<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
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ____________
Commission file number 1-12626
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 112 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 65
<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 on January 30, 1998) of the voting stock held by nonaffiliates was
approximately $4,654,265,390 as of January 31, 1998, 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, 1998, 78,445,546 shares of Common
Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 1998
Annual Meeting of Shareowners (the "1998 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; expected tax rates
and depreciation; environmental matters; the year 2000 issue; legal proceedings;
the Asian financial crisis; supply and demand, volume, price, margin, and sales
and earnings expectations and strategies 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 OF CONTENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------
ITEM PAGE
- ---------------------------------------------------------------------------------------------------------
PART I
<S> <C>
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 20-30
8. Financial Statements and Supplementary Data 31-59
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 60
PART III
10. Directors and Executive Officers of the Registrant 61
11. Executive Compensation 61
12. Security Ownership of Certain Beneficial Owners and Management 61
13. Certain Relationships and Related Transactions 61
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 62
SIGNATURES
Signatures 63-64
</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 beverage and food
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 1997 the Company had sales of $4.68 billion, operating
earnings of $506 million, net earnings of $286 million, and basic earnings per
share of $3.66.
The Company began business in 1920 for the purpose of producing chemicals for
Eastman Kodak Company's ("Kodak") photographic business. As of December 31,
1993, the Company became an independent entity when Eastman Kodak Company spun
off its chemical 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 15 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 major plastics products,
EASTAPAK polymers polyester packaging plastic, TENITE, EASTACOAT, MXSTEN and
TENITE HIFOR polyethylenes, as well as cellulose esters 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. Proprietary 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.
4
<PAGE> 5
The following table summarizes the Company's recent financial performance and
identifiable assets by industry segment.
<TABLE>
<CAPTION>
SEGMENT FINANCIAL SUMMARY
(Dollars in millions)
1997 1996 1995
<S> <C> <C> <C>
SALES
Specialty and Performance $ 2,607 $ 2,657 $ 2,647
Core Plastics 1,338 1,409 1,685
Chemical Intermediates 733 716 708
------- ------- -------
Total $ 4,678 $ 4,782 $ 5,040
======= ======= =======
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 416(1) $ 519 $ 433
Core Plastics (56)(1) (1) 347
Chemical Intermediates 146(1) 145 184
------- ------- -------
Total $ 506 $ 663 $ 964
======= ======= =======
ASSETS
Specialty and Performance $ 3,019 $ 2,887 $ 2,776
Core Plastics 2,188 1,854 1,598
Chemical Intermediates 571 525 498
------- ------- -------
Total $ 5,778 $ 5,266 $ 4,872
======= ======= =======
</TABLE>
(1) Operating earnings for 1997 reflect the effect of a $62 million ($40 million
after tax) charge for partial settlement/curtailment of pension and other
postemployment benefit liabilities. This charge was allocated to segments as
follows: Specialty and Performance, $34 million; Core Plastics, $18 million; and
Chemical Intermediates, $10 million. See Note 14 to Consolidated Financial
Statements.
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 employs 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.
5
<PAGE> 6
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, 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 fourteen 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 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 12 quality system registrations to the international quality
standard, ISO 9000. Ten of these are in North America and two are in the United
Kingdom. Approximately three-fourths of 1997 sales were from products
manufactured in ISO 9000 registered quality systems.
Expansion in International Markets
Approximately 41% of the Company's customers representing 39% of the Company's
sales were outside the United States in 1997. This growth in worldwide sales
over the past few years and achievement of satisfactory returns is primarily due
to its efficient large-scale plants in the United States and increasing
expansion of manufacturing facilities in strategic global locations. The Company
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; EASTAPAK polymers plants in
Cosoleacaque, Veracruz, Mexico and San Roque, Spain; 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 is building EASTAPAK polymers plants in the
Netherlands and Argentina, with operational dates of 1998. Construction is also
underway on an additional plant in the Netherlands to produce purified
terephthalic acid ("PTA"), a key raw material for the production of EASTAPAK
polymers, with an operational date of 1998. A newly constructed facility located
in Kuantan, Malaysia, will produce 30,000 metric tons of copolyester when it
becomes operational in 1998. In addition, the Company has begun construction of
a new oxo chemicals manufacturing complex in Singapore, with production expected
in early 1999, and is studying the feasibility of forming a joint venture in
Nanjing, People's Republic of China, to produce hydrocarbon tackifying resins.
The Company has increased its international sales and distribution
infrastructure during the past several years to position it for worldwide sales
growth. In particular, from 1990 through 1997, the Company increased personnel
outside the United States from approximately 500 to nearly 1,800 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
6
<PAGE> 7
countries. For financial information about foreign and domestic operations and
export sales, see Part II--Item 8--Financial Statements and Supplementary
Data--Note 15 to Consolidated Financial Statements.
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 600 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 1997, 1996, and 1995) has been made in the form of a contribution
by the Company 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 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 and Fabrics
Coatings, inks, and resins Coatings, inks and paints
Fine chemicals Photographic and custom chemicals
Pharmaceutical and agricultural intermediates
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 30% of the annual
worldwide production of acetate tow, and sells to all major cigarette producers
throughout the world. The two primary raw materials used in the manufacture of
acetate tow are cellulose (from wood pulp) and acetic anhydride. 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. In 1995 and
1996 worldwide growth in the market for acetate tow, led primarily by sales to
China, resulted in higher levels of capacity utilization for both the Company
and the industry. During 1997, industry capacity utilization declined somewhat
due to new domestic production facilities beginning operation in China,
resulting in lower sales of and lower operating earnings for acetate tow. The
Company expects very modest growth in worldwide demand for acetate tow over the
long term.
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 essentially no
growth during recent years, and, in fact, declined somewhat during 1997. The
Company has focused its efforts on improving its operating efficiencies to
maintain its product quality and cost position.
Fibers products accounted for approximately 28% of 1997 Specialty and
Performance segment sales.
Coatings, inks, and resins
The Company supplies a wide variety of raw materials and intermediate products
to the coatings, inks, and resins markets, including solvents, alcohols,
glycols, and resins. All of the Company's coatings, inks, and resins products
are currently produced in the United States with a majority of 1997 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. Products include
mixed cellulose esters, of which the Company is the world's only manufacturer.
Competitive suppliers of products into the coatings, inks, and resins markets
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.
Products sold in these markets accounted for approximately 26% of 1997 Specialty
and Performance segment sales.
8
<PAGE> 9
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 19% of 1997
Specialty and Performance segment sales.
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). During 1997,
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. 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 1997, performance chemicals accounted for approximately 12% of
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>
<S> <C>
Product Groupings Primary Markets
- --------------------------------- -------------------------------------------
Container plastics Soft drink, food and water containers
Flexible plastics Packaging
Photographic
Fibers
</TABLE>
Container plastics
The Company is the world's leading supplier of polyester plastics, including
EASTAPAK polymers (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. Industry estimates indicate that PET consumption
grew worldwide from 2.3 billion pounds per year in 1989 to approximately 8.9
billion pounds per year in 1997. Capital expansion projects currently underway
in the Netherlands and Argentina will add approximately 600 million pounds of
additional PET capacity by the end of 1998. Overcapacity worldwide continues to
pressure PET selling prices.
Competition for the large volume PET market is based largely on price and
service. 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. Container plastics products accounted for
approximately 62% of 1997 Core Plastics segment sales.
Flexible plastics
The Company manufactures a variety of plastics including polyethylene, cellulose
esters, and polyesters for applications such as film, extrusion coating, fibers,
tape, industrial strapping, and injection molding. The polyethylene product line
includes low density, linear low density, and medium/high density polymers. The
markets for these polyethylene 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 the overall polyethylene
market, the strategy is to focus on selected markets based on the Company's
ability to produce high quality performance polymers. In addition to
polyethylenes, the Company's strong core competency in cellulose esters and
polyesters allows it to offer a wide range of differentiated high performance
polymers in selected fiber and film markets. Flexible plastics accounted for
approximately 38% of 1997 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>
<S> <C>
Product Groupings Primary Markets
- ---------------------------------- -------------------------------------------
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 1997 approximately 76% 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 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,
purified terephthalic acid ("PTA"), 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 $749 million in 1997, $789 million in 1996, and
$446 million in 1995. Eastman anticipates that total capital expenditures in
1998 will be between $550 and $600 million. 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 1997, 1996, and 1995, the Company made capital expenditures of $70
million, $51 million, and $39 million, respectively, related to environmental
improvements. The Company estimates that such capital expenditures will be
approximately $49 million and $86 million for 1998 and 1999, respectively.
Future expenditures will be dependent in part upon implementation of government
environmental regulations.
DISPOSITIONS
As previously reported, 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 and its polyols business in 1997. The effect of these
divestitures and product discontinuances on financial position and results of
operations has not been, and is not expected to be, material.
11
<PAGE> 12
EMPLOYEE RELATIONS
The Company employs approximately 16,100 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, while it is not dependent on any one
customer or group of customers, loss of certain top customers could adversely
affect the Company until such business is replaced. The Company has
approximately 5,300 customers worldwide and the top 100 customers account for
approximately 60% of the Company's business. Eastman's largest customer is
Kodak, which accounted for approximately 5% of total sales in 1997.
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, Celanese, Mitsubishi, Novaceta,
Rhone-Poulenc, Teijin
Coatings, inks, and resins BASF, Exxon, Celanese, S. C. Johnson, Lonza,
Oxychem, Shell, Union Carbide
Fine chemicals DSM, LaPorte, Lonza
Performance chemicals AlliedSignal, ARCO, Clariant, Daicel, Dow, Exxon, Hercules,
Nutrinova, Rexene, Rhone-Poulenc, UOP
Specialty plastics BASF, Bayer, Dow, DuPont, GE, Hoechst A.G., Phillips, Akzo Nobel,
AtoHaas, ICI, Geon, Shell
Container plastics Hoechst Celanese, DuPont, Shell, Wellman, Nan Ya
Flexible plastics Chevron, Dow, Exxon, Hoechst Celanese, Mobil, Quantum, Shell,
Union Carbide
Industrial intermediates BASF, BP, Dow, Exxon, Celanese Ltd., Rhone-Poulenc, Union Carbide
</TABLE>
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" section on next page).
12
<PAGE> 13
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. 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. In addition, the Company has commercialized a group of
new, higher-value polyolefins with increased tear strength and impact
performance--MXSTEN and TENITE HIFOR.
The Company's research and development expenditures during the past five years
have averaged approximately 4% of sales annually with 1997, 1996, and 1995
expenditures totaling $191 million, $184 million, and $176 million,
respectively. Expenditures for 1998 are anticipated to be within the 1996-1997
range.
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. Company patents expire at
various times during the next several years. The Company also owns or licenses
trademarks in the U.S. and in foreign countries 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 some 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 third quarters.
MARKETING AND DISTRIBUTION
The Company markets products through a worldwide sales organization with 36
sales offices outside the United States in 32 countries. A majority of sales are
direct; however, some sales are made through indirect selling 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
The Company is actively engaged in the ongoing development and enhancement of
products that are environmentally responsible, such as waterborne products and
recyclable plastics. In addition, the Company 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.
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.
13
<PAGE> 14
The Company's commitment to environmental stewardship has earned favorable
recognition. In late 1997, Eastman was recognized by the Chemical Manufacturers
Association for its 1996 energy efficiency efforts. 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.
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 can be reasonably estimated.
The Company's environmental protection and improvement cash expenditures were
approximately $220 million, $175 million, and $150 million in 1997, 1996, and
1995, respectively, 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 1997, 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 59, 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 and also served as Group Vice President of
Kodak from 1989 through 1993.
R. Wiley Bourne, Jr., age 60, is Vice Chairman of the Board and Executive Vice
President of the Company, responsible for all business organizations. He joined
the Company in 1959, was named Executive Vice President in 1989, and 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, 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 assumed his current responsibilities in 1996.
He also served as a Vice President of Kodak from 1984 through 1993.
Harold L. Henderson, age 62, joined the Company in 1997 as Senior Vice President
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 59, is Senior Vice President of the Company, responsible for
functional organizations. Mr. Nethery joined the Company in 1960 and was named
Senior Vice President, Manufacturing of the Company in 1989. 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. Mr. Stephens has announced his retirement effective April 1,
1998.
Darryl K. Williams, age 55, is Senior Vice President, Technology and Quality, of
the Company. 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 Senior Vice President, Technology in 1996. He
assumed his current position in 1998.
Betty W. DeVinney, age 53, is Vice President, Communications and Public Affairs.
Mrs. DeVinney joined the Company in 1973. In 1991, she became Manager,
Employment, was named Manager, Community Relations in 1995 and was appointed
Manager, Corporate Relations in 1997. She assumed her current position in 1998.
Patrick R. Kinsey, age 52, is Vice President and Comptroller of the Company. Mr.
Kinsey joined the Company in 1967, was named Director, Internal Auditing in 1993
and became Director, Corporate Financial Reporting in 1996. He assumed his
current position in 1998.
B. Fielding Rolston, age 56, is Vice President, Human Resources and Health,
Safety, Environment, and Security of the Company. Mr. Rolston joined the Company
in 1964 and was appointed Vice President, Customer Service and Materials
Management of the Company in 1987. He assumed his current position in 1998.
Allan R. Rothwell, age 50, assumed his current position as Vice President,
Corporate Development and Strategy in 1997. In addition to his current
responsibilities, Mr. Rothwell will assume the position of Senior Vice President
and Chief Financial Officer on April 1, 1998, upon the retirement of Mr.
Stephens. Mr. Rothwell joined the Company in 1969 and was appointed Business
Director, Industrial Intermediates in 1993. In 1994, he became Vice President
and General Manager, Container Plastics.
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 de Mexico Polyester Polymers
Hartlepool, England Eastman Chemical Ectona, Ltd. Polyester Polymers
Hong Kong Eastman Chemical Hong Kong, Ltd. Fine Chemicals
Kingsport, TN Tennessee Eastman Acetate Tow
Coatings and Paint Raw Materials
Polyester Polymers
Fine Chemicals
Kuantan, Malaysia* Eastman Chemical Malaysia SDN BHD Copolyester Plastics
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
Textile Chemicals
Rotterdam, Netherlands* Eastman Chemical Netherlands B.V. Polyester Polymers
San Roque, Spain Eastman Chemical Espana, S.A. Polyester Polymers
Singapore* Eastman Chemical Singapore Pte. Ltd. Oxo Chemicals
Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Polyester Polymers
Workington, England Eastman Chemical Ectona, Ltd. Acetate Tow
Polyester Polymers
Zarate, Argentina* Eastman Chemical Argentina S.A. Polyester Polymers
*Under construction
</TABLE>
The Company has a 50% interest in Primester, a joint venture 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 also has a 50% interest in Genencor International, a joint venture
which develops, manufactures and markets industrial enzymes and other fine and
specialty chemicals at numerous international locations.
The Company has distribution facilities at all of its plant sites. In addition,
the Company conducts manufacturing operations at three other sites and operates
81 stand-alone distribution facilities in 18 countries. Corporate headquarters
are in Kingsport, Tennessee. The Company's regional headquarters are in Coral
Gables, Florida; The Hague, Netherlands; Singapore; and Kingsport, Tennessee.
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; Coral Gables, Florida; and Singapore.
16
<PAGE> 17
ITEM 3. LEGAL PROCEEDINGS
LEGAL PROCEEDINGS
In May 1997 the Company received notice from the Tennessee Department of
Environment and Conservation ("TDEC") alleging that the manner in which
hazardous waste was fed into certain boilers at the Tennessee Eastman facility
in Kingsport, Tennessee violated provisions of the Tennessee Hazardous Waste
Management Act. Based upon subsequent communications with the TDEC and the U.S.
Environmental Protection Agency, the Company believes that these agencies may be
contemplating enforcement proceedings which, if commenced, could result in
monetary sanctions in excess of the $100,000 threshold of Regulation S-K, Item
103, Instruction 5.C. under the Securities Exchange Act of 1934 for reporting
such contemplated proceedings in this Report.
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal injury,
patent, commercial, contract, environmental, antitrust, health and safety, and
employment matters, which are being handled and defended in the ordinary course
of business. While the Company is unable to predict the outcome of these
matters, it does not believe, based upon currently available facts, that the
ultimate resolution of any of such pending matters, including the TDEC
allegations described in the preceding paragraph, will have a material adverse
effect on the Company's financial position, 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 1997.
- --------------------------------------
RESPONSIBLE CARE is a registered service mark of the chemical industry.
EASTAPAK, TENITE, EASTACOAT, MXSTEN, SPECTAR, and TENITE HIFOR 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 1996 and 1997.
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW DECLARED
<C> <C> <C> <C>
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
1997
1st Quarter 57 53 1/2 $ .44
2nd Quarter 64 1/2 50 3/4 .44
3rd Quarter 64 57 3/8 .44
4th Quarter 65 3/8 56 1/4 .44
</TABLE>
- ----------
As of January 31, 1998 there were 78,445,546 shares of the Company's Common
Stock issued and outstanding, which shares were held by approximately 86,700
shareowners of record. These shares include 184,557 shares held by the Company's
charitable foundation. The Company has declared a cash dividend of $0.44 per
share during the first quarter of 1998, 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 the fourth quarter of 1997
in transactions not registered under the Securities Act of 1933. For information
concerning issuance of shares, a warrant to purchase shares, a warrant to
purchase shares, and option grants in 1997 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) 1997(1) 1996 1995 1994 1993(2)
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA
Sales $ 4,678 $ 4,782 $ 5,040 $ 4,329 $ 3,903
Operating earnings 506 663 964 636 451
Earnings from continuing operations
before income taxes and cumulative
effect of changes in accounting principle 446 607 899 550 439
Earnings from continuing operations 286 380 559 336 267
Discontinued operations, net of taxes - - - - (20)
Cumulative effect of changes
in accounting principle, net of taxes - - - - (456)
Net earnings (loss) 286 380 559 336 (209)
Basic earnings per share(3) 3.66 4.84 6.84 4.06 2.47
Diluted earnings per share(3) 3.63 4.79 6.78 4.04 2.46
STATEMENT OF FINANCIAL POSITION DATA
Current assets $ 1,490 $ 1,345 $ 1,487 $ 1,248 $ 1,057
Properties at cost 8,104 7,530 6,791 6,389 6,390
Accumulated depreciation 4,223 4,010 3,742 3,483 3,331
Total assets 5,778 5,266 4,872 4,395 4,341
Current liabilities 954 787 873 793 462
Long-term borrowings 1,714 1,523 1,217 1,195 1,801
Total liabilities 4,025 3,627 3,344 3,100 3,280
Total shareowners' equity 1,753 1,639 1,528 1,295 1,061
Dividends declared per common share 1.76 1.72 1.64 1.60 -
</TABLE>
- ------------
(1) Operating data for 1997 includes the effect of a $62 million ($40 million
after tax) charge for partial settlement/curtailment of pension and other
postemployment benefit liabilities. See Note 14 to Consolidated Financial
Statements.
(2) The summary of operating data for 1993 presents 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. Earnings per share for 1993 are presented on a
pro forma basis and are based on pro forma earnings from continuing operations
of $204 million. Historical earnings per share data for 1993 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.
(3) Earnings per share for prior years have been restated to conform to
requirements of the new accounting standard effective for periods ending after
December 15, 1997.
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. All references to
earnings per share contained in this report are basic earnings per share unless
otherwise noted.
MAJOR FACTORS AFFECTING EARNINGS
1997 COMPARED WITH 1996
Lower selling prices for the Company's core plastics
Overall increased sales volumes
Lower purchased raw materials costs
Lower variable-incentive compensation
Charge resulting from partial settlement/curtailment of
pension and other postemployment benefit liabilities
RESULTS OF OPERATIONS
EARNINGS
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
Operating earnings $ 506 $ 663 (24)% $ 964
Net earnings 286 380 (25) 559
Earnings per share (1)
--Basic 3.66 4.84 (24) 6.84
--Diluted 3.63 4.79 (24) 6.78
</TABLE>
(1) Earnings per share for prior years have been restated to conform to
requirements of the new accounting standard effective for periods ending after
December 15, 1997.
