<PAGE> 1
FORM 10-Q
------------------------
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
MARCH 31, 1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________
COMMISSION FILE NUMBER 1-5667
CABOT CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 04-2271897
(State of Incorporation) (I.R.S. Employer Identification No.)
75 STATE STREET 02109-1806
BOSTON, MASSACHUSETTS (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (617) 345-0100
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, and (2) has been subject to such filing requirements
for the past 90 days.
YES X NO
--------- --------
Indicate the number of shares outstanding of each of the issuer's classes of
Common Stock, as of the latest practicable date.
AS OF MAY 07, 1999, THE COMPANY HAD 66,509,978 SHARES OF COMMON
STOCK, PAR VALUE $1 PER SHARE, OUTSTANDING.
<PAGE> 2
CABOT CORPORATION
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statements of Income
Three Months Ended March 31, 1999 and 1998 3
Consolidated Statements of Income
Six Months Ended March 31, 1999 and 1998 4
Consolidated Balance Sheets
March 31, 1999 and September 30, 1998 5
Consolidated Statements of Cash Flows
Six Months Ended March 31, 1999 and 1998 7
Consolidated Statement of Changes in Stockholders' Equity
Six Months Ended March 31, 1999 8
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 15
Part II. Other Information
Item 3. Legal Proceedings 21
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits and Reports on Form 8-K 22
</TABLE>
-2-
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1.
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended March 31
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
-------- --------
<S> <C> <C>
Revenues:
Net sales and other operating revenues $ 435.8 $ 457.0
Interest and dividend income 0.9 1.7
-------- --------
Total revenues 436.7 458.7
-------- --------
Costs and expenses:
Cost of sales 304.6 312.5
Selling and administrative expenses 56.7 56.5
Research and technical service 18.8 20.4
Interest expense 12.1 11.1
Gain on sale of equity securities (Note G) (4.6) -
Other charges, net 1.8 4.6
-------- --------
Total costs and expenses 389.4 405.1
-------- --------
Income before income taxes 47.3 53.6
Provision for income taxes (17.0) (19.3)
Equity in net income of affiliated companies 3.5 4.0
Minority interest in income (0.6) (0.8)
-------- --------
Net income 33.2 37.5
Dividends on preferred stock, net of tax benefit of $0.5 and $0.5 (0.7) (0.8)
-------- --------
Income applicable to common shares $ 32.5 $ 36.7
======== ========
Weighted average common shares outstanding (Note I):
Basic 64.0 65.6
======== ========
Diluted 72.8 74.6
======== ========
Income per common share (Note I):
Basic $ 0.51 $ 0.56
======== ========
Diluted $ 0.45 $ 0.50
======== ========
Dividends per common share $ 0.11 $ 0.10
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-3-
<PAGE> 4
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
Six Months Ended March 31
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
Revenues:
Net sales and other operating revenues $ 844.8 $ 892.4
Interest and dividend income 2.2 3.3
Total revenues 847.0 895.7
------- -------
Costs and expenses:
Cost of sales 577.4 614.7
Selling and administrative expenses 115.1 112.4
Research and technical service 38.3 39.2
Interest expense 23.0 22.5
Gain on sale of equity securities (Note G) (4.6) -
Other charges, net 2.5 8.0
------- -------
Total costs and expenses 751.7 796.8
------- -------
Income before income taxes 95.3 98.9
Provision for income taxes (34.3) (35.6)
Equity in net income of affiliated companies 5.5 7.0
Minority interest in income (1.5) (1.4)
------- -------
Net income 65.0 68.9
Dividends on preferred stock, net of tax benefit of $1.0 and $1.0 (1.5) (1.6)
------- -------
Income applicable to common shares $ 63.5 $ 67.3
======= =======
Weighted average common shares outstanding (Note I):
Basic 64.3 65.9
======= =======
Diluted 73.1 74.9
======= =======
Income per common share (Note I):
Basic $ 0.99 $ 1.02
======= =======
Diluted $ 0.88 $ 0.91
======= =======
Dividends per common share $ 0.22 $ 0.20
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-4-
<PAGE> 5
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and September 30, 1998
(Dollars in millions, except share amounts)
ASSETS
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
----------- ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 13.0 $ 39.6
Accounts and notes receivable (net of reserve for doubtful
accounts of $4.6 and $4.6) 324.4 284.3
Inventories:
Raw materials 85.5 68.2
Work in process 61.4 62.9
Finished goods 87.9 76.1
Other 49.1 43.9
-------- --------
Total inventories 283.9 251.1
Prepaid expenses 23.1 26.1
Deferred income taxes 15.5 17.8
-------- --------
Total current assets 659.9 618.9
-------- --------
Investments:
Equity (Note B) 81.2 91.1
Other (Note G) 56.0 72.5
-------- --------
Total investments 137.2 163.6
-------- --------
Property, plant and equipment 1,970.0 1,914.3
Accumulated depreciation and amortization (965.9) (936.3)
-------- --------
Net property, plant and equipment 1,004.1 978.0
-------- --------
Other assets:
Intangible assets, net of amortization 23.3 24.2
Deferred income taxes 3.9 3.9
Other assets 18.5 16.6
-------- --------
Total other assets 45.7 44.7
-------- --------
Total assets $1,846.9 $1,805.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-5-
<PAGE> 6
CABOT CORPORATION
CONSOLIDATED BALANCE SHEETS
March 31, 1999 and September 30, 1998
(Dollars in millions, except share amounts)
LIABILITIES & STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
March 31 September 30
1999 1998
-------- ------------
(Unaudited)
<S> <C> <C>
Current liabilities:
Notes payable to banks $ 235.4 $ 253.3
Current portion of long-term debt 11.3 11.4
Accounts payable and accrued liabilities 218.2 268.2
U.S. and foreign income taxes payable 7.3 0.4
Deferred income taxes 3.0 3.0
-------- --------
Total current liabilities 475.2 536.3
-------- --------
Long-term debt 423.7 316.3
Deferred income taxes 71.4 82.4
Other liabilities 150.8 139.6
Commitments and contingencies (Notes F and H) - -
Minority interest 30.7 25.1
Stockholders' Equity (Note J):
Preferred Stock:
Authorized: 2,000,000 shares of $1 par value
Series A Junior Participating Preferred Stock
Issued and outstanding: none
Series B ESOP Convertible Preferred Stock 7.75% Cumulative 75.3 75.3
Issued: 75,336 shares (aggregate redemption value
of $66.1 and $67.4)
Less cost of preferred treasury stock (15.4) (13.6)
Common stock:
Authorized: 200,000,000 shares of $1 par value
Issued: 66,400,811 and 67,241,624 shares 66.4 67.2
Additional paid-in capital - 4.9
Retained earnings 701.1 671.7
Unearned compensation (19.9) (26.2)
Deferred employee benefits (59.6) (60.6)
Accumulated other comprehensive loss (Note C) (52.8) (13.2)
-------- --------
Total stockholders' equity 695.1 705.5
-------- --------
Total liabilities and stockholders' equity $1,846.9 $1,805.2
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-6-
<PAGE> 7
CABOT CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended March 31, 1999 and 1998
(Dollars in millions)
UNAUDITED
<TABLE>
<CAPTION>
1999 1998
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 65.0 $ 68.9
Adjustments to reconcile net income to cash
provided by operating activities:
Depreciation and amortization 61.5 57.6
Deferred tax benefit (3.1) (0.6)
Equity in income of affiliated companies,
net of dividends received (4.4) (4.2)
Gain on sale of equity securities (4.6) -
Other, net 6.4 7.6
Changes in assets and liabilities, net of the effect of acquisitions and
the consolidation of equity affiliates:
Increase in accounts receivable (38.4) (50.3)
Decrease (increase) in inventory (33.0) 7.9
Increase in prepayments and intangible assets (0.7) (22.8)
Increase (decrease) in accounts payable and accruals (48.1) 4.7
Increase in income taxes payable 7.7 10.5
Increase (decrease) in other liabilities 10.6 (0.3)
Other, net (0.8) (1.0)
------- -------
Cash provided by operating activities 18.1 78.0
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property, plant and equipment (80.3) (70.6)
Investments and acquisitions (5.2) (27.3)
Proceeds from sale of equity securities 9.4 -
Cash from consolidation of equity affiliates and other 7.9 2.4
------- -------
Cash used in investing activities (68.2) (95.5)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt 102.5 63.1
Repayments of long-term debt (7.9) (121.8)
Increase (decrease) in short-term debt (25.9) 137.7
Purchases of preferred and common stock (30.3) (50.1)
Sales and issuances of preferred and common stock 3.5 3.6
Cash dividends paid to stockholders (16.2) (15.1)
------- -------
Cash provided by financing activities 25.7 17.4
------- -------
Effect of exchange rate changes on cash (2.2) -
------- -------
Decrease in cash and cash equivalents (26.6) (0.1)
Cash and cash equivalents at beginning of period 39.6 39.2
------- -------
Cash and cash equivalents at end of period $ 13.0 $ 39.1
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
-7-
<PAGE> 8
CABOT CORPORATION
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
Six Months Ended March 31, 1999
(Dollars in millions)
<TABLE>
<CAPTION>
Preferred Additional
Preferred Treasury Common Paid-in
Stock Stock Stock Capital
---------- --------- ------ ----------
<S> <C> <C> <C> <C>
Balance at September 30, 1998: $ 75.3 $ (13.6) $67.2 $ 4.9
Net income
Common dividends paid
Issuance of stock under employee
compensation plans 0.1 2.0
Issuance of common stock to Cabot
Retirement Incentive Savings Plan 0.1 1.2
Purchase and retirement of common stock (1.0) (8.1)
Purchase of treasury stock - preferred (1.8)
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax
Principal payment by Employee Stock
Ownership Plan under guaranteed loan
Amortization of unearned compensation
Change in unrealized loss on available-for-sale
securities, net of deferred tax of $5.0
Foreign currency translation adjustments
------- -------- ----- -------
Balance at March 31, 1999 $ 75.3 $ (15.4) $66.4 $ 0.0
======= ======== ===== =======
- ------------------------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
Retained Unearned Deferred Accumulated Other Comprehensive
Earnings Compensation Employee Benefits Comprehensive Loss Income (Note C)
-------- ------------ ----------------- ------------------ ---------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1998: $671.7 $ (26.2) $ (60.6) $ (13.2)
Net income 65.0 $ 65.0
Common dividends paid (14.7)
Issuance of stock under employee
compensation plans 0.1
Issuance of common stock to Cabot
Retirement Incentive Savings Plan
Purchase and retirement of common stock (19.4)
Purchase of treasury stock - preferred
Preferred dividends paid to Employee
Stock Ownership Plan, net of tax (1.5)
Principal payment by Employee Stock
Ownership Plan under guaranteed loan 1.0
Amortization of unearned compensation 6.2
Change in unrealized loss on available-for-sale
securities, net of deferred tax of $5.0 (10.4) (10.4)
Foreign currency translation adjustments
(29.2) (29.2)
------ ----------- ---------- --------------- -----------
Balance at March 31, 1999 $701.1 $ (19.9) $ (59.6) $ (52.8) $ 25.4
====== =========== ========== =============== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-8-
<PAGE> 9
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
March 31, 1999
A. BASIS OF PRESENTATION
The consolidated financial statements include the accounts of Cabot
Corporation and majority-owned and controlled U.S. and non-U.S.
