<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED, EFFECTIVE OCTOBER 7, 1996]
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ____________ to ____________
Commission file number 1-12626
EASTMAN CHEMICAL COMPANY
(Exact name of registrant as specified in its charter)
DELAWARE 62-1539359
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification no.)
100 N. EASTMAN ROAD
KINGSPORT, TENNESSEE 37660
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (423) 229-2000
Securities registered pursuant to Section 12(b) of the Act:
<TABLE>
<S> <C>
Title of each class Name of each exchange on which registered
Common Stock, par value $0.01 per share New York Stock Exchange
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
</TABLE>
Securities registered pursuant to Section 12(g) of the Act: None
- --------------------------------------------------------------------------------
PAGE 1 OF 124 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 59
<PAGE> 2
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
-------- --------
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
The aggregate market value (based upon the closing price on the New York Stock
Exchange) of the voting stock held by nonaffiliates was approximately
$4,235,260,008 as of January 31, 1997, using beneficial ownership rules adopted
pursuant to Section 13 of the Securities Exchange Act of 1934 to exclude stock
that may be beneficially owned by directors, executive officers, or 10%
shareowners, some of whom might not be held to be affiliates upon judicial
determination. At January 31, 1997, 77,862,162 shares of Common Stock of the
registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 1997
Annual Meeting of Shareowners (the "1997 Proxy Statement"), to be filed with the
Securities and Exchange Commission, are incorporated by reference in Part III,
Items 10-12 of this Annual Report on Form 10-K as indicated herein.
FORWARD-LOOKING STATEMENTS
Forward-looking statements appear throughout this report. These statements
relate to planned capacity increases and capital spending; supply and demand,
volume, price, margin, and earnings expectations for individual products,
businesses, and segments as well as for the whole of Eastman Chemical Company;
cost reduction targets; and development, production, commercialization, and
acceptance of new products and technologies. These plans and expectations are
based upon certain underlying assumptions, including those mentioned within the
text of this report. Such assumptions are in turn based upon internal estimates
and analyses of current market conditions and trends, management plans and
strategies, economic conditions, and other factors. These plans and expectations
and the assumptions underlying them are necessarily subject to risks and
uncertainties inherent in projecting future conditions and results. Actual
results could differ materially from expectations expressed in the forward
looking statements if one or more of the underlying assumptions and expectations
proves to be inaccurate or are unrealized.
2
<PAGE> 3
<TABLE>
<CAPTION>
TABLE OF CONTENTS
- ----------------------------------------------------------------------------------------------------
ITEM PAGE
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
PART I
1. Business 4 - 14
Executive Officers of the Company 15
2. Properties 16
3. Legal Proceedings 17
4. Submission of Matters to a Vote of Security Holders 17
PART II
5. Market for the Registrant's Common Stock and Related Shareowner Matters 18
6. Selected Financial Data 19
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 20 - 27
8. Financial Statements and Supplementary Data 28 - 53
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 54
PART III
10. Directors and Executive Officers of the Registrant 55
11. Executive Compensation 55
12. Security Ownership of Certain Beneficial Owners and Management 55
13. Certain Relationships and Related Transactions 55
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 56
SIGNATURES
Signatures 57 - 58
</TABLE>
3
<PAGE> 4
PART I
ITEM 1. BUSINESS
GENERAL
Eastman Chemical Company ("Eastman" or the "Company") is a leading international
chemical company with a broad portfolio of plastic, chemical, and fiber
products. The Company manufactures and sells polyester plastics such as
polyethylene terephthalate ("PET"), a plastic widely used in soft drink
containers; coatings and paint raw materials; industrial and fine chemicals; and
acetate tow. The Company believes it has a competitive advantage in several
product areas due to its high level of manufacturing integration, the use of
state of the art process technologies and its operating efficiencies due to its
large-scale plants. In 1996 the Company had sales of $4.78 billion, operating
earnings of $663 million, and net earnings of $380 million, or $4.80 per share.
Eastman owns and operates substantially all of the worldwide chemical business
previously operated by Eastman Kodak Company ("Kodak") through its Eastman
Chemical Company division. Effective midnight December 31, 1993, Kodak
contributed such worldwide chemical business to the Company, which was
incorporated for that purpose on July 29, 1993. All of the outstanding shares of
Eastman common stock were distributed to Kodak shareowners (the "spin-off"),
resulting in Eastman becoming an independent, publicly held company. References
herein to "Eastman" or the "Company" include, where appropriate, the historical
operations of substantially all of Kodak's worldwide chemical business before
the spin-off. The Company's consolidated financial statements also include,
where appropriate, pro forma financial disclosures reflecting the spin-off.
The Company began business in 1920 for the purpose of producing chemicals for
Kodak's photographic business. Today, the Company is one of the largest chemical
producers in the United States and a leader in the application of several
manufacturing technologies. The Company pioneered the application of coal
gasification technology for the production of chemicals (also referred to as
"chemicals from coal technology") and currently operates one of the largest coal
gasification facilities in the United States, thereby reducing the Company's
dependence on petrochemicals in the manufacture of acetate tow, certain
plastics, and other chemicals. The Company is also a leader in the manufacture
of oxo chemicals that are used in the production of numerous coatings and resin
intermediates, the manufacture of fine chemicals used in photographic and other
custom chemicals, and the application of advanced environmental waste management
practices for chemical manufacturing operations. The Company is a world leader
in developing end-use applications for and recycling of a wide variety of
polyester plastics, including PET and other flexible packaging materials.
The Company categorizes its business into three segments, Specialty and
Performance, Core Plastics, and Chemical Intermediates. See Part II--Item
8--Financial Statements and Supplementary Data--Note 14 to the consolidated
financial statements. The Specialty and Performance segment includes plastic,
chemical, and fiber products primarily sold in diverse markets to customers that
base their buying decisions principally on a product's performance attributes.
The Core Plastics segment includes the Company's two major plastics products,
EASTAPAK PET polyester packaging plastic and TENITE polyethylene, as well as
cellulose acetate and polyesters. These container and packaging products share
similar physical characteristics and compete based on price and integrated
manufacturing capabilities. The Chemical Intermediates segment contains
industrial intermediate chemical products that are sold to customers operating
in mature markets in which multiple sources of supply exist. Propriety products
and low-cost manufacturing positions are the foundation of the Chemical
Intermediates segment. Eastman's strategy is to manage the mix between Specialty
and Performance, Core Plastics, and Chemical Intermediates products to fully
utilize its plants and obtain optimum profitability. The Company has the
capability to produce a wide range of products within its manufacturing plant
capacities and change product mix depending on customer demand and the Company's
strategy.
The Company's industry segment presentation for 1996 was revised. The
Performance segment was renamed Specialty and Performance, the Industrial
segment was renamed Chemical Intermediates, and the new Core Plastics segment,
which includes container plastics and flexible plastics products, was
established. Previously, container plastics were in the Performance segment, and
flexible plastics were in
4
<PAGE> 5
the Industrial segment. Prior periods have been restated to conform to the 1996
presentation. The following table summarizes the Company's recent financial
performance and identifiable assets by industry segment.
SEGMENT FINANCIAL SUMMARY
(Dollars in millions)
<TABLE>
<CAPTION>
1996 1995 1994
SALES
<S> <C> <C> <C>
Specialty and Performance $ 2,657 $ 2,647 $ 2,364
Core Plastics 1,409 1,685 1,390
Chemical Intermediates 716 708 575
--------- --------- ---------
Total $ 4,782 $ 5,040 $ 4,329
========= ========= =========
OPERATING EARNINGS
Specialty and Performance $ 519 $ 433 $ 350
Core Plastics (1) 347 199
Chemical Intermediates 145 184 87
--------- --------- ---------
Total $ 663 $ 964 $ 636
========= ========= =========
ASSETS
Specialty and Performance $ 2,887 $ 2,776 $ 2,508
Core Plastics 1,854 1,598 1,449
Chemical Intermediates 525 498 438
--------- --------- ---------
Total $ 5,266 $ 4,872 $ 4,395
========= ========= =========
</TABLE>
BUSINESS STRATEGY
Eastman's business strategy is to achieve consistent, profitable growth as a
highly integrated, international supplier of a diversified portfolio of
plastics, chemicals, and fibers. Specifically, the Company's strategic intent is
"To Be The World's Preferred Chemical Company." The following are the key
elements the Company is employing to achieve this strategy:
Proprietary Products and Core Competencies
The Company has developed its broad chemical product line through the
application of three major areas of technical strength referred to by the
Company as technology core competencies: polymer technology, organic chemistry
technology, and cellulose technology. The polymer core competence includes
polyester, polyolefin, and other polymer technologies, and forms the technical
basis of the Company's polyester and polyethylene product lines. The organic
chemistry core competence includes coal gasification for chemicals, oxo
chemistry, and complex organic chemistry technologies, and forms the basis of
the Company's fine chemical and intermediate chemical product lines. The
cellulose core competence includes cellulose conversion to acetate fibers and
plastic manufacturing technologies, and forms the basis of the Company's acetate
fibers and cellulose plastic product lines. The Company has developed or
acquired proprietary technologies and know-how with respect to each of these
core competencies.
The Company's ongoing product development strategy is to build on existing
technology core competencies and develop new technology core competencies.
During the last five years, the Company has successfully added significant new
products and product enhancements, which now represent approximately 23% of
current sales.
Manufacturing Integration and Scale
The Company's strategy is to continue to use integration of its manufacturing
plants to develop a competitive advantage. This integration provides the Company
with cost efficient and flexible manufacturing operations. The Company's major
manufacturing plants are highly integrated. Intermediate chemicals produced at
one plant are frequently distributed between plants to produce other plastics
and chemicals. Starting with a limited number of basic raw materials, primarily
coal, ethane and propane,
5
<PAGE> 6
cellulose, ethylene glycol, paraxylene and other basic chemicals, the Company
uses its integrated manufacturing capabilities to produce more than 400 major
products.
Through its development of highly integrated manufacturing, Eastman has the
capability to safely and efficiently operate large-scale chemical plants,
including one of the world's largest integrated chemical plants in Kingsport,
Tennessee. The Company's development efforts include the continual improvement
of these operations to achieve capacity increases and other earnings enhancement
projects with relatively low capital expenditures.
Quality Management
Quality Management is a fundamental set of operating and management principles
that are an extension of the philosophy of the Company's founder, George
Eastman. During the last thirteen years, the Company has further developed these
principles into its current Quality Policy. This policy states the Company's
goal to be the leader in quality and value of products and services, by focusing
on customers, process control, continual improvement, and innovation. The
Company's highly integrated manufacturing operations support the Company's total
quality policy by providing Company-wide internal control of intermediate raw
material processes. The Company's success in fostering this total quality policy
is evidenced by the U.S. Commerce Department's selection of the Company as the
recipient of the 1993 Malcolm Baldrige National Quality Award in the large
manufacturing category.
The Company has eleven quality system registrations to the international quality
standard, ISO 9000. Nine of these are in the United States and two are in the
United Kingdom. Approximately three-fourths of 1996 sales were from products
manufactured in ISO 9000 registered quality systems.
Expansion in International Markets
Customers outside the United States accounted for 37% of the Company's sales in
1996, while 9% of its products, measured by sales revenue, were manufactured
outside the United States. The Company has enjoyed growth in worldwide sales
over the past five years and achieved satisfactory returns primarily due to its
efficient large-scale plants in the United States. The Company also has
facilities in Hartlepool and Workington, England, for the manufacture of
polyester, used to produce film, bottles, and other packaging. The Workington
site also produces acetate tow. In addition, the Company's operations include a
polyester manufacturing facility in Toronto, Canada; polyethylene terephthalate
("PET") plants in Cosoleacaque, Veracruz, Mexico; and facilities in the United
Kingdom and Hong Kong for the manufacture of fine chemicals.
The Company is increasing its international manufacturing presence by targeting
a higher percentage of its annual capital expenditures for markets outside the
United States. The Company will complete a PET plant in San Roque, Spain in
early 1997 and has announced plans to build PET plants in the Netherlands and
Argentina, with operational dates of 1998. The Company also plans to build an
additional plant in the Netherlands to produce purified terephthalic acid
("PTA"), a key raw material for the production of PET, with an operational date
of 1998. By late 1997, the Company plans to double production capacity for
general-purpose fine chemicals at the Peboc Division of Eastman Chemical (UK)
Ltd. in Llangefni, Wales. Eastman is building a wholly owned manufacturing
facility in the Asia Pacific region--a 30,000-metric-ton copolyesters plant to
be located in Kuantan, Malaysia, expected to be in operation in early 1998. In
mid 1997, the Company plans to begin construction of a new oxo chemicals
manufacturing complex in Singapore, with production expected in early 1999. The
Company is studying the feasibility of forming a joint venture in the People's
Republic of China; consideration is being given to building two plants in
Nanjing, China, one to produce hydrocarbon tackifying resins and the other to
manufacture sorbates.
The Company has increased its international sales and distribution
infrastructure during the past seven years to position it for worldwide sales
growth. In particular, from 1990 through 1996, the Company increased personnel
outside the United States from approximately 500 to 1,500 employees. During the
same time period, the number of Company sales offices outside the United States
increased from 25 to 36 in a total of 32 countries. For financial information
about foreign and domestic operations and export sales, see Part II--Item
8--Financial Statements and Supplementary Data--Note 14 to the consolidated
financial statements.
6
<PAGE> 7
The Company's current and future business expansions in international markets
are dependent on projected regional economic conditions. Generally, the Company
uses its international marketing organizations to sell into international
markets. After achieving sufficient sales levels and developing an understanding
of the markets and earnings potential, the Company may invest in manufacturing
capacity appropriate to serve the region, taking into account the projected
future business conditions in the region. See Part II--Item 7--"Management's
Discussion and Analysis of Financial Condition and Results of Operations-Results
of Operations--Summary by Customer Location" for a discussion of certain risks
to which the Company is subject as a result of its operating in international
markets.
Strategic Market Orientation
The Company's organization is aligned to focus on strategic markets. The Company
believes that its market focus helps sustain earnings during economic downturns
and allows it to focus on growth.
Employee Ownership and Incentives
The Company believes that employee stock ownership will be a significant factor
in achieving its goal of consistent, profitable growth. The Eastman Employee
Stock Ownership Plan ("ESOP") is intended to foster employee ownership
throughout the Company, and stock ownership guidelines have been established for
the Company's directors and approximately 550 key Company managers. All Eastman
employees have placed at risk approximately 5% of their overall pay under the
Eastman Performance Plan, an annual incentive plan that rewards employees based
on the Company's achieved return on capital in relation to its cost of capital.
A certain portion of the incentive pay (approximately 5% of eligible employees'
annual pay in 1996, 5% in 1995, and 4% in 1994) has been committed to the
purchase of Eastman common stock under the ESOP. An additional portion of
management compensation is tied to Company performance under the Eastman Annual
Performance Plan. For further information concerning the Company's ESOP and
incentive pay plans, see Part II--Item 8--Financial Statements and Supplementary
Data--Note 8 to the consolidated financial statements and Part III--Item 11--
Executive Compensation.
INDUSTRY SEGMENTS
SPECIALTY AND PERFORMANCE SEGMENT
The key product groupings and primary markets in the Specialty and Performance
segment are summarized as follows:
<TABLE>
<CAPTION>
Product Groupings Primary Markets
- ------------------------------------ ---------------------------------------------------
<S> <C>
Fibers Filters
Fabrics
Coatings, inks, and resins Coatings, inks and paints
Fine chemicals Photographic chemicals and custom chemicals
Performance chemicals Additives for fibers and plastics, semi-conductors
Adhesives and sealants
Food and beverages
Nutrition, cosmetics, construction
Textiles
Specialty plastics Medical, electronics, recreation, consumer durables
Plastic packaging
</TABLE>
7
<PAGE> 8
Fibers
The Company is one of the world's largest suppliers of cellulose acetate tow, a
product developed by the Company in the 1950's that is used by our customers
primarily in the manufacture of cigarette filters. With approximately 400
million pounds of annual capacity at its plants in Kingsport, Tennessee, and
Workington, England, the Company accounts for approximately one-third of the
annual worldwide production of acetate tow, and sells to all major markets
throughout the world. The two primary raw materials used in the manufacture of
acetate tow are cellulose (from wood pulp) and acetic anhydride, and the Company
has developed the world's only commercial coal gasification facility to produce
the latter. This facility reduces the Company's dependency on petrochemicals
otherwise required for the manufacture of acetate tow.
Competition for sales of acetate tow is based on price, product quality, and
reliability of supply. The Company believes that it enjoys a low-cost position
for raw materials as a result of its coal gasification technology, efficient
integrated manufacturing processes, and overall size.
Growth in the acetate tow market is directly related to the level of filtered
cigarette consumption, which continues to increase worldwide despite declining
levels of cigarette consumption in North America. Historically, worldwide
industry sales volume growth has averaged between 2% - 3% per year. From 1985
through 1991, however, worldwide industry sales volume grew an average of 4% -
5%, primarily as a result of increased demand and purchases for inventory in the
Peoples Republic of China. During the years 1991 through 1993, a drawdown of
inventory stockpiles in China plus reduced demand in Eastern Europe contributed
to a decline in industry sales which, combined with the addition of
approximately 100 million pounds per year of new industry capacity, led to
industry overcapacity. This in turn contributed to declines in worldwide Company
sales of acetate tow and related operating earnings. In 1994, 1995, and 1996,
worldwide growth in the market for acetate tow, led primarily by sales to the
Asia Pacific region, resulted in higher levels of capacity utilization for both
the Company and the industry. The Company expects worldwide demand for acetate
tow to grow at approximately 2% - 3% per year over the long term, led primarily
by growth in Asia Pacific and Eastern European regions.
Acetate yarn is produced by the Company for the textile industry. Product price,
quality, and service are the primary factors influencing customer-purchasing
decisions. This product line utilizes the Company's basic cellulose technology
core competence along with its large cellulose acetate manufacturing position to
compete effectively. The market for acetate yarn has experienced little growth
during the last eight years. The Company has focused its efforts on improving
its operating efficiencies to maintain its product quality and cost position.
Fibers products accounted for approximately 32% of 1996 Specialty and
Performance segment sales.
Coatings, inks, and resins
The Company supplies a wide variety of coatings, inks, and resins, including
solvents, alcohols, glycols, and resins. All of the Company's coatings, inks,
and resins are currently produced in the United States with approximately 63% of
1996 sales being in the United States and the remainder worldwide. Most of the
products in this area are olefin or cellulose derivatives and utilize the
Company's proprietary oxo chemistry technology or chemicals from coal
technology. Coatings, inks, and resins include mixed cellulose esters, of which
the Company is the world's only manufacturer. Suppliers of coatings, inks, and
resins compete based on price, breadth of product line, reliability of supply,
and customer service. The Company believes it has a competitive advantage due to
the efficiency of its proprietary oxo chemistry technology and chemicals from
coal technology, the breadth of its product line, and its system of
distribution. Coatings, inks, and resins accounted for approximately 23% of 1996
Specialty and Performance segment sales.
Management anticipates limited future sales growth of traditional organic
solvent products due to environmental factors. The Company is developing
replacement products that are responsive to the environmental factors; these
products include raw materials for waterborne, powder, and high solid coatings.
8
<PAGE> 9
Fine chemicals
Fine chemicals produced by Eastman are used in the manufacture of a wide variety
of products such as photographic products, home care products, and custom
chemicals. The Company is a leading producer of custom chemicals used in the
manufacture of pharmaceuticals and agricultural chemicals, and of other products
synthesized to customer specifications. Technical competence and efficiency are
major competitive elements in the fine chemicals industry. The Company believes
it has a competitive advantage because of its competency in complex multi-step
organic chemistry and the breadth of services offered in custom manufacturing
(i.e., regulatory compliance and process design and optimization). Kodak is the
largest customer for the Company's fine chemicals. During 1996, fine chemicals
accounted for approximately 15% of Specialty and Performance segment sales.
Performance chemicals
Eastman produces a variety of additives for fibers and plastics, raw materials
for adhesives and sealants, food and beverage ingredients, and other performance
products. Fiber and plastic additives are used to impart specialized processing
and performance characteristics to polymers used in the production of a range of
fibers and plastics products. The Company produces raw materials for adhesives
that are used in hot-melt and pressure-sensitive applications. Eastman is a
manufacturer of natural and synthetic food grade antioxidants that are used to
enhance the stability and extend the shelf life of many products containing oils
and fats. Eastman is the only U.S. producer of sorbates that are used as food
and cosmetic preservatives because of their antimicrobial action. The Company
also manufactures many other performance products for use in nutrition,
cosmetic, textile and construction applications.
The Company believes it has a competitive advantage in many of the markets in
which these performance products are sold. For instance, many proprietary
products, with highly recognized trade names, deliver to customers high quality
and unique performance attributes. Competitors and competitive conditions vary
depending on the market segment. During 1996, performance chemicals accounted
for approximately 13% of Specialty and Performance segment sales.
Specialty plastics
Specialty plastics are produced by the Company for value-added end uses, such as
toothbrushes, eyeglass frames, medical devices, electrical connectors, tools,
appliance housings, food and medical packaging, heavy-gauge sheeting, and
fabricated boxes. The plastics supplied for these end uses include polyethylene,
polyester/copolyesters, cellulosics, and alloys of two or more plastics combined
to provide specific performance characteristics. The Company's strategy for
these products is to identify and serve selected niche markets that offer the
potential for attractive returns. Suppliers of specialty plastics products
compete based on price, product performance, reliability of supply, product
differentiation, and customer service. The Company believes it has a competitive
advantage due to its product performance, its systems of marketing and
distribution, and efficiency of its specialized copolyester chemistry and
cellulose technology. Specialty plastics accounted for approximately 17% of 1996
Specialty and Performance segment sales.
9
<PAGE> 10
CORE PLASTICS SEGMENT
The key product groupings and the primary markets in the Core Plastics segment
are summarized as follows:
<TABLE>
<CAPTION>
Product Groupings Primary Markets
- ---------------------------- ---------------------
<S> <C>
Container plastics Soft drink containers
Flexible plastics Packaging
</TABLE>
Container plastics
The Company is the world's leading supplier of polyester plastics, including
PET, for packaging applications, with the majority of its sales concentrated in
North America, Europe, and Latin America. The market for polyester plastics has
experienced significant growth in recent years due to the substitution of these
plastics for other packaging materials used in soft drink, food, and water
containers. Container plastics products accounted for approximately 65% of 1996
Core Plastics segment sales.
PET for containers, such as soft drink bottles, is the largest end use for
polyester plastics. Use of PET has grown because it is cost effective and
compares favorably with glass, aluminum, and other packaging materials based on
its light weight, durability, and clarity. In addition, PET is currently the
most widely recycled plastic packaging material. Industry estimates indicate
that PET consumption grew worldwide from 2.3 billion pounds per year in 1989 to
approximately 6.3 billion pounds per year in 1995, an average annual increase of
approximately 16% for the years 1989 through 1993 and 20% in 1994 and 1995. From
1989 to 1995, the Company's volume of PET sales also rose at approximately the
same rates. The container plastics industry operated at essentially full
capacity, and demand grew substantially in 1995, and to a lesser extent in 1996,
primarily due to weak sales in a soft European economy. To meet expected growth
in the PET market, Eastman intends to significantly increase its annual
worldwide PET manufacturing capacity by the year 2000 to 3.5 billion pounds by
constructing new plants and through process improvements in existing plants.
Capacity additions within the PET industry worldwide over the next 1-2 years are
expected to result in continued pressure on PET selling prices.
Competition for the large volume PET market is based largely on price.
Management believes that the Company's large scale operations, vertical
integration, and manufacturing expertise provide it with a competitive advantage
by allowing the Company to position itself as a price-competitive, consistently
reliable source of supply across a broad product line. In addition, the Company
has developed proprietary polyester polymers that enable it to respond to
specific customer design and performance requirements, and is a leader in the
manufacture of recycled-content PET. Environmental concerns have led to
increased demand for the use of recycled plastic materials, and the Company was
one of the first producers to obtain Food and Drug Administration clearance to
use recycled-content PET in polyesters sold to food and beverage container
manufacturers.
Flexible plastics
The Company manufactures a variety of plastics including polyethylene, cellulose
acetate, and polyesters for applications such as film, extrusion coating,
fibers, industrial strapping, and injection molding. The polyethylene product
line includes low density, linear low density, and medium/high density polymers.
The markets for these products are characterized generally as large volume with
a large number of customers and suppliers. The Company competes based on its
integrated manufacturing capabilities and, in some of these market areas, on the
basis of unique product characteristics. Several of the Company's competitors
are larger, with some having a higher degree of vertical integration. As a
result of the Company's position in this overall market, the strategy is to
focus on selected markets based on the Company's ability to produce high quality
performance polymers. Flexible plastics accounted for approximately 35% of 1996
Core Plastics segment sales.
10
<PAGE> 11
CHEMICAL INTERMEDIATES SEGMENT
The key product grouping and the primary markets in the Chemical Intermediates
segment are summarized as follows:
<TABLE>
<CAPTION>
Product Groupings Primary Markets
- --------------------------- ----------------------
<S> <C>
Industrial intermediates Industrial additives
Agricultural chemicals
Pharmaceuticals
Vinyl compounding
Wood and metal coatings
Artificial sweeteners
</TABLE>
Industrial Intermediates
Industrial intermediate chemicals are produced based on the Company's oxo
chemistry technology and chemicals from coal technology. These products include
basic acetyl, oxo chemicals, and plasticizers, and are marketed to customers
producing esters, polymers, industrial additives, agricultural chemicals,
industrial intermediates, monomers and polymers, medical delivery equipment, and
pharmaceuticals. In 1996 approximately 77% of these products were sold in the
United States with the remainder sold internationally. Volume growth rates of
these chemicals tend to follow the growth in the world economy.
Competition in the market for industrial intermediate chemicals is based on
price, customer relationships, and reliability of supply. The Company's
large-scale integrated manufacturing provides the Company with a low-cost
position in several of these products. In addition, the Company is able to
provide its customers with a reliable source of supply through an extensive
distribution network.
RAW MATERIALS
The Company purchases substantially all of its key raw materials under long-term
contracts, generally of three to five years of initial duration with renewal
provisions. Most of those agreements do not require the Company to buy materials
if its operations are shut down or if the Company's demand is otherwise reduced.
Key raw materials purchased include cellulose, ethylene glycol, paraxylene,
coal, ethane, and propane. The Company has multiple suppliers for most key raw
materials and uses quality management principles, such as the establishment of
long-term relationships with suppliers and ongoing performance assessment and
benchmarking, as part of the total supplier selection process.
CAPITAL EXPENDITURES
Total capital expenditures were $789 million in 1996, $446 million in 1995, and
$281 million in 1994. Eastman anticipates that total capital expenditures in
1997 will be approximately $850 million. Historically, approximately 50% of the
capital expenditures have been used to improve existing plant operations and 50%
have been used to provide new capacity. Efficiency of capital utilization is a
key initiative of the Company. The Company uses alliances and joint ventures,
where appropriate, to provide additional capital expansion.
During 1996, 1995, and 1994, the Company made capital expenditures of $51
million, $39 million, and $32 million, respectively, related to environmental
improvements. The Company estimates that such capital expenditures will be
approximately $50 million and $90 million for 1997 and 1998, respectively.
Future expenditures will be dependent in part upon implementation of government
environmental regulations.
11
<PAGE> 12
DISPOSITIONS
As previously reported, in November 1994 Eastman sold its polypropylene
business, realizing net cash, after taxes, in excess of $100 million. The
purchaser acquired the physical assets of Eastman's polypropylene plants--two
Unipol process plants located at Texas Eastman Division in Longview, Texas. In
February 1995 Eastman sold its Kingsport, Tennessee compounded polypropylene
product line. In addition, the Company ceased production of natural source
vitamin E in 1995 and of pigmented inks in 1996, and sold the food-grade
distilled monoglycerides, powder coatings, and adhesives businesses in 1996. The
effect of these divestitures and product discontinuances on financial position
or results of operations has not been, and is not expected to be, material.
EMPLOYEE RELATIONS
The Company employs approximately 17,500 men and women worldwide. None of the
employees in the United States and approximately 2% of the total worldwide labor
force are represented by labor unions. The Company believes that its employee
relations are excellent.
CUSTOMER RELATIONS
Eastman has an extensive customer base and is not dependent on any one customer
or group of customers. The Company has approximately 8,000 customers worldwide
and the top 100 customers account for less than 60% of the Company's business.
Eastman's largest customer is Kodak, which accounted for approximately 6% of
total sales in 1996.
The Company has received numerous preferred-supplier awards and is the sole
supplier to several major customers. The Company strives to be the preferred
supplier to customers in the markets it serves.
COMPETITION
The Company's competitive environment varies among markets. Some of the
Company's competitors are larger in size and capital base than the Company.
Major competitors of the Company in its key markets are summarized as follows:
<TABLE>
<CAPTION>
Key Market Major Competitors
- ---------------------------- -----------------------------------------------------------
<S> <C>
Fibers Courtaulds, Daicel, Hoechst Celanese, Mitsubishi, Novaceta,
Rhone-Poulenc, Teijin
Coatings, inks, and resins BASF, Exxon, Hoechst Celanese, S. C. Johnson, Lonza,
Oxychem, Shell, Union Carbide
Fine chemicals DSM, LaPorte, Lonza
Performance chemicals AlliedSignal, Arco, Daicel, Dow, Exxon, Hercules, Hoechst
Celanese, Hoechst Fine Chemicals, Rexene, Rhone-Poulenc,
UOP
Specialty plastics BASF, Bayer, Dow, DuPont, GE, Hoechst Celanese, Phillips,
Akzo Nobel, AtoHaas, ICI, Geon, Shell
Container plastics Hoechst, ICI, Shell, Wellman, Nan Ya
Flexible plastics Chevron, Dow, Exxon, Hoechst Celanese, ICI, Mobil,
Quantum, Shell, Union Carbide
Industrial intermediates BASF, BP, Dow, Exxon, Hoechst Celanese, Rhone-Poulenc,
Union Carbide
</TABLE>
12
<PAGE> 13
RESEARCH AND DEVELOPMENT
The Company directs its research and development programs toward four
objectives: 1) continually improving product quality by improvement in
manufacturing technology and processes; 2) lowering manufacturing costs through
process improvement; 3) conducting exploratory research to develop new product
lines and markets; and 4) developing new products and processes that are
compatible with the Company's commitment to RESPONSIBLE CARE (see
"Environmental" below).
Major achievements in research and development during the last several years
include the chemicals from coal technology, enhancements of the oxo chemistry
technology, and polyester application development and manufacturing technology.
The Company has developed wastewater treatment technology and technology to
improve PET recycling. In addition, Eastman has developed technology that
provides a faster, lower-cost route to production of EpB oxirane, a building
block chemical used in many other chemicals.
The Company's research and development expenditures during the past five years
have averaged approximately 4% of sales annually. The Company's research and
development expenditures for 1996, 1995, and 1994 were $184 million, $176
million, and $167 million, respectively. Expenditures for 1997 are anticipated
to be comparable to those for 1996. The Company has its major research center in
Kingsport, Tennessee, and currently employs approximately 375 scientists with
doctoral degrees throughout its research and development program.
PATENTS AND TRADEMARKS
The Company owns or licenses a large number of U.S. and non-U.S. patents that
relate to a wide variety of products and processes. The Company's patents expire
at various times during the next several years. The Company expects to be
granted about 100 new patents per year as a result of research and development
projects. The Company also maintains trademarks on major product segments. While
these patents, licenses, and trademarks are considered important, the Company
does not consider its business as a whole to be materially dependent upon any
one particular patent, patent license, or trademark.
SEASONALITY
Seasonality is not a significant factor for the Company, although the Specialty
and Performance segment experiences seasonal effects during the winter months
because of reduced demand for paint products, and the Core Plastics segment
experiences reduced demand for soft-drink containers during the first and fourth
quarters.
MARKETING AND DISTRIBUTION
The Company markets products through a worldwide sales organization with 36
sales offices outside the United States in 32 countries. In 1996, approximately
80% of sales were direct and 20% were through other channels. Products are
shipped to customers directly from the Company's plants as well as from
distribution centers, with the method of shipment generally determined by the
customer.
ENVIRONMENTAL
Eastman is committed to improving the environment, a commitment evidenced in
both the Company's products and manufacturing operations. The Company is
actively engaged in the ongoing development and enhancement of products that are
environmentally responsible, such as waterborne products and recyclable
plastics, and is an active participant in RESPONSIBLE CARE, a chemical industry
initiative that focuses on improving performance in areas including community
awareness and emergency response, pollution prevention, process safety,
distribution, employee health and safety, and product stewardship.
13
<PAGE> 14
Health, safety, and environmental considerations are a priority in the Company's
planning for all existing and new products and processes. The Health, Safety &
Environmental and Public Policy Committee of Eastman's Board of Directors
reviews the Company's policies and practices concerning health, safety, and the
environment, and its processes for complying with related laws and regulations,
and monitors significant related matters. The Company's policy is to operate its
plants and facilities in a manner that protects the environment and the health
and safety of its employees and the public. The Company has made and intends to
continue to make expenditures for environmental protection and improvement in a
timely manner consistent with the foregoing policies and with the technology
available. In some cases, applicable environmental regulations, such as those
adopted under the federal Clean Air Act and the Resource Conservation and
Recovery Act, and related actions of regulatory agencies determine the timing
and amount of environmental costs incurred by the Company.
The Company's commitment to environmental stewardship has earned favorable
recognition. In 1996 Eastman received Energy Efficiency Awards from the Chemical
Manufacturers Association. Also in 1996, Tennessee Eastman Division's wastewater
treatment facility received the Operational Excellence Award from the
Kentucky-Tennessee Water Environment Association and the national George F.
Burke, Jr. Award from the Water Environment Association for operation safety.
During 1995 Eastman received environmental awards from the Chemical
Manufacturers Association, the Kentucky-Tennessee Water Environment Association,
the League of Women Voters of the Texas Education Fund, and the Tennessee
Association of Business. In 1992 Texas Eastman Division was awarded an
Administrator's Award by the U.S. Environmental Protection Agency. The U.S.
Department of Labor commended the Company in 1992 for being the first company in
the nation to develop and implement a registered Environmental Operations
Specialist Apprenticeship Program to train operating personnel in monitoring
fugitive emissions. Industry Week magazine named the Kingsport, Tennessee plant
one of the 10 best plants in the nation in 1991 based on criteria that included
energy conservation and pollution prevention.
