<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------------------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
--- OF THE SECURITIES EXCHANGE ACT OF 1934
------------------------------------------------
For the quarterly period ended March 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 name 1-8142
ENGELHARD CORPORATION
------------------------------------------------------
(Exact name of Registrant as specified in its charter)
DELAWARE 22-1586002
------------------------------- ----------------------------
(State or other jurisdiction of (IRS Employer Identification
incorporation or organization Number)
101 WOOD AVENUE, ISELIN, NEW JERSEY 08830
---------------------------------------- -----------------
(Address of principal executive offices) (Zip Code)
(732) 205-5000
---------------------------------------------------
(Registrant's telephone number including area code)
Not Applicable
---------------------------------------------------
(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class of Common Stock Outstanding at April 30, 1998
- --------------------- -----------------------------
$1 par value 144,548,943
1
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PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Thousands, except per share data)
(Unaudited)
Three Months Ended
March 31,
---------------------
1998 1997
-------- --------
Net sales ........................................... $970,553 $884,212
Cost of sales ....................................... 821,598 742,476
-------- --------
Gross profit ................................... 148,955 141,736
Selling, administrative and other expenses .......... 78,741 76,975
-------- --------
Earnings from operations ....................... 70,214 64,761
Equity in earnings of affiliates .................... 4,405 1,352
Gain on sale of investment .......................... - 305
Net interest expense ................................ (12,326) (12,667)
-------- --------
Earnings before income taxes ................... 62,293 53,751
Income tax expense .................................. 19,124 16,125
-------- --------
Net earnings ................................... $ 43,169 $ 37,626
======== ========
Basic earnings per share ............................ $ 0.30 $ 0.26
======== ========
Diluted earnings per share .......................... $ 0.30 $ 0.26
======== ========
Cash dividends paid per share ....................... $ 0.10 $ 0.09
======== ========
Average number of shares outstanding - Basic ........ 144,494 144,023
======== ========
Average number of shares outstanding - Diluted ...... 145,307 145,856
======== ========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
2
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Thousands)
(Unaudited)
March 31, December 31,
1998 1997
---------- ------------
Cash ............................................. $ 45,570 $ 28,765
Receivables ...................................... 329,309 323,330
Committed metal positions ........................ 476,093 502,494
Inventories ...................................... 366,346 356,403
Other current assets ............................. 60,440 44,180
---------- ----------
Total current assets ...................... 1,277,758 1,255,172
Investments ...................................... 149,850 160,082
Property, plant and equipment, net ............... 810,446 788,178
Intangible assets, net ........................... 243,377 214,929
Other noncurrent assets .......................... 163,698 167,962
---------- ----------
Total assets .............................. $2,645,129 $2,586,323
========== ==========
Short-term borrowings ............................ $ 284,856 $ 249,368
Accounts payable ................................. 217,079 180,499
Hedged metal obligations ......................... 545,665 572,266
Other current liabilities ........................ 236,404 238,003
---------- ----------
Total current liabilities ................. 1,284,004 1,240,136
Long-term debt ................................... 382,171 373,574
Other noncurrent liabilities ..................... 187,181 187,353
Shareholders' equity ............................. 791,773 785,260
---------- ----------
Total liabilities and
shareholders' equity .................... $2,645,129 $2,586,323
========== ==========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
3
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ENGELHARD CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Thousands)
(Unaudited)
Three Months Ended
March 31,
--------------------
1998 1997
--------- --------
Cash flows from operating activities
Net earnings .................................... $ 43,169 $ 37,626
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation, depletion and amortization ... 22,384 21,040
Equity results, net of dividends ........... (4,405) (1,352)
Net change in assets and liabilities
Metal related ......................... 156,746 116,200
All other ............................. (27,366) (34,206)
-------- --------
Net cash provided by operating activities .. 190,528 139,308
-------- --------
Cash flows from investing activities
Capital expenditures, net ....................... (31,824) (20,461)
Acquisitions and investments, net ............... (35,808) (10,998)
Other ........................................... 305 (562)
-------- --------
Net cash used in investing activities ...... (67,327) (32,021)
-------- --------
Cash flows from financing activities
Increase in short-term borrowings ............... 35,684 19,185
Decrease in hedged metal obligations ............ (124,968) (118,058)
Proceeds from issuance of long-term debt ........ - 118
Repayment of long-term debt ..................... (99) (18)
Purchase of treasury stock ...................... (3,444) -
Stock bonus and option plan transactions ........ 2,210 4,265
Dividends paid .................................. (14,461) (12,976)
-------- --------
Net cash used in financing activities ...... (105,078) (107,484)
Effect of exchange rate changes on cash .............. (1,318) (623)
-------- --------
Net change in cash ......................... 16,805 (820)
Cash at beginning of year .................. 28,765 39,683
-------- --------
Cash at end of period ...................... $ 45,570 $ 38,863
======== ========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
4
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ENGELHARD CORPORATION
BUSINESS SEGMENT INFORMATION
(Thousands)
(Unaudited)
Three Months Ended
March 31,
---------------------
1998 1997
-------- --------
Net Sales
Catalysts and Chemicals ..................... $232,178 $221,829
Pigments and Additives ...................... 142,448 141,068
Engineered Materials and
Industrial Commodities Management ......... 595,927 521,315
-------- --------
$970,553 $884,212
======== ========
Operating Earnings
Catalysts and Chemicals ..................... $ 38,124 $ 35,092
Pigments and Additives ...................... 23,822 23,443
Engineered Materials and
Industrial Commodities Management ......... 17,228 13,733
-------- --------
79,174 72,268
Equity in earnings of affiliates ................. 4,405 1,352
Interest and other expenses, net ................. (21,286) (19,869)
-------- --------
Earnings before income taxes ........... $ 62,293 $ 53,751
======== ========
See the Accompanying Notes to the Condensed Consolidated Financial Statements
5
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Notes to the Condensed Consolidated Financial Statements
- --------------------------------------------------------
Note 1 - Basis of Presentation
- ------------------------------
The unaudited condensed consolidated financial statements of Engelhard
Corporation and subsidiaries (the "Company") contain all adjustments which, in
the opinion of management, are necessary for a fair statement of the results for
the interim periods presented. The financial statement results for interim
periods are not necessarily indicative of financial results for the full year.
