 8-K
During the quarter ended June 30, 1998, the Company did not file any current
reports on Form 8-K.
12
<PAGE>
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, AS OF THE 27TH DAY OF
AUGUST, 1998.
MORTON INTERNATIONAL, INC.
(REGISTRANT)
<TABLE>
<S> <C> <C>
By /s/ T. F. MCDEVITT
-----------------------------------------
T. F. MCDEVITT
VICE PRESIDENT FINANCE AND
CHIEF FINANCIAL OFFICER
</TABLE>
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 INDICATED, AS OF THE 27TH DAY OF AUGUST, 1998.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------- ----------------------------------------------------------
<S> <C>
/s/ S. J. STEWART Chairman of the Board, Chief Executive Officer
-------------------------------------- and Director (Principal Executive Officer)
S. J. STEWART
/s/ T. F. MCDEVITT Vice President Finance and Chief Financial Officer
-------------------------------------- (Principal Financial Officer)
T. F. MCDEVITT
/s/ L. N. LISZT Controller
-------------------------------------- (Principal Accounting Officer)
L. N. LISZT
/s/ R. M. BARFORD Director
--------------------------------------
R. M. BARFORD
/s/ J. R. CANTALUPO Director
--------------------------------------
J. R. CANTALUPO
/s/ W. J. FARRELL Director
--------------------------------------
W. J. FARRELL
/s/ D. C. FILL Director
--------------------------------------
D. C. FILL
/s/ W. E. JOHNSTON Director
--------------------------------------
W. E. JOHNSTON
/s/ R. L. KEYSER Director
--------------------------------------
R. L. KEYSER
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
SIGNATURE TITLE
- -------------------------------------------------- ----------------------------------------------------------
<S> <C>
/s/ R. A. MCDONALD Director
--------------------------------------
R. A. MCDONALD
/s/ E. J. MOONEY Director
--------------------------------------
E. J. MOONEY
/s/ R. W. STONE Director
--------------------------------------
R. W. STONE
</TABLE>
14
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and
Board of Directors
Morton International, Inc.
We have audited the consolidated financial statements of Morton
International, Inc. and subsidiaries listed in Item 14(a)(1) of the annual
report on Form 10-K of Morton International, Inc. for the year ended June 30,
1998. Our audits also included the financial statement schedule listed in Item
14(a)(2). These financial statements and schedule are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements and schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Morton International, Inc. and subsidiaries at June 30, 1998 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended June 30, 1998, in conformity with generally
accepted accounting principles. Also, in our opinion, the related financial
statement schedule, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.
As discussed in the notes to the consolidated financial statements, the
Company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of" in 1996.
ERNST & YOUNG LLP
Chicago, Illinois
July 29, 1998
F-1
<PAGE>
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
MORTON INTERNATIONAL, INC. AND SUBSIDIARIES
(IN THOUSANDS)
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
ADDITIONS
---------------------------------
(1) (2)
BALANCE AT CHARGED TO
BEGINNING CHARGED TO COSTS OTHER ACCOUNTS DEDUCTIONS BALANCE AT
DESCRIPTION OF PERIOD AND EXPENSES --DESCRIBE --DESCRIBE END OF PERIOD
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended June 30, 1998.................. $11,739 $5,534 $-- $3,529(A) $13,484
260(B)
Year ended June 30, 1997.................. 10,316 4,683 -- 3,587(A) 11,739
(327)(B)
Year ended June 30, 1996.................. 11,034 2,325 -- 2,818(A) 10,316
225(B)
</TABLE>
- ---------
Note A-- Represents write-offs less recoveries.
Note B-- Foreign currency translation adjustments.
F-2
<PAGE>
July 1, 1998 EXHIBIT (10)(a)
MORTON INTERNATIONAL, INC.
FISCAL 1999-01
KEY EXECUTIVE LONG-TERM INCENTIVE PROGRAM
This Program, which has been adopted pursuant to paragraph 4(d)(i) of the
Company's 1997 Incentive Plan, provides cash incentive opportunities to Senior
Corporate Officers, Group Vice Presidents and key Business Unit Executives for
achieving long-term growth oriented performance goals.
A. OBJECTIVE
---------
The objective of this Program is to further the growth of the Company by
rewarding key executives for achieving long-term growth oriented
performance goals, benefiting the shareholders.
B. TIMING
------
The Program will operate over a three-year performance period covering
fiscal 1999, 2000 and 2001.
C. ELIGIBILITY AND PARTICIPATION
-----------------------------
The Program covers the following executive positions:
Chief Executive Officer
Chief Operating Officer
Corporate Officers reporting to the Chief Executive Officer or
Chief Operating Officer
Business Unit Executives, in salary grade 22 or above, reporting
to a Group Vice President
Eligibility will be by position. Participation approval, however, will be
be only by position and incumbent.
Positions must be nominated for participation prior to the start of the
performance period. Participation requires the approval of the Chief
Operating Officer, the Chief Executive Officer and the Compensation
Committee of the Board.
D. PROGRAM FUNDING
---------------
The Chief Financial Officer, at the direction of the Chief Executive
Officer, will reserve appropriate funds during the course of the fiscal
year to provide incentive payments. Any such reserved funds shall remain
the property of the Company and no participant shall have a right or claim
to any such funds unless the right or claim has specifically accrued under
the Program.
<PAGE>
Fiscal 1999-01
Key Executive Long-Term Incentive Program
Page 2
E. PERFORMANCE CRITERIA
--------------------
Criteria used to measure performance for the performance period are:
PARTICIPANT GROUP APPLICABLE PERFORMANCE CRITERIA
----------------- -------------------------------
CEO, COO, and Corporate - Growth in Company Earnings Per
Staff Officers Share ("EPS")
- Average Return on Net Assets -
Group Roll-up
Group Vice Presidents - Growth in Pre-Tax Group Profit
- Average Return on Net Assets - Group
Business Unit Executives - Growth in Pre-Tax Group or Business
Unit Profit
- Average Return on Net Assets - Group
or Business Unit
F. ESTABLISHMENT OF PERFORMANCE OBJECTIVES
---------------------------------------
For the performance period, growth and average return on net assets
objectives have been established by the Compensation Committee of the
Board based upon recommendation by the Chief Executive Officer.
These objectives include a threshold level at which partial incentives
may be earned, the desired objective for the period at which target
incentives may be earned, and an optimum level at which maximum
incentives may be earned, as follows:
EPS OR PRE TAX PROFIT GROWTH AVERAGE RONA
---------------------------- ------------
Threshold 5% growth compounded annually (Set based on historical
Objective 10% growth compounded annually results and requirements
Optimum 20% growth compounded annually for future Company
success)
G. ADJUSTMENTS TO PERFORMANCE OBJECTIVES/ACTUAL RESULTS
----------------------------------------------------
To the extent any of the following occur after performance objectives
are initially established, the actual results will be adjusted by
action of the Compensation Committee by the same dollar effect any such
occurrence has had on actual results so that the degree to which
objectives are achieved will not be affected by any of the following:
changes in (or in the application of) accounting principles; changes in
tax laws; extraordinary items as defined under generally accepted
accounting principles; and any other significant non-recurring items
which the Company's press releases or SEC filings note and take into
account in explaining what the Company's or a Group or Business Unit's
financial results would have been on a comparable basis from period to
period.
In addition, with respect to acquisitions and divestitures the
following adjustments will apply:
ACQUISITIONS
------------
1. Group and Business Unit PTI. Results will be adjusted by
subtracting from actual Group and Business Unit PTI the "cost
of funds" of such acquisition for the same period that pre-tax
income or
<PAGE>
Fiscal 1999-01
Key Executive Long-Term Incentive Program
Page 3
loss from the acquisition are included in such measure. ("Cost
of funds" means the inputed interest for the net acquisition
cost calculated by using the Company's current borrowing rate
under its credit lines during the period or, if there is no
borrowing, the rate the Company is receiving on invested cash
during the period.)
2. Return on Net Assets. RONA objectives will be adjusted for
acquisitions that occur during the performance period to the
extent the financial standards used in justifying the
acquisition for authorization impacts the RONA objectives.
DIVESTITURES
------------
1. EPS and Group and Business Unit PTI. EPS and Group and
Business Unit performance objectives will be adjusted to
remove the effect of the profit or loss attributable to the
divested business for the time period post-divestment.
2. Return on Net Assets. RONA objectives will be adjusted to
remove the effect a divested business had on RONA for the time
period post-divestment, provided such RONA effect is greater
than 0.5%.
H. TARGET INCENTIVE AMOUNTS
------------------------
A specific dollar incentive target for each participant will be
established by the Compensation Committee based on a recommendation from
the CEO. The dollar target will be computed as a percentage of the
participant's base salary immediately before the beginning of the
performance period. The percentage to be applied will vary depending on
the participant's assigned salary grade as follows:
<TABLE>
<CAPTION>
ASSIGNED SALARY GRADE PERCENTAGE TARGET APPLIED TO SALARY
--------------------- -----------------------------------
<S> <C>
33 100%
31 100%
28 80%
27 80%
26 80%
25 70%
24 70%
23 60%
22 60%
</TABLE>
The dollar value of the incentive targets, computed in accordance with
the above schedule, may be adjusted by the Compensation Committee based
on the recommendation of the CEO, within a guideline range of plus or
minus 20% to provide a degree of flexibility in determining individual
incentive amounts. The Compensation Committee may use the same guideline
range of plus or minus 20% to determine an adjusted incentive target for
the CEO.
I. ACTUAL INCENTIVE AWARDS
-----------------------
Actual incentive awards require the approval of the CEO and Compensation
Committee and will be based upon pre-established individual participant
payout schedules reflecting achievement of performance objectives for
the performance period. For results between the established performance
objectives, linear
<PAGE>
Fiscal 1999-01
Key Executive Long-Term Incentive Program
Page 4
interpolation will be used to compute the percentage of the target
incentive which may be earned. The achievement levels and corresponding
payout opportunity are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------
--------------------------------------------------------
Achievement Percent of Target
Level Which May Be Earned
<S> <C>
------------------- ------------------------------------
------------------- ------------------------------------
Threshold 50%
Objective 100%
Optimum 200%
------------------- ------------------------------------
------------------- ------------------------------------
</TABLE>
J. INCENTIVE PAYMENTS
------------------
Any incentive payments made under the Program will be made in the form
of cash or Company stock (at the election of the Company), and will
normally be paid in the month of August following the end of the
three-year performance period. No incentive award is earned until the
date the Compensation Committee approves such payment.
If the Company reasonably anticipates that all or any portion of an
incentive award otherwise payable under the Program will be
nondeductible by the Company for federal income tax purposes as a result
of the application of Section 162(m) of the Internal Revenue Code of
1986, as amended, the Company may defer the payment of such award or
portion thereof. A deferred account balance in the amount of the
deferred portion of such award will be created by the Company for each
participant with respect to whom an incentive award payment is deferred.
Such deferred account balance will accrue interest, compounded semi-
annually, at the average rate for commercial paper as reflected in the
Federal Reserve 30 day commercial paper composite.
Prior to the end of each taxable year of the Company, the Company will
determine the maximum amount of each participant's deferred account
balance that the Company reasonably expects would be deductible by it
for federal income tax purposes in such taxable year if such amount were
paid to such participant on or before the last day of such taxable year
and will pay that amount to the participant on or before such date.
K. TERMINATION OF EMPLOYMENT OR CESSATION OF ELIGIBILITY
-----------------------------------------------------
Because incentive awards are not earned until the date the Compensation
Committee approves payment, if termination of employment occurs or the
participant ceases to be eligible for benefits under the Program before
such date (whether or not the performance period has ended), no such
terminated or ineligible employee is entitled to any incentive payment.
Under certain circumstances, as detailed below, a terminated participant
who completed one-third of the performance period and whose employment
terminates by reason other than resignation or involuntary termination
may be considered for an incentive award. Consideration of such awards
will be at the sole discretion of the Compensation Committee and require
approval based upon the Chief Executive Officer's recommendation
according to the following schedule:
<PAGE>
Fiscal 1999-01
Key Executive Long-Term Incentive Program
Page 5
REASON FOR TERMINATION INCENTIVE AWARD ELIGIBILITY
---------------------- ---------------------------
Retirement or Death Pro rata share of incentive
award, payable to retiree or
heirs/estate after the end of
the performance period subject
to the achievement of goals
for the entire performance
period.
Long-Term Disability Pro rata share of incentive
award, payable after the end
of the performance period
subject to the achievement of
goals for the entire
performance period.
Resignation or No incentive award even if
Involuntary Termination termination occurs after the
end of the performance period
but before the Compensation
Committee approves payment of
awards.
L. ADMINISTRATION
--------------
The Program will be administered by the Compensation Committee assisted
by the Company's Human Resources staff.
M. CHANGE IN CONTROL
-----------------
Anything in this Program to the contrary notwithstanding, upon the
occurrence of a Change in Control of the Company (as defined in Section
5(c) of the 1989 Incentive Plan, as amended effective June 23, 1994 of
the Indiana corporation previously known as Morton International, Inc.),
the performance periods with respect to all outstanding incentive awards
shall terminate as of such date and the related incentive awards shall
be payable as of such date. The amount payable with respect to any award
shall be equal to the percent of the target determined as follows: The
sum of (x) the product of (i) the greater of (a) the percent of target
that would have been earned and payable pursuant to Section I above if
the performance period had ended as of the last day of the fiscal
quarter immediately prior to such Change in Control of the Company or
(b) 100 and (ii) the number of full quarters elapsed in the performance
period (the "Elapsed Quarters") divided by twelve and (y) the product of
(i) 100 and (ii) the quotient obtained by dividing (a) twelve minus the
number of Elapsed Quarters by (b) twelve.
<PAGE>
EXHIBIT (10)(b)
July 1, 1998 PROGRAM ONE
MORTON INTERNATIONAL, INC.
FISCAL 1999
KEY EXECUTIVE ANNUAL BONUS PROGRAM
This Program, which has been adopted pursuant to paragraph 4(d) (i) of the
Company's 1998 Incentive Plan, provides annual cash bonus opportunities
depending on performance of Corporate Officers, Group Vice Presidents and
Business Unit Executives.
A. OBJECTIVE
---------
The objective of this Program is to reward key executives who have a
direct influence on annual profits for outstanding performance in this
regard.
B. TIMING
------
The Program year for purposes of this Program will correspond to the
Company's 1999 fiscal year.
C. ELIGIBILITY AND PARTICIPATION
-----------------------------
This Program covers the following executive positions:
Chief Executive Officer
Chief Operating Officer
Corporate Officers reporting to the Chief Executive Officer or
the Chief Operating Officer
Business Unit Executives, in salary grade 22 or above,
reporting to a Group Vice President
Eligibility will be by position. Participation approval, however, will
be only by position and incumbent.
Positions must be nominated for participation prior to the start of the
Program year. Participation requires the approval of the Chief
Operating Officer, the Chief Executive Officer and the Compensation
Committee of the Board.
D. PROGRAM FUNDING
---------------
A fund will be calculated for the Program year. The fund will be
determined by multiplying the individual participant's June 30, 1998
salary by the target bonus percent for each participant's salary grade
(see Paragraph H). The sum of these amounts times 1.6 is the maximum
fund.
The Chief Financial Officer, at the direction of the Chief Executive
Officer, will reserve appropriate funds during the course of the fiscal
year to provide bonus awards. Any such reserved funds shall remain the
property of the Company and no participant shall have a right or claim
to any such funds unless the right or claim has specifically accrued
under the Program.
<PAGE>
Fiscal 1999
Key Executive Annual Bonus Program
Page 2
E. PERFORMANCE CRITERIA
--------------------
Criteria used to measure performance for the Program year are:
APPLICABLE PERFORMANCE
PARTICIPANT GROUP CRITERIA
----------------- -----------------
CEO, COO and Corporate Staff Officers Attainment of Company Earnings
Per Share ("EPS") Goal
Group Vice Presidents Attainment of EPS Goal and
Group Profit Results
Business Unit Executives Attainment of Group Profit
Results, Business Unit Profit
Results and Strategic Goals
F. ESTABLISHMENT OF SPECIFIC PERFORMANCE OBJECTIVES
------------------------------------------------
For the Program year, EPS and Group and Business Unit profit objectives
have been established by the Compensation Committee of the Board upon
recommendation by the Chief Executive Officer.
