<PAGE> 1
1998
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FORM 10-K
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from................to...................
Commission File Number 1-584
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FERRO CORPORATION
(Exact name of registrant as specified in its charter)
An Ohio Corporation I.R.S. No. 34-0217820
1000 LAKESIDE AVENUE, CLEVELAND, OH 44114
(Address of principal executive offices)
Registrant's telephone number, including area code: 216-641-8580
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Securities Registered Pursuant to Section 12(b) of the Act:
<TABLE>
<CAPTION>
Title of Class Name of Exchange on which registered
-------------- ------------------------------------
<S> <C>
Common Stock, par value $1.00 New York Stock Exchange
Common Stock Purchase Rights New York Stock Exchange
</TABLE>
Securities Registered Pursuant to Section 12(g) of the Act:
7 5/8% Debentures due May 1, 2013
7 3/8% Debentures due November 1, 2015
8% Debentures due June 15, 2025
7 1/8 Debentures due April 1, 2028
Series A ESOP Convertible Preferred Stock, without Par Value
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
On, January 31, 1999 there were 35,126,968 shares of Ferro Common Stock, par
value $1.00 outstanding. As of the same date, the aggregate market value (based
on closing sale price) of Ferro's Common Stock held by non-affiliates was
$768,402,425.
Documents Incorporated by Reference
Portions of Annual Report to Shareholders for the year ended December 31, 1998
(Incorporated into Parts I, II and IV of this Form 10-K).
Portions of Ferro Corporation's Proxy Statement for the Annual Meeting
of Shareholders on April 23, 1999
(Incorporated into Part III of this Form 10-K).
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TABLE OF CONTENTS
PART I
Item 1. Business........................................................ Page 3
Item 2. Properties...................................................... Page 6
Item 3. Legal Proceedings............................................... Page 6
Item 4. Submission of Matters to a Vote of Security Holders............. Page 7
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters............................................. Page 8
Item 6. Selected Financial Data......................................... Page 9
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations ...................................... Page 10
Item 7.A. Quantitative and Qualitative Disclosures About Market Risk.... Page 10
Item 8. Financial Statements and Supplementary Data..................... Page 10
Item 9. Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure ....................................... Page 10
PART III
Item 10. Directors and Executive Officers of the Registrant............. Page 10
Item 11. Executive Compensation......................................... Page 10
Item 12. Security Ownership of Certain Beneficial Owners and Management. Page 10
Item 13. Certain Relationships and Related Transactions................. Page 10
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K ...................................................... Page 11
<PAGE> 3
PART I
ITEM 1- BUSINESS
Ferro Corporation ("Ferro"), which was incorporated under the laws of Ohio
in 1919, is a worldwide producer of performance materials for industry that
utilizes organic and inorganic chemistry. It operates (either directly or
through subsidiaries and affiliates) in 19 countries worldwide. Ferro produces a
variety of coatings, chemicals, plastics and related products and services.
Most of the products produced by Ferro are classified as performance
materials, rather than commodities, because they are formulated or designed to
perform a specific and important function both in the manufacturing processes
and in the finished products of Ferro customers. These materials are not sold in
the high volume normally associated with commodity businesses.
Ferro's materials require a high degree of technical service on an
individual customer basis. The value of these performance materials stems not
just from their raw materials composition, but from the result and performance
they achieve in actual use.
A further description of Ferro's business, its principal products, their
markets and applications is contained under all headings on pages 8 through 17
of its 1998 Annual Report to Shareholders (the "Annual Report"), which is
attached hereto as Exhibit 13. The information contained under the headings on
pages 8 through 17 of the Annual Report (excluding pages 10,13,14,17 on which
only pictures appear and the text describing such pictures on pages 10,13,14,17)
is incorporated herein by reference. Information concerning Ferro's business
during 1998, 1997 and 1996 and certain transactions consummated during those
years is included under the heading "Management's Discussion and Analysis" on
pages 18 through 26 of the Annual Report and in Note 8 to Ferro's Consolidated
Financial Statements, which are included in the Annual Report. Note 8 appears on
page 36 of the Annual Report. Such information is incorporated herein by
reference. Additional information about Ferro's reportable operating segments,
including financial information relating thereto, is set forth in Note 13 to
Ferro's Consolidated Financial Statements, which appears on pages 39 and 40 of
the Annual Report and is incorporated herein by reference.
Certain statements contained herein and in future filings with the
Securities and Exchange Commission reflect the Company's current expectations
with respect to the future performance of the Company and may constitute
"Forward-Looking Statements." Because they are based on current expectations,
actual results may differ materially. Please refer to the "Cautionary Note on
Forward-Looking Statements" section of "Management's Discussion and Analysis"
contained on page 24 of the Annual Report for additional information, which
information is incorporated herein by reference.
Raw Materials
The raw materials essential to Ferro's operations both in the United
States and overseas are obtainable from multiple sources worldwide. Ferro did
not encounter significant raw material shortages in 1998 and does not anticipate
such shortages in 1999.
Patents and Licenses
Ferro owns a substantial number of patents relating to its various
products and their uses. While these patents are of importance to Ferro, it does
not consider that the invalidity or expiration of any single patent or group of
patents would have a material adverse effect on its business. Ferro patents
expire at various dates through the year 2019.
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Ferro does not hold any licenses, franchises or concessions that it
considers to be material.
Customers
Ferro does not consider that a material part of its coatings or its
plastics businesses is dependent on any single customer or group of customers.
In the chemicals segment however, the loss of two or three of the largest
customers could have a material adverse effect on that segment.
Backlog of Orders
In general, no significant lead time between order and delivery exists in
any of Ferro's business segments. As a result, Ferro does not consider that the
dollar amount of backlog orders believed to be firm as of any particular date is
material for an understanding of its business. Ferro does not regard any
material part of its business to be seasonal.
Competition
In most of its products, Ferro competes with a substantial number of
competitors, none of which is dominant. However, Ferro believes that it is the
largest worldwide supplier of ceramic glaze and porcelain enamel coatings.
Competition varies by product and by region. Due to the diverse nature of
Ferro's product lines no single company competes across all product lines in any
of the Company's segments.
In the coatings group worldwide, the Company is the largest producer of
porcelain enamel and ceramic glaze coatings. Strong local competition for
ceramic glaze exists in the markets of Italy and Spain. In powder coatings,
Ferro is one of the top five producers in the world. The top five producers of
powder coatings represent approximately 60% of the market. In the chemicals
group , the Company is one of the largest producers of polymer additives in the
United States. The plastics group has a large number of competitors in all
businesses.
Product performance characteristics, customer and technical service and
price are the most important components of the competition that Ferro encounters
in the sale of nearly all of its products.
Research and Development
A substantial number of Ferro's employees are involved in research and
development activities relating to new and existing products, services and
techniques required by the ever-changing markets of its customers. Laboratories
are located at each of Ferro's major subsidiaries around the world where
technical efforts are applied to meet customer and market needs of the
particular geographical area. In the United States, laboratories are maintained
in each of its divisions. In addition, corporate research and development
activity is conducted by approximately 60 scientists and support personnel in
the Cleveland area. The research staff is organized by major business group. The
Company also operates central design and development labs in Italy and Spain to
serve the tile market worldwide.
Expenditures for research and development activities relating to the
development or significant improvement of new and/or existing products, services
and techniques were approximately $29.4 million in 1998, $26.6 million in 1997,
and $23.8 million in 1996. Expenditures for individual customer requests for
research and development were not material.
Environmental Matters
Ferro's manufacturing facilities, like those of its industry generally,
are subject to numerous laws and regulations implemented to protect the
environment, particularly with respect to plant wastes and emissions. Ferro
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believes that it is in substantial compliance with the environmental regulations
to which its operations are subject and that, to the extent Ferro may not be in
compliance with such regulations, non-compliance has not had a materially
adverse effect on Ferro's operations. Moreover, while Ferro has not experienced
substantial difficulty in complying with environmental requirements, compliance
has required a continuous management effort and significant expenditures.
Ferro and its international subsidiaries authorized $4.6 million in
capital expenditures for environmental control in 1998 and the Company's best
estimate of what it expects capital expenditures for environmental control to be
in 1999 and 2000 is $6.2 million and $5.9 million. The Company does not consider
these capital expenditures to be material.
For additional information on other environmental matters see Item 3 of
this Annual Report on Form 10-K and information included under the heading
"Management's Discussion and Analysis" on pages 18 through 26 of the Annual
Report and information contained in Note 9 on page 36 of the Annual Report.
Employees
At December 31, 1998, Ferro employed approximately 6,693 full-time
employees, including 3,856 employees in its foreign subsidiaries and affiliates
and 2,837 in the United States.
Approximately 24% of the domestic workforce is covered by labor
agreements, and approximately 7% is affected by union agreements that expire in
1999.
Foreign Operations
Financial information about Ferro's domestic and foreign operations is set
forth on page 40 of the Annual Report and is incorporated herein by reference.
Ferro's products are produced and distributed in foreign as well as
domestic markets. Ferro commenced its international operations in 1927.
Wholly-owned subsidiaries operate manufacturing facilities in Argentina,
Australia, Brazil, England, France, Germany, Holland, Italy, Mexico, Portugal
and Spain. Partially-owned subsidiaries manufacture in Indonesia, Taiwan,
Thailand, Turkey and Venezuela.
Foreign operations accounted for 46% of the consolidated net sales and 44%
of Ferro's geographic operating profit for the year 1998; comparable amounts for
the year 1997 were 46% and 42%, before realignment charges, and for the year
1996 were 46% and 44%.
Except for the sales of Ferro Italia S.R.L. (Italy), Ege-Ferro Kimya A.S.
(Turkey), Ferro Enamel do Brasil, I.C.L.(Brazil), Ferro de Venezuela
C.A.(Venezuela), Ferro Corporation Australia Pty. Ltd.(Australia), the sales of
each of Ferro's subsidiaries are principally for delivery of products outside
the country in which the subsidiary is located. Ferro's European Community
subsidiaries continue to reduce and eliminate, to the extent practical,
duplication of product lines with the intended result being that only one
subsidiary will be the primary provider of each line of Ferro products to the
entire European Community market. A similar process is occurring within the
MERCOSUR economic union in Latin America.
Ferro receives technical service fees and/or royalties from many of its
foreign subsidiaries. Historically, as a matter of corporate policy, the foreign
subsidiaries have been expected to remit a portion of their annual earnings
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to the parent as dividends. To the extent earnings of foreign subsidiaries are
not remitted to Ferro, such earnings are intended to be indefinitely invested in
those subsidiaries.
ITEM 2 - PROPERTIES
Ferro's corporate headquarters office at 1000 Lakeside Avenue, Cleveland,
Ohio and other corporate facilities located in Independence, Ohio are owned by
the Company. The business segments in which manufacturing plants are used and
the locations of the principal manufacturing plants owned by Ferro in the United
States are as follows: Coatings -- Cleveland, Ohio; Nashville, Tennessee;
Pittsburgh, Pennsylvania; Toccoa, Georgia; Orrville, Ohio; Shreve, Ohio; Penn
Yan, New York; East Liverpool, Ohio; Crooksville, Ohio and East Rochester, New
York. Plastics -- Plymouth, Indiana; Evansville, Indiana; Stryker, Ohio; Edison,
New Jersey and South Plainfield, New Jersey. Chemicals -- Bedford, Ohio;
Hammond, Indiana and Baton Rouge, Louisiana.
In addition, Ferro leases manufacturing facilities in Cleveland, Ohio
(Chemicals); Fort Worth, Texas (Chemicals); Santa Barbara, California (Coatings)
and San Marcos, California (Coatings).
Outside the United States, Ferro or its subsidiaries own manufacturing
plants in Argentina, Australia, Brazil, France, Germany, Indonesia, Italy,
Mexico, the Netherlands, Spain, Taiwan, Thailand, Turkey and the United Kingdom.
Ferro or its subsidiaries lease manufacturing plants in Italy, Portugal, Germany
and the Netherlands. In many instances, the manufacturing facilities outside of
the United States are used in multiple business segments of Ferro.
Ferro believes that all of the foregoing facilities are generally well
maintained and adequate for their present use. During the past year, several of
Ferro's plants have been operating near capacity.
ITEM 3 - LEGAL PROCEEDINGS
In 1994, the Company's Keil Chemical Division (Keil) settled an
enforcement proceeding concerning air emissions from Keil's Pyro-Chek(R)
process. The enforcement proceeding had been initiated by the Indiana Department
of Environmental Management (IDEM) and the local environmental agency, with
oversight by the United States Environmental Protection Agency (U.S. EPA). The
settlement was in the form of an Agreed Order with IDEM. The Agreed Order
confirmed the Company's plans to install additional controls and imposed certain
aggregate limitations on air emissions from the Pyro-Chek(R) production process
while the Company applied for and obtained a construction and operating permit
for the existing air source. The control equipment was installed, but the
Company has had a continuing disagreement with the agencies over whether it has
been in compliance with the Agreed Order, including which methods should be used
to demonstrate compliance.
In November 1998, IDEM filed suit in Indiana state court seeking to shut
down operation of the Pyro-Chek(R) process. At a hearing held on December 4,
l998, the court denied IDEM's request for a preliminary injunction, and later
dismissed the claim for a permanent injunction on grounds that the dispute
arising out of the Agreed Order should be addressed before the Indiana Office of
Environmental Adjudication. The day before this hearing, IDEM denied Keil's
application for a permit for air emissions for the Pyro-Chek(R) process. The
Company appealed IDEM's denial of Keil's permit application to the Indiana
Office of Environmental Adjudication.
On December 29, 1998 IDEM wrote to the Company alleging that because Keil
is in violation of the Agreed Order, operation of the Pyro-Chek(R) process is
prohibited, and that the Company will be subject to fines of up to $25,000 for
each day of continued operation. The Company filed a petition for review before
the Indiana Office
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of Environmental Adjudication seeking to confirm that operation of the
Pyro-Chek(R) process has been and remains in compliance with the Agreed Order. A
hearing date has not yet been scheduled for either petition before the Indiana
Office of Environmental Adjudication.
Through subpoenas recently issued to the Company, the U. S. EPA and IDEM
have obtained a wide range of documents relating to the operation of the
Pyro-Chek(R) process. U. S. EPA and IDEM have also ordered extensive emissions
tests at the facility to evaluate compliance with legal requirements. The
Company has supplied most of the requested documents and is planning to perform
most of the requested tests.
The law firm of Squire, Sanders & Dempsey, LLP of which Mark A. Cusick is
a partner, provided legal services to Ferro in 1998 and Ferro plans to continue
the use of such firm in 1999. Mr. Cusick is the Secretary of Ferro.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of Ferro's security holders during the
fourth quarter of the fiscal year covered by this report.
EXECUTIVE OFFICERS OF THE REGISTRANT
There is set forth below the name, age, positions and offices held by each
individual serving as executive officer as of March 16, 1999 as well as their
business experience during the past five years. Years indicate the year the
individual was named to the indicated position. There is no family relationship
between any of Ferro's executive officers.
Albert C. Bersticker - 64
Chairman of the Board, 1999
Chairman of the Board and Chief Executive Officer, 1996
President and Chief Executive Officer, 1991
David G. Campopiano - 49
Vice President, Mergers and Acquisitions, 1998
Vice President, Corporate Development, 1989
R. Jay Finch - 57
Vice President, Specialty Plastics, 1991
James F. Fisher - 61
Senior Vice President, Ceramics and Colorants, 1997
Vice President, Ceramics and Colorants, 1996
Senior Vice President, Powder Coatings, Specialty Ceramics and
Electronic Materials, 1994
Senior Vice President, Coatings, Colors and Ceramics, 1993
J. Larry Jameson - 61
Vice President, Industrial Coatings, 1998
Vice President, Powder Coatings, 1996
Self Employed, Coatings Consultant, 1993
Chief Executive Officer, Pirelli Cable Corporation, 1993
Kent H. Lee - 57
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Vice President, Specialty Chemicals, 1998
Director, United States Operations, Chemicals, 1998
General Manager Polymer Additives, 1996
Private Consultant to The BF Goodrich Company, 1994
President, Specialty Polymers and Chemicals,
The BF Goodrich Company, 1985
Charles M. Less - 49
Vice President, Marketing, 1995
Group Market Manager, Rohm and Haas, 1992
Hector R. Ortino - 56
President and Chief Executive Officer, 1999
President and Chief Operating Officer, 1996
President, 1996
Executive Vice President and Chief Financial-Administrative Officer, 1993
Millicent W. Pitts - 44
Vice President, Global Support Operations, 1998
Director, Corporate Development, Rohm & Haas Company, 1996
Director, Corporate Planning, Rohm and Haas Company, 1994
Thomas O. Purcell, Jr. - 54
Vice President and Chief Technical Officer, 1996
Vice President, Research and Development, 1991
Paul V. Richard - 39
Vice President, Human Resources, 1998
Director, Human Resources, 1993
Gary H. Ritondaro - 52
Vice President and Chief Financial Officer, 1996
Vice President, Finance, 1993
Vice President, Controller, 1991
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Information regarding the recent price and dividend history of Ferro's
Common Stock, the principal market for its Common Stock and the number of
holders of Common Stock is set forth under the heading "Quarterly Data
(unaudited)" on page 43 of the Annual Report. Said information is incorporated
herein by reference. Information concerning dividend restrictions is contained
in Note 4 to Ferro's Consolidated Financial Statements on page 33 of the Annual
Report and this information is incorporated herein by reference.
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ITEM 6 - SELECTED FINANCIAL DATA
The summary of selected financial data for each of the last five years set
forth under the heading "Selected Financial Data " on pages 44 and 45 of the
Annual Report is incorporated here by reference.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
The information contained under the heading "Management's Discussion and
Analysis" on pages 18 through 26 of the Annual Report is incorporated here by
reference.
ITEM 7.A - QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained under the heading "Management's Discussion and
Analysis" on pages 18 through 26 of the Annual Report is incorporated here by
reference.
ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Ferro and its subsidiaries
contained on pages 27 through 42, inclusive, including the Notes to Consolidated
Financial Statements, and the quarterly data (unaudited) on page 43 of the
Annual Report, are incorporated here by reference.
ITEM 9 - CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There are no such changes or disagreements.
PART III
ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding directors of Ferro contained under the headings
"Election of Directors" and "Stock Ownership of Management and Certain
Beneficial Owners"in Ferro's Proxy Statement for the Annual Meeting of
Shareholders on April 23, 1999, is incorporated here by reference. Information
regarding executive officers of Ferro is contained under Part I of this Annual
Report on Form 10-K.
ITEM 11 - EXECUTIVE COMPENSATION
The information required by this Item 11 is set forth under the heading
"Information Concerning Executive Officers" in Ferro's Proxy Statement for the
Annual Meeting of Shareholders on April 23, 1999 and is incorporated here by
reference.
ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item 12 is set forth under the headings
"Election of Directors" and "Security Ownership of Directors, Officers and
Certain Beneficial Owners" in Ferro's Proxy Statement for the Annual Meeting of
Shareholders on April 23, 1999 and is incorporated here by reference.
ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no relationships or transactions that are required to be
reported.
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PART IV
ITEM 14 - EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
1. Documents filed as part of this Annual Report on Form 10-K:
(a) The following Consolidated Financial Statements of Ferro Corporation
and its subsidiaries, contained on pages 27 through 42 inclusive, of
the Annual Report are incorporated here by reference:
Consolidated Statements of Income for the years ended December 31,
1998, 1997 and 1996
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended
December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
(b) The following additional information for the years 1998, 1997 and
1996, is submitted herewith:
Independent Auditors' Report on Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts and Reserves
All other schedules have been omitted because the material is not
applicable or is not required as permitted by the rules and
regulations of the Securities and Exchange Commission, or the
required information is included in notes to consolidated financial
statements.
Financial Statement Schedule II, together with the independent
Auditors' Report thereon, are contained on pages F-1 and F-2 of this
Annual Report on Form 10-K.
(c) Exhibits:
The exhibits listed in the attached Exhibit Index are filed pursuant
to Item 14 (c) of the Form 10-K.
2. Reports on Form 8-K:
No reports on Form 8-K were filed for the three months ended December 31,
1998
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this Annual Report on Form
10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
FERRO CORPORATION
By /s/Hector R. Ortino
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Hector R. Ortino
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Annual Report on Form 10-K has been signed below by the following persons on
behalf of the Registrant and in their indicated capacities and as of this 31st
day of March, 1999
/s/Hector R. Ortino President and Chief Executive Officer
- ------------------------- (Principal Executive Officer)
Hector R. Ortino
/s/Gary H . Ritondaro Vice President and Chief Financial Officer
- ------------------------- (Principal Financial Officer and
Gary H. Ritondaro Principal Accounting Officer)
/s/Sandra Harden Austin Director
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Sandra Harden Austin
/s/Albert C. Bersticker Chairman of the Board and Director
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Albert C. Bersticker
/s/Michael H. Bulkin Director
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Michael H. Bulkin
/s/Glenn R. Brown Director
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Glenn R. Brown
/s/William E. Butler Director
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William E. Butler
/s/John C. Morley Director
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John C. Morley
/s/Rex A. Sebastian Director
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Rex A. Sebastian
/s/William J. Sharp Director
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William J. Sharp
/s/Dennis W. Sullivan Director
- -------------------------
Dennis W. Sullivan
<PAGE> 13
INDEPENDENT AUDITORS' REPORT ON FINANCIAL STATEMENT SCHEDULE
To The Shareholders and Board of Directors of Ferro Corporation:
Under date of January 25, 1999, we reported on the consolidated balance sheets
of Ferro Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998, as
contained in the 1998 Annual Report to Shareholders. These consolidated
financial statements and our report thereon are incorporated by reference in the
Annual Report on Form 10-K for the year 1998. In connection with our audits of
the aforementioned consolidated financial statements, we also audited the
related financial statement Schedule II-Valuation and Qualifying Accounts and
Reserves. This financial statement schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion on this
financial statement schedule based on our audits.
In our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.
/s/ KPMG LLP
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KPMG LLP
Cleveland, Ohio
January 25, 1999
F-1
<PAGE> 14
FERRO CORPORATION AND SUBSIDIARIES
Valuation and Qualifying Accounts and Reserves
Years ended December 31, 1998, 1997 and 1996
(thousands of dollars)
<TABLE>
<CAPTION>
Additions
-------------------------
Balance at Charged to Charged Balance
Beginning Costs and to Other at End of
of Period Expenses Accounts Deductions Period
========= ======== ======== ========== ======
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1998
Valuation and qualifying accounts which are
deducted on consolidated balance sheet from
the assets to which they apply
Possible losses in collection of notes (181)(B)
and accounts receivable - trade $8,280 3,185 (63)(C) 1,846 (A) 9,737
====== ===== === ===== =====
Year ended December 31, 1997
Valuation and qualifying accounts which are
deducted on consolidated balance sheet from
the assets to which they apply
Possible losses in collection of notes 1,367(B)
and accounts receivable - trade $9,497 2,630 15 (C) 2,495(A) 8,280
====== ===== === ===== =====
Year ended December 31, 1996
Valuation and qualifying accounts which are
deducted on consolidated balance
sheet from the assets to which they apply 254(C)
Possible losses in collection of notes 225(B)
and accounts receivable - trade $9,877 3,006 2,907(A) 9,497
====== ===== === ===== =====
</TABLE>
Notes:
(A) Accounts written off, less recoveries
(B) Adjustment in respect of differences in rates of exchange
(C) Acquisitions and divestitures, net
F-2
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EXHIBIT INDEX
The following exhibits are filed with this report or are incorporated here
by reference to a prior filing in accordance with Rule 12b-32 under the
Securities and Exchange Act of 1934. (Asterisk denotes exhibits filed with
this report).
(3) Articles of Incorporation and by-laws
(a) Eleventh Amended Articles of Incorporation. (Reference is made to
Exhibit (3)(a) to Ferro Corporation's Quarterly Report on Form 10-Q
for the three months ended June 30, 1998 which Exhibit is
incorporated here by reference.)
(b) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed December 28, 1994.
(Reference is made to Exhibit (3)(b) to Ferro Corporation's
Quarterly Report on Form 10-Q for the three months ended June 30,
1998 which Exhibit is incorporated here by reference.)
(c) Certificate of Amendment to the Eleventh Amended Articles of
Incorporation of Ferro Corporation filed June 23, 1998.
(Reference is made to Exhibit (3)(c) to Ferro Corporation's
Quarterly Report on Form 10-Q for the three months ended June 30,
1998.)
(d) Amended Code of Regulations. (Reference is made to Exhibit (3)(d) to
Ferro Corporation's Quarterly Report on Form 10-Q for the three
months ended June 30, 1998, which Exhibit is incorporated here by
reference.)
(4) Instruments defining rights of security holders, including indentures
(a) Revolving Credit Agreement by and between Ferro and four commercial
banks dated August 22, 1990. (Reference is made to Exhibit 10 to
Ferro Corporation's Form 10-Q for the three months ended September
30, 1990, which Exhibit is incorporated here by reference.)
(b) Amendment Number 1 dated May 31, 1991, to the Revolving Credit
Agreement by and between Ferro and four commercial banks. (Reference
is made to Exhibit 4(b)(1) to Ferro Corporation's Quarterly Report
on Form 10-Q for the three months ended June 30, 1991, which Exhibit
is incorporated here by reference.)
