<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1999
-------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission File Number 1-4654
------
WITCO CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 13-1870000
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
ONE AMERICAN LANE, GREENWICH, CONNECTICUT 06831-2559
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
</TABLE>
(203) 552-2000
--------------
(Registrant's telephone number,
including area code)
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
----- -----
The number of shares of common stock outstanding is as follows:
<TABLE>
<CAPTION>
Class Outstanding at July 31, 1999
----- ----------------------------
<S> <C>
Common Stock - $5 par value 57,641,916
</TABLE>
<PAGE>
WITCO CORPORATION
FORM 10-Q
For the quarterly period ended June 30, 1999
<TABLE>
<CAPTION>
CONTENTS PAGE
-------- ----
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed consolidated balance sheets at June 30, 1999 (unaudited)
and December 31, 1998 2
Condensed consolidated statements of income (unaudited) for the three
and six months ended June 30, 1999 and 1998 3
Condensed consolidated statements of cash flows (unaudited) for the
six months ended June 30, 1999 and 1998 4
Notes to condensed consolidated financial statements (unaudited) 5
Independent accountants' report on review of interim financial
information 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosure of Market Risk 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 18
Item 4. Submission of Matters to Vote on Security Holders 19
Item 6. Exhibits and Reports on Form 8-K 20
Signatures 21
Index to Exhibits 22
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
WITCO CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands except per share data)
<TABLE>
<CAPTION>
June 30, December 31,
1999 1998 (a)
----------------- ----------------
(Unaudited)
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,395 $ 36,986
Accounts and notes receivable-net 288,951 324,738
Inventories
Raw materials and supplies 49,273 53,024
Finished goods 196,847 246,120 202,501 255,525
-------- --------
Deferred income taxes 35,364 42,533
Prepaid 16,879 20,836
---------- ----------
TOTAL CURRENT ASSETS 609,709 680,618
---------- ----------
PROPERTY, PLANT, AND EQUIPMENT -
less accumulated depreciation
of $801,882 and $813,311 1,002,079 961,703
GOODWILL AND OTHER INTANGIBLE ASSETS -
less accumulated amortization of $161,457
and $151,472 595,608 611,943
DEFERRED INCOME TAXES - 7,605
DEFERRED COSTS AND OTHER ASSETS 99,770 77,000
---------- ----------
TOTAL ASSETS $2,307,166 $2,338,869
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes and loans payable $ 286,243 $ 201,437
Accounts payable and other current liabilities 394,955 433,154
---------- ----------
TOTAL CURRENT LIABILITIES 681,198 634,591
---------- ----------
LONG-TERM DEBT 677,334 688,192
DEFERRED INCOME TAXES 12,868 -
DEFERRED CREDITS AND OTHER LIABILITIES 323,384 358,263
SHAREHOLDERS' EQUITY
$2.65 Cumulative Convertible Preferred Stock,
par value $1 per share: authorized - 14 shares,
issued and outstanding - 6 shares 6 6
Common Stock, par value $5 per share:
authorized - 100,000 shares, issued - 57,662
shares and 57,632 shares 288,311 288,163
Capital in excess of par value 161,579 161,267
Accumulated other comprehensive loss (49,905) (14,884)
Restricted stock programs (1,509) (1,613)
Retained earnings 214,388 225,310
Treasury stock, at cost - 18 shares and 12 shares (488) (426)
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 612,382 657,823
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,307,166 $2,338,869
========== ==========
</TABLE>
(a) The balance sheet at December 31, 1998 has been derived from the audited
financial statements at that date.
See accompanying notes.
2
<PAGE>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(in thousands except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
1999 1998 1999 1998
------------------------------------- ---------------------------------------
<S> <C> <C> <C> <C>
Net Sales $493,842 $504,302 $974,433 $1,011,676
Cost of Goods Sold 369,955 377,567 734,502 757,787
----------------- ---------------- ---------------- ------------------
Gross Profit 123,887 126,735 239,931 253,889
Operating Expenses
Selling expense 25,840 25,973 50,968 51,685
General and administrative expenses 37,036 35,913 76,466 69,945
Research and development 16,521 18,314 35,633 36,199
Other expenses (income) - net 4,788 5,721 6,310 6,741
Restructuring charges 522 2,781 3,204 5,043
----------------- ---------------- --------------- ------------------
Total Operating Expenses 84,707 88,702 172,581 169,613
----------------- ---------------- --------------- ------------------
Operating Income 39,180 38,033 67,350 84,276
Other Expense (Income) - Net
Interest expense 15,429 12,002 28,291 23,992
Interest income (785) (1,374) (1,801) (2,694)
Other expense - net 800 674 1,373 1,595
----------------- ---------------- --------------- ------------------
Income before Income Taxes 23,736 26,731 39,487 61,383
Income Taxes 10,919 11,574 18,164 25,781
----------------- ---------------- --------------- ------------------
Net Income $ 12,817 $ 15,157 $ 21,323 $ 35,602
================= ================ =============== ==================
Net Income Per Common Share: Basic $.22 $.26 $.37 $.62
================= ================ =============== ==================
Weighted Average Number of Common Shares:
Basic 57,570 57,528 57,565 57,485
================= ================ =============== ==================
Net Income Per Common Share: Diluted $.22 $.26 $.37 $.61
================= ================ =============== ==================
Weighted Average Number of Common Shares:
Diluted 57,744 58,052 57,739 58,173
================= ================ =============== ==================
Dividends declared $.28 $.28 $.56 $.56
================= ================ =============== ==================
</TABLE>
See accompanying notes.
3
<PAGE>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------------
1999 1998
------------- --------------
(In thousands)
<S> <C> <C>
NET CASH USED IN OPERATING ACTIVITIES $ (30,319) $ (48,086)
------------- --------------
INVESTING ACTIVITIES
Expenditures for property, plant, and equipment (126,022) (121,592)
Proceeds from dispositions 2,707 26,448
Other investing activities - 6,256
------------- --------------
Net Cash Used in Investing Activities (123,315) (88,888)
------------- --------------
FINANCING ACTIVITIES
Proceeds from borrowings 876,174 166,790
Payments on borrowings (791,851) (62,403)
Proceeds from the sale of account receivable 90,000 -
Dividends paid (32,245) (32,219)
Proceeds from exercise of stock options - 3,893
------------- --------------
Net Cash Provided By Financing Activities 142,078 76,061
------------- --------------
Effects of Exchange Rate Changes on Cash and Cash Equivalents (3,035) (503)
------------- --------------
DECREASE IN CASH AND CASH EQUIVALENTS (14,591) (61,416)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 36,986 96,383
------------- --------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 22,395 $ 34,967
============= ==============
</TABLE>
See accompanying notes.
4
<PAGE>
WITCO CORPORATION AND SUBSIDIARY COMPANIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
NOTE A - Basis of Preparation
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and with the instructions to Form 10-Q and Rule 10-01 of
Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments considered
necessary for a fair presentation have been included. All such adjustments are
of a normal recurring nature. Operating results for the three and six month
periods ended June 30, 1999 are not necessarily indicative of the results that
may be expected for the year ending December 31, 1999. For further information,
refer to the consolidated financial statements and footnotes thereto included in
the Company's annual report on Form 10-K for the year ended December 31, 1998.
The condensed consolidated financial statements at June 30, 1999, and for the
three and six month periods ended June 30, 1999 and 1998, have been reviewed in
accordance with standards established by the American Institute of Certified
Public Accountants, by independent accountants Ernst & Young LLP, and their
report is included herein.