These financial statements should be read in conjunction with the consolidated
financial statements and notes thereto included in the Company's 1997 Annual
Report to Shareholders.
Note 2 - Inventories
- --------------------
Inventories consist of the following (in thousands):
March 31, 1998 December 31, 1997
-------------- -----------------
Raw materials ........................... $134,435 $ 99,150
Work in process ......................... 38,294 31,903
Finished goods .......................... 160,109 191,890
Precious metals ......................... 33,508 33,460
-------- --------
Total inventories ....................... $366,346 $356,403
======== ========
Note 3 - Other Matters
- ----------------------
With respect to the fraud involving base metal inventory held in
third-party warehouses in Japan described in the paragraph entitled "Subsequent
Event" in Engelhard's Form 10-K for the year ended December 31, 1997, the
Company is continuing to pursue recovery of its losses from its insurance
carriers and various third parties and recorded a related receivable in the
first quarter of 1998. This matter did not have a material effect on earnings in
the first quarter of 1998.
6
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Note 4 - Comprehensive Income
- -----------------------------
In June of 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 130 "Reporting Comprehensive Income". This
statement, which the Company adopted in the first quarter of 1998, establishes
standards for reporting and displaying comprehensive income and its components
in a full set of general-purpose financial statements. Comprehensive income is
summarized as follows (in thousands):
Three Months Ended
March 31,
-------------------
1998 1997
---- ----
Net earnings ......................................... $43,169 $37,626
Other comprehensive loss:
Foreign currency translation adjustment ........... (20,963) (24,602)
------- -------
Comprehensive income ................................. $22,206 $13,024
======= =======
No provision has been made for U.S. or additional foreign taxes on the
undistributed earnings of foreign subsidiaries because such earnings are
expected to be reinvested indefinitely in the subsidiaries' operations.
Management's Discussion and Analysis of
Item 2. Financial Condition and Results of Operations
- ------- ---------------------------------------------
Results of Operations
---------------------
Comparison of the First Quarter of 1998
With the First Quarter of 1997
- ---------------------------------------
Net earnings for the first quarter of 1998 were $43.2 million compared with
$37.6 million in 1997. The effective tax rate was 30.7%, compared with 30.0% for
the same period last year. The higher effective rate was primarily due to a
shift in the geographic mix of earnings and a changing product slate.
Operating earnings for the first quarter of 1998 increased 10% as all
segments reported higher earnings. Earnings before income taxes for the first
quarter of 1998 were $62.3 million compared with $53.8 million in the first
quarter of 1997.
The Company's share of earnings from affiliates was $4.4 million for the
first quarter of 1998 compared with $1.4 million for the same quarter of 1997.
The increase was largely attributable to the increased earnings of
Engelhard-CLAL, a precious metal fabrication joint venture, and the absence of
losses from Engelhard/ICC, which has been restructured. Management anticipates
modest levels of profitability from its affiliates throughout 1998 compared to
losses incurred last year.
Net sales for the first quarter of 1998 increased 10% to $970.6 million
from $884.2 million for the same quarter of 1997 with higher sales in all
business segments.
7
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Catalysts and Chemicals
- -----------------------
Operating earnings increased 9% to $38.1 million in the first quarter of
1998 from $35.1 million in the same period of 1997. Net sales were up 5% to
$232.2 million in 1998 from $221.8 million in 1997.
The Environmental Technologies Group had higher earnings largely due to
increased volumes in Europe and a favorable product mix globally. In the
Petroleum Catalysts Group, earnings improved primarily from increased sales
volume and a favorable product mix for fluid catalytic cracking catalysts. The
Chemical Catalysts Group had lower earnings largely due to timing associated
with large, periodic orders.
Pigments and Additives
- ----------------------
Operating earnings increased 2% to $23.8 million in the first quarter of
1998 from $23.4 million in 1997. Net sales increased 1% to $142.4 million in
1998 from $141.1 million in 1997.
Earnings from paper pigments increased due to improved manufacturing costs
and a favorable product mix. Lower earnings from performance additives reflected
an unfavorable product mix, high manufacturing costs resulting from the
consolidation of facilities following the Floridin acquisition, and a modest
decrease in sales in Asia. These decreases were partially offset by continued
volume growth of pearlescent pigments, primarily in the cosmetic markets.
Engineered Materials and Industrial Commodities Management
- ----------------------------------------------------------
Operating earnings increased 25% to $17.2 million in the first quarter of
1998 from $13.7 million in the same period of 1997. Net sales increased 14% to
$596.0 million in 1998 from $521.3 million in 1997.
