<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MAY 17, 1999
REGISTRATION NO. 333-73185
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 4
TO
FORM S-3
------------------------
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
ENGELHARD CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 22-1586002
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER IDENTIFICATION NO.)
INCORPORATION OR ORGANIZATION)
</TABLE>
101 WOOD AVENUE
ISELIN, NEW JERSEY 08830
(732) 205-5000
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
------------------------
ARTHUR A. DORNBUSCH, II
VICE PRESIDENT, GENERAL
COUNSEL AND SECRETARY
ENGELHARD CORPORATION
101 WOOD AVENUE
ISELIN, NEW JERSEY 08830
(732) 205-5000
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
------------------------
COPY TO:
<TABLE>
<S> <C>
JAMES J. CLARK, ESQ JOEL S. KLAPERMAN, ESQ.
CAHILL GORDON & REINDEL SHEARMAN & STERLING
80 PINE STREET 599 LEXINGTON AVENUE
NEW YORK, NY 10005-1702 NEW YORK, NY 10022-6069
(212) 701-3000 (212) 848-4000
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
------------------------
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<PAGE> 2
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. THIS
PROSPECTUS IS NOT AN OFFER TO SELL THESE SECURITIES AND THE SELLING STOCKHOLDER
IS NOT SOLICITING OFFERS TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER IS
NOT PERMITTED.
Subject to Completion Dated May 17, 1999
PROSPECTUS
26,000,000 Shares
Engelhard Logo
Common Stock
------------------------
The selling stockholder, Minorco, is offering all of its 26,000,000 shares of
common stock of Engelhard Corporation to be sold in the offering. We will not
receive any proceeds from the offering.
Our common stock is traded on the New York Stock Exchange under the symbol "EC."
On May 12, 1999, the last reported sale price for our common stock on the New
York Stock Exchange was $19.50 per share.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF RISKS INVOLVED IN AN
INVESTMENT IN THE SHARES.
------------------------
THE SECURITIES AND EXCHANGE COMMISSION AND STATE SECURITIES REGULATORS HAVE NOT
APPROVED OR DISAPPROVED THESE SECURITIES, OR DETERMINED IF THIS PROSPECTUS IS
TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
------------------------
<TABLE>
<CAPTION>
UNDERWRITING PROCEEDS TO
PRICE TO DISCOUNTS AND SELLING
PUBLIC COMMISSION STOCKHOLDER
----------------- ----------------- -----------------
<S> <C> <C> <C>
Per Share..................... $ $ $
Total......................... $ $ $
</TABLE>
------------------------
Minorco has granted the underwriters the right to purchase up to an additional
2,000,000 shares to cover overallotments. The underwriters expect to deliver the
shares on , 1999.
The joint bookrunners are J.P. Morgan & Co. and Morgan Stanley Dean Witter.
------------------------
Joint Lead Managers
J.P. MORGAN & CO. MORGAN STANLEY DEAN WITTER
LAZARD FRERES & CO. LLC
------------------------
DONALDSON, LUFKIN & JENRETTE
MERRILL LYNCH & CO.
SALOMON SMITH BARNEY
, 1999
<PAGE> 3
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Summary..................................................... 3
Risk Factors................................................ 10
Forward Looking Statements.................................. 13
Where You Can Find More Information......................... 14
Use of Proceeds............................................. 15
Price Range of Common Stock and Dividend Policy............. 15
Capitalization.............................................. 16
Selected Consolidated Financial Data........................ 17
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 19
Business.................................................... 37
Management.................................................. 44
The Selling Stockholder..................................... 46
Description of Capital Stock................................ 46
Underwriting................................................ 49
Legal Matters............................................... 50
Experts..................................................... 51
Index to Financial Statements............................... F-1
</TABLE>
------------------------
ABOUT THIS PROSPECTUS
You should read this prospectus in its entirety. It contains information you
should consider when making your investment decision. You should rely only on
the information contained or incorporated by reference in this prospectus. We
have not, and the underwriters and Minorco have not, authorized any other person
to provide you with different information. If anyone provides you with different
or inconsistent information, you should not rely on it. We are not, and the
underwriters and Minorco are not, making an offer to sell these securities in
any jurisdiction except where the offer or sale is permitted. You should not
assume that the information contained or incorporated by reference in this
prospectus is accurate as of any date other than the date on the front cover of
these documents. Our business, financial condition, results of operations and
prospects may have changed since the applicable date. In this prospectus,
"Engelhard," "we," "our," and "us" refer to Engelhard Corporation and its
consolidated subsidiaries and "Minorco" and "selling stockholder" refer to
Minorco.
Product designations appearing in italics throughout this prospectus supplement
are trademarks, trade names or service marks of Engelhard Corporation and its
various operations. "Cloisonne(R)," "CMX(R)," "Duochrome(R)," "Meteor(R),"
"Luminex(R)," and "Premair(R)" are Engelhard Corporation registered trademarks.
No dealer, salesperson or other person is authorized to give any information or
to represent anything not contained in this prospectus. You must not rely on any
unauthorized information or representations. This prospectus is an offer to sell
only the common stock offered hereby, but only under the circumstances and in
jurisdictions where it is lawful to do so.
2
<PAGE> 4
SUMMARY
You should read the entire prospectus carefully, including our financial
statements and the notes thereto appearing elsewhere in this prospectus. Unless
we state otherwise, all information assumes the underwriters do not exercise the
overallotment option.
ENGELHARD CORPORATION
We are a leading developer and producer of products and systems based on our
expertise in chemistry and other sciences. We have leadership positions in air
pollution control, catalysts, pigments and additives, products containing
precious metals and the dealing and managing of precious metals and other raw
materials. Our main focus is on matching unique technologies to market needs,
thereby delivering significant value to customers. Our products and systems
enable our customers to improve the performance and cost-effectiveness of their
products and manufacturing processes.
Collectively, our businesses represent a unique set of technology platforms and
channels to market. We believe we hold leadership positions in most key markets
served. Strategically, we focus on the higher, more profitable portion of those
markets. We have a global presence with more than 100 locations in 28 countries,
including 44 manufacturing facilities. We employ approximately 6,425 people
worldwide. We had net sales of $4.2 billion and operating earnings of $309.4
million in 1998.
We organize our business activities into five segments:
- - Our Environmental Technologies segment develops and markets sophisticated
emission-control technologies and systems that enable customers to
cost-effectively meet clean-air regulations.
- - Our Process Technologies segment consists of our Chemical Catalysts and
Petroleum Catalysts businesses. Chemical Catalysts serves a broad spectrum of
the chemical industry, including the petrochemical, pharmaceutical and food
segments. Petroleum Catalysts develops and markets catalyst-based technologies
that enable petroleum refiners to more efficiently produce gasoline,
transportation fuels and heating oils.
- - Our Paper Pigments and Additives segment provides mineral-based performance
products used by the paper industry.
- - Our Specialty Pigments and Additives segment provides functional additives to
customers in a broad array of markets including coatings, plastics, cosmetics
and construction. The segment also supplies iridescent films used in a variety
of creative, decorative and packaging applications.
- - Our Industrial Commodities Management segment purchases and sells precious
metals, base metals and related products. This segment provides Engelhard a
strategic advantage by sourcing and managing such key raw materials as
platinum group metals, which are used by our catalysts businesses.
3
<PAGE> 5
The following table highlights the products and services offered by our business
segments:
<TABLE>
<CAPTION>
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BUSINESS SEGMENT PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
ENVIRONMENTAL TECHNOLOGIES Automotive Emission Systems
- Emission-control catalysts for gasoline and diesel
passenger cars, light-duty trucks and sport-utility
vehicles.
Emission and Performance Systems
- Catalysts, coatings and systems that remove pollutants,
improve fuel economy and enhance engine performance in a
variety of applications, including trucks and buses,
motorcycles, lawn and garden tools, forklifts, mining
equipment, aircraft, and power-generating and
manufacturing facilities.
- Surface coatings for the design, manufacture and
reconditioning of components in the aerospace, chemical
and petrochemical industries.
- Ozone-destruction catalysts for automotive and stationary
applications.
- ------------------------------------------------------------------------------------------------------
PROCESS TECHNOLOGIES Chemical Catalysts
- Chemical catalyst technology that facilitates the
manufacture of petrochemicals, polymers, fats and oils,
pharmaceuticals and fine agricultural chemicals.
- Adsorbents that purify fuel, lube oils, vegetable oils
and fats.
- Water filtration technologies, including lead and arsenic
removal.
Petroleum Catalysts
- Catalysts and additives that transform petroleum into
gasoline, other transportation fuels and heating oils.
- Adsorbents and drying agents for industrial processes,
packaged goods, automotive parts and industrial gases.
- ------------------------------------------------------------------------------------------------------
PAPER PIGMENTS AND ADDITIVES Paper Pigments
- Mineral-based performance products used as coating and
extender pigments by papermakers to improve the opacity,
brightness, gloss and printability of their products.
- ------------------------------------------------------------------------------------------------------
SPECIALTY PIGMENTS AND ADDITIVES Specialty Pigments
- Color and special-effect pigments that improve the look
of a wide array of products, such as coatings, printing
inks, ceramics, plastics, automotive finishes and
cosmetics.
Performance Additives
- Extender pigments, reinforcers, enhancers, gellants and
sorbents that improve the performance of plastics,
paints, cosmetics, pharmaceuticals, coatings,
agricultural products, adhesives, rubber and construction
materials.
Specialty Films
- Special-effect iridescent films for product packaging,
labels, anti-counterfeit security, coatings, gift wrap,
textiles and other applications.
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</TABLE>
4
<PAGE> 6
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------
BUSINESS SEGMENT PRODUCTS AND SERVICES
- ------------------------------------------------------------------------------------------------------
<S> <C> <C>
INDUSTRIAL COMMODITIES MANAGEMENT Commodities Management
- Commodities dealing and management expertise in precious
and base metals, energy, and related products and
services. This business segment structures transactions
under a variety of pricing and delivery arrangements to
meet the particular needs of Engelhard and its customers
and suppliers. This segment also offers precious-metal
salts and solutions and refining services.
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</TABLE>
THE TRANSACTIONS
In the fourth quarter of 1998, Minorco announced that it was merging with Anglo
American Corporation of South Africa Limited and that it would sell all the
shares of common stock of Engelhard owned by Minorco and its affiliates,
approximately 46 million shares.
On March 2, 1999, we announced that Minorco would sell 26 million shares in this
offering and we also agreed to purchase approximately 18 million of our shares
owned by Minorco. We will purchase those shares for the price, net of the
underwriting commission, received by Minorco in this offering. However, if that
net price is more than $18.90 per share, we will purchase those 18 million
shares for $18.90 per share. If the underwriters do not exercise all of their
overallotment option granted to them by Minorco for up to 2 million shares, we
will purchase those remaining shares at the same price that we will purchase the
18 million shares. The 20 million shares, which includes the additional 2
million shares related to the overallotment option, represent approximately 14%
of our total shares outstanding. Minorco has agreed to compensate us for our
costs and other expenses relating to this offering and our purchase of the
shares.
We plan to initially finance the purchase with short-term debt and intend to
take steps to reduce our total debt going forward. We do not believe the
financing of the purchase will have any material impact on our liquidity. We
anticipate issuing $100 million of bonds by mid-1999 to retire a portion of the
short-term debt. We are reviewing our portfolio to identify non-core assets and
businesses for potential sale and exploring ways to further reduce operating
expenses. We expect the buy-back to increase our earnings per share. If we had
purchased the 20 million shares from Minorco on January 1, 1998 at a price of
$18.90 per share, we estimate that our 1998 earnings per share would have
increased by approximately $.11 per share on a basic basis and $.10 per share on
a diluted basis.
The following table lists the shares Minorco is selling:
<TABLE>
<S> <C>
Number of shares of common stock currently
owned by Minorco........................... Approximately 46,000,000
Number of shares Minorco is selling in this
offering................................... 26,000,000 (28,000,000 if the
underwriters exercise all of their
overallotment option) at $ per
share.
Number of shares Minorco is selling to
Engelhard.................................. Approximately 20,000,000 (18,000,000
if the underwriters exercise all of
their overallotment option) at
$ per share.
Number of shares Minorco will own after this
offering and the sale to Engelhard......... None
</TABLE>
5
<PAGE> 7
RECENT DEVELOPMENTS
On April 22, 1999, we reported that net earnings for the first quarter ended
March 31 declined 6% to $40.5 million, compared with 1998 first-quarter net
earnings of $43.2 million. Earnings per share on a diluted basis for the quarter
declined to 28 cents from 30 cents a year ago.
First-quarter sales reached $1,073 million, up 11% from $971 million in last
year's first quarter.
As we previously announced, the first-quarter shortfall reflects the comparison
with unusually high earnings from our industrial commodities management business
in the year-ago quarter.
6
<PAGE> 8
THE OFFERING
The number of shares of our common stock to be outstanding after this offering
is based on shares outstanding as of March 2, 1999. This number excludes
8,108,731 shares of common stock subject to outstanding options as of December
31, 1998 which are currently exercisable.
COMMON STOCK OFFERED................ 26,000,000 shares
COMMON STOCK TO BE OUTSTANDING AFTER
THIS OFFERING....................... 123,602,500 shares
USE OF PROCEEDS..................... The common stock is being sold by
Minorco. We will not receive any of the
proceeds from the sale of the common
stock offered hereby.
OVERALLOTMENT OPTION................ 2,000,000 shares
DIVIDEND POLICY..................... We currently pay a quarterly dividend
of $0.10 per share. The declaration of
any future dividend is subject to the
discretion of our board of directors
and will depend on our financial
condition, results of operations and
capital requirements and such other
factors as the board deems relevant at
such time.
NEW YORK STOCK EXCHANGE SYMBOL...... EC
7
<PAGE> 9
SUMMARY CONSOLIDATED FINANCIAL DATA
The following table sets forth consolidated financial data for Engelhard for
each of the fiscal years in the five year period ended December 31, 1998 and as
of December 31, 1998 which has been derived from our audited consolidated
financial statements for such years, which have been audited by
PricewaterhouseCoopers LLP, independent accountants. You should read this
information in conjunction with "Capitalization," "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
accompanying notes included in this prospectus.
The basic earnings per share calculation is computed by dividing net earnings by
the average number of shares outstanding. The diluted earnings per share
calculation includes the average number of shares outstanding plus the effect of
dilutive stock options. In addition, diluted earnings per share in 1998 includes
shares held in Engelhard's Rabbi Trust described in Note 13 to our Consolidated
Financial Statements. All per share amounts reflect the three-for-two stock
split as of June 30, 1995.
"EBITDA" consists of operating earnings plus depreciation and amortization.
EBITDA is a commonly used measure of financial performance and is presented to
enhance the understanding of Engelhard's operating results. EBITDA is not a
measure of financial performance under GAAP and may not be comparable to other
similarly titled measures of other companies. EBITDA should not be considered as
an alternative to operating or net income as an indicator of Engelhard's
performance or as an alternative to cash flows from operating activities as a
measure of liquidity. See Engelhard's Consolidated Statements of Earnings and
Consolidated Statements of Cash Flows and notes thereto, included elsewhere in
this prospectus.
<TABLE>
<CAPTION>
----------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net sales............... $2,385,802 $2,840,077 $3,184,431 $3,630,653 $4,174,553
Cost of sales........... 1,970,563 2,379,474 2,671,377 3,030,717 3,527,624
Selling, administrative
and other expenses.... 244,611 244,660 255,460 327,820 337,556
Special charge
(credit).............. (8,000) -- -- 86,000 --
---------- ---------- ---------- ---------- ----------
Operating earnings...... 178,628 215,943 257,594 186,116 309,373
Equity in earnings
(losses) of
affiliates............ 632 695 (5,008) (47,833) 10,077
Interest expense........ 21,954 31,326 45,009 52,776 58,887
---------- ---------- ---------- ---------- ----------
Net earnings............ 117,980 137,521 150,447(1) 47,778(2) 187,084(3)
========== ========== ========== ========== ==========
Basic earnings per
share................. $ 0.82 $ 0.96 $ 1.05 $ 0.33 $ 1.30
========== ========== ========== ========== ==========
Diluted earnings per
share................. $ 0.82 $ 0.94 $ 1.03 $ 0.33 $ 1.29
========== ========== ========== ========== ==========
Average number of shares
outstanding--basic.... 144,100 143,619 143,810 144,270 144,157
Average number of shares
outstanding--diluted... 145,506 146,275 145,724 145,937 145,366
</TABLE>
8
<PAGE> 10
<TABLE>
<CAPTION>
----------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Cash dividends paid per
share................. $ 0.30 $ 0.35 $ 0.36 $ 0.38 $ 0.40
Capital spending........ $ 97,531 $ 147,704 $ 128,195 $ 136,945 $ 116,460
Depreciation, depletion
and amortization...... 69,104 65,450 74,871 88,066 100,931
Net cash provided by
operating
activities............ 16,116 133,811 24,759 196,548 176,712
Net cash used in
investing
activities............ (142,865) (188,171) (409,548) (163,205) (287,204)
Net cash provided by
(used in) financing
activities............ 126,042 65,327 384,856 (43,108) 105,465
EBITDA.................. 247,732 281,393 332,465 274,182 410,304
</TABLE>
- ---------------
(1) Results in 1996 include a gain of $3.3 million on the sale of inventory
accounted for under the LIFO method.
(2) Results in 1997 include special and other charges of $117.7 million for a
variety of events, including restructuring actions and a loss from a fraud
involving base-metals in Japan. In addition, 1997 results include a gain of
$2.0 million on the sale of inventory accounted for under the LIFO method.
(3) Results in 1998 include a gain of $4.9 million on the sale of inventory
accounted for under the LIFO method.
The "as adjusted" December 31, 1998 balance sheet data reflects: (1) our
purchase of 20 million shares of common stock from Minorco at an assumed price
of $18.90 per share, less a payment by Minorco to compensate us for related
costs and expenses, and (2) short-term borrowings in connection with the
purchase of the common stock.
<TABLE>
<CAPTION>
------------------------
AS OF DECEMBER 31, 1998
ACTUAL AS ADJUSTED
---------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital......... $ 89,522 $ (248,478)
Property, plant and
equipment, net........ 876,461 876,461
Total assets............ 2,866,319 2,866,319
Long-term debt.......... 497,393 497,393
Shareholders' equity.... 901,557 563,557
</TABLE>
9
<PAGE> 11
RISK FACTORS
In addition to the other information in this prospectus, you should carefully
consider the following factors before making an investment decision in the
shares of our common stock offered by this prospectus.
OUR SENIOR UNSECURED DEBT RATING WILL BE DOWNGRADED AS A RESULT OF THE MINORCO
STOCK PURCHASE
Standard & Poor's has indicated that, upon completion of the Minorco stock
purchase, it will lower our senior unsecured debt rating to A- and our
commercial paper rating from A-1 to A-2. Moody's has confirmed our senior
unsecured debt rating at A3 and our commercial paper rating at P-2. We expect
that the Standard & Poor's downgrade will result in an increase in our borrowing
rates but we do not expect it to be significant.
WE HAVE A SIGNIFICANT AMOUNT OF INDEBTEDNESS
We have a significant level of indebtedness, which could have important
consequences to you. For example, it:
- - will require us to dedicate a material portion of our cash flow from
operations to make payments on our indebtedness, thereby reducing the
availability of our cash flow to fund working capital, capital expenditures,
acquisitions or other general corporate purposes.
- - could make us less attractive to prospective or existing customers or less
attractive to potential acquisition targets.
- - may limit our flexibility to adjust to changing business and market conditions
and make us more vulnerable to a downturn in general economic conditions as
compared to a competitor that may be less leveraged.
After giving effect to borrowings we will make to finance the purchase of shares
from Minorco, we estimate that we will have in excess of $1 billion of total
debt as compared to $563.6 million of total shareholders' equity at December 31,
1998. We estimate that approximately $593 million of our debt will be in the
form of short-term bank borrowings and commercial paper. Significant increases
in short-term interest rates would significantly increase our interest expense.
SOME OF OUR COMPETITORS MAY HAVE GREATER FINANCIAL, TECHNICAL, MARKETING AND
OTHER RESOURCES THAN US
The industries in which we compete are highly competitive and most of our
customers use more than one supplier. Some of our competitors may have greater
financial, technical, marketing and other resources, which could provide them
with a competitive advantage over us. Significant competitors in some of our
business segments include other large, well-established companies such as W.R.
Grace, Akzo, Johnson Matthey and DeGussa.
Our competitors can be expected to continue to develop and introduce new and
enhanced products, which could cause a decline in market acceptance of our
products. In addition, our competitors could cause a reduction in the prices for
some of our products as a result of intensified price competition.
FAILURE TO MAKE CONTINUED IMPROVEMENTS IN OUR TECHNOLOGY AND PRODUCTIVITY COULD
HURT OUR COMPETITIVE POSITION
Many of our products could be affected by rapid technological change and new
product introductions and enhancements. We believe we must continue to enhance
our existing products and to develop and manufacture new products with improved
capabilities in order to
10
<PAGE> 12
continue to be a market leader. We also believe that we must continue to make
improvements in our productivity in order to maintain our competitive position.
Our inability to anticipate, respond to or utilize changing technologies could
have a material adverse effect on our business and results of operations.
MANY OF OUR CUSTOMERS ARE IN CYCLICAL INDUSTRIES
A majority of our profits are derived from customers which are in industries and
businesses that are cyclical in nature and sensitive to changes in general
economic conditions, such as the chemical and automotive industries. The demand
for our products depends upon the general economic conditions of the markets of
our customers. Downward economic cycles in our customers' industries may reduce
sales of our products.
CURRENCY FLUCTUATIONS COULD IMPACT OUR FINANCIAL PERFORMANCE
Our products are sold around the world and, as a result, currency fluctuations
could impact our financial performance in the future. Our revenues in foreign
countries largely are generated in foreign currencies, while costs incurred to
generate those revenues are only partly incurred in the same currencies. Since
our financial statements are denominated in U.S. dollars, changes in currency
exchange rates between the U.S. dollar and other currencies can have an impact
on our earnings. To reduce this currency exchange risk, we enter into foreign
currency forward contracts to hedge our exposure in certain currencies to reduce
the risk of an adverse currency exchange movement but such hedging positions do
not eliminate the risks associated with currency fluctuations.
WE ARE VULNERABLE TO GLOBAL AND REGIONAL ECONOMIC CONDITIONS
Engelhard's international operations are subject to a number of other potential
risks. Such risks include, among others, currency exchange controls, labor
unrest, regional economic uncertainty, political instability, restrictions on
the transfer of funds into or out of a country, export duties and quotas,
domestic and foreign customs and tariffs, current and changing regulatory
environments, difficulty in obtaining distribution support and potentially
adverse tax consequences. These factors could have an adverse effect on our
international operations in the future by reducing the demand for our products,
increasing the prices at which we can sell our products and otherwise having an
adverse affect on our results of operations. In recent years Asian economies
have been highly volatile and recessionary, resulting in significant
fluctuations in local currencies and other instabilities. These instabilities
may continue or worsen, which could have a continued adverse impact on our
results of operations.
FUTURE GROWTH OF OUR ENVIRONMENTAL TECHNOLOGIES SEGMENT DEPENDS IN PART
ON TIGHTENING OF EMISSIONS STANDARDS WORLDWIDE
We expect that our future business growth in our Environmental Technologies
segment will be driven, in part, by tightening of emissions standards worldwide.
If such standards do not continue to become stricter or are loosened by
governmental authorities, it could have an adverse impact on the results of
operations of this segment.
CHANGES IN ENVIRONMENTAL LAWS AND REGULATIONS COULD SUBJECT US TO SIGNIFICANT
FUTURE LIABILITIES
In the ordinary course of our business, like most other industrial companies, we
are subject to numerous environmental laws and regulations which impose various
environmental controls on, among other things, the discharge of pollutants into
the air and water and the handling, use, storage, disposal and clean-up of solid
and hazardous wastes. These laws and regulations govern actions that may have
adverse environmental effects and also require compliance with certain practices
when handling and disposing of hazardous and non-hazardous wastes. These
11
<PAGE> 13
laws and regulations also impose liability for the costs of, and damages
resulting from, cleaning up sites, past spills, disposals and other releases of
hazardous substances. Changes in these laws and regulations may have a material
adverse effect on our financial position and results of operations. Any failure
by us to adequately comply with such laws and regulations could subject us to
significant future liabilities.
IF YEAR 2000 PROBLEMS ARE SIGNIFICANT, WE COULD HAVE INTERRUPTIONS IN, OR
FAILURES OF, OUR NORMAL BUSINESS OPERATIONS
The ability of computers, software or any equipment utilizing microprocessors to
properly recognize and process data at the turn of century is commonly referred
to as a Y2K compliance issue. The failure to correct a material Y2K compliance
problem could result in an interruption in, or a failure of, certain normal
business activities or operations. Such failures could have a material adverse
impact on the operations of Engelhard and its customers.
We have already taken substantial steps to address the Y2K issue. We believe
that, with the implementation of new business systems and completion of our Y2K
project as scheduled, the possibility of significant interruptions of our normal
operations is reduced. However, we cannot assure you that we will identify and
address all significant internal or external Y2K problems in a prompt and
cost-effective manner. Such Y2K problems, if not fixed, could have a material
adverse effect on our business, results of operations or financial condition.
For a more complete discussion of Y2K issues, you should read "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Update."
FLUCTUATIONS IN THE SUPPLY AND PRICES OF PRECIOUS AND BASE METALS
COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS
Our Environmental Technologies and Process Technologies segments are dependent
on the availability of precious platinum group metals to manufacture many of
their products. Accordingly, the availability of platinum group metals and
fluctuations in the supply and prices of precious and base metals could impair
our ability to procure the necessary materials to, or increase our costs to,
manufacture our products. Our Industrial Commodities Management segment is
responsible for procuring precious and base metals to meet the requirements of
our operations and our customers. Supplies of newly mined platinum group metals
are obtained primarily from South Africa and the Russian Federation and, to a
lesser extent, the United States and Canada, the only four regions that are
known significant sources. In addition, in limited and closely monitored
situations for which exposure levels have been set by senior management, our
Industrial Commodities Management business holds significant unhedged metal
positions that can be subject to future market fluctuations that could result in
a negative impact on our financial results.
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<PAGE> 14
FORWARD LOOKING STATEMENTS
This prospectus includes and incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. These statements relate to analyses and other information which are based
on forecasts of future results and estimates of amounts not yet determinable.
These statements also relate to our future prospects, developments and business
strategies.
These forward-looking statements are identified by their use of terms and
phrases such as "anticipate," "believe," "could," "estimate," "expect,"
"intend," "may," "plan," "predict," "project," "will" and similar terms and
phrases, including references to assumptions. These statements are contained in
sections entitled "Summary," "Management's Discussion and Analysis of Financial
Condition and Results of Operations," "Business" and other sections of this
prospectus and in the documents incorporated by reference in this prospectus.
These forward-looking statements involve risks and uncertainties that may cause
our actual future activities and results of operations to be materially
different from those suggested or described in this prospectus. These risks
include: competitive pricing or product development activities; our ability to
achieve and execute internal business plans; global economic trends; worldwide
political instability and economic growth; markets, alliances and geographic
expansions developing differently than anticipated; fluctuations in the supply
and prices of precious and base metals; government legislation and/or regulation
(particularly on environmental issues); technology, manufacturing and legal
issues; the impact of "Year 2000"; and the impact of any economic downturns and
inflation, including the recent weaknesses in the currency, banking and equity
markets of countries in the Asia/Pacific region.
You are cautioned not to place undue reliance upon these forward-looking
statements. The information contained in this prospectus is accurate only as of
the date of this prospectus, regardless of the time of delivery of this
prospectus or of any sale of the common stock.
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<PAGE> 15
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the Securities and Exchange Commission. You can inspect and
copy these reports, proxy statements and other information at the public
reference facilities of the Commission, in Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549; 7 World Trade Center, Suite 1300, New York, New York
10048; and Suite 1400, Citicorp Center, 500 W. Madison Street, Chicago, Illinois
60661-2511. You can also obtain copies of these materials from the public
reference section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. Please call the Commission at 1-800-SEC-0330 for
further information on the public reference rooms. The Commission also maintains
a web site that contains reports, proxy and information statements and other
information regarding registrants that file electronically with the Commission
(http://www.sec.gov). You can inspect reports and other information we file at
the office of the New York Stock Exchange, Inc., 20 Broad Street, New York, New
York 10005.
We have filed a registration statement and related exhibits with the Commission
under the Securities Act. The registration statement contains additional
information about us and our common stock. You may inspect the registration
statement and exhibits without charge at the office of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, and you may obtain copies from the
Commission at prescribed rates.
The Commission allows us to "incorporate by reference" the information we file
with it, which means that we can disclose important information to you by
referring to those documents. The information incorporated by reference is an
important part of this prospectus, and information that we file later with the
Commission will automatically update and supersede this information. We
incorporate by reference the following documents we filed with the Commission
pursuant to Section 13 of the Securities Exchange Act:
- Annual Report on Form 10-K for the year ended December 31, 1998.
- Quarterly Report on Form 10-Q for the three months ended March 31, 1999.
- Current Report on Form 8-K filed with the Commission on March 2, 1999.
- All documents filed by us with the Commission pursuant to Section 13(a),
13(c), 14 or 15(d) of the Securities Exchange Act after the date of this
prospectus and before the termination of this offering.
You may request a copy of these filings at no cost, by writing or telephoning us
at the following address:
Investor Relations
Engelhard Corporation
101 Wood Avenue
Iselin, New Jersey 08830
(732) 205-5000
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<PAGE> 16
USE OF PROCEEDS
The common stock is being sold by Minorco. We will not receive any proceeds from
the offering.
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
As of March 2, 1999, there were 6,819 holders of record of our common stock,
which is traded on the New York Stock Exchange (ticker symbol "EC"), as well as
on the London and Swiss stock exchanges.
We currently pay a quarterly dividend of $0.10 per share. The declaration of any
future dividend is subject to the discretion of our board of directors and will
depend on our financial condition, results of operations, capital requirements
and such other factors as the board deems relevant at such time.
The following sets forth the closing high and low sale prices of our stock as
reported on the New York Stock Exchange consolidated tape and cash dividends
paid for each quarterly period:
<TABLE>
<CAPTION>
--------------------------------------------
CASH DIVIDENDS
HIGH LOW PAID PER SHARE
---- ---- --------------
<S> <C> <C> <C>
1997
First quarter............................. $23 3/4 $ 18 3/4 $ 0.09
Second quarter............................ 22 1/4 18 5/8 0.09
Third quarter............................. 22 15/16 19 9/16 0.10
Fourth quarter............................ 21 5/8 17 1/16 0.10
1998
First quarter............................. $20 $ 16 1/2 $ 0.10
Second quarter............................ 22 13/16 18 13/16 0.10
Third quarter............................. 21 1/2 17 5/16 0.10
Fourth quarter............................ 21 11/16 15 3/4 0.10
1999
First quarter............................. 20 13/16 16 1/2 $ 0.10
Second quarter (through May 12, 1999)..... 20 11/16 16 1/4 --
</TABLE>
15
<PAGE> 17
CAPITALIZATION
The following table sets forth our capitalization as of December 31, 1998 on an
actual basis as well as on an as adjusted basis to reflect our purchase of the
20 million shares of common stock from Minorco at an assumed purchase price of
$18.90 per share, less a payment by Minorco to compensate us for related costs
and expenses, and short-term borrowings made in connection with the repurchase.
See "Use of Proceeds" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations." This table should be read in conjunction
with our consolidated financial statements and accompanying notes included
elsewhere in this prospectus.
<TABLE>
<CAPTION>
-----------------------
DECEMBER 31, 1998
ACTUAL AS ADJUSTED
-------- -----------
(in millions)
<S> <C> <C>
Short-term debt...................................... $ 255.0 $ 593.0
Long-term debt....................................... 497.4 497.4
-------- --------
Total debt................................. 752.4 1,090.4
-------- --------
Shareholders' equity:
Preferred stock, no par value, 5,000 shares
authorized and unissued....................... -- --
Common stock, $1 par value, 350,000 authorized
and 147,295 shares issued..................... 147.3 147.3
Retained earnings............................... 853.3 853.3
Treasury stock, at cost......................... (65.0) (403.0)
Accumulated other comprehensive income/(loss)... (34.0) (34.0)
-------- --------
Total shareholders' equity.................... 901.6 563.6
-------- --------
Total capitalization....................... $1,654.0 $1,654.0
======== ========
</TABLE>
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<PAGE> 18
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth consolidated financial data for Engelhard for,
and as of, each of the fiscal years in the five year period ended December 31,
1998 that has been derived from our audited consolidated financial statements
for such years, which have been audited by PricewaterhouseCoopers LLP,
independent accountants. You should read this information in conjunction with
"Capitalization," "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and our consolidated financial statements and
accompanying notes included in this prospectus.
The basic earnings per share calculation is computed by dividing net earnings by
the average number of shares outstanding. The diluted earnings per share
calculation includes the average number of shares outstanding plus the effect of
dilutive stock options. In addition, diluted earnings per share in 1998 includes
shares held in Engelhard's Rabbi Trust described in Note 13 to our Consolidated
Financial Statements. All per share amounts reflect the three-for-two stock
split as of June 30, 1995.
"EBITDA" consists of operating earnings plus depreciation and amortization.
EBITDA is a commonly used measure of financial performance and is presented to
enhance the understanding of Engelhard's operating results. EBITDA is not a
measure of financial performance under GAAP and may not be comparable to other
similarly titled measures of other companies. EBITDA should not be considered as
an alternative to operating or net income as an indicator of Engelhard's
performance or as an alternative to cash flows from operating activities as a
measure of liquidity. See Engelhard's Consolidated Statements of Earnings and
Consolidated Statements of Cash Flows and notes thereto, included elsewhere in
this prospectus.