(c) Amendment Number 2 dated July 30, 1991, to the Revolving Credit
Agreement by and between Ferro and four commercial banks. (Reference
is made to Exhibit 4(b)(2) to Ferro Corporation's Form 10-Q for the
three months ended June 30, 1991, which Exhibit is incorporated here
by reference.)
(d) Amendment Number 3 dated December 31, 1991, to the Revolving Credit
Agreement by and between Ferro and four commercial banks. (Reference
is made to Exhibit 4 to Ferro Corporation's Form 10-K for the year
ended December 31, 1991, which Exhibit is incorporated here by
reference.)
(e) Amendment Number 4 dated July 21, 1992, to the Revolving Credit
Agreement by and between Ferro and four commercial banks. (Reference
is made to Exhibit 4 to Ferro Corporation's Form 10-Q for the three
months ended June 30, 1992, which Exhibit is incorporated here by
reference.)
<PAGE> 16
(f) Amendment Number 5 dated April 20, 1993, to the Revolving Credit
Agreement by and between Ferro and four commercial banks. (Reference
is made to Exhibit 4(b)(4) to Ferro Corporation's Form 10-Q for the
three months ended June 30, 1993, which Exhibit is incorporated here
by reference.)
(g) Amendment Number 6 dated June 22, 1995, to the Revolving Credit
Agreement by and between Ferro and four commercial banks. (Reference
is made to Exhibit 4(b)(4) to Ferro Corporation's Form 10-Q for the
three months ended June 30, 1995, which Exhibit is incorporated here
by reference.)
(h) Amendment Number 7 dated October 25, 1995 to the Revolving Credit
Agreement by and between Ferro Corporation and four commercial
banks.(Reference is made to Exhibit 4(b)(4) to Ferro Corporation's
Form 10-Q for the three months ended September 30, 1995, which
Exhibit is incorporated here by reference.)
(i) Amendment Number 8 dated July 24, 1997 to the Revolving Credit
Agreement by and between Ferro Corporation and four commercial
banks.(Reference is made to Exhibit 4(k) to Ferro Corporation's Form
10-Q for the three months ended June 30, 1997, which Exhibit is
incorporated here by reference.)
(j) Shareholder Rights Agreement between Ferro Corporation and National
City Bank, Cleveland, Ohio, as Rights Agent, dated as of March 22,
1996. (Reference is made to the Exhibit to the Registration
Statement on Form 8-A dated May 15, 1996 which Exhibit is
incorporated here by reference.)
(k) The rights of the holders of Ferro's Debt Securities issued and to
be issued pursuant to an Indenture between Ferro and Society
National Bank, as Trustee, are described in the form of Indenture
dated May 1, 1993 filed as Exhibit 4(j) to Ferro Corporation's Form
10-Q for the three months ended June 30, 1993. Said Exhibit is
incorporated here by reference.
(l) The rights of the holders of Ferro's Debt Securities issued and to
be issued pursuant to a Senior Indenture between Ferro and Chase
Manhattan Trust Company, National Association, as Trustee, are
described in the Senior Indenture, dated March 25, 1998. (Reference
is made to Exhibit 4 (c) to Ferro Corporation's Quarterly Report on
Form 10-Q for the three months ended March 31, 1998.)
(m) Form of Security (7 1/8% Debentures due 2028). (Reference is made to
Exhibit 4(a-1) to Ferro Corporation's Form 8-K filed March 31, 1998,
which Exhibit is incorporated here by reference.)
(10) Material Contracts
(a) Key elements of Ferro's Incentive Compensation Plan are set forth
under the heading "Report of the Compensation and Organization
Committee" on pages 15 through 18 of the Proxy Statement dated March
17, 1999. Said description is incorporated here by reference.
(b) Ferro's Amended and Restated 1997 Performance Share Plan. Reference
is made to Exhibit A of Ferro Corporation's Proxy Statement dated
March 17, 1999, which exhibit is incorporated here by reference.
<PAGE> 17
(c) Ferro Corporation Savings and Stock Ownership Plan. (Reference is
made to Exhibit 4.3 to Ferro Corporation's Quarterly Report on Form
10-Q for the three months ended March 31, 1989, which Exhibit is
incorporated here by reference.)
(d) Ferro's 1985 Employee Stock Option Plan for Key Personnel (Amended
and Restated). (Reference is made to Exhibit A to Ferro
Corporation's Proxy Statement dated March 11, 1991, which Exhibit is
incorporated by reference.) Reference is also made to pages 13 and
14 of Ferro Corporation's Proxy Statement dated March 20, 1995, for
an amendment to the plan. Reference is also made to pages 10 through
13 of Ferro Corporation's Proxy Statement dated March 12, 1996, for
an amendment to the plan. Reference is also made to Exhibit 10.3 of
Ferro Corporation's Form 10-K for the year ended December 31, 1996,
for an amendment to the plan.
(e) Form of Indemnification Agreement (adopted January 25, 1991 for use
from and after that date). (Reference is made to Exhibit 10 to Ferro
Corporation's Form 10-K for the year ended December 31, 1990, which
Exhibit is incorporated here by reference.)
(f) Amended and Restated Executive Employment Agreement (Reference is
made to Exhibit 10 (a) of Ferro Corporation's Form 10-Q for the
three months ended March 31, 1998, which Exhibit is incorporated
here by reference.)
*(g) Schedule I listing the officers with whom Ferro has entered into
currently effective executive employment agreements. A copy of such
Schedule I is attached hereto as Exhibit 10.
(h) Various agreements relating to an Asset Defeasance Financing
including a Participation Agreement dated as of October 31, 1995
among Ferro Corporation, State Street Bank and Trust Company (not in
its individual capacity but solely as Trustee), the financial
institutions named as Purchasers, and Citibank N.A, as Agent, and a
Lease dated October 31, 1995 between State Street Bank and Trust
Company (not in its individual capacity but solely as Trustee) as
Lessor and Ferro Corporation as Lessee. The additional agreements
are available upon request. Reference is made to Exhibit 10(a) of
Ferro Corporation's Form 10-Q for the three months ended September
30, 1995, which Exhibit is incorporated here by reference. Reference
is also made to Exhibit 10 of Ferro Corporation's 10-Q for the three
months ended June 30, 1997 for an amendment to the agreements, which
exhibit is incorporated here by reference.
(i) Ferro's Supplemental Executive Defined Contribution Plan .
(Reference is made to Exhibit 10.1 to Ferro Corporation's Form 10-K
for the year ended December 31, 1996, which Exhibit is incorporated
here by reference).
(j) Separation Agreement between Ferro Corporation and Werner F. Bush
dated September 30, 1996 (Reference is made to Exhibit 10.2 to Ferro
Corporation's Form 10-K for the year ended December 31, 1996, which
Exhibit is incorporated here by reference).
(k) Separation Agreement between Ferro Corporation and Richard C.
Oudersluys dated March 13, 1997 and effective January 6, 1997
(Reference is made to Exhibit 10 of Ferro Corporation's Form 10-Q
for the three months ended March 31, 1997).
*(l) Form of Executive Employment Agreement between Ferro Corporation and
Kent. H. Lee dated November 10, 1998.
<PAGE> 18
*(11) Statement Regarding Computation of Earnings per Share.
*(12) Ratio of Earnings to Fixed Charges.
*(13) Annual Report to Shareholders for the year ended December 31, 1998.
*(21) List of Subsidiaries.
(23) Consent of KPMG LLP to the incorporation by reference of their audit
report on the Consolidated Financial Statements contained in the Annual
Report into Ferro's Registration Statements on Form S-8 Registration Nos.
2-61407, 33-28520 and 33-45582 and Ferro's Registration Statement on Form
S-3 Registration No. 33-51284 and Registration No. 33-63855.
*(27) Financial Data Schedule (Electronic Filing Only)
<PAGE> 1
EXHIBIT 10
SCHEDULE I
Ferro Corporation has entered into executive employment agreements with
its officers listed below substantially identical in all material respects to
the Form of Amended and Restated Executive Employment Agreement (Exhibit 10(a)
to Ferro Corporation's Form 10-Q for the three months ended March 31, 1998,
which Exhibit is incorporated here by reference), except the lump sum severance
payment is equal to a full year's compensation (base salary and incentive
compensation) multiplied by three in the cases of Albert C. Bersticker and
Hector R. Ortino and multiplied by two in the case of all other officers.
Albert C. Bersticker
David G. Campopiano
R. Jay Finch
James F. Fisher
J. Larry Jameson
Kent H. Lee
Charles M. Less
Hector R. Ortino
Millicent W. Pitts
Thomas O. Purcell
Paul V. Richard
Gary H. Ritondaro
<PAGE> 1
FERRO CORPORATION
Executive Employment Contract
I. Recitals
(A) This Executive Employment Contract (this "Agreement") is between Ferro
Corporation (the "Company") and Kent H. Lee (the "Executive") and is effective
as of November 10, 1998.
(B) The address of the Company is 1000 Lakeside Avenue, Cleveland, Ohio
44114. The address of the Executive is 31855 Woodsdale Lane, Solon, Ohio 44139.
(C) The Executive is currently employed by the Company in the capacity of
Vice President, Specialty Chemicals and the Executive is one of the key
executives of the Company.
(D) In consideration of the mutual promises contained herein and other
good and valuable consideration, the Executive and the Company have entered into
this Agreement.
II. Definitions
As used in this Agreement, the following terms shall have the meanings set
forth below:
"Agreement" means this Agreement.
"Bank" has the meaning set forth in Section VI.
"Base Salary" has the meaning set forth in Section III.D.(1).
"Benefit Plans" has the meaning set forth in Section III.E.(2).
"Board" means the Board of Directors of the Company.
"Cause" has the meaning set forth in Section IV.B(1).
<PAGE> 2
"change in control of the Company" has the meaning set forth in
Section VI.
"Company" means Ferro Corporation, as modified by Section VIII.A.
"Contract Term" has the meaning set forth in Section III.A.
"Date of Termination" has the meaning set forth in Section IV.A.(2).
"Disabled" has the meaning set forth in Section IV.C.(1).
"Excise Tax" has the meaning set forth in Section V.A.(1).
"Escrow Account" has the meaning set forth in Section VI.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Executive" means the executive named in this Agreement.
"Firm" has the meaning set forth in Section V.A.(2) and refers to
certain Excise Tax matters.
"Good Reason" has the meaning set forth in Section IV.E.
"Gross-Up Payment" has the meaning set forth in Section V.A.(1) and
refers to certain Excise Tax matters.
"Incentive Compensation Plan" has the meaning set forth in Section
III.E.(1).
"Normal Retirement Age" means the normal retirement age provided for
in the Company's Pension Plan.
"Notice of Termination" has the meaning set forth in Section
IV.A.(1).
"Payment" has the meaning set forth in Section V.A.(1) and refers to
certain Excise Tax matters.
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<PAGE> 3
"Pension Plan" means the Company's salaried employees' retirement
plan, or any successor plan thereto.
"Retirement" has the meaning set forth in Section IV.D.(1).
"Total Disability" means total disability as defined in the
Company's Pension Plan.
"Underpayment" has the meaning set forth in Section V.A.(2) and
refers to certain Excise Tax matters.
III. Provisions Applicable to the Contract Term
A. Contract Term
Except as otherwise provided in this Agreement, the Company and the
Executive agree that the Executive will remain in the employ of the Company for
a primary term ending on November __, 2000 and that this Agreement will
automatically continue after such primary term unless and until either party
shall have given the other at least 24 months prior written Notice of
Termination or, if earlier, until expiration of the Contract Term. The "Contract
Term" shall refer to the period commencing on the date hereof and ending on
November __, 2000 (or any continuation thereof pursuant to the preceding
sentence); provided, however, that in no event shall the Contract Term extend
beyond the earliest to occur of (A) the Executive's attaining Normal Retirement
Age, (B) the date of death of the Executive, and (C) the Date of Termination
resulting from the termination of this Agreement for Disability (as defined in
Section IV.C.(1) hereof); and provided, further, however, that, if a change in
control of the Company (as defined in Section VI hereof) occurs during the
Contract Term, then, subject to the preceding proviso in this sentence, the
Contract Term
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<PAGE> 4
shall not expire prior to the second anniversary of the date of such change in
control of the Company.
Nothing contained in this Agreement shall prevent the Company at any time
from terminating the Executive's right and obligation to perform service for the
Company or prevent the Company from removing the Executive from any position
which the Executive holds in the Company, subject to the obligation of the
Company to make payments and provide benefits if and to the extent required
under this Agreement, which payments and benefits shall be full and complete
liquidated damages for any such action taken by the Company. The Executive
specifically acknowledges that, except for this Agreement, his employment by the
Company is employment-at-will, subject to termination by the Executive, or by
the Company, at any time with or without cause. The Executive acknowledges that
such employment-at-will status cannot be modified except in a specific writing
which has been authorized or ratified by the Board.
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<PAGE> 5
B. Nature of Duties
(1) The Executive agrees to serve the Company during the Contract
Term. The Executive agrees to devote his full business time during normal
business hours to the business and affairs of the Company (except as otherwise
provided herein) and to use his best efforts to promote the interests of the
Company and to perform faithfully and efficiently the responsibilities of the
positions assigned to him from time to time in the discretion of the Company
(whether officer positions or non-officer positions) in accordance with the
terms of this Agreement to the extent necessary to discharge such
responsibilities, except for (i) service on corporate, civic or charitable
boards or committees not significantly interfering with the performance of such
responsibilities, and (ii) periods of vacation and sick leave or other
legitimate absences under Company benefit plans and established practices.
(2) The Company agrees that, on or after a change in control of the
Company (as defined in Section VI hereof), it will not, without the Executive's
express written consent, (a) assign to the Executive duties inconsistent with
his current positions, duties, responsibilities and status with the Company, or
(b) change his titles as currently in effect, or (c) remove him from, or fail to
re-elect him to, any of such positions, except in connection with the
termination of his employment for Cause, Disability or Retirement or as a result
of his death or voluntary termination. Except as so limited, the powers and
duties of the Executive are to be more specifically determined and set by the
Company from time to time.
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<PAGE> 6
C. Place of Employment
The Executive's initial place of employment is at the Company's principal
executive offices in Cleveland, Ohio. The Company agrees that it will not,
without the Executive's express written consent, require the Executive to be
based anywhere other than Cuyahoga County, Ohio, or a county contiguous thereto,
except for required travel on the Company's business to an extent substantially
consistent with present business travel obligations.
D. Compensation
(1) Base Salary. During the Contract Term, the Executive shall
receive an annual base salary (the "Base Salary"), payable in installments,
substantially in accordance with current practice, at an annual rate at least
equal to the aggregate annual Base Salary payable to the Executive as of the
date hereof. The Base Salary may be increased (but may not be decreased) at any
time and from time to time by action of the Board, and, if so increased, such
increased Base Salary shall thereafter be the Base Salary for the purposes of
this Agreement.
(2) Incentive Compensation. During the Contract Term, the Company
agrees to pay annual incentive compensation to the Executive in an amount at
least equal to the annual incentive compensation that would have been payable to
the Executive for such year in question under the Company's Incentive
Compensation Plan as in effect for such applicable year, and giving effect to
the highest position in the Company held by the Executive during the Contract
Term.
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<PAGE> 7
E. Benefit Plans
(1) During the Contract Term, the Company agrees to continue the
Company's Annual Incentive Compensation Plan as the same may be modified from
time to time but substantially in the form presently in effect (the "Incentive
Compensation Plan"). The Company agrees to continue the Executive as a
participant in the Incentive Compensation Plan on a basis at least equivalent to
the present basis of his participation for the calendar year in which the
effective date of this Agreement occurs.
(2) During the Contract Term, the Company agrees to continue in
effect any perquisite, benefit or compensation plan (in addition to the
Incentive Compensation Plan) including its pension plan, excess benefits plans,
supplemental retirement program for short service executives, dental plan, life
insurance plan, health and accident plan or disability plan in which the
Executive is currently participating (but excluding the Company's stock option
plan and performance share plan, participation in which shall be at the sole
discretion of the Company's Board of Directors, or any applicable committee
thereof) (such plans are collectively referred to with the Incentive
Compensation Plan as the "Benefit Plans"), or to maintain plans providing
substantially similar benefits; provided, however, that the Company may make
modifications in such Benefit Plans so long as such modifications (a) are
generally applicable to all salaried employees of the Company and (b) do not
discriminate against highly-paid employees of the Company.
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<PAGE> 8
(3) During the Contract Term, except as permitted in the proviso
contained in paragraph (2) above, the Company agrees not to take any action that
would adversely affect the Executive's participation in, or materially reduce
the benefits under, any of the Benefit Plans.
(4) Benefits herein provided are in lieu of any severance payment
benefit otherwise provided under any other agreement, policy, or practice
provided by the Company and, in the event of an effective Notice of Termination
hereunder, are also in lieu of any obligations of the Company in favor of the
Executive with respect to vacation or vacation pay. The Executive waives all
rights to such payments under any such agreement, policy or practice provided,
however, that this waiver shall not extend to entitlements provided under any
disability insurance plan, retirement plan, excess benefit plan, or applicable
supplemental pension plan or agreement for short service executives and any
related Benefit Plans (including health and insurance plans), other than those
relating to severance or vacation.
F. Conflicting Interests
Prior to the Date of Termination, the Executive agrees not to accept any
other employment or engage in any outside business or enterprise without the
Company's written consent. It is understood, however, that outside activities
are not prohibited provided they are legal; do not impair or interfere with the
conscientious performance of Company duties and responsibilities; do not involve
the misuse of the Company's influence, facilities or other resources; and do not
reflect discredit upon the good name and reputation of the Company.
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<PAGE> 9
G. Disclosure of Information
During the Contract Term and thereafter, the Executive shall not reveal
any confidential information of the Company to anyone except those employees of
the Company entitled to receive such information, or as otherwise permitted
under any contract or commitment of the Company, or as otherwise authorized.
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<PAGE> 10
H. Certain Payments Upon the Occurrence of a Change in Control of the
Company
In the event a change in control of the Company (as defined in
Section VI hereof) occurs during the Contract Term, the Company shall pay to the
Executive, within five days thereafter, an amount in cash, with respect to each
grant of Performance Shares (as defined in the Company's Amended and Restated
1997 Performance Share Plan, as amended (the "Performance Share Plan"))
previously awarded to the Executive under the Performance Share Plan (or any
predecessor thereto) in respect of a Performance Period (as defined in the
Performance Share Plan) which had not expired immediately prior to such change
in control of the Company (Performance Shares awarded in respect of any such
Performance Period being referred to as "Outstanding Performance Shares"), which
amount shall be equal to the excess (but not less than zero) of (a) over (b),
where (a) equals the product of (1) the number of Outstanding Performance Shares
awarded to the Executive in respect of the applicable Performance Period, (2)
the "fair market value of the Common Stock" (as defined in the Performance Share
Plan) and (3) a fraction (not to exceed one) the numerator of which is the sum
of (x) the number of days which had elapsed in the applicable Performance Period
as of the date of such change in control of the Company plus (y) 730, and the
denominator of which is the number of days in such applicable Performance
Period, and where (b) equals the value payable to the Executive under the
Performance Share Plan (or any predecessor thereto) in respect of such
Outstanding Performance Shares in connection with such change in control of the
Company. The provisions of this Section III.H. shall not affect in any manner
the determination of amounts payable to the Executive under the Performance
Share Plan (or any predecessor thereto).
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<PAGE> 11
IV. Provisions Applicable to Termination of Employment
A. Notice of Termination; Date of Termination
(1) Any termination of the Executive's employment by the Company or
the Executive shall be communicated by written Notice of Termination to the
other party thereto. For purposes of this Agreement, a "Notice of Termination"
shall mean a notice which shall indicate the specific termination provision in
this Agreement relied upon and shall set forth in reasonable detail the facts
and circumstances claimed to provide a basis for termination under the provision
so indicated. Furthermore, either the Executive or the Company may give a Notice
of Termination to the other party for the purpose of terminating this Agreement,
as such, without terminating the Executive's employment with the Company, which
Notice of Termination shall have the effect of terminating this Agreement at the
expiration of the Contract Term as in effect on the date of giving such Notice
of Termination.
(2) "Date of Termination" shall mean the date on which the
Executive's right and obligation to perform employment services for the Company
shall terminate (subject to the right of the Company to accelerate such date
pursuant to Section III.A.) and shall be:
(a) If the Agreement is terminated for Disability, thirty (30) days
after Notice of Termination is given (provided that the Executive
shall not have returned to the performance of his duties on a
full-time basis during such thirty (30) day period),
(b) If the Executive's employment is terminated by the Executive for
Good Reason, pursuant to Section IV.E., the date specified in the
Notice of Termination, which date (except with the written consent
of the Company to the contrary) shall not be more than sixty (60)
days after the date that the Notice of Termination is given,
(c) The expiration or termination of the Contract Term, and
(d) If the Executive's employment is terminated by the Company for Cause
pursuant to Section IV.B.(1), the date on which a Notice of
Termination is given.
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<PAGE> 12
B. Termination for Cause
(1) The Company may terminate the Executive's employment and the
Contract Term for Cause. For the purposes of this Agreement, the Company shall
have "Cause" to terminate employment hereunder only (a) if termination shall
have been the result of an act or acts by the Executive which have been found in
an applicable court to constitute a felony; or (b) if termination shall have
been the result of an act or acts of dishonesty by the Executive resulting or
intended to result directly or indirectly in significant gain or personal
enrichment to the Executive at the expense of the Company; or (c) upon the
wilful and continued failure by the Executive substantially to perform his
duties with the Company (other than any such failure resulting from incapacity
due to mental or physical illness) after a demand in writing for substantial
performance is delivered by the Board, which demand specifically identifies the
manner in which the Board believes that the Executive has not substantially
performed his duties, and such failure results in demonstrably material injury
to the Company. The Executive's employment shall in no event be considered to
have been terminated by the Company for Cause if such termination took place as
the result of (a) bad judgment or negligence, or (b) any act or omission
believed in good faith to have been in or not opposed to the interest of the
Company. The Executive shall not be deemed to have been terminated for Cause
unless and until there shall have been delivered to him a copy of a resolution
duly adopted by the affirmative vote of not less than three-quarters of the
entire membership of the Board at a meeting of the Board (after reasonable
notice to the Executive and an opportunity for him, together with his counsel,
to be heard before the Board), finding that in the good faith opinion of the
Board the Executive was guilty of conduct set forth above in clauses (a), (b) or
(c) of the second sentence of this paragraph and specifying the particulars
thereof in detail.
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<PAGE> 13
(2) If the Executive's employment shall be terminated for Cause, the
Company shall pay the Executive his full Base Salary through the Date of
Termination at the rate in effect at the time Notice of Termination is given and
the Company shall have no further obligations to the Executive under this
Agreement.
C. Termination for Disability
(1) The Company may terminate this Agreement on account of the
Executive's "Disability" if the Executive is "Disabled." For purposes of this
Agreement, the Executive shall be considered Disabled only if, as a result of
his incapacity due to physical or mental illness, he shall have been absent from
his duties with the Company on a full-time basis for a period of six months and
within thirty (30) days after written Notice of Termination is given, he shall
not have returned to the full-time performance of his duties.
(2) If the Company terminates this Agreement because the Executive
is Disabled, the Company shall provide to the Executive (or his successors) the
benefits specified in Paragraph (3) (continued participation in benefit plans)
of Section IV.F. of this Agreement; provided, however, that for this purpose the
Contract Term shall be determined as of the Date of Termination, but without
regard to the termination of this Agreement by reason of the Executive's
Disability.
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<PAGE> 14
D. Termination Upon Retirement
(1) This Agreement will terminate upon the Executive's Retirement.
For purposes of this Agreement, "Retirement" shall mean termination of the
Executive's employment at or after attaining Normal Retirement Age or early
retirement if effected in accordance with any retirement arrangement established
with the Executive's consent with respect to him.
(2) In the event this Agreement terminates by reason of the
Executive's Retirement, the Company shall pay to the Executive the amounts, and
provide to the Executive the benefits, specified in Paragraph (3) (continued
participation in benefit plans) of Section IV.F. of this Agreement.
(3) Notwithstanding the preceding provisions of this Section IV.D.,
unless the Executive otherwise consents in writing, a termination of the
Executive's employment which occurs on or after the date of a change in control
of the Company (as defined in Section VI hereof) shall not be deemed to be a
termination of employment for Retirement.
E. Termination of Employment by the Executive for Good Reason
(1) The Executive may terminate his employment for Good Reason. For
purposes of this Agreement, Good Reason will exist if any one or more of the
following occur:
(a) Failure by the Company to honor any of its obligations under
Sections III.B.2. (assignment of duties, responsibilities,
etc., election to positions), III.C. (place of employment),
III.D. (compensation), III.E. (benefit plans), VI (security)
or VIII.A. (successors); or
(b) Any purported termination by the Company of the Executive's
employment that is not effected pursuant to a Notice of
Termination satisfying the requirements of Section IV.A. above
and, for purposes of this Agreement, no such purported
termination shall be effective; or
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<PAGE> 15
(c) The issuance by or on behalf of the Company, on or after a
change in control of the Company (as defined in Section VI
hereof), of a Notice of Termination described in the third
sentence of Section IV.A.(1) hereof which specifies that such
Notice of Termination is given for the purpose of terminating
this Agreement and which does not serve to terminate the
Executive's employment with the Company substantially
concurrently therewith; or
(d) Voluntary resignation by the Executive at any time during the
ninety-day period commencing on the first anniversary of a
change in control of the Company (as defined in Section VI
hereof).