<TABLE>
<CAPTION>
CHANGES IN EARNINGS PER SHARE 1997 1996 CHANGE
<S> <C> <C> <C>
Earnings per share $3.66 $4.84 $ (1.18)
=======
Operations
Selling price $ (2.18)
Volume and mix .20
Raw materials, energy, and supplies 1.14
Variable-incentive pay .37
Early retirement charge (1) (.51)
Other (.27)
-------
Change from operations (1.25)
Other
Interest expense, net (.16)
Other income/charges .12
Effective tax rate change .09
Fewer shares outstanding .02
-------
Total change $(1.18)
======
</TABLE>
(1) Charge resulting from partial settlement/curtailment of pension and other
postemployment benefit liabilities. See Note 14 to Consolidated Financial
Statements.
20
<PAGE> 21
1997 COMPARED WITH 1996
The Company's 1997 net earnings reflect returns of 17% on equity and 10% on
capital. Sales volumes improved 6% overall due to good demand and new capacity.
However, earnings reflect the significant negative impact of lower EASTAPAK
polymers prices which resulted from excess industry capacity, and substantially
lower acetate tow volume caused by excess industry capacity and customer
inventory reductions, mainly in China. Lower costs were experienced for major
raw materials including paraxylene, purified terephthalic acid ("PTA"), and
propane feedstock. Productivity gains realized from the Company's Advantaged
Cost 2000 program and a gain from damages awarded for patent infringement
positively impacted net earnings. Operating earnings for 1997 reflect a $62
million ($40 million after tax) charge for partial settlement/curtailment of
pension and other postemployment benefit liabilities arising from the retirement
of approximately 1,700 employees. The large number of retirements was not the
result of special payments or incentives. Preproduction costs related to
start-up of new manufacturing facilities had a moderately negative effect on
earnings. The Company's financial results were not materially affected by the
Asian financial crisis in 1997.
SUMMARY BY INDUSTRY SEGMENT
SPECIALTY AND PERFORMANCE SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
Sales $ 2,607 $ 2,657 (2)% $ 2,647
Operating earnings 416(1) 519 (20) 433
</TABLE>
(1) Specialty and Performance segment operating earnings for 1997 reflect an
allocation of $34 million of the $62 million charge for partial
settlement/curtailment of pension and other postemployment benefit liabilities.
See Note 14 to Consolidated Financial Statements.
1997 COMPARED WITH 1996
The effect of strong volume improvement for specialty plastics and moderately
higher volume for fine chemicals, coatings, inks, and resins products was offset
by overall lower selling prices, a shift in the mix of products sold, and
declines in unit volumes for performance chemicals and fibers. Improved volumes
for plastic esters were driven by good demand for auto coatings, particularly in
developing international regions. Increased sales volumes for specialty
plastics, including TENITE cellulosics and SPECTAR copolymer, reflected new
customer applications and regional growth. Performance chemicals results
reflected lower unit volumes due to divestiture of several product lines in
1996. Demand for acetate tow declined due to new industry capacity and customer
reductions in inventories, mainly in China. The primary factors affecting
operating earnings were significantly lower volumes for acetate tow, overall
lower selling prices, unfavorable foreign currency effects, and the effect of
the early retirement charge, partially offset by lower raw materials costs,
lower variable-incentive pay, and productivity gains.
CORE PLASTICS SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
Sales $ 1,338 $ 1,409 (5)% $1,685
Operating earnings (loss) (56) (1) (1) - 347
</TABLE>
(1) Core Plastics segment operating loss for 1997 reflects an allocation of $18
million of the $62 million charge for partial settlement/curtailment of pension
and other postemployment benefit liabilities. See Note 14 to Consolidated
Financial Statements.
21
<PAGE> 22
1997 COMPARED WITH 1996
The decline in container plastics selling prices, which began in 1996 as a
result of industry overcapacity, moderated somewhat by the end of 1997 as prices
showed some recovery and stabilization. Volumes for container plastics showed
significant improvement, primarily as a result of new capacities in Spain and
Mexico and continued strong demand. Lower volumes for flexible plastics
reflected limited availability of ethylene supply prior to the midyear
completion of a new ethylene pipeline. Improved selling prices for flexible
plastics resulted from strong market demand. Operating earnings declined
primarily due to substantially lower selling prices for EASTAPAK polymers,
start-up costs for new manufacturing sites, unfavorable currency effects, and
the effect of the early retirement charge, partially offset by improved selling
prices for flexible plastics, an increase in overall unit volumes, lower raw
materials costs, lower variable-incentive pay, and productivity improvements.
CHEMICAL INTERMEDIATES SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
Sales $ 733 $ 716 2% $ 708
Operating earnings 146(1) 145 1 184
</TABLE>
(1) Chemical Intermediates segment operating earnings for 1997 reflect an
allocation of $10 million of the $62 million charge for partial
settlement/curtailment of pension and other postemployment benefit liabilities.
See Note 14 to Consolidated Financial Statements.
1997 COMPARED WITH 1996
Sales in the Chemical Intermediates segment were slightly higher than 1996, with
increased sales volume partially offset by overall lower selling prices and
unfavorable currency exchange rates. Operating earnings reflect lower raw
materials costs and lower variable-incentive pay, offset partially by overall
lower selling prices, unfavorable currency exchange rates, and the effect of the
early retirement charge.
(For supplemental analysis of Specialty and Performance, Core Plastics, and
Chemical Intermediates segment results, see Exhibit 99.01 to this Form 10-K).
SUMMARY BY CUSTOMER LOCATION
SALES BY REGION
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
United States and Canada $ 3,051 $ 3,183 (4)% $ 3,390
Europe, Middle East, and Africa 780 745 5 825
Asia Pacific 506 548 (8) 557
Latin America 341 306 11 268
------- ------- -------
Total $ 4,678 $4,782 $ 5,040
======= ====== =======
</TABLE>
1997 COMPARED WITH 1996
Sales in the United States for 1997 were $2.875 billion, down 4% from 1996 sales
of $2.990 billion. Decreased sales were attributable to lower selling prices,
primarily for EASTAPAK polymers.
22
<PAGE> 23
Sales outside the United States in 1997 were relatively unchanged from 1996 and
were 39% of total sales compared to 37% of total sales in 1996. Higher sales
volume driven by new capacities in Mexico and Spain was mostly offset by
unfavorable currency effects and overall lower selling prices. Decreased sales
in Asia Pacific reflect a decline in sales of acetate tow.
With a substantial portion of 1997 sales to customers outside the United States
and approximately 10% of its products 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. 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.
Foreign currency hedging transactions mitigated the impact of foreign currency
transaction and remeasurement losses. However, the change in exchange rates when
compared to 1996 negatively impacted net earnings by approximately $35 million.
See Note 10 to Consolidated Financial Statements and Market Risk discussion.
SUMMARY OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
SALES $4,678 $4,782 (2)% $5,040
</TABLE>
Sales volume in 1997 improved 6% overall, but generally lower selling prices, a
shift in mix of products sold, and unfavorable currency effects resulted in
sales declining 2%.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
GROSS PROFIT $1,096 $1,179 (7)% $1,504
As a percentage of sales 23.4% 24.7% 29.8%
</TABLE>
Gross profit decline was principally attributable to lower selling prices,
partially offset by overall lower purchased raw materials costs, lower
variable-incentive compensation, and productivity gains.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $ 337 $ 332 2% $ 364
As a percentage of sales 7.2% 6.9% 7.2%
</TABLE>
Selling and general administrative expenses were up slightly in 1997 due to a
variety of general business activities relating to new business formations and
globalization strategies, increased advertising and outside professional
services, and higher compensation costs, partially offset by a reduction in
labor hours and lower variable-incentive costs.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
RESEARCH AND DEVELOPMENT COSTS $ 191 $ 184 4% $ 176
As a percentage of sales 4.1% 3.8% 3.5%
</TABLE>
Increased research and development costs resulted from increased level of
activity, partially offset by lower variable-incentive costs.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
INTEREST COSTS $ 128 $ 95 $ 88
LESS CAPITALIZED INTEREST 41 28 9
------- ------- -------
NET INTEREST EXPENSE $ 87 $ 67 30% $ 79
======= ======= =======
</TABLE>
23
<PAGE> 24
Interest costs increased due to an increase in borrowings and higher overall
effective interest rates. The increase in capitalized interest was directly
related to the major capital investment program which peaked in 1997.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
OTHER INCOME, NET $ 27 $ 11 >100% $ 14
</TABLE>
In 1997 the Company recognized increased income from Genencor International, a
joint venture that develops, manufactures, and markets industrial enzymes and
other fine and specialty chemicals. Also in 1997 the Company realized a gain
from an award of damages for patent infringement. In 1996 the Company recognized
a gain from the sale of the Company's food emulsifier business. All years
include royalty and interest income, the effect of foreign currency transactions
and translation, and income (loss) from joint ventures and equity investments.
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 CHANGE 1995
<S> <C> <C> <C> <C>
PROVISION FOR INCOME TAXES $ 160 $ 227 (30)% $ 340
Effective tax rate 35.8% 37.4% 37.8%
</TABLE>
The reduction in effective tax rate for 1997 resulted primarily from increased
tax benefits attributable to export sales and the recognition of tax benefits
attributable to foreign operations.
1996 COMPARED WITH 1995
Eastman posted sales in 1996 of $4.782 billion, down 5% compared with 1995.
Sales decreased 7% because of lower selling prices, offset 2% because of volume
gains. The Company had net earnings of $380 million in 1996, compared with $559
million for 1995 -- a 32% decrease. The factors contributing to the earnings
decline were lower selling prices for the Company's core plastics, EASTAPAK
polymers and polyethylene, preproduction and start-up costs at new EASTAPAK
polymers plants, and higher labor rates. Currency fluctuations had a minor
negative effect on earnings in 1996. Positive impacts on overall earnings
included 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.
The Specialty and Performance segment reported sales of $2.657 billion for 1996,
essentially level with 1995. The operating earnings for 1996 were $519 million,
up 20% from 1995. This increase was primarily a result of lower operating costs
reflecting overall lower raw materials 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.
The Core Plastics segment reported sales of $1.409 billion for 1996, down 16%
from 1995. The sales decrease in the Core Plastics segment was attributed
primarily to lower EASTAPAK polymers selling prices, partially offset by
increased volumes. The segment operating loss of $1 million was attributed
primarily to lower EASTAPAK polymers and polyethylene selling prices. Other
factors contributing to the overall decrease in segment operating earnings were
increased preproduction and start-up costs for new EASTAPAK polymers
manufacturing facilities and increased propane costs, which impacted primarily
polyethylene and to a lesser extent EASTAPAK polymers.
24
<PAGE> 25
The Chemical Intermediates segment reported sales of $716 million for 1996, up
1% from 1995. The slight increase in sales was attributed primarily to higher
volumes, partially offset by lower selling prices for certain industrial
intermediates. Chemical Intermediates segment operating earnings for 1996 were
$145 million, down 21% from 1995. 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.
Sales in the United States in 1996 were $2.990 billion, down 6% compared with
1995 sales of $3.168 billion. Decreased sales were attributed to lower selling
prices, partially offset by modest volume gains. Sales to customers outside the
United States in 1996 were down 4% compared with 1995 and were 37% of total
sales, same as 1995. Decreased sales in Europe, Middle East, and Africa were
primarily attributed to lower EASTAPAK polymers selling prices, partially offset
by higher volumes. Increased sales in Latin America resulted primarily from
higher EASTAPAK polymers volumes, partially offset by lower selling prices.
25
<PAGE> 26
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
FINANCIAL INDICATORS 1997 1996 1995
<S> <C> <C> <C>
Ratio of earnings to fixed charges 3.7x 6.1x 9.7x
Current ratio (1) 1.6x 1.7x 1.7x
Percent of long-term borrowings to total capital (1) 49% 48% 44%
Percent of floating-rate borrowings to total borrowings (1) 12% 21% 2%
</TABLE>
- -------------
(1) At end of year.
<TABLE>
<CAPTION>
CASH FLOW
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Net cash provided by (used in)
Operating activities $ 698 $ 746 $ 838
Investing activities (745) (809) (524)
Financing activities 52 (13) (304)
-------- -------- -------
Net change in cash and cash equivalents $ 5 $ (76) $ 10
======== ======== =======
Cash and cash equivalents at end of period $ 29 $ 24 $ 100
======== ======== =======
</TABLE>
Cash provided by operations has declined over the periods presented mainly due
to lower net earnings reflecting business conditions previously discussed. Cash
used in investing activities peaked in 1996 due to significant global expansion
activities underway at that time. Cash related to financing activities reflects
significant treasury stock purchases in 1995 and 1996, proceeds received in 1997
from a $300 million issuance of 7.60% debentures due February 1, 2027, and the
payment of dividends in all years presented. For additional analysis, see also
the Consolidated Statements of Cash Flows.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
Eastman anticipates total capital expenditures in 1998 will be between $550
million and $600 million and depreciation expense is expected to be
approximately $350 million. Long-term commitments related to capital
expenditures are not material. The Company had various purchase commitments at
the end of 1997 for materials, supplies, and energy incident to the ordinary
conduct of business. These commitments total approximately $800 million. Eastman
has other long-term commitments relating to joint venture agreements as
described in Note 4 to Consolidated Financial Statements.
LIQUIDITY
Eastman has access to an $800 million revolving credit facility (the "Credit
Facility") expiring in December 2000. 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% in 1997, 1996, and 1995. 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.
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, 1997, the Company's commercial paper outstanding balance was $213 million,
at interest rates ranging between 6.10% and 6.90%. At December 31, 1996, a total
of $295 million of commercial paper was outstanding, at interest rates ranging
between 5.50% and 6.15%. In 1997 Eastman issued $300 million of 7.60% debentures
due February 1, 2027, and used the proceeds to repay commercial paper borrowings
outstanding at that time.
26
<PAGE> 27
In 1995 the Company repurchased 3,308,200 shares of 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. In 1996 the Company acquired 2,486,300
shares at a cost of $161 million under the announced repurchase program, and
during the first quarter 1997 acquired an additional 140,801 shares at a cost of
$8 million. There were no share repurchases during the remainder of the year.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
The partial settlement/curtailment of pension and other postemployment benefit
liabilities which occurred in 1997 will result in funding which the Company
plans to make in 1998.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
<TABLE>
<CAPTION>
DIVIDENDS 1997 1996 1995
<S> <C> <C> <C>
Cash dividends declared per share $ 1.76 $ 1.72 $ 1.64
</TABLE>
ENVIRONMENTAL
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
approximately $220 million in 1997, $175 million in 1996, and $150 million in
1995, 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 materials 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.
MARKET RISK
The Company is exposed to changes in financial market conditions in the normal
course of its business due to its use of certain financial instruments as well
as transacting in various foreign currencies and funding of foreign operations.
To mitigate the Company's exposure to these market risks, Eastman has
established policies, procedures, and internal processes governing its
management of financial market risks and the use of financial instruments to
manage its exposure to such risks.
The Company is exposed to changes in interest rates primarily as a result of its
borrowing activities, which include short-term commercial paper and long-term
borrowings used to maintain liquidity and fund its business operations. The
Company continues to utilize U.S. dollar-denominated commercial paper to fund
seasonal working capital requirements. The nature and amount of the Company's
long-term and short-term debt may vary as a result of future business
requirements, market conditions, and other factors.
27
<PAGE> 28
The Company's operating cash flows denominated in foreign currencies are exposed
to changes in foreign exchange rates. The Company continually evaluates its
foreign currency exposure based on current market conditions and the locations
in which the Company conducts business. In order to mitigate the effect of
foreign currency risk, 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. The gains and losses on these contracts offset changes in
the value of related exposures. It is the Company's policy to enter into foreign
currency transactions only to the extent considered necessary to meet its
objectives as stated above. The Company does not enter into foreign currency
transactions for speculative purposes.
The Company determines its market risk utilizing sensitivity analysis, which
measures the potential losses in fair value resulting from one or more selected
hypothetical changes in interest rates and/or foreign currency exchange rates.
The market risk associated with the fair value of interest-rate-sensitive
instruments assuming an instantaneous parallel shift in interest rates of 10% is
approximately $100 million and an additional $10 million for each one percentage
point change in interest rates thereafter. This exposure is primarily related to
long-term debt with fixed interest rates. The market risk associated with
foreign currency-sensitive instruments utilizing a modified Black-Scholes option
pricing model and a 10% adverse move in the U.S. dollar relative to each foreign
currency hedged by the Company is approximately $70 million and an additional $6
million for a one percentage point change in foreign currency exchange rates.
Further adverse movements in foreign currencies would create losses in fair
value; however, such losses would not be linear to that disclosed above. This
exposure, which is primarily related to foreign currency options purchased by
the Company to manage fluctuations in foreign currencies, is limited to the
dollar value of option premiums payable by the Company for the related financial
instruments. Furthermore, since the Company utilizes currency-sensitive
derivative instruments for hedging anticipated foreign currency transactions, a
loss in fair value for those instruments is generally offset by increases in the
value of the underlying anticipated transactions.
YEAR 2000 ISSUE
The year 2000 issue is the result of computer programs written using two digits
rather than four to define the applicable year. Without corrective action,
programs with time-sensitive software could potentially recognize a date ending
in "00" as the year 1900 rather than the year 2000, causing many computer
applications to fail or create erroneous results.
Assessment and remediation of the Company's business computer systems,
manufacturing control systems, and other embedded-chip devices for compliance
with the year 2000 is underway or in some cases completed. As a result of
modifications or upgrades planned or already completed, the Company believes
that the year 2000 issue will not pose significant problems for the Company's
business, operations, or operating systems. The Company expects that any
additional modifications or upgrades of software or hardware required for year
2000 compatibility will be accomplished using existing resources and will not
have a material impact on the Company's financial position or results of
operations in future periods.
The Company has identified and is contacting customers, suppliers, and other
critical business partners to determine if entities with which the Company
transacts business have an effective plan in place to address the year 2000
issue. Contingency plans will be developed as needed.
HOLSTON DEFENSE CORPORATION
Holston Defense Corporation, a wholly owned subsidiary of the Company, has
managed the government-owned Holston Army Ammunition Plant in Kingsport,
Tennessee since 1942 under contract with the Department of Army. The current
contract expires December 31, 1998. Holston Defense Corporation has been
notified that it is not a participant in the bidding process for the contract
period beginning after December 31, 1998. In the event that Holston Defense
Corporation's management of the ammunition plant is terminated, payments to
Holston Defense Corporation's employees, additional funding of pension and other
postretirement benefits, and other termination costs could result. The Company
expects that substantially all of these costs and payments would be ultimately
reimbursed by the Department of Army, although delays in reimbursement may
require the Company to advance funds to pay such costs. Any unreimbursable
amounts charged to future earnings should not have a material adverse effect on
the Company, although earnings in a particular quarter could be negatively
impacted. See Note 17 to Consolidated Financial Statements.
28
<PAGE> 29
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1997 the FASB issued two new Statements: SFAS No. 130, "Reporting
Comprehensive Income," and SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS No. 130 requires all items recognized
as components of other comprehensive income to be reported in the financial
statements. SFAS No. 131 requires enterprises to report selected information
about operating segments and related disclosures about products and services,
geographic areas, and major customers. The Company will provide additional
reporting as required by the new standards beginning in 1998. The Company
believes that no significant changes to current segment reporting will be
required by the new standard.
OUTLOOK
In 1998 the Company expects higher sales compared to 1997, driven by good demand
and strong volume growth for products in all three segments as a result of new
applications and new production capacity. However, EASTAPAK polymers and
ethylene and propylene derivatives such as oxo chemicals and polyethylene may
face price and margin pressure as a result of additional industry capacity.