The EPS objective includes the threshold level at which a bonus may be
earned, the target objective for the year, and a maximum limit beyond
which additional bonus amounts may not be earned with respect to EPS as
follows:
Threshold - 6% Below Budget
Target - Budget
Maximum - 8% Above Budget
Strategic objectives for Business Unit Executives will be developed and
reviewed by appropriate levels of management. These objectives may be
financial or non-financial in nature. They may be weighted to reflect
relative importance. The objectives will also embody measurement
criteria so that the degree of accomplishment can be determined. Where
objectives encompass more than one year, milestones will be used to
reflect expected progress each year.
G. ADJUSTMENTS TO PROFIT OBJECTIVES/ACTUAL RESULTS
-----------------------------------------------
To the extent any of the following occur after profit objectives are
initially established, the actual results will be adjusted by action of
the Compensation Committee by the same dollar effect any such
occurrence has had on actual profit results so that the degree to which
objectives are achieved will not be affected by any of the following:
changes in (or in the application of) accounting principles; changes in
tax laws; extraordinary items as defined under generally accepted
accounting principles; and any other significant non-recurring items
which the Company's press releases or SEC filings note and take into
account in explaining what the Company's or a Group or Business Unit's
financial results would have been on a comparable basis from period to
period.
<PAGE>
Fiscal 1999
Key Executive Annual Bonus Program
Page 3
In addition, with respect to acquisitions and divestitures the following
adjustments will apply:
ACQUISITIONS
------------
1. Corporate EPS. The Company's overall EPS results will be
adjusted to eliminate the earnings or loss from "material"
acquisitions ("material" means that an acquisition increases or
decreases actual EPS results by 5.0% or more).
2. Group and Business Unit PTI. If the acquisition income or loss
is material from an EPS standpoint as defined under 1. above,
the acquisition income or loss will be eliminated from the
actual results. Otherwise, Group and Business Unit results will
be adjusted by subtracting from actual PTI the "cost of funds"
of the acquisition for the same period that pre-tax income or
loss from the acquisition are included in such measure. ("Cost
of funds" means the inputed interest for the net acquisition
cost calculated by using the Company's current borrowing rate
under its credit lines during the period or, if there is no
borrowing, the rate the Company is receiving on invested cash
during the period.)
DIVESTITURES
------------
EPS and Group and Business Unit profit objectives will be adjusted to
remove the budgeted profit or loss associated with the divested business
for the same period that actual profit or loss are no longer recognized
for that business.
H. ANNUAL BONUS TARGETS
--------------------
A dollar bonus target will be established for each participant. The
dollar bonus target will be computed as a percentage of the
participant's base salary on June 30, 1998. The percentage to be applied
will vary depending on the participant's assigned salary grade as
follows:
<TABLE>
<CAPTION>
---------------- --------------------------------------------
---------------- --------------------------------------------
Assigned Percentage Applied To Salary
Salary Grade Earnings To Determine Target Bonus
---------------- --------------------------------------------
---------------- --------------------------------------------
<S> <C>
33 75.00%
---------------- --------------------------------------------
---------------- --------------------------------------------
31 68.75%
---------------- --------------------------------------------
---------------- --------------------------------------------
28 62.50%
---------------- --------------------------------------------
---------------- --------------------------------------------
27 62.50%
---------------- --------------------------------------------
---------------- --------------------------------------------
26 56.25%
---------------- --------------------------------------------
---------------- --------------------------------------------
25 50.00%
---------------- --------------------------------------------
---------------- --------------------------------------------
24 43.75%
---------------- --------------------------------------------
---------------- --------------------------------------------
23 37.50%
---------------- --------------------------------------------
---------------- --------------------------------------------
22 37.50%
---------------- --------------------------------------------
---------------- --------------------------------------------
</TABLE>
<PAGE>
Fiscal 1999
Key Executive Annual Bonus Program
Page 4
I. ACTUAL BONUS AWARDS
-------------------
Actual bonus awards for the Program year will be based on payout
schedules reflecting achievement of performance objectives. Payments of
bonus awards require the approval of the Chief Operating Officer, the
Chief Executive Officer and the Compensation Committee.
The payout schedules are presented below by participant group. No bonus
shall be earned based upon EPS attainment if the EPS does not exceed
that for the prior year. For results between the performance indicators,
linear interpolation will be used to compute the percent of the target
bonus which may be earned.
1. CHIEF EXECUTIVE OFFICER, CHIEF OPERATING OFFICER AND CORPORATE
--------------------------------------------------------------
STAFF OFFICERS
--------------
In this group, actual bonus awards will be based on relative
attainment of the EPS objective.
The EPS threshold for minimum bonus awards to be allocated will
be 6 percentage points below the EPS goal at 100%. The EPS
objective for the bonus awards to be allocated at maximum will be
8 percentage points above the EPS goal at 100%.
<TABLE>
<CAPTION>
---------------- ------------------------------
---------------- ------------------------------
EPS Percent Of Target Bonus
Attainment Which May Be Earned
---------------- ------------------------------
---------------- ------------------------------
<S> <C>
6% below 52%
---------------- ------------------------------
---------------- ------------------------------
5% below 60%
---------------- ------------------------------
---------------- ------------------------------
4% below 68%
---------------- ------------------------------
---------------- ------------------------------
3% below 76%
---------------- ------------------------------
---------------- ------------------------------
2% below 84%
---------------- ------------------------------
---------------- ------------------------------
1% below 92%
---------------- ------------------------------
---------------- ------------------------------
EPS Goal 100%
---------------- ------------------------------
---------------- ------------------------------
5% above 140%
---------------- ------------------------------
---------------- ------------------------------
8% above 160%
---------------- ------------------------------
---------------- ------------------------------
</TABLE>
In total, the annual bonus award for a participant in this group
cannot exceed 160 percent of the participant's target bonus.
2. GROUP VICE PRESIDENTS
---------------------
Actual bonus awards for this group of participants will depend on
relative attainment of the EPS objective as well as the
appropriate Group Profit objective.
<PAGE>
Fiscal 1999
Key Executive Annual Bonus Program
Page 5
The specific payout schedule based on EPS and the applicable
Group Profit is as follows:
<TABLE>
<CAPTION>
---------------------------------- ---------------------------------------
---------------------------------- ---------------------------------------
EPS GROUP PROFIT
---------------------------------- ---------------------------------------
---------------------------------- ---------------------------------------
EPS Percent of Target Actual Profit Percent Of Target
Attainment Bonus Which As Percent Bonus Which
May Be Earned Of Budget May Be Earned
---------------------------------- ---------------------------------------
---------------------------------- ---------------------------------------
<S> <C> <C> <C>
6% below 4% 90% 48%
-------------- ------------------- ----------------- --------------------
5% below 6% 95% 60%
-------------- ------------------- ----------------- --------------------
4% below 9% 100% 80%
-------------- ------------------- ----------------- --------------------
3% below 11% 105% 92%
-------------- ------------------- ----------------- --------------------
2% below 14% 110% 104%
-------------- ------------------- ----------------- --------------------
1% below 16% 115% 120%
-------------- ------------------- ----------------- --------------------
EPS Goal 20% 120% 140%
-------------- ------------------- ----------------- --------------------
5% above 30% ----------------- --------------------
-------------- -------------------
8% above 36%
-------------- -------------------
-------------- -------------------
</TABLE>
In total, the annual bonus award for a participant in this group
cannot exceed 160 percent of the participant's target bonus.
3. BUSINESS UNIT EXECUTIVES
------------------------
Actual bonus awards for this group of participants will be based
on attainment of the applicable Group profit results compared to
budget or the applicable Group and Business Unit's profit results
compared to budget. In addition, up to 20 percent of a
participant's target bonus can be earned for achievement of
specific strategic goals.
The bonus award schedule based on the applicable Group Profit and
the applicable Business Unit Profit is as follows:
<PAGE>
Fiscal 1999
Key Executive Annual Bonus Program
Page 6
<TABLE>
<CAPTION>
----------------- ---------------------------------------------------------
----------------- ---------------------------------------------------------
Percent Of Target Which May Be Earned
Based On Unit Measurement:
---------------------------------------------------------
---------------------------------------------------------
Actual Profit
As Percent Group Business
Of Budget Profit OR Group AND Unit
Only Profit Profit
----------------- ----------- -------- ------------ -------- --------------
----------------- ----------- -------- ------------ -------- --------------
<S> <C> <C> <C> <C> <C>
90% 40% 20.0% 20.0%
----------------- ----------- ------------ --------------
95% 56% 28.0% 28.0%
----------------- ----------- ------------ --------------
100% 80% 40.0% 40.0%
----------------- ----------- ------------ --------------
105% 97% 48.5% 48.5%
----------------- ----------- ------------ --------------
110% 114% 57.0% 57.0%
----------------- ----------- ------------ --------------
115% 134% 67.0% 67.0%
----------------- ----------- ------------ --------------
120% 160% 80.0% 80.0%
----------------- ----------- -------- ------------ -------- --------------
----------------- ----------- -------- ------------ -------- --------------
</TABLE>
The additional bonus for achievement of strategic goals will be
determined as a percentage of the participant's original target
bonus up to a maximum of 20 percent.
In total, the annual bonus award for a participant in this group
cannot exceed 160 percent of the participant's target bonus,
including any discretionary fund payout (see Paragraph J).
J. DISCRETIONARY BONUS AWARD
-------------------------
Under this Program, special discretionary cash bonus awards can be made
for one-time outstanding achievements by eligible plan participants.
Such awards must be recommended by the Chief Executive Officer and
approved by the Compensation Committee of the Board. The Chief Executive
Officer and any other participating executive who the Committee
determines may reasonably be expected to be one of the four most highly
compensated executive officers (as defined under Section 162(m) of the
Internal Revenue Code) are not eligible for discretionary awards.
K. BONUS AWARD PAYMENTS
--------------------
Any bonus award payments made under the Program will be made in the form
of cash or Company stock (at the election of the Company), and will
normally be paid in the month of August following the end of the fiscal
year. No bonus award is earned until the date the Compensation Committee
approves such payment.
<PAGE>
Fiscal 1999
Key Executive Annual Bonus Program
Page 7
If the Company reasonably anticipates that all or any portion of a bonus
award otherwise payable under the Program will be nondeductible by the
Company for federal income tax purposes as a result of the application
of Section 162(m) of the Internal Revenue Code of 1986, as amended, the
Company may defer the payment of such award or portion thereof. A
deferred account balance in the amount of the deferred portion of such
award will be created by the Company for each participant with respect
to whom a bonus award payment is deferred. Such deferred account balance
will accrue interest, compounded semi-annually, at the average rate for
commercial paper as reflected in the Federal Reserve 30 day commercial
paper composite.
Prior to the end of each taxable year of the Company, the Company will
determine the maximum amount of each participant's deferred account
balance that the Company reasonably expects would be deductible by it
for federal income tax purposes in such taxable year if such amount were
paid to such participant on or before the last day of such taxable year
and will pay that amount to the participant on or before such date.
L. TERMINATION OF EMPLOYMENT OR CESSATION OF ELIGIBILITY
-----------------------------------------------------
Because bonus awards are not earned until the date the Compensation
Committee approves payment, if termination of employment occurs or the
participant ceases to be eligible for benefits under the Program before
such date (whether or not the applicable fiscal year has ended), no such
terminated or ineligible employee is entitled to any bonus payment.
Under certain circumstances, as detailed below, a terminated participant
whose employment terminates after December 31 by reason other than
resignation or involuntary termination may be considered for a bonus
award. Consideration of such awards will be at the sole discretion of
the Compensation Committee and require approval based upon the Chief
Executive Officer's recommendation according to the following schedule:
REASON FOR TERMINATION BONUS AWARD ELIGIBILITY
---------------------- -----------------------
Death or Retirement Pro rata share of bonus award,
payable to retiree, heirs/estate
Long-Term Disability Pro rata share of bonus award
Resignation or No bonus award even if termination
Involuntary Termination occurs after June 30 but before
Compensation Committee approves
payment of awards.
M. ADMINISTRATION
--------------
The Program will be administered by the Compensation Committee assisted
by the Company's Human Resources staff.
<PAGE>
EXHIBIT (10)(c)
July 1, 1998 PROGRAM TWO
MORTON INTERNATIONAL, INC.
FISCAL 1999
CORPORATE STAFF EXECUTIVE ANNUAL BONUS PROGRAM
This Program provides annual cash bonus opportunities depending on
performance of key Corporate staff executives.
A. OBJECTIVE
The objective of this Program is to reward staff executives who can
significantly affect operating results through cost reduction,
improved efficiency, or profit improvement for outstanding
performance in these areas.
B. TIMING
The Program year for purposes of this Program will correspond to the
Company's 1999 fiscal year.
C. ELIGIBILITY AND PARTICIPATION
The Corporate Staff Executive Annual Bonus Program covers key
Corporate staff executive positions in salary grades 19 and above.
Eligibility will be by position. Participation approval will be by
position and incumbent.
Positions must be nominated for participation prior to the start of
each Program year. Participation requires the approval of the
Corporate Officer in charge of the functional area involved and the
Corporate Vice President, Human Resources.
The Chief Executive Officer will review any nomination involving a
position or incumbent to be added to this Program for the first time.
D. PROGRAM FUNDING
A fund will be calculated for each Program year. The fund will be
determined by multiplying the individual participant's January 1, 1999
salary by the target bonus percent for each participant's salary grade
(see Paragraph H). The sum of these amounts times 1.75 is the maximum
fund.
The Chief Financial Officer, at the direction of the Chief Executive
Officer, will reserve appropriate funds during the course of the
fiscal year to provide bonus awards. Any such reserved funds shall
remain the property of the Company and no participant shall have a
right or claim to any such funds unless the right or claim has
specifically accrued under the Program.
<PAGE>
Fiscal 1999
Corporate Staff Executive Annual Bonus Program
Page 2
E. PERFORMANCE CRITERIA
Criteria used to measure performance for the Program year are:
Attainment of Company Earnings Per Share ("EPS") Goal
Attainment of Strategic Goals
Individual Performance
F. ESTABLISHMENT OF SPECIFIC PERFORMANCE OBJECTIVES
PROFIT GOALS
For the Program year, the EPS objective has been established by the
Compensation Committee of the Board upon recommendation by the Chief
Executive Officer.
This objective includes the minimum level at which a bonus may be
earned, the desired objective for the year, and a maximum limit
beyond which additional bonus amounts may not be earned.
STRATEGIC GOALS
Strategic goals are other financial or non-financial objectives.
These objectives will be designed to have an impact that is beyond
the participant's day to day position responsibilities. They may be
weighted to reflect relative importance. The objectives will also
embody measurement criteria so that the degree of accomplishment can
be determined. Where objectives encompass more than one year,
milestones will be used to reflect progress for the Program year.
Strategic goals will be closely reviewed by appropriate levels of
management.
INDIVIDUAL PERFORMANCE OBJECTIVES
Individual performance objectives will be established by each
participant and the supervising Corporate Officer. These objectives
are to be set at the beginning of the Program year, and will be
directed toward individual improvements in performance,
productivity, efficiencies, cost savings, profitability and other
position responsibilities. After the close of the Program year,
each participant's individual performance will be rated by the
participant's manager against those pre-established objectives.
Objectives may be weighted according to relative importance.
Individual performance for bonus purposes should be consistent with
the participant's merit increase recommendation.
G. ADJUSTMENTS TO PROFIT OBJECTIVES/ACTUAL RESULTS
To the extent any of the following occur after profit objectives are
initially established, the actual results will be adjusted by the
same dollar effect any such occurrence has had on actual profit
results so that the degree to which objectives are achieved will not
be affected by any of the following: changes in (or in the
application of) accounting principles; changes in tax laws;
extraordinary items as defined under generally accepted accounting
principles; and any other
<PAGE>
Fiscal 1999
Corporate Staff Executive Annual Bonus Program
Page 3
significant non-recurring items which the Company's press releases
or SEC filings note and take into account in explaining what the
Company's financial results would have been on a comparable basis
from period to period.
In addition, with respect to acquisitions and divestitures the
following adjustments will apply:
ACQUISITIONS
The Company's overall EPS results will be adjusted to eliminate the
earnings or loss from "material" acquisitions ("material" means that
an acquisition increases or decreases actual EPS results by 5.0% or
more).
DIVESTITURES
EPS objectives will be adjusted to remove the budgeted profit or
loss associated with the divested business for the same period that
actual profit or loss are no longer recognized for that business.