Certain of the Company's manufacturing sites generate hazardous and nonhazardous
wastes, of which the treatment, storage, transportation, and disposal are
regulated by various governmental agencies. In connection with the cleanup of
various hazardous waste sites, the Company, along with many other entities, has
been designated a potentially responsible party ("PRP") by the U.S.
Environmental Protection Agency under the Comprehensive Environmental Response,
Compensation and Liability Act, which potentially subjects PRPs to joint and
several liability for such cleanup costs. In addition, the Company will be
required to incur costs relating to environmental remediation and
closure/postclosure pursuant to the federal Resource Conservation and Recovery
Act. Because of expected sharing of costs, the availability of legal defenses,
and the Company's preliminary assessment of actions that may be required, the
Company does not believe its liability for these environmental matters,
individually or in the aggregate, will be material to Eastman's consolidated
financial position, results of operations, or competitive position. The
Company's policy is to record such liabilities when loss amounts are probable
and reasonably estimable.
The Company's environmental protection and improvement cash expenditures were
$173 million in 1996, $151 million in 1995, and $145 million in 1994, including
investments in construction, operations, and development. The Company does not
expect future environmental capital expenditures arising from requirements of
recently promulgated environmental laws and regulations to materially increase
the Company's planned level of capital expenditures for environmental control
facilities.
BACKLOG
During 1996, the Company's backlog of firm orders averaged between $200 million
and $400 million, representing two to four weeks' sales. The Company adjusts its
inventory policy to control the backlog of products dependent on customers'
needs. In areas where the Company is the single source of supply, or competitive
forces or customers' needs dictate, the Company may carry additional inventory
to reduce backlog. Backlog is also affected by utilization of a given product
manufacturing capacity.
14
<PAGE> 15
EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided below.
Earnest W. Deavenport, Jr., age 58, is Chairman of the Board and Chief Executive
Officer of the Company. He joined the Company in 1960. Mr. Deavenport was named
President of the Company in 1989. He also served as Group Vice President of
Kodak from 1989 through 1993.
R. Wiley Bourne, Jr., age 59, is Vice Chairman of the Board and Executive Vice
President of the Company, responsible for all business organizations. He joined
the Company in 1959 and was named Executive Vice President in 1989. Mr. Bourne
also served as a Vice President of Kodak from 1986 through 1993.
Dr. James L. Chitwood, age 54, is Senior Vice President of the Company,
responsible for operations outside North America. Dr. Chitwood joined the
Company in 1968. He was named Senior Vice President of the Company in 1989 and
Group Vice President, Specialty Business Group in 1991. Dr. Chitwood was
appointed Senior Vice President with responsibility for Company business
organizations in October 1994 and changed to his current area of responsibility
in 1996. He also served as a Vice President of Kodak from 1984 through 1993.
Harold L. Henderson, age 61, joined the Company in 1997 as Senior Vice
President, Secretary, and General Counsel. Mr. Henderson served previously as
chief legal officer of The Firestone Tire & Rubber Company from 1980 to 1985 and
of RJR Nabisco, Inc. from 1985 to 1989. He was a consultant, commercial real
estate developer, and private investor from 1989 through 1996.
Tom O. Nethery, age 58, is Senior Vice President of the Company, responsible for
functional organizations. Mr. Nethery joined the Company in 1960. In 1989, Mr.
Nethery was named Senior Vice President, Manufacturing of the Company. He was
named Group Vice President, Industrial Business Group in 1991 and was appointed
to his current position in October 1994. Mr. Nethery also served as a Vice
President of Kodak from 1989 through 1993.
H. Virgil Stephens, age 60, is Senior Vice President and Chief Financial Officer
of the Company. Mr. Stephens joined the Company in 1979. In 1988, Mr. Stephens
was named Vice President, Financial and Information Services, became Vice
President and Chief Financial Officer in 1993, and was appointed to his current
position in 1996.
Darryl K. Williams, age 54, is Senior Vice President of the Company, responsible
for technology. Mr. Williams joined the company in 1965. He was appointed
president of Eastman Chemical Japan Ltd. in 1992, was named vice president, Asia
Pacific regional support services in 1993, was appointed vice president, Asia
Pacific Sales in 1994, and was named to his current position in 1996.
William G. Adams, age 62, is Vice President, Human Resources and Communications
and Public Affairs of the Company. Mr. Adams joined the Company in 1958. He was
named to his current position in 1986.
Lynda W. Popwell, age 52, is Vice President, Health, Safety, and Environment and
Quality of the Company. Ms. Popwell joined the Company in 1969. In 1990, she was
appointed Superintendent, Polymer Chemicals Division, Carolina Eastman Division.
Ms. Popwell was named Superintendent, Acid Division, Tennessee Eastman Division,
in 1993, was appointed Vice President, Tennessee Eastman Division in 1994, and
was appointed to her current position in 1995.
B. Fielding Rolston, age 55, is Vice President, Customer Service and Materials
Management of the Company. Mr. Rolston joined the Company in 1964. In 1987, Mr.
Rolston was appointed to his current position.
Jimmy E. Tackett, age 59, is Vice President, Corporate Development and Strategy
of the Company. Mr. Tackett joined the Company in 1963. In 1989, Mr. Tackett was
appointed to his current position.
Thomas W. Wilson, age 55, is Vice President and Comptroller of the Company. Mr.
Wilson joined the Company in 1964. In 1986, Mr. Wilson was named Comptroller of
Texas Eastman Division and was appointed Comptroller and Treasurer, Eastman
Chemical Company, in 1993. He assumed his current position in 1997.
15
<PAGE> 16
ITEM 2. PROPERTIES
PROPERTIES
A summary of the Company's principal manufacturing sites and the key products
produced at each site is shown in the table below. Eastman's plants generally
are well maintained, are in good operating condition, and are suitable and
adequate for their use. Utilization of these facilities may vary with product
mix, and economic, seasonal, and other business conditions, but none of the
principal plants are substantially idle.
The Company's plants, including approved expansions, generally have sufficient
capacity for existing needs and expected near-term growth.
<TABLE>
<CAPTION>
Location Unit Key Products
- --------------------- -------------------------------- ---------------------------------
<S> <C> <C>
Batesville, AR Arkansas Eastman Fine Chemicals
Columbia, SC Carolina Eastman Polyester Polymers
Cosoleacaque, Mexico Eastman Chemical Industrial Polyester Polymers
De Mexico
Hartlepool, England Eastman Chemical Ectona, Ltd. Polyester Polymers
Kingsport, TN Tennessee Eastman Acetate Tow
Coatings and Paint Raw Materials
Polyester Polymers
Fine Chemicals
Llangefni, Wales Eastman Chemical (UK) Limited Fine Chemicals
Longview, TX Texas Eastman Oxo Chemicals
Plastics
Rochester, NY Distillation Products Division Monoglycerides and Antioxidants
Roebuck, SC ABCO Industries, Inc. Waterborne Polymers
San Roque, Spain Eastman Chemical Espana, S.A. Polyester Polymers
Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Polyester Polymers
Workington, England Eastman Chemical Ectona, Ltd. Acetate Tow
Polyester Polymers
</TABLE>
The Company has entered into a joint venture with Rhone-Poulenc, called
Primester, which manufactures cellulose ester at its Kingsport, Tennessee plant.
The production of cellulose ester is an intermediate step in the manufacture of
acetate tow and other cellulose-based products.
The Company has distribution facilities at all of its plant sites. In addition,
the Company conducts manufacturing operations at 3 other sites and operates 89
stand-alone distribution facilities in 18 countries. Corporate headquarters is
in Kingsport, Tennessee. The Company's regional headquarters are in Miami,
Florida; The Hague, Netherlands; and Singapore. Technical service is provided to
the Company's customers from technical service centers in Kingsport, Tennessee;
Kirkby, England; Osaka, Japan; and Singapore. Customer service centers are
located in Kingsport, Tennessee; Rotterdam, Netherlands; and Singapore.
16
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, patent,
commercial, environmental, and health and safety matters, which are being
handled and defended in the ordinary course of business. No such pending matters
are expected to have a material adverse effect on the Company's financial
condition or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the Company's shareowners during
the fourth quarter of 1996.
- ------------------------
RESPONSIBLE CARE is a registered service mark of the Chemical Manufacturers
Association. EASTAPAK AND TENITE are trademarks of Eastman Chemical Company.
17
<PAGE> 18
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED
SHAREOWNER MATTERS
The Company's Common Stock is traded on the New York Stock Exchange (the "NYSE")
under the symbol "EMN." The following table presents the high and low sales
prices of the Common Stock on the NYSE and the cash dividends per share declared
by the Company's Board of Directors for each quarterly period of 1995 and 1996.
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW DECLARED
1995
<C> <C> <C> <C>
1st Quarter 56 1/8 48 1/2 $ .40
2nd Quarter 61 52 1/2 .40
3rd Quarter 69 1/2 59 1/8 .42
4th Quarter 68 3/8 58 3/4 .42
1996
1st Quarter 76 1/4 60 1/8 $ .42
2nd Quarter 69 1/4 59 3/4 .42
3rd Quarter 62 3/8 50 3/4 .44
4th Quarter 58 1/2 52 .44
</TABLE>
- ----------
As of January 31, 1997 there were 77,862,162 shares of the Company's Common
Stock issued and outstanding, which shares were held by approximately 94,266
shareowners of record. These shares include 202,575 shares held by the Company's
charitable foundation. The Company has declared a cash dividend of $.44 per
share during the first quarter of 1997, and currently anticipates continuing to
pay quarterly cash dividends. Quarterly dividends on Common Stock, if declared
by the Company's Board of Directors, are usually paid on or about the first
business day of the month following the end of each quarter. The payment of
dividends is a business decision to be made by the Board of Directors from time
to time based on the Company's earnings, financial position and prospects, and
such other considerations as the Board considers relevant. Accordingly, the
Company's dividend policy may change at any time.
The Company did not sell any equity securities during 1996 in transactions not
registered under the Securities Act of 1933. For information concerning issuance
of shares and option grants in 1996 under compensation and benefit plans and to
the Company's charitable foundation, see Part II--Item 8--Financial Statements
and Supplementary Data -- Notes 7 and 8 to consolidated financial statements.
18
<PAGE> 19
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS) 1996 1995 1994 1993 1992
SUMMARY OF OPERATING DATA (1)
<S> <C> <C> <C> <C> <C>
Sales $ 4,782 $ 5,040 $ 4,329 $ 3,903 $ 3,811
Operating earnings 663 964 636 451 505
Earnings from continuing operations
before income taxes and cumulative
effect of changes in accounting principle 607 899 550 439 483
Earnings from continuing operations 380 559 336 267 301
Discontinued operations, net of taxes - - - (20) (9)
Cumulative effect of changes
in accounting principle, net of taxes - - - (456) 79
Net earnings (loss) 380 559 336 (209) 371
Earnings per share from continuing
operations (2) 4.80 6.78 4.05 2.46 2.85
Net earnings per share 4.80 6.78 4.05 - -
STATEMENT OF FINANCIAL POSITION DATA (1)
Current assets $ 1,345 $ 1,487 $ 1,248 $ 1,057 $ 1,007
Properties at cost 7,530 6,791 6,389 6,390 6,170
Accumulated depreciation 4,010 3,742 3,483 3,331 3,127
Total assets 5,266 4,872 4,395 4,341 4,200
Current liabilities 787 873 793 462 443
Long-term borrowings 1,523 1,217 1,195 1,801 1
Total liabilities 3,627 3,344 3,100 3,280 1,267
Total shareowners' equity 1,639 1,528 1,295 1,061 2,933
Dividends declared per common share 1.72 1.64 1.60 - -
</TABLE>
- ------------
(1) The summary of operating data for the years 1992 and 1993 and the statement
of financial position data for 1992 present the historical combined results
of the Company as the wholly owned worldwide chemical business of Kodak
before the spin-off at midnight December 31, 1993 as if it had operated as
an independent stand-alone entity.
(2) Earnings per share from continuing operations for the years 1992 and 1993
are presented on a pro forma basis. Historical earnings per share data for
periods before the spin-off is not presented because the Company was not a
publicly held company before the spin-off and such data is not meaningful
because of the significant change in capitalization as a result of the
spin-off. Pro forma earnings from continuing operations were $204 million
and $236 million for the years 1993 and 1992, respectively.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Company's consolidated
financial statements included elsewhere in this report.
MAJOR FACTORS AFFECTING EARNINGS
1996 COMPARED WITH 1995
Significantly lower selling prices for the Company's core plastics
Overall increased sales volumes
Preproduction and start-up costs for new production facilities
Lower raw material costs
Lower variable-incentive compensation
RESULTS OF OPERATIONS
EARNINGS
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
Operating earnings $ 663 $ 964 (31)% $ 636
Net earnings 380 559 (32) 336
Net earnings per share 4.80 6.78 (29) 4.05
<CAPTION>
CHANGES IN EARNINGS PER SHARE 1996 1995 CHANGE
<S> <C> <C> <C>
Net earnings per share $ 4.80 $ 6.78 $ (1.98)
Operations
Selling price $ (2.57)
Volume and mix .24
Raw materials, supplies, and energy costs .48
Variable-incentive pay .67
Preproduction and start-up costs (.42)
Other (.66)
-------
Change from operations (2.26)
Other
Interest expense, net .09
Other income/charges (.02)
Effective tax rate change .02
Fewer shares outstanding .19
-------
Total change $ (1.98)
=======
</TABLE>
1996 COMPARED WITH 1995
While Eastman's results for 1996 reflect overall decreases compared with 1995, a
year in which the Company reported record sales and earnings, the Company's 1996
net earnings still reflect a solid return on equity of 24% and strong earnings
from the Specialty and Performance segment. The factors contributing to the 1996
earnings decline were lower selling prices for the Company's core plastics,
polyethylene terephthalate ("PET") and polyethylene, preproduction and start-up
costs at new PET plants, and higher labor rates. Currency fluctuations had a
minor negative effect on earnings in 1996. Positive impacts on overall earnings
include higher overall sales volumes, lower variable-incentive compensation, and
lower costs for paraxylene, certain other raw materials, and energy, partially
offset by higher propane costs. In addition, fewer shares outstanding favorably
affected earnings per share.
20
<PAGE> 21
SUMMARY BY INDUSTRY SEGMENT
The Company's industry segment presentation for 1996 was revised. The
Performance segment was renamed Specialty and Performance, the Industrial
segment was renamed Chemical Intermediates, and the new Core Plastics segment,
which includes container plastics and flexible plastics products, was
established. Previously, container plastics were in the Performance segment, and
flexible plastics were in the Industrial segment. The new Core Plastics segment
includes the Company's two major plastics products, EASTAPAK PET polyester
packaging plastic and TENITE polyethylene. Prior periods have been restated to
conform to the 1996 presentation.
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results and for restated business segment
quarterly sales and earnings information, see Exhibits 99.01 and 99.02,
respectively, to this Form 10-K).
SPECIALTY AND PERFORMANCE SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C>
Sales $ 2,657 $ 2,647 -% $ 2,364
Operating earnings 519 433 20 350
</TABLE>
1996 COMPARED WITH 1995
Despite overall level sales, the Specialty and Performance segment operating
earnings increased primarily as a result of lower operating costs reflecting
overall lower raw material costs, divestiture and discontinuance of certain
businesses and product lines, favorable product mix changes, and lower
variable-incentive compensation. Improved pricing, particularly for acetate tow
and acetate yarn, also contributed to the increase in earnings. Sales of
coatings, inks, and resins products increased because of higher volumes,
partially offset by decreased prices. Fibers sales increased primarily because
of price increases at the beginning of 1996 and slight volume gains. Fine
chemicals products sales were down primarily because of lower volumes. Specialty
plastics products sales were essentially level with 1995, with volume increases
offset by price decreases. Sales of performance chemicals products decreased
because of lower volumes, partially offset by higher prices, and as a result of
the divestiture and discontinuance of certain businesses and product lines in
late 1995 and early 1996.
CORE PLASTICS SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
Sales $ 1,409 $ 1,685 (16)% $ 1,390
Operating earnings (loss) (1) 347 - 199
</TABLE>
1996 COMPARED WITH 1995
The sales decrease in the Core Plastics segment was attributed primarily to
lower EASTAPAK PET selling prices, partially offset by increased volumes.
Decreased operating earnings were attributed primarily to lower EASTAPAK PET and
polyethylene selling prices. Other factors contributing to the overall decrease
in segment operating earnings were increased preproduction and start-up costs
for new PET manufacturing facilities and increased propane costs, which impacted
primarily polyethylene and to a lesser extent PET.
CHEMICAL INTERMEDIATES SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
Sales $ 716 $ 708 1% $ 575
Operating earnings 145 184 (21) 87
</TABLE>
21
<PAGE> 22
1996 COMPARED WITH 1995
Increased sales in the Chemical Intermediates segment were attributed primarily
to higher volumes, partially offset by lower selling prices for industrial
intermediates. Decreased operating earnings were attributed primarily to lower
selling prices for certain industrial intermediates products, particularly
n-butyraldehyde products and their derivatives, and higher propane feedstock
costs.
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
United States and Canada $3,183 $3,390 (6)% $3,049
Europe, Middle East, and Africa 745 825 (10) 640
Asia Pacific 548 557 (2) 437
Latin America 306 268 14 203
------ ------ ------
Total $4,782 $5,040 $4,329
====== ====== ======
</TABLE>
1996 COMPARED WITH 1995
Sales in the United States for 1996 were $2.99 billion, down 6% from 1995 sales
of $3.168 billion. Decreased sales were attributed to lower selling prices,
partially offset by modest volume gains.
Sales outside the United States in 1996 were down 4% from 1995 and were 37% of
total sales, same as 1995. Decreased sales in Europe, Middle East, and Africa
were primarily attributed to lower EASTAPAK PET selling prices, partially offset
by higher volumes. Increased sales in Latin America resulted primarily from
higher EASTAPAK PET volumes, partially offset by lower selling prices.
With a substantial portion of 1996 sales to customers outside the United States
and 9% of its products (as measured by sales revenue) manufactured outside the
United States, Eastman is subject to the risks associated with operating in
international markets. To mitigate its exchange rate risks, the Company
frequently seeks to negotiate payment terms in U.S. dollars. As a result, 85% of
total 1996 sales were U.S. dollar-based. In addition, where it deems such
actions advisable, the Company engages in foreign currency hedging transactions
and requires letters of credit and prepayment for shipments where its assessment
of individual customer and country risks indicates their use is appropriate.
Consequently, credit and currency losses experienced on international
transactions have not been significant. See Item 8--Financial Statements and
Supplementary Data--Note 10 to the consolidated financial statements.
SUMMARY OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
SALES $ 4,782 $ 5,040 (5)% $ 4,329
</TABLE>
Sales in 1996 decreased 7% because of lower selling prices, offset 2% because of
volume gains.
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
GROSS PROFIT $ 1,179 $ 1,504 (22)% $ 1,113
As a percentage of sales 24.7% 29.8% 25.7%
</TABLE>
22
<PAGE> 23
Gross profit decline was principally attributable to lower selling prices,
higher labor rates, and increased preproduction and start-up costs, partially
offset by lower variable-incentive compensation, lower purchased raw material
costs, and increased volumes.
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 332 $ 364 (9)% $ 310
As a percentage of sales 6.9% 7.2% 7.2%
</TABLE>
The decrease in selling and general administrative expenses was attributable to
developmental costs incurred in 1995 for the installation of a global integrated
business information system that were not incurred in 1996. The Company invested
significant resources in this new information system to better position itself
for continued worldwide growth. Another factor affecting the decreased selling
and general administrative expenses was decreased variable-incentive
compensation costs.
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT COSTS $ 184 $ 176 5% $ 167
As a percentage of sales 3.8% 3.5% 3.9%
</TABLE>
Research and development costs increased because of an increase in research and
development activities and overall labor rates, partially offset by lower
variable-incentive costs.
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
GROSS INTEREST EXPENSE $ 95 $ 88 $ 98
LESS CAPITALIZED INTEREST 28 9 11
------- ------- -------
NET INTEREST EXPENSE $ 67 $ 79 (15)% $ 87
======= ======= =======
</TABLE>
Interest expense increased because of higher commercial paper borrowings, offset
by capitalized interest related to increased capital projects under
construction.
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
OTHER INCOME, NET $ 11 $ 14 (21)% $ 1
</TABLE>
Other income and charges include interest income, royalty income, gains and
losses on asset sales, results from equity investments, foreign exchange
transactions, and other items.
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 CHANGE 1994
<S> <C> <C> <C> <C>
PROVISION FOR INCOME TAXES $ 227 $ 340 (33)% $ 214
Effective tax rate 37.4% 37.8% 38.9%
</TABLE>
1995 COMPARED WITH 1994
Eastman posted sales in 1995 of $5.04 billion, up 16% compared with 1994. Sales
increased 11% because of higher selling prices, 3% because of volume gains, and
2% because of the favorable effect of fluctuations in currency exchange rates.
The Company had net earnings of $559 million in 1995, compared with $336 million
for 1994 -- a 66% increase. The increased earnings were attributable to higher
selling prices and slightly higher volumes, partially offset by higher purchased
raw material costs. Currency fluctuations had a minor favorable effect on
earnings in 1995 and 1994. In November 1994 Eastman sold its polypropylene
business, realizing net cash, after taxes, in excess of $100 million. Eastman's
revenues from the polypropylene business, included primarily with flexible
plastics products, were approximately $160 million in 1994.
23
<PAGE> 24
The Specialty and Performance segment reported sales of $2.647 billion for 1995,
up 12% from 1994. The increase was attributed to higher sales prices and higher
sales volumes. Sales of coatings, inks, and resins products increased because of
solid price increases. Fibers products experienced significant volume increases
and improved prices. Fine chemicals products reported substantial volume gains,
partially offset by slight decreases in selling prices. Excluding the effects of
the polypropylene business exit in 1994, specialty plastics products reported
higher volumes and increased prices in 1995. Specialty and Performance segment
operating earnings for 1995 were $433 million, compared with $350 million in
1994. The 24% increase was attributable to higher selling prices and volume
gains, partially offset by higher raw material and labor costs.
The Core Plastics segment reported sales of $1.685 billion for 1995, up 21% from
1994. PET contributed significantly to the increased segment sales, with
substantially higher selling prices and good volume increases. Excluding the
effects of the polypropylene business exit, volumes for flexible plastics
products, primarily polyethylene, were moderately higher in 1995. Core Plastics
segment operating earnings for 1995 were $347 million, compared with $199
million in 1994. The 74% increase was primarily attributable to PET and
polyethylene higher selling prices, partially offset by higher raw material and
labor costs.
The Chemical Intermediates segment reported sales of $708 million for 1995, up
23% from 1994. The substantial increase in sales was attributable to higher
selling prices and modest volume gains of industrial intermediates. Selling
prices were higher because of strong demand. Chemical Intermediates segment
operating earnings for 1995 were $184 million, up 111% from 1994. Sharp
increases in operating earnings were attributable primarily to higher selling
prices, partially offset by higher raw material and labor costs. Strengthened
demand for chemicals that resulted in high capacity utilization was a
significant factor in the 1995 gain.
Eastman reported increased 1995 sales to customers in each reported region.
Sales in the United States in 1995 were $3.168 billion, up 10% compared with
1994 sales of $2.867 billion. Increased sales were primarily attributable to
higher selling prices. Sales to customers outside the United States in 1995 were
up 28% compared with 1994 and were 37% of total sales, compared with 34% in
1994.
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
FINANCIAL INDICATORS 1996 1995 1994
<S> <C> <C> <C>
Ratio of earnings to fixed charges 6.1x 9.7x 6.3x
Current ratio (1) 1.7x 1.7x 1.5x
Percent of long-term borrowings to total capital (1) 48% 44% 48%
Percent of floating-rate borrowings to total borrowings (1) 21% 2% -
</TABLE>
- ------------
(1) At end of year.
KEY CASH FLOW ELEMENTS
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Cash provided by operations $ 746 $ 838 $ 824
Capital expenditures 789 446 281
Dividends paid 134 133 99
Net increase in commercial paper borrowings 273 22 -
Debt reduction excluding commercial paper - 2 605
Treasury stock purchases 161 200 -
</TABLE>
Cash provided by operations for 1996 decreased primarily as a result of lower
earnings, partially offset by reductions in inventory and receivables. Cash
provided by operations for 1995 increased primarily as a result of higher
earnings, partially offset by changes in certain liabilities.
24
<PAGE> 25
The increase in cash used in investing activities in 1996 is consistent with the
Company's global expansion activities and primarily reflects capital expenditure
increases. Cash used in investing activities in 1995 increased because of higher
capital expenditures, acquisitions, and investments in joint ventures.
The cash used in financing activities in 1996 reflects dividends and share
repurchases, offset by commercial paper borrowings. The cash used in financing
activities in 1995 was primarily attributed to share repurchases and dividends.
In 1994 the Company had a $605 million reduction in long-term borrowings.
CAPITAL EXPENDITURES
Eastman's commitment for capital expenditures at December 31, 1996, was
approximately $740 million, consisting primarily of planned expenditures for
previously announced expansions of production capacity. Approximately 80% of the
$740 million is expected to be disbursed in 1997. Eastman anticipates that total
capital expenditures in 1997 will be approximately $850 million. Depreciation
expense is expected to be approximately $330 million in 1997.
Construction is currently under way for a copolyester plastics plant in Kuantan,
Malaysia, with production expected by early 1998. The Company has begun
construction of an isophthalic acid ("IPA") plant in Tennessee, with production
expected in 1998. A letter of intent was signed by the Company to study the
feasibility of forming a joint venture in the People's Republic of China;
consideration is being given to building two plants in Nanjing, China, one to
produce hydrocarbon tackifying resins and the other to manufacture sorbates.
Eastman has announced a planned increase in polyethylene naphthalate ("PEN")
capacity in Kingsport, Tennessee, expected on-line in early 1997. By late 1997
Eastman plans to double production capacity for general-purpose fine chemicals
at the Peboc Division of Eastman Chemical (UK) Ltd. in Llangefni, Wales. Eastman
purchased the assets of ABCO Industries, Ltd., a waterborne polymers
manufacturer in South Carolina, in December 1996. This acquisition did not have
a material effect on financial position or results of operations.
To meet expected growth in the PET market, Eastman intends to significantly
increase its annual worldwide PET manufacturing capacity by the year 2000 to 3.5
billion pounds by constructing new plants and improving processes in existing
plants. Eastman's capacity in place by the end of 1997 is expected to be 2.5
billion pounds, with an additional 0.5 billion pounds by the end of 1998.
Capacity additions within the PET industry worldwide over the next 1-2 years are
expected to result in continued pressure on PET selling prices.
Eastman completed construction of an epoxybutene (EpB oxirane) derivatives plant
at its Longview, Texas, location in December 1996. In order to enhance
production of oxo chemicals, the Company plans to expand its Longview, Texas,
oxo aldehydes and derivatives plants and construct a new oxo chemicals
manufacturing complex in Singapore, with production expected to begin in early
1999.
LIQUIDITY
In December 1995 the Company replaced a previously existing variable rate credit
agreement with a new 5-year $800 million revolving credit facility (the "Credit
Facility"). Although the Company does not have any amounts outstanding under the
Credit Facility, any such borrowings would be subject to interest at varying
spreads above quoted market rates, principally LIBOR. The Credit Facility also
requires a facility fee on the total commitment that varies based on Eastman's
credit rating. The annual rate for such fee was 0.075% as of December 31, 1996.
The Credit Facility contains a number of covenants and events of default,
including the maintenance of certain financial ratios. Eastman was in compliance
with all such covenants for all periods.
In 1994 Eastman issued $1.2 billion of long-term debt securities and repaid
existing borrowings under the preexisting credit agreement. The issuances
included $500 million of 6 3/8% notes due 2004, $500 million of 7 1/4%
debentures due 2024, and $200 million of 7 5/8% debentures due 2024. The 7 5/8%
debentures may be redeemed June 15, 2006, at the option of their registered
holders, at 100% of the principal amount plus accrued interest to that date.
25
<PAGE> 26
Eastman utilizes commercial paper, generally with maturities of 90 days or less,
to meet its liquidity needs. The Company's commercial paper, supported by the
Credit Facility, is classified as long-term borrowings because the Company has
the ability and intent to refinance such borrowings long-term. As of December
31, 1996, the Company's commercial paper outstanding balance was $295 million,
at an effective interest rate of 5.59%. At December 31, 1995, a total of $22
million of commercial paper was outstanding, at a 6% effective interest rate.
In early 1997 the Company issued $300 million of 7.60% debentures due February
1, 2027, and used the proceeds to repay outstanding commercial paper borrowings.
In 1995 the Company repurchased $200 million of Eastman common stock. In
February 1996 the Company announced plans to repurchase up to $400 million of
additional common stock, and at December 31, 1996, had acquired an additional
2,486,300 shares at a cost of $161 million under the repurchase program
announced in 1996. Given the Company's capital expenditure program for 1997,
Eastman does not expect to make any significant share repurchases in 1997.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
<TABLE>
<CAPTION>
DIVIDENDS 1996 1995 1994
<S> <C> <C> <C>
Cash dividends declared per share $ 1.72 $ 1.64 $ 1.60
</TABLE>
ENVIRONMENTAL
Eastman is committed to improving the environment, a commitment evidenced in
both the Company's products and manufacturing operations. The Company is
actively engaged in the ongoing development and enhancement of products that are
environmentally responsible, such as waterborne products and recyclable
plastics, and is an active participant in RESPONSIBLE CARE, a chemical industry
initiative that focuses on improving performance in areas including community
awareness and emergency response, pollution prevention, process safety,
distribution, employee health and safety, and product stewardship.
Certain Eastman manufacturing sites generate hazardous and nonhazardous wastes,
of which the treatment, storage, transportation, and disposal are regulated by
various governmental agencies. In connection with the cleanup of various
hazardous waste sites, the Company, along with many other entities, has been
designated a potentially responsible party ("PRP") by the U.S. Environmental
Protection Agency under the Comprehensive Environmental Response, Compensation
and Liability Act, which potentially subjects PRPs to joint and several
liability for such cleanup costs. In addition, the Company will be required to
incur costs for environmental remediation and closure/postclosure under the
federal Resource Conservation and Recovery Act. Because of expected sharing of
costs, the availability of legal defenses, and the Company's preliminary
assessment of actions that may be required, the Company does not believe its
liability for these environmental matters, individually or in the aggregate,
will be material to Eastman's consolidated financial position, results of
operations, or competitive position.
Eastman's environmental protection and improvement cash expenditures were $173
million in 1996, $151 million in 1995, and $145 million in 1994, including
investments in construction, operations, and development. The Company does not
expect future environmental capital expenditures arising from requirements of
recently promulgated environmental laws and regulations to materially increase
the Company's planned level of capital expenditures for environmental control
facilities.
INFLATION
In recent years inflation has not had a material adverse impact on Eastman's
costs, primarily because of price competition among suppliers of raw materials.
However, changes in raw material prices, particularly petroleum derivatives,
could have a significant impact on costs, which the Company may or may not be
able to reflect fully in its pricing structure.
26
<PAGE> 27
RECENTLY ISSUED ACCOUNTING STANDARDS
In 1996 the AICPA issued SoP 96-1, "Accounting for Environmental Remediation
Costs," which provides guidance in the determination of environmental
remediation liabilities. It is effective for fiscal years beginning after
December 15, 1996. Eastman does not expect compliance with SoP 96-1 to have a
material effect on its financial position or results of operations.
OUTLOOK
Looking forward to 1997, the Company expects continued good demand for its
products. In comparison with 1996, the Company also expects to realize modest
volume growth driven by significant volume growth for EASTAPAK PET due to
increasing demand and additional available capacity. In addition, the Company
expects incremental capacity gains for fibers and various chemicals to
contribute to volume growth. The Company expects EASTAPAK PET selling prices to
remain under pressure in 1997 due to growth in capacity over the next 1-2 years
in the worldwide PET industry, but improvement in PET margins above fourth
quarter 1996 levels. For the rest of its businesses, the Company expects overall
stable margins when compared with 1996 as a result of stable to slightly lower
selling prices and stable to slightly lower costs for key purchased raw
materials. The Company is also targeting $100 million in labor and material
productivity gains in 1997 as a result of its Advantaged Cost 2000 initiative to
eliminate $500 million from Eastman's cost structure by the year 2000.
The above-stated expectations, other forward-looking statements in this report,
and other statements of the Company relating to matters such as cost reduction
targets; planned capacity increases and capital spending; expected depreciation;
and supply and demand, volume, price, margin, and earnings expectations for
individual products, businesses, and segments, as well as for the whole of the
Company, are based upon certain underlying assumptions. These assumptions are in
turn based upon internal estimates and analyses of current market conditions and
trends, management plans and strategies, economic conditions, and other factors
and are subject to risks and uncertainties inherent in projecting future
conditions and results.
The forward-looking statements in this Management's Discussion and Analysis are
based upon the following assumptions: relatively stable business conditions in
North America, improving business conditions in Europe, and continued growth in
Latin America and Asia Pacific, supporting continued good overall demand for the
Company's products; continued demand growth worldwide for PET; continued
capacity additions within the PET industry worldwide; availability of scheduled
Eastman capacity increases; stable to slightly lower pricing for Eastman
products; overall stable to slightly lower purchase costs for key Eastman raw
materials; and labor and material productivity gains sufficient to meet targeted
cost structure reductions. Actual results could differ materially from current
expectations if one or more of these assumptions prove to be inaccurate or are
unrealized.
- ------------------------------------
RESPONSIBLE CARE is a registered service mark of the Chemical Manufacturers
Association. EASTAPAK AND TENITE are trademarks of Eastman Chemical Company.
27
<PAGE> 28
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
Management's responsibility for financial statements 29
Report of independent accountants 30
Consolidated statements of earnings and retained earnings 31
Consolidated statements of financial position 32
Consolidated statements of cash flows 33
Notes to consolidated financial statements 34 - 53
</TABLE>
28
<PAGE> 29
MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS
Management is responsible for the preparation and integrity of the
accompanying consolidated financial statements of Eastman Chemical
Company and subsidiaries appearing on pages 31 through 53. Eastman has
prepared these consolidated financial statements in accordance with
generally accepted accounting principles, and the statements of
necessity include some amounts that are based on management's best
estimates and judgments.