F. Compensation Upon Termination Other Than for Cause
(1) If the Company shall terminate the Executive's employment other
than pursuant to Sections IV.B. (Cause), IV.C. (Disability) or IV.D.
(Retirement) hereof or if the Executive shall terminate his employment for Good
Reason pursuant to Section IV.E. hereof, then the Company shall pay to the
Executive the following amounts:
(a) The Executive's Base Salary through the Date of Termination at
the rate in effect at the time Notice of Termination is given;
(b) In a lump sum (in lieu of the installment payments otherwise
payable under this Agreement), payable on or before the fifth
(5th) day following the Date of Termination, an amount equal
to the Executive's Base Salary through the conclusion of the
Contract Term;
(c) In a lump sum (in lieu of the installment payments otherwise
payable under this Agreement), payable on or before the fifth
(5th) day following the Date of Termination, an amount equal
to the Executive's annual incentive compensation payments,
applicable to periods through the conclusion of the Contract
Term. For this purpose, the annual incentive compensation
amounts payable shall be deemed to be thirty percent (30%) of
the Base Salary, or such greater percentage thereof, as may be
applicable to the Executive, at target levels, under the
Incentive Compensation Plan as in effect (i) immediately prior
to the Notice of Termination or (ii) immediately prior to a
change in control of the Company (as defined in Section VI
hereof), whichever is more favorable to the Executive;
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(d) In a lump sum, payable on or before the fifth (5th) day
following the Date of Termination, an amount equal to the pro
rata portion of the Executive's annual incentive compensation
for the calendar year in which the Date of Termination occurs,
such amount to be determined by multiplying the Executive's
annual incentive compensation amount (as described below) by a
fraction, the numerator of which is the number of days in such
calendar year which had elapsed as of the Date of Termination
and the denominator of which is 365; provided, however, that
this Section IV.F.(1)(d) shall have effect only if the Date of
Termination occurs in a calendar year following the calendar
year in which occurs a change in control of the Company (as
defined in Section VI hereof). For purposes of this paragraph,
the Executive's annual incentive compensation amount shall be
equal to the amount determined pursuant to the second sentence
of Section IV.F.(1)(c) above; and
(e) The Company shall also pay all legal fees and expenses
incurred as a result of such termination (including all such
fees and expenses, if any, incurred in seeking to obtain or
enforce any right or benefit provided by this Agreement, or in
interpreting this Agreement).
(2) If the Company shall terminate the Executive's employment other
than pursuant to Sections IV.B. (Cause), IV.C. (Disability) or IV.D.
(Retirement) hereof or if the Executive shall terminate his employment for Good
Reason pursuant to Section IV.E. hereof, then the Company shall pay him in one
sum in cash, payable on or before the fifth (5th) day following the Date of
Termination, an amount equal to the present value as of the Date of Termination
(calculated at a discount rate equal to the discount rate used at the Date of
Termination for computing the present value of commuted payments under the
Pension Plan) of (a) the lump sum value (determined as of the Executive's Normal
Retirement Age, using the same methods and assumptions used at the Date of
Termination for purposes of the Pension Plan, of the retirement pension to which
the Executive would have been entitled under the terms of the Pension Plan,
excess benefits plan and supplemental retirement program for short service
executives in which he participates (as in effect
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on the date of this Agreement) if the Executive's employment had continued
through the conclusion of the Contract Term, at compensation levels consistent
with those set forth in paragraphs (1)(b) (Base Salary) and (c) (Incentive
Compensation) above (and including any other compensation, if any, which is to
be considered under the formulas applicable to such plans), assuming
commencement of payment of the Executive's pension at Normal Retirement Age,
reduced by (b) the lump sum value (determined as of the Executive's Normal
Retirement Age using the methods and assumptions hereinabove specified) of the
retirement pension, if any, to which the Executive will be entitled under the
terms of the Pension Plan, excess benefits plan and supplemental retirement
program for short service executives in which the Executive participates (as in
effect on the Date of Termination), based upon termination of the Executive's
employment as of the Date of Termination and assuming commencement of payment of
the Executive's pension benefits at his Normal Retirement Age. The lump sum
value to be calculated under clause (a) of the immediately preceding sentence
shall be determined (y) under the assumption that the Executive is fully vested
in his retirement pension under the Pension Plan, excess benefits plan and
supplemental retirement program for short service executives; and (z) without
regard to any amendments to any of such plans, which amendments are adopted on
or after the date of a change in control of the Company (as defined in Section
VI hereof), to the extent any such amendments adversely affect in any manner the
computation of benefits thereunder or are otherwise adverse to the Executive.
(3) Unless the Executive is terminated for Cause, the Company shall
maintain in full force and effect, for the Executive's continued benefit
throughout the Contract Term, all active
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and retired employee Benefit Plans in which he was entitled to participate
immediately prior to the Date of Termination (except as specified in paragraphs
(2) (right of Company to make non-discriminatory changes in plans) and (4) (this
Agreement in lieu of other plans as to severance and vacation) of Section III.E.
of this Agreement), provided that continued participation is possible under the
general terms and provisions of such plans and programs. In the event that
participation in any such plan or program is barred, the Company shall arrange
to provide him with benefits substantially similar to those which he is entitled
to receive under such Benefit Plans. Unless the Executive is terminated for
Cause, if prior to the expiration of the Contract Term the Executive attains
Normal Retirement Age (or earlier retirement age should he so elect) as defined
in the Pension Plan in effect on the Date of Termination hereunder, he shall
have the right at any time prior to the expiration of the Contract Term to so
retire and the Company shall thereafter maintain in full force and effect, for
the Executive's continued benefit, all retired employee Benefit Plans applicable
to him, as in effect immediately prior to the Date of Termination (except as
specified in paragraphs (2) (right of Company to make non-discriminatory changes
in plans) and (4) (this Agreement in lieu of other plans as to severance and
vacation) of Section III.E. of this Agreement). If the termination of the
Executive's employment occurs on or after a change in control of the Company (as
defined in Section VI hereof), (a) the Company's obligation to maintain Benefit
Plans pursuant to this Section IV.F.(3) shall be determined, on a plan-by-plan
basis, based on the terms of the applicable Benefit Plan as in effect (i)
immediately prior to such change in control of the Company or (ii) immediately
prior to the Date of Termination, whichever is more favorable to the Executive,
and (b) the Executive shall be treated as having remained in employment
throughout the
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remainder of the Contract Term for purposes of determining his rights under any
such Benefit Plans applicable to retired employees.
(4) Upon termination of employment for any reason other than
pursuant to Sections IV.B. (Cause), IV.C. (Disability) or IV.D. (Retirement), or
by reason of the Executive's death, the Company will provide to the Executive,
at the cost and expense of the Company, the services of an outplacement firm to
be mutually agreed upon between the Company and the Executive.
G. Compensation Upon Disability
During any period that the Executive fails to perform his duties hereunder
as a result of incapacity due to physical or mental illness, he shall continue
to receive his full Base Salary and incentive compensation at the rate then in
effect until this Agreement is terminated pursuant to Section IV.C. hereof.
Thereafter, his benefits shall be determined in accordance with the Company's
Pension Plan, excess benefits plan, supplemental retirement program for short
service executives and disability insurance plans in which the Executive
participates, or a substitute plan then in effect; provided, however, that if
the Executive's employment is terminated pursuant to Section IV.C. hereof
following a change in control of the Company (as defined in Section VI hereof),
the Company shall pay to the Executive (a) in a cash lump sum on or before the
fifth (5th) day following the Date of Termination, the amounts described in
Sections IV.F(1)(a) and (d) hereof, and (b) during each month commencing with
the month in which occurs the Date of Termination and through and including the
month in which occurs the expiration of the Contract Term (for this purpose the
Contract Term shall be determined as of the Date of Termination, but without
regard to the Executive's termination for Disability), an aggregate amount in
cash equal to
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the excess (but not less than zero) of (i) one-twenty-fourth of the aggregate
amount determined under Sections IV.F.(1)(b) and (c) hereof over (ii) the
aggregate amount received by the Executive during such month under the Company's
long-term disability plans.
H. Compensation Upon Death
In the event this Agreement terminates by reason of the Executive's death
following a change in control of the Company (as defined in Section VI hereof),
the Company shall pay to the Executive's legal representatives or estate or as
may be directed by the legal representatives of his estate, as the case may be,
in a lump sum payable on or before the fifth (5th) day following the Executive's
death, an amount in cash equal to the amounts determined under Sections
IV.F.(1)(a), (b), (c) and (d) hereof (and for the purpose of determining such
amounts payable under Sections IV.F.(1)(b) and (c), the Contract Term shall be
determined as of the date of the Executive's death, but without regard to such
death).
I. Restrictions on Competition.
(1) The Executive will not, at any time during the Restricted
Period (as defined in Section IV.I.(2) below), accept
employment with, own an interest in, form a partnership or
joint venture with, consult with or otherwise assist any
person or enterprise that manufactures or sells products
("Competitive Products") similar to, or competitive with, the
products manufactured or sold by the Company on the Date of
Termination.
(2) The "Restricted Period" means:
(a) 24 months after the Date of Termination; and
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(b) an additional 12 months thereafter (the "Additional
Period") if:
(i) the Company has not terminated the Executive's
employment in accordance with Section IV.C.
(Disability);
(ii) the Company elects to impose the Additional Period
by providing to the Executive written notice of
such election not later than two months after the
termination of the Executive's employment; and
(iii) the Company pays the Executive, in twelve (12)
monthly installments during the Additional Period,
an aggregate amount equal to the Executive's Base
Salary for the calendar year in which the
Executive's employment terminated; and
(c) in addition to the time period(s) set forth in (a) and,
if applicable, (b) above, the remaining period of time,
if any, until the Executive is 60 years old if:
(i) this Agreement has terminated by reason of the
Executive's Retirement before the Normal
Retirement Age;
(ii) the Executive is an officer of the Company;
(iii) the Executive has elected to receive his or her
early retirement benefit on the basis of the
increased "Post-1995 Factors" set forth in Section
4 of the Company's Excess
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Benefits Plan, as such provision may be amended
from time to time.
(3) Section IV.I.(1) above will not apply if the relevant person
or enterprise acquires a business or product line that
manufactures or sells Competitive Products after the
commencement of the Executive's employment or other
relationship with such person or enterprise and the Executive
does not participate in any way in the business of the
Competitive Products for 24 months after the termination of
the Executive's employment and, at the request of the Company,
the Executive and the relevant person or enterprise certify to
the Company in writing that the Executive has and will comply
with the restrictions of this Section IV.I.(3).
(4) Nothing in this Section IV.I. eliminates or affects any right
to payments or benefits that the Executive otherwise has under
other provisions of this Article IV; and nothing in this
Section IV.I. gives the Executive the right to any payment or
benefit under other provisions of this Article IV that he or
she does not otherwise have.
J. Mitigation
The Executive shall not be required to mitigate the amount of any payment
or benefit provided for in this Agreement by seeking other employment or
otherwise, nor shall the amount of any payment or benefit provided for herein be
reduced by any compensation earned by the
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Executive as the result of employment by another employer after the Date of
Termination, or otherwise.
V. Certain Tax Matters
A. Additional Payments
(1) Anything in this Agreement to the contrary notwithstanding, in
the event it shall be determined (as hereafter provided) that any payment or
distribution to or for the Executive's benefit, whether paid or payable or
distributed or distributable pursuant to the terms of this Agreement or
otherwise pursuant to or by reason of any other agreement, policy, plan, program
or arrangement (including without limitation any stock option agreement or
Performance Share Plan Participant agreement), or similar right (a "Payment"),
would be subject to the excise tax imposed by Section 4999 of the Internal
Revenue Code of 1986 (or any successor provision thereto), or any interest or
penalties with respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereafter collectively referred to as the
"Excise Tax"), then the Executive shall be entitled to receive an additional
payment or payments (a "Gross-Up Payment") in an amount such that, after payment
by the Executive of all taxes (including any interest or penalties imposed with
respect to such taxes), including any Excise Tax, imposed upon the Gross-Up
Payment, the Executive retains an amount of the Gross-Up Payment equal to the
Excise Tax imposed upon the Payments.
(2) Subject to the provisions of Section V.A.(5), all determinations
required to be made under this Section V.A., including whether an Excise Tax is
payable by the Executive, the amount of such Excise Tax, whether a Gross-Up
Payment is required, and the amount of such
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Gross-Up Payment, shall be made by a nationally-recognized legal or accounting
firm (the "Firm") selected by the Executive in the Executive's sole discretion.
The Executive agrees to direct the Firm to submit its determination and detailed
supporting calculations to both the Executive and the Company as promptly as
practicable. If the Firm determines that any Excise Tax is payable by the
Executive and that a Gross-Up Payment is required, the Company shall pay the
Executive the required Gross-Up Payment within ten business days after receipt
of such determination and calculations. If the Firm determines that no Excise
Tax is payable by the Executive, it shall, at the same time as it makes such
determination, furnish the Executive with an opinion that the Executive has
substantial authority not to report any Excise Tax on the Executive's federal
income tax return. Any determination by the Firm as to the amount of the
Gross-Up Payment shall be binding upon the Executive and the Company. As a
result of the uncertainty in the application of Section 4999 of the Internal
Revenue Code of 1986 (or any successor provision thereto) at the time of the
initial determination by the Firm hereunder, it is possible that Gross-Up
Payments which will not have been made by the Company should have been made (an
"Underpayment"). In the event that the Company exhausts its remedies pursuant to
Section V.A.(5) hereof and the Executive thereafter is required to make a
payment of any Excise Tax, the Executive may direct the Firm to determine the
amount of the Underpayment (if any) that has occurred and to submit its
determination and detailed supporting calculations to both the Executive and the
Company as promptly as possible. Any such Underpayment shall be promptly paid by
the Company to the Executive, or for the Executive's benefit, within ten
business days after receipt of such determination and calculations.
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(3) The Executive and the Company shall each provide the Firm access
to and copies of any books, records and documents in the possession of the
Company or the Executive, as the case may be, reasonably requested by the Firm,
and otherwise cooperate with the Firm in connection with the preparation and
issuance of the determination contemplated by Section V.A.(2) hereof.
(4) The fees and expenses of the Firm for its services in connection
with the determinations and calculations contemplated by Section V.A.(2) hereof
shall be borne by the Company. If such fees and expenses are initially paid by
the Executive, the Company shall reimburse the Executive the full amount of such
fees and expenses within ten business days after receipt from the Executive of a
statement therefor and reasonable evidence of the Executive's payment thereof.
(5) The Executive agrees to notify the Company in writing of any
claim by the Internal Revenue Service that, if successful, would require the
payment by the Company of a Gross-Up Payment. Such notification shall be given
as promptly as practicable but no later than ten (10) business days after the
Executive actually receives notice of such claim. The Executive agrees to
further apprise the Company of the nature of such claim and the date on which
such claim is requested to be paid (in each case, to the extent known by the
Executive). The Executive agrees not to pay such claim prior to the earlier of
(a) the expiration of the 30-calendar-day period following the date on which the
Executive gives such notice to the Company and (b) the date that any payment
with respect to such claim is due. If the Company notifies the Executive in
writing at least
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five business days prior to the expiration of such period that it desires to
contest such claim, the Executive agrees to:
(a) provide the Company with any written records or documents in the
Executive's possession relating to such claim reasonably requested by the
Company;
(b) take such action in connection with contesting such claim as the
Company shall reasonably request in writing from time to time, including
without limitation accepting legal representation with respect to such
claim by an attorney competent in respect of the subject matter and
reasonably selected by the Company;
(c) cooperate with the Company in good faith in order effectively to
contest such claim; and
(d) permit the Company to participate in any proceedings relating to
such claim;
provided, however, that the Company shall bear and pay directly all costs and
expenses (including interest and penalties) incurred in connection with such
contest and shall indemnify and hold the Executive harmless, on an after-tax
basis, from and against any Excise Tax or income tax, including interest and
penalties with respect thereto, imposed as a result of such representation and
payment of costs and expenses. Without limiting the foregoing provisions of this
Section V.A.(5), the Company shall control all proceedings taken in connection
with the contest of any claim contemplated by this Section V.A.(5) and, at its
sole option, may pursue or forego any and all administrative appeals,
proceedings, hearings and conferences with the taxing authority in respect of
such claim (provided, however, that the Executive may participate therein at the
Executive's own cost and expense) and may, at its option, either direct the
Executive to pay the tax claimed and sue for a refund or contest the claim in
any permissible manner, and the Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in a court of initial
jurisdiction and in one or more appellate courts, as the Company shall
determine; provided, however, that if the
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Company directs the Executive to pay the tax claimed and sue for a refund, the
Company shall advance the amount of such payment to the Executive on an
interest-free basis and shall indemnify and hold the Executive harmless, on an
after-tax basis, from any Excise Tax or income tax, including interest or
penalties with respect thereto, imposed with respect to such advance; and
provided further, however, that any extension of the statute of limitations
relating to payment of taxes for the Executive's taxable year with respect to
which the contested amount is claimed to be due is limited solely to such
contested amount. Furthermore, the Company's control of any such contested claim
shall be limited to issues with respect to which a Gross-Up Payment would be
payable hereunder and the Executive shall be entitled to settle or contest, as
the case may be, any other issue raised by the Internal Revenue Service or any
other taxing authority.
(6) If, after the receipt by the Executive of an amount advanced by the
Company pursuant to Section V.A.(5) hereof, the Executive receives any refund
with respect to such claim, the Executive agrees (subject to the Company's
complying with the requirements of Section V.A.(5) hereof) to promptly pay to
the Company the amount of such refund (together with any interest paid or
credited thereon after any taxes applicable thereto). If, after the Executive's
receipt of an amount advanced by the Company pursuant to Section V.A.(5) hereof,
a determination is made that the Executive is not entitled to any refund with
respect to such claim and the Company does not notify the Executive in writing
of its intent to contest such denial of refund prior to the expiration of thirty
(30) calendar days after such determination, then such advance shall be forgiven
and shall not be required to be repaid and the amount of such advance shall
offset, to the extent thereof, the amount of Gross-Up Payment required to be
paid pursuant to this Section V.A.
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VI. Security
To secure payment of the benefits provided for in this Agreement,
the Company agrees forthwith to establish an irrevocable escrow account (the
"Escrow Account") at National City Bank (the "Escrow Agent"), Cleveland, Ohio,
or, in the event that National City Bank shall resign, any other financial
institution satisfactory to the Company and the Executive (or the Executive's
executor or other personal representative) or appointed by a court of competent
jurisdiction and to keep on deposit in the Escrow Account such amount, if any,
as shall at all times be at least equal to the required security hereinafter
provided for. The maximum amount of required security to be kept on deposit at
any time shall be (A) the sum of $657,800 (the "Maximum Amount") or (B) if there
has been determination with the Executive's written consent or by a final
arbitral award rendered in accordance with this Agreement that a specific lesser
amount fully secures the Company's obligations under this Agreement, then such
specific lesser amount or, in the case that the Company has fully performed its
obligations under this Agreement, nothing. Subject to the provisions hereof, the
Maximum Amount of required security shall be kept on deposit at all times after
(i) the expiration of five days following the occurrence of a "potential change
in control of the Company" or (ii) a "change in control of the Company" (as such
terms are hereinafter defined), whichever occurs earlier. For purposes of this
Agreement, a "change in control of the Company" shall be deemed to have occurred
if the conditions set forth in any one of the following paragraphs shall have
been satisfied:
(1) Any "person" (as that term is used in Sections 13(d) and
14(d)(2) of the Exchange Act) is or becomes the beneficial owner, directly or
indirectly, of securities of the
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Company representing twenty-five percent (25%) or more of the combined voting
power of the Company's then outstanding voting securities; or
(2) During any period of two consecutive years, individuals who at
the beginning of such period constituted the Board of Directors of the Company
and any new director (other than a director designated by a person who has
entered into an agreement or arrangement with the Company to effect a
transaction described in clause (1) or (3) of this sentence) whose appointment,
election, or nomination for election by the Company's shareholders, was approved
by a vote of at least two-thirds (2/3) of the directors then still in office who
either were directors at the beginning of the period or whose appointment,
election or nomination for election was previously so approved, cease for any
reason to constitute a majority of the Board of Directors of the Company; or
(3) There is consummated a merger or consolidation of the Company or
a subsidiary thereof with or into any other corporation, other than a merger or
consolidation which would result in the holders of the voting securities of the
Company outstanding immediately prior thereto holding securities which represent
immediately after such merger or consolidation more than fifty (50%) of the
combined voting power of the voting securities of either the Company or the
other entity which survives such merger or consolidation or the parent of the
entity which survives such merger or consolidation; or
(4) There is consummated a sale or disposition by the Company of all
or substantially all the Company's assets.
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For purposes of this Agreement, a "potential change in control of the Company"
shall be deemed to have occurred if the conditions set forth in any one of the
following paragraphs shall have been satisfied:
(a) any person is or becomes the beneficial owner, directly or
indirectly, of securities of the Company representing twenty
percent (20%) or more of the combined voting power of the
Company's then outstanding voting securities; or
(b) the Company enters into an agreement, the consummation of
which would result in the occurrence of a change in control of
the Company; or
(c) any person publicly announces an intention to take or to
consider taking actions which, if consummated, would
constitute or result in a change in control of the Company; or
(d) any person commences a solicitation (as defined in Rule 14a-1
of the General Rules and Regulations under the Exchange Act)
of proxies or consents which has the purpose of effecting or
would (if successful) result in a change in control of the
Company; or
(e) a tender or exchange offer for voting securities of the
Company, made by a person (other than the Company, any
subsidiary thereof, any employee benefit plan of the Company
or any person organized, appointed or established by the
Company for or pursuant to the terms of any such plan), is
first published or sent or given (within the meaning of Rule
14d-2(a) of the General Rules and Regulations under the
Exchange Act).
Until the Maximum Amount of required security is required to be kept on
deposit, the Company shall only be obliged to maintain on deposit in the Escrow
Account an amount (the "Required Security") at least equal to sixty percent
(60%) of the Maximum Amount of required security; provided, however, that if a
potential change in control of the
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Company shall occur prior to a change in control of the Company and if a change
in control of the Company does not occur within twelve months after the most
recent occurrence of a potential change in control of the Company, the Escrow
Agent shall be entitled, upon receipt of a written request by the Company, to
return to the Company any amounts in excess of the Required Security (or reduce
the amount of any letter of credit to an amount equal to the Required Security).
Except as provided in the immediately preceding sentence and in the penultimate
paragraph of this Section VI, amounts deposited in the Escrow Account shall be
paid out by the Escrow Agent only (a) to the Company, to the extent that the
amount on deposit exceeds the maximum amount of required security as specified
in joint written instructions from the Executive and the Company to the Escrow
Agent or in a final arbitral award rendered pursuant to Section VII hereof, or
(b) to the Executive, (i) if prior to a change in control of the Company, in
amounts specified in joint written instructions from the Executive and the
Company or in a final arbitral award rendered pursuant to Section VII hereof or
(ii) if after a change in control of the Company in such amounts as the
Executive shall certify to the Escrow Agent as amounts that the Company is in
default in paying the Executive under this Agreement.
The Company shall have the right, at any time and from time to time, to
instruct the Escrow Agent to invest all or any or any part of the funds in the
Escrow Account in time deposits or certificates of deposit with, or repurchase
or other obligations of, National City Bank, in its individual corporate
capacity, or any of its domestic or foreign branches, or any other "bank" (as
determined by the Company), or obligations issued or guaranteed by the United
States or any of its agencies or instrumentalities, provided that no such
investment shall be for a period in excess of ninety (90) days. The Escrow Agent
shall have no liability whatsoever for following the
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instructions of the Company regarding any such investment, or for any loss in
value of the Escrow Account as a consequence of any such investment or the
liquidation thereof.
The Company may meet its obligation to keep amounts on deposit in the
Escrow Account through (a) deposits of assets; (b) one or more letters of credit
deposited in escrow; or (c) any combination of the foregoing. The Company shall
have right, at any time and from time to time, to substitute one form of
permitted deposit in the Escrow Account for another form of permitted deposit in
the Escrow Account.
Intending that the Escrow Agent and its successors and assigns shall have
the right to rely hereon, the Executive consents to the agreement pertaining to
the Escrow Account to be maintained pursuant to this Section VI (the "Escrow
Agreement") substantially in the form attached hereto as Exhibit A, and consents
to the amendment and restatement, pursuant to the Escrow Agreement, of all prior
escrow agreements which have been made between the Company and National City
Bank (in any capacity) and of which the Executive is a beneficiary. The
Executive further consents to amendments, modifications, restatements and
clarifications of the Escrow Agreement from time to time, so long as, after
giving effect to each such amendment, modification, restatement or
clarification, the then aggregate amount (whether in the form of cash,
investments which the Company has instructed the Escrow Agent to make as
hereinbefore provided (the amount of which shall be determined, in each case, at
the time of the investment), amounts available to be drawn by the Escrow Agent
under one or more letters of credit, or any combination of the foregoing)
credited to the Escrow Account by the Escrow Agent would not be less than the
required security provided
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for in this Section VI. The Escrow Agent and its successors and assigns shall
have the right to rely upon such consent of the Executive.
