<PAGE>
1998
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
AMENDMENT NO. 1
Annual Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the year ended December 31, 1998 Commission file number 1-815
E. I. DU PONT DE NEMOURS AND COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 51-0014090
(State or Other Jurisdiction of (I.R.S. Employer Identification No.)
Incorporation or
Organization)
1007 Market Street
Wilmington, Delaware 19898
(Address of principal executive offices)
Registrant's telephone number, including area code: 302-774-1000
Securities registered pursuant to Section 12(b) of the Act
(Each class is registered on the New York Stock Exchange, Inc.):
Title of Each Class
Common Stock ($.30 par value)
Preferred Stock
(without par value-cumulative)
$4.50 Series
$3.50 Series
No securities are registered pursuant to Section 12(g) of the Act.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
Aggregate market value of voting stock held by nonaffiliates of the
registrant (excludes outstanding shares beneficially owned by directors and
officers; and shares held by DuPont's Flexitrust) as of March 8, 1999, was
approximately $60.3 billion. As of such date, 1,126,944,121 shares (excludes
12,570,033 shares held by DuPont's Flexitrust) of the company's common stock,
$.30 par value, were outstanding.
Documents Incorporated by Reference
(Specific pages incorporated are indicated under the applicable Item herein):
<TABLE>
<CAPTION>
Incorporated By
Reference In Part No.
---------------------
<S> <C>
The company's 1998 Annual Report to Stockholders...... I, II, and IV
The company's Proxy Statement, dated March 19, 1999,
in connection with the Annual Meeting of Stockholders
to be held on April 28, 1999......................... III
</TABLE>
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
<PAGE>
EXPLANATION OF AMENDMENT
The purpose of this amendment is to delete the references to independent
appraisals from the discussion of Purchased In-Process Research and
Development on pages 28, 31, 32, 48, 49, 57 and 58 of Exhibit 13. No other
changes have been made to the Company's 1998 Annual Report filed on Form 10-K
on March 19, 1999.
Accordingly, the Company hereby amends Exhibit 13 by deleting it in its
entirety and inserting in its place the following:
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Financial Statements, Financial Statement Schedules and Exhibits
3. Exhibits
<TABLE>
<CAPTION>
Exhibit
Number
-------
<C> <S>
13 The Letter to Shareholders; 1998 Highlights; Management's Discussion
and Analysis and the Financial Information Section of the Annual
Report to Shareholders for the year ended December 31, 1998, as
amended hereby. The foregoing are furnished to the Commission for
information only; and not filed except as expressing incorporated by
reference in this Report.
</TABLE>
2
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 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 and in the capacities indicated, as
of the 7th day of July 1999.
E. I. DU PONT DE NEMOURS AND COMPANY
(Registrant)
/s/G. M. Pfeiffer
By __________________________________
G. M. Pfeiffer
Senior Vice President--DuPont
Finance
(Principal Financial and
Accounting Officer)
3
<PAGE>
To Our Shareholders
Exhibit 13
================================================================================
The year 1998 was one of marked contrasts in both business and stock
price performance.
Investors responded favorably to record first quarter earnings, to the
announcement of the Conoco divestiture plan, and to our acquisition of Merck's
half of our pharmaceuticals joint venture. In May, we reached an all-time high
stock price of $84 per share. Then oil prices dropped and the turmoil in Asia
took a toll on many of our businesses. We experienced our first underlying
earnings decline in four years. For 1998, diluted earnings on a continuing
operations basis before nonrecurring items fell from $2.70 to $2.55 per share,
down six percent. DuPont's total return to shareholders ended the year down 10
percent, while the S&P 500 was up almost 29 percent. We intend never to see this
repeated.
[BAR GRAPH APPEARS HERE]
Despite this setback, we remain on our charted course, a course we believe
will lead to sustainable, profitable growth. Let me restate our strategic intent
in order to make clear who we are and where we're going.
DuPont is a science company
We continue to be asked whether DuPont is a chemical company, a "life
sciences" company, or something else altogether. DuPont is a science company.
Science provides and maintains our competitive advantage and inspires our
products. We bring the miracles of science to the marketplace in ways that
benefit people and generate value for our shareholders.
Two domains of science are of particular importance to us: the chemical and
materials sciences and the biological sciences. In each, DuPont scientists are
among the best in the world. But our unique strength is our ability to integrate
this scientific knowledge into valuable commercial applications for our
customers. We believe that DuPont is without peer in this regard.
New segment alignment
Science also drives our portfolio composition. However, our shareholder
surveys tell us that DuPont is a difficult company to understand and that
greater clarity in communicating the company's performance would be valuable. In
addition, there are new financial reporting requirements related to reporting
results of operating segments. In response, we introduce in this annual report a
new way of reporting business results. We are increasing the number of reporting
segments and grouping them by market or scientific competency. We think you'll
find this helpful.
Performance and outlook
The market difficulties we experienced in 1998 are likely to continue in
1999. So our immediate challenge is to improve short-term performance while we
continue the transformation necessary for long-term growth. We're focused on
executing well and improving productivity. We intend to deliver.
Last year I said that our objective was to make DuPont a faster growing,
more profitable and less cyclical company. I indicated that there were five
things we had to do quickly to accomplish that. We are making substantial
progress on all five:
. Exit energy
One is to exit the energy business. In October 1998 Conoco became a
publicly traded company on the New York Stock Exchange in the largest initial
public offering in U.S. history. The IPO generated over $4 billion in cash. In
1999 we expect to complete the process of exiting energy in a transaction that
delivers the greatest shareholder value and will lead to a debt repayment from
Conoco of almost $5 billion later this year.
. Strengthen differentiated businesses
I also said we needed to strengthen those businesses
================================================================================
1
<PAGE>
"Our unique strength is our ability to integrate scientific knowledge into
valuable commercial applications for our customers."
================================================================================
where our products, technology, and brand power allow us to compete in a manner
that differentiates us from other competitors in the marketplace. In 1999, we
will look for opportunities to grow this set of attractive businesses. One
example: we acquired Herberts, the coatings company of Hoechst. This acquisition
makes DuPont the world's leading supplier of performance coatings.
. Reshape mature businesses
I said that we have to reshape our businesses that compete in mature
markets. To accomplish that, we are building a new business model that will
create more value with less capital intensity. Typically this involves
partnering with an industry or geographical market leader. An example is the
strengthening of DuPont Dacron(R) polyester staple through our planned joint
venture with Alfa. Another is our move to enhance polyester films through the
joint venture with Teijin announced in early 1999. We intend to do more along
these lines.
. Position DuPont advantageously in life sciences
I said that we have to position ourselves to be successful in those
businesses that fall into the "life sciences" category - our Pharmaceuticals
segment and our Agriculture & Nutrition segment. Our 1998 purchase of Merck's
half of The DuPont Merck Pharmaceutical Company brought to $6 billion our
investment in life sciences during the past two years. Also, late last year
DuPont Pharmaceuticals brought to market SustivaTM (efavirenz), one of the most
promising drugs for the treatment of HIV. Cozaar(R), an antihypertension drug
invented by DuPont and marketed by Merck, passed $1 billion in sales during
1998.
. Drive productivity through Six Sigma
Finally, I said that we have to drive productivity. As a tool in the drive,
we are launching Six Sigma methodology throughout the company this year. Six
Sigma was pioneered by Motorola and successfully adopted by AlliedSignal and
General Electric. We introduced it in one of our business units late last year
and are confident that it can help us achieve our productivity goals. We will
extend it to all our other businesses in 1999. Meanwhile, every business in
[PHOTO APPEARS HERE]
================================================================================
2
<PAGE>
================================================================================
DuPont is including asset and cost productivity strategies in their business
plans. We continue to focus on reducing costs and on improving the quality of
our products. By increasing utilization of existing facilities, we will reduce
capital needs by over $1 billion in the next five years.
Knowledge-intensive businesses
Looking to the future, I believe that our company is poised to grow by
taking on what I call knowledge-intensive projects that transform industries.
What do I mean by "knowledge-intensive?" I mean a complete understanding of all
aspects of a consumer or business need and the dynamics of the existing value
chain that meets that need. This will create higher value solutions for our
customers in more productive and less capital-intensive ways.
One project we have underway aims to transform the world's food supply by
using our science to increase the quality and quantity of nutrition per acre.
Another, launched last year, is a new strategic business unit called DuPont
Safety Resources. Its objective is to manage hazards around the world. We plan
to convert our 200 years of safety knowledge and performance into a high growth
business with a clear benefit to society. In addition to these larger projects,
we will be adding "knowledge" components to our existing products.
Gearing up for future growth
Taking on ambitious projects is in keeping with our tradition of making
technological "leaps" that create shareholder value and benefit the world. In
the century now drawing to a close the most important leap we made was the
invention of nylon. Using that as our base, we transformed the way materials are
made and used in the modern world. DuPont materials are now as everyday as
hosiery, packaging, and kitchen countertops. And they're as exotic as the
parachute that lowered the Galileo probe into the atmosphere of Jupiter.
More innovations are coming. In fact, in my 30 years at DuPont, I have
never been more encouraged by the quality of our "innovation pipeline" than I am
now. For example, exciting business solutions will emerge from our leading
position in coatings technology. We will also introduce new flexible sheet
structures that will be made by technologies orders of magnitude ahead of
anything our competition has. We expect to be a key player in alternative energy
systems, such as batteries and fuel cells. We plan to revolutionize digital
display technology. And we anticipate new pharmaceutical breakthroughs and
advances in nutrition and health.
Delivering the miracles of science
As I have already said, success for DuPont depends on our ability to bring
science to the marketplace in ways that benefit people and generate value for
our shareholders. And in doing this we will be consistently guided by our core
values of safety, ethics, environmental stewardship and respect for people - all
of which are essential to sustainable growth at DuPont.
Business growth in this globally competitive environment also requires that
all DuPonters continuously increase their capabilities. Personal growth occurs
when the company provides opportunity and our people accept responsibility for
their own development. Fortunately we have thousands of excellent people in our
company. We also recognize that we have to be more aggressive in recruiting
people to meet skill needs and to ensure a continual flow of fresh ideas and
perspectives.
In this report, you'll hear directly from some enthusiastic DuPont people.
They are preparing to meet future challenges of personal growth and business
success as DuPonters have done for nearly two centuries - with a spirit that is
impatient with incremental steps and with a passion that inspires us to take the
next leap.
/s/ Chad Holliday
Chad Holliday
Chairman and Chief Executive Officer
March 1, 1999
================================================================================
3
<PAGE>
The company had zero major process or environmental incidents in 1998, down from
100 such incidents per year in the early 1990s.
================================================================================
1998 Highlights
. DuPont achieved another record year of improved safety performance. Injuries
to employees, both on and off the job, were reduced by 25 percent in 1998,
compared with 1997.
. As part of the company's strategy to reshape businesses such as polyester that
compete in mature markets, DuPont Dacron(R) and Alpek S.A. de C.V., a subsidiary
of Alfa S.A. de C.V. of Mexico, signed a letter of intent in May to form a joint
venture to produce and market polyester staple fiber. The joint venture
initially will produce about 750 million pounds of staple fiber annually. In
addition, the partners will invest in a new facility in Altamira, Tamaulipas,
Mexico, with production beginning in late 2000.
. In July DuPont continued its strong move into "life sciences" by completing
the purchase of Merck & Co.'s 50 percent interest in The DuPont Merck
Pharmaceutical Co. for $2.6 billion. Operating as DuPont Pharmaceuticals, the
business is pursuing research in cardiovascular, central nervous system and
virology therapeutics.
. The "life sciences" strategy was strengthened further in September with
approval by the U.S. Food and Drug Administration (FDA) of SustivaTM (efavirenz)
- - a once-daily non-nucleoside reverse transcriptase inhibitor for treatment of
HIV-1 infected individuals. SustivaTM, from DuPont Pharmaceuticals, is the first
anti-HIV drug to be approved by the FDA for once-daily dosing and will be used
in combination with other anti-HIV drugs.
. As part of the company's strategy to strengthen differentiated businesses, the
company agreed to acquire Herberts, the coatings company of Hoechst AG, for
about $1.9 billion in October. Herberts is the leading supplier of automotive
coatings in Europe, while DuPont is the leader in both North and South America.
Each company has developed new technology in environmentally acceptable products
such as low-emission waterborne and powder coatings.
. Exiting the energy business, the company realized net proceeds of $4.2 billion
from the initial public offering of Conoco shares in the largest IPO in U.S.
history. In 1999, the company intends to offer its remaining Conoco shares to
DuPont shareholders in exchange for DuPont shares in a tax-free split off.
[PHOTO APPEARS HERE]
. In November the company sold substantially all of its interest in CONSOL
Energy Inc., a 50/50 coal operations joint venture with Rheinbraun AG, a
subsidiary of RWE AG of Germany.
. With the sale of the Maitland, Ontario, Canada, facility in December, the
company completed the sale of its global hydrogen peroxide business. Earlier in
the year, facilities were sold in Memphis, Tennessee; Gibbons, Alberta, Canada;
and New Zealand.
================================================================================
10
<PAGE>
Management's Discussion and Analysis
This review and discussion of financial performance should be read in
conjunction with the letter to stockholders (pages 1-3) and consolidated
financial statements (pages 41-67).
Discontinued Operations
On September 28, 1998, the company announced that the Board
of Directors had approved a plan to divest the company's 100 percent-owned
petroleum business (Conoco). On October 21, 1998, Conoco sold, in an initial
public offering (IPO), 191,456,427 shares of Conoco Class A common stock at $23
per share, leaving DuPont a 69.5 percent interest in Conoco. The company expects
to receive a favorable ruling from the Internal Revenue Service and complete the
divestiture by offering to exchange its remaining Conoco shares for DuPont
shares in a tax-free split off no later than third quarter 1999. This business
is presented as discontinued operations in the financial statements and notes.
Results reported by Conoco to its shareholders are on a stand-alone basis and
differ from the results based on discontinued operations reporting discussed
below.
For the year 1998, income from operations of Conoco before nonrecurring items
was $608 million after tax, down 38 percent from $979 million in 1997. This
decline is principally attributable to lower net realizable crude oil and
natural gas prices and refined product prices. The lower prices were partly
offset by higher natural gas volumes, lower exploration expenses and improved
international downstream marketing margins. Total results from discontinued
operations including nonrecurring items was $3,033 million after tax for the
year 1998, reflecting the net gain from the IPO, compared to $973 million in
1997.
For the year 1997, income from operations of Conoco before nonrecurring items
was $979 million, up 31 percent from $746 million in 1996. The increase was
attributable to improved U.S. natural gas prices and higher international
natural gas volumes in addition to stronger worldwide downstream product margins
and increased worldwide refinery production. Income from operations including
nonrecurring items was $973 million compared to $705 million in 1996.
The profitability of Conoco is expected to be subject to wide price fluctuations
resulting from changes in global and regional crude oil and natural gas supply
and changes in market demand.
Analysis of Continuing Operations
Sales
Sales in 1998 were a record $24.8 billion, up 3 percent from 1997. Sales from
acquisitions added $2.1 billion during the year. Excluding the effect of
acquisitions and divestitures, sales decreased 4 percent. This reflects 2
percent lower worldwide sales volume and 2 percent lower selling prices.
Excluding currency fluctuation effects, prices would have been about flat. U.S.
sales were adversely affected by 3 percent lower sales volumes, principally
reflecting lower volumes in Crop Protection Products and the Dacron(R) polyester
and Polyester Films businesses. The latter two were adversely affected by
general market weakness and increased competition from Asian suppliers. U.S.
prices averaged 1 percent lower for the year reflecting pricing softness in
polyester, crop protection products, and commodity chemicals. Sales outside the
United States were reduced 5 percent by the currency effect of the stronger U.S.
dollar. Also reducing sales were economic weakness in Asia and South America,
and slower growth in Europe. Volumes were 7 percent lower in Asia, with Europe
up only 2 percent. Prices outside the United States, including currency
fluctuation effects, were 2 percent lower. This principally reflects lower
prices for polyester films and fibers, partly offset by higher titanium dioxide
prices.
Sales in 1997 were $24.1 billion, up 2 percent. After adjusting for divestitures
and formation of the elastomers joint venture, sales were up 4 percent,
reflecting 7 percent higher volume partly offset by 3 percent lower selling
prices. Excluding the effect of currency fluctuation, worldwide selling prices
were about flat versus 1996. U.S. prices were down less than 1 percent for the
year, but were up 1 percent when comparing the fourth quarter 1997 to fourth
quarter 1996. Outside the United States, prices for the year averaged 7 percent
below 1996. U.S. sales volume was up 5 percent, while outside the United States
volume was up 10 percent. The latter reflected strength in Europe, South America
and Mexico. Growth in Asia for the year averaged 7 percent but fell to 1 percent
below 1996 levels in the fourth quarter. Europe's annual volume growth of 11
percent was largely offset by lower selling prices due to the effect of currency
fluctuation.
Earnings
Income from continuing operations in 1998 was $1,648 million versus $1,432
million in 1997. Both years contain significant net nonrecurring charges -
$1,265 million and $1,676 million in 1998 and 1997, respectively. Nonrecurring
items for 1998 are principally the write-off of purchased in-process research
and development and charges taken in connection with productivity initiatives
partially offset by gains from asset sales. For 1997, nonrecurring
14 DuPont
<PAGE>
Management's Discussion and Analysis
items principally include the write-off of purchased in-process research and
development. Excluding net nonrecurring items from both years, income from
continuing operations was $2,913 million in 1998 versus a record $3,108 million
in 1997, down 6 percent. The decline in income from continuing operations
principally reflects 4 percent lower after-tax operating income (ATOI) and
higher interest expense. ATOI was lower due to higher income taxes. Pretax
operating income from continuing operations was flat as higher sales were offset
by higher fixed and variable costs. Excluding acquisitions, sales were 4 percent
lower, fixed costs were 3 percent lower, variable costs declined 6 percent and
variable cost per unit declined 4 percent reflecting lower raw material costs.
Diluted earnings per share from continuing operations before extraordinary item
were $1.43 in 1998 versus $1.24 in the prior year. Excluding nonrecurring net
charges of $1.12 per share and $1.46 in 1998 and 1997, respectively, 1998
diluted earnings per share were $2.55, down 6 percent from $2.70 per share in
1997.
Income from continuing operations in 1997 was $1,432 million versus $2,931
million in 1996. Excluding net nonrecurring charges of $1,676 million and $60
million in 1997 and 1996, respectively, income from continuing operations was a
record $3,108 million in 1997, up 4 percent from $2,991 million in 1996. The
earnings increase reflects 7 percent higher sales volumes partly offset by lower
selling prices due to the effect of currency fluctuation, and the absence of
$186 million after tax from the favorable allocation of DuPont Merck
Pharmaceutical venture operating income in 1996.
Diluted earnings per share from continuing operations were $1.24 in 1997 versus
$2.56 per share in 1996. Excluding nonrecurring items totalling net charges of
$1.46 and $.05 per share in 1997 and 1996, respectively, 1997 diluted earnings
per share were $2.70, up 3 percent.
Income tax expense and effective income tax rates are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
Income tax expense (dollars in millions) $ 941 $ 1,354 $ 1,416
Effective income tax rate (EITR) 36.0% 47.9% 32.3%
- --------------------------------------------------------------------------------
The 1998 EITR of 36 percent is significantly lower than the 1997 EITR of 48
percent, yet higher than historic rates due to higher taxes on foreign earnings.
Excluding nonrecurring items and related tax, the EITR in 1998 increased to 34
percent from 33 percent in 1997. The 1997 EITR of 48 percent was significantly
higher than the 1996 EITR of 32 percent primarily due to the in-process research
and development charges for the Pioneer and Protein Technologies transactions
which reduced earnings but had no tax effect.
The company's continuing operations paid total taxes of $1.5 billion in 1998,
compared with $1.8 billion in 1997 and $1.9 billion in 1996. 1998 total tax
payments were lower than in 1997 and 1996 due principally to lower earnings.
CORPORATE OUTLOOK
The profitable growth of the company is dependent on worldwide economic growth,
most importantly in the United States and Europe. While the growth of real gross
domestic product (GDP) in the United States continues to exceed most forecasts,
the industrial production sector on which the company is most dependent has been
growing at a much slower pace. In the third quarter of 1998 U.S. GDP increased
at a historically strong annual rate of about 4 percent, but U.S. chemical
production decreased 28 percent versus the third quarter 1997, the largest such
decrease in 23 years. Overall worldwide demand for the company's products
declined 2 percent in 1998 and continues to be soft in 1999. This reflects the
economic problems in Asia and more recently in Brazil and much of the rest of
South America. The company's business in Europe in the first three quarters of
1998 grew at above-trend rates, but slowed considerably in the fourth quarter
and continues to be weak thus far in 1999.
Apart from acquisitions, the company's ability to achieve stronger revenue
growth depends most significantly on the following factors among others: 1)
continued strength in the U.S. housing and automotive industries; 2) sustained
growth in Europe; 3) continued recovery of the major Asian economies from
recession; 4) recovery of the Brazilian economy and that of other South American
economies; 5) stronger worldwide polyester prices and better balance between
supply and demand for polyester; 6) improving pricing and profitability in U.S.
agricultural industry; and 7) increased worldwide demand and stronger pricing
for commodity chemicals. In addition to the foregoing factors, growth in
earnings will benefit from controlling fixed costs, productivity improvements,
lower raw material costs, successful integration of acquired businesses, and
continued successful launching of new products and services.
DuPont 15
<PAGE>
Management's Discussion and Analysis
Segment Reviews
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," is adopted by the company
beginning with this Annual Report. This standard requires disclosure of segment
information on the same basis used internally for evaluating business
performance and deciding how to allocate resources among businesses. The
company's strategic business units are organized by product line. For purposes
of SFAS No. 131, these have been aggregated into eight reportable segments. The
following pages provide perspective on these segments and the company's Other
segment. Sales include pro rata equity affiliate sales and intersegment
transfers. ATOI does not include corporate expenses, interest and exchange gains
(losses).
- --------------------------------------------------------------------------------
AGRICULTURE & NUTRITION
- --------------------------------------------------------------------------------
Crop Protection Products
Nutrition & Health
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
---------------------- --------------------- ----------------------
1998 3.2 257 330
---------------------- --------------------- ----------------------
1997 2.5 (1,017) 448
---------------------- --------------------- ----------------------
1996 2.4 351 461
---------------------- --------------------- ----------------------
See Industry Segment Information (Note 28 to Financial Statements.)
Agriculture & Nutrition consists of Crop Protection Products and the newly
formed Nutrition & Health business. Agriculture & Nutrition continues to pursue
its vision of a growing partnership with nature, focused on effective and
efficient value chains for food and feed crops, food ingredients and nutrition
science.
Crop Protection Products (CP) includes global businesses in herbicides,
fungicides and insect control. CP is a global leader in discovery-driven crop
protectants and expanded its position by forming a joint venture with Griffin
Corporation in April to produce and market generic crop protectants worldwide.
While CP is particularly strong in herbicides, its position in that market has
been adversely affected recently by competition and weak economic conditions in
Asia and Eastern Europe. In addition, CP announced an agreement with FMC under
which CP will have exclusive use of FMC's sulfentrazone herbicides which are
marketed in the U.S. soybean market under the trademarks Authority(R) and
Canopy(R) XL. This agreement, along with a growing market for sulfonyl herbicide
resistant STS(R) soybeans, will strengthen CP's position in soybean herbicides.
The Nutrition & Health business (N&H) was formed in 1998 to leverage DuPont's
strong position in biotechnology across high value opportunities in animal
feeds, food ingredients, nutritional sciences and biosourced industrial
materials. N&H consists of:
. Pioneer Hi-Bred International (Pioneer) alliance - includes the Optimum
Quality Grains joint venture research alliance and DuPont's 20 percent
equity interest in Pioneer;
. Protein Technologies International Inc. (PTI);
. Cereals Innovation Centre (CIC), purchased from Dalgety PLC in 1998;
. Hybrinova S.A., a French hybrid wheat seed company, purchased in 1998;
. Qualicon Inc., a food safety subsidiary; and
. Biotechnology research and business development efforts focused on
agriculture, food and nutrition.
In addition to the CIC and Hybrinova acquisitions, N&H entered into
collaborative research arrangements during 1998 to broaden significantly the
scientific research of DuPont's efforts in genetics, biotechnology and related
sciences. Research agreements were completed with Lynx Therapeutics,
3-Dimensional Pharmaceuticals, the John Innes Centre and Plant Bioscience Ltd.,
among others.
[PHOTO APPEARS HERE]
An important development during 1998 was a proposal by the U.S. Food and Drug
Administration (FDA) to authorize the use of health claims concerning the
association between soy protein and reduced risk of heart disease. The FDA
proposal is expected to increase consumer demand for foods containing soy
protein. Soy protein is the principal business of PTI which started up a major,
state-of-the-art production line at its Memphis, Tennessee, site in 1998. This
year also marked the inception of Optimum Quality Grains LLC (Optimum), a 50/50
joint venture with Pioneer, which will bring improved quality traits in grains
to the food and feed industries. In 1998 Optimum produced about 1 million acres
of high oil corn and launched its high oleic soybean.
1998 versus 1997 Sales of $3.2 billion were 26 percent higher reflecting
additional sales from the acquisition of PTI partly offset
16 DuPont
<PAGE>
Management's Discussion and Analysis
by lower selling prices for CP. ATOI was $257 million compared to a loss of
$1,017 million in 1997. ATOI before nonrecurring items was $330 million, down
$118 million or 26 percent. The earnings decline reflects lower crop protection
revenue and higher costs.
1997 versus 1996 Sales of $2.5 billion were 3 percent higher reflecting 7
percent higher volume partly offset by 4 percent lower prices. ATOI was a loss
of $1,017 million compared to income of $351 million in 1996. ATOI before
nonrecurring items was $448 million down 3 percent as higher sales were more
than offset by higher costs.
Outlook Agriculture is a large, diverse industry that is changing rapidly due to
the introduction of new technology, including biotechnology. As a leader in this
industry, DuPont believes it is in a good position to capitalize on these
changes. Increased need for farmers to control costs and increase productivity,
driven by downward pressure on crop prices, has made the worldwide market for
crop protectants very competitive. While CP offers many high value-in-use
products, so do its competitors; consequently, market share will continue to be
critical to CP's performance. However, recent acquisitions, technology
collaborations and alliances, along with new products, are expected to aid
growth in Agriculture & Nutrition beginning in 1999. CP is planning the
registration and launch of two additional product families - Milestone
herbicides in 1999 and Steward insecticides in 2000. In N&H, Optimum expects to
double the number of acres planted in high oil corn in 1999. Research and
development expenditures are expected to increase by about 10 percent for 1999
primarily due to increases in N&H.
- --------------------------------------------------------------------------------
NYLON ENTERPRISE
- --------------------------------------------------------------------------------
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
- ----------------------- ---------------------- -----------------------
1998 4.6 244 406
- ----------------------- ---------------------- -----------------------
1997 4.6 372 372
- ----------------------- ---------------------- -----------------------
1996 4.2 334 354
- ----------------------- ---------------------- -----------------------
See Industry Segment Information (Note 28 to Financial Statements).