NOTE B - New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 requires that all derivatives
be recorded on the balance sheet as an asset or liability measured at its fair
value. Derivatives that are not hedges must be adjusted to fair value through
income. If the derivative is a hedge, depending on the nature of the hedge,
changes in fair value of the derivative will either be offset against the
changes in fair market value of the hedged assets, liabilities, or firm
commitments through earnings or recognized in other comprehensive income until
the hedged item is recognized in earnings. The ineffective portion of a
derivative's change in fair market value will be immediately recognized in
earnings. The Company has not yet determined what the effect of SFAS No. 133
will be on its earnings and financial position. Since the standard allows
certain foreign currency transactions to be accounted for as hedges for
financial reporting purposes that were not previously treated as hedges, the
Company may change its policies towards the management of certain foreign
currency exposures. Any changes that may occur would be to further reduce the
Company's exposure to foreign currency risks. In June 1999, the FASB approved
the deferral of SFAS No. 133 for one year. Therefore, the Company is required to
adopt the provisions of SFAS No. 133 by January 1, 2001, however, early
application is permitted as of the beginning of any preceding fiscal quarter.
NOTE C - Comprehensive Income (Loss)
The components of comprehensive income (loss) for the three and six month
periods ended June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands of dollars) June 30, June 30,
------------------------------- ---------------------------------
1999 1998 1999 1998
------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Net income $ 12,817 $15,157 $ 21,323 $35,602
Foreign currency translation adjustments (13,233) 1,256 (35,021) (3,920)
------------- -------------- -------------- ---------------
Comprehensive income (loss) $ (416) $16,413 $(13,698) $31,682
============== =============== ============= ===============
</TABLE>
<TABLE>
<CAPTION>
The components of accumulated other comprehensive loss, net of related tax, at
June 30, 1999 and December 31, 1998 are as follows:
(in thousands of dollars) 1999 1998
------------- -------------
<S> <C> <C>
Foreign currency translation adjustments $(47,862) $(12,841)
Pension - minimum liability adjustments (2,043) (2,043)
------------- -------------
Accumulated other comprehensive loss $(49,905) $(14,884)
============= =============
5
<PAGE>
NOTE D - Effective Tax Rate
The effective tax rate of 46.0% for the three and six month periods ended June
30, 1999 and 43.3% and 42% for the three and six month periods ended June 30,
1998, respectively, as compared to the federal statutory tax rate of 35%, is
primarily the result of state income taxes, goodwill amortization which is not
deductible for income tax purposes and the effect of the mix between domestic
and foreign earnings. The 4% increase in the tax rate as of June 30,1999 as
compared to June 30, 1998 is mainly due to the effect of non-deductible
amortization costs on reduced earnings.
NOTE E - Earnings Per Share
The following is a reconciliation of the numerator and denominator of basic and
diluted EPS computations:
</TABLE>
<TABLE>
<CAPTION>
(in thousands of dollars and shares, except per Three Months Ended Six Months Ended
common share amounts) June 30, June 30,
---------------------------- -----------------------------
1999 1998 1999 1998
------------ ------------ ------------ -------------
<S> <C> <C> <C> <C>
Numerator:
- ----------
Net income $12,817 $15,157 $21,323 $35,602
Preferred stock dividends (4) (4) (8) (8)
------------ ------------ ------------ ------------
Numerator for basic earnings per share - income
available to common shareholders 12,813 15,153 21,315 35,594
Effect of dilutive securities:
Preferred stock dividends 4 4 8 8
------------ ------------ ------------ ------------
Numerator for diluted earnings per share - income
available to common shareholders after assumed
conversions $12,817 $15,157 $21,323 $35,602
============ ============ ============ ============
Denominator:
- ------------
Denominator for basic earnings per share -
weighted-average shares 57,570 57,528 57,565 57,485
Effect of dilutive securities:
Employee stock options - 345 - 508
Cumulative convertible preferred stock 99 102 99 103
Restricted shares 75 77 75 77
------------ ------------ ------------ ------------
Dilutive potential common shares 174 524 174 688
------------ ------------ ------------ ------------
Denominator for diluted earnings per share - adjusted
weighted -average shares and assumed conversions 57,744 58,052 57,739 58,173
============ ============ ============ ============
Basic Earnings Per Share $.22 $.26 $.37 $.62
============ ============ ============ ============
Diluted Earnings Per Share $.22 $.26 $.37 $.61
============ ============ ============ ============
</TABLE>
NOTE F - Litigation and Environmental
The Company is a potentially responsible party (PRP) or a defendant in a number
of governmental (federal, state and local) and private actions associated with
the release, or suspected release, of contaminants into the environment. As a
PRP, the Company may be liable for costs associated with the investigation and
remediation of environmental contamination, as well as various penalties and
damages to persons, property and natural resources. As of June 30, 1999, the
Company was a PRP, or a defendant, in connection with 62 sites at which it is
likely to incur environmental response costs as a result of actions brought
against the Company pursuant to the federal Comprehensive Environmental Response
Compensation and Liability Act (CERCLA), the federal Resource Conservation and
Recovery Act (RCRA) or similar state or local laws. With 28 exceptions, all of
these sites involve one or more other PRPs, and in most cases there are numerous
other PRPs in addition to the Company. CERCLA, RCRA and the state counterparts
to these federal laws authorize governments to investigate and remediate actual
or suspected damage to the environment caused by the release, or suspected
release, of hazardous substances into the environment, or to order the
responsible parties to investigate and/or remediate such environmental damage.
6
<PAGE>
NOTE F - Litigation and Environmental (continued)
The Company evaluates and reviews environmental reserves for future remediation
and other costs on a quarterly basis to determine appropriate reserve amounts.
Inherent in this process are considerable uncertainties which affect the
Company's ability to estimate the ultimate costs of remediation efforts. Such
uncertainties include the nature and extent of contamination at each site,
evolving governmental standards regarding remediation requirements, changes in
environmental regulations, widely varying costs of alternative cleanup methods,
the number and financial condition of other potentially responsible parties at
multi-party sites, innovations in remediation and restoration technology and the
identification of additional environmental sites.
At June 30, 1999, the Company's reserves for environmental remediation and
compliance costs amounted to $110,295, reflecting the Company's estimate of the
costs to be incurred over an extended period of time in respect of those matters
which are reasonably estimable. At June 30, 1999, $90,436 of the reserves are
included in Deferred Credits and Other Liabilities on the Condensed Consolidated
Balance Sheets. The Company believes it has provided adequate reserves for these
commitments.
The Company is a defendant in four similar actions arising out of the Company's
involvement in the polybutylene resin manufacturing business in the 1970's.
Three of the following cases are currently pending in California state courts
and one is pending in Texas state court. East Bay Municipal Utility District v.
Mobil Oil Corporation, et al., filed in November 1993, and pending in Superior
Court for the County of San Mateo, California; Alameda County Water District v.
Mobil Oil Corporation, et al., filed in April 1996, and Marin Municipal Water
District v. Shell Oil Company, et al., filed in May 1996, both pending in
Superior Court for the County of San Mateo; and City of Austin v. Shell Oil
Company, et al., filed in June 1996, and pending in the District Court of Travis
County, Texas. The actions generally allege that the Company and several other
defendants negligently misrepresented the performance of polybutylene pipe and
fittings installed in water distribution systems. Other allegations in the
California and Texas actions include breach of the California Unfair Practices
Act and the Texas Deceptive Practices Act, respectively; breach of warranty,
fraud and strict liability. It is possible that the Company may be named as a
defendant in future actions arising out of its past involvement in the
polybutylene resin manufacturing business.
The Company is not a party to any legal proceedings, including environmental
matters, which it believes will have a material adverse effect on its
consolidated financial position or liquidity. However, the Company's results of
operations or cash flows could be materially affected in future periods by the
resolution of these contingencies.
Note G - Segment Information
For the year ended December 31, 1998, the Company adopted SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." SFAS No.