The Industrial Commodities Management Group generated higher earnings by
continuing to capitalize on unusual market volatility. The Engineered Materials
Group had higher earnings primarily due to increased refining business in Europe
and increased demand for metal joining products.
Financial Condition and Liquidity
---------------------------------
At March 31, 1998, the Company's current ratio was 1.0, the same as at
December 31, 1997. The Company's total debt to total capital ratio increased to
46% from 44% at year-end, primarily due to the timing of new investments made in
the first quarter. A reduction in committed metal positions combined with an
increase in metal-related accounts payable resulted in a decrease in hedged
metal obligations. The nature of the Industrial Commodities Management business
can result in significant fluctuations in cash flow. Management believes that
the Company will continue to have adequate access to credit and capital markets
to meet its needs for the foreseeable future.
8
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Subsequent Events
-----------------
On May 1, 1998, the Company acquired the chemical catalysts businesses of
Mallinckrodt, Inc. for $210 million in cash. The Company initially financed the
acquisition with a combination of commercial paper and bank borrowings. The
acquisition will expand the Company's chemical catalysts business. The
businesses, with $100 million in annual sales, produce custom and licensed
polymerization catalysts, base-metal catalysts, precious-metal catalysts, and
maleic-anhydride catalysts. It is anticipated that the acquisition will be
slightly accretive to earnings and provide positive cash flow in the first full
year of operation.
In June 1998, the Company plans to issue $120 million of 30-year bonds
whose proceeds will be used to reduce short-term debt related to the acquisition
of the chemical catalysts businesses of Mallinckrodt, Inc.
The Company currently plans to file a new shelf registration for $300
million prior to the end of the second quarter of 1998. The shelf registration
will be used for general corporate purposes, which may include the reduction of
outstanding indebtedness, working capital increases, capital expenditures, and
acquisitions.
Forward-looking Statements
--------------------------
This document contains forward-looking statements. Investors should be
aware of factors that could cause Engelhard's actual results to vary materially
from those projected in the forward-looking statements. These factors include,
but are not limited to, global economic trends; competitive pricing or product
development activities; markets, alliances, and geographic expansions developing
differently than anticipated; government legislation and/or regulation
(particularly on environmental issues); and technology, manufacturing and legal
issues.
Part II - OTHER INFORMATION
---------------------------
Item 4. Results of Matters to a Vote of Security Holders
- ------- ------------------------------------------------
(a) The Company's Annual Meeting of the Shareholders was held on
May 7, 1998.
(b) Results of votes of security holders.
1. Election of Directors For Withheld
--------------------- --- --------
Linda G. Alvarado 132,566,948 1,748,084
William R. Loomis, Jr. 120,906,318 13,408,714
James V. Napier 132,531,636 1,783,396
Norma T. Pace 132,497,439 1,817,593
2. Appointment of Coopers & Lybrand L.L.P. as Independent Public Accountants.
For Against Abstain Broker Non-Vote
--- ------- ------- ---------------
133,175,428 934,458 205,146 -
9
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Item 6. Exhibits and Reports on Form 8-K Pages
- ------- -------------------------------- -----
(a)(10) Material Contracts.
(a) Change in Control Agreement dated as of March 17, 1998. 12-24
(12) Computation of the Ratio of Earnings to Fixed Charges. 25-26
(b) There were no reports on Form 8-K filed during the quarter
ended March 31, 1998.
10
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SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ENGELHARD CORPORATION
-----------------------------
(Registrant)
Date May 15, 1998 /s/ Orin R. Smith
--------------------- -----------------------------
Orin R. Smith
Chairman and Chief
Executive Officer
Date May 15, 1998 /s/ Thomas P. Fitzpatrick
--------------------- -----------------------------
Thomas P. Fitzpatrick
Senior Vice President and
Chief Financial Officer
Date May 15, 1998 /s/ David C. Wajsgras
---------------------- -----------------------------
David C. Wajsgras
Controller
11
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EXHIBIT 10(a)
CHANGE IN CONTROL AGREEMENT
---------------------------
12
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CHANGE IN CONTROL AGREEMENT
Agreement, made this 17th day of March, 1998, by and between
ENGELHARD CORPORATION, a Delaware corporation (the "Company"), and (the
"Executive").
WHEREAS, the Executive is a key employee of the Company; and
WHEREAS, the Board of Directors of the Company (the "Board")
considers the maintenance of a sound management to be essential to protecting
and enhancing the best interests of the Company and its stockholders and
recognizes that the possibility of a change in control raises uncertainty and
questions among key employees and may result in the departure or distraction of
such key employees to the detriment of the Company and its stockholders; and
WHEREAS, the Board wishes to assure that it will have the
continued dedication of the Executive and the availability of his advice and
counsel, notwithstanding the possibility, threat or occurrence of a bid to take
over control of the Company, and to induce the Executive to remain in the employ
of the Company; and
WHEREAS, the Executive is willing to continue to serve the
Company taking into account the provisions of this Agreement;
NOW, THEREFORE, in consideration of the foregoinq, and the
respective covenants and agreements of the parties herein contained, the parties
agree as follows:
1. Potential Change in Control; Change in Control. Benefits shall be provided
hereunder only in the event there shall have occurred a "Potential Change in
Control" or "Change in Control," as such terms are defined below, and the
Executive's employment by the Company shall thereafter have terminated in
accordance with Section 2 below within the period beginning on the date of the
"Potential Change in Control" or "Change in Control" and ending on the third
anniversary of the date on which a "Change in Control" occurs (the "Protection
Period"); provided, however, that if the Protection Period begins by reason of a
"Potential Change in Control," and the Board determines in good faith that a
"Change in Control" is unlikely to occur, such Protection Period shall end on
the date of adoption of a resolution by the Board to that effect. If any
Protection Period terminates without the Executive's employment having
terminated, any "Potential Change in Control" or "Change in Control" subsequent
to such termination shall give rise to a new Protection Period. No benefits
shall be paid under this Agreement if the Executive's employment terminates
outside of a Protection Period.