VII. Arbitration
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in Cleveland, Ohio in
accordance with the rules of the American Arbitration Association then in
effect; provided that all arbitration expenses shall be borne by the Company.
Judgment may be entered on the arbitrators' award in any court having
jurisdiction; provided, however, that the Executive shall be entitled to seek
specific performance of his right to be paid until the Date of Termination
during the pendency of any dispute or controversy arising under or in connection
with this Agreement.
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VIII. Miscellaneous
A. Successors, Binding Agreement
The Company will require any successor (whether direct or indirect, by
purchase, merger, consolidation or otherwise) to all or substantially all of the
business and/or assets of the Company, by agreement in form and substance
satisfactory to the Executive, to expressly assume and agree to perform this
Agreement in the same manner and to the same extent that the Company would be
required to perform it if no such succession had taken place. Failure of the
Company to obtain such agreement prior to the effectiveness of any such
succession shall be a breach of this Agreement and shall entitle the Executive
to compensation from the Company in the same amount and on the same terms as
would apply if the Executive terminated his employment for Good Reason, except
that for purposes of implementing the foregoing, the date on which any such
succession becomes effective shall be deemed the Date of Termination. As used in
this Agreement, "Company" shall mean the Company as hereinbefore defined and any
successor to its business and/or assets as aforesaid that executes and delivers
the agreement provided for in this section or which otherwise becomes bound by
all the terms and provisions of this Agreement by operation of law. This
Agreement shall inure to the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, administrators, successors, heirs,
distributees, devisees and legatees. If the Executive should die while any
amount payable hereunder remains unpaid, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the terms of this Agreement to
the Executive's devisee, legatee, or other designee or, if there be no such
designee, to his estate.
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B. Notice
Notices and all other communications provided for in this Agreement shall
be in writing and shall be deemed to have been duly given when delivered by
United States registered mail, return receipt requested, postage prepaid,
addressed to the respective addresses set forth on the first page of this
Agreement, provided that all notices to the Company shall be directed to the
attention of the Secretary of the Company, or to such other address as either
party may have furnished to the other in writing in accordance herewith.
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C. Waiver and Amendment; Governing Law
No provisions of this Agreement may be modified, waived or discharged
unless such modification, waiver or discharge is agreed to in writing signed by
the Executive and such officer as may be specifically designated by the Board
(which shall in any event include the Company's Chief Executive Officer). No
waiver by either party hereto at any time of any breach by the other party
hereto of, or compliance with, any condition or provision of this Agreement to
be performed by such other party shall be deemed a waiver of similar or
dissimilar provisions or conditions at the same or at any prior or subsequent
time. No agreement or representations, oral or otherwise, express or implied,
with respect to the subject matter hereof have been made by either party which
are not set forth expressly in this Agreement, and this Agreement constitutes
the entire agreement between the parties with respect to the subject matter
hereof. Without limiting the generality of the foregoing, this Agreement
supersedes and replaces in its entirety any prior agreement relating to the
subject matter hereof (other than agreements between the Executive and the
Company which constitute Benefit Plans). The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of Ohio.
D. Release and Reaffirmation
In connection with any termination of the Executive's employment prior to
a change in control of the Company (as defined in Section VI hereof), the
Company may, as a condition to the payment by the Company to the Executive of
any post-employment benefits under this Agreement, condition such payment upon
the execution and delivery by the Executive to the Company of:
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(1) A release, in form reasonably acceptable to the Company,
releasing the Company from any further obligations to the Executive, except for
obligations under Benefit Plans which remain in favor of the Executive and any
other remaining obligations under the specific terms of this Agreement or any
other written agreement in effect between the Company and the Executive; and
(2) A reaffirmation by the Executive of his obligations under this
Agreement and any other agreement theretofore in effect between the Executive
and the Company relating to confidentiality, restrictions on competition or
intellectual property rights.
This Section IX.D. shall not apply in connection with any termination of
the Executive's employment on or after the date on which a change in control of
the Company (as defined in Section VI hereof) shall have occurred.
E. Validity
The invalidity or unenforceability of any one or more provisions of this
Agreement shall not affect the validity or enforceability of any other provision
of this Agreement, which shall remain in full force and effect.
F. Certain Obligations of the Company
All obligations of the Company to make payments and provide benefits under
this Agreement shall survive the expiration of the Contract Term.
G. Counterparts
This Agreement may be executed in one or more counterparts, each of which
shall be deemed to be an original but all of which together will constitute one
and the same instrument.
-37-
<PAGE> 38
FERRO CORPORATION
BY:/s/ Hector R. Ortino
-------------------------------------------
/s/ Kent H. Lee
-------------------------------------------
Kent H. Lee
-38-
<PAGE> 1
EXHIBIT 11
FERRO CORPORATION AND SUBSIDIARIES
STATEMENT REGARDING COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
12 Months 12 Months
(Dollars in thousands, except per share data) December December
1998 1997
----------- ---------
<S> <C> <C>
Basic:
Weighted Average Common Shares Outstanding 36,419,090 38,131,631
Net Income (Loss) 69,282 ($37,277)
Less Preferred Stock Dividend, Net of Tax (3,789) (3,757)
------------ ----------
Net Income (Loss) Available to Common
Shareholders $65,493 ($41,034)
Basic Earnings Per Common Share $1.80 ($1.08)
Diluted:
Weighted Average Common Shares Outstanding 36,419,090 38,131,631
Adjustments for assumed conversion
of convertible
preferred stock and common stock options 4,060,051 4,136,397
----------- ----------
40,479,141 42,268,028
Net Income (Loss) $69,282 ($37,277)
Additional ESOP Contribution, Net of Tax (1,584) (1,803)
------------ ----------
Adjusted Net Income (Loss) $67,698 ($39,080)
Diluted Earnings Per Share $1.67 ($0.92)
</TABLE>
Note: Due to the anti-dilutive effect of the net loss in 1997,
Basic Earnings Per Share is reported
for both Basic and Diluted Earnings Per Share.
<PAGE> 1
EXHIBIT 12 FERRO
CORPORATION AND SUBSIDIARIES
RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
12 months 12 months
DECEMBER DECEMBER
(Dollars in Thousands) 1998 1997
--------- ---------
<S> <C> <C>
Earnings:
Pre-Tax Income (Loss) 69,282 (48,470)
Add: Fixed Charges 18,761 15,293
Less: Interest Capitalization (637) (482)
------- -------
Total Earnings 87,406 (33,659)
======= =======
Fixed Charges:
Interest Expense 15,284 12,163
Interest Capitalization 637 482
Interest Portion of Rental Expense 2,840 2,648
------- -------
Total Fixed Charges 18,761 15,293
======= =======
Total Earnings 87,406 (33,659)
Divided By:
Total Fixed Charges 18,761 15,293
------- -------
Ratio 4.66 (2.20)
</TABLE>
Note: Preferred dividends are excluded. Amortization of debt expense and
discounts and premiums were deemed immaterial to the above
calculation. Interest portion of rental expense includes conservative
estimates based on calculations from prior years.
<PAGE> 1
Exhibit 13
[LOGO-FERRO]
REALIZING OUR VISION
1998 ANNUAL REPORT
<PAGE> 2
OUR VISION
To achieve market leadership positions through a customer-centered and highly
creative organization committed to delivering top-quality products and
outstanding services to customers worldwide and superior returns to
shareholders.
CONTENTS
1 Financial Highlights
2 Letter to Shareholders
6 Growing Our Operations
8 Products and Markets
10 Customer Focus
12 Creativity
14 Quality Products
16 Worldwide Reach
18 Financial Section
46 Directors and Officers
47 Corporate Information
[photo]
We are committed to realizing our vision and, indeed, already have the
distinction of market leadership in a number of our core businesses. Our
strategies are designed to firmly maintain our leadership positions or achieve
them as quickly as possible. Each element of our vision - customer focus,
creativity, quality products and services, and worldwide reach - is contributing
to a long and growing list of satisfied customers and the kind of growth and
profitability that benefits shareholders. Throughout this annual report, you'll
read about and see examples of specific businesses and products that exemplify
the elements of our vision. Our powder coatings business, represented on the
cover by powder-coated aluminum wheels, is particularly well positioned to
expand its market leadership.
<PAGE> 3
1998 SALES BY SEGMENT
Plastics 18%
Chemicals 22%
Coatings 60%
1998 SALES BY REGION
Asia-Pacific 5%
Latin America 8%
Europe 33%
United States
and Canada 54%
FINANCIAL HIGHLIGHTS
Ferro Corporation and subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands except per share data)
1998 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING RESULTS
Net sales $ 1,361,844 1,381,280 1,355,685
Net income (loss) (a) $ 69,282 (37,277) 54,586
PER COMMON SHARE DATA(A)(B)
Basic earnings (loss) $ 1.80 (1.08) 1.29
Diluted earnings (loss) $ 1.67 (1.08) 1.21
Cash dividends $ 0.495 0.43 0.39
OTHER
Average shares outstanding(b) 36,419,090 38,131,631 39,506,572
Net cash provided by operations $ 80,031 130,283 111,572
Return on average shareholders' equity(a) 25% -- 14%
Number of holders of common stock (year-end) 2,257 2,945 3,090
Number of employees (year-end) 6,693 6,851 6,912
- ------------------------------------------------------------------------------------------------------
</TABLE>
(a) Included in 1997 numbers is a pre-tax realignment charge of $152.8
million, which on an after-tax basis is $100.0 million, or $2.52 per
common share. Excluding the realignment charge, the Company recorded
net income for 1997 of $62.7 million, or $1.44 per diluted common
share.
(b) Basic earnings (loss) per share are based on a weighted average of
common shares outstanding. Diluted earnings per share reflect the
potential dilution of earnings per share assuming that certain stock
options whose exercise price is less than the average market price of
the stock are exercised and that convertible preferred shares are
converted into common shares. Outstanding shares and per share data are
adjusted to reflect a 3-for-2 stock split in November 1997.
FERRO CORPORATION is a major global producer of performance materials for
manufacturers. We are the world's largest supplier of ceramic glaze and
porcelain enamel coatings. We also hold leading market positions in powder
coatings, pigments, specialty plastic compounds and colors, and polymer
additives. Our materials are used extensively in the markets of building and
renovation, major appliances, household furnishings, transportation and
industrial products. Headquartered in Cleveland, Ohio, Ferro has operations in
19 countries and sells products in more than 100 countries.
<PAGE> 4
Albert C. Bersticker, Chairman (left)
Hector R. Ortino, President and Chief Executive Officer (right)
[photo]
TO OUR SHAREHOLDERS
Profitable growth is what Ferro is all about. You've heard us state it
many times before, and it remains our singular focus. In 1998, we continued our
momentum of recent years and made significant progress toward profitable growth
by delivering double-digit earnings growth.
Back in 1996, we concentrated our strategic efforts on four key areas -
organization, productivity improvement, marketing and technology. We also set
major financial targets for earnings growth and gross margin expansion.
Our performance over the past three years demonstrates that our
strategies have been paying off. We have now recorded 12 consecutive quarters of
year-over-year earnings improvement. Ten of those quarters have been
double-digit improvements and nine of them record quarters. In addition, our
gross margins have climbed 260 basis points during the past three years.
How have we done it? Hard work toward a shared vision of success. As
this annual report shows, we have successfully improved every element of our
vision, including our customer focus, creativity, quality products and worldwide
reach. We believe that, guided by our vision, we will continue to deliver
consistent returns on your investment.
2/3
<PAGE> 5
"We remain dedicated to
maintaining Ferro's momentum and to
achieving profitable growth."
However, we aim to accomplish much more. We are reshaping Ferro to become a
stronger and more competitive company with a higher sustainable growth rate.
Among all of our achievements last year, one result more than any other
demonstrates our progress in reshaping our company. For the first time, profits
of our products based on organic chemistry, which are relatively new to our
history, exceeded those of our products based on inorganic chemistry, which have
been part of Ferro since our beginning. In 1999 and in the years ahead, we will
become even more aggressive in directing our efforts and resources toward our
organic and other growth businesses.
WHAT WE'VE ACHIEVED
We had many significant achievements in 1998. It was another year of strong
improvement in gross margins and a record year for operating profit, net income
and earnings per share.
However, sales for the year fell short of our expectations. Net sales of
$1.36 billion were down slightly from 1997. Negative currency translation,
divestitures and a decline in domestic chemical volumes, combined with economic
difficulties in Latin America and Asia, had a negative impact on revenues.
Additionally, as we continue to focus resources on our most profitable sales
accounts, we walked away from significant volumes in low-margin accounts.
On the positive side, European sales showed strong improvement, and our
powder coatings business continued to record excellent performance. Although
sales in Asia were down, we were able to gain market share, due to our advantage
of being the only major local producer in the tile market there. That puts us in
the enviable position of being a leader in the tile market as the Asian economy
continues its recovery.
Net income was $69.3 million, up 10.5 percent, excluding a 1997 realignment
charge. Earnings per share (diluted) were $1.67, up 16 percent from 1997,
excluding the charge. In the past three years, we have achieved earnings per
share growth at levels above our target for 12 percent compound annual earnings
growth.
We made strong progress toward our gross margin target, reaching a yearly
rate of 26.7 percent versus 25.6 percent a year ago. Our target of 28 percent
gross margins exiting 1999 is clearly in sight.
All our business groups showed improvement in operating profits, driven
largely by improved product mixes and continuous productivity improvements. Our
plastics group had record operating profits, spurred by an improved mix of
products for higher-margin applications and substantial productivity
improvements. Our powder coatings business, which continued to improve
profitability, benefited from the introduction of new products, strong
performance in the domestic appliance market and increased market share in
automotive products. Our ceramic tile business posted good improvement in
profits, particularly in Europe, by broadening its product offerings and
commercializing new products.
<PAGE> 6
Advancing Toward
Our Goals
We are pleased to report we have made steady progress toward our performance
goals, thanks to careful execution of our strategies. We are aiming to achieve a
compound annual growth rate (CAGR) of 12 percent in earnings and to expand
consolidated gross margins to 28 percent by year-end 1999. Here's how we are
measuring up:
Diluted Earnings
per Share
3-year CAGR = 17%
<TABLE>
<S> <C> <C> <C>
1.04 1.21 1.44 1.67
---- ---- ---- ----
95 96 97 98
</TABLE>
* EXCLUDES
REALIGNMENT
CHARGE
GROSS MARGIN
28%
26 NEED PLOT POINTS!
24
22
95 96 97 98
Results by quarter
Most important, our total return on investment, measured by stock price
appreciation, was 7 percent, giving us one of the best performances in the
specialty chemicals industry, which endured a difficult year. The Standard and
Poor's Mid-Cap Chemical Stock Index, of which Ferro is a part, was down 25
percent for 1998.
WHAT WE ARE DOING
Over the past three years, we have been working hard to change the way
we operate. Most of our efforts to date have focused on our key strategies to
build a solid foundation and structure for our growth plans to succeed.
For example, we have reshaped our operating structure to reflect a more
market- oriented, entrepreneurial style. We are also well along with our
corporate-wide realignment plan, a three-year program that began in May 1997 and
is to be completed in 1999. We are significantly reducing the number of our
worldwide manufacturing facilities.
4/5
<PAGE> 7
Additionally, we expect that our emphasis on marketing and new product
development will support our efforts to produce profitable growth. So far we
have benefited from new marketing training and marketing tools designed to help
us better understand our customers and our markets. We also are applying our
core technologies in new markets or in fast-growing segments of existing markets
and have reorganized our R&D programs to become more market-focused.
Furthermore, we are moving aggressively to build our businesses through
acquisitions and geographic expansion. We have transferred the responsibility
for acquisitions to our group vice presidents and, as a result, we are very
active in researching many opportunities and have a number of acquisitions in
various stages of development. We fully expect to announce several key
acquisitions within the year. In 1998, we established our first-ever operation
in China by acquiring Ningbo Powder Coatings Company, reflecting our optimism in
the vast potential of China and the future of Asian markets.
WHAT TO EXPECT
As you can see, we have taken many steps to improve our long-term
performance and, while we've been successful, we are committed to doing much
more. Toward this end, we are developing new plans and are prepared to take more
decisive actions in reshaping Ferro to spur top-line growth.
We have started 1999 with a fresh leadership agenda to support our
focus on growth. In order to revitalize top-line growth, it is imperative that
we challenge our current course. We intend to direct resources more intensely on
those business units that will have significant growth opportunities and to seek
new business opportunities that build upon our strengths. Where businesses are
mature and growth prospects less robust, we will selectively invest to improve
and maintain current positions. In all cases, we will remain focused on the
bottom line.
Our expectations are that 1999 will prove to be another year of slowing
economic growth and increasing competitive conditions in specialty chemicals
markets. However, we are confident that our company is well positioned to face
those challenges. We remain dedicated to maintaining Ferro's momentum and to
achieving profitable growth. Again, that's what Ferro is all about.
MANAGEMENT TRANSITION
To allow for an orderly transition in Ferro's senior management, in October
1998 Ferro's Board of Directors appointed Hector Ortino to become President and
Chief Executive Officer beginning on January 1, 1999. After 40 years of
extraordinary service to Ferro, Al Bersticker will retire in April 1999.
OUR THANKS
Our optimism for the future derives largely from the talents of our
employees and their determination to achieve our goals. We thank them for
embracing change and delivering strong performance. We also offer sincere thanks
to our fellow board members for their counsel and guidance, to our customers for
their confidence in our solutions, and to you, our investors, for your unending
support and enthusiasm for Ferro's future.
Sincerely,
/s/ Albert C. Bersticker /s/ Hector R. Ortino
Albert C. Bersticker Hector R. Ortino
Chairman President and Chief Executive Officer
<PAGE> 8
[photo]
GROWING OUR OPERATIONS
JIM FISHER is Senior Vice President, Ceramics and Colorants, with responsibility
for Ferro's worldwide ceramic glaze coatings, specialty ceramics, pigments and
electronic materials businesses. He has been with Ferro since 1959.
"We have several exciting efforts in motion designed to reward us with good
growth going forward. We are continuing to achieve efficiencies from the
consolidation of our global operations. We also expect further market share
gains as we expand our range of products and services to ceramic tile
manufacturers around the world.
In another promising area, we are committed to building our electronic
materials business into an important player in a high-growth industry. Indeed,
we plan to grow this business into one of Ferro's core businesses."
Q&A
WHAT DO YOU SEE AS
THE GREATEST GROWTH
OPPORTUNITIES
IN THE BUSINESSES
LARRY JAMESON is Vice President, Industrial Coatings, managing Ferro's porcelain
enamel and powder coatings operations worldwide. He has extensive career
experience with international business and markets and joined Ferro in 1996.
"Thanks to closer relationships with longtime customers, we are enjoying
growth opportunities in our traditional markets such as appliances and
automotive, as new applications of powder coatings continue to penetrate the
paint market. For example, Ferro continues to develop new business in the
automotive market with powder coatings as a replacement for liquid coatings as a
full-body primer. We're also working to establish a presence in the profitable
small-customer niche of the general industrial finishing market, which is
growing at a faster rate than traditional markets. Longer term, the prospect of
powder coatings for wood and plastic applications could provide additional
growth opportunities.
Finally, we're enthusiastic about our opportunities for global expansion,
particularly in China and the rest of Asia. Our new powder coatings joint
venture in China gives us a stepping stone for further growth in that region."
6/7
<PAGE> 9
[photo]
JAY FINCH is Vice President, Specialty Plastics, managing Ferro's worldwide
businesses in thermo- plastic compounds, colorants, additives, thermoset gel
coats and dispersions. He has more than 30 years of experience in the plastics
industry and has been with Ferro since 1991.
"The combination of Ferro's exceptional products and favorable industry trends
should lead to significant opportunities for our specialty plastics business.
Customers are continuing to look for ways to differentiate their products
through the use of plastic colors and special effects. Ferro's innovative
products anticipate these trends and continue to offer customers advantages in
selling their products. In addition, our quick response to color matching and
order delivery is an excellent competitive advantage in an industry where speed
is key.
Furthermore, we are continuing to benefit from the ability of our
lower-cost plastic compounds to replace higher-cost plastics with the same
performance characteristics. For instance, we expect our metallocene-based
products to continue to displace expensive plastics, especially in the
automotive arena. In addition, we expect the appliance industry to be a source
of creative plastic applications in standard appliances and even in entirely new
appliances."
UNDER YOUR RESPONSIBILITY?
[photo]
KENT LEE is Vice President, Specialty Chemicals, with responsibility for Ferro's
worldwide polymer additives, industrial specialties and petroleum additives
businesses. He is a seasoned veteran of the specialty chemicals industry and has
been with Ferro since 1996.
"Bolstered by the acquisition of Synpro in late 1995 and by new product
and marketing initiatives over the past three years, our polymer additive
products have achieved leading positions in each of their major markets in North
America. Last year we strengthened our chemical management teams in Europe and
Asia in preparation for taking these excellent products into selected new
geographic markets. We are excited about the prospects for geographic expansion
and are confident that our products will be well received by customers in these
markets concerned with maintaining quality and lowering manufacturing costs.
In addition, we are excited about growth coming from new applications
for our industrial chemicals in life sciences and other markets new to Ferro.
These new prospects, developed in recent years, are now ready to be leveraged
into applications for pharmaceuticals, food preparation, batteries and other
non-polymer markets."
[photo]
<PAGE> 10
FERRO
Ferro's performance materials and technology help customers in many industries
lower costs, improve safety, raise quality and durability and enrich the
appearance of finished items. Consumers worldwide enjoy the benefit of products
that make their lives more pleasant and productive.
TOUCHES
[PICTURE]
TRANSPORTATION. Cars are often "loaded" with Ferro materials. Our powder
coatings are used as primers and for coating wheels, trim, parts and numerous
underbody applications. Our plastic compounds and colorants are found in parts
and trim, and our glass decorating enamels on windshields. Our petroleum
additives boost fuel efficiency and cleanliness, and our polymer additives
protect fabrics, electrical components and interior plastic panels. MAJOR
APPLIANCES. Ferro helps you cook and clean up. Stoves, refrigerators, washers
and other major appliances are often finished with our porcelain enamel and
powder coatings. Interior components are crafted with our plastic compounds and
colorants, pigments and polymer additives. Controls utilize our electronic
materials. Oven and microwave doors incorporate our glass decorating enamels.
BUILDING AND RENOVATION. Structures of all kinds are created with Ferro
materials. Our ceramic glaze materials and colors finish and decorate tiles and
fixtures. Our polymer additives increase the life of floor and wall coverings,
siding, cable, piping and more. Our porcelain enamel coats building panels and
sanitary ware. HOUSEHOLD FURNISHINGS. Ferro is right at home in homes
everywhere. Our porcelain enamel and powder coatings and colors protect
cookware, grills, small appliances, lighting fixtures and furniture. Our glaze
coatings and colors beautify tableware and artware, and our plastic compounds
and colorants shape small appliances, furniture, utensils and power tool
housings. Our polymer additives and flame retardants preserve items ranging from
upholstery to television cabinets. INDUSTRIAL PRODUCTS. Ferro materials are at
work in many industrial products and processes. Our polymer additives reduce
deterioration and discoloration in PVC pipe. What's more, our materials are used
in everything from chemical processing and material handling to ceramic firing
systems and water treatment facilities.
8/9
<PAGE> 11
<TABLE>
<CAPTION>
YOUR [PICTURE] LIFE
END-USE MARKETS
-------------------------------------------------------------------------------------
Building and Major Household Transportation Industrial Other*
PRODUCTS renovation appliances furnishings products
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
CERAMICS AND COLORANTS
Ceramic glaze coatings X X X
- --------------------------------------------------------------------------------------------------------------------
Pigments and colorants X X X X X X
- --------------------------------------------------------------------------------------------------------------------
Electronic materials X X X X
- --------------------------------------------------------------------------------------------------------------------
Specialty ceramics X X X
- --------------------------------------------------------------------------------------------------------------------
INDUSTRIAL COATINGS
Porcelain enamel coatings X X X X X
- --------------------------------------------------------------------------------------------------------------------
Powder coatings X X X X X X
- --------------------------------------------------------------------------------------------------------------------
PLASTICS
Plastic colorants X X X X X X
- --------------------------------------------------------------------------------------------------------------------
Filled and reinforced plastics X X X X X X
- --------------------------------------------------------------------------------------------------------------------
Liquid coatings and dispersions X X X X X
- --------------------------------------------------------------------------------------------------------------------
CHEMICALS
Polymer additives X X X X X X
- --------------------------------------------------------------------------------------------------------------------
Industrial specialties X
- --------------------------------------------------------------------------------------------------------------------
Petroleum additives X X
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
*Packaging, leisure products and miscellaneous end-use markets
[photo]
<PAGE> 12
CUSTOMER FOCUS
[photo]
(above) Ferro is increasing sales of its electronic materials to flat panel
display manufacturers and other producers of high-tech products, largely through
account managers who serve strategic customers. (right) Serving as a one-source
resource for tile finishing materials has earned Ferro top-of-mind awareness in
the global tile industry and new business from existing and new customers.
<PAGE> 13
[picture]
CUSTOMER FOCUS. Putting ourselves in our customers' shoes ... it has become a
passion for Ferro and a key means of growth. By developing a deeper
understanding of customers and their objectives, we help them resolve
challenges, achieve better financial returns and please their own customers.