DuPont Nylon celebrated its 60th anniversary in 1998 with its
fourth consecutive year of record earnings before nonrecurring items. DuPont is
the global leader in nylon intermediates, polymers and fibers for major markets
such as carpets and rugs, apparel, tire reinforcement and numerous other
industrial applications. DuPont Nylon brands include Stainmaster(R) and
Antron(R) fibers for carpets and Tactel(R) and Supplex(R) yarns for apparel.
[PHOTO APPEARS HERE]
The year was marked by the strong performance of the flooring business, which
supplies carpet fibers to the residential and commercial markets; start-up of a
state-of-the-art textile nylon plant which is part of a joint venture in Brazil;
restructuring to strengthen the nylon tire cord fiber and fabric businesses in
Europe and South America with our partner, the Sabanci Group; and completion of
investments to reduce emissions of nitrous oxide by more than 90 percent at the
five nylon sites worldwide that produce adipic acid, a nylon intermediate
chemical.
1998 versus 1997 Sales of $4.6 billion were essentially unchanged, as slightly
higher volumes offset modestly lower selling prices. Stronger flooring business
sales offset lower sales of textile and industrial products. ATOI was $244
million compared to $372 million in 1997. ATOI before nonrecurring items was
$406 million, up 9 percent reflecting lower costs and increased flooring
business earnings.
1997 versus 1996 Sales of $4.6 billion were 9 percent higher reflecting higher
volumes, partly offset by lower prices. ATOI was $372 million versus $334
million in 1996. ATOI before nonrecurring items of $372 million was up 5 percent
reflecting higher revenue and lower costs.
Outlook Two key drivers for growth of this segment in the United States, the
automotive industry and sales of existing homes, are expected to remain strong
in 1999. Worldwide demand will be tempered by increased competition outside the
United States, and slowing economies in Europe and South America. To improve
both asset and total cost productivity, the business will continue its five-year
program (begun in 1997) to modernize and consolidate sites. Environmental
investments are being made in Texas to eliminate the disposal of waste in deep
wells, and at a number of other sites, including facilities at Wilton, United
Kingdom.
DuPont 17
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
PERFORMANCE COATINGS & POLYMERS
- --------------------------------------------------------------------------------
Engineering Polymers
Performance Coatings
DuPont Dow Elastomers
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
- ----------------------- ---------------------- -----------------------
1998 4.6 508 525
- ----------------------- ---------------------- -----------------------
1997 4.7 519 519
- ----------------------- ---------------------- -----------------------
1996 4.6 502 447
- ----------------------- ---------------------- -----------------------
See Industry Segment Information (Note 28 to Financial Statements).
Engineering Polymers manufactures and markets a broad portfolio of engineering
materials for automotive, electrical, electronic, consumer and industrial
applications. The automotive and electrical/electronics industries are its
largest markets. Serving customers throughout the world, the business unit
supplies six families of engineering resins - Zytel(R) nylon, Delrin(R) acetal,
Rynite(R) polyester PET, Crastin(R) polyester PBT, Hytrel(R) thermoplastic
elastomer and Zenite(TM) liquid crystal polymer - plus plus Vespel(R) polyimide
parts and shapes, Tribon composites and Tynex(R) filaments.
[PHOTO APPEARS HERE]
Production of Hytrel(R) was near capacity through much of 1998 as demand for
automotive air bag safety systems increased. A new facility in Charleston, South
Carolina, for Hytrel(R) and Crastin(R) is to be completed in early 1999. The
strategy is to focus new investment mainly on improving the competitiveness and
production capability of existing assets. Engineering Polymers was able to
offset weakness in Asia Pacific markets, the impact of the General Motors strike
and the effects of a strong dollar primarily through lower fixed costs and lower
raw material costs.
DuPont is an industry leader in automotive original equipment coatings,
automotive refinish and industrial, high-performance coatings. In addition,
DuPont has established new technology to serve market needs for improved digital
inks. Reflecting the broadening scope of the business in industrial, powder and
specialty coatings, DuPont Automotive Coatings has changed its name to DuPont
Performance Coatings.
In October, the company announced its intent to acquire Herberts GmbH, the
coatings business of Hoechst AG, headquartered in Wuppertal, Germany, for about
$1.9 billion. Herberts is the market leader in automotive coatings in Europe
with strong positions in the industrial coatings and markets for emerging
ultra-low-emission powder coatings. The acquisition adds significant
opportunities to increase worldwide market penetration of powder and industrial
coatings. Combined, the companies will be the world's third largest coatings
company and the leading automotive coatings supplier with sales of about $4
billion. This transaction was completed in February 1999.
DuPont Dow Elastomers continued the commercial launch of its new generation EPDM
products. Demand is strong for the Nordel(R) IP products, made via Dow's
proprietary INSITE(TM) process and catalyst technology, due to their increased
processibility.
1998 versus 1997 Sales of $4.6 billion were down 1 percent reflecting flat
selling prices and 1 percent lower volume. ATOI was $508 million compared to
$519 million in 1997. ATOI before nonrecurring items was $525 million, up 1
percent reflecting higher Engineering Polymers earnings offset principally by
lower earnings from the DuPont Dow Elastomers joint venture.
1997 versus 1996 Sales of $4.7 billion were up 2 percent reflecting higher
volumes partly offset by lower prices. ATOI was $519 million versus $502 million
in 1996. ATOI before nonrecurring items was $519 million versus $447 million in
1996, 16 percent higher reflecting increased revenue and DuPont Dow Elastomers
joint venture income.
Outlook Prospects for continued earnings growth will be heavily dependent on
growth in the worldwide automotive industry. New capacity for Hytrel(R)should
help meet demand created by the trends to install more air bags per vehicle and
increase the number of vehicles with air bags installed as standard equipment.
The company expects that long-term demand for engineering polymers will grow
above GDP rates as these polymers increasingly replace metal and thermoset
plastics in industrial applications. Environmental pressures for greater fuel
efficiency in cars and the continuing trend to miniaturization are expected to
create this growth. Continued cost control, productivity improvement, and the
successful integration of the newly acquired Herberts coatings business will
also be paramount.
18 DuPont
<PAGE>
Management's Discussion and Analysis
- --------------------------------------------------------------------------------
PHARMACEUTICALS
- --------------------------------------------------------------------------------
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
----------------------- ---------------------- -----------------------
1998 1.1 (668) 185
----------------------- ---------------------- -----------------------
1997 0.8 234 162
----------------------- ---------------------- -----------------------
1996 0.7 305 305
----------------------- ---------------------- -----------------------
See Industry Segment Information (Note 28 to Financial Statements).
As part of its strategy to build a strong life sciences business, DuPont
purchased Merck & Co. Inc.'s 50 percent interest in The DuPont Merck
Pharmaceutical Company in July for $2.6 billion. The renamed DuPont
Pharmaceuticals focuses on research, development and delivery of pharmaceuticals
to treat medical needs for HIV, cardiovascular disease, central nervous system
disorders, cancer and arthritis-related disorders. It also is a leader in
medical imaging.
The company's launch of Sustiva(TM) (efavirenz), the first once-daily anti-HIV
medicine, was perhaps the most successful to date in that disease category,
achieving rapid adoption by physicians and reimbursers.
In spite of generic competition, Coumadin(R) (warfarin sodium), used to treat
conditions which can lead to stroke, achieved record sales during the year due
to physician loyalty, market growth and a continuing emphasis on physician
education.
DuPont Pharmaceuticals acquired U.S. rights to Innohep(R) (low molecular-weight
heparin) and expects to launch the product in 2000. It also filed a new drug
application in the United States for Definity(TM), a contrast-imaging agent for
ultrasound procedures.
[PHOTO APPEARS HERE]
1998 versus 1997 Sales were $1.1 billion compared to $0.8 billion in 1997. The
increase reflects the mid-year purchase of Merck's 50 percent in The DuPont
Merck Pharmaceutical Company. ATOI was a loss of $668 million compared to income
of $234 million in 1997. ATOI before nonrecurring items was $185 million, up 14
percent reflecting increased sales of Coumadin(R), and the successful launch of
Sustiva(TM).
1997 versus 1996 DuPont's share of DuPont Merck Pharmaceutical Company sales
was $0.8 billion, up 4 percent. ATOI was $234 million versus $305 million in
1996. ATOI before nonrecurring items was $162 million, down 47 percent
reflecting the absence of $186 million after tax from the favorable allocation
of DuPont Merck Pharmaceutical venture operating income in 1996.
Outlook Research and development expenditures are expected to increase by 20
percent for 1999. Sustiva(TM) will benefit in 1999 from a full year of sales in
the United States and from expected approvals in Canada and Europe. A second
generic warfarin entered the market in 1998 and may challenge the strong
hospital treatment base of Coumadin(R). Profits from the arrangement with Merck
& Co. Inc. for the antihypertension drugs Cozaar(R) and Hyzaar(R) are expected
to begin to contribute to earnings in 1999.
- --------------------------------------------------------------------------------
PIGMENTS & CHEMICALS
- --------------------------------------------------------------------------------
White Pigment & Mineral Products
Specialty Chemicals
Fluorochemicals
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
----------------------- ---------------------- -----------------------
1998 3.7 577 581
----------------------- ---------------------- -----------------------
1997 3.8 513 513
----------------------- ---------------------- -----------------------
1996 3.7 493 507
----------------------- ---------------------- -----------------------
See Industry Segment Information (Note 28 to Financial Statements).
White Pigment & Mineral Products is the world's largest manufacturer of titanium
dioxide, serving customers globally in the coatings, plastic and paper
industries. The company's plants at DeLisle, Mississippi; New Johnsonville,
Tennessee; Edgemoor, Delaware; Altamira, Mexico; and Kuan Yin, Taiwan, utilize
the chloride manufacturing process. DuPont Ti-Pure(R) titanium dioxide is
available to customers in slurry and powder form in a variety of grades.
In January 1999 White Pigment & Mineral Products announced the termination of
agreements between DuPont, ICI and NL Industries under which DuPont would have
acquired ICI's Tioxide titanium dioxide business outside North America. The
agreements were terminated because the U.S. Federal Trade Commission would not
approve the transaction under terms acceptable to the parties. While the
acquisition was attractive to DuPont, it was not essential to the success of the
company's titanium dioxide business. Changes in world markets since the
acquisition was announced in mid-1997 leave DuPont in a considerably stronger
position, even without the added capacity. The successful
DuPont 19
<PAGE>
Management's Discussion and Analysis
start-up of an innovative co-products operation at the New Johnsonville plant
enabled the business to successfully meet the requirements of a federal consent
order to exit and close deep wells used for waste disposal.
[PHOTO APPEARS HERE]
Specialty Chemicals produces a wide range of chemical intermediates. The major
markets served are the chemical processing industry, mining, pulp and paper, and
textile treatment. Products include acrylonitrile, aniline, ammonia, aramid
intermediates, cyanides, methylamines, sodium and sulfur products, anchorage
systems, catalysts, environmental services, fluoro-protectants, fluoro-additives
and custom chemicals, glycolic acid, industrial diamonds, performance
lubricants, silica products, SIP and methacrols, Oxone(R) monopersulfate
compound and Vazo(R) free radical sources.
Specialty Chemicals enhanced its portfolio with a number of new alliances. A
joint venture, Noranda DuPont LLC, was formed with Noranda Inc. to market and
distribute sulfuric acid. A technology alliance with Benchmark Research &
Technology will better serve the oil field services industry by combining DuPont
Tyzor(R) titanate and Zirconate catalysts and other specialty products with
Benchmark's marketing expertise in the oil field industry. The existing alliance
with Ciba Specialty Chemicals was strengthened to extend the leading market
position in textile fluorochemicals.
Specialty Chemicals exited several businesses that were not integral to future
growth, including its sale of the global hydrogen peroxide business, the sodium
nitrite business and selected surfactants product lines.
The principal products of Fluorochemicals are Suva(R) refrigerants, Vertrel(R)
cleaning agents and Dymel(R) propellants. Fluorochemicals continued to improve
cost and operational productivity while promoting growth in new specialty
cleaning and fire extinguishant products.
1998 versus 1997 Sales of $3.7 billion were down 4 percent reflecting 7 percent
lower sales volume partly offset by 3 percent higher selling prices. Higher
sales of titanium dioxide were more than offset by lower sales of specialty
chemicals. ATOI was $577 million compared to $513 million in 1997. ATOI before
nonrecurring items was $581 million, up 13 percent as higher earnings from
titanium dioxide more than offset lower specialty chemicals earnings. The latter
reflects lower revenue due to pricing weakness in the industrial commodity
chemicals markets.
1997 versus 1996 Sales of $3.8 billion were up 2 percent reflecting higher
volumes partly offset by lower prices. ATOI was $513 million versus $493 million
in 1996. ATOI before nonrecurring items of $513 million was 1 percent higher
reflecting increased specialty chemicals earnings, partly offset by lower
titanium dioxide earnings.
Outlook While White Pigment & Mineral Products remains alert for acquisition
opportunities that make good business sense, the immediate focus is on further
cost improvements and the support of customers globally. Specialty Chemicals'
targeted growth plan will push expansion of the Sulfur Products business into
South America and Mexico. Fluorochemicals should benefit as supply and demand
for HFC-134a, an ozone-friendly refrigerant, come into better balance.
- --------------------------------------------------------------------------------
POLYESTER ENTERPRISE
- --------------------------------------------------------------------------------
DuPont Dacron(R)
Polyester Films
Polyester Resins & Intermediates
ATOI BEFORE
NONRECURRING
SALES ($ in Billions) ATOI ($ in Millions) ITEMS ($ in Millions)
----------------------- ---------------------- -----------------------
1998 2.8 (228) (7)
----------------------- ---------------------- -----------------------
1997 2.2 124 187
----------------------- ---------------------- -----------------------
1996 2.3 161 177
----------------------- ---------------------- -----------------------
See Industry Segment Information (Note 28 to Financial Statements).
DuPont Dacron(R) produces polyester staple and filament fibers for such diverse
global markets as apparel, home furnishings, sleepwear, outdoor products and
transportation. Leading Dacron(R) polyester brands include CoolMax(R) and
ThermaStat(R) performance fabrics, Comforel(R) sleep products, Thermolite(R)
insulations, Micromattique(TM) microfibers and the newest introduction,
Supriva(TM) fabric. Global demand for Dacron(R) products was adversely affected
by Asian economic conditions.
In an effort to improve asset productivity, DuPont Dacron(R) entered into a
joint venture with Alfa to produce and market polyester staple fiber. The
venture is expected to begin operating in early 1999 and will construct a new
production facility in Altamira, Mexico, which is scheduled to be completed by
early 2001.
20 DuPont
<PAGE>
Management's Discussion and Analysis
Polyester Films specializes in films and related products for the specialty,
industrial, packaging, electrical and electronics markets. Brand names include
Melinex(R) and Mylar(R) polyester films, Kaladex(R) polyethylene naphthalate
films and Cronar(R) polyester photographic base film. The business includes the
DuPont-Hongji Films Foshan Co. Ltd. joint venture in China and the Teijin-DuPont
Films joint venture.
The acquisition of ICI's polyester films business in 1998 established DuPont as
the global leader in polyester films with a concentration on differentiated
products that provide added value to customers. Polyester Films started the
world's fastest thin-film line in Scotland and a state-of-the-art, ultra-thin
film line in Luxembourg. As part of an aggressive asset optimization strategy,
older film manufacturing lines were shut down to improve both asset and total
cost productivity.
[PICTURE APPEARS HERE]
In February 1999 the company and Teijin Ltd. announced a letter of intent to
form a 50/50 joint venture for their global polyester films businesses. The new
venture will have combined capacity of more than 300,000 tons per year. The
company expects the joint venture to begin operating in late 1999 pending
governmental approvals and negotiation of definitive agreements.
Polyester Resins & Intermediates successfully started a pilot plant using NG-3
(next generation) polyester polymerization technology. This technology offers
lower investment costs, putting DuPont in the lowest cost position for PET
polymer when integrated with DuPont's technology for PTA (purified terepthalic
acid).
Improved versions of Laser+(R) container resin were introduced for production of
carbonated soft drink bottles and custom containers. A new marketing effort
launched Crystar(R) specialty resins in Europe. Biomax(R) hydrobiodegradable PET
began commercial sales with applications in coated paper for packaging and cups,
thermoforms and shrink wrap film.
1998 versus 1997 Sales of $2.8 billion were up 26 percent reflecting additional
sales from the acquisition of ICI's polyester films, resins and intermediates
businesses. Partly offsetting this increase were a 14 percent sales volume
decline and a 9 percent price decline for Dacron(R) polyester reflecting weak
demand, increased competition from imports, and price pressures from worldwide
overcapacity. ATOI was a loss of $228 million compared to income of $124 million
in 1997. ATOI before nonrecurring items was a loss of $7 million compared to
income of $187 million in 1997, reflecting lower Dacron(R) polyester earnings
and losses in the films, resins and intermediates businesses.
1997 versus 1996 Sales of $2.2 billion were 5 percent lower reflecting lower
sales across most product lines. ATOI was $124 million versus $161 million in
1996. ATOI before nonrecurring items of $187 million was up 6 percent as lower
revenue was offset by lower costs.
Outlook Conditions are expected to remain difficult in the worldwide polyester
industry in 1999 reflecting an overall slowing in worldwide economies and
weakness in the U.S. apparel industry. Global demand for Dacron(R) polyester
products should increase if Asian market conditions improve in the second half
of 1999. For Polyester Films, the Asian economic crisis and worldwide economic
slowdown have caused deterioration in the marketplace. These dynamic market
conditions are expected to continue in 1999 with some improvement expected in
the second half of the year. Global double-digit growth in the demand for
polyester resin by container markets is expected to continue in 1999 and 2000.
To capture a greater share of that growth and deliver higher value to customers,
Polyester Resins & Intermediates will introduce new barrier resins aimed at the
food, beer and carbonated soft drink markets.
- --------------------------------------------------------------------------------
SPECIALTY FIBERS
- --------------------------------------------------------------------------------
DuPont Lycra(R)
Nonwovens
Advanced Fiber Systems
ATOI BEFORE
NONRECURRING
SALES ($ in billions) ATOI ($ in millions) ITEM ($ in millions)
--------------------- -------------------- --------------------
1998 3.3 659 662
--------------------- -------------------- --------------------
1997 3.3 708 708
--------------------- -------------------- --------------------
1996 3.1 624 624
--------------------- -------------------- --------------------
See Industry Segment Information (Note 28 to Financial Statemets).
DuPont Lycra(R) continued to move beyond its traditional markets - intimate
apparel, swimwear, hosiery and activewear - to gain increased acceptance in
menswear, childrenswear, socks, sweater knits, denims, wovens and shoes. This
will remain the strategy for growth, along with geographic expansion in
developing markets,
21
<PAGE>
Management's Discussion and Analysis
such as China, and strengthening of the Lycra(R) market position with increased
investment in the Lycra(R) brand.
Nonwoven products include Tyvek(R) brand products, Typar(R) spunbonded
polypropylene and Sontara(R) spunlaced products. Nonwovens formed a joint
venture, DuPont-Dayuan Nonwovens Fabric Co. Ltd., to produce and supply
spunlaced fabrics to China and Asia Pacific. A new product, Tyvek(R)
StuccoWrap(TM), was quickly accepted as a customized offering for stucco
contractors.
Advanced fibers are Kevlar(R) brand fiber, Nomex(R) brand fiber and paper, and
Teflon(R) brand fluoropolymer fiber. Advanced Fiber Systems is expanding into
new end uses while growing in already strong market categories, such as sporting
goods and sport shoes. The strategy also seeks growth for Nomex(R) thermal
workwear, industrial protective apparel.
1998 versus 1997 Sales of $3.3 billion were 1 percent lower reflecting 2 percent
lower selling prices partly offset by 1 percent higher sales volumes. ATOI was
$659 million compared to $708 million in 1997. ATOI before nonrecurring items
was $662 million, down 6 percent reflecting lower revenue and slightly higher
costs.
1997 versus 1996 Sales of $3.3 billion were up 7 percent reflecting higher
volumes partly offset by lower prices. ATOI was $708 million, up 13 percent
reflecting higher revenue.
Outlook The introduction by DuPont Lycra(R) of fibers with softer stretch, the
launch of a new global brand campaign, and penetration of new market segments
and geographic regions should aid growth for Lycra(R). Nonwovens will increase
production capacity for Tyvek(R) in Richmond, Virginia, and for Sontara(R) in
Asturias, Spain, to meet growing market demand. Advanced Fiber Systems' emphasis
on new market segments, applications, and its global campaign is expected to
stimulate revenue and earnings next year.
- --------------------------------------------------------------------------------
SPECIALTY POLYMERS
- --------------------------------------------------------------------------------
Photopolymer & Electronic Materials
Packaging & Industrial Polymers
Fluoropolymers
DuPont Corian(R)
ATOI BEFORE
NONRECURRING
SALES ($ in billions) ATOI ($ in millions) ITEMS ($ in millions)
--------------------- -------------------- ---------------------
1998 4.1 598 608
--------------------- -------------------- ---------------------
1997 4.1 577 577
--------------------- -------------------- ---------------------
1996 3.8 496 496
--------------------- -------------------- ---------------------
See Industry Segment Information (Note 28 to Financial Statement)
For the printed, flexible and microcircuit segments of the electronics industry,
Photopolymer & Electronic Materials (P&EM) markets Riston(R) photoresists,
Birox(R) thick films, Pyralux(R) flexible laminates and Fodel(R) photoimageable
technology. For the printing industry, P&EM markets Cyrel(R) flexographic
printing plates and Color Proofing systems including Waterproof(R), Cromalin(R)
and Dylux(R).
P&EM continued its growth strategy through alliances, acquisitions and
accelerated new product development. The Color Proofing business is working with
Kodak Polychrome Graphics and Epson to create growth opportunities and open
paths to new markets, including desktop proofing. The acquisition of new
thermally processed flexographic printing plate technology will further
strengthen the global leadership position of Cyrel(R) in the flexographic
industry.
Kapton(R), Teflon(R) and Tefzel(R) films are high-value offerings with
good growth potential, particularly in the electronics market. New production
lines were added to existing facilities in Japan and Texas. The increased
capacity will help meet worldwide demand for Kapton(R) polyimide films. New
products are in the early stages of commercialization to make thinner, brighter
display screens on an array of electronic equipment.
Packaging & Industrial Polymers (P&IP) offers specialized, high-value polymers
in packaging and selected industrial markets. P&IP consists of Ethylene
Copolymers, Vinyls, Clysar(R) polyolefin shrink film and DuCan Films.
P&IP is developing the next generation polyolefin technology, Versipol(R).
Expansion of manufacturing capacity for Nucrel(R) brand ethylene/acid copolymer
continues at Victoria, Texas. In 1998 P&IP completed divestiture of its AMS
ventures, which utilized composites technology in various industries.
22
<PAGE>
Management's Discussion and Analysis
The trademarks of Fluoropolymers include Teflon(R) and Tefzel(R) fluoropolymers,
and SilverStone(R) and Autograph(R) non-stick finishes. Fluoropolymers announced
an investment program to expand global capacity for Teflon(R) PTFE resins and
completed a capacity expansion for Teflon(R) FEP resins. Both expansions were
aimed at meeting increasing demand in a number of industries, particularly data
processing, architectural, automotive and chemical processing. The business also
introduced its newest development nonstick surfaces for cookware, SilverStone(R)
with ScratchGuard(TM), a product durable enough for use with most metal cooking
utensils.
[PHOTO OF SINK APPEARS HERE]
DuPont Corian(R) continued to pursue growth by increasing value and reducing the
installed cost to the consumer, and broadening distribution channels. DuPont
Corian(R) acquired Granirex Inc., a manufacturer of engineered stone in Thetford
Mines, Quebec, Canada.
1998 versus 1997 Sales of $4.1 billion were flat as lower sales of Packaging &
Industrial Polymers were offset by higher sales in other businesses. ATOI was
$598 million compared to $577 million in 1997. ATOI before nonrecurring items
was $608 million, up 5 percent reflecting lower costs. Earnings growth in
Fluoropolymers and DuPont Corian(R)was partly offset by marginally lower
earnings in the other businesses.
1997 versus 1996 Sales of $4.1 billion were up 7 percent principally reflecting
higher sales of P&IP, DuPont Corian(R), and P&EM. ATOI was $577 million, up 16
percent reflecting increased revenue and flat costs.
Outlook Smaller and more powerful cell phones, pagers and laptop computers
require the advanced technology of P&EM's flexible, printed circuit and
microcircuit materials. Growing demand for LAN cables insulated with
Teflon(R)FEP should enhance revenues in Fluoropolymers. Significant growth in
demand for Teflon(R)PFA should accompany recovery in the semiconductor industry.
OTHER
This segment represents less than 2 percent of total 1998 segment sales and
consists of the company's photomasks, safety resources, and global services
businesses, and divested businesses including certain printing and publishing
businesses, medical products and coal. Segment sales in 1998 were $0.4 billion
versus $1.0 billion in 1997. The decline is principally attributable to the
absence of sales of the divested printing and publishing businesses. ATOI was
$183 million in 1998 compared to a loss of $225 million in 1997. ATOI before
nonrecurring items was $105 million compared to a loss of $5 million,
principally reflecting absence of losses related to the divested printing and
publishing businesses. Segment sales in 1997 were $1.0 billion versus $1.5
billion in 1996. The decline is principally attributable to the absence of sales
of the divested medical products businesses. ATOI was a loss of $225 million in
1997, compared to a loss of $24 million in 1996. ATOI before nonrecurring items
was a loss of $5 million, compared to a loss of $69 million.
Financial Condition
In 1998, DuPont took two major steps in line with its strategic direction. In
May, the company announced its intent to divest its Conoco energy business. In
October, an initial public offering of Conoco stock was made. Conoco sold
191,456,427 shares of Conoco Class A common stock at $23 per share to outside
investors, leaving DuPont with a 69.5 percent interest in Conoco. Net proceeds
from the offering were $4.2 billion. By the end of the third quarter 1999,
DuPont expects to receive a favorable ruling from the Internal Revenue Service
and complete the divestiture by offering to exchange its remaining Conoco shares
for DuPont shares in a tax-free split off. In July, DuPont acquired Merck's 50
percent interest in The DuPont Merck Pharmaceutical Company for $2.6 billion.
DuPont now owns 100 percent of the business, which operates as DuPont
Pharmaceuticals.
During 1998 and 1997, the company recorded charges to terminate employees and
write down assets as described in Note 6 to the financial statements. Cash
payments totaling about $225 million are expected to be made in 1999 to satisfy
the remaining liabilities as of December 31, 1998, associated with these
actions. These cash payments, which are primarily attributable to employee
separation costs resulting from the 1998 company-wide productivity
DuPont 23
<PAGE>
Management's Discussion and Analysis
improvement initiatives, are not expected to have a material adverse impact on
the company's financial position or liquidity.
Borrowings at year-end 1998 of $11.1 billion were $0.9 billion lower than the
$12.0 billion at the end of 1997. As described in the Restructuring, Transfer
and Separation Agreement, Conoco is obligated to repay all outstanding debt owed
to DuPont at such time as DuPont's voting power becomes less than 50 percent of
Conoco. DuPont intends to use this payment for general corporate purposes,
including reduction of debt. At December 31, 1998, such indebtedness to DuPont
was $4.6 billion.