H. ANNUAL BONUS TARGETS
A dollar bonus target will be established at the start of the Program
year for each participant. The dollar bonus target will be computed as
a percentage of the participant's base salary on January 1, 1999. The
percentage to be applied will vary depending on the participant's
assigned salary grade as follows:
<TABLE>
<CAPTION>
---------------------------- ----------------------------------------
Assigned Salary Grade Percentage Applied To Salary Earnings
To Determine Target Bonus
---------------------------- ----------------------------------------
<S> <C> <C>
23 30%
---------------------------- ----------------------------------------
22 30%
---------------------------- ----------------------------------------
21 25%
---------------------------- ----------------------------------------
20 22%
---------------------------- ----------------------------------------
19 18%
---------------------------- ----------------------------------------
</TABLE>
I. ACTUAL BONUS AWARDS
Actual bonus awards for the Program year will be based on payout
schedules reflecting achievement of performance objectives. Payments
of bonus awards require the approval of the Chief Operating Officer
and the Chief Executive Officer.
<PAGE>
Fiscal 1999
Corporate Staff Executive Annual Bonus Program
Page 4
PROFIT GOALS
The EPS threshold for minimum bonus awards to be allocated will be 6
percentage points below the EPS goal. The EPS objective for the
bonus awards to be allocated at maximum will be 7.5 percentage
points above the EPS goal.
<TABLE>
<CAPTION>
--------------------------- ---------------------------
EPS Attainment Percent Of Target Bonus
Which May Be Earned
--------------------------- ---------------------------
<S> <C> <C>
6% below 15%
--------------------------- ---------------------------
5% below 25%
--------------------------- ---------------------------
4% below 35%
--------------------------- ---------------------------
3% below 45%
--------------------------- ---------------------------
2% below 55%
--------------------------- ---------------------------
1% below 65%
--------------------------- ---------------------------
EPS Goal 75%
--------------------------- ---------------------------
5% above 125%
--------------------------- ---------------------------
7.5% above 150%
--------------------------- ---------------------------
</TABLE>
No bonus shall be earned based upon EPS attainment if the EPS does
not exceed that for the prior year. For results between the EPS
rates shown, linear interpolation will be used to compute the
percentage of the target bonus which may be earned.
STRATEGIC GOALS
The additional award for achievement of strategic goals will be
determined as a percentage of the participant's original target
bonus up to a maximum of 25 percent. The guidelines for measuring
achievement of strategic goals are:
<TABLE>
<CAPTION>
--------------------------- -----------------------------
Achievement Percent Of Target Bonus
Which May Be Earned
--------------------------- -----------------------------
<S> <C> <C>
Not Met 0%
--------------------------- -----------------------------
Minimum Achievement 1% - 14%
--------------------------- -----------------------------
Substantially Met 15%
--------------------------- -----------------------------
All Met 25%
--------------------------- -----------------------------
</TABLE>
<PAGE>
Fiscal 1999
Corporate Staff Executive Annual Bonus Program
Page 5
INDIVIDUAL PERFORMANCE
The resulting award for each participant is then subject to
adjustment based on the participant's individual performance
compared to pre-established objectives. The individual performance
rating guidelines are as follows:
<TABLE>
<CAPTION>
--------------------------------------------------------- -------------------------
Range Of Adjustment
Rating Percentages To Be Applied
To EPS/Strategic
Goal-Derived Bonus
--------------------------------------------------------- -------------------------
<S> <C> <C>
1 - Marginal - Did not meet most objectives 0%
--------------------------------------------------------- -------------------------
2 - Good - Substantially met most objectives 50 - 84%
--------------------------------------------------------- -------------------------
3 - Exceeds Expectations - Met all objectives 85 - 114%
--------------------------------------------------------- -------------------------
4 - Outstanding - Clearly exceeded most or all objectives 115% - 150%
--------------------------------------------------------- -------------------------
</TABLE>
In aggregate, however, bonus awards for participants cannot exceed
the pool established as a result of EPS and strategic goal
attainment for all participants. This will require a leveling back
of the individual performance adjustments on a pro rata basis.
J. BONUS AWARD LIMITATIONS
Bonuses earned under this Program will be limited to no more than
175 percent of the aggregate target bonus amounts for all
participants. This limit does not apply to any discretionary fund
awards covered in Paragraph K below.
K. DISCRETIONARY BONUS AWARD
Under this Program, special discretionary cash bonus awards can be
made for one-time outstanding achievements. Such awards must be
recommended by the Chief Executive Officer and approved by the
Compensation Committee of the Board.
L. BONUS AWARD PAYMENTS
Any bonus award payments made under the Program will be made in the
form of cash or Company stock (at the election of the Company), and
will normally be paid in the month of August following the end of the
fiscal year. No bonus award is earned until the date the Compensation
Committee has reviewed the CEO's approval of such payment.
<PAGE>
Fiscal 1999
Corporate Staff Executive Annual Bonus Program
Page 6
M. TERMINATION OF EMPLOYMENT OR CESSATION OF ELIGIBILITY
Because bonus awards are not earned until the date on which the
Compensation Committee reviews the CEO's approval of payment, if
termination of employment occurs or the participant ceases to be
eligible for benefits under the Program before such date (whether or
not the applicable fiscal year has ended), no such terminated or
ineligible employee is entitled to any bonus payment. Under certain
circumstances, as detailed below, a terminated participant whose
employment terminates after December 31 by reason other than
resignation or involuntary termination may be considered for a bonus
award. Consideration of such awards will be at the sole discretion
of the Compensation Committee and require approval based upon the
Chief Executive Officer's recommendation according to the following
schedule:
<TABLE>
<CAPTION>
Reason For Termination Bonus Award Eligibility
---------------------- -----------------------
<S> <C>
Death or Retirement Pro rata share of bonus award, payable
to retiree, heirs/estate
Long-Term Disability Pro rata share of bonus award
Resignation or No bonus award even if termination
Involuntary Termination occurs after June 30 but before
Compensation Committee reviews the
CEO's approval of award payments.
</TABLE>
N. ADMINISTRATIVE PROVISIONS
The Program will be administered by the Corporate Vice President, Human
Resources.
New participants and exceptional situations will be referred to the
Chief Executive Officer for review. Monitoring reports prepared by
the Corporate Human Resources staff will be distributed to the Chief
Executive Officer and the Compensation Committee of the Board for
informational purposes.
It is the intention that this Program remain in effect in future
years. However, as with any special compensation plan, senior
management and the Board reserve the right to modify, revise, or
terminate the Program at any time.
<PAGE>
EXHIBIT (13)(a)
FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
1998 1997
----------------------------------- -----------------------------------------
Per share Per share
dollars in millions, ---------------------- --------------------------
except per share data Amount Basic Diluted Amount Basic Diluted
----------------------------------- -----------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Net sales $ 2,530.1 $ 2,340.6
Income from continuing
operations $ 208.5 $1.59 $1.57 $ 213.6 $1.51 $1.48
Net income $ 208.5 $1.59 $1.57 $ 343.0 $2.43 $2.38
Book value at end of year $ 1,514.1 $ 1,734.3
Book value per share at end
of year $ 11.94 $ 12.65
Total debt to capitalization 13.3% 12.6%
</TABLE>
<PAGE>
QUARTERLY FINANCIAL HIGHLIGHTS (Unaudited)
in millions, except per share data
<TABLE>
<CAPTION>
FISCAL YEAR 1998 FISCAL YEAR 1997
-------------------------------------------- ------------------------------------------
THREE MONTHS ENDED THREE MONTHS ENDED
-------------------------------------------- ------------------------------------------
JUNE 30(4) MARCH 31 DEC. 31 SEPT. 30 JUNE 30 MARCH 31 DEC. 31 SEPT. 30
---------- --------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 603.4 $ 660.5 $ 664.9 $ 601.3 $ 614.9 $ 638.5 $ 564.2 $ 523.0
Gross profit 189.5 209.0 213.0 192.5 199.9 208.0 179.5 172.9
Income from continuing operations
before income taxes 55.6 94.6 90.9 84.7 83.4 100.6 79.2 70.6
Income from continuing operations $ 35.6 $ 60.5 $ 58.2 $ 54.2 $ 53.5 $ 64.4 $ 50.6 $ 45.1
Income from discontinued operations,
net of income taxes -- -- -- -- 13.4 44.9 37.5 33.6
---------- --------- --------- --------- --------- --------- --------- ---------
Net income $ 35.6 $ 60.5 $ 58.2 $ 54.2 $ 66.9 $ 109.3 $ 88.1 $ 78.7
---------- --------- --------- --------- --------- --------- --------- ---------
Per share(1):
Basic income per share:
Income from continuing operations $ .28 $ .47 $ .44 $ .40 $ .38 $ .46 $ .35 $ .32
Income from discontinued operations -- -- -- -- .11 .31 .27 .23
---------- --------- --------- --------- --------- --------- --------- ---------
Net income $ .28 $ .47 $ .44 $ .40 $ .49 $ .77 $ .62 $ .55
---------- --------- --------- --------- --------- --------- --------- ---------
Diluted income per share:
Income from continuing operations $ .28 $ .46 $ .44 $ .39 $ .37 $ .45 $ .35 $ .31
Income from discontinued operations -- -- -- -- .10 .31 .26 .23
---------- --------- --------- --------- --------- --------- --------- ---------
Net income $ .28 $ .46 $ .44 $ .39 $ .47 $ .76 $ .61 $ .54
---------- --------- --------- --------- --------- --------- --------- ---------
Cash dividends per share(2) $ .12 $ .12 $ .12 $ .12 $ .12 $ .15 $ .15 $ .15
Market price of common stock(3)
High $33 1/8 $34 7/16 $35 7/8 $35 3/4 $42 7/8 $44 5/8 $43 $39 3/4
Low 24 13/16 29 13/16 31 1/16 30 1/16 29 7/8 40 38 1/8 33 1/4
</TABLE>
- -----------
(1) Basic income per share has been calculated based on the average number
of common shares outstanding. Diluted income per share includes average
outstanding shares and common equivalent shares. Shares outstanding are
for the company and the predecessor corporation (Old Morton). Refer to
Spinoff and Basis of Presentation footnote.
(2) Cash dividends reflect total payments made by Old Morton through
April 30, 1997, and by the company thereafter.
(3) The principal market is the New York Stock Exchange and prices are based
on the Composite Tape (Ticker symbol MII). Stock prices after
April 30, 1997 reflect the result of the Spinoff described in the
Spinoff and Basis of Presentation footnote.
(4) Includes special charges of $15.0 million pretax ($9.6 million after tax
or $.07 per share). Refer to Special Charges footnote.
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On April 30, 1997, Morton International, Inc. completed the Spinoff of its
specialty chemicals and salt businesses into a new company, referred to as
"New" Morton International, Inc. ("the company"). See page 27 of the Notes to
Consolidated Financial Statements for a more detailed description of the
Spinoff.
The company manufactures and markets quality products to meet the needs
of its salt and specialty chemicals customers. For reporting purposes, the
company separates revenues and costs into two business segments--Specialty
Chemicals and Salt.
The following is a discussion of operating results comparing fiscal
years 1998 to 1997 and 1997 to 1996; liquidity and capital resources; year
2000 compliance; the impact of inflation; environmental matters; and market
risk exposure.
COMPARISON: FISCAL 1998 TO FISCAL 1997
For the fiscal year 1998, the company reported sales of $2.5 billion, an 8
percent increase over the prior fiscal year sales of $2.3 billion. The full
year impact of the fiscal 1997 acquisitions of Pulverlac and Salins du Midi
and higher volumes in the specialty chemicals business segment were the main
reasons for the sales growth. Partially offsetting was an unfavorable
foreign exchange translation impact of $89.4 million as well as lower pricing
in a portion of specialty chemicals and the negative impact of El Nino on ice
control salt sales. Income from continuing operations for fiscal 1998 was
$208.5 million, a decrease of 2 percent from the prior year. Included in the
fiscal year 1998 results was a $15.0 million pretax ($9.6 million after tax
or $.07 per share) special charge related to several restructuring actions
the company took during the fourth quarter. Morton expects to see annual
cost savings of approximately $5.2 million once these actions are fully
implemented. Without the special charge, income from continuing operations
increased 2 percent from the $213.6 million reported for fiscal 1997.
Earnings per share from continuing operations in fiscal 1998 on a diluted
basis were $1.57 ($1.64 before the special charge taken in the fourth
quarter) compared to $1.48 last year, a 6 percent increase (11 percent
excluding the special charge). All per share disclosures are on a diluted
basis.
SPECIALTY CHEMICALS
Sales for the specialty chemicals business grew 3 percent in fiscal 1998 to
$1.74 billion from the $1.68 billion reported for fiscal 1997. The sales
increase was mainly attributable to higher volumes and the fiscal 1997
acquisition of Pulverlac which contributed $33.5 million to the
year-over-year sales increase.
<PAGE>
Unfavorable price/mix and exchange rates mitigated the sales growth during
fiscal 1998. The impact of the strong dollar during fiscal year 1998 had a
negative impact of $59.4 million on the translation of foreign sales.
Operating earnings, including the $15.0 million restructuring charge,
fell 10 percent to $242.8 million from $268.6 million in fiscal 1997. The
$15.0 million pretax special charge related to the restructuring actions
announced in the fourth quarter and includes the closing of three facilities,
the divestiture of several product lines, and the reorganization of the
industrial coatings business and the adhesives and chemical specialties
groups. Excluding that charge, operating earnings declined by 4 percent.
Softness in end markets, the Asian economic crisis, pricing pressures and a
strong dollar all contributed to the reduced earnings in the specialty
chemicals business segment.
For the full year ended June 30, 1998, several specialty chemicals
product lines saw improved sales and earnings results including industrial
adhesives, advanced materials, performance chemicals, automotive coatings and
powder coatings. Included in the powder coatings results were Pulverlac, an
Italian powder coatings company acquired in January 1997. Even excluding
those results, Morton's powder coatings operation had a strong performance in
fiscal 1998 with sales up 8 percent and earnings up 17 percent. These
product lines contributed $621.2 million to specialty chemicals sales, an
increase of 11 percent from fiscal 1997. Earnings of these product lines
showed good growth, up 10 percent to $136.6 million or 56 percent of
specialty chemicals earnings.
The packaging adhesives and polymer systems product lines showed
unfavorable year-to-year comparisons in both sales and earnings. Sales
decreased 3 percent while earnings dropped 13 percent. These product lines
contributed 20 percent to both sales and earnings of the segment during
fiscal 1998. Packaging adhesives results were adversely affected by a
decline in export sales due to the Asian crisis while polymer systems has
been negatively impacted by strong competitive pricing pressure. Also, both
product lines have a significant portion of business in Europe and therefore
their financial results were adversely impacted by the strong dollar.
Several product lines showed year-to-year decreases in profits. Dyes,
electronic materials, industrial coatings and plastics additives all
experienced significant pricing pressure which negatively impacted
comparisons to fiscal 1997 earnings. These product lines contributed $56.2
million to fiscal 1998 earnings, a 29 percent decrease from fiscal 1997
profits of $79.4 million.
The specialty chemicals return on sales decreased from 16 percent in
fiscal 1997 to 14 percent in fiscal 1998 including the $15.0 million special
charge. Excluding the special charge, the
<PAGE>
return on sales was 14.8 percent in fiscal 1998. Severe pricing pressure and
the impact resulting from the Asian crisis more than offset lower raw
material costs, the savings from manufacturing efficiencies and the benefits
from the restructuring initiated in fiscal 1996.
SALT
For the fiscal year ended June 30, 1998, the salt business had sales of
$792.7 million, an increase of 20 percent. The fiscal 1997 acquisition of
Salins du Midi, a French-based salt company, was the reason for the sales
increase. Salins du Midi contributed sales of $203.8 million and operating
earnings of $20.4 million to fiscal 1998 results. Operating earnings grew by
5 percent during the same period to $144.2 million. Excluding the
acquisition, salt sales would have declined by 4 percent and earnings would
have decreased 7 percent.
During the year, the company was impacted by the weather effects of El
Nino, which reduced ice control sales by 18 percent. Helping offset the
dramatic decline were good performances from the rest of the salt product
lines including water conditioning salt and grocery salt. Also benefiting
salt results were operating margin improvements at Salins du Midi, which
increased from 8 percent in fiscal year 1997 to 10 percent in fiscal year
1998.
North American non-ice control sales for fiscal 1998 ended 3 percent
ahead of fiscal 1997 sales of $ 414.9 million. The increase in sales was
primarily generated by improved results in water conditioning, specialty and
evaporated products. Sales of water conditioning products increased $6.6
million or 5 percent to $134.1 million. Sales of evaporated products
increased 4 percent to $107.1 million while sales of specialty products
increased $2.9 million or 10 percent.
Salt sales of $155.7 million for the fourth quarter in fiscal 1998 were
flat with fourth quarter results from a year ago of $156.4 million.
Operating earnings declined by 4 percent to $19.3 million, as operating costs
were slightly higher than in fiscal 1997.