(i) For purposes of this Agreement, a "Potential Change in Control" shall
be deemed to have occurred if:
(A) the Company enters into an agreement the consummation of which, or
the approval by shareholders of which, would constitute a Change in
Control;
(B) proxies for the election of directors are solicited by anyone
other than the Company;
13
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(C) any Person (as defined below) publicly announces an intention to
take or to consider taking actions which, if consummated, would
constitute a Change in Control; or
(D) any other event occurs which is deemed to be a Potential Change in
Control by the Board and the Board adopts a resolution to the effect
that a Potential Change in Control has occurred.
(ii) For purposes of this Agreement, a "Change in Control" shall mean:
(A) the acquisition by any individual, entity or group (within the
meaning of Section 13(d)(3) or 14(d)(2) of the Securities Exchange Act
of 1934, as amended (the "Exchange Act")) (a "Person"), of beneficial
ownership (within the meaning of Rule 13d-3 promulgated under the
Exchange Act) of 25% or more of either (1) the then outstanding shares
of common stock of the Company (the "Outstanding Company Common
Stock") or (2) the combined voting power of the then outstanding
voting securities of the Company entitled to vote generally in the
election of directors (the "Outstanding Company Voting Securities");
provided, however, that the following acquisitions shall not
constitute a Change in Control: (i) any acquisition directly from the
Company (other than by exercise of a conversion privilege); (ii) any
acquisition by the Company or any of its subsidiaries; (iii) any
acquisition by any employee benefit plan (or related trust) sponsored
or maintained by the Company or any of its subsidiaries; (iv) any
acquisition by any corporation with respect to which, following such
acquisition, more than 60% of, respectively, the then outstanding
shares of common stock of such corporation and the combined voting
power of the then outstanding voting securities of such corporation
entitled to vote generally in the election of directors is then
beneficially owned, directly or indirectly, by all or substantially
all of the individuals and entities who were the beneficial owners,
respectively, of the outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such acquisition in
substantially the same proportions as their ownership, immediately
prior to such acquisition, of the Outstanding Company Common Stock and
Outstanding Company Voting Securities, as the case may be; or (v) any
acquisition by a Person owning more than 25% of the Outstanding
Company Common Stock on the date hereof;
(B) during any period of two consecutive years, individuals who, as of
the beginning of such period, constitute the Board (the "Incumbent
Board") cease for any reason to constitute at least a majority of the
Board; provided, however, that any individual becoming a director
subsequent to the beginning of such period whose election, or
nomination for election by the Company's shareholders, was approved by
a vote of at least a majority of the directors then comprising the
Incumbent Board shall be considered as though such individual were a
member of the Incumbent Board, but excluding, for this purpose, any
such individual whose initial assumption of office occurs as a result
of either an actual or threatened election contest (as such terms are
used in Rule 14a-11 of Regulation 14A promulgated under the Exchange
Act); or
14
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(C) approval by the shareholders of the Company of a reorganization,
merger or consolidation, in each case, with respect to which all or
substantially all of the individuals and entities who were the
beneficial owners, respectively, of the Outstanding Company Common
Stock and outstanding Company Voting Securities immediately prior to
such reorganization, merger or consolidation, do not, following such
reorganization, merger or consolidation, beneficially own, directly or
indirectly, more than 60% of, respectively, the then outstanding
shares of common stock and the combined voting power of the then
outstanding voting securities entitled to vote generally in the
election of directors, as the case may be, of the corporation
resulting from such reorganization, merger or consolidation in
substantially the same proportions as their ownership, immediately
prior to such reorganization, merger or consolidation, of the
Outstanding Company Common Stock and Outstanding Company Voting
Securities, as the case may be; or
(D) approval by the shareholders of the Company of (1) a complete
liquidation or dissolution of the Company or (2) a sale or other
disposition of all or substantially all of the assets of the Company,
other than to a corporation with respect to which following such sale
or other disposition, more than 60% of, respectively, the then
outstanding shares of common stock of such corporation and the
combined voting power of the then outstanding voting securities of
such corporation entitled to vote generally in the election of
directors is then beneficially owned, directly or indirectly, by all
or substantially all of the individuals and entities who were the
beneficial owners, respectively, of the outstanding Company Common
Stock and Outstanding Company Voting Securities immediately prior to
such sale or other disposition in substantially the same proportions
as their ownership, immediately prior to such sale or other
disposition, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities, as the case may be.
2. Termination Following Change in Control. The Executive shall be entitled
to the benefits provided in Section 3 hereof upon any termination of his
employment with the Company within a Protection Period, except a termination of
employment (a) because of his death, (b) because of a "Disability," (c) by the
Company for "Cause," or (d) by the Executive other than for "Good Reason."