Eastman's accounting systems include extensive internal controls
designed to provide reasonable assurance of the reliability of its
financial records and the proper safeguarding and use of its assets.
Such controls are based on established policies and procedures, are
implemented by trained, skilled personnel with an appropriate
segregation of duties, and are monitored through a comprehensive
internal audit program. The Company's policies and procedures prescribe
that the Company and all employees are to maintain the highest ethical
standards and that its business practices throughout the world are to
be conducted in a manner that is above reproach.
The consolidated financial statements have been audited by Price
Waterhouse LLP, independent accountants, who were responsible for
conducting their audits in accordance with generally accepted auditing
standards. Their report is included herein.
The Board of Directors exercises its responsibility for these financial
statements through its Audit Committee, which consists entirely of
nonmanagement Board members. The independent accountants and internal
auditors have full and free access to the Audit Committee. The Audit
Committee meets periodically with Price Waterhouse LLP and Eastman's
director of internal auditing, both privately and with management
present, to discuss accounting, auditing, policies and procedures,
internal controls, and financial reporting matters.
/s/ Earnest W. Deavenport, Jr. /s/ H. Virgil Stephens
------------------------------ ---------------------------
Earnest W. Deavenport, Jr. H. Virgil Stephens
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 21, 1997
29
<PAGE> 30
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareowners of
Eastman Chemical Company
In our opinion, the accompanying consolidated financial statements
listed in the index appearing under Item 14(a)(1) on page 56 present
fairly, in all material respects, the financial position of Eastman
Chemical Company and subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with
generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
/s/ Price Waterhouse LLP
------------------------
PRICE WATERHOUSE LLP
New York, New York
January 21, 1997
30
<PAGE> 31
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Sales $ 4,782 $ 5,040 $ 4,329
Cost of sales 3,603 3,536 3,216
--------- --------- ---------
Gross profit 1,179 1,504 1,113
Selling and general administrative expenses 332 364 310
Research and development costs 184 176 167
--------- --------- ---------
Operating earnings 663 964 636
Interest expense, net 67 79 87
Other income, net 11 14 1
--------- --------- ---------
Earnings before income taxes 607 899 550
Provision for income taxes 227 340 214
--------- --------- ---------
Net earnings $ 380 $ 559 $ 336
========= ========= =========
Net earnings per share $ 4.80 $ 6.78 $ 4.05
========= ========= =========
Retained earnings at beginning of year $ 1,684 $ 1,258 $ 1,055
Net earnings 380 559 336
Cash dividends declared (135) (133) (133)
---------- --------- ---------
Retained earnings at end of year $ 1,929 $ 1,684 $ 1,258
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
31
<PAGE> 32
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
ASSETS
<S> <C> <C>
Current assets
Cash and cash equivalents $ 24 $ 100
Receivables 744 802
Inventories 465 467
Other current assets 112 118
--------- ---------
Total current assets 1,345 1,487
--------- ---------
Properties
Properties and equipment at cost 7,530 6,791
Less: Accumulated depreciation 4,010 3,742
--------- ---------
Net properties 3,520 3,049
--------- ---------
Other noncurrent assets 401 336
--------- ---------
Total assets $ 5,266 $ 4,872
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables $ 708 $ 771
Other current liabilities 79 102
--------- ---------
Total current liabilities 787 873
Long-term borrowings 1,523 1,217
Deferred income tax credits 348 348
Postemployment obligations 722 690
Other long-term liabilities 247 216
--------- ---------
Total liabilities 3,627 3,344
--------- ---------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares authorized;
shares issued - 83,386,459 and 83,250,683) 1 1
Paid-in capital 37 30
Retained earnings 1,929 1,684
Cumulative translation adjustment 31 13
--------- ---------
1,998 1,728
Less: Treasury stock at cost (5,766,528 and 3,308,200 shares) 359 200
--------- ---------
Total shareowners' equity 1,639 1,528
--------- ---------
Total liabilities and shareowners' equity $ 5,266 $ 4,872
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
32
<PAGE> 33
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 380 $ 559 $ 336
--------- --------- ---------
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 314 308 329
Provision (benefit) for deferred income taxes 8 (11) (8)
(Increase) decrease in receivables 66 (90) (159)
(Increase) decrease in inventories 10 (108) (60)
Increase (decrease) in incentive pay and
employee benefit liabilities (69) 179 153
Increase in liabilities excluding borrowings,
incentive pay, and employee benefit liabilities 31 18 203
Other items, net 6 (17) 30
--------- --------- ---------
Total adjustments 366 279 488
--------- --------- ---------
Net cash provided by operating activities 746 838 824
--------- --------- ---------
Cash flows from investing activities
Additions to properties and equipment (789) (446) (281)
Acquisitions and investments in joint ventures (26) (56) -
Proceeds from sales of assets 43 9 132
Capital advances to suppliers (37) (39) (35)
Other items - 8 -
--------- --------- ---------
Net cash used in investing activities (809) (524) (184)
--------- --------- ---------
Cash flows from financing activities
Proceeds from borrowings - - 1,202
Net increase in commercial paper borrowings 273 22 -
Repayment of borrowings - (2) (1,807)
Dividends paid to shareowners (134) (133) (99)
Treasury stock purchases (161) (200) -
Other items 9 9 13
--------- --------- ---------
Net cash used in financing activities (13) (304) (691)
--------- --------- ---------
Net change in cash and cash equivalents (76) 10 (51)
Cash and cash equivalents at beginning of year 100 90 141
--------- --------- ---------
Cash and cash equivalents at end of year $ 24 $ 100 $ 90
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
33
<PAGE> 34
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SIGNIFICANT ACCOUNTING POLICIES
FINANCIAL STATEMENT PRESENTATION
The consolidated financial statements of Eastman Chemical Company and
subsidiaries ("Eastman" or the "Company") are prepared in conformity with
generally accepted accounting principles and of necessity include some
amounts that are based upon management estimates and judgments. Future
actual results could differ from such current estimates. The consolidated
financial statements include assets, liabilities, revenues, and expenses
of all wholly owned subsidiaries. Eastman accounts for investments in
minority-owned companies where it exercises significant influence on the
equity basis. Intercompany transactions and balances are eliminated in
consolidation.
TRANSLATION OF NON-U.S. CURRENCIES
Eastman uses the local currency as the "functional currency" to translate
the accounts of all consolidated entities outside the United States where
cash flows are primarily denominated in local currencies. The U.S. dollar
is used to report operations in highly inflationary economies and certain
other locations. The effects of translating those operations that use the
local currency as the functional currency are included as a separate
component of shareowners' equity. The effects of remeasuring those
operations where the U.S. dollar is used as the functional currency and
all transaction gains and losses are reflected in current earnings.
REVENUE RECOGNITION
Sales are recognized when products are shipped and the earnings process
is complete. Appropriate accruals for discounts, volume rebates and other
allowances are recorded as reductions in sales.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, time deposits, and readily
marketable securities with original maturities of 3 months or less.
INVENTORIES
Inventories are valued at cost, which is not in excess of market. The
Company determines the cost of most raw materials, work in process, and
finished goods inventories by the last-in, first-out (LIFO) method. The
cost of all other inventories, including inventories outside the United
States, is determined by the first-in, first-out (FIFO) or average cost
method.
PROPERTIES
The Company records properties at cost. Maintenance and repairs are
charged to earnings; replacements and betterments are capitalized. When
Eastman retires or otherwise disposes of assets, it removes the cost of
such assets and related accumulated depreciation from the accounts. The
Company records any profit or loss on retirement or other disposition in
earnings.
DEPRECIATION
Depreciation expense is calculated based on historical cost and the
estimated useful lives of the assets (buildings and building equipment 20
to 50 years; machinery and equipment 3 to 33 years), generally using the
straight-line method. For U.S. assets acquired before January 1, 1992,
the Company generally uses accelerated methods to calculate the provision
for depreciation.
34
<PAGE> 35
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRED ASSETS
The Company reviews the carrying values of long-lived assets and
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Measurement of any impairment would include a comparison of discounted
estimated future operating cash flows to the net carrying value of the
related assets.
DERIVATIVE FINANCIAL INSTRUMENTS
Derivative financial instruments are used by the Company in the
management of its foreign currency exposures. The purpose of the
Company's foreign currency hedging activities is to protect the Company
from the risk that changes in exchange rates will adversely affect the
eventual dollar cash flows resulting from such transactions. The Company
enters into forward exchange contracts to hedge certain firm commitments
denominated in foreign currencies and currency options to hedge probable
anticipated but not yet committed export sales and purchase transactions
expected within no more than 5 years and denominated in foreign
currencies (principally the German mark, French franc, and Japanese yen).
The Company's forward and option contracts are accounted for as hedges
because the derivative instruments are designated and effective as hedges
and reduce the Company's exposure to foreign currency risks. Gains and
losses resulting from effective hedges of existing assets, liabilities,
firm commitments, or anticipated transactions are deferred and recognized
when the offsetting gains and losses are recognized on the related hedged
items and are reported as a component of operating earnings. Deferred
premiums and the related obligation for payment are generally included in
other noncurrent assets and liabilities, respectively, and are paid in
the period in which the options are exercised or expire and forward
exchange contracts mature.
INVESTMENTS
The Company includes in other noncurrent assets its investments in joint
ventures, which are managed as integral parts of the Company's operations
and accounted for on the equity basis. Eastman carries certain
investments at negative values, based on its intention to fund its share
of deficits in such investments, and includes such negative carrying
values in other long-term liabilities. The Company includes its share of
earnings and losses of such joint ventures in other income and charges.
EARNINGS PER SHARE
Eastman calculates earnings per share based on the weighted average
number of common shares outstanding and common share equivalents that
represent the dilutive effect of stock options outstanding during the
year.
INCOME TAXES
Deferred income taxes, reflecting the impact of temporary differences
between the assets and liabilities recognized for financial reporting
purposes and amounts recognized for tax purposes, are based on tax laws
currently enacted.
STOCK-BASED COMPENSATION
Compensation cost attributable to stock option and similar plans is
recognized based on the difference, if any, between the quoted market
price of the stock on the date of grant over the amount the employee is
required to pay to acquire the stock (intrinsic value method). Such
amount, if any, is accrued over the related vesting period, as
appropriate.
35
<PAGE> 36
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMPENSATED ABSENCES
The Company accrues compensated absences and related benefits as current
charges to earnings.
ENVIRONMENTAL COSTS
The Company accrues environmental costs when it is probable that the
Company has incurred a liability and the amount can be reasonably
estimated. Estimated costs associated with closure/postclosure are
accrued over the facilities' estimated remaining useful lives. Accruals
for environmental liabilities are included in other long-term liabilities
at undiscounted amounts and exclude claims for recoveries from insurance
companies or other third parties. Environmental costs are capitalized if
they extend the life of the related property, increase its capacity,
and/or mitigate or prevent future contamination. The cost of operating
and maintaining environmental control facilities is charged to expense.
RECLASSIFICATIONS
The Company has reclassified certain 1995 and 1994 amounts to conform to
the 1996 presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1996 1995
<S> <C> <C>
At FIFO or average cost (approximates current cost)
Finished goods $ 426 $ 461
Work in process 133 127
Raw materials and supplies 214 199
--------- ---------
Total inventories at FIFO or average cost 773 787
Reduction to LIFO value (308) (320)
---------- ---------
Total inventories at LIFO value $ 465 $ 467
========= =========
</TABLE>
Inventories valued on the LIFO method are approximately 80% of total
inventories in 1996 and 1995.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 6,791 $ 6,389 $ 6,390
Additions 796 464 281
Deductions (57) (62) (282)
---------- --------- ---------
Balance at end of year $ 7,530 $ 6,791 $ 6,389
========= ========= =========
Properties at end of year
Land $ 41 $ 36 $ 32
Buildings and building equipment 640 600 588
Machinery and equipment 6,315 5,819 5,647
Construction in progress 534 336 122
--------- --------- ---------
Total $ 7,530 $ 6,791 $ 6,389
========= ========= =========
</TABLE>
36
<PAGE> 37
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Balance at beginning of year $ 3,742 $ 3,483 $ 3,331
Provision for depreciation 314 308 329
Deductions (46) (49) (177)
---------- --------- ---------
Balance at end of year $ 4,010 $ 3,742 $ 3,483
========= ========= =========
</TABLE>
Construction-period interest of $257 million, $229 million, and $220
million, reduced by accumulated depreciation of $111 million, $97
million, and $84 million, is included in cost of properties at December
31, 1996, 1995, and 1994, respectively.
4. EQUITY INVESTMENTS AND OTHER NONCURRENT ASSETS AND LIABILITIES
Eastman has a 50% interest in Genencor International, a joint venture
engaged in developing, manufacturing, and marketing industrial enzymes
and other fine and specialty chemicals, accounted for under the equity
method and included in other noncurrent assets. At December 31, 1996 and
1995, Eastman's equity in the joint venture was $138 million and $119
million, respectively. The Company guarantees a portion of the joint
venture's third-party borrowings that is not considered material to
Eastman. Management believes, based on current facts and circumstances
and the joint venture's financial position, that the likelihood of a
payment pursuant to such guarantee is remote.
Eastman has a 50% interest in and serves as the operating partner in
Primester, a joint venture formed in 1991 to construct and operate a
production facility, accounted for under the equity method. The Company
guarantees a portion of the principal amount of the joint venture's
third-party borrowings; however, management believes, based on current
facts and circumstances and the structure of the venture, that the
likelihood of a payment pursuant to such guarantee is remote. At December
31, 1996 and 1995, Eastman had a negative investment in the joint venture
of $44 million and $41 million, respectively, representing the recognized
portion of the venture's accumulated deficits and the debt guarantee that
it has a commitment to fund, as necessary. Such amounts are included in
other long-term liabilities. The Company provides certain utilities and
general plant services to the joint venture. In return for Eastman
providing those services, the joint venture paid Eastman a total of $39
million in three equal installments in 1991, 1992, and 1993. Eastman is
amortizing the deferred credit to earnings over a 10-year period.
Eastman has entered into an agreement with a supplier that guarantees the
Company's right to buy a specified quantity of a certain raw material
annually through 2007 at prices determined by the pricing formula
specified in the agreement. In return, the Company will pay a total of
$239 million to the supplier through 1999 ($175 million of which has been
paid through December 31, 1996). The Company defers and amortizes those
costs over the 15-year period during which the product is received. The
Company began amortizing those costs in 1993 and has recorded accumulated
amortization of $64 million and $48 million at December 31, 1996 and
1995, respectively.
37
<PAGE> 38
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1996 1995
<S> <C> <C>
Trade creditors $ 312 $ 291
Accrued payrolls and vacation 101 93
Accrued variable-incentive compensation 137 239
Other 158 148
--------- ---------
Total $ 708 $ 771
========= =========
</TABLE>
6. LONG-TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1996 1995
<S> <C> <C>
6 3/8% notes due 2004 $ 499 $ 499
7 1/4% debentures due 2024 495 495
7 5/8% debentures due 2024 200 200
Commercial paper and other 329 23
--------- ---------
Total $ 1,523 $ 1,217
========= =========
</TABLE>
In December 1995 the Company replaced a previously existing variable rate
credit agreement with a new 5-year $800 million revolving credit facility
(the "Credit Facility"). Although the Company does not have any amounts
outstanding under the Credit Facility, any such borrowings would be
subject to interest at varying spreads above quoted market rates,
principally LIBOR. The Credit Facility also requires a facility fee on the
total commitment that varies based on Eastman's credit rating. The annual
rate for such fee was 0.075% as of December 31, 1996. The Credit Facility
contains a number of covenants and events of default, including the
maintenance of certain financial ratios. Eastman was in compliance with
all such covenants for all periods.
In 1994 Eastman issued $1.2 billion of long-term debt securities and
repaid existing borrowings under the preexisting credit agreement. The
issuances included $500 million of 6 3/8% notes due 2004, $500 million of
7 1/4% debentures due 2024, and $200 million of 7 5/8% debentures due
2024. The 7 5/8% debentures may be redeemed June 15, 2006, at the option
of their registered holders, at 100% of the principal amount plus accrued
interest to that date.
Eastman utilizes commercial paper, generally with maturities of 90 days or
less, to meet its liquidity needs. The Company's commercial paper,
supported by the Credit Facility, is classified as long-term borrowings
because the Company has the ability and intent to refinance such
borrowings long-term. As of December 31, 1996, the Company's commercial
paper outstanding balance was $295 million, at an effective interest rate
of 5.59%. At December 31, 1995, a total of $22 million of commercial paper
was outstanding, at a 6% effective interest rate.
In early 1997 the Company issued $300 million of 7.60% debentures due
February 1, 2027, and used the proceeds to repay outstanding commercial
paper borrowings.
38
<PAGE> 39
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Common stock at par value $ 1 $ 1 $ 1
------------- ------------- --------------
Paid-in capital
Balance at beginning of year 30 22 -
Additions 7 8 22
------------- ------------- --------------
Balance at end of year 37 30 22
------------- ------------- --------------
Retained earnings 1,929 1,684 1,258
------------- ------------- --------------
Cumulative translation adjustment
Balance at beginning of year 13 14 5
Currency translation adjustments 18 (1) 9
------------- ------------- --------------
Balance at end of year 31 13 14
------------- ------------- --------------
Treasury stock at cost (359) (200) -
------------- ------------- --------------
Total $ 1,639 $ 1,528 $ 1,295
============= ============= ==============
Shares of common stock issued
Balance at beginning of year 83,250,683 83,067,368 82,626,942
Issued for employee compensation
and benefit plans 135,776 183,315 440,426
------------- ------------- --------------
Balance at end of year 83,386,459 83,250,683 83,067,368
============= ============= ==============
</TABLE>
The Company has authority to issue 400 million shares of all classes of
stock, of which 50 million may be preferred stock, par value $0.01 per
share, and 350 million may be common stock, par value $0.01 per share.
Eastman has issued no shares of preferred stock. The Company declared
dividends of $1.72 per share in 1996, $1.64 per share in 1995, and $1.60
per share in 1994.
The increase in paid-in capital in 1994 was primarily due to an issue of
Eastman shares in connection with transfers of amounts from a preexisting
Kodak employee stock ownership plan (see Note 8). The additions to
paid-in capital in 1995 and 1996 are the result of exercises of stock
options by employees.
In 1995 the Company repurchased 3,308,200 shares of Eastman common stock
at a cost of $200 million. In February 1996 the Company announced plans
to repurchase up to $400 million of additional common stock. At December
31, 1996, the Company had acquired an additional 2,486,300 shares at a
cost of $161 million under the program announced in 1996. Given the
Company's capital expenditure program for 1997, Eastman does not expect
to make any significant share repurchases in 1997. Repurchased common
shares may be used to meet common stock requirements for benefit plans
and other corporate purposes. In 1996 approximately $2 million of
treasury stock (27,972 shares) was reissued. The Company's charitable
foundation holds 202,575 shares of Eastman common stock.
39
<PAGE> 40
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLAN
Eastman's 1994 Omnibus Long-Term Compensation Plan (the "Omnibus Plan")
provides for grants to employees of nonqualified stock options, incentive
stock options, tandem and freestanding stock appreciation rights,
performance shares, and various other stock and stock-based awards.
Certain of these awards may be based on criteria relating to Eastman
performance as established by the Compensation and Management Development
Committee of the Board of Directors. The Omnibus Plan provides that
options can be granted through December 31, 1998, for the purchase of
Eastman common stock at an option price not less than 50% of the per share
fair market value on the date of the stock option's grant. Substantially
all grants awarded have been at option prices equal to the fair market
value on the date of grant. Options generally become exercisable 50% one
year after grant and 100% after two years and expire up to ten years after
grant. There is a maximum of 6 million shares of common stock available
for grant during the term of the Omnibus Plan, of which 2 million are
reserved for issuance to Eastman employees who had received awards prior
to January 1, 1994, under Kodak plans.
DIRECTOR LONG-TERM COMPENSATION PLAN
Eastman's 1994 Director Long-Term Compensation Plan (the "Director Plan")
provides for grants of nonqualified stock options and restricted shares to
nonemployee members of the Board of Directors upon the first day of the
directors' initial term of service. The Director Plan provides that
options can be granted through December 31, 1998, for the purchase of
Eastman common stock at an option price not less than the stock's fair
market value on the date of the grant. The options vest in 50% increments
on the first two anniversaries of the grant date.
NONEMPLOYEE DIRECTOR STOCK OPTION PLAN
Eastman's 1996 Nonemployee Director Stock Option Plan provides for grants
of nonqualified stock options to nonemployee members of the Board of
Directors in lieu of all or a portion of each member's annual retainer.
The Nonemployee Director Stock Option Plan provides that options may be
granted for the purchase of Eastman common stock at an option price not
less than the stock's fair market value on the date of grant. The options
become exercisable 6 months after the grant date. The maximum number of
shares of Eastman common stock available for grant under the plan is
150,000.
STOCK OPTION BALANCES AND ACTIVITY
The Company has adopted SFAS 123, "Accounting for Stock-Based
Compensation," and in accordance with the provisions thereof, the Company
continues to apply intrinsic value accounting for its plans. If the
Company had elected to recognize compensation expense based upon the fair
value at the grant dates for awards under these plans consistent with the
methodology prescribed by SFAS 123, the Company's net earnings and net
earnings per share would be reduced to the unaudited pro forma amounts
indicated below.
<TABLE>
<CAPTION>
(Dollars in millions, except for per share amounts) 1996 1995
<S> <C> <C>
Net earnings As reported $ 380 $ 559
Pro forma $ 375 $ 558
Net earnings per share As reported $ 4.80 $ 6.78
Pro forma $ 4.74 $ 6.77
</TABLE>
40
<PAGE> 41
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The fair value of each option is estimated on the grant date using the
Black-Scholes option-pricing model, which requires input of highly
subjective assumptions. Some of these assumptions used for grants in 1996
and 1995, respectively, include: average expected volatility of 25.23%
and 26.07%; average expected dividend yield of 2.56% and 2.83%; and
average risk-free interest rates of 5.76% and 6.37%. An expected option
term of 6 years for both periods was developed based on historical grant
information. The expected term for reloads was considered as part of this
calculation and is equivalent to the remaining term of the original grant
at the time of reload.
Because Eastman stock has been traded for a period less than the baseline
expected term assumption, monthly volatility factors for five peer
companies were calculated. For valuation purposes, an average volatility
factor based on the calendar-year quarter in which the options were
granted was utilized.
Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes
in the subjective input assumptions can materially affect the fair value
estimate, in management's opinion, the existing models do not necessarily
provide a reliable single measure of the fair value of its employee stock
options.
A summary of the status of the Company's stock option plans is presented
below:
<TABLE>
<CAPTION>
1996 1995 1994
------------------------ ----------------------- -----------------------
WEIGHTED- WEIGHTED- WEIGHTED-
AVERAGE AVERAGE AVERAGE
OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE OPTIONS EXERCISE PRICE
--------- -------------- ------- -------------- ------- --------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 2,850,532 $ 45 2,492,745 $ 41 709,508 $ 36
Granted 542,591 55 566,679 62 1,842,659 43
Exercised 176,686 40 208,892 40 28,522 34
Forfeited or canceled - - - - 30,900 43
--------- ----- ---------- ------ ---------- -------
Outstanding at end
of year 3,216,437 $ 47 2,850,532 $ 45 2,492,745 $ 41
========= ========= =========
Options exercisable at
year-end 2,461,995 1,406,400 577,041
========= ========= =======
Weighted-average fair
value of options granted
during the year $14.66 $17.60 Not applicable
Available for grant at end
of year 2,384,543 2,915,741 3,482,412
========= ========= =========
</TABLE>
41
<PAGE> 42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
---------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/96 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/96 EXERCISE PRICE
--------------- ----------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$31-$40 409,086 4.2 years $34 409,086 $34
43-44 1,762,446 7.1 43 1,762,446 43
48-63 482,129 9.4 53 16,987 57
64-74 562,776 8.4 65 273,476 65
--------- ---------
$31-$74 3,216,437 7.3 $47 2,461,995 $44
========= =========
</TABLE>
EMPLOYEE STOCK OWNERSHIP PLAN
The Company sponsors a defined contribution employee stock ownership plan
(the "ESOP"), which is a qualified plan under Section 401(a) of the
Internal Revenue Code. Eastman anticipates that it will direct a portion
of the compensation of all U.S. employees to the ESOP. The Company also
sponsors an employee stock ownership plan, which is substantially similar
to the ESOP, for its international employees. In October 1994 Kodak
transferred to the ESOP certain amounts held for Eastman employees in a
preexisting Kodak employee stock ownership plan. The Company used the
proceeds from the transfer to buy outstanding Eastman shares and 394,800
previously unissued Eastman shares. Allocated shares in the ESOP totaled
1,887,003, 1,488,436, and 998,853 as of December 31, 1996, 1995, and
1994, respectively.
Compensation expense is measured based on the fair value of the shares
contributed to or committed to be contributed to the ESOP. The shares are
allocated to participant accounts and held by the ESOP until distributed
to the employees at a future date, such as on the date of termination or
retirement. Dividends on shares held by the ESOP are charged to retained
earnings. All shares held by the ESOP are treated as outstanding in
computing earnings per share.
EASTMAN PERFORMANCE PLAN
The Eastman Performance Plan (the "EPP") provides a lump-sum payment to
plan participants based on the Company's financial performance. Certain
portions of such payments, which are approved annually by Eastman's Board
of Directors, are directed to the Company's ESOP. Charges under the EPP
were $131 million, $229 million, and $118 million for 1996, 1995, and
1994, respectively. Of these amounts, $36 million, $35 million, and $27
million were directed to the Company's ESOP.
ANNUAL PERFORMANCE PLAN
Eastman's managers and executive officers participate in an Annual
Performance Plan (the "APP"), which places a portion of annual cash
compensation at risk based upon Company performance as measured by
specified annual goals. Charges under the APP for 1996, 1995, and 1994
were $6 million, $10 million, and $12 million, respectively.
42
<PAGE> 43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. INCOME TAXES
Components of earnings before income taxes and the provision for U.S.
and other income taxes follow:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Earnings (loss) before income taxes
United States $ 679 $ 825 $ 526
Outside the United States (72) 74 24
--------- --------- ---------
Total $ 607 $ 899 $ 550
========= ========= =========
Provision (benefit) for income taxes
United States
Current $ 190 $ 291 $ 183
Deferred 19 (12) (13)
Non-United States
Current 4 30 13
Deferred (12) 2 6
State and other
Current 25 30 26
Deferred 1 (1) (1)
--------- --------- ---------
Total $ 227 $ 340 $ 214
========= ========= =========
</TABLE>
Differences between the provision for income taxes and income taxes
computed using the U.S. federal statutory income tax rate follow:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Amount computed using the statutory rate $ 212 $ 315 $ 193
State income taxes 17 19 15
Foreign rate variance 13 3 5
Foreign sales corporation benefit (14) (14) (6)
Other (1) 17 7
--------- --------- ---------
Provision for income taxes $ 227 $ 340 $ 214
========= ========= =========
</TABLE>
43
<PAGE> 44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The significant components of deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1996 1995
<S> <C> <C>
Deferred tax assets
Postemployment obligations $ 263 $ 255
Payroll and related items 49 46
Inventories 13 20
Deferred revenue 21 23
Miscellaneous reserves 33 30
Preproduction and start-up costs 18 -
Other 17 12
--------- ---------
Total $ 414 $ 386
========= =========
Deferred tax liabilities
Depreciation $ 677 $ 642
Other 25 24
--------- ---------
Total $ 702 $ 666
========= =========
</TABLE>
Unremitted earnings of subsidiaries outside the United States totaling
$18 million at December 31, 1996, are considered to be reinvested
indefinitely. If remitted, they would be substantially free of additional
tax. It is not practicable to determine the deferred tax liability for
temporary differences related to those unremitted earnings.
Current taxes payable totaling $34 million and $51 million are included
in other current liabilities at December 31, 1996 and 1995, respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Long-term borrowings $ 1,523 $ 1,515 $ 1,217 $ 1,297
Foreign exchange contracts 74 63 55 32
</TABLE>
Eastman uses the following methods and assumptions in estimating its
fair-value disclosures for financial instruments:
Long-term borrowings
The Company has based the fair value for the 6 3/8% notes and 7 1/4% and
7 5/8% debentures on current interest rates for comparable securities.
The Company's floating-rate borrowings approximate fair value.
44
<PAGE> 45
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign exchange contracts
The Company estimates the fair value of its foreign exchange contracts
based on dealer-quoted market prices of comparable instruments.
Other financial instruments
Because of the nature of all other financial instruments, recorded
amounts approximate fair value. In the judgment of management, exposure
to third-party guarantees is remote and the potential earnings impact
pursuant to such guarantees is insignificant.
DERIVATIVE FINANCIAL INSTRUMENTS HELD OR ISSUED FOR PURPOSES OTHER THAN
TRADING
Eastman purchased currency options with maturities of not more than 5
years and short-term forward exchange contracts to exchange various
foreign currencies for U.S. dollars in the aggregate notional amount of
$1.536 billion and $1.085 billion at December 31, 1996 and 1995,
respectively. The net unrealized loss deferred on such options and
forwards as of December 31, 1996 and 1995, was not significant. Those
amounts, based on dealer-quoted prices, represent the estimated loss that
would have been recognized had those hedges been liquidated at estimated
market value on the last day of each year presented.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on foreign exchange contracts but anticipates no such
nonperformance. The Company minimizes such risk exposure by limiting the
counterparties to major international banks and financial institutions.
Concentrations of credit risk with respect to trade accounts receivable
are generally diversified because of the large number of entities
constituting the Company's customer base and their dispersion across many
different industries and geographies.
11. COMMITMENTS
LEASE COMMITMENTS
Eastman leases facilities, principally property and machinery and
equipment, under cancelable, noncancelable, and month-to-month operating
leases. Future lease payments, reduced by sublease income, follow:
<TABLE>
<CAPTION>
(Dollars in millions)
<S> <C>
Year ending December 31,
1997 $ 58
1998 40
1999 24
2000 13
2001 12
2002 and beyond 76
-------
Total minimum payments required $ 223
=======
</TABLE>
If certain operating leases are terminated by the Company, it guarantees
a portion of the residual value loss, if any, incurred by the lessors in
disposing of the related assets. Management believes, based on current
facts and circumstances and current values of such equipment, that a
material payment pursuant to such guarantees is remote.
45
<PAGE> 46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL EXPENSE
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Gross rentals $ 54 $ 47 $ 37
Deduct: Sublease income 2 12 18
--------- --------- ---------
Total $ 52 $ 35 $ 19
========= ========= =========
</TABLE>
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
As of December 31, 1996, the Company had entered into commitments for
capital expenditures of approximately $740 million, of which
approximately 80% is expected to be disbursed in 1997. Eastman has other
long-term commitments relating to purchases of product and joint venture
agreements as described in Note 4.
12. RETIREMENT PLANS
Eastman maintains defined benefit plans that provide eligible employees
with retirement benefits calculated based on years of service and
generally on the employees' final average compensation as defined in the
plans. Benefits are paid to employees by insurance companies or from
trust funds. Plan contributions are made as permitted by laws and
regulations.
Pension coverage for employees of Eastman's international operations is
provided, to the extent deemed appropriate, through separate plans. The
Company systematically provides for obligations under such plans by
depositing funds with trustees, under insurance policies, or by book
reserves. Total pension funds and accruals for non-U.S. plans less
pension prepayments and deferred charges exceed the actuarially computed
value of vested benefits under such plans as of the beginning of 1996 and
1995.
Eastman participated in Kodak's U.S. defined benefit pension plans
covering substantially all U.S. employees prior to the spin-off. In
connection with the spin-off, Eastman assumed the share of Kodak's U.S.
defined benefit pension plan obligations relating primarily to active
employees as of the date of the spin-off, while Kodak retained
responsibility for pension obligations of substantially all retired U.S.
employees.
The components of net periodic pension cost for Eastman's U.S. defined
benefit pension plans follow:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Service cost $ 49 $ 35 $ 40
Interest cost 92 76 67
Loss (return) on plan assets (175) (116) 15
Net amortization 87 39 (90)
--------- --------- ---------
Total U.S. pension cost $ 53 $ 34 $ 32
========= ========= =========
</TABLE>
Eastman's worldwide net pension cost was $57 million in 1996 and $38
million in both 1995 and 1994.
46
<PAGE> 47
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The status of the Company's U.S. defined benefit pension plans follows:
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1996 1995
<S> <C> <C>
Vested benefit obligation $ 1,029 $ 841
========= =========
Accumulated benefit obligation $ 1,119 $ 895
========= =========
Projected benefit obligation $ 1,410 $ 1,206
Market value of assets 1,210 931
--------- ---------
Projected benefits in excess of plan assets 200 275
Unrecognized net loss (70) (153)
Unrecognized net transition asset 57 66
Unrecognized prior service cost (30) (33)
---------- ---------
Accrued pension cost $ 157 $ 155
========= =========
</TABLE>
The plans' assets are principally listed stocks. Kodak's defined benefit
pension plan trust currently holds a significant portion of all such
assets, which will be distributed to Eastman's pension plan trusts when
certain calculations are completed, likely in 1997.
The assumptions used to develop the projected benefit obligation for the
Company's U.S. pension plans follow:
<TABLE>
<CAPTION>
DECEMBER 31,
1996 1995
<S> <C> <C>
Discount rate 7.75% 7.25%
Salary increase rate 4.00% 4.00%
Long-term rate of return on plan assets 9.50% 9.50%
</TABLE>
13. OTHER POSTEMPLOYMENT COSTS
Eastman provides life insurance and health care benefits for eligible
retirees, and health care benefits for retirees' eligible survivors. In
general, Eastman provides those benefits to retirees eligible under the
Company's U.S. pension plans.
Eastman and Kodak agreed that Kodak would retain the postretirement
health and life insurance benefit obligations of substantially all U.S.
retirees at the date of the spin-off. As a result, Eastman has no
liability recorded for expected postretirement health and life insurance
benefit costs for substantially all of its employees who retired through
year-end 1993 while Eastman was a wholly owned business of Kodak.