131 requires comparative disclosure of limited segment information in financial
statements for interim periods after adoption. The adoption of SFAS No. 131 does
not affect results of operations or financial position.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
(in thousands of dollars) June 30, June 30,
1999 1998 1999 1998
--------------------- -----------------------
<S> <C> <C> <C> <C>
Net sales
Polymer Chemicals $118,772 $124,691 $232,303 $ 248,694
OrganoSilicones 113,442 112,511 226,056 224,199
Performance Chemicals 174,813 173,572 339,803 351,170
Oleochemicals & Derivatives 86,815 93,528 176,271 187,613
--------- --------- --------- -----------
Total net sales $493,842 $504,302 $974,433 $1,011,676
========= ========= ========= ===========
Operating income
Polymer Chemicals $12,750 $ 14,572 $ 20,831 $ 32,450
OrganoSilicones 14,333 12,033 27,285 23,830
Performance Chemicals 15,334 17,002 28,558 36,996
Oleochemicals & Derivatives 2,451 1,978 6,218 1,984
--------- --------- --------- -----------
Total segment operating income 44,868 45,585 82,892 95,260
Corporate and unallocated (5,688) (7,552) (15,542) (10,984)
--------- --------- --------- -----------
Operating income 39,180 38,033 67,350 84,276
Other expense - net (800) (674) (1,373) (1,595)
Interest expense - net (14,644) (10,628) (26,490) (21,298)
--------- --------- --------- -----------
Income before income taxes $ 23,736 $ 26,731 $ 39,487 $ 61,383
========= ========= ========= ===========
</TABLE>
7
<PAGE>
Note H - Accounts Receivable Program
On June 10, 1999, the Company entered into a three-year receivables sale
agreement to sell up to $150 million of its trade accounts receivable. This
agreement provides the Company with an alternate source of financing. At June
30, 1999, $90 million of trade accounts receivable had been sold. The sales of
trade accounts receivable are reflected as a reduction in accounts and notes
receivable-net in the Condensed Consolidated Balance Sheets and the proceeds are
included in cash flows from financing activities in the accompanying Condensed
Consolidated Statements of Cash Flows. The proceeds from the sale of the trade
accounts receivable were used to reduce short-term debt.
The discount and fees under this agreement are based on variable rates which
approximated 5.10% at June 30, 1999 plus certain administrative costs typical in
such transactions. In addition, the Company receives compensation for servicing
the sold receivables that approximates to the cost of servicing the trade
accounts receivable.
Note I - Other Matters
The six month period ended June 30, 1999 includes a gain of $2,200 ($1,342
after-tax or $.02 per common share - diluted) for additional proceeds received
on the 1998 disposition of the company's SACI Anti-Corrosion Coatings business.
The three and six month periods ended June 30, 1998 include a gain of $362 ($221
after-tax; with no per common share effect) on the disposition of the Company's
epoxy systems and adhesives business. Additionally, the six month period ended
June 30, 1998 includes a gain of $4,484 ($2,466 after-tax or $.04 per common
share - diluted) as a result of the disposition of an investment.
The restructuring charge of $522 ($318 after-tax or $.01 per common share -
diluted) for the three month period ended June 30, 1999 primarily relates to
costs associated with the company's global systems implementation. The
restructuring charge of $3,204 ($1,954 after-tax or $.03 per common share -
diluted) for the six month period ended June 30, 1999 includes severance and
related costs of $1,710 and other costs primarily associated with the company's
global systems implementation. During the six month period ended June 30, 1999,
the Company made cash payments against the restructuring accruals of
approximately $10,107 related principally to severance and other costs.
The restructuring charges of $2,781 ($1,696 after-tax or $.03 per common share -
diluted) and $5,043 ($3,076 after-tax or $.02 per common share - diluted) for
the three and six month periods ended June 30, 1998, respectively, primarily
relate to expenditures for equipment at sites previously identified for closure,
which otherwise would have been capitalized, and costs associated with the
Company's global systems implementation. During the six month period ended
June 30, 1998, the Company made cash payments against the restructuring accruals
of approximately $11,290 related principally to severance and other costs.
On June 1, 1999, the Company announced that its Board of Directors approved a
merger agreement with Crompton and Knowles Corporation (C&K). A special
shareholder's meeting has been scheduled on September 1, 1999 for the purpose of
voting on the merger proposal. Following shareholder approval of the merger and
closing of the transaction, each share of common stock of the Company will be
exchanged for 0.9242 shares of common stock of the new company to be named CK
Witco Corporation (CK Witco). CK Witco will be approximately 55% owned by
current shareholders of C&K and approximately 45% owned by current shareholders
of the Company. The merger will be treated as a purchase and C&K will be treated
as the acquirer for accounting purposes.
On June 23, 1999, the Company announced an agreement to sell a significant
portion of the assets and liabilities of its Oleochemicals and Derivatives
business. The sale is scheduled to be completed on or about August 31, 1999.
8
<PAGE>
Independent Accountants' Review Report
The Board of Directors
Witco Corporation
We have reviewed the accompanying condensed consolidated balance sheet of Witco
Corporation and Subsidiary Companies as of June 30, 1999, and the related
condensed consolidated statements of income for the three-month and six-month
periods ended June 30, 1999 and 1998, and the condensed consolidated statements
of cash flows for the six-month periods ended June 30, 1999 and 1998. These
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data, and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, which will be performed
for the full year with the objective of expressing an opinion regarding the
financial statements taken as a whole. Accordingly, we do not express such an
opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to the accompanying condensed consolidated financial statements referred
to above for them to be in conformity with generally accepted accounting
principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated balance sheet of Witco Corporation and Subsidiary
Companies as of December 31, 1998, and the related consolidated statements of
operations, shareholders' equity, and cash flows for the year then ended (not
presented herein) and in our report dated February 1, 1999, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of December 31, 1998, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
August 11, 1999
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
LIQUIDITY AND FINANCIAL RESOURCES
Net cash used in operating activities was $30.3 million for the six month period
ended June 30, 1999 as compared to $48.1 million for the same period of 1998.
The decrease in cash used in operating activities is mainly due to a decrease in
working capital requirements, primarily due to the timing of payments associated
with the 1996 restructuring plan and other initiatives, partially offset by a
decrease in net sales.
Net cash provided by financing activities increased $66 million to $142.1
million for the six month period ended June 30, 1999 as compared to the same
period of 1998. This increase is primarily the result of the sale of $90 million
of trade accounts receivable under a receivable sale agreement entered into by
the Company to diversify its sources of financing.
Total debt increased $73.9 million to $963.6 million at June 30, 1999 as
compared to December 31, 1998. The increase in total debt, coupled with the
proceeds from the sale of $90 million of trade accounts receivable, was used
primarily to finance capital expenditures and other costs associated with the
1996 restructuring plan and other initiatives and the Company's global systems
implementation.
The Company has a revolving credit agreement with various banks in the amount of
$500 million, $260 million of which was outstanding at June 30, 1999. In
addition, the Company has access to short-term uncommitted facilities based on
current money market interest rates. As of June 30, 1999, the Company had $21.6
million outstanding on these uncommitted facilities. The Company also has,
through certain of its international subsidiaries, arrangements with various
banks for lines of credit in the amount of $29.3 million, of which $4.1 million
was utilized as of June 30, 1999. The Company plans to utilize the credit
agreement, uncommitted facilities and lines of credit periodically for its
operating requirements and planned capital investment program. Based upon the
existing covenants under the Company's revolving credit agreement, the Company
could have borrowed up to an additional $160.9 million on its various borrowing
arrangements as of June 30, 1999. On March 31, 1999, the Company amended its
revolving credit agreement to delay the implementation of a more restrictive
financial covenant from April 1, 1999 to January 1, 2000.
On January 13, 1999, the Company announced the next phase of its strategic plan,
which includes the divestiture of a significant portion of the assets and
liabilities of its Oleochemical and Derivatives business (ODG). The proceeds
from the divestiture of ODG, which is scheduled to be completed on or about
August 31, 1999, will be used primarily to reduce short-term debt. In addition,
the Company will focus its resources on its market leadership, high growth
businesses. The Company also plans to reduce its non-manufacturing operating
expenses, including costs related to the corporate infrastructure. On April 28,
1999, the Company's Board of Directors approved the 1999 Early Retirement
Opportunity (1999 ERO) as part of its strategic plan. This is a voluntary
program, that will provide enhanced retirement benefits to certain U.S. based
employees. Certain U.S. based employees as of May 1, 1999 may be eligible for
the 1999 ERO if they will be at least 50 years old and will have at least five
years of vesting service as of December 31, 1999. The impact the 1999 ERO will
have on the Company's earnings and financial position will not be known until
participation in the program has been determined.