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<PAGE> 19
<TABLE>
<CAPTION>
-----------------------------------------------------------------
YEARS ENDED DECEMBER 31,
1994 1995 1996 1997 1998
---------- ---------- ---------- ---------- ----------
(in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Net Sales.................... $2,385,802 $2,840,077 $3,184,431 $3,630,653 $4,174,553
Cost of sales................ 1,970,563 2,379,474 2,671,377 3,030,717 3,527,624
Selling, administrative and
other expenses............. 244,611 244,660 255,460 327,820 337,556
Special charge (credit)...... (8,000) -- -- 86,000 --
---------- ---------- ---------- ---------- ----------
Operating earnings........... 178,628 215,943 257,594 186,116 309,373
Equity in earnings (losses)
of affiliates.............. 632 695 (5,008) (47,833) 10,077
Interest expense............. 21,954 31,326 45,009 52,776 58,887
Net earnings................. 117,980 137,521 150,447(1) 47,778(2) 187,084(3)
========== ========== ========== ========== ==========
Basic earnings per share..... $ 0.82 $ 0.96 $ 1.05 $ 0.33 $ 1.30
========== ========== ========== ========== ==========
Diluted earnings per share... $ 0.82 $ 0.94 $ 1.03 $ 0.33 $ 1.29
========== ========== ========== ========== ==========
Average number of shares
outstanding--basic......... 144,100 143,619 143,810 144,270 144,157
Average number of shares
outstanding--diluted....... 145,506 146,275 145,724 145,937 145,366
BALANCE SHEET DATA:
Working capital.............. $ 81,039 $ 113,635 $ 115,332 $ 15,036 $ 89,522
Property, plant and
equipment, net............. 540,361 609,540 744,655 788,178 876,461
Total assets................. 1,777,774 1,943,309 2,490,504 2,586,323 2,866,319
Long-term debt............... 111,762 211,533 375,075 373,574 497,393
Shareholders' equity......... 614,735 737,742 833,156 785,260 901,557
OTHER DATA:
Cash dividends paid per
share...................... $0.30 $0.35 $0.36 $0.38 $0.40
Capital spending............. $ 97,531 $ 147,704 $ 128,195 $ 136,945 $ 116,460
Depreciation, depletion and
amortization............... 69,104 65,450 74,871 88,066 100,931
Net cash provided by
operating activities....... 16,116 133,811 24,759 196,548 176,712
Net cash used in investing
activities................. (142,865) (188,171) (409,548) (163,205) (287,204)
Net cash provided by (used
in) financing activities... 126,042 65,327 384,856 (43,108) 105,465
EBITDA....................... 247,732 281,393 332,465 274,182 410,304
</TABLE>
- ---------------
(1) Results in 1996 include a gain of $3.3 million on the sale of inventory
accounted for under the LIFO method.
(2) Results in 1997 include special and other charges of $117.7 million for a
variety of events, including restructuring actions and a loss from a fraud
involving base-metals in Japan. In addition, 1997 results include a gain of
$2.0 million on the sale of inventory accounted for under the LIFO method.
(3) Results in 1998 include a gain of $4.9 million on the sale of inventory
accounted for under the LIFO method.
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<PAGE> 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Unless otherwise indicated, all per-share amounts are presented as basic
earnings per share, as calculated under SFAS No. 128, "Earnings per Share."
RESULTS OF OPERATIONS
Net earnings in 1997 include special and other charges of $117.7 million ($0.82
per share) for a variety of events, including restructuring actions and a loss
from the base-metal fraud in Japan (see "Business--Legal Proceedings and
Contingencies" for detail).
The information in the discussion of each segment's results is derived directly
from that segment's internal financial reporting system used for Management
purposes. Items allocated to the segment's results include various corporate
overhead charges such as expenses for information technology, research and
development, and site management. Unallocated items include interest expense,
royalty income, sale of inventory accounted for under the LIFO method, special
and other charges and other miscellaneous Corporate items (see Note 15 of the
Notes to Consolidated Financial Statements for further detail on Engelhard's
segment reporting).
ENVIRONMENTAL TECHNOLOGIES
The Environmental Technologies segment develops and markets sophisticated
technologies and systems to control emissions from mobile and stationary
sources. These technologies enable customers to cost-effectively meet stringent
environmental regulations.
1998 Performance
Sales increased 9% to $558.5 million, and operating earnings increased 22% to
$83.5 million.
Discussion
The segment's operating earnings grew at a greater rate than sales as a result
of three key factors:
1) sale of higher-value, more sophisticated emission-control technologies
required to meet stricter environmental regulations;
2) lower manufacturing and overall operating costs; and
3) the absence of losses from the portion of the stationary-source,
emission-control business related to capital equipment, which was sold in
February 1998.
More than 80% of the segment's sales and more than 90% of its operating earnings
came from technologies to control emissions from mobile sources, including
gasoline- and diesel-powered passenger cars, sport utility vehicles, trucks,
buses and off-road vehicles. Sales and operating earnings from these
technologies increased 12% and 13%, respectively. Continuing demand for the more
sophisticated emission-control technologies drove sales increases in both Europe
and North America. In Europe, the volume increase resulted from greater share
with major European automakers. In North America, a major volume gain resulted
from increased shipments to General Motors for their redesigned full-size
trucks.
Outlook
We expect demand for environmental technologies to increase, driven by
tightening air-emission standards worldwide. In 1998, for example, the
California Air Resources Board (CARB)--a leader for the world's clean-air
initiatives--enacted more stringent regulations for passenger cars, light
trucks, minivans and sport utility vehicles for the 2004 model year. Compliance
with stricter standards will likely require more sophisticated catalyst systems,
which plays to Engelhard's technology strength. Additionally, the U.S.
Environmental Protection Agency has
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<PAGE> 21
accelerated the effective date for stricter diesel truck regulations to 2002
from 2004, driving development of new catalyst systems for diesel engine
manufacturers. Beginning in 1999, we expect new sales of our diesel retrofit
systems for several major urban bus programs.
We are bolstering manufacturing capacity in emerging markets where the phase-out
of leaded fuels is driving catalyst demand. Engelhard Environmental Systems,
Ltd., a joint venture of Engelhard and UCAL Fuel Systems Ltd., opened India's
first emission-catalyst plant in June 1998. We also broke ground for a plant in
Brazil, which will supply a major automaker's South American operations
beginning in mid-1999.
Some automakers continue to emphasize the environmental benefits of their
vehicles. For example, Volvo announced that it will include Engelhard's
proprietary PremAir(R) catalyst system on the Volvo S80 luxury sedan beginning
in late 1999. When applied to an automobile's radiator, PremAir converts
ground-level ozone into oxygen.
ENVIRONMENTAL TECHNOLOGIES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 10% to $512.4 million, and operating earnings increased 27% to
$68.3 million.
Sales from mobile-source, emission-control technologies grew 16%, while
operating earnings increased 43%. Earnings growth outpaced the sales increase
due to the sale of higher-value, more sophisticated emission-control
technologies required to meet stricter environmental regulations, improved
utilization of existing manufacturing capacity and other productivity
improvements. New volume from several European automakers provided the majority
of the sales growth.
1996 compared with 1995
Sales increased 31% to $465.7 million, and operating earnings increased 63% to
$53.9 million.
Sales from mobile-source, emission-control technologies grew 24%, while
operating earnings grew 73%. The increases were driven by demand for the more
sophisticated new technologies needed to meet stricter environmental
regulations. Share growth at Ford Motor Company in North America and new
customers in Europe provided the majority of the sales increase.
PROCESS TECHNOLOGIES
The Process Technologies segment helps customers make their processes more
productive, efficient, environmentally sound and safer. The segment supplies
advanced chemical and polymerization catalysts, sorbents and separation
products. In addition, the segment's advanced cracking and hydroprocessing
technologies enable petroleum refiners to more efficiently produce gasoline,
transportation fuels and heating oils.
1998 Performance
Sales increased 19% to $533.3 million, and operating earnings increased 41% to
$78.5 million.
Discussion
Sales and earnings growth were driven by the May 1998 acquisition of the
catalyst businesses of Mallinckrodt Inc., which accounted for $67.7 million in
sales and $16.2 million in operating earnings in 1998. The operating earnings
increase also reflects a lower overall cost structure for the petroleum
catalysts business. The lower cost structure resulted from the mid-1998 shutdown
of a manufacturing facility in The Netherlands, manufacturing efficiencies and
reduced administrative expenses. The plant shutdown reduced fixed costs by $4.0
million in 1998. The manufacturing efficiencies accounted for $6.0 million,
while the reduced administra-
20
<PAGE> 22
tive expenses totaled $3.0 million. Global customer needs for fluid catalytic
cracking (FCC) catalysts are now being met from expanded facilities in North
America.
The acquisition broadened and strengthened the segment's existing product
offering and gave it a position in the high-growth polymerization catalyst
market segment. This business is now a major producer of custom and licensed
catalysts for the manufacture of polypropylene, one of the fastest growing
segments of the polyolefin market. The polypropylene market segment is expected
to grow about 6% per year compared with growth rates of about 3%-5% for other
polymerization catalyst market segments. This portion of the business had enough
new commitments to justify significant expansions shortly following the
acquisition. These expansions will increase capacity by about 20%.
Excluding the results of the acquisition, operating earnings for the segment
would have increased 12%, largely due to the improved performance from petroleum
catalysts, which more than offset declines from petrochemical catalysts. Overall
competitive weakness in the chemical industry reduced demand for petrochemical
catalysts.
Outlook
We expect earnings growth opportunities for chemical catalysts to be driven by:
1) a favorable comparison from the full-year inclusion of results from the
acquired Mallinckrodt businesses; and
2) anticipated strong demand for polypropylene catalysts.
We expect new capacity to be on stream by mid-year, and, based on continuing
indications of growing demand, we are planning to add even more capacity in the
second half of the year. We anticipate weakness in the chemical industry to
continue to negatively affect demand for petrochemical catalysts. As a result,
the business intends to focus on aggressively controlling operating costs.
Lower spreads between light and heavy crude oils flattened demand for FCC
catalysts in recent years. Petroleum refiners use FCC catalysts to break down
crude oil in gasoline and other transportation and heating fuels. Refining
lighter crudes requires a reduced quantity of catalysts as well as less
sophisticated catalyst technology. As a result, competing technologies have
become less differentiated. We expect demand for FCC catalysts to be relatively
flat for several years. To generate value, this business expects to aggressively
manage costs, maintain positive price momentum, capitalize on opportunities
inherent in process technology proprietary to Engelhard and pursue select growth
opportunites worldwide.
PROCESS TECHNOLOGIES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 3% to $447.5 million, and operating earnings decreased 5% to
$55.6 million.
Operating earnings from increased sales of chemical catalysts were offset by a
$6 million decline in operating earnings from petroleum catalysts, primarily the
result of continuing losses from European FCC catalyst operations. Sales of
petroleum catalysts were flat. The segment's sales gain reflects higher sales of
chemical catalysts driven by new alliances and the trend toward
decaptivation -- producing catalysts for customers who formerly made their own.
Alliances and decaptivation accounted for more than two thirds of the sales
increase.
1996 compared with 1995
Sales increased 7% to $433.3 million, and operating earnings increased 14% to
$58.6 million.
Strong economic conditions in the chemical industry and success in new business
programs led to sales and operating earnings increases. Volumes were up for all
product lines, most notably
21
<PAGE> 23
for catalysts used to make PTA (the main component for polyester), catalysts
used to make PVC intermediates, and products to remove lead from drinking water.
Collectively, these product lines accounted for about 25% of the segment's sales
increase. Volume increases in petroleum catalysts were offset by lower pricing
due to excess capacity in the FCC catalyst industry.
PAPER PIGMENTS AND ADDITIVES
The Paper Pigments and Additives segment provides primarily kaolin-based
performance products used as coating and extender pigments by papermakers to
improve the opacity, brightness, gloss and printability of their products.
1998 Performance
Sales decreased 1% to $239.4 million, and operating earnings increased 6% to
$35.8 million.
Discussion
Operating earnings were up despite relatively flat sales as a result of ongoing
productivity initiatives, which accounted for substantially all of the increase.
The flat sales reflected an overall slowdown in the paper industry and reduced
demand resulting from some paper makers switching to a process that does not
require Kaolin-based pigments. Regionally, sales varied, with North American
sales down 10% from the prior year and Europe up 7%. Asia-Pacific volume grew
modestly, but prices there declined about 4%. The business launched Digitex(TM)
paper pigment, which enables large-scale commercial ink jet printers to
economically produce large, colorful graphics like those on billboards and bus
advertisements. The market's initial reception was positive, although shipments
primarily were for trial and testing purposes.
Outlook
We expect paper industry conditions to remain depressed. We believe recovery in
1999 will be gradual if it occurs at all. Unused industry capacity could again
impact pricing. In the face of these market conditions, the segment intends to
focus on aggressive cost reductions, sale of higher-value-add products and
continued introduction of new products. The segment is targeting increased sales
of newly introduced Digitex(TM) pigments as well as engineered pigments.
PAPER PIGMENTS AND ADDITIVES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 2% to $242.0 million, and operating earnings decreased 19% to
$33.9 million.
Lower pricing was the primary factor in the operating earnings decline despite a
slight sales increase. The industry sought to address overcapacity issues by
lowering prices to boost manufacturing volume. Earnings also were adversely
affected by sales of lower margin products to certain customers in Asia and
unscheduled maintenance costs.
1996 compared with 1995
Sales decreased 1% to $237.6 million, and operating earnings decreased 13% to
$41.9 million.
Lower operating earnings resulted from reduced demand, which resulted from
depressed economic conditions in the paper industry. However, new performance
products developed and marketed during 1996 improved Engelhard's results
compared with much of the industry. Among these new products was Luminex(R), a
pigment bright enough to compete with more costly products and several other
pigments that work better on high-speed papermaking machines. These pigments are
based on a new, patented manufacturing process.
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<PAGE> 24
SPECIALTY PIGMENTS AND ADDITIVES
The Specialty Pigments and Additives segment provides functional additives to
customers in a broad array of markets, including coatings, plastics, cosmetics
and construction. The segment also provides iridescent films used in a variety
of creative, decorative and packaging applications. The segment's products help
customers improve the look, performance and overall cost of their products.
1998 Performance
Sales of $349.0 million were flat, and operating earnings decreased 35% to $42.0
million.
Discussion
Sales were flat as the impact of the economic downturn in the Asia-Pacific
region and lower selling prices offset increases in sales of pearlescent
pigments and attapulgite-based products. The economic crisis in Asia-Pacific
began in 1997 and continued throughout 1998. Sales in Asia of pearlescent
pigments and specialty-mineral products decreased 24% to $33.1 million.
Competitive pressures in our color and pearlescent pigment businesses drove
prices down about 1.5%. We expect prices to continue at the same level through
1999. Overall, sales of pearlescent pigments rose 1% to $139.1 million, on the
strength of increased demand from the cosmetics and industrial market segments.
Sales of attapulgite-based products increased 15% to $32.2 million, reflecting
the full-year inclusion of results from the acquisition of certain assets of
Floridin, which occurred in June 1997.
A number of factors resulted in reduced operating earnings. First, reduced sales
in Asia lowered earnings by $6.8 million, primarily in the industrial and
automotive segments served by the specialty pigments and specialty minerals
businesses. Second, operating earnings were reduced by another $4.9 million as a
result of a sales shift to less sophisticated color products, which was driven
by customer consolidations and vertical integration of a portion of the customer
base, particularly in the ink market segment. Third, operating earnings were
affected by price decreases of about 5%, which resulted from competitive
pressure in the specialty pigments business. Fourth, operating earnings were
adversely affected by $7.5 million as a result of an inventory-reduction program
completed in 1998. All other sales volume increases resulted in an earnings
increase of $1.0 million, due mostly to increased pearlescent pigment sales
outside the Asia-Pacific region. In addition, operating earnings from
attapulgite-based products were up $2.9 million, reflecting full-year benefit of
the Floridin acquisition.
Benefits of cost reduction and productivity initiatives resulted in savings of
$8.0 million in manufacturing costs, which partially was offset by operating
cost increases of $6.0 million and non-recurring items totaling $2.0 million.
Outlook
The segment intends to focus on aggressive cost management and implementation of
productivity improvements. We expect any improvement in economic conditions in
Asia will be slow. The segment has planned new product introductions to the
cosmetics and personal care markets as well as new product launches in the
specialty-mineral and optical-effect film businesses. The segment is targeting
increased sales of new glass-flake effect pigments across multiple market
segments, including: custom car finishes; motorcycles, gel coats for
automobiles, boats and personal watercraft; and plastic items such as toys and
skis.
SPECIALTY PIGMENTS AND ADDITIVES--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 34% to $349.0 million, and operating earnings rose 64% to $64.3
million.
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<PAGE> 25
Sales and operating earnings growth were driven by the successful integration of
Mearl Corporation, which was acquired in May 1996. Full-year, pretax benefit of
the acquisition totaled $29.1 million. Capitalizing on cost, technology and
market-channel synergies, Engelhard continued to build its leadership in
pearlescent and color pigments, particularly in the automotive and cosmetics
industries. In 1997, Engelhard introduced a unique product line called
Cellini(R) which combines pearlescent and organic pigments. These unique
products better position Engelhard to capitalize on the growing, high-fashion
trend toward bright, vibrant color.
1996 compared with 1995
Sales increased 59% to $260.5 million, and operating earnings increased 64% to
$39.1 million.
Sales growth was driven by performance additives and color pigments and addition
of pearlescent pigment sales resulting from the acquisition of Mearl in May
1996. These factors contributed $15.2 million in operating earnings.
INDUSTRIAL COMMODITIES MANAGEMENT
The Industrial Commodities Management segment purchases and sells precious
metals, base metals and related products. It does so under a variety of pricing
and delivery arrangements structured to meet the logistical, financial and price
risk management requirements of Engelhard, its customers and suppliers.
Additionally, it offers related services for precious-metals refining and
produces salts and solutions.
1998 Performance
Sales increased 20% to $2,346.8 million and operating earnings increased 8% to
$48.4 million.
Discussion
Sales for this segment include all sales of metals to industrial customers plus
purchases for refining, which are resold to the market at the conclusion of the
refining process. The significant increase resulted primarily from higher
palladium and rhodium volumes and prices. Changes in metal sales amounts are not
necessarily indicative of changes in earnings because of the mix of potential
arrangements with customers and other factors that may affect dealing and
refining revenues. Operating earnings in 1998 were affected by lower margins
earned on metal sales. As described in Note 1 to our Consolidated Financial
Statements, the lower margins on Industrial Commodities Management sales are
driven by including precious metals in both sales and cost of sales for certain
transactions. Sales growth outpaced operating earnings as the result of higher
prices for certain platinum group metals.
Both 1998 and 1997 operating earnings benefited greatly from volatility in
platinum group metals. This volatility resulted primarily from the variability
of shipments from Russia, which impacted both spot prices and the relationship
of the spot price to forward prices. The situation was exacerbated by the
continually increasing demand for platinum, palladium and rhodium in the
manufacture of various products, including jewelry and automotive catalysts.
Volatility not only increases the spreads on dealing transactions, but also
provides opportunities to benefit from strong and prudent physical positions.
The increase in 1998 was partially offset by a decrease in pretax earnings from
Japanese base-metal dealing.
It should be noted that customers often supply the precious metals for
manufactured products. In those cases, precious-metal values are not included as
sales. The mix of such arrangements and the extent of market-price fluctuation
can significantly affect the level of reported sales, but do not usually have a
material effect on earnings. Precious metals are considered as sales if the
metal was supplied by Engelhard. Purchase of metal generally is hedged (see Note
1 to our Consolidated Financial Statements.)
24
<PAGE> 26
Outlook
While a sustainable level of base business is anticipated, market volatility,
such as described above, cannot be assured. The benefits of such volatility
represent an upside opportunity for this segment above its sustainable base
business.
INDUSTRIAL COMMODITIES MANAGEMENT--PRIOR-YEAR COMPARISONS
1997 compared with 1996
Sales increased 18% to $1,954.0 million and operating earnings increased 111% to
$44.9 million.
Strong increases in both sales and operating earnings were driven by unusually
high volatility in the platinum-group-metals markets. Refining operations,
although down slightly, also benefited from increased activity generated by the
market volatility.
1996 compared with 1995
Sales increased 39% to $1,659.1 million and operating earnings increased 8% to
$21.3 million.
Improvement was driven by strong performance in the precious-metals refining and
salts and solutions product lines.
SPECIAL AND OTHER CHARGES
In response to weak results of certain operations, and as a result of the
base-metal fraud in Japan, Engelhard recorded, in the fourth quarter of 1997,
special and other charges of $149.6 million ($117.7 million after tax). The
following table sets forth the impact of the special and other charges in the
1997 Consolidated Statement of Earnings:
FINANCIAL IMPACT
<TABLE>
<CAPTION>
-------------
SPECIAL AND
OTHER CHARGES
-------------
(in millions,
except per
share
amounts)
<S> <C>
Cost of sales $ (6.1)
Selling, administrative and other expenses (12.7)
Special charge (86.0)
-------------
Operating loss (104.8)
Equity in losses of affiliates (44.8)
-------------
Loss before income taxes (149.6)
Income tax benefit 31.9
-------------
Net loss $ (117.7)
-------------
Basic loss per share $ (0.82)
-------------
</TABLE>
The 1997 special and other charges are described below:
- The Process Technologies segment incurred charges of $35.4 million
primarily related to the closure and subsequent sale of a petroleum
catalysts facility in The Netherlands used for the manufacture of fluid
catalytic cracking (FCC) catalysts. Management approved a plan to improve
the profitability of this business, primarily by lowering its cost
structure and optimizing its manufacturing resources. The most
significant action resulted in the 1998 sale of the FCC catalysts
facility in The Netherlands. There was no gain or loss on the sale of the
facility as the sales price approximated the carrying value as adjusted
by
25
<PAGE> 27
the special and other charges. This decision was driven by industry overcapacity
and the determination that Engelhard's European customers could be served more
efficiently by North American FCC catalysts operations. As a result, Engelhard
provided for employee severance obligations of $6.4 million covering 90
site employees, plant closure and other miscellaneous costs of $1.7
million and asset write-downs of $27.3 million consisting of $22.1 million
to reduce the carrying value of the facility to an estimate of fair value
based on appraisals performed by third parties, a $2.7 million reserve for
obsolete inventory, and $2.5 million to write-off intangible assets
related to production technology which could no longer be utilized. These
actions are expected to be substantially complete by the end of 1999.
Management anticipated annual pretax savings of $11 million, consisting
of:
Cash savings of $7 million due to the elimination of Terneuzen-based
operating staff and non-Terneuzen-based-support staff involved in
research and development and sales and marketing.
Non-cash savings of $4 million due to the elimination of depreciation
charges related to fixed assets written off.
The actual pretax savings realized during 1998 were $7 million - $5
million in cash savings and $2 million in non-cash savings. During 1999,
management expects to realize the full pretax savings of $11 million.
- The Environmental Technologies segment incurred charges of $29.6 million
related to the sale of the stationary-source, emission-control capital
equipment business. Management approved a plan to sell this business
based on unfavorable market growth projections, combined with low
technological barriers to enter this market. Management believes that
this strategy will allow Engelhard to concentrate on its core
competency--catalyst technology. Revenue and operating loss for the
capital equipment business were $21.6 million and $6.4 million,
respectively, for the year ended December 31, 1997 and $40.3 million and
zero, respectively, for the year ended December 31, 1996. Engelhard
continues to sell catalysts for stationary-source pollution abatement.
Engelhard provided for losses on contracts and warranty costs of $7.9
million and reduced the carrying value of goodwill and other assets by
$21.7 million to an estimate of fair value based on negotiations with
third parties. This write-down consisted of the write-off of goodwill of
$15.0 million, a reserve for uncollectable accounts receivable of $4.2
million and a reserve for obsolete inventory of $2.5 million. The sale
was completed in February 1998 and there was no gain or loss on the sale
of the business as the sales price approximated the carrying value as
adjusted by the special and other charges. These actions are expected to
be substantially complete by the end of 1999.
Management anticipated annual pretax savings of $6 million, consisting
of:
Cash savings of $5 million due to the elimination of losses generated by
the capital equipment business.
Non-cash savings of $1 million due to the elimination of amortization
charges related to goodwill written off.
The actual pretax savings realized during 1998 were $6 million - $5
million in cash savings and $1 million in non-cash savings.
- The Specialty Pigments and Additives segment wrote off assets of
approximately $0.8 million.
- Japan base-metal fraud of $39.0 million which is discussed in Note 18 to
our Consolidated Financial Statements.
26
<PAGE> 28
- Engelhard recorded equity in losses of affiliates of $44.8 million as
follows:
- Engelhard-CLAL continued to face pressures of declining demand for French
manufactured jewelry, generally due to the availability of inexpensive
high-quality costume jewelry, and increased competition from other
international fabricators of precious-metal products with lower cost
structures. In response to these economic pressures and market
conditions, Engelhard and its partner, FIMALAC, agreed to rationalize
certain operations, determined that related assets were impaired and
reduced those assets to their estimated realizable value. The impact to
Engelhard of these actions was approximately $30.9 million, the
components of which were: a valuation allowance provided on deferred tax
assets of $14.3 million, employee severance of $10.5 million, write off
of production equipment of $4.3 million and inventory obsolescence
reserves of $1.8 million. In addition, Engelhard wrote off goodwill of
$9.0 million related to its investment in the joint venture based on the
expected future undiscounted cash flows. While market conditions continue
to reflect the circumstances noted in 1997, as a result of the actions
taken by Engelhard-CLAL, operating results turned marginally positive in
1998. Engelhard-CLAL management expects that these actions will be
substantially completed during 1999.
Management anticipated annual pretax savings of $2 million due to the
elimination of the losses from this joint venture. The actual pretax
savings realized during 1998 were $2 million.
- In 1997, Engelhard reached an agreement with its partner, ICC
Technologies, to restructure Engelhard/ICC, a joint venture in
desiccant-based, climate-control systems. As a result of this
restructuring, Engelhard subsequently acquired 100% of Engelhard Hexcore
L.P., the portion of the former joint venture that focuses on
manufacturing and marketing desiccant-coated rotors and related products,
and sold its interest in Fresh Air Solutions L.P. which comprised the
remainder of the joint venture. Goodwill of $4.9 million related to Fresh
Air Solutions L.P. was written off as a loss on sale. Management believes
that this reorganization will allow greater concentration on core
competencies. This action had been completed prior to the end of 1998.
Management anticipated annual pretax savings of $5 million due to the
elimination of the losses from this joint venture. The actual pretax
savings realized during 1998 were $5 million.
In summary, the activities covered by these charges yielded pretax savings of
approximately $20 million as a result of lower manufacturing costs for the FCC
catalysts business and the elimination of operating losses for the former
stationary-source, emission-control capital equipment business and the equity
investments, and yielded annual cash savings of approximately $10 million as a
result of lower employee and plant operating costs for the FCC catalysts
business, capital equipment business and the Engelhard/ICC joint venture.
PRE-1997 CHARGES
The pre-1997 restructuring charges are related to:
- The restructuring of administrative operations at corporate headquarters
and the process technologies organization;
- The transfer of Attapulgite operations from Engelhard's Attapulgus, GA
facility to the acquired Quincy, FL site and the associated closing of
the Attapulgus operations;
- The closure of the Plainville, MA site and the subsequent disposal upon
the completion of environmental remediation activities;
- The shutdown of operations at an Engelhard facility in Newark, NJ and the
subsequent disposal of the facility;
27
<PAGE> 29
- The shutdown of certain operations of the Union, NJ facility and
relocation of certain other operations to other underutilized Engelhard
facilities.
The employee severance costs associated with the pre-1997 restructuring charges
are primarily related to the restructuring of administrative operations and the
transfer of Attapulgite operations. The severance costs associated with these
actions have been paid over extended periods as certain agreements negotiated
with severed employees provided for payments to be spread over several years.
The pre-1997 restructuring charges originally provided for employee severance
obligations for 1,863 corporate and site employees. The remaining severance
obligation as of December 31, 1998 is primarily attributable to 43 employees.
Additionally, regulatory delays in the consummation of Engelhard's acquisition
of the Quincy, FL attapulgite operation and inherent delays in the completion of
environmental remediation activities at Plainville, MA have extended the payment
periods for those severance costs. Costs of retention of employees for the
longer than expected periods prior to termination have been expensed as
incurred. The remaining severance accrual of $3.6 million at December 31, 1998
is principally for long-term severance payments related to the Union facility
and for severance costs for employees remaining at the Plainville, MA site until
its closure.
Non-separation related costs associated with the pre-1997 restructuring charges
are primarily for costs associated with the shut down of the Union and Newark,
NJ sites, the Attapulgus, GA attapulgite operations, as well as
non-environmental shut-down costs at the Plainville, MA site. These shut down
costs approximated $15 million during the three year period ended December 31,
1998. The remaining accrual of $2.9 million is primarily for shut-down costs to
be incurred until closure of the Plainville and Union facilities. The timeframe
for final closure of the Plainville facility is pending government approval of
environmental cleanup plans at the site. Additionally, negotiations have begun
for the sale of a portion of the Union facility which, if consummated, will
complete the closure process for that site.
The actions related to the Plainville, MA site and the Union, NJ site are
expected to be substantially complete by the end of 2000. Pending resolution of
the matters discussed above, Engelhard believes remaining reserves related to
pre-1997 restructuring activities are adequate for remaining activities under
those plans. No significant incremental savings from the pre-1997 restructurings
were achieved in 1998.
The following table sets forth the components of Engelhard's reserves for
restructuring and exit costs:
RESTRUCTURING RESERVES
<TABLE>
<CAPTION>
------------------------------------------------------------
SEPARATIONS OTHER TOTAL
PRE-1997 1997 PRE-1997 1997 PRE-1997 1997
-------- ----- -------- ----- -------- ------
(in millions)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995 $13.7 $ -- $ 18.8 $ -- $ 32.5 $ --
Cash spending (7.4) -- (10.6) -- (18.0) --
Asset write-offs -- -- (1.0) -- (1.0) --
------ ----- ------- ----- ------- ------
Balance at December 31, 1996 6.3 -- 7.2 -- 13.5 --
Cash spending (1.7) -- (6.5) -- (8.2) --
Provision -- 6.6 -- 10.1 -- 16.7
------ ----- ------- ----- ------- ------
Balance at December 31, 1997 4.6 6.6 0.7 10.1 5.3 16.7
Cash spending (1.0) (3.7) 2.2 (8.0) 1.2 (11.7)
Asset write offs -- -- -- (1.9) -- (1.9)
------ ----- ------- ----- ------- ------
Balance at December 31, 1998 $ 3.6 $ 2.9 $ 2.9 $ 0.2 $ 6.5 $ 3.1
------ ----- ------- ----- ------- ------
------ ----- ------- ----- ------- ------
</TABLE>
28
<PAGE> 30
The non-separation related cash spending for pre-1997 restructuring and exit
cost liabilities for each of the three years ended December 31, 1998, 1997, and
1996 consisted primarily of costs associated with the shut-down of the Union and
Newark, NJ sites, the Attapulgus, GA site and the Plainville, MA site. The
Newark, NJ site was sold in 1998 and had a carrying value of $4.8 million in
1993. The proceeds received in 1998 of $7.1 million related to this facility
have been netted against $4.9 million of cash expenditures in the above
presentation. The remaining balance in the pre-1997 restructuring reserves
consist of shut-down costs for the Union, NJ, Attapulgus, GA and Plainville, MA
sites.
The non-separation restructuring and exit cost provision made in 1997 consists
primarily of costs associated with the shutdown of the facilities to be closed
in connection with the Process Technologies and Environmental Technologies
actions discussed above, and certain warranty obligations associated with the
sold Environmental Technologies business. Non-separation related cash spending
related to these liabilities for the year ended December 31, 1998 consisted of
payments related to the completion of the shutdown of the facilities and the
satisfaction of any warranty obligations.
ACQUISITIONS AND PARTNERSHIPS
<TABLE>
<CAPTION>
OTHER PARTY BUSINESS ARRANGEMENT TRANSACTION DATE BUSINESS OPPORTUNITY
- ----------- -------------------- ----------------- --------------------
<S> <C> <C> <C>
Mallinckrodt Inc. Acquired the chemical catalysts May 1998 Strategic expansion of chemical
businesses of Mallinckrodt Inc. catalysts business.
("Mallinckrodt businesses")
Semo Chemical Company Acquired the pearlescent pigments January 1998 Asian expansion in automotive and
business cosmetics pigment markets
Mearl Corporation Acquired business May 1996 Rationalization of costs and
expansion of pigments markets.
</TABLE>
GROSS PROFIT
Gross profit as a percentage of sales was 16% in 1998 compared to 17% in 1997.
The decrease was driven by the lower margins earned on metal sales by the
Industrial Commodities Management segment. Sales from this segment increased 20%
in 1998 to $2,346.8 million and provided a gross profit of 4% while 1998 sales
from all other segments increased by 9% and provided a gross profit of 31%. As
described in Note 1 to our Consolidated Financial Statements, the lower margins
on Industrial Commodities Management sales are driven by including precious
metals in both sales and cost of sales for certain transactions.
SELLING, ADMINISTRATIVE AND OTHER EXPENSES
Selling, administrative and other expenses of $337.6 million in 1998 were up
from $327.8 million in 1997 and $255.5 million in 1996. The 1998 amount reflects
the acquisition of the Mallinckrodt businesses in May 1998. The 1997 amount
reflects a full year of Mearl (acquired in May 1996), the impact of the special
and other charges (see "--Special and Other Charges" for detail), a 1996
insurance recovery ($5.7 million after tax or $0.04 per share) and general
growth in our businesses due to new programs and strategic alliances. Selling,
administrative and other expenses as a percentage of sales were 8% in 1998
compared to 9% in 1997. The decrease was driven by higher metal sales by the
Industrial Commodities Management segment. See "--Gross Profit" above. Some
metal sales from this segment do not generate proportionate increases in
underlying selling and administrative expenses. See Note 1 to our Consolidated
Financial Statements.
29
<PAGE> 31
EQUITY EARNINGS/LOSSES
Equity in earnings of affiliates was $10.1 million in 1998, compared with equity
in losses of affiliates of $47.8 million in 1997 and $5.0 million in 1996. The
1997 loss reflects the 1997 special and other charges of $44.8 million related
to Engelhard-CLAL and Engelhard/ICC (see "--Special and Other Charges" for
detail). The increase was also partially attributable to Engelhard-CLAL's
improved operating results and the absence of losses from Engelhard/ICC.
GAIN ON SALE OF INVESTMENT
In 1996, we sold our share of Heraeus Engelhard Electrochemistry Corporation, a
marketer of electrochemical products. We realized a gain of $2.4 million ($1.5
million after tax or $0.01 per share) on the sale.
INTEREST
Interest expense was $58.9 million in 1998, compared with $52.8 million in 1997
and $45.0 million in 1996. The 1998 increase primarily reflects the incremental
financing costs associated with acquiring the Mallinckrodt businesses in May
1998. Excluding the impact of financing the acquisition of the Mallinckrodt
businesses, interest expense would have decreased in the current year primarily
due to lower interest rates and a decrease in average debt balances. Higher
interest expense in 1997 and 1996 was primarily due to higher average debt
balances as a result of acquisitions and investments.
We capitalized interest of $1.9 million in 1998, $0.7 million in 1997 and $0.9
million in 1996.
Interest income, included as a component of net sales, was $2.3 million in 1998,
$1.1 million in 1997 and $1.8 million in 1996.
TAXES
Income tax expense was $73.5 million in 1998, $38.0 million in 1997 and $59.5
million in 1996. The effective income tax rate was 28.2% in 1998, 29.7% in 1997,
excluding the valuation allowance associated with the 1997 special and other
charges, and 28.3% in 1996. The effective income tax rate was 44.3% in 1997
including the special and other charges.
The effective tax rate in 1998 includes a $7.1 million reduction of a valuation
allowance created in 1997 for certain capital loss carryforwards. In 1998,
capital gains were realized on the disposal of certain capital assets. We also
anticipate additional capital gains in 1999 sufficient to fully utilize this
benefit.
At year-end 1998, the net deferred tax asset was $106.0 million, primarily for
accrued postretirement and postemployment benefit obligations, the 1997 special
and other charges, the environmental clean-up reserve and other accruals.
Management believes Engelhard will generate sufficient taxable income and employ
tax planning strategies to ensure deferred tax benefits are realized.