47
<PAGE> 48
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables set forth the status of the Company's U.S. plans at
December 31, 1996 and 1995:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
<S> <C> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 87 $ 15 $ 102
Fully eligible active plan participants 93 - 93
Other active plan participants 198 113 311
--------- -------- --------
Total accumulated postretirement benefit
obligation 378 128 506
Plan assets at fair value 20 5 25
--------- -------- --------
Accumulated postretirement benefit obligation
in excess of plan assets $ 358 $ 123 481
========= ========
Unrecognized net loss 6
--------
Accrued postretirement benefit cost $ 475
========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
<S> <C> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 58 $ 17 $ 75
Fully eligible active plan participants 80 - 80
Other active plan participants 202 99 301
--------- -------- --------
Total accumulated postretirement benefit
obligation 340 116 456
Plan assets at fair value 14 3 17
--------- -------- --------
Accumulated postretirement benefit obligation
in excess of plan assets $ 326 $ 113 439
========= ========
Unrecognized net gain 8
--------
Accrued postretirement benefit cost $ 447
========
</TABLE>
48
<PAGE> 49
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net periodic postretirement benefit cost follows:
<TABLE>
<CAPTION>
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
<S> <C> <C> <C>
1996
Service cost $ 7 $ 5 $ 12
Interest cost 25 9 34
Return on plan assets (1) - (1)
---------- -------- ---------
Net periodic postretirement benefit cost $ 31 $ 14 $ 45
========= ======== ========
1995
Service cost $ 8 $ 3 $ 11
Interest cost 27 8 35
Return on plan assets (1) - (1)
--------- -------- --------
Net periodic postretirement benefit cost $ 34 $ 11 $ 45
========= ======== ========
1994
Service cost $ 10 $ 4 $ 14
Interest cost 26 8 34
Net amortization 1 1 2
--------- -------- --------
Net periodic postretirement benefit cost $ 37 $ 13 $ 50
========= ======== ========
</TABLE>
To estimate the Company's postretirement benefit cost, health care costs
were assumed to increase 8.25% for 1997, with the rate of increase
declining to 5.25% by 2002 and thereafter. The discount rate and salary
increase rate were assumed to be 7.75% and 4.00% at December 31, 1996,
7.25% and 4.00% at December 31, 1995, and 8.75% and 5.00% at December 31,
1994. If the health care cost trend rates were increased by 1 percentage
point, the Company's accumulated postretirement health care benefit
obligation as of December 31, 1996, would increase by $80 million, while
the net periodic postretirement health care benefit cost would increase
by $9 million.
A few of Eastman's non-U.S. operations have supplemental health benefit
plans for certain retirees, the cost of which is not significant to the
Company.
49
<PAGE> 50
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SEGMENT INFORMATION
INDUSTRY SEGMENTS
Eastman is an international chemical company that manufactures and sells
a broad range of products. The Company categorizes its business into
three segments: Specialty and Performance, Core Plastics, and Chemical
Intermediates.
The Specialty and Performance segment contains products that are sold to
customers that base their buying decisions principally on product
performance attributes. The major products in this segment include
specialty plastics, coatings and paint raw materials, fine chemicals,
performance chemicals, and fibers. Targeted markets for this segment are
diverse and include medical, electronics, recreation, consumer durables,
photographic chemicals, additives for fibers and plastics, adhesives,
sealants, food and beverages, nutrition, cosmetics, textiles,
construction, coatings, inks, paints, filters, and specialty plastic
applications. Competitive factors for this segment include price,
reliability of supply, customer service, and technical competence.
Coatings and paint raw materials are sold primarily to North American
industrial concerns. The principal markets for Eastman's fine chemicals
are largely U.S. photographic, agricultural, and pharmaceutical
companies. Acetate tow is sold worldwide to the tobacco industry for use
in cigarette filters.
The Core Plastics segment includes the Company's two major plastics
products, EASTAPAK PET polyester packaging plastic and TENITE
polyethylene, as well as cellulose acetate and polyesters. These
container and packaging products share similar physical characteristics
and compete based on price and integrated manufacturing capabilities.
Polyester plastics are sold to soft-drink and other packaging
manufacturers principally in North America, Europe, and Latin America.
Polyethylene is sold generally to North American industries.
The Chemical Intermediates segment contains industrial intermediate
chemicals that are produced based on the Company's oxo chemistry
technology and chemicals-from-coal technology and are sold to customers
operating in mature markets in which multiple sources of supply exist.
They are sold generally in large volume mostly to North American
industries. These products are targeted at markets for industrial
additives, agricultural chemicals, esters, pharmaceuticals, and vinyl
compounding. Competitive factors include price, reliability of supply,
and integrated manufacturing capability. Favorable cost position,
proprietary products, and improving standards of living worldwide are key
value drivers for this segment.
The Company's business segment presentation was revised in 1996 from its
previous two-segment approach. The Company believes that the new
segmentation will provide more useful information for decision-making and
for understanding the Company's financial results. The products within
each segment have generally similar characteristics, the markets share
similar economic characteristics, and customers have similar buying
criteria. Prior periods have been restated to conform to the 1996
presentation.
50
<PAGE> 51
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
SALES
Specialty and Performance $ 2,657 $ 2,647 $ 2,364
Core Plastics 1,409 1,685 1,390
Chemical Intermediates 716 708 575
--------- --------- ---------
Total sales $ 4,782 $ 5,040 $ 4,329
========= ========= =========
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 519 $ 433 $ 350
Core Plastics (1) 347 199
Chemical Intermediates 145 184 87
--------- --------- ---------
Total operating earnings $ 663 $ 964 $ 636
========= ========= =========
ASSETS
Specialty and Performance $ 2,887 $ 2,776 $ 2,508
Core Plastics 1,854 1,598 1,449
Chemical Intermediates 525 498 438
--------- --------- ---------
Total assets $ 5,266 $ 4,872 $ 4,395
========= ========= =========
DEPRECIATION EXPENSE
Specialty and Performance $ 174 $ 178 $ 189
Core Plastics 109 96 108
Chemical Intermediates 31 34 32
--------- --------- ---------
Total depreciation expense $ 314 $ 308 $ 329
========= ========= =========
CAPITAL EXPENDITURES
Specialty and Performance $ 302 $ 176 $ 174
Core Plastics 388 215 82
Chemical Intermediates 99 55 25
--------- --------- ---------
Total capital expenditures $ 789 $ 446 $ 281
========= ========= =========
</TABLE>
GEOGRAPHIC SEGMENTS
Sales are reported in the geographic area where they originate. Transfers
among geographic areas are made on a basis intended to reflect the market
value of the products, recognizing prevailing market prices and
distributor discounts. Export sales to unaffiliated customers from the
United States were $687 million in 1996, $698 million in 1995, and $526
million in 1994.
<TABLE>
<CAPTION>
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated
1996
<S> <C> <C> <C> <C> <C>
Sales $ 3,674 $ 735 $ 373 $ 4,782
Transfers among geographic areas 785 27 55 $ (867) -
--------- -------- --------- ---------- ---------
Total sales $ 4,459 $ 762 $ 428 $ (867) $ 4,782
========= ======== ========= ========== =========
Operating earnings (losses) $ 717 $ (36) $ (31) $ 13 $ 663
========= ========= ========== ========= =========
Assets at end of year $ 5,076 $ 582 $ 424 $ (816) $ 5,266
========= ======== ========= ========== =========
</TABLE>
51
<PAGE> 52
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
1995
Sales $ 3,864 $ 806 $ 370 $ 5,040
Transfers among geographic areas 806 50 17 $ (873) -
--------- -------- --------- --------- ---------
Total sales $ 4,670 $ 856 $ 387 $ (873) $ 5,040
========= ======== ========= ========= =========
Operating earnings $ 881 $ 47 $ 25 $ 11 $ 964
========= ======== ========= ========= =========
Assets at end of year $ 4,569 $ 508 $ 324 $ (529) $ 4,872
========= ======== ========= ========= =========
1994
Sales $ 3,393 $ 629 $ 307 $ 4,329
Transfers among geographic areas 572 23 7 $ (602) -
--------- -------- --------- --------- ---------
Total sales $ 3,965 $ 652 $ 314 $ (602) $ 4,329
========= ======== ========= ========= =========
Operating earnings $ 594 $ 20 $ 14 $ 8 $ 636
========= ======== ========= ========= =========
Assets at end of year $ 4,216 $ 456 $ 169 $ (446) $ 4,395
========= ======== ========= ========= =========
</TABLE>
15. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1996 1995 1994
<S> <C> <C> <C>
Interest (net of amounts capitalized) $ 79 $ 91 $ 55
Income taxes 236 364 165
</TABLE>
Cash flows from operating activities include losses from equity
investments of $3 million, $6 million, and $11 million for 1996, 1995,
and 1994, respectively. Derivative financial instruments and related
gains and losses are included in cash flows from operating activities.
The effect of foreign currency transactions and exchange rate changes for
all years presented was insignificant. The $100 million net cash received
from the divestiture of the Company's polypropylene business in 1994 is
included in cash flows from sales of properties. The consolidated
statements of cash flows do not separately reflect certain Eastman assets
acquired and liabilities assumed through noncash transactions.
16. ENVIRONMENTAL MATTERS
Certain Eastman manufacturing sites generate hazardous and nonhazardous
wastes, of which the treatment, storage, transportation, and disposal are
regulated by various governmental agencies. In connection with the
cleanup of various hazardous waste sites, the Company, along with many
other entities, has been designated a potentially responsible party
("PRP") by the U.S. Environmental Protection Agency under the
Comprehensive Environmental Response, Compensation and Liability Act,
which potentially subjects PRPs to joint and several liability for such
cleanup costs. In addition, the Company will be required to incur costs
for environmental remediation and closure/postclosure under the federal
Resource Conservation and Recovery Act. Because of expected sharing of
costs, the
52
<PAGE> 53
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
availability of legal defenses, and the Company's preliminary assessment
of actions that may be required, the Company does not believe its
liability for these environmental matters, individually or in the
aggregate, will be material to Eastman's consolidated financial position,
results of operations, or competitive position.
The Company's environmental protection and improvement cash expenditures
were $173 million in 1996, $151 million in 1995, and $145 million in
1994, including investments in construction, operations, and development.
17. LEGAL MATTERS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, patent,
commercial, environmental, and health and safety matters, which are being
handled and defended in the ordinary course of business. No such pending
matters are expected to have a material adverse effect on the Company's
financial condition or results of operations.
18. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1996 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
<S> <C> <C> <C> <C>
Sales $ 1,261 $ 1,241 $ 1,167 $ 1,113
Operating earnings 191 190 169 113
Earnings before income taxes 178 177 156 96
Provision for income taxes 66 65 60 36
Net earnings 112 112 96 60
Net earnings per share (1) 1.39 1.41 1.22 .77
</TABLE>
<TABLE>
<CAPTION>
1995 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.
<S> <C> <C> <C> <C>
Sales $ 1,232 $ 1,321 $ 1,266 $ 1,221
Operating earnings 228 265 260 211
Earnings before income taxes 213 255 239 192
Provision for income taxes 81 97 91 71
Net earnings 132 158 148 121
Net earnings per share (1) 1.58 1.90 1.81 1.50
</TABLE>
-----------
(1) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount.
53
<PAGE> 54
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
54
<PAGE> 55
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors -- General" in the 1997
Proxy Statement is incorporated by reference herein in response to this Item.
Certain information concerning executive officers of the Company is set forth
under the heading "Executive Officers of the Company" in Part I of this Annual
Report on Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION
The material under the headings "Election of Directors -- Compensation of
Directors" in the 1997 Proxy Statement is incorporated by reference herein in
response to this Item. In addition, the material under the heading "Executive
Compensation and Benefits" in the 1997 Proxy Statement is incorporated by
reference herein in response to this Item, except for the material under the
subheadings " -- Compensation and Management Development Committee Report on
Executive Compensation" and " -- Performance Graph," which are not incorporated
by reference herein.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The material under the headings "Stock Ownership of Directors and Executive
Officers--Common Stock" and "Stock Ownership of Certain Beneficial Owners" in
the 1997 Proxy Statement is incorporated by reference herein in response to this
Item.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
There are no transactions or relationships since the beginning of the last
completed fiscal year required to be reported in response to this Item.
55
<PAGE> 56
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Consolidated financial statements:
<TABLE>
<CAPTION>
Page
<S> <C>
Management's responsibility for financial statements 29
Report of independent accountants 30
Consolidated statements of earnings and retained earnings 31
Consolidated statements of financial position 32
Consolidated statements of cash flows 33
Notes to consolidated financial statements 34 - 53
</TABLE>
2. Financial statement schedules
EX-27 Financial Data Schedule (for SEC use only).
3. Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 59.
(b) Reports on Form 8-K
During the quarter ended December 31, 1996, no reports on Form 8-K
were filed.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 59.
(d) There are no applicable financial statement schedules required to be
filed as part of this report.
56
<PAGE> 57
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Eastman Chemical Company
By: /s/ Earnest W. Deavenport, Jr.
------------------------------
Earnest W. Deavenport, Jr.
Chairman of the Board and
Chief Executive Officer
Date: March 12, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant and
in the capacities and on the date indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
PRINCIPAL EXECUTIVE OFFICER:
<S> <C> <C>
/s/ Earnest W. Deavenport, Jr. Chairman of the March 12, 1997
- ------------------------------ Board and Chief
Earnest W. Deavenport, Jr. Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ H. Virgil Stephens Senior Vice President and March 12, 1997
- ---------------------- Chief Financial Officer
H. Virgil Stephens
PRINCIPAL ACCOUNTING OFFICER:
/s/ Thomas W. Wilson Vice President and March 12, 1997
- -------------------- Comptroller
Thomas W. Wilson
</TABLE>
57
<PAGE> 58
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
DIRECTORS:
<S> <C> <C>
/s/ R. Wiley Bourne, Jr. Vice Chairman March 12, 1997
- --------------------------- of the Board
R. Wiley Bourne, Jr. and Executive
Vice President
/s/ H. Jesse Arnelle Director March 12, 1997
- ---------------------------
H. Jesse Arnelle
/s/ Dexter F. Baker Director March 12, 1997
- ---------------------------
Dexter F. Baker
/s/ Calvin A. Campbell, Jr. Director March 12 , 1997
- ---------------------------
Calvin A. Campbell, Jr.
- --------------------------- Director
Michael von Clemm
/s/ Lee Liu Director March 12, 1997
- ---------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 12, 1997
- ---------------------------
Marilyn R. Marks
/s/ Gerald B. Mitchell Director March 12, 1997
- ---------------------------
Gerald B. Mitchell
/s/ John A. White Director March 12, 1997
- ---------------------------
John A. White
</TABLE>
58
<PAGE> 59
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<S> <C> <C>
3.01 Amended and Restated Certificate of Incorporation
of Eastman Chemical Company (incorporated herein by
reference to Exhibit 3.01 to Eastman Chemical Company's
Registration Statement on Form S-1, File No. 33-72364, as
amended (the "S-1"))
3.02 Amended and Restated By-laws of Eastman Chemical Company, as
amended October 1, 1994 (incorporated by reference to Exhibit
3.02 to Eastman Chemical Company's Annual Report on Form 10-K
for the year ended December 31, 1994 (the "1994 10-K"))
4.01 Form of Eastman Chemical Company Common Stock certificate
(incorporated herein by reference to Exhibit 3.02 to Eastman
Chemical Company's Annual Report on Form 10-K for the year
ended December 31, 1993 (the "1993 10-K"))
4.02 Stockholder Protection Rights Agreement dated as of December
13, 1993, between Eastman Chemical Company and First Chicago
Trust Company of New York, as Rights Agent (incorporated
herein by reference to Exhibit 4.4 to Eastman Chemical
Company's Registration Statement on Form S-8 relating to the
Eastman Investment Plan, File No. 33-73810)
4.03 Indenture, dated as of January 10, 1994, between Eastman
Chemical Company and The Bank of New York, as Trustee (the
"Indenture") (incorporated herein by reference to Exhibit 4(a)
to Eastman Chemical Company's current report on Form 8-K dated
January 10, 1994 (the "8-K"))
4.04 Form of 6 3/8% Notes due January 15, 2004 (incorporated
herein by reference to Exhibit 4(c) to the 8-K)
4.05 Form of 7 1/4% Debentures due January 15, 2024 (incorporated
herein by reference to Exhibit 4(d) to the 8-K)
4.06 Officers' Certificate pursuant to Sections 201 and 301 of the
Indenture (incorporated herein by reference to Exhibit 4(a) to
Eastman Chemical Company's Current Report on Form 8-K dated
June 8, 1994 (the "June 8-K"))
4.07 Form of 7 5/8% Debentures due June 15, 2024 (incorporated
herein by reference to Exhibit 4(b) to the June 8-K)
4.08 Form of 7.60% Debenture due February 1, 2027 63
</TABLE>
59
<PAGE> 60
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<S> <C> <C>
4.09 Officer's Certificate pursuant to Sections 201 and 301 of 68
the Indenture related to 7.60% Debentures due February 1,
2027
4.10 Credit Agreement, dated as of December 19, 1995 (the "Credit
Agreement") among Eastman Chemical Company, the Lenders named
therein, and The Chase Manhattan Bank, as Agent (incorporated
herein by reference to Exhibit 4.08 to Eastman Chemical
Company's Annual Report on Form 10-K for the year ended
December 31, 1995 (the "1995 10-K"))
*10.01 Eastman Annual Performance Plan, as amended 70
*10.02 1994 Director Long-Term Compensation Plan, as amended
(incorporated herein by reference to Exhibit 10.02 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1995)
*10.03 1994 Omnibus Long-Term Compensation Plan (incorporated herein
by reference to Exhibit 10.03 to Eastman Chemical Company's Registration
Statment on Form 10, orginally filed on November 26, 1993 (the "Form 10")
*10.04 1996 Non-Employee Director Stock Option Plan, as amended
(incorporated herein by reference to Exhibit 10.02 to Eastman
Chemical Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996 (the
"September 30, 1996 10-Q"))
*10.05 Director Deferred Compensation Plan, as amended 76
*10.06 Executive Deferred Compensation Plan, as amended 84
*10.07 Form of Executive Severance Agreements (incorporated herein
by reference to Exhibit 10.06 to the 1995 10-K)
*10.08 Employment Agreement between Eastman Chemical Company and 94
Harold L. Henderson
*10.09 Eastman Excess Retirement Income Plan (incorporated herein by
reference to Exhibit 10.10 to the Form 10)
*10.10 Eastman Unfunded Retirement Income Plan (incorporated herein
by reference to Exhibit 10.11 to the Form 10)
*10.11 Eastman Employee Stock Ownership Plan Excess Plan 104
</TABLE>
60
<PAGE> 61
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<S> <C> <C>
*10.12 Eastman 1994-1996 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated
herein by reference to Exhibit 10.04 to the September 30, 1996
10-Q)
*10.13 Eastman 1995-1997 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated by
reference to Exhibit 10.05 to the September 30, 1996 10-Q)
*10.14 Eastman 1996-1998 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated by
reference to Exhibit 10.06 to the September 30, 1996 10-Q)
*10.15 Eastman 1997-1999 Long-Term Performance Subplan of 111
1994 Omnibus Long-Term Compensation Plan
10.16 Contribution Agreement, dated as of December 9, 1993, between
Eastman Kodak Company and Eastman Chemical Company
(incorporated herein by reference to Exhibit 10.07 to the S-1)
10.17 General Assignment, Assumption and Agreement Regarding
Litigation, Claims and Other Liabilities, dated as of December
31, 1993, between Eastman Kodak Company and Eastman Chemical
Company (incorporated herein by reference to Exhibit 10.08 to
the S-1)
10.18 Tax Sharing and Indemnification Agreement, dated as of
December 31, 1993, between Eastman Kodak Company and Eastman
Chemical Company (incorporated herein by reference to Exhibit
10.09 to the S-1)
10.19 Intellectual Property Agreement Non-Imaging, dated as of
December 31, 1993, between Eastman Kodak Company and Eastman
Chemical Company (incorporated herein by reference to Exhibit
10.12 to the S-1)
10.20 Imaging Chemicals License Agreement, dated as of December 31,
1993, between Eastman Kodak Company and Eastman Chemical
Company (incorporated herein by reference to Exhibit 10.13 to
the S-1)
11.01 Statement re Computation of Earnings Per Common Share 118
12.01 Statement re Computation of Ratios of Earnings to Fixed 119
charges
</TABLE>
61
<PAGE> 62
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<C> <S> <C>
21.01 Subsidiaries of the Company 120
23.01 Consent of Independent Accountants 122
27.01 Financial Data Schedule (for SEC use only)
99.01 Supplemental Business Segment Information 123
99.02 Restated Business Segment Information 124
</TABLE>
- ------------------------------
* Management contract or compensatory plan or arrangement filed pursuant to
Item 601(b)(10)(iii) of Regulation S-K.
62
<PAGE> 1
EXHIBIT 4.08
EASTMAN CHEMICAL COMPANY
FORM OF 7.60% DEBENTURE DUE FEBRUARY 1, 2027
[FACE OF SECURITY]
CUSIP No. 277 432 AD2
THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE
INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF A DEPOSITARY
OR A NOMINEE THEREOF. THIS SECURITY MAY NOT BE EXCHANGED IN WHOLE OR IN PART FOR
A SECURITY REGISTERED, AND NO TRANSFER OF THIS SECURITY IN WHOLE OR IN PART MAY
BE REGISTERED, IN THE NAME OF ANY PERSON OTHER THAN SUCH DEPOSITARY OR A NOMINEE
THEREOF, EXCEPT IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE.
Unless this certificate is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC"), to Eastman Chemical
Company or its agent for registration of transfer, exchange, or payment, and any
certificate issued is registered in the name of Cede & Co. or in such other name
as is requested by an authorized representative of DTC (and any payment is made
to Cede & Co. or to such other entity as is requested by an authorized
representative of DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL inasmuch as the registered owner
hereof, Cede & Co., has an interest herein.
EASTMAN CHEMICAL COMPANY
7.60% Debentures due February 1, 2027
No. D-1 $300,000,000
EASTMAN CHEMICAL COMPANY, a corporation duly organized and existing under
the laws of the State of Delaware (herein called the "Company", which term
includes any successor Person under the Indenture hereinafter referred to), for
value received, hereby promises to pay to CEDE & CO., or registered assigns, the
principal sum of Three Hundred Million Dollars on February 1, 2027, and to pay
interest thereon from February 3, 1997 or from the most recent Interest Payment
Date to which interest has been paid or duly provided for, semi-annually on
February 1 and August 1 in each year, commencing August 1, 1997, at the rate of
7.60% per annum, until the principal hereof is paid or made available for
payment. The interest so payable, and punctually paid or duly provided for, on
any Interest Payment Date will, as provided in such Indenture, be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on the Regular Record Date for such
interest, which shall be the January 15 or July 15 (whether or not a Business
Day), as the case may be, next preceding such Interest Payment Date. Any such
interest not so punctually paid or duly provided for will forthwith cease to be
payable to the Holder on such Regular Record Date and may either be paid to the
Person in whose name this Security (or one or more Predecessor Securities) is
registered at the close of business on a Special Record Date for the payment of
such Defaulted Interest to be fixed by the Trustee, notice whereof shall be
given to Holders of Securities of this series not less than 10 days prior to
such Special Record Date, or be paid at any time in any other lawful manner not
inconsistent with the requirements of any securities exchange on which the
Securities of this series may be listed, and upon such notice as may be required
by such exchange, all as more fully provided in said Indenture. Interest on the
Securities of each series shall be computed on the basis of a 360-day year of
twelve 30-day months.
63
<PAGE> 2
Payment of the principal of (and premium, if any) and any such interest on
this Security will be made at the office or agency of the Company maintained for
that purpose in The City of New York, in such coin or currency of the United
States of America as at the time of payment is legal tender for payment of
public and private debts; provided, however, that at the option of the Company
payment of interest may be made by check mailed to the address of the Person
entitled thereto as such address shall appear in the Security Register.
Reference is hereby made to the further provisions of this Security set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
Unless the certificate of authentication hereon has been executed by the
Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
64
<PAGE> 3
In Witness Whereof, the Company has caused this instrument to be duly
executed under its corporate seal.
EASTMAN CHEMICAL COMPANY
By
-----------------------
Attest:
- ------------------------
CERTIFICATE OF AUTHENTICATION
This is one of the Securities of the series designated therein
referred to in the within-mentioned Indenture.
Dated: February 3, 1997 THE BANK OF NEW YORK,
As Trustee
By
------------------------
Authorized Signatory
65
<PAGE> 4
[REVERSE OF SECURITY]
This Security is one of a duly authorized issue of securities of the
Company (herein called the "Securities"), issued and to be issued in one or more
series under an Indenture, dated as of January 10, 1994 (herein called the
"Indenture", which term shall have the meaning assigned to it in such
instrument), between the Company and The Bank of New York, as Trustee (herein
called the "Trustee", which term includes any successor trustee under the
Indenture), and reference is hereby made to the Indenture for a statement of the
respective rights, limitations of rights, duties and immunities thereunder of
the Company, the Trustee and the Holders of the Securities and of the terms upon
which the Securities are, and are to be, authenticated and delivered. This
Security is one of the series designated on the face hereof, limited in
aggregate principal amount to $300,000,000.
The Indenture contains provisions for defeasance at any time of the entire
indebtedness of this Security or certain restrictive covenants and Events of
Default with respect to this Security, in each case upon compliance with certain
conditions set forth in the Indenture.
If an Event of Default with respect to Securities of this series shall
occur and be continuing, the principal of the Securities of this series may be
declared due and payable in the manner and with the effect provided in the
Indenture.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the Securities at
the time Outstanding of each series to be affected. The Indenture also contains
provisions permitting the Holders of specified percentages in principal amount
of the Securities of each series at the time Outstanding, on behalf of the
Holders of all Securities of such series, to waive compliance by the Company
with certain provisions of the Indenture and certain past defaults under the
Indenture and their consequences. Any such consent or waiver by the Holder of
this Security shall be conclusive and binding upon such Holder and upon all
future Holders of this Security and of any Security issued upon the registration
of transfer hereof or in exchange herefor or in lieu hereof, whether or not
notation of such consent or waiver is made upon this Security.
As provided in and subject to the provisions of the Indenture, the Holder
of this Security shall not have the right to institute any proceeding with
respect to the Indenture or for the appointment of a receiver or trustee or for
any other remedy thereunder, unless such Holder shall have previously given the
Trustee written notice of a continuing Event of Default with respect to the
Securities of this series, the Holders of not less than 25% in principal amount
of the Securities of this series at the time Outstanding shall have made written
request to the Trustee to institute proceedings in respect of such Event of
Default as Trustee and offered the Trustee reasonable indemnity, and the Trustee
shall not have received from the Holders of a majority in principal amount of
Securities of this series at the time Outstanding a direction inconsistent with
such request, and shall have failed to institute any such proceeding, for 60
days after receipt of such notice, request and offer of indemnity. The foregoing
shall not apply to any suit instituted by the Holder of this Security for the
enforcement of any payment of principal hereof or any premium or interest hereon
on or after the respective due dates expressed herein.
No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of and any premium and interest
on this Security at the times, place and rate, and in the coin or currency,
herein prescribed.
As provided in the Indenture and subject to certain limitations therein set
forth, the transfer of this Security is registrable in the Security Register,
upon surrender of this Security for registration of transfer at the office or
agency of the Company in any place where the principal of and any premium and
interest on this Security are payable, duly endorsed by, or accompanied by a
written instrument of transfer in form satisfactory to the Company and the
Security Registrar duly executed by, the Holder hereof or his attorney
66
<PAGE> 5
duly authorized in writing, and thereupon one or more new Securities of this
series and of like tenor, of authorized denominations and for the same aggregate
principal amount, will be issued to the designated transferee or transferees.
The Securities of this series are issuable only in registered form without
coupons in denominations of $1,000 and any integral multiple thereof. As
provided in the Indenture and subject to certain limitations therein set forth,
Securities of this series are exchangeable for a like aggregate principal amount
of Securities of this series and of like tenor of a different authorized
denomination, as requested by the Holder surrendering the same.
No service charge shall be made for any such registration of transfer or
exchange, but the Company may require payment of a sum sufficient to cover any
tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer, the
Company, the Trustee and any agent of the Company or the Trustee may treat the
Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
All terms used in this Security which are defined in the Indenture shall
have the meanings assigned to them in the Indenture.
THIS INDENTURE AND THE SECURITIES SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAW OF THE STATE OF NEW YORK.
67
<PAGE> 1
EXHIBIT 4.09
EASTMAN CHEMICAL COMPANY
Officers' Certificate Pursuant to
Sections 201 and 301 of the Indenture
Pursuant to resolutions of the Board of Directors adopted by
unanimous consents, dated November 12, 1993 and December 4, 1993 (the
"Resolutions"), of Eastman Chemical Company (the "Company"), and the
determination, dated January 29, 1997 (the "Determination"), of a Designated
Officer (as defined in the Resolutions) of the Company pursuant to the
Resolutions and Sections 201 and 301 of the Indenture, dated as of January 10,
1994 (the "Indenture"), between the Company and The Bank of New York, as Trustee
(the "Trustee"), the undersigned certify that the terms of the series of
Debentures established pursuant to the Resolutions, the Determination and
Section 301 of the Indenture shall be as follows. Capitalized terms not defined
herein shall have the meanings assigned to them in the Indenture or the
Prospectus, dated January 30, 1997, and the Prospectus Supplement, dated January
30, 1997.
(a) The title of the series of Debt Securities is "7.60% Debentures due
February 1, 2027" (the Debentures").
(b) The aggregate principal amount of the Debentures that may be
authenticated and delivered under the Indenture shall be $300,000,000
(except for Debentures authenticated and delivered upon registration
of transfer of, or in exchange for, or in lieu of, other Debentures
pursuant to Section 304, 305, 306, 906 or 1107 of the Indenture and
except for any Debentures that, pursuant to Section 303, are deemed
never to have been delivered thereunder).
(c) Each Debenture shall mature, and the principal amount thereof shall be
payable, on February 1, 2027.
(d) The rate at which each Debenture shall bear interest shall be 7.60%
per annum. Each Debenture shall bear interest from February 3, 1997 or
from the last date to which payment of interest has been made or duly
provided for. Interest on the Debentures shall be payable
semi-annually on February 1 and August 1 of each year (each an
"Interest Payment Date"), commencing August 1, 1997. Interest shall be
payable to the person in whose name a Debenture is registered at the
close of business on the January 15 or July 15, as the case may be,
next preceding each Interest Payment Date.
(e) The Debentures may not be redeemed by the Company prior to Maturity.
(f) The Debentures will not have the benefit of any sinking fund and the
provisions of Article 13 of the Indenture relating to defeasance and
covenant defeasance will apply to the Debentures.
(g) The Debentures shall be issued initially in the form of one or more
Global Securities (collectively, the "Global Note") and the Depository
for such Global Note shall initially be The Depository Trust Company
("DTC"). Initially, the Global Note shall be issued to DTC, registered
in the name of Cede & Co., as the nominee of DTC.
Except as otherwise set forth herein, in the Indenture or in the
Global Note, owners of beneficial interests in the Debentures
evidenced by the Global Note will not be entitled to any rights under
the Indenture with respect to the Global Note, and the Depository may
be treated by the Company, the Trustee, and any agent of the Company
or the Trustee as the owner of the Global Note for all purposes
whatsoever.
68
<PAGE> 2
(h) The Debentures shall be unsecured and unsubordinated obligations of
the Company, and shall rank pari passu with the Company's other
unsecured and unsubordinated indebtedness.
(i) The Debentures shall be substantially in the form of Annex A attached
hereto, with such modifications thereto as may be approved by a
Designated Officer.
IN WITNESS WHEREOF, the undersigned, hereunto duly authorized, has
duly signed and delivered, or caused to be delivered, to the Trustee
under the Indenture, this Officer's Certificate.
Dated: February 3, 1997
/s/ Larry A. Munsey
---------------------------
Larry A. Munsey
Treasurer of the Company
/s/ H. Virgil Stephens
---------------------------
H. Virgil Stephens
Senior Vice President and
Chief Financial Officer
CERTIFICATION
I, Gary R. Whitaker, Assistant Secretary of the Company, do hereby certify
that H. Virgil Stephens is on the date hereof the duly elected or appointed
Chief Financial Officer of the Company and is a Senior Vice President of the
Company and the signature set forth above is his own true signature, and further
certify that Larry A. Munsey is on the date hereof the duly elected or appointed
Treasurer of the Company and the signature set forth above is his own true
signature.
/s/ Gary R. Whitaker
---------------------------
Gary R. Whitaker
Assistant Secretary
69
<PAGE> 1
EXHIBIT 10.01
EASTMAN ANNUAL PERFORMANCE PLAN, AS AMENDED
ARTICLE 1. PURPOSE
The Eastman Annual Performance Plan ("APP", or the "Plan") is a variable
compensation plan for Eastman Chemical Company (the "Company") management level
individuals which is designed to deliver a portion of annual cash compensation
according to business performance. APP is intended to provide an incentive for
superior performance and to motivate participants toward higher achievement and
business results, and to tie the interests of management-level individuals to
the interests of the Company and its shareowners. The Annual Performance Plan is
also intended to secure the full deductibility of Plan compensation payable to
the Company's Chief Executive Officer and the four highest compensated executive
officers (collectively, the "Covered Employees") whose compensation is required
to be reported in the Company's proxy statement, and all compensation payable
hereunder to such persons is intended to qualify as "performance-based
compensation" as described in Section 162(m) of the Internal Revenue Code of
1986, as amended.
ARTICLE 2. SUMMARY OF PLAN DESIGN
The annual cash compensation of each participant in the Plan consists of a base
salary, an annual Eastman Performance Plan award, and an annual performance
award from the Annual Performance Plan. APP is designed so that a target award
will be paid when the expected financial performance level is reached.
Generally, APP awards vary from zero, if financial goals are not met, to two
times the target award for specified above-goal performance. Target awards range
from 5% of Target Total Annual Compensation ("TTAC"), as defined in Exhibit 1,
for lower management positions, to 35% of TTAC for the Chief Executive Officer.
APP awards are in addition to the 5% target award level for the Eastman
Performance Plan. APP awards are paid in a lump sum in March of the year
following the year for which performance was measured ("Performance Year").
ARTICLE 3. ELIGIBILITY AND PARTICIPATION
3.01 GENERAL ELIGIBILITY
The Plan is designed for management-level individuals (salary grade 46 and
above) in key roles which have an impact on the financial performance of the
Company. Prior to or at the time performance objectives are established for a
Performance Year, the Compensation and Management Development Committee (the
"Committee") of the Board of Directors (the "Board") will confirm in writing the
salary grade level of the individuals eligible to participate in the Plan for
such Performance Year.