Significant SPECTAR copolymer volume growth is expected due to strong demand and
added production capacity in Malaysia. Volume growth is expected for the
coatings line, driven by good demand for auto coatings and architectural
coatings. Acetate tow volume is expected to stabilize as new industry capacity
is absorbed and customer inventory reductions are completed, but price and
margin pressure will result from the new capacities. Modest growth in sales
revenue is expected for fine chemicals based on increased volumes of
pharmaceutical and agrochemical intermediates and the impact of new
Epoxybutene-based derivatives. Strong revenue growth is expected for performance
chemicals due to new capacities for EASTOTAC resins and EASTOBRITE optical
brighteners. Within the Core Plastics segment, demand for EASTAPAK polymers is
expected to continue to grow as new applications are developed. Increased
revenues and operating earnings are expected for container plastics products,
driven by additional available capacity, reduced costs, and stable pricing.
Recently introduced polyethylene performance polymers, MXSTEN and TENITE HIFOR,
are expected to provide more profitable and less cyclical niche markets as they
gain market acceptance. Within the Chemical Intermediates segment, a recently
completed U.S. oxo plant expansion is expected to produce continued volume
gains. The Company does not expect to have significant credit or business
exposure relating to the Asian financial crisis.
The Company is prepared to take the necessary steps through its capital spending
program and its Advantaged Cost 2000 initiative to maintain the financial
flexibility necessary to realize its full potential to create value. The 1998
target for the Company's Advantaged Cost 2000 initiative is $100 million in
labor and material productivity gains. In 1998 the Company expects a 20%
reduction in capital spending, and depreciation expense is expected to be
approximately $350 million.
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; the year 2000 issue;
the Asian financial crisis; expected tax rates and depreciation; and supply and
demand, unit volume, price, margin, and sales and earnings expectations and
strategies 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 and those mentioned in the context of the
specific statements: relatively stable economic business conditions in North
America, improving business conditions in Europe, and continued growth in Latin
America, supporting continued good overall demand for the Company's products; no
significant impact on results of operations due to the Asian financial crisis;
no significant decline in overall selling prices, except for fibers; continued
demand growth worldwide for EASTAPAK polymers; continued capacity additions
within the PET industry worldwide; capacity additions within the ethylene
industry worldwide; realization of recent
29
<PAGE> 30
EASTAPAK polymers price increases; stabilization of acetate tow demand and
volume; relatively stable prices for and availability of key purchased raw
materials; good market reception of new polyethylene products; availability of
announced manufacturing capacity increases; 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.
- ------------------------------------
EASTAPAK, SPECTAR, MXSTEN, TENITE and TENITE HIFOR are trademarks of Eastman
Chemical Company.
30
<PAGE> 31
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
Management's responsibility for financial statements 32
Report of independent accountants 33
Consolidated statements of earnings and retained earnings 34
Consolidated statements of financial position 35
Consolidated statements of cash flows 36
Notes to consolidated financial statements 37-59
</TABLE>
31
<PAGE> 32
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 34 through 59. 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 27, 1998
32
<PAGE> 33
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 62 present fairly, in all material
respects, the financial position of Eastman Chemical Company and subsidiaries at
December 31, 1997 and 1996, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 1997, 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 27, 1998
33
<PAGE> 34
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS AND RETAINED EARNINGS
(DOLLARS IN MILLIONS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Sales $ 4,678 $ 4,782 $ 5,040
Cost of sales 3,582 3,603 3,536
------- ------- -------
Gross profit 1,096 1,179 1,504
Selling and general administrative expenses 337 332 364
Research and development costs 191 184 176
Early retirement charge 62 -- --
------- ------- -------
Operating earnings 506 663 964
Interest expense, net 87 67 79
Other income, net 27 11 14
------- ------- -------
Earnings before income taxes 446 607 899
Provision for income taxes 160 227 340
------- ------- -------
Net earnings $ 286 $ 380 $ 559
======= ======= =======
Basic earnings per share $ 3.66 $ 4.84 $ 6.84
======= ======= =======
Diluted earnings per share $ 3.63 $ 4.79 $ 6.78
======= ======= =======
Retained earnings at beginning of year $ 1,929 $ 1,684 $ 1,258
Net earnings 286 380 559
Cash dividends declared (137) (135) (133)
------- ------- -------
Retained earnings at end of year $ 2,078 $ 1,929 $ 1,684
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
34
<PAGE> 35
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 29 $ 24
Receivables 793 744
Inventories 511 465
Other current assets 157 112
--------- ---------
Total current assets 1,490 1,345
--------- ---------
Properties
Properties and equipment at cost 8,104 7,530
Less: Accumulated depreciation 4,223 4,010
--------- ---------
Net properties 3,881 3,520
--------- ---------
Other noncurrent assets 407 401
--------- ---------
Total assets $ 5,778 $ 5,266
========= =========
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 954 $ 787
-------- --------
Total current liabilities 954 787
Long-term borrowings 1,714 1,523
Deferred income tax credits 397 348
Postemployment obligations 724 722
Other long-term liabilities 236 247
--------- ---------
Total liabilities 4,025 3,627
--------- ---------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares authorized;
shares issued -- 84,144,672 and 83,386,459) 1 1
Paid-in capital 77 37
Retained earnings 2,078 1,929
Other (37) 31
---------- ---------
2,119 1,998
Less: Treasury stock at cost (5,889,311 and 5,766,528 shares) 366 359
--------- ---------
Total shareowners' equity 1,753 1,639
--------- ---------
Total liabilities and shareowners' equity $ 5,778 $ 5,266
========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 286 $ 380 $ 559
--------- --------- ---------
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 327 314 308
Provision (benefit) for deferred income taxes 7 8 (11)
(Increase) decrease in receivables (53) 66 (90)
(Increase) decrease in inventories (65) 10 (108)
Increase (decrease) in employee benefit liabilities
and incentive pay 134 (69) 179
Increase in liabilities excluding borrowings,
employee benefit liabilities, and incentive pay 60 31 18
Other items, net 2 6 (17)
--------- --------- ----------
Total adjustments 412 366 279
--------- --------- ---------
Net cash provided by operating activities 698 746 838
--------- --------- ---------
Cash flows from investing activities
Additions to properties and equipment (749) (789) (446)
Acquisitions and investments in joint ventures - (26) (56)
Proceeds from sales of assets 20 43 9
Capital advances to suppliers (21) (37) (39)
Other items 5 - 8
--------- --------- ---------
Net cash used in investing activities (745) (809) (524)
---------- --------- ---------
Cash flows from financing activities
Proceeds from long-term borrowings 295 - -
Net increase (decrease) in commercial paper borrowings (82) 273 22
Repayment of borrowings (22) - (2)
Dividends paid to shareowners (138) (134) (133)
Treasury stock purchases (8) (161) (200)
Other items 7 9 9
--------- --------- ---------
Net cash provided by (used in) financing activities 52 (13) (304)
--------- --------- ---------
Net change in cash and cash equivalents 5 (76) 10
Cash and cash equivalents at beginning of year 24 100 90
--------- --------- ---------
Cash and cash equivalents at end of year $ 29 $ 24 $ 100
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
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 joint ventures and
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 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.
37
<PAGE> 38
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
Basic earnings per share reflect reported earnings divided by the
weighted average number of common shares outstanding. Diluted earnings
per share include the effect of dilutive stock options outstanding during
the year. Prior earnings per share amounts have been restated to conform
to requirements of the new accounting standard effective for periods
ending after December 15, 1997.
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.
38
<PAGE> 39
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 1996 and 1995 amounts to conform to
the 1997 presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1997 1996
<S> <C> <C>
At FIFO or average cost (approximates current cost)
Finished goods $ 436 $ 426
Work in process 140 133
Raw materials and supplies 211 214
--------- ---------
Total inventories at FIFO or average cost 787 773
Reduction to LIFO value (276) (308)
--------- ---------
Total inventories at LIFO value $ 511 $ 465
========= =========
</TABLE>
Inventories valued on the LIFO method were approximately 75% of total
inventories in 1997 and 1996.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 7,530 $ 6,791 $ 6,389
Additions 749 796 464
Deductions (175) (57) (62)
---------- --------- ---------
Balance at end of year $ 8,104 $ 7,530 $ 6,791
========= ========= =========
Properties at end of year
Land $ 42 $ 41 $ 36
Buildings and building equipment 702 640 600
Machinery and equipment 6,757 6,315 5,819
Construction in progress 603 534 336
--------- --------- ---------
Total $ 8,104 $ 7,530 $ 6,791
========= ========= =========
</TABLE>
39
<PAGE> 40
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACCUMULATED DEPRECIATION
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Balance at beginning of year $ 4,010 $ 3,742 $ 3,483
Provision for depreciation 327 314 308
Deductions (114) (46) (49)
--------- --------- ---------
Balance at end of year $ 4,223 $ 4,010 $ 3,742
========= ========= =========
</TABLE>
Construction-period interest of $295 million, $257 million, and $229
million, reduced by accumulated depreciation of $125 million, $111
million, and $97 million, is included in cost of properties at December
31, 1997, 1996, and 1995, 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, 1997 and
1996, Eastman's equity in the joint venture was $142 million and $138
million, respectively. The Company guarantees a portion of the joint
venture's third-party borrowings. Such guarantees are 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, 1997 and 1996, Eastman had a negative investment in the joint venture
of $42 million and $44 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 ($196 million and $175 million
of which have been paid through December 31, 1997 and 1996,
respectively). 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 $79 million and $64 million at December 31, 1997 and 1996,
respectively.
40
<PAGE> 41
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. PAYABLES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1997 1996
<S> <C> <C>
Trade creditors $ 281 $ 312
Accrued payrolls and vacation 99 101
Accrued variable-incentive compensation 92 137
Accrued pension liabilities 140 -
Accrued taxes 95 79
Other 247 158
--------- ---------
Total $ 954 $ 787
========= =========
</TABLE>
6. LONG-TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1997 1996
<S> <C> <C>
6 3/8% notes due 2004 $ 500 $ 499
7 1/4% debentures due 2024 495 495
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 296 -
Commercial paper and other 223 329
--------- ---------
Total $ 1,714 $ 1,523
========= =========
</TABLE>
Eastman has access to an $800 million revolving credit facility (the "Credit
Facility") expiring in December 2000. 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% in 1997, 1996, and 1995. 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.
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, 1997, the Company's commercial paper outstanding balance was $213 million,
at interest rates ranging between 6.10% and 6.90%. At December 31, 1996, a total
of $295 million of commercial paper was outstanding, at interest rates ranging
between 5.50% and 6.15%. 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. During first quarter 1997 the Company issued $300
million of 7.60% debentures due February 1, 2027, and used the proceeds to repay
previously outstanding commercial paper borrowings outstanding at that time.
41
<PAGE> 42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Common stock at par value $ 1 $ 1 $ 1
------------- ------------- --------------
Paid-in capital
Balance at beginning of year 37 30 22
Additions 40 7 8
------------- ------------- --------------
Balance at end of year 77 37 30
------------- ------------- --------------
Retained earnings 2,078 1,929 1,684
------------- ------------- --------------
Other
Balance at beginning of year 31 13 14
Change in cumulative translation
adjustment (52) 18 (1)
Change in unfunded minimum pension
liability (16) -- --
-------------- ------------- --------------
Balance at end of year (37) 31 13
-------------- ------------- --------------
Treasury stock at cost (366) (359) (200)
-------------- ------------- ---------------
Total $ 1,753 $ 1,639 $ 1,528
============= ============= ==============
Shares of common stock issued
Balance at beginning of year 83,386,459 83,250,683 83,067,368
Issued for employee compensation
and benefit plans 758,213 135,776 183,315
------------- ------------- --------------
Balance at end of year 84,144,672 83,386,459 83,250,683
============= ============= ==============
</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 $1.76 per share in 1997, $1.72 per share in 1996, and $1.64
per share in 1995.
The Company established a benefit security trust in the fourth quarter,
1997, to provide a degree of financial security for unfunded obligations
under certain plans. The Company has contributed to the trust a warrant
to purchase up to one million shares of common stock of the Company for
par value. The warrant is exercisable by the trustee if the Company does
not meet certain funding obligations, which obligations would be
triggered by certain occurrences, including a change in control or
potential change in control, as defined, or failure by the Company to
meet its payment obligations under covered unfunded plans. Such warrant
is excluded from the computation of diluted earnings per share because
the conditions upon which the warrant is exercisable have not been met.
The additions to paid-in capital for the three years are the result of
exercises of stock options by employees and the issuance of shares to the
Employee Stock Ownership Plan to settle Eastman Performance Plan
obligations.
The Company repurchased 140,801 shares of Eastman common stock at a cost
of $8 million, 2,486,300 shares at a cost of $161 million, and 3,308,200
shares at a cost of $200 million, in 1997, 1996, and
42
<PAGE> 43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1995, respectively. Repurchased common shares may be used to meet common
stock requirements for benefit plans and other corporate purposes.
Treasury stock at a cost of approximately $1 million (18,018 shares) and
$2 million (27,972 shares) was reissued in 1997 and 1996, respectively.
The Company's charitable foundation held 184,557 shares, 202,575 shares,
and 230,547 shares of Eastman common stock at December 31, 1997, 1996,
and 1995, respectively.
For 1997, 1996, and 1995, respectively, the weighted average number of
common shares outstanding used to compute basic earnings per share was
78.1 million, 78.5 million, and 81.7 million and for diluted earnings per
share was 78.8 million, 79.3 million, and 82.4 million, reflecting the
effect of dilutive options outstanding. Certain options outstanding at
the end of 1997, 1996, and 1995, respectively, were excluded in the
computation of diluted earnings per share because the options' exercise
prices were greater than average market price of the common shares.
Excluded were options to purchase 790,324 shares of common stock at a
range of prices from $59.00 to $74.25; 566,490 shares of common stock at
a range of prices from $57.125 to $74.25; and 489,942 shares of common
stock at a range of prices from $63.1875 to $68.9375 outstanding at the
end of 1997, 1996, and 1995, respectively.
8. STOCK OPTION AND COMPENSATION PLANS
OMNIBUS PLAN
Eastman's 1997 Omnibus Long-Term Compensation Plan (the "1997 Omnibus
Plan"), which is substantially similar to and intended to replace the 1994
Omnibus Long-Term Compensation Plan (the "1994 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. No new awards have been made under the 1994
Omnibus Plan following the effectiveness of the 1997 Omnibus Plan.
Outstanding grants and awards under the 1994 Omnibus Plan are unaffected
by the replacement of the 1994 Omnibus Plan with the 1997 Omnibus Plan.
The 1997 Omnibus Plan provides that options can be granted through April
30, 2002, 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 under the 1994 Omnibus
Plan and under the 1997 Omnibus Plan 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 7 million shares of
common stock available for option grants and other awards during the term
of the 1997 Omnibus Plan. The maximum number of shares of common stock
with respect to one or more options and/or SARs that may be granted during
any one calendar year under the 1997 Omnibus Plan to the Chief Executive
Officer or to any of the next four most highly compensated executive
officers (each, a "Covered Employee") is 200,000. The maximum fair market
value of any awards (other than options and SARs) that may be received by
a Covered Employee during any one calendar year under the 1997 Omnibus
Plan is equal to the fair market value of 100,000 shares of common stock
as of December 31 of the preceding year.
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.
43
<PAGE> 44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 applies intrinsic value accounting for its stock option 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 No. 123, the Company's net
earnings and basic earnings per share would be reduced to the unaudited
pro forma amounts indicated below:
<TABLE>
<CAPTION>
(Dollars in millions, except for per share amounts) 1997 1996 1995
<S> <C> <C> <C>
Net earnings As reported $ 286 $ 380 $ 559
Pro forma $ 285 $ 375 $ 558
Basic earnings per share As reported $ 3.66 $ 4.84 $ 6.84
Pro forma $ 3.65 $ 4.78 $ 6.82
</TABLE>
44
<PAGE> 45
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
1997, 1996, and 1995, respectively, include: average expected volatility
of 21.61%, 25.23%, and 26.07%; average expected dividend yield of 2.92%,
2.56%, and 2.83%; and average risk-free interest rates of 6.14%, 5.76%,
and 6.37%. An expected option term of 6 years for all 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 the Company's stock had been traded for a period less than the
baseline expected term assumption, previous years' calculations have used
monthly volatility factors for five peer companies. The Company's
volatility is now considered consistent with the peer group; therefore,
for 1997 and subsequent years, the Company's volatility factors will be
utilized. 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>
1997 1996 1995
------------------------ ----------------------- ------------------------
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 3,216,437 $ 47 2,850,532 $ 45 2,492,745 $ 41
Granted 623,735 60 542,591 55 566,679 62
Exercised 123,964 40 176,686 40 208,892 40
Forfeited or canceled - - - - - -
---------- ------ ---------- ------ ---------- -------
Outstanding at end
of year 3,716,208 $ 50 3,216,437 $ 47 2,850,532 $ 45
========= ========= =========
Options exercisable at
year-end 2,842,573 2,461,995 1,406,400
========= ========= =========
Weighted-average fair
value of options granted
during the year $14.65 $14.66 $ 17.60
Available for grant at end
of year 8,766,755 2,384,543 2,915,741
========= ========= =========
</TABLE>
45
<PAGE> 46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/97 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/97 EXERCISE PRICE
--------------- ----------- ----------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$31-$40 357,357 3.4 years $34 357,357 $34
43-44 1,692,686 6.1 43 1,692,686 43
48-63 1,103,017 8.1 57 254,690 53
64-74 563,148 7.4 65 537,840 65
--------- ----------
$31-$74 3,716,208 6.6 $50 2,842,573 $47
========= ==========
</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. Allocated shares in the
ESOP totaled 2,289,826, 1,887,003, and 1,488,436 as of December 31, 1997,
1996, and 1995, 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") places a portion of each
employee's annual compensation at risk and 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 $81 million, $131 million, and $229 million for 1997, 1996, and
1995, respectively. Of these amounts, approximately $36 million in each
year was 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 1997, 1996, and 1995
were $11 million, $6 million, and $10 million, respectively.
46
<PAGE> 47
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) 1997 1996 1995
<S> <C> <C> <C>
Earnings (loss) before income taxes
United States $ 541 $ 679 $ 825
Outside the United States (95) (72) 74
---------- ---------- ---------
Total $ 446 $ 607 $ 899
========= ========= =========
Provision (benefit) for income taxes
United States
Current $ 134 $ 190 $ 291
Deferred 14 19 (12)
Non-United States
Current 6 4 30
Deferred (8) (12) 2
State and other
Current 13 25 30
Deferred 1 1 (1)
--------- --------- ---------
Total $ 160 $ 227 $ 340
========= ========= =========
</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) 1997 1996 1995
<S> <C> <C> <C>
Amount computed using the statutory rate $ 156 $ 212 $ 315
State income taxes 9 17 19
Foreign rate variance (4) 13 3
Foreign sales corporation benefit (8) (14) (14)
Other 7 (1) 17
--------- --------- ---------
Provision for income taxes $ 160 $ 227 $ 340
========= ========= =========
</TABLE>
47
<PAGE> 48
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) 1997 1996
<S> <C> <C>
Deferred tax assets
Postemployment obligations $ 292 $ 263
Payroll and related items 51 49
Inventories 17 13
Deferred revenue 19 21
Miscellaneous reserves 40 33
Preproduction and start-up costs 8 18
Other 36 17
--------- ---------
Total $ 463 $ 414
========= =========
Deferred tax liabilities
Depreciation $ 728 $ 677
Other 30 25
--------- ---------
Total $ 758 $ 702
========= =========
</TABLE>
Unremitted earnings of subsidiaries outside the United States totaling
$25 million at December 31, 1997, 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 income taxes payable totaling $53 million and $34 million are
included in current liabilities at December 31, 1997 and 1996,
respectively.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1997 DECEMBER 31, 1996
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Long-term borrowings $ 1,714 $ 1,800 $ 1,523 $ 1,515
Foreign exchange contracts 62 149 74 63
</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 fixed-rate borrowings on current
interest rates for comparable securities. The Company's floating-rate
borrowings approximate fair value.
48
<PAGE> 49
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 had currency options with maturities of not more than 5 years to
exchange various foreign currencies for U.S. dollars in the aggregate
notional amount of $1.275 billion and $1.536 billion at December 31, 1997
and 1996, respectively. The net unrealized gain (loss) deferred on such
options was $87 million and $(11) million as of December 31, 1997 and
1996, respectively. Those amounts, based on dealer-quoted prices,
represent the estimated gain (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, 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,
1998 $ 61
1999 49
2000 28
2001 24
2002 18
2003 and beyond 63
-------
Total minimum payments required $ 243
=======
</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.