(i) Disability. The Executive's employment shall be deemed to have
terminated because of a "Disability" if the Executive applies for and is
determined to be eligible to receive disability benefits under the
Company's Long-Term Disability Plan.
(ii) Cause. Termination of the Executive's employment by the Company for
"Cause" shall mean termination by reason of the Executive's willful
engagement in conduct which involves dishonesty or moral turpitude in
connection with his employment and which is demonstrably and materially
injurious to the financial condition or reputation of the Company. An act
or omission shall he deemed "willful" only if done, or omitted to be done,
in bad faith and without reasonable belief that it was in the best interest
of the Company. Notwithstanding the foregoing, the Executive shall not be
deemed to have been terminated for Cause unless and until there shall have
15
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been delivered to the Executive a written notice of termination from the
Compensation Committee (the "Committee") after reasonable notice to the
Executive and an opportunity for him, together with his counsel, to be
heard before the Committee, finding that, in the good faith opinion of such
Committee, he was guilty of conduct set forth above in the first sentence
of this subsection (ii) and specifying the particulars in detail.
(iii) Without Cause. The Company may terminate the employment of
the Executive without Cause during a Protection Period only by
giving the Executive written notice of termination to that
effect. In that event, the Executive's employment shall terminate
on the last day of the month in which such notice is given (or
such later date as may be specified in such notice), and the
benefits set forth in Section 3 hereof shall be provided to the
Executive.
(iv) Good Reason. Termination of employment by the Executive for "Good
Reason" shall mean termination:
(A) within a Protection Period, if there has occurred a reduction
by the Company in the Executive's base salary in effect
immediately before the beginning of the Protection Period or as
increased from time to time thereafter;
(B) within a Protection Period, and without the Executive's
written consent, if the Company has required the Executive to be
relocated anywhere in excess of thirty-five (35) miles from his
office location immediately before the beginning of the
Protection Period, except for required travel on the business of
the Company to an extent substantially consistent with the
Executive's business travel obligations immediately before the
beginning of the Protection Period;
(C) within a Protection Period, if there has occurred a failure
by the Company to maintain plans providing benefits at least as
beneficial as those provided by any benefit or compensation plan
(including, without limitation, any incentive compensation plan,
bonus plan or program, retirement, pension or savings plan, stock
option plan, restricted stock plan, life insurance plan, health
and dental plan and disability plan) in which the Executive is
participating immediately before the beginning of the Protection
Period, or if the Company has taken any action which would
adversely affect the Executive participation in or reduce the
Executive's benefits under any of such plans or deprive the
Executive of any material fringe benefit enjoyed by him
immediately before the beginning of the Protection Period, or if
the Company has failed to provide the Executive with the number
of paid vacation days to which he would be entitled in accordance
with the normal vacations policy of the Company as in effect
immediately before the beginning of the Protection Period;
provided, however, that a reduction in benefits under the
Company's tax-qualified retirement, pension or savings plans or
its life insurance plan, health and dental plan, disability plans
or other insurance plans which reduction applies equally to all
16
<PAGE>
participants in the plans and has a de minimis effect on the
Executive shall not constitute "Good Reason" for termination by
the Executive;
(D) within a Protection Period, if the Company has reduced in any
manner which the Executive considers important the Executive's
title, job authorities or responsibilities immediately before the
beginning of the Protection Period;
(E) within a Protection Period, if the Company has failed to
obtain the assumption of the obligations contained in this
Agreement by any successor as contemplated in Section 8(c)
hereof; or
(F) within a Protection Period, if there occurs any purported
termination of the Executive's employment by the Company which is
not effected pursuant to a written notice of termination as
described in subsection (ii) or (iii) above.
The Executive shall exercise his right to terminate his
employment for Good Reason by giving the Company a written notice of termination
specifying in reasonable detail the circumstances constituting such Good Reason.
In that event, the Executive's employment shall terminate on the last day of the
month in which such notice is given.
A termination of employment by the Executive within a Protection
Period shall be for Good Reason if one of the occurrences specified in this
subsection (iv) shall have occurred, notwithstanding that the Executive may have
other reasons for terminating employment, including employment by another
employer which the Executive desires to accept. For purposes of this subsection
(iv), any good faith determination of "Good Reason" made by the Executive shall
be conclusive.