In December, Standard & Poor's (S&P) affirmed its rating of the company's
senior, unsecured long-term debt at AA- and removed the company from
CreditWatch. The rating affirmation recognizes that the company will benefit
from a favorable capital structure following the divestiture of Conoco assuming
DuPont meets its debt-reduction goals. Moody's Investors Service (Moody's) has
not changed its Aa3 long-term debt rating. The company's commercial paper rating
remains at Prime 1 by Moody's and A-1+ by S&P.
Borrowings at year-end 1997 of $12.0 billion were $3.1 billion higher than the
$8.9 billion at the end of 1996. This increase was primarily the result of
strategic acquisitions made in 1997. The company spent $1.7 billion to purchase
a 20 percent interest in Pioneer Hi-Bred International, $1.2 billion to acquire
ICI's global polyester intermediates and resins businesses, and issued 22.5
million shares of DuPont stock valued at $1.3 billion to acquire Protein
Technologies International. In each of the ICI and PTI acquisitions, the company
assumed $0.2 billion debt of the respective companies.
CASH PROVIDED BY CONTINUING OPERATIONS
Cash provided by continuing operations totaled $4.1 billion in 1998, $0.1
billion more than the $4.0 billion in 1997. The increase is primarily due to
smaller increases in trade receivables and other operating assets offset by $0.5
billion lower net income before nonrecurring items after adjusting for noncash
charges and credits. The extraordinary charge from early retirement of debt of
$0.3 billion eliminates noncash charges included in net income related to
long-term debt retirement. The adjustment of $1.4 billion in 1998 and $1.5
billion in 1997 for purchased in-process research and development eliminates the
noncash charge to earnings associated with the DuPont Merck, Pioneer, Protein
Technologies International, and ICI polyester transactions (see Note 5 to
Financial Statements). Other noncash charges and credits-net of $(0.3) billion
in 1998 includes reductions to eliminate income from asset sales and pretax
exchange gains, partially offset by adjustments to eliminate noncash charges to
earnings associated with productivity initiatives.
In 1997, cash provided by continuing operations totaled $4.0 billion, $0.1
billion less than the $4.1 billion in 1996. Net income, after adjusting for
noncash charges and credits, was $0.6 billion higher than in 1996, offset by
increases in receivables. Other noncash charges and credits-net in 1997 includes
an adjustment to eliminate the noncash charge taken to write down certain
Printing and Publishing assets. In both 1998 and 1997, $0.3 billion was
transferred from the company's pension trust in the United States to pay the
company's portion of certain retiree health care costs as permitted under
federal law; these receipts are reflected as a reduction in other operating
assets.
WORKING CAPITAL INVESTMENT
At the end of 1998, the investment in working capital by continuing operations
(excluding cash and cash equivalents, marketable securities, and short-term
borrowings and capital lease obligations) was $3.2 billion, an increase of $0.3
billion from the $2.9 billion at year-end 1997. This increase was principally
due to increased inventories in certain end-use markets and geographies where
difficult 1998 conditions offset ongoing productivity improvements. Net
increases due to the 1998 ICI polyester films and DuPont Merck Pharmaceutical
acquisitions were largely offset by reductions generated by business
dispositions during the year.
Current assets, including cash and cash equivalents and marketable securities,
increased $0.1 billion with inventories up $0.3 billion, offset by lower
receivables. Current liabilities, excluding short-term borrowings and capital
lease obligations, were essentially unchanged.
In 1997, working capital investment increased $0.3 billion from $2.6 billion to
$2.9 billion. The increase was principally due to the Protein Technologies
International and ICI polyester resins and intermediates acquisitions during the
year.
The ratio of current assets to current liabilities was 0.8:1 at year-end 1998
and 1997.
24 DuPont
<PAGE>
Management's Discussion and Analysis
INVESTMENT ACTIVITIES
Total capital investments by continuing operations, including investments in
affiliates and acquisitions, were $5.6 billion, an increase of $0.3 billion from
1997. 1998 payments for businesses acquired (net of cash acquired) of $3.3
billion included $2.5 billion (net of $0.1 billion cash acquired) for the
acquisition of Merck's 50 percent interest in DuPont Merck Pharmaceutical, and
$0.7 billion for acquisition of ICI's polyester films business. 1997 payments
for businesses acquired (net of cash acquired) include acquisition of ICI's
global polyester resins and intermediates businesses for $1.2 billion. In the
1997 ICI acquisition, the company also assumed $0.2 billion of debt. 1997
investment in affiliates included acquisition of a 20 percent interest in
Pioneer Hi-Bred International for $1.7 billion.
Excluding major acquisitions, 1998 capital spending totaled $2.3 billion,
unchanged from the $2.3 billion spent in 1997. Expenditures were made to expand
capacity and build market positions in Europe and Asia for key businesses,
including Lycra(R) elastane, crop protection products, Mylar(R) thin films and
Sontara(R) nonwovens. In the United States, expenditures increased capacity for
Hytrel(R) and Vespel(R) resins, Lycra(R), and Fortress(R) insecticide. The
program to modernize, consolidate and renew the cost competitiveness of DuPont
Nylon continued in 1998 with expenditures made in the United States, Europe and
Asia to upgrade both nylon manufacturing facilities and nylon intermediates.
Significant expenditures also were made for environmental projects.
In 1999, non-acquisition spending is expected to be about $2.0 billion, or $0.3
billion less than 1998 non-acquisition spending. This reflects expected asset
productivity gains from our Six Sigma initiative as well as the uncertain
business climate in 1999. Planned spending will include capacity expansion in
Lycra(R), a new microdenier product in the Sontara(R) line of nonwovens,
and additional capacity for Tyvek(R) nonwovens, and fluoropolymers. Major
expansions are also planned in support of the recently acquired Protein
Technologies International business. In October, DuPont announced it had agreed
to acquire Herberts, the coatings company of Hoechst AG, for about $1.9 billion.
The acquisition was completed in February 1999, making the DuPont coatings
business the world's third largest and the leading global automotive coatings
supplier. Other potential major acquisition moves will likely focus on
implementation of the company's life sciences strategy.
Proceeds from asset sales were $0.9 billion in 1998. In November, DuPont sold
substantially all of its remaining interest in CONSOL Energy Inc., a 50/50 coal
operations joint venture with Rheinbraun AG for $0.5 billion. Other sale
proceeds included $0.3 billion for the sale of various global hydrogen peroxide
assets, and $0.1 billion related to disposition of the printing and publishing
business. 1997 asset sales of $0.6 billion were principally generated by sale of
the Diagnostic Imaging business, the sale of NEN Life Sciences Products, and the
sale by DuPont Merck of its generic and multisource product lines.
As discussed above under Financial Condition, the October initial public
offering of 30.5 percent of Conoco generated net proceeds of $4.2 billion.
Miscellaneous net investment activities in 1997 include $0.5 billion from the
liquidation of financial investments by Danube Insurance Limited, the company's
self-insurance subsidiary. These funds from excess insurance reserves were used
for operating and investment purposes.
FINANCING ACTIVITIES
Dividends per share of common stock were $1.365 in 1998, $1.23 in 1997, and
$1.115 in 1996. The quarterly dividend was increased from $.315 to $.35 in the
second quarter of 1998 and from $.285 to $.315 in the second quarter of 1997.
In accordance with the company's policy to offset dilution resulting from the
issuance of DuPont stock under compensation plans, the company spent $769
million in 1998 to purchase 12.8 million shares of DuPont common stock. Not
related to the share buyback program, the company received $65 million as a
final settlement payment on shares repurchased in 1997 under the terms of a
private placement agreement in connection with the Protein Technologies
International acquisition, bringing net 1998 acquisition of treasury stock to
$704 million. 1997 acquisition of treasury stock of $1,747 million includes
$1,420 million to buy back and retire 22.5 million shares issued to acquire
Protein Technologies International, as well as $327 million to buy back and
retire 5.8 million shares issued under compensation plans.
DuPont 25
<PAGE>
Management's Discussion and Analysis
Purchased In-Process Research and Development
Purchased in-process research and development represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced, but not yet completed, at the date of
acquisition and which, if unsuccessful, have no alternative future use in
research and development activities or otherwise. In accordance with Statement
of Financial Accounting Standards No. 2, "Accounting for Research and
Development Costs," as interpreted by FASB Interpretation No. 4, amounts
assigned to purchased in-process research and development meeting the above
criteria must be charged to expense at the date of consummation of the purchase
business combination. In this regard, the company recorded charges for purchased
in-process research and development totaling $1,478 million in 1997 with respect
to three purchase business combinations completed that year. In 1998 the company
recorded charges totaling $1,443 million with respect to two purchase business
combinations completed that year ($1,280 million) and revisions ($163 million)
of prior year estimates for two purchase business combinations completed in
December 1997.
The following is a more detailed discussion of the purchased in-process research
and development associated with each of these acquisitions. The company believes
that the assumptions and forecasts used in valuing purchased in-process research
and development were reasonable at the time of the respective business
combination. No assurance can be given, however, that future events will
transpire as estimated. As such, actual results may vary from the projected
results.
Management expects to continue supporting these research and development
efforts. However, as noted below, there is risk associated with the successful
completion of these research and development projects. There can be no assurance
that any of these projects will meet with either technological or commercial
success. If none of these projects is successfully completed, the sales and
profitability of the company may be adversely affected in future periods.
Failure of any single project would not materially impact the company's
financial condition, results of operations or liquidity.
DUPONT PHARMACEUTICALS
On July 1, 1998, the company purchased the 50 percent general partnership
interest of Merck & Co. in The DuPont Merck Pharmaceutical Company for $2,586
million cash, the assumption of approximately $269 million of liabilities, and
acquisition related costs of $8 million. As part of the transaction, the company
agreed to indemnify Merck for certain future liabilities that may arise from
events that occurred during Merck's tenure as a general partner. The business,
renamed DuPont Pharmaceuticals, is engaged in the research, development,
manufacturing and sale of human pharmaceutical and radiopharmaceutical products
and is the principal component of the company's Pharmaceuticals business
segment. The preliminary allocation of purchase price to the identifiable assets
acquired, based on their estimated fair values, is as follows (dollars in
millions):
- --------------------------------------------------------------------------------
Current Assets $ 272
Property, Plant and Equipment 310
Completed Technology 866
In-Process Research and Development 1,230
Other Identifiable Intangibles 103
Other Assets 9
- --------------------------------------------------------------------------------
Total Identifiable Assets $2,790
================================================================================
The $73 million excess of the cost of the acquisition ($2,863 million) over the
fair value of the identifiable assets acquired has been recorded as goodwill.
At the date of acquisition, the business had 32 research and development
projects meeting the criteria for purchased in-process research and development.
The pharmaceuticals industry categorizes research and development activities
into phases, which represent stages of completion in the research and
development process. The following summarizes the status of the research and
development efforts in process at the date of acquisition and the allocation of
purchase price to each group (dollars in millions):
- --------------------------------------------------------------------------------
Number of
Status Projects Fair Value
- --------------------------------------------------------------------------------
Pre Clinical Trial 20 $170
Phase 1 2 $ 40
Phase 2 4 $240
Phase 3 3 $690
New Applications for Existing Products 3 $ 90
================================================================================
26 DuPont
<PAGE>
Management's Discussion and Analysis
Projects in the Pre Clinical Trial phase of the research and development process
represent compounds that have demonstrated biological activity directed at
disease targets in specific therapeutic areas. Research and development
activities conducted during this phase include optimizing the pharmacological
activity, early screening for toxicity, testing and other activities that must
be performed before a new drug can be administered to humans. If successful,
projects in this phase are expected to be completed in the period 2003 to 2007.
Successful completion of a research and development project is deemed to occur
upon receipt of regulatory approval for sale of the drug in a major market,
which is normally approval by the FDA for sale in the United States.
Phase 1 involves the first clinical trials in humans to test a potential new
drug for pharmacological activity, tolerance and safety. This stage of
development typically takes about one year to complete. The two Phase 1 projects
in process at the acquisition date involve the development of second generation
nonnucleoside reverse transcriptase inhibitors to be used in combination therapy
for HIV. If successful, these projects are expected to be completed in 2001
assuming the projects would qualify for accelerated regulatory review (see
below).
Phase 2 involves clinical trials designed to determine efficacy and dosing.
Efforts to optimize manufacturing of active pharmaceutical ingredient,
formulation, and packaging are also underway during this phase. This stage of
development normally takes 18 months to complete. The four Phase 2 projects in
process at the acquisition date were:
. DMP754 (roxifiban), an oral IIb/IIIa platelet receptor antagonist to be used
in the inhibition of platelet activity in cardiovascular patients
. DMP777, an elastase inhibitor to be used in the treatment of cystic fibrosis
. DMP543, a neurotransmitter release enhancer with the potential for use in the
treatment of Alzheimer's disease
. DMP444, a radiopharmaceutical agent for use in thrombus imaging.
If successful, these projects are expected to be completed in the
period 2001 to 2005.
Phase 3 typically involves large multi-center clinical trials intended to gather
evidence of the effectiveness of the new drug for specific therapeutic use and
to better understand safety and drug-related adverse effects. This stage of
development normally takes two to four years plus an additional six to 12 months
for regulatory review. The regulatory review period can take less time if the
new drug qualifies for accelerated review. The three Phase 3 projects in process
at the date of acquisition were:
. DMP266 Sustiva(TM) (efavirenz), a nonnucleoside reverse transcriptase
inhibitor for use in combination therapy for HIV
. DMP115 Definity(TM), a contrast imaging agent for ultrasound procedures
. DMP702 Innohep(R) (tinzaparin), a low-molecular weight heparin anticoagulant.
At the date of acquisition, Sustiva(TM) (efavirenz) was expected to be completed
in late 1998, assuming an accelerated regulatory review and successful
completion, and Definity(R) and Innohep(R) were expected, if successful, to be
completed in 1999.
At the date of acquisition, there were two projects underway to support the
submission for regulatory approval of new therapeutic uses for Coumadin(R)
(warfarin sodium). These projects, if successful, were expected to be completed
in the period 2000 to 2003. A third project, the submission for regulatory
approval of Coumadin(R) for the extended (180 to 300 day) use in treatment of
deep vein thrombosis was, if successful, expected to be completed later in 1998.
The company estimates that it will spend $1 billion, on a risk-adjusted basis,
over the next 10 years in its efforts to complete the above projects. This
estimate recognizes the fact that not all projects will be completed
successfully. The cost of successfully taking a project from preclinical
development through regulatory approval is estimated to range from $250 million
to $500 million. Estimates of the cost to complete a specific project are
dependent on its stage of development, the disease to be treated, the size and
structure of clinical trials required to prove improved efficacy and/or safety
versus current treatment options, and the project's Probability of Technical
Success (see next page).
Risks and uncertainties associated with successfully completing a project
include, but are not limited to, failure to demonstrate efficacy, the generation
of inconclusive study results, the emergence in clinical trials of significant
drug-related adverse
DuPont 27
<PAGE>
Management's Discussion and Analysis
events, the emergence of acute or long-term toxicity, disputes involving
intellectual property rights, instability of the active pharmaceutical
ingredient, and the failure to develop an effective manufacturing process. There
is also the potential for emergence of new drugs or therapies that are more
effective, offer a better dosage regimen, or are better tolerated by patients.
The emergence of any of these issues can result in project delay or termination.
The fair values assigned to property, plant and equipment, completed technology,
in-process research and development, and other identifiable intangibles were all
based on in-depth analysis. The valuation of in-process research and
development followed longstanding pharmaceutical industry practices used to
value and manage in-process research and development. A simplified model of that
valuation methodology is as follows:
Cash Flows from Successful Completion
Less: Cash Flows to Complete
Less: Return on Assets Employed
-------------------------------------
Equals: Adjusted Cash Flows
Times: Probability of Technical Success
-------------------------------------
Equals: Risk Adjusted Cash Flows
Times: Present Value Factor
-------------------------------------
Equals: Fair Value
Cash Flows from Successful Completion represents the estimated future revenues
forecast to be earned over the life of the product less the costs and expenses
required to generate those revenues, assuming successful completion of the
project in process. Significant assumptions include estimates of market size,
market share to be achieved, date of introduction, life cycle pattern, product
pricing, and operating margins. Cash Flows to Complete represents the estimated
future research and development costs required to complete the project, assuming
the project is ultimately successful. Significant assumptions include the work
required to successfully complete the project and the date of completion. Return
on Assets Employed represents an allocation of the estimated future profits from
the product to existing assets, including identifiable intangible assets,
thereby ensuring that all appropriate future cash flows are attributed to
existing assets for purposes of determining their fair value.
Probability of Technical Success represents management's assessment of all risks
associated with successfully completing a given project. The starting point for
this assessment is the pharmaceutical industry-standard success rate for
compounds in the same phase of completion, i.e., the risk associated with
pharmaceutical research and development in general. Management may adjust this
rate, in most cases downward, based on the specifics of each individual project
and scientific judgment as to the progress achieved to date and the complexity
of the work still to be completed. These adjustments reflect project-specific
risks, i.e., the probability that a given project will be more or less likely to
succeed than the industry norm. The range of Probability of Technical Success
factors used in determining the fair value of in-process research and
development at the date of acquisition is as follows:
- --------------------------------------------------------------------------------
Status Probability of Technical Success
- --------------------------------------------------------------------------------
Pre Clinical Trial 5% to 9%
Phase 1 14% to 18%
Phase 2 30% to 50%
Phase 3 55% to 95%
New Applications for Existing Products 70% to 90%
================================================================================
Risk Adjusted Cash Flows were discounted to present value using a 13 percent
discount rate, which is 50 basis points higher than the estimated weighted
average cost of capital for research-based pharmaceutical companies. The
weighted average cost of capital is a market-based measure of investment risk,
i.e., the risk associated with investing in a particular business, company,
industry, etc. The higher discount rate used to present value these risk
adjusted cash flows compensates for the increased risk associated with a finite
number of projects versus a diversified business as a whole.
Since the date of acquisition, Sustiva(TM) was granted accelerated FDA approval
in the United States. Definity(TM) was submitted for approval for marketing in
the United States in December 1998. Innohep(R) is expected to be submitted for
approval for marketing in the United States in the second quarter of 1999, a
slight delay from earlier projections. In October 1998 management terminated the
project investigating the use of Coumadin(R) in the prevention of primary
myocardial infarction because the Thrombosis Prevention Trial was not conclusive
in demonstrating the benefits of warfarin in this therapeutic use. Clinical
trials investigating the use of Coumadin(R) in the extended
28 DuPont
<PAGE>
Management's Discussion and Analysis
treatment of deep vein thrombosis continue and are expected to conclude in 2001.
POLYESTER FILMS
In January 1998 the company purchased the global polyester films business of ICI
for $647 million cash, the assumption of $110 million of liabilities, and
acquisition related costs of $5 million. The preliminary allocation of purchase
price to the identifiable assets acquired, based on their estimated fair values,
is as follows (dollars in millions):
Current Assets $ 62
Property, Plant and Equipment 501
Completed Technology 55
In-Process Research and Development 50
Other Assets 18
- --------------------------------------------------------------------------------
Total Identifiable Assets $686
================================================================================
The $76 million excess of the cost of the acquisition ($762 million) over the
fair value of the identifiable assets acquired has been recorded as goodwill.
At the date of the acquisition, the business had 10 research and development
projects meeting the criteria for purchased in-process research and development.
These projects were of two general types (dollars in millions):
- --------------------------------------------------------------------------------
Project Type Number of Projects Fair Value
- --------------------------------------------------------------------------------
New Product Development 7 $36
Process Modification 3 $14
================================================================================
New Product Development projects have as their goal the discovery and
development of new formulations and/or significant modifications of existing
product formulations to meet specific end user needs. These projects are
expected to be completed in the period 1998 to 1999. Management estimates the
Probability of Technical Success for these projects ranges from 40 percent to 80
percent.
Process Modification projects have as their goal the design and development of
significant modifications to existing capital assets in order to increase
capacity or otherwise improve efficiency of the manufacturing process. These
projects are expected to be completed in the period 1998 to 1999. Management
estimates the Probability of Technical Success for these projects ranges from 60
percent to 70 percent.
The fair values of these projects are based on estimates prepared by management
utilizing procedures that are essentially the same as those described above for
the pharmaceutical business acquisition. Industry success rates are not
generally available for this type of research and development. As such, the
Probability of Technical Success was estimated by management based on scientific
judgment regarding the results achieved to date, the complexity of successfully
completing the project, and the business' historical experience with similar
types of research and development projects. Successful completion of a project
is deemed to occur when the new or improved product or process is defined and
technological feasibility has been objectively demonstrated. The cost to
complete these projects is estimated to total $5 million over the period 1998 to
1999.
Risk Adjusted Cash Flows were discounted to present value using a 15 percent
discount rate. This rate is higher than the estimated weighted average cost of
capital for this business and reflects management's assessment of the risks of
projections, volatility and market uncertainty.
As of December 31, 1998, three of the seven New Product Development projects
have achieved technical feasibility; the remaining four projects are still in
process. The three Process Modification projects are still in process, with
detail process modeling currently underway.
POLYESTER RESINS AND INTERMEDIATES
On December 31, 1997, the company purchased the global polyester resins and
intermediates business of ICI for $1,240 million cash, the assumption of $265
million of liabilities, and acquisition related costs of $7 million. The
purchase price was allocated to the identifiable assets acquired, based on their
fair values, as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 89
Property, Plant and Equipment 810
Completed Technology 339
In-Process Research and Development 178
Other Assets 70
- --------------------------------------------------------------------------------
Total Identifiable Assets $1,486
================================================================================
DuPont 29
<PAGE>
Management's Discussion and Analysis
The $26 million excess of the cost of the acquisition ($1,512 million) over the
fair value of the identifiable assets acquired has been recorded as goodwill.
At the date of the acquisition, the business had eight research and development
projects meeting the criteria for purchased in-process research and development.
These projects were of three general types (dollars in millions):
- --------------------------------------------------------------------------------
Project Type Number of Projects Fair Value
- --------------------------------------------------------------------------------
New Product Development 3 $26
Process Modification 4 $66
New Manufacturing Process 1 $86
================================================================================
New Product Development projects have as their goal the discovery and
development of new formulations and/or significant modifications of existing
product formulations to meet specific end user needs. These projects are
expected to be completed in the period 1998 to 2000. Management estimates the
Probability of Technical Success for these projects ranges from 14 percent to 72
percent.
Process Modification projects have as their goal the design and development of
significant modifications to existing capital assets in order to increase
capacity or otherwise improve efficiency of the manufacturing process. These
projects are expected to be completed in the period 2000 to 2001. Management
estimates the Probability of Technical Success for these projects ranges from 70
percent to 80 percent.
The New Manufacturing Process project has as its goal the design and development
of a totally new manufacturing process. This project is expected to be completed
in 2002. Management estimates an 80 percent Probability of Technical Success for
this project.
The fair values of these projects are based on estimates prepared by management
utilizing procedures that are essentially the same as those described above for
the pharmaceutical business acquisition. Industry success rates are not
generally available for this type of research and development. As such, the
Probability of Technical Success was estimated by management based on scientific
judgment regarding the results achieved to date, the complexity of successfully
completing the project, and the business' and DuPont's extensive historical
experience with similar types of research and development projects for polyester
resins and intermediates. The cost to complete these projects is estimated to
total $20 million over the period 1998 to 2002.
Risk Adjusted Cash Flows were discounted to present value using a 12 percent
discount rate, which approximates the weighted average cost of capital for this
business. This rate was deemed by management to be appropriate in these
circumstances given the extensive historical knowledge and experience upon which
the Probability of Technical Success was based. Seven of these projects are
still in process and are expected to be completed within the same relative time
frame used to establish fair values. One Process Modification project (fair
value $3 million) was terminated in January 1999 when the company and ICI ended
discussions about the formation of a joint venture in Pakistan.
PROTEIN TECHNOLOGIES INTERNATIONAL INC.
On December 1, 1997, the company acquired the stock of Protein Technologies
International (PTI), a wholly owned subsidiary of Ralston Purina Company, for
22,570,673 shares of DuPont common stock, with a fair value of $1,301 million,
in a tax-free exchange. Established in 1973, the business is engaged in the
research, development, manufacturing and sale of high quality soy protein and
soy fiber ingredients for a variety of food applications and soy protein-based
polymers for the coated paper and paperboard industry. The total purchase price,
consisting of the fair value of the stock issued and liabilities assumed,
including acquisition costs of $5 million, was $1,578 million and was allocated
to the identifiable assets acquired, based on their fair values, and related
deferred taxes as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 226
Property, Plant and Equipment 443
Completed Technology 464
In-Process Research and Development 560
Other Identifiable Intangibles 80
Deferred Taxes (280)
- --------------------------------------------------------------------------------
Total Identifiable Assets and Deferred Taxes $ 1,493
================================================================================
30 DuPont
<PAGE>
Management's Discussion and Analysis
The $85 million excess of the cost of the acquisition over the fair value of the
identifiable assets acquired has been recorded as goodwill.
At the date of acquisition, the business had 29 research and development
projects meeting the criteria for purchased in-process research and development.
These projects were grouped into three broad categories as follows (dollars in
millions):
- --------------------------------------------------------------------------------
Project Type Number of Projects Fair Value
- --------------------------------------------------------------------------------
New Product Development
for Existing Business 14 $124
Health and Nutrition 7 $288
Biotechnology 8 $148
================================================================================
New Product Development projects are principally aimed at significantly
improving the functionality, color, taste and flavor of soy protein isolate for
use as a food ingredient in cheese, coffee whiteners, milk, egg and meat
alternatives, baking products, and nutritional/sports drink products. This
category also includes projects aimed at the conversion of process waste streams
into salable products. If successful, most of the projects in this category are
expected to be completed in the period 1998 to 2000. The Probability of
Technical Success for these projects generally ranges from 60 percent to 80
percent.
Health and Nutrition projects principally consist of clinical trials and other
studies designed to prove the existence of certain health benefits associated
with soy protein including its effectiveness in the reduction of heart disease
and osteoporosis, relief of post-menopausal symptoms, and prevention and/or
treatment of prostate cancers. Also included are projects to control the level
of isoflavone and other components of soy protein shown to be associated with
these health benefits. If successful, these projects are expected to be
completed in the period 1998 to 2005. The Probability of Technical Success for
projects expected to be completed in the period 1998 to 2000 ranges from 65
percent to 90 percent, whereas the Probability of Technical Success for projects
expected to be completed in the period 2004 to 2005 ranges from 15 percent to 30
percent.
Biotechnology projects are aimed at developing new, high-value applications for
soybeans that have been genetically engineered to modify the levels of certain
oils, proteins, amino acids and carbohydrates in order to improve the
nutritional value, taste and other characteristics of the bean. If successful,
these projects are expected to be completed in the period 2000 to 2005. The
Probability of Technical Success for these projects generally ranges from 50
percent to 70 percent.