49
<PAGE> 50
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
RENTAL EXPENSE
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Gross rentals $ 81 $ 66 $ 60
Less: Sublease income 1 2 12
--------- --------- ---------
Total $ 80 $ 64 $ 48
========= ========= =========
</TABLE>
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
Eastman anticipates total capital expenditures in 1998 will be between
$550 million and $600 million and depreciation expense is expected to be
approximately $350 million. The Company had various purchase commitments
at the end of 1997 for materials, supplies, and energy incident to the
ordinary conduct of business. These commitments total approximately $800
million. Eastman has other long-term commitments relating to 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 1997 and
1996.
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) 1997 1996 1995
<S> <C> <C> <C>
Service cost $ 49 $ 49 $ 35
Interest cost 103 92 76
Return on plan assets (137) (175) (116)
Net amortization 39 87 39
--------- --------- ---------
Total U.S. pension cost $ 54 $ 53 $ 34
========= ========= =========
</TABLE>
Eastman's worldwide net pension cost was $59 million, $57 million, and
$38 million in 1997, 1996, and 1995, respectively.
See Note 14 for discussion of partial settlement/curtailment of pension
and other postemployment benefit liabilities.
50
<PAGE> 51
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) 1997 1996
<S> <C> <C>
Vested benefit obligation $ 978 $ 1,029
========= =========
Accumulated benefit obligation $ 1,081 $ 1,119
========= =========
Projected benefit obligation $ 1,345 $ 1,410
Market value of assets 857 1,210
--------- ---------
Projected benefits in excess of plan assets 488 200
Unrecognized net loss (226) (70)
Unrecognized net transition asset 35 57
Unrecognized prior service cost (49) (30)
--------- ---------
Accrued pension cost $ 248 $ 157
========= =========
</TABLE>
The plans' assets are principally listed stocks.
The assumptions used to develop the projected benefit obligation for the
Company's U.S. pension plans follow:
<TABLE>
<CAPTION>
DECEMBER 31,
1997 1996
<S> <C> <C>
Discount rate 7.25% 7.75%
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.
51
<PAGE> 52
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, 1997 and 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
HEALTH LIFE
(Dollars in millions) CARE INSURANCE TOTAL
<S> <C> <C> <C>
Accumulated postretirement benefit obligation
Retirees $ 300 $ 52 $ 352
Fully eligible active plan participants 55 - 55
Other active plan participants 136 41 177
--------- -------- --------
Total accumulated postretirement benefit
obligation 491 93 584
Plan assets at fair value 27 6 33
--------- -------- --------
Accumulated postretirement benefit obligation
in excess of plan assets $ 464 $ 87 551
========= ========
Unrecognized prior service cost 49
Unrecognized net loss 98
--------
Accrued postretirement benefit cost $ 502
========
<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>
52
<PAGE> 53
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>
1997
Service cost $ 6 $ 3 $ 9
Interest cost 31 7 38
Return on plan assets (1) (3) (4)
--------- -------- --------
Net periodic postretirement benefit cost $ 36 $ 7 $ 43
========= ======== ========
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
========= ======== ========
</TABLE>
To estimate the Company's postretirement benefit cost, health care costs
were assumed to increase 8.00% for 1998, with the rate of increase
declining to 5.00% by 2002 and thereafter. The discount rate and salary
increase rate were assumed to be 7.25% and 4.00% at December 31, 1997,
7.75% and 4.00% at December 31, 1996, and 7.25% and 4.00% at December 31,
1995. If the health care cost trend rates were increased by one
percentage point, the Company's accumulated postretirement health care
benefit obligation as of December 31, 1997, would increase by $75
million, while the net periodic postretirement health care benefit cost
would increase by $8 million. See Note 14 for discussion of partial
settlement/curtailment of pension and other postemployment benefit
liabilities.
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.
14. EARLY RETIREMENT CHARGE
In fourth quarter 1997 the Company recorded a $62 million ($40 million
after tax) charge for the partial settlement/curtailment of pension and
other postemployment benefit liabilities. The charge resulted from the
early retirement of approximately 1,700 employees, a majority of whom
chose to take their retirement benefits as a lump sum. No special
payments or incentives were offered.
53
<PAGE> 54
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
15. 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 Company believes no significant changes to current
reporting will be required as a result of SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information," which is
effective for 1998.
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, pharmaceutical, agricultural,
recreation, consumer durables, photographic, 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, environmental responsibility,
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 operations of Holston
Defense Corporation are included in the Specialty and Performance segment
and do not have a significant impact on the financial position or results
of operations of the Company.
The Core Plastics segment includes the Company's two major plastics
products, EASTAPAK polymers and TENITE polyethylene, as well as cellulose
esters 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, with increasing focus in Southeast Asia. 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.
54
<PAGE> 55
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
SALES
Specialty and Performance $ 2,607 $ 2,657 $ 2,647
Core Plastics 1,338 1,409 1,685
Chemical Intermediates 733 716 708
--------- --------- ---------
Total $ 4,678 $ 4,782 $ 5,040
========= ========= =========
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 416(1) $ 519 $ 433
Core Plastics (56)(1) (1) 347
Chemical Intermediates 146(1) 145 184
--------- --------- ---------
Total $ 506 $ 663 $ 964
========= ========= =========
ASSETS
Specialty and Performance $ 3,019 $ 2,887 $ 2,776
Core Plastics 2,188 1,854 1,598
Chemical Intermediates 571 525 498
--------- --------- ---------
Total $ 5,778 $ 5,266 $ 4,872
========= ========= =========
DEPRECIATION EXPENSE
Specialty and Performance $ 172 $ 174 $ 178
Core Plastics 123 109 96
Chemical Intermediates 32 31 34
--------- --------- ---------
Total $ 327 $ 314 $ 308
========= ========= =========
CAPITAL EXPENDITURES
Specialty and Performance $ 227 $ 302 $ 176
Core Plastics 390 388 215
Chemical Intermediates 132 99 55
--------- --------- ---------
Total $ 749 $ 789 $ 446
========= ========= =========
</TABLE>
(1)Operating earnings for 1997 reflect the $62 million ($40 million after tax)
charge for partial settlement/curtailment of pension and other postemployment
benefit liabilities. The charge was allocated to segments as follows: Specialty
and Performance, $34 million; Core Plastics, $18 million; and Chemical
Intermediates, $10 million. See Note 14 for a discussion of the charge.
55
<PAGE> 56
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $626 million in 1997, $687 million in 1996, and $698
million in 1995.
<TABLE>
<CAPTION>
(Dollars in millions) United States Europe Other Areas Eliminations Consolidated
<S> <C> <C> <C> <C> <C>
1997
Sales $3,500 $ 755 $ 423 $4,678
Transfers among geographic areas 798 18 74 $ (890) --
------ ----- ----- ------- ------
Total sales $4,298 $ 773 $ 497 $ (890) $4,678
====== ===== ===== ======= ======
Operating earnings (losses) $ 580 $ (51) $ (37) $ 14 $ 506
====== ===== ===== ======= ======
Assets at end of year $5,628 $ 805 $ 625 $(1,280) $5,778
====== ===== ===== ======= ======
1996
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
====== ===== ===== ======= ======
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
====== ===== ===== ======= ======
</TABLE>
56
<PAGE> 57
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest and income taxes is as follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1997 1996 1995
<S> <C> <C> <C>
Interest (net of amounts capitalized) $ 88 $ 79 $ 91
Income taxes 131 236 364
</TABLE>
Cash flows from operating activities include gains (losses) from equity
investments of $11 million, $(3) million, and $(6) million for 1997,
1996, and 1995, respectively. Derivative financial instruments and
related gains and losses are included in cash flows from operating
activities. The effect on cash of foreign currency transactions and
exchange rate changes for all years presented was insignificant.
In March 1997 the Company issued 611,962 shares of its common stock with
a market value of $34 million to its Employee Stock Ownership Plan as
partial settlement of the Company's Eastman Performance Plan payout. This
noncash transaction is not reflected in the Consolidated Statements of
Cash Flows. The Consolidated Statements of Cash Flows do not separately
reflect certain Eastman assets acquired and liabilities assumed through
noncash transactions.
17. HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly owned subsidiary of the
Company, has, as its sole business, managed the government-owned Holston
Army Ammunition Plant in Kingsport, Tennessee (the "Facility") since 1942
under a series of contracts with the Department of Army (the "DOA").
Holston is currently managing the Facility under a contract that expires
on December 31, 1998 (the "Contract"), unless such management is
otherwise extended by the DOA pursuant to the terms of the Contract or by
agreement between the parties. The Contract generally provides for
payment of a management fee to Holston and reimbursement by the DOA of
defined costs incurred by Holston for the operation of the Facility.
Holston's operating results historically have been insignificant to the
Company's consolidated sales and earnings.
The DOA has undertaken to accept bids from qualified companies to manage
the Facility upon termination of the Contract under terms and conditions
substantially different from those of the Contract. During fourth quarter
1997 the DOA advised Holston that, because of Holston's position on the
DOA's proposed terms and conditions, it was not a qualified participant
in the bidding process. The bidding process is still in progress, and its
outcome and impact on Holson's continued management of the Facility is
currently uncertain. Consequently, management does not believe that it is
reasonably assured that Holston will not continue to manage the Facility
in some capacity.
Pension and other postemployment benefits are currently provided to
Holston's present and past employees under the terms of Holston's plans.
Termination of Holston's management of the Facility, if it occurs, could
result in termination payments to Holston's then-current employees and
require additional funding for the acceleration of obligations under the
pension and other postretirement benefit plans (such payments and
additional funding referred to collectively as "Termination Costs").
Actual Termination Costs would depend upon a number of factors, all of
which are not yet known to the Company. If the Company subsequently were
to determine that it is probable that it will incur Termination Costs,
then the Company would, in accordance with generally accepted accounting
principles, be required to recognize the Termination Costs as
liabilities, and payments and reimbursements from the DOA, where
appropriate, as receivables. While the exact amount of Termination Costs
cannot be determined at this time, the Company estimates the range of
additional liabilities which it would recognize if Holston's management
of the Facility were to terminate on December 31, 1998, without giving
effect to any
57
<PAGE> 58
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
payment or reimbursement, to be approximately $50 million to $75 million.
The difference, if any, between any such liabilities and receivables
would result in a charge to then-current earnings. In the event of
termination of Holston's management of the Facility, delays in the
payment or reimbursement of all or portions of the Termination Costs may
require the Company to advance funds to pay such costs.
Although the DOA's position with respect to similar contracts is that it
has no legal liability for unfunded postretirement benefit costs, other
than pension obligations, and the DOA may disagree with the specific
amount of other Termination Costs, it is the opinion of the Company and
its management, based on the Contract terms, applicable law, and legal
and equitable precedents, that substantially all of the Termination Costs
would be paid by the DOA or recovered from the government in related
proceedings, and that the amounts, if any, not paid or recovered, or the
advancement of funds by the Company pending such reimbursement or
recovery, should not have a material adverse effect on the consolidated
financial position of the Company.
18. 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 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 approximately $220 million, $175 million, and $150 million in 1997,
1996, and 1995, respectively, including investments in construction,
operations, and development.
19. LEGAL MATTERS
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal
injury, patent, commercial, contract, environmental, antitrust, health
and safety, and employment matters, which are being handled and defended
in the ordinary course of business. While the Company is unable to
predict the outcome of these matters, it does not believe, based upon
currently available facts, that the ultimate resolution of any of such
pending matters will have a material adverse effect on the Company's
business, financial position, or results of operations.
58
<PAGE> 59
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts)
1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. (1)
<S> <C> <C> <C> <C>
Sales $ 1,171 $ 1,208 $ 1,145 $ 1,154
Operating earnings 134 157 148 67
Earnings before income taxes 114 141 148 43
Provision for income taxes 42 51 52 15
Net earnings 72 90 96 28
Basic earnings per share (2) .93 1.15 1.23 .36
Diluted earnings per share (2) .92 1.14 1.22 .35
<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
Basic earnings per share (2) 1.41 1.42 1.23 .77
Diluted earnings per share (2) 1.39 1.41 1.22 .77
</TABLE>
-------------------------
(1) Fourth quarter 1997 operating data reflects a charge of $62 million
($40 million after tax) resulting from partial settlement/curtailment of
pension and other postemployment benefit liabilities. See Note 14 for a
discussion of the charge.
(2) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount. Earnings per
share for prior periods have been restated to conform to requirements of
the new accounting standard effective for periods ending after December
15, 1997.
59
<PAGE> 60
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
60
<PAGE> 61
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors -- General" in the 1998
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 1998 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 1998 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 1998 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.
61
<PAGE> 62
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
(a) 1. Consolidated financial statements: Page
<S> <C>
Management's responsibility for financial statements 32
Report of independent accountants 33
Consolidated statements of earnings and retained earnings 34
Consolidated statements of financial position 35
Consolidated statements of cash flows 36
Notes to consolidated financial statements 37 - 59
</TABLE>
2. Financial statement schedules
All schedules have been omitted because they are not applicable
or because the required information is shown in the financial
statements or notes thereto.
3. Exhibits filed as part of this report are listed in the Exhibit
Index appearing on page 65.
(b) Reports on Form 8-K
During the quarter ended December 31, 1997, no reports on Form 8-K
were filed.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 65.
(d) There are no applicable financial statement schedules required to be
filed as part of this report.
62
<PAGE> 63
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 6, 1998
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
--------- ----- ----
<S> <C> <C>
PRINCIPAL EXECUTIVE OFFICER:
/s/ Earnest W. Deavenport, Jr. Chairman of the March 6, 1998
- ------------------------------ Board and Chief
Earnest W. Deavenport, Jr. Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ H. Virgil Stephens Senior Vice President and March 6, 1998
- ------------------------------ Chief Financial Officer
H. Virgil Stephens
PRINCIPAL ACCOUNTING OFFICER:
/s/ Patrick R. Kinsey Vice President and March 6, 1998
- ------------------------------ Comptroller
Patrick R. Kinsey
</TABLE>
63
<PAGE> 64
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
DIRECTORS:
/s/ R. Wiley Bourne, Jr. Vice Chairman March 6, 1998
- ------------------------------ of the Board
R. Wiley Bourne, Jr. and Executive
Vice President
/s/ H. Jesse Arnelle Director March 6, 1998
- ------------------------------
H. Jesse Arnelle
/s/ Calvin A. Campbell, Jr. Director March 6, 1998
- ------------------------------
Calvin A. Campbell, Jr.
/s/ Jerry E. Dempsey Director March 6, 1998
- ------------------------------
Jerry E. Dempsey
/s/ John W. Donehower Director March 6, 1998
- ------------------------------
John W. Donehower
/s/ Lee Liu Director March 6, 1998
- ------------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 6, 1998
- ------------------------------
Marilyn R. Marks
/s/ Gerald B. Mitchell Director March 6, 1998
- ------------------------------
Gerald B. Mitchell
/s/ John A. White Director March 6, 1998
- ------------------------------
John A. White
</TABLE>
64
<PAGE> 65
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 February 3, 1998 69-78
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 (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, 1996 (the "1996 10-K"))
4.09 Officer's Certificate pursuant to Sections 201 and 301 of
the Indenture related to 7.60% Debentures due February 1, 2027 (incorporated herein by
reference to Exhibit 4.09 1996 10-K)
</TABLE>
65
<PAGE> 66
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Sequential
Number Page
Number
<S> <C> <C>
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 (incorporated herein by reference to
Exhibit 10.01 to the 1996 10-K)
*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 Statement on Form 10, originally
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 (incorporated herein by reference to
Exhibit 10.05 to the 1996 10-K)
*10.06 Executive Deferred Compensation Plan, as amended (incorporated herein by reference to
Exhibit 10.06 to the 1996 10-K)
*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 Harold L. Henderson
(incorporated herein by reference to Exhibit 10.08 to the 1996 10-K)
*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 (incorporated herein by reference to
Exhibit 10.11 to the 1996 10-K)
</TABLE>
66
<PAGE> 67
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Sequential
Number Page
Number
<S> <C> <C>
*10.12 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)
*10.13 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)
*10.14 Eastman 1997-1999 Long-Term Performance Subplan of
1994 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Exhibit
10.15 to 1996 10-K)
*10.15 Eastman 1998-2000 Long-Term Performance Subplan of 1997 Omnibus Long-Term Compensation
Plan 79-87
*10.16 1997 Omnibus Long-Term Compensation Plan (incorporated herein by reference to Appendix
A to Eastman Chemical Company's definitive 1997 Annual Meeting Proxy Statement filed
pursuant to Regulation 14A)
*10.17 Award Notice for Price-Vesting Stock Option Granted to CEO under 1997 Omnibus Long-
Term Compensation Plan (incorporated herein by reference to Exhibit 10.01 to Eastman
Chemical Company's Form 10-Q for the quarter ended September 30, 1997)
*10.18 Eastman Chemical Company Benefit Security Trust dated December 24, 1997 88-106
10.19 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)
10.20 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)
10.21 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)
10.22 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)
</TABLE>
67
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit Description Sequential
Number Page
Number
<S> <C> <C>
10.23 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)
12.01 Statement re Computation of Ratios of Earnings to Fixed Charges 107
21.01 Subsidiaries of the Company 108-109
23.01 Consent of Independent Accountants 110
27.01 Financial Data Schedule (for SEC use only) 111
99.01 Supplemental Business Segment Information 112
</TABLE>
- ------------------------------
* Management contract or compensatory plan or arrangement filed pursuant to
Item 601(b)(10)(iii) of Regulation S-K.
68
<PAGE> 1
Exhibit 3.02
EASTMAN CHEMICAL COMPANY BYLAWS
AMENDED AND RESTATED AS OF FEBRUARY 3, 1998
SECTION I
Capital Stock
Section 1.1. Certificates. Every holder of stock in the Corporation
shall be entitled to have a certificate signed in the name of the Corporation
by the Chairman of the Board of Directors or the Vice Chairman or a Vice
President, and by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary of the Corporation certifying the number of shares in
the Corporation owned by such holder. Any or all of the signatures on the
certificate may be a facsimile. In case any officer, transfer agent, or
registrar who has signed or whose facsimile signature has been placed upon a
certificate shall have ceased to be such officer, transfer agent, or registrar
before such certificate is issued, it may be issued by the Corporation with the
same effect as if such person were such officer, transfer agent, or registrar
at the date of issue.
Section 1.2. Record Ownership. A record of the name and address of
the holder of each certificate, the number of shares represented thereby and
the date of issue thereof shall be made on the Corporation's books. The
Corporation shall be entitled to treat the holder of record of any share of
stock as the holder in fact thereof, and accordingly shall not be bound to
recognize any equitable or other claim to or interest in any share on the part
of any other person, whether or not it shall have express or other notice
thereof, except as required by the laws of the State of Delaware.
Section 1.3. Transfer of Record Ownership. Transfers of stock shall
be made on the books of the Corporation only by direction of the person named
in the certificate or such person's attorney, lawfully constituted in writing,
and only upon the surrender of the certificate therefor and a written
assignment of the shares evidenced thereby, which certificate shall be canceled
before the new certificate is issued.
Section 1.4. Lost Certificates. Any person claiming a stock
certificate in lieu of one lost, stolen or destroyed shall give the Corporation
an affidavit as to such person's ownership of the certificate and of the facts
which go to prove its loss, theft or destruction. Such person shall also, if
required by policies adopted by the Board of Directors, give the Corporation a
bond, in such form as may be approved by the Corporation, sufficient to
indemnify the Corporation against any claim that may be made against it on
account of the alleged loss of the certificate or the issuance of a new
certificate.
Section 1.5. Transfer Agents; Registrars; Rules Respecting
Certificates. The Board of Directors may appoint, or authorize any officer or
officers to appoint, one or more transfer agents and one or more registrars.