3.02 NEW PARTICIPANTS DURING THE PERFORMANCE YEAR
Individuals who are appointed to positions eligible for Plan participation
during the Performance Year become eligible for participation on the first day
of the month of the appointment. Individuals who become participants during the
Performance Year will receive a pro rata award based upon the number of months
in an eligible position during the Performance Year. (For example, an individual
promoted to an eligible position on May 1 during the Performance Year would
receive an award based upon eight months' participation in the Plan, or 8/12
(eight-twelfths) of an award).
3.03 JOB CHANGES DURING THE PERFORMANCE YEAR
Participants who change jobs during a Performance Year which results in a change
of their target award level will receive a pro rata award for the interval of
time spent in each job. Each pro rata award is calculated using the
participant's base salary just prior to each job change which changes their
target award level; and their base pay at the end of the Performance Year. Each
pro rata award is based on the financial performance of the full Performance
Year. In these instances, each pro rata award will compose the participant's
award for the full Performance Year.
70
<PAGE> 2
3.04 TERMINATIONS
Participants who (1) retire, or (2) become disabled under the Eastman Long-Term
Disability Plan, or (3) terminate employment under circumstances which qualify
for a Termination Allowance Benefit under the Company's Termination Allowance
Plan, or (4) terminate employment as a result of, pursuant to, or in connection
with layoff, special separation, divestiture, or similar circumstances, where
such termination does not qualify for a Termination Allowance but for which
Company management in its sole discretion authorizes an award, receive a pro
rata award at the normal time of payout based on base salary at the time of
separation and financial performance at the end of the Performance Year.
The estates of participants who die receive a pro rata award at the normal time
of payout based on base salary at the time of death and financial performance at
the end of the Performance Year.
Participants who terminate employment with the Company for reasons other than
those specified under this Section 3.04 will receive an award only if they were
actively employed on the last scheduled workday of the Performance Year.
ARTICLE 4. PERFORMANCE YEAR, GOAL SETTING, AND PERFORMANCE GOALS
4.01 PERFORMANCE YEAR
The Plan's Performance Year shall be the calendar year beginning on January 1
and ending on December 31. The performance period with respect to which payouts
may be payable under the APP shall generally be the Performance Year.
4.02 PERFORMANCE GOAL SETTING
In December of each year, The Chief Executive Officer will recommend performance
goals for the following Performance Year to the Committee. No later than the
first day of the Performance Year (or such later date as may be permitted by
Section 162(m) of the Internal Revenue Code of 1986, as amended), the Committee
shall establish in writing, with respect to the Performance Year, one or more
performance goals, the relative weights to be assigned to such goals, a specific
target objective or objectives with respect to such performance goals, and
objective formulae or methods for computing the amount of the APP award payable
to each participant if the performance goals are attained.
4.03 PERFORMANCE GOALS
Performance goals shall be based upon one or more of the following business
criteria, alone or in combination, for the Company as a whole, as the Committee
deems appropriate: (i) economic value created; (ii) productivity; (iii) cost
improvements; (iv) cash flow; (v) sales revenue growth; (vi) earnings from
operations; (vii) quality; (viii) customer satisfaction. Performance goals will
include a minimum, maximum, and target level of performance, with the size of
the award based upon the level attained for each of the criteria selected, and
the weighting selected for each of the criteria. Once established, performance
goals for a particular Performance Year cannot be changed.
ARTICLE 5. AWARD DETERMINATION
5.01 CERTIFICATION OF PERFORMANCE
As soon as practicable following the availability of performance results for the
completed Performance Year, the Committee shall determine the Company's
performance in relation to the performance goals for that period and certify in
writing the extent to which performance goals were satisfied. Measurement of the
Company's performance against the performance goals established by the Committee
shall be objectively determinable, and to the extent they are expressed in
standard accounting terms, they shall be determined according to generally
accepted accounting principles as in existence on the date on which the
performance goals are established and without regard to any changes in such
principles after such date.
71
<PAGE> 3
5.02 CALCULATION AND REVIEW/APPROVAL
Based upon the Company's performance against the performance goals, and the
formulae or methods established, the APP award for each participant is
calculated. (The calculation method for the Plan is illustrated in Exhibit 1).
The Committee shall approve the APP award amounts for participants who are
members of the Board of Directors and for participants who are "Covered
Employees" as defined in Section 162(m)(3) of the Internal Revenue Code of 1986;
and review the APP award amounts for other executive officers of the Company.
5.03 AWARD ADJUSTMENTS
The Committee shall have no discretion to increase the amount of any
participant's award as so determined, but may reduce the amount of or totally
eliminate such award, if it determines, in its absolute and sole discretion,
that such a reduction or elimination is appropriate in order to reflect the
participant's performance or unanticipated factors.
5.04 MAXIMUM AWARD PAYABLE IN PERFORMANCE YEAR
No participant's APP award for any Performance Year shall exceed $1,000,000.
ARTICLE 6. PAYMENT OF AWARDS
APP awards shall be paid by the Company in March for performance in the previous
year, and after the Committee has certified in writing that the relevant
performance goals were achieved. The Committee has the authority, in its
discretion, to defer payment of a participant's award into the Executive
Deferred Compensation Plan until the participant retires or otherwise terminates
employment, if the Committee determines that payment of the award could result
in the participant receiving compensation in excess of the maximum amount
deductible by the Company for Federal income tax purposes.
ARTICLE 7. SALARY ADJUSTMENTS AND BENEFITS
7.01 SALARY ADJUSTMENT UPON ENTRY INTO THE APP
The Plan is a variable compensation, or pay at risk, program whereby
participants have their base salary administered on reduced rate ranges. New
participants to the Plan are immediately administered on the reduced rate range
for their assigned salary grade. This may reduce or eliminate promotional
increases, depending upon the person's pay position in the rate range of the new
salary grade. Subsequent salary treatment will depend upon pay/performance
relationships in the reduced rate range for their assigned grade.
7.02 SALARY CONVERSION UPON WITHDRAWAL FROM THE APP
In unusual circumstances when it is necessary for an individual to be removed
from the Plan, the individual will be placed on a non-APP rate schedule and the
base salary recalculated. The recalculated base salary will be determined by
calculating the ratio of the individual's base salary prior to removal from the
Plan to the midpoint of the APP rate schedule, and applying the same ratio to
the midpoint of the non-APP rate schedule, to determine the new base salary.
Should the removal from the Plan involve a reduction in salary grade, a new rate
in the new salary grade will be selected based upon the individual's applicable
training and experience.
7.03 RELATIONSHIP TO BENEFITS AND OTHER COMPENSATION
The APP award payout is considered in calculating the basis for other
compensation and benefits. Base salary, the actual APP payout and the actual
Eastman Performance Plan payout are included in calculating retirement benefits.
Base salary, the target APP award payout and the target Eastman Performance Plan
payout are
72
<PAGE> 4
included in the basis for calculating the actual APP payout, the actual Eastman
Performance Plan payout, life insurance, long-term disability, termination
allowance, miscellaneous expense allowance, and foreign service premium. The
base salary rate is the basis for calculating short-term disability, vacation
pay, holiday pay, personal absence, and field allowance.
ARTICLE 8. OTHER TERMS AND CONDITIONS
8.01 SHAREOWNER APPROVAL
No APP award payment shall be paid under the Plan to any "Covered Employee" for
any Performance Year after 1996 unless and until the material terms (within the
meaning of Section 162(m) of the Internal Revenue Code of 1986) of the APP,
including the performance goals on which the APP award payout would be based,
are disclosed to the Company's shareowners and are approved by the shareowners
by a majority of the votes cast.
8.02 CLAIMS
No person shall have any legal claim to be granted an award under the Plan.
Except as may be otherwise required by law, payouts under the Plan shall not be
subject in any manner to anticipation, alienation, sale, transfer, assignment,
pledge, encumbrance, charge, garnishment, execution, or levy of any kind, either
voluntary or involuntary. Plan payouts shall be payable from the general assets
of the Company and no participant shall have any claim with respect to any
specific assets of the Company.
8.03 NO EMPLOYMENT RIGHTS
Neither the Annual Performance Plan nor any action taken under the Annual
Performance Plan shall be construed as giving any employee the right to be
retained in the employ of the Company or to maintain any participant's
compensation at any level.
8.04 WITHHOLDING
The Company shall have the power and the right to deduct or withhold, or require
a Participant to remit to the Company, an amount sufficient to satisfy Federal,
state, and local taxes (including the participant's OASDI and MEDI obligation)
required by law to be withheld.
ARTICLE 9. ADMINISTRATION
9.01 POWER AND AUTHORITY OF THE COMMITTEE
All members of the Committee shall be persons who qualify as "outside directors"
as defined under Section 162(m) of the Internal Revenue Code. The Committee
shall have full power and authority to administer and interpret the provisions
of the Plan and to adopt such rules, regulations, agreements, guidelines, and
instruments for the administration of the Plan and for conduct of its business
as the Committee deems appropriate or advisable. The Committee sets and
interprets policy, establishes annual performance goals, evaluates Company
performance against the goals, and confirms and certifies the extent to which
Company performance goals were satisfied under the Plan.
9.02 COMMITTEE'S DELEGATION OF AUTHORITY
Except with respect to matters which under Section 162(m) of the Internal
Revenue Code are required to be determined in the sole and absolute discretion
of the Committee, the Committee shall have full power to delegate to any officer
or employee of the Company the authority to administer and interpret the
procedural aspects of the Plan, subject to the Plan's terms, including adopting
and enforcing rules to decide procedural and administrative issues.
73
<PAGE> 5
9.03 AMENDING OR TERMINATING THE PLAN
By action of the Committee, the Plan may be amended, modified, suspended, or
terminated, in whole or in part, at any time for any reason. Unless otherwise
prohibited by applicable law, any amendment required to conform the Plan to the
requirements of Section 162(m) of the Internal Revenue Code may be made by the
Committee. No amendment may be made to the class of individuals who are eligible
to participate in the Plan, the performance criteria specified in Article 4, or
the maximum Plan payout payable to any participant without shareowner approval
unless shareowner approval is not required in order for payouts paid to "Covered
Employees" to constitute qualified performance-based compensation under Section
162(m) of the Internal Revenue Code.
ARTICLE 10. PLAN AUDIT
The Vice President, Human Resources and Communications and Public Affairs, has
responsibility for monitoring and reporting on the administration and
effectiveness of the Plan. The Vice President's role is to provide independent,
objective appraisal and guidance to both the Committee and to the Chief
Executive Officer in the administration of the APP. Each year, the Vice
President will provide a formal review to the Committee and the CEO on the
overall effectiveness of the APP.
74
<PAGE> 6
EXHIBIT 1. CALCULATION OF THE ANNUAL PERFORMANCE PLAN PAYOUT
Awards are paid based on goal achievement. In the example below, three
performance goals have been selected for the relevant Performance Year with a
weighting of 50% for goal number 1, 25% for goal number 2, and 25% for goal
number 3. Weighted performance is calculated on a scale ranging from zero (0%,
or no payout at this level of performance) to 200% (or 2 times target
performance), with target performance at 100% (or 1 times target performance
level). In this way, regardless of their target award percentage (5% to 35%),
the performance for all participants can be calculated using the same scale. In
the example, the performance for goal 1 is 125% on the scale of 0 to 200%,
resulting in a weighted performance (50% times 125%) of 62.5%. Goal 2
performance is 94% on the scale, resulting in a weighted performance of 23.5%
(25% times 94%). Goal 3 performance is 116%, resulting in weighted performance
of 29% (25% times 116%). Adding the weighted performance factors together
results in a total weighted performance of 115%.
PERFORMANCE LEVELS
Example:
Performance Level: A B C D E
Performance Percent: 200% 150% 100% 50% 0%
<TABLE>
<CAPTION>
Goal Weighted
Goals Weighting X Performance Level = Performance
- ----- --------- --- ----------------- -----------
<S> <C> <C> <C> <C> <C>
#1 50% X 125% = 62.5%
#2 25% X 94% = 23.5%
#3 35% X 116% = 29.0%
---------------
Total 115.0%
</TABLE>
In this example, assume that the participant has a year-end base salary of
$100,000 and a target award level of 10%. To calculate this participant's award,
the Target Total Annual Compensation is calculated as described below. Then the
target award for the performance year is determined. Knowing the target award
and the total weighted performance (115% from above), the APP payout can be
calculated.
Target Total Annual Compensation = Base Salary divided by [1 minus (the target
award percent+Eastman Performance Plan 5%)].
$100,000
In this example: ------------ = $117,647 = Target Total Annual
1-(.10+.05) Compensation
Target Payout = Target Total Annual Compensation times Target Award %
Target Payout = $117,647 X 10% = $11,765.
APP Payout = Target Payout times Total Weighted Performance
APP Payout = $11,765 X 115% = $13,530
75
<PAGE> 1
EXHIBIT 10.05
THIRD AMENDED AND RESTATED
EASTMAN DIRECTORS' DEFERRED COMPENSATION PLAN
Preamble. The Third Amended and Restated Eastman Directors' Deferred
Compensation Plan is an unfunded, non-qualified deferred compensation
arrangement for non-employee members of the Board of Directors of Eastman
Chemical Company (the "Company"). Under the Plan, each Eligible Director is
annually given an opportunity to elect to defer payment of part of his or her
compensation for serving as a Director. This Plan originally was adopted
effective January 1, 1994, was amended and restated effective as of December 1,
1994 and as of May 2, 1996, and is further amended and restated effective as of
October 10, 1996.
Section 1. Definitions.
Section 1.1. "Account" means the Interest Account or the Stock Account.
Section 1.2. "Board" means the Board of Directors of the Company.
Section 1.3. "Change In Control" means a change in control of the Company
of a nature that would be required to be reported (assuming such event has
not been "previously reported") in response to Item 1(a) of a Current
Report on Form 8-K, as in effect on August 1, 1993, pursuant to Section 13
or 15(d) of the Exchange Act; provided that, without limitation, a Change
In Control shall be deemed to have occurred at such time as (i) any
"person" within the meaning of Section 14(d) of the Exchange Act, other
than the Company, a subsidiary of the Company, or any employee benefit
plan(s) sponsored by the Company or any subsidiary of the Company, is or
has become the "beneficial owner," as defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of 25% or more of the combined voting
power of the outstanding securities of the Company ordinarily having the
right to vote at the election of directors; provided, however, that the
following will not constitute a Change In Control: any acquisition by any
corporation if, immediately following such acquisition, more than 75% of
the outstanding securities of the acquiring corporation ordinarily having
the right to vote in the election of directors is beneficially owned by all
or substantially all of those persons who, immediately prior to such
acquisition, were the beneficial owners of the outstanding securities of
the Company ordinarily having the right to vote in the election of
directors; or (ii) individuals who constitute the Board on January 1, 1994
(the "Incumbent Board") have ceased for any reason to constitute at least a
majority thereof, provided that: any person becoming a director subsequent
to January 1, 1994 whose election, or nomination for election by the
Company's shareowners, was approved by a vote of at least three-quarters
(3/4) of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in which such
person is named as a nominee for director without objection to such
nomination) shall be, for purposes of the Plan, considered as though such
person were a member of the Incumbent Board; or (iii) upon approval by the
Company's shareowners of a reorganization, merger or consolidation, other
than one with respect to which all or substantially all of those persons
who were the beneficial owners, immediately prior to such reorganization,
merger or consolidation, of outstanding securities of the Company
ordinarily having the right to vote in the election of directors own,
immediately after such transaction, more than 75% of the outstanding
securities of the resulting corporation ordinarily having the right to vote
in the election of directors; or (iv) upon approval by the Company's
stockholders of a complete liquidation and dissolution of the Company or
the sale or other disposition of all or substantially all of the assets of
the Company other than to a subsidiary of the Company.
76
<PAGE> 2
Notwithstanding the occurrence of any of the foregoing, the Board of
Directors may determine, if it deems it to be in the best interest of the
Company, that an event or events otherwise constituting a Change in Control
shall not be so considered. Such determination shall be effective only if
it is made by the Board of Directors prior to the occurrence of an event
that otherwise would be or probably will lead to a Change In Control or
after such event if made by the Board of Directors a majority of which is
composed of directors who were members of the Board immediately prior to
the event that otherwise would be or probably will lead to a Change In
Control.
Section 1.4. "Committee on Directors" means the Committee on Directors of
the Board.
Section 1.5. "Common Stock" means the $.01 par value common stock of the
Company.
Section 1.6. "Company" means Eastman Chemical Company.
Section 1.7. "Deferrable Amount" means an amount equal to the sum of the
Eligible Director's cash compensation, including retainer, meeting fees,
and any other compensation otherwise payable in cash.
Section 1.8. "Eligible Director" means a member of the Board of Directors
of the Company who is not an employee of the Company or any subsidiary of
the Company.
Section 1.9. "Enrollment Period" means the period designated by the
Committee on Directors each year; provided however, that such period shall
end on or before December 31 of each year.
Section 1.10. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
Section 1.11. "Interest Account" means the account established by the
Company for each Participant for compensation deferred pursuant to this
Plan and which shall bear interest as described in Section 4.1 below. The
maintenance of individual Interest Accounts is for bookkeeping purposes
only.
Section 1.12. "Interest Rate" means the monthly average of bank prime
lending rates to most favored customers as published in The Wall Street
Journal, such average to be determined as of the last day of each month.
Section 1.13. "Market Value" means the closing price of the shares of
Common Stock on the New York Stock Exchange on the day on which such value
is to be determined or, if no such shares were traded on such day, said
closing price on the next business day on which such shares are traded;
provided, however, that if at any relevant time the shares of Common Stock
are not traded on the New York Stock Exchange, then "Market Value" shall be
determined by reference to the closing price of the shares of Common Stock
on another national securities exchange, if applicable, or if the shares
are not traded on an exchange but are traded in the over-the-counter
market, by reference to the last sale price or the closing "asked" price of
the shares in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System (NASDAQ) or
other national quotation service.
Section 1.14. "Plan" means this Third Amended and Restated Eastman
Directors' Deferred Compensation Plan.
Section 1.15. "Participant" means an Eligible Director who elects for one
or more years to defer compensation pursuant to this Plan.
77
<PAGE> 3
Section 1.16. "Stock Account" means the account established by the Company
for each Participant, the performance of which shall be measured by
reference to the Market Value of Common Stock. The maintenance of
individual Stock Accounts is for bookkeeping purposes only.
Section 1.17. "Valuation Date" means each business day.
Section 2. Deferral of Compensation. An Eligible Director may elect to defer
receipt of all or any portion of his or her Deferrable Amount to his or her
Interest Account and/or Stock Account. No deferral shall be made of any
compensation payable after termination of the Eligible Director's service on the
Board.
Section 3. Time of Election of Deferral. An Eligible Director who wishes to
defer compensation must irrevocably elect to do so during the applicable
Enrollment Period. The Enrollment Period shall end on or before December 31 of
the calendar year immediately preceding the year in which the Eligible
Director's applicable Deferrable Amount will be earned. Elections shall be made
annually.
Section 4. Hypothetical Investments.
Section 4.1. Interest Account. Amounts in a Participant's Interest Account
are hypothetically invested in an interest bearing account which bears
interest computed at the Interest Rate, compounded monthly.
Section 4.2. Stock Account. Amounts in a Participant's Stock Account are
hypothetically invested in units of Common Stock. Amounts deferred into a
Stock Account are recorded as units of Common Stock, and fractions thereof,
with one unit equating to a single share of Common Stock. Thus, the value
of one unit shall be the Market Value of a single share of Common Stock.
The use of units is merely a bookkeeping convenience; the units are not
actual shares of Common Stock. The Company will not reserve or otherwise
set aside any Common Stock for or to any Stock Account. The maximum number
of Common Stock units that may be hypothetically purchased by deferral of
compensation to Stock Accounts under this Plan is 80,000.
Section 5. Deferrals and Crediting Amounts to Accounts.
Section 5.1. Manner of Electing Deferral. An Eligible Director may elect to
defer compensation by executing and returning to the Committee on Directors
a deferred compensation form provided by the Company. The form shall
indicate: (i) the amount of Deferrable Amount to be deferred; and (ii) the
portion of the deferral to be credited to the Participant's Interest
Account and Stock Account, respectively. An election to defer compensation
shall be irrevocable following the end of the applicable Enrollment Period,
but the portion of the deferral to be credited to the Participant's
Interest Account and Stock Account, respectively, may be reallocated by the
Participant in the manner specified by the Committee on Directors or its
authorized designee through and including the business day immediately
preceding the date on which the deferred amount is credited to the
Participant's Accounts pursuant to Section 5.2.
Section 5.2. Crediting of Amounts to Accounts. Amounts to be deferred shall
be credited to the Participant's Interest Account and/or Stock Account, as
applicable, as of the date such amounts are otherwise payable.
Section 6. Deferral Period. Subject to Sections 9, 10 and 17 hereof, the
compensation which a Participant elects to defer under this Plan shall be
deferred until the Participant ceases to serve as a member of the Board. Any
such election shall be made during the applicable Enrollment Period on the
deferred compensation form referenced in Section 5 above. The payment of a
Participant's account shall be governed by Sections 8, 9, 10 and 17, as
applicable.
78
<PAGE> 4
Section 7. Investment in the Stock Account and Transfers Between
Accounts.
Section 7.1. Election Into the Stock Account. If a Participant elects to
defer compensation into his or her Stock Account, his or her Stock Account
shall be credited, as of the date described in Section 5.2, with that
number of units of Common Stock, and fractions thereof, obtained by
dividing the dollar amount to be deferred into the Stock Account by the
Market Value of the Common Stock as of such date.
Section 7.2. Transfers Between Accounts. A Participant may direct that all
or any portion, designated as a whole dollar amount, of the existing
balance of one of his or her Accounts be transferred to his or her other
Account, effective as of (i) the date such election is made, if and only if
such election is made prior to the close of trading on the New York Stock
Exchange on a day on which the Common Stock is traded on the New York Stock
Exchange, or (ii) if such election is made after the close of trading on
the New York Stock Exchange on a given day or at any time on a day on which
no sales of Common Stock are made on the New York Stock Exchange, then on
the next business day on which the Common Stock is traded on the New York
Stock Exchange (the date described in (i) or (ii), as applicable, is
referred to hereinafter as the election's "Effective Date"). Such election
shall be made in the manner specified by the Committee on Directors or its
authorized designee during the period that begins on the third business day
following the public release of the Company's quarterly earnings report and
that ends on the last business day of the second calendar month following
the release of the Company's quarterly earnings report; provided, however,
that a Participant may only elect to transfer between his or her Accounts
if he or she has made no election within the previous six months to effect
an "opposite way" fund-switching (i.e., transfer out versus transfer in)
transfer into or out of the Stock Account or any other "opposite way"
intra-plan transfer or plan distribution involving a Company equity
securities fund which constitutes a "Discretionary Transaction" as defined
in Rule 16b-3 under the Exchange Act.
Section 7.3. Transfer Into the Stock Account. If a Participant elects
pursuant to Section 7.2 to transfer an amount from his or her Interest
Account to his or her Stock Account, effective as of the election's
Effective Date, (i) his or her Stock Account shall be credited with that
number of units of Common Stock, and fractions thereof, obtained by
dividing the dollar amount elected to be transferred by the Market Value of
the Common Stock on the Valuation Date immediately preceding the election's
Effective Date; and (ii) his or her Interest Account shall be reduced by
the amount elected to be transferred.
Section 7.4. Transfer Out of the Stock Account. If a Participant elects
pursuant to Section 7.2 to transfer an amount from his or her Stock Account
to his or her Interest Account, effective as of the election's Effective
Date, (i) his or her Interest Account shall be credited with a dollar
amount equal to the amount obtained by multiplying the number of units to
be transferred by the Market Value of the Common Stock on the Valuation
Date immediately preceding the election's Effective Date; and (ii) his or
her Stock Account shall be reduced by the number of units elected to be
transferred.
Section 7.5. Dividend Equivalents. Effective as of the payment date for
each cash dividend on the Common Stock, the Stock Account of each
Participant who had a balance in his or her Stock Account on the record
date for such dividend shall be credited with a number of units of Common
Stock, and fractions thereof, obtained by dividing (i) the aggregate dollar
amount of such cash dividend payable in respect of such Participant's Stock
Account (determined by multiplying the dollar value of the dividend paid
upon a single share of Common Stock by the number of units of Common Stock
held in the Participant's Stock Account on the record date for such
dividend); by (ii) the Market Value of the Common Stock on the Valuation
Date immediately preceding the payment date for such cash dividend.
79
<PAGE> 5
Section 7.6. Stock Dividends. Effective as of the payment date for each
stock dividend on the Common Stock, additional units of Common Stock shall
be credited to the Stock Account of each Participant who had a balance in
his or her Stock Account on the record date for such dividend. The number
of units that shall be credited to the Stock Account of such a Participant
shall equal the number of shares of Common Stock, and fractions thereof,
which the Participant would have received as stock dividends had he or she
been the owner on the record date for such stock dividend of the number of
shares of Common Stock equal to the number of units credited to his or her
Stock Account on such record date.
Section 7.7. Recapitalization. If, as a result of a recapitalization of the
Company, the outstanding shares of Common Stock shall be changed into a
greater number or smaller number of shares, the number of units credited to
a Participant's Stock Account shall be appropriately adjusted on the same
basis.
Section 7.8. Distributions. Amounts in respect of units of Common Stock may
only be distributed out of the Stock Account by transfer to the Interest
Account (pursuant to Sections 7.2 and 7.4 or 7.10) or withdrawal from the
Stock Account (pursuant to Section 8, 9, 10, or 17), and shall be
distributed in cash. The number of units to be distributed from a
Participant's Stock Account shall be valued by multiplying the number of
such units by the Market Value of the Common Stock as of the Valuation Date
immediately preceding the date such distribution is to occur.
Section 7.9.Responsibility for Investment Choices. Each Participant is
solely responsible for any decision to defer compensation into his or her
Stock Account and to transfer amounts to and from his or her Stock Account
and accepts all investment risks entailed by such decision, including the
risk of loss and a decrease in the value of the amounts he or she elects to
defer into his or her Stock Account.
Section 7.10. Liquidation of Stock Account. Upon the date that a
Participant ceases to serve on the Board, the entire balance, if any, of
the Participant's Stock Account shall automatically be transferred to his
or her Interest Account. For purposes of valuing the units of Common Stock
subject to such a transfer, the approach described in Section 7.8 shall be
used.
Section 8. Payment of Deferred Compensation.
Section 8.1. Background. No withdrawal may be made from a Participant's
Account except as provided in this Section 8 and Sections 9, 10 and 17.
Section 8.2. Manner of Payment. Payment of a Participant's Account shall be
made in a single lump sum or annual installments, in the sole discretion of
the Committee on Directors. The maximum number of annual installments is
ten. All payments from the Plan shall be made in cash.
Section 8.3. Timing of Payments. Payments shall be made by the fifth
business day in March and shall commence in any year designated in the sole
discretion of the Committee on Directors, up through the tenth year
following the year in which the Participant ceases to be a member of the
Board for any reason, but in no event shall payment commence later than the
year the Participant reaches age 71.
Section 8.4. Valuation. The amount of each payment shall be equal to the
value, as of the preceding Valuation Date, of the Participant's Account,
divided by the number of installments remaining to be paid.
80
<PAGE> 6
Section 9. Payment of Deferred Compensation After Death. If a Participant dies
prior to complete payment of his or her Accounts, the balance of such Accounts,
valued as of the Valuation Date immediately preceding the date payment is made,
shall be paid in a single, lump-sum payment to: (i) the beneficiary or
contingent beneficiary designated by the Participant on forms supplied by the
Committee on Directors; or, in the absence of a valid designation of a
beneficiary or contingent beneficiary, (ii) the Participant's estate within 30
days after appointment of a legal representative of the deceased Participant.
Section 10. Withdrawals.
Section 10.1. Acceleration of Payment for Hardship. Upon written approval
from the Company's Vice President, Human Resources, with respect to
Participants other than executive officers of the Company, and by the
Compensation Committee, with respect to Participants who are executive
officers of the Company, and subject to the restrictions in the next two
sentences, a Participant, whether or not he or she is still employed by the
Company or any of its U.S. Subsidiaries, may be permitted to receive all or
part of his or her Accounts if the Company's Vice President, Human
Resources, or the Compensation Committee, as applicable, determines that an
emergency event beyond the Participant's control exists which would cause
such Participant severe financial hardship if the payment of his or her
Accounts were not approved. Any such distribution for hardship shall be
limited to the amount needed to meet such emergency.
Section 10.2. Payment to Individuals. Any participant in the Eastman
Executive Deferred Compensation Plan may at his or her discretion withdraw
at any time all or part of that person's account balance under the Plan;
provided, if this option is exercised the individual will forfeit to the
Corporation 10% of his or her account balance or $50,000, whichever is
less, and will not be permitted to participate in this plan for a period of
36 months from date any payment to a participant is made under this
section.
Section 10.3. Accelerated Payment. If under Eastman Executive Deferred
Compensation Plan one-half or more of the Participants or one-fifth or more
of the Participants with one-half or more of the value of all benefits owed
exercise their option for immediate distribution in any consecutive
six-month period this will trigger immediate payment to all Participants of
all benefits owed under the terms of the plan. Immediate payout under this
section will not involve reduction of the amounts paid to Participants as
set forth in section 10.2. Any individual that has been penalized in this
six-month period for electing immediate withdrawal will be paid that
penalty, and continuing participation will be allowed, if payout to all
Participants under this section occurs.
Section 10.4. Section 16. A Section 16 Insider may only receive a
withdrawal from his or her Stock Account pursuant to this Section 10 if he
or she has made no election within the previous six months to effect a
fund-switching transfer into the Stock Account or the Eastman Stock Fund of
the Eastman Investment Plan or the Savings and Investment Plan Appendix, or
any other "opposite way" intra-plan transfer into a Company equity
securities fund which constitutes a "Discretionary Transaction" as defined
in Rule 16b-3 under the Exchange Act. If such a distribution occurs while
the Participant is employed by the Company or any of its U.S. Subsidiaries,
any election to defer compensation for the year in which the Participant
receives a withdrawal shall be ineffective as to compensation earned for
the pay period following the pay period during which the withdrawal is made
and thereafter for the remainder of such year and shall be ineffective as
to any other compensation elected to be deferred for such year.
Section 11. Participant's Rights Unsecured. The benefits payable under this Plan
shall be paid by the Company each year out of its general assets. To the extent
a Participant acquires the right to receive a payment under this Plan, such
right shall be no greater than that of an unsecured general creditor of the
81
<PAGE> 7
Company. No amount payable under this Plan may be assigned, transferred,
encumbered or subject to any legal process for the payment of any claim against
a Participant. No Participant shall have the right to exercise any of the rights
or privileges of a shareowner with respect to units credited to his or her Stock
Account.
Section 12. No Right to Continued Service. Participation in the Plan shall not
give any Participant any right to remain a member of the Board.
Section 13. Statement of Account. Statements will be sent no less frequently
than annually to each Participant or his or her estate showing the value of the
Participant's Accounts.
Section 14. Deductions. The Company will withhold to the extent required by law
all applicable income and other taxes from amounts deferred or paid under the
Plan.
Section 15. Administration.
Section 15.1. Responsibility. Except as expressly provided otherwise
herein, the Committee on Directors shall have total and exclusive
responsibility to control, operate, manage and administer the Plan in
accordance with its terms.
Section 15.2. Authority of the Committee on Directors. The Committee on
Directors shall have all the authority that may be necessary or helpful to
enable it to discharge its responsibilities with respect to the Plan.
Without limiting the generality of the preceding sentence, the Committee on
Directors shall have the exclusive right: to interpret the Plan, to
determine eligibility for participation in the Plan, to decide all
questions concerning eligibility for and the amount of benefits payable
under the Plan, to construe any ambiguous provision of the Plan, to correct
any default, to supply any omission, to reconcile any inconsistency, and to
decide any and all questions arising in the administration, interpretation,
and application of the Plan.
Section 15.3. Discretionary Authority. The Committee on Directors shall
have full discretionary authority in all matters related to the discharge
of its responsibilities and the exercise of its authority under the Plan
including, without limitation, its construction of the terms of the Plan
and its determination of eligibility for participation and benefits under
the Plan. It is the intent that the decisions of the Committee on Directors
and its action with respect to the Plan shall be final and binding upon all
persons having or claiming to have any right or interest in or under the
Plan and that no such decision or action shall be modified upon judicial
review unless such decision or action is proven to be arbitrary or
capricious.
Section 15.4. Delegation of Authority. The Committee on Directors may
delegate some or all of its authority under the Plan to any person or
persons provided that any such delegation be in writing.
Section 15.5. Restriction on Authority of the Committee on Directors. Under
any circumstances where the Committee on Directors is authorized to make a
discretionary decision concerning a payment of any type under this Plan to
a member of such Committee, the member of the Committee who is to receive
such payment shall take no part in the deliberations or have any voting or
other power with respect to such decision.
Section 16. Amendment. The Board may suspend or terminate the Plan at any time.
In addition, the Board may, from time to time, amend the Plan in any manner
without shareowner approval; provided, however, that the Board may condition any
amendment on the approval of shareowners if such approval is necessary or
advisable with respect to tax, securities, or other applicable laws. No
amendment, modification, or termination shall, without the consent of a
Participant, adversely affect such Participant's accruals in his or her Accounts
as of the date of such amendment, modification, or termination.
82
<PAGE> 8
Section 17. Change in Control.
Section 17.1. Background. The terms of this Section 17 shall immediately
become operative, without further action or consent by any person or
entity, upon a Change in Control, and once operative shall supersede and
control over any other provisions of this Plan.
Section 17.2. Acceleration of Payment Upon Change in Control. Upon the
occurrence of a Change in Control, each Participant, whether or not he or
she is still a Director, shall be paid in a single, lump-sum cash payment
the balance of his or her Accounts as of the Valuation Date immediately
preceding the date payment is made. Such payment shall be made as soon as
practicable, but in no event later than 90 days after the date of the
Change in Control.
Section 17.3. Amendment On or After Change in Control. On or after a Change
in Control, no action, including, but not by way of limitation, the
amendment, suspension or termination of the Plan, shall be taken which
would affect the rights of any Participant or the operation of this Plan
with respect to the balance in the Participant's Accounts.