Through ongoing training, we are sharpening our ability to design programs that
allow us to bring the greatest value to our customers.
At the broadest levels, we are restructuring our major businesses to better
serve customers. In businesses such as ceramic tile, color and porcelain enamel,
we have moved effectively from a site-based, manufacturing-oriented approach to
a market- and customer-focused structure. For example, we are now better
positioned to provide customers with everything they need for tile finishing,
from glaze coatings, colors and additives to designs, screens and technical
assistance. In addition, we provide grinding media and kiln furniture for firing
tiles.
Our businesses are also teaming with each other to offer more value for
customers. Account managers have established strong partnerships between Ferro
and our largest customers, in part by offering them a strategic sourcing
approach, including a full array of Ferro products. Through better service and
stronger relationships, we have gained business in targeted accounts in the
electronic materials, appliance and automotive industries.
Multi-business teams are working together on new solutions to meet
customer needs and create opportunities for new business. For example, our
powder coatings, plastic colorants and glass decoration businesses are helping a
top global beverage producer standardize its color applications worldwide.
We also are perfecting the details of everyday service. For instance, our
plastic colorants business offers customers up-to-the-minute price information
and quick color-matching skills, which have enabled us to capture more business.
These customer-focused efforts are resulting in vibrant growth with key
customers as well as opportunities with new customers.
10/11
<PAGE> 14
[photo]
CREATIVITY. In all aspects of our business, we are striving to think
"out-of-the-box." Fresh, future-oriented thinking gives our customers an
advantage, provides a more invigorating work environment and helps us seize
opportunities for growth.
We prize our position on the leading edge of new designs and applications of
performance materials. For example, a Ferro team was instrumental in the design
of a major part for the revolutionary front-end-loading Neptune(TM) washer by
Maytag, which became an immediate best-seller upon its introduction in 1998. Our
development of an innovative chemical replacement for lead in wire and cable
compounds offers manufacturers an effective and environmentally friendly
material and offers Ferro further penetration of a high-growth market. We
continue to explore products with great potential, including powder
coatings-on-plastic applications, special effects for plastics, and
reformulations of inorganic pigments that provide performance characteristics at
lower costs.
Expressions of our creativity also extend to how we market our
products. Our technicians can show up to 500 tile designs via CD-ROM, resulting
in more efficient service for customers and additional sales opportunities for
Ferro. Our marketing representatives conduct training in color trends,
counseling major customers in selecting plastic colorants to satisfy consumer
tastes. In all businesses, we're using new marketing techniques to pinpoint and
best serve our highest potential customers.
Some of our most creative work involves our efforts to improve productivity.
Simple, yet powerful, equipment design changes have contributed to substantial
improvements in our coatings production, without new capital investments. The
program's focus is on using this new capacity and lower cost base to support
more sales. In another example, we've rationalized our color line, offering a
palette of standardized colors while still retaining the ability for the local
blending that customers value.
<PAGE> 15
CREATIVITY
[picture]
(above) The popular Maytag Neptune(TM) washer uses 17 pounds of Ferro plastics
and Ferro powder coatings in an innovative design that offers customers energy
cost-savings, greater capacity, a better and gentler cleaning cycle and an
appealing look. (left) Packaging companies use creative special effects and new
colors from Ferro to differentiate and sell their products to consumer markets
such as cosmetics.
<PAGE> 16
Quality Products
[picture]
(above) Our new powder coatings are a top choice for manufacturers of automotive
headlamps in Europe because they simulate chrome yet resist corrosion and do not
distort light. (right) Colorful architectural window and door frames will retain
their appearance for decades thanks to the durability and quality of Ferro's
powder coatings.
<PAGE> 17
[picture]
QUALITY PRODUCTS AND SERVICES. The quality of our products
and services has long been one of our greatest assets. In the past year,
customers such as Hamilton Beach, Whirlpool, Bosch-Siemens and United
Technologies/Carrier have honored us for our quality and our ability to meet
their needs - often leading to further business with these key accounts.
First, customers can count on Ferro to get the basics right. For example, our
high-quality manufacturing capabilities in many locations give us preference
over the competition in the race for new business. Many of our products are
custom formulated to meet exact specifications.
Second, customers look to us for new products that address their market
needs. Over the past year, we've enhanced our product mix for stronger growth.
Our new superhard glazes are ideal for areas of high traffic and aesthetic
needs, such as shopping malls, and our new soluble salts offer a range of
decoration possibilities for porcelain tile. Our new color pellets feature
higher concentrations of pigments for more efficient coloring. And our
pre-formulated electronic powders offer a comprehensive solution for
manufacturers of multi-layer ceramic capacitors.
We've also developed new technologies for applying our materials to our
customers' products or for creating our own materials. Our new plastics
technology eliminates contaminant airborne material in the production of
rotational molded parts, such as toys and tanks. Our unique process for
producing porcelain enamel results in greater efficiency and control of
colors. New technology for ultra-low-fire ceramic dielectric powders offers
advantages over the competition for the use of lower-cost metal electrodes in
capacitors.
This emphasis on quality products that add value is translating into
strengthened global leadership for Ferro, competitive advantages for our
customers and more value for our shareholders.
14/15
<PAGE> 18
[picture]
WORLDWIDE REACH. Global thinking is not new for us, but we are
pursuing global growth with new energy and resources. All of our major
businesses now have global managers, and many have regional presidents in areas
such as Europe and Asia. In key businesses, we have moved from being country-
and site-centric to a true regional or global approach, which has given us added
efficiency and effectiveness in serving global customers as well as new growth
opportunities.
We are taking our quality product lines into new geographic
markets. Our chemicals group is building its presence in Europe and
Asia-Pacific, as demand for our chemicals for vinyl and for wire and cabling
grows along with the building and renovation markets there. Our electronic
materials for solar cells are growing in India, where remote villages rely on
solar-generated electricity to pump water.
In 1998, we entered into new partnerships to grow globally, most notably a
new distribution agreement for inorganic pigments and a powder coatings joint
venture, both in China. We will continue to pursue acquisitions and distribution
agreements to build our global presence.
In businesses where we already have global strength, we are using it to
our greatest advantage. In our tile business, we developed an entirely new brand
of glaze in Indonesia for local tastes as well as new precious metal decorations
and colors for the preferences of other nations. We recently won the business of
a major tile manufacturer because of our ability to service its needs in plant
locations from England to Greece to Australia.
We plan to realize significant synergies from an expanded global presence.
Sharing best manufacturing practices worldwide is leading to substantial
improvements in our ceramic glaze and porcelain enamel plants. Interna-tional
forums are boosting our product development in businesses such as powder
coatings and plastics. Corporate-wide, we are installing a new enterprise
resource planning system that is designed to enable us to achieve greater
efficiencies from being a global operation.
<PAGE> 19
WORLDWIDE REACH
[picture]
(above) The popularity of electronic applications that use rechargeable
batteries is growing rapidly worldwide, and Ferro's chemical solutions for
batteries are part of that growth trend. (left) Ferro's stearates are used in
the production of pharmaceutical products, representing a new market for polymer
additives and a target for aggressive growth.
<PAGE> 20
Gary H. Ritondaro, Vice President and Chief Financial Officer
[picture]
Financials
19 Management's Discussion and Analysis
27 Financial Statements
31 Notes to Financial Statements
42 Independent Auditors' Report
44 11-Year Summary of Financial Data
18/19
<PAGE> 21
Ferro Corporation and subsidiaries
Ferro Corporation is a global producer of performance materials for
manufacturers. The Company's business segments consist of coatings, chemicals
and plastics.
Geographically, the Company operates in North America, Europe, Latin
America and Asia-Pacific. See Note 13 to the consolidated financial statements
for segment operating data.
1998 RESULTS OF OPERATIONS
Consolidated net sales of $1.36 billion for 1998 were 1.4% lower than
1997 net sales. The variety of products sold by the Company makes it difficult
to determine with certainty the increases or decreases in sales resulting from
changes in the volume of products sold and selling prices. However, management's
best estimate of volume and selling price changes, as well as changes in other
factors, follows:
<TABLE>
<S> <C>
Currency -1.0%
Volume -0.7%
Price/Mix +0.7%
Acquisitions +0.3%
Divestitures -0.7%
- -------------------------------------------------------
Total -1.4%
=======================================================
</TABLE>
Net income and earnings per share for 1998 were records of $69.3 million
and $1.67 (diluted), respectively, compared with a net loss of $37.3 million and
a loss of $1.08 (diluted) in 1997. The 1997 loss was due to a second quarter
pre-tax realignment charge of $152.8 million. Excluding the effects of this
charge, net income and earnings per share for 1997 would have been $62.7 million
and $1.44 (diluted), respectively. Thus, excluding the charge, net income was up
10.5% and earnings per share were up 16.0% for 1998.
Gross margins improved from 25.6% to 26.7%. Gross margin improvement was
broad-based across all segments and regions. The major contributions to gross
margin expansion came from a better mix of products sold and manufacturing
efficiencies from continuous productivity improvement initiatives, including
benefits from the Company's previously announced plant consolidation plan. New
product introductions in the plastics and coatings segments, particularly in the
ceramic tile and powder coatings businesses, have helped improve sales of
higher-margin products and develop business in new markets. Simultaneously, the
Company has been reallocating resources away from low-margin accounts and
increasing its penetration of higher-margin accounts.
The decrease in foreign currency gains to $0.9 million from $2.2 million
in 1997 is largely attributable to the strengthening of the U.S. dollar versus
foreign currencies. Foreign currency gains accrue from option contracts
purchased by the parent company to hedge the earnings of selected foreign
subsidiaries, primarily in Europe. For further information, see Note 14 to the
consolidated financial statements.
The increase in interest expense from $12.2 million to $15.3 million in
1998 is primarily attributable to the issuance of $55.0 million 71/8% debentures
in March.
COATINGS
Worldwide sales of $817.8 million for this segment were 0.3% greater than
1997 sales. Growth in sales was largely due to significantly improved
performance in the powder coatings business worldwide and the electronics
business domestically. Additionally, continued improvement in European results
had a positive impact on sales. The effect of the stronger U.S. dollar had a
major negative impact on sales.
Segment income was up 6.1% to $89.3 million. Improvements were led by
strong European results for the ceramic tile business and by the powder coatings
business worldwide. A combination of manufacturing efficiencies and improvement
in the mix of products sold were the main factors contributing to the
improvements in ceramic tile. New product introductions for the tile market have
broadened the product line in this business and generated additional high-margin
business.
CHEMICALS
Sales for this segment were $305.3 million, down 6.9% compared with 1997.
Sales were negatively impacted by volume declines in the United States,
particularly in the petroleum additives business. Additionally, sales were
impacted negatively by currency translation and a divestiture of a joint venture
operation in Asia.
Segment income improved by 12.3% to establish a new record of $36.4
million. The improvement was largely due to outstanding performance in the
domestic industrial chemicals business and continued improvement in polymer
additives. Overall, the chemicals segment has benefited from productivity
improvements and an improvement in the mix of products sold through careful key
account selection and improved sales of higher-margin products.
<PAGE> 22
PLASTICS
Sales improved 0.3% over 1997, reaching $238.7 million for the year.
Strong domestic volume improvement, particularly in the plastic colorants and
filled and reinforced plastics businesses, was offset by a weak domestic price
environment.
Segment income of $22.2 million set a new record, 22.7% above the
previous record established in 1997. Margin improvements resulted from excellent
performance in both the plastic colorants business and the filled and reinforced
plastics business. The plastics segment has improved margins through the
introduction of new products for new applications at several key accounts.
Additionally, improved manufacturing efficiencies and lower costs for raw
materials had a positive impact on margins.
1997 RESULTS OF OPERATIONS
For the fourth consecutive year, the Company achieved record net sales,
with 1997 sales of $1.38 billion exceeding the prior-year sales by 1.9%. The
variety of products sold by the Company makes it difficult to determine with
certainty the increases or decreases in sales resulting from changes in the
volume of products sold and selling prices. However, management's best estimate
of volume and selling price changes, as well as changes in other factors,
follows:
<TABLE>
<S> <C>
Currency -3.9%
Volume +6.9%
Price/Mix -0.4%
Acquisitions +0.8%
Divestitures -1.5%
- -------------------------------------------------------
Total +1.9%
=======================================================
</TABLE>
During the second quarter, the Company announced an aggressive three-year
realignment plan to significantly reduce the Company's cost base and reallocate
resources to strategies designed to foster profitable growth. Associated with
this realignment was a $152.8 million pre-tax, or $100.0 million after-tax,
charge in the second quarter. The plan calls for consolidation of manufacturing
facilities worldwide, gross margin expansion and resulting improvements in
operating profit.
Including the realignment charge, the Company had a net loss of $37.3
million, or $1.08 per diluted share. Net income, excluding the effects of the
realignment charge, increased 14.8% to $62.7 million. On the same basis,
earnings per share increased 19.0% to a new record of $1.44 (diluted).
The effects of the realignment plan, coupledwith strong volume
improvements in all regions and all segments, drove gross margin from 24.5% to
25.6%.
The increase in foreign currency gains to $2.2 million from $0.8 million
in 1996 is largely attributable to gains on foreign currency option contracts
purchased by the parent company to hedge the earnings of selected foreign
subsidiaries, primarily in Europe. For further information, see Note 14 to the
consolidated financial statements.
COATINGS
Worldwide sales of $815.4 million for this segment were 4.4% greater than
1996 sales. This growth was primarily attributable to improved demand both
domestically and internationally for most of the product offerings. Were it not
for the negative impact of the stronger U.S. dollar, the sales increase would
have been in the low double digits.
Led by strong double-digit improvements primarily in ceramic glaze and
powder coatings due to manufacturing efficiencies and mix changes to
higher-margin products, segment income, excluding the realignment charge, was up
7.0% to $84.2 million. In general, raw material prices were flat to down
relative to 1996. Recognition of the realignment charge reduced segment income
to $13.6 million.
CHEMICALS
Sales from ongoing operations for this segment were essentially flat
compared with 1996, as positive volume gains were more than offset largely by
negative currency influences.
Sales of $328.0 million were down nearly 2.6% due to the late-1996
divestiture of a domestic dispersion business. Volume and currency factors
offset each other.
Segment income surged 21.3% to establish a new record of $32.4 million,
excluding the realignment charge. The improvement was largely due to outstanding
performance in domestic polymer additives, though each product line bettered its
1996 performance. Margins were also aided by further productivity enhancements.
Including the realignment charge, the segment would have incurred a loss of
$20.2 million.
20/21
<PAGE> 23
PLASTICS
Sales from ongoing operations exceeded 1996 sales by 4.5% primarily
because significant volume increases more than offset unfavorable currency
influence. Total sales of $237.9 million, which reflected the impact of 1996
divestitures, were comparable to 1996 sales.
Segment income of $18.1 million, excluding the realignment charge, set a
new record, 14.6% above the previous record established in 1996. Operating
margins expanded most notably in the domestic businesses, where volume increases
fueled higher capacity utilization. Inclusion of the realignment charge resulted
in a segment loss of $0.3 million.
OTHER ITEMS
YEAR 2000 READINESS DISCLOSURE
Historically, many computer software programs were written to refer to
years in terms of their final two digits only. Such programs may interpret the
year 2000 to mean the year 1900 instead. The Company is aware of the
implications and issues associated with this problem and could be faced with
disruption of operations and a corresponding impact on the Company's results of
operations if the Year 2000 issues are not resolved in a timely manner.
The Company currently operates multiple computer systems, including
hardware and software, in its global business operations. The Company believes
it has identified the issues that affect its global computer operations and is
in the process of implementing appropriate plans to address this problem. Local
area networks, telephone systems, business systems, financial systems, shop
floor devices, facility operations and end-user computing systems are being
assessed globally. In order to determine fully the readiness of its production
and other equipment with the Year 2000 issue, the Company has substantially
completed a comprehensive inventory of operations systems that it believes may
be impacted.
The Company is using multiple strategies to address the Year 2000 issues.
New software is being purchased and installed, current software is being
rewritten, and hardware that is non-Year 2000 compliant is being replaced. The
Company has contracted with a third-party consultant with special expertise in
this area.
The Company expects that all correction and testing will be completed by
the end of the second quarter of 1999. In addition, the Company is in the
process of developing contingency plans in the event that these corrective
actions are not implemented in a timely manner as expected. The Company has
established millennium watch teams to develop and coordinate a contingency plan
to be implemented at all of the Company's sites. Readiness plans are being
established to ensure internal resources are in place from the second half of
December 1999 through the end of January 2000.
Based upon findings to date, the Company's total external costs
(historical plus estimated future costs) are currently estimated to be in the
range of $11.0 million to $12.0 million, of which approximately $8.0 million has
been incurred and the majority of which has been capitalized. The Company does
not separately track internal costs for Year 2000 compliance, which are
primarily for payroll and related costs of information systems personnel. The
Company does not now anticipate that the total estimated cost of being in
compliance with Year 2000 will materially exceed the estimate.
The Company is assessing the plans and progress of key suppliers and
customers in addressing the Year 2000 problem. To the extent that these key
suppliers and customers are impacted by their failure to address the Year 2000
problem, such disruption could have a direct impact on the Company. The Company
is exploring a variety of contingency plans to minimize the impact of
third-party failures on the Company. This plan will focus on availability of raw
materials, energy and other resources critical to maintaining operations.
The Company's expectations outlined above with respect to the Year 2000
are subject to uncertainties and are forward-looking statements that express the
Company's current expectations or forecasts of future events. The Company
believes that it has identified the Year 2000 issues that affect its global
computer operations. However, if the Company is unsuccessful in identifying or
solving all Year 2000 issues in its critical operations, or if the Company is
materially and adversely affected by the inability of its key suppliers and
customers to identify and solve their Year 2000 issues, the Company's results of
operations or financial condition could be materially impacted.
<PAGE> 24
Furthermore, the total costs that the Company will incur with respect to
Year 2000 issues will be influenced by the Company's ability to successfully
identify and solve Year 2000 issues, the extent and complexity of programming
required to fix affected programs, the related labor and consulting costs the
Company will incur and the ability of third parties with whom the Company has
business relationships to successfully identify and solve their own Year 2000
issues. These and other unforeseen factors could have a material adverse effect
on the Company's results of operations or financial condition.
IMPACT OF THE EURO CONVERSION
On January 1, 1999, 11 of 15 member countries of the European Economic
and Monetary Union (the "EMU") established fixed conversion rates between their
existing sovereign currencies ("legacy currencies") and the European Union's
common currency, the euro. As of that date, the euro traded on currency
exchanges and may be used in business transactions. The legacy currencies remain
legal tender in the participating countries for a transition period between
January 1, 1999 and at least January 1, 2002 (but not later than July 1, 2002).
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legacy currencies will be withdrawn from circulation.
The Company has implemented a plan that enables each of its businesses to
effectively process the necessary transactions in both euro and local currencies
during this transition period. The plan includes, among other things, the need
to adapt computer and financial systems to accommodate euro-denominated
transactions and the impact of one common currency on pricing. Since financial
systems and processes currently accommodate multiple currencies, the Company
does not anticipate system conversion costs to be material. Since the euro
conversion may affect cross-border competition by creating cross-border price
transparency, the Company will be assessing its pricing strategies to ensure it
remains competitive in a broader European market.
Continuing analysis and development efforts by project teams among the
Company's business units will help ensure that the implementation of the
Company's plans meets the timetable and regulations established by the EMU.
The Company's exposure to changes in foreign exchange rates may be
reduced as a result of the euro conversion. Conversely, changes in the value of
the euro/U.S. dollar exchange rate may have a greater impact because there will
be less diversity in the Company's exposure to foreign currencies.
Based on information currently available and our current assessment, the
Company does not anticipate that the conversion to the euro will have a material
effect on its results of operations or financial condition.
ENVIRONMENTAL
The Company is party to judicial and administrative proceedings that
commenced in November 1998 relating to emissions from its plant in Hammond,
Indiana. In these proceedings, the State of Indiana is seeking to impose fines
and to alter or terminate the Company's right to produce Pyro-Chek(R) at the
Hammond plant. See the description in Note 9 to the consolidated financial
statements on page 36. The Company is vigorously contesting these claims and
evaluating alternatives for mitigating the impact should the Company not
prevail. If the State of Indiana were to prevail on all of its claims, it could
have a material adverse effect on the Company.
In 1996, the Company signed a Consent Decree whereby the Company agreed
to pay a civil penalty of $0.4 million and to pay $1.4 million (the "Settlement
Amount") into a fund to be established to help clean sediment in the West Branch
of the Grand Calumet River following entry of the Consent Decree by the Court.
The Consent Decree was entered by the Court in February 1997. The Company paid
the Settlement Amount in March 1997.
Additionally, governmental agencies have identified several disposal
sites for clean-up under Superfund and similar laws to which the Company has
been named a Potential Responsible Party. The Company is participating in the
cost of certain clean-up efforts. However, the Company's share of such costs has
not been material and is not expected to have a material adverse impact on the
Company's financial condition or results of operations.
22/23
<PAGE> 25
GEOGRAPHICAL
United States sales of $737.3 million declined 1.5% from 1997 as strong
domestic volume improvements in the plastics segment and in the coatings
segment, specifically, powder coatings and electronic materials products, were
offset by a volume decline in chemicals and price declines in plastics due to
declining raw material costs. Generally, an improved mix of products sold and
productivity improvements led to improved segment income for the region of $82.8
million.
European sales of $445.9 million improved by 2.1% over 1997. European
sales were helped by a shift in the mix of products sold toward higher priced
products that offset negative currency translation effects. Improvement in
segment income to $50.7 million was led by a strong margin improvement in
ceramic tile products within the coatings segment, through the introduction of
new products and increased market share.
Latin American sales of $107.3 million decreased 4.5% primarily because
of the economic downturn in the Mercosur region, particularly Brazil, and as a
result of pricing pressure from imported goods. In addition, divestitures had a
negative impact on sales. Improvement in segment income to $8.2 million stemmed
from improved manufacturing efficiencies and an improved mix of products sold.
Sales in Asia-Pacific were down 14.9% to $71.3 million. Volume declines
as a result of the economic difficulties in the region, combined with negative
currency translation and the divestiture of a joint venture, led to the decline.
Being a local producer in the region versus the competition's imports has led to
improved market share in the region, and the trend in performance toward the
latter half of 1998 was positive. Segment income declined to $6.2 million as
market share improvements were not enough to offset negative currency
translation and volume declines.
ACCOUNTING CHANGES
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits," standardizing disclosure requirements. The
Statement was effective for years beginning after December 15, 1997. The Company
adopted the Statement effective with the year ending December 31, 1998.
During 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments and for hedging activities. This Statement
is effective for all quarters of fiscal years beginning after June 15, 1999.
While the Company has not yet determined the effects the Statement will have on
its financial position or results of its operations, it does not anticipate a
material impact.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income," which
establishes standards for reporting and displaying comprehensive income and its
components in a full set of general-purpose financial statements. The Company
adopted the Statement effective with the quarter ending March 31, 1998.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which provides that public enterprises
report certain information about business segments in complete sets of financial
statements and information concerning products and services, geographic areas in
which they operate and major customers. The Company adopted the Statement
effective with the year ending December 31, 1998.
In the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) No. 98-1, "Accounting for Costs
of Computer Software Developed or Obtained for Internal Use," which requires
that certain internal and external costs to develop or obtain software for
internal use be expensed or capitalized when incurred. Generally, costs incurred
during the preliminary project stage and post-implementation/operation stages
must be expensed. The Statement will be effective for fiscal years beginning
after December 15, 1998 and can be adopted early for 1998 as of January 1, 1998.
The Company is currently assessing the effect of this Statement, but does not
anticipate a material impact on the results of operations.
<PAGE> 26
In the first quarter of 1998, the American Institute of Certified Public
Accountants issued Statement of Position (SOP) No. 98-5, "Reporting on the Costs
of Startup Activities," which requires that the cost of startup activities be
expensed as incurred. The Statement will amend provisions of a number of
existing SOPs and audit and accounting guides. The Statement will be effective
for fiscal years beginning after December 15, 1998. The Company is currently
assessing the effect of this Statement, but does not anticipate a material
impact on the results of operations.
CAUTIONARY NOTE ON FORWARD-LOOKING
STATEMENTS
Certain statements contained in this Management's Discussion and Analysis
and elsewhere in this report reflect the Company's current expectations with
respect to the future performance of the Company and may constitute
"forward-looking statements" within the meaning of the federal securities laws.
These statements are subject to a variety of uncertainties, unknown risks and
other factors concerning the Company's operations and business environment, and
actual events or results may differ materially from the results discussed in the
forward-looking statements. Factors that could cause or contribute to such
differences include, but are not limited to: changes in customer requirements,
markets or industries served; changing economic conditions within the regions we
serve; foreign exchange rates, especially in Europe or Asia-Pacific; changes in
the prices of major raw materials; significant technological or competitive
developments; the Company's conversion to a single European currency, the euro;
and disruption of operations associated with certain computer-based systems that
rely on date routines in connection with the year 2000.
MARKET RISK MANAGEMENT
The Company's consolidated cash flows and earnings are subject to
fluctuations due to changes in foreign currency exchange rates. The Company
attempts to limit its exposure to changing foreign currency exchange rates
through operational and financial market actions.