3. Benefits Upon Termination Within Protection Period. If, within a
Protection Period, the Executive's employment by the Company shall be terminated
(a) by the Company other than for Cause or because of a Disability, or (b) by
the Executive for Good Reason, the Executive shall be entitled to the benefits
provided for below:
(i) The Company shall pay to the Executive through the date of the
Executive's termination of employment salary at the rate then in effect,
together with salary in lieu of vacation accrued to the date on which his
employment terminates, in accordance with the standard payroll practices of
the Company;
(ii) The Company shall pay to the Executive an amount equal to the product
of (A) the total incentive pool under the Company's Incentive Compensation
Plan (the "Incentive Plan") for the Executive for the calendar year that
includes the date of the Change in Control, determined based on the
Executive's annual base salary in effect at the time of the Change in
Control, the Executive's "Pool Development Factors" (i.e., cash bonus
factor, equity pool factor and stock options factor) under the Incentive
Plan for the year that includes the date of the Change in Control, and the
highest "Performance Multiplier" attributable solely to Company performance
17
<PAGE>
under the Incentive Plan for each Pool Development Factor in respect of any
of the 3 calendar years immediately preceding the calendar year that
includes the date of the Change in Control (or if less than 3 full calendar
years have elapsed since December 31, 1994, the number of full calendar
years that have elapsed since that date), multiplied by (B) a fraction, the
numerator of which is the number of days elapsed in the calendar year
through the date of termination of the Executive's employment, and the
denominator of which is 365; and such payment shall be made in a lump sum
within 10 business days after the date of such termination of employment;
(iii) The Company shall pay to the Executive an amount equal to the sum of
(A) his highest annual salary in effect during any of the 36 months
immediately preceding his date of termination of employment, and (B) the
total incentive pool under the Incentive Plan for the Executive for the
calendar year that includes the date of the Change in Control, determined
based on the Executive's annual base salary in effect at the time of the
Change in Control, the Executive's "Pool Development Factors" (i.e., cash
bonus factor, equity pool factor and stock options factor) under the
Incentive Plan for the year that includes the date of the Change in
Control, and the highest "Performance Multiplier" attributable solely to
Company performance under the Incentive Plan for each Pool Development
Factor in respect of any of the 3 calendar years immediately preceding the
calendar year that includes the date of the Change in Control (or if less
than 3 full calendar years have elapsed since December 31, 1994, the
number of full calendar years that have elapsed since that date); and such
payment shall be made in a lump sum within 10 business days after the date
of such termination of employment;
(iv) The Company shall continue to cover the Executive and his dependents
under, or provide the Executive and his dependents with insurance coverage
no less favorable than, the Company's life, disability, health, dental or
other emp1oyee welfare benefit plans or programs (as in effect on the day
immediately preceding the Protection Period or, at the option of the
Executive, on the date of termination of his employment) for a period
equal to the lesser of (x) one year following the date of termination or
(y) until the Executive is provided by another employer with benefits
substantially comparable to the benefits provided by such plans or
programs; and
(v) Following the Executive's termination of employment, the Company shall
treat the Executive as if he had continued participation and benefit
accruals under the Company's Supplemental Retirement Program or a
successor plan (as in effect on the date immediately preceding the
Protection Period) for one year following the date of termination, or the
Company shall provide an equivalent benefit outside such plan with the
result that an additional year of age and service shall be granted to the
Executive.
4. Non-exclusivity of Rights. Nothing in this Agreement shall prevent or
limit the Executive's continuing or future participation in any benefit, bonus,
incentive or other plans, practices, policies or programs provided by the
Company or any of its subsidiaries and for which the Executive may qualify, nor
shall anything herein limit or otherwise affect such rights as the Executive
may have under any stock option or other agreements with the Company or any of
its subsidiaries. Amounts which are vested benefits or which the Executive is
18
<PAGE>
otherwise entitled to receive under any plan, practice, policy or program of the
Company or any of its subsidiaries at or subsequent to the date of termination
of the Executive's employment shall be payable in accordance with such plan,
practice, policy or program.
5. Full-Settlement; Legal Expenses. The Company's obligation to make the
payments provided for in this Agreement and otherwise to perform its
obligations hereunder shall not be affected by any set-off, counterclaim,
recoupment, defense or other claim, right or action which the Company may have
against the Executive or others. In no event shall the Executive be obligated to
seek other employment or take any other action by way of mitigation of the
amounts payable to the Executive under any of the provisions of this Agreement.
The Company agrees to pay, upon written demand therefor by the Executive, all
legal fees and expenses which the Executive may reasonably incur as a result of
any dispute or contest (regardless of the outcome thereof) by or with the
Company or others regarding the validity or enforceability of, or liability
under, any provision of this Agreement (including as a result of any contest by
the Executive about the amount of any payment hereunder), plus in each case
interest at the applicable Federal rate provided for in Section 7872(f)(2) of
the Internal Revenue Code of 1986, as amended (the "Code"). In any such action
brought by the Executive for damages or to enforce any provisions of this
Agreement, he shall be entitled to seek both legal and equitable relief and
remedies, including, without limitation, specific performance of the Company's
obligations hereunder, in his sole discretion.
6. Certain Additional Payments by the Company.
(a) Anything in this Agreement to the contrary notwithstanding,
in the event it shall be determined that any payment or
distribution made, or benefit provided (including, without
limitation, the acceleration of any payment, distribution or
benefit), by the Company to or for the benefit of the Executive
(whether paid or payable or distributed or distributable pursuant
to the terms of this Agreement or otherwise, but determined
without regard to any additional payments required under this
Section 6) (a "Payment") would be subject to the excise tax
imposed by Section 4999 of the Code (or any similar excise tax)
or any interest or penalties are incurred by the Executive with
respect to such excise tax (such excise tax, together with any
such interest and penalties, are hereinafter collectively
referred to as the "Excise Tax"), then the Executive shall be
entitled to receive an additional payment (a "Gross-Up Payment")
in an amount such that after payment by the Executive of all
taxes (including any Excise Tax) imposed upon the Gross-Up
Payment and any interest or penalties imposed with respect to
such taxes, the Executive retains from the Gross-Up Payment an
amount equal to the Excise Tax imposed upon the Payments.