subsidiaries (the "Company"). Investments in majority-owned affiliates
where control does not exist and investments in 20 percent to 50 percent
owned affiliates are accounted for on the equity method. Intercompany
transactions have been eliminated.
The financial statements have been prepared in accordance with the
requirements of Form 10-Q and consequently do not include all disclosures
required by Form 10-K. Additional information may be obtained by
referring to the Company's Form 10-K for the year ended September 30,
1998.
The financial information submitted herewith is unaudited and reflects
all adjustments which are, in the opinion of management, necessary to
provide a fair statement of the results for the interim periods ended
March 31, 1999 and 1998. All such adjustments are of a normal recurring
nature. The results for interim periods are not necessarily indicative of
the results to be expected for the fiscal year.
B. BUSINESS DEVELOPMENTS
On November 14, 1995, the Company modified its existing joint venture
agreement for its carbon black venture in Shanghai, China. This amendment
provided for the expansion of the facility and the increase of the
Company's ownership interest to 70%, to take effect as the expansion is
funded. As of October 1, 1998 the Company began accounting for this
venture on a consolidated basis.
C. COMPREHENSIVE INCOME
As of October 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No.
130"). The adoption of this Statement had no impact on net income or
stockholders' equity. SFAS No. 130 establishes new rules for the
reporting and display of comprehensive income and its components.
Accumulated Other Comprehensive Income (Loss), which is disclosed in the
stockholders' equity section of the consolidated balance sheet, includes
unrealized gains or losses on available-for-sale securities and
translation adjustments on investments in foreign subsidiaries. Prior to
the adoption of SFAS No. 130, the Company reported such unrealized gains
or losses and translation adjustments separately in the stockholders'
equity section of the consolidated balance sheet. Amounts in the prior
year financial statements have been reclassified to conform to SFAS No.
130.
-9-
<PAGE> 10
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
D. SEGMENTS OF AN ENTERPRISE
In June 1997, the Financial Accounting Standards Board ("FASB") issued
a new Statement, SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information", which establishes new requirements
for the reporting of segment information by public companies. It
supersedes SFAS No. 14, Financial Reporting for Segments of a Business
Enterprise, and is effective for the annual financial statements of
fiscal years beginning after December 15, 1997. The new framework for
segment reporting is referred to as the management approach. It is
intended to give analysts and other financial-statement users a view of
the company "through the eyes of management", by looking to a company's
internal management reporting structure as the basis for determining the
company's external segments, as well as the basis for determining the
information that is to be disclosed for those segments. The Company is
currently assessing the impact this Statement will have on the
consolidated financial statements.
E. RECLASSIFICATION
Certain amounts were reclassified in fiscal year 1998 to reflect changes
in the Company's organization during the year.
F. CONTINGENCIES
The Company is a defendant, or potentially responsible party, in various
lawsuits and environmental proceedings wherein substantial amounts are
claimed or at issue. In the opinion of the Company, although final
disposition of all of its suits and claims may impact the Company's
financial statements in a particular period, they should not, in the
aggregate, have a material adverse effect on the Company's financial
position.
G. INVESTMENTS
During the second quarter the Company sold .5 million shares of its
investment in K N Energy, Inc. The Company received cash proceeds of $9.4
million and recorded a gain of $4.6 million related to the sale.
H. LEASE COMMITMENTS
During the second quarter the Company entered into a non-cancelable lease
agreement for its corporate offices in Boston, Massachusetts expiring in
September, 2015. This contract results in additional future minimum
rental commitments under the non-cancelable lease as follows: (dollars in
millions)
2000 $ 0.4
2001 5.0
2002 5.2
2003 5.2
2004 and thereafter 64.4
----
$80.2
----
The Company is currently evaluating opportunities for the existing
facility lease that expires in 2001.
-10-
<PAGE> 11
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
I. EARNINGS PER SHARE
Basic and diluted earnings per share ("EPS") were calculated for the
three months ended March 31, 1999 and 1998 as follows (dollars in
millions, except per share amounts):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
BASIC EPS
Income available to common shares (numerator) $ 32.5 $ 36.7
======== =========
Weighted-average common shares outstanding 66.5 67.8
Less: Contingently issuable shares (2.5) (2.2)
-------- ---------
Adjusted weighted-average shares (denominator) 64.0 65.6
======== =========
Basic EPS $ 0.51 $ 0.56
======== =========
DILUTED EPS
Income available to common shares $ 32.5 $ 36.7
Dividends on preferred stock 0.7 0.8
Less: Income effect of assumed conversion of
preferred stock (0.4) (0.5)
-------- ---------
Income available to common shares plus
assumed conversions (numerator) $ 32.8 $ 37.0
======== =========
Weighted-average common shares outstanding
66.5 67.8
Effect of dilutive securities: Stock-based
compensation (1) 6.3 6.8
-------- ---------
Adjusted weighted-average shares (denominator) 72.8 74.6
======== =========
Diluted EPS $ 0.45 $ 0.50
======== =========
</TABLE>
(1) Options to purchase 0.3 million shares of common stock were
outstanding at March 31, 1999, but were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
-11-
<PAGE> 12
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
I. EARNINGS PER SHARE ( CONTINUED )
Basic and diluted earnings per share ("EPS") were calculated for the six
months ended March 31, 1999 and 1998 as follows (dollars in millions,
except per share amounts):
<TABLE>
<CAPTION>
1999 1998
------ ------
<S> <C> <C>
BASIC EPS
Income available to common shares (numerator) $ 63.5 $ 67.3
======= ========
Weighted-average common shares outstanding 66.8 68.1
Less: Contingently issuable shares (2.5) (2.2)
------- --------
Adjusted weighted-average shares (denominator) 64.3 65.9
======= ========
Basic EPS $ 0.99 $ 1.02
======= ========
DILUTED EPS
Income available to common shares $ 63.5 $ 67.3
Dividends on preferred stock 1.5 1.6
Less: Income effect of assumed conversion of
preferred stock (0.8) (0.8)
------- --------
Income available to common shares plus
assumed conversions (numerator) $ 64.2 $ 68.1
======= ========
Weighted-average common shares outstanding 66.8 68.1
Effect of dilutive securities: Stock-based
compensation (1) 6.3 6.8
------- --------
Adjusted weighted-average shares (denominator) 73.1 74.9
======= ========
Diluted EPS $ 0.88 $ 0.91
======= ========
</TABLE>
(1) Options to purchase 0.3 million shares of common stock were
outstanding at March 31, 1999, but were not included in the
computation of diluted EPS because the options' exercise price was
greater than the average market price of the common shares.
-12-
<PAGE> 13
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
J. SHARES OF STOCK
The following table summarizes the changes in shares of stock for the
three months ended March 31, 1999 (preferred shares in thousands and
common shares in millions):
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
PREFERRED STOCK
Balance at December 31, 1998 75.3
----
Balance at March 31, 1999 75.3
====
PREFERRED TREASURY STOCK
Balance at December 31, 1998 8.8
Purchased preferred treasury stock 0.5
----
Balance at March 31, 1999 9.3
====
COMMON STOCK
Balance at December 31, 1998 66.4
Issued common stock 0.1
Purchased and retired common stock (0.1)
----
Balance at March 31, 1999 66.4
====
</TABLE>
-13-
<PAGE> 14
CABOT CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (Continued)
March 31, 1999
UNAUDITED
J. SHARES OF STOCK (CONTINUED)
The following table summarizes the changes in shares of stock for the six
months ended March 31, 1999 (preferred shares in thousands and common
shares in millions):
<TABLE>
<CAPTION>
1999
-------------
<S> <C>
PREFERRED STOCK
Balance at September 30, 1998 75.3
----
Balance at March 31, 1999 75.3
----
PREFERRED TREASURY STOCK
Balance at September 30, 1998 8.5
Purchased preferred treasury stock 0.8
----
Balance at March 31, 1999 9.3
====
COMMON STOCK
Balance at September 30, 1998 67.2
Issued common stock 0.2
Purchased and retired common stock (1.0)
----
Balance at March 31, 1999 66.4
====
</TABLE>
-14-
<PAGE> 15
CABOT CORPORATION
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
RESULTS OF OPERATIONS
Sales and operating profit by industry segment are shown in the accompanying
table on page 20.