Section 17.4. Attorney Fees. The Corporation shall pay all reasonable legal
fees and related expenses incurred by a participant in seeking to obtain or
enforce any payment, benefit or right such participant may be entitled to
under the plan after a Change in Control; provided, however, the
participant shall be required to repay any such amounts to the Corporation
to the extent a court of competent jurisdiction issues a final and
non-appealable order setting forth the determination that the position
taken by the participant was frivolous or advanced in bad faith.
Section 18. Governing Law. The Plan shall be construed, governed and enforced in
accordance with the law of Tennessee, except as such laws are preempted by
applicable federal law.
Section 19. Successors and Assigns. This Plan shall be binding upon the
successors and assigns of the parties hereto.
Section 20. Compliance with SEC Regulations. It is the Company's intent that the
Plan comply in all respects with Rule 16b-3 of the Exchange Act, and any
regulations promulgated thereunder. If any provision of the Plan is found not to
be in compliance with such rule, the provision shall be deemed null and void.
All transactions under the Plan, including, but not by way of limitation, a
Participant's election to defer compensation or transfer Account balances under
Section 7 and hardship withdrawals under Section 10, shall be executed in
accordance with the requirements of Section 16 of the Exchange Act, as amended
and any regulations promulgated thereunder. To the extent that any of the
provisions contained herein do not conform with Rule 16b-3 of the Exchange Act
or any amendments thereto or any successor regulation, then the Committee may
make such modifications so as to conform the Plan to the Rule's requirements.
83
<PAGE> 1
EXHIBIT 10.06
AMENDED AND RESTATED
EASTMAN EXECUTIVE DEFERRED COMPENSATION PLAN
Preamble. The Amended and Restated Eastman Executive Deferred Compensation Plan
is an unfunded, nonqualified deferred compensation arrangement for eligible
employees of Eastman Chemical Company ("the Company") and certain of its
subsidiaries. Under the Plan, each Eligible Employee is annually given an
opportunity to elect to defer payment of part of his or her cash compensation.
This Plan also assumed the liabilities accrued under the Kodak Executive
Deferred Compensation Plan, as of January 1, 1994, in respect of each Eligible
Employee who was actively employed by the Company as of such date and who chose
to transfer his or her deferred compensation account to the Company. This Plan
originally was adopted effective January 1, 1994, was amended effective March 2,
1994, and is further amended and restated effective as of October 10, 1996.
Section 1. Definitions.
Section 1.1. "Account" means the Interest Account or the Stock Account.
Section 1.2. "Board" means the Board of Directors of the Company.
Section 1.3. "Change In Control" means a change in control of the Company
of a nature that would be required to be reported (assuming such event has
not been "previously reported") in response to Item 1 (a) of a Current
Report on Form 8-K, as in effect on August 1, 1993, pursuant to Section 13
or 15(d) of the Exchange Act; provided that, without limitation, a Change
In Control shall be deemed to have occurred at such time as (i) any
"person" within the meaning of Section 14(d) of the Exchange Act, other
than the Company, a subsidiary of the Company, or any employee benefit
plan(s) sponsored by the Company or any subsidiary of the Company, is or
has become the "beneficial owner," as defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of 25% or more of the combined voting
power of the outstanding securities of the Company ordinarily having the
right to vote at the election of directors; provided, however, that the
following will not constitute a Change In Control: any acquisition by any
corporation if, immediately following such acquisition, more than 75% of
the outstanding securities of the acquiring corporation ordinarily having
the right to vote in the election of directors is beneficially owned by all
or substantially all of those persons who, immediately prior to such
acquisition, were the beneficial owners of the outstanding securities of
the Company ordinarily having the right to vote in the election of
directors, or (ii) individuals who constitute the Board on January 1, 1994
(the "Incumbent Board") have ceased for any reason to constitute at least a
majority thereof, provided that: any person becoming a director subsequent
to January 1, 1994 whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least three-quarters
(3/4) of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in which such
person is named as a nominee for director without objection to such
nomination) shall be, for purposes of the Plan, considered as though such
person were a member of the Incumbent Board, (iii) upon approval by the
Company's stockholders of a reorganization, merger or consolidation, other
than one with respect to which all or substantially all of those persons
who were the beneficial owners, immediately prior to such reorganization,
merger or consolidation, of outstanding securities of the Company
ordinarily having the right to vote in the election of directors own,
immediately after such transaction, more than 75 % of the outstanding
securities of the resulting corporation ordinarily having the right to vote
in the election of directors; or (iv) upon approval by the Company's
stockholders of a complete liquidation and dissolution of the Company or
the sale or other disposition of all or substantially all of the assets of
the Company other than to a subsidiary of the Company. Notwithstanding the
occurrence of any of the foregoing, the Compensation Committee may
determine, if it deems it to be in the best interest of the Company, that
an event or events otherwise constituting a Change In Control shall not be
so considered. Such determination shall be effective only if it is made by
the Compensation Committee prior to the occurrence of an event that
otherwise would be or probably will lead to a Change In Control or after
such event if made by the Compensation Committee a majority of which is
composed of directors who were members of the Board immediately prior to
the event that otherwise would be or probably will lead to a Change In
Control.
84
<PAGE> 2
Section 1.4. "Common Stock" means the $.01 par value common stock of the
Company.
Section 1.5. "Company" means Eastman Chemical Company.
Section 1.6. "Compensation Committee" shall mean the Compensation and
Management Development Committee of the Board.
Section 1.7. "Deferrable Amount" means, for a given fiscal year of the
Company, an amount equal to the sum of the Eligible Employee's (i) annual
base cash compensation; (ii) annual cash payments under the Eastman
Performance Plan and the Annual Performance Plan of the Company; and (iii)
stock and stock-based awards under the Omnibus Plan which, under the terms
of the Omnibus Plan and the award, are payable in cash and required or
allowed to be deferred into this Plan; provided, however, that the
Deferrable Amount shall not include any amount that must be withheld from
the Eligible Employee's wages for income or employment tax purposes. In
addition, each Eligible Employee as of January 1, 1994, who had previously
participated in the Kodak Executive Deferred Compensation Plan could elect
to transfer the amount then in his or her account in the Kodak Executive
Deferred Compensation Plan into the Plan. Furthermore, "Deferred Amount"
included, for 1993, annual cash payments under the Kodak Wage Dividend
policy and Success Sharing program payable in 1994 and attributable to 1993
service.
Section 1.8. "Eligible Employee" means a U.S.-based employee of the Company
or any of its U.S. Subsidiaries who, as of the first day of the applicable
Enrollment Period (i) has a salary grade classification of SG 49 or above;
or (ii) is not covered under clause (i), but who was an Eligible Employee
under the Kodak Executive Deferred Compensation Plan, as in effect on
January 1, 1994. Any employee who becomes eligible to participate in this
Plan and in a future year does not qualify as an Eligible Employee because
of a change in position level shall nevertheless be eligible to participate
in such year.
Section 1.9. "Enrollment Period" means the period designated by the
Compensation Committee each year; provided however, that such period shall
end on or before the last business day before the last Sunday in December
of each year.
Section 1.10. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
Section 1.11. "Interest Account" means the account established by the
Company for each Participant for compensation deferred pursuant to this
Plan and which shall bear interest as described in Section 4.1 below. The
maintenance of individual Interest Accounts is for bookkeeping purposes
only.
Section 1.12. "Interest Rate" means the monthly average of bank prime
lending rates to most favored customers as published in THE WALL STREET
JOURNAL, such average to be determined as of the last day of each month.
Section 1.13. "Market Value" means the closing price of the shares of
Common Stock on the New York Stock Exchange on the day on which such value
is to be determined or, if no such shares were traded on such day, said
closing price on the next business day on which such shares are traded;
provided, however, that if at any relevant time the shares of Common Stock
are not traded on the New York Stock Exchange, then "Market Value" shall be
determined by reference to the closing price of the shares of Common Stock
on another national securities exchange, if applicable, or if the shares
are not traded on an exchange but are traded in the over-the-counter
market, by reference to the last sale price or the closing "asked" price of
the shares in the over-the-counter market as reported by the National
Association of Securities Dealers Automated Quotation System (NASDAQ) or
other national quotation service.
Section 1.14. "Omnibus Plan" means the Eastman Chemical Company 1994
Omnibus Long-Term Compensation Plan or any successor plan to the Omnibus
Plan providing for awards of stock and stock-based compensation to Company
employees.
85
<PAGE> 3
Section 1.15. "Participant" means an Eligible Employee who elects for one
or more years to defer compensation pursuant to this Plan.
Section 1.16. "Plan" means this Amended and Restated Eastman Executive
Deferred Compensation Plan.
Section 1.17. "Section 16 Insider" means a Participant who is, with respect
to the Company, subject to Section 16 of the Exchange Act.
Section 1.18. "Stock Account" means the account established by the Company
for each Participant, the performance of which shall be measured by
reference to the Market Value of Common Stock. The maintenance of
individual Stock Accounts is for bookkeeping purposes only.
Section 1.19. "U.S. Subsidiaries" means the United States subsidiaries of
the Company listed on Schedule A.
Section 1.20. "Valuation Date" means each business day.
Section 2. Deferral of Compensation. An Eligible Employee may elect to defer
receipt of all or any portion of his or her Deferrable Amount to his or her
Interest Account and/or Stock Account. A Participant in this Plan need not
participate in the Eastman Investment Plan. If an Eligible Employee terminates
employment with the Company or any of its U.S. Subsidiaries, any previous
deferral election with respect to a Wage Dividend, Success Sharing, Eastman
Performance Plan, Annual Performance Plan or Omnibus Plan payment or award shall
remain in effect with respect to such items of compensation payable after
termination of employment.
Section 3. Time of Election of Deferral. An Eligible Employee who wishes to
defer compensation must irrevocably elect to do so during the applicable
Enrollment Period. Except as provided in the next sentence, the Enrollment
Period shall end prior to the first day of the calendar year in which the
applicable Deferrable Amount will first be paid, earned, or awarded. The
Enrollment Period with respect to payouts (if any) in 1997 under the 1994-1996
Long-Term Performance Subplan of the Omnibus Plan shall end prior to October 31,
1996. Elections shall be made annually.
This Plan was first adopted January 1, 1994, and is generally effective with
respect to compensation earned on or after such date. However, (i) if a person
who is eligible to participate in this Plan made an election under the Kodak
Executive Deferred Compensation Plan with respect to a payment under the
Management Annual Performance Plan (MAPP) that would be paid in calendar year
1994, such election remained in force and was effective under this Plan for such
MAPP payment; and (ii) Participants could elect to defer under this Plan a Wage
Dividend or Success Sharing payment payable in calendar year 1994 but
attributable to 1993 service.
Section 4. Hypothetical Investments.
Section 4.1. Interest Account. Amounts in a Participant's Interest Account
are hypothetically invested in an interest bearing account which bears
interest computed at the Interest Rate, compounded monthly.
Section 4.2. Stock Account. Amounts in a Participant's Stock Account are
hypothetically invested in units of Common Stock. Amounts deferred into a
Stock Account are recorded as units of Common Stock, and fractions thereof,
with one unit equating to a single share of Common Stock. Thus, the value
of one unit shall be the Market Value of a single share of Common Stock.
The use of units is merely a bookkeeping convenience; the units are not
actual shares of Common Stock. The Company will not reserve or otherwise
set aside any Common Stock for or to any Stock Account. The maximum number
of Common Stock units that may be hypothetically purchased by deferral of
compensation to Stock Accounts under this Plan is 4,500,000.
86
<PAGE> 4
Section 5. Deferrals and Crediting Amounts to Accounts.
Section 5.1. Manner of Electing Deferral. An Eligible Employee may elect to
defer compensation by executing and returning to the Compensation Committee
a deferred compensation form provided by the Company. The form shall
indicate (i) the amount and sources of Deferrable Amount to be deferred;
(ii) whether deferral of annual base cash compensation is to be at the same
rate throughout the year, or at one rate for part of the year and at a
second rate for the remainder of the year; and (iii) the portion of the
deferral to be credited to the Participant's Interest Account and Stock
Account, respectively. An election to defer compensation shall be
irrevocable following the end of the applicable Enrollment Period, but the
portion of the deferral to be credited to the Participant's Interest
Account and Stock Account, respectively, may be reallocated by the
Participant in the manner specified by the Compensation Committee or its
authorized designee through and including the business day immediately
preceding the date on which the deferred amount is credited to the
Participant's Accounts pursuant to Section 5.2.
Section 5.2. Crediting of Amounts to Accounts. Amounts to be deferred shall
be credited to the Participant's Interest Account and/or Stock Account, as
applicable, as of the date such amounts are otherwise payable.
Section 6. Deferral Period. Subject to Sections 9, 10, and 19 hereof, the
compensation which a Participant elects to defer under the Plan will be deferred
until the Participant retires or otherwise terminates employment with the
Company or any of its U.S. Subsidiaries. Any such election shall be made during
the applicable Enrollment Period on the deferred compensation form referenced in
Section 5 above. The payment of a Participant's Account shall be governed by
Sections 8, 9, 10, and 19, as applicable.
Notwithstanding the foregoing, any fixed date election made by an Eligible
Employee under the Kodak Executive Deferred Compensation Plan shall remain in
force under this Plan, provided he or she continues as an employee of the
Company or any of its U.S. Subsidiaries during the period of deferral. Payment
of such amount pursuant to a deferral election made under such Kodak Plan shall
be made in cash in a single lump sum on the fifth business day in March in the
year following the termination of such deferral period, and the amount of the
lump-sum due the Participant shall be valued as of the last Valuation Date in
February in the year following the termination of the deferral period. If such
Participant ceases to be an employee of the Company or any of its U.S.
Subsidiaries prior to the end of the fixed period, Section 8 shall govern the
payment of his or her Accounts.
Section 7. Investment in the Stock Account and Transfers Between Accounts.
Section 7.1. Election Into the Stock Account. If a Participant elects to
defer compensation into his or her Stock Account, his or her Stock Account
shall be credited, as of the date described in Section 5.2, with that
number of units of Common Stock, and fractions thereof, obtained by
dividing the dollar amount to be deferred into the Stock Account by the
Market Value of the Common Stock as of such date.
Section 7.2. Transfers Between Accounts. A Participant may direct that all
or any portion, designated as a whole dollar amount, of the existing
balance of one of his or her Accounts be transferred to his or her other
Account, effective as of (i) the date such election is made, if and only if
such election is made prior to the close of trading on the New York Stock
Exchange on a day on which the Common Stock is traded on the New York Stock
Exchange, or (ii) if such election is made after the close of trading on
the New York Stock Exchange on a given day or at any time on a day on which
no sales of Common Stock are made on the New York Stock Exchange, then on
the next business day on which the Common Stock is traded on the New York
Stock Exchange (the date described in (i) or (ii), as applicable, is
referred to hereinafter as the election's "Effective Date"). Such election
shall be made in the manner specified by the Compensation Committee or its
authorized designee during the period that begins on the third business day
following the public release of the Company's quarterly earnings report and
that ends on the last business day of the second calendar month following
the end of each
87
<PAGE> 5
fiscal quarter of the Company; provided however, that a Section 16 Insider
may only elect to transfer between his or her Accounts if he or she has
made no election within the previous six months to effect an "opposite way"
fund-switching (i.e., transfer out versus transfer in) transfer into or out
of the Stock Account or the Eastman Stock Funds of the Eastman Investment
Plan or the Savings and Investment Plan Appendix, or any other "opposite
way" intra-plan transfer or plan distribution involving a Company equity
securities fund which constitutes a "Discretionary Transaction" as defined
in Rule 16b-3 under the Exchange Act.
Section 7.3. Transfer Into the Stock Account. If a Participant elects
pursuant to Section 7.2 to transfer an amount from his or her Interest
Account to his or her Stock Account, effective as of the election's
Effective Date, (i) his or her Stock Account shall be credited with that
number of units of Common Stock, and fractions thereof, obtained by
dividing the dollar amount elected to be transferred by the Market Value of
the Common Stock on the Valuation Date immediately preceding the election's
Effective Date; and (ii) his or her Interest Account shall be reduced by
the amount elected to be transferred.
Section 7.4. Transfer Out of the Stock Account. If a Participant elects
pursuant to Section 7.2 to transfer an amount from his or her Stock Account
to his or her Interest Account, effective as of the election's Effective
Date, (i) his or her Interest Account shall be credited with a dollar
amount equal to the amount obtained by multiplying the number of units to
be transferred by the Market Value of the Common Stock on the Valuation
Date immediately preceding the election's Effective Date; and (ii) his or
her Stock Account shall be reduced by the number of units elected to be
transferred.
Section 7.5. Dividend Equivalents. Effective as of the payment date for
each cash dividend on the Common Stock, the Stock Account of each
Participant who had a balance in his or her Stock Account on the record
date for such dividend shall be credited with a number of units of Common
Stock, and fractions thereof, obtained by dividing (i) the aggregate dollar
amount of such cash dividend payable in respect of such Participant's Stock
Account (determined by multiplying the dollar value of the dividend paid
upon a single share of Common Stock by the number of units of Common Stock
held in the Participant's Stock Account on the record date for such
dividend); by (ii) the Market Value of the Common Stock on the Valuation
Date immediately preceding the payment date for such cash dividend.
Section 7.6. Stock Dividends. Effective as of the payment date for each
stock dividend on the Common Stock, additional units of Common Stock shall
be credited to the Stock Account of each Participant who had a balance in
his or her Stock Account on the record date for such dividend. The number
of units that shall be credited to the Stock Account of such a Participant
shall equal the number of shares of Common Stock, and fractions thereof,
which the Participant would have received as stock dividends had he or she
been the owner on the record date for such stock dividend of the number of
shares of Common Stock equal to the number of units credited to his or her
Stock Account on such record date.
Section 7.7. Recapitalization. If, as a result of a recapitalization of the
Company, the outstanding shares of Common Stock shall be changed into a
greater number or smaller number of shares, the number of units credited to
a Participant's Stock Account shall be appropriately adjusted on the same
basis.
Section 7.8. Distributions. Amounts in respect of units of Common Stock may
only be distributed out of the Stock Account by transfer to the Interest
Account (pursuant to Sections 7.2 and 7.4 or 7.10) or withdrawal from the
Stock Account (pursuant to Section 8, 9, 10, or 19), and shall be
distributed in cash. The number of units to be distributed from a
Participant's Stock Account shall be valued by multiplying the number of
such units by the Market Value of the Common Stock as of the Valuation Date
immediately preceding the date such distribution is to occur. Pending the
complete distribution under Section 8.2 or liquidation under Section 7.10
of the Stock Account of a Participant who has terminated his or her
employment with the Company or any of its U.S. Subsidiaries, the
Participant shall continue to be able to make elections pursuant to
Sections 7.2, 7.3, and 7.4 and his or her Stock Account shall continue to
be credited with additional units of Common Stock pursuant to Sections 7.5,
7.6, and 7.7.
88
<PAGE> 6
Section 7.9. Responsibility for Investment Choices. Each Participant is
solely responsible for any decision to defer compensation into his or her
Stock Account and to transfer amounts to and from his or her Stock Account
and accepts all investment risks entailed by such decision, including the
risk of loss and a decrease in the value of the amounts he or she elects to
transfer into his or her Stock Account.
Section 7.10. Liquidation of Stock Account. The provisions of this Section
7.10 shall be applicable if the Vice President, Human Resources, or the
Compensation Committee, as applicable, determines pursuant to Section 8 to
pay a Participant's Accounts in annual installments and, on the second
anniversary of the Participant's retirement or, if earlier, termination of
employment from the Company or any of its U.S. Subsidiaries, the
Participant has a balance remaining in his or her Stock Account. In such
case, effective as of the first day of the first calendar month immediately
following the date of such second anniversary, the entire balance of the
Participant's Stock Account shall automatically be transferred to his or
her Interest Account and he or she shall thereafter be ineligible to
transfer any amounts to his or her Stock Account. For purposes of valuing
the units of Common Stock subject to such a transfer, the approach
described in Section 7.8 shall be used.
Section 8. Payment of Deferred Compensation.
Section 8.1. Background. No withdrawal may be made from a Participant's
Accounts except as provided in this Section 8 and Sections 9, 10, and 19.
Section 8.2. Manner of Payment. Payment of a Participant's Accounts shall
be made in a single lump sum or annual installments, in the sole discretion
of the Company's Vice President, Human Resources, with respect to
Participants other than executive officers of the Company, and by the
Compensation Committee, with respect to Participants who are executive
officers of the Company. The maximum number of annual installments is ten.
All payments from the Plan shall be made in cash.
Section 8.3. Timing of Payments. Payments shall be made by the fifth
business day in March and shall commence in any year designated in the sole
discretion of the Company's Vice President, Human Resources, with respect
to Participants other than executive officers of the Company, and by the
Compensation Committee, with respect to Participants who are executive
officers of the Company, up through the tenth year following the year in
which the Participant retires, becomes disabled, or for any other reason,
ceases to be an employee of the Company or any of its U.S. Subsidiaries,
but in no event shall payment commence later than the year the Participant
reaches age 71.
Section 8.4. Valuation. The amount of each payment shall be equal to the
value, as of the preceding Valuation Date, of the Participant's Accounts,
divided by the number of installments remaining to be paid. If payment of a
Participant's Accounts is to be paid in installments and the Participant
has a balance in his or her Stock Account at the time of the payment of an
installment, the amount that shall be distributed from his or her Stock
Account shall be the amount obtained by multiplying the total amount of the
installment determined in accordance with the immediately preceding
sentence by the percentage obtained by dividing the balance in the Stock
Account as of the immediately preceding Valuation Date by the total value
of the Participant's Accounts as of such date. Similarly, in such case, the
amount that shall be distributed from the Participant's Interest Account
shall be the amount obtained by multiplying the total amount of the
installment determined in accordance with the first sentence of this
Section 8.4 by the percentage obtained by dividing the balance in the
Interest Account as of the immediately preceding Valuation Date by the
total value of the Participant's Accounts as of such date.
Section 9. Payment of Deferred Compensation After Death. If a Participant dies
prior to complete payment of his or her Accounts, the balance of such Accounts,
valued as of the Valuation Date immediately preceding the date payment is made,
shall be paid in a single, lump-sum payment to: (i) the beneficiary or
contingent beneficiary designated by the Participant on forms supplied by the
Compensation Committee; or, in the absence of a valid designation of a
beneficiary or contingent beneficiary, (ii) the Participant's estate within 30
days after appointment of a legal representative of the deceased Participant.
89
<PAGE> 7
Section 10. Withdrawals.
Section 10.1. Acceleration of Payment for Hardship. Upon written approval
from the Company's Vice President, Human Resources, with respect to
Participants other than executive officers of the Company, and by the
Compensation Committee, with respect to Participants who are executive
officers of the Company, and subject to the restrictions in the next two
sentences, a Participant, whether or not he or she is still employed by the
Company or any of its U.S. Subsidiaries, may be permitted to receive all or
part of his or her Accounts if the Company's Vice President, Human
Resources, or the Compensation Committee, as applicable, determines that an
emergency event beyond the Participant's control exists which would cause
such Participant severe financial hardship if the payment of his or her
Accounts were not approved. Any such distribution for hardship shall be
limited to the amount needed to meet such emergency.
Section 10.2. Payment to Individuals. Any participant in the Eastman
Executive Deferred Compensation Plan may at his or her discretion withdraw
at any time all or part of that person's account balance under the Plan;
provided, if this option is exercised the individual will forfeit to the
Corporation 10% of his or her account balance or $50,000, whichever is
less, and will not be permitted to participate in this plan for a period of
36 months from date any payment to a participant is made under this
section.
Section 10.3. Accelerated Payment. If under Eastman Executive Deferred
Compensation Plan one-half or more of the Participants or one-fifth or more
of the Participants with one-half or more of the value of all benefits owed
exercise their option for immediate distribution in any consecutive
six-month period this will trigger immediate payment to all Participants of
all benefits owed under the terms of the plan. Immediate payout under this
section will not involve reduction of the amounts paid to Participants as
set forth in section 10.2. Any individual that has been penalized in this
six-month period for electing immediate withdrawal will be paid that
penalty, and continuing participation will be allowed, if payout to all
Participants under this section occurs.
Section 10.4. Section 16. A Section 16 Insider may only receive a
withdrawal from his or her Stock Account pursuant to this Section 10 if he
or she has made no election within the previous six months to effect a
fund-switching transfer into the Stock Account or the Eastman Stock Fund of
the Eastman Investment Plan or the Savings and Investment Plan Appendix, or
any other "opposite way" intra-plan transfer into a Company equity
securities fund which constitutes a "Discretionary Transaction" as defined
in Rule 16b-3 under the Exchange Act. If such a distribution occurs while
the Participant is employed by the Company or any of its U.S. Subsidiaries,
any election to defer compensation for the year in which the Participant
receives a withdrawal shall be ineffective as to compensation earned for
the pay period following the pay period during which the withdrawal is made
and thereafter for the remainder of such year and shall be ineffective as
to any other compensation elected to be deferred for such year.
Section 11. Non-Competition and Non-Disclosure Provision. Participant will not,
without the written consent of the Company, either during his or her employment
by Company or any of its U.S. Subsidiaries or thereafter, disclose to anyone or
make use of any confidential information which he or she has acquired during his
or her employment relating to any of the business of the Company or any of its
subsidiaries, except as such disclosure or use may be required in connection
with his or her work as an employee of Company or any of its U.S. Subsidiaries.
During Participant's employment by the Company or any of its U.S. Subsidiaries,
and for a period of two years after the termination of such employment, he or
she will not, without the written consent of the Company, either as principal,
agent, consultant, employee or otherwise, engage in any work or other activity
in competition with the Company in the field or fields in which he or she has
worked for the Company or any of its U.S. Subsidiaries. The agreement in this
Section 11 applies separately in the United States and in other countries but
only to the extent that its application shall be reasonably necessary for the
protection of the Company. If the Participant does not comply with the terms of
this Section 11, the Company's Vice President, Human Resources, with respect to
Participants other than executive officers of the Company, or the Compensation
Committee, with respect to executive officers of the Company may, in his or its
sole discretion, direct the Company to pay to the Participant the balance
credited to his or her Interest Account and/or Stock Account.
90
<PAGE> 8
Section 12. Participant's Rights Unsecured. The benefits payable under this Plan
shall be paid by the Company each year out of its general assets. To the extent
a Participant acquires the right to receive a payment under this Plan, such
right shall be no greater than that of an unsecured general creditor of the
Company. No amount payable under this Plan may be assigned, transferred,
encumbered or subject to any legal process for the payment of any claim against
a Participant. No Participant shall have the right to exercise any of the rights
or privileges of a shareowner with respect to the units credited to his or her
Stock Account.
Section 13. No Right to Continued Employment. Participation in the Plan shall
not give any employee any right to remain in the employ of the Company or any of
its U.S. Subsidiaries. The Company and each employer U.S. Subsidiary reserve the
right to terminate any Participant at any time.
Section 14. Statement of Account. Statements will be sent no less frequently
than annually to each Participant or his or her estate showing the value of the
Participant's Accounts.
Section 15. Deductions. The Company will withhold to the extent required by law
all applicable income and other taxes from amounts deferred or paid under the
Plan.
Section 16. Administration.
Section 16.1. Responsibility. Except as expressly provided otherwise
herein, the Compensation Committee shall have total and exclusive
responsibility to control, operate, manage and administer the Plan in
accordance with its terms.
Section 16.2. Authority of the Compensation Committee. The Compensation
Committee shall have all the authority that may be necessary or helpful to
enable it to discharge its responsibilities with respect to the Plan.
Without limiting the generality of the preceding sentence, the Compensation
Committee shall have the exclusive right: to interpret the Plan, to
determine eligibility for participation in the Plan, to decide all
questions concerning eligibility for and the amount of benefits payable
under the Plan, to construe any ambiguous provision of the Plan, to correct
any default, to supply any omission, to reconcile any inconsistency, and to
decide any and all questions arising in the administration, interpretation,
and application of the Plan.
Section 16.3. Discretionary Authority. The Compensation Committee shall
have full discretionary authority in all matters related to the discharge
of its responsibilities and the exercise of its authority under the Plan
including, without limitation, its construction of the terms of the Plan
and its determination of eligibility for participation and benefits under
the Plan. It is the intent that the decisions of the Compensation Committee
and its action with respect to the Plan shall be final and binding upon all
persons having or claiming to have any right or interest in or under the
Plan and that no such decision or action shall be modified upon judicial
review unless such decision or action is proven to be arbitrary or
capricious.
Section 16.4. Authority of Vice President, Human Resources. Where expressly
provided for under Sections 8, 10 and 11, the authority of the Compensation
Committee is delegated to the Company's Vice President, Human Resources,
and to that extent the provisions of Section 16.1 through 16.3 above shall
be deemed to apply to such Vice President.
Section 16.5. Delegation of Authority. The Compensation Committee may
provide for an additional delegation of some or all of its authority under
the Plan to any person or persons provided that any such delegation be in
writing.
91
<PAGE> 9
Section 17. Amendment. The Board may suspend or terminate the Plan at anytime.
In addition, the Board may, from time to time, amend the Plan in any manner
without shareowner approval; provided however, that the Board may condition any
amendment on the approval of shareowners if such approval is necessary or
advisable with respect to tax, securities, or other applicable laws. However, no
amendment, modification, or termination shall, without the consent of a
Participant, adversely affect such Participant's accruals in his or her Accounts
as of the date of such amendment, modification, or termination.
Section 18. Governing Law. The Plan shall be construed, governed and enforced in
accordance with the law of Tennessee, except as such laws are preempted by
applicable federal law.
Section 19. Change in Control.
Section 19.1. Background. The terms of this Section 19 shall immediately
become operative, without further action or consent by any person or
entity, upon a Change in Control, and once operative shall supersede and
control over any other provisions of this Plan.
Section 19.2. Acceleration of Payment Upon Change In Control. Upon the
occurrence of a Change in Control, each Participant, whether or not he or
she is still employed by the Company or any of its U.S. Subsidiaries, shall
be paid in a single, lump-sum cash payment the balance of his or her
Accounts as of the Valuation Date immediately preceding the date payment is
made. Such payment shall be made as soon as practicable, but in no event
later than 90 days after the date of the Change in Control.
Section 19.3. Amendment On or After Change in Control. On or after a Change
in Control, no action, including, but not by way of limitation, the
amendment, suspension or termination of the Plan, shall be taken which
would affect the rights of any Participant or the operation of this Plan
with respect to the balance in the Participant's Accounts.
Section 19.4. Attorney Fees. The Corporation shall pay all reasonable legal
fees and related expenses incurred by a participant in seeking to obtain or
enforce any payment, benefit or right such participant may be entitled to
under the plan after a Change in Control; provided, however, the
participant shall be required to repay any such amounts to the Corporation
to the extent a court of competent jurisdiction issues a final and
non-appealable order setting forth the determination that the position
taken by the participant was frivolous or advanced in bad faith.
Section 20. Compliance with SEC Regulations. It is the Company's intent that the
Plan comply in all respects with Rule 16b-3 of the Exchange Act, and any
regulations promulgated thereunder. If any provision of the Plan is found not to
be in compliance with such rule, the provision shall be deemed null and void.
All transactions under the plan, including, but not by way of limitation, a
Participant's election to defer compensation or transfer Account balances under
Section 7 and hardship withdrawals under Section 10, shall be executed in
accordance with the requirements of Section 16 of the Exchange Act, as amended
and any regulations promulgated thereunder. To the extent that any of the
provisions contained herein do not conform with Rule 16b-3 of the Exchange Act
or any amendments thereto or any successor regulation, then the Committee may
make such modifications so as to conform the Plan to the Rule's requirements.
Section 21. Successors and Assigns. This Plan shall be binding upon the
successors and assigns of the parties hereto.
92
<PAGE> 10
SCHEDULE A
Holston Defense Corporation
93
<PAGE> 1
EXHIBIT 10.08
EMPLOYMENT AGREEMENT
THIS AGREEMENT, made as of the 1st day of December, 1996, between Eastman
Chemical Company, a Delaware corporation (the "Company") and Harold L. Henderson
(the "Executive"),
WITNESSETH:
WHEREAS, the Company desires to employ the Executive as its Senior Vice
President and General Counsel, and
WHEREAS, the Company and the Executive desire to enter into an agreement
providing for the terms and conditions of such employment (the "Agreement").
NOW, THEREFORE, in consideration of the respective covenants and agreements
set forth below, the parties agree as follows:
1. Employment
The Company agrees to employ the Executive, and the Executive agrees to
serve the Company, on the terms and conditions set forth herein.
The employment of the Executive by the Company, unless earlier terminated
pursuant to Section 7 below, shall be for the period commencing on December
1, 1996 (the "Commencement Date"), and terminating on December 31, 2000
(the "Employment Period").
2. Position and Duties
(a) Effective January 1, 1997, the Executive shall serve as the Senior Vice
President and General Counsel of the Company, reporting to the Company's
Chief Executive Officer. The Executive shall have the powers and duties of
the chief legal officer of the Company, which shall include, without
limitation, the responsibility for the general management of the legal
affairs of the Company under the supervision of the Chief Executive
Officer.
(b) The Executive shall devote his best efforts to the business and affairs
of the Company and, effective January 1, 1997, to carrying out the
responsibilities of Senior Vice President and General Counsel of the
Company, and shall diligently follow and implement all management policies
and decisions of the Company.
3. Place of Employment and Relocation
(a) The Executive shall relocate his residence to the Tri-City area in
eastern Tennessee. The Executive's services shall normally be performed at
the Company's principal executive office in Kingsport, Tennessee.
(b) The Company shall pay, or reimburse the Executive for, all reasonable
costs and expenses incurred by the Executive in relocating Executive's
residence from Atlanta, Georgia, to the Kingsport area in accordance with
the Company's standard policies and practices applicable to the relocation
of comparable senior corporate executives.
94
<PAGE> 2
4. Compensation
(a) The Executive shall receive a beginning salary at an annual rate of
$300,000 (the "Base Salary"). The Base Salary may be increased from time to
time at the discretion of the Company. Once increased, the Executive's
salary shall not be reduced except as a part of a general salary reduction
applicable to all comparable senior executives, and in no event to an
amount below the Base Salary.