FINANCIAL CONDITION AND LIQUIDITY
Working capital was $89.5 million at December 31, 1998, compared with $15.0
million last year. The increase was primarily due to an increase in accounts
receivable combined with changes in metal related assets and liabilities. The
current ratio was 1.1, compared with 1.0 in 1997. The year-end market value of
our precious-metal inventories exceeded carrying cost by $85.8 million, compared
with $49.7 million last year. The increase in excess value reflects higher
market values which more than offset the impact of slightly reduced levels of
this inventory accounted for under the LIFO method. (See Note 4 to our
Consolidated Financial Statements.)
30
<PAGE> 32
Our total debt increased to $752.4 million at December 31, 1998, compared with
$622.9 million last year, primarily due to the acquisition of the Mallinckrodt
businesses in May 1998. The ratio of total debt to total capital was 45% at
December 31, 1998, compared with 44% last year.
We currently have one $600 million, five-year committed credit facility with a
group of major U.S. and overseas banks. Additional unused, uncommitted lines of
credit available exceeded $670 million at year-end 1998.
In July 1998, we filed a shelf registration for $300 million. The net proceeds
from offerings under the shelf registration are expected to be used to retire
short-term debt and for general corporate purposes. We anticipate issuing $100
million of bonds under the shelf registration by mid-1999.
Operating activities provided net cash of $176.7 million in 1998, compared with
$196.5 million in 1997 and $24.8 million in 1996. The variance in cash flows
from operating activities primarily occurred in the Industrial Commodities
Management segment (ICM) and reflects changes in metal positions used to
facilitate both supplier and customer requirements. ICM routinely enters into a
variety of arrangements for the sourcing of industrial commodities. Generally,
all such transactions are hedged on a daily basis (see Note 1 to our
Consolidated Financial Statements.) Hedging is accomplished primarily through
forward, future and option contracts. Hedged metal obligations (metal sold not
yet purchased but fully hedged) are considered financing activities and reflect
the fair value of the derivative instruments. These transactions generally cover
the sourcing requirements of ICM. ICM works to ensure that Engelhard and its
customers have an uninterrupted source of industrial commodities utilizing
supply contracts and commodities markets around the world.
The cash provided from operations other than the change in metal related assets
and liabilities, exceeded $200 million in 1998 and 1997 and approximated $145
million in 1996.
The variance in cash flows from investing activities is primarily due to the
acquisition of the Mallinckrodt businesses in May 1998, partially offset by
proceeds received from the sale and leaseback of our principal executive and
administrative offices in December 1998.
The variance in cash flows from financing activities is primarily due to the
issuance in June 1998 of $120 million of our 6.95% bonds due 2028 related to the
acquisition of the Mallinckrodt businesses.
Management believes that existing sources of capital, together with cash flows
from operations, will be sufficient to meet foreseeable cash flow requirements.
MARKET RISK SENSITIVE TRANSACTIONS
We are exposed to market risks arising from adverse changes in interest rates,
foreign currency exchange rates, and commodity prices. In the normal course of
business, we use a variety of techniques and instruments, including derivatives,
as part of our overall risk management strategy. We enter into derivative
agreements with a diverse group of major financial and other institutions with
individually determined credit limits to reduce the risk of nonperformance by
counterparties.
INTEREST RATE RISK
We use sensitivity analysis to assess the market risk of our debt-related
financial instruments and derivatives. Market risk is defined here as the
potential change in the fair value of debt resulting from an adverse movement in
interest rates. The fair value of our total debt was $750.0 million at December
31, 1998 and $633.5 million at December 31, 1997 based on average market
quotations of price and yields provided by investment banks. A 100 basis point
increase in interest rates could result in a reduction in the fair value of
total debt of $23.0 million at December 31, 1998 compared with $13.9 million at
December 31, 1997.
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<PAGE> 33
Also, we use interest rate derivatives to help achieve its fixed and floating
rate debt objectives. As of December 31, 1998, we had two forward treasury lock
agreements with a total notional value of $100 million, both of which were
settled in March 1999. As of December 31, 1997, we had forward starting swaps
with a total notional value of $120 million, each with a start date of April 30,
1998 and termination date of April 30, 2008. These contracts hedged a debt
issuance of $120 million in June 1998.
FOREIGN CURRENCY EXCHANGE RATE RISK
We use a variety of strategies, including foreign currency forward contracts, to
minimize or eliminate foreign currency exchange rate risk associated with
substantially all of our foreign currency transactions, including metal-related
transactions denominated in other than U.S. dollars. In selected circumstances,
we may enter into foreign currency forward contracts to hedge the U.S. dollar
value of our foreign investments.
We use sensitivity analysis to assess the market risk associated with our
foreign currency transactions. Market risk is defined here as the potential
change in fair value resulting from an adverse movement in foreign currency
exchange rates. A 10% adverse movement in foreign currency rates could result in
a net loss of $7.3 million in 1998 compared with $4.7 million in 1997 on our
foreign currency forward contracts; however, since we limit the use of foreign
currency derivatives to the hedging of contractual foreign currency payables and
receivables, this loss in fair value for those instruments would generally be
offset by a gain in the value of the underlying payable or receivable.
A 10% adverse movement in foreign currency rates could result in an unrealized
loss of $61.4 million in 1998 compared with $61.3 million in 1997 on our net
investment in foreign subsidiaries and affiliates; however, since we view these
investments as long term, we would not expect such a loss to be realized in the
near term.
COMMODITY PRICE RISK
Generally, all industrial commodity transactions are hedged on a daily basis
using forward, future or option contracts to substantially eliminate the
exposure to price risk. In addition, all industrial commodity transactions are
marked-to-market daily. In limited and closely monitored situations, for which
exposure levels have been set by senior management, we hold significant unhedged
industrial commodity positions that are subject to future market fluctuations.
Such positions may include varying levels of derivative commodity instruments.
We have performed a "value-at-risk" analysis on all of our commodity assets and
liabilities. The "value-at-risk" calculation is a statistical model that uses
historical price and volatility data to predict market risk on a one-day
interval with a 95% confidence level. While the "value-at-risk" models are
relatively sophisticated, the quantitative information generated is limited by
the historical information used in the calculation. For example, the volatility
in the platinum and palladium markets in 1998 and 1997 was greater than
historical norms. Therefore, we use this model only as a supplement to other
risk management tools and not as a substitute for the experience and judgment of
senior management and dealers who have extensive knowledge of the markets and
adjust positions and revise strategies as the markets change. Based on the
"value-at-risk" analysis, the maximum potential one-day loss in fair value was
approximately $2.7 million as of December 31, 1998 compared with $1.1 million as
of December 31, 1997.
CAPITAL EXPENDITURES, COMMITMENTS AND CONTINGENCIES
Capital projects are designed to maintain capacity, expand operations, improve
efficiency or protect the environment. Capital expenditures amounted to $116.5
million in 1998, $136.9 million in 1997 and $128.2 million in 1996. Capital
expenditures in 1999 are expected to approximate 1998 spending. For information
about commitments and contingencies, see Note 17 and Note 18 to our Consolidated
Financial Statements.
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<PAGE> 34
DIVIDENDS AND CAPITAL STOCK
The annualized common stock dividend rate at the end of 1998 and 1997 was $0.40
per share. In the third quarter of 1997, the Board of Directors approved an
11.1% increase in the common stock dividend, raising the level to $0.10 per
share effective September 30, 1997.
In the first quarter of 1996, the Board approved the purchase of five million
shares of our common stock. At December 31, 1998, 435,000 shares had been
purchased under this plan.
YEAR 2000 UPDATE
The ability of computers, software or any equipment utilizing microprocessors to
properly recognize and process data at the turn of the century is commonly
referred to as a Y2K compliance issue. To address this issue, Engelhard has
developed a worldwide Y2K readiness plan that is divided into phases. The phases
are as follows:
- INVENTORY -- understanding what applications are in the portfolio
- ASSESSMENT -- determining what, if any, Y2K shortcomings each
application has
- REMEDIATION -- fixing or replacing each application to make it Y2K
compliant
- TESTING -- conducting thorough Y2K scenarios to ensure that the fixing
of each application is complete
The entire company has completed the inventory and assessment stages. Our major
corporate-wide applications, such as order processing, financials, metals
trading, human resources and payroll, are all complete, including testing.
Engelhard has approached its Y2K compliance issue by categorizing its
dependencies into two sections: Internal IT systems, and External systems of
suppliers and customers. Generally, internal systems identified as non-Y2K
compliant will be replaced or modified by reprograming, upgrading or other
means. Many of the internal non-compliant systems were targeted for replacement
for reasons other than Y2K issues as the benefits of newer technology had
already created an economic business case for action. The cost of these
replacement solutions will be capitalized as permitted by applicable accounting
standards whereas the cost of modification solutions will generally be expensed
as repairs. External systems will be monitored with the cooperation of our
suppliers and customers.
Internal IT systems -- includes internal applications software such as finance,
manufacturing and logistics. All internal IT systems have been inventoried and
assessed for Y2K compliance.
An estimate of completion for individual business unit systems is as follows:
APPROXIMATE % COMPLETION OF KEY APPLICATIONS
<TABLE>
<CAPTION>
ACTUAL PLAN
------ ----------------
3/99 6/99 9/99
---- ---- ----
<S> <C> <C> <C>
Environmental Technologies 70 95 100
Process Technologies 90 100 100
Paper, Pigments and Additives 80 100 100
Specialty Pigments and Additives 70 90 100
Industrial Commodities Management 90 100 100
Corporate and Other 90 100 100
</TABLE>
The projects which are either complete or still underway have been primarily
internally planned and staffed. The only major project which used external help
in assessment, remediation, and testing was our corporate order processing
system (CSS), for which we engaged MCI Systemhouse. This is now complete.
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<PAGE> 35
A core team in corporate headquarters, including a representative from internal
audit, has been given the responsibility to assess Y2K project progress during
remediation. They also conduct reviews at the end of each major project to
validate Y2K concurrence, according to a pre-determined checklist.
There has been little in the way of deferral of projects due to Y2K efforts. In
fact, the two major system implementations at corporate (PeopleSoft for Human
Resources and Oracle for Accounts Receivable) were Y2K compliance driven. Both
are now complete.
There have been no Y2K problems to date. In particular, orders which have been
placed with Y2K delivery have experienced no problem.
Internal Non-IT systems--includes embedded chip technology such as programmable
logic controllers and related hardware/software; and personal computers and
related software. Engelhard's programmable logic controllers and related
hardware/software have been inventoried and assessed for Y2K compliance.
Engelhard anticipates that all non-compliant equipment software will be replaced
or upgraded by mid-1999. Engelhard believes that all of its "critical" personal
computers and related software are Y2K compliant. All of Engelhard's other
personal computers and related software are in the process of being remediated
and tested. Engelhard believes that any non-compliant hardware/software will be
replaced or upgraded by mid-1999.
External systems--includes systems of customers and suppliers. Engelhard is in
the process of understanding the extent to which it is vulnerable to the Y2K
issues of its customers and suppliers. Engelhard has identified and contacted
third parties who would have a significant negative impact on operations if not
Y2K compliant. Engelhard has assessed the status of these third parties and has
developed requisite action where necessary. There can be no assurance that the
Y2K compliance issues of these customers and suppliers will not have a material
adverse affect on operating results or cash flows of Engelhard.
Engelhard's assessment of its suppliers regarding their Y2K readiness, including
both domestic and international, includes comprehensive surveys of all vendors
and individual assessments of key ones. The surveys are complete and revealed no
major problems. The individual assessments are ongoing through 1999, and will
include face-to-face reviews if appropriate. In Engelhard's communication with
its customers regarding their inquiries to us, we have replied, with a standard
written response which gives our assurance that we are taking the appropriate
steps to be Y2K compliant before January 1, 2000.
The estimated total cost of implementing Y2K solutions is approximately $13.1
million. The total amount expended through December 31, 1997 was $0.8 million,
with an additional $9.8 million expended in 1998. With regard to the $10.6
million expended to date, approximately $6.1 million has been expensed and $4.5
million capitalized in accordance with applicable accounting standards. The
remaining Y2K expenditures are estimated to be incurred by the end of 1999, of
which approximately $1.6 million will be expensed.
The dates on which Engelhard plans to complete any necessary Y2K modifications
are based on management's best estimates, which were derived utilizing numerous
assumptions of future events, including the continued availability of certain
resources, third-party modification plans and other factors. However, there can
be no assurance that these estimates will be achieved and actual results could
differ materially from those plans. Specific factors that might cause such
material differences include, but are not limited to, the availability of
personnel trained in this area, the ability to locate and correct all relevant
computer codes and similar uncertainties.
The failure to correct a material Y2K compliance problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could have a material adverse impact on the operations
of Engelhard. Engelhard believes that, with the implementation of new business
systems and completion of the Y2K project as scheduled, the possibility of
significant interruptions of normal operations is reduced.
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While we feel that we do not have significant exposure with respect to our major
systems in dealing with Y2K, we have begun to assess areas in which a
contingency plan is prudent in the event of an unforeseen problem.
To that end, each business has identified the key systems that require a
contingency plan to be developed. Going forward, the milestones through 1999
are:
<TABLE>
<S> <C>
Establish business/site teams to develop plans and
procedures to address identified critical components 6/30
Develop contingency plans 6/30
Publish recommendations relative to year end 1999 activities 7/31
Test contingency plans where possible 8/31
</TABLE>
EURO
On January 1, 1999, eleven of fifteen member countries of the European Union
established fixed conversion rates between their existing currencies ("legacy
currencies") and one common currency--the euro. The euro is traded on currency
exchanges and may be used in business transactions. The conversion to the euro
will eliminate currency exchange rate risk between the member countries.
Beginning in January 2002, new euro-denominated bills and coins will be issued,
and legacy currencies will be withdrawn from circulation. Our operating
subsidiaries affected by the euro conversion have established plans to address
the issues raised by the currency conversion. These issues include, among
others, the need to adapt computer and financial systems, business processes and
equipment, to accommodate euro-denominated transactions and the impact of one
common currency on pricing. Since financial systems and processes currently
accommodate multiple currencies, the plans contemplate conversion by mid-2001 if
not already addressed in conjunction with Y2K remediation. We do not expect the
system and equipment conversion costs to be material. Due to numerous
uncertainties, we cannot reasonably estimate the effects one common currency
will have on pricing and the resulting impact, if any, on our financial
condition or results of operations.
JAPAN FRAUD UPDATE
In 1998, management learned that we and several other companies operating in
Japan had been victims of a fraudulent scheme involving base-metal inventory
held in third-party warehouses in Japan. The inventory loss was approximately
$40 million in 1997 and $20 million in 1998. We are vigorously pursuing various
recovery actions. These actions include negotiations with the various third
parties involved and in several instances the commencement of litigation. During
1998, we recorded a receivable from the insurance carriers and third parties
involved for approximately $20 million. This amount represents management's and
counsel's best estimate of the minimum probable recovery from the various
insurance policies and other parties involved in the fraudulent scheme.
OTHER MATTERS
We adopted Statement of Financial Accounting Standards No. 131 "Disclosures
about Segments of an Enterprise and Related Information" in the fourth quarter
of 1998. This statement establishes standards for the way in which public
business enterprises report information about operating segments in annual
financial statements and requires that those enterprises report selected
information about those operating segments in interim reports. It also
establishes standards for related disclosures about products and services,
geographic areas and major customers. The adoption of SFAS 131 did not have an
effect on our financial position or results of operations.
We adopted Statement of Financial Accounting Standards No. 132 "Employers'
Disclosures about Pensions and Other Postretirement Benefits" in the fourth
quarter of 1998. This statement
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<PAGE> 37
revises employers' disclosures about pension and other postretirement benefit
plans. It does not change the measurement or recognition of those plans. The
adoption of SFAS 132 did not have an effect on our financial position or results
of operations.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities." SFAS 133 is effective for the Company on January 1,
2000. We will adopt SFAS 133 by the first quarter of 2000. SFAS 133 requires
that all derivative instruments be recorded on the balance sheet at their fair
value. We have not yet determined the impact that the adoption of SFAS 133 will
have on our earnings, comprehensive income or statement of financial position.
SUBSEQUENT EVENT
In October 1998, Standard & Poor's and Moody's Investors Service each placed its
ratings of our debt on credit watch. The rating action was prompted by our
announcement that we had hired financial advisors to help the Company explore
its strategic alternatives after Minorco announced that it will be divesting its
31.8% interest in Engelhard. In March 1999, Moody's Investors Service confirmed
the A3 ratings on our senior unsecured debt and confirmed our commercial paper
rating at Prime-2. In addition, in March 1999 Standard & Poor's announced that
ratings on Engelhard remain on credit watch, with the implications being revised
to "negative" from "developing". If the transaction is consummated as described
above, Standard & Poor's indicated that it would lower its corporate credit and
senior unsecured debt ratings to single-A minus from single-A and its commercial
paper ratings to A-2 from A-1. These rating actions followed the March 2, 1999
announcement of our purchase of shares of our common stock owned by Minorco.
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<PAGE> 38
BUSINESS
We are a leading developer and producer of products and systems based on our
expertise in chemistry and other sciences. Our business activities are organized
into five segments: Environmental Technologies, Process Technologies, Paper
Pigments and Additives, Specialty Pigments and Additives, and Industrial
Commodities Management.
ENVIRONMENTAL TECHNOLOGIES
Our Environmental Technologies segment consists of Automotive Emission Systems
and Emission and Performance Systems, serving the automotive, off-road vehicle,
light and heavy duty truck, aircraft, power generation and process industries.
Environmental technology catalysts are used in applications such as the
abatement of carbon monoxide, oxides of nitrogen and hydrocarbons from gasoline,
diesel and alternate fueled vehicle exhaust gases to meet emission control
standards. These catalysts also are used for removal of odors, fumes and
pollutants generated by a variety of process industries, including but not
limited to the painting of automobiles, appliances and other equipment; printing
processes; the manufacture of nitric acid and tires; the curing of polymers; and
power generation sources. In 1997, we dissolved our Metreon joint venture,
formed in 1995 with W. R. Grace, to develop and market metallic substrate
catalytic converters for cars. Also in 1997, we purchased the assets of W. R.
Grace's Camet Metal Monolith business, which manufactures and markets pre-coated
catalyzed metal monoliths for mobile-source applications as well as stationary
nitrogen oxides and carbon dioxide emission-control products.
We also participate in the manufacture and supply of automotive emission-control
catalysts through affiliates serving the Asia-Pacific region: N.E. Chemcat
Corporation (Japan)--38.8% owned; and Heesung-Engelhard (South Korea)--49%
owned, both of which also produce other catalysts and products.
The products of the Environmental Technologies segment compete in the
marketplace on the basis of cost and value performance. No single competitor is
dominant in the markets in which the Company operates.
The manufacturing operations of the Environmental Technologies segment are
carried out in the United States, Germany, India, South Africa and the United
Kingdom with equity investments located in the United States and South Korea.
The products are sold principally through the Company's sales organizations or
those of its equity investments, supplemented by independent distributors and
representatives.
The principal raw materials used by the Environmental Technologies segment
include precious metals, procured by the Industrial Commodities Management
segment, and a variety of minerals and chemicals that are generally readily
available.
As of January 1, 1999, the Environmental Technologies segment had approximately
1,525 employees worldwide.
PROCESS TECHNOLOGIES
Our Process Technologies segment consists of the Chemical Catalysts and
Petroleum Catalysts businesses. Our Chemical Catalysts business consists of
chemical and polymerization catalysts products, serving the chemical,
petrochemical, pharmaceutical and food processing industries. Our Petroleum
Catalysts business consists of a variety of petroleum refining catalyst
products, serving the petroleum refining industries.
The Chemical Catalysts products consist of catalysts and sorbents used in the
production of a variety of products or intermediates, including synthetic
fibers, fragrances, antibiotics, vitamins, polymers, plastics, detergents, fuels
and lube oils, solvents, oleochemicals and edible products.
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These catalysts are used in both batch and continuous operations, that in many
cases, require special catalysts for each application. Chemical catalysts are
based on our proprietary technology and are developed in close cooperation with
specific customers. Sorbents are used to purify and decolorize naturally
occurring fats and oils for manufacture into shortenings, margarines and cooking
oils.
On May 1, 1998, we acquired the chemical catalysts businesses of Mallinckrodt
Inc. for approximately $210 million in cash. The acquired businesses produce
custom and licensed polymerization catalysts, base-metal catalysts,
precious-metal catalysts, and maleic-anhydride catalysts and expanded our
existing chemical catalysts businesses.
The products of the Chemical Catalysts business compete in the marketplace on
the basis of cost and value performance. No single competitor is dominant in the
markets in which the Company operates.
The manufacturing operations of the Chemical Catalysts business are carried out
in the United States, Belgium, Italy and The Netherlands. The products are sold
principally through the Company's sales organizations supplemented by
independent representatives.
The principal raw materials used by the Chemical Catalysts business include
metals, procured by the Industrial Commodities Management segment and third
parties, and a variety of minerals and chemicals that are generally readily
available.
The principal products of the Petroleum Catalysts business are zeolitic cracking
catalysts widely used by refiners to provide economies in petroleum processing.
We offer a full line of fluid catalytic cracking (FCC) catalysts, many of which
are based on patented technology. These catalysts can be used to separately
control selectivity and cracking activity, which enables catalyst formulations
to be tailored to meet specific refiners' needs.
Other catalyst products of the Petroleum Catalysts business are used in
reforming, hydrotreating, isomerization and selective hydrogenation processes in
petroleum refineries to meet increasingly stringent fuel quality requirements.
Silica gel absorbents are used in air drying and natural gas treating.
The products of the Petroleum Catalysts business compete in the marketplace on
the basis of cost and value performance. No single competitor is dominant in the
markets in which the Company operates.
The manufacturing operations of the Petroleum Catalysts business are carried out
in the United States and Germany. The products are sold principally through our
sales organizations supplemented by independent distributors and
representatives.
The principal raw materials used by the Petroleum Catalysts business include
kaolin, supplied by the Paper Pigments and Additives segment, and a variety of
minerals and chemicals which are generally readily available.
As of January 1, 1999 the Process Technologies segment had approximately 1,875
employees worldwide. Most hourly employees are covered by collective bargaining
agreements. Employee relations have generally been good.
PAPER PIGMENTS AND ADDITIVES
Our Paper Pigments and Additives segment serves customers in the worldwide paper
industry. The products impart performance characteristics, including opacity,
brightness, gloss and printability to paper products.
Products for the paper market include Miragloss pigments for coating
applications requiring superior gloss and brightness; Luminex pigments, a high
brightness material for high-quality paper coating: Ansilex pigments that
provide the desired opacity, brightness, gloss and printability in paper
products; Nuclay specialized coating pigment for lightweight publication
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papers; Exsilon structured pigments that improve the printability of lightweight
coated paper and carbonless forms; and Spectrafil pigments for newsprint and
groundwood specialty markets.
The products of the Paper Pigments and Additives segment compete with those of
other kaolin manufacturers, as well as those of producers of precipitated
calcium carbonate and ground calcium carbonate, on the basis of cost and value
performance. No single competitor is dominant in the markets in which the
Company competes.
Paper Pigments and Additives' manufacturing operations are carried out in the
United States, Finland and Japan. An equity investment is located in the
Ukraine. Products are sold through our sales organization or those of our equity
investment, supplemented by independent distributors and representatives.
The principal raw materials used by the Paper Pigments and Additives segment
include kaolin, which is mined from owned or leased property by the Company, and
a variety of other minerals and chemicals which are readily available.
As of January 1, 1999 the Paper Pigments and Additives segment had approximately
1,050 employees worldwide. Most hourly employees are covered by collective
bargaining agreements. Employee relations have generally been good.
SPECIALTY PIGMENTS AND ADDITIVES
Our Specialty Pigments and Additives segment provides functional additives to
customers in a broad array of markets including coatings, plastics, cosmetics
and construction. In addition, the segment provides iridescent films used in a
variety of creative, decorative and packaging applications. Our products create
value for our customers by improving the look, performance and cost of their
products. We apply our technical competencies in mineral beneficiation, material
science, surface chemistry and optical physics to kaolin, attapulgite, mica and
other naturally-occurring materials to produce performance additives, specialty
pigments and effect pigments as well as specialty films.
Minerals-based performance additives are used principally as extender pigments
for a variety of purposes in the manufacture of plastic, rubber, ink, ceramic,
adhesive products and paint. Principal products include Satintone products, ASP
pigments and Translink surface modified reinforcements. The segment produces a
variety of organic and inorganic color and pearlescent and natural pearl
special-effect pigments for a wide range of applications. Additionally, the
segment also produces gellants and sorbents with an assortment of uses, as well
as Metamax for the concrete industry.
The products of the Specialty Pigments and Additives segment compete with those
of other minerals and effect pigment manufacturers on the basis of cost and
value performance. No single competitor is dominant in the markets in which the
Company competes.
Specialty Pigments and Additives' manufacturing operations are carried out in
the United States and in South Korea. Subsidiary sales and distribution centers
are located in France, Hong Kong, Japan, Mexico, The Netherlands and Turkey.
Products are sold through our sales organization supplemented by independent
distributors and representatives.
The principal raw materials used by the Specialty Pigments and Additives segment
include attapulgite and mica, which are mined from mineral reserves owned or
leased by the Company, and a variety of other minerals and chemicals which are
readily available.
As of January 1, 1999 the Specialty Pigments and Additives segment had
approximately 1,325 employees worldwide. Most hourly employees are covered by
collective bargaining agreements. Employee relations have generally been good.
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<PAGE> 41
INDUSTRIAL COMMODITIES MANAGEMENT
Our Industrial Commodities Management segment purchases and sells precious
metals, base metals and related products. It does so under a variety of pricing
and delivery arrangements structured to meet the logistical, financial and price
risk management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metals refining and
produces salts and solutions.
The Industrial Commodities Management segment is responsible for procuring
precious and base metals to meet the requirements of the Company's operations
and its customers. Supplies of newly mined platinum group metals are obtained
primarily from South Africa and the Russian Federation and to a lesser extent
from the United States and Canada, the only four regions that are known
significant sources. Most of these platinum group metals are obtained pursuant
to a number of contractual arrangements with different durations and terms. Gold
and silver are purchased from various sources. In addition, in the normal course
of business, certain customers and suppliers deposit significant quantities of
precious metals with the Company under a variety of arrangements. Equivalent
quantities of precious metals are returnable as product or in other forms.
The Industrial Commodities Management segment also engages in precious and base
metals dealing with industrial consumers, dealers, central banks, miners and
refiners. It also participates in refining of precious metals and the production
of salts and solutions. Offices are located in the United States, Italy, Japan,
Peru, the Russian Federation, Switzerland and the United Kingdom.
As of January 1, 1999 the Industrial Commodities Management segment had
approximately 125 employees worldwide.
MAJOR CUSTOMERS
For the years ended December 31, 1998 and 1997, Ford Motor Company, a customer
of our Environmental Technologies and Industrial Commodities Management
segments, accounted for 18% and 12%, respectively, of our net sales. For the
year ended December 31, 1996, Engelhard-CLAL, a related party and a customer of
our Environmental Technologies and Industrial Commodities Management segments,
accounted for 16% of our net sales. Sales to these customers include both
fabricated products and precious metals and were therefore significantly
influenced by fluctuations in precious-metal prices, as was the quantity and
type of metal purchased. In such cases, market price fluctuations, quantities
and types purchased can result in material variations in sales reported, but do
not usually have a direct or significant effect on earnings.
RESEARCH AND PATENTS
We currently employ approximately 475 scientists, technicians and auxiliary
personnel engaged in research and development in the field of chemistry and
metallurgy. These activities are conducted in the United States and abroad.
Research and development expense was $69.8 million in 1998, $61.4 million in
1997 and $56.5 million in 1996.
Research facilities include fully staffed instrument analysis laboratories,
which we maintain in order to achieve the high level of precision necessary for
our various business groups and to assist customers in understanding how
Engelhard's products and services add value to their businesses.
We own or are licensed under numerous patents secured over a period of years. It
is our policy to normally apply for patents whenever we develop new products or
processes considered to be commercially viable and, in appropriate
circumstances, to seek licenses when such products or processes are developed by
others. While we deem our various patents and licenses to be
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<PAGE> 42
important to certain aspects of our operations, we do not consider any
significant portion of our business as a whole to be materially dependent on
patent protection.
ENVIRONMENTAL MATTERS
With the oversight of environmental agencies, we are currently preparing, have
under review, or are implementing, environmental investigations and cleanup
plans at several currently or formerly owned and/or operated sites, including
Plainville, MA, Salt Lake City, UT and Attapulgus, GA. We are continuing to
investigate contamination at Plainville under a 1993 agreement with the United
States Environmental Protection Agency (EPA) and are awaiting approval of a
decommissioning plan by the State of Massachusetts under authority delegated by
the Nuclear Regulatory Commission. Investigation of the environmental status at
Salt Lake City continues under a 1993 agreement with the Utah Solid and
Hazardous Waste Control Board. An approved reclamation program at the Attapulgus
site, under a 1994 consent order with the Georgia Department of Natural
Resources, Environmental Protection Division, is complete pending final
Department approval.
In addition, seven sites have been identified at which we believe liability as a
potentially responsible party (PRP) is probable under the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as amended, or
similar state laws (collectively referred to as Superfund) for the cleanup of
contamination resulting from the historic disposal of hazardous substances
allegedly generated by the Company, among others. Superfund imposes strict,
joint and several liability under certain circumstances. In many cases, the
dollar amount of the claim is unspecified and claims have been asserted against
a number of other entities for the same relief sought from the Company. Based on
existing information, we believe that we are a de minimis contributor of
hazardous substances at a number of the sites referenced above. Subject to the
reopening of existing settlement agreements for extraordinary circumstances or
natural resource damages, we have settled a number of other cleanup proceedings.
We have also responded to information requests from EPA and state regulatory
authorities in connection with other Superfund sites.
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1998 and 1997 were $39.5 million and
$43.6 million, respectively, including $1.2 million and $3.8 million,
respectively, for Superfund sites. These amounts represent those costs which we
believe are probable and reasonably estimable. Based on currently available
information and analysis, our accrual represents approximately 55% of what we
believe are the reasonably possible environmental cleanup related costs of a
noncapital nature. The estimate of reasonably possible costs is less certain
than the probable estimate upon which the accrual is based.
During the past three-year period, cash payments for environmental cleanup
related matters were $4.1 million, $6.0 million and $7.0 million for 1998, 1997
and 1996, respectively. The amounts accrued in connection with environmental
cleanup related matters were not significant over this time period.
For the past three-year period, environmental related capital projects have
averaged less than 10 percent of our total capital expenditure programs, and the
expense of environmental compliance, including environmental testing, permits,
consultants and in-house staff, was not material.
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that we will not incur significant costs
in the future to comply with such laws and regulations. Based on existing
information and currently enacted environmental laws and regulations, cash
payments for environmental cleanup related matters are projected to be $8.0
million for 1999, all of which has already been accrued. Further, we anticipate
that the amounts of capitalized environmental projects and the expense of
environmental compliance will approximate current levels. While it is not
possible to predict with certainty, we believe
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that environmental cleanup related reserves at December 31, 1998 are reasonable
and adequate and that environmental matters are not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on our
operating results or cash flows.
LEGAL PROCEEDINGS AND CONTINGENCIES
Various lawsuits, claims and proceedings are pending against Engelhard. During
1998, 1997 and 1996, we provided $2.4 million, $2.8 million and $4.3 million,
respectively, for existing legal proceedings.
We and certain of our present and former officers have agreed to a stipulation
of settlement of a class action filed in November 1995 which alleged
misstatements and omissions in connection with press releases issued in 1995
concerning our PremAir catalyst systems. In the settlement, which was approved
by the Court on December 8, 1998, in exchange for the dismissal of the complaint
against all defendants, we will pay no more than $7.2 million of a maximum
settlement amount of $21.5 million. The balance of the settlement amount will be
paid by insurance carried by us for such purposes. Because the final settlement
amount will depend on the number of eligible shares of our common stock for
which claims are submitted, the amounts to be paid by us and our insurer could
be less, but in no event more, than the above-stated amounts. This matter, if
resolved in accordance with the stipulation of settlement, will not have a
material adverse effect on our operating results.
We are one of a number of defendants in numerous proceedings which allege that
the plaintiffs contracted cancer and/or suffered other injuries from exposure to
talc, asbestos or other "toxic" substances purportedly supplied by us and other
defendants. We are also subject to a number of environmental contingencies and
are a defendant in a number of lawsuits covering a wide range of other matters.
In some of these matters, the remedies sought or damages claimed are
substantial. While it is not possible to predict with certainty the ultimate
outcome of these lawsuits or the resolution of the environmental contingencies,
management believes, after consultation with counsel, that resolution of these
matters is not expected to have a material adverse effect on our financial
condition. These matters, if resolved in a manner different from management's
current expectations, could have a material adverse effect on our operating
results or cash flows. See Note 17 to our Consolidated Financial Statements for
information regarding environmental cleanup costs.
In July 1996, the Securities and Exchange Commission issued a formal order of
investigation concerning the sales of our stock by certain of our officers and
directors during 1995. Subpoenas for documents and witness testimony were issued
by the SEC. In response, we provided documents to the SEC and witnesses were
examined by the SEC staff during 1996.
In 1998, management learned that we and several other companies operating in
Japan had been victims of a fraudulent scheme involving base-metal inventory
held in third-party warehouses in Japan. The inventory loss was approximately
$40 million in 1997 and $20 million in 1998. We are vigorously pursuing various
recovery actions. These actions include negotiations with the various third
parties involved and in several instances the commencement of litigation. During
1998, we recorded a receivable from the insurance carriers and third parties
involved for approximately $20 million. This amount represents management's and
counsel's best estimate of the minimum probable recovery from the various
insurance policies and other parties involved in the fraudulent scheme.
In February 1999, the Peruvian taxing authority made public an investigation of
the country's gold industry stemming from suspected evasion of value-added tax
payments. Engelhard Peru, S.A., a purchaser and exporter of gold, paid the tax
to its vendors for each purchase and then claimed a refund from the Peruvian
taxing authority after export. We typically would post a one-month letter of
credit to obtain a prompt refund. Our refund claims for November and December of
1998 and January of 1999 were approximately $10 million per month. We have
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received the refunds for November and December, but, at the request of the
government, the letters of credit, in the amount of $20 million, have been
extended until July 1999 while the investigation is conducted. The refund for
January 1999 is going through the claims procedure and remains unpaid.
Management believes, based upon consultation with counsel, that all appropriate
tax payments have been made and that we are entitled to all refunds claimed.
However, if the resolution of this matter differs from management's belief, the
maximum financial exposure is approximately $30 million. Meanwhile, Engelhard
has suspended any operations that could further increase the value-added tax
exposure pending completion of the industry investigation.