In the fourth quarter of fiscal 1995, the company's Mines Seleine salt
mine on the Magdalen Islands was shut down due to water intrusion into the
production shaft. Production was suspended at this mine with corresponding
increased production at the company's remaining ice control mines.
Operations at the mine resumed in August of fiscal 1998. Costs related to
the efforts to save the mine have been recovered from insurance proceeds.
CORPORATE
During fiscal 1998, Morton bought back 11.1 million of its shares outstanding
at a total cost of $361.3 million. The total number of shares purchased
since the spinoff in April 1997 is 14.3 million
<PAGE>
shares at a total cost of $461.2 million. The company has approval to acquire
an additional 5.7 million shares. The total share buyback program
contributed approximately 4 cents per share to fiscal year 1998 results.
Average shares outstanding for the fiscal year were 133.1 million versus
143.9 million at the end of fiscal 1997.
Corporate expenses decreased 15 percent during fiscal 1998 due to tight
cost control, lower incentive pay and adjustment of accruals for certain
stock option related supplemental cash payments. The incentive pay accruals
were lower due to the actual results achieved for fiscal 1998. The
supplemental cash payment accrual (refer to Incentive Plan footnote) was
reduced to reflect the recent decline in Morton's stock price. Excluding
these two items, corporate expenses declined 8 percent from the fiscal year
ended June 30, 1997. The company's effective tax rate for continuing
operations remained flat at 36 percent.
COMPARISON: FISCAL 1997 TO FISCAL 1996
Boosted by strong fourth quarter volumes in chemicals and the recent
acquisitions of Salins du Midi and Pulverlac, the company generated sales of
$2.34 billion, an increase of 6 percent from fiscal 1996 sales of $2.22
billion. Income from continuing operations increased 20 percent to $213.6
million. Fiscal 1996 income from continuing operations included special
charges of $23.9 million ($29.2 million pretax), offset by $15.1 million
($24.1 million pretax) related to the settlement of several environmental
insurance issues and $9.4 million ($15.0 million pretax) related to proceeds
received for the formation of a joint venture. Income from discontinued
operations, net of applicable income taxes, was $129.4 million in fiscal 1997
versus $155.5 million in 1996. Fiscal 1997 discontinued operations included
10 months of Morton Automotive Safety Products results versus a full year in
1996. On an earnings per share basis, continuing operations increased from
$1.20 in fiscal 1996 to $1.48 in fiscal 1997. Total earnings per share in
fiscal 1997, including the results of Morton's Automotive Safety Products
business for 10 months, was $2.38 versus $2.25 in fiscal 1996, an increase of
6 percent.
SPECIALTY CHEMICALS
For the full year 1997, Morton's specialty chemicals sales were up 4 percent
to $1.68 billion from $1.61 billion in 1996. The increase in sales was
mainly attributed to higher volumes and the Pulverlac acquisition which
contributed $35.4 million to 1997 sales.
Those product lines contributing most to the increase were industrial
adhesives, thermoplastic polyurethanes, advanced materials, plastics
additives, industrial coatings and powder coatings. These product lines
contributed $588.7 million or 35 percent of specialty chemicals full year
sales. Year-over-year
<PAGE>
growth of the combined sales of these product lines was 10 percent,
contributing approximately 76 percent of the year-over- year sales increase.
Operating earnings rose 21 percent to $268.6 million during fiscal 1997
or 8 percent excluding the prior year $27.1 million pretax special charge.
Strong profit contributors included packaging adhesives, advanced materials,
performance chemicals, plastics additives, industrial coatings and powder
coatings. Automotive coatings results, excluding the impact of the creation
of the joint venture in January 1996, were also up in fiscal 1997. Operating
earnings of these product lines contributed $188.4 million or 70 percent of
specialty chemicals earnings in fiscal 1997. Combined, these product lines
grew 20 percent from fiscal 1996 and contributed 51 percent to the
year-over-year increase. Packaging adhesives achieved its 10 percent
earnings growth despite a 4 percent decrease in sales from 1996. Improved
manufacturing processes, tight cost controls and lower raw material costs
were the main reasons for the year-to-year earnings increase.
The electronic materials, dyes and polymer systems product lines showed
unfavorable year-to-year comparisons for both sales and earnings. Sales
decreased 3 percent while earnings dropped 21 percent. All three of these
product lines experienced strong competitive pricing pressures which led to
decreased earnings. These product lines contributed 20 percent of specialty
chemicals sales and 19 percent of fiscal 1997 earnings.
Morton's specialty chemicals improved their return on net sales to 16
percent in fiscal 1997 from 15.5 percent in fiscal 1996, before special
charges. This improvement can be attributed to lower raw material costs as
well as tight cost controls and some benefit from the restructuring in fiscal
1996. The translation of foreign exchange negatively impacted sales by $29.4
million and pretax earnings by $3.6 million in fiscal 1997.
SALT
For the full year ended June 30, 1997, Morton's salt business had sales of
$659.7 million, a 9 percent increase, and operating earnings of $137.5
million, up 10 percent. Except for sales of ice control salt, all North
American salt product lines were up for the full year, and without the
benefit of Salins du Midi, salt sales would have increased by 1 percent.
Although Canadian ice control salt demand was high, salt sales for de-icing
in the United States could not compare to the extraordinary winter of 1995-96.
Sales of non-ice control products in North America increased 4 percent
over fiscal 1996. The sales increase was primarily due to improved results
for water conditioning, evaporated and solar products. Evaporated products
increased $6.9 million or 7 percent to $103.0 million. Solar products
increased 6 percent in fiscal 1997 with sales of $52.1 million while water
conditioning products
<PAGE>
increased $3.2 million from sales of $124.2 million in fiscal 1996.
<PAGE>
Morton's salt business recorded sales of $156.4 million in the fourth
quarter, up 54 percent over fourth quarter 1996; operating earnings increased
21 percent to $20.0 million in the same period. The fourth quarter increase
was primarily due to the addition of $48.1 million of sales and $3.8 million
of operating earnings from Salins du Midi, as this was the first quarter of
inclusion of its results.
CORPORATE
In the fourth quarter of fiscal 1997, Morton sold its former headquarters
building and recorded a pretax gain of $4.4 million. At the end of April,
the company received $750 million as part of its tax-free Spinoff from
Automotive Safety Products. Some of this cash was used to pay down
short-term debt, mainly incurred with the acquisitions of Pulverlac and
Salins du Midi. Additionally, $99.9 million was used to purchase 3.2 million
shares of stock under the April 1997 Board authorization of a 10 million
share buyback. At June 30, 1997, the company's cash and short-term
investments position was $430.3 million.
For the full fiscal year 1997, Morton repurchased 6.5 million of its
shares for $234.9 million. Between July 1, 1996 and April 30, 1997, the
company repurchased 3.3 million shares at an average price of $41.24
completing an earlier repurchase authorization before the April 30 spinoff.
Average shares outstanding for fiscal 1997 were 143.9 million versus 149.4
million in fiscal 1996. Fewer shares outstanding and a lower tax rate added
8 cents to earnings per share for the full year.
Total corporate expenses increased 18 percent in fiscal 1997. This
increase was due to the receipt of $24.1 million in the second quarter of
fiscal 1996 related to the settlement of several environmental insurance
issues. Excluding this income from fiscal 1996, corporate costs decreased 16
percent year-to-year. Tight control of administrative expenses, the gain on
the sale of the former headquarters site and lower net interest expense were
the main reasons for the decrease in fiscal 1997.
The company's effective tax rate decreased to 36.0 percent in fiscal
1997 from 37.4 percent in fiscal 1996. The main reason for the decrease in
the effective tax rate was the fact that fiscal 1996 included an impairment
loss on long-lived assets with no tax benefit.
LIQUIDITY AND CAPITAL RESOURCES
OPERATING ACTIVITIES
Cash provided by continuing operating activities was $253.2 million, $291.3
million and $270.3 million in the fiscal years ended June 30, 1998, 1997 and
1996. Net cash from operations in fiscal 1998 decreased $38.1 million as
income from continuing operations decreased $5.1 million. The $15.0 million
pretax special charge in fiscal 1998 did not adversely impact cash.
<PAGE>
Depreciation and amortization expense increased $13.2 million in fiscal 1998.
Changes in operating assets and liabilities were a use of funds in fiscal
1998, 1997 and 1996 of $93.7 million, $36.6 million and $38.4 million,
respectively.
Net cash from operations in fiscal 1997 increased $21.0 million over
fiscal 1996 as income from continuing operations increased $34.9 million. In
addition, the special charges of $29.2 million discussed above did not
adversely impact cash in fiscal 1996. Depreciation and amortization expense
increased $13.1 million in fiscal 1997.
INVESTING ACTIVITIES
Net investing activities for fiscal 1998 required $123.7 million of cash
compared with $420.2 million and $122.4 million in fiscal 1997 and 1996. Net
investing activities included capital spending of $136.8 million in fiscal
1998 compared to $117.4 million in 1997 and $124.4 million in 1996.
Expansion related to certain chemical products as well as basic upkeep of the
salt and chemical facilities were the major areas of capital spending.
Cash invested in businesses acquired decreased from $309.5 million in
fiscal 1997 to $18.1 million in fiscal 1998. In fiscal 1997, the company
acquired all of the outstanding stock of a French salt company, Salins du
Midi, for $231.2 million, net of cash acquired. During fiscal 1997, the
company also acquired 90 percent of the outstanding stock of Pulverlac
S.p.A., an Italian powder coatings manufacturer, for $64.2 million, net of
cash acquired, and a manufacturing plant in Singapore from Zeneca Resins for
$14.1 million. The remaining 10 percent of Pulverlac S.p.A and Surface Tek,
Inc., a manufacturer of process chemicals and control equipment used in the
manufacture of printed circuit boards, were acquired in fiscal 1998.
Investing activities in fiscal 1998 also reflected $35.9 million of
proceeds from property and other asset disposals compared to $8.9 million in
fiscal 1997 and $4.3 million in fiscal 1996.
FINANCING ACTIVITIES
Financing activities were a net use of funds representing $421.6 million,
$323.6 million and $307.8 million for fiscal 1998, 1997 and 1996,
respectively. Dividend payments for the three years were $63.0 million, $80.7
million and $76.3 million. This decrease was attributed to a nine cents per
share reduction in dividends paid after discontinuing the airbag business in
a spinoff transaction coupled with fewer shares outstanding due to the share
repurchase program.
During fiscal 1998, the company repurchased 11.1 million shares of
common stock at a cost of $361.3 million. The fiscal 1998 repurchases
included 6.8 million shares to complete the 10 million shares authorized by
the Board of Directors in April 1997 and 4.3 million of the 10 million share
buyback authorized in
<PAGE>
December 1997. At June 30, 1998 the company was authorized to repurchase up
to 5.7 million additional shares. During fiscal 1997, the company
repurchased 6.5 million shares of its common stock at a cost of $234.9
million.
Short-term notes payable decreased $4.8 million, $23.1 million and $1.1
million in fiscal 1998, 1997 and 1996. This reflected the lower level of
short-term borrowing required due to higher cash on hand including the funds
transferred from the Spinoff transactions described in the Notes to
Consolidated Financial Statements.
DISCONTINUED OPERATIONS
Net transfers from discontinued operations were a source of cash of $806.8
million in fiscal 1997 and $141.8 million in 1996. Fiscal 1997 included the
$750.0 million tax-free capital contribution to "New" Morton as part of the
Spinoff agreement.
OTHER
The company's current ratio was 2.4 at June 30, 1998 and 2.7 at June 30,
1997. Total debt as a percentage of total capitalization was 13.3 percent at
June 30, 1998, compared to 12.6 percent at June 30, 1997.
As of June 30, 1998, the company had unexpended authorizations for fixed
asset projects totaling $100.3 million. The authorizations related primarily
to chemical facility expansion, product improvements, and maintenance on a
company-wide basis.
In May 1998, the company filed a shelf registration with the Securities
and Exchange Commission for up to $1.0 billion of debt securities. As of
June 30, 1998, no amounts have been issued against the shelf registration.
Estimated cash flow from operations and current financial resources,
including financing capacity, are expected to be adequate to fund the
company's anticipated working capital requirements, fixed asset spending,
dividend payments, business acquisitions and share repurchases in the
foreseeable future.
YEAR 2000 COMPLIANCE
Management has initiated a comprehensive study and program to prepare the
company's computer systems, manufacturing systems and facility systems, and
the related systems applications, for the Year 2000. The company is
utilizing both internal and external resources to identify, correct or
reprogram and test the systems for Year 2000 compliance. The company expects
these efforts to be completed primarily by December 31, 1998. Maintenance or
modification costs will be expensed as incurred, while the costs of new
software will be capitalized and amortized over the software's useful life.
The company currently does not expect the
<PAGE>
amounts required to be incurred to have a material effect on its financial
condition, results of operations or liquidity.
The company also has initiated formal communications with its major
suppliers and large customers to determine the extent and steps they are
taking to be Year 2000 compliant. To date no significant issues have been
identified; however, there can be no guarantee that the systems of other
companies on which the company's businesses rely will be converted in a
timely way and would not have an adverse effect on the company's businesses.
The costs of the project and the date on which the company believes it
will complete the Year 2000 modifications are based on management's current
best estimates, which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved and actual results could
differ materially from those anticipated. Specific factors that might cause
such material differences include, but are not limited to, the availability
and cost of personnel trained in this area, the ability to locate and correct
all relevant computer codes, the availability of new software and the ability
of our customers and suppliers to be Year 2000 compliant.
IMPACT OF INFLATION
Inflation generally has not had a significant impact upon the results of the
company's operations in recent years. Historically, the company has taken
steps to reduce the effects of inflation on its business. In periods of
increasing prices, to the extent permitted by competition, the company has
adjusted its selling prices to compensate for increased costs.
An ongoing cost control program implemented throughout the company also
has contributed to reducing the influence of inflationary costs. Further, a
continuing program of investment in new and more efficient facilities,
production processes and productivity enhancements has made a significant
contribution in offsetting inflation.
The company uses the LIFO method of accounting for its domestic
inventories. Under this method the cost of products sold, as reported in the
financial statements, approximates current costs.
ENVIRONMENTAL MATTERS
For a detailed discussion, see Environmental Matters on pages 35 and 36
included in the Notes to Consolidated Financial Statements.
MARKET RISK EXPOSURE
<PAGE>
Notes payable, long-term debt and forward exchange contracts are the three
types of market risk-sensitive instruments held by the company. Details
regarding these instruments are described in the Summary of Significant
Accounting Policies, Financing Arrangements, and Fair Values of Financial
Instruments notes to the accompanying financial statements. The company
believes its exposure to market risk fluctuations for the aforementioned
instruments is not material at June 30, 1998.
<PAGE>
FORWARD-LOOKING CAUTIONARY STATEMENT
Morton's 1998 Annual Report contains statements that are not historical facts
but forward-looking statements about expected future financial results and
management's business plans, strategies and objectives. These
forward-looking statements are often identified by qualifiers such as:
"targets," "expects," "plans," "anticipates," "objectives," or similar words
and expressions. Morton intends to take advantage of the new "safe harbor"
provisions of the Private Securities Litigation Reform Act of 1995 by making
this cautionary statement with respect to these forward-looking statements,
since there are risks and uncertainties that could cause Morton's results to
differ materially from what is projected.
Morton undertakes no obligation to update publicly any forward-looking
statements whether as a result of new information or future events.
