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UNITED STATES
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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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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:
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Title of each class Name of each exchange on which registered
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Common Stock, par value $0.01 per share New York Stock Exchange
(including rights to purchase shares of
Common Stock or Participating Preferred Stock)
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Securities registered pursuant to Section 12(g) of the Act: None
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PAGE 1 OF 116 TOTAL SEQUENTIALLY NUMBERED PAGES
EXHIBIT INDEX ON PAGE 66
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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
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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 29, 1999) of the voting stock held by nonaffiliates as of
December 31, 1998 was approximately $3,209,415,421, using beneficial ownership
rules adopted pursuant to Section 13 of the Securities Exchange Act of 1934 to
exclude stock that may be deemed beneficially owned as of December 31, 1998 by
directors, executive officers, or the Company's charitable foundation, some of
whom might not be held to be affiliates upon judicial determination. At December
31, 1998, 79,263,548 shares of Common Stock of the registrant were outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive Proxy Statement relating to the 1999
Annual Meeting of Shareowners (the "1999 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;
global economic conditions; supply and demand, volume, prices, costs, margin,
and sales and earnings and cash flow 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 is unrealized.
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TABLE OF CONTENTS
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ITEM PAGE
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PART I
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1. Business 4-12
Executive Officers of the Company 13
2. Properties 14-15
3. Legal Proceedings 15-16
4. Submission of Matters to a Vote of Security Holders 16
PART II
5. Market for the Registrant's Common Stock and Related Shareowner Matters 17
6. Selected Financial Data 18
7. Management's Discussion and Analysis of Financial Condition and Results
of Operations 19-30
7A. Quantitative and Qualitative Disclosures About Market Risk 31
8. Financial Statements and Supplementary Data 32-60
9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure 61
PART III
10. Directors and Executive Officers of the Registrant 62
11. Executive Compensation 62
12. Security Ownership of Certain Beneficial Owners and Management 62
13. Certain Relationships and Related Transactions 62
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 63
SIGNATURES
Signatures 64-65
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PART I
ITEM 1. BUSINESS
GENERAL
Eastman Chemical Company ("Eastman" or the "Company") is a global chemical
company with a broad portfolio of plastic, chemical, and fiber products. The
Company manufactures and sells polyester plastics such as polyethylene
terephthalate ("PET") sold under the trademark EASTAPAK polymers, 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 1998 the Company
had sales of $4.481 billion, operating earnings of $434 million, net earnings of
$249 million, and earnings per share of $3.13 diluted.
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 production 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. The Specialty and
Performance segment includes plastic, chemical, and fiber products that are
primarily sold to customers that base their buying decisions principally on a
product's performance attributes. The Core Plastics segment includes the
Company's major plastic product, EASTAPAK polymers for packaging applications,
as well as general purpose films. Core Plastics 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 manages this diverse product portfolio with a
bias towards products that can contribute to stable earnings growth and returns
of at least 5 percent above the cost of capital over the chemical industry
cycle. For 1999, the Company is focusing on utilizing capacity, maintaining and
enhancing its advantaged cost structure, rededicating the Company to quality
management, and generating cash flow. The Company's executive management
continuously examines the Company's product portfolio to determine which
products are contributing or can contribute to the achievement of its long-term
and short-term strategic objectives. The Company has the capability to produce a
wide range of products within its manufacturing plant capacities and to change
product mix depending on customer demand and the Company's strategy.
The following table summarizes the Company's recent financial performance and
identifiable assets by operating segment and geographic area:
SEGMENT FINANCIAL SUMMARY (1)
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(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
SALES
Specialty and Performance $2,736 $2,878 $2,923
Core Plastics 1,071 1,067 1,143
Chemical Intermediates 674 733 716
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Segment Total $4,481 $4,678 $4,782
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<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 357 $ 452 $ 554
Core Plastics (40) (92) (36)
Chemical Intermediates 117 146 145
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Segment Total $ 434 $ 506 $ 663
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ASSETS
Specialty and Performance $ 3,441 $ 3,382 $ 3,152
Core Plastics 1,790 1,775 1,589
Chemical Intermediates 645 621 525
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Segment Total $ 5,876 $ 5,778 $ 5,266
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GEOGRAPHIC INFORMATION
REVENUES
United States $ 2,764 $ 2,875 $ 2,990
All foreign countries 1,717 1,803 1,792
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Total $ 4,481 $ 4,678 $ 4,782
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LONG-LIVED ASSETS, NET
United States $ 3,135 $ 3,117 $ 2,981
All foreign countries 925 764 539
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Total $ 4,060 $ 3,881 $ 3,520
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</TABLE>
Revenues are attributed to countries based on customer location. No individual
foreign country is material with respect to revenues or long-lived assets.