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MANAGEMENT
The following table sets forth certain information concerning the executive
officers and directors of Engelhard as of December 31, 1998:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Linda G. Alvarado 46 Director
Marion H. Antonini 68 Director
Anthony W. Lea 50 Director
William R. Loomis, Jr. 50 Director
James V. Napier 62 Director
Norma T. Pace 77 Director
Barry W. Perry 52 Director, President and Chief Operating Officer
Reuben F. Richards 69 Director
Henry R. Slack 49 Director
Orin R. Smith 63 Director, Chairman and Chief Executive Officer
Douglas G. Watson 54 Director
Arthur A. Dornbusch, II 55 Vice President, General Counsel and Secretary
Mark Dresner 47 Vice President, Corporate Communications
Thomas P. Fitzpatrick 60 Senior Vice President and Chief Financial Officer
Joseph E. Gonnella 52 Senior Vice President, Strategy and Corporate
Development
John C. Hess 46 Vice President, Human Resources
Peter B. Martin 59 Vice President, Investor Relations
Peter R. Rapin 44 Treasurer
Robert J. Schaffhauser 60 Vice President and Chief Technical Officer
Michael A. Sperduto 41 Vice President, Finance
David C. Wajsgras 38 Controller
</TABLE>
LINDA G. ALVARADO. President and Chief Executive Officer of Alvarado
Construction, Inc., since prior to 1994. Ms. Alvarado is also a director of
Cyprus Amax Minerals Company, Pitney Bowes, Inc. and US West Communications Inc.
MARION H. ANTONINI. Principal of Kohlberg & Co. since March 1998. President and
Chief Executive Officer of Welbilt Corporation from prior to 1994 to 1998. Mr.
Antonini is also a director of Vulcan Materials Company, Scientific-Atlanta,
Inc., Color Spot Nurseries, Inc. and Holley Performance Products, Inc.
ANTHONY W. LEA. Executive Director and Member of the Executive Committee of
Minorco since prior to 1994; Director of Anglo American Corporation of South
Africa since prior to 1994. Mr. Lea is also a director of Terra Industries Inc.
WILLIAM R. LOOMIS, JR. Chairman of the Board of Terra Industries Inc. since
April 1996; Managing Director, Lazard Freres & Co. LLC, an investment bank,
since prior to 1994; General Partner in the Banking Group of Lazard Freres & Co.
LLC from prior to 1994 to June 1995.
JAMES V. NAPIER. Chairman of Scientific-Atlanta, Inc., a communications
manufacturing company, since prior to 1994. Mr. Napier is also a director of
Intelligent Systems Corporation, Vulcan Materials Company, HBO & Company,
Personnel Group of America, Inc. and Westinghouse Air Brake Company.
NORMA T. PACE. Partner, Paper Analytics Associates, a planning and consulting
company since 1995; Senior Advisor and Director of WEFA Group, Inc., economic
consultants and forecasters since prior to 1994. Mrs. Pace is also a director of
Hasbro, Inc.
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BARRY W. PERRY. President and Chief Operating Officer of Engelhard since 1997;
previously Group Vice President and General Manager of the Pigments and
Additives Group. Mr. Perry is also a director of Arrow Electronics, Inc.
REUBEN F. RICHARDS. Retired Chairman of the Board of Terra Industries, Inc.;
Retired Chairman of the Board of Minorco (U.S.A.); Retired Non-Executive
Chairman of the Board of Engelhard; Chairman of the Board of Terra Industries
Inc. from prior to 1994 until April 1996. Mr. Richards is also a director of
Santa Fe Energy Resources, Inc., Ecolab, Grupo Financiero Banorte and Potlatch
Corporation.
HENRY R. SLACK. Chief Executive of Minorco since December 1992; Member of the
Executive Committee of Minorco since prior to 1994, and President and a director
of Minorco since prior to 1994; director of Anglo American Corporation of South
Africa Limited since prior to 1994. Mr. Slack is also a director of Terra
Industries Inc.
ORIN R. SMITH. Chairman and Chief Executive Officer of Engelhard since January
1995; previously President and Chief Executive Officer of Engelhard. Mr. Smith
is also a director of Ingersoll-Rand Company, Perkin-Elmer Corporation, Summit
Bancorp, and Vulcan Materials Company.
DOUGLAS G. WATSON. President, CEO and Director of Novartis Corporation, a life
sciences company, since January 1997. President of the Pharmaceuticals Division
of CIBA-GEIGY Corporation from prior to 1994 to January 1997. Mr. Watson is also
a director of Summit Bancorp.
ARTHUR A. DORNBUSCH, II. Vice President, General Counsel and Secretary of
Engelhard from prior to 1994.
MARK DRESNER. Vice President of Corporate Communications effective December 17,
1998. Director of Corporate Communications from October 1995 to December 1998.
Director of Human Resources for the Chemical Catalysts Group from August 1994 to
September 1995. Director of Communications prior thereto.
THOMAS P. FITZPATRICK. Senior Vice President and Chief Financial Officer
effective May 1, 1997. Partner with Coopers & Lybrand L.L.P. prior thereto.
JOSEPH E. GONNELLA. Senior Vice President, Strategy and Corporate Development
effective February 1, 1997. Group Vice President and General Manager of the
Environmental Technologies Group from August 1994 to January 1997. Business
Director of the Mobile Source business prior thereto.
JOHN C. HESS. Vice President, Human Resources effective August 1, 1997.
Director of Human Resources for the Chemical Catalyst Group from November 1995
to July 1997. Director of Human Resources for Policies, Plans and Services prior
thereto.
PETER B. MARTIN. Vice President, Investor Relations effective June 18, 1997.
Vice President, Investor Relations, W.R. Grace & Company prior thereto.
PETER R. RAPIN. Treasurer effective July 8, 1998. Assistant treasurer from July
1995 to July 1998. Director, Banking Services for Westinghouse Electric
Corporation prior thereto.
ROBERT J. SCHAFFHAUSER. Vice President and Chief Technical Officer effective
February 1, 1997. Vice President, Technology and Corporate Development from
January 1995 to January 1997. Vice President, Corporate Development prior
thereto.
MICHAEL A. SPERDUTO. Vice President-Finance since July 8, 1998. Treasurer prior
thereto.
DAVID C. WAJSGRAS. Controller of Engelhard effective September 1, 1997. Chief
Financial Officer and Director of Financial Services with AlliedSignal Inc.
Business Services Group from July 1994 to August 1997. Business Unit Controller
for AlliedSignal Inc. prior thereto.
45
<PAGE> 47
When the offering is completed, Messrs. Anthony W. Lea and Henry R. Slack will
resign from our Board of Directors.
THE SELLING STOCKHOLDER
Minorco is selling the common stock. Minorco, through Taurus Investments S.A., a
wholly-owned subsidiary of Minorco, holds 45,943,494 shares of common stock of
Engelhard, representing approximately 32% of the outstanding voting securities
of Engelhard.
DESCRIPTION OF CAPITAL STOCK
General
Engelhard is authorized to issue 350,000,000 shares of common stock, par value
$1.00 per share, and 5,000,000 shares of preferred stock, without par value. All
outstanding shares of common stock are fully paid and non-assessable. As of
January 31, 1999, there were 144,645,642 shares of common stock outstanding.
Common Stock
The holders of the common stock of Engelhard are entitled to receive dividends
from legally available funds when they are declared by the Board of Directors,
subject to the rights of the holders of preferred stock, and are entitled upon
liquidation to share on a proportionate basis in all assets of Engelhard after
claims of creditors of Engelhard and holders of any preferred stock have been
satisfied.
The holders of the common stock are entitled to one vote for each share held on
all matters which shareholders are entitled to vote upon. The holders of the
common stock do not have cumulative voting rights, any preferential or
preemptive right with respect to any securities of Engelhard, or any conversion
rights. The common stock is not subject to redemption.
The common stock is listed on the following stock exchanges: New York, Chicago
(options), London and the Swiss Electronic Bourse. The transfer agent for the
common stock is ChaseMellon Shareholder Services, L.L.C.
Preferred Stock
Engelhard is authorized to issue 5,000,000 shares of preferred stock in one or
more series. Engelhard's Board of Directors can fix the rights, preferences and
limitations of each series. If any particular issue of preferred stock has the
right to receive dividends before the common stock, any payments to satisfy
those dividend preferences would reduce the amount of funds available for the
payment of dividends on common stock. Also, holders of preferred stock would
normally be entitled to receive a preference payment before any payment is made
to holders of common stock in the event of any liquidation, dissolution or
winding-up of Engelhard. As of the date of this prospectus, no shares of
preferred stock are issued or outstanding.
Supermajority Voting Requirements and Classified Board of Directors
Engelhard's restated certificate of incorporation contains restrictions on
business combinations, including by merger, sale, consolidation or through the
issuance of voting securities of Engelhard, with any entity who beneficially
owns 5% or more of the outstanding common stock of Engelhard. At least 80% of
the outstanding shares of common stock must vote to approve a business
combination. The 80% affirmative vote must include at least 50% of the
outstanding shares of common stock held by shareholders other than any such 5%
beneficial owner. A majority of the board of directors of Engelhard could
approve a business combination without the 80% affirmative vote if a majority of
the directors approving the transaction had been
46
<PAGE> 48
members of the board prior to the time such 5% beneficial owner became the 5%
beneficial owner.
Engelhard's restated certificate of incorporation also provides for a classified
board of directors divided into three classes. All classes shall be as nearly
equal in number as possible and no class shall include fewer than two directors,
with one class of directors to be elected each year for a three-year term.
Neither provision described in the previous paragraphs can be amended without
the affirmative vote of the holders of at least 80% of the outstanding shares of
common stock. The 80% affirmative vote must include at least 50% of the
outstanding shares of common stock held by shareholders other than a 5%
beneficial owner.
Engelhard believes that the classified board and the 80% voting requirements are
desirable to assure continuity in board membership and in policy formulated by
the board. Such provisions are expected to moderate the pace of any change in
control of Engelhard by extending the time required to elect a majority of the
directors and to better enable the board to protect the interests of
shareholders in the event that any person or corporation should attempt to
obtain control of Engelhard.
Engelhard recognizes, however, that these provisions could prevent or discourage
a merger, tender offer or proxy contest or attempts to gain control of a large
block of Engelhard securities.
The 80% voting requirement for approval of business combinations with 5%
beneficial owners, absent board approval, provides the board and minority
shareholders with a veto power over such transactions. This provision would be
beneficial to Engelhard management when confronted with a hostile tender offer
and may deter such offers, thus depriving a shareholder of the opportunity to
dispose of his or her shares in a hostile tender offer or at a premium to the
market price of the common stock. The deterrence of such offers also has the
effect of supporting existing management in its present position.
Shareholder Rights Plan
On October 1, 1998, our board of directors adopted a stockholder rights plan
declaring a dividend distribution on November 13, 1998 of one right for each
outstanding share of our common stock. Each right entitles the registered
stockholders to purchase from Engelhard one one-thousandth of a share of series
A junior participating preferred stock at a price of $100 per one one-thousandth
of a share.
Subject to certain exceptions, the rights may not be exercised until 10 days
after:
- a person or group acquires 15% or more of our common stock.
- a person or group announces a tender offer that, if consummated, would
result in such person or group owning 15% or more of our common stock.
If either of these events happen, each holder of a right, other than the person
or group who acquired 15% or more of our common stock, may exercise the right
and receive common stock, or, in certain circumstances, cash, property, or other
securities of Engelhard, having a value equal to two times the purchase price of
the right rather than receiving the series A junior participating preferred
stock.
In the event that we are acquired in a merger or other business combination
transaction, or 50% or more of our assets or earning power is sold or
transferred, each holder of a right will have the right to receive common stock
of the acquiring company having a value equal to two times the purchase price of
the right.
Subject to certain exceptions, if 15% or more of our common stock is acquired,
the board of directors may exchange the rights, other than the acquirer's rights
which will have become void, in whole or in part, at an exchange ratio of one
share of common stock, or a fraction of a share of preferred stock having the
same market value, per right.
47
<PAGE> 49
The rights will expire on October 1, 2008, unless exchanged or redeemed prior to
that date. We may redeem the rights at a price of $.001 per right at any time
prior to the tenth day following a public announcement that a person or group
has acquired 15% or more of our common stock.
Until the rights become exercisable, they may be transferred only with the
common stock.
The purchase price payable, and the number of shares of series A preferred stock
or other securities or property issuable, upon exercise of the rights are
subject to adjustment to prevent dilution in the event of certain actions taken
by Engelhard.
The rights have certain anti-takeover effects. The rights will cause substantial
dilution to a person or group that attempts to acquire Engelhard without
conditioning the offer on a substantial number of rights being acquired. The
rights should not interfere with any merger or other business combination
approved by the board of directors of Engelhard since the board of directors
may, at its option, at any time prior to the time a person has become an
acquiring person, redeem all the then outstanding rights at redemption price of
$.001 per right.
Directors' Liability and Indemnification of Directors and Officers
Engelhard's restated certificate of incorporation, as amended, provides that no
director of Engelhard will be held personally liable to Engelhard or its
shareholders for monetary damages of any kind for breach of fiduciary duty as a
director, except for liability:
(1) for any breach of the director's duty of loyalty to Engelhard or its
shareholders,
(2) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law,
(3) in respect of certain unlawful dividend payments or stock redemptions or
repurchases in violation of Section 174 of the Delaware General Corporation Law
("DGCL"), or
(4) for any transaction from which the director derived an improper personal
benefit.
The effect of such provisions in the restated certificate of incorporation will
be to eliminate the rights of Engelhard and its shareholders, including through
shareholders' derivative suits on behalf of Engelhard, to recover monetary
damages against a director for breach of fiduciary duty as a director, including
breaches resulting from negligent or grossly negligent behavior, except in the
situations described in clauses (1) through (4) above.
The by-laws of Engelhard provide that each person who was or is made a party or
is threatened to be made a party to or is involved in any actual or threatened
action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person is or was a director or
officer of Engelhard or is or was serving at the request of Engelhard as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, whether the basis of such proceeding is
alleged action in an official capacity as a director, officer, employee or agent
or in any other capacity while serving as a director, officer, employee or
agent, shall be indemnified and held harmless by Engelhard to the fullest extent
authorized by the DGCL. This right to indemnification shall also include the
right to be paid by Engelhard the expenses incurred in connection with any such
proceeding in advance of its final disposition to the fullest extent authorized
by the DGCL. This right to indemnification shall be a contract right. Engelhard
may, by action of the board of directors, provide indemnification to such of the
employees and agents of Engelhard to such extent and to such effect as the board
of directors determines to be appropriate and authorized by the DGCL.
48
<PAGE> 50
UNDERWRITING
Under the terms and subject to the conditions contained in an underwriting
agreement dated the date hereof, the underwriters named below for whom Morgan
Stanley & Co. Incorporated and J.P. Morgan Securities Inc. are acting as
representatives, have severally agreed to purchase, and Minorco has agreed to
sell to them, severally, the respective number of shares of common stock set
forth opposite the names of such Underwriters below:
<TABLE>
<CAPTION>
NUMBER OF
SHARES
----------
<S> <C>
UNDERWRITERS
J.P. Morgan Securities Inc..................................
Morgan Stanley & Co. Incorporated...........................
Lazard Freres & Co. LLC.....................................
Donaldson, Lufkin & Jenrette Securities Corporation.........
Merrill Lynch, Pierce, Fenner & Smith
Incorporated..................................
Salomon Smith Barney Inc....................................
----------
Total............................................. 26,000,000
==========
</TABLE>
The underwriters are offering the shares of common stock subject to their
acceptance of the shares from Minorco and subject to prior sale. The
underwriting agreement provides that the obligations of the several underwriters
to pay for and accept delivery of the shares of common stock offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. The underwriters are obligated to take and pay for all of the
shares of common stock offered hereby, other than those covered by the
underwriters' over-allotment option described below, if any such shares are
taken.
The underwriters initially propose to offer part of the shares of common stock
directly to the public at the public offering price set forth on the cover page
hereof and part to certain dealers at a price that represents a concession not
in excess of $ a share under the public offering price. Any underwriter
may allow, and such dealers may reallow, a concession not in excess of
$ a share to other underwriters or to certain dealers. After the
initial offering of the shares of common stock, the offering price and other
selling terms may from time to time be varied by the representatives.
Minorco has granted to the underwriters an option, exercisable for 3 days from
the date of this prospectus, to purchase up to an aggregate of 2,000,000
additional shares of common stock at the public offering price set forth on the
cover page hereof, less underwriting discounts and commissions. The underwriters
may exercise such option solely for the purpose of covering overallotments, if
any, made in connection with the offering of the shares of common stock offered
hereby. To the extent such option is exercised, each underwriter will become
obligated, subject to certain conditions, to purchase approximately the same
percentage of such additional shares of common stock as the number set forth
next to such underwriter's name in the preceding table bears to the total number
of shares of common stock set forth next to the names of all underwriters in the
preceding table.
Engelhard and certain directors, executive officers and stockholders of
Engelhard, and Minorco, in the event that the underwriters' overallotment option
is not exercised in full, have agreed that, without the prior written consent of
the representatives, on behalf of the underwriters, it will not, during the
period ending 90 days after the date of this prospectus:
(1) offer, pledge, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option,
right or warrant to purchase, lend or
49
<PAGE> 51
otherwise transfer or dispose of, directly or indirectly, any shares of
common stock or other securities of Engelhard that are convertible into
or exchangeable for common stock or
(2) enter into any swap or other ownership arrangement that transfers to
another, in whole or in part, any of the economic consequences of
ownership of the common stock, whether any such transaction described
in clause (1) or (2) above is to be settled by delivery of common stock
or such other securities, in cash or otherwise.
The restrictions described in the above paragraph do not apply to:
(a) the sale of shares of common stock to the underwriters,
(b) in the case of Engelhard, the sale of shares of common stock of
Engelhard to Engelhard by Minorco,
(c) the issuance by Engelhard of shares of common stock upon the exercise
of an option or a warrant or the conversion of a security outstanding
on the date of this prospectus of which the underwriters have been
advised in writing or
(d) transactions by any person other than Engelhard relating to shares of
common stock or other securities acquired in open market transactions
after the completion of the offering of the common stock.
In order to facilitate the offering of the common stock, the underwriters may
engage in transactions that stabilize, maintain or otherwise affect the price of
the common stock. Specifically, the underwriters may overallot in connection
with the offering, creating a short position in the common stock for their own
account. In addition, to cover overallotments or to stabilize the price of the
common stock, the underwriters may bid for, and purchase, shares of common stock
in the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the common
stock in the offering, if the syndicate repurchases previously distributed
common stock in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the common stock above independent market
levels. The underwriters are not required to engage in these activities, and may
end any of these activities at any time.
Engelhard, Minorco and the underwriters have agreed to indemnify each other
against civil liabilities under the Securities Act, including material
misstatements or omissions in this prospectus.
In the ordinary course of their respective businesses, certain of the
underwriters and their affiliates have engaged, are engaging and may in future
engage in commercial banking, financial advisory and/or investment banking
transactions with Engelhard and its affiliates for which they have received or
will receive customary compensation.
LEGAL MATTERS
Cahill Gordon & Reindel (a partnership including a professional corporation) of
New York, New York, will issue an opinion with respect to the validity of the
common stock for Engelhard Corporation. Elvinger, Hoss & Prussen of Luxembourg
and Ben L. Keisler, General Counsel for Minorco, will each act as counsel for
Minorco. Shearman & Sterling of New York, New York will act as counsel for the
Underwriters.
50
<PAGE> 52
EXPERTS
Our consolidated balance sheets as of December 31, 1998 and December 31, 1997
and the related statements of earnings, shareholders' equity and cash flows for
each of the three fiscal years in the period ended December 31, 1998, included
and incorporated by reference in this prospectus have been included and
incorporated by reference herein in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
that firm as experts in accounting and auditing.
51
<PAGE> 53
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
Report of Independent Auditors.............................. F-2
Consolidated Financial Statements:
Consolidated Statements of Earnings for the years ended
December 31, 1996, 1997 and 1998....................... F-3
Consolidated Balance Sheets as of December 31, 1997 and
1998................................................... F-4
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1997 and 1998....................... F-5
Consolidated Statements of Shareholders' Equity as of
December 31, 1996, 1997 and 1998....................... F-6
Notes to Consolidated Financial Statements.................. F-8
</TABLE>
F-1
<PAGE> 54
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and
Board of Directors of Engelhard Corporation:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of earnings, shareholders' equity and cash flows
appearing on pages F-3 through F-34 present fairly, in all material respects,
the consolidated financial position of Engelhard Corporation and Subsidiaries
(the "Company") as of December 31, 1998 and 1997, and the consolidated results
of operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
PRICEWATERHOUSECOOPERS LLP
New York, New York
February 4, 1999, except for Note 20,
as to which the date is March 2, 1999
F-2
<PAGE> 55
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF EARNINGS
<TABLE>
<CAPTION>
------------------------------------------
YEARS ENDED DECEMBER 31,
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
(in thousands, except per share amounts)
Net sales $4,174,553 $3,630,653 $3,184,431
Cost of sales 3,527,624 3,030,717 2,671,377
---------- ---------- ----------
Gross profit 646,929 599,936 513,054
Selling, administrative and other expenses 337,556 327,820 255,460
Special charge -- 86,000 --
---------- ---------- ----------
Operating earnings 309,373 186,116 257,594
Equity in earnings (losses) of affiliates 10,077 (47,833) (5,008)
Gain on sale of investment -- 305 2,378
Interest expense (58,887) (52,776) (45,009)
---------- ---------- ----------
Earnings before income taxes 260,563 85,812 209,955
Income tax expense 73,479 38,034 59,508
---------- ---------- ----------
Net earnings $ 187,084 $ 47,778 $ 150,447
========== ========== ==========
Basic earnings per share $ 1.30 $ 0.33 $ 1.05
Diluted earnings per share $ 1.29 $ 0.33 $ 1.03
Average number of shares outstanding--basic 144,157 144,270 143,810
========== ========== ==========
Average number of shares outstanding--diluted 145,366 145,937 145,724
========== ========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 56
ENGELHARD CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
--------------------------
DECEMBER 31,
1998 1997
---------- ----------
<S> <C> <C>
(in thousands)
ASSETS
Cash $ 22,339 $ 28,765
Receivables, net of allowances of $7,038 and $4,931,
respectively 376,826 323,330
Committed metal positions 541,224 502,494
Inventories 349,752 356,403
Other current assets 69,826 44,180
---------- ----------
Total current assets 1,359,967 1,255,172
Investments 156,727 160,082
Property, plant and equipment, net 876,461 788,178
Intangible assets, net 326,253 214,929
Other noncurrent assets 146,911 167,962
---------- ----------
Total assets $2,866,319 $2,586,323
========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Short-term borrowings $ 255,002 $ 249,368
Accounts payable 227,535 180,499
Hedged metal obligations 552,690 572,266
Other current liabilities 235,218 238,003
---------- ----------
Total current liabilities 1,270,445 1,240,136
Long-term debt 497,393 373,574
Other noncurrent liabilities 196,924 187,353
---------- ----------
Total liabilities 1,964,762 1,801,063
Commitments and contingent liabilities
Shareholders' equity:
Preferred stock, no par value, 5,000 shares authorized and
unissued -- --
Common stock, $1 par value, 350,000 shares authorized and
147,295 shares issued 147,295 147,295
Retained earnings 853,249 726,082
Treasury stock, at cost, 4,008 and 2,803 shares,
respectively (65,013) (45,992)
Accumulated other comprehensive loss (33,974) (42,125)
---------- ----------
Total shareholders' equity 901,557 785,260
---------- ----------
Total liabilities and shareholders' equity $2,866,319 $2,586,323
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 57
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
-----------------------------------
YEAR ENDED DECEMBER 31,
1998 1997 1996
--------- --------- ---------
<S> <C> <C> <C>
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 187,084 $ 47,778 $ 150,447
Adjustments to reconcile net earnings to net cash
provided by operating activities
Depreciation, depletion and amortization 100,931 88,066 74,871
Gain on sale of investments -- (305) (2,378)
Special charge -- 86,000 --
Equity results, net of dividends (8,055) 51,636 7,523
Net change in assets and liabilities
Metal related (71,859) (29,763) (121,270)
All other (31,389) (46,864) (84,434)
--------- --------- ---------
Net cash provided by operating activities 176,712 196,548 24,759
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Capital expenditures, net (116,460) (136,945) (128,195)
Proceeds from sale of investment 1,018 2,458 1,391
Proceeds from sale and leaseback 67,168 -- --
Acquisition of businesses and investments (244,780) (37,409) (287,675)
Other 5,850 8,691 4,931
--------- --------- ---------
Net cash used in investing activities (287,204) (163,205) (409,548)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase (decrease) in short-term borrowings 5,349 (55,493) 121,419
Increase in hedged metal obligations 39,743 55,403 159,286
Proceeds from issuance of long-term debt 115,605 555 250,164
Repayment of long-term debt -- (2,051) (100,786)
Purchase of treasury stock (8,411) -- (7,357)
Stock bonus and option plan transactions 11,021 13,329 13,903
Dividends paid (57,842) (54,851) (51,773)
--------- --------- ---------
Net cash provided by (used in) financing
activities 105,465 (43,108) 384,856
Effect of exchange rate changes on cash (1,399) (1,153) (407)
--------- --------- ---------
Net decrease in cash (6,426) (10,918) (340)
Cash at beginning of year 28,765 39,683 40,023
--------- --------- ---------
Cash at end of year $ 22,339 $ 28,765 $ 39,683
========= ========= =========
</TABLE>
See accompanying notes to consolidated financial statements
F-5
<PAGE> 58
ENGELHARD CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
STOCK EARNINGS STOCK INCOME/(LOSS) INCOME/(LOSS) EQUITY
-------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
(in thousands, except
per share amounts)
Balance at December
31, 1995 $147,295 $625,787 $(57,173) $ 21,833 $ 737,742
Comprehensive
income/(loss):
Net earnings 150,447 150,447 150,447
-------------
Other comprehensive
loss:
Foreign currency
translation
adjustments (9,806)
-------------
Other comprehensive
loss (9,806) (9,806) (9,806)
-------------
Comprehensive income 140,641
=============
Dividends ($0.36 per
share) (51,773) (51,773)
Treasury stock
acquired (7,357) (7,357)
Stock bonus and
option plan
transactions 5,852 8,051 13,903
-------- -------- -------- ------------- ------------- ------------
Balance at December
31, 1996 147,295 730,313 (56,479) 12,027 833,156
Comprehensive
income/(loss):
Net earnings 47,778 47,778 47,778
-------------
Other comprehensive
loss:
Foreign currency
translation
adjustments (54,152)
-------------
Other comprehensive
loss (54,152) (54,152) (54,152)
-------------
Comprehensive loss (6,374)
=============
Dividends ($0.38 per
share) (54,851) (54,851)
Stock bonus and
option plan
transactions 2,842 10,487 13,329
-------- -------- -------- ------------- ------------- ------------
Balance at December
31, 1997 147,295 726,082 (45,992) (42,125) 785,260
</TABLE>
F-6
<PAGE> 59
<TABLE>
<CAPTION>
------------------------------------------------------------------------------
ACCUMULATED
OTHER TOTAL
COMMON RETAINED TREASURY COMPREHENSIVE COMPREHENSIVE SHAREHOLDERS'
STOCK EARNINGS STOCK INCOME/(LOSS) INCOME/(LOSS) EQUITY
-------- -------- -------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
Comprehensive
income/(loss):
Net earnings 187,084 187,084 187,084
-------------
Other comprehensive
income/(loss):
Foreign currency
translation
adjustments 12,067
Minimum pension
liability
adjustment (3,916)
-------------
Other comprehensive
income 8,151 8,151 8,151
-------------
Comprehensive income 195,235
=============
Dividends ($0.40 per
share) (57,842) (57,842)
Treasury stock
acquired (8,411) (8,411)
Adoption of Rabbi
Trust (3,603) (20,103) (23,706)
Stock bonus and
option plan
transactions 1,528 9,493 11,021
-------- -------- -------- ------------- ------------- ------------
Balance at December
31, 1998 $147,295 $853,249 $(65,013) $ (33,974) $ 901,557
======== ======== ======== ============= ============= ============
</TABLE>
See accompanying notes to consolidated financial statements
F-7
<PAGE> 60
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1997 AND 1998
NOTE ONE--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
Engelhard Corporation and its wholly-owned subsidiaries (collectively referred
to as Engelhard or the Company). All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior year amounts have
been reclassified to conform with the current year presentation.
Use of Estimates
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.
Cash and Cash Equivalents
Cash equivalents include all investments purchased with an original maturity of
three months or less, and have virtually no risk of loss in value.
Inventories
Inventories are stated at the lower of cost or market. The elements of cost
include direct labor and materials, variable overhead and the full absorption of
fixed manufacturing overhead. The cost of precious-metals inventories is
determined using the last-in, first-out (LIFO) method of inventory valuation.
The cost of other inventories is principally determined using either the average
cost or the first-in, first-out (FIFO) method.
Property, Plant and Equipment
Property, plant, and equipment are stated at cost. Depreciation of buildings and
equipment are provided primarily on a straight-line basis over the estimated
useful lives of the assets. Buildings and building improvements are depreciated
over 20 years, while machinery and equipment is depreciated based on lives
varying from 3 to 10 years. Depletion of mineral deposits and mine development
are provided under the units of production method. When assets are sold or
retired, the cost and related accumulated depreciation is removed from the
accounts and any gain or loss is included in earnings.
Intangible Assets
Identifiable intangible assets such as patents and trademarks are amortized
using the straight-line method over their estimated useful lives. Goodwill is
amortized over periods up to 40 years using the straight-line method. The
Company recorded amortization expense of $12.6 million in 1998, $9.6 million in
1997, and $6.3 million in 1996. The accumulated amortization amounted to $34.8
million and $22.2 million at December 31, 1998 and December 31, 1997,
respectively. Included in intangible assets, is net goodwill which amounted to
$300.0 million and $209.4 million at December 31, 1998 and December 31, 1997,
respectively. The increase in net goodwill was primarily the result of the
acquisition of the Mallinckrodt businesses in May 1998. The Company continually
evaluates the reasonableness of its amortization of intangibles. In addition, if
it becomes probable that expected future undiscounted cash flows associated with
intangible assets are less than their carrying value, the assets are written
down to their fair value.
F-8
<PAGE> 61
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Committed Metal Positions and Hedged Metal Obligations
The Company routinely enters into a variety of arrangements for the sourcing of
industrial commodities. These arrangements are spread among a number of
counterparties, which are generally major industrial companies or highly rated
financial or other institutions. The conduct of this business is closely
monitored.
Generally, all industrial commodity transactions are hedged on a daily basis,
using forward, future, option or swap contracts to substantially eliminate the
exposure to price risk. In addition, all industrial commodity transactions are
marked-to-market daily. In limited and closely monitored situations, for which
exposure levels have been set by senior management, the Company holds
significant unhedged industrial commodity positions that are subject to future
market fluctuations. Such positions may include varying levels of derivative
commodity instruments.
Committed metal positions (non-inventory metal purchases) and hedged metal
obligations (metal sold not yet purchased but fully hedged) are carried at fair
value. Fair value is generally based on listed market prices. If listed market
prices are not available or if liquidating the Company's positions would
reasonably be expected to impact market prices, fair value is determined based
on other relevant factors, including dealer price quotations and price
quotations in different markets, including markets located in different
geographic areas. Any change in value, realized or unrealized, is recognized in
gross profit in the period of the change.
Environmental Costs
In the ordinary course of business, like most other industrial companies, the
Company is subject to extensive and changing federal, state, local and foreign
environmental laws and regulations, and has made provisions for the estimated
financial impact of environmental cleanup related costs. The Company's policy is
to accrue environmental cleanup related costs of a noncapital nature when those
costs are believed to be probable and can be reasonably estimated. Environmental
clean-up costs are deemed probable when litigation has commenced or a claim or
an assessment has been asserted or, based on available information, commencement
of litigation or assertion of a claim or an assessment is probable and based on
available information, it is probable that the outcome of such litigation, claim
or assessment will be unfavorable. The quantification of environmental exposures
requires an assessment of many factors, including changing laws and regulations,
advancements in environmental technologies, the quality of information available
related to specific sites, the assessment stage of each site investigation,
preliminary findings and the length of time involved in remediation or
settlement. For certain matters, the Company expects to share costs with other
parties. The Company does not include anticipated recoveries from insurance
carriers or other third parties in its accruals for environmental liabilities.
Revenue Recognition
Revenues are recognized on sales of product at the time the goods are shipped or
when title has passed to the customer. In limited situations, revenue is
recognized on a bill and hold basis as title passes to the customer before
shipment of goods. These bill and hold sales meet the criteria for revenue
recognition. Sales recognized on a bill and hold basis were approximately $10.8
million in 1998, $2.6 million in 1997 and $4.1 million in 1996.
The metal component of product sales is recognized at contract price on the date
of title transfer. For all other commodity related activities, an unrealized
gain or loss is recorded based on changes in the market value of the Company's
positions.
F-9
<PAGE> 62
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Sales and Cost of Sales
Some of the Company's businesses use precious metals in their manufacturing
processes. Precious metals are included in sales and cost of sales if the metal
has been supplied by the Company. Often, customers supply the precious metals
for the manufactured product. In those cases, precious-metals values are not
included in sales or cost of sales. The mix of such arrangements and the extent
of market price fluctuations can significantly affect the level of reported
sales but do not usually have a material effect on earnings.
In addition, sales and purchases of precious metals to/from industrial and
refining customers are transacted through the Company's dealing operations and
are recorded in sales and cost of sales. Secondarily, and usually as a
consequence of the above transactions, the Company also engages in
precious-metals dealing with other counterparties. In these cases, the
precious-metals values are generally included in sales and cost of sales only to
the extent that the Company has added value by changing the physical form of the
metal.
Income Taxes
Deferred income taxes reflect the differences between the assets and liabilities
recognized for financial reporting purposes and amounts recognized for tax
purposes. Deferred taxes are based on tax laws as currently enacted.
Equity Method of Accounting
The Company's investments in 20% to 50% owned companies in which it has the
ability to exercise significant influence over operating and financial policies
are accounted for using the equity method. Accordingly, the Company's share of
the earnings of these companies is included in consolidated net income.
Investments in other companies are carried at cost.
Derivative Instruments
Engelhard enters into foreign exchange contracts as a hedge against monetary
assets and/or liabilities which are denominated in currencies other than the
functional currency of the entity holding those assets or liabilities. The
ultimate maturities of the contracts are timed to coincide with the expected
liquidation of the underlying monetary balances. Gains and losses on the
ultimate settlement of the contracts are offset against the losses and gains
realized on those underlying monetary accounts.
Interest rate swaps and similar arrangements are used by Engelhard to lock in
interest rates and/or convert floating rates to fixed and vice versa. The
differential to be paid or received is accrued as interest rates change and is
recognized over the life of the underlying debt agreements.
The use of derivative commodity instruments is discussed above under "Committed
Metal Positions and Hedged Metal Obligations." To the extent that the maturities
of these instruments are mismatched, Engelhard may be exposed to cash interest
rates. This exposure is mitigated through use of Eurodollar futures which are
marked to market daily along with the underlying commodity instruments.
Stock Option Plans
The Company adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" in 1997. In conjunction with the
adoption, the Company will continue to apply the intrinsic value based method of
accounting prescribed by Accounting Principles Board Opinion No. 25 "Accounting
for Stock Issued to Employees" with pro-forma disclosure of net income and
earnings per share as if the fair value based method prescribed by
F-10
<PAGE> 63
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
SFAS 123 had been applied. In general, no compensation cost related to these
plans is recognized in the consolidated statements of earnings.