THREE MONTHS ENDED MARCH 31, 1999 VERSUS
THREE MONTHS ENDED MARCH 31, 1998
Unless indicated otherwise, financial comparisons in the following text are for
the quarter ended March 31, 1999 versus the quarter ended March 31, 1998.
Net income for the second quarter of fiscal year 1999 was $33.2 million ($0.45
per diluted common share), compared with $37.5 million ($0.50 per diluted common
share) in the same quarter a year ago. The quarter just ended included a $0.04
per diluted share gain from the sale of investments in equity securities. Net
sales and other operating revenues decreased 5% to $435.8 million from last
year's $457.0 million. Operating profit was $61.7 million for the quarter
compared to $73.4 million in the same quarter a year ago. Significantly lower
natural gas prices and the effect of Brazil's economic turmoil largely drove the
decrease in earnings. To a lesser extent, earnings were affected by volume
declines and continued price pressure in several of the Company's traditional
chemical markets.
In the Specialty Chemicals and Materials Group, sales for the second quarter of
fiscal 1999 decreased 7% to $347.9 million from $372.5 million. Overall volumes
in the Company's chemical businesses decreased 4% for the quarter. The reduction
in revenue also reflects lower year-to-year carbon black selling prices.
Operating profit for the Specialty Chemicals and Materials Group decreased 12%
to $54.4 million from $62.0 million. The decrease was primarily the result of
lower earnings in the Company's carbon black business. The Company's fumed
silica, plastics, and performance materials businesses also reported lower
operating profit for the quarter. The performance of the Company's new chemical
businesses (microelectronics materials ("MMD"), inkjet colorants and specialty
fluids), however, contributed favorably to earnings compared to the second
quarter of 1998.
The Company's CARBON BLACK business reported a decrease in operating profit of
approximately $6 million. The shortfall was caused primarily by the economic
difficulty within the Brazilian market. The dramatic depreciation of the
Brazilian Real and reduced volumes in the South American region negatively
impacted results for the quarter. In addition, the effects of significantly
lower feedstock costs were offset by lower year-to-year carbon black selling
prices. Overall volumes in the Company's carbon black business were 1% lower
than the second quarter of 1998. Volumes in the tire and special blacks markets
were about flat. However, volumes decreased 8% in the industrial products
business as the Company sacrificed some volumes by retaining pricing discipline
in a price competitive environment.
The FUMED SILICA business reported a decrease in operating profit of
approximately $3 million caused primarily by lower demand in the Company's base
business volumes. A softening of the silicone rubber markets largely caused the
reduction. Volumes in the second quarter were down 10%.
The PERFORMANCE MATERIALS business reported a decrease in operating profit of
approximately $1 million. Inventory adjustments at the Company's capacitor
manufacturing customers caused a 50% decrease in tantalum powder volumes in the
quarter. The effects of decreased powder volumes were somewhat mitigated by
improved pricing for the business's intermediate products. Powder volumes
rebounded somewhat during April. Cost reduction efforts, improved volumes and
margins in the business's intermediate products and greater powder volumes are
expected to cause a strong second half of the fiscal year in this business.
-15-
<PAGE> 16
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
The Company's PLASTICS business reported a $2 million shortfall in operating
profit in the quarter on flat volumes, compared with last year's second quarter.
The decline is primarily due to product mix changes and year-to-year selling
price erosion. Overcapacity has caused severe pricing pressure in the European
plastics market in which the Company does business.
The Company's new chemical businesses contributed over $4 million of increased
operating profit in the second quarter. A large portion of the increase was
driven by the Company's MMD business, which reported a 55% increase in revenue.
This business reported higher average prices and margins mainly due to improved
product mix and increased capacity utilization. The INKJET COLORANTS and
SPECIALTY FLUIDS businesses contributed incrementally to earnings by reducing
operating losses.
Research and technical expenses were $18.8 million for the second quarter of
1999 versus $20.4 million for the second quarter of 1998. The decrease reflects
a reduction in spending in the Company's carbon black business, offset somewhat
by an increase in spending in MMD and fumed silica new product development
programs. The Company continues to pursue and is encouraged by progress made in
several of its new product and new business initiatives, although progress to
date on some of the Company's initiatives has been slower than expected. The
Company's objective of developing higher value, differentiated products and
creating new businesses is central to its strategy for generating earnings
growth.
In the ENERGY GROUP, which is comprised of the liquefied natural gas importation
and distribution operations, sales for the second quarter increased to $87.9
million from $84.5 million for the same quarter a year ago. The Group's
operating profit was $7.3 million, compared with $11.4 million in the second
quarter of 1998. The decrease in operating profit was attributable to
significantly lower year-to-year natural gas prices, partially offset by 30%
greater volumes in the quarter.
The Company's effective tax rate was 36% for the quarters ended March 31, 1999
and 1998.
SIX MONTHS ENDED MARCH 31, 1999 VERSUS
SIX MONTHS ENDED MARCH 31, 1998
Unless indicated otherwise, financial comparisons in the following text are for
the six-month period ended March 31, 1999 versus the six month period ended
March 31, 1998.
Net income for the first six months of fiscal 1999 was $65.0 million compared
with $68.9 million for the first half of fiscal 1998. Operating profit decreased
5% to $130.1 million from $136.3 million.
In the Specialty Chemicals and Materials Group, revenues decreased 4% to $702.8
million from $735.1 million. The reduction in revenue reflects softened demand
and increased competitive pricing in several of the Company's market segments.
Operating profits increased 5% to $119.5 million from $113.5 million. The
improvement in operating profit was driven primarily by significantly lower
year-to-year carbon black feedstock costs. However, competitive price pressure,
particularly in the Company's carbon black business, drove average selling
prices down as the year progressed. In the second quarter, lower year-to-year
carbon black selling prices offset the benefit of lower feedstock costs. Profit
improvement in the Company's new businesses contributed incrementally to
earnings, particularly the Company's MMD business, which continues to perform
well within the high growth chemical mechanical planarization (CMP) market.
Other charges, net, decreased from $8.0 million to $2.5 million for the six
months ended March 31, 1998 and 1999, respectively. The decrease was primarily a
reduction in foreign currency exchange losses. Results in fiscal 1998 included
the effects of a strengthened U.S. dollar and significant devaluation of the
Indonesian rupiah.
In the Company's Energy Group, revenues decreased 10% to $142.0 million from
$157.3 million and operating profits decreased 54% to $10.6 million from $22.8
million in the same period a year ago. The decrease in operating profit was
attributable to the combination of warmer than normal weather and weak natural
gas prices. Average gas selling prices decreased approximately 19%
year-over-year. Offsetting weak prices was an increase in volumes equivalent to
two additional cargos for the first six months of the year. Additionally, the
first quarter earnings in 1998 included a $3.2 million contract revenue payment
from the signing of a long-term gas supply contract.
-16-
<PAGE> 17
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
Certain conditions that negatively impacted the Company's earnings in the
first six months of the year improved toward the end of March. The Brazilian
Real and South American carbon black market have shown some recent recovery. In
addition, natural gas futures prices indicate that next year, given a greater
and more predictable supply, the LNG business should contribute significantly to
earnings. In contrast, recent increases in carbon black feedstock prices will
present near term challenges given the current pricing environment in several of
the Company's carbon black markets. Continuing cost reduction efforts are
expected to mitigate a portion of any margin squeeze.
The Company's chemical industry customers are consolidating and shifting
production to lower cost locations. In turn, the Company is beginning the
process of evaluating production capacity, including the current deployment of
productive assets across some of the chemical businesses, and other cost
reduction initiatives. Various courses of action are currently being identified.
CASH FLOWS AND LIQUIDITY
During the first six months of the year, the Company's operations provided $18.1
million of cash compared to $78.0 million last year. The change year-to-year is
primarily due to increased working capital needs.
Capital spending for the first six months of the year was $85.5 million. The
Company plans to make approximately $200 million of capital expenditures during
the fiscal year. The major components of the 1999 capital program include new
business expansion and normal plant operating capital projects, the Company's
equity share of a natural gas liquefaction project in Trinidad, refurbishment of
the Company's LNG tanker, and capacity expansion in the Company's fumed silica
and MMD businesses.
On September 11, 1998, the Company's Board of Directors authorized the
repurchase of 4.0 million shares of the Company's common stock, superseding
prior authorizations. During the first six months of the year, the Company
purchased approximately 1.0 million shares of common stock. At March 31, 1999,
approximately 2.3 million shares remained under the September 1998 repurchase
authorization.
The Company's ratio of total debt (including short-term debt net of cash) to
capital increased from 43% at September 30, 1998 to 48% at the end of the second
quarter of fiscal year 1999.
On September 29, 1998, the Company filed a shelf registration statement with the
Securities and Exchange Commission ("SEC") for up to $500 million of debt
securities that the Company may issue from time to time. The SEC declared the
registration statement effective on October 13, 1998.
In December 1998, the Company issued $100 million of medium-term notes. The
notes mature as follows: $40 million in 2 years, $30 million in 7 years and $30
million in 20 years. The notes have a weighted average interest rate of 6.6%.
Proceeds from the issuance were used to reduce short-term debt.
The Company maintains a credit agreement under which it may borrow up to $300
million at floating rates. The facility is available through January 3, 2002.
The Company had no borrowings outstanding under this agreement at March 31,
1999. Management expects cash from operations and present financing
arrangements, including the Company's unused line of credit and shelf
registration, to be sufficient to meet the Company's cash requirements for the
foreseeable future.