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Year ended June 30
-----------------------------------------
in millions, except per share data 1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Net sales $ 2,530.1 $ 2,340.6 $ 2,215.0
Interest, royalties and sundry income 44.3 47.6 73.2
---------- ---------- ----------
2,574.4 2,388.2 2,288.2
Deductions from income
Cost of products sold 1,726.1 1,580.3 1,517.7
Selling, administrative and general expense 411.2 378.5 361.1
Research and development expense 60.9 58.8 60.2
Interest expense 23.3 25.6 24.4
Amortization of goodwill 12.1 11.2 10.3
Special charges 15.0 - 29.2
---------- ---------- ----------
2,248.6 2,054.4 2,002.9
---------- ---------- ----------
Income from continuing operations
before income taxes 325.8 333.8 285.3
Income taxes 117.3 120.2 106.6
---------- ---------- ----------
Income from continuing operations 208.5 213.6 178.7
Income from discontinued operations,
net of applicable income taxes - 129.4 155.5
---------- ---------- ----------
Net income $ 208.5 $ 343.0 $ 334.2
---------- ---------- ----------
---------- ---------- ----------
Basic income per share:
Income from continuing operations $ 1.59 $ 1.51 $ 1.21
Income from discontinued operations - .92 1.06
---------- ---------- ----------
Net income $ 1.59 $ 2.43 $ 2.27
---------- ---------- ----------
---------- ---------- ----------
Diluted income per share:
Income from continuing operations $ 1.57 $ 1.48 $ 1.20
Income from discontinued operations - .90 1.05
---------- ---------- ----------
Net income $ 1.57 $ 2.38 $ 2.25
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30
------------------------
in millions 1998 1997
---------- ----------
<S> <C> <C>
Assets
Current Assets
Cash and cash equivalents $ 138.0 $ 430.3
Receivables, less allowances of $13.5 and $11.7 468.6 466.4
Inventories 381.0 351.6
Prepaid expenses and other 125.4 141.7
---------- ----------
Total Current Assets 1,113.0 1,390.0
---------- ----------
Other Assets
Cost in excess of net assets of businesses acquired,
less amortization 357.4 338.4
Investments in affiliates 73.9 91.5
Miscellaneous 121.9 105.9
---------- ----------
553.2 535.8
---------- ----------
Property, Plant and Equipment
Land 94.9 102.5
Buildings and improvements 484.8 461.3
Machinery and equipment 1,101.9 1,061.7
Construction in progress 91.5 87.0
---------- ----------
1,773.1 1,712.5
Less allowances for depreciation 891.4 833.4
---------- ----------
881.7 879.1
---------- ----------
$ 2,547.9 $ 2,804.9
---------- ----------
---------- ----------
Liabilities and Shareholders' Equity
Current Liabilities
Notes payable and current portion of long-term debt $ 22.6 $ 32.7
Accounts payable 215.6 255.9
Accrued salaries, wages and other compensation 52.1 58.4
Other accrued expenses 159.3 156.2
Income taxes 22.1 19.9
---------- ----------
Total Current Liabilities 471.7 523.1
---------- ----------
Noncurrent Liabilities
Long-term debt, less current portion 222.5 224.1
Deferred income taxes 77.9 46.0
Accrued postretirement benefits other than pensions 157.9 156.0
Other noncurrent liabilities 103.8 121.4
---------- ----------
Total Noncurrent Liabilities 562.1 547.5
---------- ----------
Shareholders' Equity
Preferred stock (par value $1.00 per share)
Authorized - 25.0 shares, none issued
Common stock (par value $1.00 per share)
Authorized - 500.0 shares
Issued - 140.1 shares 140.1 140.1
Additional paid-in capital - .3
Retained earnings 1,840.3 1,706.0
Foreign currency translation adjustment and other (36.9) (16.8)
---------- ----------
1,943.5 1,829.6
Less cost of common stock in treasury- 13.3 shares and 3.0 shares
in 1998 and 1997 429.4 95.3
---------- ----------
Total Shareholders' Equity 1,514.1 1,734.3
---------- ----------
$ 2,547.9 $ 2,804.9
---------- ----------
---------- ----------
</TABLE>
See notes to consolidated financial statements
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Cash provided (used)
Year ended June 30
----------------------------
in millions 1998 1997 1996
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Income from continuing operations $ 208.5 $ 213.6 $ 178.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 129.2 116.0 102.9
Deferred income taxes (6.1) 5.8 2.7
Undistributed earnings of affiliates .3 (7.5) (4.8)
Special charges 15.0 - 29.2
Changes in operating assets and liabilities
net of effects of businesses acquired:
Receivables (9.8) (7.9) (16.0)
Inventories and prepaid expenses (23.1) (15.6) -
Accounts payable and accrued expenses (66.4) 10.2 (27.0)
Income taxes 27.1 (15.7) 10.4
Other-net (21.5) (7.6) (5.8)
------- ------- -------
Net cash provided by operating activities 253.2 291.3 270.3
------- ------- -------
INVESTING ACTIVITIES
Purchase of property, plant and equipment (136.8) (117.4) (124.4)
Proceeds from property and other asset
disposals 35.9 8.9 4.3
Net cash invested in businesses acquired (18.1) (309.5) (.6)
Other (4.7) (2.2) (1.7)
------- ------- -------
Net cash used for investing activities (123.7) (420.2) (122.4)
------- ------- -------
FINANCING ACTIVITIES
Purchase of common stock for treasury (361.3) (234.9) (242.3)
Net repayment of short-term borrowings (4.8) (23.1) (1.1)
Repayment of long-term debt (2.9) (.1) -
Stock option transactions 10.4 15.2 11.9
Dividends paid (63.0) (80.7) (76.3)
------- ------- -------
Net cash used for financing activities (421.6) (323.6) (307.8)
------- ------- -------
DISCONTINUED OPERATIONS
Net transfer from discontinued operations - 806.8 141.8
------- ------- -------
Effect of foreign exchange rate changes on cash
and cash equivalents (.2) 7.1 (1.3)
------- ------- -------
(Decrease) increase in cash and cash equivalents (292.3) 361.4 (19.4)
Cash and cash equivalents at beginning of year 430.3 68.9 88.3
------- ------- -------
Cash and cash equivalents at end of year $ 138.0 $ 430.3 $ 68.9
------- ------- -------
------- ------- -------
</TABLE>
See notes to consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SPINOFF AND BASIS OF PRESENTATION
On April 24, 1997, the shareholders of the current Morton International,
Inc.'s predecessor ("Old Morton") approved the spinoff of its specialty
chemicals and salt businesses (the "Spinoff") and the combination of Old
Morton's automotive safety products business ("ASP") with the businesses of
Autoliv AB (the "Combination"), pursuant to the Combination Agreement, dated
as of November 25, 1996, by and among Old Morton, Autoliv AB, Autoliv, Inc.,
a newly formed corporation ("Autoliv"), and ASP Merger Sub, Inc. In
connection with the Spinoff, Old Morton contributed its specialty chemicals
and salt businesses and corporate operations, together with $750 million of
cash, to New Morton International, Inc. ("New Morton"), a newly formed
subsidiary of Old Morton.
On April 30, 1997, all of the outstanding shares of New Morton were
distributed to Old Morton shareholders on a basis of one New Morton share for
each Old Morton share held by such shareholders. On May 1, 1997, the
Combination became effective, and each outstanding Old Morton share was
converted into the right to receive .341 of a share of Autoliv, a holding
company which now holds ASP.
The net assets and results of operations of the ASP business are reflected in
the accompanying financial statements prior to the Spinoff as discontinued
operations.
NATURE OF OPERATIONS
The company is an international organization engaged in the manufacture and
marketing of specialty chemicals and salt. Specialty Chemicals is the largest
segment, accounting for 69 percent of fiscal 1998 net sales. Its major
markets include general industrial, packaging, construction, automotive,
electronics, paper and printing, textiles and petroleum. Chemical products
are sold primarily in North America and Europe but with some activity in
Japan, Southeast Asia and South America. The Salt segment contributed 31
percent of 1998 net sales. It serves major North American and European salt
markets with a complete line of products.
<PAGE>
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
Investments in 50 percent or less owned companies and joint ventures, where
the company does not effectively control the entity, are carried on the
equity basis. All intercompany accounts and transactions have been eliminated
from the consolidated financial statements.
CASH EQUIVALENTS
The company considers all highly liquid investment instruments purchased with
a maturity of three months or less to be cash equivalents.
INVENTORIES
Inventories are stated at the lower of cost or market. The cost of domestic
inventories (55 percent and 56 percent of consolidated inventories at June
30, 1998 and 1997) is determined by the last-in, first-out (LIFO) method,
while the cost of foreign inventories is determined by the first-in,
first-out (FIFO) method. If the FIFO method, which approximates replacement
cost, had been used for all inventories, the total amount for inventories
would have been increased by $33.9 million and $34.8 million at June 30, 1998
and 1997.
INTANGIBLE ASSETS
Cost in excess of net assets of businesses acquired and other intangibles is
being amortized on a straight-line basis over periods not exceeding 40 years.
The amount of accumulated amortization related to intangibles, primarily
goodwill, recorded as of June 30, 1998 and 1997 was $161.3 million and $145.6
million.
PROPERTY, PLANT AND EQUIPMENT
The company provides for depreciation of property, plant and equipment, all
of which are recorded at cost, by annual charges to income, computed
primarily under the straight-line method.
FOREIGN CURRENCY TRANSLATION
All assets and liabilities in the balance sheet of foreign subsidiaries whose
functional currency is other than the U.S. dollar are translated at year-end
exchange rates except shareholders' equity, which is translated at historical
rates. Translation gains and losses are accumulated as a separate component
of shareholders' equity. Foreign currency transaction gains and losses are
included in determining net income.
FOREIGN EXCHANGE CONTRACTS
Neither foreign exchange contracts nor other financial instruments are held
or issued for trading purposes. The company considers forward foreign
exchange contracts primarily to offset the effects
<PAGE>
of foreign currency fluctuations related to firm and anticipated foreign
denominated receivables and payables transactions, intercompany financing
transactions and dividends from subsidiaries. The company may also use
forward foreign exchange contracts to offset the currency fluctuation related
to foreign currency denominated debt. The company nets its exposures before
entering into hedge transactions. Generally, contracts do not exceed one
year. Gains or losses on forward foreign exchange contracts that hedge an
identifiable long-term foreign currency commitment or exposure are deferred.
All other forward foreign exchange contracts are marked to market at the
current foreign exchange rates with unrealized gains and losses currently
recognized in determining net income. Exchange gains (losses) recorded on
forward contracts as an adjustment to general expense in 1998, 1997 and 1996
were $(.2) million, $1.2 million and $1.6 million. Unrealized amounts related
to foreign exchange contracts are included in current assets and liabilities.
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 amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
QUARTERLY RESULTS
Quarterly results are presented on the inside front cover of the annual
report.
EARNINGS PER SHARE
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share." Statement 128 replaced the
calculation of primary and fully diluted earnings per share with basic and
diluted earnings per share. Unlike primary earnings per share, basic earnings
per share excludes any dilutive effects of options, warrants and convertible
securities. Diluted earnings per share is very similar to the previously
reported fully diluted earnings per share. All earnings per share amounts for
all periods have been presented to conform to the Statement 128 requirements.
The numerators for the earnings per share disclosures on the accompanying
Consolidated Statements of Income are the same as the income numbers shown on
that Statement. Following is the computation of the denominator for the basic
and diluted earnings per share calculations:
<PAGE>
<TABLE>
<CAPTION>
in millions
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Denominator for basic
earnings per share--
weighted average shares
outstanding 131.2 141.4 146.9
Dilutive effect of
employee stock options 1.9 2.5 1.9
----- ----- -----
Denominator for diluted
earnings per share 133.1 143.9 148.8
----- ----- -----
----- ----- -----
</TABLE>
DISCONTINUED OPERATIONS
As a result of the Spinoff, results for fiscal years 1997 and 1996 have been
restated to reflect ASP as a discontinued operation. The results reported
below include allocations of certain company assets (including pension
assets), liabilities (including pension and postretirement benefits) and
expenses relating to ASP that were transferred to ASP. The company also
provided certain general administrative services including legal management,
tax compliance, risk management and other corporate services to ASP. The cost
of these services was not material and was not included in the cost and
expenses of discontinued operations.
The operating results of the discontinued ASP business are as follows:
<TABLE>
<CAPTION>
Ten months
ended Year ended
April 30, June 30,
in millions 1997 1996
---------- ----------
<S> <C> <C>
Net sales $1,249.2 $1,397.5
Interest, royalties and sundry
income (loss) (.9) 2.2
------- -------
1,248.3 1,399.7
Cost of products sold 946.3 1,048.6
Selling, administrative and
general expense 77.8 75.3
Research and development 12.5 20.0
Interest expense 2.3 1.9
------- -------
1,038.9 1,145.8
------- -------
Income before income taxes 209.4 253.9
Income taxes 80.0 98.4
------- -------
Net income $ 129.4 $ 155.5
------- -------
------- -------
</TABLE>
<PAGE>
ACQUISITIONS
In December 1996, Morton signed a definitive agreement to acquire
approximately two-thirds of the stock of Compagnie des Salins du Midi et des
Salines de l'Est ("Salins du Midi"). A subsidiary of Morton acquired
two-thirds of the stock in March 1997, made a public cash tender offer in
France for the remaining shares, and as of June 30, 1997, owned 100 percent
of Salins du Midi for a total cost of $268.9 million. Salins du Midi is the
leading independent salt producer in France. Based in Paris, Salins du Midi
supplies salt for food and agricultural products, water treatment and
ice/snow and industrial applications, and markets its products under the "La
Baleine" label. Salins du Midi produces solar, rock and vacuum-processed salt
at nine sites in France and at four sites in Spain as well as other locations.
In December 1996, rights to acquire 90 percent of the outstanding stock of
Pulverlac S.p.A. ("Pulverlac"), an Italian powder coatings maker, were
purchased for $66.3 million. The remaining 10 percent was purchased in
January 1998 for $6.5 million. Pulverlac is a leader in the European powder
coatings industry.
These acquisitions consisted principally of values for property, plant and
equipment of $151.5 million, working capital of $55.2 million, and
intangibles of $90.7 million (primarily goodwill). The accounts and results
of operations since acquisition of the companies have been included in the
accompanying consolidated financial statements. Assuming the acquisitions had
been effective as of July 1, 1995, unaudited pro forma data for the years
ended June 30, 1997 and 1996 would not be materially different in relation to
consolidated results presented herein.
SPECIAL CHARGES
During the fourth quarter of fiscal 1998, the company recorded a special
charge of $15.0 million pretax ($9.6 million after tax or $.07 per share) for
restructuring actions. These activities, which are expected to improve
operating margins and enhance efficiency, relate to $9.2 million for the
closure of three chemical facilities and divestiture of several product
lines, and $5.8 million related to termination costs associated with the
reorganization of the industrial coatings and adhesives and chemical
specialties groups. These actions are expected to be completed primarily in
fiscal 1999 and generate annual cost savings of approximately $5.2 million.
During the fourth quarter of fiscal 1996, the company recorded special pretax
charges of $29.2 million ($23.9 million after tax or $.16 per share). The
charges included amounts related to the early adoption of the accounting
standard related to impairment of long-lived assets and the costs related to
selected facility
<PAGE>
rationalizations and employee terminations resulting from the reorganization
of the specialty chemicals operations.
During fiscal 1996, in applying the criteria of (FASB) Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets to be Disposed Of," the
company determined that the significant reduction in the defense-related
business of its chemical vapor deposition product line and the resulting
negative impact on income in recent years were indicators of potential
impairment. Accordingly, the company evaluated the ongoing value of
long-lived assets associated with this product line in accordance with the
provisions of Statement No. 121. Based on this evaluation, the company
determined that an impairment did exist and recorded an impairment loss of
$15.8 million to write these assets down to their fair value. Fair value was
based on estimated future cash flows to be generated by this product line,
discounted at a rate commensurate with the risk involved. No tax benefit was
recorded related to this charge.
During the fourth quarter of fiscal 1996, the company recorded a pretax
charge of $11.3 million for the planned closure of three domestic chemical
facilities and a European sales office as well as the elimination of certain
duplicate management and administrative positions. Operations at these
facilities were transferred to other existing facilities.
Components of the one-time charge included $3.0 million related to the
disposal of the facilities mentioned above, $4.9 million related to the
write-down to net realizable value of certain manufacturing equipment and
$3.4 million related to employee termination costs. These actions were
finalized in fiscal year 1998 and are expected to generate estimated annual
savings of $8.5 million.
In addition, in the fourth quarter of fiscal 1996 the company recorded a
pretax charge of $2.1 million to write down to current estimated realizable
value certain corporate assets held for sale.
INVENTORIES
Components of inventories were as follows:
<TABLE>
<CAPTION>
June 30
------------------
in millions 1998 1997
------ ------
<S> <C> <C>
Finished products and work-in-process $294.6 $271.8
Materials and supplies 86.4 79.8
------ ------
$381.0 $351.6
------ ------
------ ------
</TABLE>
<PAGE>
FINANCING ARRANGEMENTS
In May 1998, the company filed a shelf registration with the Securities and
Exchange Commission for up to $1 billion of debt securities. Should the sale
of the debt securities occur, proceeds will be used for general corporate
purposes which may include financing and re-financing of acquisitions,
purchases of company stock, repurchases of outstanding long-term debt,
capital expenditures, investments in subsidiaries, working capital and
repayment of borrowings under credit facilities.
The company has committed credit agreements with banks that will expire in
April 1999 and April 2002. In addition, lines of credit are available from
domestic and foreign banks that generally do not have termination dates but
are reviewed annually for renewal. Under these arrangements, the company may
borrow upon such terms and conditions as the company and the banks may
mutually agree. At June 30, 1998, such credit facilities amounted to
approximately $526.2 million, and the unused portions thereof were
approximately $507.2 million.