Research and Development Costs
Research and development costs are charged to expense as incurred and were $69.8
million in 1998, $61.4 million in 1997 and $56.5 million in 1996. These costs
are included within selling, administrative and other expenses in the Company's
consolidated statements of earnings.
Foreign Currency Translation
The functional currency for the majority of the Company's foreign operations is
the applicable local currency. The translation from the applicable foreign
currencies to U.S. dollars is performed for balance sheet accounts using current
exchange rates in effect at the balance sheet date and for revenue and expense
accounts using a weighted average exchange rate during the period. The resulting
translation adjustments are recorded as a component of shareholders' equity.
Gains or losses resulting from foreign currency transactions are included in the
Company's consolidated statements of earnings.
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133 "Accounting for Derivative Instruments
and Hedging Activities". SFAS 133 is effective for the Company on January 1,
2000. The Company will adopt SFAS 133 by the first quarter of 2000. SFAS 133
requires that all derivative instruments be recorded on the balance sheet at
their fair value. The Company has not yet determined the impact that the
adoption of SFAS 133 will have on its earnings, comprehensive income or
statement of financial position.
NOTE TWO--ACQUISITIONS
On May 1, 1998, the Company acquired the chemical catalyst businesses of
Mallinckrodt Inc. for approximately $210 million in cash. The Company initially
financed the acquisition with a combination of commercial paper and bank
borrowings. The purchase price exceeded the preliminary assessment of the fair
value of net assets acquired by approximately $90 million, which is being
amortized on a straight-line basis over 40 years. The results of the
Mallinckrodt businesses are included in the accompanying financial statements
from the date of acquisition: For the year ended December 31, 1998, the
acquisition increased net sales by $67.7 million; operating earnings by $16.2
million; and earnings per share by $0.04. Earnings per share include the impact
of higher interest expense related to the acquisition.
F-11
<PAGE> 64
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following summarized unaudited pro forma financial information of the
Company assumes the acquisition had occurred on January 1 of each year:
<TABLE>
<CAPTION>
--------------------
PRO FORMA INFORMATION 1998 1997
- --------------------- -------- --------
<S> <C> <C>
(in millions except per share amounts)
Net sales $4,203.8 $3,717.6
Net earnings 188.9 47.9(1)
Basic earnings per share 1.31 0.33(1)
Diluted earnings per share 1.30 0.33(1)
</TABLE>
- ---------------
(1) The 1997 pro forma balances include special and other charges of $149.6
million ($117.7 million after tax or $0.82 per share).
The 1997 amounts above include the Mallinckrodt businesses actual results in
1997. The 1998 amounts above include the Mallinckrodt businesses results for the
first four months of 1998 prior to the acquisition, and the eight months in 1998
postacquisition. The pro forma amounts are based upon certain assumptions and
estimates, and do not reflect any benefit economies that might be achieved from
combined operations. The pro forma results do not necessarily represent results
that would have occurred if the acquisition had taken place on the basis assumed
above, nor are they indicative of the results of future combined operations.
On May 31, 1996, the Company acquired the Mearl Corporation (Mearl). Mearl
manufactured and supplied the automotive, cosmetics and industrial markets with
pearlescent pigments, and also manufactured and supplied iridescent film and
other products to a variety of markets. The transaction was accounted for as a
purchase. The purchase price was $272.7 million in cash, financed primarily with
long-term debt. The purchase price exceeded the fair value of net assets
acquired by $153.5 million, which is being amortized on a straight-line basis
over 35 years. The results of operations of Mearl, integrated into the Specialty
Pigments and Additives segment, are included in the accompanying consolidated
financial statements from the date of acquisition.
NOTE THREE--SPECIAL AND OTHER CHARGES
In response to weak results of certain operations, and as a result of the
base-metal fraud in Japan, Engelhard recorded, in the fourth quarter of 1997,
Special and Other Charges of $149.6 million ($117.7 million after tax).
F-12
<PAGE> 65
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the impact of the Special and Other Charges in
the 1997 Consolidated Statement of Earnings:
FINANCIAL IMPACT
<TABLE>
<CAPTION>
-------------
SPECIAL AND
OTHER CHARGES
-------------
<S> <C>
(in millions, except per share amounts)
Cost of sales $ (6.1)
Selling, administrative and other expenses (12.7)
Special charge (86.0)
-------------
Operating loss (104.8)
Equity in losses of affiliates (44.8)
-------------
Loss before income taxes (149.6)
Income tax benefit 31.9
-------------
Net loss $ (117.7)
-------------
Basic loss per share $ (0.82)
-------------
</TABLE>
The 1997 special and other charges are described below:
- The Process Technologies segment incurred charges of $35.4 million
primarily related to the closure and subsequent sale of a petroleum
catalysts facility in The Netherlands used for the manufacture of fluid
catalytic cracking (FCC) catalysts. Management approved a plan to improve
the profitability of this business, primarily by lowering its cost
structure and optimizing its manufacturing resources. The most
significant action resulted in the 1998 sale of the FCC catalysts
facility in The Netherlands. There was no gain or loss on the sale of the
facility as the sales price approximated the carrying value as adjusted
by the special and other charges. This decision was driven by industry
overcapacity and the determination that Engelhard's European customers
could be served more efficiently by North American FCC catalysts
operations. As a result, Engelhard provided for employee severance
obligations of $6.4 million covering 90 site employees, plant closure and
other miscellaneous costs of $1.7 million and asset write-downs of $27.3
million consisting of $22.1 million to reduce the carrying value of the
facility to an estimate of fair value based on appraisals performed by
third parties, a $2.7 million reserve for obsolete inventory, and $2.5
million to write-off intangible assets related to production technology
which could no longer be utilized. These actions are expected to be
substantially complete by the end of 1999.
- The Environmental Technologies segment incurred charges of $29.6 million
related to the sale of the stationary-source, emission-control capital
equipment business. Management approved a plan to sell this business
based on unfavorable market growth projections, combined with low
technological barriers to enter this market. Management believes that
this strategy will allow Engelhard to concentrate on its core
competency--catalyst technology. Revenue and operating loss for the
capital equipment business were $21.6 million and $6.4 million,
respectively, for the year ended December 31, 1997 and $40.3 million and
zero, respectively, for the year ended December 31, 1996. Engelhard
continues to sell catalysts for stationary-source pollution abatement.
Engelhard provided for losses on contracts and warranty costs of $7.9
million and reduced the carrying value of goodwill and other assets by
$21.7 million to an estimate of fair value based on
F-13
<PAGE> 66
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
negotiations with third parties. This write-down consisted of the
write-off of goodwill of $15.0 million, a reserve for uncollectable
accounts receivable of $4.2 million and a reserve for obsolete inventory
of $2.5 million. The sale was completed in February 1998 and there was no
gain or loss on the sale of the business as the sales price approximated
the carrying value as adjusted by the special and other charges. These
actions are expected to be substantially complete by the end of 1999.
- The Specialty Pigments and Additives segment wrote off assets of
approximately $0.8 million.
- Japan base-metal fraud of $39.0 million (see Note 18--"Litigation and
Contingencies" of the Notes to Consolidated Financial Statements of the
1998 Form 10-K for further detail).
- Engelhard recorded equity in losses of affiliates of $44.8 million as
follows:
- Engelhard-CLAL continued to face pressures of declining demand for
French manufactured jewelry, generally due to the availability of
inexpensive high-quality costume jewelry, and increased competition from
other international fabricators of precious-metal products with lower
cost structures. In response to these economic pressures and market
conditions, Engelhard and its partner, FIMALAC, agreed to rationalize
certain operations, determined that related assets were impaired and
reduced those assets to their estimated realizable value. The impact to
Engelhard of these actions was approximately $30.9 million, the
components of which were: a valuation allowance provided on deferred tax
assets of $14.3 million, employee severance of $10.5 million, write off
of production equipment of $4.3 million and inventory obsolescence
reserves of $1.8 million. In addition, Engelhard wrote off goodwill of
$9.0 million related to its investment in the joint venture based on the
expected future undiscounted cash flows. While market conditions
continue to reflect the circumstances noted in 1997, as a result of the
actions taken by Engelhard-CLAL, operating results turned marginally
positive in 1998. Engelhard-CLAL management expects that these actions
will be substantially completed during 1999.
- In 1997, Engelhard reached an agreement with its partner, ICC
Technologies, to restructure Engelhard/ICC, a joint venture in
desiccant-based, climate-control systems. As a result of this
restructuring, Engelhard subsequently acquired 100% of Engelhard Hexcore
L.P., the portion of the former joint venture that focuses on
manufacturing and marketing desiccant-coated rotors and related
products, and sold its interest in Fresh Air Solutions L.P., which
comprised the remainder of the joint venture. Goodwill of $4.9 million
related to Fresh Air Solutions L.P. was written off as a loss on sale.
Management believes that this reorganization will allow greater
concentration on core competencies. This action had been completed prior
to the end of 1998.
PRE-1997 CHARGES
The pre-1997 restructuring charges are related to:
- The restructuring of administrative operations at corporate headquarters
and the process technologies organization;
- The transfer of Attapulgite operations from the Company's Attapulgus, GA
facility to the acquired Quincy, FL site and the associated closing of
the Attapulgus operations;
- The closure of the Plainville, MA site and the subsequent disposal upon
the completion of environmental remediation activities;
F-14
<PAGE> 67
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
- The shutdown of operations at a Company facility in Newark, NJ and the
subsequent disposal of the facility;
- The shutdown of certain operations of the Union, NJ facility and
relocation of certain other operations to other underutilized Company
facilities.
The employee severance costs associated with the pre-1997 restructuring charges
are primarily related to the restructuring of administrative operations and the
transfer of Attapulgite operations. The severance costs associated with these
actions have been paid over extended periods as certain agreements negotiated
with severed employees provided for payments to be spread over several years.
The pre-1997 restructuring charges originally provided for employee severance
obligations for 1,863 corporate and site employees. The remaining severance
obligation as of December 31, 1998 is primarily attributable to 43 employees.
Additionally, regulatory delays in the consummation of the Company's acquisition
of the Quincy, FL attapulgite operation and inherent delays in the completion of
environmental remediation activities at Plainville, MA. have extended the
payment periods for those severance costs. Costs of retention of employees for
the longer than expected periods prior to termination have been expensed as
incurred. The remaining severance accrual of $3.6 million at December 31, 1998
is principally for long-term severance payments related to the Union facility
and for severance costs for employees remaining at the Plainville, MA site until
its closure.
Non-separation related costs associated with the pre-1997 restructuring charges
are primarily for costs associated with the shut down of the Union and Newark,
NJ sites, the Attapulgus, GA attapulgite operations, as well as
non-environmental shut-down costs at the Plainville, MA site. These shut down
costs approximated $15 million during the three year period ended December 31,
1998. The remaining accrual of $2.9 million is primarily for shut-down costs to
be incurred until closure of the Plainville and Union facilities. The timeframe
for final closure of the Plainville facility is pending government approval of
environmental cleanup plans at the site. Additionally, negotiations have begun
for the sale of a portion of the Union facility which, if consummated, will
complete the closure process for that site.
The actions related to the Plainville, MA site and the Union, NJ site are
expected to be substantially complete by the end of 2000.
Pending resolution of the matters discussed above, the Company believes
remaining reserves related to pre-1997 restructuring activities are adequate for
remaining activities under those plans.
F-15
<PAGE> 68
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the components of Engelhard's reserves for
restructuring and exit costs:
RESTRUCTURING RESERVES
<TABLE>
<CAPTION>
------------------------------------------------------------
SEPARATIONS OTHER TOTAL
PRE-1997 1997 PRE-1997 1997 PRE-1997 1997
-------- ----- -------- ----- -------- ------
<S> <C> <C> <C> <C> <C> <C>
(in millions)
Balance at December 31, 1995 $13.7 $ -- $ 18.8 $ -- $ 32.5 $ --
Cash spending (7.4) -- (10.6) -- (18.0) --
Asset write-offs -- -- (1.0) -- (1.0) --
------ ----- ------- ----- ------- ------
Balance at December 31, 1996 6.3 -- 7.2 -- 13.5 --
Cash spending (1.7) -- (6.5) -- (8.2) --
Provision -- 6.6 -- 10.1 -- 16.7
------ ----- ------- ----- ------- ------
Balance at December 31, 1997 4.6 6.6 0.7 10.1 5.3 16.7
Cash spending (1.0) (3.7) 2.2 (8.0) 1.2 (11.7)
Asset write offs -- -- -- (1.9) -- (1.9)
------ ----- ------- ----- ------- ------
Balance at December 31, 1998 $ 3.6 $ 2.9 $ 2.9 $ 0.2 $ 6.5 $ 3.1
------ ----- ------- ----- ------- ------
------ ----- ------- ----- ------- ------
</TABLE>
The non-separation related cash spending for pre-1997 restructuring and exit
cost liabilities for each of the three years ended December 31, 1998, 1997, and
1996 consisted primarily of costs associated with the shut-down of the Union and
Newark, NJ sites, the Attapulgus, GA site and the Plainville, MA site. The
Newark NJ site was sold in 1998 and had a carrying value of $4.8 million in
1993. The proceeds received in 1998 of $7.1 million related to this facility
have been netted against $4.9 million of cash expenditures in the above
presentation. The remaining balance in the pre-1997 restructuring reserves
consist of shut-down costs for the Union, NJ, Attapulgus, GA and Plainville, MA
sites.
The non-separation restructuring and exit cost provision made in 1997 consists
primarily of costs associated with the shutdown of the facilities to be closed
in connection with the Process Technologies and Environmental Technologies
actions discussed above, and certain warranty obligations associated with the
sold Environmental Technologies business. Non-separation related cash spending
related to these liabilities for the year ended December 31, 1998 consisted of
payments related to the completion of the shutdown of the facilities and the
satisfaction of any warranty obligations.
NOTE FOUR--INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
----------------
INVENTORIES 1998 1997
- ----------- ------ ------
<S> <C> <C>
(in millions)
Raw materials $ 76.3 $ 99.2
Work in process 54.9 31.9
Finished goods 189.7 191.8
Precious metals 28.9 33.5
------ ------
Total inventories $349.8 $356.4
====== ======
</TABLE>
F-16
<PAGE> 69
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
All precious-metals inventories are stated at LIFO cost. The market value of the
precious-metals inventories exceeded cost by $85.8 million and $49.7 million at
December 31, 1998 and 1997, respectively. Net earnings include after-tax gains
of $4.9 million in 1998, $2.0 million in 1997, and $3.3 million in 1996 from the
sale of inventory accounted for under the LIFO method.
In the normal course of business, certain customers and suppliers deposit
significant quantities of precious metals with the Company under a variety of
arrangements. Equivalent quantities of precious metals are returnable as product
or in other forms.
NOTE FIVE--PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment consist of the following:
<TABLE>
<CAPTION>
--------------------
PROPERTY, PLANT AND EQUIPMENT 1998 1997
- ----------------------------- -------- --------
<S> <C> <C>
(in millions)
Land $ 26.1 $ 38.3
Buildings and building improvements 210.6 232.9
Machinery and equipment 1,323.7 1,196.9
Construction in progress 124.2 111.5
Mineral deposits and mine development 79.7 76.9
-------- --------
1,764.3 1,656.5
Accumulated depreciation and depletion 887.8 868.3
-------- --------
Property, plant and equipment, net $ 876.5 $ 788.2
======== ========
</TABLE>
Mineral deposits and mine development consist of industrial mineral reserves
such as kaolin, attapulgite and mica. The Company does not own any mining
reserves or conduct any mining operations with respect to platinum, palladium or
other metals.
In December 1998, the Company entered into a sale-leaseback transaction for
property that served as the principal executive and administrative offices of
the Company and its operating businesses. The gain on the transaction was
approximately $15.3 million and is being amortized over the twenty-year term of
the lease.
The Company capitalized interest of $1.9 million in 1998, $0.7 million in 1997
and $0.9 million in 1996.
NOTE SIX--INVESTMENTS
The Company has investments in affiliates that are accounted for on the equity
method. The more significant of these investments are Engelhard-CLAL and N.E.
Chemcat Corporation (N.E. Chemcat). Engelhard-CLAL, a 50% joint venture,
manufactures and markets certain products containing precious metals. N.E.
Chemcat is a 38.8% owned, publicly-traded Japanese corporation and a leading
producer of automotive and chemical catalysts, electronic chemicals and other
precious-metals-based products.
At December 31, 1998 and 1997, the quoted market value of the Company's
investment in N.E. Chemcat was approximately $66 million and $56 million,
respectively. The valuation represents a mathematical calculation based on the
closing quotation published by the Tokyo over-the-counter market and is not
necessarily indicative of the amount that could be realized upon sale.
F-17
<PAGE> 70
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Due to the recent weakness of the Japanese equity markets, the Company's
investment in N.E. Chemcat exceeded the quoted market values by $3.7 million and
$17.9 million as of December 31, 1998 and 1997, respectively. Management
believes this situation to be temporary.
The summarized unaudited financial information below represents an aggregation
of the Company's nonsubsidiary affiliates on a 100 percent basis, unless
otherwise noted:
<TABLE>
<CAPTION>
--------------------------------
FINANCIAL INFORMATION 1998 1997 1996
--------------------- -------- -------- --------
<S> <C> <C> <C>
(unaudited)(in millions)
Earnings data:
Revenue $1,540.7 $1,788.6 $1,739.7
Gross profit 151.8 165.0 327.9
Net earnings/(losses) 14.3 (69.6)(1) (5.3)
Engelhard's equity in net earnings/(losses)
of affiliates 10.1 (47.8)(1) (5.0)
Balance sheet data:
Current assets $ 530.2 $ 420.1
Noncurrent assets 197.5 216.5
Current liabilities 250.0 117.4
Noncurrent liabilities 89.1 185.8
Net assets 388.6 333.4
Engelhard's equity in net assets 153.6 156.1
</TABLE>
The Company's share of undistributed earnings/losses of affiliated companies
included in consolidated retained earnings were losses of $5.4 million in 1998
and $14.2 million in 1997, compared with earnings of $36.0 million in 1996.
Dividends from affiliated companies were $2.0 million in 1998, $3.8 million in
1997 and $2.5 million in 1996.
- ---------------
(1) The 1997 loss includes $39.9 million in special and other charges related to
Engelhard-CLAL (see Note 3, "Special and Other Charges," of the Notes to
Consolidated Financial Statements for further detail).
NOTE SEVEN--METAL POSITIONS AND OBLIGATIONS
The following table sets forth the Company's open metal positions included in
Committed Metal Positions on the consolidated balance sheets:
<TABLE>
<CAPTION>
--------------------------------------
1998 1997
GROSS GROSS
METAL POSITIONS INFORMATION POSITION VALUE POSITION VALUE
--------------------------- -------- ----- -------- -----
<S> <C> <C> <C> <C>
(in millions)
Platinum group metals Long $17.4 Long $16.0
Gold Flat -- Short (0.6)
Silver Flat -- Short (1.7)
Base metals Long 4.6 Short (0.2)
----- -----
Total open metal positions,
net $22.0 $13.5
===== =====
</TABLE>
F-18
<PAGE> 71
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The net mark-to-market adjustments related to open positions were not material
in 1998, 1997 or 1996.
Derivative commodity and foreign currency instruments used to hedge metal
positions and obligations consist of the following:
<TABLE>
<CAPTION>
----------------------------------------
1998 1997
METAL HEDGING INSTRUMENTS BUY SELL BUY SELL
- ------------------------- -------- -------- ------ ------
<S> <C> <C> <C> <C>
(in millions)
Forward/futures contracts $1,270.9 $1,057.4 $927.9 $742.5
Eurodollar futures 44.5 120.4 385.0 639.0
Swaps 367.2 343.5 246.9 298.4
Options 0.1 -- 42.9 14.6
Yen forwards/futures -- 11.6 -- 31.1
</TABLE>
NOTE EIGHT--FINANCIAL INSTRUMENTS
The Company's nonderivative financial instruments consist primarily of cash in
banks, temporary investments, accounts receivable and debt. The fair value of
financial instruments in working capital approximates book value. The fair value
of long-term debt was $495.9 million in 1998 and $384.1 million in 1997 based on
current interest rates, compared with a book value of $497.4 million in 1998 and
$373.6 million in 1997.
The Company believes that its financial instruments do not represent a
concentration of credit risk because the Company deals with a variety of major
banks worldwide, and its accounts receivable are spread among a number of major
industries, customers and geographic areas. In addition, a centralized credit
committee reviews significant credit transactions and risk management issues
before the granting of credit and an appropriate level of reserves is
maintained. For the past three-year period, provisions to these reserves were
not significant.
Foreign Currency Instruments
Aggregate foreign transaction gains and losses were not significant for any year
presented. The following table sets forth, in U.S. dollars, the Company's open
foreign currency forward contracts used for hedging other than metal-related
transactions (see Note 7, "Metal Positions and
F-19
<PAGE> 72
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Obligations," of the Notes to Consolidated Financial Statements for foreign
currency instruments used to hedge metal-related transactions):
<TABLE>
<CAPTION>
-------------------------------
1998 1997
FOREIGN CURRENCY FORWARD CONTRACTS INFORMATION BUY SELL BUY SELL
- ---------------------------------------------- ----- ----- ----- ----
<S> <C> <C> <C> <C>
(in millions)
Deutsche Mark $ -- $34.7 $ -- $ --
Korean Won -- -- 14.3 --
Japanese Yen 16.0 19.6 -- 1.2
French Franc -- 5.9 2.4 --
Finnish Markka -- -- -- 1.4
Netherlands Guilder 30.1 4.3 -- --
Thai Baht -- 0.2 -- --
Peru Soles 4.4 9.0 -- --
Swedish Krona -- 1.2 -- --
Italian Lira -- 1.9 -- 1.4
----- ----- ----- ----
Total open foreign currency forward
contracts $50.5 $76.8 $16.7 $4.0
===== ===== ===== ====
</TABLE>
None of these contracts exceeds a year in duration and the net amount of
deferred income and expense on foreign currency forward contracts had no impact
on financial position or results of operations in 1998, 1997 and 1996.
Interest Rate Instruments
In 1998, the Company entered into two treasury lock agreements which were
settled in March 1999.
In 1997, the Company entered into five forward starting swaps commencing in
1998, which were closed concurrent with the debt issuance.
In 1996, in connection with the $150 million 7% Notes due 2001 and the $100
million 7.375% Notes due 2006, the Company entered into ten forward starting
swaps, which were closed concurrent with the debt issuance. The resulting impact
on the weighted-average interest rate for 1998 and 1997 was not material.
The Company entered into an interest rate swap agreement in 1993 to change
certain fixed rate debt into floating rate debt. The impact of this swap
contract, which terminated in 1996, was to increase interest expense by $0.6
million in 1996.
NOTE NINE--SHORT-TERM BORROWINGS AND LONG-TERM DEBT
At December 31, 1998, the Company had an unsecured committed revolving credit
agreement for $600 million with a group of North American money center banks and
major foreign banks which expires in the year 2002. In connection with its
credit facility, the Company has agreed to certain covenants, none of which is
considered restrictive to the operations of the Company. Facility fees are paid
to the bank group for this line.
At December 31, 1998 and 1997, short-term bank borrowings were $185.0 million
and $164.2 million, respectively. Weighted-average interest rates were 5.5%,
5.9% and 5.7% during 1998, 1997 and 1996, respectively. At December 31, 1998 and
1997, long-term debt due within one year was $5.0 million and $0.2 million,
respectively.
F-20
<PAGE> 73
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1998 and 1997, commercial paper borrowings were $65.0 million
and $85.0 million, respectively. Weighted-average interest rates were 5.5%, 5.8%
and 5.5% during 1998, 1997 and 1996, respectively.
Additional unused, uncommitted lines of credit available exceeded $670 million
at December 31, 1998. The Company's lines of credit with its banks are available
in accordance with normal terms for prime commercial borrowers and are not
subject to commitment fees or other restrictions.
The following table sets forth the components of long-term debt:
<TABLE>
<CAPTION>
----------------
DEBT INFORMATION 1998 1997
- ---------------- ------ ------
<S> <C> <C>
(in millions)
Notes, with a weighted-average interest rate of 6.53%, due
2000 $ 99.8 $ 99.7
Notes acquired, with a weighted-average interest rate of
12.0%, due 2003-2006 14.1 14.1
7% Notes, due 2001, net of discount 149.4 149.2
7.375% Notes, due 2006, net of discount 99.5 99.4
6.95% Notes, due 2028, net of discount 118.4 --
Industrial revenue bonds, 64.5% of prime rate, due 1999 4.5 4.5
Industrial revenue bonds, 5.375%, due 2006 6.5 6.5
Industrial revenue bonds, variable rate, due 2020 8.5 --
Foreign bank loans with a weighted-average interest rate of
7.0%, due 2000 0.4 0.1
Other, with weighted-average rate of 5.5%, due 1999-2000 1.3 0.3
------ ------
502.4 373.8
Amounts due within one year 5.0 0.2
------ ------
Total long-term debt $497.4 $373.6
====== ======
</TABLE>
As of December 31, 1998, the aggregate maturities of long-term debt for the
succeeding five years are as follows: $5.0 million in 1999, $101.0 million in
2000, $149.4 million in 2001, zero in 2002, $0.1 million in 2003 and $246.9
million thereafter. See Note 8 of the Notes to Consolidated Financial
Statements, "Financial Instruments," for a discussion about interest rate swap
agreements.
Interest expense was $58.9 million in 1998, compared with $52.8 million in 1997
and $45.0 million in 1996. Interest income, included as a component of net
sales, was $2.3 million in 1998, $1.1 million in 1997 and $1.8 million in 1996.
F-21
<PAGE> 74
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE TEN--INCOME TAXES
The components of income tax expense are shown in the following table:
<TABLE>
<CAPTION>
------------------------
INCOME TAX EXPENSE 1998 1997 1996
- ------------------ ----- ------ -----
<S> <C> <C> <C>
(in millions)
Current income tax expense
Federal $39.5 $ 27.9 $21.7
State 7.9 4.5 2.1
Foreign 22.4 22.7 11.0
----- ------ -----
69.8 55.1 34.8
----- ------ -----
Deferred income tax expense
Federal 1.9 2.9 16.6
State (1.0) 0.1 3.0
Foreign 8.6 (17.4) 4.7
Changes in tax rates (0.8) (1.1) --
Loss carryforwards/tax credits (5.0) (1.6) 0.4
----- ------ -----
3.7 (17.1) 24.7
----- ------ -----
Income tax expense $73.5 $ 38.0 $59.5
===== ====== =====
</TABLE>
The foreign portion of earnings before income tax expense was $77.9 million in
1998, $13.8 million in 1997 and $50.6 million in 1996. Taxes on income of
foreign consolidated subsidiaries and affiliates are provided at the tax rates
applicable to their respective foreign tax jurisdictions.
The following table sets forth the components of the net deferred tax asset
which results from temporary differences between the amounts of assets and
liabilities recognized for financial reporting and tax purposes:
<TABLE>
<CAPTION>
----------------
NET DEFERRED INCOME TAX ASSET 1998 1997
- ----------------------------- ------ ------
<S> <C> <C>
(in millions)
Deferred tax assets
Accrued liabilities $ 77.4 $ 48.5
Noncurrent liabilities 79.4 82.4
Tax credits/carryforwards 38.1 32.7
------ ------
Total deferred tax assets 194.9 163.6
------ ------
Deferred tax liabilities
Prepaid pension expense (36.4) (38.0)
Property, plant and equipment (15.5) (8.4)
Other assets (31.1) (16.1)
------ ------
Total deferred tax liabilities (83.0) (62.5)
------ ------
Valuation allowance (5.9) (13.0)
------ ------
Net deferred tax asset $106.0 $ 88.1
------ ------
</TABLE>
In 1997, the Company recorded special and other charges of $149.6 million. A net
deferred tax asset was provided with respect to this charge. The tax benefit was
net of a valuation allowance
F-22
<PAGE> 75
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
against the capital loss carryforwards expected to be generated by some of these
charges. In 1998, the Company disposed of certain capital assets and thereby
realized capital gains. The Company also anticipates that additional capital
gains will be realized in 1999. Therefore, the valuation allowance recorded in
1997 against the capital loss carryforwards was reduced in 1998 by $7.1 million.
As of December 31, 1998, the Company had approximately $17.6 million of
nonexpiring alternative minimum tax credit carryforwards available to offset
future U.S. federal income taxes. Also, as of December 31, 1998, the Company had
approximately $3.8 million of domestic capital loss carryforwards expiring in
2003 and approximately $5.4 million of foreign investment tax credits expiring
in 2000 available to offset certain future foreign income taxes. Management
believes that the Company will generate sufficient taxable income and employ tax
planning strategies to ensure realization of these tax benefits.
A reconciliation of the difference between the Company's consolidated income tax
expense and the expense computed at the federal statutory rate is shown in the
following table:
<TABLE>
<CAPTION>
--------------------------
CONSOLIDATED INCOME TAX EXPENSE RECONCILIATION 1998 1997 1996
- ---------------------------------------------- ------ ------ ------
<S> <C> <C> <C>
(in millions)
Income tax expense at federal statutory rate $ 91.2 $ 30.0 $ 73.5
State income taxes, net of federal effect 5.1 2.3 3.3
Percentage depletion (13.5) (14.0) (13.4)
Equity earnings (1.3) 14.0 (1.0)
Effect of different tax rates on foreign
earnings, net 4.3 1.4 0.2
Tax credits/carrybacks (2.3) (2.8) (0.8)
Foreign sales corporation (7.4) (6.8) (5.0)
Non-deductible goodwill 2.0 2.2 1.3
Valuation allowance (7.1) 13.0 --
Other items, net 2.5 (1.3) 1.4
------ ------ ------
Income tax expense $ 73.5 $ 38.0 $ 59.5
====== ====== ======
</TABLE>
At December 31, 1998, the Company's share of the cumulative undistributed
earnings of foreign subsidiaries was approximately $259.2 million. 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. It is not practical to estimate
the amount of additional tax that might be payable on these foreign earnings in
the event of distribution or sale; however, under existing law, foreign tax
credits would be available to substantially reduce, or in some cases eliminate,
U.S. taxes payable.
NOTE ELEVEN--RELATED PARTY TRANSACTIONS
In the ordinary course of business, the Company has raw material supply
arrangements with entities in which Anglo American Corporation of South Africa
Limited has material interests and with Engelhard-CLAL and its subsidiaries.
Anglo, indirectly through Minorco S.A., holds a significant minority interest in
the common stock of the Company. Engelhard-CLAL is a 50% owned joint venture.
The Company's transactions with such entities amounted to: purchases-from of
$176.3 million in 1998, $101.2 million in 1997 and $203.2 million in 1996;
sales-to of $1.7 million in 1998, $42.2 million in 1997 and $513.5 million in
1996; and metal leasing-to of
F-23
<PAGE> 76
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
$17.5 million in 1998, $16.3 million in 1997 and $37.7 million in 1996. At
December 31, 1998 and 1997, amounts due to such entities totaled $8.6 million
and $5.3 million, respectively. Also, see Note 20 of the Notes to Consolidated
Financial Statements for a discussion of Engelhard's announcement that it has
reached an agreement to purchase shares of Engelhard stock owned by Minorco.
NOTE TWELVE--BENEFITS
The Company has domestic and foreign pension plans covering substantially all
employees. Plans covering most salaried employees generally provide benefits
based on years of service and the employee's final average compensation. Plans
covering most hourly bargaining unit members generally provide benefits of
stated amounts for each year of service. The Company makes contributions to the
plans as required and to such extent contributions are currently deductible for
tax purposes. Plan assets primarily consist of listed stocks and fixed income
securities.
The following table sets forth the plans' funded status:
<TABLE>
<CAPTION>
----------------
FUNDED STATUS 1998 1997
- ------------- ------ ------
<S> <C> <C>
(in millions)
CHANGE IN PROJECTED BENEFIT OBLIGATION
Projected benefit obligation at beginning of year $328.7 $297.3
Service cost 12.1 10.1
Interest cost 23.6 22.7
Plan amendments 6.3 0.6
Actuarial losses 37.9 20.9
Benefits paid (24.5) (22.3)
Business combinations 0.7 3.2
Curtailments (1.0) --
Special termination benefits 0.4 --
Foreign exchange 1.9 (3.8)
------ ------
Projected benefit obligation at end of year $386.1 $328.7
====== ======
</TABLE>
F-24
<PAGE> 77
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<S> <C> <C>
CHANGE IN PLAN ASSETS
Fair value of plan assets at beginning of year $374.7 $329.4
Actual return on plan assets 18.7 62.0
Employer contribution 3.4 7.4
Benefits paid (24.5) (22.3)
Business combinations 0.7 3.2
Foreign exchange 2.1 (5.0)
------ ------
Fair value of plan assets at end of year $375.1 $374.7
------ ------
Funded status $(11.0) $ 46.0
Unrecognized net actuarial loss 77.5 27.2
Unrecognized prior service cost 10.5 5.9
Unrecognized transition asset, net of amortization (1.7) (2.7)
Fourth quarter contribution 0.2 0.2
------ ------
Prepaid pension asset $ 75.5 $ 76.6
====== ======
Amounts recognized in the statement of financial position
consist of:
Prepaid benefit cost $ 79.8 $ 80.4
Accrued benefit liability (4.3) (3.8)
Intangible asset (2.5) --
Accumulated other comprehensive income (3.9) --
------ ------
Net amount recognized $ 69.1 $ 76.6
====== ======
</TABLE>
The prepaid pension asset balances of $75.5 million and $76.6 million at
December 31, 1998 and December 31, 1997, respectively, are included in other
noncurrent assets in the Company's consolidated balance sheets. In 1998, the
Company recorded a minimum pension liability adjustment amounting to $3.9
million. This adjustment was recognized and charged to accumulated other
comprehensive income/(loss).
The components of the net pension credit for all plans are shown in the
following table:
<TABLE>
<CAPTION>
--------------------------
NET PERIODIC PENSION CREDIT 1998 1997 1996
- --------------------------- ------ ------ ------
<S> <C> <C> <C>
(in millions)
Service cost $ 12.1 $ 10.1 $ 8.9
Interest cost 23.6 22.7 20.3
Expected return on plan assets (34.7) (32.4) (30.0)
Amortization of prior service cost 1.6 0.8 0.9
Amortization of transition asset (1.0) (3.0) (3.0)
Recognized actuarial loss 2.4 1.4 1.1
Curtailment gain (1.0) -- --
------ ------ ------
Net periodic pension expense/(credit) $ 3.0 $ (0.4) $ (1.8)
====== ====== ======
</TABLE>
The discount rates used in determining the actuarial present value of the
projected benefit obligation are 6.00% to 6.75% in 1998, 6.00% to 7.50% in 1997
and 6.50% to 8.50% in 1996. The expected increase in future compensation levels
was 3.00% to 4.00% in 1998, 3.00% to 5.00% in 1997 and 3.00% to 6.00% in 1996.