-17-
<PAGE> 18
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION and RESULTS OF
OPERATIONS (CONTINUED)
YEAR 2000 READINESS DISCLOSURE
The Company's Year 2000 plan has three key areas of focus and is overseen by an
Executive Steering Committee. A Program Management Office has been established
to coordinate the Year 2000 efforts with regional teams in Asia Pacific, Europe,
North America and South America. These teams have been in place and working for
more than a year. The Company's Year 2000 efforts are proceeding on schedule.
1. The first key area of focus is the Company's core business systems
software, PC hardware and desktop software, and manufacturing plant devices
and software. The Company's plan with respect to this area includes the
inventory of all core business systems software, PC hardware and desktop
software, and plant devices and software that have clocking devices or
computer codes that will be impacted by the change of date to Year 2000;
assessment for priority as to mission critical systems; upgrading or
replacing such hardware and software as required; testing and placing into
an operational state; and developing contingency plans. The current status
and plans for each component of this area are as follows:
- Core Business Systems: This component includes all software and
hardware systems that record relevant data for business operations and
summarize revenue, cost, cash flows, capital, and other information.
The Company has completed the inventory and assessment of core
business systems. The Company's assessment indicates that as a result
of investments in significant global business system renewals during
the past several years, as well as ongoing efforts, the Company's core
business systems are expected to be Year 2000 ready. Current global
business system renewal projects are progressing as expected. These
projects include the rollout of AspenTech's manufacturing production
support systems, the migration of the Company's Asia Pacific and
plastics manufacturing facilities to JDEdwards software, and the
migration of the Company's European facilities to the JDEdwards and
Marcam suites of business software. The upgrade to PeopleSoft Human
Resources/Payroll in North America is now complete. Testing of all
core business systems is expected to occur during the third quarter of
fiscal year 1999.
- PC Hardware and Desktop Software: The Company has completed the
inventory, assessment, and testing phases for its PC hardware.
Replacement or repair of desktop hardware and mission critical
software is ongoing and expected to be completed in the third quarter
of fiscal year 1999.
- Manufacturing Plant Devices and Software: The Company completed the
inventory and assessments of plant embedded devices and software
during the second quarter of fiscal year 1999. Replacement or repair
of plant devices and software is ongoing and expected to be completed
in the third quarter of fiscal year 1999. Final testing in all
manufacturing facilities is expected to be completed during normal
plant shutdowns by the end of the fourth quarter of fiscal year 1999.
2. The second key area of focus is the Company's suppliers. This includes
identifying key suppliers whose supply disruption could have an adverse
impact on the Company's ability to produce and ship product, working with
these suppliers to decrease the chances supply will be disrupted,
identifying alternative sources or contingency plans as needed, and
attempting to obtain written assurances that purchased products and
services are Year 2000 compliant. Even in cases where the Company has
received assurances that delays or disruption will not be encountered by
third parties, the Company is not in a position to determine with
-18-
<PAGE> 19
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
certainty whether the assurances will prove accurate, given the
uncertainties associated with the Year 2000. The current status and plans
for this area are as follows:
- Key suppliers are being identified. Letters and questionnaires are
being sent to those suppliers and review of their responses is
expected to be completed in the third quarter of fiscal year 1999. The
development of contingency plans is expected to be completed in the
fourth quarter of fiscal year 1999.
3. The final area of key focus is internal and external communications, and
includes ongoing status reporting to the Company's management, coordinated
responses to external customer requests for information on the Company's
Year 2000 status, and timely delivery of information on Year 2000 to
Company employees worldwide. The current status and plans for this area are
as follows:
- An internal status reporting mechanism is in place. Coordinated
responses are being delivered to key customers. An employee awareness
program will continue throughout 1999.
Overall, the Company has established a goal to complete most activities related
to mission critical core business systems, PC hardware and desktop software, and
plant devices and software by June 30, 1999. Testing at some manufacturing
facilities will occur during plant shutdowns in the fourth quarter of fiscal
year 1999. Work with suppliers, contingency planning and ongoing communications
will continue throughout fiscal year 1999, with periodic reviews to be scheduled
through the millennium date change.
The Company does not believe that the cost of implementing system and program
changes necessary to address Year 2000 issues will have a material effect on the
Company's results of operations or financial condition. The Company has
identified Year 2000 expenses as costs incurred specifically to modify hardware
or software to be Year 2000 compliant where such modifications do not add any
other functionality. The vast majority of the Company's projects currently in
progress are considered to be part of the Company's ongoing global business
system renewal initiatives. The Company recognizes that a benefit of these
initiatives will be Year 2000 compliance. However, these initiatives were not
undertaken primarily for Year 2000 compliance and therefore are not treated as
Year 2000 costs. The Year 2000 compliance effort is being supported by a
reallocation of existing information technology and human resources. The Company
does not specifically track all costs associated with employees working on Year
2000 projects. The Company expects to spend approximately $2 million during
fiscal year 1999 on direct Year 2000 remediation efforts in addition to the
global business system renewal efforts. There can be no assurance that there
will not be increased costs associated with the implementation of such changes.
The above plans and status represent the Company's expectations based on current
Year 2000 plans and work progress. However, there is no assurance that such
expectations will be realized. While the Company believes that prudent steps
have been taken to assure that there is an effective program, the Company cannot
guarantee that the plans and funds expended will correct all Year 2000 errors or
that the information systems will not generate Year 2000 errors when operating
with third party computer systems or data.
The Company cannot predict reliably the source, nature, or extent of any Year
2000 disruptions that may be experienced in the U.S. or other countries where it
operates and, therefore, cannot predict reliably the effect any such disruptions
may have on the Company, its operations or financial condition. The Company does
not know what is the most likely "worse case scenario" as a result of Year 2000
disruptions, but believes that the effects on the Company are not substantially
different from those facing industry generally. The Company believes that the
most likely causes of disruption are one or more of the following: disruptions
in the banking system, disruptions in the supply of electricity to the Company's
plants that could delay production of the Company's products, and disruptions in
transportation services that could delay shipments from the Company's suppliers
or to the Company's customers. In addition, the Company does not know whether
any of its customers will experience Year 2000
-19-
<PAGE> 20
CABOT CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS (CONTINUED)
disruptions, either directly or as a result of disruptions in their customers'
businesses or in the economy generally, but any such disruptions might reduce
demand for the Company's products and adversely affect the Company. At this
time, however, the Company believes that if none of the third parties with which
it deals, directly or indirectly, experience disruptions or delays related to
the Year 2000 problem, it will be able to continue to operate with little or no
disruption or delay.
(Dollars in millions, except per share amounts)
UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED MARCH 31 SIX MONTHS ENDED MARCH 31
--------------------------- -------------------------
1999 1998 1999 1998
---- ---- ---- ----
INDUSTRY SEGMENT DATA
- ---------------------
<S> <C> <C> <C> <C>
Net Sales:
Specialty chemicals and materials $ 347.9 $ 372.5 $ 702.8 $ 735.1
Energy 87.9 84.5 142.0 157.3
---------- -------- --------- ---------
Net sales $ 435.8 $ 457.0 $ 844.8 $ 892.4
========== ======== ========= =========
Operating profit:
Specialty chemicals and materials $ 54.4 $ 62.0 $ 119.5 $ 113.5
Energy 7.3 11.4 10.6 22.8
---------- -------- --------- --------
Total operating profit $ 61.7 $ 73.4 $ 130.1 $ 136.3
---------- -------- --------- ---------
Interest expense (12.1) (11.1) (23.0) (22.5)
Gain on sale of equity securities 4.6 - 4.6 -
General corporate/other expenses (6.9) (8.7) (16.4) (14.9)
---------- -------- --------- ---------
Income before income taxes 47.3 53.6 95.3 98.9
Provision for income taxes (17.0) (19.3) (34.3) (35.6)
Equity in net income of affiliated companies 3.5 4.0 5.5 7.0
Minority interest in income (0.6) (0.8) (1.5) (1.4)
---------- -------- --------- ---------
Net income 33.2 37.5 65.0 68.9
Dividends on preferred stock (0.7) (0.8) (1.5) (1.6)
---------- -------- --------- ---------
Income applicable to common shares $ 32.5 $ 36.7 $ 63.5 $ 67.3
========== ======== ========= =========
Income per common share:
Basic $ 0.51 $ 0.56 $ 0.99 $ 1.02
========== ======== ========= =========
Diluted $ 0.45 $ 0.50 $ 0.88 $ 0.91
========== ======== ========= =========
</TABLE>
FORWARD-LOOKING INFORMATION: Included herein are statements relating to
management's projections of future profits, the possible achievement of the
Company's financial goals and objectives, management's expectations for the
Company's product development program, and Year 2000 risks. Actual results may
differ materially from the results anticipated in the statements included herein
due to a variety of factors including market supply and demand conditions,
fluctuations in currency exchange rates, cost of raw materials, patent rights of
others, Year 2000 disruptions, demand for the Company's customers' products and
competitors' reactions to market conditions. Timely commercialization of
products under development by the Company may be disrupted or delayed by
technical difficulties, market acceptance or competitors' new products, as well
as difficulties in moving from the experimental stage to the production stage.
-20-
<PAGE> 21
PART II. OTHER INFORMATION
ITEM 3. LEGAL PROCEEDINGS.
Environmental Proceedings
In January 1999, the Direction Regionale de L'Industrie, de la Recherche et de
L'Environment (the "DRIRE") notified Cabot France, S.A., a French subsidiary of
Cabot Corporation, that the DRIRE was investigating groundwater pollution in the
Montee des Pins area where Cabot France S.A.'s carbon black plant in Berre
l'Etang, France is located. The DRIRE convened meetings of various industries in
the area and asked them to work together on a study of groundwater conditions in
the area. Ten companies, including Cabot France, S.A., are working together to
fund and undertake the initial study requested by the DRIRE. Cabot estimates
that its share of this initial study will cost less than $10,000. It is not
possible at this point to predict whether groundwater remediation will be
required, how much it will cost or what Cabot France S.A.'s share of such
groundwater remediation will be.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
The Annual Meeting of Stockholders of Cabot Corporation (the "Annual Meeting")
was held on March 11, 1999. An election of Directors was held for which Ms. Jane
C. Bradley and Mr. Charles P. Siess, Jr. were nominated and elected to the class
of Directors whose terms expire in 2000, and Messrs. Samuel W. Bodman, Arthur L.