Long-term debt consisted of the following:
<TABLE>
<CAPTION>
June 30
-------------------
in millions 1998 1997
------ ------
<S> <C> <C>
Credit Sensitive Debentures
(net of unamortized discount of $1.3) $198.7 $198.7
Other 26.9 28.3
------ ------
225.6 227.0
Less current portion 3.1 2.9
------ ------
$222.5 $224.1
------ ------
------ ------
</TABLE>
The Credit Sensitive Debentures ("Debentures") due June 1, 2020, are
unsecured obligations of the company. The Debentures had an initial effective
interest rate of 9.335 percent, subject to adjustment on the calendar day
that certain changes in the debt rating of the Debentures occur, as
determined by Standard & Poor's Corporation or Moody's Investor Service. No
adjustment of the initial effective interest rate has occurred.
The aggregate maturities of long-term debt through June 30, 2003, total $6.9
million. Interest paid on borrowings in 1998, 1997 and 1996 was $23.1
million, $26.6 million and $24.0 million.
Notes payable at June 30, 1998 and 1997, reflected borrowings from banks at
average interest rates of 7.4 percent and 5.5 percent.
<PAGE>
FAIR VALUES OF FINANCIAL INSTRUMENTS
The following methods were used by the company to estimate its fair value
disclosures for financial instruments.
CASH AND CASH EQUIVALENTS
The carrying amount reported in the balance sheet for cash and cash
equivalents approximates its fair value.
NOTES PAYABLE AND LONG-TERM DEBT
The carrying amount of the company's borrowings in the form of notes payable
approximates its fair value. The fair value of the company's long-term debt
is estimated using discounted cash flow analyses, based on the company's
current incremental borrowing rates for similar types of borrowing
arrangements.
FOREIGN CURRENCY EXCHANGE CONTRACTS
Forward foreign exchange contracts that hedge foreign currency exposures or
transactions are valued at current foreign exchange rates.
The carrying or notional amounts and fair values of the company's financial
instruments at June 30, 1998, were as follows:
<TABLE>
<CAPTION>
Carrying or
notional Fair
in millions amount value
----------- -------
<S> <C> <C>
Notes payable $ 19.5 $ 19.5
Long-term debt 225.6 293.3
Forward foreign exchange contracts 276.0 276.4
</TABLE>
INCOME TAXES
The provisions for income taxes for continuing operations were as follows:
<TABLE>
<CAPTION>
in millions 1998 1997 1996
----- ---- ----
<S> <C> <C> <C>
Current:
Federal $ 49.6 $ 55.3 $ 55.2
State 12.9 12.0 11.6
Foreign 60.9 47.1 37.1
------ ------ ------
123.4 114.4 103.9
------ ------ ------
Deferred:
Federal (4.7) 2.9 1.5
State .5 1.4 .9
Foreign (1.9) 1.5 .3
------ ------ ------
(6.1) 5.8 2.7
------ ------ ------
$117.3 $120.2 $106.6
------ ------ ------
------ ------ ------
</TABLE>
<PAGE>
A reconciliation of the United States statutory rate to the effective income
tax rate for continuing operations follows:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Statutory rate 35.0% 35.0% 35.0%
Effect of:
State tax, net of federal tax benefit 2.7 2.6 2.8
Impairment loss on long-lived assets - - 1.9
Depletion (1.8) (1.9) (2.1)
Other .1 .3 (.2)
---- ---- ----
Effective rate 36.0% 36.0% 37.4%
---- ---- ----
---- ---- ----
</TABLE>
Deferred income taxes reflect the impact of temporary differences between the
valuation of assets and liabilities for financial reporting and their tax
bases. Significant components of the company's deferred tax balances were as
follows:
<TABLE>
<CAPTION>
June 30
----------------
in millions 1998 1997
---- ----
<S> <C> <C>
Deferred tax benefits related to:
Postretirement and postemployment benefits $ 65.4 $ 65.5
Accrual for environmental liabilities 14.1 15.0
Other 65.2 67.1
------ ------
144.7 147.6
------ ------
Deferred tax liabilities related to:
Tax over book depreciation 94.0 90.5
Pension 38.7 34.4
Other 81.4 59.7
------ ------
214.1 184.6
------ ------
Net deferred tax liability $ 69.4 $ 37.0
------ ------
------ ------
</TABLE>
No individual item included in other deferred tax benefits or deferred tax
liabilities above is material.
Total income tax payments related to the company (including ASP prior to the
Spinoff) during fiscal 1998, 1997 and 1996 were $106.3 million, $167.4
million and $189.2 million.
<PAGE>
Components of the company's income from continuing operations before income
taxes were as follows:
<TABLE>
<CAPTION>
in millions 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Domestic $177.2 $213.2 $176.8
Foreign 148.6 120.6 108.5
------ ------ ------
$325.8 $333.8 $285.3
------ ------ ------
------ ------ ------
</TABLE>
The Internal Revenue Service has completed its examination of Old Morton's
consolidated federal income tax returns through fiscal 1992, and all issues,
which were not significant individually or in the aggregate, have been
settled.
<PAGE>
SHAREHOLDERS' EQUITY
Changes in shareholders' equity are summarized below:
<TABLE>
<CAPTION>
Foreign
currency
Common stock Additional translation
------------------ paid-in Retained adjustment Treasury
in millions Shares Amount capital earnings and other stock
-------- -------- ---------- ---------- ------------ --------
<S> <C> <C> <C> <C> <C> <C>
Balance June 30, 1995 148.3 $ 148.3 $ 62.2 $ 1,417.6 $ 35.4 $ -
Net income - - - 334.2 - -
Cash dividends paid, $.52
per share - - - (76.3) - -
Exercise of stock
options and related
income tax benefits .1 .1 (6.3) - .2 24.3
Translation adjustment - - - - (24.6) -
Purchase of common stock
for treasury - - - - - (242.3)
-------- -------- ---------- ---------- ------------ --------
Balance June 30, 1996 148.4 148.4 55.9 1,675.5 11.0 (218.0)
Net income - - - 343.0 - -
Cash dividends paid, $.57
per share - - - (80.7) - -
Exercise of stock
options and related
income tax benefits .1 .1 (11.5) - (.3) 36.1
Translation adjustment - - - - (26.4) -
Purchase of common stock
for treasury - - - - - (234.9)
Elimination of treasury stock(1) (8.4) (8.4) (44.1) (269.0) - 321.5
Disposal of business operations(2) - - - 37.2 (1.1) -
-------- -------- ---------- ---------- ------------ --------
Balance June 30, 1997 140.1 140.1 .3 1,706.0 (16.8) (95.3)
Net income - - - 208.5 - -
Cash dividends paid, $.48
per share - - - (63.0) - -
Exercise of stock
options and related
income tax benefits - - (.3) (11.2) (.4) 27.2
Translation adjustment - - - - (19.7) -
Purchase of common stock
for treasury - - - - - (361.3)
-------- -------- ---------- ---------- ------------ --------
Balance June 30, 1998 140.1 $ 140.1 $ - $ 1,840.3 $ (36.9) $(429.4)
-------- -------- ---------- ---------- ------------ --------
-------- -------- ---------- ---------- ------------ --------
</TABLE>
<PAGE>
(1) In connection with the Spinoff, 8.4 million shares of treasury stock were
canceled without payment of consideration therefor, resulting in reductions of
common stock, additional paid-in capital and retained earnings, and the
elimination of treasury stock.
(2) Retained earnings were decreased to reflect the divestiture of the net
assets of ASP, increased by the cash received by the company as part of the
Spinoff, and decreased to reflect the elimination of intercompany indebtedness
of the ASP business and the liability for the company's portion of expenses in
connection with the Spinoff.
<PAGE>
SHAREHOLDERS' EQUITY (CONTINUED)
In both April 1997 and December 1997, the company's Board of Directors
authorized the repurchase of up to 10 million additional shares (20 million
shares in aggregate) of the company's common stock. During fiscal 1997 and
1998, 3.2 million shares and 11.1 million shares were repurchased on the open
market. In October 1995, Old Morton's Board of Directors authorized the
repurchase of up to 10 million shares of Old Morton's common stock on the
open market. During fiscal 1997 and 1996, 3.3 million shares and 6.7 million
shares were repurchased.
In March 1997, the company declared a dividend distribution of one preferred
share purchase right (the "Rights") for each outstanding common share, paid
in connection with the Spinoff. Until exercisable, the Rights will not be
transferable apart from the company's common stock. Each Right entitles its
holder to buy one one-hundredth of a share of the company's Series A Junior
Participating Preferred Stock at an exercise price of $105 per one
one-hundredth of a share of preferred stock. The Rights will only become
exercisable if a person or group acquires or makes an offer to acquire 20
percent or more of the company's common stock. In the event the company is
acquired in a merger, each Right entitles the holder to purchase common stock
of the surviving company having a market value of twice the exercise price of
the Rights. In the event any person or group acquires 20 percent or more of
the company's common stock (which the company's Board of Directors may reduce
to 10 percent), each Right entitles the holder (other than such acquirer) to
purchase common stock of the company having a market value of twice the
exercise price of the Right. The Rights may be redeemed by the company at the
price of one cent per Right prior to the acquisition of 20 percent of the
outstanding shares of the company's common stock. At June 30, 1998, 1.6
million shares of preferred stock were reserved for future exercises of the
Rights.
<PAGE>
BENEFIT PLANS
PENSIONS
The company has noncontributory defined benefit pension plans covering
employees at most domestic operations. The benefits are based on an
average of the employee's earnings in the years preceding retirement and
on credited service. Certain supplemental unfunded plan arrangements also
provide retirement benefits to specified groups of participants. Most
international subsidiaries also have retirement plans.
The company's funding policy for domestic plans is to contribute
amounts sufficient to meet the minimum funding requirements of the Employee
Retirement Income Security Act of 1974, as amended, plus any additional
amounts which the company may determine to be appropriate.
The actuarially computed portion of net pension expense related to the
company consisted of the following components:
<TABLE>
<CAPTION>
in millions 1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Service cost-benefits earned
during the year $17.5 $15.4 $15.0
Interest cost on projected
benefit obligation 41.4 38.3 35.8
Return on plan assets:
Actual $(124.4) $(103.9) $(79.9)
Deferred portion 72.8 57.7 38.6
------- -------- -------
Expected return (51.6) (46.2) (41.3)
Net amortization 1.0 1.1 2.9
------- -------- -------
Net pension expense $ 8.3 $ 8.6 $12.4
------- -------- -------
------- -------- -------
</TABLE>
<PAGE>
The reconciliation of the funded status of pension plans was as follows:
<TABLE>
<CAPTION>
June 30, 1998 June 30, 1997
-------------------------------- -------------------------------
Plans in which Plans in which Plans in which Plans in which
assets exceed accumulated assets exceed accumulated
accumulated benefit accumulated benefit
benefit obligation benefit obligation
in millions obligation exceeds assets obligation exceeds assets
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Plan assets at fair value $ 721.0 $ 17.5 $ 620.1 $ 11.4
--------- --------- --------- --------
Actuarial present value of projected
benefit obligations:
Accumulated benefit obligation
Vested 467.0 49.5 416.3 46.4
Non-vested 27.3 4.8 24.6 .1
Provision for future salary
increases 101.4 8.2 85.3 7.2
--------- --------- --------- --------
595.7 62.5 526.2 53.7
--------- --------- --------- --------
Plan assets in excess of (less than)
projected benefit obligation 125.3 (45.0) 93.9 (42.3)
Unrecognized net experience (gain) loss
since July 1, 1986 (1.4) 14.7 24.0 11.0
Prior service cost not yet recognized
in net pension cost (.5) 1.6 (.3) 1.9
Unrecognized net (asset) obligation
at July 1, 1986 (15.7) .6 (19.5) .6
Adjustment to recognize minimum liability - (9.5) - (7.8)
--------- --------- --------- --------
Net pension asset (liability) recognized
in the consolidated balance sheets $107.7 $ (37.6) $ 98.1 $ (36.6)
--------- --------- --------- --------
--------- --------- --------- --------
</TABLE>
The weighted averages of assumptions used in the determination of the
projected benefit obligation were:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Discount rate 6.8% 7.4% 7.8%
Rate of increases in compensation level 4.8% 4.8% 4.9%
Expected long-term rate of return
on assets 9.4% 9.5% 9.5%
</TABLE>
<PAGE>
The assets of the company-sponsored plans are invested primarily in equities
and bonds.
Certain pension plans contain restrictions on the use of excess pension
plan assets in the event of a change in control of the company.
POSTRETIREMENT BENEFITS OTHER THAN PENSIONS
The company currently provides postretirement health care and life insurance
benefits to most United States, Canadian and French retirees. In general,
the United States plans provide that employees who retire after attaining age
55 with five years of service are eligible for continued health care and life
insurance coverage. Dependent health care and life insurance coverage are
also available. Some retirees contribute toward the cost of health care
coverage, with the contributions generally varying based on service. In June
1993, a provision was adopted which caps the level of subsidy at the amount
in effect as of the year 2000 for most United States employees who retire
after December 31, 1992. In general, most Canadian employees who retire
after attaining age 55 and are entitled to a pension benefit are eligible for
continued retiree health and life insurance coverage. Dependent health
insurance is also generally available. The benefits are provided on a
noncontributory basis. In France, the company pays a portion of retiree
insurance premiums to cover health care costs in excess of those reimbursed
by social security.
Net periodic postretirement benefit cost included the following components:
<TABLE>
<CAPTION>
in millions 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Service cost-benefits
earned during the year $ 1.9 $ 1.8 $ 1.9
Interest cost on accumulated
postretirement benefit obligation 10.5 10.4 10.6
Net amortization (1.3) (1.2) (.8)
------ ------ ------
Net periodic postretirement
benefit cost $11.1 $11.0 $11.7
------ ------ ------
------ ------ ------
</TABLE>
At present, there is no prefunding of the postretirement benefits recognized
under FASB Statement No. 106. The following table presents the status of the
plans reconciled with amounts recognized in the consolidated balance sheet
for the company's postretirement benefits:
<PAGE>
<TABLE>
<CAPTION>
June 30
---------------------
in millions 1998 1997
------ ------
<S> <C> <C>
Accumulated postretirement benefit obligation:
Retirees and dependents $ 99.8 $ 97.2
Fully eligible active plan participants 11.5 11.5
Other active plan participants 38.4 36.9
------ ------
149.7 145.6
Unrecognized prior period gain 3.5 7.6
Unamortized plan amendment 10.3 11.5
------ ------
Postretirement benefit liability recognized
in the consolidated balance sheet $163.5 $164.7
------ ------
------ ------
</TABLE>
For measurement purposes, the assumed weighted average annual rate of
increase per capita cost of health care benefits was 7.5 percent for 1999 and
assumed to decrease one percent per year to 5.5 percent in 2001 and remain
constant thereafter. As noted above, for United States employees retiring
after December 31, 1992, the company's policy is to increase retiree
contributions so that the company's annual per capita cost contribution
remains constant at the level incurred in the year 2000. The weighted
average discount rate used in determining the accumulated postretirement
benefit obligation was 6.9 percent at June 30, 1998, and 7.4 percent at June
30, 1997. The rate of increase on compensation levels assumed was 4.8
percent at June 30, 1998 and 1997.
A one percent increase in the annual health care cost trend rates would have
increased the accumulated postretirement benefit obligation at June 30, 1998,
by approximately $8.1 million and increased postretirement benefit expense
for fiscal 1998 by approximately $.8 million.
OTHER
The company contributes to savings plans for eligible domestic employees.
The company contributions to the savings plans were $6.1 million in 1998
and 1997 and $5.3 million in 1996.
INCENTIVE PLAN
In October 1997, the shareholders approved the Morton International, Inc.
1997 Incentive Plan (the "Plan") which provides for the award to key
employees of stock options, restricted stock, limited stock appreciation
rights, and performance and other awards. There were 8,000,000 shares
reserved under the Plan, plus the number of shares subject to options to
purchase shares of common stock of Old Morton held prior to the Spinoff which
were exchanged for options to purchase common stock of the company in
connection with the Spinoff. As
<PAGE>
of June 30, 1998, there were 14,759,882 shares available for awards under the
Plan with 8,085,672 of those shares available for future issuances. To the
extent any awards expire unexercised or unpaid or are canceled, terminated or
forfeited in any manner without the issuance of shares of common stock
thereunder, or if the company receives any shares of common stock as the
exercise price of any award, such shares shall be available under the Plan.
All options granted under the Plan have an option exercise price equal to the
fair market value of the company's stock on the date of grant and the number
of option shares is fixed. Options expire ten years after the date of grant.