The expected long-term rate of return on assets was 8.50% to 10.50% in 1998 and
1997 and 7.50% to 10.50% in 1996. The aggregate ABO (Accumulated Benefit
F-25
<PAGE> 78
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Obligation) for those plans with ABO's in excess of plan assets is $38.1 million
in 1998. The aggregate fair value of assets for those plans with ABO's in excess
of plan assets is $28.2 million in 1998.
The Company also sponsors three savings plans covering certain salaried and
hourly paid employees. The Company's contributions, which may equal up to 50% of
certain employee contributions, were $3.2 million in 1998, $2.9 million in 1997
and $2.4 million in 1996.
The Company also currently provides postretirement medical and life insurance
benefits to certain retirees (and their spouses), certain disabled employees
(and their families) and spouses of certain deceased employees. Substantially
all U.S. salaried employees and certain hourly paid employees are eligible for
these benefits, which are paid through the Company's general health care and
life insurance programs, except for certain medicare-eligible salaried and
hourly retirees who are provided a defined contribution towards the cost of a
partially insured health plan. In addition, the Company provides postemployment
benefits to former or inactive employees after employment but before retirement.
These benefits are substantially similar to the postretirement benefits but
cover a much smaller group of employees.
The following table sets forth the components of the accrued postretirement and
postemployment benefit obligation, all of which are unfunded:
<TABLE>
<CAPTION>
----------------
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 1998 1997
- ------------------------------------------ ------ ------
<S> <C> <C>
(in millions)
Change in benefit obligation
Benefit obligation at beginning of year $111.5 $113.8
Service cost 3.0 2.3
Interest cost 8.0 8.5
Actuarial (gains) losses 15.3 (1.5)
Business combinations 0.8 --
Benefits paid (10.5) (11.6)
------ ------
Benefit obligation at end of year $128.1 $111.5
------ ------
Unrecognized net gain (loss) (10.0) 5.9
Unrecognized prior service cost 33.2 39.0
Fourth quarter contribution (2.5) (3.1)
------ ------
Accrued benefit obligation $148.8 $153.3
====== ======
</TABLE>
The postretirement and postemployment benefit balances of $148.8 million and
$153.3 million at December 31, 1998 and December 31, 1997, respectively, are
included in other noncurrent liabilities in the Company's consolidated balance
sheets.
F-26
<PAGE> 79
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The components of the net expense for these postretirement and postemployment
benefits are shown in the following table:
<TABLE>
<CAPTION>
-----------------------
POSTRETIREMENT AND POSTEMPLOYMENT BENEFITS 1998 1997 1996
- ------------------------------------------ ----- ----- -----
<S> <C> <C> <C>
(in millions)
Components of net periodic benefit cost
Service cost $ 3.0 $ 2.3 $ 2.4
Interest cost 8.0 8.5 8.1
Net amortization (5.8) (6.0) (5.5)
----- ----- -----
Net periodic benefit cost $ 5.2 $ 4.8 $ 5.0
===== ===== =====
</TABLE>
The weighted-average discount rate used in determining the actuarial present
value of the accumulated postretirement and postemployment benefit obligation
for 1998 is 6.75%. The average assumed health care cost trend rate used for 1998
is 8%, gradually decreasing to 5% by 2005. A 1% increase in the assumed health
care cost trend rate would have increased aggregate service and interest cost in
1998 by $0.8 million and the accumulated postretirement and postemployment
benefit obligation as of December 31, 1998 by $6.6 million. A 1% decrease in the
assumed healthcare cost trend rate would have decreased aggregate service and
interest cost in 1998 by $1.3 million and the accumulated postretirement and
postemployment benefit obligation as of December 31, 1998 by $11.1 million.
NOTE THIRTEEN--STOCK OPTION AND BONUS PLANS
The Company's Stock Option Plans of 1991 and 1981, as amended (the Key Option
Plans) generally provide for the granting to key employees of options to
purchase an aggregate of 16,875,000 and 6,834,375 common shares, respectively,
at fair market value on the date of grant. No options under the Key Option Plans
may be granted after June 30, 2001.
In 1993, the Company established the Employee Stock Option Plan of 1993, as
amended, which generally provided for the granting to all employees (excluding
U.S. bargaining unit employees and key employees eligible under the Key Option
Plans) of options to purchase an aggregate of 2,812,500 common shares at fair
market value on the date of grant. No additional options may be granted under
this plan. In 1995, the Company established the Directors Stock Options Plan,
which generally provides for the granting to each nonemployee director the
option to purchase up to 3,000 common shares at the fair market value on the
date of grant. Options under all plans become exercisable in four installments
beginning after one year, and no options may be exercised after 10 years from
the date of grant. Outstanding options may be canceled and reissued under terms
specified in the plan documents.
Had compensation cost for the Company's two stock option plans been determined
based on the fair value at grant date for awards in 1998, 1997 and 1996
consistent with the provisions of
F-27
<PAGE> 80
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based
Compensation," the Company's net earnings and earnings per share would have been
as follows:
<TABLE>
<CAPTION>
-------------------------
PRO FORMA INFORMATION 1998 1997 1996
- --------------------- ------ ----- ------
<S> <C> <C> <C>
(in millions, except per share data)
Net earnings--as reported $187.1 $47.8 $150.4
Net earnings--pro forma 179.4 41.4 145.0
Basic earnings per share--as reported 1.30 0.33 1.05
Basic earnings per share--pro forma 1.24 0.29 1.01
Diluted earnings per share--as reported 1.29 0.33 1.03
Diluted earnings per share--pro forma 1.23 0.28 1.00
</TABLE>
The pro forma amounts shown above are not representative of the effects on net
earnings or earnings per share in future years because only options granted
after January 1, 1995 have been included in the above numbers, and the full net
earnings effect is recognized over the vesting period, typically four years. The
weighted-average fair value at date of grant for options granted during 1998,
1997 and 1996 was $5.07, $5.74 and $7.37, respectively. Fair value of each
option grant is estimated on the date of grant using the Black-Scholes
option-pricing model. The following assumptions were used for option grants in
1998, 1997 and 1996: dividend yield of 1.3% to 2.3%, expected volatility of 31%
to 32%; risk free interest rate of 4.5% to 6.5%; and expected life of 4 to 5
years.
Stock option transactions under all plans are as follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------
1998 1997 1996
WEIGHTED AVERAGE WEIGHTED AVERAGE WEIGHTED AVERAGE
NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE NUMBER EXERCISE PRICE
OF SHARES PER SHARE OF SHARES PER SHARE OF SHARES PER SHARE
---------- ---------------- ---------- ---------------- --------- ----------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at
beginning of year 11,730,245 $17.93 9,187,945 $17.43 7,901,801 $17.08
Granted 2,903,190 $18.59 2,935,789 $19.13 2,006,572 $21.65
Forfeited (320,162) $20.61 (62,643) $19.04 (351,168) $16.03
Exercised (229,125) $12.67 (330,846) $13.44 (369,260) $11.52
---------- ------ ---------- ------ --------- ------
Outstanding at end of
year 14,084,148 $18.17 11,730,245 $17.93 9,187,945 $17.43
Exercisable at end of
year 8,108,731 $17.45 5,850,724 $16.53 4,652,411 $15.55
Available for future
grants 3,864,065 6,447,093 9,320,239
</TABLE>
F-28
<PAGE> 81
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information about fixed-price options outstanding
at December 31, 1998:
<TABLE>
<CAPTION>
--------------------------------------------------------------------
OPTIONS OUTSTANDING
WEIGHTED- OPTIONS EXERCISABLE
AVERAGE WEIGHTED- WEIGHTED-
NUMBER REMAINING AVERAGE NUMBER AVERAGE
RANGE OF OUTSTANDING CONTRACTUAL EXERCISE EXERCISABLE EXERCISE
EXERCISE PRICES AT 12/31/98 LIFE (YEARS) PRICE AT 12/31/98 PRICE
- --------------- ----------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$5.54 to 9.46 497,555 2 $ 7.91 497,555 $ 7.91
11.45 to 19.14 2,058,510 5 16.91 2,058,510 16.91
14.21 to 19.06 2,096,036 6 16.18 2,096,036 16.18
16.83 to 22.38 1,868,448 7 18.99 1,515,040 19.00
19.00 to 23.88 1,910,887 8 21.54 1,164,846 21.53
18.56 to 20.91 2,786,397 9 19.13 749,873 19.31
17.34 to 21.69 2,866,315 10 18.60 26,871 17.56
---------- --- ------- ----------- -------
14,084,148 $18.17 8,108,731 $17.45
</TABLE>
The Company's Key Employee Stock Bonus Plan, as amended (the Bonus Plan)
provides for the award of up to 15,187,500 common shares to key employees as
compensation for future services, not exceeding 1,518,750 shares in any year
(plus any canceled awards or shares available for award, but not previously
awarded). The Bonus Plan terminates on June 30, 2006. Shares awarded vest in
five annual installments, provided the recipient is still employed by the
Company on the vesting date. Compensation value is measured on the date the
award is granted. In 1998 and 1997, the Company granted 197,000 and 193,000
shares to key employees at a fair value of $17.54 and $20.25, respectively, per
share.
Compensation expense relating to stock awards was $3.9 million in 1998, $5.2
million in 1997 and $7.0 million in 1996. Shares awarded, net of cancellations,
are included in average shares outstanding.
Engelhard has certain deferred compensation arrangements where shares earned
under the Engelhard stock bonus plan are deferred and placed in a "Rabbi Trust".
Under certain conditions, the plan permits the employees to convert their
deferred stock balance to deferred cash. In the third quarter of 1998, the
Company adopted the provisions of Emerging Issues Task Force ("EITF") 97-14
"Accounting for Deferred Compensation Arrangements Where Amounts Earned Are Held
in a Rabbi Trust and Invested". This EITF requires Engelhard to consolidate into
its financial statements the net assets of the trust. The impact to the third
quarter, 1998 consolidated financial statements was a $20.1 million increase in
treasury stock (measured at historical cost); the recording of a $23.7 million
deferred compensation obligation (measured on the reporting date by fair value
of the Engelhard common stock held in the trust on behalf of the employees); and
a charge to equity for the $3.6 million difference (referred to as the
"transition differential"). After the transition date but prior to final
settlement, increases/ decreases in the deferred compensation liability will be
recognized (1) in equity to the extent that the share price change falls within
the transition differential, or (2) in income to the extent that the share
change falls outside the transition differential.
During the fourth quarter of 1998, the Company recognized a charge to expense of
$2.4 million as a result of an increase in the stock price from $17.69 at
September 30, 1998 to $19.50 at December 31, 1998. For the year ended December
31, 1998, the total charge to expense as a result of adopting EITF 97-14 was
$2.4 million. The total value of the Rabbi Trust at December 31, 1998 was $26.1
million.
F-29
<PAGE> 82
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE FOURTEEN--EARNINGS PER SHARE
Statement of Financial Accounting Standard No. 128, "Earnings Per Share" (SFAS
128) specifies the computation, presentation, and disclosure requirements for
basic and diluted earnings per share (EPS). The following table represents the
computation of basic and diluted EPS as required by SFAS 128.
<TABLE>
<CAPTION>
EARNINGS PER SHARE COMPUTATIONS --------------------------------
YEAR ENDED DECEMBER 31 1998 1997 1996
- ------------------------------- -------- -------- --------
<S> <C> <C> <C>
(in thousands, except per share data)
Basic EPS Computation
Net income applicable to common shares $187,084 $ 47,778 $150,447
Average number of shares outstanding 144,157 144,270 143,810
-------- -------- --------
Basic earnings per share $ 1.30 $ 0.33 $ 1.05
-------- -------- --------
Diluted EPS Computation Net income
applicable to common shares $187,084 $ 47,778 $150,447
-------- -------- --------
Average number of shares outstanding 144,157 144,270 143,810
Effect of dilutive stock options 818 1,667 1,914
Effect of Rabbi Trust 391 -- --
-------- -------- --------
Total number of shares
outstanding 145,366 145,937 145,724
-------- -------- --------
Diluted earnings per share $ 1.29 $ 0.33 $ 1.03
-------- -------- --------
</TABLE>
Options to purchase additional shares of common stock of 2,886,768 (at a price
range of $19.72 to $23.88), 1,775,827 (at a price range of $20.91 to $23.88),
and 1,757,223 (at a price range of $22.38 to $23.88) were outstanding at the end
of 1998, 1997 and 1996, respectively, but were not included in the computation
of diluted EPS because the options' exercise prices were greater than the
average annual market price of the common shares. Shares held in the Rabbi Trust
were included in basic and diluted shares outstanding until adoption of EITF
97-14 (as of September 30, 1998) at which point they were considered treasury
stock and excluded from basic shares outstanding.
NOTE FIFTEEN--BUSINESS SEGMENT AND GEOGRAPHIC AREA DATA
The Company adopted SFAS No. 131 "Disclosures about Segments of an Enterprise
and Related Information" in the fourth quarter of 1998. SFAS No. 131 requires a
new basis of determining reportable business segments, i.e., the management
reporting approach. This approach designates the Company's internal
organizational structure as used by management for making operating decisions
and assessing performance, as the source of business segments. On this basis,
the Company has five reportable business segments: Environmental Technologies,
Process Technologies, Paper Pigments and Additives, Specialty Pigments and
Additives, and Industrial Commodities Management. Segment results, as well as
selected geographic data, are presented on this new basis in 1998, as well as
1997 and 1996.
Items that are allocated to the segment results include various corporate
overhead charges such as expenses for information technology, research and
development, and site management. Unallocated items include interest expense,
royalty income, sale of inventory accounted for under the LIFO method, special
and other charges and other miscellaneous Corporate items.
F-30
<PAGE> 83
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The Environmental Technologies segment, located principally in the United
States, Europe and South Africa, develops and markets sophisticated
emission-control technologies and systems that enable customers to cost
effectively meet stringent environmental regulations.
The Process Technologies segment, located principally in the United States and
Europe, enables customers to improve the productivity, efficiency, environmental
compliance and safety of their processes through advanced chemical and
polymerization catalysts, sorbents and separation products and related
manufacturing expertise. In addition, the segment manufactures advanced cracking
and hydroprocessing technologies that enable petroleum refiners to more
efficiently produce gasoline, transportation fuels and heating oils.
The Paper Pigments and Additives segment, located principally in the United
States, Finland and Japan, provides kaolin-based performance products used as
coating and extender pigments by the paper industry. These pigments provide the
opacity, brightness, gloss and printability in paper products.
The Specialty Pigments and Additives segment, located principally in the United
States and South Korea, provides functional additives to customers in a broad
array of markets including coatings, plastics, cosmetics and construction. The
segment also provides iridescent films used in a variety of creative, decorative
and packaging applications. These products help customers improve the look,
performance and overall cost of their products.
The Industrial Commodities Management segment, located principally in the United
States, Europe and Japan, purchases and sells precious metals, base metals and
related products. It does so under a variety of pricing and delivery
arrangements structured to meet the logistical, financial and price risk
management requirements of the Company, its customers and suppliers.
Additionally, it offers related services for precious-metals refining and
produces salts and solutions.
Within the "All Other" category, sales to external customers are primarily from
the Engineered Materials business; operating earnings/(losses) are derived
primarily from the Engineered Materials business, the sale of inventory
accounted for under the LIFO method, royalty income and other miscellaneous
income and expense items not related to the reportable segments.
F-31
<PAGE> 84
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents certain data by business segment:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAPER SPECIALTY
BUSINESS PIGMENTS PIGMENTS INDUSTRIAL REPORTABLE
SEGMENT ENVIRONMENTAL PROCESS AND AND COMMODITIES SEGMENTS ALL
INFORMATION TECHNOLOGIES TECHNOLOGIES ADDITIVES ADDITIVES MANAGEMENT SUB-TOTAL OTHER TOTAL
- ----------- ------------- ------------ --------- --------- ----------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
(in millions)
1998
Sales to external
customers $558.5 $533.3 $239.4 $349.0 $2,346.8 $4,027.0 $147.6 $4,174.6
Operating earnings 83.5 78.5 35.8 42.0 48.4 288.2(1) 21.2 309.4
Interest expense -- -- -- -- -- -- 58.9 58.9
Depreciation,
depletion &
amortization 16.9 24.4 24.6 22.4 1.6 89.9 11.0 100.9
Equity in earnings
(losses) of
affiliates (0.5) (1.2) -- -- -- (1.7) 11.8 10.1
Total assets 376.5 595.3(2) 358.3 509.4 611.5 2,451.0 415.3 2,866.3
Equity investments 4.2 0.7 1.3 -- -- 6.2 147.4 153.6
Capital expenditures 27.5 27.4 27.4 25.6 3.6 111.5 5.0 116.5
------ ------ ------ ------ ------- --------- ------ -------
1997
Sales to external
customers $512.4 $447.5 $242.0 $349.0 $1,954.0 $3,504.9 $125.8 $3,630.7
Operating earnings/
(losses) 68.3 55.6 33.9 64.3 44.9 267.0 (80.9)(1) 186.1
Interest expense -- -- -- -- -- -- 52.8 52.8
Depreciation,
depletion &
amortization 15.6 19.3 23.5 20.1 1.0 79.5 8.6 88.1
Equity in earnings
(losses) of
affiliates 1.1 0.1 (0.6) -- -- 0.6 (48.4)(3) (47.8)
Total assets(4) 331.3 371.1 348.2 515.4 550.4 2,116.4 469.9 2,586.3
Equity investments 8.8 1.9 1.3 -- -- 12.0 144.1 156.1
Capital expenditures 28.6 33.6 37.5 21.8 2.7 124.2 12.7 136.9
------ ------ ------ ------ ------- --------- ------ -------
</TABLE>
F-32
<PAGE> 85
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------
PAPER SPECIALTY
BUSINESS PIGMENTS PIGMENTS INDUSTRIAL REPORTABLE
SEGMENT ENVIRONMENTAL PROCESS AND AND COMMODITIES SEGMENTS ALL
INFORMATION TECHNOLOGIES TECHNOLOGIES ADDITIVES ADDITIVES MANAGEMENT SUB-TOTAL OTHER TOTAL
- ----------- ------------- ------------ --------- --------- ----------- ---------- ------ --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996
Sales to external
customers $465.7 $433.3 $237.6 $260.5 $1,659.1 $3,056.2 $128.2 $3,184.4
Operating earnings 53.9 58.6 41.9 39.1 21.3 214.8 42.8(1) 257.6
Interest expense -- -- -- -- -- -- 45.0 45.0
Depreciation,
depletion &
amortization 14.0 18.9 22.2 14.6 0.6 70.3 4.6 74.9
Equity in earnings
(losses) of
affiliates 0.7 0.6 -- -- -- 1.3 (6.3) (5.0)
Total assets 298.1 362.3 328.6 451.1 441.0 1,881.1 609.4 2,490.5
Equity investments 7.6 1.9 1.9 -- -- 11.4 206.1 217.5
Capital expenditures 35.6 37.6 33.0 9.9 2.1 118.2 10.0 128.2
------ ------ ------ ------ ------- --------- ------ -------
</TABLE>
- ---------------
(1) Includes pre-tax gains on the sale of certain inventories accounted for
under the LIFO method of $8.2 million in 1998, $3.3 million in 1997 and $5.4
million in 1996. In addition, the 1997 amount includes special and other
charges of $104.8 million.
(2) The total assets of the Process Technologies segment reflect the acquisition
of the Mallinckrodt businesses in May 1998.
(3) Includes special and other charges of $44.8 million in 1997.
(4) The special and other charges in 1997 reduced total assets by $21.7 million
in the Environmental Technologies segment, $27.3 million in the Process
Technologies segment, $0.8 million in the Specialty Pigments and Additives
segment, $39.0 million in Industrial Commodities Management and $44.8
million in All Other (see Note 3 of the Notes to Consolidated Financial
Statements, "Special and Other Charges," of the Notes to Consolidated
Financial Statements).
The following table presents certain data by geographic area:
<TABLE>
<CAPTION>
--------------------------------
GEOGRAPHIC AREA DATA 1998 1997 1996
- -------------------- -------- -------- --------
<S> <C> <C> <C>
(in millions)
Sales to External Customers:
United States $2,824.1 $2,455.0 $1,910.9
International 1,350.5 1,175.7 1,273.5
-------- -------- --------
Total consolidated sales to
external customers $4,174.6 $3,630.7 $3,184.4
-------- -------- --------
Property, Plant and Equipment, Net:
United States $ 791.6 $ 718.3 $ 657.7
International 84.9 69.9 87.0
-------- -------- --------
Total Property, Plant and
Equipment, net $ 876.5 $ 788.2 $ 744.7
-------- -------- --------
</TABLE>
F-33
<PAGE> 86
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The special and other charges in 1997 reduced total assets by $32.6 million in
the United States and by $101.0 million in Europe. The Company's international
operations are predominantly based in Europe.
The following table reconciles segment operating earnings with earnings before
income taxes as shown in the Consolidated Statements of Earnings:
<TABLE>
<CAPTION>
--------------------------------
SEGMENT RECONCILIATIONS 1998 1997 1996
- ----------------------- -------- -------- --------
<S> <C> <C> <C>
(in millions)
Total Sales to External Customers:
Total sales for reportable segments $4,027.0 $3,504.9 $3,056.2
Sales for other business units 107.1 113.4 122.3
All other 40.5 12.4 5.9
-------- -------- --------
Total consolidated sales to external
customers $4,174.6 $3,630.7 $3,184.4
======== ======== ========
Earnings Before Income Taxes:
Operating earnings for reportable
segments $ 288.2 $ 267.0 $ 214.8
Operating earnings for other business
units 5.7 4.2 12.1
Special and other charges -- (104.8) --
Other operating earnings 15.5 19.7 30.7
-------- -------- --------
Total operating earnings $ 309.4 $ 186.1 $ 257.6
Interest expense (58.9) (52.8) (45.0)
Equity in earnings (losses) of
affiliates 10.1 (3.0) (5.0)
Special and other charges -- (44.8) --
Gain on sale of investment -- 0.3 2.4
-------- -------- --------
Earnings before income taxes $ 260.6 $ 85.8 $ 210.0
======== ======== ========
Total Assets Total assets for reportable
segments $2,451.0 $2,116.4 $1,881.1
Assets for other business units 27.1 23.3 24.2
Other assets 388.2 446.6 585.2
-------- -------- --------
Total consolidated assets $2,866.3 $2,586.3 $2,490.5
======== ======== ========
</TABLE>
For the year ended December 31, 1996, Engelhard-CLAL, a related party and a
customer of the Environmental Technologies and Industrial Commodities Management
segments, accounted for approximately $513 million (16%) of the Company's net
sales.
Ford Motor Company, a customer of the Environmental Technologies and Industrial
Commodities Management segments, accounted for approximately $731 million (18%)
of the Company's net sales in 1998 and approximately $443 million (12%) of the
Company's net sales in 1997.
NOTE SIXTEEN--LEASE COMMITMENTS
The Company rents real property and equipment under long-term operating leases.
Future minimum rental payments required under noncancellable operating leases,
having initial or remaining lease terms in excess of one year, are $12.0 million
in 1999, $11.0 million in 2000, $9.8 million in 2001, $9.5 million in 2002, $9.4
million in 2003 and $92.6 million thereafter.
F-34
<PAGE> 87
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Rental/lease expense, including all leases, amounted to $10.7 million in 1998,
$9.2 million in 1997 and $11.8 million in 1996. In December 1998, the Company
entered into a sales-leaseback transaction for property that served as the
principal executive and administrative offices of the Company and its operating
businesses. The term of the lease is twenty years.
NOTE SEVENTEEN--ENVIRONMENTAL COSTS
With the oversight of environmental agencies, the Company is currently
preparing, has under review, or is implementing, environmental investigations
and cleanup plans at several currently or formerly owned and/or operated sites,
including Plainville, MA, Salt Lake City, UT and Attapulgus, GA. The Company is
continuing to investigate contamination at Plainville under a 1993 agreement
with the United States Environmental Protection Agency (EPA) and is awaiting
approval of a decommissioning plan by the State of Massachusetts under authority
delegated by the Nuclear Regulatory Commission. Investigation of the
environmental status at the Salt Lake City site continues under a 1993 agreement
with the Utah Solid and Hazardous Waste Control Board. An approved reclamation
program at the Attapulgus site, under a 1994 consent order with the Georgia
Department of Natural Resources, Environmental Protection Division, is complete
pending final Department approval.
In addition, seven sites have been identified at which the Company believes
liability as a potentially responsible party (PRP) is probable under the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980,
as amended, or similar state laws (collectively referred to as Superfund) for
the cleanup of contamination resulting from the historic disposal of hazardous
substances allegedly generated by the Company, among others. Superfund imposes
strict, joint and several liability under certain circumstances. In many cases,
the dollar amount of the claim is unspecified and claims have been asserted
against a number of other entities for the same relief sought from the Company.
Based on existing information, the Company believes that it is a de minimis
contributor of hazardous substances at a number of the sites referenced above.
Subject to the reopening of existing settlement agreements for extraordinary
circumstances or natural resource damages, the Company has settled a number of
other cleanup proceedings. The Company has also responded to information
requests from EPA and state regulatory authorities in connection with other
Superfund sites.
The liabilities for environmental cleanup related costs recorded in the
consolidated balance sheets at December 31, 1998 and 1997 were $39.5 million and
$43.6 million, respectively, including $1.2 million and $3.8 million,
respectively, for Superfund sites. These amounts represent those costs which the
Company believes are probable and reasonably estimable. Based on currently
available information and analysis, the Company's accrual represents
approximately 55% of what it believes are the reasonably possible environmental
cleanup related costs of a noncapital nature. The estimate of reasonably
possible costs is less certain than the probable estimate upon which the accrual
is based.
During the past three-year period, cash payments for environmental cleanup
related matters were $4.1 million, $6.0 million and $7.0 million for 1998, 1997
and 1996, respectively. The amounts accrued in connection with environmental
cleanup related matters were not significant over this time period.
For the past three-year period, environmental related capital projects have
averaged less than 10 percent of the Company's total capital expenditure
programs, and the expense of environmental compliance (e.g. environmental
testing, permits, consultants and in-house staff) was not material.
F-35
<PAGE> 88
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
There can be no assurances that environmental laws and regulations will not
become more stringent in the future or that the Company will not incur
significant costs in the future to comply with such laws and regulations. Based
on existing information and currently enacted environmental laws and
regulations, cash payments for environmental cleanup related matters are
projected to be $8.0 million for 1999, all of which has already been accrued.
Further, the Company anticipates that the amounts of capitalized environmental
projects and the expense of environmental compliance will approximate current
levels. While it is not possible to predict with certainty, management believes
that environmental cleanup related reserves at December 31, 1998 are reasonable
and adequate and that environmental matters are not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from the estimates, could have a material adverse effect on operating
results or cash flows.
NOTE EIGHTEEN--LITIGATION AND CONTINGENCIES
Various lawsuits, claims and proceedings are pending against the Company. During
1998, 1997 and 1996, the Company provided $2.4 million, $2.8 million and $4.3
million, respectively, for existing legal proceedings.
The Company and certain of its present and former officers have agreed to a
Stipulation of Settlement ("Stipulation") of a class action filed in November
1995 which alleged misstatements and omissions in connection with press releases
issued in 1995 concerning the Company's PremAir(TM) catalyst systems. In the
settlement, which was approved by the Court on December 8, 1998, in exchange for
the dismissal of the complaint against all defendants, the Company will pay no
more than $7.2 million of a maximum settlement amount of $21.5 million. The
balance of the settlement amount will be paid by insurance carried by the
Company for such purposes. Because the final settlement amount will depend on
the number of eligible shares of the Company's common stock for which claims are
submitted, the amounts to be paid by the Company and the insurer could be less
(but in no event more) than the above-stated amounts. This matter, if resolved
in accordance with the Stipulation, will not have a material adverse effect on
the operating results of the Company.
The Company is one of a number of defendants in numerous proceedings which
allege that the plaintiffs contracted cancer and/or suffered other injuries from
exposure to talc, asbestos or other "toxic" substances purportedly supplied by
the Company and other defendants. The Company is also subject to a number of
environmental contingencies (see Note 17, "Environmental Costs" of the Notes to
Consolidated Financial Statements) and is a defendant in a number of lawsuits
covering a wide range of other matters. In some of these matters, the remedies
sought or damages claimed are substantial. While it is not possible to predict
with certainty the ultimate outcome of these lawsuits or the resolution of the
environmental contingencies, management believes, after consultation with
counsel, that resolution of these matters is not expected to have a material
adverse effect on financial condition. These matters, if resolved in a manner
different from management's current expectations, could have a material adverse
effect on the operating results or cash flows.
In July 1996, the Securities and Exchange Commission (SEC) issued a formal order
of investigation concerning the sales of Engelhard stock by certain of the
Company's officers and directors during 1995. Subpoenas for documents and
witness testimony were issued by the SEC. In response, the Company provided
documents to the SEC and witnesses were examined by the SEC staff during 1996.
F-36
<PAGE> 89
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In 1998, management learned that Engelhard and several other companies operating
in Japan had been victims of a fraudulent scheme involving base-metal inventory
held in third-party warehouses in Japan. The inventory loss was approximately
$40 million in 1997 and $20 million in 1998. The Company is vigorously pursuing
various recovery actions. These actions include negotiations with the various
third parties involved and in several instances the commencement of litigation.
During 1998, Engelhard recorded a receivable from the insurance carriers and
third parties involved for approximately $20 million. This amount represents
management's and counsel's best estimate of the minimum probable recovery from
the various insurance policies and other parties involved in the fraudulent
scheme.
In February 1999, the Peruvian taxing authority made public an investigation of
the country's gold industry stemming from suspected evasion of value-added tax
payments. Engelhard Peru, S.A., a purchaser and exporter of gold, has paid the
tax to its vendors for each purchase and then claimed a refund from the Peruvian
taxing authority after export. Engelhard typically would post a one-month letter
of credit to obtain a prompt refund. Engelhard's refund claims for November and
December of 1998 and January of 1999 were approximately $10 million per month.
Engelhard has received the refunds for November and December, but, at the
request of the government, the letters of credit, in the amount of $20 million,
have been extended until July 1999 while the industry investigation is
conducted. The refund for January 1999 is going through the claim procedure and
remains unpaid. Management believes, based upon consultation with counsel, that
all appropriate tax payments have been made and that the Company is entitled to
all refunds claimed. However, if the resolution of this matter differs from
management's belief, the maximum financial exposure is approximately $30
million. Meanwhile, the Company has suspended any operations that could further
increase the value-added tax exposure pending completion of the industry
investigation.
NOTE NINETEEN--SUPPLEMENTAL INFORMATION
The following table presents certain supplementary information to the
Consolidated Statements of Cash Flows:
SUPPLEMENTARY CASH FLOW INFORMATION
<TABLE>
<CAPTION>
--------------------------------
1998 1997 1996
------- ------ -------
<S> <C> <C> <C>
(in millions)
Cash paid during the year for
Interest $ 49.6 $ 43.9 $ 34.2
Income taxes 57.6 29.5 41.3
Change in assets and liabilities--source
(use) Receivables $ (41.1) $ 43.2 $ (82.1)
Committed metal positions (98.0) (81.6) (64.8)
Inventories 23.9 (36.0) (33.2)
Other current assets (29.5) 24.4 (7.5)
Other noncurrent assets 21.8 (68.8) 0.2
Accounts payable 41.4 17.1 2.7
Accrued liabilities (7.6) 48.2 (23.5)
Noncurrent liabilities (14.1) (23.1) 2.5
------- ------ -------
Net change in assets and liabilities $(103.2) $(76.6) $(205.7)
======= ====== =======
</TABLE>
F-37
<PAGE> 90
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents certain supplementary information to the
Consolidated Balance Sheets:
SUPPLEMENTARY BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
------------------
1998 1997
------ ------
<S> <C> <C>
(in millions)
Taxes payable $ 63.9 $ 50.4
Payroll-related accruals 48.7 45.3
Deferred income 17.4 7.1
Interest payable 13.5 12.4
Restructuring reserve 9.6 22.0
Environmental reserve 8.5 10.6
Other 73.6 90.2
------ ------
Other current liabilities $235.2 $238.0
====== ======
</TABLE>
NOTE TWENTY--SUBSEQUENT EVENT
On March 2, 1999, Engelhard Corporation announced that it has reached an
agreement to purchase approximately 18 million shares of Engelhard stock owned
by Minorco, with the remainder of Minorco's 31.8% stake (approximately 28
million shares) to be sold through an underwritten public offering. Engelhard
has filed a shelf registration on Form S-3 for those 28 million shares.
Minorco, a Luxembourg-based company, previously announced its intention to
divest its 31.8% interest in Engelhard prior to the combination of its
businesses with those of Anglo American Corporation of South Africa Limited,
which is expected to occur by the end of May 1999.
Under terms of the agreement, Engelhard will purchase approximately 18 million
shares at $18.90 per share or the price received by Minorco in the secondary
offering less the underwriting spread, whichever is lower. Engelhard also has
agreed to purchase up to an additional two million shares if available at the
end of the offering. The 20 million shares represent 13.9% of Engelhard's total
shares outstanding. In addition, Minorco will compensate Engelhard for the costs
and expenses incurred in connection with the transaction.
Engelhard anticipates initially financing the purchase with short-term debt and
intends to take steps to reduce its total debt going forward. It is reviewing
its portfolio to identify non-core assets and businesses for potential sale and
exploring ways to further reduce operating expenses.
Engelhard's purchase of shares and the secondary offering are expected to be
completed during the second quarter of 1999.
In October 1998, Standard & Poor's and Moody's Investors Service each placed its
ratings of Engelhard Corporation debt on credit watch. The rating action was
prompted by Engelhard's announcement that it had hired financial advisors to
help the Company explore its strategic alternatives after Minorco announced that
it will be divesting its 31.8% interest in Engelhard Corporation. In March 1999,
Moody's Investors Service confirmed the A3 ratings on Engelhard's senior
unsecured debt and confirmed the Company's commercial paper rating at Prime-2.
In addition, in March 1999 Standard & Poor's announced that ratings on Engelhard
remain on credit watch, with the implications being revised to "negative" from
"developing". If the
F-38
<PAGE> 91
ENGELHARD CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
transaction is consummated as described above, Standard & Poor's indicated that
it would lower its corporate credit and senior unsecured debt ratings to
single-'A' minus from single-'A' and its commercial paper ratings to A-'2' from
A-'1'. These rating actions followed the March 2, 1999 announcement discussed
above.
F-39
<PAGE> 92
[This page intentionally left blank]
<PAGE> 93
Engelhard Logo
<PAGE> 94
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the costs and expenses, other than underwriting
discounts and commissions, incurred in connection with the sale of common stock
being registered (all amounts are estimated (on the assumption that all shares
will be sold in a single transaction), except the SEC registration fee). The
selling stockholder will bear all expenses incurred in connection with the sale
of the common stock being registered hereby.
<TABLE>
<S> <C>
SEC registration fee $ 138,900
Printing and engraving expenses 30,000
Legal fees and expenses 200,000
Accounting fees and expenses 70,000
Blue Sky fees and expenses 5,000
Miscellaneous 6,100
==========
Total $ 450,000
==========
</TABLE>
ITEM 15. INDEMNIFICATION OF OFFICERS AND DIRECTORS.