Goldstein, Gautam S. Kaji and John H. McArthur were nominated and elected to the
class of Directors whose terms expire in 2002. The following votes were cast for
or withheld with respect to each of the nominees:
Director In Favor Of Withheld
-------- ----------- --------
Jane C. Bradley 66,850,345 667,477
Charles P. Siess, Jr. 66,781,305 736,517
Samuel W. Bodman 66,831,878 685,944
Arthur L. Goldstein 66,892,449 625,373
Gautam S. Kaji 66,766,454 751,368
John H. McArthur 66,800,208 717,614
Other Directors whose terms of office as Directors continued after the meeting
are:
Director Term Of Office Expires
-------- ----------------------
Kennett F. Burnes 2001
John G.L. Cabot 2001
John S. Clarkeson 2001
Robert P. Henderson 2001
Arnold S. Hiatt 2000
Roderick C.G. MacLeod 2001
John F. O'Brien 2001
David V. Ragone 2000
Lydia W. Thomas 2000
Mark S. Wrighton 2000
The second proposal before the Annual Meeting was the adoption of Cabot's 1999
Equity Incentive Plan (the "Plan"). This proposal was approved by the
stockholders. The following votes were cast for or against, or abstained from
voting on, the Plan:
FOR AGAINST ABSTAINED
48,186,413 18,959,355 372,054
-21-
<PAGE> 22
The third proposal before the Annual Meeting was the approval of Cabot's
Short-Term Incentive Compensation Plan (the "STIC"). This proposal was approved
by the stockholders. The following votes were cast for or against, or abstained
from voting on, the STIC:
FOR AGAINST ABSTAINED
63,031,505 4,171,836 314,481
Effective March 11, 1999, Morris Tanenbaum retired as a member of the Board of
Directors, in accordance with the Company's Director Retirement Policy.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBITS
The exhibit numbers in the following list correspond to the
number assigned to such exhibits in the Exhibit Table of Item 601
of Regulation S-K:
Exhibit
Number Description
------ -----------
10.1 Cabot Corporation 1999 Equity
Incentive Plan, approved by Cabot's
Board of Directors on November 13,
1998, and by Cabot's stockholders
on March 11, 1999.
10.2 Cabot Corporation Short-Term Equity
Incentive Compensation Plan,
approved by the Compensation
Committee of Cabot's Board of
Directors on November 12, 1998, and
by Cabot's stockholders on March
11, 1999.
12 Statement Regarding Computation of
Ratio of Earnings to Fixed Charges,
filed herewith.
27.1 Financial Data Schedule for the
period ended March 31, 1999, filed
herewith. (Not included with
printed copy of the Form 10-Q.)
27.2 Restated Financial Data Schedule
for the period ended March 31,
1998, filed herewith. (Not
included with printed copy of the
Form 10-Q.)
(b) REPORTS ON FORM 8-K
No report on Form 8-K was filed by the Company during the three
months ended March 31, 1999.
-22-
<PAGE> 23
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.
CABOT CORPORATION
Date: May 17, 1999 /s/ Robert L. Culver
----------------------------
Robert L. Culver
Executive Vice President and
Chief Financial Officer
Date: May 17, 1999 /s/ William T. Anderson
----------------------------
William T. Anderson
Controller
(Chief Accounting Officer)
-23-
<PAGE> 1
Exhibit 10.1
CABOT CORPORATION
1999 EQUITY INCENTIVE PLAN
1. PURPOSE
The purpose of this 1999 Equity Incentive Plan (the "Plan") is to
advance the interests of Cabot Corporation (the "Company") and its stockholders
by enhancing the Company's ability to (a) attract and retain employees who are
in a position to make significant contributions to the success of the Company
and its subsidiaries; (b) reward employees for such contributions; and (c)
encourage employees to take into account the long-term interests of the Company
and its stockholders through ownership of shares of the Company's common stock
("Stock").
2. ADMINISTRATION
The Plan will be administered by the Compensation Committee or such
other committee (the "Committee") of the Board of Directors of the Company (the
"Board") as the Board may from time to time designate; provided that any
Committee administering the Plan shall consist of at least three directors and
shall not include any employees of the Company. The Committee will have
authority, not inconsistent with the express provisions of the Plan and in
addition to other authority granted under the Plan, to (a) grant awards
("Awards") and determine the terms and conditions of each Award; (b) modify or
waive, on a case by case basis, any term or condition of, or compliance by a
Participant with any obligation to be performed by him or her under, a
previously granted Award; (c) prescribe forms, rules and procedures (which it
may vary from time to time) as appropriate for the administration of the Plan;
and (d) interpret the Plan and decide any questions and settle all controversies
and disputes that may arise in connection with the Plan. Such determinations and
actions of the Committee, and all other determinations and actions of the
Committee made or taken under authority granted by any provision of the Plan,
will be conclusive and will bind all parties.
3. EFFECTIVE DATE AND TERM OF PLAN
The Plan will become effective on the date on which it is approved by
the stockholders of the Company. No Award may be granted under the Plan after
the tenth anniversary of the date on which this Plan was adopted by the Board,
but Awards previously granted may extend beyond that date.
4. SHARES SUBJECT TO THE PLAN
Subject to adjustment as provided in Section 8.6, the maximum number of
shares of Stock that may be delivered under the Plan will be (a) 3,000,000
shares of Stock; plus (b) any shares of Stock issued under the Plan and
forfeited; plus (c) without duplication for shares counted under the immediately
preceding clause, a number of shares of Stock equal to the number of shares
repurchased by the Company in the open market or otherwise and having an
aggregate repurchase price no greater than the amount of cash proceeds received
by the Company from the sale of shares of Stock under the Plan; plus (d) any
shares of Stock surrendered to the Company in payment of the exercise price of
Options issued under the Plan. However, in no event shall the Company (a)
deliver more than 3,000,000 shares of Stock under the Plan (subject to
adjustment pursuant to Section 8.6) to the officers of the Company, (b) issue
ISO's (as defined in Section 6.2(a)) under the Plan covering more than 3,000,000
shares of Stock, or (c) issue any Award under the Plan if after giving effect to
such Award the aggregate of all outstanding awards under the Plan, the 1996
Equity Incentive Plan, and the Equity Incentive Plan approved by the
stockholders of
<PAGE> 2
the Company at the 1989 Annual Meeting of Stockholders (i.e., unexercised
Options, unvested Purchase Restricted Stock, or other awards that remain subject
to the restrictions of the Plan or such other plans) would exceed 9.9% of the
total number of shares of Stock at the time outstanding.
Stock delivered under the Plan may be either from authorized but
unissued Stock or from treasury shares.
5. ELIGIBILITY AND PARTICIPATION
Those eligible to receive Awards under the Plan will be key employees
of the Company or any of its subsidiaries ("Employees") who, in the opinion of
the Committee, are in a position to make a significant contribution to the
success of the Company or its subsidiaries. A "subsidiary" for purposes of the
Plan is an entity in which the Company owns, directly or indirectly, (a) equity
interests possessing 40% or more, but less than a majority, of the total
combined voting power of all classes of equity, and which entity the Committee
shall have determined is managed as part of one of the Company's core
businesses, or (b) equity interests possessing a majority of the total combined
voting power of all classes of equity. The Committee will from time to time
select the eligible Employees who are to be granted Awards ("Participants"), but
no Participant shall receive Awards under the Plan covering more than 1,000,000
shares of Stock (subject to adjustment pursuant to Section 8.6).
6. TYPES OF AWARDS
6.1. RESTRICTED STOCK.
(a) Nature of Restricted Stock Award. An Award of Restricted Stock
entitles the recipient to acquire, at such time or times as the Committee may
determine, shares of Stock subject to the restrictions described in paragraph
(d) below ("Restricted Stock") for a consideration which may be either (i) any
amount which is not less than 30% of the fair market value of the Stock at the
time of grant, or (ii) an amount less than 30% of the fair market value of the
Stock at the time of grant if the Committee has expressly determined to grant
the discount in accordance with Section 6.5 or in lieu of a comparable amount of
salary or cash bonus. However, the number of shares issued at less than 30% of
the fair market value in lieu of salary or cash bonus shall be no more than
500,000 shares (subject to adjustment pursuant to Section 8.6).
(b) Payment for Restricted Stock. An Award of Restricted Stock may
permit the Participant to pay some or all of the purchase price thereof, or
withholding taxes to be paid by the Participant in connection therewith, in the
form of a note from the Participant on such terms as the Committee shall
determine. Such terms may include forgiveness of all or a portion of any such
note upon such conditions as the Committee may specify. However, if any portion
of such a note is to be forgiven on the sole condition that the Participant
remain an Employee for a period of time, the portion to be so forgiven shall not
be counted for the purposes of Section 6.1(a) as consideration for such Stock.
(c) Rights as a Stockholder. A Participant who receives Restricted
Stock will have all the rights of a stockholder with respect to the Stock,
including voting and dividend rights, subject to the restrictions described in
paragraph (d) below and any other conditions imposed by the Committee at the
time of grant.