It is the Company's belief that annual cash flows from operations, along with
the flexibility provided by the credit agreement, uncommitted facilities and
lines of credit will be sufficient to fund, for the foreseeable future,
operating requirements, the 1996 restructuring plan and other initiatives,
capital investments, Year 2000 expenditures, dividend payments, and commitments
on environmental remediation projects.
RESTRUCTURING CHARGES
For information regarding restructuring charges, see Note I of the Notes to
Condensed Consolidated Financial Statements.
CAPITAL INVESTMENTS AND COMMITMENTS
Capital expenditures for the first six months of 1999 amounted to $126 million
as compared to $121.6 during the same period of 1998. Capital expenditures
during the first six months of 1999 were primarily related to the 1996
10
<PAGE>
restructuring plan and other initiatives and the Company's global systems
implementation. The Company expects capital expenditures to be slightly above
$200 million for the year.
YEAR 2000
State of Readiness
The Company is currently in the process of addressing date sensitive system
issues associated with the Year 2000. The Company's Year 2000 project is led by
the Group Vice President of Corporate Restructuring/Implementation and is
managed by an executive steering committee of key management personnel. The
Company has assigned business teams, regional and location coordinators and
contracted third-party vendors to carry out the Company's Year 2000 compliance
plan. The Company's Board of Directors is updated regularly regarding the Year
2000 compliance plan and its progress. The Company's approach to mitigating the
Year 2000 issue involves the following five phases: awareness, assessment
(including an inventory of hardware, software, process control equipment and
monitoring devices for plants, safety systems and other non-information
technology systems and equipment), repair/replacement, testing and
implementation.
In connection with the Company's 1996 restructuring plan and other initiatives,
the Company began a worldwide business process redesign and implementation
project (Project EDGE). It is anticipated that the new systems implemented as
part of Project EDGE, which are Year 2000 compliant, will replace substantially
all of the Company's existing information technology (IT) business application
systems. All other IT business application systems, which are not part of
Project EDGE, and all non-IT systems and equipment (collectively non-EDGE) will
be made compliant through the efforts of internal resources and third-party
vendors. In order to assess the readiness of its EDGE and non-EDGE systems and
equipment with the Year 2000 issue, the Company has completed an inventory of
hardware, software, process control equipment and monitoring devices for plants,
safety systems and other non-IT systems and equipment. Regarding both the EDGE
and non-EDGE projects, the Company has completed the awareness and the
assessment phases, is 70 percent complete with respect to the repair/replacement
phase and is 60 percent complete with respect to each of the testing and
implementation phases. Completion of the repair/replacement, testing and
implementation phases is expected during the third quarter of 1999, with the
exception of the Asia/Pacific region, where we are updating our existing
business systems, the repair/replacement, testing and implementation phases will
be completed in the fourth quarter of 1999.
The Company has identified critical raw material suppliers, service providers
and major customers and has initiated communications with these third parties in
an effort to assess their plans and progress in addressing the Year 2000 issue.
The Company has completed its initial evaluation of critical raw material
suppliers and service providers, and is 90 percent complete with respect to
major customers. The Company has identified approximately 170 high-impact
suppliers whose failure to deliver raw materials could cause disruption to
operations and a loss of business. The Company has obtained information from key
service providers with respect to their Year 2000 readiness and has considered
their Year 2000 compliance status such that long-term disruptions in the
services provided are not anticipated at this time. The Company has also
surveyed its major customers regarding their Year 2000 compliance status and is
in the process of reviewing the results of these surveys. The Company will
closely monitor the Year 2000 readiness of its high-impact suppliers, key
service providers and major customers throughout 1999.
Costs
The total costs associated with Project EDGE and non-EDGE systems and equipment
are expected to range from $123-$127 million (including $107-$110 million of
capital expenditures), of which $106 million has been incurred ($90.5 million
capitalized and $15.5 million expensed) to date. Expenditures of $28.3 million
were made during the first half of 1999 ($27.4 million capitalized and $.9
million expensed). Substantially all of these costs are associated with Project
EDGE. The costs associated with the third-party evaluation initiative are not
expected to be significant.
Risks and Contingency Plans
The Company has ascertained that failure to alleviate the Year 2000 issues
within its EDGE and non-EDGE projects could result in possible system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices, produce
products and engage in similar normal business activities, with a corresponding
impact on the Company's results of operations. The Company has completed its
initial contingency plans for its critical EDGE and non-EDGE activities, which
involve, among other actions, manual and/or external processing and building
inventories. Reviews and revisions of such plans will be made throughout 1999 as
circumstances warrant.
11
<PAGE>
To the extent that the operations of critical raw material suppliers, service
providers, and major customers are impacted by their failure to address their
Year 2000 issues, such disruption may have a direct impact on the Company's
results of operations. Contingency plans are being developed and will include,
but will not be limited to, building inventories, switching suppliers, managing
production levels and finding alternate methods of transportation. The Company
is 90 percent complete with respect to the development of its third-party
contingency plans, with preliminary plans for raw material suppliers and service
providers already completed. Reviews and revisions of such plans will be made
throughout 1999 as circumstances warrant.
The Company is confident that the Year 2000 issues will be resolved by the
implementation of the EDGE and non-EDGE projects and the completion of the
third-party initiative. If the measures associated with the EDGE and non-EDGE
projects, as well as the efforts associated with critical raw material
suppliers, service providers, and major customers, were to fail, the contingency
plans will be implemented. The amount of potential liability and lost revenue
associated with the failure to alleviate the Year 2000 issues or implement
appropriate contingency plans cannot be reasonably estimated at this time.
EURO CONVERSION
On January 1, 1999, certain member countries of the European Union adopted the
Euro as their common legal currency. Between January 1, 1999 and January 1,
2002, transactions may be conducted in either the Euro or the participating
countries national currency. However, by July 1, 2002, the participating
countries will withdraw their national currency as legal tender and complete the
conversion to the Euro.
The Company conducts business in Europe and does not expect the conversion to
the Euro to have an adverse effect on its competitive position or consolidated
financial position. The Company believes that the implementation of Project EDGE
will allow the Company to conduct business transactions in both the Euro as well
as the participating countries national currency.
The Company has determined that failure to implement systems that are able to
process both the Euro and participating countries national currency may cause
disruptions to operations including, among other things, a temporary inability
to process transactions, send invoices or engage in normal business activities.
These problems could be substantially alleviated with manual processing.
However, this would cause delays in certain normal business activities.
CONTINGENCIES
The Company is a potentially responsible party (PRP) or a defendant in a number
of governmental (federal, state and local) and private actions associated with
the release, or suspected release, of contaminants into the environment. As a
PRP, the Company may be liable for costs associated with the investigation and
remediation of environmental contamination, as well as various penalties and
damages to persons, property and natural resources.
The Company is not a party to any legal proceedings, including environmental
matters, which it believes will have a material adverse effect on its
consolidated financial position or liquidity. However, the Company's results of
operations or cash flows could be materially affected in future periods by the
resolution of contingencies. See Note F of Notes to Condensed Consolidated
Financial Statements.
12
<PAGE>
RESULTS OF OPERATIONS
Second quarter 1999 net sales of $493.8 million were $10.5 million, or 2
percent, lower than the same quarter of the prior year. The decline was mainly
due to an unfavorable product sales mix and an adverse effect on net sales of
approximately $8 million attributable to the comparatively stronger US dollar.
The negative impact of these factors was partially offset by a 2 percent
increase in volume.
Net income for the second quarter of 1999 was $12.8 million compared to $15.1
million for the corresponding quarter of 1998. The $2.3 million decline was
primarily due to higher net interest expense resulting from increased short-term
borrowing, the above mentioned shortfall in net sales and higher depreciation
expense. These unfavorable factors were partially offset by a reduction in
performance based compensation costs and lower restructuring charges.
Net sales for the six months ended June 30, 1999 of $974.4 million were $37.2
million, or 4 percent, below the corresponding period of 1998. The shortfall in
revenue was primarily the result of an unfavorable product sales mix. A 1
percent decrease in volume and an adverse effect on net sales of approximately
$7 million attributable to the comparatively stronger US dollar added to the
decline.