The Board of Directors may make such further rules and regulations as it may
deem expedient concerning the issue, transfer and registration of stock
certificates of the Corporation.
Section 1.6. Record Date. The Board of Directors may fix in advance
a future date, not exceeding 60 days (nor, in the case of a stockholders'
meeting, less than ten days) preceding the date of any meeting of stockholders,
payment of dividend or other distribution, allotment of rights, or change,
conversion or exchange of capital stock or for the purpose of any other lawful
action, as the record date for determination of the stockholders entitled to
notice of and to vote at any such meeting and any adjournment thereof, or to
receive any such dividend or other distribution or allotment of rights, or to
exercise the rights in respect of any such change, conversion or exchange of
capital stock, or to participate in any such other lawful action, and in such
case such stockholders and only such stockholders as shall be stockholders of
record on the date so fixed shall be entitled to such notice of and to vote at
such meeting and any adjournment thereof, or to receive such dividend or other
distribution or allotment of rights, or to exercise such rights, or to
participate in any such other lawful action, as the case may be,
notwithstanding any transfer of any stock on the books of the Corporation after
any such record date fixed as aforesaid.
69
<PAGE> 2
SECTION II
Meetings of Stockholders
Section 2.1. Annual. The annual meeting of stockholders for the
election of directors and the transaction of such other proper business shall
be held on the first Thursday in May, unless otherwise specified by resolution
adopted by the Board of Directors, and at the time and place, within or without
the State of Delaware, as determined by the Board of Directors.
Section 2.2. Special. Special meetings of stockholders for any
purpose or purposes may be called only by the Board of Directors, pursuant to a
resolution adopted by a majority of the members of the Board of Directors then
in office. Special meetings may be held at any place, within or without the
State of Delaware, as determined by the Board of Directors. The only business
which may be conducted at such a meeting, other than procedural matters and
matters relating to the conduct of the meeting, shall be the matter or matters
described in the notice of the meeting.
Section 2.3. Notice. Written notice of each meeting of stockholders,
stating the date, time, place and, in the case of a special meeting, the
purpose thereof, shall be given as provided by law by the Secretary or an
Assistant Secretary not less than ten days nor more than 60 days before such
meeting (unless a different time is specified by law) to every stockholder
entitled by law to notice of such meeting.
Section 2.4. List of Stockholders. A complete list of the
stockholders entitled to vote at any meeting of stockholders, arranged in
alphabetical order, and showing the address of each stockholder and the number
of shares registered in the name of each stockholder, shall be prepared by the
Secretary and shall be open to the examination of any stockholder, for any
purpose germane to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified at the place where the meeting is to be held,
for at least ten days before the meeting and at the place of the meeting during
the whole time of the meeting.
Section 2.5. Quorum. The holders of shares of stock entitled to cast
a majority of the votes on the matters at issue at a meeting of stockholders,
present in person or represented by proxy, shall constitute a quorum, except as
otherwise required by the Delaware General Corporation Law. In the event of a
lack of a quorum, the chairman of the meeting or a majority in interest of the
stockholders present in person or represented by proxy may adjourn the meeting
from time to time without notice other than announcement at the meeting, until
a quorum shall be obtained. At any such adjourned meeting at which there is a
quorum, any business may be transacted that might have been transacted at the
meeting originally called.
Section 2.6. Organization and Procedure. (a) The Chairman of the
Board, or, in the absence of the Chairman of the Board, the Vice Chairman, or,
in the absence of the Vice Chairman, any other person designated by the Board
of Directors, shall preside at meetings of stockholders. The Secretary of the
Corporation shall act as secretary, but in the absence of the Secretary, the
presiding officer may appoint a secretary.
(b) At each meeting of stockholders, the chairman of the meeting
shall fix and announce the date and time of the opening and the closing of the
polls for each matter upon which the stockholders will vote at the meeting and
shall determine the order of business and all other matters of procedure.
Except to the extent inconsistent with any such rules and regulations as
adopted by the Board of Directors, the chairman of the meeting may establish
rules, which need not be in writing, to maintain order for the conduct of the
meeting, including, without limitation, restricting attendance to bona fide
stockholders of record and their proxies and other persons in attendance at the
invitation of the chairman and making rules governing speeches and debates.
The chairman of the meeting acts in his or her absolute discretion and his or
her rulings are not subject to appeal.
70
<PAGE> 3
Section 2.7. Stockholder Nominations and Proposals. (a) No proposal
for a stockholder vote shall be submitted by a stockholder (a "Stockholder
Proposal") to the Corporation's stockholders unless the stockholder submitting
such proposal (the "Proponent") shall have filed a written notice setting forth
with particularity (i) the names and business addresses of the Proponent and
all Persons (as such term is defined in Article V of the Certificate of
Incorporation) acting in concert with the Proponent; (ii) the name and address
of the Proponent and the Persons identified in clause (i), as they appear on
the Corporation's books (if they so appear); (iii) the class and number of
shares of the Corporation beneficially owned by the Proponent and the Persons
identified in clause (i); (iv) a description of the Stockholder Proposal
containing all material information relating thereto; and (v) such other
information as the Board of Directors reasonably determines is necessary or
appropriate to enable the Board of Directors and stockholders of the
Corporation to consider the Stockholder Proposal. The presiding officer at any
stockholders' meeting may determine that any Stockholder Proposal was not made
in accordance with the procedures prescribed in these Bylaws or is otherwise
not in accordance with law, and if it is so determined, such officer shall so
declare at the meeting and the Stockholder Proposal shall be disregarded.
(b) Only persons who are selected and recommended by the Board of
Directors or the committee of the Board of Directors designated to make
nominations, or who are nominated by stockholders in accordance with the
procedures set forth in this Section 2.7, shall be eligible for election, or
qualified to serve, as directors. Nominations of individuals for election to
the Board of Directors of the Corporation at any annual meeting or any special
meeting of stockholders at which directors are to be elected may be made by any
stockholder of the Corporation entitled to vote for the election of directors
at that meeting by compliance with the procedures set forth in this Section
2.7. Nominations by stockholders shall be made by written notice (a
"Nomination Notice"), which shall set forth (i) as to each individual
nominated, (A) the name, date of birth, business address and residence address
of such individual; (B) the business experience during the past five years of
such nominee, including his or her principal occupations and employment during
such period, the name and principal business of any corporation or other
organization in which such occupations and employment were carried on, and such
other information as to the nature of his or her responsibilities and level of
professional competence as may be sufficient to permit assessment of his or her
prior business experience; (C) whether the nominee is or has ever been at any
time a director, officer or owner of 5% or more of any class of capital stock,
partnership interests or other equity interest of any corporation, partnership
or other entity; (D) any directorships held by such nominee in any company with
a class of securities registered pursuant to Section 12 of the Securities
Exchange Act of 1934, as amended, or subject to the requirements of Section
15(d) of such Act or any company registered as an investment company under the
Investment Company Act of 1940, as amended; and (E) whether, in the last five
years, such nominee has been convicted in a criminal proceeding or has been
subject to a judgment, order, finding or decree of any federal, state or other
governmental entity, concerning any violation of federal, state or other law,
or any proceeding in bankruptcy, which conviction, order, finding, decree or
proceeding may be material to an evaluation of the ability or integrity of the
nominee; and (ii) as to the Person submitting the Nomination Notice and any
Person acting in concert with such Person, (x) the name and business address of
such Person, (y) the name and address of such Person as they appear on the
Corporation's books (if they so appear), and (z) the class and number of shares
of the Corporation that are beneficially owned by such Person. A written
consent to being named in a proxy statement as a nominee, and to serve as a
director if elected, signed by the nominee, shall be filed with any Nomination
Notice. If the presiding officer at any stockholders' meeting determines that
a nomination was not made in accordance with the procedures prescribed by these
Bylaws, he shall so declare to the meeting and the defective nomination shall
be disregarded.
(c) Nomination Notices and Stockholder Proposals shall be delivered
to the Secretary at the principal executive office of the Corporation 60 days
or more before the date of the stockholders' meeting if such Nomination Notice
or Stockholder Proposal is to be submitted at an annual stockholders' meeting
(provided, however, that if such annual meeting is called to be held before the
date specified in Section 2.1 hereof, such Nomination Notice or Stockholder
Proposal shall be so delivered no later than the close of business on the 15th
day following the day on which notice of the date of the annual stockholders'
meeting was given).
71
<PAGE> 4
Nomination Notices and Stockholder Proposals shall be delivered to the
Secretary at the principal executive office of the Corporation no later than
the close of business on the 15th day following the day on which notice of the
date of a special meeting of stockholders was given if the Nomination Notice or
Stockholder Proposal is to be submitted at a special stockholders' meeting.
Section 2.8. Voting. Unless otherwise provided in a resolution or
resolutions providing for any class or series of Preferred Stock pursuant to
Article IV of the Certificate of Incorporation or by the Delaware General
Corporation Law, each stockholder shall be entitled to one vote, in person or
by written proxy, for each share held of record by such stockholder who is
entitled to vote generally in the election of directors. All elections for the
Board of Directors shall be decided by a plurality of the votes cast and all
other questions shall be decided by a majority of the votes cast, except as
otherwise required by the Delaware General Corporation Law or as provided for
in the Certificate of Incorporation or these Bylaws. Abstentions shall not be
considered to be votes cast.
Section 2.9. Inspectors. The Board of Directors by resolution shall,
in advance of any meeting of stockholders, appoint one or more inspectors,
which inspector or inspectors may include individuals who serve the Corporation
in other capacities, including, without limitation, as officers, employees,
agents or representatives of the Corporation, to act at the meeting and make a
written report thereof. One or more persons may be designated by the Board of
Directors as alternate inspectors to replace any inspector who fails to act.
If no inspector or alternate is able to act at a meeting of stockholders, the
chairman of the meeting shall appoint one or more inspectors to act at the
meeting. Each inspector, before discharging his or her duties, shall take and
sign an oath faithfully to execute the duties of inspector with strict
impartiality and according to the best of his or her ability. The inspectors
shall have the duties prescribed by the Delaware General Corporation Law.
SECTION III
Board of Directors
Section 3.1. Number and Qualifications. The business and affairs of
the Corporation shall be managed by or under the direction of its Board of
Directors. The number of directors constituting the Board of Directors shall
be as authorized from time to time exclusively by a vote of a majority of the
members of the Board of Directors then in office. The maximum number of
consecutive three-year terms of office that may be served by any director is
three, and for purposes of calculating such maximum number of terms there shall
not be counted as a three-year term any service during a partial term for which
such director is serving or during any initial term; provided, however, that
the Board of Directors is authorized in circumstances it deems appropriate to
nominate and thereby render eligible a person for a fourth or subsequent
consecutive three-year term. Notwithstanding the foregoing, (i) a person who
is not serving as a director shall not be eligible for nomination, appointment,
or election if such person has or will have reached age 70 on the date of his
or her appointment or election; and (ii) any director reaching the age of 70
during any term of office shall continue to be qualified to serve as a director
only until the next annual meeting of stockholders following his or her 70th
birthday, provided, however, that the Board of Directors is authorized, in
circumstances it deems appropriate and by unanimous approval of all of the
directors then in office (excepting the director whose qualification is the
subject of the action), to render a director then in office eligible to serve
until the next annual meeting of stockholders following his or her 71st
birthday.
Section 3.2. Resignation. A director may resign at any time by
giving written notice to the Chairman of the Board, to the Vice Chairman or to
the Secretary. Unless otherwise stated in such notice of resignation, the
acceptance thereof shall not be necessary to make it effective; and such
resignation shall take effect at the time specified therein or, in the absence
of such specification, it shall take effect upon the receipt thereof.
72
<PAGE> 5
Section 3.3. Regular Meetings. Regular meetings of the Board of
Directors may be held without further notice at such time as shall from time to
time be determined by the Board of Directors. Unless otherwise determined by
the Board of Directors, the locations of the regular meetings of the Board of
Directors shall be in Kingsport, Tennessee. A meeting of the Board of
Directors for the election of officers and the transaction of such other
business as may come before it may be held without notice immediately following
the annual meeting of stockholders.
Section 3.4. Special Meetings. Special meetings of the Board of
Directors may be called by the Chairman of the Board, or the Vice Chairman or
at the request in writing of one third of the members of the Board of Directors
then in office.
Section 3.5. Notice of Special Meetings. Notice of the date, time
and place of each special meeting shall be mailed by regular mail to each
director at his designated address at least six days before the meeting; or
sent by overnight courier to each director at his designated address at least
two days before the meeting (with delivery scheduled to occur no later than the
day before the meeting); or given orally by telephone or other means, or by
telegraph or telecopy, or by any other means comparable to any of the
foregoing, to each director at his designated address at least 24 hours before
the meeting; provided, however, that if less than five days' notice is provided
and one third of the members of the Board of Directors then in office object in
writing prior to or at the commencement of the meeting, such meeting shall be
postponed until five days after such notice was given pursuant to this sentence
(or such shorter period to which a majority of those who objected in writing
agree), provided that notice of such postponed meeting shall be given in
accordance with this Section 3.5. The notice of the special meeting shall
state the general purpose of the meeting, but other routine business may be
conducted at the special meeting without such matter being stated in the
notice.
Section 3.6. Place of Meetings. The Board of Directors may hold
their meetings and have an office or offices inside or outside of the State of
Delaware.
Section 3.7. Telephonic Meeting and Participation. Any or all of the
directors may participate in a meeting of the Board of Directors or any
committee thereof by conference telephone or similar communications equipment
by means of which all persons participating in the meeting can hear each other,
and such participation shall constitute presence in person at the meeting.
Section 3.8. Action by Directors Without a Meeting. Unless otherwise
restricted by the Certificate of Incorporation or these Bylaws, any action
required or permitted to be taken at any meeting of the Board of Directors, or
of any committee thereof, may be taken without a meeting if all members of the
Board or of such committee, as the case may be, consent thereto in writing, and
the writing or writings are filed with the minutes of proceedings of the Board
or committee.
Section 3.9. Quorum and Adjournment. A majority of the directors
then holding office shall constitute a quorum. The vote of the majority of the
directors present at a meeting at which a quorum is present shall be the act of
the Board of Directors. Whether or not a quorum is present to conduct a
meeting, any meeting of the Board of Directors (including an adjourned meeting)
may be adjourned by a majority of the directors present, to reconvene at a
specific time and place. It shall not be necessary to give to the directors
present at the adjourned meeting notice of the reconvened meeting or of the
business to be transacted, other than by announcement at the meeting that was
adjourned; provided, however, notice of such reconvened meeting, stating the
date, time, and place of the reconvened meeting, shall be given to the
directors not present at the adjourned meeting in accordance with the
requirements of Section 3.5 hereof.
Section 3.10. Organization. The Chairman of the Board, or, in the
absence of the Chairman of the Board, the Vice Chairman, or in the absence of
the Vice Chairman, a member of the Board selected by the members present, shall
preside at meetings of the Board. The Secretary of the Corporation shall act
as secretary, but in the absence of the Secretary, the presiding officer may
appoint a secretary.
73
<PAGE> 6
Section 3.11. Compensation of Directors. Directors shall receive
such compensation for their services as the Board of Directors may determine.
Any director may serve the Corporation in any other capacity and receive
compensation therefor.
Section 3.12. Presumption of Assent. A director of the Corporation
who is present at a meeting of the Board of Directors when a vote on any matter
is taken is deemed to have assented to the action taken unless he votes against
or abstains from the action taken, or unless at the beginning of the meeting or
promptly upon arrival the director objects to the holding of the meeting or
transacting specified business at the meeting. Any such dissenting votes,
abstentions or objections shall be entered in the minutes of the meeting.
SECTION IV
Committees
Section 4.1. Committees. The Board of Directors may, by resolutions
passed by a majority of the members of the Board of Directors, designate
members of the Board of Directors to constitute other committees which shall in
each case consist of such number of directors, and shall have and may execute
such powers as may be determined and specified in the respective resolutions
appointing them. Any such committee may fix its rules of procedure, determine
its manner of acting and the time and place, whether within or without the
State of Delaware, of its meetings and specify what notice thereof, if any,
shall be given, unless the Board of Directors shall otherwise by resolution
provide. Unless otherwise provided by the Board of Directors or such
committee, the quorum, voting and other procedures shall be the same as those
applicable to actions taken by the Board of Directors. A majority of the
members of the Board of Directors then in office shall have the power to change
the membership of any such committee at any time, to fill vacancies therein and
to discharge any such committee or to remove any member thereof, either with or
without cause, at any time.
SECTION V
Officers
Section 5.1. Designation. The officers of the Corporation shall be a
Chairman of the Board, a Vice Chairman, a President of one or more Divisions,
Regions, or other functional or operational unit or units of the Corporation,
one or more Vice Presidents in such gradations as the Board of Directors may
determine, a Treasurer, one or more Assistant Treasurers, a Comptroller, one or
more Assistant Comptrollers, a Secretary, and one or more Assistant
Secretaries. The Board of Directors may elect or appoint, or provide for the
appointment of, such officers or agents as may from time to time appear
necessary or advisable in the conduct of the business and affairs of the
Corporation. Any number of offices may be held by the same person.
Section 5.2. Election Term. At its first meeting after each annual
meeting of stockholders, the Board of Directors shall elect the officers or
provide for the appointment thereof. Subject to Section 5.3 and Section 5.4
hereof, the term of each officer elected by the Board of Directors shall be
until the first meeting of the Board of Directors following the next annual
meeting of stockholders and until such officer's successor is chosen and
qualified.
Section 5.3. Resignation. Any officer may resign at any time by
giving written notice to the Secretary. Unless otherwise stated in such notice
of resignation, the acceptance thereof shall not be necessary to make it
effective; and such resignation shall take effect at the time specified therein
or, in the absence of such specification, it shall take effect upon the receipt
thereof.
74
<PAGE> 7
Section 5.4. Removal. Any officer may be removed at any time with or
without cause by the affirmative vote of a majority of the members of the Board
of Directors then in office. Any officer appointed by another officer may be
removed with or without cause by such officer or the Chief Executive Officer.
Section 5.5. Vacancies. A vacancy in any office may be filled for
the unexpired portion of the term by the Board of Directors or, in the case of
offices held by officers who may be appointed by other officers, by any officer
authorized to appoint such officer.
Section 5.6. Chief Executive Officer. The Chairman of the Board
shall be the Chief Executive Officer of the Corporation. The Chief Executive
Officer shall be responsible for carrying out the policies adopted by the Board
of Directors.
Section 5.7. Chairman of the Board. The Chairman of the Board shall
have such powers and perform such duties as may be provided for herein and as
may be incident to the office and as may be assigned by the Board of Directors.
Section 5.8. Vice Chairman of the Board. The Vice Chairman of the
Board shall have such powers and perform such duties as may be provided for
herein and as may be assigned by the Board of Directors.
Section 5.9. President. Each President of a Division, Region or
other functional or operational unit or units shall have such powers and
perform such duties as may be provided for herein and as may be assigned by the
Chairman of the Board or the Board of Directors.
Section 5.10. Vice President. Each Vice President shall have such
powers and perform such duties as may be provided for herein and as may be
assigned by the Chairman of the Board or the Board of Directors.
Section 5.11. Treasurer. The Treasurer shall have charge of all
funds of the Corporation and shall perform all acts incident to the position of
Treasurer, subject to the control of the Board of Directors.
Section 5.12. Comptroller. The Comptroller shall have the custody
and operation of the accounting books and records of the Corporation and shall
perform all acts incident to the position of Comptroller, subject to the
control of the Board of Directors.
Section 5.13. Secretary. The Secretary shall keep the minutes, and
give notices, of all meetings of stockholders and directors and of such
committees as directed by the Board of Directors. The Secretary shall have
charge of such books and papers as the Board of Directors may require. The
Secretary or any Assistant Secretary is authorized to certify copies of
extracts from minutes and of documents in the Secretary's charge and anyone may
rely on such certified copies to the same effect as if such copies were
originals and may rely upon any statement of fact concerning the Corporation
certified by the Secretary (or any Assistant Secretary). The Secretary shall
perform all acts incident to the office of Secretary, subject to the control of
the Board of Directors.