-2-
<PAGE> 3
(d) Restrictions. The restrictions on each grant of Restricted Stock
will lapse at such time or times, and on such conditions, as the Committee may
specify. However, not more than 5% of the shares of Stock subject to the Plan
shall be awarded with a vesting period less than 3 years from the date of grant,
or with no vesting period, or with a vesting schedule that is faster than
ratably over a three year period. Except as otherwise specifically provided by
the Plan or by the Committee in any particular case, until these restrictions
lapse, Restricted Stock may not be sold, assigned, transferred, pledged or
otherwise encumbered or disposed of, except that Restricted Stock may be pledged
as security for the purchase price thereof, or for loans used to fund any or all
of the purchase price thereof or withholding taxes paid in connection with the
purchase thereof. If the Participant ceases to be an Employee before such
restrictions have lapsed, the Company shall have the right to repurchase the
Restricted Stock for the amount of consideration (excluding services) it
received for the Stock plus, if the Committee shall so determine, an amount
equal to the withholding taxes paid in connection with the sale of the Stock, or
for such other consideration as the Committee shall determine, including for no
consideration if no consideration other than services was paid. The Committee
shall not accelerate the time at which the restrictions on all or any part of a
grant of Restricted Stock will lapse, except as the Committee may determine to
be appropriate in connection with a Participant's termination as an Employee.
6.2. OPTIONS.
(a) Nature of Options. An Option is an Award entitling the recipient on
exercise thereof to purchase Stock at a specified exercise price.
Both "incentive stock options," as defined in Section 422 of the
Internal Revenue Code of 1986, as amended (the "Code"), and Options that are not
incentive stock options, may be granted under the Plan. Any Option intended to
qualify as an incentive stock option will be referred to in the Plan as an
"ISO". Once an ISO has been granted, no action by the Committee that would cause
the Option to lose its status under the Code as an incentive stock option will
be effective without the consent of the Option holder.
(b) Exercise Price. The exercise price of an Option will be determined
by the Committee, but except as provided in Section 6.5 the Committee shall not
set the exercise price of an Option at less than the fair market value per share
of the Stock at the time the Option is granted unless the Committee expressly
determines to grant the discount in lieu of a comparable amount of salary or
cash bonus.
(c) Duration of Options. The latest date on which an Option may be
exercised will be the tenth anniversary of the date the Option was granted, or
such earlier date as may have been specified by the Committee at the time the
Option was granted.
(d) Exercise of Options. An Option will become exercisable at such time
or times, and on such terms and conditions, as the Committee may specify. The
Committee may at any time accelerate the time at which all or any part of the
Option may be exercised.
Any exercise of an Option must be in writing, signed by the proper
person and delivered or mailed to the Company, accompanied by (1) any documents
required by the Committee and (2) payment in full for the number of shares for
which the Option is exercised.
6.3. APPRECIATION RIGHTS.
(a) Nature of Appreciation Rights. An Appreciation Right is an Award
entitling the recipient on exercise of the Right to receive an amount, in cash
or Stock or a combination thereof (such form to be
-3-
<PAGE> 4
determined by the Committee), determined in whole or in part by reference to
appreciation in Stock value.
An Appreciation Right may be either a standard Stock Appreciation Right
or a Performance Appreciation Right. A Stock Appreciation Right entitles the
Participant to receive, with respect to each share of Stock as to which the
Right is exercised, the excess of (1) the share's fair market value on the date
of exercise, increased if the Committee so provides by the value of dividends on
the Stock, over (2) its fair market value on the date the Right was granted. A
Performance Appreciation Right is a form of Stock Appreciation Right pursuant to
which the amount the recipient is entitled to receive is adjusted upward or
downward under rules established by the Committee to take into account the
performance of the Stock in comparison with the performance of other stocks or
an index of other stocks or to take into account other criteria determined by
the Committee to be appropriate to reflect the true performance of the Stock or
the Company.
Appreciation Rights shall be exercisable at such time or times (not
later than ten years from the date of grant), and on such terms, as the
Committee may specify.
(b) Tandem Appreciation Rights. Appreciation Rights may be granted in
tandem with, or independently of, Options granted under the Plan. The
relationship between an Option and any Tandem Appreciation Rights shall be set
forth in the respective instrument for the Option or the Tandem Appreciation
Right or both.
6.4. PERFORMANCE AWARDS.
(a) Nature of Performance Awards. A Performance Award entitles the
recipient to receive an amount, in cash or Stock or a combination thereof (such
form to be determined by the Committee), based on one or more measures of
performance and/or the attainment of one or more performance goals. Performance
measures or goals may be related to personal performance, corporate performance,
departmental performance or any other category of performance deemed by the
Committee to be important to the success of the Company. The Committee will
determine the performance measures and/or goals, the period or periods during
which performance is to be measured and all other terms and conditions
applicable to the Award. The Committee may in its discretion, in order to
qualify an Award under Section 162(m) of the Code, or for any other reason, seek
Stockholder approval for particular Awards, or a program pursuant to which
Awards were or are to be made, and may make any such Awards subject to such
approval.
(b) Other Awards May be Made Subject to Performance Criteria. The
Committee may, at the time any Award described in this Section 6 is granted,
specify one or more measures of performance and/or the attainment of one or more
performance goals to be used in determining one or more terms of the Award or
which shall be conditions to the Participant's realization of benefits under all
or a portion of the Award.
-4-
<PAGE> 5
6.5. SUBSTITUTE AWARDS.
In connection with any acquisition, the Committee may grant Awards to
persons who become Employees in connection with such acquisition in substitution
for equity incentives held by them in the seller or acquired entity. In such
case the Committee may set the prices and other terms of the substitute Awards
at such amounts and in such manner as may be appropriate to preserve for the
Participants the economic values of the equity incentives for which such Awards
are substitutes, or otherwise to provide such incentives as the Committee may
determine are appropriate. Any substitute Awards granted under the Plan shall
not count toward the share limitations set forth in Section 4, 6.1(a) or 6.1(d).
7. EVENTS AFFECTING OUTSTANDING AWARDS
7.1. DEATH AND DISABILITY.
If a Participant ceases to be an Employee by reason of death or total
and permanent disability (as determined by the Committee), the following will
apply:
(a) Subject to paragraph (c) below, each Option and
Appreciation Right held by the Participant when his or her employment
ended will immediately become exercisable in full and will continue to
be exercisable until the earlier of (1) the third anniversary of the
date on which his or her employment ended, and (2) the date on which
the Award would have terminated had the Participant remained an
Employee. If the Participant has died, his or her Award may be
exercised within such limits by his or her executor or administrator or
by the person or persons to whom the Award is transferred by will or
the applicable laws of descent and distribution (the Participant's
"legal representative").
(b) Subject to paragraph (c) below, each share of Restricted
Stock held by the Participant when his or her employment ended will
immediately become free of the restrictions.
(c) If when the Participant's employment ended exercise of an
Option or Appreciation Right or lapse of restrictions on Restricted
Stock was subject to performance or other conditions (other than
conditions relating solely to the passage of time and continued
employment, which automatically lapse pursuant to Section 7.1(a) or
(b)) which had not been satisfied at such time, the Committee may
remove or modify such conditions or provide that the Participant will
receive the benefit of the Award if and when the conditions are
subsequently satisfied. If the Committee does not take such action,
however, such Award will terminate as of the date on which the
Participant's employment ended as described above.
(d) Any payment or benefit under a Performance Award to which
the Participant has not become irrevocably entitled will be forfeited
and the Award canceled as of the date on which the Participant's
employment ended, unless otherwise provided in the instrument
evidencing the Award or otherwise agreed to by the Committee.
If a Participant dies after his or her employment has ended but while
an Award held by him or her is still exercisable, his or her legal
representative will be entitled to exercise such Award until the earlier of (1)
the third anniversary of his or her death and (2) the date on which the Award
would have terminated had the Participant remained an Employee.
-5-
<PAGE> 6
7.2. OTHER TERMINATION OF EMPLOYMENT.
If a Participant ceases to be an Employee for any reason other than
those specified in Section 7.1 above, except as otherwise determined by the
Committee in any particular case, the following will apply:
(a) All Options and Appreciation Rights held by the
Participant that were not exercisable when his or her employment ended
will terminate. Any Awards that were so exercisable will continue to be
exercisable until the earlier of (1) the date which is three months
after the date on which his or her employment ended and (2) the date on
which the Award would have terminated had the Participant remained an
Employee.
(b) All Restricted Stock held by the Participant must be
transferred to the Company in accordance with Section 6.1 above.
(c) Any payment or benefit under a Performance Award to which
the Participant has not become irrevocably entitled will be forfeited
and the Award canceled, unless otherwise provided in the instrument
evidencing the Award or otherwise agreed to by the Committee.
For purposes of this Section 7.2, an Employee's employment will not be
considered to have ended (1) in the case of sick leave or other bona fide leave
of absence approved for purposes of the Plan by the Committee, so long as his or
her right to reemployment is guaranteed either by statute or by contract, (2) as
a result of a reduction in the Company's percentage ownership of the entity
employing the Employee, or (3) in the case of a transfer of the Employee to the
employment of a person or entity acquiring all or a portion of the business of
the Company or any of its subsidiaries.
7.3 CHANGE IN CONTROL.
Notwithstanding any other provision of the Plan or of any Award, in the
event of a Change in Control as defined in Exhibit A the following will apply:
(a) Each outstanding Option and Appreciation Right will
immediately become exercisable in full.
(b) Each outstanding share of Restricted Stock will
immediately become free of all restrictions and conditions.
(c) Conditions on Performance Awards which relate solely to
the passage of time and continued employment will be removed.
Performance or other conditions (other than conditions relating solely
to the passage of time and continued employment) will continue to apply
unless otherwise provided in the instrument evidencing the Awards or in
any other agreement between the Participant and the Company or unless
otherwise agreed to by the Committee.