The fair values assigned to property, plant and equipment, completed technology,
in-process research and development and other identifiable intangibles were all
based on in-depth analysis. This valuation of in-process research and
development used essentially the same procedures as described above for the
valuation of in-process research and development associated with the
pharmaceutical business acquisition. Significant assumptions in developing Cash
Flows from Successful Completion include estimates of market size, date of
completion, life cycle pattern, product pricing and operating margins.
Industry success rates are not generally available for this type of research and
development. As such, the Probability of Technical Success was estimated by
management based on scientific judgment regarding the results achieved to date,
the complexity of successfully completing the project, and the business'
historical experience with similar types of research and development projects.
The cost to complete the projects is estimated to total $65 million over the
period 1998 to 2005.
Risk Adjusted Cash Flows were discounted to present value using a 15 percent
discount rate. The rate is 200 basis points higher than the estimated weighted
average cost of capital for this business. This higher rate compensates for the
risk of projections, volatility, and market uncertainty due to the limited
historical experience in certain areas of endeavor.
As of December 31, 1998, test marketing or full commercialization has been
initiated on a majority of the New Product Development projects that were in
process at the acquisition date; the remainder are still being actively pursued.
In May 1998 PTI submitted an initial petition to the FDA for a health claim on
isolated soy protein. In August 1998 the FDA accepted for review PTI's petition
for a health claim that soy protein may reduce cholesterol and the risk for
heart disease. The FDA announced its proposed rule in November 1998. The
proposed rule will be published for public comment prior to final FDA action.
The Biotechnology projects are still in process.
DuPont 31
<PAGE>
Management's Discussion and Analysis
PIONEER HI-BRED INTERNATIONAL
In September 1997 the company acquired a 20 percent interest in Pioneer Hi-Bred
International for $1,711 million, including acquisition costs. Pioneer's
principal business is the development, production, and marketing of hybrids of
corn and varieties of soybeans. For purposes of determining equity in earnings,
the purchase price was allocated to the identifiable assets and liabilities of
Pioneer, based on their fair values, as follows (dollars in millions):
- --------------------------------------------------------------------------------
Current Assets $ 235
Property, Plant and Equipment 125
Completed Technology 458
In-Process Research and Development 903
Other Identifiable Intangibles 51
Other Assets 20
Liabilities (287)
- --------------------------------------------------------------------------------
Total Identifiable Assets Less Liabilities $ 1,505
================================================================================
The $206 excess of the purchase price of the acquisition over the fair value of
the identifiable assets and liabilities was recorded as goodwill.
At the date of acquisition, Pioneer had extensive research and development
efforts underway that met the criteria for purchased in-process research and
development. These research and development activities had as their goals (a)
the improvement of harvestable yield, (b) the reduction of crop losses, grower
input costs and risk through genetically improving insect, disease and herbicide
resistance and (c) improving the quality of the grain and forage produced
through a combination of traditional breeding methods and genetic improvement
technologies.
Pioneer's research and product development consists of three main groups: Maize
Research, Oilseeds and Field Crops Research, and Trait and Technology
Development.
Pioneer has been successfully improving corn hybrids for more than 70 years.
Each year, Pioneer maize researchers evaluate about 130,000 new experimental
hybrids. These hybrids enter into a four to five year testing cycle during which
the hybrids are tested in a range of soil types, stresses, and climate
conditions. As the results of these tests become known, fewer and fewer hybrids
are designated as candidates for further testing. In the past, only about 20 of
the original 130,000 experimental hybrids became commercial products. In 1997,
Pioneer indicated that they expect the number of new product introductions to
increase in the future.
Each year, Pioneer's soybean researchers plant more than 600,000 yield test
plots to measure performance of experimental varieties in many different
environments. Each year about 500,000 new experimental lines are tested.
Thousands of crosses are made each year to assure a steady flow of new
varieties.
Pioneer's Trait and Technology Development group conducts research and
development in the areas of gene discovery, gene transfer technology, molecular
gene targeting, genetically improving insect, disease and herbicide resistance
in crops, and developing products that increase the value of commodity grains by
modifying their protein, oil and carbohydrate components.
At August 31, 1997, Pioneer employed approximately 940 people who directly and
indirectly engaged in research and product development activities. Pioneer's
expenditures for research and development were $146 million, $136 million and
$130 million for the fiscal years ending August 31, 1997, 1996 and 1995,
respectively.
The fair value of Pioneer's completed technology, in-process research and
development, and other identifiable intangibles were based on in-depth analysis
using methods that were generally consistent with those described above. Future
cash flows for in-process research and development projects were discounted to
present value using discount rates ranging from 13.5 percent to 16 percent.
These rates are higher than the estimated weighted average cost of capital for
Pioneer and are intended to compensate for the risks of projection and market
uncertainty. Significant assumptions include estimates of market size, market
share, product pricing and product life cycle.
Pioneer introduced 37 new corn hybrids in 1998 and has stated that it expects to
introduce 60 new hybrids in 1999, including high-oil products and several with
the Bt gene for resistance to European Corn Borer (ECB). Pioneer has also stated
that in 1999 it expects to introduce ECB-resistant corn hybrids in limited
volumes in several countries outside of North America. Pioneer's expenditures
for research and development were $155 million for the fiscal year ending
August 31, 1998.
32 DuPont
<PAGE>
Management's Discussion and Analysis
Financial Instruments
DERIVATIVES AND OTHER HEDGING INSTRUMENTS
Under procedures and controls established by the company's Financial Risk
Management Framework, the company enters into contractual arrangements
(derivatives) in the ordinary course of business to hedge its exposure to
foreign currency, interest rate and commodity price risks. The counterparties to
these contractual arrangements are major financial institutions. Although the
company is exposed to credit loss in the event of nonperformance by these
counterparties, this exposure is managed through credit approvals, limits and
monitoring procedures and, to the extent possible, by restricting the period
over which unpaid balances are allowed to accumulate. The company does not
anticipate nonperformance by counterparties to these contracts, and no material
loss would be expected from any such nonperformance.
The company will adopt Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities," effective
January 1, 2000. This statement establishes accounting and reporting standards
for derivatives. It requires that the company recognize all derivatives as
either assets or liabilities in the statement of financial position and measure
those instruments at fair value. Changes in the fair value of derivatives are
recorded each period in current earnings or other comprehensive income. Based on
analysis to date, it is not expected that adoption of this statement will have a
material effect on the company's financial condition, results of operations or
liquidity.
FOREIGN CURRENCY RISK
The company routinely uses forward exchange contracts to hedge its net
exposures, by currency, related to the foreign currency-denominated monetary
assets and liabilities of its operations. The primary business objective of this
hedging program is to maintain an approximately balanced position in foreign
currencies so that exchange gains and losses resulting from exchange rate
changes, net of related tax effects, are minimized.
In addition, from time to time, the company will enter into forward exchange
contracts to establish with certainty the U.S. dollar amount of future firm
commitments denominated in a foreign currency. Decisions regarding whether or
not to hedge a given commitment are made on a case-by-case basis taking into
consideration the amount and duration of the exposure, market volatility and
economic trends. Forward exchange contracts are also used from time to time to
manage near-term foreign currency cash requirements and to place foreign
currency deposits and marketable securities investments into currencies offering
favorable returns.
Principal currency exposures and related hedge positions at December 31, 1998,
were as follows (dollars in millions):
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
After-Tax After-Tax After-Tax Open Contracts To Net
Net Monetary Net Monetary Net Monetary Buy/(Sell) Foreign Currency After-Tax
Asset (Liability) Asset/(Liability) ------------------------------- Exposure
Currency Exposure Exposure Exposure Pre-Tax After-Tax Asset/(Liability)
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
French franc $ 1,315 $ (920) $ 395 $ (635) $ (394) $ 1
Italian lira $ 460 $ (195) $ 265 $ (430) $ (266) $ (1)
German mark $ 1,016 $(1,273) $ (257) $ 417 $ 259 $ 2
Taiwan dollar $ 81 $ (199) $ (118) $ 190 $ 118 $ --
Canadian dollar $ 506 $ (424) $ 82 $ (148) $ (92) $ (10)
Netherlands guilder $ 669 $ (578) $ 91 $ (135) $ (84) $ 7
=======================================================================================================================
</TABLE>
DuPont 33
<PAGE>
Management's Discussion and Analysis
The fair value of forward exchange contracts accounted for as hedges that were
outstanding as of December 31, 1998, was $(23) million. Given the company's
balanced foreign exchange position shown above, a 10 percent adverse change in
foreign exchange rates upon which these contracts are based would result in
exchange losses from these contracts that, net of tax, would, in all material
respects, be fully offset by exchange gains on the underlying net monetary
exposures for which the contracts are designated as hedges.
In December 1998 the company entered into forward exchange contracts to purchase
3.1 billion German marks for $1.9 billion in conjunction with the signing of a
definitive agreement to purchase the performance coatings business of Hoechst AG
for 3.1 billion German marks. The business purpose of these contracts is to lock
in the U.S. dollar functional currency cost of this acquisition and thereby
prevent adverse movements in the dollar/mark exchange rate from causing the net
U.S. dollar cash purchase price to exceed the negotiated fair value of the
business. The use of hedge accounting for these contracts is precluded by
accounting guidance. Changes in fair value of these contracts are included in
income in the period the change occurs. The U.S. dollar purchase price for the
acquired business will be measured using the dollar/mark exchange rate on the
date of payment. At December 31, 1998, the change in fair value of these
contracts resulted in a loss of $20 million. Further strengthening of the dollar
will result in additional losses.
INTEREST RATE RISK
The company uses a combination of financial instruments, including interest rate
swaps, interest and principal currency swaps and structured medium-term
financings, as part of its program to manage the fixed and floating interest
rate mix of the total debt portfolio and related overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest
payments to effectively convert fixed rate debt into floating rate debt based on
LIBOR or commercial paper rates. Interest rate swaps also involve the exchange
of floating for fixed rate interest payments to effectively convert floating
rate debt into fixed rate debt. Interest rate swaps allow the company to
maintain a target range of floating rate debt.
Under interest and principal currency swaps, the company receives predetermined
foreign currency-denominated payments corresponding, both as to timing and
amount, to the fixed or floating interest rate and fixed principal amounts to be
paid by the company under concurrently issued foreign currency-denominated
bonds. In return, the company pays U.S. dollar interest and a fixed U.S. dollar
principal amount to the counterparty thereby effectively converting the foreign
currency-denominated bonds into U.S. dollar-denominated obligations for both
interest and principal. Interest and principal currency swaps allow the company
to be fully hedged against fluctuations in currency exchange rates and foreign
interest rates and to achieve U.S. dollar fixed or floating interest rate
payments below the market interest rate, at the date of issuance, for borrowings
of comparable maturity.
Structured medium-term financings consist of a structured medium-term note and a
concurrently executed structured medium-term swap which, for any and all
calculations of the note's interest and/or principal payments over the term of
the note, provide a fully hedged transaction such that the note is effectively
converted to a U.S. dollar-denominated fixed or floating interest rate payment.
Structured medium-term swaps allow the company to be fully hedged against
fluctuations in exchange rates and interest rates and to achieve U.S. dollar
fixed or floating interest rate payments below the market interest rate, at the
date of issuance, for borrowings of comparable maturity.
The fair value of interest rate derivatives outstanding as of December 31, 1998,
was not material. A one percentage point adverse change in the interest rates
upon which these contracts are based would not cause these instruments to have a
material impact on future earnings.
COMMODITY PRICE RISK AND TRADING
The company enters into exchange-traded and over-the-counter derivative
commodity instruments to hedge its exposure to price fluctuations on certain raw
material purchases.
The fair value of derivative commodity instruments outstanding as of December
31, 1998, was not material. A 10 percent adverse change in the commodity prices
upon which these contracts are based would not cause these instruments to have a
material impact on future earnings.
Additional details on these and other financial instruments are set forth in
Note 25 to the financial statements.
Year 2000 Readiness Disclosure
The Year 2000 problem concerns the application of computer systems written using
six (e.g. 12/31/99) versus eight (e.g. 12/31/1999) digits to define the
applicable date. This could result,
34 DuPont
<PAGE>
Management's Discussion and Analysis
among other things, in computer systems recognizing "00" as the year 1900 rather
than the year 2000. Computer hardware, software, and embedded chip equipment are
affected, and if such systems and components are not remediated satisfactorily,
it could lead to plant interruptions or temporary shutdowns, the generation of
financial and business misinformation, or the interruption of the company's
supply chains, or those of its suppliers or customers.
The company has identified its critical and significant internal systems which
will require remediation to provide for the company's continuing business
operations after January 1, 2000. Approximately 75 percent of the company's
computer systems are classified as either critical or significant. A critical
system is considered to be one, which if not operational, would have an imminent
safety, environmental, or community impact, or would cause a business to be
non-operational for more than a few days. A significant system is one which
could potentially cause a safety, environmental or community incident, or will
require significant manual effort to assure uninterrupted business operations.
The company is addressing the Year 2000 problem in these systems, and continues
its analysis of the Year 2000 readiness of key third parties. Computer Sciences
Corporation and Andersen Consulting, who operate the majority of the company's
global information systems and technology infrastructure, are assisting in these
activities.
The initial inventory and assessment phases of the company's internal systems
are essentially completed. Progress continues to be made in the remediation
phase of the company's plan in which systems that are not Year 2000-capable are
repaired, replaced or retired, and remediated systems are tested and returned to
active use.
Project reporting data indicates that approximately 85 percent of the company's
critical and significant computer systems are now Year 2000-capable, and the
remaining systems in these categories are expected to be remediated on the
following schedule:
- --------------------------------------------------------------------------------
Systems Time Frame
- --------------------------------------------------------------------------------
Mainframe Corporate Data Centers 4/99
Mid-Range Computers 10/98-6/99
Telecommunications 11/98-3/99
Corporate (e.g. Payroll and Electronic Mail) 6/99
Business (e.g. Inventory Processing) 12/98-4Q99
Manufacturing, Process Control and Equipment 4Q98-4Q99
================================================================================
The company believes its critical and significant internal computer systems will
be Year 2000-capable in a timely manner. The remaining systems are considered to
be of minimal criticality because they are judged to have no significant impact
on safety or continuity of operations. However, the company's computer systems
are complex, highly interdependent, and globally integrated, and there are a
number of risks associated with the complexity and high degree of integration of
the systems. For example, an incorrect classification of the importance of a
system or systems, or the cumulative effect of a number of negligible systems
that have not been remediated, could result in an unpredicted failure or
shutdown in one or more of the company's business or manufacturing systems,
which could have a significantly adverse effect on production or cost of
operations. The current belief is that this has a relatively low probability of
occurring. To minimize these risks, the company has employed highly skilled and
knowledgeable information technology and plant personnel in its decision making
processes and in developing its plan to perform integrated systems testing in
its businesses and/or manufacturing operations.
The company is continuing its Business Partner Year 2000 Program with its major
customers and key suppliers. The purpose of this process is to (1) assess
external parties as either low, moderate or high risk for Year 2000
non-readiness based on information they provide about their own readiness, and
(2) to help formulate contingency plans. However, no screening method is
guaranteed, and the accuracy of information provided by external parties about
their own readiness cannot be guaranteed by the company. Additionally, certain
external parties may refuse to respond to a readiness survey or request for
information, and the company categorizes such non-responding parties as
high-risk for non-readiness. It is possible that these suppliers and customers
may, in fact, be prepared to address Year 2000 concerns, but simply refuse to
respond. Conversely, various suppliers and customers may respond that they are
Year 2000 ready and be assessed as low risk, when, in fact, they are not ready.
As of December 1998, approximately 45 percent of key supplier recipients have
responded to the survey. The company assessed approximately 65 percent of the
total number of survey recipients as having a high risk of not being Year
2000-capable on a timely basis. Based on what the company believes to be an
unacceptably high percentage of key suppliers who are either not
DuPont 35
<PAGE>
Management's Discussion and Analysis
willing to disclose specific information about their Year 2000 readiness, or who
do not indicate sufficient progress toward readiness, the company is including
in its plans training sessions, telephone interviews and face to face
discussions to understand state of readiness of key suppliers and to assist them
with becoming Year 2000-capable.
In addition, the company is conducting an assessment of its major customers,
focusing on their Year 2000 capability as it affects ordering procedures, and
delivery of and payment for company products. As of December 1998, the company
had contacted approximately 40 percent of these customers and currently
anticipates completing this assessment by March 1999. The company has assessed
28 percent of contacted customers as being in the high risk category. The
company has invited certain of these customers to a series of Year 2000 forums
to communicate the processes and status of DuPont's Year 2000 efforts.
The company's plant and business operations are highly dependent on a continuous
supply of key services from raw material suppliers and utility providers. If the
Year 2000 problem causes suppliers and utility providers to fail to deliver such
essential materials and services, multiple disruptions in the company's plant
operations, computer infrastructure or telecommunications systems could result.
Because of the inherent uncertainties associated with the Year 2000 problem,
including understanding the Year 2000 readiness of these key third parties, it
is not possible to quantify the potential impact at this time. However, failure
of key suppliers, utility providers, major customers or the company to properly
and timely address the Year 2000 problem could have a material adverse effect on
the company's financial condition, results of operations or liquidity.
Furthermore, there can be no guarantee that any contingency plans developed by
the company will prevent such failures from having a material adverse effect.
The company believes that there is a low probability that these multiple
failures are likely to occur.
Contingency plans are being formulated by each of the company's various business
units. Preliminary plans were completed in January 1999 and final plans must be
submitted by the end of the second quarter of 1999. These plans will address
potential disruptions with the business, administrative and manufacturing
operations, and supply chain interruptions by key suppliers and major customers.
The company has certain options, which include among other things sourcing raw
material supplies from alternate vendors, arranging for back-up or alternate
transportation carriers, scheduling certain plant shutdowns within specific
business units during the latter part of December, and preparing for manual
operation of various procedures in circumstances where this is practical. These
plans will continue to be updated during the remainder of 1999.
The company currently expects total expenditures to become Year 2000-capable to
be in the range of $350 million to $400 million, of which 20 percent represents
internal costs. As of December 31, 1998, the company had spent an estimated $190
million on implementing its plan. The company does not specifically track all
costs associated with employees working on Year 2000 projects, but has included
an estimate of these costs in the amount of internal costs included in the range
above. The company does not include the costs of systems projects which will
address the Year 2000 problem but were initiated to accomplish other (non-Year
2000) objectives. The company will fund Year 2000 expenditures from company cash
flow from operations and expects that total remediation costs, including the
reallocation of internal resources, will not have a material adverse effect on
the company's financial condition, results of operations or liquidity.
The foregoing timetable and assessment of costs to become Year 2000-capable
reflect management's best estimates. These estimates are based upon many
assumptions, including: assumptions about the cost, availability and ability of
resources to identify and classify systems properly; properly identifying them
as needing remediation; locating, remediating and modifying affected systems;
and making various assessments of Year 2000 readiness of key third parties.
Based upon its activities to date, the company does not believe that these
factors will cause its current cost and timetable projections to differ
significantly from those estimated. However, the company cannot reasonably
estimate the potential impact on its financial condition, results of operations
or liquidity if critical third parties, including suppliers, customers and
governments, do not become Year 2000-capable on a timely basis.
European Monetary Union
On May 2, 1998, the final decision was made to form the European Monetary Union
(EMU), comprised of 11 out of the 15 member countries of the European Union, and
to introduce a common currency, the euro, on January 1, 1999.
36 DuPont
<PAGE>
Management's Discussion and Analysis
On December 31, 1998, the 11 participating countries fixed the irrevocable
currency exchange rates between their national currencies and the euro. At that
time, the euro began to trade on worldwide currency exchanges and was used in
business transactions. During the transition period, January 1, 1999 - January
1, 2002, both the euro and national currencies will coexist. The national
currencies will remain legal tender until at least January 1, 2002, but not
later than July 1, 2002. In January 2002 euro notes and coins will be introduced
and become legal tender while national currencies will start to be withdrawn
from circulation by July 1, 2002, at the latest.
The company recognized the introduction of the euro as a significant opportunity
and organized itself to handle transactions with its business partners in euros.
The company does business in euros by preference within all EMU countries.
Further, the company does not expect the euro conversion to have a material
adverse impact on its financial condition, results of operations or liquidity.
Environmental Matters
DuPont operates manufacturing facilities, product-handling and distribution
facilities around the world. These facilities are significantly affected by a
broad array of environmental laws and regulations. Company policy requires that
all operations fully meet or exceed legal and regulatory requirements. DuPont
has implemented voluntary programs to reduce air emissions, curtail the
generation of hazardous waste, decrease the volume of wastewater discharges and
improve the efficiency of energy use. The costs of complying with complex
environmental laws and regulations, as well as internal voluntary programs, are
significant and will continue to be so for the foreseeable future. These costs
may increase in the future, but are not expected to have a material impact on
the company's competitive or financial position.
In 1998 DuPont spent about $220 million for environmental capital projects
either required by law or necessary to meet the company's internal waste
elimination and pollution prevention goals. The company currently estimates
expenditures for environmental-related capital projects will total $220 million
in 1999. Significant capital expenditures may be required over the next decade
for treatment, storage and disposal facilities for solid and hazardous waste and
for compliance with the Clean Air Act (CAA) and its 1990 amendments. Until all
new CAA regulatory requirements are known, considerable uncertainty will remain
regarding future estimates of capital expenditures. Total CAA capital costs over
the next two years are currently estimated to range from $10 million to $50
million.
The Environmental Protection Agency (EPA) has challenged the U.S. chemical
industry to conduct screening level health and environmental effects testing on
nearly 3,000 high production volume (HPV) chemicals or to make equivalent
information publicly available. A HPV chemical is a chemical listed on the 1990
Inventory Update Rule with an annual U.S. cumulative production of 1 million
pounds or more. The cost of testing to DuPont for HPV chemicals it makes is
estimated to be $10 million to $15 million over the next five years; for the
entire industry, the cost of testing is estimated to be $500 million.
Increasing attention has been focused on the issue of global climate change
since approval of the Kyoto Protocol in December 1997. If ratified by sufficient
number of countries over the next few years, this would establish significant
emission reduction targets for six gases considered to have global warming
potential. DuPont has a stake in a number of these gases: CO2, N2O, HFCs and
PFCs, but has been reducing its greenhouse gas emissions since 1991 and is well
ahead of the target/timetable contemplated by the Protocol, on a global basis.
Specific measures to implement the Protocol are not scheduled to be decided
before the end of 2000 in the global negotiation, but individual countries are
beginning to consider strategies for meeting their targets.
Estimated pretax environmental expenses charged to current operations totaled
about $560 million in 1998 as compared to $570 million in 1997. These expenses
include the remediation accruals discussed below, operating, maintenance and
depreciation costs for solid waste, air and water pollution control facilities
and the costs of environmental research activities. The largest of these
expenses resulted from the operation of water pollution control facilities and
solid waste management facilities for about $150 million and $170 million,
respectively. About 88 percent of total annual expenses resulted from the
operations in the United States.
REMEDIATION ACCRUALS
DuPont accrues for remediation activities when it is probable that a liability
has been incurred and reasonable estimates of the liability can be made. These
accrued liabilities exclude claims against third
DuPont 37
<PAGE>
Management's Discussion and Analysis
parties and are not discounted. Much of this liability results from the
Comprehensive Environmental Response, Compensation and Liability Act (CERCLA,
often referred to as Superfund), the Resource Conservation and Recovery Act
(RCRA) and similar state laws that require the company to undertake certain
investigative and remedial activities at sites where the company conducts or
once conducted operations or at sites where company-generated waste was
disposed. The accrual also includes a number of sites identified by the company
that may require environmental remediation, but which are not currently the
subject of CERCLA, RCRA or state enforcement activities. Over the next one to
two decades the company may incur significant costs under both CERCLA and RCRA.
Considerable uncertainty exists with respect to these costs and under adverse
changes in circumstances, potential liability may exceed amounts accrued as of
December 31, 1998.
Remediation activities vary substantially in duration and cost from site to site
depending on the mix of unique site characteristics, evolving remediation
technologies, diverse regulatory agencies and enforcement policies and the
presence or absence of potentially liable third parties. Therefore, it is
difficult to develop reasonable estimates of future site remediation costs. At
December 31, 1998, the company's balance sheet included an accrued liability of
$462 million as compared to $447 million and $466 million at year-end 1997 and
1996, respectively. Approximately 80 percent of the company's environmental
reserve at December 31, 1998, was attributable to RCRA and similar remediation
liabilities and 20 percent to CERCLA liabilities. During 1998, remediation
accruals of $77 million were added to the reserve compared to $42 million in
1997 and $62 million in 1996.
REMEDIATION EXPENDITURES
RCRA extensively regulates the treatment, storage and disposal of hazardous
waste and requires a permit to conduct such activities. The law requires that
permitted facilities undertake an assessment of environmental conditions at the
facility. If conditions warrant, companies may be required to remediate
contamination caused by prior operations. As contrasted by CERCLA, the RCRA
corrective action program results in the cost of corrective action activities
being typically borne solely by the company. The company anticipates that
significant ongoing expenditures for RCRA remediation activities may be required
over the next two decades, although annual expenditures for the near term are
not expected to vary significantly from the range of such expenditures over the
past few years. Longer term, expenditures are subject to considerable
uncertainty and may fluctuate significantly. The company's expenditures
associated with RCRA and similar remediation activities were approximately $40
million in 1998, $46 million in 1997 and $60 million in 1996.
The company from time to time receives requests for information or notices of
potential liability from the EPA and state environmental agencies alleging that
the company is a "potentially responsible party" (PRP) under CERCLA or an
equivalent state statute. The company also has on occasion been made a party to
cost recovery litigation by those agencies or by private parties. These
requests, notices and lawsuits assert potential liability for remediation costs
at various sites that typically are not company owned but allegedly contain
wastes attributable to the company's past operations. As of December 31, 1998,
the company had been notified of potential liability under CERCLA or state law
at about 325 sites around the United States, with active remediation under way
at 137 of those sites. In addition, the company has resolved its liability at
109 sites, either by completing remedial actions with other PRPs or by
participating in "de minimis buyouts" with other PRPs whose waste, like the
company's, represented only a small fraction of the total waste present at a
site. The company received notice of potential liability at eight new sites
during 1998 compared with 11 similar notices in 1997 and seven in 1996. In 1998,
17 sites were settled by the company. The company's expenditures associated with
CERCLA and similar state remediation activities were approximately $22 million
in 1998, $15 million in 1997 and $21 million in 1996.
For most Superfund sites, the company's potential liability will be
significantly less than the total site remediation costs because the percentage
of waste attributable to the company versus that attributable to all other PRPs
is relatively low. Other PRPs at sites where the company is a party typically
have the financial strength to meet their obligations and, where they do not, or
where PRPs cannot be located, the company's own share of liability has not
materially increased. There are relatively few sites where the company is a
major participant, and neither the cost to the company of remediation at those
sites, nor at all CERCLA sites in the aggregate, is expected to have a material
impact on the competitive or financial position of the company.
Total expenditures for previously accrued remediation activities under CERCLA,
RCRA and similar state laws were $62 million in
38 DuPont
<PAGE>
Management's Discussion and Analysis
1998, $61 million in 1997 and $81 million in 1996. Although future remediation
expenditures in excess of current reserves is possible, the effect on future
financial results is not subject to reasonable estimation because of the
considerable uncertainty regarding the cost and timing of expenditures.