Section 5.14. Assistant Secretaries, Assistant Treasurers and
Assistant Comptrollers. Assistant Secretaries, Assistant Treasurers and
Assistant Comptrollers shall have such powers and perform such duties as
usually pertain to their respective offices and as may be assigned by the Board
of Directors or an officer designated by the Board of Directors.
Section 5.15. Compensation of Officers. The officers of the
Corporation shall receive such compensation for their services as the Board of
Directors or the appropriate committee thereof may determine. The Board of
Directors may delegate its authority to determine compensation to designated
officers of the Corporation.
75
<PAGE> 8
Section 5.16. Execution of Instruments. Checks, notes, drafts, other
commercial instruments, assignments, guarantees of signatures and contracts
(except as otherwise provided herein or by law) shall be executed by the
Chairman of the Board, the Vice Chairman, any President of a Division, Region
or other functional or operational unit or units, any Vice President or other
officers or employees or agents, in any such case as the Board of Directors may
direct or authorize.
Section 5.17. Mechanical Endorsements. The Chairman of the Board,
the Vice Chairman, any President of a Division, Region or other functional or
operational unit or units, any Vice President or the Secretary may authorize
any endorsement on behalf of the Corporation to be made by such mechanical
means or stamps as any of such officers may deem appropriate.
SECTION VI
Indemnification
Section 6.1. Indemnification Provisions in Certificate of
Incorporation. The provisions of this Section VI are intended to supplement
Article VII of the Certificate of Incorporation pursuant to Sections 7.2 and
7.3 thereof. To the extent that this Section VI contains any provisions
inconsistent with said Article VII, the provisions of the Certificate of
Incorporation shall govern. Terms defined in such Article VII shall have the
same meaning in this Section VI.
Section 6.2. Indemnification of Employees. The Corporation shall
indemnify and advance expenses to its employees to the same extent as to its
directors and officers, as set forth in the Certificate of Incorporation and in
this Section VI of the Bylaws of the Corporation.
Section 6.3. Undertakings for Advances of Expenses. If and to the
extent the Delaware General Corporation Law requires, an advancement by the
Corporation of expenses incurred by an indemnitee pursuant to clause (iii) of
the last sentence of Section 7.1 of the Certificate of Incorporation
(hereinafter an "advancement of expenses") shall be made only upon delivery to
the Corporation of an undertaking (hereinafter an "undertaking"), by or on
behalf of such indemnitee, to repay all amounts so advanced if it shall
ultimately be determined by final judicial decision from which there is no
further right to appeal (hereinafter a "final adjudication") that such
indemnitee is not entitled to be indemnified for such expenses under Article
VII of the Certificate of Incorporation or otherwise.
Section 6.4. Claims for Indemnification. If a claim for
indemnification under Section 7.1 of the Certificate of Incorporation is not
paid in full by the Corporation within 60 days after it has been received in
writing by the Corporation, except in the case of a claim for an advancement of
expenses, in which case the applicable period shall be 20 days, the indemnitee
may at any time thereafter bring suit against the Corporation to recover the
unpaid amount of the claim. If successful in whole or in part in any such
suit, or in a suit brought by the Corporation to recover an advancement of
expenses pursuant to the terms of an undertaking, the indemnitee shall be
entitled to be paid also the expense of prosecuting or defending such suit. In
any suit brought by the indemnitee to enforce a right to indemnification
hereunder (but not in a suit brought by the indemnitee to enforce a right to an
advancement of expenses) it shall be a defense that, and in any suit by the
Corporation to recover an advancement of expenses pursuant to the terms of an
undertaking the Corporation shall be entitled to recover such expenses only
upon a final adjudication that, the indemnitee has not met the applicable
standard of conduct set forth in Section 145 of the Delaware General
Corporation Law (or any successor provision or provisions). Neither the
failure of the Corporation (including the Board of Directors, independent legal
counsel, or its stockholders) to have made a determination prior to the
commencement of such suit that indemnification of the indemnitee is proper in
the circumstances because the indemnitee has met the applicable standard of
conduct set forth in Section 145 of the Delaware General
76
<PAGE> 9
Corporation Law (or any successor provision or provisions), nor an actual
determination by the Corporation (including the Board of Directors, independent
legal counsel, or its stockholders) that the indemnitee has not met such
applicable standard of conduct, shall create a presumption that the indemnitee
has not met the applicable standard of conduct or, in the case of such a suit
brought by the indemnitee, be a defense to such suit. In any suit brought by
the indemnitee to enforce a right to indemnification or to an advancement of
expenses hereunder, or by the Corporation to recover an advancement of expenses
pursuant to the terms of an undertaking, the burden of proving that the
indemnitee is not entitled to be indemnified, or to have or retain such
advancement of expenses, under Article VII of the Certificate of Incorporation
or this Section VI or otherwise, shall be on the Corporation.
Section 6.5. Insurance. The Corporation may maintain insurance, at
its expense, to protect itself and any director, trustee, officer, employee or
agent of the Corporation or another enterprise against any expense, liability
or loss, whether or not the Corporation would have the power to indemnify such
person against such expense, liability or loss under the Delaware General
Corporation Law.
Section 6.6. Severability. In the event that any of the provisions
of this Section VI (including any provision within a single section, paragraph
or sentence) is held by a court of competent jurisdiction to be invalid, void
or otherwise unenforceable, the remaining provisions are severable and shall
remain enforceable to the full extent permitted by law.
SECTION VII
Miscellaneous
Section 7.1. Seal. The Corporation shall have a suitable seal,
containing the name of the Corporation. The Secretary shall be in charge of
the seal and may authorize one or more duplicate seals to be kept and used by
any other officer or person.
Section 7.2. Waiver of Notice. Whenever any notice is required to be
given, a waiver thereof in writing, signed by the person or persons entitled to
the notice, whether before or after the time stated therein shall be deemed
equivalent thereto. Attendance of a person at a meeting shall constitute a
waiver of notice of such meeting, except when the person attends a meeting for
the express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened.
Section 7.3. Voting of Stock Owned by the Corporation. Powers of
attorney, proxies, waivers of notice of meeting, consents and other instruments
relating to securities owned by the Corporation may be executed in the name of
and on behalf of the Corporation by the Chairman of the Board, the Vice
Chairman, any Vice President or such officers or employees or agents as the
Board of Directors or any of such designated officers may direct. Any such
officer may, in the name of and on behalf of the Corporation, take all such
action as any such officer may deem advisable to vote in person or by proxy at
any meeting of security holders of any corporation in which the Corporation may
own securities and at any such meeting shall possess and may exercise any and
all rights and powers incident to the ownership of such securities and which,
as the owner thereof, the Corporation might have exercised and possessed if
present. The Board of Directors may from time to time confer like powers upon
any other person or persons.
77
<PAGE> 10
SECTION VIII
Amendment of Bylaws
The Board of Directors shall have power to amend, alter, change, adopt
or repeal the Bylaws of the Corporation at any regular or special meeting;
provided, however, any action relating to the last sentence of Section 3.1 of
these Bylaws concerning the age 70 qualification limitation on Board service
shall require the vote of 100 percent of the directors then in office. The
stockholders also shall have the power to amend, alter, change, adopt or repeal
the Bylaws of the Corporation at any annual or special meeting subject to the
requirements of the Certificate of Incorporation.
78
<PAGE> 1
Exhibit 10.15
LONG-TERM PERFORMANCE SUBPLAN
OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN
1998-2000 PERFORMANCE PERIOD
EASTMAN CHEMICAL COMPANY
Effective January 1, 1998
79
<PAGE> 2
LONG-TERM PERFORMANCE SUBPLAN
OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN
1998-2000 PERFORMANCE PERIOD
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Title
- ------- -----
<S> <C>
Section 1. Background
Section 2. Definitions
Section 3. Administration
Section 4. Eligibility
Section 5. Form of Awards
Section 6. Size of Awards
Section 7. Composition of Peer Group
Section 8. Preconditions to Receipt of an Award
Section 9. Manner and Timing of Award Payments
Section 10. No Rights as Shareowner
Section 11. Application of Plan
Section 12. Amendments
</TABLE>
80
<PAGE> 3
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE SUBPLAN
OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN
1998-2000 PERFORMANCE PERIOD
Section 1. Background. Under Section 11 of the Eastman Chemical Company 1997
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 Long-Term Performance Subplan (this "Subplan") is to set forth
the terms of the grant of performance shares for the 1998-2000 Performance
Period specified herein, effective as of January 1, 1998 (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, 1998.
(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, 1998 through December
31, 2000.
(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.
81
<PAGE> 4
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
1998, 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
1998 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
1998 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 1998 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 Peer Group, the Committee may designate a replacement company,
which shall then be substituted in the Peer Group for the former member. In any
82
<PAGE> 5
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.
83
<PAGE> 6
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 12 (relating
to qualification of Awards as "performance-based" under Code Section 162(m)),
Section 17 (relating to nonassignability), Section 18 (relating to adjustment
of shares available), Section 19 (relating to withholding taxes), Section 20
(relating to noncompetition and confidentiality), Section 21 (relating to
regulatory approvals and listings), Section 23 (relating to the governing law),
Section 24 (relating to changes in ownership), Section 25 (relating to changes
in control), Section 26 (relating to no rights, title, or interest in Company
assets), and Section 27 (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.
84
<PAGE> 7
EXHIBIT A
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE SUBPLAN GRANT TABLE
1998-2000 CYCLE
Original on File in
Management Compensation
85
<PAGE> 8
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
86
<PAGE> 9
EXHIBIT C
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE SUBPLAN
1998-2000 PERFORMANCE PERIOD
PAYOUT TABLE
<TABLE>
<CAPTION>
Eastman's TSR Payout Multiplier
Ranking (Times Target Grant Amount)
------------- ---------------------------
<S> <C>
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
</TABLE>
87
<PAGE> 1
Exhibit 10.18
EASTMAN CHEMICAL COMPANY
BENEFIT SECURITY TRUST
THIS TRUST AGREEMENT is made this 24th day of December, 1997, by and
between Eastman Chemical Company ("Company"), and Wachovia Bank, N.A., as
Trustee ("Trustee").
W I T N E S S E T H:
WHEREAS, Company has adopted certain nonqualified deferred
compensation plans and severance agreements listed on Appendix A attached
hereto and made a part hereof (collectively, the "Plans", and each such plan
and severance agreement may be referred to herein as a "Plan"); and
WHEREAS, Company wishes to establish a trust (hereinafter called
"Trust") and to contribute to the Trust assets that shall be held therein,
subject to the claims of Company's creditors in the event of Company's
Insolvency, as herein defined, until paid to Plan participants and their
beneficiaries in such manner and at such times as specified in the Plans; and
WHEREAS, it is the intention of the parties that this Trust shall
constitute an unfunded arrangement and shall not affect the status of the Plans
as unfunded plans maintained for the purpose of providing deferred compensation
for a select group of management or highly compensated employees for purposes
of Title I of the Employee Retirement Income Security Act of 1974;
NOW, THEREFORE, the parties do hereby establish this Trust and agree
that the Trust shall be comprised, held and disposed of as follows:
Section 1. Establishment of Trust.
(a) Company hereby deposits with Trustee in trust Fifteen Thousand
Dollars ($15,000.00), which shall become the principal of the Trust to be held,
administered and disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust shall be irrevocable once executed by the Company
and Trustee, except as provided in Section 12 of this Trust Agreement.
(c) The Trust is intended to be a grantor trust, of which Company
is the grantor, within the meaning of subpart E, part I, subchapter J, chapter
1, subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be
held separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their beneficiaries shall
have no preferred claim on, or any beneficial ownership interest in, any assets
of the Trust. Any rights created under the Plans and this Trust Agreement
shall be mere unsecured contractual rights of Plan participants and their
beneficiaries against Company. Any assets held by the Trust will be subject to
the claims of Company's general creditors under federal and state law in the
event of Insolvency, as defined in Section 3(a) herein.
(e) The funding of the Trust shall be governed by the following
terms and conditions.
(1) The Company may at any time or from time to time make
contributions to the Trust, provided that such contributions are
approved by the Board of Directors of the Company in a resolution
validly adopted by the Board that expressly authorizes such
contributions. Notwithstanding the foregoing, assets contributed
to the Trust (other than the assets described on Appendix C) must
be (i) in the opinion of the Trustee, liquid or easily liquidated;
and (ii) in the case of equity securities, traded on a national
securities exchange or on the NASDAQ National Market System. Debt
securities must be at least "investment grade", as that term is
commonly used by debt rating agencies.
88
<PAGE> 2
(2) Upon the creation of this Trust, the Company shall
convey to the Trustee a deed of trust with respect to those parcels
of real property described on Appendix C attached hereto (the "Deed
of Trust") and a warrant to purchase common stock of the Company
described on Appendix C attached hereto (the "Warrant"). Such Deed
of Trust and Warrant (together with any additional security
interests granted to the Trustee by the Company hereafter and any
security which is substituted for such Deed of Trust, Warrant or
future security interests) may be referred to herein as the
"Security Interests." The real property with respect to which the
Deed of Trust is granted and the unissued Company common stock
which is subject to issuance under the Warrant (together with any
additional real, personal or intangible property as to which the
Trustee is given a security interest and any real, personal or
intangible property which is substituted for the property described
on Appendix C), may be referred to herein as the "Underlying
Property".
(3) Within five (5) business days after the first to
occur of (i) the date the Company has knowledge of a Potential
Change in Control (and for this purpose, "knowledge" shall mean
that the Chief Executive Officer, Chief Financial Officer or
General Counsel has actual knowledge of such event); (ii) the date
the Company experiences a Change in Control; (iii) the date the
Company receives a Notice or Notices of Plan Payment Default that
are not postponed under Section 1(f)(4) pending the final
resolution of independent judicial or arbitration proceedings; or
(iv) the date the Trustee issues a final Notice of Plan Payment
Default following the final resolution of the independent judicial
or arbitration proceedings described in Section 1(f)(4), the
Company shall transfer to the Trustee cash or other liquid funds
acceptable to the Trustee in the amount of the Value of the Benefit
Obligations as most recently determined by the Trustee in its sole
and absolute discretion or its agents under Section 2(b) of this
Trust, as well as the Expected Trust Expenses, and immediately upon
such transfer the Trustee shall release and convey to the Company
any and all interest which the Trustee has in the Security
Interests and the Underlying Property. If the Company fails to
make such transfer of cash or other liquid funds within the period
prescribed by the preceding sentence, then the Trustee shall
exercise the Warrant and shall foreclose on the Deed of Trust and
any other Security Interests without further notice to the Company.
Each of the events described in clauses (i) through (iv) of the
first sentence of this paragraph shall be referred to herein as a
"Triggering Event."
(4) The Company shall have the right at any time to
purchase from the Trustee (i) the Warrant and/or any Company common
stock issued pursuant to the Warrant; and (ii) any other Underlying
Property then held by the Trustee for then fair market value of the
Warrant, Company common stock issued pursuant to the Warrant, or
other Underlying Property (as determined by the Trustee in its sole
discretion), as applicable, upon such terms and conditions as are
determined reasonable by the Trustee in its sole and absolute
discretion, provided, however, that the consideration paid to the
Trust shall either be cash or property which meets the conditions
of the second sentence of Section 1(e)(1).
(5) If the event which caused the Company to transfer
cash or other liquid funds to the Trustee was a Potential Change in
Control, and the conditions which created the Potential Change in
Control cease to exist (other than by consummation of a Change in
Control), then the Company shall have the right at any time
thereafter to cause the Trustee to return to the Company any and
all cash or other assets then held by the Trustee, upon the
reconveyance to the Trustee of the Security Interests in the
Underlying Property or by giving the Trustee security acceptable to
the Trustee in an amount not less than the Value of the Benefit
Obligations as most recently determined by the Trustee in its sole
and absolute discretion under Section 2(b) of this Trust, as well
as the Expected Trust Expenses.
(6) If the Company funds the Trust on a discretionary
basis (i.e., such funding was not required by a Triggering Event),
then, at any time when the aggregate fair market value (as
determined by the Trustee in its sole and absolute discretion) of
all property held by the Trustee (excluding the value of the Deed
of Trust, the Warrant and any other Security Interests) exceeds the
Value of the Benefit Obligations as most recently determined by the
Trustee in its sole and absolute
89
<PAGE> 3
discretion under Section 2(b) of this Trust, as well as the
Expected Trust Expenses, then upon the written request of the
Company the Trustee shall release and convey to the Company any and
all interest which the Trustee has in the Security Interests and
the Underlying Property. At any time thereafter, the Company shall
have the right at any time to cause the Trustee to return to the
Company (i) cash or other assets then held by the Trustee in an
amount equal to the lesser of (A) the current fair market value (as
determined by the Trustee in its sole and absolute discretion) of
the Security Interests previously released to the Company, or (B)
the fair market value (as determined by the Trustee in its sole and
absolute discretion) of the Security Interests previously released
to the Company at the time of their previous release to the
Company, in either case by reconveying to the Trustee the Security
Interests previously released to the Company; or (ii) any and all
cash or other assets then held by the Trustee, by giving the
Trustee security acceptable to the Trustee in an amount not less
than the Value of the Benefit Obligations as most recently
determined by the Trustee in its sole and absolute discretion under
Section 2(b) of this Trust, as well as the Expected Trust Expenses.
(f) Special Determinations Concerning Plan Payment Default.
(1) A "Claim of Plan Payment Default" means a written
notice from any Trust Beneficiary to the Trustee that (i) one or more
payment(s) have not been made on a timely basis to a participant or
beneficiary under any Plan; or (ii) if the Company or Trustee has
engaged a paying agent to make payments under one or more Plans, that
Company has not transferred funds to such paying agent on a timely
basis to enable the paying agent to make all payments then due under
the Plans for which the paying agent has responsibility.
(2) A "Notice of Plan Payment Default" means a written
notice from the Trustee to the Company given by facsimile not more
than ten (10) business days after its receipt of a Claim of Plan
Payment Default which the Trustee has determined to be accurate, or,
if the Trustee has not been able to determine the accuracy of such
claim, that appears to the Trustee to have been made in good faith,
stating that (i) the Company is not in compliance with the terms of
one or more of the Plans, specifying the Plan(s) involved, the
participants or beneficiaries involved, the payments not made on a
timely basis, and the actions necessary to cure such default, or (ii)
if the Company or the Trustee has engaged a paying agent to make
payments under one or more of the Plans, the Company has not
transferred funds to such paying agent on a timely basis to enable the
paying agent to make all payments then due under the Plans for which
the paying agent has responsibility, and the actions necessary to cure
such default.
(3) A "Plan Payment Default" shall mean (i) that one or
more payment(s) have not been made on a timely basis to a Participant
or beneficiary under any Plan; or (ii) if the Company or Trustee has
engaged a paying agent to make payments under one or more of the
Plans, that the Company has not transferred funds to such paying agent
on a timely basis to enable the paying agent to make all payments then
due under the Plans for which the paying agent has responsibility.
Notwithstanding the foregoing, a "Plan Payment Default" shall not be
deemed to occur if the Company makes an incorrect Plan payment to a
Participant or beneficiary, but the payment is at least ninety percent
(90%) of what is ultimately determined by the Trustee to be the
correct amount; provided, further that this exception shall no longer
apply with respect to a given Participant or beneficiary if the
Company makes three incorrect underpayments to such Participant or
beneficiary.
(4) Not more than ten (10) business days after the
Trustee's receipt of a Claim of Plan Payment Default which the Trustee
has determined to be accurate, or, if the Trustee has not been able to
determine the accuracy of such claim, that appears to the Trustee to
have been made in good faith, the Trustee shall issue by facsimile a
Notice of Plan Payment Default to the Company. The Company's
responses to such Notice shall be one of the following:
(A) If the Company does not respond by facsimile to such
Notice within five (5) business days after such Notice was
sent to and received by the Company, then the Trustee shall
exercise the Warrant and foreclose on the Deed of Trust and
any other Security Interests.