For the six months ended June 30, 1999, net income was $21.3 million compared to
$35.6 million for the same period of 1998. The lower earnings were mainly the
result of the above mentioned decline in net sales. An increase in general and
administrative expenses, including costs attributable to business process
improvement initiatives, and higher net interest and depreciation expenses added
to the shortfall. A reduction in performance based compensation costs and lower
restructuring charges partially offset the adverse effect of these negative
factors.
SEGMENT INFORMATION
Segment net sales and operating income for the second quarter and six months of
1999 and 1998 are set forth in the following table.
<TABLE>
<CAPTION>
Three Months Ended June 30, Six Months Ended June 30,
(Unaudited - millions of dollars) 1999 1998 1999 1998
- -------------------------------------------- ---------------------------------- ---------------------------------
- -------------------------------------------- --------------- ---------------- ---------------- --------------
<S> <C> <C> <C> <C>
Net sales
Polymer Chemicals $ 118.8 $ 124.7 $ 232.3 $ 248.7
OrganoSilicones 113.4 112.5 226.0 224.2
Performance Chemicals 174.8 173.6 339.8 351.2
Oleochemicals & Derivatives 86.8 93.5 176.3 187.6
- -------------------------------------------- --------------- ---------------- ---------------- -------------
Net sales $ 493.8 $ 504.3 $ 974.4 $1,011.7
- -------------------------------------------- --------------- ---------------- ---------------- -------------
Operating income:
Polymer Chemicals $ 12.8 $ 14.6 $ 20.8 $ 32.5
OrganoSilicones 14.3 12.0 27.3 23.8
Performance Chemicals 15.3 17.0 28.6 37.0
Oleochemicals & Derivatives 2.5 2.0 6.2 2.0
Corporate and unallocated (5.7) (7.6) (15.5) (11.0)
- -------------------------------------------- --------------- ---------------- ---------------- -------------
Operating income $ 39.2 $ 38.0 $ 67.4 $ 84.3
- -------------------------------------------- --------------- ---------------- ---------------- -------------
</TABLE>
13
<PAGE>
POLYMER CHEMICALS
Polymer Chemicals' net sales for the second quarter of 1999 of $118.8 million
were $5.9 million, or 5 percent, lower than the second quarter of 1998. The
reduction was mainly attributable to the 1998 swap of businesses with Ciba
Specialty Chemicals, which involved the receipt of a PVC heat stabilizers
business that had comparatively higher sales prices but substantially lower
volume than the epoxy systems and adhesives business exchanged. The
comparatively stronger US dollar also adversely affected current quarter net
sales.
Current quarter operating income of $12.8 million was $1.8 million, or 13
percent, below the same period of 1998. The decrease was primarily the result of
the above mentioned reduction in net sales and higher fixed costs attributable
to asset consolidation initiatives and the Ciba swap.
Net sales of $232.3 million for Polymer Chemicals for the first six months of
1999 declined $16.4 million, or 7 percent, from the same period of 1998. This
shortfall was primarily the result of a 12 percent decline in volume, partially
offset by a more favorable product sales mix. The swap of businesses with Ciba
Specialty Chemicals, in which the business received had comparatively higher
sales prices but substantially lower volume than the business swapped, was the
primary factor causing both the decline in volume and improved product mix. Also
contributing to the lower volume were product rationalization and weaker demand
for marine antifouling coatings in Asia.
Operating income for Polymer Chemicals for the first six months of 1999 was
$20.8 million, which was $11.7 million, or 36 percent, less than the same period
of the prior year. This decline was primarily due to the lower sales volume
mentioned above, higher fixed costs attributable to asset consolidation
initiatives and the Ciba swap, and additional costs associated with the February
1999 fire at the Bergkamen, Germany facility.
ORGANOSILICONES
Second quarter 1999 net sales of $113.4 million for OrganoSilicones increased
$.9 million, or 1 percent, from the same period of 1998. The increase was mainly
attributable to a 2 percent increase in volume, partially offset by the adverse
effect of the strengthening US dollar versus most currencies, principally the
Brazilian Real.
Operating income for the second quarter of 1999 of $14.3 million was $2.3
million, or 19 percent, ahead of the same quarter of 1998. The increase was
primarily due to an improvement in margins associated with the increase in sales
of specialty versus commodity products within the Specialty Fluids business and
the comparatively weaker US dollar compared to the Japanese Yen.
Net sales for OrganoSilicones for the six months ended June 30, 1999 of $226.0
million were 1 percent ahead of the same period of 1998. The increase of $1.8
million was driven by a 2 percent increase in volume, the impact of which was
partially offset by the comparatively stronger US dollar versus most currencies,
primarily the Brazilian Real.
OrganoSilicones' operating income for the first six months of 1999 rose $3.5
million, or 15 percent, to $27.3 million compared to the corresponding period of
1998. The increase was mainly due to improved margins attributable to higher
specialty versus commodity product sales and greater operating efficiencies, and
the above mentioned increase in shipment volume.
PERFORMANCE CHEMICALS
Performance Chemicals' second quarter 1999 net sales of $174.8 million were $1.2
million, or 1 percent, greater than 1998. The segment benefited from increased
volume in the paraffinic white oils business resulting from the arrangement
entered into with Petro-Canada Lubricants in late 1998. A vast majority of the
revenue attributable to the higher volume was offset by competitive pricing
pressures in certain markets, the adverse impact of the stronger US dollar and
the absence of sales associated with the July 1998 sale of the SACI
Anti-Corrosion Coatings business.
Operating income for the second quarter of 1999 of $15.3 million was $1.7
million, or 10 percent, lower than the second quarter of 1998. The major factors
that contributed to the decrease in operating income were the above mentioned
competitive pricing pressures and higher costs associated with business process
improvement initiatives.
For the first six months of 1999, Performance Chemicals reported net sales of
$339.8 million, a decrease of $11.3 million, or 3 percent, compared to the same
period of the prior year. The reduction was mainly attributable to
14
<PAGE>
weakness and competitive pricing pressure in certain markets, the absence of
sales associated with the July 1998 disposition of the SACI business and the
adverse impact of the comparatively stronger US dollar. Partially offsetting
these unfavorable factors was additional volume associated with the arrangement
entered into with Petro-Canada Lubricants in late 1998.
Performance Chemicals' current year operating income of $28.6 million, which
included a $2.2 million non-recurring gain from the 1998 disposition of the SACI
business, was $8.4 million, or 23 percent, less than the corresponding period of
1998. This decrease was driven by the above mentioned revenue shortfall,
additional costs attributable to fires at the segment's Petrolia, Pennsylvania
facility and at Petro-Canada's refinery, and higher costs attributable to
business process improvement initiatives.
OLEOCHEMICALS AND DERIVATIVES
Net sales for Oleochemicals and Derivatives for the second quarter of 1999 of
$86.8 million were $6.7 million, or 7 percent, lower than the same quarter of
1998. This reduction was primarily attributable to a volume decline of 6 percent
in low margin products. The comparatively stronger US dollar and lower prices
related to formula sales contracts that are based on raw material prices, which
were lower in the second quarter of 1999 compared to the same quarter of the
prior year, also contributed to the decrease in net sales.
Oleochemicals and Derivatives' operating income for the second quarter of 1999
was $2.5 million compared to $2.0 million for the same period of 1998. Despite
lower net sales, operating income rose $.5 million primarily due to a reduction
of operating expenses and an improved product sales mix including increased
sales of refined glycerin due to the installation of a new glycerin still.
Oleochemicals and Derivatives' net sales for the six months ended June 30, 1999
were $176.3 million, a decrease of $11.3 million or 6 percent compared to the
same six months of 1998. This decrease was primarily attributable to a 6 percent
decline in volume of low margin products. Also adding to the shortfall were
lower prices attributable to formula sales contracts based on lower raw material
prices.
Operating income for the six months ended June 30, 1999 was $6.2 million, an
increase of $4.2 million from the comparable 1998 period. The increase was a
result of reduced operating expenses, lower raw material costs and product mix
improvements which included increased sales of refined glycerin due to the
installation of a new glycerin still.