(d) During the 60-day period following the Change in Control,
a Participant holding an Option or an Appreciation Right will have the
right (by giving written notice to the Company) to surrender all or
part of his or her Award to the Company and receive a cash payment
equal to (1) the excess of the value per share of stock (as defined
below) on the date of exercise over the exercise price per share,
adjusted, in the case of a Performance Appreciation Right to take into
-6-
<PAGE> 7
account the performance of the Stock in comparison to the other stocks
or index specified by the Committee, multiplied by (2) the number of
shares subject to the surrendered Award. Such right will not apply to
any Option as to which the Committee expressly excludes such right at
the date of grant; provided, however, if (i) the Change of Control is a
merger to be accounted for as a pooling of interest, (ii) adequate
provision is made for all Participants to receive, in substitution for
their Awards, awards from the surviving entity in the same form and
terms (after giving effect to the foregoing paragraphs (a), (b) and
(c)) and with the same economic value as their Awards under the Plan,
and (iii) the Committee, in its discretion, determines that the rights
to receive cash payment under this paragraph (d) are not in the best
interests of the Company, then no Participant shall have the right
pursuant to this paragraph (d) to surrender his or her Award to the
Company for a cash payment. As used in this paragraph with respect to
an election by a Participant to receive cash in respect of an Award
which is not an ISO, the term "value per share" will mean the higher of
(i) the highest reported sales price, regular way, of a share of Stock
on the New York Stock Exchange Composite Transactions Index during the
60-day period ending on the date of the Change in Control and (ii) if
the Change in Control is the result of the acquisition of Stock by a
"person" (as defined in Exhibit A), the highest price per share of the
Stock paid by such person. In the case of an election by a Participant
to receive cash in respect of an ISO, however, the term "value" will
mean fair market value unless otherwise agreed to by the Participant.
7.4 MERGERS, CONSOLIDATIONS, ETC.
In the event of a merger or consolidation in which the Company is not
the surviving corporation or which results in the acquisition of substantially
all the Company's outstanding Stock by a single person or entity or by a group
of persons or entities acting in concert, or in the event of sale or transfer of
all or substantially all of the Company's assets (a "covered transaction"), all
outstanding Options and Appreciation Rights may be terminated by the Board as of
the effective date of the covered transaction, subject to the following: If the
covered transaction follows a Change in Control or would give rise to a Change
in Control, no Option or Appreciation Right will be terminated (without the
consent of the Participant) prior to the expiration of 20 days following the
later of (i) the date on which the Award became fully exercisable and (ii) the
date on which the Participant received written notice of the covered
transaction.
8. GENERAL PROVISIONS
8.1. DOCUMENTATION OF AWARDS.
Awards will be evidenced by written instruments prescribed by the
Company from time to time. Such instruments may be in the form of agreements, to
be executed by both the Participant and the Company, or certificates, letters or
similar instruments, which need not be executed by the Participant but
acceptance of which will evidence agreement to the terms thereof and hereof.
8.2. RIGHTS AS A STOCKHOLDER; DIVIDEND EQUIVALENTS.
Except as specifically provided by the Plan, the receipt of an Award
will not give a Participant rights as a stockholder; the Participant will obtain
such rights, subject to any limitations imposed by the Plan or the instrument
evidencing the Award, upon actual receipt of Stock. However, the Committee may,
on such conditions as it deems appropriate, provide that a Participant will
receive a benefit in lieu of
-7-
<PAGE> 8
cash dividends that would have been payable on any or all Stock subject to the
Participant's Award had such Stock been outstanding. Without limitation, the
Committee may provide for payment to the Participant of amounts representing
such dividends, either currently or in the future, or for the investment of such
amounts on behalf of the Participant.
8.3. CONDITIONS ON DELIVERY OF STOCK.
The Company will not be obligated to deliver any shares of Stock
pursuant to the Plan or to remove any restriction from shares previously
delivered under the Plan (a) until all conditions of the Award have been
satisfied or removed, (b) until, in the opinion of the Company's counsel, all
applicable federal and state laws and regulations have been complied with, (c)
if the outstanding Stock is at the time listed on any stock exchange, until the
shares to be delivered have been listed or authorized to be listed on such
exchange upon official notice of notice of issuance, and (d) until all other
legal matters in connection with the issuance and delivery of such shares have
been approved by the Company's counsel. If the sale of Stock has not been
registered under the Securities Act of 1933, as amended, the Company may
require, as a condition to exercise of the Award, such representations or
agreements as counsel for the Company may consider appropriate to avoid
violation of such Act and may require that the certificates evidencing such
Stock bear an appropriate legend restricting transfer.
8.4. TAX WITHHOLDING.
The Company will withhold from any payment made pursuant to an Award an
amount sufficient to satisfy all federal, state and local withholding tax
requirements (the "withholding requirements").
In the case of an Award pursuant to which Stock may be delivered, the
Committee will have the right to require that the Participant or other
appropriate person remit to the Company an amount sufficient to satisfy the
withholding requirements, or make other arrangements satisfactory to the
Committee with regard to such requirements, prior to the delivery of any Stock.
If and to the extent that such withholding is required, the Committee may permit
the Participant or such other person to elect at such time and in such manner as
the Committee provides to have the Company hold back from the shares to be
delivered, or to deliver to the Company, Stock having a value calculated to
satisfy the withholding requirement.
If at the time an ISO is exercised the Committee determines that the
Company could be liable for withholding requirements with respect to a
disposition of the Stock received upon exercise, the Committee may require as a
condition of exercise that the person exercising the ISO agree (a) to inform the
Company promptly of any disposition of Stock received upon exercise, and (b) to
give such security as the Committee deems adequate to meet the potential
liability of the Company for the withholding requirements and to augment such
security from time to time in any amount reasonably deemed necessary by the
Committee to preserve the adequacy of such security.
8.5. NONTRANSFERABILITY OF AWARDS.
Except as otherwise specifically provided by the Committee, no Award
may be transferred other than by will or by the laws of descent and
distribution, and during a Participant's lifetime an Award requiring exercise
may be exercised only by him or her (or in the event of incapacity, the person
or persons properly appointed to act on his or her behalf).
-8-
<PAGE> 9
8.6. ADJUSTMENTS IN THE EVENT OF CERTAIN TRANSACTIONS.
(a) In the event of a stock dividend, stock split or combination of
shares, recapitalization or other change in the Company's capitalization, or
other distribution with respect to common stockholders other than normal cash
dividends, the Committee will make any appropriate adjustments to the maximum
number of shares that may be delivered under the Plan under Section 4 above.
(b) In any event referred to in paragraph (a) the Committee will also
make any appropriate adjustments to the number and kind of shares of stock or
securities subject to Awards then outstanding or subsequently granted, any
exercise prices relating to Awards and any other provisions of Awards affected
by such change. The Committee may also make such adjustments to take into
account material changes in law or in accounting practices or principles,
mergers, consolidations, acquisitions, dispositions, repurchases or similar
corporate transactions, or any other event, if it is determined by the Committee
that adjustments are appropriate to avoid distortion in the operation of the
Plan, but no such adjustments other than those required by law may adversely
affect the rights of any Participant (without the Participant's consent) under
any Award previously granted.
8.7. EMPLOYMENT RIGHTS.
Neither the adoption of the Plan nor the grant of Awards will confer
upon any person any right to continued employment with the Company or any
subsidiary or affect in any way the right of the Company or subsidiary to
terminate an employment relationship at any time. Except as specifically
provided by the Committee in any particular case, the loss of existing or
potential profit in Awards granted under the Plan will not constitute an element
of damages in the event of termination of an employment relationship even if the
termination is in violation of an obligation of the Company to the Employee.
8.8. DEFERRAL OF PAYMENTS.
The Committee may agree at any time, upon request of the Participant,
to defer the date on which any payment under an Award will be made.
8.9. PAYMENT FOR STOCK; LOANS.
Stock purchased from the Company under this Plan either as Restricted
Stock or on exercise of an Option may be paid for with such legal consideration
as the Committee may determine. If and to the extent authorized by the
Committee, the Company may permit Participants to pay for Stock with promissory
notes, and may make loans to Participants of all or a portion of any withholding
taxes to be paid in connection with the grant, exercise or vesting of any Award.
Any such extensions of credit may be secured by Stock or other collateral, or
may be made on an unsecured basis, as the Committee may determine.
-9-
<PAGE> 10
9. DISCONTINUANCE, CANCELLATION, AMENDMENT AND TERMINATION
The Committee may at any time discontinue granting Awards under the
Plan. The Board may at any time or times amend the Plan or any outstanding Award
for any purpose which may at the time be permitted by law, or may at any time
terminate the Plan as to any further grants of Awards, provided that (except to
the extent expressly required or permitted by the Plan) no such amendment will,
without the approval of the stockholders of the Company, (a) increase the
maximum number of shares available under the Plan, (b) extend the time within
which Awards may be granted, or (c) amend the provisions of this Section 9, and
no amendment or termination of the Plan may adversely affect the rights of any
Participant (without his or her consent) under any Award previously granted.