90
<PAGE> 4
(B) The Company may cure in full such Plan Payment
Default within five (5) business days after such Notice was
sent to and received by the Company, and in such event the
Trustee shall not exercise the Warrant or foreclose upon the
Security Interests unless and until the Trustee determines in
its sole discretion that the Company's actions did not
constitute a full and complete cure under the circumstances.
What constitutes a full and complete cure under the
circumstances shall be determined by the Trustee in its sole
discretion. If the Trustee determines in its sole discretion
that the Company's actions did not constitute a full and
complete cure under the circumstances, then the Trustee shall
exercise the Warrant and foreclose upon the Deed of Trust and
any other Security Interests without further notice to the
Company.
(C) The Company may respond to such Notice within five
(5) business days of receipt of such Notice by sending to the
Trustee by facsimile a notice signed by the Chief Executive
Officer, Chief Financial Officer or General Counsel of the
Company which (i) affirms that the Company has a good faith
belief that Plan Payment Default in question was permitted
under the applicable Plan; (ii) sets forth the basis for such
good faith belief; and (iii) represents that independent
judicial or arbitration proceedings are pending concerning the
Plan Payment Default, or will be instituted by the Company in
no less than thirty (30) calendar days, seeking to resolve
whether or not a Plan Payment Default was permitted under the
terms of the applicable Plan. If the Trustee receives such a
notice within such time period, then the Trustee shall not
exercise the Warrant or foreclose upon the Deed of Trust or
other Security Interests unless and until (i) the Trustee
determines in its sole and absolute discretion that the issue
of the Plan Payment Default has been finally resolved
adversely to the Company in such independent proceedings; (ii)
after making the determination referred to in clause (i), the
Trustee gives the Company by facsimile a final Notice of Plan
Payment Default; and (iii) such final Notice of Plan Payment
Default gives the Company a period of five (5) business days
after such final Notice was received by the Company to make a
full and complete cure of such Plan Payment Default. If the
Trustee determines in its sole and absolute discretion that
the Company's actions do not constitute a full and complete
cure under the circumstances, then the Trustee shall exercise
the Warrant and foreclose upon the Deed of Trust and any other
Security Interests without further notice to the Company.
(D) Notwithstanding paragraph (f)(4)(C) above, the
Trustee shall have the right at all times to determine in its
sole and absolute discretion the independence of the judicial
or arbitration proceeding described in paragraph (f)(4)(C)
above, the finality of such judicial or arbitration
proceeding, and the meaning of any such judicial or
arbitration proceeding. In addition, if the Trustee
determines that the issue of the Plan Payment Default has been
finally resolved adversely to the Company in such independent
proceedings, then in its final Notice of Plan Payment Default
to the Company the Trustee shall require that the Company pay
directly to the affected Trust Beneficiaries within five (5)
business days of the date the final Notice of Plan Payment
Default is received by the Company, the reasonable attorneys
fees and expenses incurred by such affected Trust
Beneficiaries in pursuing such judicial or arbitration
proceedings, and the Company's cure of the Plan Payment
Default shall not be full and complete unless such payment is
made to the affected Trust Beneficiaries within such period.
(g) As an alternative to exercising the Warrant or foreclosing
upon the Deed of Trust or other Security Interests under paragraphs (e) or (f)
above, the Trustee may sell or assign the Warrant, the Deed of Trust, and any
other Security Interests for adequate consideration (as determined by the
Trustee) to one or more persons other than the Company or any subsidiary of the
Company, provided that prior to such sale or assignment the Trustee (i) gives
the Company at least five (5) business days prior written notice of such sale
or assignment and offers the Company the opportunity to purchase the Warrant,
the Deed of Trust, or other Security Interests, as applicable, on the same
terms and conditions as are being offered by such proposed third party
purchaser, and (ii) gives the Company five (5) business days to accept such
offer in writing
91
<PAGE> 5
(h) Each participant in a Plan listed on Appendix A, and each
beneficiary of such participant (to the extent such beneficiary has become
entitled to payments from a Plan) shall be referred to herein as a "Trust
Beneficiary." Upon direction from the Company, the Trustee shall create (1) a
separate sub-trust for each Trust Beneficiary of the Class I and Class III
Plans listed on Appendix A, (2) a separate sub-trust for each of the Class II
Plans listed on Appendix A; and (3) a separate sub-trust (to be known as the
"Expense Sub-Trust") to hold Trust funds to be used to pay Trust administration
and Trustee fees and expenses. Each time the Company transfers property to the
Trust (other than a Security Interest), Company shall identify the specific
sub-trust to which such property shall be credited. Thereafter all income and
appreciation from such property shall also be credited to such sub-trust.
Notwithstanding the foregoing, to the extent the Trust is funded as a result of
a Triggering Event, then (A) if the then existing assets of the Trust, together
with the assets added as a result of a Triggering Event, are less than the
Value of the Benefit Obligations for all of the Plans as most recently
determined by the Trustee in its sole and absolute discretion under Section
2(b) of this Trust, together with the Expected Trust Expenses, then the assets
added as a result of the Triggering Event shall be allocated among the Plans
and the Expense Sub-Account in such a manner that the funding percentage of
each Plan and the Expense Sub-Account relative to each Plan's then Benefit
Obligations and the Expected Trust Expenses, and after such allocation, is as
equal as possible among the Plans and the Expense Sub-Account; and (B) if the
then existing assets of the Trust, together with the assets added as a result
of a Triggering Event, are more than the Value of the Benefit Obligations for
all of the Plans as most recently determined by the Trustee in its sole and
absolute discretion under Section 2(b) of this Trust, together with the
Expected Trust Expenses, then (i) the assets added as a result of the
Triggering Event shall first be allocated to the Class II Plans identified on
Appendix A (i.e., the defined benefit pension-type plans) until the funding
percentage for each such Class II Plan is 125% of the then Benefit Obligation
for each such Plan, (ii) the assets added as a result of the Triggering Event
shall next be allocated to the Expense Sub-Account until the funding percentage
for the Expense Sub-Account is 125% of the then Expected Trust Expenses, and
(iii) any remaining assets added as a result of the Triggering Event shall then
be allocated among all of the Plans identified on Appendix A and the Expense
Sub-Account in proportion to the Value of each Plan's then Benefit Obligation
and the Expected Trust Expenses.
Except as specifically otherwise provided in this Trust, (x)
all amounts credited to the sub-trust of an individual Trust Beneficiary of a
Class I or Class III Plan shall be used solely and exclusively to pay to such
Trust Beneficiary the benefits to which such persons are entitled under the
Plan(s), (y) all amounts credited to the sub-trust of a Class II Plan shall be
used solely and exclusively to pay the benefits owing to such Trust
Beneficiaries under such Plan(s); and (z) all amounts credited to the Expense
Sub-Account shall be used solely and exclusively to pay Trust administration and
Trustee fees and expenses (including fees and expenses of any agent of the
Trustee). The Trustee may commingle the property of the separate sub-trusts for
administration and investment purposes, provided that the Trustee maintains
sufficient records to identify the principal and income of the commingled
property which is allocable to each sub-trust, and further provided that under
no circumstances shall the property of a sub-trust be distributed to or used for
the benefit of any other sub-trust.
Section 2. Payments to Plan Participants and Their Beneficiaries.
(a) Company has appointed Fidelity Institutional Retirement
Services Company as the independent recordkeeper with respect to the Class I
and Class III Plans listed on Appendix A. Company has appointed Towers Perrin
as the independent actuary with respect to the Class II Plans listed on
Appendix A.
The Company may change the recordkeeper or actuary with respect to any
of the Plans before or after a Triggering Event, provided that in all cases
(before or after a Triggering Event), the Steering Committee described in
Section 12 of this Trust consents to the removal of the existing entity
performing such function and the appointment of the new entity performing such
function; and further provided that after a Triggering Event the Trustee also
consents to the removal of the existing entity performing such function and the
appointment of the new entity performing such function. The original or
successor recordkeeper may be referred to herein as "Recordkeeper", and the
original or successor independent actuary may be referred to herein as
"Actuary."
The fees and expenses of such agents shall be deemed to be
administrative fees and expenses for purposes of Section 9 of this Trust
Agreement.
92
<PAGE> 6
(b) Prior to a Triggering Event, the Company shall provide to the
Trustee and the Steering Committee at least once each calendar year, and more
frequently if requested by the Trustee, a report which shows (i) the aggregate
amount of the Benefit Obligation for each Plan; (ii) the Security Interests
held by the Trustee; and (iii) the fair market value of the aggregate assets
held by the Trust and allocable to each Plan (other than the Security Interests
or Underlying Property); provided, however, that this shall not be construed to
require the Company to contribute additional assets or additional Security
Interests to the Trust.
After a Triggering Event, the Company shall provide to the Trustee or
its agents such information as the Trustee or its agents may reasonably request
in order to determine the Benefit Obligations, the Value thereof, or any aspect
concerning the payment thereof. Once the Trustee or its agents has determined
the aggregate amount of the Benefit Obligations for each Plan, the Trustee
shall promptly provide to the Steering Committee a report with the items of
information described in clauses (i) through (iii) of the immediately preceding
paragraph.
The Company shall pay all of the expenses, including without limitation
attorneys' fees and expenses, incurred by the Trustee or its agents in
enforcing in good faith the duties and obligations of the Company as set forth
in this Section 2(b). The Recordkeeper and Actuary shall provide the Trustee
with any information within the knowledge of the Recordkeeper or the Actuary
concerning the Company, the Plans, the Trust Beneficiaries, the Benefit
Obligations, or the Value thereof, which is necessary for the Trustee to
discharge its duties hereunder.
(c) Prior to the date a Triggering Event occurs, the Company,
either directly or through a paying agent (if one has been appointed) shall
make all payments to the Plan participants and their beneficiaries in
accordance with the Plans. Once a Triggering Event occurs, the Trustee or the
paying agent (if one has been appointed) shall make payments to Plan
participants and their beneficiaries in accordance with such information as is
available from time to time to the paying agent, the Recordkeeper or the
Trustee, and which the Trustee or its agents deems reliable.
(d) The Trustee or the paying agent (if one has been appointed)
shall make provision for the reporting and withholding of any federal, state or
local taxes that may be required to be withheld with respect to the payment of
benefits pursuant to the terms of the Plans and shall pay amounts withheld to
the appropriate taxing authorities or determine that such amounts have been
reported, withheld and paid by Company.
Section 3. Trustee Responsibility Regarding Payments to Trust Beneficiary When
Company is Insolvent.
(a) Trustee shall cease payment of benefits to Plan participants
and their beneficiaries if the Company is Insolvent. Company shall be
considered "Insolvent" for purposes of this Trust Agreement if (i) Company is
unable to pay its debts as they become due, or (ii) Company is subject to a
pending proceeding as a debtor under the United States Bankruptcy Code.
(b) At all times during the continuance of this Trust, as provided
in Section 1(d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of Company under federal and state law as set
forth below.
(1) The Board of Directors and the Chief Executive
Officer of Company shall have the duty to inform Trustee in writing of
Company's Insolvency. If a person claiming to be a creditor of Company alleges
in writing to Trustee that Company has become Insolvent, Trustee shall
determine whether Company is Insolvent and, pending such determination, Trustee
shall discontinue payment of benefits to Plan participants or their
beneficiaries. In making the determination whether Company is Insolvent,
Trustee may employ an accounting firm (other than the auditors to the Company)
and such other agents as are necessary or appropriate in making such
determination. The fees and expenses of such agents shall be deemed to be fees
and expenses for purposes of Section 9 of this Trust. The Insolvency of any
subsidiary or affiliate of the Company will not in and of itself cause the
Company or any other subsidiary or affiliate to be deemed Insolvent.
93
<PAGE> 7
(2) Unless Trustee has actual knowledge of Company's
Insolvency, or has received notice from Company or a person claiming to be a
creditor alleging that Company is Insolvent, Trustee shall have no duty to
inquire whether Company is Insolvent. Trustee may in all events rely on such
evidence concerning Company's solvency as may be furnished to Trustee and that
provides Trustee with a reasonable basis for making a determination concerning
Company's solvency.
(3) If at any time Trustee has determined that Company is
Insolvent, Trustee shall discontinue payments to Plan participants or their
beneficiaries and shall hold the assets of the Trust for the benefit of
Company's general creditors. Nothing in this Trust Agreement shall in any way
diminish any rights of Plan participants or their beneficiaries to pursue their
rights as general creditors of Company with respect to benefits due under the
Plan(s) or otherwise.
(4) Trustee shall resume the payment of benefits to Plan
participants or their beneficiaries in accordance with Section 2 of this Trust
Agreement only after Trustee has determined that Company is not Insolvent (or
is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee
discontinues the payment of benefits from the Trust pursuant to Section 3(b)
hereof and subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to Plan
participants or their beneficiaries under the terms of the Plan(s) for the
period of such discontinuance, plus interest from the date each such payment
was due to the date actual payment is made (using an interest rate of eight
percent (8%) per annum, compounded monthly), less the aggregate amount of any
payments made to Plan participants or their beneficiaries by Company in lieu of
the payments provided for hereunder during any such period of discontinuance.
Section 4. Payments to Company.
(a) Except as provided in Section 3 (Company Insolvency), Section
12 (certain actions taken with consent of Trust Representatives) hereof, and
Section 4(b) below, Company shall have no right or power to direct Trustee to
return to Company or to divert to others any of the Trust assets before all
payment of benefits have been made to Plan participants and their beneficiaries
pursuant to the terms of the Plans. This Section shall not prohibit or
diminish the right of the Company to substitute assets of equal fair market
value for any asset then held by the Fund, as permitted in Section 1(e) and
Section 5(b)(13).
(b) Notwithstanding paragraph (a) above, if the fair
market value of the assets (excluding the Deed of Trust, the Warrant, the
Underlying Property, and any other Security Interest) in each and every
sub-account under this Trust Agreement (including the Expense Sub-Account) is
more than 125% of the most recent Value of the Benefit Obligations of such
sub-account (and, in the case of the Expense Sub-Account, more than 125% of the
most recently determined Expected Benefit Expenses), then upon written request
by the Company, the Trustee shall deliver all or part of such excess (as
requested by the Company) of any sub-account(s) hereunder to the Company.
Section 5. Authority of Trustee.
In the management, care and disposition of the Trust Fund, the
following provisions shall apply:
(a) The Trustee shall have the sole authority to manage, acquire,
or dispose of the assets of the Trust. The Company may request that certain
general investment guidelines and diversification policies be followed with
regard to assets of the Trust, but the decision whether to follow and how to
implement such guidelines shall be made solely by the Trustee.
(b) The Trustee shall have the following powers, rights, and
duties in addition to those provided elsewhere in this Trust or by law, all of
which may be exercised without order or report to any court:
94
<PAGE> 8
(1) To receive and hold all contributions paid to it under the
Plans; provided, however, that the Trustee shall have no duty to determine that
the contributions received by it comply with the provisions of the Plans. The
Trustee shall be authorized at any time when the Company is obligated to make a
contribution to this Trust to use all legal means to compel the Company to make
such contribution, and the Company shall pay all of the expenses, including
without limitation attorneys' fees and expenses, incurred by the Trustee or its
agents in enforcing in good faith the obligation of the Company to make
contributions to this Trust when due.
(2) To have the authority to invest and reinvest assets of the
Trust in shares of common or preferred stock (including shares of common or
preferred stock of the Company, including the rights to acquire such common or
preferred stock), bonds, notes, debentures, short-term securities, mutual
funds, certificates of deposits, and other property, real or personal, of any
kind; to purchase and sell "put" and "call" options on publicly traded
securities; and to acquire, hold, manage, operate, sell, contract to sell,
grant options with respect to, convey, exchange, transfer, abandon, lease,
manage, and otherwise deal with respect to assets of the Trust.
(3) To borrow from anyone such amount or amounts of money as the
Trustee shall consider necessary to carry out the purpose of this Trust and for
that purpose to mortgage or pledge all or any part of the Trust.
(4) To retain in cash any portion of the Trust deemed appropriate
by the Trustee.
(5) To establish accounts in the commercial department of any bank
or other financial institution (including any financial institution which is
affiliated with the Company) for payment of benefits or other amounts under the
Plans.
(6) To make the payments from the Trust in accordance with the
terms of the Plans, as directed by Company, which directions are proper on
their face, without inquiring as to whether a payee is entitled to the payment
or as to whether a payment is proper, without liability for a payment made in
good faith without actual notice or knowledge of the changed condition or
status of the payee, and without obligation to search for or ascertain the
whereabouts of any payee or distributee of benefits from the Trust.
(7) To compromise, contest, arbitrate, settle, or abandon claims
and demands in favor of or against the Trust.
(8) To begin, maintain, defend, compromise, or settle any
litigation in connection with the Trust and the administration of the Trust.
(9) To have all rights of an individual owner, including the power
to give proxies, to join in or oppose (alone or jointly with others) voting
trusts, mergers, consolidations, foreclosure, reorganizations,
recapitalizations, or liquidations, and to exercise or sell stock subscription
or conversion rights.
(10) To hold securities or other property in the name of the
Trustee or its nominee or nominees, or in such other form as it determines
best, with or without disclosing the trust relationship, provided the records
of the Trustee shall indicate the actual ownership of such securities or other
property.
(11) To deposit securities with a clearing corporation; to hold the
certificates representing securities, including those in bearer form, in bulk
form and to merge such certificates into certificates of the same class of the
same issuer which constitute assets of other accounts or owners, without
certification as to the ownership attached; and to utilize a book-entry system
for the transfer or pledge of securities held by the Trustee or by a clearing
corporation, provided that the records of the Trustee shall indicate the actual
ownership of the securities and other property of the Trust.
(12) To employ, and to be protected in relying upon, such agents,
attorneys, actuaries, and accountants (including any such person who may be
retained by Company or the Plans) as are reasonably necessary in managing and
protecting the Trust.
95
<PAGE> 9
(13) Notwithstanding anything to the contrary in Section 5, (i) all
rights associated with assets of the Trust (including but not limited to
Company stock held by the Trust) shall be exercised by the Trustee or the
person designated by the Trustee, and shall in no event be exercisable by or
rest with Plan participants; and (ii) Company shall have the right at any time,
and from time to time in its sole discretion, to substitute assets of equal
fair market value for any asset held by the Trust; provided, however, that the
specific provisions of Section 1(e) (4), (5), and (6) shall override the
general provisions of this clause (ii).
(c) Notwithstanding anything to the contrary in this Section 5, at
no time before a Triggering Event occurs shall the Trustee be authorized or
permitted to sell, assign, convey, exchange, transfer, or abandon the Security
Interests or the Underlying Property to any person or entity other than (i) the
Company, or (ii) with the consent of the Company, to an affiliate of the
Company.
Section 6. Disposition of Income.
During the term of this Trust, all income received by the Trust, net
of expenses and taxes, shall be accumulated and reinvested.
Section 7. Accounting by Trustee.
Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within sixty (60) days following the close of each
calendar year and within sixty (60) days after the removal or resignation of
Trustee, Trustee shall deliver to Company a written account of its
administration of the Trust during such year or during the period from the
close of the last preceding year to the date of such removal or resignation,
setting forth all investments, receipts, disbursements and other transactions
effected by it, including a description of all securities and investments
purchased and sold with the cost or net proceeds of such purchases or sales
(accrued interest paid or receivable being shown separately), and showing all
cash, securities and other property held in the Trust at the end of such year
or as of the date of such removal or resignation, as the case may be.
Section 8. Special Provisions.
(a) Trustee shall have, without exclusion, all powers conferred on
Trustees by applicable law, unless expressly provided otherwise herein,
provided however, that if an insurance policy is held as an asset of the Trust,
Trustee shall have no power to name a beneficiary of the policy other than the
Trust, to assign the policy (as distinct from conversion of the policy to a
different form) other than to a successor Trustee, or to loan to any person the
proceeds of any borrowing against such policy.
(b) Notwithstanding any powers granted to Trustee pursuant to this
Trust Agreement or to applicable law, Trustee shall not have any power that
could give this trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedures and
Administrative Regulations promulgated pursuant to the Internal Revenue Code.