The Company manufactures and sells its products in a number of locations
around the world, resulting in a well-diversified revenue and cost base that is
exposed to fluctuations in European, Latin American and Asian currencies. This
diverse base of foreign currency revenues and costs serves to create a natural
hedge that limits the Company's net exposure to fluctuations in these foreign
currencies.
Exposures to changing foreign currency exchange rates in selective
currencies are managed by financial market transactions, principally through the
purchase of put options on currencies and forward foreign exchange contracts.
Put options are purchased to offset the exposure of foreign currency-denominated
earnings to a depreciation in the value of the local currency versus the U.S.
dollar. The Company's primary foreign currency put option market exposures are
in Dutch guilders, French francs, German marks and Spanish pesetas.
Foreign exchange forward contracts are denominated in the same currency
as the receivable or payable being covered, and the term and amount of the
forward foreign exchange contract substantially mirror the term and amount of
the underlying receivable or payable. The Company covers measurable exposed
receivables and payables denominated in foreign currencies that have a liquid,
cost-effective forward foreign exchange market. The receivables and payables
being covered arise from trade and financing transactions of the Company and
also foreign subsidiaries. The Company has hedged transactions denominated in
Brazilian reals, Dutch guilders, Hong Kong dollars, Indonesian rupiah and Taiwan
dollars. Foreign subsidiaries hedge their exposure to the cost of raw materials
denominated in U.S. dollars through the forward purchase of dollars to cover the
future payable.
The Company does not have significant exposure to fluctuations in
interest rates because of the low levels of marketable securities and the low
cost of fixed-rate debt on the Company's balance sheet. The Company does not
undertake any specific actions to cover its exposure to interest rate risk, and
the Company is not a party to any interest rate risk
management transactions.
Derivative financial instruments are entered into with a diversified
group of major financial institutions in order to manage the Company's exposure
to nonperformance on such instruments. The Company does not purchase or hold any
derivative financial instruments for trading or speculative purposes.
24/25
<PAGE> 27
The fair value of foreign currency put options is sensitive to changes in
foreign currency exchange rates. The selected 10% change in the value of the
U.S. dollar is expected to reflect reasonably possible near-term changes in the
foreign currencies' exchange rates. If the actual change in the value of foreign
currencies is substantially different than expected, the net impact of foreign
currency exchange rate risk on the Company's earnings may be materially
different than that disclosed below. As of December 31, 1998, a 10% appreciation
in the U.S. dollar from the prevailing market rates would increase the related
unrealized gain by $0.6 million. Conversely, a 10% depreciation in the U.S.
dollar from the prevailing market rates would decrease the related unrealized
gain by $0.2 million. With regard to forward foreign exchange contracts, the
fair market value is also sensitive to changes in foreign currency exchange
rates. As of December 31, 1998, a 10% appreciation in the U.S. dollar from the
prevailing market rates would increase the related unrealized gain by $1.4
million. Conversely, a 10% depreciation in these currencies from the prevailing
market rates would decrease the related unrealized gain by $2.5 million.
Unrealized gains/losses in foreign currency exchange contracts are
defined as the difference between the contract rate at the inception date of the
foreign currency exchange contract and the current market exchange rates.
Consistent with the nature of the economic hedge of such foreign currency
exchange contracts, such unrealized gains or losses would be offset by
corresponding decreases or increases, respectively, of the underlying instrument
or transaction being hedged.
ACQUISITIONS AND DIVESTITURES
In May 1998, the Company acquired a majority interest in Ningbo Powder
Coatings Company of the People's Republic of China. A new company called Ferro
Ningbo Powder Coatings Company was formed. In March 1998, the Company sold a
majority of its shares in Ferro Ecuatoriana S.A. of Ecuador. Neither of these
transactions was material to Ferro.
In July 1997, the Company sold the remaining interest in Nissan-Ferro
Organic Chemical Company, Ltd., located in Japan. The results of this operation
were not material to Ferro.
In January 1996, the Company purchased the remaining interest in Ferro
Industrias Quimicas S.A., located in Portugal. In November 1996, the Company
purchased Ceramica Technica Industrial S.A. of Spain. Neither of these
transactions was material to Ferro.
In October 1996, the Company sold the dispersions portion of Synthetic
Products Company (Synpro) acquired in the prior October from Cookson Group plc.
The Company also sold two small plastics operations located in Canada. The
results of these operations were not material to Ferro.
LIQUIDITY AND CAPITAL RESOURCES
Cash flow provided by operations declined to $80.0 million in 1998 mainly
due to increases in accounts and trade notes receivable and inventories. Cash
provided by operations was more than sufficient to enable the Company to meet
financial obligations, including repurchasing approximately 2.6 million shares
of Ferro common stock and providing for capital expenditures.
The Company purchased 2,595,482 shares of common stock during 1998,
1,346,627 shares during 1997 and 1,455,014 shares during 1996 under share
repurchase authorizations.
Capital expenditures for plant and equipment were $60.3 million in 1998,
$45.1 million in 1997 and $46.7 million in 1996. Capital expenditures for 1999
are estimated to be $70.0 million.
The Company's estimate for higher capital expenditures for 1999 includes
some of the expenditures for the implementation of a global enterprise-wide
management information system. The project supports the Company's strategies
both to improve customer service and to improve Ferro's cost structure by
reducing complexity and increasing efficiency. When fully implemented, the
system will provide immediate, worldwide access to information so that resources
will be shared and processes will be standardized and integrated across global
sites. The project was initiated in 1998, and the Company estimates that it will
take several years to implement the system. During 1998, the Company's principal
focus was to design and configure templates for this system for the
implementation at five locations in the first phase. The Company expects the
system to become operational at these sites in the first half of 1999.
<PAGE> 28
Cash used for financing activities principally includes repurchases of
stock and cash dividends paid, partially offset by proceeds from long-term debt.
In October 1995, the Company filed a $300.0 million Shelf Registration
with the Securities and Exchange Commission. This registration will enable the
Company to offer, either separately or together, debt securities, common stock
and/or preferred stock, warrants, stock purchase contracts, depositary shares
and stock purchase units. Proceeds would be used for general corporate purposes.
In March 1998, the Company issued $55.0 million 71/8% debentures under this
registration. The debentures have a 30-year maturity.
The Company filed a $100.0 million Shelf Registration with the Securities
and Exchange Commission in August 1992. Securities sold under that registration
include the following:
On November 7, 1995, the Company issued $25.0 million 73/8% debentures
with a 20-year maturity; on June 20, 1995, the Company issued $50.0 million 8%
debentures with a 30-year maturity; and on May 13, 1993, the Company issued
$25.0 million 75/8% debentures with a 20-year maturity.
In October 1998, the Company increased the quarterly common stock cash
dividend by 12.5% to $0.135 per share, or an annual rate of $0.54. The annual
dividend payout for 1998 was $0.495 per common share, an increase of 15.1% over
1997. In November 1997, the Company effected a 3-for-2 stock split, and the
common stock cash dividend was increased 16.1% to a post-split annual rate of
$0.48 per common share. The common stock cash dividend was increased 14.8%
during 1996 to an annual post-split rate of $0.41 per common share. Common stock
cash dividends were paid in the amount of $0.43 per share in 1997 and $0.39 per
share in 1996. See page 43 for additional dividend data.
The Company's financial condition remains strong, and the Company has the
resources necessary to meet future anticipated funding requirements. In addition
to cash flow provided by operations, the Company has sufficient unused debt
capacity, including a $150.0 million line of credit and $245.0 million remaining
from the $300.0 million Shelf Registration previously mentioned, to finance its
ongoing capital requirements and to take advantage of acquisition opportunities.
INFLATION
Management does not consider its business as a whole to be subject to
significant effects of inflationary pressures. Because of the diverse geographic
distribution of the Company's operations, the high inflation in certain
countries in which the Company operates is not considered to create an
unacceptable risk to conducting business worldwide.
26/27
<PAGE> 29
Consolidated Statements of Income
Ferro Corporation and subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands except per share data)
Years ended December 31 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET SALES $1,361,844 1,381,280 1,355,685
Cost of sales 997,583 1,028,069 1,023,401
Selling, administrative and general expense 235,155 233,674 226,518
Realignment charge -- 152,790 --
Other charges (income):
Interest expense 15,284 12,163 13,031
Interest earned (2,936) (2,286) (2,528)
Foreign currency transactions (944) (2,246) (812)
Miscellaneous - net 7,221 7,586 7,868
- ----------------------------------------------------------------------------------------------------
18,625 15,217 17,559
- ----------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE TAXES 110,481 (48,470) 88,207
Income tax expense (benefit) 41,199 (11,193) 33,621
- ----------------------------------------------------------------------------------------------------
Net income (loss) 69,282 (37,277) 54,586
Dividend on preferred stock, net of tax 3,789 3,757 3,735
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) AVAILABLE TO
COMMON SHAREHOLDERS $ 65,493 (41,034) 50,851
- ----------------------------------------------------------------------------------------------------
PER COMMON SHARE DATA
Basic earnings (loss) $ 1.80 (1.08) 1.29
Diluted earnings (loss) 1.67 (1.08) 1.21
======================================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE> 30
Consolidated Balance Sheets
Ferro Corporation and subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands)
December 31 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
CURRENT ASSETS
Cash and cash equivalents $ 12,185 16,337
Accounts and trade notes receivable after deduction of
$9,737 in 1998 and $8,280 in 1997 for possible losses 249,771 232,927
Inventories 140,970 127,175
Other current assets 53,967 50,591
- ----------------------------------------------------------------------------------------------------
Total current assets 456,893 427,030
OTHER ASSETS
Unamortized intangibles 50,617 54,355
Miscellaneous other assets 67,603 64,114
- ----------------------------------------------------------------------------------------------------
Total other assets 118,220 118,469
PROPERTY, PLANT AND EQUIPMENT
Land 14,583 13,545
Buildings 140,117 128,486
Machinery and equipment 486,944 419,150
- ----------------------------------------------------------------------------------------------------
641,644 561,181
Less accumulated depreciation and amortization 367,592 321,001
- ----------------------------------------------------------------------------------------------------
Net plant and equipment 274,052 240,180
- ----------------------------------------------------------------------------------------------------
Total assets $849,165 785,679
- ----------------------------------------------------------------------------------------------------
Liabilities and shareholders' equity
CURRENT LIABILITIES
Notes and loans payable $ 30,987 23,269
Accounts payable 105,932 109,958
Income taxes 4,006 6,563
Accrued payrolls 19,762 17,501
Accrued expenses/other current liabilities 121,869 120,416
- ----------------------------------------------------------------------------------------------------
Total current liabilities 282,556 277,707
OTHER LIABILITIES
Long-term liabilities, less current portion 156,283 102,020
ESOP loan guarantee 4,067 13,815
Postretirement liabilities 45,426 44,462
Other non-current liabilities 77,572 74,524
SHAREHOLDERS' EQUITY
Serial convertible preferred stock, without par value.
Authorized 2,000,000 shares; 1,520,215 shares issued 70,500 70,500
Guaranteed ESOP obligation (4,067) (13,815)
Common stock, par value $1 per share.
Authorized 300,000,000 shares; 47,323,053 shares issued 47,323 47,323
Paid-in capital 7,954 1,908
Retained earnings 453,265 405,768
Accumulated other comprehensive income (44,927) (54,403)
Other (6,758) (4,998)
- ----------------------------------------------------------------------------------------------------
523,290 452,283
Less cost of treasury stock:
Common - 11,995,955 shares-1998 and 9,999,844 shares-1997 226,076 167,974
Preferred - 300,881 shares-1998 and 240,592 shares-1997 13,953 11,158
- ----------------------------------------------------------------------------------------------------
Total shareholders' equity 283,261 273,151
Commitments and contingencies -- --
- ----------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $849,165 785,679
- ----------------------------------------------------------------------------------------------------
</TABLE>
See accompanying notes to consolidated financial statements.
28/29
<PAGE> 31
Consolidated Statements of Shareholders' Equity
Ferro Corporation and subsidiaries
<TABLE>
<CAPTION>
Years ended December 31 (dollars in thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
Accumulated Common Preferred Total
Guaranteed other com- stock stock share-
Preferred ESOP Common Paid-in Retained prehensive held in held in holders'
stock obligation stock capital earnings income(b) treasury treasury Other equity
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCES AT
DECEMBER 31, 1995 $70,500 (30,470) 31,549 13,237 427,611 (23,909) (97,626) (6,480) (2,262) 382,150
Comprehensive income
Net income 54,586 54,586
Other comprehensive income
(loss), net of tax(a)
Foreign currency
translation adjustment (3,728) (3,728)
Minimum pension
liability adjustment (167) (167)
Other comprehensive income (loss) (3,895)
Comprehensive income 50,691
Cash dividends:
Common (15,311) (15,311)
Preferred (4,408) (4,408)
Federal tax benefits 699 699
Transactions involving benefit plans 7,878 870 4,285 (658) (1,468) 10,907
Purchase of treasury stock (39,254) (1,270) (40,524)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1996 $70,500 (22,592) 31,549 14,107 463,177 (27,804) (132,595) (8,408) (3,730) 384,204
Comprehensive income (loss)
Net income (loss) (37,277) (37,277)
Other comprehensive income
(loss), net of tax(a)
Foreign currency
translation adjustment (27,467) (27,467)
Minimum pension
liability adjustment 868 868
Other comprehensive income (loss) (26,599)
Comprehensive income (loss) (63,876)
Cash dividends:
Common (16,428) (16,428)
Preferred (4,229) (4,229)
Federal tax benefits 525 525
Transactions involving benefit plans 8,777 3,589 7,871 (2,750) (1,268) 16,219
Three-for-two stock split 15,774 (15,788) (14)
Purchase of treasury stock (43,250) (43,250)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1997 $70,500 (13,815) 47,323 1,908 405,768 (54,403) (167,974) (11,158) (4,998) 273,151
Comprehensive income
Net income 69,282 69,282
Other comprehensive income
(loss), net of tax(a)
Foreign currency
translation adjustment 11,005 11,005
Minimum pension
liability adjustment (1,529) (1,529)
Other comprehensive income (loss) 9,476
Comprehensive income 78,758
Cash dividends:
Common (18,072) (18,072)
Preferred (4,038) (4,038)
Federal tax benefits 325 325
Transactions involving benefit plans 9,748 6,046 6,082 (2,795) ( 1,760) 17,321
Purchase of treasury stock (64,184) (64,184)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCES AT
DECEMBER 31, 1998 $70,500 (4,067) 47,323 7,954 453,265 (44,927) (226,076) (13,953) (6,758) 283,261
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Income tax benefits related to the components of other comprehensive
income (loss) were $679, $340 and $248 in 1998, 1997 and 1996,
respectively.
(b) Accumulated translation adjustments were $(40,766), $(51,771),
$(24,304) and $(20,576) and accumulated minimum pension liability
adjustments were $(4,161), $(2,632), $(3,500) and $(3,333) at December
31, 1998, 1997, 1996 and 1995, respectively.
See accompanying notes to consolidated financial statements.
<PAGE> 32
Consolidated Statements of Cash Flows
Ferro Corporation and subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands)
Years ended December 31 1998 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ 69,282 (37,277) 54,586
Adjustments to reconcile net income (loss) to net cash
provided by operating activities
Depreciation and amortization 43,122 44,975 49,635
Change in deferred income taxes 4,652 (48,823) (2,575)
Realignment charge -- 152,790 --
Changes in current assets and liabilities,
net of effects of acquisitions
Accounts and trade notes receivable (14,687) (1,119) 13,297
Inventories (13,357) 23,544 2,169
Other current assets (902) (10,939) (8,901)
Accounts payable (5,290) (2,238) (1,218)
Accrued expenses and other current liabilities (3,037) 11,414 2,386
Other operating activities 248 (2,044) 2,193
- -----------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 80,031 130,283 111,572
CASH FLOW FROM INVESTING ACTIVITIES
Proceeds from sale of equipment 2,298 2,709 933
Capital expenditures for plant and equipment (60,274) (45,129) (46,655)
Proceeds from divestitures 562 4,623 6,049
Acquisition of companies, net of cash acquired (4,146) -- (13,345)
Transactions with affiliated companies (315) -- 830
Other investing activities 303 1,250 (704)
- -----------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (61,572) (36,547) (52,892)
CASH FLOW FROM FINANCING ACTIVITIES
Net borrowings (payments) under short-term lines 7,718 (25,290) (3,878)
Proceeds from long-term debt 54,297 760 2,626
Principal payments on long-term debt (1,254) (1,938) (1,533)
Proceeds from sale of stock 5,084 4,801 2,069
Purchase of treasury stock (64,184) (43,250) (40,524)
Cash dividends paid to minority shareholders of subsidiaries (590) (1,560) (646)
Cash dividends paid (22,110) (20,657) (19,719)
- -----------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (21,039) (87,134) (61,605)
Effect of exchange rate changes on cash (1,572) (4,291) 256
- -----------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (4,152) 2,311 (2,669)
Cash and cash equivalents at beginning of period 16,337 14,026 16,695
- -----------------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $12,185 16,337 14,026
=====================================================================================================
CASH PAID DURING THE PERIOD FOR
Interest $13,879 8,473 11,927
Income taxes $40,909 36,917 35,026
</TABLE>
See accompanying notes to consolidated financial statements.
30/31
<PAGE> 33
Notes to Consolidated Financial Statements
Ferro Corporation and subsidiaries
Years ended December 31, 1998, 1997 and 1996
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS
Ferro Corporation is a worldwide producer of performance materials for
manufacturers. Ferro produces a variety of coatings, chemicals and plastics by
utilizing organic and inorganic chemistry. The Company's materials are used
extensively in the markets of building and renovation, major appliances,
household furnishings, transportation and industrial products. Ferro's products
are sold principally in the United States and Europe; however, operations extend
to the Latin America and Asia-Pacific regions.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and all of its subsidiaries after elimination of significant intercompany
accounts, transactions and profits.
Certain amounts in the 1997 and 1996 financial statements and the
accompanying notes have been reclassified to conform to the 1998 presentation.
Financial results for acquisitions are included in the consolidated
financial statements from the date of acquisition.
TRANSLATION OF FOREIGN CURRENCIES
Except for international companies whose functional currency is the U.S.
dollar, financial statements of international companies are translated to U.S.
dollar equivalents at the following exchange rates: (1) balance sheet accounts
at year-end rates; (2) income statement accounts at exchange rates weighted by
the monthly volume of transactions occurring during the year. Translation gains
or losses are recorded in shareholders' equity as a component of accumulated
other comprehensive income, and transaction gains and losses are reflected in
net income.
The U.S. dollar is the functional currency of the Company's operations in
Indonesia, Mexico and Venezuela due to the high inflation experienced in those
countries. Translation and transaction gains or losses for these operations are
reflected in net income.
CASH EQUIVALENTS
Cash equivalents consist of highly liquid instruments with a maturity of
three months or less and are carried at cost, which approximates market value.
MARKETABLE SECURITIES
Marketable securities consist of highly liquid investments carried at
cost, which approximates market value.
RISK MANAGEMENT DERIVATIVES
Derivatives primarily consist of foreign-currency forward exchange
contracts and foreign-currency options. Gains and losses related to qualifying
hedges of firm commitments are deferred and are recognized as adjustments of
carrying amounts when the hedged transaction occurs. Gains and losses on
derivative financial instruments that do not qualify as hedges are recognized as
foreign currency transaction gains or losses. Premiums paid on purchased options
are deferred and amortized over the life of the option.
NEW ACCOUNTING PRONOUNCEMENTS
During 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 132, "Employers' Disclosures About Pensions
and Other Postretirement Benefits," standardizing disclosure requirements. The
Statement was effective for years beginning after December 15, 1997. The Company
adopted the Statement effective with the year ending December 31, 1998.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, "Reporting Comprehensive Income,"
which establishes standards for reporting and displaying comprehensive income
and its components in a full set of general-purpose financial statements. The
Company adopted the Statement effective with the quarter ending March 31, 1998.
During 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131, "Disclosures About Segments of an
Enterprise and Related Information," which provides that public enterprises
report certain information about business segments in complete sets of financial
statements and information concerning products and services, geographic areas in
which they operate and major customers. The Company adopted this Statement
effective with the year ending December 31, 1998.
USE OF ESTIMATES IN THE 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.
<PAGE> 34
INVENTORIES
Inventories are valued at the lower of cost or market. Cost is determined
utilizing the first-in, first-out (FIFO) method, except for selected domestic
and international inventories which utilize the last-in, first-out (LIFO)
method.
LONG-LIVED ASSETS
In the case of goodwill and other intangibles, the excess cost over
equity in net assets of acquired companies is being amortized over periods
benefited, with the most extended period being 40 years. Accumulated
amortization was $25.9 million and $21.5 million at December 31, 1998 and 1997,
respectively.
The realizability of goodwill and other intangibles is evaluated
periodically as events or circumstances warrant. As such, the Company recognized
as part of the realignment charge in 1997 an impairment loss in the pre-tax
amount of $33.2 million for goodwill and other intangibles under the provisions
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of."
Plant and equipment is carried at cost. Depreciation of plant and
equipment is provided on a straight-line basis for financial reporting purposes.
The annual depreciation provision has been based on the following estimated
useful lives:
<TABLE>
<S> <C> <C>
Buildings 20 to 40 years
Machinery and equipment 5 to 15 years
</TABLE>
In 1997, under the provisions of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of," the Company recognized an impairment loss in the pre-tax amount
of $55.7 million as part of the realignment charge for plant and equipment at
certain domestic and international facilities which will be closed or sold.
ENVIRONMENTAL COSTS
The Company expenses recurring costs associated with control and disposal
of hazardous materials in current operations. Costs associated with the
remediation of environmental pollution are accrued when it becomes probable that
a liability has been incurred and the costs can be reasonably estimated.
INCOME TAXES
Income taxes are accounted for under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases and operating loss and tax credit carryforwards. Deferred tax assets are
reduced by a valuation allowance when, in the opinion of management, it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. Deferred tax assets and liabilities are adjusted for the effects of
changes in tax laws and rates on the date of enactment.
EARNINGS PER SHARE
Basic earnings per share are based on a weighted average of common shares
outstanding. Diluted earnings per share reflect the potential dilution of
earnings per share assuming that certain stock options whose exercise price is
less than the average market price of the stock are exercised and that
convertible preferred shares are converted into common shares.
2. REALIGNMENT CHARGE
In 1997, the Company recorded a $152.8 million pre-tax charge associated
with a plan to significantly reduce the Company's cost base and allocate
resources to strategies designed to foster profitable growth. The three-year
plan provided for consolidation of worldwide manufacturing facilities and
reduction in work force levels. Items included in the charge consisted of the
write-off of certain long-lived assets totaling $88.9 million, including
goodwill of $33.2 million, termination benefits of $45.3 million for work force
reductions, and $18.6 million for facility closure and other costs. Work force
reductions through the end of 1998 were approximately 500 persons. Cash payments
were $15.6 million and $4.2 million, of which $14.1 million and $3.9 million
were for termination costs in 1998 and 1997, respectively. The remaining accrued
balance is $40.7 million, which is expected to be utilized over the remaining 18
months of the three-year plan period.
3. INVENTORIES
The portion of inventories valued on a LIFO basis at December 31, 1998
and 1997 is as follows:
<TABLE>
<CAPTION>
1998 1997
- ---------------------------------------------------------
<S> <C> <C>
United States 52% 51%
Outside the United States 9 9
Consolidated 27 26
=========================================================
</TABLE>
If the FIFO method of inventory valuation had been used exclusively by
the Company, inventories would have been $14.5 million and $14.4 million higher
than reported at December 31, 1998 and 1997, respectively.
Inasmuch as certain of the inventory costs are determined by use of the
LIFO dollar value method (under which the raw materials, work in process and
finished goods are included in one pool), it is impracticable to separate LIFO
inventory values among raw materials, work in process and finished goods.
32/33
<PAGE> 35
4. FINANCING AND LONG-TERM LIABILITIES
Long-term liabilities at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- ------------------------------------------------------------
<S> <C> <C>
Parent Company:
Unsecured:
Debentures, 7.125%, due 2028 $ 54,385 --
Debentures, 7.625%, due 2013 24,808 24,801
Debentures, 8.0%, due 2025 49,388 49,364
Debentures, 7.375%, due 2015 24,939 24,936
Software lease obligation 368 --
Secured:
Mortgages, 7.207%
payable to 2017 -- 74
Subsidiary Companies:
Unsecured:
Notes payable, 0.0% to 13.0%
payable to 2003 784 1,482
Secured:
Mortgages, 0.0% to 12.5%
payable to 2002 2,721 2,263
- ------------------------------------------------------------
157,393 102,920
Less current portion(a) 1,110 900
- ------------------------------------------------------------
Total $156,283 102,020
============================================================
</TABLE>
(a) Included in notes and loans payable.
The aggregate principal payments on long-term indebtedness for the next
five years are as follows: (dollars in thousands)
<TABLE>
<S> <C> <C> <C> <C>
1999 2000 2001 2002 2003
- ---------------------------------------------------------
1,110 745 537 507 --
==========================================================
</TABLE>
At December 31, 1998, $2.7 million of long-term indebtedness was secured
by property, equipment and certain other assets with a net book value
approximating $3.5 million.