CABOT CORPORATION
By ____________________________
-10-
<PAGE> 11
EXHIBIT A
A "Change in Control" shall be deemed to have occurred if:
(a) any "person" as such term is used in Sections 13(d) and 14(d) of
the Securities Exchange Act of 1934 (the "1934 Act") (other than (i) the
Company, (ii) any subsidiary of the Company, (iii) any trustee or other
fiduciary holding securities under an employee benefit plan of the Company or of
any subsidiary of the Company, or (iv) any company owned, directly or
indirectly, by the stockholders of the Company in substantially the same
proportions as their ownership of stock of the Company), is or becomes the
"beneficial owner" (as defined in Section 13(d) of the 1934 Act), together with
all Affiliates and Associates (as such terms are used in Rule 12b-2 of the
General Rules and Regulations under the 1934 Act) of such person, directly or
indirectly, of securities of the Company representing 25% or more of the
combined voting power of the Company's then outstanding securities;
(b) the stockholders of the Company approve a merger or consolidation
of the Company with any other company, other than (1) a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining
outstanding or by being converted into voting securities of the surviving
entity), in combination with the ownership of any trustee or other fiduciary
holding securities under an employee benefit plan of the Company or any
subsidiary of the Company, at least 65% of the combined voting power of the
voting securities of the Company or such surviving entity outstanding
immediately after such merger or consolidation or (2) a merger or consolidation
effected to implement a recapitalization of the Company (or similar transaction)
after which no "person" (with the method of determining "beneficial ownership"
used in clause (a) of this definition) owns more than 25% of the combined voting
power of the securities of the Company or the surviving entity of such merger or
consolidation; or
(c) during any period of two consecutive years (not including any
period prior to the execution of the Plan), individuals who at the beginning of
such period constitute the Board, and any new director (other than a director
designated by a person who has conducted or threatened a proxy contest, or has
entered into an agreement with the Company to effect a transaction described in
clause (a), (b) or (d) of this definition) whose election by the Board or
nomination for election by the Company's stockholders was approved by a vote of
at least two-thirds (2/3) of the directors then still in office who either were
directors at the beginning of the period or whose election or nomination for
election was previously so approved cease for any reason to constitute at least
a majority thereof; or
(d) the stockholders of the Company approve a plan of complete
liquidation of the Company or an agreement for the sale or disposition by the
Company of all or substantially all of the Company's assets.
-11-
<PAGE> 1
Exhibit 10.2
CABOT CORPORATION
SHORT-TERM INCENTIVE COMPENSATION PLAN
The purpose of this Short-Term Incentive Compensation Plan (this "Plan") is to
provide incentives for certain senior executives of Cabot Corporation (the
"Company") to achieve a sustained, high level of financial success for the
Company. This Plan does that by placing a portion of the senior executives'
annual compensation at risk based on Company and individual performance. This
Plan is intended to comply with the requirements for tax deductibility imposed
by Internal Revenue Code Section 162(m) as in effect from time to time ("Section
162(m)") with respect to Awards paid pursuant to this Plan.
ADMINISTRATION
This Plan will be administered by the Compensation Committee of the Board of
Directors or, if any member of the Compensation Committee is not an "outside
director" for the purposes of Section 162(m), by a subcommittee of the
Compensation Committee consisting of those members of the Compensation Committee
who are "outside directors" for such purposes. The Compensation Committee or
subcommittee administering this Plan is referred to herein as the "Committee."
The Committee may delegate to management administrative functions that do not
involve discretion. The Committee shall have the authority to interpret this
Plan, and any interpretation or decision by the Committee with regard to any
questions arising under this Plan shall be final and conclusive on all
participants in this Plan.
ELIGIBILITY; PARTICIPANTS
Only officers of the Company shall be eligible to participate in this Plan for
any fiscal year of the Company (an "Award Year"). Not later than 90 days after
the beginning of each Award Year, the Committee shall (a) select, from among
those eligible, the persons who shall participate in this Plan (the
"Participants") for the Award Year, and (b) designate for each Participant a
specific percentage of the Award Pool as the Participant's potential award (the
"Potential Award"). No Participant shall have a Potential Award exceeding 50% of
the Award Pool, and the sum of the Potential Awards specified by the Committee
for an Award Year shall not exceed 100% of the Award Pool.
FORMULA
The amount available for Awards under this Plan for each Award Year (the "Award
Pool") will be 10% of the amount, if any, by which the Company's Adjusted Net
Income for the Award Year exceeds 10% of Average Stockholders' Equity. Adjusted
Net Income for an Award Year shall be the consolidated net income of the Company
as reported to shareholders in the Company's Annual Report, excluding from the
calculation of net income all of the following items to the extent they appear
as separate line items in the
<PAGE> 2
Company's audited consolidated statement of income appearing in the Annual
Report: extraordinary or non-recurring items, changes in tax laws, items
relating to discontinued operations, items relating to divested businesses or
sales of businesses, restructuring charges, effects of accounting changes and
any other special, unusual or non-recurring gain or loss; provided, however,
that the Committee may in its discretion include any such item that causes the
Award Pool to be reduced. Where any such item to be excluded is stated in the
Company's consolidated statement of income as a pre-tax amount, the amount to be
excluded shall be adjusted to an after-tax amount using an assumed tax rate (to
cover all federal, state and foreign income taxes) equal to the maximum marginal
federal income tax rate in effect for US corporations during the Award Year,
plus 2%. Average Stockholders' Equity shall be the average of (a) the total
stockholders' equity at the end of the Award Year and (b) the total
stockholders' equity at the end of the preceding fiscal year (i.e., at the
beginning of the Award Year), in each case as reported in the Company's Annual
Report.
PAYMENTS
When the Company's financial results for the Award Year have been determined,
the Committee will evaluate the Company's financial results, determine the
dollar amounts of the Award Pool and of the Potential Award and the actual
Award, if any, for each Participant, and shall certify its determinations in
writing (the "Certification").
In determining the actual Award to be paid to each Participant, the Committee
may exercise discretion to reduce (but not increase) the Award from the amount
of the Participant's Potential Award, after taking into account the Company's
financial performance, performance of the Participant, and competitive
compensation levels. It is expected that the Committee will use its discretion
carefully and apply good and rigorous judgment in appraising the performance of
the Company and the contributions of each Participant to the Company's
performance.
A reduction in the Award paid to a Participant shall not be available to
increase the Award of any other Participant. If the total of the Awards as
finally determined for any Award Year is less than the Award Pool, the unused
portion of the Award Pool will not be carried over to the next Award Year or be
added to any future Award Pool.
Awards will be paid in cash as soon as practical after the Certification or may,
at the election of the Participant and under procedures adopted by the Committee
or any deferred compensation plans from time to time in effect and in accordance
with the regulations promulgated under Section 162(m), be deferred.
TAX WITHHOLDING
The Company will deduct any required withholding taxes from the payments under
this Plan.
<PAGE> 3
TERMINATION OF EMPLOYMENT
Any Participant who is not an employee of the Company on September 30 of an
Award Year will not receive any Award for that Award Year, except that if a
Participant's employment terminates due to death or disability the Committee may
at its discretion authorize payment of an Award to such Participant (or his or
her estate) at the time other Awards are paid in respect of that Award Year.
NO RIGHT TO AWARDS OR CONTINUED EMPLOYMENT
No person shall have any claim or right to be granted an Award, nor shall the
selection for participation in the Plan for any Award Year be construed as
giving a Participant the right to be retained in the employ of the Company for
that Award Year or for any other period.
INTERPRETATION AND AMENDMENTS
This Plan is designed to comply with Section 162(m), and all provisions in this
Plan shall be construed in a manner consistent with that intent. The Company's
Board of Directors may amend or terminate this Plan at any time, but no
amendment shall expand the class of eligible employees or increase either the
funding formula for determining the Award Pool or the maximum Award to an
individual Participant without the approval of the Company's shareholders.
Subject to the foregoing restrictions, this Plan may be amended to add
conditions or provisions required, or to remove conditions or provisions no
longer required or permitted, by Section 162(m).
Nothing in this Plan shall be deemed in any way to limit or restrict the Company
from making any award to any person (including a Participant in this Plan) under
any other plan, arrangement or understanding, whether now existing or hereafter
arising, or on an ad hoc basis, except as follows. No award to any Participant
in this Plan shall be made under any other plan, arrangement or understanding,
or on an ad hoc basis, where the amount of such other award is designed to
compensate the Participant if, and to the extent that, as a result of the
Company's performance, his or her Potential Award or actual Award under this
Plan does not reach a particular level.
PLAN TERM
This Plan shall be effective as of the date adopted, for the Award Year ending
September 30, 1999, subject to receiving shareholder approval at the 1999 Annual
Shareholders Meeting, and shall remain in effect for subsequent Award Years
until terminated by the Company's Board of Directors.
<PAGE> 1
EXHIBIT 12
CABOT CORPORATION AND CONSOLIDATED SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in millions, except ratios)
<TABLE>
<CAPTION>
Six Months
ended
March 31 Years ended September 30
------------ ---------------------------------------------------------------
1999 1998 1997 1996 1995 1994
------------ --------- --------- --------- ------------ --------------
<S> <C> <C> <C> <C> <C> <C>
Earnings:
Pre-tax income from continuing operations $ 95.3 $168.0 $117.0 $279.8 $256.0 $ 118.3
Distributed income of affiliated companies 1.1 7.5 10.4 11.2 11.7 5.6
Add fixed charges:
Interest on indebtedness 23.0 42.0 43.2 41.7 35.6 41.7
Portion of rents representative of
the interest factor 2.6 5.1 4.9 4.8 5.5 5.9
------- ------ ------ ------ ------ -------
Income as adjusted $ 122.0 $222.6 $175.5 $337.5 $308.8 $ 171.5
Fixed charges:
Interest on indebtedness $ 23.0 $ 42.0 $ 43.2 $ 41.7 $ 35.6 $ 41.7
Portion of rents representative of
the interest factor 2.6 5.1 4.9 4.8 5.5 5.9
------- ------ ------ ------ ------ -------
Total fixed charges $ 25.6 $ 47.1 $ 48.1 $ 46.5 $ 41.1 $ 47.6
Ratio of earnings to fixed charges 4.8 4.7 3.6 7.3 7.5 3.6
======= ====== ====== ====== ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-END> MAR-31-1999
<CASH> 13
<SECURITIES> 0
<RECEIVABLES> 329
<ALLOWANCES> 5
<INVENTORY> 284
<CURRENT-ASSETS> 660
<PP&E> 1,970
<DEPRECIATION> 966
<TOTAL-ASSETS> 1,847
<CURRENT-LIABILITIES> 475
<BONDS> 424
0
60
<COMMON> 66
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