(b) Except as provided in paragraph 6 of this Agreement, the Executive
shall be entitled to participate, on the same basis as other comparable
senior corporate executives, in all present and future Company incentive,
compensation, tax-qualified and non tax-qualified retirement, welfare and
severance plans, programs, agreements, or arrangements in effect during the
Employment Period; provided, however, that, to the extent legally
permissible, the Company agrees to waive, or to obtain the waiver of, any
waiting period or periods otherwise required for participation under any of
such plans, programs, agreements or arrangements. In addition, upon
expiration of the Employment Period, or upon earlier termination of the
Executive's employment pursuant to subsections 7(d) or (e), the Executive
shall be entitled to receive all medical insurance, life insurance and
other welfare benefits provided under the welfare plans described in the
preceding sentence to other comparable retired senior executives.
5. Special Restricted Stock and Stock Option Grants
(a) On the Commencement Date, the Executive shall receive a special grant
of Company common stock under the Company's restricted stock program, the
number of such restricted shares to be included in the grant to be
determined by dividing $50,000 by the closing price of the Company's common
stock on the New York Stock Exchange on the last regular trading day
immediately prior to the Commencement Date.
(b) On the Commencement Date, the Executive shall receive an option under
the Company's stock option program to purchase 50,000 shares of the
Company's common stock at a price equal to the closing price of the
Company's common stock on the New York Stock Exchange on the last regular
trading day immediately prior to the Commencement Date. This option grant
shall constitute an advance grant of options that would otherwise be
granted to Executive during the Employment Period, and any additional grant
of options of the Company's common stock shall be made in the sole and
uncontrolled discretion of the Compensation Committee of the Company's
Board of Directors (the "Board").
6. Retirement Benefits.
In lieu of any annual monetary retirement benefit to which the
Executive might otherwise be entitled under the Excess Retirement Income
Plan ("ERIP") and the Eastman Unfunded Retirement Income Plan ("URIP"), the
Executive shall, immediately upon the earlier of the expiration of the
Employment Period or the termination of the Executive's employment pursuant
to subsections 7(b), (d) or (e), receive the first lump sum cash payment in
the amount determined by Exhibit A hereto, which Exhibit is hereby made a
part of this Agreement. In addition, if the Executive is employed hereunder
immediately prior to the expiration of the Employment Period, the Executive
shall receive the second lump sum cash payment in the amount determined by
Exhibit A hereto, payable no later than May 1, 2001.
Finally, if the Executive is employed hereunder immediately prior to
the expiration of the Employment Period, the Executive shall be entitled to
elect no later than the date the Company announces to participants the
performance results under the Company's Long Term Performance Plan for the
performance cycle under such plan ending in the year 2000, to receive the
third lump sum cash payment in the amount determined by Exhibit A hereto,
payable no later than May 1, 2001. If the Executive does not make a timely
election as described in the immediately preceding sentence, then Executive
shall continue to participate in the Company's Long Term Performance Plan
after December 31, 2000, and shall receive awards of stock under such Plan
with respect to the performance cycles that commenced prior to December 31,
2000 and end after the expiration of the Employment Period as
95
<PAGE> 3
though the target performance levels for each such cycle had been achieved
by the Company if less than target level performance is actually achieved;
provided, however, that the actual delivery of company stock for each such
cycle shall be made at the later of (a) the time delivery of company stock
would be made to other participants in the Plan with respect to such cycle
if target performance with respect to such cycle was achieved, or (b)
January 31, 2001. Except as expressly provided in this Agreement, any
rights that Executive may have under the incentive compensation,
retirement, welfare and severance plans described in subsection 4(b) shall
be determined by the terms and conditions of such plans as in effect on the
Date of Termination and the Company's applicable programs and practices as
in effect on the Date of Termination, and all other rights under this
Agreement shall be terminated.
7. Termination
(a) Death. The Executive's employment shall terminate upon his death.
(b) Disability. If the Executive becomes entitled to receive benefits under
the Company's group long-term disability plan, from time to time in effect,
the Executive may be considered disabled and the Company may terminate this
Agreement.
(c) Cause. The Company may terminate the Executive's employment for
"Cause". For purposes of this Agreement, "Cause" is defined as (i) a
material breach by Executive of the terms of this Agreement, (ii) the
conviction of Executive of any criminal act that the Board shall, in its
sole and absolute discretion, deem to constitute Cause for purposes of this
Agreement, or (iii) conduct by Executive in his office with the Company
that is grossly inappropriate and demonstrably likely to lead to material
injury to the Company, as determined by the Board acting reasonably and in
good faith; provided, however, that in the case of (iii) above, such
conduct shall not constitute Cause unless the Board shall have delivered to
Executive notice setting forth with specificity (x) the conduct deemed to
qualify as Cause, (y) reasonable action that would remedy such objection,
and (z) a reasonable time (not less than thirty (30) days) within which
Executive may take such remedial action, and Executive shall not have taken
such specified remedial action within such specified reasonable time.
(d) Termination by the Company without Cause. Notwithstanding the foregoing
provisions, the Company may terminate the Executive's employment without
Cause at any time, subject to the provisions of subsection 8(c) hereof.
(e) Termination for Good Reason by the Executive. The Executive may
terminate his employment at any time for Good Reason; provided, however,
that the Executive shall have delivered a notice of termination to the
Company within ninety (90) days after the occurrence of the event or events
that the Executive believes constitute Good Reason and specifying the
nature thereof. For this purpose, termination for "Good Reason" prior to a
Change in Control shall mean the occurrence of any of the following
circumstances without the Executive's prior written consent which
circumstances are not completely remedied by the Company such that an event
of Good Reason no longer exists within thirty (30) days after receipt of
the Executive's notice of termination:
i) any substantial limitation of the authority and responsibility of
the Executive contemplated by Section 2 hereof;
ii) any organizational change that requires the Executive to report to
anyone other than the Chief Executive Officer;
iii) any organizational change or other circumstances that, as a
practical matter, require the Executive to perform the majority of his
responsibilities and duties at a location more than thirty-five (35)
miles from the present Company executive offices, other than any
relocation of the executive offices of the Company; or
iv) a material breach by the Company of the terms of this Agreement.
96
<PAGE> 4
However, if such termination occurs after the Change in Control, then
termination for "Good Reason" shall mean "Good Reason" as that term is
defined in the Severance Agreement between the Company and its Chief
Executive Officer on the date of such Change in Control.
(f) Date of Termination. "Date of Termination" shall mean (i) if the
Executive's employment is terminated by death pursuant to subsection 7(a),
the date of the Executive's death; (ii) if the Executive's employment is
terminated by the Company as a result of the Executive's disability
pursuant to subsection 7(b), the date of such termination, (iii) if the
Executive's employment is terminated by the Company for Cause pursuant to
subsection 7(c), the date that the Notice of Termination is communicated to
the Executive, after the expiration of the right to take remedial action in
the case of paragraph 7(c)(iii), (iv) if the employment is terminated by
the Company without Cause pursuant to subsection 7(d), the date the Notice
of Termination is communicated to the Executive; and (v) if the employment
is terminated by the Executive for Good Reason under subsection 7(e),
thirty (30) days after the Notice of Termination is given if the
circumstances causing the Good Reason have not been completely remedied by
such date.
8. Compensation and Other Rights of Executive Upon Termination
(a) If the Executive's employment shall be terminated due to death pursuant
to subsection 7(a) or disability pursuant to subsection 7(b), the Company
shall pay the legal representative of the Executive's estate (in the case
of death) or the Executive or his legal guardian or representative (in the
case of disability) all salary, incentive compensation, other awards, and
payments owed to the Executive up to the date of death or disability, as
applicable. All other rights of the Executive and his estate, guardian,
legal representatives and heirs under the incentive compensation,
retirement, welfare and severance plans described in subsection 4(b) shall
be determined by the terms and conditions of such plans as in effect on the
date of Executive's death or disability, as applicable and the Company's
applicable program and practices as in effect on the date of Executive's
death or disability, as applicable; provided, however, that the stock
option award provided for in Section 5 shall continue to vest in accordance
with the normal vesting schedule under such award and shall remain
exercisable for at least the period of time that such exercise would
have been permitted had the Executive lived and remained an employee for
the entire Employment Period, or not been disabled and remained an employee
for the entire Employment Period. Finally, (i) if the Executive's
employment shall be terminated due to death pursuant to subsection 7(a),
then the Company shall pay the legal representative of the Executive's
estate within thirty (30) days following the Executive's death the first
lump sum described in Exhibit A if the Executive had terminated employment
for Good Reason on the date of his death but determined (A) as though the
Executive terminated employment for Good Reason on the date of his death;
and (B) as though the calculation of the first lump sum described in
Exhibit A was fifty percent (50%) of what such lump sum would be absent
this clause (B); and (ii) if the Executive's employment shall be terminated
due to disability pursuant to subsection 7(b), then the Company shall pay
the Executive or his legal guardian or representative within thirty (30)
days following the date of disability the first lump sum described in
Exhibit A.
(b) If the Executive's employment shall be terminated by (i) the Company
for Cause pursuant to subsection 7(c), or (ii) by the Executive for any
reason other than termination by Executive for Good Reason as set forth in
subsection 7(e), the Company shall pay the Executive all salary, incentive
compensation, other awards, and payments owed to him up to the Date of
Termination. Any rights that Executive may have under the incentive
compensation, retirement, welfare and severance plans described in
subsection 4(b) shall be determined by the terms and conditions of such
plans as in effect on the Date of Termination and the Company's applicable
programs and practices as in effect on the Date of Termination, and all
other rights under this Agreement shall be terminated.
(c) If the Executive's employment shall be terminated by the Company
without Cause pursuant to subsection 7(d) or if the Executive's employment
shall be terminated by the Executive for Good Reason pursuant to subsection
7(e), then the Company shall pay to the Executive all salary, incentive
compensation, other awards, and payments owed to him up to the Date of
Termination. In addition, the Company shall pay as liquidated damages, and
not as penalty, to the Executive:
97
<PAGE> 5
(i) within thirty (30) days following the Date of Termination, a lump
sum cash payment equal to (A) if the Date of Termination is on or
after January 1, 1998, the aggregate amount of salary that would have
been payable to the Executive between the Date of Termination and
December 31, 2000, computed at the Executive's salary rate in effect
on the Date of Termination, or (B) if the Date of Termination is prior
to January 1, 1998, the aggregate amount of salary that would have
been payable to the Executive between the Date of Termination and the
third anniversary of his Date of Termination, computed at the
Executive's salary rate in effect on the Date of Termination;
(ii) within thirty (30) days following the Date of Termination, a lump
sum cash payment equal to the aggregate value of all bonus, incentive
and other awards and rights under each annual cash incentive plan and
(at the election of the Executive, to be made in writing and delivered
to the Company no later than his Date of Termination) the Company's
Long Term Performance Plan to which Executive was entitled on the Date
of Termination, or to which he would reasonably become entitled during
because of his salary grade and position in the Company (including but
not limited to all payments and awards under the Long Term Performance
Plan that otherwise would have been made subsequent to the expiration
of the Employment Period), without any reduction for early payment
thereof, assuming (A) (1) if the Date of Termination is on or after
January 1, 1998, that the Executive would have been employed until the
end of the Employment Period, or (2) if the Date of Termination is
prior to January 1, 1998, that the Executive would have been employed
for thirty-six (36) consecutive months following the Date of
Termination (such period of deemed employment being referred to as the
"Deemed Employment Period"); (B) that all conditions relating to such
payments would have been fulfilled, (C) that the Company's performance
for all uncompleted periods after December 1, 1996 had achieved, or
would have achieved, target performance levels under each such plan or
program (provided, however, that if the target performance level under
any such plan or program has not been established as of the Date of
Termination for any such period, then the target performance level for
such period shall for purposes of this subsection 8(c)(ii) be deemed
to be no less than the last target performance level established under
such plan or program prior to the Date of Termination); and (D) for
purposes of this computation, awards based on stock under the Long
Term Performance Plan would be valued at 100% of the closing price of
the Company's common stock on the New York Stock Exchange on the last
trading day immediately preceding the Date of Termination; and
(iii) on the date required pursuant to subsection 6(a), the first lump
sum payment described in Exhibit A attached hereto.
If the Executive does not make a timely written election to receive
immediate payment of future awards under the Long Term Performance Plan, as
described in clause (ii) above, then Executive shall continue to
participate in the Company's Long Term Performance Plan after his Date of
Termination and for the Deemed Employment Period described in clause
(ii)(A) above, and shall receive awards of stock under such Plan with
respect to the performance cycles that are uncompleted as of the Date of
Termination, and determined as though (w) the Executive remained employed
for the Deemed Employment Period; and (x) the target performance levels for
each such uncompleted cycle had been achieved by the Company if less than
target level performance is actually achieved; provided, however, that if
the target performance level has not been established as of the Date of
Termination for any such period, then the target performance level for such
period shall for purposes of this paragraph be deemed to be no less than
the last target performance level established prior to the Date of
Termination; and further provided, that the actual delivery of Company
stock for each such cycle shall be made at the later of (y) the time
delivery of Company stock is made to other participants in the Plan with
respect to such cycle or (z) within thirty (30) days of the Date of
Termination.
Further, in the event of such termination, (i) all outstanding options
on the Company's common stock held by the Executive shall continue to vest
under the normal vesting schedule under such grant and shall remain
exercisable by the Executive or legal representative of his estate at any
time thereafter, in whole or in part, for the period of time that such
exercise would have been permitted had the Executive's employment been
terminated by the Company without Cause on the last day of the
98
<PAGE> 6
Employment Period, and (ii) any of the Company's common stock owned by the
Executive subject to conditions, restrictions, or limitations which lapse
over time or upon a subsequent event shall immediately be free of all such
conditions, restrictions and limitations. Through December 31, 2000, the
Company shall allow Executive and his family members to participate in all
welfare plans described in subsection 4(b) on the same terms and conditions
and at the same cost as to which they were entitled to participate
immediately prior to the Date of Termination. If the Executive or his
family members shall be ineligible to participate in any of such welfare
plans as a result of Executive's ceasing to be an employee of the Company,
then the Company shall arrange to provide the Executive and his family
members with substantially equivalent benefits as if Executive remained
employed by the Company throughout the Employment Period. Except as
expressly provided in this Agreement, any rights that Executive may have
under the incentive compensation, retirement, welfare and severance plans
described in subsection 4(b) shall be determined by the terms and
conditions of such plans as in effect on the Date of Termination and the
Company's applicable programs and practices as in effect on the Date of
Termination, and all other rights under this Agreement shall be terminated.
Finally, if the Date of Termination is prior to December 1, 1997, then
within sixty (60) days following the Date of Termination, (i) the Company
will offer to purchase the Executive's principal residence in the Tri-City
area of eastern Tennessee at a guarantee price based on the average of two
fair market appraisals if the lower appraisal is within seven percent (7%)
of the higher value, and if not, a third appraisal will be used and the
average of the two highest appraisals will be used; and (ii) the Company
will pay the Executive an amount equal to the reasonable expenses necessary
to move the Executive's furnishings and personal belongings from the
Tri-City area in eastern Tennessee to metropolitan Atlanta, Georgia.
9. No Mitigation, No Offset
(a) In the event of any termination of employment under Section 7, the
Executive shall be under no obligation to seek other employment, and there
shall be no offset against amounts due the Executive under this Agreement
of account of any remuneration attributable to any subsequent employment
that he may obtain.
(b) No payment or benefit of any kind under this Agreement shall duplicate
any payment or benefit that the Executive becomes entitled to under any
severance or change in control agreement, plan or arrangement of the
Company, and in the event of such duplication, such duplicate payment or
benefit (to the extent of such duplication) shall be paid under this
Agreement, and the remaining amount of such payment or benefit shall be
paid under such severance or change in control agreement, plan or
arrangement.
10. Assignment; Binding Agreement
(a) This Agreement may be assigned (including any assignment by merger,
consolidation, transfer of assets, operation of law or otherwise) by the
Company. Neither this Agreement nor any right of the Executive hereunder
may be assigned by the Executive (or the Executive's legal representative,
if applicable), nor may the Executive in any way delegate the performance
of the Executive's covenants and obligations hereunder.
(b) This Agreement and all obligations of the Company hereunder shall be
binding upon, and all rights of the Company hereunder shall inure to the
benefit of and be enforceable by, the Company, its successors and assigns.
This Agreement and all rights of the Executive hereunder shall inure to the
benefit of, and be enforceable by, the Executive and the Executive's
personal or legal representatives, executors, administrators, successors
and heirs.
99
<PAGE> 7
11. Notice
For the purposes of this Agreement, notices and all other
communications provided for in this Agreement shall be in writing and shall
be deemed to have been duly given when delivered or mailed by United States
registered or certified mail, return receipt requested, postage prepaid,
addressed as follows:
If to the Company:
Chief Executive Officer
Eastman Chemical Company
100 North Eastman Road
Kingsport, Tennessee 37660
If to the Executive:
Harold Henderson
Eastman Chemical Company
100 North Eastman Road
Kingsport, Tennessee 37660
or to such other address as either party may have furnished to the other in
writing.
12. Arbitration.
Any dispute or controversy arising under or in connection with this
Agreement shall be settled exclusively by arbitration in the State of
Tennessee by three arbitrators in accordance with the rules of the American
Arbitration Association then in effect.
13. Miscellaneous
(a) No provision of this Agreement may be modified, waived or discharged
unless such waiver, modification or discharge is agreed in writing signed
by the Executive and the Chief Executive Officer or such other officer as
may be specifically designated by the Chief Executive Officer or the
Board. No waiver by either party at any time of any breach by the other
party of, or compliance with, any condition or provision of this Agreement
to be performed by the other party shall be deemed a waiver of any similar
or dissimilar provisions or conditions at the same or at any prior or
subsequent time. Any party's failure, at any time, to require strict
performance of the other party of any provision of this Agreement shall not
waive, affect or diminish any right of the first party thereafter to demand
strict compliance and conformance.
(b) The invalidity or unenforceability of any provision of provisions of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.
(c) Anything in this Agreement to the contrary notwithstanding, all
payments required to be made by the Company hereunder to the Executive, his
estate or legal representatives shall be subject to the withholding of such
amounts relating to taxes as the Company may reasonably determine it should
withhold pursuant to any applicable law or regulation.
14. Law Governing
This Agreement shall be governed by, and construed and interpreted in
accordance with, the laws of the State of Tennessee without reference to
principles or conflict of laws.
100
<PAGE> 8
15. Expenses
The Company shall pay all of the Executive's expenses, including
without limitation attorneys' fees and expenses, incurred by Executive or
his estate (other than attorneys' fees or expenses of the Executive himself
acting as attorney) (a) in defending the validity of this, Agreement, and
(b) in contesting in good faith any determinations by the Company
concerning amounts payable by the Company under this Agreement.
16. "Change in Control."
Change in Control for purposes of this Agreement shall mean "Change in
Control" as that term is defined in the Severance Agreement between the
Company and its Chief Executive Officer on the earlier of (i) the date the
Notice of Termination under subsection 7(d) or 7(e) is given, as
applicable, or (ii) the date of a Change in Control.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date and year first above written.
Eastman Chemical Company
By:
-----------------------------
Name:
---------------------------
Its:
----------------------------
Executive
--------------------------------
Harold L. Henderson
101
<PAGE> 9
EXHIBIT A
FIRST LUMP SUM
The first lump sum cash payment is intended to provide the Executive with a
lump sum payment which is the actuarial equivalent at the Executive's age 65 of
A minus [B plus C], where
A equals the benefit the Executive would have been entitled to under the
Eastman Retirement Assistance Plan ("ERAP") as in effect on the effective
date of this Agreement, expressed as a single life annuity commencing at
age 65, assuming that
(i) for benefit accrual purposes, as though the Executive had 36 years of
continuous, full-time service with the Company;
(ii) for purposes of determining his Average Participating Compensation
("APC") under the ERAP,
(A) if he was employed by the Company for the entire Employment
Period, his APC shall be the higher of (1) his actual APC under
the ERAP, or (2) what his APC would have been as though the
target performance levels under the Company's annual cash
incentive plans had been achieved for each performance year
included within the Employment Period; or
(B) if was not employed by the Company for the entire Employment
Period, his APC shall be determined (1) for the period from
December 1, 1996, through his Date of Termination, by taking into
account his actual base salary received from December 1, 1996
through his Date of Termination; (2) for the period between his
Date of Termination and December 31, 2000, by assuming that he
would have continued to receive base salary from his Date of
Termination through December 31, 2000, at the rate in effect
immediately prior to his Date of Termination; (3) for the period
from December 1, 1996 through his Date of Termination, by taking
into account the higher of his actual payments received from the
Company's annual cash incentive plans during such period or what
such payments would have been if the target performance levels
under the Company's annual cash incentive plans had been achieved
for each performance year included within such period under this
clause (3); and (4) for the period between his Date of
Termination and December 31, 2000, by assuming that he would have
received payments under such annual cash incentive plans as
though the target performance levels under such plans had been
met for each performance year included within such period under
this clause (4); and
(iii) as though the legal restrictions the ERAP relating to the amount of
compensation (Internal Revenue Code Section 401(a)(17)) and the amount of
benefit (Internal Revenue Code Section 415) did not exist;
B equals the benefit the Executive is actually entitled to receive under
the ERAP at age 65, expressed as a single life annuity commencing at age
65; and
C equals a single life annuity of $196,065 per year, commencing at age 65,
which represents certain retirement benefits received by the Executive from
his prior employers.
For this purpose, "actuarial equivalent" shall mean the interest rate and
mortality table used by the ERAP in calculating the value of a lump sum benefit
as of the date of payment of this First Lump Sum.
102
<PAGE> 10
Notwithstanding the foregoing, if the Executive's Date of Termination is
prior to December 31, 2000, then the lump sum calculated under the preceding
paragraphs of this Exhibit A shall be multiplied by a fraction, the numerator of
which is the number of complete calendar months between November 30, 1996, and
the Date of Termination, and the denominator of which is forty-nine (49);
provided, however, that the calculation under this sentence shall not reduce the
lump sum payable to the Executive by more than fifty percent (50%) of the lump
sum that would be payable absent this paragraph.
Furthermore, if the reduced lump sum determined under the immediately
preceding sentence is required to be, and is in fact, paid before December 31,
2000, such reduced lump sum shall be discounted to present value as of the date
of payment of the lump sum using the interest rate that is used by the ERAP in
calculating the value of a lump sum benefit as of the date of payment of this
First Lump Sum.
SECOND LUMP SUM
In the event that the Company fails to perform at or above target
performance levels under its annual cash incentive plans in effect from time to
time (in the aggregate over the performance years included within the Employment
Period--December 1, 1996 through December 31, 2000), the Company will pay to the
Executive no later than May 1, 2001, an amount equal to (i) the aggregate
payments Executive would have received under such annual cash incentive plans
attributable to performance years included within the Employment Period (and
without adjusting for timing of payment), as if those target performance levels
had been achieved by the Company (in the aggregate, over the performance years
included within the Employment Period; reduced by (ii) the actual payments
received by the Executive under such annual cash incentive plans attributable to
the performance years included within the Employment Period.
THIRD LUMP SUM
At the written election of the Executive, to be made no later than the date
the Company announces to participants the performance results under the
Company's Long Term Performance Plan for the performance cycle ending in the
year 2000, and in lieu of receiving any payments under the Company's Long Term
Performance Plan after December 31, 2000, the Company shall pay to the Executive
no later than May 1, 2001, an amount equal to (i) the aggregate amount the
Executive would have received under the Long Term Performance Plan over each
performance cycle commencing within the Employment Period (and without adjusting
for timing of payment), as if the target performance levels for each cycle under
the Long Term Performance Plan had been achieved by the Company (in the
aggregate, over each performance cycle commencing within the Employment Period,
including cycles commencing within the Employment Period that end after the
expiration of the Employment Period); reduced by (ii) the actual payments
received by the Executive under the Long Term Performance Plan by May 1, 2001.
For purposes of this computation, payments made in the form of Company common
stock under the Long Term Performance Plan shall be valued at 100% of the
closing price of the Company's common stock on the New York Stock Exchange on
the last trading day immediately preceding the day the Company announces to
participants the performance results under the Company's Long Term Performance
Plan for the performance cycle ending in the year 2000.
103
<PAGE> 1
EXHIBIT 10.11
EASTMAN ESOP EXCESS PLAN
Preamble. The Eastman ESOP Excess Plan is intended to be an unfunded,
non-qualified deferred compensation arrangement for a select group of management
or highly compensated employees of Eastman Chemical Company ("the Company") and
certain of its subsidiaries, under the Employee Retirement Income Security Act
of 1974, as amended, and shall be so interpreted. This Plan is designed to
provide benefits payable out of the Company's general assets where certain
benefits cannot be paid under the Eastman Employee Stock Ownership Plan (the
"ESOP") because of Internal Revenue Code Section 401(a)(17) and the provisions
of the ESOP that implement that Section. This Plan is adopted effective February
2, 1995.
Section 1. Definitions.
Section 1.1. "Account" means the Interest-Bearing Account or the Stock
Account.
Section 1.2. "Affiliated Company" has the same meaning as in the ESOP.
Section 1.3. "Board" means the Board of Directors of the Company.
Section 1.4. "Change In Control" means a change in control of the Company
of a nature that would be required to be reported (assuming such event has
not been "previously reported") in response to Item 1(a) of a Current
Report on Form 8-K, as in effect on August 1, 1993, pursuant to Section 13
or 15(d) of the Exchange Act; provided that, without limitation, a Change
In Control shall be deemed to have occurred at such time as (i) any
"person" within the meaning of Section 14(d) of the Exchange Act, other
than the Company, a subsidiary of the Company, or any employee benefit
plan(s) sponsored by the Company or any subsidiary of the Company, is or
has become the "beneficial owner," as defined in Rule 13d-3 under the
Exchange Act, directly or indirectly, of 25% or more of the combined voting
power of the outstanding securities of the Company ordinarily having the
right to vote at the election of directors; provided, however, that the
following will not constitute a Change In Control: any acquisition by any
corporation if, immediately following such acquisition, more than 75% of
the outstanding securities of the acquiring corporation ordinarily having
the right to vote in the election of directors is beneficially owned by all
or substantially all of those persons who, immediately prior to such
acquisition, were the beneficial owners of the outstanding securities of
the Company ordinarily having the right to vote in the election of
directors, or (ii) individuals who constitute the Board on January 1, 1994
(the "Incumbent Board") have ceased for any reason to constitute at least a
majority thereof, provided that: any person becoming a director subsequent
to January 1, 1994 whose election, or nomination for election by the
Company's stockholders, was approved by a vote of at least three-quarters
(3/4) of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in which such
person is named as a nominee for director without objection to such
nomination) shall be, for purposes of the Plan, considered as though such
person were a member of the Incumbent Board, (iii) upon approval by the
Company's stockholders of a reorganization, merger or consolidation, other
than one with respect to which all or substantially all of those persons
who were the beneficial owners, immediately prior to such reorganization,
merger or consolidation, of outstanding securities of the Company
ordinarily having the right to vote in the election of directors own,
immediately after such transaction, more than 75% of the outstanding
securities of the resulting corporation ordinarily having the right to vote
in the election of directors; or (iv) upon approval by the Company's
stockholders of a complete liquidation and dissolution of the Company or
the sale or other disposition of all or substantially all of the assets of
the Company other than to a subsidiary of the Company. Notwithstanding the
occurrence of any of the foregoing, the Committee may determine, if it
deems it to be in the best
104
<PAGE> 2
interest of the Company, that an event or events otherwise constituting a
Change In Control shall not to be so considered. Such determination shall
be effective only if it is made by the Committee prior to the occurrence of
an event that otherwise would be or probably will lead to a Change In
Control or after such event if made by the Committee a majority of which is
composed of directors who were members of the Board immediately prior to
the event that otherwise would be or probably will lead to a Change In
Control.
Section 1.5. "Committee" means the Compensation and Management Development
Committee of the Board.
Section 1.6. "Common Stock" means the $.01 par value common stock of the
Company.
Section 1.7. "Company" means Eastman Chemical Company.
Section 1.8. "Effective Date" of an election means (i) the date such
election is made, if such election is made prior to the close of trading on
the New York Stock Exchange on a day on which the Common Stock is traded on
the New York Stock Exchange, or (ii) if such election is made after the
close of trading on the New York Stock Exchange on a given day or at any
time on a day on which no sales of Common Stock are made on the New York
Stock Exchange, then on the next business day on which the Common Stock is
traded on the New York Stock Exchange.
Section 1.9. "Eligible Employee" means any Participant in the ESOP.
Section 1.10. "ESOP" means the Eastman Employee Stock Ownership Plan, as
the same now exists or may be amended hereafter.
Section 1.11. "ESOP Contribution Date" means the date, if any, on which the
Trustee of the ESOP receives the Company's contributions to the ESOP for a
particular Plan Year.
Section 1.12. "ESOP Payout Percentage" means the percentage amount of an
Eligible Employee's "Compensation" (as defined in the ESOP) to which such
Eligible Employee is entitled as an allocation, whether such allocation is
in the form of cash, Common Stock, or a combination thereof, under the ESOP
for a particular Plan Year.
Section 1.13. "Excess Compensation" means the excess, if any, of (1) an
Employee's "Participating Earnings," as specified in Section 2.11(a) of the
ESOP, over (2) the dollar amount referred to in Section 2.11(b) of the
ESOP.
Section 1.14. "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
Section 1.15. "Interest-Bearing Account" means the account established by
the Company for a Participant pursuant to Section 4, which shall bear
interest as described in Section 4. The maintenance of individual
Interest-Bearing Accounts is for bookkeeping purposes only.
Section 1.16. "Interest Rate" means the monthly average of bank prime
lending rates to most favored customers as published in THE WALL STREET
JOURNAL, such average to be determined as of the last day of each month.
Section 1.17. "Market Value" means the closing price of the Common Stock on
the New York Stock Exchange as quoted in the New York Stock Exchange
Composite Transactions on the day for which the determination is to be
made, or if no sales of the Common Stock were made on that day, said
closing price on the next preceding business day on which the Common Stock
was traded.
Section 1.18. "Participant" means a person who in one or more years
receives an allocation pursuant to this Plan.
Section 1.19. "Plan" means this Eastman ESOP Excess Plan.
105
<PAGE> 3
Section 1.20. "Plan Year" has the same meaning as in the ESOP.
Section 1.21. "Section 16 Insider" means a Participant who is, with respect
to the Company, subject to Section 16 of the Exchange Act.
Section 1.22. "Stock Account" means the account established by the Company
for each Participant, the performance of which shall be measured by
reference to the Market Value of Common Stock. The maintenance of
individual Stock Accounts is for bookkeeping purposes only.
Section 1.23. "Valuation Date" means each business day.
Section 2. Allocations. For any Plan Year (including, without limitations, the
1994 Plan Year) in which an Eligible Employee has Excess Compensation, at such
time, if any, as the Company makes a contribution to the ESOP with respect to
such Plan Year, the Company shall credit to the Eligible Employee's Stock
Account under this Plan, an amount equal to the product of (1) the amount of
such Eligible Employee's Excess Compensation multiplied by (2) the ESOP Payout
Percentage.
Section 3. Description of Stock Account.
Section 3.1. General. Amounts in a Participant's Stock Account are
hypothetically invested in units of Common Stock. Such amounts are recorded
as units of Common Stock, and fractions thereof, with one unit equating to
a single share of Common Stock. Thus, the value of one unit shall be the
Market Value of a single share of Common Stock. The use of units is merely
a bookkeeping convenience; the units are not actual shares of Common Stock.
The Company will not reserve or otherwise set aside any Common Stock for or
to any Stock Account. The maximum number of shares of Common Stock that may
be hypothetically purchased through allocations to Stock Accounts under
this Plan is 100,000.
Section 3.2. Manner of Crediting Stock Account. If a Participant is
entitled to an allocation pursuant to Section 2, effective as of the ESOP
Contribution Date, his or her Stock Account shall be credited with that
number of units of Common Stock, and fractions thereof, obtained by
dividing (1) the dollar amount of such allocation as described in Section 2
by (2) the Market Value of the Common Stock on the ESOP Contribution Date.
Section 3.3. Election Out of the Stock Account. If a Participant elects
pursuant to Section 4 to transfer an amount from his or her Stock Account
to his or her Interest-Bearing Account, effective as of the election's
Effective Date, (i) his or her Interest-Bearing Account shall be credited
with a dollar amount equal to the amount obtained by multiplying the number
of units to be transferred by the Market Value of the Common Stock on the
election's Effective Date; and (ii) his or her Stock Account shall be
reduced by the number of units elected to be transferred.
Section 3.4. Dividend Equivalents. Effective as of the payment date for
each cash dividend on the Common Stock, the Stock Account of each
Participant who had a balance in his or her Stock Account on the record
date for such dividend shall be credited with the number of units of Common
Stock, and fractions thereof, obtained by dividing (i) the aggregate dollar
amount of such cash dividend payable in respect of such Participant's Stock
Account (determined by multiplying the dollar value of the dividend paid
upon a single share of Common Stock by the number of units of Common Stock
held in the Participant's Stock Account on the record date for such
dividend); by (ii) the Market Value of the Common Stock on the Valuation
Date immediately preceding the payment date for such cash dividend.
Section 3.5. Stock Dividends. Effective as of the payment date for each
stock dividend on the Common Stock, additional units of Common Stock shall
be credited to the Stock Account of each Participant who had a balance in
his or her Stock Account on the record date for such dividend. The number
of units that shall be credited to the Stock Account of such a Participant
shall equal the number of shares of Common Stock, and fractions thereof,
which the Participant would have received as stock dividends had he or she
been the owner on the record date for such stock dividend of the number of
shares of Common Stock equal to the number of units credited to his or her
Stock Account on such record date.
106
<PAGE> 4
Section 3.6. Recapitalization. If, as a result of a recapitalization of the
Company, the outstanding shares of Common Stock shall be changed into a
greater number or smaller number of shares, the number of units credited to
a Participant's Stock Account shall be appropriately adjusted on the same
basis.
Section 3.7. Distributions. Amounts in respect of units of Common Stock
shall be distributed in cash in accordance with Sections 5, 6, 7 and 15.
For purposes of a distribution pursuant to Sections 5, 6, 7 and 15, the
number of units to be distributed from a Participant's Stock Account shall
be valued by multiplying the number of such units by the Market Value of
the Common Stock as of the Valuation Date immediately preceding the date
such distribution is to occur. Pending the complete distribution of the
Stock Account of a Participant who has terminated his or her employment
with the Company or any of its Affiliated Companies, the Participant's
Stock Account shall continue to be credited with additional units of Common
Stock pursuant to Sections 3.4, 3.5 and 3.6.