(1) Prior period amounts have been reclassified to conform to the 1998
presentation, which is prepared in accordance with SFAS 131, "Disclosures
about Segments of an Enterprise and Related Information." See Part II--Item
8--"Financial Statements and Supplementary Data"--Note 15 to Consolidated
Financial Statements.
BUSINESS STRATEGY
Eastman's business strategy is to achieve consistent, profitable growth, with a
bias towards short-term value creation, 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 competency 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 competency 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 competency 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.
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Manufacturing Integration and Scale
The Company's strategy is to continue to use integration of its manufacturing
plants to develop a competitive advantage, while exploring innovative ways to
reduce capital intensity. 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 fifteen 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 13 quality system registrations to the international quality
standard, ISO 9000. Nine of these are in North America, two are in the United
Kingdom, and one each are in Spain and Mexico. Approximately 80% of 1998 sales
were from products manufactured in ISO 9000 registered quality systems.
Expansion in International Markets
Approximately 43% of the Company's customers representing 38% of the Company's
sales were outside the United States in 1998. The Company's strategy is to
produce long-term value-creating growth as it continues to globalize. 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.
Several new international manufacturing facilities were started up in 1998,
increasing the Company's international presence. In 1998 EASTAPAK polymers
plants were completed in the Netherlands and Argentina. Other additions during
1998 include a facility in the Netherlands to produce purified terephthalic acid
("PTA"), a key raw material for the production of EASTAPAK polymers, and a new
plant in Kuantan, Malaysia, with capacity to produce 30,000 metric tons of
copolyester. In addition, limited production is underway at a new oxo chemicals
manufacturing complex in Singapore, with the facility expected to be fully
operational in early 1999. During 1998, the Company also announced that it had
acquired a German manufacturer of specialty polymers used by formulators of
architectural and industrial coatings, printing inks, adhesives, sealants and
floor care products. Additionally, during 1998 the Company announced its
agreement to form a joint venture in the People's Republic of China to produce
hydrocarbon tackifying resins for adhesive manufacturers. Plant construction is
expected to begin in mid-1999 and to be completed by late 2000.
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 1998, the Company increased personnel
outside the United States from approximately 500 to over 2,000 employees. During
the same time period, the number of Company sales offices outside the United
States increased from 25 to 36 in 32 countries.
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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 end use markets. The Company
believes that this emphasis helps mitigate the impact of 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 1998, 1997, and 1996) 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 9 to Consolidated Financial Statements and Part
III--Item 11--"Executive Compensation."
OPERATING SEGMENTS
Adoption of SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information" at yearend 1998 resulted in no material changes in the
products comprising the Company's existing segments. Prior periods have been
restated to conform to the 1998 presentation.
SPECIALTY AND PERFORMANCE SEGMENT
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, fabricated
boxes, specialty packaging, films, extrusion coating, fibers, tape, industrial
strapping, and injection molding. The plastics supplied for these end uses
include polyesters, copolyesters, cellulosics, polyethylene, 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. The Company's strong
core competency in cellulose esters, polyesters/copolyesters, and polyethylene
allows it to offer a wide range of differentiated high performance polymers in
selected markets. SPECTAR copolyester is the Company's fastest growing specialty
plastic. Heavy gauge sheet made of SPECTAR is used in supermarket bins, greeting
card and jewelry displays, indoor and outdoor signs, and vending machine fronts.
TENITE HIFOR and MXSTEN specialty polyethylene products have been introduced to
the market and are experiencing strong growth. The Company believes it has a
competitive advantage due to product performance, reliability of supply, product
differentiation, integrated manufacturing capabilities, and customer service.
Specialty plastics accounted for approximately 28% of 1998 Specialty and
Performance segment sales.
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 customers
primarily in the manufacture of cigarette filters. With approximately 400
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million pounds of annual capacity at its plants in Kingsport, Tennessee, and
Workington, England, the Company accounts for approximately 28% 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 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 and 1998, 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 little 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 slightly during 1998. The
Company has focused its efforts on improving its operating efficiencies to
maintain its product quality and cost position. Fibers accounted for
approximately 25% of 1998 Specialty and Performance segment sales.
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 1998 sales being
in the United States. 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. Coatings, inks and
resins accounted for approximately 22% of 1998 Specialty and Performance segment
sales.
Fine chemicals produced by Eastman are used in the manufacture of a wide variety
of products such as photographic products, home care products, agricultural
chemicals, and ethical pharmaceuticals. Many of these are custom chemicals
manufactured to precise 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, such as
regulatory compliance and process design and optimization, offered in custom
manufacturing from a global manufacturing base. Fine chemicals accounted for
approximately 14% of 1998 Specialty and Performance segment sales.
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. The Company also manufactures many other performance products for use
in nutrition, cosmetic, textile and construction applications.
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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.