Section 145 of the Delaware General Corporation Law provides for indemnification
of directors and officers against any legal liability (other than liability
arising from derivative suits) if the officer or director acted in good faith
and in a manner that he or she reasonably believed to be in or not opposed to
the best interests of the corporation. In criminal actions, the officer or
director must also have no reasonable cause to believe that his or her conduct
was unlawful. A corporation may indemnify an officer or director in a derivative
suit if the officer or director acted in good faith and in a manner that he or
she reasonably believed to be in or not opposed to the best interests of the
corporation unless the officer or director is found liable to the corporation.
However, if the Court of Chancery or the court in which the officer or director
was found liable determines that the officer or director is fairly and
reasonably entitled to indemnity, then the Court of Chancery or such other court
may permit indemnity for such officer or director to the extent it deems proper.
The Registrant's Certificate of Incorporation, as amended, provides that no
director of the Registrant will be held personally liable to the Registrant or
its shareholders for monetary damages of any kind for breach of fiduciary duty
as a director, except for liability (1) for any breach of the director's duty of
loyalty to the Registrant or its shareholders, (2) for acts or omissions not in
good faith or which involve intentional misconduct or a knowing violation of
law, (3) in respect of certain unlawful dividend payments or stock redemptions
or repurchases in violation of Section 174 of the Delaware General Corporation
Law, or (4) for any transaction from which the director derived an improper
personal benefit. The Registrant's By-Laws provide for the indemnification of
each officer and director of the Company to the fullest extent permitted by the
Delaware General Corporation Law.
ITEM 16. EXHIBITS.
Reference is made to the Exhibit Index filed as a part of this Registration
Statement.
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
1. That, for the purpose of determining any liability under the Securities Act,
each such post-effective amendment shall be deemed to be a new registration
statement relating to the
II-1
<PAGE> 95
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
2. To remove from registration by means of a post-effective amendment any of
the securities being registered which remain unsold at the termination of the
offering.
3. That, for purposes of determining any liability under the Securities Act,
each filing of the registrant's annual report pursuant to Section 13(a) or 15(d)
of the Exchange Act that is incorporated by reference in the Registration
Statement shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
4. Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant, pursuant to the provisions described under Item 15, or otherwise,
the registrant has been advised that in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the registrant of expenses incurred or paid by a director, officer or
controlling person of the registrant in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or controlling person
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question of whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-2
<PAGE> 96
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Iselin, State of New Jersey, on May 17, 1999.
ENGELHARD CORPORATION
By: /s/ THOMAS P. FITZPATRICK
-----------------------------------
Name: Thomas P. Fitzpatrick
Title: Senior Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Chairman, Chief Executive
- --------------------------------------------------- Officer and Director
Name: Orin R. Smith (Principal Executive Officer) May 17, 1999
/s/ THOMAS P. FITZPATRICK Senior Vice President and Chief
- --------------------------------------------------- Financial Officer (Principal
Name: Thomas P. Fitzpatrick Financial Officer) May 17, 1999
/s/ DAVID C. WAJSGRAS Controller (Principal
- --------------------------------------------------- Accounting Officer) May 17, 1999
Name: David C. Wajsgras
* Director May 17, 1999
- ---------------------------------------------------
Name: Linda G. Alvarado
* Director May 17, 1999
- ---------------------------------------------------
Name: Marion H. Antonini
* Director May 17, 1999
- ---------------------------------------------------
Name: Anthony W. Lea
* Director May 17, 1999
- ---------------------------------------------------
Name: William R. Loomis, Jr.
* Director May 17, 1999
- ---------------------------------------------------
Name: James V. Napier
* Director May 17, 1999
- ---------------------------------------------------
Name: Norma T. Pace
</TABLE>
II-3
<PAGE> 97
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
* Director May 17, 1999
- ---------------------------------------------------
Name: Barry W. Perry
* Director May 17, 1999
- ---------------------------------------------------
Name: Reuben F. Richards
* Director May 17, 1999
- ---------------------------------------------------
Name: Henry R. Slack
* Director May 17, 1999
- ---------------------------------------------------
Name: Douglas G. Watson
*By: /s/ ARTHUR A. DORNBUSCH, II
----------------------------------------------
Arthur A. Dornbusch, II
Attorney-in-fact
</TABLE>
II-4
<PAGE> 98
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER
------- EXHIBIT
<S> <C>
1.1 Form of Underwriting Agreement
4.1 Rights Agreement, dated as of October 1, 1998, between
Engelhard Corporation and ChaseMellon Shareholder Services,
L.L.C., as Rights Agent (incorporated by reference to Form
8-K filed with the Securities and Exchange Commission on
October 29, 1998).
4.2 Restated Certificate of Incorporation (incorporated by
reference to Form 10, as amended on Form 8-K filed with the
Securities and Exchange Commission on May 19, 1981).
4.3 By-laws of the Company as amended September 17, 1981
(incorporated by reference to Form 10-Q for the quarter
ended September 30, 1981).
4.4 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated by reference to
Form 10-K for the year ended December 31, 1987).
4.5 Article XVII of the Company's By-laws as amended on May 2,
1988 (incorporated by reference to Form 8-K filed with the
Securities and Exchange Commission on May 21, 1988).
4.6 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated by reference to
Form 10-Q for the quarter ended March 31, 1993).
4.7 Certificate of Amendment to the Restated Certificate of
Incorporation of the Company (incorporated by reference to
Form 10-Q for the quarter ended May 14, 1996).
4.8 By-laws of the Company as amended June 12, 1997
(incorporated by reference to Form 10-Q filed with the
Securities and Exchange Commission on August 13, 1997).
4.9 Article II of the Company's By-laws as amended on December
17, 1998 (incorporated by reference to the Form S-8
registration statement filed on January 29, 1999).
5.1 Opinion of Cahill Gordon & Reindel.*
23.1 Consent of PricewaterhouseCoopers LLP.
23.2 Consent of Cahill Gordon & Reindel (included in Exhibit
5.1).*
24.1 Powers of Attorney.*
</TABLE>
- ---------------
* Previously filed.
<PAGE> 1
MINORCO
26,000,000 SHARES
OF
ENGELHARD CORPORATION
COMMON STOCK (PAR VALUE $1.00 PER SHARE)
UNDERWRITING AGREEMENT
__________, 1999
<PAGE> 2
[_____________], 1999
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
Lazard Freres & Co. L.L.C.
c/o Morgan Stanley & Co. Incorporated and
J.P. Morgan Securities Inc.
Ladies and Gentlemen:
Minorco, a Luxembourg corporation, through its wholly owned
subsidiary Taurus Investments S.A., a Luxembourg corporation ("TAURUS"), is a
stockholder of Engelhard Corporation, a Delaware corporation (the "COMPANY").
Minorco and Taurus are sometimes collectively and on a joint and several basis
referred to herein as the "SELLING STOCKHOLDER". Taurus proposes to sell to the
several Underwriters listed on Schedule I hereto, an aggregate of 26,000,000
shares of the common stock (par value $1.00 per share) of the Company (the "FIRM
SHARES").
The Selling Stockholder also proposes to sell to the several
Underwriters not more than an additional 2,000,000 shares of the Company's
common stock (par value $1.00 per share) (the "ADDITIONAL SHARES") if and to the
extent that you, as Managers of the offering, shall have determined to exercise,
on behalf of the Underwriters, the right to purchase such shares of common stock
granted to the Underwriters in Section 3 hereof. The Firm Shares and the
Additional Shares are hereinafter collectively referred to as the "SHARES". The
shares of common stock (par value $1.00 per share) of the Company to be
outstanding after giving effect to the sales contemplated hereby are hereinafter
referred to as the "COMMON STOCK".
The Company has filed with the Securities and Exchange
Commission (the "COMMISSION") a registration statement on Form S-3 (File No.
333-73185), including a base prospectus, relating to the Shares and has filed
with, or transmitted for filing to, or shall promptly hereafter file with or
transmit for filing to, the Commission a prospectus supplement (the "PROSPECTUS
SUPPLEMENT") relating to the offering of the Shares contemplated hereby pursuant
to Rule 424 under the Securities Act of 1933, as amended (the "SECURITIES ACT").
The term "REGISTRATION STATEMENT" means the registration statement, including
the exhibits thereto, as amended to the date of this Agreement. The term "BASE
PROSPECTUS" means the prospectus included in the Registration Statement at the
time it went effective. The term "PROSPECTUS" means the Base Prospectus as
supplemented by the Prospectus Supplement. The term "PRELIMINARY PROSPECTUS"
means a preliminary prospectus supplement specifically relating to the offering
of the Shares, together with the Base Prospectus. As used herein, the terms
"BASE PROSPECTUS", "PROSPECTUS" and "PRELIMINARY PROSPECTUS" shall include in
each case the
<PAGE> 3
documents incorporated by reference therein and filed by the
Company with the Commission pursuant to the Securities Exchange Act of 1934, as
amended (the "EXCHANGE ACT").
1. Representations and Warranties of the Company. The Company
represents and warrants to and agrees with each of the Selling Stockholder and
the Underwriters that:
(a) The Company meets the requirements for use of Form S-3
under the Securities Act; the Registration Statement has become
effective; and no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such
purpose are pending before or, to the knowledge of the Company,
threatened by the Commission.
(b) (i) Each document filed or to be filed pursuant to the
Exchange Act and incorporated by reference in the Prospectus complied
or will comply when so filed in all material respects with the Exchange
Act and the applicable rules and regulations of the Commission
thereunder; (ii) each part of the Registration Statement, when such
part became effective, did not contain, and each such part, as amended
or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not
misleading; (iii) the Registration Statement and the Prospectus comply,
and, as amended or supplemented, if applicable, will comply in all
material respects with the Securities Act and the applicable rules and
regulations of the Commission thereunder; and (iv) the Prospectus does
not contain and, as amended or supplemented, if applicable, will not
contain any untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading; provided
that the representations and warranties set forth in this paragraph (b)
do not apply to statements or omissions in the Registration Statement
or the Prospectus based upon (x) any information relating to any
Underwriter furnished to the Company in writing by any Underwriter
expressly for use therein ("UNDERWRITER INFORMATION"), or (y) any
Selling Stockholder Information (as such term is defined in Section
9(a)).
(c) The Company has been duly incorporated, is validly
existing as a corporation in good standing under the laws of the
jurisdiction of its incorporation, has the corporate power and
authority to own its property and to conduct its business as described
in the Prospectus and is duly qualified to transact business and is in
good standing in each jurisdiction in which the conduct of its business
or its ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be in good
standing would not have a material adverse effect on the condition,
financial or otherwise, or on the earnings, business or operations of
the Company and its subsidiaries, taken as a whole ("MATERIAL ADVERSE
EFFECT").
2
<PAGE> 4
(d) Each of the Company's "significant subsidiaries" within
the meaning of Regulation S-X under the Securities Act ("SIGNIFICANT
SUBSIDIARIES") has been duly incorporated, is validly existing as a
corporation in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own its
property and to conduct its business as described in the Prospectus and
is duly qualified to transact business and is in good standing in each
jurisdiction in which the conduct of its business or its ownership or
leasing of property requires such qualification, except to the extent
that the failure to be so qualified or be in good standing would not
have a Material Adverse Effect; all of the issued and outstanding
shares of capital stock of each Significant Subsidiary of the Company
have been duly and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company or through a
wholly-owned subsidiary, free and clear of all liens, encumbrances,
equities or claims.
(e) This Agreement and the Stock Purchase and Registration
Rights Agreement, dated March 2, 1999 (the "STOCK PURCHASE AGREEMENT"),
between the Company and Minorco, have been duly authorized, executed
and delivered by the Company.
(f) The authorized capital stock of the Company conforms as to
legal matters in all material respects to the description thereof
contained in the Prospectus.
(g) The shares of Common Stock (including the Shares to be
sold by the Selling Stockholder) outstanding have been duly authorized
and are validly issued, fully paid and non-assessable, and the sale of
the Shares will not be subject to any preemptive or similar rights
(other than those that may have been granted or created by the Selling
Stockholder or any other stockholder of the Company).
(h) The execution and delivery by the Company of, and the
performance by the Company of its obligations under, this Agreement and
the Stock Purchase Agreement will not contravene in any material
respect any provision of applicable law or the certificate of
incorporation or bylaws of the Company or any agreement or other
instrument binding upon the Company or any of its subsidiaries that is
material to the Company and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over the Company or any of its subsidiaries, and no
consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by the
Company of its obligations under this Agreement or the Stock Purchase
Agreement, except such as may be required by the securities or Blue Sky
laws of the various states in connection with the offer and sale of the
Shares.
(i) There has not occurred any material adverse change, or any
development involving a prospective material adverse change, in the
condition, financial or
3
<PAGE> 5
otherwise, or in the earnings, business or operations of the Company
and its subsidiaries, taken as a whole, from that set forth in the
Prospectus (exclusive of any amendments or supplements thereto
subsequent to the date of this Agreement).
(j) Except as set forth in or contemplated by the Prospectus,
there are no legal or governmental proceedings pending or threatened to
which the Company or any of its subsidiaries is a party or to which any
of the properties of the Company or any of its subsidiaries is subject
which the Company believes are likely to have a Material Adverse
Effect.
(k) Each preliminary prospectus filed as part of the
registration statement as originally filed or as part of any amendment
thereto, or filed pursuant to Rule 424 under the Securities Act,
complied when so filed in all material respects with the Securities Act
and the applicable rules and regulations of the Commission thereunder.
(l) The Company is not an "investment company" as such term is
defined in the Investment Company Act of 1940, as amended.
(m) Subsequent to the respective dates as of which information
is given in the Registration Statement and the Prospectus, the Company
has not purchased any of its outstanding capital stock, nor declared,
paid or otherwise made any dividend or distribution of any kind on its
capital stock other than
4
<PAGE> 6
ordinary and customary dividends, and there has not been any material
change in the capital stock of the Company, except in each case as
described in the Prospectus (exclusive of any amendments or supplements
thereto subsequent to the date of this Agreement).
(n) There are no contracts, agreements or understandings
between the Company and any person granting such person the right to
require the Company to file a registration statement under the
Securities Act with respect to any securities of the Company or to
require the Company to include such securities with the Shares
registered pursuant to the Registration Statement.
(o) Any reprogramming reasonably required to permit the proper
functioning, in and following the year 2000, of (i) the Company's
computer systems and (ii) equipment containing embedded microchips
(including systems and equipment supplied by others or with which the
Company's systems interface) and the testing of all such systems and
equipment, as reprogrammed, will be completed by October 31, 1999,
except with respect to such systems and equipment, which if such
reprogramming and/or testing shall not have been completed, would not
have a Material Adverse Effect. The cost to the Company of such
reprogramming and testing and of the reasonably foreseeable
consequences of Year 2000 to the Company (including, without
limitation, reprogramming errors and the failure of others' systems or
equipment) will not result in a Material Adverse Effect.
2. Representations and Warranties of the Selling Stockholder.
The Selling Stockholder represents and warrants to and agrees with each of the
Company and the Underwriters that:
5
<PAGE> 7
(a) This Agreement has been duly authorized, executed and
delivered by or on behalf of Minorco.
(b) This Agreement has been duly authorized, executed and
delivered by or on behalf of Taurus.
(c) The execution and delivery by Minorco of, and the
performance by Minorco of its obligations under, this Agreement and the
Stock Purchase Agreement will not contravene any provision of
applicable law, or the certificate of incorporation or bylaws of
Minorco, or any agreement or other instrument binding upon Minorco that
is material to Minorco and its subsidiaries, taken as a whole, or any
judgment, order or decree of any governmental body, agency or court
having jurisdiction over Minorco, and no consent, approval,
authorization or order of, or qualification with, any governmental body
or agency is required for the performance by Minorco of its obligations
under this Agreement or the Stock Purchase Agreement, except such as
may be required by the securities or Blue Sky laws of the various
states in connection with the offer and sale of the Shares.
(d) The execution and delivery by Taurus of, and the
performance by Taurus of its obligations under, this Agreement will not
contravene any provision of applicable law, or the certificate of
incorporation or bylaws of Taurus, or any agreement or other instrument
binding upon Taurus or any judgment, order or decree of any
governmental body, agency or court having jurisdiction over Taurus and
no consent, approval, authorization or order of, or qualification with,
any governmental body or agency is required for the performance by
Taurus of its obligations under this Agreement, except such as may be
required by the securities or Blue Sky laws of the various states in
connection with the offer and sale of the Shares.
(e) Taurus has, and on the Closing Date will have, valid title
to the Shares, free and clear of any security interests, claims, liens,
equities or other encumbrances, and the legal right and power, and all
authorization and approval required by law, to enter into this
Agreement and to sell, transfer and deliver the Shares.
(f) The Stock Purchase Agreement has been duly authorized,
executed and delivered by Minorco and is a valid and binding agreement
of Minorco, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency or similar laws affecting creditors'
rights generally and general principles of equity.
(g) Delivery of the Shares pursuant to this Agreement will
pass title to such Shares free and clear of any security interests,
claims, liens, equities and other encumbrances.
6
<PAGE> 8
(n) The Selling Stockholder Information does not, and on the
Closing Date will not, contain any untrue statement of a material fact
or omit to state any material fact necessary to make such information
not misleading, and the Selling Stockholder Information does not, and
on the Closing Date will not, contain any untrue statement of a
material fact or omit to state any material fact necessary to make such
information not misleading in the light of the circumstances under
which they were made.
3. Agreements to Sell and Purchase. Taurus hereby agrees to
sell to the several Underwriters, and each Underwriter, upon the basis of the
representations and warranties herein contained, but subject to the conditions
hereinafter stated, agrees, severally and not jointly, to purchase from Taurus
at $[______] a share (the "PURCHASE PRICE") the number of Firm Shares (subject
to such adjustments to eliminate fractional shares as you may determine) that
bears the same proportion to the number of Firm Shares to be sold by the Selling
Stockholder as the number of Firm Shares set forth in Schedule I hereto opposite
the name of such Underwriter bears to the total number of Firm Shares.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, Taurus agrees to
sell to the Underwriters the Additional Shares, and the Underwriters shall have
a right to purchase, severally and not jointly, up to 2,000,000 Additional
Shares at the Purchase Price. If you, on behalf of the Underwriters, elect to
exercise such option, you shall so notify the Company and the Selling
Stockholder in writing not later than 3 days after the date of this Agreement,
which notice shall specify the number of Additional Shares to be purchased by
the Underwriters and the date on which such shares are to be purchased. Such
date may be the same as the Closing Date (as defined below). Additional Shares
may be purchased as provided in Section 5 hereof solely for the purpose of
covering over-allotments made in connection with the offering of the Firm
Shares. If any Additional Shares are to be purchased, each Underwriter agrees,
severally and not jointly, to purchase the number of Additional Shares (subject
to such adjustments to eliminate fractional shares as you may determine) that
bears the same proportion to the total number of Additional Shares to be
purchased as the number of Firm Shares set forth in Schedule I hereto opposite
the name of such Underwriter bears to the total number of Firm Shares.
Each of the Company and the Selling Stockholder hereby agrees
that, without the prior written consent of Morgan Stanley & Co. Incorporated and
J.P. Morgan Securities Inc. on behalf of the Underwriters, it will not, during
the period ending 90 days after the date of the Prospectus, (i) offer, pledge,
sell, contract to sell, sell any option or contract to purchase, purchase any
option or contract to sell, grant any option, right or warrant to purchase,
lend, or otherwise transfer or dispose of, directly or indirectly, any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock or (ii) enter into any swap or other arrangement that transfers
to another, in whole or in part, any of the economic consequences of ownership
of the Common Stock, whether any such
7
<PAGE> 9
transaction described in clause (i) or (ii) above is to be settled by delivery
of Common Stock or such other securities, in cash or otherwise. The foregoing
sentence shall not apply to (A) the Shares to be sold hereunder, (B) the shares
of Common Stock to be sold by Minorco to Engelhard pursuant to the Stock
Purchase Agreement, (C) the issuance by the Company of shares of Common Stock
upon the exercise of an option or warrant or the conversion of a security
outstanding on the date hereof, pursuant to the Company's employee benefits plan
or employment agreements described in its most recent proxy statement, of which
the Underwriters have been advised in writing or (D) transactions by any person
other than the Company relating to shares of Common Stock or other securities
acquired in open market transactions after the completion of the offering of the
Shares. In addition, the Selling Stockholder, agrees that, without the prior
written consent of Morgan Stanley & Co. Incorporated and J.P. Morgan Securities
Inc. on behalf of the Underwriters, it will not, during the period ending 90
days after the date of the Prospectus, make any demand for, or exercise any
right with respect to, the registration of any shares of Common Stock or any
security convertible into or exercisable or exchangeable for Common Stock.
4. Terms of Public Offering. The Company and the Selling
Stockholder are advised by you that the Underwriters propose to make a public
offering of their respective portions of the Shares as soon after this Agreement
has become effective as in your judgment is advisable. The Company and the
Selling Stockholder are further advised by you that the Shares are to be offered
to the public initially at $[_______] a share (the "PUBLIC OFFERING PRICE") and
to certain dealers selected by you at a price that represents a concession not
in excess of $[______] a share under the Public Offering Price, and that any
Underwriter may allow, and such dealers may reallow, a concession, not in excess
of $[_____] a share, to any Underwriter or to certain other dealers.
5. Payment and Delivery. Payment for the Firm Shares to be
sold by Taurus shall be made to Taurus, or as directed by it to you in writing
not later than two business days prior to the Closing Date (as defined below),
in Federal or other funds immediately available in New York City against
delivery of such Firm Shares for the respective accounts of the several
Underwriters at 10:00 a.m., New York City time, on May 21, 1999. The time and
date of such payment are hereinafter referred to as the "CLOSING DATE".
Payment for any Additional Shares shall be made to Taurus, or
as directed by it to you in writing not later than two business days prior to
the Option Closing Date (as defined below), in Federal or other funds
immediately available in New York City against delivery of such Additional
Shares for the respective accounts of the several Underwriters at 10:00 a.m.,
New York City time, on the date specified in the notice described in Section 3.
The time and date of such payment are hereinafter referred to as the "OPTION
CLOSING DATE".
8
<PAGE> 10
Certificates for the Firm Shares and Additional Shares shall
be in definitive form and registered in such names and in such denominations as
you shall request in writing not later than one full business day prior to the
Closing Date or the Option Closing Date, as the case may be. The certificates
evidencing the Firm Shares and Additional Shares shall be delivered to you on
the Closing Date or the Option Closing Date, as the case may be, for the
respective accounts of the several Underwriters, with any transfer taxes payable
in connection with the transfer of the Shares to the Underwriters duly paid,
against payment of the Purchase Price therefor.
6. Conditions to the Underwriters' Obligations. The several
obligations of the Underwriters to purchase and pay for the Shares on the
Closing Date are subject to the following conditions:
(a) Subsequent to the execution and delivery of this Agreement
and prior to the Closing Date:
(i) there shall not have occurred any downgrading,
nor shall any notice have been given of any intended or
potential downgrading or of any review for a possible change
that does not indicate the direction of the possible change,
in the rating accorded any of the Company's securities by any
"nationally recognized statistical rating organization", as
such term is defined for purposes of Rule 436(g)(2) under the
Securities Act (except for the possible downgrading by
Standard & Poor's Ratings Group of the Company's corporate
credit and senior unsecured debt ratings to "single-A-minus"
from "single-A" and its commercial paper ratings to "A-2" from
"A-1"); and
(ii) there shall not have occurred any change, or any
development involving a prospective change, in the condition,
financial or otherwise, or in the earnings, business or
operations of the Company and its subsidiaries, taken as a
whole, from that set forth in the Prospectus (exclusive of any
amendments or supplements thereto subsequent to the execution
and delivery of this Agreement) that, in your judgment, is
material and adverse and that makes it, in your judgment,
impracticable to market the Shares on the terms and in the
manner contemplated in the Prospectus.
(b) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an executive officer
of the Company on behalf of the Company, to the effect set forth in
Section 6(a)(i) above and to the effect that the representations and
warranties of the Company contained in this Agreement are true and
correct as of the Closing Date and that the Company has complied in all
material respects with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
9
<PAGE> 11
The officer signing and delivering such certificate may rely
upon the best of his or her knowledge as to proceedings threatened.
(c) The Underwriters shall have received on the Closing Date a
certificate, dated the Closing Date and signed by an officer of the
Selling Stockholder, to the effect that the representations and
warranties of the Selling Stockholder are true and correct as of the
Closing Date in all material respects and that the Selling Stockholder
has complied with all of the agreements and satisfied all of the
conditions on its part to be performed or satisfied hereunder on or
before the Closing Date.
(d) The Underwriters shall have received on the Closing Date
an opinion of Cahill Gordon & Reindel, outside counsel for the Company,
dated the Closing Date, in the form of Exhibit A hereto.
(e) The Underwriters shall have received on the Closing Date
an opinion of Arthur A. Dornbusch, II, General Counsel for the Company,
dated the Closing Date, in the form of Exhibit B hereto.
(f) The Underwriters shall have received on the Closing Date
an opinion of Elvinger, Hoss & Prussen, Luxembourg counsel for Minorco
and Taurus, dated the Closing Date, in the form of Exhibit C hereto.
(g) The Underwriters shall have received on the Closing Date
an opinion of Ben L. Keisler, General Counsel for Minorco and Taurus,
dated the Closing Date, in the form of Exhibit D hereto.
(h) The Underwriters shall have received on the Closing Date
an opinion of Shearman & Sterling, counsel for the Underwriters, dated
the Closing Date, in form and substance satisfactory to you.
(i) The Underwriters shall have received, on each of the date
hereof and the Closing Date, a letter dated the date hereof or the
Closing Date, as the case may be, in form and substance reasonably
satisfactory to the Underwriters, from Pricewaterhouse Coopers L.L.P.,
independent public accountants, containing statements and information
of the type ordinarily included in accountants' "comfort letters" to
underwriters with respect to the financial statements and certain
financial information contained in the Registration Statement and the
Prospectus; provided that the letter delivered on the Closing Date
shall use a "cut-off date" not earlier than the date hereof.
(j) The "lockup" agreements, each substantially in the form of
Exhibit E hereto, between you and certain executive officers and
directors of the Company relating to sales and certain other
dispositions of shares of Common Stock or certain
10
<PAGE> 12
other securities, delivered to you on or before the date hereof, shall
be in full force and effect on the Closing Date.
(k) The Company shall have purchased the shares of Common
Stock held by the Selling Stockholder and certain directors of the
Selling Stockholder pursuant to the Stock Purchase Agreement and shall
have financed such purchase on terms and conditions no less favorable
to the Company than as described in the Prospectus.
7. Covenants of the Company. In further consideration of the
agreements of the Underwriters herein contained, the Company covenants with each
Underwriter as follows:
(a) To furnish to you, without charge, one signed copy of the
Registration Statement (including exhibits thereto) and for delivery to
each other Underwriter a conformed copy of the Registration Statement
(without exhibits thereto) and to furnish to you in New York City,
without charge, prior to 10:00 a.m. New York City time on the business
day next succeeding the date of this Agreement and during the period
mentioned in Section 7(c) below, as many copies of the Prospectus and
any supplements and amendments thereto or to the Registration Statement
as you may reasonably request.
(b) Before amending or supplementing the Registration
Statement or the Prospectus, to furnish to you a copy of each such
proposed amendment or supplement (other than any document required to
be filed with the Commission pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act and incorporated by reference in the
Prospectus) and not to file any such proposed amendment or supplement
to which you reasonably object, and to file with the Commission within
the applicable period specified in Rule 424(b) under the Securities Act
any prospectus required to be filed pursuant to such Rule.
(c) If, during such period after the first date of the public
offering of the Shares as in the opinion of counsel for the
Underwriters the Prospectus is required by law to be delivered in
connection with sales by an Underwriter or dealer, any event shall
occur or condition exist as a result of which it is necessary to amend
or supplement the Prospectus in order to make the statements therein,
in the light of the circumstances when the Prospectus is delivered to a
purchaser, not misleading, or if, in the opinion of counsel for the
Underwriters or the Company, it is necessary to amend or supplement the
Prospectus to comply with applicable law, forthwith to prepare and file
with the Commission and furnish, at no expense to the Underwriters,
either amendments or supplements to the Prospectus so that the
statements in the Prospectus as so amended or supplemented will not, in
the light of the circumstances when the Prospectus is delivered to a
purchaser, be misleading or so that the Prospectus, as amended or
supplemented, will comply with law.
11
<PAGE> 13
(d) To endeavor to qualify the Shares for offer and sale under
the securities or Blue Sky laws of such jurisdictions as you shall
reasonably request.
(e) To make generally available to the Company's security
holders and to you as soon as practicable an earnings statement that
shall satisfy the provisions of Section 11(a) of the Securities Act and
the rules and regulations of the Commission thereunder.
8. Expenses. Whether or not the transactions contemplated in
this Agreement are consummated or this Agreement is terminated, the Selling
Stockholder agrees to pay or cause to be paid, by the Company or otherwise, all
expenses incident to the performance of the obligations of the Company and the
Selling Stockholder under this Agreement, including: (i) the fees, disbursements
and expenses of the Company's counsel, the Company's accountants and counsel for
the Selling Stockholder in connection with the registration and delivery of the
Shares under the Securities Act and all other fees or expenses in connection
with the preparation and filing of the Registration Statement, any preliminary
prospectus, the Prospectus and amendments and supplements to any of the
foregoing, including all printing costs associated therewith, and the mailing
and delivering of copies thereof to the Underwriters and dealers, in the
quantities hereinabove specified, (ii) all costs and expenses related to the
transfer and delivery of the Shares to the Underwriters, including any transfer
or other taxes payable thereon, (iii) the cost of printing or producing any Blue
Sky or Legal Investment memorandum in connection with the offer and sale of the
Shares under state securities laws and all expenses in connection with the
qualification of the Shares for offer and sale under state securities laws as
provided in Section 7(d) hereof, including filing fees and the reasonable fees
and disbursements of counsel for the Underwriters in connection with such
qualification and in connection with the Blue Sky or Legal Investment
memorandum, (iv) all filing fees and the reasonable fees and disbursements of
counsel to the Underwriters incurred in connection with the review and
qualification of the offering of the Shares by the National Association of
Securities Dealers, Inc., (v) the cost of printing certificates representing the
Shares, (vi) the costs and charges of any transfer agent, registrar or
depositary, (vii) the costs and expenses of the Company relating to investor
presentations on any "road show" undertaken in connection with the marketing of
the offering of the Shares, including, without limitation, expenses associated
with the production of road show slides and graphics, fees and expenses of any
consultants engaged in connection with the road show presentations with the
prior approval of the Company, travel and lodging expenses of the
representatives and officers of the Company and any such consultants, and the
cost of any aircraft chartered in connection with the road show, and (viii) all
other costs and expenses incident to the performance of the obligations of the
Company and the Selling Stockholder hereunder for which provision is not
otherwise made in this Section. It is understood, however, that except as
provided in this Section, Section 9 entitled "Indemnity and Contribution", and
the last two paragraphs of Section 11 below, the Underwriters will pay all of
their costs and expenses, including fees and disbursements of their counsel,
stock transfer taxes payable on resale of any of the Shares by them and any
advertising expenses connected with any offers they may make.
12
<PAGE> 14
The provisions of this Section shall not supersede or
otherwise affect any agreement that the Company and Minorco may otherwise have
for the allocation of such expenses among themselves.
9. Indemnity and Contribution. (a) The Company agrees to
indemnify and hold harmless each Underwriter, each person, if any, who controls
any Underwriter within the meaning of either Section 15 of the Securities Act or
Section 20 of the Exchange Act and the Selling Stockholder, from and against any
and all losses, claims, damages and liabilities (including, without limitation,
any legal or other expenses reasonably incurred in connection with defending or
investigating any such action or claim) caused by any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement or any amendment thereof, any preliminary prospectus or the Prospectus
(as amended or supplemented if the Company shall have furnished any amendments
or supplements thereto), or caused by any omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were made,
not misleading, except insofar as such losses, claims, damages or liabilities
are caused by any such untrue statement or omission or alleged untrue statement
or omission based upon (i) any Underwriter Information or (ii) any information
relating to the Selling Stockholder furnished in writing by or on behalf of the
Selling Stockholder expressly for use in the Registration Statement, any
preliminary prospectus, the Prospectus or any amendments or supplements thereto
("SELLING STOCKHOLDER INFORMATION"); provided, however, that the foregoing
indemnity agreement with respect to any preliminary prospectus shall not inure
to the benefit of any Underwriter from whom the person asserting any such
losses, claims, damages or liabilities purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus (as then amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto) was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to the written
confirmation of the sale of the Shares to such person, and if the Prospectus (as
so amended or supplemented) would have cured the defect giving rise to such
losses, claims, damages or liabilities, unless such failure is the result of
noncompliance by the Company with Section 7(a) hereof.
(b) The Selling Stockholder agrees to indemnify and hold
harmless each Underwriter, each person, if any, who controls any Underwriter
within the meaning of Section 15 of the Securities Act or Section 20 of the
Exchange Act and the Company from and against any and all losses, claims,
damages and liabilities (including, without limitation, any legal or other
expenses reasonably incurred in connection with defending or investigating any
such action or claim) caused by any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any amendment
thereof, any preliminary prospectus or the Prospectus (as amended or
supplemented if the Company shall have furnished any amendments or supplements
thereto), or caused by any omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein not misleading, but only with reference to Selling Stockholder
Information;
13
<PAGE> 15
provided, however, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any Underwriter from
whom the person asserting any such losses, claims, damages or liabilities
purchased Shares, or any person controlling such Underwriter, if a copy of the
Prospectus (as then amended or supplemented if the Company shall have furnished
any amendments or supplements thereto) was not sent or given by or on behalf of
such Underwriter to such person, if required by law so to have been delivered,
at or prior to the written confirmation of the sale of the Shares to such
person, and if the Prospectus (as so amended or supplemented) would have cured
the defect giving rise to such losses, claims, damages or liabilities, unless
such failure is the result of noncompliance by the Company with Section 7(a)
hereof.
(c) Each Underwriter agrees, severally and not jointly, to
indemnify and hold harmless the Company, the Selling Stockholder, the directors
of the Company, the officers of the Company who sign the Registration Statement
and each person, if any, who controls the Company or the Selling Stockholder
within the meaning of either Section 15 of the Securities Act or Section 20 of
the Exchange Act from and against any and all losses, claims, damages and
liabilities (including, without limitation, any legal or other expenses
reasonably incurred in connection with defending or investigating any such
action or claim) caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement or any amendment thereof,
any preliminary prospectus or the Prospectus (as amended or supplemented if the
Company shall have furnished any amendments or supplements thereto), or caused
by any omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
but only with reference to Underwriter Information relating to such Underwriter.
(d) In case any proceeding (including any governmental
investigation) shall be instituted involving any person in respect of which
indemnity may be sought pursuant to Section 9(a), 9(b) or 9(c), such person (the
"INDEMNIFIED PARTY") shall promptly notify the person against whom such
indemnity may be sought (the "INDEMNIFYING PARTY") in writing and the
indemnifying party, upon request of the indemnified party, shall retain counsel
reasonably satisfactory to the indemnified party to represent the indemnified
party and any others the indemnifying party may designate in such proceeding and
shall pay the fees and disbursements of such counsel related to such proceeding.