OUTLOOK
During the balance of 1999, the Company will continue to implement the next
phase of its strategic plan, focusing its resources on its market leadership,
high growth businesses: Polymer Chemicals, OrganoSilicones, and Industrial
Specialties. Refined Products, a lower growth but market leadership business,
will continue as an important part of the Company's portfolio providing cash
generation. The Company intends to complete the divestiture of a significant
portion of the assets and liabilities of its Oleochemicals and Derivatives
business (ODG) to Th Goldschmidt AG and SKW Trostberg AG during August 1999. The
proceeds from this transaction will be used primarily to reduce short-term debt.
In connection with these portfolio changes, the Company also plans to reduce
non-manufacturing operating expenses, including costs related to corporate
infrastructure, consistent with the restructuring of the portfolio and change in
business emphasis. During the second quarter, an Early Retirement Opportunity
(ERO) was offered to qualifying employees. The impact the 1999 ERO will have on
the Company's earnings and financial position will not be known until
participation in the program has been determined. It is anticipated the ERO will
result in additional restructuring charges during 1999, and reduced operating
costs in 1999 and beyond. As plans to achieve other reductions are better
defined, additional restructuring charges will be taken at various times during
1999 to provide for the costs of transitioning to the new business support
structure. As volume and revenue increase during the year and combine with the
leverage present in the cost structure, the benefits of the restructuring
efforts will begin to become visible in the Company's earnings.
Although during the first half of 1999 the Company experienced sequential
improvement in its businesses, and conditions in certain world regions seem to
have stabilized, the Company believes 1999 will continue to be a difficult year
and remains cautious about market and economic conditions for the remainder of
the year. During
15
<PAGE>
1999, the Company will complete the remaining elements of its three year
restructuring program, while continuing its efforts to grow its business in the
current environment.
Capital spending in 1998 was $281.6 million, the highest level of the three year
restructuring plan, and is now expected to be slightly above $200 million during
1999. Total capital spending for the three year period ending in 1999 will
exceed original estimates by approximately $83 million. This will result in
significantly higher depreciation in 1999 and future years as compared to 1998.
Total debt increased by approximately $74 million during the first half of 1999
to $963.6 million. During the second quarter of 1999, the company entered into a
$90 million receivable sale agreement. The Company expects debt in the near term
to continue at approximately this level, or to be slightly higher, excluding any
proceeds that will be received as a result of the ODG transaction mentioned
above.
In June, the Company announced the signing of a merger agreement with Crompton &
Knowles Corporation. The resulting possibility of enhanced revenues through
cross-selling of products and services has led the Company to withdraw its plans
to divest its Petroleum Additives business. A special shareholders' meeting has
been scheduled on September 1, 1999 for the purpose of voting on the merger
proposal. Following shareholder approval of the merger and closing of the
transaction, each share of common stock in the Company will be exchanged for
0.9242 shares of common stock of the new company to be named CK Witco
Corporation. Completion of this merger will create a global specialty chemicals
company with annual revenues of approximately $3.4 billion, on a 1998 pro forma
basis, exclusive of businesses divested since the end of 1998, such as ODG.
CAUTIONARY STATEMENTS
Certain statements made in this "Management's Discussion and Analysis of
Financial Condition and Results of Operations" section are "forward looking
statements" that involve certain risks and uncertainties. The factors that could
cause the actual results to differ materially from those presented herein
include, without limitation, the cost and timing of the implementation of the
Company's EDGE and non-EDGE projects, the ability of the Company to implement
its EDGE and non-EDGE projects before the calendar year 2000, the timely
response to and correction by third parties, suppliers and customers to address
Year 2000 problems, the ability of the Company to assess and implement
contingency plans to its EDGE and non-EDGE projects, the Company's ability to
generate sufficient cash flows, the cost and timing of the implementation of
certain capital improvements, the cost and timing associated with the cost
savings initiatives, the Company's ability to effectively divest certain
businesses and enter into other strategic alternatives and transactions
regarding other businesses, including the successful completion of the Company's
merger with Crompton and Knowles Corporation and its ability to maintain
currently expected revenues following the merger, the amount of proceeds the
Company receives as a result of any divestiture or other transaction, the
ability of the Company to commercialize new products and bring them to the
market place, the ability of the Company to improve its customer service and
error free delivery rates, the ability of the Company to implement its sales
initiatives, including, realizing cross-business group selling opportunities,
account development and a process to track new opportunities, the cost of
environmental remediation and compliance efforts, technological or competitive
changes in any of the Company's businesses, the ability to reach agreement with
third parties on planned business arrangements, the Company's ability to
maintain price levels, changes in product mix, availability and pricing of raw
materials, shifts in market demand, price and product competition, certain
global and regional economic conditions and other factors listed from time to
time in the Company's other Securities Exchange Commission filings.
16
<PAGE>
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Refer to the Market Risk and Risk Management Polices section of Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in the Company's annual report on Form 10-K for the year ended December
31, 1998.
17
<PAGE>
PART II. OTHER INFORMATION
ITEM 3. Legal Proceedings
The Company is a potentially responsible party (PRP) or a defendant in a number
of governmental (federal, state and local) and private actions associated with
the release, or suspected release, of contaminants into the environment. As a
PRP, the Company may be liable for costs associated with the investigation and
remediation of environmental contamination, as well as various penalties and
damages to persons, property and natural resources. As of June 30, 1999, the
Company was a PRP, or a defendant, in connection with 62 sites at which it is
likely to incur environmental response costs as a result of actions brought
against the Company pursuant to the federal Comprehensive Environmental Response
Compensation and Liability Act (CERCLA), the federal Resource Conservation and
Recovery Act (RCRA) or similar state or local laws. With 28 exceptions, all of
these sites involve one or more other PRPs, and in most cases there are numerous
other PRPs in addition to the Company. CERCLA, RCRA and the state counterparts
to these federal laws authorize governments to investigate and remediate actual
or suspected damage to the environment caused by the release, or suspected
release, of hazardous substances into the environment, or to order the
responsible parties to investigate and/or remediate such environmental damage.
The Company evaluates and reviews environmental reserves for future remediation
and other costs on a quarterly basis to determine appropriate reserve amounts.
Inherent in this process are considerable uncertainties which affect the
Company's ability to estimate the ultimate costs of remediation efforts. Such
uncertainties include the nature and extent of contamination at each site,
evolving governmental standards regarding remediation requirements, changes in
environmental regulations, widely varying costs of alternative cleanup methods,
the number and financial condition of other potentially responsible parties at
multi-party sites, innovations in remediation and restoration technology and the
identification of additional environmental sites.
The Company is a defendant in four similar actions arising out of the Company's
involvement in the polybutylene resin manufacturing business in the 1970's.
Three of the following cases are currently pending in California state courts
and one is pending in Texas state court. East Bay Municipal Utility District v.
Mobil Oil Corporation, et al., filed in November 1993, and pending in Superior
Court for the County of San Mateo, California; Alameda County Water District v.
Mobil Oil Corporation, et al., filed in April 1996, and Marin Municipal Water
District v. Shell Oil Company, et al., filed in May 1996, both pending in
Superior Court for the County of San Mateo; and City of Austin v. Shell Oil
Company, et al., filed in June 1996, and pending in the District Court of Travis
County, Texas. The actions generally allege that the Company and several other
defendants negligently misrepresented the performance of polybutylene pipe and
fittings installed in water distribution systems. Other allegations in the
California and Texas actions include breach of the California Unfair Practices
Act and the Texas Deceptive Practices Act, respectively; breach of warranty,
fraud and strict liability. It is possible that the Company may be named as a
defendant in future actions arising out of its past involvement in the
polybutylene resin manufacturing business.
The Company is not a party to any legal proceedings, including environmental
matters, which it believes will have a material adverse effect on its
consolidated financial position or liquidity. However, the Company's results of
operations or cash flows could be materially affected in future periods by the
resolution of these contingencies.