Forward-Looking Statements
This report contains forward-looking statements which may be identified by their
use of words like "plans," "expects," "will," "anticipates," "intends,"
"projects," "estimates" or other words of similar meaning. All statements that
address expectations or projections about the future, including statements about
the company's strategy for growth, product development, market position,
expenditures, financial results and the company's efforts to remediate Year 2000
issues, are forward-looking statements.
Forward-looking statements are based on certain assumptions and expectations of
future events. The company cannot guarantee that these assumptions and
expectations are accurate or will be realized. In addition to the factors
discussed in this report, the following are some of the important factors that
could cause the company's actual results to differ materially from those
projected in any such forward-looking statements:
. The company operates in approximately 65 countries worldwide and derives
about half of its revenues from sales outside the United States. Changes in
the laws or policies of other governmental and quasi-governmental
activities in the countries in which the company operates could affect its
business in the country and the company's results of operations. In
addition, economic factors (including inflation and fluctuations in
interest rates, foreign currency exchange rates) and competitive factors
(such as greater price competition or a decline in U.S. or European
industry sales from slowing economic growth) in those countries could
affect the company's revenues, expenses and results.
. The company's growth objectives are largely dependent on its ability to
renew its pipeline of new products and to bring those products to market.
This ability may be adversely affected by difficulties or delays in product
development including, but not limited to, the inability to identify viable
new products; successfully complete clinical trials of new pharmaceuticals;
obtain relevant regulatory approvals, which may include approval from the
U.S. Food and Drug Administration; the ability to obtain adequate
intellectual property protection; or gain market acceptance of the new
products.
. As part of its strategy for growth, the company has made and may continue
to make acquisitions, divestitures and alliances. There can be no assurance
that these will be completed or beneficial to the company.
. The company has articulated and updated in its periodic reports filed with
the Securities and Exchange Commission on Forms 10-Q and 10-K its timetable
and assessment of costs to become Year 2000-capable. The failure of the
company or third parties with which it conducts business to become Year
2000-capable could have a material adverse affect on the company's
financial condition, results of operation and liquidity.
. The company's facilities are subject to a broad array of environmental laws
and regulations. The costs of complying with complex environmental laws and
regulations as well as internal voluntary programs, are significant and
will continue to be so for the foreseeable future. The company's accruals
for such costs and liabilities may not be adequate since the estimates on
which the accruals are based depend on a number of factors including the
nature of the allegation, the complexity of the site, the nature of the
remedy, the outcome of discussions with regulatory agencies and other
potentially responsible parties (PRPs) at multi-party sites, and the number
and financial viability of other PRPs.
. The company's results of operations could be affected by significant
litigation adverse to the company including product liability claims,
patent infringement claims and antitrust claims.
. The profitability of the company's petroleum business (Conoco Inc.),
currently reported as discontinued operations, will be affected by the
prices for crude oil, natural gas and refined products. These prices are
subject to wide fluctuations in response to changes in global and regional
supply over which the company has no control, including political
developments and the ability of the Organization of Petroleum Exporting
Countries and other producing nations to set and maintain production levels
and prices. The company has announced its intention to completely divest
itself of Conoco no later than the third quarter of 1999.
The foregoing list of important factors is not inclusive, or necessarily in
order of importance.
DuPont 39
<PAGE>
Responsibility for Financial Reporting
Management is responsible for the consolidated financial statements and the
other financial information contained in this Annual Report. The financial
statements have been prepared in accordance with generally accepted accounting
principles considered by management to present fairly the company's financial
position, results of operations and cash flows. The financial statements include
some amounts that are based on management's best estimates and judgments.
The company's system of internal controls is designed to provide reasonable
assurance as to the protection of assets against loss from unauthorized use or
disposition, and the reliability of financial records for preparing financial
statements and maintaining accountability for assets. The company's business
ethics policy is the cornerstone of our internal control system. This policy
sets forth management's commitment to conduct business worldwide with the
highest ethical standards and in conformity with applicable laws. The business
ethics policy also requires that the documents supporting all transactions
clearly describe their true nature and that all transactions be properly
reported and classified in the financial records. The system is monitored by an
extensive program of internal audit, and management believes that the system of
internal controls at December 31, 1998, meets the objectives noted above.
The financial statements have been audited by the company's independent
accountants, PricewaterhouseCoopers LLP. The purpose of their audit is to
independently affirm the fairness of management's reporting of financial
position, results of operations and cash flows. To express the opinion set forth
in their report, they study and evaluate the internal controls to the extent
they deem necessary. Their report is shown on this page. The adequacy of the
company's internal controls and the accounting principles employed in financial
reporting are under the general oversight of the Audit Committee of the Board of
Directors. This committee also has responsibility for employing the independent
accountants, subject to stockholder ratification. No member of this committee
may be an officer or employee of the company or any subsidiary or affiliated
company. The independent accountants and the internal auditors have direct
access to the Audit Committee, and they meet with the committee from time to
time, with and without management present, to discuss accounting, auditing and
financial reporting matters.
/s/ Charles O. Holliday, Jr. /s/ Gary M. Pfeiffer
Charles O. Holliday, Jr. Gary M. Pfeiffer
Chairman of the Board Senior Vice President
and Chief Executive Officer and Chief Financial Officer
February 19, 1999
Report of Independent Accountants
To the Stockholders and the Board of Directors of
E. I. du Pont de Nemours and Company
In our opinion, the consolidated financial statements appearing on pages 41-67
of this Annual Report present fairly, in all material respects, the financial
position of E. I. du Pont de Nemours and Company and its subsidiaries at
December 31, 1998 and 1997, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles. These financial
statements are the responsibility of the company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
February 19, 1999
40 DuPont
<PAGE>
Financial Statements
E.I. du Pont de Nemours and Company and Consolidated Subsidiaries
Consolidated Income Statement
(Dollars in millions, except per share)
- --------------------------------------------------------------------------------
1998 1997 1996
--------------------------------
Sales $ 24,767 $ 24,089 $ 23,644
Other Income (Note 3) 981 1,005 1,101
Total 25,748 25,094 24,745
--------------------------------
Cost of Goods Sold and Other Operating Charges 15,664 15,564 15,314
Selling, General and Administrative Expenses 2,115 2,061 2,119
Depreciation and Amortization 1,452 1,361 1,526
Research and Development Expense 1,308 1,072 990
Interest Expense (Note 4) 520 389 409
Purchased In-Process Research and Development
(Note 5) 1,443 1,478 --
Employee Separation Costs and Write-down of
Assets (Note 6) 633 340 --
--------------------------------
Total 23,135 22,265 20,358
--------------------------------
Income from Continuing Operations Before
Income Taxes and Minority Interests 2,613 2,829 4,387
Provision for Income Taxes (Note 7) 941 1,354 1,416
Minority Interests in Earnings of
Consolidated Subsidiaries 24 43 40
--------------------------------
Income from Continuing Operations 1,648 1,432 2,931
Discontinued Operations (Note 2)
Income from Operations of
Discontinued Business, Net of
Income Taxes 594 973 705
Gain on Disposal of Discontinued
Business, Net of Income Taxes 2,439 -- --
--------------------------------
Income Before Extraordinary Item 4,681 2,405 3,636
Extraordinary Charge From Early
Extinguishment of Debt, Net of Income
Taxes (Note 8) (201) -- --
Net Income $ 4,480 $ 2,405 $ 3,636
================================================================================
Basic Earnings (Loss) Per Share of
Common Stock (Note 9)
Continuing Operations Before
Extraordinary Item $ 1.45 $ 1.26 $ 2.60
Discontinued Operations 2.69 .86 .63
--------------------------------
Before Extraordinary Item 4.14 2.12 3.23
Extraordinary Charge (.18) -- --
--------------------------------
Net Income $ 3.96 $ 2.12 $ 3.23
Diluted Earnings (Loss) Per Share ================================
of Common Stock (Note 9)
Continuing Operations Before
Extraordinary Item $ 1.43 $ 1.24 $ 2.56
Discontinued Operations 2.65 .84 .62
--------------------------------
Before Extraordinary Item 4.08 2.08 3.18
Extraordinary Charge (.18) -- --
--------------------------------
Net Income $ 3.90 $ 2.08 $ 3.18
================================================================================
See pages 45-67 for Notes to Financial Statements.
DuPont 41
<PAGE>
Financial Statements
E.I. du Pont de Nemours and Company and Consolidated Subsidiaries
Consolidated Balance Sheet
(Dollars in millions, except per share)
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Assets
Current Assets
Cash and Cash Equivalents (Note 10) $ 1,059 $ 1,004
Marketable Securities (Note 10) 10 142
Accounts and Notes Receivable (Note 11) 4,201 4,309
Inventories (Note 12) 3,129 2,792
Prepaid Expenses 192 169
Deferred Income Taxes (Note 7) 645 691
------------------------------
Total Current Assets 9,236 9,107
------------------------------
Property, Plant and Equipment (Note 13) 34,728 32,911
Less: Accumulated Depreciation and Amortization 20,597 20,310
------------------------------
Net Property, Plant and Equipment 14,131 12,601
------------------------------
Investment in Affiliates (Note 14) 1,796 2,372
Other Assets (Notes 7 and 15) 4,956 4,211
Net Assets of Discontinued Operations (Note 2) 8,417 8,398
------------------------------
Total $ 38,536 $ 36,689
================================================================================
Liabilities and Stockholders' Equity
Current Liabilities
Accounts Payable (Note 16) $ 1,929 $ 1,921
Short-Term Borrowings and Capital Lease
Obligations (Note 17) 6,629 6,152
Income Taxes (Note 7) 130 120
Other Accrued Liabilities (Note 18) 2,922 3,024
------------------------------
Total Current Liabilities 11,610 11,217
Long-Term Borrowings and Capital Lease
Obligations (Note 19) 4,495 5,897
Other Liabilities (Note 20) 7,640 7,444
Deferred Income Taxes (Note 7) 430 500
------------------------------
Total Liabilities 24,175 25,058
------------------------------
Minority Interests 407 361
------------------------------
Stockholders' Equity (next page)
Preferred Stock, without par value -
cumulative; 23,000,000 shares
authorized; issued at December 31:
$4.50 Series--1,672,594 shares
(callable at $120) 167 167
$3.50 Series--700,000 shares
(callable at $102) 70 70
Common Stock, $.30 par value;
1,800,000,000 shares authorized;
Issued at December 31, 1998--1,140,354,154;
1997--1,152,762,128 342 346
Additional Paid-In Capital 7,854 7,991
Reinvested Earnings 6,705 4,389
Accumulated Other Comprehensive Loss (432) (297)
Common Stock Held in Trust for Unearned
Employee Compensation and Benefits
(Flexitrust), at Market
(Shares: December 31, 1998--14,167,867;
1997--23,245,747) (752) (1,396)
------------------------------
Total Stockholders' Equity 13,954 11,270
------------------------------
Total $ 38,536 $ 36,689
================================================================================
See pages 45-67 for Notes to Financial Statements.
42 DuPont
<PAGE>
Financial Statements
E.I. du Pont de Nemours and Company and Consolidated Subsidiaries
Consolidated Statement of Stockholders' Equity (Notes 21 and 22)
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated
Additional Other Total Total
Preferred Common Paid-In Reinvested Comprehensive Treasury Stockholders' Comprehensive
Stock Stock Capital Earnings Loss Flexitrust Stock Equity Income
-----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Balance January 1, 1996 $ 237 $ 441 $ 8,689 $ 9,503 $ (113) $ (1,645) $(8,789) $ 8,323
----------------------------------------------------------------------------------------------
Net Income 3,636 $ 3,636
Cumulative Translation
Adjustment (23) (23)
Minimum Pension
Liability (3) (3)
-------------
Total Comprehensive
Income $ 3,610
=============
Common Dividends
($1.115 per share) (1,251)
Preferred Dividends (10)
Treasury Stock
Retirement (94) (1,748) (6,947) 8,789
Warrant Repurchase (504)
Common Stock Issued
Flexitrust (289) 644
Compensation Plans 70
Adjustments to Market
Value 458 (458)
----------------------------------------------------------------------------------------------
Balance December 31, 1996 $ 237 $ 347 $ 6,676 $ 4,931 $ (139) $ (1,459) $ - $10,593
----------------------------------------------------------------------------------------------
1997
Net Income 2,405 $ 2,405
Cumulative Translation
Adjustment (130) (130)
Minimum Pension Liability (28) (28)
-------------
Total Comprehensive
Income $ 2,247
=============
Common Dividends
($1.23 per share) (1,391)
Preferred Dividends (10)
Treasury Stock
Acquisition (1,747)
Retirement (8) (193) (1,546) 1,747
Common Stock Issued
Flexitrust (299) 419
Businesses Acquired 7 1,317
Compensation Plans 134
Adjustments to Market
Value 356 (356)
----------------------------------------------------------------------------------------------
Balance December 31, 1997 $ 237 $ 346 $ 7,991 $ 4,389 $ (297) $ (1,396) $ - $11,270
----------------------------------------------------------------------------------------------
1998
Net Income 4,480 $ 4,480
Cumulative Translation
Adjustment (23) (23)
Minimum Pension Liability (112) (112)
-------------
Total Comprehensive
Income $ 4,345
=============
Common Dividends ($1.365
per share) (1,539)
Preferred Dividends (10)
Treasury Stock
Acquisition (704)
Issuance/Retirement (4) (85) (615) 704
Common Stock Issued
Flexitrust (279) 598
Businesses Acquired 4
Compensation Plans 269
Adjustments to Market
Value (46) 46
----------------------------------------------------------------------------------------------
Balance December 31, 1998 $ 237 $ 342 $ 7,854 $ 6,705 $ (432) $ (752) $ - $13,954
===========================================================================================================
</TABLE>
See pages 45-67 for Notes to Financial Statements.
DuPont 43
<PAGE>
Financial Statements
E.I. du Pont de Nemours and Company and Consolidated Subsidiaries
<TABLE>
<CAPTION>
Consolidated Statement of Cash Flows
(Dollars in millions)
- -------------------------------------------------------------------------------------------------
1998 1997 1996
------------------------------------
<S> <C> <C> <C>
Cash and Cash Equivalents at Beginning of Year $ 1,004 $ 1,066 $ 1,408
------------------------------------
Cash Provided by Continuing Operations
Net Income 4,480 2,405 3,636
Adjustments to Reconcile Net Income to Cash
Provided by Continuing Operations:
Net Income from Discontinued Operations (3,033) (973) (705)
Extraordinary Charge from Early Retirement of
Debt (Note 8) 275 -- --
Depreciation and Amortization 1,452 1,361 1,526
Purchased In-Process Research and
Development (Note 5) 1,443 1,478 --
Other Noncash Charges and Credits--Net (319) 569 (270)
Decrease (Increase) in Operating Assets:
Accounts and Notes Receivable (580) (783) (262)
Inventories and Other Operating Assets 34 (335) (258)
Increase (Decrease) in Operating Liabilities:
Accounts Payable and Other Operating Liabilities 254 (20) 151
Accrued Interest and Income Taxes (Notes 4 and 7) 126 325 291
------------------------------------
Cash Provided by Continuing Operations 4,132 4,027 4,109
------------------------------------
Investment Activities of Continuing Operations (Note 23)
Purchases of Property, Plant and Equipment (2,240) (2,089) (1,665)
Investments in Affiliates (63) (1,920) (82)
Payments for Businesses (Net of Cash Acquired) (3,282) (1,238) (75)
Proceeds from Sales of Assets 946 558 996
Net Proceeds from Sale of Interest in Petroleum
Operations (Note 2) 4,206 -- --
Net Decrease (Increase) in Short-Term Financial
Instruments 131 115 (197)
Miscellaneous--Net 124 552 36
------------------------------------
Cash Used for Investment Activities of
Continuing Operations (178) (4,022) (987)
------------------------------------
Financing Activities
Dividends Paid to Stockholders (1,549) (1,401) (1,261)
Net Increase (Decrease) in Short-Term Borrowings 1,574 1,737 (954)
Long-Term and Other Borrowings:
Receipts 6,335 6,462 3,194
Payments (8,966) (5,562) (5,171)
Acquisition of Treasury Stock (Note 21) (704) (1,747) --
Repurchase of Warrants (Note 21) -- -- (504)
Proceeds from Exercise of Stock Options 257 116 315
Increase (Decrease) in Minority Interests -- (56) 363
------------------------------------
Cash Used for Financing Activities (3,053) (451) (4,018)
------------------------------------
Net Cash Flow from Discontinued Operations (568) 483 606
Effect of Exchange Rate Changes on Cash 97 (99) (52)
------------------------------------
Cash and Cash Equivalents at End of Year $ 1,434* $ 1,004 $ 1,066
------------------------------------
Increase (Decrease) in Cash and Cash Equivalents $ 430 $ (62) $ (342)
=================================================================================================
</TABLE>
*Includes cash and cash equivalents classified in the Consolidated Balance Sheet
within "Net Assets of Discontinued Operations."
See pages 45-67 for Notes to Financial Statements.
44 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
1. Summary of Significant Accounting Policies
DuPont observes the generally accepted accounting principles described below.
These, together with the other notes that follow, are an integral part of the
consolidated financial statements.
Basis of Consolidation
The accounts of wholly owned and majority-owned subsidiaries are included in the
consolidated financial statements. Investments in affiliates owned 20 percent or
more are accounted for under the equity method. Other securities and
investments, excluding marketable securities, are generally carried at cost. The
company's petroleum business is reported as discontinued operations and is
discussed in Note 2.
Subsidiary Stock Transactions
Gains or losses arising from issuances by a subsidiary of its own stock in a
public offering are recorded as nonoperating income.
Inventories
Substantially all inventories are valued at cost as determined by the last-in,
first-out (LIFO) method; in the aggregate, such valuations are not in excess of
market. Elements of cost in inventories include raw materials, direct labor and
manufacturing overhead. Stores and supplies are valued at cost or market,
whichever is lower; cost is generally determined by the average cost method.
Property, Plant and Equipment
Property, plant and equipment (PP&E) is carried at cost and, where placed in
service in 1995 and following years, is depreciated using the straight-line
method. PP&E placed in service prior to 1995 is depreciated under the
sum-of-the-years' digits method and other substantially similar methods.
Depreciation rates are based on estimated useful lives ranging from 3 to 25
years. Capitalizable costs associated with internal use of computer software are
amortized on a straight-line basis over 5 to 7 years. Generally, for PP&E
acquired in 1991 and later, the gross carrying value and related accumulated
depreciation of assets surrendered, retired, sold or otherwise disposed of are
removed from the accounts and included in determining gain or loss on such
disposals. For disposals of PP&E acquired prior to 1991, the gross carrying
value is charged to accumulated depreciation and any salvage or other recovery
therefrom is credited to accumulated depreciation.
Maintenance and repairs are charged to operations; replacements and betterments
are capitalized.
Intangible Assets
Identifiable intangible assets such as purchased technology, patents and
trademarks are amortized using the straight-line method over their estimated
useful lives, generally for periods ranging from 5 to 40 years. Goodwill is
amortized over periods up to 40 years using the straight-line method. The
company continually evaluates the reasonableness of its amortization of
intangibles. In addition, if it becomes probable that expected future
undiscounted cash flows associated with intangible assets are less than their
carrying value, the assets are written down to their fair value.
Environmental Liabilities and Expenditures
Accruals for environmental matters are recorded in operating expenses when it is
probable that a liability has been incurred and the amount of the liability can
be reasonably estimated. Accrued liabilities do not include claims against third
parties and are not discounted.
Costs related to environmental remediation are charged to expense. Other
environmental costs are also charged to expense unless they increase the value
of the property and/or mitigate or prevent contamination from future operations,
in which event they are capitalized.
Income Taxes
The provision for income taxes has been determined using the asset and liability
approach of accounting for income taxes. Under this approach, deferred taxes
represent the future tax consequences expected to occur when the reported
amounts of assets and liabilities are recovered or paid. The provision for
income taxes represents income taxes paid or payable for the current year plus
the change in deferred taxes during the year. Deferred taxes result from
differences between the financial and tax bases of the company's assets and
liabilities and are adjusted for changes in tax rates and tax laws when changes
are enacted. Valuation allowances are recorded to reduce deferred tax assets
when it is more likely than not that a tax benefit will not be realized.
Provision has been made for income taxes on unremitted earnings of subsidiaries
and affiliates, except for subsidiaries in which earnings are deemed to be
permanently invested. Investment tax credits or grants are accounted for in the
period earned (the flow-through method).
DuPont 45
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
Foreign Currency Translation
The U.S. dollar is the "functional currency" of the company's worldwide
continuing operations. All foreign currency asset and liability amounts are
remeasured into U.S. dollars at end-of-period exchange rates, except for
inventories, prepaid expenses and property, plant and equipment, which are
remeasured at historical rates. Foreign currency income and expenses are
remeasured at average exchange rates in effect during the year, except for
expenses related to balance sheet amounts remeasured at historical exchange
rates. Exchange gains and losses arising from remeasurement of foreign
currency-denominated monetary assets and liabilities are included in income in
the period in which they occur.
Hedging and Trading Activities
The company routinely uses forward exchange contracts to hedge its net exposure,
by currency, related to monetary assets and liabilities denominated in
currencies other than the U.S. dollar. Exchange gains and losses associated with
these contracts, net of their related tax effects, are included in income in the
period in which they occur and substantially offset the exchange gains and
losses arising from remeasurement as described above. As a result, net exchange
gains and losses are not material in amount.
The company selectively enters into forward exchange contracts and similar
agreements to effectively convert firm foreign currency commitments to
functional currency-denominated transactions. Gains and losses on these firm
commitment hedges are deferred and included in the functional currency
measurement of the related foreign currency-denominated transactions. Changes in
the fair value of forward exchange contracts that do not qualify for hedge
accounting treatment are reflected in income in the period the change occurs.
The company enters into interest rate swap agreements as part of its program to
manage the fixed and floating interest rate mix of its total debt portfolio and
related overall cost of borrowing. The differential to be paid or received is
accrued as interest rates change and is recognized in income over the life of
the agreements.
The company enters into commodity futures contracts to hedge its exposure to
price fluctuations for certain raw material purchases. Gains and losses on these
hedge contracts are deferred and included in the measurement of the related
transaction.
In the event that a derivative designated as a hedge of a firm commitment or
anticipated transaction is terminated prior to the maturation of the hedged
transaction, gains or losses realized at termination are deferred and included
in the measurement of the hedged transaction. If a hedged transaction matures,
or is sold, extinguished or terminated prior to the maturity of a derivative
designated as a hedge of such transaction, gains or losses associated with the
derivative through the date the transaction matured are included in the
measurement of the hedged transaction and the derivative is reclassified as for
trading purposes. Derivatives designated as a hedge of an anticipated
transaction are reclassified as for trading purposes if the anticipated
transaction is no longer likely to occur.
In the Consolidated Statement of Cash Flows, the company reports the cash flows
resulting from its hedging activities in the same category as the related item
that is being hedged.
Preparation of Financial Statements
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
Reclassifications
Certain reclassifications of prior years' data have been made to conform to 1998
classifications.
2. Discontinued Operations
On September 28, 1998, the company announced that the Board of Directors had
approved a plan to divest the company's 100 percent-owned petroleum business
(Conoco Inc.). On October 21, 1998, Conoco sold, in an initial public offering
(IPO), 191,456,427 shares of Conoco Class A common stock at $23 per share for
net proceeds of $4,228, which were remitted to DuPont to repay a portion of
Conoco's intercompany indebtedness to DuPont. In addition, $22 in other costs
directly related to the IPO were incurred. The company intends to complete the
divestiture with a tax-free split off by exchanging its remaining Conoco shares
(69.5 percent) for DuPont shares no later than third quarter 1999. The company
has not recognized a deferred tax liability for the difference between the book
basis and tax basis of its investment in Conoco's common stock because the
company does not expect this basis difference to become subject to tax. The
46 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
company's consolidated financial statements and notes report its petroleum
business as discontinued operations. Prior periods have been restated. Results
reported separately by Conoco are reported on a stand-alone basis and may differ
from results based on discontinued operations reporting as discussed below. In
addition, beginning October 22, 1998, the company's results from discontinued
operations reflect minority interests of 30.5 percent.
Income from operations of discontinued business reflects Conoco's operations
through September 30, 1998. Effective October 1, 1998, Conoco's results are
reported as part of gain on disposal of discontinued business, and include the
gain realized by the company from the IPO. For the three months and year ended
December 31, 1998, such gain is $2,439. This includes a loss from Conoco's
operations of $147 (after a tax benefit of $116) and reflects nonrecurring
charges of $164; principally $127 for compensation expense for options granted
by Conoco in substitution for DuPont options held by Conoco employees, $69 for
employee separation costs and property impairments, partially offset by $32 of
asset sales. In addition, net gain from sale of stock by subsidiary includes
charges of $40 that are a direct result of the decision to divest Conoco. Also,
1998 results of income from operations of discontinued business includes a $31
tax benefit related to the sale of an international subsidiary, partly offset by
a $28 litigation accrual in the United States. The year ended December 31, 1997,
includes charges of $112 for impairment of nonrevenue producing properties and
$55 for a write-down of an office building held for sale, substantially offset
by a $161 gain on the sale of certain North Sea producing and exploration
properties. The year ended December 31, 1996, includes charges of $63 for
write-down of investment in an European natural gas marketing joint venture and
$22 principally for employee separation costs in the United States, partly
offset by a net benefit of $44 related to environmental insurance recoveries.
The cumulative translation adjustment reflected in the Consolidated Balance
Sheet and Consolidated Statement of Stockholders' Equity pertains to Conoco's
operations. Effective January 1, 1996, local currency was designated as the
functional currency for Conoco's integrated European petroleum operations to
properly reflect changed circumstances in the primary economic environment in
which these subsidiaries operate. For Conoco subsidiaries whose functional
currency is local currency, assets and liabilities denominated in local currency
are translated into U.S. dollars at end-of-period exchange rates, and resultant
translation adjustments are reported as a separate component of stockholders'
equity.
- --------------------------------------------------------------------------------
Income from Operations of
Discontinued Business 1 1998 1997 1996
- --------------------------------------------------------------------------------
Net Sales $14,446 $20,990 $20,166
Income Before Income Taxes and
Minority Interests 2 921 1,918 1,654
Provision for Income Taxes 311 921 930
Minority Interests 16 24 19
-------------------------------------------
Income from Operations,
Net of Income Taxes $ 594 $ 973 $ 705
================================================================================
1 1998 results are nine months ended September 30, 1998.
2 Includes net interest expense allocations (based on the ratio of net assets
of discontinued operations to consolidated net assets plus debt) of $240
through September 30, 1998, $248 for 1997, and $285 for 1996.
- --------------------------------------------------------------------------------
Gain on Disposal of Discontinued Business 1 1998
- --------------------------------------------------------------------------------
Net Sales $ 4,737
(Loss) Before Income Taxes and
Minority Interests 2 (308)
Provision for Income Taxes (116)
Minority Interests (45)
-----------
(Loss) from Operations, Net of Income Taxes (147)
Net Gain from Sale of Stock by Subsidiary 2,586
-----------
Gain on Disposal of Discontinued Business,
Net of Income Taxes $ 2,439
================================================================================
1 Three months ended December 31, 1998.
2 Includes interest expense allocation (based on specific debt to be assumed)
of $93.