Options may be granted as qualified or non-qualified stock options.
Restricted stock is awarded under the Plan to certain key employees at no
cost. The outstanding restricted stock award shares vest from one to five
years subsequent to their award dates. The cost of restricted stock awards,
based on the stock's fair market value at the award dates, is charged to
consolidated equity and subsequently amortized against earnings over the
vesting period. At June 30, 1998, 29,387 shares of common stock were
outstanding under restricted stock awards.
At June 30, 1998, limited appreciation rights were outstanding covering
3,473,230 option shares. Limited appreciation rights are paid in cash in
lieu of the related options upon a change in control of the company, at which
time a charge to earnings would be recorded. As of June 30, 1998,
supplemental cash payment rights were outstanding with respect to 447,166
option shares, payable upon exercise of options or limited appreciation
rights. Supplemental cash payment rights provide for cash payments to
optionees upon the exercise of stock options for the purpose of reimbursing
them for the income tax liability incurred as the result of such exercises.
Supplemental cash payment rights outstanding have been accrued based on the
current fair market value of the company's stock and current income tax rates.
Due to the Spinoff, the number of option shares and the related exercise
prices in the following summary have been adjusted to maintain both the total
fair market value of common stock underlying the options, and the
relationship between the market value of the company's common stock and the
option's exercise price in all years presented. Options previously granted
to ASP employees are excluded from the summary.
<PAGE>
<TABLE>
<CAPTION>
Weighted average
Shares exercise price
------ ----------------
<S> <C> <C>
Options outstanding
at June 30, 1995 7,759,261 $14.78
Granted 1,010,505 24.40
Cancellations (78,974) 24.23
Exercised (1,294,751) 12.31
-----------
Options outstanding
at June 30, 1996 7,396,041 16.40
Granted 855,428 29.10
Cancellations (39,327) 28.99
Exercised (1,480,056) 12.65
-----------
Options outstanding
at June 30, 1997 6,732,086 18.70
Granted 883,740 33.40
Cancellations (21,000) 33.53
Exercised (920,616) 14.02
-----------
Options outstanding
at June 30, 1998 6,674,210 21.25
-----------
-----------
Options exercisable at:
June 30, 1996 6,453,851 15.23
June 30, 1997 5,915,328 17.27
June 30, 1998 5,811,470 19.45
</TABLE>
The range of exercise prices for options outstanding at June 30, 1998, was
$7.93 to $34.72. The range of exercise prices for options is wide due
primarily to the change in price of Old Morton's and New Morton's stock over
the period of the grants.
<PAGE>
The following table summarizes information about options outstanding at June
30, 1998:
<TABLE>
<CAPTION>
Range of exercise prices
------------------------
<S> <C> <C>
$7.93-$21.63 $21.84-$34.72
Outstanding options
Number of shares 3,272,062 3,402,148
Weighted average remaining
contractual life (in years) 3.42 7.63
Weighted average exercise
price $14.80 $27.45
Exercisable options
Number of shares 3,272,062 2,539,408
Weighted average exercise price $14.80 $25.43
</TABLE>
The company has elected to follow APB Opinion No. 25, "Accounting for Stock
Issued to Employees," to account for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
the use of option valuation models that were not developed for use in valuing
employee stock options. Under APB No. 25, because the exercise price of the
company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized in the
company's financial statements.
Pro forma information regarding income from continuing operations and income
per share is required by Statement No. 123. This information is required to
be determined as if the company had accounted for its employee stock options
granted in fiscal years 1998, 1997 and 1996 under the fair value method. The
fair value of options granted in these years as reported below has been
estimated at the date of grant using a Black-Scholes option pricing model
with the following weighted average assumptions for 1998, 1997 and 1996:
<TABLE>
<CAPTION>
1997
and
1998 1996
---- ----
<S> <C> <C>
Expected life (in years) 7 7
Risk-free interest rate 6.3% 6.5%
Expected volatility 26% 34%
Expected dividend yield 2% 2%
</TABLE>
The Black-Scholes option valuation model was developed for use in estimating
the fair value of traded options that have no vesting
<PAGE>
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the company's options have
characteristics significantly different from those of traded options, and
because changes in the subjective input assumptions can materially affect the
fair value estimate, in management's opinion, the existing models do not
necessarily provide a reliable single measure of the fair value of its
employee stock options. The weighted average estimated fair value of
employee stock options granted during 1998, 1997 and 1996 was $10.89, $14.86
and $12.34 per share.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The
company's pro forma information from continuing operations follows (in
millions, except per share information):
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Pro forma income $200.6 $202.5 $172.3
Pro forma income per share-Basic 1.53 1.43 1.17
Pro forma income per share-Diluted 1.51 1.41 1.16
</TABLE>
Pro forma net income from continuing operations was reduced by $3.4
million ($.02 per share) in 1997 due to additional pro forma compensation
resulting from adjustments to options made in connection with the Spinoff.
The effects on pro forma disclosures of applying Statement No. 123 are not
likely to be representative of the effects of such disclosures in future
years. Because Statement No. 123 is applicable only to options granted
subsequent to June 30, 1995, the pro forma effect is not fully reflected in
fiscal 1996.
ENVIRONMENTAL MATTERS
The company, like others in similar businesses, is subject to extensive
federal, state and local environmental laws and regulations. Although
company environmental policies and practices are designed to ensure
compliance with these laws and regulations, future developments and
increasingly stringent regulation could require the company to make
additional unforeseen environmental expenditures.
Environmental accruals are routinely reviewed on an interim basis as events
and developments warrant and are subjected to a comprehensive review annually
during the fiscal fourth quarter.
The company has been named a potentially responsible party at approximately
60 inactive waste disposal sites where cleanup costs have been or may be
incurred under the Federal
<PAGE>
Comprehensive Environmental Response, Compensation and Liability Act and
similar state statutes. The company's potential exposure has been evaluated
on a site-by-site basis, and an accrual reflecting the company's best
estimate of the liability has been established to the extent sufficient
information is available to reasonably estimate costs which may be incurred.
However, at certain of these sites, the company is unable, due to a variety
of factors, to assess and quantify the ultimate extent of its responsibility
for study and remediation costs. The most significant of these sites is
located in Wood-Ridge, New Jersey, where, at present, the company and
Velsicol Chemical Corporation ("Velsicol") have been held jointly and
severally liable for the cost of remediation necessary to correct
mercury-related environmental problems associated with a former mercury
processing plant. Although the company has accrued for expected site study
costs and some remedial effort, no reliable estimate can presently be made of
the company's range of liability due to the absence of site-specific data,
the unique nature of mercury plant wastes and the complex characteristics of
the plant site and adjacent areas. An estimate of the range of liability at
Wood-Ridge is not reasonably possible until technical studies are
sufficiently completed to permit such a determination. The Wood-Ridge plant
site study commenced in early fiscal 1997, and has been estimated to take
approximately 42 months to complete. A separate study of the surrounding
area is expected, but on a timetable yet to be determined. The company's
ultimate exposure will also depend upon the continued participation of
Velsicol and on the results of both formal and informal attempts to spread
liability to others believed to share responsibility. In this vein, a
recovery action against other potentially responsible parties was initiated.
Settlements in principle have been reached with those defendants considered
DE MINIMIS for claims associated only with the Wood-Ridge plant site and not
Berry's Creek. These proposed settlements total approximately $1.5 million.
Where appropriate, the analysis to determine the company's liability, if any,
with respect to remedial costs at the above sites reflects an assessment of
the likelihood and extent of participation of other potentially responsible
parties. The possibility of recoveries from insurance carriers (in addition
to recoveries previously made) is factored into accrual determinations only
when such additional recoveries are probable of realization.
During the second quarter of fiscal 1996, the company received approximately
$24.1 million related to settlement of substantially all claims against
former insurance carriers for cleanup expenses at chemical waste disposal
sites located throughout the country. These settlements involved policies
<PAGE>
written by various insurance companies from the 1940s through the mid-1980s.
Due to the age of these issues, related expenses had previously been charged
to earnings either through actual expenditures for remediation or through the
establishment of environmental accruals. As such, the settlement payments
received were included in sundry income.
During the fourth quarter of fiscal 1996, the U.S. EPA notified the company
of possible irregularities in water discharge monitoring reports filed by the
Moss Point, Mississippi plant in early 1995. The company retained an outside
law firm to investigate, and it was confirmed that such reports had been
falsified over a period of years. Other environmental problems at the plant
were also identified, and the investigation has been expanded to address the
additional issues. No administrative or judicial enforcement proceedings
have been initiated, but the company has been served with grand jury
subpoenas seeking documents related to wastewater discharge and groundwater
monitoring reporting at Moss Point. The company has furnished the requested
documents, and is cooperating with the environmental authorities. As a
result of these irregularities and possible violations, the company may be
exposed to material fines, penalties, and remedial expenses, but is unable to
determine the ultimate resolution.
The company's cleanup expenditures totaled approximately $3.1 million for
1998 and 1997 and $6.8 million for 1996. Amounts accrued as of June 30,
1998, are generally expected to be paid out over a period of up to 15 years.
Although the level of future expenditures for environmental matters cannot be
determined with any degree of certainty, based on the facts presently known
to management, it does not believe that such costs should have a material
effect on the company's financial position, results of operations, or
liquidity.
LITIGATION AND REGULATION
There are judicial and administrative claims pending or contemplated against
the company in addition to those of an environmental nature discussed in the
Environmental Matters noted above. Management believes that the resolution
of those claims should not have a material effect upon the company's
financial position, results of operations, or liquidity.
Various governmental agencies have authority to limit or prohibit
distribution of some of the company's products should they formally conclude
that continued distribution is unsafe to the population or the environment.
There are currently no challenges pending, the resolution of which would have
a material effect
<PAGE>
upon the company's operations.
LEASE COMMITMENTS
The company has commitments under operating leases primarily for building and
office space, railroad equipment and real estate. Rental expense charged in
1998, 1997 and 1996 was $40.3 million, $35.2 million and $36.1 million,
including insignificant amounts for contingent rentals and sublease income.
Renewal and purchase options are available on certain of these leases.
Future minimum rental commitments under operating leases having initial or
remaining non-cancelable terms in excess of one year as of June 30, 1998,
were as follows (in millions): 1999 -- $27.0; 2000 -- $17.6; 2001 -- $14.2;
2002 -- $11.9; 2003 -- $10.6; thereafter -- $297.3.
NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income" and No. 131, "Disclosures About
Segments of an Enterprise and Related Information." Statement No. 130
establishes standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements.
Statement No. 131 establishes standards for the way that public business
enterprises report information about operating segments in annual financial
statements and requires that those enterprises report selected information
about operating segments in interim financial reports to shareholders. It
also establishes standards for related disclosures about products and
services, geographic areas and major customers. Statement No. 131 supersedes
Statement No. 14, "Financial Reporting for Segments of a Business
Enterprise," but retains the requirement to report information about major
customers. In February 1998, the FASB issued Statement of Financial
Accounting Standards No. 132, "Employers' Disclosures about Pensions and
Other Post Retirement Benefits." This statement revises footnote disclosures
about pension and other postretirement benefit plans. It does not change the
accounting measurement or recognition of those plans.
The company is evaluating the impact that Statement Nos. 130, 131 and 132
will have on its financial disclosures and will adopt the Statements for the
year ended June 30, 1999.
<PAGE>
BUSINESS SEGMENT INFORMATION
OPERATIONS IN DIFFERENT BUSINESSES
<TABLE>
<CAPTION>
Profit as a percent
of average
SALES AND PROFIT Sales(1) Profit(2) identifiable assets
-------------------------------------- ------------------------------ ---------------------
in millions 1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ---------- ----------- -------- --------- -------- ------ ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Chemicals(3) $ 1,737.4 $ 1,680.9 $ 1,611.7 $ 242.8 $ 268.6 222.0 15.6% 18.1% 15.4%
Salt 792.7 659.7 603.3 144.2 137.5 124.7 18.0 23.2 32.9
---------- ---------- ----------- -------- --------- --------
Business totals 2,530.1 2,340.6 2,215.0 387.0 406.1 346.7 16.4 19.5 19.0
General Corporate expense - net(4) - - - (61.2) (72.3) (61.4)
---------- ---------- ----------- -------- --------- --------
Consolidated totals $ 2,530.1 $ 2,340.6 $ 2,215.0 $ 325.8 $ 333.8 285.3
---------- ---------- ----------- -------- --------- --------
---------- ---------- ----------- -------- --------- --------
</TABLE>
<TABLE>
<CAPTION>
ASSETS, CAPITAL EXPENDITURES, Year end Capital Depreciation and
DEPRECIATION AND AMORTIZATION identifiable assets expenditures amortization
---------------------------------- ----------------------------- --------------------------
in millions 1998 1997 1996 1998 1997 1996 1998 1997 1996
---------- ---------- ---------- -------- --------- -------- ------- ------ -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Specialty Chemicals $ 1,575.8 $ 1,540.0 $ 1,427.8 $ 82.8 $ 75.2 86.8 $ 76.2 $ 71.9 66.8
Salt(5) 803.5 802.2 385.3 53.4 40.7 35.8 50.7 40.2 32.6
--------- --------- --------- ------- -------- ------- ------- ------ -------
Business totals 2,379.3 2,342.2 1,813.1 136.2 115.9 122.6 126.9 112.1 99.4
General Corporate(6) 168.6 462.7 180.9 .6 1.5 1.8 2.3 3.9 3.5
Net assets of
discontinued business - - 635.1 - - - - - -
---------- --------- --------- ------- -------- -------- ------- ------- -------
Consolidated totals $ 2,547.9 $ 2,804.9 $ 2,629.1 $ 136.8 $ 117.4 124.4 $ 129.2 $ 116.0 $ 102.9
---------- --------- --------- ------- -------- -------- ------- ------- -------
---------- --------- --------- ------- -------- -------- ------- ------- -------
</TABLE>
<PAGE>
OPERATIONS IN DIFFERENT GEOGRAPHIC AREAS
<TABLE>
<CAPTION>
Year end
Sales(1) Profit(2) identifiable assets
------------------------------ ------------------------------ -----------------------------------
in millions 1998 1997 1996 1998 1997 1996 1998 1997 1996
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
United States $1,525.9 $1,519.1 $1,491.9 237.4 $ 283.7 $ 237.4 $1,283.5 $1,260.2 $1,240.9
Foreign Areas -
Canada and Bahamas 202.6 218.0 194.1 52.1 50.5 41.0 177.4 196.1 161.5
Europe 758.0 572.8 498.0 93.4 68.9 64.7 871.8 849.0 388.1
Others 43.6 30.7 31.0 4.1 3.0 3.6 46.6 36.9 22.6
--------- --------- --------- -------- -------- --------- --------- --------- ---------
$2,530.1 $2,340.6 $2,215.0 $ 387.0 $ 406.1 $ 346.7 $2,379.3 $2,342.2 $1,813.1
--------- --------- --------- -------- -------- --------- --------- --------- ---------
--------- --------- --------- -------- -------- --------- --------- --------- ---------
</TABLE>
(1) Export sales from the United States in fiscal 1998 were 6% and in
1997 and 1996 were 7% of sales to unaffiliated customers in each
year, primarily to the Far East, Latin America, Europe and Canada.
Intersegment and intergeographic area sales and transfers were
insignificant. No country within the European grouping contributed
or represented 10% or more of sales, profit, or identifiable assets
(except $392.6 million and $381.7 million of identifiable assets in
France in 1998 and 1997).
(2) Business segment profit was from continuing operations before income
taxes, interest income, interest expense and allocation of certain
corporate administrative expenses, but included foreign exchange
losses of ($1.9) million, ($2.7) million and ($.7) million in 1998,
1997 and 1996.
(3) Fiscal 1998 and fiscal 1996 profits included special charges of $15.0
million and $27.1 million, respectively. Refer to Special Charges
footnote. Fiscal 1996 profit also included $11.2 million related to
proceeds received, net of the impact on operations, for the formation
of a joint venture.
(4) Fiscal 1996 included $24.1 million of income related to the
settlement of several environmental insurance issues. Fiscal 1996
also included special charges of $2.1 million. Refer to Special
Charges footnote.
(5) Starting in fiscal 1997, year end identifiable assets include the
acquisition of Salins du Midi.
(6) Corporate assets are principally cash and cash equivalents, deferred
income tax benefits, prepaid expenses and property, plant and
equipment.