(b) Subject to the provisions of Section 6(c), all determinations
required to be made under this Section 6, including determination
of whether a Gross-Up Payment is required and of the amount of
any such Gross-up Payment, shall be made by Coopers & Lybrand
(the "Accounting Firm"), which shall provide detailed supporting
calculations both to the Company and the Executive within 15
19
<PAGE>
business days of the date of termination of the Executive's
employment, if applicable, or such earlier time as is requested
by the Company, provided that any determination that an Excise
Tax is payable by the Executive shall be made on the basis of
substantial authority. The initial Gross-Up Payment, if any, as
determined pursuant to this Section 6(b), shall be paid to the
Executive within five business days of the receipt of the
Accounting Firm's determination. If the Accounting Firm
determines that no Excise Tax is payable by the Executive, it
shall furnish the Executive with a written opinion that he has
substantial authority not to report any Excise Tax on his Federal
income tax return. Any determination by the Accounting Firm
meeting the requirements of this Section 6(b) shall be binding
upon the Company and the Executive; subject only to payments
pursuant to the following sentence based on a determination that
additional Gross-Up Payments should have been made, consistent
with the calculations required to be made hereunder (the amount
of such additional payments is referred to herein as the
"Gross-Up Underpayment"). In the event that the Company exhausts
its remedies pursuant to Section 6(c) and the Executive
thereafter is required to make a payment of any Excise Tax, the
Accounting Firm shall determine the amount of the Gross-Up
Underpayment that has occurred and any such Gross-Up Underpayment
shall be promptly paid by the Company to or for the benefit of
the Executive. The fees and disbursements of the Accounting Firm
shall be paid by the Company.
(c) The Executive shall 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 soon as practicable but not later
than ten business days after the Executive receives written
notice of such claim and shall apprise the Company of the nature
of such claim and the date on which such Claim is requested to be
paid. The Executive shall not pay such claim prior to the
expiration of the 30-day period following the date on which it
gives such notice to the Company (or such shorter period ending
on the date that any payment of taxes with respect to such claim
is due). If the Company notifies the Executive in writing prior
to the expiration of such period that it desires to contest such
claim and that it will bear the costs and provide the
indemnification as required by this sentence, the Executive
shall:
(i) give the Company any information reasonably requested by the Company
relating to such claim,
(ii) 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 reasonably selected by the Company,
(iii) cooperate with the Company in good faith in order effectively to
contest such claim, and
20
<PAGE>
(iv) 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 additional interest and penalties) incurred in connection
with such contest and shall indemnify and hold the Executive harmless, on an
after-tax basis, for 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 limitation on the foregoing
provisions of this Section 6(c), the Company shall control all proceedings taken
in connection with such contest and, at its sole option, may pursue or forgo any
and all administrative appeals, proceedings, hearings and conferences with the
taxing authority in respect of such claim and may, at its sole 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 Company directs the Executive to pay
such claim 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 or with respect to any imputed income with respect to such
advance; and further provided that any extension of the statute of limitations
relating to the payment of taxes for the taxable year of the Executive with
respect to which such contested amount is claimed to be due is limited solely to
such contested amount. Furthermore, the Company's control of the contest 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.
(d) If, after the receipt by the Executive of an amount advanced
by the Company pursuant to Section 6(c), the Executive becomes
entitled to receive any refund with respect to such claim, the
Executive shall (subject to the Company's complying with the
requirements of Section 6(c)) promptly pay to the Company the
amount of such refund (together with any interest paid or
credited thereon after taxes applicable thereto). If, after the
receipt by the Executive of an amount advanced by the Company
pursuant to Section 6(c), a determination is made that the
Executive shall not be 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 30 days after such determination, then any
obligation of the Executive to repay such advance shall be
forgiven and the amount of such advance shall offset, to the
extent thereof, the amount of Gross-Up Payment required to be
paid.
7. Confidential Information. The Executive shall hold in a fiduciary capacity
for the benefit of the Company all secret or confidential information, knowledge
or data relating to the Company or any of its subsidiaries, and their respective
21
<PAGE>
businesses, which shall have been obtained by the Executive during the
Executive's employment by the Company or any of its subsidiaries and which
shall not be or become public knowledge (other than by acts of the Executive or
his representatives in violation of this Agreement). After the date of
termination of the Executive's employment with the Company, the Executive shall
not, without the prior written consent of the Company, communicate or divulge
any such information, knowledge or data to anyone other than the Company and
those designated by it. In no event shall an asserted violation of the
provisions of this Section 7 constitute a basis for deferring or withholding any
amounts otherwise payable to the Executive under this Agreement.
8. Successors.
(a) This Agreement is personal to the Executive and without the
prior written consent of the Company shall not be assignable by
the Executive otherwise than by will or the laws of descent and
distribution. This Agreement shall inure to the benefit of and be
enforceable by the Executive's legal representatives or
successor(s) in interest.
(b) This Agreement shall inure to the benefit of and be binding
upon the Company and its successors and assigns.
(c) The Company will require any successor (whether direct or
indirect, by purchase, merger, consolidation or otherwise) to a11
or substantially all of the business and/or assets of the Company
to assume expressly 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. As
used in this Agreement, "Company" shall mean the Company as
hereinbefore defined and any successor to its business and/or
assets as aforesaid which assumes and agrees to perform this
Agreement by operation of law or otherwise.
9. Miscellaneous.
(a) This Agreement shall be governed by and construed in
accordance with the laws of the State of New York, without
reference to principles of conflict of laws. The captions of this
Agreement are not part of the provisions hereof and shall have no
force or effect. This Agreement may not be amended or modified
otherwise than by a written agreement executed by the parties
hereto or their respective successors and legal representatives.