The 1998 effective income tax rate (EITR) of 31.8 percent on Conoco's operations
is significantly lower than the 1997 EITR of 48.0 percent and the 1996 EITR of
56.2 percent due to a larger U.S. alternative fuels tax credit, realization of a
tax benefit on the sale of a subsidiary and a greater percentage of earnings in
countries with lower effective tax rates.
It is expected that there will be a gain on ultimate disposal of Conoco, taking
into account its estimated results in 1999.
- --------------------------------------------------------------------------------
Net Assets of Discontinued Operations 1998 1997
- --------------------------------------------------------------------------------
December 31
Cash and Cash Equivalents $ 375 $ --
Other Current Assets 2,864 2,938
Property, Plant and Equipment - net 11,438 10,982
Other Assets 2,011 1,490
Current Liabilities (2,473) (3,023)
Other Liabilities (4,115) (3,680)
Minority Interests (1,683) (309)
--------------------------
Net Assets of Discontinued Operations $ 8,417 $ 8,398
================================================================================
DuPont 47
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
As of December 31, 1998, DuPont and Conoco had an intercompany receivable and
payable, respectively, for $4,596 that has been eliminated for purposes of
presenting net assets of discontinued operations. As described in the
Restructuring, Transfer and Separation Agreement, Conoco is obligated to repay
all outstanding debt owed to DuPont at such time as DuPont's voting power
becomes less than 50 percent of Conoco.
3. Other Income
- --------------------------------------------------------------------------------
1998 1997 1996
------------------------------------
Royalty income $ 132 $ 64 $ 72
Interest income, net of
miscellaneous interest expense 112 131 118
Equity in earnings of affiliates
(see Note 14) 278 643 694
Sales of assets 375* 64 162
Miscellaneous income and
expenses--net 84 103 55
------------------------------------
$ 981 $1,005 $1,101
- --------------------------------------------------------------------------------
* Includes a $217 gain on the sale of substantially all of the company's
remaining interest in CONSOL Energy Inc.
4. Interest Expense
- --------------------------------------------------------------------------------
1998 1997 1996
------------------------------------
Interest incurred $640 $469 $479
Less: Interest capitalized 120 80 70
------------------------------------
$520 $389 $409
- --------------------------------------------------------------------------------
Interest paid (net of amounts capitalized) was $553 in 1998, $324 in 1997 and
$451 in 1996.
5. Purchased In-Process Research and Development
Purchased in-process research and development represents the value assigned in a
purchase business combination to research and development projects of the
acquired business that were commenced but not yet completed at the date of
acquisition, for which technological feasibility has not been established and
which have no alternative future use in research and development activities or
otherwise. In accordance with Statement of Financial Accounting Standards No. 2,
"Accounting for Research and Development Costs," as interpreted by FASB
Interpretation No. 4, amounts assigned to purchased in-process research and
development meeting the above criteria must be charged to expense at the date of
consummation of the purchase business combination.
In 1997, a charge of $903 was recorded in conjunction with the purchase of a 20
percent interest in Pioneer Hi-Bred International Inc. In addition, charges of
$500 and $75 were recorded in conjunction with the purchase of Protein
Technologies International and the ICI polyester resins and intermediates
businesses, respectively, based on preliminary allocations of purchase
price.
In 1998, charges of $60 and $103 were recorded to revise the preliminary
allocation for Protein Technologies International, and the ICI polyester resins
and intermediates businesses, respectively, upon revision of preliminary
purchase price allocations for these acquisitions. In addition, a charge of $50
was recorded in conjunction with the 1998 acquisition of the ICI polyester films
business based on preliminary allocations of the purchase price for this
acquisition and a charge of $1,230 was recorded in conjunction with the 1998
purchase of Merck & Co.'s interest in The DuPont Merck Pharmaceutical Company,
based on preliminary allocations of purchase price. See Note 23.
6. Employee Separation Costs and Write-down of Assets
During 1998 the company recorded charges totaling $577 directly related to
management decisions to implement company-wide productivity improvement
initiatives. Charges from these initiatives reduced segment earnings as follows:
Agriculture & Nutrition - $19; Nylon Enterprise - $231; Performance Coatings &
Polymers - $25; Pigments & Chemicals - $23; Polyester Enterprise - $158;
Specialty Fibers - $6; Specialty Polymers - $47; Other - $68.
These charges included $310 related to employee separation costs, substantially
all of which were for estimated involuntary and voluntary termination payments
for approximately 4,100 employees, and were based on plans that identified the
number of employees to be terminated, their functions and their businesses.
Approximately two-thirds of the reductions will occur in the United States. As
of December 31, 1998, about 2,700 employees have been terminated under these
initiatives, and about $134 has been settled and charged against the related
liability. The remaining 1,400 employee terminations will occur in 1999.
48 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
The remaining charge of $267 relates to write-downs of property, plant and
equipment, principally due to the shutdown of excess production capacity. The
charge covers the net book value of the facilities and estimated dismantlement
costs less estimated salvage proceeds. The largest component, $114, covers the
shutdown of polyester manufacturing lines at Circleville, Ohio; Cooper River,
South Carolina; Kinston, Cape Fear and Cedar Creek, North Carolina; and
Luxembourg. In addition, $78 represents the shutdown of DuPont Nylon
manufacturing operations at Martinsville, Virginia; Doncaster, United Kingdom;
and Bayswater, Australia. Other charges are principally attributable to the
shutdown of manufacturing and other facilities within the Pigments & Chemicals
and Other segments. DuPont expects to complete these activities in 1999.
In the fourth quarter of 1998, the company also recorded a charge of $56
relating to the impairment of certain intangible assets held for use by the
Pharmaceuticals segment when it was determined that future undiscounted cash
flows associated with these assets were insufficient to recover their carrying
value. The impaired assets principally represent the company's historical
ownership interest in product rights and license agreements contributed in 1991
by Merck & Co. Inc. to The DuPont Merck Pharmaceutical Company. The assets were
written down to fair value, which was determined on the basis of discounted cash
flows.
During 1997 DuPont and the Agfa-Gevaert Group (Agfa) signed an agreement under
which Agfa would acquire DuPont's global graphic arts and offset printing plates
businesses. Agfa agreed to purchase the company's inventory, manufacturing
facilities in Germany and the United Kingdom, and provide employment to most of
the 2,200 DuPont employees working in these businesses. A decision was made to
dispose of these businesses, which are a component of the Other segment, after
it became apparent that the company would not be a leader in this industry. In
connection with the sale, DuPont recorded a charge of $340 in the third quarter
1997 period. This included $233 to write down assets held for sale to their
estimated net realizable value based on the agreement with Agfa, $53 for
employee separation and other people related costs, and $54 to provide for other
expenses associated with exiting these businesses. The number of people
identified for termination was less than 250. Total remaining reserve balances
are approximately $30 at December 31, 1998. The 1997 loss from operations from
these businesses was not material. The transaction closed during the first
quarter of 1998.
7. Provision for Income Taxes
- --------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------------
Current tax expense:
U.S. federal $ 526 $ 841 $ 718
U.S. state and local (15) 45 23
International 447 398 381
-----------------------------------------
Total 958 1,284 1,122
-----------------------------------------
Deferred tax expense:
U.S. federal (129) 110 314
U.S. state and local 21 3 5
International 91 (43) (25)
-----------------------------------------
Total (17) 70 294
-----------------------------------------
Provision for Income Taxes 941 1,354 1,416
Stockholders' Equity
Stock Compensation 1 (82) (96) (69)
Minimum Pension Liability 2 (81) (18) (1)
Extraordinary Loss (74) -- --
Discontinued Operations 195 921 930
-----------------------------------------
Total $ 899 $ 2,161 $ 2,276
================================================================================
1 Represents tax benefit of certain stock compensation amounts that are
deductible for income tax purposes but do not affect net income.
2 Represents deferred tax charge for minimum pension liability recorded in
stockholders' equity. See Note 21.
Total income taxes paid on continuing operations worldwide were $782 in 1998,
$1,094 in 1997 and $1,083 in 1996.
DuPont 49
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
Deferred income taxes result from temporary differences between the financial
and tax bases of the company's assets and liabilities. The tax effects of
temporary differences and tax loss/tax credit carryforwards included in the
deferred income tax provision are as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
------------------------------------
Depreciation $ 185 $ 96 $ 28
Accrued employee benefits 71 63 122
Other accrued expenses 19 9 (63)
Inventories 54 (36) (31)
Unrealized exchange gains (losses) (11) (6) 5
Investment in subsidiaries and
affiliates (73) (38) (19)
Amortization of intangibles (504)* (2) 5
Other temporary differences 158 61 173
Tax loss/tax credit carryforwards 35 (50) 119
Valuation allowance change-- net 49 (27) (45)
------------------------------------
$ (17) $ 70 $ 294
================================================================================
* Amortization of intangibles includes the write-off of in-process research
and development for DuPont Pharmaceuticals, Polyester Films, and Polyester
Resins & Intermediates.
The significant components of deferred tax assets and liabilities at December
31, 1998 and 1997, are as follows:
- --------------------------------------------------------------------------------
1998 1997
--------------------------------------------------
Deferred Tax Asset Liability Asset Liability
- --------------------------------------------------------------------------------
Depreciation $ -- $1,578 $ -- $1,345
Accrued employee benefits 3,075 1,143 2,913 968
Other accrued expenses 454 3 505 25
Inventories 278 63 331 55
Unrealized exchange gains 8 8 6 19
Tax loss/tax credit
carryforwards 118 -- 130 --
Investment in subsidiaries
and affiliates 77 35 62 93
Amortization of intangibles 519 178 21 --
Other 227 921 237 662
--------------------------------------------------
Total $4,756 $3,929 $4,205 $3,167
------- --------------
Less: Valuation
allowance 220 171
-------- -------
Net $4,536 $4,034
================================================================================
Current deferred tax liabilities (included in the Consolidated Balance Sheet
caption "Income Taxes") were $14 and $7 at December 31, 1998 and 1997,
respectively. In addition, deferred tax assets of $406 and $683 were included in
Other Assets at December 31, 1998 and 1997, respectively (see Note 15).
An analysis of the company's effective income tax rate follows:
- --------------------------------------------------------------------------------
1998 1997 1996
-----------------------------------
Statutory U.S. federal income tax rate 35.0% 35.0% 35.0%
International operations 2.0 (3.5) --
Lower effective tax rate on export sales (1.9) (2.2) (1.4)
In-process research and development 1.7 17.9* --
Other--net (0.8) 0.7 (1.3)
-----------------------------------
Effective income tax rate 36.0% 47.9% 32.3%
================================================================================
* Charges associated with the Pioneer and PTI transactions were not tax
effected because these purchases were stock acquisitions rather than asset
purchases. See Note 5.
Income from continuing operations before income taxes and minority interests
shown below are based on the location of the corporate unit to which such
earnings are attributable. However, since such earnings are often subject to
taxation in more than one country, the income tax provision shown above as U.S.
or international does not correspond to the earnings set forth below.
- --------------------------------------------------------------------------------
1998 1997 1996
------------------------------------
United States (including exports) $1,388 $1,820 $3,226
International 1,225 1,009 1,161
------------------------------------
$2,613 $2,829 $4,387
================================================================================
At December 31, 1998, unremitted earnings of subsidiaries outside the United
States totaling $5,996 were deemed to be permanently invested. No deferred tax
liability has been recognized with regard to the remittance of such earnings. It
is not practicable to estimate the income tax liability that might be incurred
if such earnings were remitted to the United States.
Under the tax laws of various jurisdictions in which the company operates,
deductions or credits that cannot be fully utilized for tax purposes during the
current year may be carried forward, subject to statutory limitations, to reduce
taxable income or taxes payable in a future year. At December 31, 1998, the tax
effect of such carryforwards approximated $118. Of this amount, $77 has no
expiration date and $41 expires after 1999 but before 2003.
8. Extraordinary Charge from Early Extinguishment of Debt
In September 1998, the company redeemed various outstanding notes and debentures
with an aggregate principal value of $1,633. The extraordinary charge of $201,
net of a tax benefit of $74, principally represents call premium and unamortized
discount. The effective income tax rate of 26.9 percent reflects the mix of U.S.
and international operations.
50 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
9. Earnings Per Share of Common Stock
Basic earnings per share is computed by dividing income available to common
stockholders (the numerator) by the weighted-average number of common shares
(the denominator) for the period. The numerator for both income from continuing
operations and net income is reduced by preferred dividends of $10. For diluted
earnings per share, the numerator is adjusted to recognize reduced share of
earnings assuming options in subsidiary company stock are exercised if the
effect of this adjustment is dilutive. For 1998 this effect was anti-dilutive.
The denominator is based on the following weighted-average number of common
shares and includes the additional common shares that would have been
outstanding if potentially dilutive common shares had been issued:
- --------------------------------------------------------------------------------
1998 1997 1996
- --------------------------------------------------------------------------------
Basic 1,128,826,525 1,130,755,483 1,121,350,592
Diluted 1,145,347,028 1,149,803,450 1,139,822,755
================================================================================
Average stock options of 5,527,629 and 4,930,300 are not included in the diluted
earnings per share calculation for the years 1998 and 1997, respectively, since
in each case the exercise price is greater than the average market price.
Shares held by the Flexitrust are not considered as outstanding in computing the
weighted-average number of common shares. See Notes 21 and 22
10. Cash and Cash Equivalents and Marketable Securities
Cash equivalents represent investments with maturities of three months or less
from time of purchase. They are carried at cost plus accrued interest, which
approximates fair value because of the short maturity of these instruments. Cash
and cash equivalents are used in part to support a portion of the company's
commercial paper program.
Marketable securities represent investments in fixed and floating rate financial
instruments classified as available-for-sale securities and reported at fair
value.
11. Accounts and Notes Receivable
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Trade--net of allowances of $101 in 1998
and $66 in 1997 $3,591 $3,438
Miscellaneous 610 871
-----------------------------
$4,201 $4,309
================================================================================
Accounts and notes receivable are carried at amounts that approximate fair value
and include $70 for 1998 and $74 for 1997 due from equity affiliates.
See Note 28 for a description of business segment markets and associated
concentrations of credit risk.
12. Inventories
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Finished products $2,209 $2,115
Semifinished products 836 827
Raw materials and supplies 749 659
-----------------------------
Total 3,794 3,601
Less: Adjustment of inventories
to a last-in, first-out
(LIFO) basis 665 809
-----------------------------
$3,129 $2,792
================================================================================
Inventory values before LIFO adjustment are generally determined by the average
cost method, which approximates current cost. Inventories valued under the LIFO
method comprised 85 percent of consolidated inventories before LIFO adjustment
at December 31, 1998 and 1997.
13. Property, Plant and Equipment
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Buildings $ 3,889 $ 3,464
Equipment 28,485 27,326
Land 288 260
Construction 2,066 1,861
-----------------------------
$34,728 $32,911
================================================================================
Property, plant and equipment includes gross assets acquired under capital
leases of $115 and $130 at December 31, 1998 and 1997, respectively; related
amounts included in accumulated depreciation and amortization were $54 and $57
at December 31, 1998 and 1997, respectively.
DuPont 51
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
14. Summarized Financial Information for Affiliated Companies
Summarized combined financial information for affiliated companies for which the
equity method of accounting is used (see Note 1, Basis of Consolidation) is
shown below on a 100 percent basis. The most significant of these affiliates at
December 31, 1998, are DuPont Dow Elastomers LLC (50 percent owned by DuPont)
and Pioneer Hi-Bred International Inc. (20 percent owned by DuPont). Dividends
received from equity affiliates were $239 in 1998, $676 in 1997 and $776 in
1996.
Year Ended December 31
- --------------------------------------------------------------------------------
Results of operations 1998 1 1997 1996
- --------------------------------------------------------------------------------
Sales 2 $8,656 $7,778 $7,604
Earnings before income taxes 863 1,166 803
Net Income 689 1,027 661
----------------------------------------
DuPont's equity in earnings
of affiliates
Partnerships 3 $ 162 $ 493 $ 610
Corporate joint ventures
(after income taxes) 116 150 84
----------------------------------------
$ 278 $ 643 4 $ 694 5
================================================================================
1 Effective July 1, 1998, DuPont purchased Merck's 50 percent interest in
DuPont Merck and results are fully consolidated. Effective November 5,
1998, substantially all of DuPont's 50 percent interest in CONSOL Energy
Inc. was sold.
2 Includes sales to DuPont of $614 in 1998, $685 in 1997 and $734 in 1996.
3 Income taxes are reflected in the company's provision for income tax.
4 Includes a benefit of $115 from the gain on the sale by DuPont Merck of its
generic and multisource product lines.
5 Reflects a more favorable allocation of DuPont Merck operating income to
recognize the performance of assets originally contributed to the venture
by DuPont.
- --------------------------------------------------------------------------------
Financial position at December 31 1998 1997
- --------------------------------------------------------------------------------
Current assets $ 3,428 $ 4,234
Noncurrent assets 3,838 7,239
----------------------------------
Total assets $ 7,266 $11,473
----------------------------------
Short-term borrowings* $ 1,022 $ 633
Other current liabilities 1,569 2,128
Long-term borrowings* 679 874
Other long-term liabilities 231 2,857
----------------------------------
Total liabilities $ 3,501 $ 6,492
----------------------------------
DuPont's investment in affiliates
(includes advances) $ 1,796 $ 2,372
================================================================================
* DuPont's pro rata interest in total borrowings was $705 in 1998 and $688 in
1997 of which $168 in 1998 and $192 in 1997 was guaranteed by the company.
These amounts are included in the guarantees disclosed in Note 26.
15. Other Assets
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Prepaid pension cost $1,362 $1,602
Intangible assets - net of accumulated
amortization of $225 in 1998 and
$130 in 1997 2,566* 1,270
Other securities and investments 84 185
Deferred income taxes (see Note 7) 406 683
Miscellaneous 538 471
-----------------------------
$4,956 $4,211
================================================================================
* Includes $1,070 for DuPont Pharmaceuticals, and increases of $58 reflecting
revision of preliminary purchase price allocations for businesses purchased
from Ralston Purina and ICI.
Other securities and investments includes $97 at December 31, 1997, representing
marketable securities classified as available for sale and reported at fair
value. The remainder represents numerous small investments in securities for
which there are no quoted market prices and for which it is not practicable to
determine fair value. Such securities are reported at cost.
16. Accounts Payable
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Trade $1,206 $1,074
Payables to banks 162 188
Compensation awards 216 267
Miscellaneous 345 392
-----------------------------
$1,929 $1,921
================================================================================
Payables to banks represents checks issued on certain disbursement accounts but
not presented to the banks for payment. The reported amounts shown above
approximate fair value because of the short maturity of these obligations.
52 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
17. Short-Term Borrowings and Capital Lease Obligations
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Commercial paper $5,978 $2,576
Private placement commercial paper -- 2,896
Non-U.S. bank borrowings 180 197
Medium-term notes payable within
one year 140 128
Long-term borrowings payable
within one year 300 300
Industrial development bonds
payable on demand 26 51
Capital lease obligations 5 4
----------------------------------
$6,629 $6,152
================================================================================
The estimated fair value of the company's short-term borrowings, including
interest rate financial instruments, based on quoted market prices for the same
or similar issues or on current rates offered to the company for debt of the
same remaining maturities, was $6,700 and $6,200 at December 31, 1998 and 1997,
respectively. The increase in estimated fair value in 1998 was primarily due to
higher short-term borrowing levels.
Unused short-term bank credit lines were approximately $7,400 and $6,200 at
December 31, 1998 and 1997, respectively. These lines support short-term
industrial development bonds, a portion of the company's commercial paper
program and other borrowings.
The weighted-average interest rate on short-term borrowings outstanding at
December 31, 1998 and 1997, was 5.4 percent and 5.9 percent, respectively
18. Other Accrued Liabilities
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Payroll and other employee-related costs $ 673 $ 582
Accrued postretirement benefits cost (see Note 24) 302 317
Productivity initiatives 165 --
Miscellaneous 1,782 2,125
-------------------------
$2,922 $3,024
================================================================================
19. Long-Term Borrowings and Capital Lease Obligations
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
U.S. dollar:
Industrial development bonds due 2007-2026 $ 309 $ 333
Medium-term notes due 2000-2048 1 653 437
7.50% notes due 1999 -- 301
9.15% notes due 2000 301 303
6.00% debentures due 2001 ($660 face
value, 13.95% yield to maturity) -- 505
6.50% notes due 2002 499 498
6.75% notes due 2002 300 299
8.00% notes due 2002 252 252
8.50% notes due 2003 2 141 300
8.13% notes due 2004 331 331
8.25% notes due 2006 282 282
6.75% notes due 2007 499 499
8.25% debentures due 2022 49 372
7.95% debentures due 2023 38 299
6.50% debentures due 2028 298 --
7.50% debentures due 2033 23 247
6.25% Swiss franc notes due 2000 3 103 103
Other loans (various currencies)
due 1999-2008 363 475
Capital lease obligations 54 61
---------------------------------
$4,495 $5,897
================================================================================
1 Average interest rates at December 31, 1998 and 1997, were 6.4 percent and
7.1 percent, respectively.
2 The company entered into an interest rate swaption agreement as part of the
program to manage the fixed and floating interest rate mix of total
borrowings. The agreement gives the swaption counterparty the one-time
option to put the company into an interest rate swap with a notional amount
of $300, whereby the company would, over the remaining term of the note,
receive fixed rate payments essentially equivalent to the fixed interest
rate of the underlying note, and pay the counterparty a floating rate of
interest essentially equivalent to the rate the company pays on its
commercial paper. If exercised, the swaption would effectively convert the
note to a floating rate obligation over the remaining maturity of the note.
The premium received from the counterparty for this swaption is being
amortized to income, using the effective interest method, over the
remaining maturity of the note. The interest rate swaption agreement was
reduced to a notional amount of $141 in September 1998. The fair value and
carrying value of the swaption at December 31, 1998 and 1997, was not
material.
3 Represents notes denominated as 150 million Swiss francs with a 6.25
percent Swiss franc fixed interest rate. Concurrent with the issuance of
these notes, the company entered into an interest and principal currency
swap that effectively established a $103 fixed principal amount with a 6.9
percent U.S. dollar fixed interest rate.
DuPont 53
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
At December 31, 1998, average interest rates on industrial development bonds and
on other loans (various currencies) were 6.1 percent and 7.0 percent,
respectively, the same as December 31, 1997.
Maturities of long-term borrowings, together with sinking fund requirements for
years ending after December 31, 1999, are $628, $107, $1,242 and $428 for the
years 2000, 2001, 2002 and 2003, respectively.
The estimated fair value of the company's long-term borrowings, including
interest rate financial instruments, based on quoted market prices for the same
or similar issues or on current rates offered to the company for debt of the
same remaining maturities was $4,900 and $6,500 at December 31, 1998 and 1997,
respectively.
20. Other Liabilities
- --------------------------------------------------------------------------------
December 31 1998 1997
- --------------------------------------------------------------------------------
Accrued postretirement benefits cost $5,555 $5,548
Reserves for employee-related costs 921 956
Miscellaneous 1,164 940
--------------------------
$7,640 $7,444
================================================================================
21. Stockholders' Equity
In January 1997 the company approved plans to purchase and retire up to 20
million shares of common stock to offset dilution resulting from shares issued
under its compensation programs. In 1997 the company spent $327 to purchase and
retire 5,833,100 shares of DuPont common stock under this program. In 1998 the
company spent $769 to purchase 12,814,162 shares, of which 6 million shares were
purchased in a private placement transaction. Under the terms of this private
placement agreement, the final settlement payment resulted in the issuance of
333,862 treasury shares valued at $20. In 1998, 12,480,300 shares were retired.
In 1997, 509,778 shares were issued for 100 percent of the capital stock of
Pfister Hybrid Corn Company. Also in 1997, 22.5 million shares were issued for
100 percent of the capital stock of Protein Technologies International (PTI).
Immediately subsequent to the PTI transaction, 22.5 million shares were
repurchased for $1,420 ($63.13 a share) in two private placement transactions.
The purchase price for one transaction for 16 million shares was subject to
adjustment under terms of the private placement agreement. The company received
$65 in 1998 as a final settlement payment associated with this transaction. The
remaining 6.5 million shares were purchased from the DuPont Pension Trust Fund
for $410. Also in 1998, 72,326 shares valued at $4.4 were issued for final
settlement of 1997 acquisitions, principally PTI.
Additional paid-in capital (compensation plans) includes $66 and $38 at December
31, 1998 and 1997, respectively, related to amounts accrued for variable
options.
In July 1996 DuPont repurchased warrants from Seagram for $504. Coincident with
the repurchase, the company retired 312 million shares of common stock held as
treasury stock.
Shares held by the Flexitrust are used to satisfy existing employee compensation
and benefit programs.
Set forth below is a reconciliation of common stock share activity for the three
years ended December 31, 1998:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Shares of Common Stock Held In
-------------------------------
Issued Flexitrust Treasury
-------------------------------------------------
<S> <C> <C> <C>
Balance January 1, 1996 1,470,085,448 (47,092,352) (312,000,000)
-------------------------------------------------
Issued 2 16,100,762
Treasury Stock Retirement (312,000,000) 312,000,000
-------------------------------------------------
Balance December 31, 1996 1,158,085,450 (30,991,590) -
-------------------------------------------------
Businesses Acquired 23,009,778
Issued 7,745,843
Treasury Stock
Acquisition (28,333,100)
Retirement (28,333,100) 28,333,100
-------------------------------------------------
Balance December 31, 1997 1,152,762,128 (23,245,747) -
-------------------------------------------------
Businesses Acquired 72,326
Issued 9,077,880 333,862
Treasury Stock
Acquisition (12,814,162)
Retirement (12,480,300) 12,480,300
-------------------------------------------------
Balance December 31, 1998 1,140,354,154 (14,167,867) -
===================================================================================
</TABLE>
54 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income," was adopted by the company in 1998 and establishes standards for
reporting and displaying comprehensive income. The pretax, tax and after-tax
effects of the components of other comprehensive income are shown below:
- --------------------------------------------------------------------------------
Other Comprehensive Income Pretax Tax After-tax
-----------------------------------------
1998
Cumulative Translation Adjustment $ (23) $ - $ (23)
Minimum Pension Liability Adjustment (193) 81 (112)
-----------------------------------------
Other Comprehensive Income (Loss) $ (216) $ 81 $ (135)
1997
Cumulative Translation Adjustment $ (130) $ - $ (130)
Minimum Pension Liability Adjustment (46) 18 (28)
-----------------------------------------
Other Comprehensive Income (Loss) $ (176) $ 18 $ (158)
1996
Cumulative Translation Adjustment $ (23) $ - $ (23)
Minimum Pension Liability Adjustment (4) 1 (3)
-----------------------------------------
Other Comprehensive Income (Loss) $ (27) $ 1 $ (26)
================================================================================
The minimum pension liability included in the Consolidated Statement of
Stockholders' Equity is $256, $144 and $116 as of December 31, 1998, 1997 and
1996, respectively, and includes $79, $25 and $16 for Conoco for the years then
ended.