18
<PAGE>
ITEM 4. Submission of Matters to Vote of Security Holders
(a) The Company's Annual Meeting of Shareholders was held on April 28, 1999,
at the offices of the Company, One American Lane, Greenwich, Connecticut
beginning at 10:30 a.m.
(b) At the Annual Meeting, the Company's shareholders elected three directors
to serve a term expiring in 2002 as follows:
<TABLE>
<CAPTION>
Votes
-----------------------------------------------------
For Withheld
----------------------- -----------------------
<S> <C> <C>
Don L. Blankenship 53,482,093 683,980
Harry G. Hohn 53,407,846 758,227
Dan J. Samuel 53,395,272 770,801
Bruce F. Wesson 53,492,052 674,021
</TABLE>
Directors who did not stand for election and were previously elected to continue
in office until the 2000 Annual Meeting are: Simeon Brinberg, William R. Grant,
Richard M. Hayden and Nicholas Pappas. Directors who did not stand for election
and were previously elected to continue in office until the 2001 Annual Meeting
are: Bruce R. Bond, William G. Burns, E. Gary Cook, Louise Goeser and William
Wishnick. Effective May 28, 1999, Louise Goeser resigned as a director of the
Company.
(c) In addition to the election of directors, at the Annual Meeting the
Company's shareholders:
(i) Ratified the appointment of Ernst & Young LLP as the Company's
independent auditors for 1999.
<TABLE>
<CAPTION>
Votes
--------------------------------------------------------------------------------
For Against Abstain
-------------------------- ------------------------ -----------------------
<S> <C> <C>
54,080,357 61,388 24,328
</TABLE>
19
<PAGE>
ITEM 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10(i) Amendment, dated March 5, 1999, to the Witco Corporation
Long-Term Incentive Plan
10(ii) Amendment, dated May 31, 1999, to the Witco Corporation
Long-Term Incentive Plan
10(iii) Amendment, dated May 31, 1999, to the Supplemental Retirement
Plan of Witco Corporation
10(iv) Amendment, dated May 31, 1999, to the Trust under the
Supplemental Executive Retirement Plan of Witco Corporation
and the Excess Benefit and Compensation Cap Plan of Witco
Corporation
10(v) Amendment, dated May 31, 1999, to the Witco Corporation
Change in Control Severance Policy
10(vi) Amendment, dated May 31, 1999, to the Witco Corporation
Deferred Compensation Plan
15 Letter re unaudited interim financial information
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed Current Reports on Form 8-K and 8-K/A on
June 4, 1999 and June 8, 1999, respectively, pertaining to
the May 31, 1999 Merger Agreement and Plan of Reorganization
and Stock Option Agreements which the Company entered into
with Crompton & Knowles Corporation.
The Company filed a Current Report on Form 8-K on July 7,
1999 pertaining to a purchase agreement between the Company
and Goldschmidt SKW Surfactants GmbH for the sale of the
Company's Oleochemicals and Derivatives business.
The Company filed a Current Report on Form 8-K on August 4,
1999 which included the Company's press release of its second
quarter results dated August 2, 1999.
20
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WITCO CORPORATION
(Registrant)
/s/ BRIAN J. DICK
Date: August 13, 1999 ______________________________________
Brian J. Dick
Controller - Chief Accounting Officer
/s/ CAMILLO J. DIFRANCESCO
Date: August 13, 1999 ______________________________________
CAMILLO J. DIFRANCESCO
Senior Vice President
and Chief Financial Officer
21
<PAGE>
WITCO CORPORATION
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
- ----------- ----------------------------------------------------------------
<S> <C>
10(i) Amendment, dated March 5, 1999, to the Witco Corporation
Long-Term Incentive Plan
10(ii) Amendment, dated May 31, 1999, to the Witco Corporation
Long-Term Incentive Plan
10(iii) Amendment, dated May 31, 1999, to the Supplemental Retirement
Plan of Witco Corporation
10(iv) Amendment, dated May 31, 1999 to the Trust under the
Supplemental Executive Retirement Plan of Witco Corporation
and the Excess Benefit and Compensation Cap Plan of Witco
Corporation
10(v) Amendment, dated May 31, 1999, to the Witco Corporation Change
in Control Severance Policy
10(vi) Amendment, dated May 31, 1999, to the Witco Corporation
Deferred Compensation Plan
15 Letter re unaudited interim financial information
27 Financial Data Schedule
22
</TABLE>
<PAGE>
Exhibit 10(i)
AMENDMENT TO THE WITCO CORPORATION
LONG-TERM INCENTIVE PLAN
In accordance with Section 12(e) of the Witco Corporation Long-Term Incentive
Plan (the "LTIP") and by order of the Organization and Compensation Committee of
the Board of Directors of Witco Corporation, Section 3(l) of the LTIP is hereby
amended to read in its entirety as follows:
SECTION 3. Definitions
(1) "Eligible Employee" shall mean an employee of the Company or one of its
subsidiaries and affiliates who is a member of Salary Band I, II or III. A
person shall cease to be an Eligible Employee on the earlier of his or her
Disability Date or the date of his or her termination of employment (including
termination due to Retirement or death).
Date: March 5, 1999
---------------
<PAGE>
Exhibit 10(ii)
AMENDMENT
TO THE WITCO CORPORATION
LONG-TERM INCENTIVE PLAN
WHEREAS, Witco Corporation (the "Company") is considering
entering into the Agreement and Plan of Reorganization by and among Crompton &
Knowles Corporation, Park Merger Co. and the Company (the "Merger Agreement");
and
WHEREAS, the Company has determined that the transactions
contemplated by the Merger Agreement should be considered a "Change in Control"
of the Company for purposes of the Long-Term Incentive Plan (the "Plan").
NOW THEREFORE, the Company hereby amends the Plan in as
follows:
The definition of "Change in Control" contained in the Plan is
hereby amended by adding the following to the end thereof:
Notwithstanding anything to the contrary contained herein, a
merger, consolidation, reorganization or other business
combination involving the Company and Crompton & Knowles
Corporation ("C&K") or any affiliate of C&K shall be
considered a "Change in Control" for all purposes of the Plan.
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed as of the date set forth below.
WITCO CORPORATION,
/s/ E. Gary Cook
----------------------------------
Name: E. Gary Cook
Title: Chairman, President and
CEO
Date: May 31, 1999
--------------
<PAGE>
Exhibit 10(iii)
AMENDMENT
TO THE
SUPPLEMENTAL RETIREMENT PLAN
OF WITCO CORPORATION
WHEREAS, Witco Corporation (the "Company") is considering
entering into the Agreement and Plan of Reorganization by and among Crompton &
Knowles Corporation, Park Merger Co. and the Company (the "Merger Agreement");
and
WHEREAS, the Company has determined that the transactions
contemplated by the Merger Agreement should be considered a "Change in Control"
of the Company for purposes of the Supplemental Retirement Plan of Witco
Corporation (the "Plan") and desires to make certain additional amendments to
the Plan.
NOW THEREFORE, the Company hereby amends the Plan as follows:
1. The definition of "Change in Control" contained in Section
1.7 of the Plan is hereby amended by adding the following to the end thereof:
Notwithstanding anything to the contrary contained herein, a
merger, consolidation, reorganization or other business
combination involving the Company and Crompton & Knowles
Corporation ("C&K") or any affiliate of C&K shall be
considered a "Change in Control" for all purposes of the Plan.
2. Section 1.13 of the Plan is hereby amended by (i) deleting
"or" immediately before subclause (c) thereof and (ii) deleting "." from the end
of subclause (c) thereof and substituting the following therefor:
; or (d) any voluntary termination of employment by the
Officer during the one year period commencing upon the Change
in Control.