(b) All notices and other communications hereunder shall be in
writing and shall be given by hand delivery to the other party or
by registered or certified mail, return receipt requested,
postage prepaid, addressed as follows:
22
<PAGE>
If to the Executive:
--------------------
Executive
If to the Company:
------------------
Engelhard Corporation
101 Wood Avenue
Iselin, New Jersey 08830-0770
Attention: Arthur A. Dornbusch, II
or to such other address as either party shall have furnished to
the other in writing in accordance herewith. Notice and
communications shall be effective when actually received by the
addressee.
(c) The invalidity or unenforceability of any provision of this
Agreement shall not affect the validity or enforceability of any
other provision of this Agreement.
(d) The Company may withhold from any amounts payable under this
Agreement such Federal, state or local taxes as shall be required
to be withheld pursuant to any applicable law or regulation.
(e) The Executive's failure to insist upon strict compliance with
any provision hereof shall not be deemed to be a waiver of such
provision or any other provision thereof.
(f) This Agreement contains the entire understanding of the
Company and the Executive with respect to the subject matter
hereof but does not supersede or override the provisions of any
stock option, employee benefit or other plan, program, policy or
practice in which Executive is a participant or under which the
Executive is a beneficiary.
IN WITNESS WHEREOF, the Executive has hereunto set his hand and, pursuant
to the authorization from its Board of Directors, the Company has caused these
presents to be executed as of the day and year first above written.
Executive:
/s/ Gary A. Cappeline /s/ Peter B. Martin
- ---------------------------- ------------------------------
Name: Gary A. Cappeline Name: Peter B. Martin
/s/ Thomas P. Fitzpatrick /s/ Edmund A. Stanczak, Jr.
- ---------------------------- ------------------------------
Name: Thomas P. Fitzpatrick Name: Edmund A. Stanczak, Jr.
/s/ John C. Hess /s/ David C. Wajsgras
- ---------------------------- ------------------------------
Name: John C. Hess Name: David C. Wajsgras
23
<PAGE>
ENGELHARD CORPORATION
By: /s/ Arthur A. Dornbusch, II
-------------------------------
Name: Arthur A. Dornbusch, II
Title: V.P., General Counsel
& Secretary
Attest:
/s/ Lester Fliegel
- --------------------------
Name: Lester Fliegel
Title: Assistant Secretary
24
<PAGE>
EXHIBIT 12
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
-----------------------------------------------------
25
<PAGE>
<TABLE>
EXHIBIT 12
ENGELHARD CORPORATION
COMPUTATION OF THE RATIO OF EARNINGS TO FIXED CHARGES
(Dollars in Thousands)
(Unaudited)
Three Months Ended
March 31, Years Ended December 31,
------------------ ----------------------------------------------------------------
1998 1997 1996 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations
before provision for income taxes $62,293 $ 85,812 $209,955 $185,312 $157,306 ($4,709)
Add/(deduct)
Portion of rents representative
of the interest factor 1,150 4,600 3,900 4,700 4,800 4,500
Interest on indebtedness 12,326 52,776 45,009 31,326 21,954 13,696
Equity dividends - 3,803 2,515 3,411 3,800 2,600
Equity in (earnings)/losses
of affiliates (4,405) 47,833 5,008 (695) (632) (3,443)
------- -------- -------- --------- --------- --------
Earnings, as adjusted $71,364 $194,824 $266,387 $224,054 $187,228 $12,644
======= ======== ======== ========= ========= ========
Fixed Charges
Portion of rents representative
of the interest factor $ 1,150 $4,600 $3,900 $4,700 $4,800 $4,500
Interest on indebtedness 12,326 52,776 45,009 31,326 21,954 13,696
Capitalized interest 125 651 875 784 528 -
------- ------- ------- ------- -------- --------
Fixed charges $13,601 $58,027 $49,784 $36,810 $27,282 $18,196
======= ======= ======= ======= ======== ========
Ratio of Earnings to Fixed Charges 5.25 3.36 (A) 5.35 6.09 6.86 - (B)
======= ======= ======= ======= ======== ========
(A) Earnings in 1997 were negatively impacted by special and other charges of $149.6 million for a variety of events.
Without such charges the ratio of earnings to fixed charges would have been 5.94.
(B) Earnings in 1993 were insufficient to cover fixed charges by $5.6 million. Earnings were negatively impacted
by a special charge of $148.0 million for the realignment and consolidation of businesses and environmental
matters. Without such charge the ratio of earnings to fixed charges would have been 8.83.
</TABLE>
26
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<CASH> 45570
<SECURITIES> 0
<RECEIVABLES> 329309
<ALLOWANCES> 0
<INVENTORY> 366346
<CURRENT-ASSETS> 1277758
<PP&E> 1628256
<DEPRECIATION> 817810
<TOTAL-ASSETS> 2645129
<CURRENT-LIABILITIES> 1284004
<BONDS> 382171
0
0
<COMMON> 147295
<OTHER-SE> 644478
<TOTAL-LIABILITY-AND-EQUITY> 2645129
<SALES> 970553
<TOTAL-REVENUES> 970553
<CGS> 821598
<TOTAL-COSTS> 821598
<OTHER-EXPENSES> 78741
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 12326
<INCOME-PRETAX> 62293
<INCOME-TAX> 19124
<INCOME-CONTINUING> 43169
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 43169
<EPS-PRIMARY> 0.30
<EPS-DILUTED> 0.30
</TABLE>