Section 3.8. Special Provision for Section 16 Insiders. The Stock Account
of a Section 16 Insider is not transferable by him or her to any other
person or entity other than by will or the laws of descent and
distribution. The designation of a beneficiary by a Section 16 Insider does
not constitute a transfer for this purpose.
Section 4. Transfers to Interest-Bearing Account.
Section 4.1. General. Each Participant who has become a "Qualified
Participant" under Article 9 of the ESOP, or any successor provisions
thereto, may direct that an amount determined under Section 4.2 be
transferred from the Participant's Stock Account to his or her
Interest-Bearing Account at such time or times as such Participant could
make a diversification election pursuant to Article 9 of the ESOP, or any
successor provisions thereto. Amounts in a Participant's Interest-Bearing
Account are hypothetically invested in an account which bears interest
computed at the Interest Rate, compounded monthly.
Section 4.2. Amount of Transfer. A Participant who is a Qualified
Participant under the ESOP may direct the Plan to transfer from the
Participant's Stock Account to the Participant's Interest-Bearing Account,
a dollar amount equal to the value of the same portion (or all, if
applicable) of the total number of units credited to the Participant's
Stock Account as the portion of the total number of shares of "Employer
Securities" treated as acquired after 1986 which the Participant could
direct the ESOP to distribute pursuant to Article 9 of the ESOP, or any
successor provisions thereto; provided, however, that if a Participant does
not transfer to the Interest-Bearing Account the full number of units
eligible for transfer in a given year, then such untransferred units may be
carried forward and eligible for transfer in future years using
substantially the same methodology as is used for carry forward of unused
shares eligible for diversification under Article 9 of the ESOP, or any
successor provisions thereto.
Section 4.3. Manner of Directing Transfer. A Participant's election to
transfer under this Section 4 shall be provided to the Company's Vice
President, Human Resources, during the same period during which any
diversification election pursuant to Article 9 of the ESOP, or any
successor provisions thereto, must be provided and shall be in writing.
Notwithstanding the provisions of the ESOP, any such election may not be
modified or revoked, but shall be effective as of the election's Effective
Date. No amounts transferred from a Participant's Stock Account to a
Participant's Interest-Bearing Account may subsequently be transferred back
to the Participant's Stock Account.
Section 5. Payment of Accounts.
Section 5.1. Background. No withdrawal may be made from a Participant's
Accounts except as provided in this Section 5 and Sections 6, 7 and 15.
107
<PAGE> 5
Section 5.2. Manner of Payment. Payment of a Participant's Accounts shall
be made in a single lump sum or installments, in the sole discretion of the
Company's Vice President, Human Resources, with respect to Participants
other than executive officers of the Company, and by the Committee, with
respect to Participants who are executive officers (which, as used herein,
includes any officers who are Section 16 Insiders as a result of their
positions) of the Company. The maximum number of installments is ten. All
payments from the Plan shall be made in cash.
Section 5.3. Timing of Payments. Payments shall be made by the fifth
business day in March and shall commence in any year designated in the sole
discretion of the Company's Vice President, Human Resources, with respect
to Participants other than executive officers of the Company, and by the
Committee, with respect to Participants who are executive officers of the
Company, up through the tenth year following the year in which the
Participant retires, becomes disabled, or for any other reason ceases to be
an employee of the Company or any of its Affiliated Companies, but in no
event later than the year the Participant reaches age 71.
Section 5.4. Valuation. The amount of each payment shall be equal to the
value, as of the preceding Valuation Date, of the Participant's Accounts,
divided by the number of installments remaining to be paid. If a
Participant's Accounts are to be paid in installments and the Participant
has a balance in both his or her Stock Account and his or her
Interest-Bearing Account at the time of the payment of an installment, the
amount that shall be distributed from each Account shall be proportional to
the value of the balance in each such Account as of the immediately
preceding Valuation Date.
Section 6. Payment of Deferred Compensation After Death. If a Participant dies
prior to complete payment of his or her Accounts, the balance of such Accounts,
valued as of the Valuation Date immediately preceding the date payment is made,
shall be paid in a single, lump-sum payment to the same person who would be
entitled to receive survivor benefits with respect to the Participant under the
ESOP.
Section 7. Withdrawals.
Section 7.1. Acceleration of Payment for Hardship. Upon written approval
from the Company's Vice President, Human Resources, with respect to
Participants other than executive officers of the Company, and by the
Committee, with respect to Participants who are executive officers of the
Company, a Participant, whether or not he or she is still employed by the
Company or any of its Affiliated Companies, may be permitted to receive all
or part of his or her Accounts if the Company's Vice President, Human
Resources, or the Committee, as applicable, determines that an emergency
event beyond the Participant's control exists which would cause such
Participant severe financial hardship if the payment of his or her Accounts
were not approved. Any such distribution for hardship shall be limited to
the amount needed to meet such emergency. If at the time of such
distribution for hardship a Participant has a balance in both his or her
Stock Account and his or her Interest-Bearing Account, then the amount to
be distributed from each Account shall be determined in accordance with the
principles described in Section 5.4.
Section 7.2. Payment to Individuals. Any participant in the Eastman ESOP
Excess Plan may at his or her discretion withdraw at any time all or part
of that person's account balance under the Plan. If this option is
exercised the individual will forfeit to the Corporation 10% of his or her
account balance or $50,000, whichever is less, and will not be permitted to
participate in this plan for a period of 36 months from date any payment to
a participant is made under this section.
Section 7.3. Accelerated Payment. If under Eastman ESOP Excess Plan
one-half or more of the participants or one-fifth of the participants with
one-half of the value of all benefits owed exercise their option for
immediate distribution in a six month period then this will trigger
immediate payout to all participants of all benefits owed under the plans.
Immediate payout under this section will not involve reduction of the
amounts paid to participants as set forth in section 7.2. Any individual
that has been penalized in this six month period for electing immediate
withdrawal will be paid that penalty if payout to all participants under
this section occurs.
108
<PAGE> 6
Section 8. Participant's Rights Unsecured. The benefits payable under this Plan
shall be paid by the Company out of its general assets. To the extent a
Participant acquires the right to receive a payment under this Plan, such right
shall be no greater than that of an unsecured general creditor of the Company.
No amount payable under this Plan may be assigned, transferred, encumbered or
subject to any legal process for the payment of any claim against a Participant.
No Participant shall have the right to exercise any of the rights or privileges
of a stockholder with respect to the units credited to his or her Stock Account.
Section 9. No Right to Continued Employment. Participation in this Plan shall
not give any employee any right to remain in the employ of the Company or any of
its Affiliated Companies. The Company and each employer Affiliated Company
reserve the right to terminate any Participant at any time.
Section 10. Statement of Account. Statements will be sent no less frequently
than annually to each Participant or his or her estate showing the value of the
Participant's Accounts.
Section 11. Deductions. The Company will withhold to the extent required by law
all applicable income and other taxes with respect to amounts deferred or paid
under the Plan. Such withholding may, at the discretion of the Committee, be
deducted from sources outside of this Plan.
Section 12. Administration.
Section 12.1. Responsibility. Except as expressly provided otherwise
herein, the Committee shall have total and exclusive responsibility to
control, operate, manage and administer the Plan in accordance with its
terms.
Section 12.2. Authority of the Committee. The Committee shall have all the
authority that may be necessary or helpful to enable it to discharge its
responsibilities with respect to the Plan. Without limiting the generality
of the preceding sentence, the Committee shall have the exclusive right: to
interpret the Plan, to determine eligibility for participation in the Plan,
to decide all questions concerning eligibility for and the amount of
benefits payable under the Plan, to construe any ambiguous provision of the
Plan, to correct any default, to supply any omission, to reconcile any
inconsistency, and to decide any and all questions arising in the
administration, interpretation, and application of the Plan.
Section 12.3. Discretionary Authority. The Committee shall have full
discretionary authority in all matters related to the discharge of its
responsibilities and the exercise of its authority under the Plan
including, without limitation, its construction of the terms of the Plan
and its determination of eligibility for participation and benefits under
the Plan. It is the intent of the Plan that the decisions of the Committee
and its action with respect to the Plan shall be final and binding upon all
persons having or claiming to have any right or interest in or under the
Plan and that no such decision or action shall be modified upon judicial
review unless such decision or action is proven to be arbitrary or
capricious.
Section 12.4. Authority of Vice President, Human Resources. Where expressly
provided for under Sections 4 and 6, the authority of the Committee is
delegated to the Company's Vice President, Human Resources, and to that
extent the provisions of Section 11.1 through 11.3 above shall be deemed to
apply to such Vice President.
Section 12.5. Delegation of Authority. The Committee may provide for an
additional delegation of some or all of its authority under the Plan to any
person or persons provided that any such delegation be in writing.
Section 13. Amendment. The Committee may suspend or terminate the Plan at any
time, and may, from time to time, amend the Plan in any manner. However, no
amendment, modification, or termination shall, without the consent of a
Participant, adversely affect such Participant's accruals in his or her Accounts
as of the date of such amendment, modification, or termination.
109
<PAGE> 7
Section 14. Governing Law. The Plan shall be construed, governed and enforced in
accordance with the law of Tennessee, except as such laws are preempted by
applicable federal law.
Section 15. Change In Control.
Section 15.1. Background. The terms of this Section 15 shall immediately
become operative, without further action or consent by any person or
entity, upon a Change In Control, and once operative shall supersede and
control over any other provisions of this Plan.
Section 15.2. Acceleration of Payment Upon Change In Control. Upon the
occurrence of a Change In Control, each Participant, whether or not he or
she is still employed by the Company or any of its Affiliated Companies,
shall be paid in a single, lump-sum cash payment the balance of his or her
Accounts as of the Valuation Date immediately preceding the date payment is
made. Such payment shall be made as soon as practicable, but in no event
later than 90 days after the date of the Change In Control.
Section 15.3. Amendment On or After Change In Control. On or after a Change
In Control, no action, including, but not by way of limitation, the
amendment, suspension or termination of the Plan, shall be taken which
would affect the rights of any Participant or the operation of this Plan
with respect to the balance in the Participant's Accounts.
Section 15.4. Attorney Fees. The Corporation shall pay all reasonable legal
fees and related expenses incurred by a participant in seeking to obtain or
enforce any payment, benefit or right such participant may be entitled to
under the plan after a Change in Control; provided, however, the
participant shall be required to repay any such amounts to the Corporation
to the extent a court of competent jurisdiction issues a final and
non-appealable order setting forth the determination that the position
taken by the participant was frivolous or advanced in bad faith.
Section 16. Compliance with Securities Laws. The hypothetical units of Common
Stock provided for by this Plan are intended not to constitute "derivative
securities" for purposes of Rule 16a-1(c), or any successor provisions, under
the Exchange Act. To the extent any provision of this Plan or action by the
Committee would cause such units to constitute "derivative securities" for those
purposes, it shall be deemed to be null and void, to the extent permitted by law
and deemed advisable by the Committee.
The Committee may, from time to time, impose additional restrictions upon
Participants as it deems necessary, advisable or appropriate in order to comply
with applicable federal and state securities laws. All such restrictions shall
be accomplished by way of written administrative guidelines adopted by the
Committee.
Section 17. Successors and Assigns. This Plan shall be binding upon the
successors and assigns of the parties hereto.
110
<PAGE> 1
EXHIBIT 10.15
EASTMAN CHEMICAL COMPANY
1997-1999 LONG-TERM PERFORMANCE SUBPLAN
OF THE 1994 OMNIBUS LONG-TERM COMPENSATION PLAN
Section 1. Background. Under Section 11 of the Eastman Chemical Company 1994
Omnibus Long-Term Compensation Plan (the "Plan"), the "Committee" (as defined in
the Plan), may, among other things, award shares of the $.01 par value common
stock ("Common Stock") of Eastman Chemical Company (the "Company") to
"Employees" (as defined in the Plan), and such awards may take the form of
performance shares, which are contingent upon the attainment of certain
performance objectives during a specified period, and subject to such other
terms, conditions, and restrictions as the Committee deems appropriate. The
purpose of this 1997-1999 Long-Term Performance Subplan (this "Subplan") is to
set forth the terms of the grant of performance shares specified herein,
effective as of January 1, 1997 (the "Effective Date").
Section 2. Definitions.
(a) The following definitions shall apply to this Subplan:
(i) "Actual Grant Amount" means the number of shares of Common Stock to
which a participant is entitled under this Subplan, calculated in
accordance with Section 6 of this Subplan.
(ii) "Award Payment Date" means the date the shares of Common Stock
covered by an award under this Subplan are delivered to a
participant.
(iii) "Compared Group" means the Company and the companies in the Peer
Group.
(iv) "Maximum Deductible Amount" means the maximum amount deductible by
the Company under Section 162(a), taking into consideration the
limitations under Section 162(m), of the Internal Revenue Code of
1986, as amended, or any similar or successor provisions thereto.
(v) "Target Grant Amount" means, with respect to any eligible Employee,
the number of shares of Common Stock specified on Exhibit A hereto
for the Salary Grade applicable to such Employee.
(vi) "Participation Date" means June 30, 1997.
(vii) "Peer Group" means the group of companies identified in Exhibit B
hereto, with any changes made by the Committee pursuant to Section 7
of this Subplan.
(viii)"Performance Period" means January 1, 1997 through December 31,
1999.
(ix) "TSR" means total return to shareowners, as reflected by the sum of
(A) change in stock price (measured as the difference between (I) the
average of the closing prices of a company's common stock on the New
York Stock Exchange, or of the last sale prices of such stock on the
Nasdaq Stock Market, as applicable, over the first 20 trading days of
the period for which such change is being measured and (II) the
average of such closing or last sale prices for such stock over the
final 20 trading days of the period for which such change is being
measured) plus (B) dividends declared, assuming reinvestment of
dividends, and expressed as a percentage return on a shareowner's
hypothetical investment.
(b) Any capitalized terms used but not otherwise defined in this Subplan shall
have the respective meanings set forth in the Plan.
111
<PAGE> 2
Section 3. Administration. This Subplan shall be administered by the Committee.
The Committee shall have authority to interpret this Subplan, to prescribe rules
and regulations relating to this Subplan, and to take any other actions it deems
necessary or advisable for the administration of this Subplan, and shall retain
all general authority granted to it under Section 3 of the Plan.
Section 4. Eligibility. The Employees who are eligible to participate in this
Subplan are those Employees who, as of the Effective Date, have been designated
as "officers" of the Company for purposes of Section 16 of the Exchange Act and
those Employees designated by the Company's Chief Executive Officer during 1997,
which shall generally include Employees who, as of the Effective Date or the
Participation Date, held positions with the Company considered by the Chief
Executive Officer to carry responsibilities and functions generally associated
with a vice-president-level position. Employees who are promoted during the
Performance Period to a position that would meet the above criteria, but who do
not hold such position as of the Participation Date, are not eligible to
participate in this Subplan; however, the ability of the Chief Executive Officer
under this Section 4 to designate eligible Employees at any time during 1997 is
intended to allow the participation of Employees who, as of the Participation
Date, held positions with the Company that may not have been considered to carry
responsibilities and functions generally associated with a vice-president-level
position but which positions are or were evaluated during 1997 and determined by
the Chief Executive Officer to carry such responsibilities and functions.
Section 5. Form of Awards. Subject to the terms and conditions of the Plan and
this Subplan, Awards under this Subplan shall be paid in the form of
unrestricted shares of Common Stock, except for conversions to cash and
deferrals under Section 9 of this Subplan, and except that if a participant is
entitled to any fraction of a share of Common Stock, as a result of Section 10
of this Subplan or otherwise, then in lieu of receiving such fraction of a
share, the participant shall be paid a cash amount representing the market
value, as determined by the Committee, of such fraction of a share at the time
of payment.
Section 6. Size of Awards. Exhibit A hereto shows by Salary Grade the Target
Grant Amount. The Salary Grade to be used in calculating the size of any Award
to a participant under this Subplan shall be the higher of (a) the Salary Grade
applicable to the position held by the participant on the Participation Date
(or, in the case of participants whose employment is terminated prior to the
Participation Date, the Effective Date) and (b) the Salary Grade assigned to
such position during 1997 as a result of any reevaluation of the Salary Grade
appropriate for such position. The Actual Grant Amount shall be determined by
comparing the Company's TSR during the Performance Period to the TSRs of the
companies in the Peer Group during the Performance Period. Specifically, the
Company and each company in the Peer Group shall be ranked by TSR, in descending
order, with the company having the highest TSR during the Performance Period
being ranked number one. The Company's rank, by TSR, in relation to the Compared
Group, shall determine a multiplier to be applied to the Target Grant Amount.
Multipliers range from 2.0 (i.e. 200%), if the Company's TSR is ranked number
one, to 0.0 (with no shares of Common Stock being delivered to participants
under this Subplan), if the Company's rank is lower than company fifteen in the
Compared Group. The payout table with multipliers for each TSR rank is shown in
Exhibit C. The Actual Grant Amount is determined by applying the multiplier
corresponding to the Company's TSR rank (Exhibit C) to the Target Grant Amount.
Notwithstanding the foregoing, if the Peer Group produces fewer than 19 distinct
TSRs (as a result of the removal of a company from the Peer Group without
substitution of a replacement company therefor, as described in Section 7 of
this Subplan), then the Committee shall, in its sole discretion, determine the
appropriate means of calculating the Actual Grant Amount.
Section 7. Composition of Peer Group. The members of the Peer Group identified
in Exhibit B hereto have been identified as companies currently relevant for
purposes of TSR comparisons under this Subplan. However, the Committee shall
have the authority, at any time and from time to time, to determine that any
member of the Peer Group is no longer appropriate for inclusion. Circumstances
that might require such a determination include, without limitation, the
following events: a company's common stock ceasing to be publicly traded on an
exchange or on the Nasdaq Stock Market; a company's being a party to a
significant merger, acquisition, or other reorganization; or a company's ceasing
to operate in the chemical industry. In any case where the Committee determines
that a particular company is no longer appropriate for inclusion in the
112
<PAGE> 3
Peer Group, the Committee may designate a replacement company, which shall then
be substituted in the Peer Group for the former member. In any such case, the
Committee shall have authority to determine the appropriate method of
calculating the TSR of such former and/or replacement company or companies,
whether by complete substitution of the replacement company (and disregard of
the former company) over the entire Performance Period or by pro rata
calculations for each company or otherwise. Alternatively, in any case where the
Committee determines that a particular company is no longer appropriate for
inclusion in the Peer Group, the Committee may remove such company from the Peer
Group without substituting a replacement company therefor.
Section 8. Preconditions to Receipt of an Award.
(a) Continuous Employment. Except as specified in paragraph (b) below, to
remain eligible for an Award under this Subplan, an eligible Employee must
remain continuously employed with the Company or a Subsidiary at all times
from the Participation Date (or the Effective Date) through the Award
Payment Date.
(b) Death, Disability, Retirement, or Termination for an Approved Reason Before
the Award Payment Date. If a participant's employment with the Company or
a Subsidiary is terminated due to death, disability, retirement, or any
approved reason prior to the Award Payment Date, the participant shall
receive, subject to the terms and conditions of the Plan and this Subplan,
an Award representing a prorated portion of the Actual Grant Amount to
which such participant otherwise would be entitled, with the precise
amount of such Award to be determined by multiplying the Actual Grant
Amount by a fraction, the numerator of which is the number of full
calendar months in the Performance Period from the Effective Date through
and including the effective date of such termination, and the denominator
of which is 36 (the total number of months in the Performance Period). If
the effective date of a participant's termination of employment occurs on
or after the last business day of a particular calendar month, then such
month shall be considered a full calendar month and shall be counted
in determining the numerator of the fraction described in the preceding
sentence; if the effective date of such termination occurs prior to the
last business day of a particular calendar month, then such month
shall not be so counted.
Section 9. Manner and Timing of Award Payments.
(a) Timing of Award Payment. Except for deferrals under Sections 9(b) and 9(c),
if any Awards are payable under this Subplan, the payment of such Awards to
eligible Employees shall be made as soon as is administratively practicable
after the end of the Performance Period.
(b) Deferral of Award in Excess of the Maximum Deductible Amount. If payment of
the Award would, or could in the reasonable estimation of the Committee,
result in the participant's receiving compensation in excess of the Maximum
Deductible Amount in a given year, then such portion (or all, as
applicable) of the Award as would, or could in the reasonable estimation of
the Committee, cause such participant to receive compensation from the
Company in excess of the Maximum Deductible Amount shall be converted into
the right to receive a cash payment, which shall be deferred until after
the participant retires or otherwise terminates employment with the Company
and its Subsidiaries.
(c) Election to Defer the Award. Any participant in this Subplan may elect to
defer the Award until after the participant retires or otherwise terminates
employment with the Company and its Subsidiaries under the terms and
subject to the conditions of the Eastman Executive Deferred Compensation
Plan, as the same now exists or may be amended hereafter (the "EDCP"). If
the participant chooses to defer the Award, the Award shall be converted
into the right to receive a cash payment.
(d) Award Deferral to the EDCP. In the event that all or any portion of an
Award is converted into a right to receive a cash payment pursuant to
Sections 9(b) or 9(c), an amount representing the Fair Market Value, as of
the date the Common Stock covered by the Award otherwise would be delivered
to the participant, of the Actual Grant Amount (or the deferred portion
thereof) will be credited to the Stock Account of the EDCP, and
hypothetically invested in units of Common Stock. Thereafter, such amount
shall be treated in the same manner as other investments in the EDCP and
shall be subject to the terms and conditions thereof.
113
<PAGE> 4
Section 10. No Rights as Shareowner. No certificates for shares of Common Stock
shall be issued under this Subplan nor shall any participant have any rights as
a shareowner as a result of participation in this Subplan, until the Actual
Grant Amount has been determined and such participant has otherwise become
entitled to an Award under the terms of the Plan and this Subplan. In
particular, no participant shall have any right to vote or to receive dividends
on any shares of Common Stock under this Subplan, until certificates for such
shares have been issued as described above; provided, however, that if payment
of all or any portion of an Award under this Subplan has been deferred pursuant
to Section 9 of this Subplan or otherwise, but such Award otherwise has become
payable hereunder, then during the period during which payment is deferred, the
deferred Award shall be credited with additional units of Common Stock, and (if
applicable) fractions thereof, based on any dividends declared on the Common
Stock, in accordance with the terms of the EDCP.
Section 11. Application of Plan. The provisions of the Plan shall apply to this
Subplan, except to the extent that any such provisions are inconsistent with
specific provisions of this Subplan. In particular, and without limitation,
Section 11 (relating to performance shares), Section 16 (relating to
nonassignability), Section 17 (relating to adjustment of shares available),
Section 18 (relating to withholding taxes), Section 19 (relating to
noncompetition and confidentiality), Section 20 (relating to regulatory
approvals and listings), Section 22 (relating to the governing law), Section 23
(relating to changes in ownership), Section 24 (relating to changes in control),
Section 25 (relating to no rights, title, or interest in Company assets), and
Section 26 (relating to securities laws) shall apply to this Subplan.
Section 12. Amendments. The Committee may, from time to time, amend this Subplan
in any manner.
114
<PAGE> 5
EXHIBIT A
EASTMAN CHEMICAL COMPANY LTPP GRANT TABLE
1997-1999 CYCLE
TARGET GRANT AMOUNT
Original on File in
Management Compensation
115
<PAGE> 6
EXHIBIT B
COMPANIES IN THE PEER GROUP
Air Products and Chemicals, Inc.
ARCO Chemical Company
Crompton & Knowles Corporation
Dow Chemical Company
E. I. du Pont de Nemours and Company
H. B. Fuller Company
The Geon Company
Georgia Gulf Corporation
W. G. Grace, Inc.
Great Lakes Chemical Corporation
M. A. Hanna Company
Hercules Chemical Corporation
Lyondell Petrochemical Company
Millenium
Morton International, Inc.
Rohm and Haas Company
Union Carbide Corporation
Wellman, Inc.
Witco Corporation
116
<PAGE> 7
EXHIBIT C
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE PLAN
Eastman's TSR Payout Multiplier
Ranking (Times Target Grant Amount)
1 2.0 X
2 1.9 X
3 1.8 X
4 1.7 X
5 1.6 X
6 1.5 X
7 1.4 X
8 1.3 X
9 1.2 X
10 1.1 X
11 0.9 X
12 0.7 X
13 0.5 X
14 0.3 X
15 0.1 X
16 0.0 X
17 0.0 X
18 0.0 X
19 0.0 X
20 0.0 X
117
<PAGE> 1
EXHIBIT 11.01
EASTMAN CHEMICAL COMPANY SUBSIDIARIES
COMPUTATION OF EARNINGS PER COMMON SHARE
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
EARNINGS $ 380 $ 559 $ 336
========= ========= =========
PRIMARY EARNINGS PER SHARE
Average number of common shares outstanding 78.5 81.7 82.7
Common share equivalents (1) 0.7 0.7 0.3
--------- --------- ---------
Average number of common shares and share equivalents 79.2 82.4 83.0
========= ========= =========
Primary earnings per share (1) $ 4.80 $ 6.78 $ 4.05
========= ========= =========
FULLY DILUTED EARNINGS PER SHARE
Average number of common shares outstanding 78.5 81.7 82.7
Common share equivalents (1) 0.8 0.9 0.3
--------- --------- ---------
Average number of common shares and share equivalents 79.3 82.6 83.0
========= ========= =========
Fully diluted earnings per share $ 4.79 $ 6.77 $ 4.05
========= ========= =========
</TABLE>
- ----------------------
(1) Common share equivalents of the Company represent the effect of dilutive
stock options outstanding during the period.
118
<PAGE> 1
EXHIBIT 12.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1996 1995 1994 1993(1) 1992(1)
<S> <S> <C> <C> <C> <C>
Earnings from continuing
operations before provision
for income taxes $ 607 $ 899 $ 550 $ 439 $ 483
Add:
Interest expense 67 79 87 7 3
Rental expense(2) 22 16 7 11 8
Amortization of
capitalized interest 14 13 15 15 14
--------- --------- --------- --------- ---------
Earnings as adjusted $ 710 $ 1,007 $ 659 $ 472 $ 508
========= ========= ========= ========= =========
Fixed charges:
Interest expense $ 67 $ 79 $ 87 $ 7 $ 3
Rental expense(2) 22 16 7 11 8
Capitalized interest 28 9 11 24 27
--------- --------- --------- --------- ---------
Total fixed charges $ 117 $ 104 $ 105 $ 42 $ 38
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 6.1x 9.7x 6.3x 11.2x 13.4x
========= ========= ========= ========= =========
</TABLE>
- ---------------------------
(1) The historical amounts for 1992-1993 as presented above, were determined
during periods when the Company was a wholly owned chemical business of
Kodak. If the Company was an independent publicly held entity during these
years, the pro forma ratio of earnings to fixed charges would approximate
4.1x and 3.7x for 1992 and 1993, respectively, reflecting the assumption of
$1,800 million of new borrowings at a 6% annual interest rate, and
adjustments for pension, postretirement and certain other employee benefit
costs. These costs were not allocated to the Company by Kodak during
1992-1993 and therefore, are not included in the historical amounts
presented above.
(2) For all periods presented, the interest component of rental expense is
estimated to equal one-third of such expense.
119
<PAGE> 1
EXHIBIT 21.01
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
<S> <C>
ABCO Industries, Incorporated South Carolina
Eastman Chemical Argentina S.A. Argentina
Eastman Chemical, Asia Pacific Pte. Ltd. Singapore
Eastman Chemical Brasileira Ltd. Brazil
Eastman Chemical B.V. Netherlands
Eastman Chemical Canada, Inc. Canada
Eastman Chemical Ectona, Ltd. England
Eastman Chemical Espana, Inc. Delaware
Eastman Chemical Espana, S.A. Spain
Eastman Chemical, Europe, Middle East and Africa, Ltd. Delaware
Eastman Chemical Foreign Sales Corporation Barbados
Eastman Chemical Company Foundation, Inc. Tennessee
Eastman Chemical Holdings, S.A. de C.V. Mexico
Eastman Chemical Hong Kong Limited Hong Kong
Eastman Chemical Industrial de Mexico, S.A. de C.V. Mexico
Eastman Chemical Japan Limited Japan
Eastman Chemical Korea Ltd. Korea
Eastman Chemical Ltd. New York
Eastman Chemical (Malaysia) Sdn. Bhd. Malaysia
Eastman Chemical Mexicana S.A. de C.V. Mexico
Eastman Chemical, Netherlands B.V. Amsterdam Netherlands
Eastman Chemical S. Com P.A. Spain
Eastman Chemical Singapore Pte. Ltd. Singapore
Eastman Chemical (UK) Limited United Kingdom
</TABLE>
120
<PAGE> 2
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
<S> <C>
Eastman International Management Company Tennessee
Enterprise Genetics, Inc. Nevada
Hartlepet, Limited United Kingdom
Holston Defense Corporation Virginia
Mustang Pipeline Company Texas
Pinto Pipeline Company of Texas Texas
Workington Investments Limited United Kingdom
</TABLE>
121
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (No. 33-73808, No. 33-73810, No. 33-73812 and No.
33-77844) of Eastman Chemical Company of our report dated January 21, 1997
relating to the consolidated financial statements of Eastman Chemical Company
appearing on page 30 of this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
- ---------------------------------------
PRICE WATERHOUSE LLP
New York, New York
March 12, 1997
122
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF EASTMAN CHEMICAL COMPANY FOR THE TWELVE MONTHS ENDED
DECEMBER 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 24
<SECURITIES> 0
<RECEIVABLES> 744<F1>
<ALLOWANCES> 0
<INVENTORY> 465
<CURRENT-ASSETS> 1,345
<PP&E> 7,530
<DEPRECIATION> 4,010
<TOTAL-ASSETS> 5,266
<CURRENT-LIABILITIES> 787
<BONDS> 1,523
0
0
<COMMON> 1
<OTHER-SE> 1,638
<TOTAL-LIABILITY-AND-EQUITY> 5,266
<SALES> 4,782
<TOTAL-REVENUES> 4,782
<CGS> 3,603
<TOTAL-COSTS> 3,603
<OTHER-EXPENSES> 516
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 67
<INCOME-PRETAX> 607
<INCOME-TAX> 227
<INCOME-CONTINUING> 380
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 380
<EPS-PRIMARY> 4.80
<EPS-DILUTED> 4.80
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL BUSINESS SEGMENT INFORMATION
1996 CHANGE FROM 1995
<TABLE>
<CAPTION>
FOURTH QUARTER TWELVE MONTHS
% CHANGE OPERATING % CHANGE OPERATING
SALES VOLUME EARNINGS(1) SALES VOLUME EARNINGS(1)
<S> <C> <C> <C> <C> <C> <C>
SPECIALTY & PERFORMANCE SEGMENT (2)
Specialty plastics (5)% 7 % ++ (1)% 3 % ++
Performance chemicals (7)% (8)% -- (2)% (3)% ++
Fine chemicals (15)% (15)% -- (4)% (4)% --
Fibers (3)% (7)% ++ 7 % 1 % ++
Coatings, inks & resins 9 % 14 % - 3 % 6 % -
Total Segment (5)% (3)% 20 % - % - % 20 %
======= ======= ========= ======= ======= =========
CORE PLASTICS SEGMENT (2)
Container plastics (37)% 12 % -- (21)% 1 % --
Flexible plastics 10 % 4 % -- (7)% 2 % --
Total Segment (22)% 10 % (156)% (16)% 1 % (100)%
======= ======= ========= ======= ======= =========
CHEMICAL INTERMEDIATES SEGMENT (2)
Industrial intermediates 7 % 13 % -- 1 % 9 % --
Total Segment 7 % 13 % (39)% 1 % 9 % (21)%
======= ======= ========= ======= ======= =========
Total Eastman (9)% 3 % (46)% (5)% 2 % (31)%
======= ======= ========= ======= ======= =========
</TABLE>
- ------------------------------
(1) 0 = Change of approximately 0 - 2% (+ or -)
+ = Increase of approximately 2 - 10%
++ = Increase of greater than 10%
- = Decrease of approximately (2) - (10)%
-- = Decrease of greater than (10%)
Sm = Negligible change in dollar amount
Nm = Not meaningful
(2) In 1996 the Company created a new business segment, Core Plastics, and
renamed the remaining two segments. The Company believes that the new
segmentation will provide more useful information for decision-making and
for understanding the Company's financial results. The 1995 results have
been restated to conform to the 1996 presentation.
123
<PAGE> 1
EXHIBIT 99.02
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
RESTATED BUSINESS SEGMENT INFORMATION
QUARTERLY SALES AND EARNINGS INFORMATION(1)
<TABLE>
<CAPTION>
(DOLLARS IN MILLIONS) FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
<S> <C> <C> <C> <C> <C>
SPECIALTY AND PERFORMANCE
Sales
1996 $ 663 $ 686 $ 674 $ 634 $ 2,657
1995 651 680 649 667 2,647
1994 549 575 609 631 2,364
Operating earnings
1996 $ 119 $ 139 $ 139 $ 122 $ 519
1995 97 115 119 102 433
1994 71 90 97 92 350
CORE PLASTICS
Sales
1996 $ 423 $ 373 $ 311 $ 302 $ 1,409
1995 407 448 441 389 1,685
1994 302 333 372 383 1,390
Operating earnings (losses)
1996 $ 40 $ 8 $ (14) $ (35) $ (1)
1995 92 97 94 64 347
1994 28 44 56 71 199
CHEMICAL INTERMEDIATES
Sales
1996 $ 175 $ 182 $ 182 $ 177 $ 716
1995 174 193 176 165 708
1994 132 139 149 155 575
Operating earnings
1996 $ 32 $ 43 $ 44 $ 26 $ 145
1995 39 53 47 45 184
1994 18 20 26 23 87
</TABLE>
- ------------------------
(1) In 1996 the Company created a new business segment, Core Plastics, and
renamed the remaining two segments. The Company believes that the new
segmentation will provide more useful information for decision-making and
for understanding the Company's financial results. Prior periods have been
restated to conform to the 1996 presentation. See Management's Discussion
and Analysis of Financial Condition and Results of Operations - Summary by
Industry Segment and Note 14 to the consolidated financial statements.
124