In 1993, the Company issued $25.0 million 75/8% debentures under the 1992
Shelf Registration. These debentures mature in the year 2013, and the fair
market value was approximately $27.7 million at December 31, 1998.
In 1995, the Company issued $50.0 million 8% debentures under the 1992
Shelf Registration. These debentures mature in the year 2025, and the fair
market value was approximately $53.6 million at December 31, 1998.
In 1995, the Company issued $25.0 million 73/8% debentures under the 1992
Shelf Registration. These debentures mature in the year 2015, and the fair
market value was approximately $26.9 million at December 31, 1998. This issuance
exhausted the $100.0 million Shelf Registration filed in 1982.
In 1995, the Company filed a $300.0 million Shelf Registration with the
Securities and Exchange Commission. This registration will enable the Company to
offer, separately or together, debt securities, common stock and/or preferred
stock, warrants, stock purchase contracts, depositary shares and stock purchase
units. Proceeds would be used for general corporate purposes.
In 1998, the Company issued $55.0 million 71/8% debentures under the
1995 Shelf Registration. These debentures mature in the year 2028, and the fair
market value was approximately $54.9 million at December 31, 1998.
The Company has a five-year revolving credit agreement in the amount of
$150.0 million, which matures on August 1, 2003. The agreement permits the
maturity date to be extended for one year with the consent of the parties.
Interest on revolving credit borrowings is payable at floating prime or lower
rates based on Company options. There is a commitment fee of 3/16% per year. At
December 31, 1998, the Company had no outstanding borrowing under this
agreement.
There are no covenants in the revolving credit agreement which
significantly limit the dividend payment capability of the Company, and the
Company does not expect to include any such covenants in future offerings under
the Shelf Registration. In addition, there are no significant restrictions on
the payment of dividends by the subsidiaries and affiliates of the Company.
In 1989, the Company created an Employee Stock Ownership Plan (ESOP). The
ESOP borrowed $63.5 million at an interest rate of 8.5% and $7.0 million at an
adjustable interest rate in 10-year loans guaranteed by the Company. Interest
paid by the ESOP totaled $0.9 million, $1.7 million and $2.4 million in 1998,
1997 and 1996, respectively. The Company has reflected the guaranteed ESOP
borrowings as a loan guarantee on its balance sheet with a like amount of
"Guaranteed ESOP Obligation" recorded as a reduction of shareholders' equity. As
the Company and its employees make contributions to the ESOP, these
contributions, plus the dividends paid on the Company's preferred stock held by
the ESOP, are used to service the borrowings. As the principal amounts of the
loans are repaid, the "Guaranteed ESOP Obligation" is reduced accordingly.
Capitalized interest was $0.6 million, $0.5 million and $0.6 million in
1998, 1997 and 1996, respectively.
The maintenance of minimum cash balances is informally agreed to with
certain banks as a result of loans, commitments and services rendered. Cash
balances maintained to meet operating needs on a daily basis are sufficient to
satisfy these informal agreements. These balances are available for use by the
Company and its subsidiaries at all times and do not contain legal restrictions.
Cash in excess of such operating requirements is invested in short-term
securities.
<PAGE> 36
5. STOCK PLANS
The Company maintains the following stock plans for the benefit of its
employees: a stock option plan, a performance share plan and a savings and stock
ownership plan which includes an investment savings plan and an ESOP.
The stock option plan provides for the issuance of stock options at no
less than the then current market price. Stock options have a maximum term of 10
years and vest evenly over four years.
Information pertaining to these stock options is shown below:
<TABLE>
<CAPTION>
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Shares granted 642,935 682,942 584,273
Average option price $23.58 19.56 15.91
Shares exercised 277,139 379,149 79,536
Average option price $12.96 11.18 8.63
Shares which became
exercisable 461,739 363,454 241,341
Average option price $18.29 17.85 19.02
Shares unexercised
at year-end 2,820,764 2,478,641 2,200,199
Option price range
per share $8.89 8.89 6.52
to $29.25 to 22.67 to 22.67
Shares cancelled 23,673 25,304 23,224
Shares available
for granting
future options 1,377,273 1,996,535 2,654,174
===========================================================
</TABLE>
Significant option groups outstanding at December 31, 1998 and the
related weighted-average price for the exercisable options and remaining life
information are as follows:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
- ----------------------------------------------------------
Range of Average Remain- Average
exercise exerciseing average exercise
prices Shares pricelife (years) Shares price
- ---------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$26-30 33,500 $28.60 10 -- $--
22-26 745,045 22.96 8 139,500 22.67
18-22 982,602 19.82 7 863,486 20.42
10-18 976,488 15.65 5 652,131 15.56
8-10 83,129 8.89 2 83,129 8.89
- ---------------------------------------------------------
$ 8-30 2,820,764 $18.99 7 1,738,246 $18.23
=========================================================
</TABLE>
All options were granted at an exercise price equal to the fair market
value of the Company's common stock at the date of grant. The weighted-average
fair market value at date of grant for options granted during 1998, 1997 and
1996 were $8.16, $6.89 and $6.18 per option, respectively. The fair value of
options at date of grant was estimated using the Black-Scholes model with the
following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Expected life (years) 8.5 8.5 10
Interest rate 5.85% 5.84% 6.25%
Volatility 25.25 25.25 26.40
Dividend yield 1.88 1.88 1.92
- ---------------------------------------------------------
</TABLE>
On a pro forma basis, had compensation cost for the Company's stock
option plan been determined based on the fair value at the grant date consistent
with the provisions of Statement of Accounting Standards No. 123, "Accounting
for Stock-Based Compensation," the Company's net income and earnings per share
would have been reduced to the pro forma amounts shown below:
<TABLE>
<CAPTION>
1998 1997 1996
- -------------------------------------------------------------
<S> <C> <C> <C>
Net income (loss)
as reported $69,282 (37,277) 54,586
Net income (loss)
pro forma 67,013 (39,138) 53,770
Income (loss) per share
(diluted) as reported $ 1.67 (1.08) 1.21
Income (loss) per share
(diluted) pro forma 1.61 (1.13) 1.19
=============================================================
</TABLE>
The pro forma effects on net income (loss) are not representative of the
pro forma effects on net income in future years because they do not take into
consideration pro forma compensation expense related to grants made prior to
1996.
The Company maintains a performance share plan whereby awards,
expressed as shares of common stock of the Company, are earned only if the
Company meets specific performance targets over a three-year period. The plan
pays 50% cash and 50% common stock for the value of any earned performance
shares. Performance share awards in the amount of 832,007 shares, 601,802 shares
and 243,479 shares were outstanding at the end of 1998, 1997 and 1996,
respectively. The Company accrues amounts based on performance reflecting the
value of cash and common stock, which is anticipated to be earned. The effect of
the plan was to reduce income by $3.5 million, $2.7 million and $0.6 million in
1998, 1997 and 1996, respectively.
The ESOP provides for the Company to match eligible employee pre-tax
savings. Amounts expensed under the ESOP were $3.5 million, $3.3 million and
$2.9 million in 1998, 1997 and 1996, respectively.
6. CAPITAL STOCK
In 1989, Ferro issued 1,520,215 shares of 7% Series A ESOP Convertible
Preferred Stock to National City Bank, trustee for the Ferro ESOP. The shares
were issued at a price of $46.375 per share for a total consideration of $70.5
million. Each share of ESOP convert-
34/35
<PAGE> 37
ible preferred stock is convertible into 2.5988 shares of common stock. As the
loans are repaid by the trustee, preferred shares are allocated to participating
individual employee accounts. The Company is required to repurchase at the
original issue price, for cash or common stock at the Company's option, the
preferred shares allocated to an employee's ESOP account upon distribution of
such account to the employee unless such shares have been converted to common
stock. Each preferred share carries one vote, voting together with the common
stock on most matters.
On January 26, 1996, the Board of Directors authorized the repurchase of
up to 3,000,000 shares of Ferro common stock in addition to any previously
authorized shares. These shares are to be purchased on the open market from time
to time.
On January 23, 1998, the Board of Directors authorized the repurchase of
up to 5,000,000 shares of Ferro common stock in addition to any previously
authorized shares. These shares are to be purchased on the open market from time
to time.
The Company purchased 2,595,482 shares of common stock in 1998 at an
aggregate cost of $64.2 million; 1,346,627 shares of common stock in 1997 at an
aggregate cost of $43.3 million; and 1,455,015 shares of common stock in 1996 at
an aggregate cost of $39.3 million. At December 31, 1998, the Company had
remaining authorization to acquire 2,967,912 shares under the then current
treasury stock purchase program.
The Company maintains a Shareholder Rights Plan ("the Plan") whereby,
until the occurrence of certain events, each share of the outstanding common
stock represents ownership of one right (Right). The Rights become exercisable
only if a person or group acquires 20% or more of the Company's common stock
(10% under certain circumstances) or commences a tender or exchange offer upon
consummation of which such person or group would control 20% or more of the
common shares or is declared an Adverse Person (as defined in the Plan) by the
Board of Directors. The Rights, which do not have the right to vote or receive
dividends, expire on April 8, 2006. Rights may be redeemed by the Company at
$0.03 1/3 per Right at any time until the 15th day following public announcement
that a person or group has acquired 20% or more of the voting power, unless such
period is extended by the Board of Directors while the Rights are redeemable.
If any person becomes the owner of 20% or more of the common stock (10%
under certain circumstances), or if the Company is the surviving corporation in
a merger with a 20% or more stockholder and its common shares are not changed or
converted, or if a 20% or more stockholder engages in certain self-dealing
transactions with the Company, then each Right not owned by such person or
related parties will entitle its holder to purchase shares of common stock at a
purchase price of 50% of the then current market price of the common stock up to
a value of $73.33 per Right.
In the event the Company engages in a merger or other business
combination transaction in which the Company is not the surviving corporation or
the Company is the surviving corporation but its common stock is changed or
exchanged or 50% or more of the Company's assets or earning power is sold or
transferred, each holder of a Right shall have the right to receive, upon
exercise thereof at the then current exercise price of the Right, that number of
shares of common stock of the surviving company which at the time of the
transaction would have a market value of two times the exercise price of the
Right.
7. EARNINGS PER SHARE COMPUTATION
Information concerning the calculation of basic and diluted earnings per
share (EPS) is shown below:
<TABLE>
<CAPTION>
(in thousands, except EPS) 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Basic EPS
Computation
Numerator:
Net income (loss)
available $65,493 (41,034) 50,851
Denominator:
Weighted-average
common shares
outstanding 36,419 38,132 39,507
- -----------------------------------------------------------
Basic EPS $ 1.80 (1.08) 1.29
- -----------------------------------------------------------
Diluted EPS
Computation
Numerator:
Net income (loss)
available $65,493 (41,034) 50,851
Convertible
preferred stock 2,205 (a) 1,862
Net income (loss)
assuming
conversion $67,698 (41,034) 52,713
Denominator:
Weighted-average
common shares
outstanding 36,419 38,132 39,507
Convertible
preferred stock 3,247 (a) 3,528
Options 813 (a) 382
Total shares 40,479 38,132 43,417
- -----------------------------------------------------------
Diluted EPS $ 1.67 (1.08) 1.21
===========================================================
</TABLE>
(a) Use basic EPS since conversion of preferred shares and options would be
anti-dilutive.
<PAGE> 38
8. ACQUISITIONS AND DIVESTITURES
In May 1998, the Company acquired the assets of Ningbo Powder Coatings
Company Ltd., located in the People's Republic of China. This transaction was
not material to Ferro.
In March 1998, the Company sold a majority of its shares in Ferro
Ecuatoriana S.A., located in Ecuador. The results of this operation were not
material to Ferro.
In July 1997, the Company sold the remaining interest in Nissan-Ferro
Organic Chemical Company, Ltd., located in Japan. The results of this operation
were not material to Ferro.
In January 1996, the Company purchased the remaining interest in Ferro
Industrias Quimicas S.A., located in Portugal. In November 1996, the Company
purchased Ceramica Technica Industrial S.A. of Spain. Neither of these
transactions was material to Ferro.
In October 1996, the Company sold the
dispersions portion of Synthetic Products Company (Synpro) acquired in October
1995 from Cookson Group plc. The Company also sold two small plastics operations
located in Canada. The results of these operations were not material to Ferro.
The Company sold or closed operations representing annual sales of $1.7
million, $16.8 million, and $31.3 million in 1998, 1997 and 1996, respectively.
9. CONTINGENT LIABILITIES
In 1994, the Company's Keil Chemical Division (Keil) settled an
enforcement proceeding brought by the Indiana Department of Environmental
Management (IDEM) concerning air emissions from Keil's Pyro-Chek(R) process. The
settlement was in the form of an Agreed Order with IDEM. The Agreed Order
confirmed the Company's plans to install additional controls and imposed certain
aggregate limitations on air emissions from the Pyro-Chek(R) production process
while the Company applied for and obtained a construction and operating permit
for the existing air source. The control equipment was installed, but the
Company has had a continuing disagreement with the agency over whether it has
been in compliance with the Agreed Order, including which methods should be used
to demonstrate compliance.
In November 1998, IDEM filed suit in Indiana state court seeking to shut
down operation of the
Pyro-Chek(R) process. At a hearing held on December 4, 1998, the court denied
IDEM's request for a preliminary injunction, and later dismissed the claim for a
permanent injunction on grounds that the dispute arising out of the Agreed Order
should be addressed before the Indiana Office of Environmental Adjudication. The
day before this hearing, IDEM denied Keil's application for a permit for air
emissions for the Pyro-Chek(R) process. The Company appealed IDEM's denial of
Keil's permit application to the Indiana Office of Environmental Adjudication.
On December 29, 1998, IDEM wrote to the Company alleging that because
Keil is in violation of the Agreed Order, operation of the Pyro-Chek(R) process
is prohibited, and that the Company will be subject to fines of up to $25,000
for each day of continued operation. The Company filed a petition for review
before the Indiana Office of Environmental Adjudication seeking to confirm that
operation of the Pyro-Chek(R) process has been and remains in compliance with
the Agreed Order.
A hearing date has not yet been scheduled for either petition before the
Indiana Office of Environmental Adjudication. Accordingly, the Company is unable
at this time to determine if any potential liability exists, and if it does,
cannot estimate what that liability may be. If the State of Indiana were to
prevail on all of its claims, it could have a material adverse effect on the
operating results and financial condition of the Company.
There are also pending against the Company and its consolidated
subsidiaries various other lawsuits and claims. In the opinion of management,
the ultimate liabilities resulting from such other lawsuits and claims will not
materially affect the consolidated financial position or results of operations
or liquidity of the Company.
10. RESEARCH AND DEVELOPMENT EXPENSE
Amounts expended for development or significant improvement of new and/or
existing products, services and techniques approximated $29.4 million, $26.6
million and $23.8 million in 1998, 1997 and 1996, respectively.
36/37
<PAGE> 39
11. RETIREMENT BENEFITS
Information concerning the pension and other postretirement benefit plans
of the Company and consolidated subsidiaries is as follows:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Change in benefit obligation
Benefit obligation at beginning of year $242,733 220,893 $ 35,253 38,284
Service cost 7,363 6,658 777 671
Interest cost 16,808 16,118 2,515 2,479
Amendments 347 68 -- --
Effect of curtailment gain (loss) (737) -- -- --
Plan participants' contributions 468 484 -- --
Benefits paid (11,206) (10,504) (1,822) (1,881)
Actuarial loss (gain) 21,873 20,406 1,747 (4,300)
Exchange rate effect 2,644 (11,390) -- --
- ----------------------------------------------------------------------------------------------------------------------
Benefit obligation at end of year 280,293 242,733 38,470 35,253
- ----------------------------------------------------------------------------------------------------------------------
Change in plan assets
Fair value of plan assets at beginning of year 220,575 200,955 -- --
Actual return on plan assets 21,702 33,015 -- --
Employer contribution 3,516 3,351 1,822 1,881
Plan participants' contributions 468 484 -- --
Benefits paid (11,206) (10,504) (1,822) (1,881)
Exchange rate effect 2,981 (6,726) -- --
- ----------------------------------------------------------------------------------------------------------------------
Fair value of plan assets at end of year 238,036 220,575 -- --
- ----------------------------------------------------------------------------------------------------------------------
Funded status (42,257) (22,158) (38,470) (35,253)
Unrecognized net actuarial loss 8,703 (9,822) (6,255) (8,331)
Unrecognized prior service cost 7,194 8,592 (701) (878)
- ----------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (26,360) (23,388) $(45,426) (44,462)
=========================================================================================================================
Amounts recognized in the statement of financial position consist of:
Prepaid benefit cost $ 3,099 1,396 $ -- --
Accrued benefit liability (39,971) (33,420) (45,426) (44,462)
Intangible asset 4,111 4,587 -- --
Accumulated other comprehensive income 6,401 4,049 -- --
- ----------------------------------------------------------------------------------------------------------------------
Net amount recognized $ (26,360) (23,388) $(45,426) (44,462)
- ----------------------------------------------------------------------------------------------------------------------
Weighted-average assumptions as of December 31
Discount rate 6.50% 7.08% 6.84% 7.33%
Expected return on plan assets 8.10% 8.38% N/A N/A
Rate of compensation increase 4.1% 4.2% N/A N/A
=========================================================================================================================
</TABLE>
For measurement purposes, a 7.81% increase in the cost of covered health
care benefits was assumed for 1999, gradually decreasing to 4% for 2015 and
later years.
<PAGE> 40
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
- ---------------------------------------------------------------------------------------------------------------------
(dollars in thousands) 1998 1997 1996 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Components of net periodic cost
Service cost $ 7,363 6,658 6,477 $ 777 671 715
Interest cost 16,808 16,118 15,526 2,515 2,479 2,820
Expected return on plan assets (18,208) (16,513) (15,791) -- -- --
Amortization of prior service cost 1,278 1,276 1,209 (177) (177) (177)
Net amortization and deferral (282) (336) (327) (330) (507) (15)
Curtailment effect (609) -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------------------
Net periodic pension cost $ 6,350 7,203 7,094 $2,785 2,466 3,343
======================================================================================================================
</TABLE>
Costs for defined contribution pension plans were $0.6 million in 1998,
1997 and 1996.
The projected benefit obligation, accumulated benefit obligation, and
fair value of plan assets for the pension plans with accumulated benefit
obligations in excess of plan assets were $42.2 million, $40.7 million and $16.2
million, respectively, as of December 31, 1998, and $34.3 million, $33.1 million
and $12.2 million, respectively, as of December 31, 1997.
A one-percentage point change in assumed health care cost trend rates
would have the following effect:
1-Percentage 1-Percentage
(dollars in thousands) Point Increase Point Decrease
- ----------------------------------------------------------
Effect on total of service
and interest cost
component $ 246 (224)
Effect on postretirement
benefit obligation $3,030 (2,756)
- ----------------------------------------------------------
12. INCOME TAX EXPENSE
Income tax expense (benefit) is comprised of the
following components:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Current:
U.S. federal $19,583 21,958 18,641
Foreign 20,753 14,354 12,968
State and local 3,416 3,758 3,345
- ----------------------------------------------------------
43,752 40,070 34,954
- ----------------------------------------------------------
Deferred:
U.S. federal (1,381) (25,173) (588)
Foreign (774) (21,908) (663)
State and local (398) (4,182) (82)
- ----------------------------------------------------------
(2,553) (51,263) (1,333)
Total income tax $41,199 (11,193) 33,621
- ----------------------------------------------------------
</TABLE>
In addition to the 1998 income tax expense of $41,199, certain tax
benefits of $2.2 million were allocated directly to shareholders' equity.
The above taxes are based on earnings before income taxes. These
earnings (losses) aggregated $60.7 million, $(14.5) million and $53.7 million
for domestic operations and $49.8 million, $(34.0) million and $34.5 million for
foreign operations in 1998, 1997 and 1996, respectively.
A reconciliation of the statutory federal income tax rate and the
effective tax rate follows:
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Statutory federal income
tax rate 35.0% (35.0) 35.0
Realignment charge -- 7.2 --
Foreign tax rate difference 2.3 1.6 0.4
U.S. taxes on dividends
from subsidiaries 0.4 1.4 0.9
Foreign sales corporation (1.0) (0.3) --
State and local taxes
net of federal 1.8 3.9 2.4
Miscellaneous (1.2) (1.9) (0.6)
- ---------------------------------------------------------
Effective tax rate 37.3% (23.1) 38.1
=========================================================
</TABLE>
38/29
<PAGE> 41
The components of deferred tax assets and liabilities at
December 31 were:
<TABLE>
<CAPTION>
(dollars in thousands) 1998 1997
- ---------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Realignment reserves $24,434 31,865
Pension and other
benefit programs 29,502 25,466
Accrued liabilities 5,680 6,577
Net operating loss carryforwards 8,342 8,628
Inventories 3,730 4,342
Other 11,409 10,117
- --------------------------------------------------------
Total deferred tax assets $83,097 86,995
- --------------------------------------------------------
Deferred tax liabilities:
Property and equipment -
depreciation and amortization 14,211 11,143
Other -- 111
- --------------------------------------------------------
Total deferred tax liabilities $14,211 11,254
- --------------------------------------------------------
Net deferred tax asset before
valuation allowance 68,886 75,741
Valuation allowance (6,475) (8,678)
- --------------------------------------------------------
Net deferred tax asset $62,411 67,063
========================================================
</TABLE>
At December 31, 1998, the Company's foreign subsidiaries had deferred tax
assets relating to net operating loss carryforwards for income tax purposes of
$8.3 million that expire in years 1999 through 2002, and in three instances have
no expiration period. For financial reporting purposes, a valuation allowance of
$1.8 million has been recognized to offset the deferred tax assets relating to
the net operating loss carryforwards.
In connection with the 1997 realignment charge, a valuation allowance in
the amount of $4.7 million has been recognized to offset the deferred tax assets
relating to the realignment charge.
Of the total deferred tax assets, $32.3 million and $34.0 million were
classified as current at December 31, 1998 and 1997, respectively.
Undistributed earnings of the Company's foreign subsidiaries amounted to
approximately $99.7 million. Deferred income taxes are not provided on these
earnings as it is intended that the majority of these earnings are indefinitely
invested in these entities.
13. REPORTING FOR SEGMENTS
Effective for the year ended December 31, 1998, the Company adopted
Statement of Financial Accounting Standards No. 131, "Disclosures About Segments
of an Enterprise and Related Information," requiring that companies disclose
segment data based on how management makes resource allocation decisions and
evaluates segment operating performance.
In applying the Statement, the Company considered its operating and
management structure and the types of information subject to regular review by
its "chief operating decision maker." On this basis, the Company's reportable
segments include Coatings, Chemicals and Plastics. The segment disclosures are
presented on this new basis for 1998, as well as retroactively. The Coatings
segment is an aggregation of the Company's Ceramics and Colorants and Industrial
Coatings operating segments.
Principal products from which the Coatings segment derives its revenues
are ceramic glaze coatings, inorganic color, powder and porcelain enamel
coatings. The Chemicals segment generates its revenues through the sale of
polymer and petroleum additives as well as industrial specialties. Revenues for
the Plastics segment result primarily from the sale of plastic colorants and
filled and reinforced plastics.
The accounting policies of the segments are consistent with those
described for the consolidated financial statements in the summary of
significant accounting policies (see Note 1). The Company measures segment
profit for internal reporting purposes as net operating profit before interest
and tax. Excluded from net operating profit are such items as realignment
charges and unallocated corporate expenses. A complete reconciliation of segment
income to consolidated income before tax is presented below.
Sales to external customers are presented in the following chart.
Intersegment sales are not material.
<TABLE>
<CAPTION>
(dollars in millions) 1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Net sales
Coatings $ 817.8 815.4 781.0
Chemicals 305.3 328.0 336.7
Plastics 238.7 237.9 238.0
- -----------------------------------------------------------
Total $1,361.8 1,381.3 1,355.7
===========================================================
</TABLE>
<PAGE> 42
<TABLE>
<CAPTION>
Income and reconciliation to income (loss) before taxes follows:
1998 1997 1996
- -----------------------------------------------------------
<S> <C> <C> <C>
Coatings $ 89.3 84.2 78.7
Chemicals 36.4 32.4 26.7
Plastics 22.2 18.1 15.8
- -----------------------------------------------------------
Segment income 147.9 134.7 121.2
Unallocated expenses 18.7 15.1 15.4
Realignment charge -- 152.8 --
Interest expense 15.3 12.2 13.0
Interest earned (2.9) (2.3) (2.5)
Foreign currency (0.9) (2.2) (0.8)
Miscellaneous-net 7.2 7.6 7.9
- -----------------------------------------------------------
Income (loss)
before taxes $110.5 (48.5) 88.2
===========================================================
</TABLE>
Unallocated expenses consist primarily of corporate costs. Had
realignment costs been charged to segments, 1997 segment income would have been
reduced by $70.6 million in Coatings, $52.6 million in Chemicals and $18.4
million in Plastics.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Depreciation &
amortization
Coatings $ 25.7 25.8 27.1
Chemicals 10.8 12.2 14.4
Plastics 4.6 5.2 6.1
- ---------------------------------------------------------
Segment depreciation
and amortization 41.1 43.2 47.6
Other 2.0 1.8 2.0
- ---------------------------------------------------------
Total consolidated $ 43.1 45.0 49.6
=========================================================
Assets
Coatings $452.4 403.9 450.8
Chemicals 163.2 163.5 218.1
Plastics 83.1 75.4 83.0
- ---------------------------------------------------------
Segment assets 698.7 642.8 751.9
Other assets 150.5 142.9 118.6
- ---------------------------------------------------------
Total consolidated $849.2 785.7 870.5
=========================================================
</TABLE>
Segment assets consist of trade receivables, inventories, intangibles,
and property, plant and equipment net of applicable reserves. Other assets
include cash, deferred taxes and other items.