Balances of related after-tax components comprising accumulated other
comprehensive loss are summarized below:
- --------------------------------------------------------------------------------
Accumulated Other Comprehensive Loss 1998 1997 1996
- --------------------------------------------------------------------------------
December 31
Foreign Currency Translation Adjustment $(176) $(153) $ (23)
Minimum Pension Liability Adjustment (256) (144) (116)
-------------------------------------
$(432) $(297) $(139)
================================================================================
22. Compensation Plans
From time to time, the Board of Directors has approved the adoption of worldwide
Corporate Sharing Programs. Under these programs, essentially all employees have
received a one-time grant to acquire shares of DuPont common stock at the market
price on the date of grant. Option terms are "fixed" and options generally are
exercisable one year after date of grant and expire 10 years from date of grant.
There are no additional shares that may be subject to option under existing
programs.
Stock option awards under the DuPont Stock Performance Plan may be granted to
key employees of the company and may be "fixed" and/or "variable." The purchase
price of shares subject to option is equal to or in excess of the market price
of the company's stock at the date of grant. Optionees are eligible for reload
options upon the exercise of stock options with the condition that shares
received from the exercise are held for at least two years. A reload option is
granted at the market price on the date of grant and has a term equal to the
remaining term of the original option. The maximum number of reload options
granted is limited to the number of shares subject to option in the original
option times the original option price divided by the option price of the reload
option. Generally, fixed options are fully exercisable from one to three years
after date of grant and expire 10 years from date of grant. Beginning in 1998,
shares otherwise receivable from the exercise of nonqualified options can be
deferred as stock units for a designated future delivery.
Variable stock option grants have been made to certain members of senior
management. These options are subject to forfeiture if, within five years from
the date of grant, the market price of DuPont common stock does not achieve a
price of $75 per share for 50 percent of the options and $90 per share for the
remaining 50 percent. This condition was met in 1998 for options with a $75 per
share hurdle price and, as a result, these options became "fixed" and
exercisable.
The maximum number of shares that may be subject to option for any consecutive
five-year period is 72 million shares. Subject to this limit, additional shares
that may have been made subject to options were 60,949,492 for 1998, 56,842,462
for 1997 and 59,078,926 for 1996.
Awards for 1998 under the DuPont Stock Performance Plan (granted to key
employees in 1999) consisted of 4,946,131 fixed options to acquire DuPont common
stock at the market price ($52.50 per share) on the date of grant and 700,000
fixed options at an exercise price of $75 per share. Fixed options granted at
$52.50 per share vest over a three-year period and, except for the last six
months of the 10-year option term, are exercisable when the market price of
DuPont common stock exceeds the option grant price by 20 percent. Fixed options
granted at an exercise price of $75 per share vest three years from the date of
grant and expire 10 years after the date of grant.
DuPont 55
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
The following table summarizes activity for fixed and variable options for the
last three years:
- --------------------------------------------------------------------------------
Fixed Variable
--------------------------------------------------------
Number Weighted- Number Weighted-
of Average of Average
Shares Price Shares Price
--------------------------------------------------------
January 1, 1996 61,539,178 $23.83 -- --
Granted 5,674,188 $39.41 -- --
Exercised 17,754,052 $23.56 -- --
Forfeited 93,186 $25.96 -- --
- --------------------------------------------------------------------------------
December 31, 1996 49,366,128 $25.73 -- --
Granted 22,937,612 $52.82 4,926,900 $ 52.66
Exercised 9,719,982 $24.47 -- --
Forfeited 1,373,884 $47.85 95,600 $ 52.50
- --------------------------------------------------------------------------------
December 31, 1997 61,209,874 $35.58 4,831,300 $ 52.66
Granted 5,697,539 $59.96 101,000 $ 64.90
Reclassified 1,653,748 $52.52 (1,653,748) $ 52.52
Exercised 8,345,303 $33.70 -- --
Forfeited* 8,786,328 $39.74 629,800 $ 52.50
- --------------------------------------------------------------------------------
December 31, 1998 51,429,530 $38.42 2,648,752 $ 53.25
================================================================================
* Includes options cancelled as part of the Conoco IPO.
Options exercisable and weighted-average exercise price at the end of the last
three years and the weighted-average fair value of options granted are as
follows:
- --------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------
Fixed Options:
Number of shares at year-end 46,728,321 40,037,649 43,742,702
Weighted-avg. price at year-end $36.29 $26.50 $23.97
Weighted-avg. fair value of
options granted during year $14.30 $12.91 $ 8.95
- --------------------------------------------------------------------------------
Variable Options:
Number of shares at year-end -- -- --
Weighted-avg. price at year-end -- -- --
Weighted-avg. fair value of
options granted during year $15.79 $13.08 --
================================================================================
The fair value of options granted is calculated using the Black-Scholes option
pricing model. Assumptions used were as follows:
- --------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------
Fixed Variable Fixed Variable Fixed
------------------------------------------------------------
Dividend yield 2.1% 2.1% 2.2% 2.2% 2.6%
Volatility 19.8% 19.9% 18.8% 18.6% 21.0%
Risk-free
interest rate 5.5% 5.6% 6.4% 6.4% 5.4%
Expected life
(years) 5.7 5.8 5.6 5.7 6.0
================================================================================
The following table summarizes information concerning currently outstanding and
exercisable options:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Exercise Exercise Exercise Exercise
Price Price Price Price
$16.13- $24.38- $39.63- $59.50-
December 31, 1998 $24.19 $36.56 $59.44 $82.09
- -----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fixed Options
Options outstanding 9,882,545 15,920,674 21,105,446 4,520,865
Weighted-avg. remaining
contractual life (years) 2.4 5.5 7.9 9.0
Weighted-avg. price $ 19.76 $ 27.48 $ 50.76 $ 60.16
Options exercisable 9,882,545 15,920,674 20,813,569 111,533
Weighted-avg. price $ 19.76 $ 27.48 $ 50.69 $ 72.42
- -----------------------------------------------------------------------------------
Variable Options
Options outstanding -- -- 2,505,752 143,000
Weighted-avg. remaining
contractual life (years) -- -- 8.1 9.0
Weighted-avg. price -- -- $ 52.54 $ 65.71
Options exercisable -- -- -- --
Weighted-avg. price -- -- -- --
===================================================================================
</TABLE>
The company applies APB Opinion No. 25, "Accounting for Stock Issued to
Employees," and related interpretations in accounting for its stock option
plans. Accordingly, no compensation expense has been recognized for fixed
options. Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock-Based Compensation," was issued in 1995. The company has elected not
to adopt the optional recognition provisions of SFAS No. 123. In addition,
certain majority-owned subsidiaries of the company grant options to their
respective employees under APB Opinion No. 25 and have elected not to adopt SFAS
No. 123. The following table sets forth pro forma information as if the company
and Conoco had adopted these recognition provisions; the effect on reported net
income of applying these recognition provisions to majority-owned subsidiaries
other than Conoco is not material. The pro forma disclosures are not
representative of the effects on net income and earnings per share in future
years.
56 Dupont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
- --------------------------------------------------------------------------------
Pro Forma Net Income and
Earnings per share 1998 1997 1996
- --------------------------------------------------------------------------------
Net Income
As Reported $4,480 $2,405 $3,636
Pro Forma $4,584 $2,206 $3,602
Earnings Per Share - Basic
As Reported $ 3.96 $ 2.12 $ 3.23
Pro Forma $ 4.05 $ 1.94 $ 3.20
Earnings Per Share - Diluted
As Reported $ 3.90 $ 2.08 $ 3.18
Pro Forma $ 3.99 $ 1.91 $ 3.15
================================================================================
Compensation expense recognized in income for stock-based employee compensation
awards was $174 ($15 excluding Conoco), $65 ($40 excluding Conoco) and $22 ($9
excluding Conoco) for 1998, 1997 and 1996, respectively.
Awards under the company's Variable Compensation Plan may be granted in stock
and/or cash to employees who have contributed most in a general way to the
company's success, consideration being given to ability to succeed to more
important managerial responsibility. Such awards were $182 for 1998, $268 ($223
excluding Conoco) for 1997 and $233 ($195 excluding Conoco) for 1996. Amounts
credited to the Variable Compensation Fund are dependent on company earnings and
are subject to maximum limits as defined by the plan. The amounts credited to
the fund were $188 in 1998, $265 ($221 excluding Conoco) in 1997 and $230 ($189
excluding Conoco) in 1996. Awards made and amounts credited under the Variable
Compensation Plan for 1998 relate solely to employees of continuing operations.
In accordance with the terms of the Variable Compensation Plan and similar plans
of subsidiaries, 1,309,208 shares of common stock are awaiting delivery from
awards for 1998 and prior years.
23. Investment Activities
The company purchased Merck's 50 percent interest in The DuPont Merck
Pharmaceutical Company on July 1, 1998, for a cash payment of $2,586. As part of
the purchase, the company agreed to indemnify Merck for certain liabilities that
may arise from events that occurred during Merck's tenure as a general partner
(see Note 26). In addition, related costs of $8 were incurred. The company now
operates as DuPont Pharmaceuticals. For accounting purposes, the acquisition has
been treated as a purchase. The preliminary allocation of purchase price is as
follows: cash $69; other current assets $203; noncurrent assets $1,361; in-
process research and development $1,230; and liabilities $269. Noncurrent assets
includes $73 of goodwill, which is being amortized over 20 years. Excluding the
effect of the $1,230 charge for purchased in-process research and development on
1997's unaudited pro forma results, the unaudited pro forma effect on net income
and earnings per share for 1998 and 1997 is not material.
The company purchased ICI's global polyester films business on January 31, 1998,
for a cash payment of $647; in addition, related costs of $5 were incurred and
liabilities of $110 were assumed, including $54 in employee separation costs and
$6 in other costs pursuant to an exit plan the company began to formulate as of
the acquisition date. For accounting purposes, the acquisition has been treated
as a purchase. The preliminary allocation of purchase price is as follows:
current assets $62; noncurrent assets $650; and in-process research and
development $50. Noncurrent assets includes $76 of goodwill, which is being
amortized over 20 years.
Investment in affiliates in 1997 includes $1,711 for the September 1997 purchase
of a 20 percent interest in Pioneer Hi-Bred International. Pioneer develops,
produces and markets hybrids of corn and varieties of soybeans. For accounting
purposes, the acquisition has been treated as a purchase. Of the $1,711 purchase
price, $903 was allocated to purchased in-process research and development and
the remainder was allocated based on fair values to assets and liabilities of
Pioneer, principally intangible assets (including $206 of goodwill to be
amortized over 40 years), for purposes of determining equity in earnings. The
1997 allocation of purchase price was revised in 1998 with finalization of
purchase accounting.
Protein Technologies International was purchased on December 1, 1997. PTI is a
global supplier of soy proteins and applied technology to the food and paper
processing industries. 22,500,000 shares of DuPont common stock were issued in
this transaction with a fair value of $1,297. In addition, related costs of $4
were incurred. For accounting purposes, the acquisition has been treated as a
purchase. Based on preliminary estimates, the purchase price was allocated as
follows: cash $47; other current assets $158; noncurrent assets $897; in-process
research and
DuPont 57
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
development $500; and liabilities $301, including $188 of debt. In 1998, an
additional 70,673 shares of DuPont common stock were issued with a fair value of
$4, and related costs of $1 were incurred. The purchase price allocations were
revised as follows: cash $47; other current assets $179; noncurrent assets
$1,072; in-process research and development $560; deferred tax liability $280;
and other liabilities $272. Noncurrent assets includes $85 of goodwill, which is
being amortized over 25 years.
The company purchased ICI's global polyester resins and intermediates businesses
on December 31, 1997, for a cash payment of $1,240, including $50 held in escrow
pending satisfactory demonstration of intermediates process technology in a new
facility; in addition, related costs of $7 were incurred and liabilities of $230
were assumed. As part of the transaction, the company acquired a 70 percent
interest in an ICI subsidiary that had approximately $225 in long-term
borrowings at December 31, 1997. For accounting purposes, the acquisition has
been treated as a purchase. The preliminary allocation of purchase price was as
follows: current assets $99; noncurrent assets $1,303; in-process research and
development $75; and liabilities $230, including $176 of debt. In 1998, the
purchase price allocations were revised as follows: current assets $89;
noncurrent assets $1,245; in-process research and development $178; and
liabilities $265, including $15 in employee separation costs pursuant to an exit
plan the company began to formulate as of the acquisition date. Noncurrent
assets includes $26 of goodwill, which is being amortized over 20 years.
Note 5 provides information on purchased in-process research and development in
connection with the Pioneer, PTI, ICI and DuPont Merck transactions.
Proceeds from sales of assets in 1998 principally include: (a) $500 from the
sale of substantially all of DuPont's 50 percent interest in CONSOL Energy Inc.;
(b) $279 from the sale of the global hydrogen peroxide business; and (c) $86
from the sale of the printing and publishing businesses.
Proceeds from sales of assets in 1997 principally include: (a) $175 from
collection of a note from The Sterling Group Inc. received in connection with
its purchase of the Diagnostic Imaging business in 1996; (b) $125 from DuPont
Merck for sale of its generic and multisource product lines; and (c) $62 from
the sale of the NEN Life Sciences Products to Genstar Capital LLC.
Proceeds from sales of assets in 1996 principally include $570 from the sales of
Medical Products businesses, and $390 from the formation of the elastomers joint
venture. Assets sold in connection with these sales amounted to $1,163, of which
$644 was for property, plant and equipment, with the remainder being primarily
working capital.
Payments for businesses acquired in 1996 principally relate to the purchase of
commercial floorcovering distribution and installation companies.
24. Pensions and Other Postretirement Benefits
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits," was adopted by the company in
1998. The standard revises disclosures for pensions and other postretirement
benefits and standardizes them into a combined format.
The company offers various postretirement benefits to its employees. Where
permitted by applicable law, the company reserves the right to change, modify or
discontinue the plans.
Pensions
The company has noncontributory defined benefit plans covering substantially all
U.S. employees. The benefits under these plans are based primarily on years of
service and employees' pay near retirement. The company's funding policy is
consistent with the funding requirements of federal law and regulations.
Pension coverage for employees of the company's non-U.S. consolidated
subsidiaries is provided, to the extent deemed appropriate, through separate
plans. Obligations under such plans are systematically provided for by
depositing funds with trustees, under insurance policies or by book reserves.
Other Postretirement Benefits
The parent company and certain subsidiaries provide medical, dental, and life
insurance benefits to pensioners and survivors. The associated plans are
unfunded and approved claims are paid from company funds.
58 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
Summarized information on the company's postretirement plans is as follows:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------
Pension Benefits Other Benefits
---------------------------------------------------
1998 1997 1998 1997
---------------------------------------------------
Change in Benefit Obligation
<S> <C> <C> <C> <C>
Benefit obligation at
beginning of year $ 17,133 $ 15,505 $ 4,590 $ 4,486
Service cost 355 328 61 55
Interest cost 1,121 1,123 310 334
Plan participants'
contributions 17 17 28 24
Actuarial loss 1,586 1,595 245 34
Foreign currency exchange
rate changes 43 (182) (4) (2)
Benefits paid (1,236) (1,213) (330) (341)
Amendments 7 -- (167) --
New Plans 389 28 32 --
Divestiture (144) (68) -- --
Benefit obligation at end ---------------------------------------------------
of year $ 19,271 $ 17,133 $ 4,765 $ 4,590
===================================================
Change in Plan Assets
Fair value of plan assets
at beginning of year $ 18,697 $ 16,957 $ -- $ --
Actual return on
plan assets 2,411 3,196 -- --
Foreign currency exchange
rate changes 9 (112) -- --
Employer contributions 189 137 302 317
Plan participants'
contributions 17 17 28 24
Benefits paid (1,236) (1,213) (330) (341)
Retiree health care
pension assets transfer (249) (232) -- --
Special termination
payments (159) -- -- --
New plans 244 27 -- --
Divestiture (94) (80) -- --
Fair value of plan ---------------------------------------------------
assets at end of year $ 19,829 $ 18,697 $ -- $ --
===================================================
Funded Status $ 558 $ 1,564 $ (4,765) $ (4,590)
Unrecognized prior
service cost 572 625 (752) (650)
Unrecognized actuarial
(gain) loss 201 (439) (340) (625)
Unrecognized transition
asset (622) (776) -- --
---------------------------------------------------
Net amount recognized $ 709 $ 974 $ (5,857) $ (5,865)
===================================================
Amounts recognized in the
statement of financial
position consist of:
Prepaid (accrued) benefit cost $ 798 $ 1,055 $ (5,857) $ (5,865)
Accrued benefit liability (448) (327) -- --
Intangible asset 61 51 -- --
Accumulated other
comprehensive income 298 195 -- --
---------------------------------------------------
Net amount recognized $ 709 $ 974 $ (5,857) $ (5,865)
===================================================================================
</TABLE>
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------
Weighted-average Pension Benefits Other Benefits
assumptions as of -------------------------------------------------
December 31 1998 1997 1998 1997
-------------------------------------------------
<S> <C> <C> <C> <C>
Discount rate 6.5% 7.0% 6.5% 7.0%
Expected return on plan assets 9.0% 9.0% -- --
Rate of compensation increase 5.0% 5.0% 5.0% 5.0%
===================================================================================
</TABLE>
The above assumptions are for U.S. plans only. For non-U.S. plans, no one of
which was material, assumptions reflect economic assumptions applicable to each
country.
The assumed health care trend rates used in determining other benefits at
December 31, 1998, are 7.5 percent decreasing to 4 percent over five years. At
December 31, 1997, such rates were 8 percent decreasing to 5 percent over eight
years.
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------
Components of Pension Benefits Other Benefits
Net Periodic -----------------------------------------------------------------------
Benefit Cost 1998 1997 1996 1998 1997 1996
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost $ 355 $ 328 $ 327 $ 61 $ 55 $ 62
Interest cost 1,121 1,123 1,097 310 334 316
Expected return
on plan assets (1,581) (1,417) (1,369) -- -- --
Amortization of
transition asset (150) (150) (159) -- -- --
Amortization of
unrecognized
(gain) loss 56 35 52 (25) (21) (22)
Amortization of
prior service
cost 53 54 38 (65) (65) (75)
Curtailment/
settlement loss 6 -- -- -- -- --
Net periodic -----------------------------------------------------------------------
benefit cost
(credit) $ (140) $ (27) $ (14) $ 281 $ 303 $ 281
==========================================================================================
</TABLE>
DuPont 59
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
The projected benefit obligation, accumulated benefit obligation, and fair value
of plan assets for the pension plan with accumulated benefit obligations in
excess of plan assets were $2,364, $1,968, and $990, respectively, as of
December 31, 1998, and $1,307, $974, and $167, respectively, as of December 31,
1997. The special termination benefit of $159 was provided to U.S. employees
terminated under company-wide productivity improvement initiatives. (These
initiatives are described in Note 6.) U.S. pension assets consist principally of
common stocks, including 9,353,570 shares of DuPont at December 31, 1998 and
U.S. government obligations.
Excluded from Note 24 are the Conoco projected benefit obligation and fair value
of plan assets of $1,737 and $1,316, respectively, as of December 31, 1998, and
$1,404 and $1,196, respectively, as of December 31, 1997.
Assumed health care cost trend rates have a significant effect on the amount
reported for the health care plan. A one-percentage-point change in assumed
health care cost trend rates would have the following effects:
- --------------------------------------------------------------------------------
1-Percentage 1-Percentage
Point Increase Point Decrease
---------------------------------------------
Effect on total of service and
interest cost components $ 44 $ (35)
Effect on postretirement
benefit obligation $444 $(366)
================================================================================
25. Derivatives and Other Hedging Instruments
The company enters into contractual arrangements (derivatives) in the ordinary
course of business to hedge its exposure to currency, interest rate and
commodity price risks. The company has established an overlying Financial Risk
Management Framework for risk management and derivative activities. The
framework sets forth senior management's financial risk management philosophy
and objectives through a Corporate Financial Risk Management Policy. In
addition, it establishes oversight committees and risk management guidelines
that authorize the use of specific derivative instruments and further
establishes procedures for control and valuation, counterparty credit approval,
and routine monitoring and reporting. The counterparties to these contractual
arrangements are major financial institutions. The company is exposed to credit
loss in the event of nonperformance by these counterparties. The company manages
this exposure to credit loss through the aforementioned credit approvals, limits
and monitoring procedures and, to the extent possible, by restricting the period
over which unpaid balances are allowed to accumulate. The company does not
anticipate nonperformance by counterparties to these contracts, and no material
loss would be expected from such nonperformance. Market and counterparty credit
risks associated with these instruments are regularly reported to management.
The company's accounting policies with respect to these financial instrument
transactions are set forth in Note 1.
Currency Risk
The company routinely uses forward exchange contracts to hedge its net
exposures, by currency, related to monetary assets and liabilities of its
operations that are denominated in currencies other than the designated
functional currency. The primary business objective of this hedging program is
to maintain an approximately balanced position in foreign currencies so that
exchange gains and losses resulting from exchange rate changes, net of related
tax effects, are minimized.
In addition, the company from time to time will enter into forward exchange
contracts to establish with certainty the functional currency amount of future
firm commitments denominated in another currency. Decisions regarding whether or
not to hedge a given commitment are made on a case-by-case basis, taking into
consideration the amount and duration of the exposure, market volatility and
economic trends. At December 31, 1998, the company had no open forward exchange
contracts designated as hedges of firm foreign currency commitments. Forward
exchange contracts are also used from time to time to manage near-term foreign
currency cash requirements and, from time to time, to place foreign currency
deposits and marketable securities investments into currencies offering
favorable returns. Net cash inflow (outflow) from settlement of forward exchange
contracts was $(31), $146 and $(192) for the years 1998, 1997 and 1996,
respectively.
60 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
In December 1998 the company entered into forward exchange contracts to purchase
3.1 billion German marks for about $1,900 in conjunction with the signing of a
definitive agreement to purchase the performance coatings business of Hoechst AG
for 3.1 billion German marks. The business purpose of these contracts was to
lock in the U.S. dollar functional currency cost of this acquisition and thereby
prevent adverse movements in the dollar/mark exchange rate from causing the net
U.S. dollar cash purchase price to exceed the negotiated fair value of the
business. The use of hedge accounting for these contracts is precluded by
accounting guidance. Changes in fair value of these contracts are included in
income in the period the change occurs and the U.S. dollar purchase price for
the acquired business will be measured using the dollar/mark exchange rate on
the date of payment. At December 31, 1998, the change in fair value of these
contracts resulted in a loss of $20.
Interest Rate Risk
The company uses a combination of financial instruments, including interest rate
swaps, interest and principal currency swaps and structured medium-term
financings, as part of its program to manage the fixed and floating interest
rate mix of the total debt portfolio and related overall cost of borrowing.
Interest rate swaps involve the exchange of fixed for floating rate interest
payments that are fully integrated with underlying fixed-rate bonds or notes to
effectively convert fixed rate debt into floating rate debt based on LIBOR or
commercial paper rates. Interest rate swaps also involve the exchange of
floating for fixed rate interest payments that are fully integrated with
commercial paper or other floating rate borrowings to effectively convert
floating rate debt into fixed rate debt. Both types of interest rate swaps are
denominated in U.S. dollars. Interest rate swaps allow the company to maintain a
target range of floating rate debt.
Under interest and principal currency swaps, the company receives predetermined
foreign currency-denominated payments corresponding, both as to timing and
amount, to the fixed or floating interest rate and fixed principal amount to be
paid by the company under concurrently issued foreign currency-denominated
bonds. In return, the company pays a U.S. dollar-denominated fixed or floating
interest rate and a U.S. dollar-denominated fixed principal amount to the
counterparty, thereby effectively converting the foreign currency-denominated
bonds into U.S. dollar-denominated obligations for both interest and principal.
Interest and principal currency swaps allow the company to be fully hedged
against fluctuations in currency exchange rates and foreign interest rates and
to achieve U.S. dollar fixed or floating interest rate payments below the market
interest rate, at the date of issuance, for borrowings of comparable maturity.
An interest and principal currency swap was outstanding at December 31, 1998 and
1997, that effectively converted a 150 million Swiss franc borrowing with a 6.25
percent Swiss franc fixed interest rate and a maturity of 2000 to a U.S. dollar
fixed principal amount of $103 with a 6.9 percent U.S. dollar fixed interest
rate. The fair value of this swap at December 31, 1998 and 1997, was not
material.
Structured medium-term financings consist of: (a) a structured medium-term note
with interest and/or principal payments (denominated in either U.S. dollars or
foreign currencies) determined using a specified calculation incorporating
changes in currency exchange rates or other financial indexes, and (b) a
concurrently executed structured medium-term swap that, for any and all
calculations of the note's interest and/or principal payments over the term of
the note, provides a fully hedged transaction such that the note is effectively
converted to a U.S. dollar-denominated fixed or floating interest rate with a
U.S. dollar-denominated fixed principal amount. Structured medium-term swaps
allow the company to be fully hedged against fluctuations in exchange rates and
interest rates and to achieve U.S. dollar fixed or floating interest rate
payments below the market interest rate, at the date of issuance, for borrowings
of comparable maturity.
The face amount of structured medium-term financings outstanding was $50 at
December 31, 1998 and 1997. The weighted-average interest rate and weighted-
average maturity was 5.1 percent and 5.6 percent, and 6.8 years and 7.8 years,
at December 31, 1998 and 1997, respectively. The fair value of the structured
medium-term swap associated with these financings at December 31, 1998 and 1997,
was not material.
It is the company's policy that foreign currency bonds and structured
medium-term notes will not be issued unless a hedge of the market risks inherent
in such borrowings is executed simultaneously with a management-approved, highly
creditworthy counterparty to provide a fully hedged transaction.
DuPont 61
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
Interest rate financial instruments did not have a material effect on the
company's overall cost of borrowing at December 31, 1998 and 1997.
See also Notes 17 and 19 for additional descriptions of interest rate financial
instruments.
Summary of Outstanding Derivative Financial Instruments
Set forth below is a summary of the notional amounts, estimated fair values and
carrying amounts of outstanding financial instruments at December 31, 1998 and
1997.
Notional amounts represent the face amount of the contractual arrangements and
are not a measure of market or credit exposure. Estimated fair value of forward
exchange contracts is based on market prices for contracts of comparable time to
maturity. Carrying amounts represent the receivable (payable) recorded in the
Consolidated Balance Sheet. See also Notes 10, 11, 15, 16, 17 and 19 for fair
values and carrying amounts of other financial instruments.
Notional Amount, Estimated Fair Value and Carrying Amount of Outstanding
Derivative Financial Instruments
- --------------------------------------------------------------------------------
Notional Estimated Carrying
Type of Instrument Amount Fair Value Amount
- --------------------------------------------------------------------------------
Forward Exchange Contracts
December 31, 1998 $ 11,389 $ (43) $ (41)
1997 8,621 (3) 16
================================================================================
Estimated fair values shown above only represent the value of the hedge
component of these transactions, and thus are not indicative of the fair value
of the company's overall hedged position. The estimated fair value of the
company's total debt portfolio, based on quoted market prices for the same or
similar issues or on current rates offered to the company for debt of the same
remaining maturities, was $11,600 and $12,700 at December 31, 1998 and 1997,
respectively. The decrease in fair value in 1998 was primarily due to lower
borrowing levels.