3. Section 4.1(a) of the Plan is hereby amended by adding the
following after the words "In the event of" and before the words "the
termination" at the beginning of such Section 4.1(a):
the termination of a Participant's employment within one year after a
Change-in-Control by such Participant for any reason in his absolute
discretion (and whether or not Good Cause exists) or in the event of
<PAGE>
Exhibit 10(iii)(continued)
4. Section 4.1(a)(2)(ii) of the Plan is hereby amended
and restated as follows:
(ii) Form of Benefit. The normal form of payment of
benefits payable under this Section 4.1(a) shall be a monthly
pension payable to the Participant for life with no further
payments due after the Participant's death; provided, however,
that a Participant may elect any time to receive the Actuarial
Equivalent of this benefit in one lump sum. If the Participant
elects a lump sum, such payment shall be made no later than
ten days following the Termination Date. The factors and
assumptions used to calculate the value of that benefit shall
be those used under Section 4.17 of the Retirement Plan to
calculate the lump sum value of small pensions as of the date
immediately prior to the Change in Control.
5. Article VI of the Plan is hereby amended by adding
the following to the end thereof:
Notwithstanding anything herein to the contrary, after a
Change in Control, no amendment may be made to Article IV that
decreases the protections or benefits provided thereunder.
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed as of the date set forth below.
WITCO CORPORATION,
/s/ E. Gary Cook
----------------------------------
Name: E. Gary Cook
Title: Chairman, President and
CEO
Date: May 31, 1999
--------------
<PAGE>
Exhibit 10(iv)
AMENDMENT
TO THE TRUST UNDER THE SUPPLEMENTAL
EXECUTIVE RETIREMENT PLAN OF
WITCO CORPORATION AND
THE EXCESS BENEFIT AND COMPENSATION CAP PLAN OF
WITCO CORPORATION
WHEREAS, Witco Corporation (the "Company") is considering
entering into the Agreement and Plan of Reorganization by and among Crompton &
Knowles Corporation, Park Merger Co. and the Company (the "Merger Agreement");
and
WHEREAS, the Company has determined that the transactions
contemplated by the Merger Agreement should be considered a "Change in Control"
of the Company for purposes of the Trust under the Supplemental Executive
Retirement Plan of Witco Corporation and the Excess Benefit and Compensation
Plan of Witco Corporation (the "Trust").
NOW THEREFORE, the Company hereby amends the Trust Agreement
as follows:
1. The definition of "Change in Control" contained in the
Trust Agreement is hereby amended by adding the following to the end thereof:
Notwithstanding anything to the contrary contained herein, a
merger, consolidation, reorganization or other business
combination involving the Company and Crompton & Knowles
Corporation ("C&K") or any affiliate of C&K shall be
considered a "Change in Control" for all purposes of the
Trust.
2. Section 2(f) of the Trust Agreement is hereby amended by
deleting "Upon a Change in Control, the Company shall, as soon as possible, but
in no event later than 30 days following the Change the Change in Control" from
the first sentence thereof and substituting the following thereof:
As soon as reasonably practicable after the Company has reason
to believe a Change in Control has occurred or, in the
immediate future, will occur, the Company shall
3. Section 2(f) of the Trust Agreement is hereby amended by
adding the following to the end thereof:
In the event the Company makes a contribution to the Trust in
anticipation of a Change in Control and the Board
<PAGE>
Exhibit 10(iv)(continued)
subsequently determines that such Change in Control is not reasonably likely to
occur, the Trustee shall return to the Company the portion of the contribution
designated by the Board.
4. Section 13(a) of the Trust Agreement is deleting the first
proviso thereof and substituting the following therefor:
provided, however that Sections 2(f), 3, 11(c), 11(d), 12(b)
and 13(a) of this Trust Agreement may not be amended by the
Company for 10 years following a Change in Control.
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed as of the date set forth below.
WITCO CORPORATION,
/s/ E. Gary Cook
----------------------------------
Name: E. Gary Cook
Title: Chairman, President and
CEO
Date: May 31, 1999
--------------
<PAGE>
Exhibit 10(v)
AMENDMENT
TO THE
WITCO CORPORATION CHANGE IN CONTROL
SEVERANCE POLICY
WHEREAS, Witco Corporation (the "Company") is considering
entering into the Agreement and Plan of Reorganization by and among Crompton &
Knowles Corporation, Park Merger Co. and the Company (the "Merger Agreement");
and
WHEREAS, the Company has determined that the transactions
contemplated by the Merger Agreement should be considered a "Change in Control"
of the Company for purposes of the Witco Corporation Change in Control Severance
Policy (the "Policy").
NOW THEREFORE, the Company hereby amends the Policy as
follows:
A new Section H is hereby added to the Policy as follows:
H. Amendment
The Policy may not be amended during the two year period
following a Change in Control in any manner that decreases the
benefits or protections provided under the Policy to Eligible
Employees.
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed as of the date set forth below.
WITCO CORPORATION,
/s/ E. Gary Cook
-----------------------------------
Name: E. Gary Cook
Title: Chairman, President and
CEO
Date: May 31, 1999
--------------
<PAGE>
Exhibit 10(vi)
AMENDMENT
TO THE
WITCO CORPORATION
DEFERRED COMPENSATION PLAN
WHEREAS, Witco Corporation (the "Company") is considering
entering into the Agreement and Plan of Reorganization by and among Crompton &
Knowles Corporation, Park Merger Co. and the Company (the "Merger Agreement");
and
WHEREAS, the Company has determined that the transactions
contemplated by the Merger Agreement should be considered a "Change in Control"
of the Company for purposes of the Witco Corporation Deferred Compensation Plan
(the "Plan").
NOW THEREFORE, the Company hereby amends the Plan as follows:
1. The definition of "Change in Control" contained in the Plan
is hereby amended by adding the following to the end thereof:
Notwithstanding anything to the contrary contained herein, a
merger, consolidation, reorganization or other business
combination involving the Company and Crompton & Knowles
Corporation ("C&K") or any affiliate of C&K shall be
considered a "Change in Control" for all purposes of the Plan.
2. Section VII(B) is hereby amended by adding the following
paragraph to the end thereof:
Notwithstanding the foregoing, in the event of a Change in
Control, the Company, in its sole discretion, may permit
employees to defer payment of the amount calculated above to a
subsequent date approved by the Company.
IN WITNESS WHEREOF, the Company has caused this Amendment to
be executed as of the date set forth below.
WITCO CORPORATION,
/s/ E. Gary Cook
----------------------------------
Name: E. Gary Cook
Title: Chairman, President and
CEO
Date: May 31, 1999
--------------
<PAGE>
EXHIBIT 15
LETTER RE: UNAUDITED FINANCIAL INFORMATION
ACKNOWLEDGMENT LETTER
August 11, 1999
The Board of Directors
Witco Corporation
We are aware of the incorporation by reference in the Registration Statement
(Form S-3, No. 33-45865) and the Post-effective Amendment No. 2 to the
Registration Statement (Form S-3, No. 33-58066), each pertaining to the issuance
of debentures, the Amendment No. 1 to the Registration Statement (Form S-3, No.
33-58120), pertaining to the issuance of common stock, the Registration
Statement (Form S-3, No. 33-65203), pertaining to the issuance of debt
securities, preferred stock, and common stock, the Post-effective Amendment No.
2 to the Registration Statement (Form S-8, No. 33-10715), the Post-effective
Amendment No. 1 to the Registration Statement (Form S-8, No. 33-30995), and
Registration Statement (Form S-8, No. 33-48806), each pertaining to stock option
plans of Witco Corporation, the Registration Statement (Form S-8, No. 33-45194),
pertaining to an employee benefit plan of Witco Corporation, the Registration
Statement (Form S-8, No. 33-60755) and Registration Statement (Form S-8, No.
333-05509), each pertaining to stock option plans, the Registration Statement
(Form S-8, No. 333-33221), pertaining to the Witco Corporation 1997 Stock
Incentive Plan and the Registration Statement (Form S-8, No. 333-66033),
pertaining to an employee benefit plan, of our report dated August 11, 1999
relating to the unaudited condensed consolidated interim financial statements of
Witco Corporation and Subsidiary Companies which is included in its Form 10-Q
for the quarter ended June 30, 1999.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not part of
the registration statements prepared or certified by accountants within the
meaning of Sections 7 or 11 of the Securities Act of 1933.
/s/ ERNST & YOUNG LLP
Stamford, Connecticut
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