<TABLE>
<CAPTION>
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Expenditures for
long-lived assets
Coatings $38.7 29.0 39.0
Chemicals 9.0 11.2 13.1
Plastics 6.8 3.7 4.2
- ----------------------------------------------------------
Total $54.5 43.9 56.3
==========================================================
</TABLE>
<TABLE>
<CAPTION>
Geographic information follows:
1998 1997 1996
- ----------------------------------------------------------
<S> <C> <C> <C>
Net sales
United States
and Canada $ 737.3 748.6 733.9
Europe 445.9 436.6 439.7
Latin America 107.3 112.3 97.1
Asia-Pacific 71.3 83.8 85.0
- ----------------------------------------------------------
Total $1,361.8 1,381.3 1,355.7
==========================================================
</TABLE>
Geographic revenues are based on region in which the customer invoice
was generated. The United States of America is the single largest country for
customer sales. No other single country represents greater than 10% of
consolidated sales.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Segment income
United States
and Canada $ 82.8 78.1 67.7
Europe 50.7 42.3 40.3
Latin America 8.2 7.5 8.1
Asia-Pacific 6.2 6.8 5.1
- ---------------------------------------------------------
Total $147.9 134.7 121.2
=========================================================
</TABLE>
Had realignment costs been charged to geographic regions in 1997, segment
income in the United States and Canada, Europe, Latin America and Asia-Pacific
would have been reduced by $59.3 million, $39.6 million, $19.9 million and $22.8
million, respectively.
<TABLE>
<CAPTION>
1998 1997 1996
- ---------------------------------------------------------
<S> <C> <C> <C>
Long-lived assets
United States
and Canada $218.4 207.0 251.0
Europe 84.3 69.8 105.7
Latin America 9.2 10.1 14.7
Asia-Pacific 12.8 7.6 29.3
- ---------------------------------------------------------
Total $324.7 294.5 400.7
=========================================================
</TABLE>
Except for the United States of America, no single country has greater
than 10% of consolidated long-lived assets.
40/41
<PAGE> 43
14. FINANCIAL INSTRUMENTS
The carrying amounts of cash and cash equivalents, trade receivables,
other current assets, accounts payable and amounts included in investments and
accruals meeting the definition of a financial instrument approximate fair
value.
It is the Company's hedging policy to neutralize or mitigate the
potentially negative effects of currency movements and raw material prices. The
Company's use of derivative financial instruments is limited to the hedging of
underlying exposures. The Company does not engage in speculative transactions
for trading purposes.
The Company uses forward exchange contracts and currency options to hedge
its exposure to foreign currency fluctuations. Several of the Company's foreign
subsidiaries enter into forward contracts to protect against the risk of
increased cost of non-local currency-denominated raw materials. The most
prevalent transactions involve the purchase of U.S. dollars against Dutch
guilders and Spanish pesetas. The maturity of the hedges is consistent with the
underlying exposure, generally not beyond one year. At December 31, 1998, the
market value of such forward contracts was $7.1 million, compared with a
contract value of $7.1 million.
The Company enters into foreign currency options to protect the U.S.
dollar value of profits generated by certain European operations. Such activity
involves the purchase of put options for the Dutch guilder, German mark, Spanish
peseta and French franc against the U.S. dollar. The maturity of the options is
generally under one year. At December 31, 1998, the face value or notional
amount of all outstanding currency options was $16.4 million. If liquidated at
year-end 1998, these options would have produced a cash amount of $0.2 million
versus an unamortized cost of $0.3 million.
The Company enters into selective foreign currency forward contracts to
protect the U.S. dollar value of certain intercompany loans or subsidiary
currency exposures. Such activities involve the forward sale of foreign
currencies against the U.S. dollar. The maturity date of the forward contract is
usually under one year. At December 31, 1998, the contract value of all
outstanding forward contracts was $13.0 million. If liquidated at year-end 1998,
these forward contracts would have produced a cash loss amount of $0.9 million.
All forward contract, option and hedging activity is executed with major
reputable multinational financial institutions. Accordingly, the Company does
not anticipate counterparty default.
15. LEASE COMMITMENT
In 1995, in conjunction with the Synthetic Products Company acquisition,
the Company entered into a five-year operating lease agreement for certain land,
buildings, machinery and equipment. The Company has the option to purchase the
assets at the end of the lease term for a price of $29.6 million. In the event
the Company chooses not to exercise this option, the Company is obligated to
pay, or is entitled to receive from the lessor, the difference between the net
sales proceeds and the outstanding lease balance.
Rentals are based on floating rates, and the total annual lease payments,
based on the amount outstanding as of December 31, 1998, are estimated to be
$1.8 million.
<PAGE> 44
Independent Auditors' Report
Ferro Corporation and subsidiaries
To the Shareholders and Board of Directors of Ferro Corporation
We have audited the accompanying consolidated balance sheets of Ferro
Corporation and subsidiaries as of December 31, 1998 and 1997 and the related
consolidated statements of income, shareholders' equity, and cash flows for each
of the years in the three-year period ended December 31, 1998. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Ferro
Corporation and subsidiaries at December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG LLP
KPMG LLP
Cleveland, Ohio
January 25, 1999
42/43
<PAGE> 45
Quarterly Data (Unaudited)
Ferro Corporation and subsidiaries
(dollars in thousands except per share data)
<TABLE>
<CAPTION>
Per common share
-------------------------------
Net Basic Diluted
Gross income earnings earnings Cash Common stock
Quarter Net sales profit (loss) (loss) (loss) dividends price range
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 1 $ 339,763 90,141 17,055 0.43 0.40 0.120 $30.125-22.438
2 348,004 92,551 18,402 0.47 0.44 0.120 29.750-23.875
3 334,388 89,965 16,762 0.44 0.41 0.120 25.875-18.000
4 339,689 91,604 17,063 0.46 0.42 0.135 29.250-18.563
- ----------------------------------------------------------------------------------------------------------------------
Total $1,361,844 364,261 69,282 1.80 1.67 0.495
- ----------------------------------------------------------------------------------------------------------------------
1997 1 $ 342,197 86,427 15,194 0.37 0.35 0.103 $21.583-18.667
2(a) 363,045 92,881 (83,946) (2.21) (2.21) 0.103 25.917-18.833
3 338,957 86,778 15,364 0.38 0.35 0.103 26.042-23.583
4 337,081 87,125 16,111 0.40 0.38 0.120 26.667-22.438
- ----------------------------------------------------------------------------------------------------------------------
Total(a) $1,381,280 353,211 (37,277) (1.08) (1.08) 0.430
=======================================================================================================================
</TABLE>
Per share data has been adjusted to reflect a 3-for-2 split in November 1997.
The common stock of the Company is listed on the New York Stock Exchange. Ticker
Symbol: FOE
At January 31, 1999, the Company had 2,510 holders of its common stock.
The Company's total earnings per share for 1997 differ from the sum of the
quarterly amounts because of the effect of anti-dilutive securities in the
second quarter 1997 calculation and due to rounding differences and changes in
the basis of shares used to calculate earnings per share.
(a) Included in 1997 is a pre-tax realignment charge of $152.8 million,
which on an after-tax basis is $100.0 million, or $2.52 per share.
Excluding the realignment charge, net income for 1997 would have been
$62.7 million, or $1.44 per common share.
<PAGE> 46
Selected Financial Data
Ferro Corporation and subsidiaries
<TABLE>
<CAPTION>
Years ended December 31, 1988
through 1998 (dollars in thousands except per
share data
and sales per employee data) 1998 1997 1996 1995 1994
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
OPERATING RESULTS (a)
Net sales $ 1,361,844 1,381,280 1,355,685 1,322,954 1,194,247
Income (loss) before taxes and
cumulative effect of changes
in accounting principles 110,481 (48,470) 88,207 80,159 74,306
Income tax expense (benefit) $ 41,199 (11,193) 33,621 30,905 26,912
Net income (loss) $ 69,282 (37,277) 54,586 49,254 47,394
Income as a percent of sales before
cumulative effect of changes in
accounting principles 5.1% -- 4.0% 3.7% 4.0%
RETURN ON AVERAGE
SHAREHOLDERS' EQUITY 24.9% -- 14.2% 13.2% 13.1%
PER COMMON SHARE DATA (a,b)
Average shares outstanding 36,419,090 38,131,631 39,506,572 41,419,578 42,745,959
Basic earnings $ 1.80 (1.08) 1.29 1.10 1.02
Diluted earnings 1.67 (1.08) 1.21 1.04 0.97
Cash dividends 0.495 0.43 0.39 0.36 0.36
Book value 8.02 7.32 9.99 9.49 8.79
FINANCIAL CONDITION AT YEAR-END
Current assets $ 456,893 427,030 416,522 433,530 415,415
Current liabilities 282,556 277,707 252,333 258,472 228,336
- ---------------------------------------------------------------------------------------------------------------------
Working capital 174,337 149,323 164,189 175,058 187,079
- ---------------------------------------------------------------------------------------------------------------------
Plant and equipment 641,644 561,181 683,129 653,352 601,594
Accumulated depreciation
and amortization 367,592 321,001 375,746 364,064 313,005
- ---------------------------------------------------------------------------------------------------------------------
Net plant and equipment 274,052 240,180 307,383 307,288 288,589
- ---------------------------------------------------------------------------------------------------------------------
Other assets 118,220 118,469 146,563 136,294 97,372
Total assets 849,165 785,679 870,468 872,112 801,376
Long-term liabilities 156,283 102,020 105,308 104,910 77,611
ESOP loan guarantee 4,067 13,815 22,592 30,470 37,503
Postretirement liabilities 45,426 44,462 44,846 43,570 42,076
Other non-current liabilities 77,572 74,524 61,185 57,540 49,106
Shareholders' equity 283,261 273,151 384,204 382,150 366,744
PLANT AND EQUIPMENT
Capital expenditures and
acquisitions 64,420 45,129 50,592 60,733 63,404
Depreciation 38,650 39,421 42,283 40,233 37,076
EMPLOYEES
Number (year-end) 6,693 6,851 6,912 6,914 6,817
Sales per employee $ 203,473 201,617 196,135 191,344 175,187
=====================================================================================================================
</TABLE>
44/45
<PAGE> 47
<TABLE>
<CAPTION>
1993 1992 1991 1990 1989 1988
- --------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1,065,748 1,097,793 1,056,940 1,124,833 1,083,573 1,008,990
89,289 97,689 20,349 43,509 83,764 88,436
31,784 38,861 15,532 24,090 34,016 41,816
36,955 58,828 4,817 19,419 49,748 46,620
5.4% 5.4% 0.5% 1.7% 4.6% 4.6%
16.3% 18.1% 1.6% 6.4% 16.8% 16.8%
43,601,090 43,301,822 42,689,787 43,074,468 45,695,063 46,327,196
0.77 1.29 0.04 0.38 1.04 1.01
0.73 1.18 0.04 0.35 0.97 --
0.34 0.30 0.29 0.29 0.27 0.21
8.21 7.95 7.11 7.18 6.80 6.35
411,253 414,927 405,740 386,704 408,692 356,972
198,958 205,043 212,575 221,155 210,059 194,171
- ------------------------------------------------------------------------------------------
212,295 209,884 193,165 165,549 198,633 162,801
- ------------------------------------------------------------------------------------------
538,188 497,561 511,605 519,044 446,290 399,785
280,367 269,998 276,885 263,114 226,268 202,563
- ------------------------------------------------------------------------------------------
257,821 227,563 234,720 255,930 220,022 197,222
- ------------------------------------------------------------------------------------------
98,820 54,055 31,465 43,029 40,417 33,946
767,894 696,545 671,925 685,663 669,131 588,140
79,349 53,210 55,658 58,047 60,764 63,163
44,076 50,897 57,229 62,649 68,020 --
40,096 -- -- -- -- --
46,618 42,422 41,176 38,210 33,219 35,472
358,797 344,973 305,287 305,602 297,069 295,334
75,037 48,761 39,005 61,408 53,471 53,753
33,812 33,451 32,686 30,389 27,574 24,696
6,627 6,535 7,266 8,205 8,045 8,374
160,820 167,990 145,460 137,090 134,690 120,490
=========================================================================================
</TABLE>
(a) Included in 1997 is a pre-tax realignment charge of $152.8 million,
which on an after-tax basis is $100.0 million, or $2.52 per common
share. Excluding the realignment charge, net income for 1997 would have
been $62.7 million, or $1.44 per common share. Included in 1993 is a
pre-tax charge of $3.0 million, which on an after-tax basis is $1.8
million, or $0.04 per common share. Also included in 1993 is the
cumulative effect of accounting changes of $20.6 million, which on an
after-tax basis is $0.47 per common share. Included in 1991 is a
pre-tax restructuring charge of $45.3 million, which on an after-tax
basis is $31.7 million, or $0.74 per common share. A litigation charge
of $12.0 million is included in 1990, which on an after-tax basis is
$7.9 million, or $0.18 per common share. Excluding the charges in 1991
and 1990, net income for 1991 would have been $36.5 million, or $0.78
per common share, and net income for 1990 would have been $27.3
million, or $0.56 per common share.
(b) Basic earnings per share are based on a weighted average of common
shares outstanding. Diluted earnings per share further reflect the
potential dilution of earnings per share, assuming that certain stock
options whose exercise price is less than the average market price for
the stock are exercised and that convertible preferred shares are
converted into common shares. Book value is based on outstanding common
shares and net worth at the end of the year. Outstanding common shares
and per share data are adjusted to reflect the 3-for-2 stock split in
August 1989, 3-for-2 stock split in August 1992 and 3-for-2 stock split
in November 1997.
<PAGE> 48
Directors
SANDRA HARDEN AUSTIN (1994)
President and CEO, Austin
and Associates, a management
consulting firm; Former President
and Chief Executive Officer,
Sedona Healthcare Group, Inc.,
Age 51 [2,3,4]
ALBERT C. BERSTICKER (1978)
Chairman, Age 64 [3]
DR. GLENN R. BROWN (1988)
Retired Senior Vice President
and Director, Standard Oil
Company (now BP America),
Age 68 [1,2]
MICHAEL H. BULKIN (1998)
Private investor; Retired Director,
McKinsey & Company, a management consulting
firm, Age 60 [2]
WILLIAM E. BUTLER (1992)
Retired Chairman and Chief
Executive Officer, Eaton
Corporation, a manufacturer of
engineered products for automotive,
industrial, commercial and
military markets, Age 67 [2,3]
JOHN C. MORLEY (1987)
President, Evergreen Ventures, Ltd.;
Retired Director, President and
Chief Executive Officer, Reliance
Electric Company, a manufacturer
of industrial motors and controls,
mechanical power transmission
products and specialty telecommu-
nication systems and products,
Age 67 [1,3]
HECTOR R. ORTINO (1993)
President and Chief Executive
Officer, Age 56 [3]
REX A. SEBASTIAN (1986)
Private investor; Retired
Senior Vice President,
Operations, Dresser Industries,
a producer of energy and
industrial-related products
and services, Age 69 [3,4]
WILLIAM J. SHARP (1998)
President, Global Support
Operations, The Goodyear
Tire & Rubber Company,
a worldwide manufacturer
of tires, chemicals and
engineered products,
Age 57 [1, 4]
DENNIS W. SULLIVAN (1992)
Executive Vice President,
Parker Hannifin Corporation,
a manufacturer of fluid
power products, Age 60 [3,4]
Note: Figures in parentheses
indicate the year the Director
was elected to the Board.
Figures in brackets indicate
the Committee(s) on which
a Director serves.
[1] Audit
[2] Compensation & Organization
[3] Executive
[4] Finance
CORPORATE OFFICERS
ALBERT C. BERSTICKER (1958)
Chairman, Age 64
DAVID G. CAMPOPIANO (1989)
Vice President, Mergers and
Acquisitions, Age 49
MARK A. CUSICK (1995)
Secretary
Principal Occupation:
Partner, Squire, Sanders & Dempsey LLP,
Attorneys at Law, Age 50
R. JAY FINCH (1991)
Vice President, Specialty Plastics,
Age 57
JAMES F. FISHER (1959)
Senior Vice President, Ceramics
and Colorants, Age 61
J. Larry Jameson (1996)
Vice President, Industrial
Coatings, Age 61
KENT H. LEE, JR. (1996)
Vice President, Specialty Chemicals,
Age 57
CHARLES M. LESS (1995)
Vice President, Marketing,
Age 49
HECTOR R. ORTINO (1971)
President and Chief Executive Officer, Age 56
MILLICENT W. PITTS (1998)
Vice President, Global Operations
Support, Age 44
THOMAS O. PURCELL (1990)
Vice President, Chief Technical Officer, Age 54
PAUL V. RICHARD (1983)
Vice President, Human Resources,
Age 39
GARY H. RITONDARO (1986)
Vice President and Chief Financial
Officer, Age 52
Note: Figures in parentheses indicate the
year the Officer joined the Corporation.
46/47
<PAGE> 49
CORPORATE INFORMATION
AUTOMATIC DIVIDEND REINVESTMENT
AND STOCK PURCHASE PLAN
This Plan provides an opportunity for shareholders to purchase
additional shares of Ferro common stock by automatic reinvestment of dividends
and by optional additional periodic cash payments, without paying service
charges or brokerage commissions. These costs will be paid by Ferro.
The Plan is administered by National City Bank.
Any questions or correspondence about the Plan should be addressed to:
National City Bank
Corporate Trust Department
P.O. Box 92301
Cleveland, Ohio 44193-0900
216-476-8573
Toll free: 800-622-6757
BROKERAGE ACCOUNTS
To reduce communication delays that exist for some Ferro shareholders
who hold their stock in brokerage accounts, the Company will send its various
printed communications directly to these shareholders. If you would like to take
advantage of this service, please write to Treasury Department, Ferro
Corporation, 1000 Lakeside Avenue, P.O. Box 147000, Cleveland, Ohio 44114-7000,
U.S.A., indicating the number of Ferro shares owned and the name and address of
the brokerage firm that administers your account.
STOCK TRANSFER AGENT/REGISTRAR
AND DIVIDEND DISBURSING AGENT
National City Bank
P.O. Box 5756
Cleveland, Ohio 44101-0756
TRUSTEE 73/8%, 75/8%, 71/8%
AND 8% DEBENTURES
Chase Manhattan Trust Company
National Association
Chase Financial Tower
250 West Huron Road, Suite 220
Cleveland, Ohio 44113
INDEPENDENT AUDITORS
KPMG LLP
1500 National City Center
1900 East Ninth Street
Cleveland, Ohio 44114
EXCHANGE LISTING
New York Stock Exchange
Common Stock
Stock symbol: FOE
FORM 10-K
Ferro Corporation's Form 10-K filed with the Securities and Exchange
Commission for the year ended December 31, 1998 is available to shareholders
upon written request to:
Investor Relations
Ferro Corporation
1000 Lakeside Avenue
P.O. Box 147000
Cleveland, Ohio 44114-7000
or call 216-641-8585, ext. 2100
INVESTOR CONTACTS
Aidan Gormley, Manager,
Investor Relations, or
D. Thomas George, Treasurer
216-641-8580
ANNUAL MEETING
April 23, 1999, 9:00 a.m.
Great Lakes Science Center
Auditorium
601 Erieside Avenue
Cleveland, Ohio 44114
EXECUTIVE OFFICES
Ferro Corporation
1000 Lakeside Avenue
P.O. Box 147000
Cleveland, Ohio 44114-7000
216-641-8580
<PAGE> 50
WORLDWIDE OPERATING UNITS
UNITED STATES
Coatings
California, Georgia, New York,
Ohio, Pennsylvania, Tennessee
Plastics
Indiana, New Jersey, Ohio
Chemicals
Indiana, Louisiana, Ohio, Texas
EUROPE
France
Ferro France S.a.R.L.,
Ferro Chemicals S.A.
Germany
Ferro (Deutschland) GmbH,
Ruhr-Pulverlack GmbH
Great Britain
Ferro (Great Britain) Ltd.
Holland
Ferro (Holland) B.V.
Italy
Ferro (Italia) S.R.L.
Portugal
Ferro Industrias Quimicas, S.A.
Spain
Ferro Enamel Espanola, S.A.
Turkey
Ege-Ferro Kimya A.S. (49.9%)
LATIN AMERICA
Argentina
Ferro Enamel Argentina, S.A.I.C.y.M.
Brazil
Ferro Enamel do Brasil I.C.L.
Mexico
Ferro Mexicana S.A. de C.V.
Venezuela
Ferro de Venezuela, C.A. (51%)
ASIA-PACIFIC
Australia
Ferro Corporation (Australia) Pty. Ltd.
Indonesia
P.T. Ferro Mas Dinamika (55%)
Japan
Ferro (Japan) K.K.
People's Republic of China
Ferro (Ningbo) Powder
Coatings, Ltd.
Taiwan, Republic of China
Ferro Industrial Products
Limited
Ferro Toyo Co., Ltd. (60%)
Thailand
Ferro (Thailand) Co. Ltd. (49%)
Note: Percentages in parentheses
indicate Ferro's ownership.
[LOGO-FERRO] is a trademark of Ferro Corporation.
<PAGE> 51
FERRO CORPORATION 1000 LAKESIDE AVENUE CLEVELAND OHIO 44114 www.ferro.com
<PAGE> 1
EXHIBIT 21
LIST OF SUBSIDIARIES
<TABLE>
<CAPTION>
Sovereign power under
Name of Subsidiary* the laws of which organized
- --------------------------------------------------------------------------------
<S> <C>
Ferro Industrial Products Ltd. Canada
Ferro B.V. The Netherlands
Ferro (Holland) B.V. The Netherlands
Ferro France S.a.R.L. France
Ferro Plastics S.A. France
Ferro Chemicals S.A. France
Ruhr-Pulverlack G.m.b.H. Germany
Ferro Plastics (Germany) G.m.b.H. Germany
Ferro (Deutschland) G.m.b.H. Germany
Ferro (Italia) S.R.L. Italy
Ferro Industrias Quimicas S.A. Portugal
Ferro Toyo Co., Ltd. (60%) Taiwan, Republic of China
Ferro Enamel Espanola S.A. Spain
Ege-Ferro Kimya A.S. (49.9%) Turkey
Ferro (Great Britain) Ltd. United Kingdom
Ferro Enamel Argentina S.A.I.C.y.M. Argentina
Ferro Enamel do Brasil, I.C.L. Brazil
Ferro Mexicana S.A. de C.V. Mexico
Ferro de Venezuela C.A. ( 51%) Venezuela
Ferro Corporation (Australia) Pty. Ltd. Australia
Ferro Far East, Ltd. Peoples Republic of China
Ferro (Ningbo) Powder Coatings, Ltd. Peoples Republic of China
Ferro Industrial Products Limited (Taiwan) Taiwan, Republic of China
Ferro (Thailand) Co., Ltd. (49%) Thailand
Ferro Japan K.K. Japan
PT Ferro Mas Dinamika (55%) Indonesia
- --------------------------------------------------------------------------------
</TABLE>
* Percentages in parentheses indicate Ferro's ownership.
Ferro has a number of sales and warehousing subsidiaries throughout the
world which are omitted from the foregoing list because they are
considered in the aggregate or individually not to constitute a
significant subsidiary.
<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT AUDITORS
To The Shareholders and The Board of Directors Ferro Corporation:
We consent to incorporation by reference in the Registration Statements (File
Nos. 2-61407, 33-28520, and 33-45582) on Form S-8 and in the Registration
Statements (File Nos. 33-51284 and 33-63855) on Form S-3 of Ferro Corporation of
our report dated January 25, 1999 relating to the consolidated balance sheets of
Ferro Corporation and subsidiaries as of December 31, 1998 and 1997, and the
related consolidated statements of income, shareholders' equity, and cash flows
for each of the years in the three-year period ended December 31, 1998, which
report appears in the December 31, 1998 Annual Report on Form 10-K of Ferro
Corporation.
/s/ KPMG LLP
- ------------
KPMG LLP
Cleveland, Ohio
March 31, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000035214
<NAME> FERRO CORPORATION
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 12,185
<SECURITIES> 0
<RECEIVABLES> 249,771
<ALLOWANCES> 0
<INVENTORY> 140,970
<CURRENT-ASSETS> 456,893
<PP&E> 641,644
<DEPRECIATION> 367,592
<TOTAL-ASSETS> 849,165
<CURRENT-LIABILITIES> 282,556
<BONDS> 156,283
0
0
<COMMON> 47,323
<OTHER-SE> 235,938
<TOTAL-LIABILITY-AND-EQUITY> 849,165
<SALES> 1,361,844
<TOTAL-REVENUES> 1,361,844
<CGS> 997,583
<TOTAL-COSTS> 1,232,738
<OTHER-EXPENSES> 18,625
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 15,284
<INCOME-PRETAX> 110,481
<INCOME-TAX> 41,199
<INCOME-CONTINUING> 69,282
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,282
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.67
</TABLE>