(c) Should it become necessary for the Trustee (hereinafter called
the "Domiciliary Trustee" in this paragraph (c)) to hold property or otherwise
any action in any state in which the Domiciliary Trustee shall be unable to
qualify as Trustee, then and in that event, a bank or trust company designated
in writing by the Domiciliary Trustee shall serve as the ancillary Trustee in
such state.
(d) (i) The Company shall indemnify the Trustee, directly
from the Company's own assets (including the proceeds of any
insurance policy the premiums of which are paid from the
Company's own assets), from and against any and all claims,
demands, losses, damages, expenses (including, by way of
illustration and not limitation, reasonable attorneys' fees
and other legal and litigation costs), judgments and
liabilities arising from, out of, or in connection with the
administration of the Plans or this Trust, except when
determined to be due to the Trustee's gross negligence or
willful misconduct.
96
<PAGE> 10
(ii) The Trustee shall have no responsibility for: (a)
any condition which now exists or may hereafter be found to
exist in, under, or about any real estate investment of the
Trust or of a corporation, the stock of which is held as an
asset of the Trust; or (b) any violation of any applicable
environmental or health or safety law, ordinance, regulation
or ruling; or (c) the presence, use, generation, storage,
release, threatened release, or containment, treatment or
disposal of any hazardous or toxic substances or materials
including such situations at or activities on any investment
of the Trust or of a corporation, the stock of which is held
as an asset of the
97
<PAGE> 11
Trust. The Trustee is hereby authorized to pay from the Trust
all costs and expenses (including attorneys fees) relating to
or connected with any condition, violation, presence or other
situation referred to in (a), (b) and (c) above, and
notwithstanding anything to the contrary in this Trust
Agreement, to the extent permitted by law, Wachovia Bank, N.A.
shall be indemnified from the Trust from all claims, suits,
losses and expenses (including attorneys fees) arising
therefrom. The authority to pay from the Trust and the right
of indemnification set forth in the preceding sentence include
and relate to, without limitation, any claims, suits,
liabilities, losses and expenses (including attorneys fees)
arising from any matters relating to the existence of
petroleum including crude oil and any fraction thereof,
hazardous substances, pollutants, or contaminants as defined
in the Comprehensive Environmental, Responsibility,
Compensation, and Liability Act, as amended, 42 U.S.C. Section
9601 et seq., or hazardous wastes as defined in the Resource
Conservation and Liability Act, 42 U.S.C. Section 6906 et
seq., or as any of the foregoing terms or similar terms may be
defined in similar state environmental laws or subsequent
federal or state legislation of a similar nature which may be
enacted from time to time. This Section 8(d)(ii) shall
survive the sale or other disposition of any real estate
investment of the Trust and the termination of this Trust
Agreement. Nothing in this Section 8(d)(ii) shall be
construed to in any way limit the indemnification rights of
the Trustee provided for in this Section 8.
(iii) The indemnification provided the Trustee by this
Section 8(d) shall survive termination of this Agreement.
Section 9. Compensation and Expenses of Trustee.
Company shall pay all administrative and Trustee's fees and expenses,
including the cost of reasonable fiduciary liability insurance for the members
of the Steering Committee. If Company does not pay such fees and expenses on a
timely basis, Trustee may withdraw such amounts from the Trust and shall then
seek to recover such amounts from Company. If Trustee seeks recovery of such
amounts from Company, then Company shall pay all of the expenses, including
without limitation attorneys' fees and expenses, incurred by Trustee or its
agents in enforcing in good faith the obligations of Company as set forth in
this Section 9.
Section 10. Resignation and Removal of Trustee.
(a) Trustee may resign at any time by written notice to Company,
which shall be effective one hundred eighty (180) days after receipt of such
notice unless Company and Trustee agree otherwise.
(b) With the consent of the Steering Committee, the Trustee may be
removed by Company on one hundred eighty (180) days notice or upon shorter
notice accepted by Trustee.
(c) If Trustee resigns within five (5) years after a Triggering
Event, Company, with the consent of the Steering Committee, shall apply to a
court of competent jurisdiction for the appointment of a successor Trustee or
for instructions.
(d) Upon resignation or removal of Trustee and appointment of a
successor Trustee, all assets shall subsequently be transferred to the
successor trustee. The transfer shall be completed within one-hundred eighty
(180) days after receipt of notice of resignation, removal or transfer, unless
Company extends the time limit.
(e) If Trustee resigns or is removed, a successor shall be
appointed, in accordance with Section 11 hereof, by the effective date of
resignation or removal under paragraph(s) (a) or (b) of this section. If no
such appointment has been made, Trustee or any participant in a Plan may apply
to a court of competent jurisdiction for appointment of a successor or for
instructions. All expenses of Trustee in connection with the proceeding shall
be allowed as administrative expenses of the Trust.
Section 11. Appointment of Successor.
98
<PAGE> 12
(a) If Trustee resigns or is removed in accordance with Section
10(a) or (b) hereof, Company, with the consent of the Steering Committee, may
appoint any third party, such as a bank trust department or other party that
may be granted corporate trustee powers under state law, as a successor to
replace Trustee upon resignation or removal; provided, however, that such bank
or trust company must have shareholder equity of at least $1.0 billion. The
appointment shall be effective when accepted in writing by the new Trustee, who
shall have all of the rights and powers of the former Trustee, including
ownership rights in the Trust assets. The former Trustee shall execute any
instrument necessary or reasonably requested by Company or the successor
Trustee to evidence the transfer.
(b) The successor Trustee need not examine the records and acts of
any prior Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for and
Company shall indemnify and defend the successor Trustee from any claim or
liability resulting from any action or inaction of any prior Trustee or from any
other past event, or any condition existing at the time it becomes successor
Trustee.
Section 12. Amendment or Termination.
(a) This Trust Agreement may be amended by a written instrument
executed by Trustee and Company only as follows:
(1) The Trustee obtains an opinion of legal counsel that
is independent of the Company (as determined by the Trustee in its
sole discretion) that such amendment is being made for the purpose of
and only to the extent reasonably necessary to preserve for the Trust
Beneficiaries the deferral of federal income taxation of amounts paid
under the Plans until the time such amounts are actually paid to the
Trust Beneficiaries; or
(2) The Trustee obtains the written approval of the
Steering Committee, as hereinafter defined. The initial members of
the Steering Committee, each of which shall be known as a "Trust
Representatives", shall be the persons listed on Appendix B attached
hereto and made a part hereof. A person shall cease to be a Trust
Representative as of the earliest of (A) the date such person ceases
to be entitled to any benefits from any of the Plans, (B) the date
such person delivers written notice to the Trustee that he or she no
longer wishes to serve as a Trust Representative hereunder, provided
that such Trust Representative shall simultaneously deliver to the
Trustee a written designation of a successor Trust Representative, (C)
the Trustee determines in its sole discretion that the Trust
Representative, because of mental or physical incapacity certified by
the Trust Representative's primary attending physician, is no longer
able to properly serve in such capacity manage his affairs; (D) the
date of the Trust Representative's death; or (E) the fifth anniversary
of the date of the Participant's termination of employment with or
retirement from the Company. A person may serve as a successor Trust
Representative only if such person is himself or herself a Trust
Beneficiary under this Trust and is actively employed by the Company
at the time of such appointment. A successor Trust Representative
shall take the place of and succeed to all of the powers and duties of
the designating Trust Representative (including the power to resign
and appoint his own successor Trust Representative). If at any time
there are fewer than ten (10) Trust Representatives then serving, then
the Trustee may apply to a court of competent jurisdiction for
appointment of one or more Trust Representatives; and all expenses of
Trustee in connection with the proceeding shall be allowed as
administrative expenses of the Trust.
(b) In addition to consenting to amendments to this Trust
Agreement, the Trust Representatives may also consent to (i) the complete
revocation of this Trust; and (ii) any changes with respect to the Security
Interests.
(c) Unless sooner revoked as provided in Section 12(b) above, the
Trust shall not terminate until the date on which Plan participants and their
beneficiaries are no longer entitled to benefits pursuant to the terms of the
Plan(s). Upon termination of the Trust any assets remaining in the Trust shall
be returned to Company.
99
<PAGE> 13
(d) An action of the Steering Committee shall be valid only if
approved in writing by at least two-thirds of the members of the Steering
Committee who are serving at the time of such approval.
Section 13. Miscellaneous.
(a) Except to the extent expressly provided otherwise herein, any
action permitted or required to be taken by the Company under this Trust
Agreement shall be exercised by the management committee currently known as the
Benefit Plans Committee.
(b) Any provision of this Trust Agreement prohibited by law shall
be ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(c) Benefits payable to Plan participants and their beneficiaries
under this Trust Agreement may not be anticipated, assigned (either at law or
in equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
(d) Definitions.
(1) "Actuarial Present Value" shall be determined by the Actuary,
using the interest rate, mortality tables, and other actuarial
assumptions used to determine the value of a lump sum distribution
under the tax-qualified defined benefit pension plan maintained by the
Company which covers the participants in one or more of the "Class II"
plans identified in Appendix A to the Trust, and if no such plan then
exists, then "actuarial present value" shall be determined using such
interest rates, mortality tables, and other actuarial assumptions which
the Actuary determines to be reasonable under the circumstances.
(2) "Actuary." See Section 2(a).
(3) "Benefit Obligations" means, collectively, (a) the obligations
owing to the employees and other beneficiaries under the "Class I"
plans identified in Appendix A to the Trust; (b) the obligations owing
to the employees and other beneficiaries under the "Class II" plans
identified in Appendix A to the Trust; and (c) the obligations that
would be owed to the employees and other beneficiaries covered by the
"Class III" agreements identified in Appendix A to the Trust if all of
the conditions for all payments were met.
(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 December 31, 1996,
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
("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 19% or more
of the combined voting power of the outstanding securities of the
Company ordinarily having the right to vote in 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,
1997 (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, 1997 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
100
<PAGE> 14
(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
shareowners 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.
(5) "Claim of Plan Payment Default." See Section 1(f)(1).
(6) "Deed of Trust." See Section 1(e)(2).
(7) "Expected Trust Expenses" shall mean the Actuarial Present
Value of the Trust administration and Trustee fees and expenses
(including fees and expenses of any agent of the Trustee) which the
Trustee reasonably determines are expected to be incurred over the
life of the Trust.
(8) "Insolvent." See Section 3(a).
(9) "Notice of Plan Payment Default." See Section 1(f)(2).
(10) "Plan Payment Default." See Section 1(f)(3).
(11) A "Potential Change in Control" shall be deemed to have
occurred if (a) the Company enters into a definitive agreement, the
consummation of which would result in the occurrence of a Change in
Control, (b) any person (including the Company) publicly announces an
intention to take or to consider taking actions which if consummated
would constitute a Change in Control, but only if the Trustee
determines, in its sole discretion, that such announcement is credible
in the sense that the person making the announcement has or appears to
have the reasonable ability to carry out the announced intention,
without regard for whether such person's ultimate success in bringing
about a Change in Control is reasonably likely, or (c) after the date
this Trust is created, any person (other than (i) the Company or any
of its subsidiaries, (ii) a trustee or other fiduciary holding
securities under an employee benefit plan of the Company or any of its
subsidiaries, (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities, (iv) a corporation owned,
directly or indirectly, by the stockholders of the Company in
substantially the same proportions as their ownership of stock of the
Company; or (v) a person which is eligible to use Schedule 13G to
report its ownership of Company stock to the SEC; provided, however,
that the exception under this clause (v) shall lapse as of the day
such person ceases to be eligible to use Schedule 13G for such
ownership reports) becomes the beneficial owner, directly or
indirectly, of securities of the Company representing 10% or more of
the combined voting power of the Company's then-outstanding
securities.
(12) "Recordkeeper." See Section 2(a).
(13) "Security Interest." See Section 1(e)(2)
(14) "Steering Committee." See Section 12(a)(2).
(15) "Triggering Event." See Section 1(e)(3).
(16) "Trust Beneficiary." See Section 1(h).
(17) "Trust Representative." See Section 12(a)(2).
(18) "Underlying Property." See Section 1(e)(2).
101
<PAGE> 15
(19) "Value" means, on any date of determination, (i) with respect
to Benefit Obligations described in clause (a) of the definition of
"Benefit Obligations" (which are defined contribution, individual
account plans), the aggregate amount owed to participants in such
Plans as of such date of determination; (ii) with respect to Benefit
Obligations described in clause (b) of the definition of "Benefit
Obligations" (which are defined benefit pension-type plans), the
Actuarial Present Value of the aggregate amount owed to participants
in such Plans as of such date of determination; and (iii) with respect
to Benefit Obligations with respect to the Plans described in clause
(c) of the definition of "Benefit Obligations" (which are individual
severance agreements), the aggregate amount that would be owed to the
employees and other beneficiaries covered by such agreements if all of
the conditions for all payments were met under such agreements as of
such date of determination.
(20) "Warrant." See Section 1(e)(2).
(e) The Trustee may from time to time request that the Chief
Executive Officer of the Company, the members of the Company's Benefit Plans
Committee, and the members of the Steering Committee provide specimen
signatures to the Trustee, and the Trustee shall not be required to take action
at the direction of any such parties until the specimen signature for the
applicable parties has been delivered.
(f) Notices to the Company under this Trust shall be made by
facsimile and U.S. mail to:
Vice President of Human Resources, Health, Safety, Environment and
Security
Eastman Chemical Company
100 North Eastman Road
Kingsport, Tennessee 37660
Facsimile (423) 229-1351
and
Senior Vice President and General Counsel
Eastman Chemical Company
100 North Eastman Road
Kingsport, Tennessee 37660
Facsimile (423) 229-4137
Notices to the Trustee under this Trust shall be made by facsimile and
U.S. mail to
Wachovia Bank, N.A.
Trust Services Division
Attn: Beverley H. Wood
301 North Main Street
Winston-Salem, North Carolina 27150-3099
Facsimile (910) 770-4059
The sender of a facsimile letter or other notice or message may show receipt of
such facsimile by the recipient by any reasonable means of proof.
(g) This Trust Agreement shall be governed by and constructed in
accordance with the laws of the State of North Carolina.
Section 14. Effective Date.
The effective date of this Agreement shall be the date first shown above.
102
<PAGE> 16
IN WITNESS WHEREOF, this Trust has been executed by the duly
authorized officers of the Company and the Trustee as of the date first shown
above.
EASTMAN CHEMICAL COMPANY
By: /s/ H. V. Stephens
------------------------------------
Title: Senior Vice President and
---------------------------------
Chief Financial Officer
Attest:
/s/ Gary R. Whitaker
- --------------------------
Assistant Secretary
WACHOVIA BANK, N.A., as Trustee
By: /s/ Beverley H. Wood
------------------------------------
Title: Senior Vice President
---------------------------------
Attest:
/s/ Donna L. Stern
- --------------------------
Assistant Secretary
103
<PAGE> 17
APPENDIX A
PLANS SUBJECT TO THIS TRUST AGREEMENT
Class I Plans
Executive Deferred Compensation Plan
ESOP Excess Plan
Class II Plans
Unfunded Retirement Income Plan
Excess Retirement Income Plan
Class III Agreements
Severance Agreement
(Provided to Wachovia)
104
<PAGE> 18
APPENDIX B
INITIAL TRUST REPRESENTATIVES
WHO ARE MEMBERS OF STEERING COMMITTEE
(NAMES HAVE BEEN PROVIDED TO WACHOVIA)
105
<PAGE> 19
APPENDIX C
SECURITY INTERESTS AND UNDERLYING PROPERTY
(SEE ATTACHED DEED OF TRUST AND WARRANT)
106
<PAGE> 1
EXHIBIT 12.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(DOLLARS IN MILLIONS)
<TABLE>
<CAPTION>
1997 1996 1995 1994 1993(1)
<S> <C> <C> <C> <C> <C>
Earnings from continuing
operations before provision
for income taxes $ 446 $ 607 $ 899 $ 550 $ 439
Add:
Interest expense 87 67 79 87 7
Rental expense (2) 27 22 16 7 11
Amortization of
capitalized interest 16 14 13 15 15
-------- -------- --------- -------- ---------
Earnings as adjusted $ 576 $ 710 $ 1,007 $ 659 $ 472
======== ======== ========= ======== =========
Fixed charges:
Interest expense $ 87 $ 67 $ 79 $ 87 $ 7
Rental expense (2) 27 22 16 7 11
Capitalized interest 41 28 9 11 24
-------- -------- --------- -------- ---------
Total fixed charges $ 155 $ 117 $ 104 $ 105 $ 42
======== ======== ========= ======== =========
Ratio of earnings to fixed charges 3.7x 6.1x 9.7x 6.3x 11.2x
======== ======== ========= ======== =========
</TABLE>
- ---------------------------
(1) The historical amounts for 1993 as presented above, were determined
during periods when the Company was a wholly owned chemical business of
Kodak. If the Company were an independent publicly held entity during 1993,
the pro forma ratio of earnings to fixed charges would approximate 3.7x,
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 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.
107
<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 Financial Corporation 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 Latin America, Inc. Delaware
Eastman Chemical (Malaysia) Sdn. Bhd. Malaysia
Eastman Chemical Mexicana S.A. de C.V. Mexico
Eastman Chemical, Netherlands B.V. Netherlands
Eastman Chemical S. Com P.A. Spain
</TABLE>
108
<PAGE> 2
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
<S> <C>
Eastman Chemical Singapore Pte. Ltd. Singapore
Eastman Chemical Technology Corporation Delaware
Eastman Chemical (UK) Limited United Kingdom
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>
109
<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 27, 1998
relating to the consolidated financial statements of Eastman Chemical Company
appearing on page 33 of this Annual Report on Form 10-K.
/s/ Price Waterhouse LLP
- ---------------------------
PRICE WATERHOUSE LLP
New York, New York
March 6, 1998
110
<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, 1997 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-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 793<F1>
<ALLOWANCES> 0
<INVENTORY> 511
<CURRENT-ASSETS> 1,490
<PP&E> 8,104
<DEPRECIATION> 4,223
<TOTAL-ASSETS> 5,778
<CURRENT-LIABILITIES> 954
<BONDS> 1,714
0
0
<COMMON> 1
<OTHER-SE> 1,752
<TOTAL-LIABILITY-AND-EQUITY> 5,778
<SALES> 4,678
<TOTAL-REVENUES> 4,678
<CGS> 3,582
<TOTAL-COSTS> 3,582
<OTHER-EXPENSES> 590
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 87
<INCOME-PRETAX> 446
<INCOME-TAX> 160
<INCOME-CONTINUING> 286
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 286
<EPS-PRIMARY> 3.66
<EPS-DILUTED> 3.63
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL BUSINESS SEGMENT INFORMATION
1997 CHANGE FROM 1996
<TABLE>
<CAPTION>
FOURTH QUARTER TWELVE MONTHS
% CHANGE % CHANGE
--------------------- ------------------------
SALES OPERATING (1)(2) SALES OPERATING (1)(2)
REVENUE EARNINGS REVENUE EARNINGS
------- ------------ ------- -------------
<S> <C> <C> <C> <C>
SPECIALTY & PERFORMANCE SEGMENT
Specialty plastics 14 % -- 5% ++
Performance chemicals (11)% -- (9)% --
Fine chemicals (8)% -- (2)% --
Fibers (16)% -- (12)% --
Coatings, inks & resins 5 % - 5% +
Total Segment (3)% (57)% (2)% (20)%
=== === === ===
CORE PLASTICS SEGMENT
Container plastics 30 % ++ (9)% --
Flexible plastics (8)% ++ 2 % ++
Total Segment 14 % 40% (5)% -%
=== === === ===
CHEMICAL INTERMEDIATES SEGMENT
Industrial intermediates 8% ++ 2% +
Total Segment 8% 38% 2% 1%
=== === === ===
TOTAL EASTMAN 4 % (41)% (2)% (24)%
=== === === ===
</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) Operating earnings reflect an allocation of the $62 million ($40 million
after tax) charge for partial settlement/curtailment of pension and other
postemployment benefit liabilities to segments as follows: Specialty and
Performance, $34 million; Core Plastics, $18 million; and Chemical
Intermediates, $10 million.
112