In any such proceeding, any indemnified party shall have the right to retain its
own counsel, but the fees and expenses of such counsel shall be at the expense
of such indemnified party unless (i) the indemnifying party and the indemnified
party shall have mutually agreed to the retention of such counsel, (ii) the
indemnifying party has failed within a reasonable time to retain counsel
reasonably satisfactory to the indemnified party or (iii) the named parties to
any such proceeding (including any impleaded parties) include both the
indemnifying party and the indemnified party and representation of both parties
by the same counsel would be inappropriate due to actual or potential differing
interests between them. It is understood that the indemnifying party shall not,
in respect of the legal expenses of any indemnified party in connection with any
proceeding or related proceedings in the same jurisdiction, be liable for (i)
the fees and expenses of more than one separate firm (in
14
<PAGE> 16
addition to any local counsel) for all Underwriters and all persons, if any, who
control any Underwriter within the meaning of either Section 15 of the
Securities Act or Section 20 of the Exchange Act, (ii) the fees and expenses of
more than one separate firm (in addition to any local counsel) for the Company,
its directors, its officers who sign the Registration Statement and each person,
if any, who controls the Company within the meaning of either such Section and
(iii) the fees and expenses of more than one separate firm (in addition to any
local counsel) for the Selling Stockholder and all persons, if any, who control
the Selling Stockholder within the meaning of either such Section, and that all
such fees and expenses shall be reimbursed as they are incurred. In the case of
any such separate firm for the Underwriters and such control persons of any
Underwriters, such firm shall be designated in writing by Morgan Stanley & Co.
Incorporated and J.P. Morgan Securities, Inc. In the case of any such separate
firm for the Company, and such directors, officers and control persons of the
Company, such firm shall be designated in writing by the Company. In the case of
any such separate firm for the Selling Stockholder and such control persons of
the Selling Stockholder, such firm shall be designated in writing by the Selling
Stockholder. The indemnifying party shall not be liable for any settlement of
any proceeding effected without its written consent, but if settled with such
consent or if there be a final judgment for the plaintiff, the indemnifying
party agrees to indemnify the indemnified party from and against any loss or
liability by reason of such settlement or judgment. No indemnifying party shall,
without the prior written consent of the indemnified party, effect any
settlement of any pending or threatened proceeding in respect of which any
indemnified party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement includes an
unconditional release of such indemnified party from all liability on claims
that are the subject matter of such proceeding.
(e) To the extent the indemnification provided for in Section
9(a), 9(b) or 9(c) is unavailable to an indemnified party or insufficient in
respect of any losses, claims, damages or liabilities referred to therein, then
each indemnifying party under such paragraph, in lieu of indemnifying such
indemnified party thereunder, shall contribute to the amount paid or payable by
such indemnified party as a result of such losses, claims, damages or
liabilities (i) in such proportion as is appropriate to reflect the relative
benefits received by the indemnifying party or parties on the one hand and the
indemnified party or parties on the other hand from the offering of the Shares
(it being understood that solely as between the Selling Stockholder and the
Company, but without affecting any right the Underwriters may have under this
clause (i), contribution shall be made only in such proportion as is appropriate
to reflect the relative fault of the indemnifying party on the one hand and of
the indemnified party on the other hand in connection with the statements or
omissions that resulted in such losses, claims, damages or liabilities) or (ii)
if the allocation based on relative benefits provided by clause 9(e)(i) above is
not permitted by applicable law, in such proportion as is appropriate to reflect
not only the relative benefits referred to in clause 9(e)(i) above but also the
relative fault of the indemnifying party or parties on the one hand and of the
indemnified party or parties on the other hand in connection with the statements
or omissions that resulted in such losses, claims, damages or liabilities, as
well as any other relevant equitable considerations. The
15
<PAGE> 17
relative benefits received by the Company and the Selling Stockholder on the one
hand and the Underwriters on the other hand in connection with the offering of
the Shares shall be deemed to be in the same respective proportions as the net
proceeds from the offering of the Shares (before deducting expenses) received by
the Selling Stockholder and the total underwriting discounts and commissions
received by the Underwriters, in each case as set forth in the table on the
cover of the Prospectus Supplement, bear to the aggregate Public Offering Price
of the Shares. The relative fault of the Company and the Selling Stockholder on
the one hand and the Underwriters on the other hand shall be determined by
reference to, among other things, whether the untrue or alleged untrue statement
of a material fact or the omission or alleged omission to state a material fact
relates to information supplied by the Company or the Selling Stockholder or by
the Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The Underwriters' respective obligations to contribute pursuant to this Section
9 are several in proportion to the respective number of Shares they have
purchased hereunder, and not joint.
(f) The Company, the Selling Stockholder and the Underwriters
agree that it would not be just or equitable if contribution pursuant to this
Section 9 were determined by pro rata allocation (even if the Underwriters were
treated as one entity for such purpose) or by any other method of allocation
that does not take account of the equitable considerations referred to in
Section 9(e). The amount paid or payable by an indemnified party as a result of
the losses, claims, damages and liabilities referred to in the immediately
preceding paragraph shall be deemed to include, subject to the limitations set
forth above, any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim.
Notwithstanding the provisions of this Section 9, (i) no Underwriter shall be
required to contribute any amount in excess of the amount by which the total
price at which the Shares underwritten by it and distributed to the public were
offered to the public exceeds the amount of any damages that such Underwriter
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission, and (ii) the Selling Stockholder
shall not be required to contribute any amount in excess of the amount by which
the proceeds received by the Selling Stockholder from the Shares sold by it
pursuant to this Agreement exceeds the amount of any damages that the Selling
Stockholder has otherwise been required to pay by reason of such untrue or
alleged untrue statement or omission or alleged omission. No person guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The remedies provided for in this
Section 9 are not exclusive and shall not limit any rights or remedies which may
otherwise be available to any indemnified party at law or in equity.
(g) The indemnity and contribution provisions contained in
this Section 9 and the representations, warranties and other statements of the
Company, the Selling Stockholder contained in this Agreement shall remain
operative and in full force and effect regardless of (i) any termination of this
Agreement, (ii) any investigation made by or on behalf of any Underwriter or any
person controlling any Underwriter, the Selling Stockholder or any
16
<PAGE> 18
person controlling the Selling Stockholder, or the Company, its officers or
directors or any person controlling the Company and (iii) acceptance of and
payment for any of the Shares.
10. Termination. This Agreement shall be subject to
termination by notice given by you to the Company, if (a) after the execution
and delivery of this Agreement and prior to the Closing Date (i) trading
generally shall have been suspended or materially limited on or by any of the
New York Stock Exchange or the National Association of Securities Dealers, Inc.,
(ii) trading of any securities of the Company shall have been suspended on any
exchange or in any over-the-counter market, (iii) a general moratorium on
commercial banking activities in New York shall have been declared by either
Federal or New York State authorities or (iv) there shall have occurred any
outbreak or escalation of hostilities or any change in financial markets or any
calamity or crisis that, in your judgment, is material and adverse and (b) in
the case of any of the events specified in clauses 10(a)(i) through 10(a)(iv),
such event, singly or together with any other such event, makes it, in your
judgment, impracticable to market the Shares on the terms and in the manner
contemplated in the Prospectus.
11. Effectiveness; Defaulting Underwriters. This Agreement
shall become effective upon the execution and delivery hereof by the parties
hereto.
If, on the Closing Date or the Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase Shares that it has or they have agreed to purchase hereunder on such
date, and the aggregate number of Shares which such defaulting Underwriter or
Underwriters agreed but failed or refused to purchase is not more than one-tenth
of the aggregate number of the Shares to be purchased on such date, the other
Underwriters shall be obligated severally in the proportions that the number of
Firm Shares set forth opposite their respective names in Schedule I bears to the
aggregate number of Firm Shares set forth opposite the names of all such
non-defaulting Underwriters, or in such other proportions as you may specify, to
purchase the Shares which such defaulting Underwriter or Underwriters agreed but
failed or refused to purchase on such date; provided that in no event shall the
number of Shares that any Underwriter has agreed to purchase pursuant to this
Agreement be increased pursuant to this Section 11 by an amount in excess of
one-ninth of such number of Shares without the written consent of such
Underwriter. If, on the Closing Date, any Underwriter or Underwriters shall fail
or refuse to purchase Firm Shares and the aggregate number of Firm Shares with
respect to which such default occurs is more than one-tenth of the aggregate
number of Firm Shares to be purchased, and arrangements satisfactory to you, the
Company and the Selling Stockholder for the purchase of such Firm Shares are not
made within 36 hours after such default, this Agreement shall terminate without
liability on the part of any non-defaulting Underwriter, the Company or the
Selling Stockholder. In any such case either you, the Company or the Selling
Stockholder shall have the right to postpone the Closing Date, but in no event
for longer than seven days, in order that the required changes, if any, in the
Registration Statement and in the Prospectus or in any other documents or
arrangements may be effected. If, on the Option Closing Date, any
17
<PAGE> 19
Underwriter or Underwriters shall fail or refuse to purchase Additional Shares
and the aggregate number of Additional Shares with respect to which such default
occurs is more than one-tenth of the aggregate number of Additional Shares to be
purchased, the non-defaulting Underwriters shall have the option to (i)
terminate their obligation hereunder to purchase Additional Shares or (ii)
purchase not less than the number of Additional Shares that such non-defaulting
Underwriters would have been obligated to purchase in the absence of such
default. Any action taken under this paragraph shall not relieve any defaulting
Underwriter from liability in respect of any default of such Underwriter under
this Agreement.
If this Agreement shall be terminated by the Underwriters, or
any of them, because of any failure or refusal on the part of the Company or the
Selling Stockholder to comply with the terms or to fulfill any of the conditions
of this Agreement, or if for any reason the Company or the Selling Stockholder
shall be unable to perform their obligations under this Agreement, the Selling
Stockholder will reimburse the Underwriters, or such Underwriters as have so
terminated this Agreement with respect to themselves, for all out-of-pocket
expenses (including the fees and disbursements of their counsel) reasonably
incurred by such Underwriters in connection with this Agreement or the offering
contemplated hereunder.
Nothing stated herein shall affect the rights of either the
Selling Stockholder or the Company in respect of the breach of their respective
obligations under the Stock Purchase Agreement.
12. Counterparts. This Agreement may be signed in two or more
counterparts, each of which shall be an original, with the same effect as if the
signatures thereto and hereto were upon the same instrument.
13. Applicable Law. This Agreement shall be governed by and
construed in accordance with the internal laws of the State of New York.
18
<PAGE> 20
14. Headings. The headings of the sections of this Agreement
have been inserted for convenience of reference only and shall not be deemed a
part of this Agreement.
Very truly yours,
ENGELHARD CORPORATION
By:
--------------------------
Name:
Title:
MINORCO
By:
--------------------------
Name:
Title:
TAURUS INVESTMENTS S.A.
By:
--------------------------
Name:
Title:
19
<PAGE> 21
Accepted as of the date hereof
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
Lazard Freres & Co. L.L.C.
Acting severally on behalf
of themselves and the
several Underwriters named
in Schedule I hereto.
By: Morgan Stanley & Co. Incorporated
By:
-------------------------------------------
Name:
Title:
By: J.P. Morgan Securities Inc.
By:
-------------------------------------------
Name:
Title:
<PAGE> 22
SCHEDULE I
<TABLE>
<CAPTION>
NUMBER OF
FIRM SHARES
UNDERWRITER TO BE PURCHASED
<S> <C>
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
Lazard Freres & Co. L.L.C.
Merrill Lynch, Pierce Fenner & Smith Incorporated
Salomon Smith Barney Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
----------
Total............................................... 26,000,000
==========
</TABLE>
2
<PAGE> 23
EXHIBIT A
FORM OF OPINION OF CAHILL GORDON & REINDEL
NEW YORK COUNSEL FOR THE COMPANY
(i) the Company has been duly incorporated, is
validly existing as a corporation in good standing under the
laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its property and to
conduct its business as described in the Prospectus;
(ii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iii) the Shares to be sold by the Selling
Stockholder have been duly authorized and are validly issued,
fully paid and non-assessable, and, to our knowledge, the sale
of the Shares will not be subject to any preemptive or similar
rights granted by the Company;
(iv) the Underwriting Agreement has been duly
authorized, executed and delivered by the Company;
(v) The Stock Purchase Agreement has been duly
authorized, executed and delivered by the Company and
(assuming the due authorization, execution and delivery
thereof by Minorco) is a valid and binding agreement of the
Company, enforceable in accordance with its terms, subject to
applicable bankruptcy, insolvency or similar laws affecting
creditors' rights generally and general principles of equity;
and except that rights to indemnity and contribution
thereunder may be limited by applicable law;
(vi) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
the Underwriting Agreement and the Stock Purchase Agreement
will not contravene any provision of applicable New York or
federal law or the certificate of incorporation or bylaws of
the Company, and no consent, approval, authorization or order
of, or qualification with, any New York or federal
governmental body or agency is required for the performance by
the Company of its obligations under the Underwriting
Agreement or the Stock Purchase Agreement, except such as may
be required by the securities or Blue Sky laws in connection
with the offer and sale of the Shares;
(vii) the Registration Statement has become
effective; and, to our knowledge, no stop order suspending the
effectiveness of the Registration
<PAGE> 24
Statement has been issued, and no proceedings for such purpose
are pending before or, to the best of counsel's knowledge;
threatened by the Commission;
(viii) the Company is not an "investment company" as
such term is defined in the Investment Company Act of 1940, as
amended; and
(ix) the Registration Statement and Prospectus
(except for financial statements and schedules and other
financial and statistical data included therein as to which
such counsel need not express any opinion) comply as to form
in all material respects with the Securities Act and the
applicable rules and regulations of the Commission thereunder.
Such counsel shall additionally state that such
counsel has participated in conferences with officers and
other representatives of the Company, representatives of the
independent public accountants for the Company and
representatives of the Underwriters and their counsel, at
which the contents of the Registration Statement and the
Prospectus and related matters were discussed, and although
such counsel is not passing upon and does not assume
responsibility for the accuracy, completeness or fairness of
the statements contained in the Registration Statement and the
Prospectus, on the basis of the foregoing (relying as to
materiality to a large extent upon statements of officers and
other representatives of the Company), no facts have come to
the attention of such counsel which would lead such counsel to
believe that, at the time the Registration Statement became
effective, the Registration Statement contained an untrue
statement of a material fact or omitted to state a material
fact required to be stated therein or necessary to make the
statements therein not misleading or that the Prospectus, as
of the date thereof or the Closing Date, included or includes
an untrue statement of a material fact or omitted or omits to
state a material fact necessary in order to make the
statements therein, in the light of the circumstances under
which they were made, not misleading (except that no statement
need be made as to the financial statements or financial or
statistical data contained or incorporated therein.
In rendering such opinions, such counsel may state
that they have examined the originals, photocopies or
conformed copies of all such records of the Company and its
subsidiaries and all such agreements, certificates of public
officials, certificates of officers and representatives of the
Company and its subsidiaries and such other documents as they
have deemed relevant and necessary as a basis for the opinions
express therein. Such counsel may assume the genuineness of
all signatures on original documents and the conformity to the
originals of all copies submitted to them as conformed or
photocopies. As to various questions of fact material to their
opinion, such counsel may rely upon representations,
statements or certificates of public officials, officers and
A-2
<PAGE> 25
representatives of the Company and its subsidiaries and
others. Such counsel may also state that they are admitted to
practice in the State of New York and do not express any
opinion on any laws other than the laws of the State of New
York, the General Corporation Law of the State of Delaware and
federal law.
The opinion of Cahill Gordon & Reindel described above shall
be rendered to the Underwriters at the request of the Company and shall so state
therein.
A-3
<PAGE> 26
EXHIBIT B
FORM OF OPINION OF ARTHUR A. DORNBUSCH, II
GENERAL COUNSEL FOR THE COMPANY
(i) the Company is duly qualified and is in good
standing in each jurisdiction in which the conduct of its
business or its ownership or leasing of property requires such
qualification, except to the extent that the failure to be so
qualified or be in good standing would not have a Material
Adverse Effect;
(ii) each Significant Subsidiary of the Company has
been duly incorporated, is validly existing as a corporation
in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power and authority to own
its property and to conduct its business as described in the
Prospectus and is duly qualified and is in good standing in
each jurisdiction in which the conduct of its business or its
ownership or leasing of property requires such qualification,
except to the extent that the failure to be so qualified or be
in good standing would not have a Material Adverse Effect;
(iii) the authorized capital stock of the Company
conforms as to legal matters to the description thereof
contained in the Prospectus;
(iv) the shares of Common Stock (including the Shares
to be sold by the Selling Stockholder) outstanding prior to
the sale of the Shares by the Selling Stockholder have been
duly authorized and are validly issued, fully paid and
non-assessable, and the sale of the Shares will not be subject
to any preemptive or similar rights;
(v) all of the issued and outstanding shares of
capital stock of each subsidiary of the Company have been duly
and validly authorized and issued, are fully paid and
non-assessable and are owned directly by the Company, free and
clear of all liens, encumbrances, equities or claims;
(vi) the execution and delivery by the Company of,
and the performance by the Company of its obligations under,
the Underwriting Agreement and the Stock Purchase Agreement
will not contravene the certificate of incorporation or bylaws
of the Company or, to the best of such counsel's knowledge,
any agreement or other instrument binding upon the Company or
any of its subsidiaries that is material to the Company and
its subsidiaries, taken as a whole, or, to the best of such
counsel's knowledge, any judgment, order or decree of any
governmental body, agency or court having jurisdiction over
the Company or any subsidiary other than the securities or
Blue Sky laws in connection with the offer and sale of the
Shares;
<PAGE> 27
(vii) such counsel does not know of any legal or
governmental proceedings pending or threatened to which the
Company or any of its subsidiaries is a party or to which any
of the properties of the Company or any of its subsidiaries is
subject that are required to be described in the Registration
Statement or the Prospectus and are not so described or of any
statutes, regulations, contracts or other documents that are
required to be described in the Registration Statement or the
Prospectus or to be filed as exhibits to the Registration
Statement that are not described or filed as required;
(viii) each document filed pursuant to the Exchange
Act and incorporated by reference in the Prospectus complied
when so filed in all material respects with the Exchange Act
and the applicable rules and regulations of the Commission
thereunder; and
Such counsel shall additionally state that no facts
have come to the attention of such counsel which would lead
such counsel to believe that, at the time the Registration
Statement became effective, the Registration Statement,
contained an untrue statement of a material fact or omitted to
state a material fact required to be stated therein or
necessary to make the statements therein not misleading or
that the Prospectus, as of the date thereof or the Closing
Date, included or includes an untrue statement of a material
fact or omitted or omits to state a material fact necessary in
order to make the statements therein, in the light of the
circumstances under which they were made, not misleading
(except that no statement need be made as to the financial
statements or financial or statistical data contained or
incorporated therein).
B-2
<PAGE> 28
EXHIBIT C
FORM OF OPINION OF ELVINGER, HOSS & PRUSSEN
LUXEMBOURG COUNSEL FOR MINORCO AND TAURUS
Re: MINORCO - ENGELHARD
Ladies and Gentlemen,
1.
(i) We have acted as Luxembourg counsel to Minorco, Societe
Anonyme ("Minorco") [and Taurus International S.A.] ("Taurus")
in connection with the execution and delivery by the parties
thereto of
(a) the Underwriting Agreement dated as of [ ]
among Minorco, [ ] and [ ] (the
"Underwriting Agreement"); and
(b) the Stock Purchase Agreement dated [ ] among Minorco,
[ ] and [ ] (the "Stock Purchase Agreement").
Capitalised terms used and not otherwise defined herein have
the meanings given to them in the [ ].
(ii) In rendering the opinions expressed below, we have examined
executed copies of the Underwriting Agreement and the Stock
Purchase Agreement (collectively, the "Agreements") and
certified extracts dated [ ] of the resolutions 1) of
a meeting of the Board of Directors of Minorco held on
[ ], 2) of a written consent of the Directors of
Minorco of 24th February, 1999 and 3) of a meeting of the US
Asset Disposal Committee of Minorco held on [ ] (the
"Minorco Resolutions") as well as the resolutions 4)
[ ] and 5 [ ] (the "Taurus Resolutions").
(iii) Except for the documents referred to in (ii) above and the
articles of incorporation of Minorco and of Taurus, we have
not examined any contract, agreement or instrument to which
any of Minorco, Taurus and their respective Subsidiaries is a
party or by which any of them is bound or to which any of them
is subject or any other corporate records of Minorco, Taurus
or any of their respective Subsidiaries. We have made no
investigations of the matters as to which it is stated herein
"to be of our knowledge" (whether in this firm or otherwise).
<PAGE> 29
We have assumed for purposes of our opinions hereinafter set forth:
(i) that the Agreements have been duly authorised, executed and
delivered by the respective parties thereto (other than
Minorco and Taurus) and that the performance thereof is within
the capacity and powers of each of them (other than Minorco
and Taurus);
(ii) that each of the respective parties (other than Minorco and
Taurus) to the Agreements is duly organised and validly
existing under the laws of the jurisdiction of its
organisation and has full power, authority and legal right to
make and perform each of the Agreements to which it is a
party;
(iii) that the making and performance of each of the Agreements by
the respective parties thereto (other than Minorco and Taurus)
do not, in the case of any such party, contravene, and such
agreements are not invalid or unenforceable under the law of
the jurisdiction of organisation of such party (other than the
Grand-Duchy of Luxembourg ("Luxembourg") as to which we make
no assumption);
(iv) the genuineness of all signatures, stamps and seals, the
conformity to the originals of all documents supplied to us as
certified, photostatic or faxed copies, the authenticity of
the originals of such documents and the conformity of the
final drafts of the documents reviewed by us to the originals
thereof;
(v) that, under New York law, the Agreements represent valid and
binding obligations of the parties thereto and are enforceable
thereunder in accordance with their respective terms;
(vi) that all consents and authorisations required under the laws
or regulations of any jurisdiction other than Luxembourg for
or in connection with the entering into of the Agreements and
the execution and enforcement of the obligations under each of
the Agreements have been obtained and are in full force and
effect; and
(vii) that words and phrases in English have the same implied
meaning under New York law _______ were governed by Luxembourg
law.
2. In rendering the opinions expressed below, we have examined such
documents and papers as we have deemed necessary as a basis for the opinions
hereinafter expressed. With respect to certain matters of fact, we have relied
upon representations, including, without limitation, the representations in the
Agreements.
3. Based upon the foregoing, and to the qualifications, exceptions and
comments set forth below, we are of the opinion that:
C-2
<PAGE> 30
(i) Each of Minorco and Taurus is a societe anonyme duly organised
and validly existing under the laws of Luxembourg;
(ii) the Underwriting Agreement has been duly authorised, executed
and delivered by Minorco and by Taurus respectively;
(iii) the execution and delivery by Minorco of, and the performance
by Minorco of its obligations under, the Underwriting
Agreement and the Stock Purchase Agreement will not contravene
any provision of applicable Luxembourg law or the articles of
incorporation of Minorco or, to our knowledge, any agreement
or other instrument binding upon Minorco, or, to our
knowledge, any judgment, order or decree of any governmental
body, agency or court in Luxembourg having jurisdiction over
Minorco, and no consent, approval, authorisation or order of,
or qualification with, any Luxembourg governmental body or
agency is required for the performance by Minorco of its
obligations under the Underwriting Agreement or the Stock
Purchase Agreement; and
(iv) the execution and delivery by Taurus of, and the performance
by Taurus of its obligations under, the Underwriting Agreement
will not contravene any provision of applicable Luxembourg law
or the articles of incorporation of Taurus or, to the best of
such counsel's knowledge, any agreement or other instrument
binding upon Taurus, or, to the best of such counsel's
knowledge, any judgment, order or decree of any governmental
body, agency or court in Luxembourg having jurisdiction over
Taurus, and no consent, approval, authorisation or order of,
or qualification with, any Luxembourg governmental body or
agency is required for the performance by Taurus of its
obligations under the Underwriting Agreement.
4. The opinions stated above are subject to the following
qualifications:
(i) the binding effect of the obligations of Minorco and Taurus
respectively under the Agreements may be limited by
bankruptcy, insolvency, liquidation or other laws affecting
the enforcement of creditor's rights generally;
(ii) any obligations to pay a sum of money in a currency which is
not of legal tender in Luxembourg (a "foreign currency") will
be enforceable in a currency which is of legal tender therein,
though the monetary judgment may be expressed in a foreign
currency and/or its Luxembourg equivalent currency having
legal tender in Luxembourg at time of payment and any loss
incurred as a result of currency exchange fluctuation can be
recovered under Luxembourg law;
(iii) an obligation to pay interest on interest may not be
enforceable;
C-3
<PAGE> 31
(iv) certain obligations other than payment obligations may not be
the subject of specific performance pursuant to Court orders,
but may result only in damages;
(v) a Luxembourg Court may refuse to give effect to a purported
contractual obligation to pay costs imposed upon another party
in respect of the costs of any unsuccessful litigation brought
against that party before a Luxembourg Court and a Luxembourg
Court may not award by way of costs all of the expenditure
incurred by a successful litigant in proceedings brought
before a Luxembourg Court;
(vi) claims may be subject to the rules of set-off or counterclaim;
and
(vii) any court award by a State or Federal Court in New York, New
York would be declared enforceable in Luxembourg by the
Luxembourg courts subject to exequatur procedure, without
re-examining the merits of the case provided the following
conditions laid down by Luxembourg law for enforcement of
foreign courts awards are justified:
(1) the judgement is enforceable in New York;
(2) the New York Court had jurisdiction over the subject matter of
the action leading to the judgement;
(3) the New York Court acted in accordance with its own procedural
laws;
(4) the judgement was granted following proceedings where the
counterparty had the opportunity to appear, and if it
appeared, to present a defense;
(5) the New York Court applied the substantive laws chosen by the
parties to govern the Guarantees; and
(6) the judgement is not contrary to the public order of
Luxembourg.
In this context, article 1251 of the Luxembourg Code of Civil Procedure
provides that subject to the provisions of international conventions, the judge
may refuse the exequatur (1) if the award is not final and the arbitrators have
not ordered the provisional execution (2) if the award or its execution is
contrary to public order or (3) if the existence of causes for annulment as
provided for by article 1244 3 to 12 of the Luxembourg Code of Civil Procedure
is established.
We further point out that provisions of the Agreements which permit
certain parties to take actions or make determinations or require payments under
indemnity and similar provisions may be subject to a requirement that such
actions be taken and such determinations
C-4
<PAGE> 32
be made on a reasonable basis and in good faith and that any action or omission
to act in respect of which any such payment is so required be reasonable and in
good faith.
The foregoing opinions are limited to matters involving the law of
Luxembourg, and we do not express any opinion as to the law of any other
jurisdiction.
This opinion is provided to you by us and may not be relied upon by any
other person without our prior written consent.
Yours faithfully,
Elvinger, Hoss & Prussen
By:
-----------------------------
Pit Reckinger
C-5
<PAGE> 33
EXHIBIT D
FORM OF OPINION OF BEN L. KEISLER
GENERAL COUNSEL FOR MINORCO AND TAURUS
__________, 1999
J.P. Morgan Securities Inc.
Morgan Stanley & Co. Incorporated
Lazard Freres & Co. L.L.C.
Merrill Lynch, Pierce Fenner & Smith Incorporated
Salomon Smith Barney Inc.
Donaldson, Lufkin & Jenrette Securities Corporation
c/o J.P. Morgan Securities Inc. and
Morgan Stanley & Co. Incorporated
Dear Sirs:
I refer to the Underwriting Agreement, dated ________, 1999
(the "Underwriting Agreement"), among Engelhard Corporation, a Delaware
corporation (the "Company"), Minorco, a Luxembourg corporation, Taurus
Investments S.A., a Luxembourg corporation ("Taurus"), and you (the
"Underwriters"), of 26,000,000 shares (the "Securities") of the Company's Common
Stock, par value $1.00 per share (the "Common Stock"). As General Counsel of
Minorco, I have examined such corporate records, certificates and other
documents, and such questions of law, as I have considered necessary or
appropriate for the purposes of this opinion. Upon the basis of such
examination, it is my opinion that:
(1) The execution and delivery by Minorco of, and the
performance by Minorco of its obligations under, the Underwriting
Agreement and the Stock Purchase and Registration Rights Agreement,
dated March 2, 1999 (the "Stock Purchase Agreement"), between the
Company and Minorco, will not contravene any provision of applicable
New York or federal law (it being understood that I am not rendering
any
<PAGE> 34
opinion regarding compliance of the prospectus or registration
statement with any New York or federal antifraud laws), or, to the best
of my knowledge, any judgment, order or decree of any New York or
federal governmental body, agency or court having jurisdiction over
Minorco, and no consent, approval, authorization or order of, or
qualification with, any New York or federal governmental body or agency
is required for the performance by Minorco of its obligations under the
Underwriting Agreement or the Stock Purchase Agreement, except such as
may be required by the securities or Blue Sky laws in connection with
offer and sale of the Shares.
(2) The execution and delivery by Taurus of, and the
performance by Taurus of its obligations under, the Underwriting
Agreement will not contravene any provision of applicable New York or
federal law (it being understood that I am not rendering any opinion
regarding compliance of the prospectus or registration statement with
any New York or federal antifraud laws), or, to the best of my
knowledge, any judgment, order or decree of any New York or federal
governmental body, agency or court having jurisdiction over Taurus, and
no consent, approval, authorization or order of, or qualification with,
any New York or federal governmental body or agency is required for the
performance by Taurus of its obligations under the Underwriting
Agreement, except such as may be required by the securities or Blue Sky
laws in connection with offer and sale of the Shares.
(3) The Stock Purchase Agreement is a valid and binding
agreement of Minorco enforceable in accordance with its terms, subject
to bankruptcy, insolvency,
D-2
<PAGE> 35
fraudulent transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting creditors' rights and to
general equity principles.
(4) Assuming that the certificate or certificates representing
the Shares to be sold by Taurus pursuant to the Underwriting Agreement
have been effectively indorsed in blank or to the Underwriters in
accordance with the New York Uniform Commercial Code (the "NYUCC"),
then, by delivery of such certificate or certificates to the
Underwriters, the Underwriters who have purchased such Shares pursuant
to the Underwriting Agreement (without notice of any adverse claim
thereto under the NYUCC) will be "protected purchasers" of such Shares
(within the meaning of Section 8-303 of the NYUCC) and will acquire
their respective interests in the Shares (including, without
limitation, all rights that Taurus had or has the power to transfer in
such Shares) free of any adverse claim.
The foregoing opinion is limited to the Federal laws of the
United States and the laws of the State of New York and I am expressing no
opinion as to the effect of the laws of any other jurisdiction. I understand you
are relying, as to all matters governed by the laws of Luxembourg, upon the
opinion, dated today, of Elvinger, Hoss & Prussen, Luxembourg counsel to Minorco
and Taurus, delivered to you pursuant to Section 6(f) of the Underwriting
Agreement.
With your approval, I have relied as to certain matters on
information obtained from public officials, officers of Minorco and Taurus and
other sources believed by me to be responsible, and I have assumed that (i) each
of Minorco and Taurus is duly incorporated and validly existing under Luxembourg
law, (ii) each of the Underwriting Agreement and the Stock
D-3
<PAGE> 36
Purchase Agreement has been duly authorized, executed and delivered by each of
Minorco and Taurus which is a party thereto insofar as Luxembourg law is
concerned, and (iii) the signatures on all documents examined by me are genuine,
assumptions which I have not independently verified.
This opinion is provided to you by me and may not be relied
upon by any other person without my prior written consent.
Very truly yours,
D-4
<PAGE> 37
EXHIBIT E
[FORM OF LOCK-UP LETTER]
____________, 1999
Morgan Stanley & Co. Incorporated
J.P. Morgan Securities Inc.
Lazard Freres & Co. L.L.C.
c/o Morgan Stanley & Co. Incorporated
1585 Broadway
New York, NY 10036
Dear Sirs and Mesdames:
The undersigned understands that Morgan Stanley & Co.
Incorporated, J.P. Morgan Securities Inc. and Lazard Freres & Co. L.L.C. (the
"MANAGERS") propose to enter into an Underwriting Agreement (the "UNDERWRITING
AGREEMENT") with Engelhard Corporation, a Delaware corporation (the "COMPANY")
and Taurus Investments S.A., a [ ] corporation (the "SELLING STOCKHOLDER"),
providing for the public offering (the "PUBLIC OFFERING") by the several
Underwriters listed on Schedule I to the Underwriting Agreement, including the
Managers (the "UNDERWRITERS"), of 26,000,000 shares (the "SHARES") of the common
stock (par value $1.00 per share) of the Company (the "COMMON STOCK").
To induce the Underwriters that may participate in the Public
Offering to continue their efforts in connection with the Public Offering, the
undersigned hereby agrees that, without the prior written consent of Morgan
Stanley & Co. Incorporated and J.P. Morgan Securities Inc. on behalf of the
Underwriters, I will not, during the period commencing on the date hereof and
ending 90 days after the date of the final prospectus relating to the Public
Offering (the "PROSPECTUS"), (1) offer, pledge, sell, contract to sell, sell any
option or contract to purchase, purchase any option or contract to sell, grant
any option, right or warrant to purchase, lend, or otherwise transfer or dispose
of, directly or indirectly, any shares of Common Stock or any securities
convertible into or exercisable or exchangeable for Common Stock, or (2) enter
into any swap or other arrangement that transfers to another, in whole or in
part, any of the economic consequences of ownership of the Common Stock, whether
any such transaction described in clause (1) or (2) above is to be settled by
delivery of Common Stock or such other securities, in cash or otherwise. The
foregoing sentence shall not apply to transactions relating to shares of Common
Stock or other securities acquired in open market transactions after the
completion of the Public Offering. In addition, the undersigned agrees that,
without the prior written consent of Morgan Stanley & Co. Incorporated and J.P.
Morgan Securities Inc. on behalf of the Underwriters, it will not, during the
period commencing on the
E-1
<PAGE> 38
date hereof and ending 90 days after the date of the Prospectus, make any demand
for or exercise any right with respect to, the registration of any shares of
Common Stock or any security convertible into or exercisable or exchangeable for
Common Stock.
Whether or not the Public Offering actually occurs depends on
a number of factors, including market conditions. Any Public Offering will only
be made pursuant to an Underwriting Agreement, the terms of which are subject to
negotiation between the Company, the Selling Stockholder and the Underwriters.
Very truly yours,
(Name)
(Address)
E-2
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the inclusion and incorporation by reference in the
Registration Statement of Engelhard Corporation and Subsidiaries on Form S-3 of
our report dated February 4, 1999 (except for Note 20, as to which the date is
March 2, 1999), on our audits of the consolidated financial statements of
Engelhard Corporation and Subsidiaries as of December 31, 1998 and 1997, and for
each of the three years in the period ended December 31, 1998, which report is
included in Engelhard Corporation and Subsidiaries' Annual Report on Form 10-K
for the year ended December 31, 1998. We also consent to the reference to our
firm under the caption "Experts."
PricewaterhouseCoopers LLP
New York, New York
May 17, 1999