Commodity Price Risk
The company enters into exchange-traded and over-the-counter derivative
commodity instruments to hedge its exposure to price fluctuations on certain raw
material purchases. The fair value of outstanding derivative commodity
instruments at December 31, 1998 and 1997, was not material.
26. Commitments and Contingent Liabilities
The company uses various leased facilities and equipment in its operations.
Future minimum lease payments under noncancelable operating leases are $148,
$111, $84, $69 and $45 for the years 1999, 2000, 2001, 2002 and 2003,
respectively, and $260 for subsequent years, and are not reduced by
noncancelable minimum sublease rentals due in the future in the amount of $18.
Rental expense under operating leases was $214 in 1998, $250 in 1997 and $240 in
1996.
In June 1997, DuPont formed alliances with Computer Sciences Corporation (CSC)
and Andersen Consulting. CSC operates a majority of DuPont's global information
systems and technology infrastructure and provides selected applications and
software services. Andersen Consulting provides information systems solutions
designed to enhance DuPont's manufacturing, marketing, distribution and customer
service. The total dollar value of the contracts is in excess of $4,000 over 10
years. Minimum payments due under the contracts are: $253, $203, $168, $161 and
$154 for the years 1999, 2000, 2001, 2002 and 2003, respectively, and a total of
$502 thereafter.
The company has various purchase commitments for materials, supplies and items
of permanent investment incident to the ordinary conduct of business. In the
aggregate, such commitments are not at prices in excess of current market.
The company is subject to various lawsuits and claims with respect to such
matters as product liabilities, governmental regulations and other actions
arising out of the normal course of business. While the effect on future
financial results is not subject to reasonable estimation because considerable
uncertainty exists, in the opinion of company counsel, the ultimate liabilities
resulting from such lawsuits and claims will not materially affect the
consolidated financial position of the company.
62 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
During 1991 the company initiated a stop-sale and recall of Benlate(R) 50 DF
fungicide. About 140 of the more than 750 cases filed against the company in
connection with the recall remain, the rest having been disposed of by trial,
dismissal or settlement. In the fourth quarter of 1995, DuPont and the other
major defendants in litigation concerning allegedly defective plumbing systems
made with polybutylene pipe and acetal fittings settled two of several national
class actions. The company's liability in the settled actions is limited to 10
percent of the cost of repairing plumbing systems up to a total company payout
of $120. The related liability for each of these matters included in the
Consolidated Balance Sheet is not reduced by the amounts of any expected
insurance recoveries. Adverse changes in estimates for such costs could result
in additional future charges.
The company is also subject to contingencies pursuant to environmental laws and
regulations that in the future may require the company to take further action to
correct the effects on the environment of prior disposal practices or releases
of chemical or petroleum substances by the company or other parties. The company
has accrued for certain environmental remediation activities consistent with the
policy set forth in Note 1. At December 31, 1998, such accrual amounted to $462
and, in management's opinion, was appropriate based on existing facts and
circumstances. Under adverse changes in circumstances, potential liability may
exceed amounts accrued. In the event that future remediation expenditures are in
excess of amounts accrued, management does not anticipate that they will have a
material adverse effect on the consolidated financial position of the company.
The company has indirectly guaranteed various debt obligations under agreements
with certain affiliated and other companies to provide specified minimum
revenues from shipments or purchases of products. At December 31, 1998, these
indirect guarantees totaled $15, and the company had directly guaranteed $502 of
the obligations of certain affiliated companies and others. No material loss is
anticipated by reason of such agreements and guarantees.
As part of the company's purchase of Merck's 50 percent interest in The DuPont
Merck Pharmaceutical Company, the company agreed to indemnify Merck for certain
liabilities that may arise from events that occurred during Merck's tenure as
general partner. As this contingency is resolved and if additional consideration
is paid, the amount of such payments will be recorded as additional cost of the
acquired business and will increase the amount of goodwill recorded for this
acquisition. Amounts paid in 1998 under the indemnity were not material.
In addition, the company has historically guaranteed certain obligations and
liabilities of Conoco Inc., its subsidiaries and affiliates. The company has
guaranteed $808, plus interest, of the financial obligations of Conoco as well
as certain non-financial performance obligations. Conoco has indemnified the
company for any liabilities the company may incur pursuant to these guarantees.
The Restructuring, Transfer and Separation Agreement between DuPont and Conoco
requires Conoco to use its best efforts to have Conoco, or any of its
subsidiaries, substitute for DuPont as guarantor.
DuPont 63
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
27. Geographic Information
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
1998 1997 1996
--------------------------------------------------------------------
Net Net Net Net Net Net
Sales* Property Sales* Property Sales* Property
--------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
North America
United States $13,075 $ 8,454 $12,802 $ 7,469 $12,472 $ 6,690
Canada 881 459 867 559 808 526
Mexico 421 117 402 118 343 103
Other 93 135 65 74 66 74
--------------------------------------------------------------------
Total 14,470 9,165 14,136 8,220 13,689 7,393
Europe, Middle East and Africa
Germany 1,450 388 1,300 384 1,214 517
United Kingdom 988 1,078 925 759 968 467
France 904 181 863 174 962 167
Italy 902 5 818 5 832 6
Other 2,108 1,188 2,029 1,102 2,091 1,023
--------------------------------------------------------------------
Total 6,352 2,840 5,935 2,424 6,067 2,180
Asia Pacific
Japan 820 159 914 77 1,020 101
Taiwan 591 707 396 688 356 219
China 398 208 373 205 348 161
Singapore 86 635 85 584 63 561
Other 947 244 1,157 212 1,138 190
--------------------------------------------------------------------
Total 2,842 1,953 2,925 1,766 2,925 1,232
South America
Brazil 659 83 642 106 560 101
Other 444 90 451 85 403 53
--------------------------------------------------------------------
Total 1,103 173 1,093 191 963 154
--------------------------------------------------------------------
Total $24,767 $14,131 $24,089 $12,601 $23,644 $10,959
===================================================================================================
</TABLE>
*Sales are attributed to countries based on location of customer.
28. Industry Segment Information
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information," was adopted by the company
beginning with this Annual Report. This standard requires disclosure of segment
information on the same basis used internally for evaluating segment performance
and deciding how to allocate resources to segments. The company's strategic
business units (operating segments) are organized by product line. For purposes
of SFAS No. 131, these have been aggregated into eight reportable segments
including Agriculture & Nutrition, Nylon Enterprise, Performance Coatings &
Polymers, Pharmaceuticals, Pigments & Chemicals, Polyester Enterprise, Specialty
Fibers and Specialty Polymers. The company's ongoing photomasks, safety
resources, and global services businesses, and the divested businesses of
printing and publishing, medical products and coal are included in Other. Major
products by segment include: Agriculture & Nutrition (herbicides, fungicides,
insecticides, soy protein and value-enhanced grains); Nylon Enterprise (flooring
systems, textiles, industrial fibers and intermediates); Performance Coatings &
Polymers (automotive finishes, engineering polymers and elastomers);
Pharmaceuticals (prescription pharmaceuticals and radiopharmaceuticals);
Pigments & Chemicals (white pigment and mineral products, specialty chemicals
and fluorochemicals); Polyester Enterprise (Dacron(R) polyester,
high-performance films and resins and intermediates); Specialty Fibers (Lycra(R)
brand elastane, nonwovens and aramids); and Specialty Polymers (photopolymers
and electronic materials, packaging and industrial polymers, Corian(R) surfaces
and fluoropolymers). The company operates globally in substantially all of its
product lines. The company's sales are not materially dependent on a single
customer or small group of customers. The Performance
64 DuPont
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
Coatings & Polymers and Nylon Enterprise segments have several large customers
in their respective industries that are important to these segments' operating
results.
In general, the accounting policies of the segments are the same as those
described in the Summary of Significant Accounting Policies. Exceptions are
noted as follows and are shown in the reconciliations below. Sales include pro
rata equity affiliate sales and intersegment transfers. After-tax operating
income does not include corporate expenses, interest and exchange gains
(losses).
Segment net assets measures net working capital, net permanent investment and
other noncurrent operating assets and liabilities of the segment. Affiliate net
assets (pro rata share) excludes borrowings and other long-term liabilities.
Depreciation and amortization includes depreciation on research and development
facilities and amortization of intangible assets, excluding write-down of assets
discussed in Note 6. Expenditures for long-lived assets excludes investments in
affiliates and includes payments for long-lived assets as part of business
acquisitions. See Note 23 for discussion of strategic acquisitions in the
segments.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Agriculture Performance Pigments
& Nylon Coatings & Pharma- &
Nutrition Enterprise Polymers ceuticals Chemicals
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Total Segment Sales $ 3,156 $ 4,594 $ 4,607 $ 1,109 $ 3,659
Intersegment Transfers -- 39 42 -- 228
After-Tax Operating Income 2 257 244 508 (668) 577
Depreciation and Amortization 133 236 149 60 232
Equity in Earnings of Affiliates 10 35 16 77 (3)
Provision for Income Taxes 25 140 264 (317) 303
Segment Net Assets 4,069 3,082 2,214 1,843 1,734
Affiliate Net Assets 1,169 551 281 23 62
Expenditures for Long-Lived Assets 214 493 229 655 189
===============================================================================================================
1997
Total Segment Sales $ 2,513 $ 4,582 $ 4,676 $ 753 $ 3,812
Intersegment Transfers -- 26 51 -- 228
After-Tax Operating Income 3 (1,017) 372 519 234 513
Depreciation and Amortization 73 231 157 -- 241
Equity in Earnings of Affiliates (913) 42 67 232 --
Provision for Income Taxes (16) 177 274 142 238
Segment Net Assets 3,231 2,928 2,043 404 1,885
Affiliate Net Assets 882 507 262 437 68
Expenditures for Long-Lived Assets 499 490 258 -- 203
===============================================================================================================
1996
Total Segment Sales $ 2,443 $ 4,186 $ 4,573 $ 721 $ 3,734
Intersegment Transfers -- 29 47 -- 230
After-Tax Operating Income 4 351 334 502 305 493
Depreciation and Amortization 70 244 198 -- 253
Equity in Earnings of Affiliates 6 26 51 302 --
Provision for Income Taxes 56 172 282 186 231
Segment Net Assets 1,405 2,325 1,879 439 1,929
Affiliate Net Assets 28 283 220 479 70
Expenditures for Long-Lived Assets 88 300 219 -- 196
===============================================================================================================
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Polyester Specialty Specialty
Enterprise Fibers Polymers Other Total 1
----------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
Total Segment Sales $ 2,797 $ 3,296 $ 4,093 $ 445 $ 27,756
Intersegment Transfers 175 86 155 4 729
After-Tax Operating Income 2 (228) 659 598 183 2,130
Depreciation and Amortization 419 230 169 64 1,692
Equity in Earnings of Affiliates (1) 25 12 81 252
Provision for Income Taxes (100) 331 318 89 1,053
Segment Net Assets 3,142 2,574 2,183 260 21,101
Affiliate Net Assets 174 134 237 -- 2,631
Expenditures for Long-Lived Assets 706 361 267 134 3,248
===============================================================================================================
1997
Total Segment Sales $ 2,215 $ 3,320 $ 4,094 $ 1,022 $ 26,987
Intersegment Transfers 169 70 192 18 754
After-Tax Operating Income 3 124 708 577 (225) 1,805
Depreciation and Amortization 126 240 178 64 1,310
Equity in Earnings of Affiliates 3 23 21 67 (458)
Provision for Income Taxes 77 319 289 (178) 1,322
Segment Net Assets 3,156 2,332 2,011 375 18,365
Affiliate Net Assets 158 127 199 249 2,889
Expenditures for Long-Lived Assets 1,131 285 320 136 3,322
===============================================================================================================
1996
Total Segment Sales $ 2,337 $ 3,095 $ 3,835 $ 1,542 $ 26,466
Intersegment Transfers 275 32 129 76 818
After-Tax Operating Income 4 161 624 496 (24) 3,242
Depreciation and Amortization 147 247 179 101 1,439
Equity in Earnings of Affiliates 11 20 25 36 477
Provision for Income Taxes 76 287 250 (63) 1,477
Segment Net Assets 1,212 2,232 1,865 1,123 14,409
Affiliate Net Assets 144 116 185 436 1,961
Expenditures for Long-Lived Assets 167 326 247 67 1,610
===============================================================================================================
</TABLE>
DuPont 65
<PAGE>
Notes to Financial Statements
(Dollars in millions, except per share)
1 A reconciliation of the totals reported for the operating segments to the
applicable line items on the consolidated financial statements is as
follows:
Segment Sales to Total Sales
- --------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------
Total Segment Sales $ 27,756 $ 26,987 $ 26,466
Elimination of Intersegment
Transactions (729) (754) (818)
Elimination of Equity
Affiliate Sales (2,260) (2,204) (2,045)
Miscellaneous -- 60 41
-------------------------------------------------
Total Sales $ 24,767 $ 24,089 $ 23,644
================================================================================
After-Tax Operating Income to Income from Continuing Operations
- --------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------
Total Segment ATOI $ 2,130 $ 1,805 $ 3,242
Interest and Exchange
Gains (Losses) (292) (226) (182)
Corporate Expenses (190) (147) (129)
-------------------------------------------------
Income from Continuing
Operations $ 1,648 $ 1,432 $ 2,931
================================================================================
Segment Net Assets to Total Assets
- --------------------------------------------------------------------------------
1998 1997 1996
-------------------------------------------------
Total Segment Net Assets $ 21,101 $ 18,365 $ 14,409
Corporate Assets 4,768 5,296 5,990
Liabilities included
in Net Assets 4,250 4,630 4,092
Net Assets of
Discontinued Operations 8,417 8,398 7,851
-------------------------------------------------
Total Assets $ 38,536 $ 36,689 $ 32,342
================================================================================
Other Items
- --------------------------------------------------------------------------------
Segment Consolidated
Totals Adjustments Totals
-------------------------------------------------
1998
Depreciation and Amortization $ 1,692 $ (240) $ 1,452
Equity in Earnings of Affiliates 252 26 278
Provision for Income Taxes 1,053 (112) 941
Affiliate Net Assets 2,631 (835) 1,796
Expenditures for Long-Lived
Assets 3,248 135 3,383
1997
Depreciation and Amortization $ 1,310 $ 51 $ 1,361
Equity in Earnings of Affiliates (458) 1,101* 643
Provision for Income Taxes 1,322 32 1,354
Affiliate Net Assets 2,889 (517) 2,372
Expenditures for Long-Lived
Assets 3,322 118 3,440
1996
Depreciation and Amortization $ 1,439 $ 87 $ 1,526
Equity in Earnings of Affiliates 477 217 694
Provision for Income Taxes 1,477 (61) 1,416
Affiliate Net Assets 1,961 (389) 1,572
Expenditures for Long-Lived
Assets 1,610 63 1,673
================================================================================
* Includes a charge of $903 for Pioneer in-process research and development
reported in Note 5.
2 Includes the following (charges) benefits:
- --------------------------------------------------------------------------------
Agriculture & Nutrition a $ (73)
Nylon Enterprise b (162)
Performance Coatings & Polymers b (17)
Pharmaceuticals c (853)
Pigments & Chemicals b (4)
Polyester Enterprise d (221)
Specialty Fibers b (3)
Specialty Polymers b (10)
Other e 78
-------
$(1,265)
================================================================================
a Includes a $60 charge to adjust the preliminary allocation of purchased
in-process research and development for PTI and a $13 charge related to
productivity improvement initiatives.
b Includes charges associated with productivity improvement initiatives.
c Includes a $799 charge for purchased in-process research and development
associated with the purchase of Merck's 50 percent interest in The DuPont
Merck Pharmaceutical Company and a $54 impairment write-down to fair value
of certain Pharmaceuticals assets.
d Includes a $123 charge for adjustments to the preliminary allocation of
purchased in-process research and development for the purchase of the ICI
polyester businesses and a $98 charge associated with productivity
improvement initiatives.
e Includes a $121 gain on the sale of CONSOL Energy Inc. and a $43 charge
related to productivity improvement initiatives.
3 Includes the following (charges) benefits:
- --------------------------------------------------------------------------------
Agriculture & Nutrition a $(1,465)
Pharmaceuticals b 72
Polyester Enterprise c (63)
Other d (220)
-------
$(1,676)
================================================================================
a Includes charges of $1,403 for acquired in-process research and development
relating to the Pioneer transaction ($903) and PTI transaction ($500) and
$62 associated with the Benlate(R) 50 DF fungicide recall.
b Includes a benefit of $72 from the gain on the sale by DuPont Merck of its
generic and multisource product lines.
c Includes a charge of $63 for acquired in-process research and development
relating to the ICI polyester resins and intermediates transaction.
d Includes a charge of $220 associated with the divestiture of certain
printing and publishing businesses.
<PAGE>
4 Includes the following (charges) benefits:
- --------------------------------------------------------------------------------
Agriculture & Nutrition a $(110)
Nylon Enterprise b (20)
Performance Coatings & Polymers c 55
Pigments & Chemicals b (14)
Polyester Enterprise b (16)
Other d 45
-----
$ (60)
================================================================================
a Includes charge associated with the Benlate(R) 50 DF fungicide recall.
b Includes charges associated principally with employee separation costs in
the United States.
c Includes benefit associated with formation of the DuPont Dow elastomers
joint venture.
d Includes gains of $41 from the sale of certain medical products businesses
and $33 related to sale of stock received in connection with the previously
sold connector systems business, and a charge of $29, principally employee
separation costs outside the United States, associated with the printing
and publishing business.
See segment discussions on pages 16-23 for a description of each industry
segment. Products are transferred between segments on a basis intended to
reflect as nearly as practicable the "market value" of the products.
29. Subsequent Event
In February 1999 the company acquired Herberts, the leading supplier of
automotive coatings in Europe, from Hoechst for about $1,900. This business will
become part of DuPont's Performance Coatings & Polymers segment. Herberts
operates 37 manufacturing facilities worldwide and currently employs
approximately 9,000 employees. For the year-ended December 31, 1998, Herberts
had sales of approximately $1,900. The acquisition will be accounted for as a
purchase in 1999.
DuPont 67
<PAGE>
Quarterly Financial Data
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
Quarter Ended March 31 June 30 September 30 December 31
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998
Sales $ 6,194 $ 6,432 $ 6,042 $ 6,099
Cost of Goods Sold and Other Expenses 1 5,302 5,272 6,874 5,167
Income (Loss) from Continuing Operations 637 2 794 3 (564) 4 781 5
Income from Discontinued Operations 269 165 160 2,439
Net Income 906 959 (404) 6 3,220
Basic Earnings Per Share of Common Stock 7
Income (Loss) from Continuing Operations .56 .70 (.50) .69
Income from Discontinued Operations .24 .15 .14 2.17
Net Income .80 .85 (.36) 6 2.86
Diluted Earnings Per Share of Common Stock 7
Income (Loss) from Continuing Operations .55 .69 (.50) .68
Income from Discontinued Operations .24 .14 .14 2.14
Net Income .79 .83 (.36) 6 2.82
Dividends Per Share of Common Stock .315 .35 .35 .35
Market Price of Common Stock 8
High 70 7/16 84 7/16 79 1/2 66 1/2
Low 52 5/8 67 1/8 52 1/4 51 11/16
==========================================================================================================================
1997
Sales $ 5,851 $ 6,541 $ 5,794 $ 5,903
Cost of Goods Sold and Other Expenses1 4,854 5,260 6,038 5,724
Income (Loss) from Continuing Operations 710 924 (273) 9 71 10
Income from Discontinued Operations 310 216 256 191
Net Income 1,020 1,140 (17) 262
Basic Earnings Per Share of Common Stock 7
Income (Loss) from Continuing Operations .63 .82 (.24) .06
Income from Discontinued Operations .27 .19 .22 .17
Net Income .90 1.01 (.02) .23
Diluted Earnings Per Share of Common Stock 7
Income (Loss) from Continuing Operations .62 .80 (.24) .06
Income from Discontinued Operations .27 .19 .22 .17
Net Income .89 .99 (.02) .23
Dividends Per Share of Common Stock .285 .315 .315 .315
Market Price of Common Stock 8
High 57 5/8 62 7/8 69 3/4 64 15/16
Low 46 3/8 49 3/4 60 11/16 50 3/16
==========================================================================================================================
</TABLE>
1 Excludes interest expense and provision for income taxes.
2 Includes a net charge of $145 ($.13 per share-diluted) reflecting: a charge
of $85 for the modernization program for global nylon operations; and a
charge of $60 to revise a prior estimate for the 1997 write-off of acquired
in-process research and development relating to the PTI transaction.
3 Includes a net charge of $45 ($.04 per share-diluted) reflecting a charge
principally for the modernization program for global nylon operations.
4 Includes a net charge of $1,174 ($1.03 per share-diluted) reflecting: a
charge of $954 associated with acquired in-process research and development
relating to the DuPont Merck acquisition ($845) and a revision to the 1997
ICI polyester write-off ($109); a charge of $256 related to productivity
improvement initiatives involving employee separation costs and asset
write-downs; a benefit of $36 related to the sale of hydrogen peroxide
assets.
5 Includes a net benefit of $99 ($.08 per share-diluted) reflecting: a gain
of $121 on the sale of substantially all of the company's remaining
interest in CONSOL Energy Inc.; a charge of $54 associated with the
impairment write-down to fair value of certain pharmaceutical assets; and a
net benefit of $32 to revise prior estimates for the write-off of acquired
in-process research and development relating to the DuPont Merck
acquisition ($46 benefit) and the ICI polyester purchase ($14 charge).
6 Before effect of extraordinary item.
7 Earnings per share for the year may not equal to the sum of quarterly
earnings per share due to changes in average share calculations.
8 As reported on the New York Stock Exchange, Inc. Composite Transactions
Tape.
9 Includes a net charge of $998 ($.87 per share - diluted) reflecting: a
charge of $850 associated with acquired in-process research and development
for the Pioneer transaction; a charge of $220 associated with the planned
divestiture of certain printing and publishing businesses; and a gain of
$72 from the sale by DuPont Merck of its generic and multisource product
lines.
10 Includes a net charge of $678 ($.59 per share - diluted) reflecting: a
charge of $616 associated with acquired in-process research and development
relating to the PTI transaction ($500), the Pioneer transaction ($53), and
the ICI polyester intermediates and resins transaction ($63); and a charge
of $62 associated with the Benlate(R) 50 DF fungicide recall.
68 DuPont
<PAGE>
Five-Year Financial Review 1
(Dollars in millions, except per share)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
--------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Summary of Operations
Sales $ 24,767 $ 24,089 $ 23,644 $ 24,500 $ 22,518
Income from Continuing Operations Before
Income Taxes and Minority Interests $ 2,613 $ 2,829 $ 4,387 $ 4,319 $ 3,384
Provision for Income Taxes $ 941 $ 1,354 $ 1,416 $ 1,432 $ 1,164
Income from Continuing Operations $ 1,648 $ 1,432 $ 2,931 $ 2,858 $ 2,205
Income from Discontinued Operations $ 3,033 $ 973 $ 705 $ 435 $ 522
Net Income $ 4,681 2 $ 2,405 $ 3,636 $ 3,293 $ 2,727
--------------------------------------------------------------------------------------
Basic Earnings Per Share of Common Stock
Income from Continuing Operations $ 1.45 $ 1.26 $ 2.60 $ 2.43 $ 1.61
Income from Discontinued Operations $ 2.69 $ 0.86 $ 0.63 $ 0.38 $ 0.39
Net Income $ 4.14 2 $ 2.12 $ 3.23 $ 2.81 $ 2.00
Diluted Earnings Per Share of Common Stock
Income from Continuing Operations $ 1.43 $ 1.24 $ 2.56 $ 2.41 $ 1.60
Income from Discontinued Operations $ 2.65 $ 0.84 $ 0.62 $ 0.36 $ 0.38
Net Income $ 4.08 2 $ 2.08 $ 3.18 $ 2.77 $ 1.98
======================================================================================
Financial Position at Year End
Working Capital $ (2,374) $ (2,110) $ 15 $ (2,116) $ 3,208
Total Assets $ 38,536 $ 36,689 $ 32,342 $ 32,748 $ 32,577
Borrowings and Capital Lease Obligations:
Short Term $ 6,629 $ 6,152 $ 3,907 $ 6,152 $ 1,286
Long Term $ 4,495 $ 5,897 $ 5,052 $ 5,646 $ 6,338
Stockholders' Equity $ 13,954 $ 11,270 $ 10,593 $ 8,323 $ 12,743
======================================================================================
General
For the Year:
Capital Expenditures $ 5,480 3 $ 7,075 3 $ 1,783 $ 1,810 $ 1,615
Depreciation and Amortization $ 1,452 $ 1,361 $ 1,526 $ 1,643 $ 1,748
Research and Development Expense $ 1,308 4 $ 1,072 4 $ 990 $ 1,031 $ 1,004
As Percent of Sales: 5.3% 4.5% 4.2% 4.2% 4.5%
Average Number of Shares (millions)
Basic 1,129 1,131 1,121 1,170 1,360
Diluted 1,145 1,150 1,140 1,183 1,371
Dividends Per Common Share $ 1.365 $ 1.23 $ 1.115 $ 1.015 $ 0.91
Common Stock Prices
High $ 84 7/16 $ 69 3/4 $ 49 11/16 $ 36 1/2 $ 31 3/16
Low $ 51 11/16 $ 46 3/8 $ 34 13/16 $ 26 5/16 $ 24 1/8
Year-End Close $ 53 1/16 $ 60 1/16 $ 47 1/16 $ 34 15/16 $ 28 1/16
At Year End:
Employees (thousands) 5 101 98 97 105 107
Common Stockholders of Record (thousands) 145 154 158 166 172
Book Value Per Common Share $ 12.18 $ 9.77 $ 9.19 $ 7.28 $ 9.18
====================================================================================================================================
</TABLE>
1 See Management's Discussion and Analysis, Consolidated Financial Statements
and Quarterly Financial Data for information relating to significant items
affecting the results of operations and financial position.
2 Before extraordinary item (Note 8).
3 Includes strategic acquisitions as discussed in Note 23.
4 Excludes purchased in-process research and development.
5 Includes employees of discontinued operations.
DuPont 69
<PAGE>
Exhibit 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-3 (No. 33-53327,
No. 33-61339, and No. 33-60069) and Form S-8 (No. 2-74004, No. 33-43918,
No. 33-51817, No. 33-51821, No. 33-60037, and No. 33-61703) of E. I. du Pont
de Nemours and Company of our report dated February 19, 1999, appearing on
page 40 of the Annual Report to Stockholders which is incorporated in this
Annual Report on Form 10-K/A Amendment No. 1. We also consent to the
incorporation by reference of our report on the Financial Statement Schedule,
which appears on page 25 of E. I. du Pont de Nemours and Company and its
subsidiaries' Annual Report on Form 10-K/A Amendment No. 1.
PRICEWATERHOUSECOOPERS LLP
Thirty South Seventeenth Street
Philadelphia, Pennsylvania 19103
July 7, 1999