<PAGE>
<TABLE>
<CAPTION>
SELECTED FINANCIAL DATA (1)
dollars in millions, except per share data 1998 1997 1996 1995 1994 1993 1992
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C> <C> <C> <C> <C>
Net sales $ 2,530.1 $ 2,340.6 $ 2,215.0 $ 2,099.6 $ 1,911.1 $ 1,785.8 $ 1,715.0
Cost of products sold 1,726.1 1,580.3 1,517.7 1,424.1 1,277.8 1,201.9 1,152.7
Selling, administrative and
general expense 411.2 378.5 361.1 361.4 373.0 356.2 317.3
Research and development expense 60.9 58.8 60.2 58.1 53.8 54.6 52.1
Interest expense 23.3 25.6 24.4 28.4 27.8 33.5 33.8
Amortization of goodwill 12.1 11.2 10.3 10.3 10.4 10.7 10.8
Special charges (income) 15.0 - 29.2 - - 30.0 -
Income from continuing operations before
other charges, net of income taxes(2) 208.5 213.6 178.7 152.7 123.3 77.2 113.3
Other charges to income(3) - - - - - 90.7 -
Income (loss) from continuing operations 208.5 213.6 178.7 152.7 123.3 (13.5) 113.3
Income (loss) from discontinued operations - 129.4 155.5 141.4 103.2 46.0 31.2
Net income 208.5 343.0 334.2 294.1 226.5 32.5 144.5
Provision for depreciation(4) 113.4 100.3 88.8 83.1 77.6 75.5 73.9
- -----------------------------------------------------------------------------------------------------------------------------------
FINANCIAL
Total assets $ 2,547.9 $ 2,804.9 $ 2,629.1 $ 2,652.0 $ 2,352.3 $ 2,154.5 $ 2,056.7
Working capital 641.3 866.9 415.5 398.9 286.2 228.8 251.7
Current ratio 2.4 2.7 1.9 1.8 1.6 1.5 1.6
Long-term debt $ 222.5 $ 224.1 $ 218.5 $ 218.5 $ 198.$ $ 217.8 $ 222.6
Total debt to capitalization 13.3% 12.6% 13.0% 13.3% 15.6% 20.7% 20.3%
Shareholders' equity $ 1,514.1 $ 1,734.3 $ 1,672.8 $ 1,663.5 $ 1,399.6 $ 1,200.2 $ 1,222.9
Shareholders' equity per share $ 11.94 $ 12.65 $ 11.75 $ 11.22 $ 9.48 $ 8.20 $ 8.40
Return on shareholders' equity(5) 12.0% 20.5% 20.1% 21.0% 18.9% 10.4% 13.1%
Capital expenditures(4) $ 136.8 $ 117.4 $ 124.4 $ 126.4 $ 125.0 $ 97.9 $ 92.0
Cash dividends paid(6) 63.0 80.7 76.3 65.1 54.9 46.6 46.5
- -----------------------------------------------------------------------------------------------------------------------------------
PER SHARE DATA(8)
Basic income per share:
Income (loss) from continuing operations $ 1.59 $ 1.51 $ 1.21 $ 1.03 $ .84 $ (.09) $ .78
Income (loss) from discontinued operations - .92 1.06 .96 .70 .31 .21
-------- -------- -------- -------- ------- -------- --------
Net income $ 1.59 $ 2.43 $ 2.27 $ 1.99 $ 1.54 $ .22 $ .99
-------- -------- -------- -------- ------- -------- --------
Diluted income per share:
Income (loss) from continuing operations $ 1.59 $ 1.48 $ 1.20 $ 1.02 $ .82 $ (.09) $ .78
Income (loss) from discontinued operations - .90 1.05 .95 .69 .31 .21
-------- -------- -------- -------- ------- -------- --------
Net income $ 1.58 $ 2.38 $ 2.25 $ 1.97 $ 1.51 $ .22 $ .99
-------- -------- -------- -------- ------- -------- --------
Cash dividends paid(6) $ .480 $ .570 $ .520 $ .440 $ .373 $ .320 $ .320
- -----------------------------------------------------------------------------------------------------------------------------------
GENERAL
Average number of common shares outstanding
(in thousands)(8):
Basic 131,150 141,406 146,944 147,917 147,096 145,829 145,288
Diluted 133,060 143,866 148,771 149,610 149,551 147,289 146,698
Approximate number of shareholders 9,650 10,500 10,625 9,900 8,860 9,370 9,870
Approximate number of employees(4) 10,600 10,500 8,700 8,800 8,800 8,700 8,600
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
dollars in millions, except per share data
1991 1990 1989(7)
- -----------------------------------------------------------------------------------------------
OPERATIONS
<S> <C> <C> <C>
Net sales $ 1,680.7 $ 1,475.7 $ 1,356.3
Cost of products sold 1,146.4 990.1 910.1
Selling, administrative and
general expense 273.7 249.8 216.5
Research and development expense 54.3 44.3 36.7
Interest expense 36.4 17.3 9.1
Amortization of goodwill 10.6 7.0 5.7
Special charges (income) - (14.3) 37.1
Income from continuing operations before
other charges, net of income taxes(2) 117.9 124.5 100.0
Other charges to income(3) - - -
Income (loss) from continuing operations 117.9 124.5 100.0
Income (loss) from discontinued operations 20.4 10.3 (2.9)
Net income 138.3 134.8 97.1
Provision for depreciation(4) 69.5 61.6 54.7
- -----------------------------------------------------------------------------------------------
FINANCIAL
Total assets $ 1,886.6 $ 1,781.7 $ 1,347.8
Working capital 288.0 281.4 238.9
Current ratio 1.8 1.7 1.8
Long-term debt $ 255.7 $ 261.4 $ 43.9
Total debt to capitalization 22.2% 24.1% 9.4%
Shareholders' equity $ 1,103.4 $ 1,008.1 $ 900.7
Shareholders' equity per share $ 7.61 $ 7.00 $ 6.27
Return on shareholders' equity(5) 13.7% 15.0% 12.3%
Capital expenditures(4) $ 98.0 $ 82.8 $ 92.0
Cash dividends paid(6) 45.2 41.4 -
- -----------------------------------------------------------------------------------------------
PER SHARE DATA(8)
Basic income per share:
Income (loss) from continuing operations $ .82 $ .87 $ .70
Income (loss) from discontinued operations .14 .07 (.02)
-------- -------- ----------
Net income $ .96 $ .94 $ .68
-------- -------- ----------
Diluted income per share:
Income (loss) from continuing operations $ .81 $ .86 $ .70
Income (loss) from discontinued operations .14 .07 (.02)
-------- -------- ----------
Net income $ .95 $ .93 $ .68
-------- -------- ----------
Cash dividends paid(6) $ .313 $ .287 $ -
- ------------------------------------------------------------------------------------------------
GENERAL
Average number of common shares outstanding
(in thousands)(8):
Basic 144,437 143,819 142,941
Diluted 145,144 144,210 143,482
Approximate number of shareholders 10,190 10,600 11,280
<PAGE>
Approximate number of employees(4) 8,800 8,800 7,900
- -----------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
(1) The Selected Financial Data primarily reflect the continuing operations
of the company's specialty chemicals, salt and corporate operations
which were spun-off to shareholders of Old Morton in a tax-free
distribution in the U.S. effective April 30, 1997. The operations of
the Automotive Safety Products business have been accounted for as
discontinued operations in all periods prior to the Spinoff. Refer to
Spinoff and Basis of Presentation footnote.
(2) Fiscal 1998 and fiscal 1996 included special charges of $9.6 million or
$.07 per share and $23.9 million or $.16 per share, respectively. Refer
to Special Charges footnote. Fiscal 1996 also included $15.1 million or
$.10 per share related to the settlement of several environmental
insurance issues and $9.4 million or $.06 per share related to proceeds
received for the formation of a joint venture. Fiscal 1993 included
special charges related to the restructuring of operations including
disposition of facilities and relocation of manufacturing facilities of
$19.1 million or $.13 per share. Fiscal 1990 included the gain on sale
of a 40 percent interest in a foreign affiliate of $13.1 million or $.09
per share and unusual charges of $7.3 million or $.05 per share for
additional anticipated costs related primarily to previously divested
operations and to the Spinoff from Thiokol Corporation. Fiscal 1989
included reorganization and other unusual charges of $25.0 million or
$.17 per share.
(3) The 1993 charge was the cumulative effect of change in accounting for
postretirement benefits other than pensions and postemployment benefits.
(4) Continuing operations only.
(5) Based on net income before other charges including those related to
discontinued operations and calculated on beginning-of-year
shareholders' equity.
(6) Cash dividends reflect total payments made by Old Morton through April
30, 1997, and by the company thereafter. Refer to Spinoff and Basis of
Presentation footnote.
(7) Effective July 1, 1989, Morton Thiokol, Inc. (MTI) transferred its
commercial businesses and certain corporate assets and liabilities to
Old Morton. Since July 1, 1989, MTI (originally renamed Thiokol
Corporation and subsequently renamed Cordant Technologies, Inc.) and the
company have been independent companies. MTI was responsible for
dividend payments prior to July 1, 1989.
(8) Average number of common shares outstanding have been restated to comply
with the requirements of the Financial Accounting Standards Board
Statement No. 128, "Earnings Per Share." For fiscal 1990 through 1998,
per share amounts were calculated based on the average number of common
and common equivalent shares outstanding for the company and Old Morton
described in note (1) above. For fiscal 1989, per share amounts were
calculated based on the average number of common and common equivalent
shares outstanding for MTI.
<PAGE>
Report of Ernst & Young LLP, Independent Auditors
To the Shareholders and
Board of Directors
Morton International, Inc.
We have audited the accompanying consolidated balance sheets of Morton
International, Inc. as of June 30, 1998 and 1997, and the related
consolidated statements of income and cash flows for each of the three years
in the period ended June 30, 1998. 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 in accordance with generally accepted auditing
standards. 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Morton
International, Inc. at June 30, 1998 and 1997, and the consolidated results
of its operations and its cash flows for each of the three years in the
period ended June 30, 1998, in conformity with generally accepted accounting
principles.
As discussed in the notes to the consolidated financial statements, the
company adopted Financial Accounting Standards Board Statement No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed Of" in 1996.
/s/ Ernst & Young LLP
----------------------------
Chicago, Illinois
July 29, 1998
<PAGE>
REPORT OF MANAGEMENT
We have prepared the accompanying consolidated financial statements of Morton
International, Inc. in conformity with generally accepted accounting
principles appropriate in the circumstances. The integrity and objectivity of
data in these financial statements are the responsibility of management.
Based on currently available information, management makes informed judgments
and estimates of the effects of certain events and transactions when
preparing the financial statements. Financial information included elsewhere
in this Annual Report is consistent with that contained in the financial
statements.
We maintain a highly developed accounting system and controls to provide
reasonable assurance that assets are safeguarded against loss from
unauthorized use or disposition and that financial records are reliable for
preparing financial statements and maintaining accountability for assets.
However, there are inherent limitations that should be recognized in
considering the potential effectiveness of any system of internal accounting
control. The concept of reasonable assurance is based on the recognition
that the cost of a system of internal control should not exceed the benefits
derived and that the evaluation of those factors requires estimates and
judgments by management. The company's systems provide such reasonable
assurance.
The functioning of the accounting system and controls over it are reviewed by
an extensive program of internal audits and by the company's independent
auditors, Ernst & Young LLP. The responsibility of the Board of Directors for
the company's financial statements is exercised through its Audit Committee
which is composed of Directors who are not company employees. The Audit
Committee recommends to the Board of Directors the selection of the
independent auditors and reviews their fee arrangements. It meets
periodically with management, the internal auditors and the independent
auditors to assure that each is carrying out its responsibilities. The
independent auditors have full and free access to the Audit Committee to
discuss auditing and financial reporting matters.
The company's legal counsel has reviewed the company's position with respect
to litigation, claims, assessments, and illegal or questionable acts, has
communicated that position to our independent auditors, and is satisfied that
it is properly disclosed in the financial statements.
The company has prepared and distributed to its employees a statement of its
policies prohibiting certain activities deemed illegal, unethical, or against
the best interest of the company. Certification of compliance with such
policies is required of certain employees and any apparent problems are
reviewed by the Audit Committee of the Board of Directors. In consultation
with our independent auditors, we have developed and instituted additional
internal controls and internal audit procedures designed to prevent or detect
violations of those policies. We believe that the policies and procedures
provide reasonable assurance that our operations are conducted in conformity
with the law and with a high standard of business conduct.
/s/ Thomas F. McDevitt
- ----------------------
Thomas F. McDevitt
Vice President Finance and Chief Financial Officer
July 29, 1998
<PAGE>
EXHIBIT (21)(a)
SUBSIDIARIES OF MORTON INTERNATIONAL, INC.
The following is a list of the subsidiaries of the Company as of June 30,
1998. Other subsidiaries, which considered in the aggregate as a single
subsidiary would not constitute a significant subsidiary, have been omitted.
The consolidated financial statements reflect the operations of all
subsidiaries as they existed on June 30, 1998, except for certain primarily
inactive subsidiaries not considered significant as defined in Regulation S-X,
Rule 1.02(w).
<TABLE>
<CAPTION>
STATE OR OTHER
JURISDICTION OF
INCORPORATION OR
NAME OF SUBSIDIARY ORGANIZATION
- ------------------------------------------------------------ ----------------
<S> <C>
Bee Chemical Company........................................ Illinois
Nippon Bee Chemical Co., Ltd............................ Japan
(50% owned by Bee Chemical Company)
Morton Nippon Coatings Partnership...................... Illinois
(50% owned by Bee Chemical Company)
Canadian Salt Company Limited (The)......................... Canada
Compagnie des Salins du Midi et des Salines de l'Est........ France
Compagnie Italienne Des Sels S.A........................ Italy
Union Salinera De Espana S.A............................ Spain
CVD Incorporated............................................ Delaware
Inagua Transports, Incorporated............................. Liberia
Morton Bahamas Limited...................................... Bahamas
Inagua General Store, Limited........................... Bahamas
Morton International B.V.................................... Netherlands
Morton International Co., Ltd............................... Japan
Morton International G.m.b.H................................ Germany
IRO Chemie.............................................. Germany
Morton International Limited................................ England
Morton International, Ltd................................... Canada
Morton International Ireland Company.................... Ireland
Morton International, Ltd................................... Japan
Morton International, Ltd................................... Taiwan
Morton International S.A.................................... France
Morton S.A.............................................. France
Morton International, S.A. de C.V........................... Mexico
Morton International S.p.A.................................. Italy
Morton International Spain, S.A............................. Spain
Morton-WKK, Ltd............................................. Bermuda
(50% owned by Morton International, Inc.)
Dongguan Kong King...................................... China
Morton-WKK, Ltd......................................... Hong Kong
Nichigo-Morton Co., Ltd..................................... Japan
(50% owned by Morton International, Inc.)
N.V. Morton International S.A............................... Belgium
Toyo-Morton Limited......................................... Japan
(50% owned by Morton International, Inc.)
</TABLE>
S-2
<PAGE>
CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-3) of Morton International, Inc. filed with the Securities and
Exchange Commission on May 1, 1998, the Registration Statement (Form S-8 No.
333-39487) pertaining to the 1997 Incentive Plan, and the Registration
Statement (Form S-8 No. 333-26281) pertaining to the 1994 Non-Employee
Directors Stock Plan, of our report dated July 29, 1998, with respect to the
consolidated financial statements and schedule of Morton International, Inc.
and subsidiaries, included or incorporated by reference in the Annual Report
(Form 10-K) for the year ended June 30, 1998.
/s/ Ernst & Young LLP
ERNST & YOUNG LLP
Chicago, Illinois
September 21, 1998
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-END> JUN-30-1998
<CASH> 50,800
<SECURITIES> 87,200
<RECEIVABLES> 482,100
<ALLOWANCES> (13,500)
<INVENTORY> 381,000
<CURRENT-ASSETS> 1,113,000
<PP&E> 1,773,100
<DEPRECIATION> (891,400)
<TOTAL-ASSETS> 2,547,900
<CURRENT-LIABILITIES> 471,700
<BONDS> 222,500
0
0
<COMMON> 140,100
<OTHER-SE> 1,374,000
<TOTAL-LIABILITY-AND-EQUITY> 2,547,900
<SALES> 2,530,100
<TOTAL-REVENUES> 2,574,400
<CGS> 1,726,100
<TOTAL-COSTS> 2,192,700
<OTHER-EXPENSES> 27,100
<LOSS-PROVISION> 5,500
<INTEREST-EXPENSE> 23,300
<INCOME-PRETAX> 325,800
<INCOME-TAX> 117,300
<INCOME-CONTINUING> 208,500
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 208,500
<EPS-PRIMARY> 1.59
<EPS-DILUTED> 1.57
</TABLE>