Performance chemicals accounted for approximately 11% of 1998 Specialty and
Performance segment sales.
CORE PLASTICS SEGMENT
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 grown significantly 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 10
billion pounds per year in 1998. Eastman capital expansion projects in the
Netherlands and Argentina added approximately 500 million pounds of additional
PET capacity in 1998. Overcapacity worldwide continues to pressure PET selling
prices; however, continued high growth rates should significantly improve the
supply/demand balance in the future.
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 accounted for
approximately 82% of 1998 Core Plastics segment sales.
The Company manufactures low density polyethylene ("LDPE") and linear low
density polyethylene ("LLDPE") polymers for general purpose film applications.
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. Most of the Company's
competitors are larger, with some having a higher degree of vertical
integration. Flexible plastics accounted for approximately 18% of 1998 Core
Plastics segment sales.
CHEMICAL INTERMEDIATES SEGMENT
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 1998 approximately 79% of these products were sold in the
United States. 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. 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.
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CAPITAL EXPENDITURES
Total capital expenditures were $500 million in 1998, $749 million in 1997, and
$789 million in 1996. For 1999 the Company estimates that capital expenditures
will be equal to or less than depreciation. 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 1998, 1997, and 1996, the Company made capital expenditures of $29
million, $70 million, and $51 million, respectively, related to environmental
improvements. The Company estimates that such capital expenditures will
approximate $49 million and $83 million for 1999 and 2000, respectively. Future
expenditures will be dependent in part upon implementation of government
environmental regulations.
DISPOSITIONS
The Company ceased production 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
material.
ACQUISITIONS AND INVESTMENTS
In September 1998 and February 1999, respectively, Eastman purchased for cash a
European manufacturer of specialty polymers and a North American textile
chemicals business. These acquisitions have not had, and are not expected to
have, a material effect on financial position or results of operations of the
Company.
EMPLOYEE RELATIONS
The Company employs approximately 16,000 men and women worldwide. None of the
employees in the United States and approximately 3% 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 7,400 customers worldwide and the top 100 customers account for
approximately 60% of the Company's business.
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 for its key products are summarized as follows:
<TABLE>
<CAPTION>
Key Products Major Competitors
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Specialty plastics Akzo Nobel, AtoHaas, BASF, Bayer, Chevron, Dow, DuPont, Equistar,
Exxon, GE, Geon, ICI, KoSa, Mobil, Phillips, Shell, Union Carbide
Fibers Acordis, Daicel, Celanese Acetate, LLC, Mitsubishi,
Rhodia, Teijin
Coatings, inks, and resins BASF, Exxon, Celanese, S. C. Johnson, Lonza,
Oxychem, Shell, Union Carbide
</TABLE>
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<TABLE>
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Fine chemicals DSM, LaPorte, Lonza, Cambrex
Performance chemicals AlliedSignal, ARCO, Bayer, Clariant, Daicel, Dow, Exxon, Hercules,
Huntsman, Nutrinova, Rhodia
Container plastics KoSa, DuPont, Shell, Wellman, Nan Ya
Flexible plastics Chevron, Dow, Exxon, Mobil, Equistar, Shell, Union Carbide
Industrial intermediates BASF, BP, Dow, Exxon, Celanese Ltd., Rhodia, 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).
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 1998, 1997, and 1996
expenditures totaling $185 million, $191 million, and $184 million,
respectively. Expenditures are anticipated to be at the same level during 1999.
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 products. 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.
11
<PAGE> 12
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.
The Company's commitment to environmental stewardship has earned favorable
recognition. Since the Chemical Manufacturers Association ("CMA") began its
Energy Efficiency Award Program in 1994, Eastman has won awards each year for
its energy efficiency efforts. In 1998, three of the Company's U.S. plants
received a total of five awards from the CMA. Eastman was also the 1998
recipient of the Chemical Education Foundation's Vanguard Award, which
recognizes outstanding chemical product stewardship practices within the
industry. 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.
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 $190 million, $220 million, and $175 million in 1998, 1997, and
1996, 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 1998, the Company's backlog of firm orders averaged between $175 million
and $350 million, representing approximately 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.
12
<PAGE> 13
EXECUTIVE OFFICERS OF THE COMPANY
Certain information about the Company's executive officers is provided below:
Earnest W. Deavenport, Jr., age 60, 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 61, 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 55, 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 63, 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.
Allan R. Rothwell, age 51, is Senior Vice President and Chief Financial Officer
of the Company. 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, was appointed Vice President,
Corporate Development and Strategy in 1997, and assumed his current position in
1998.
Darryl K. Williams, age 56, 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 54, is Vice President, Communications and Public Affairs
of the Company. 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 53, 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.
Roger K. Mowen, Jr., age 53, is Vice President, Customer Demand Chain of the
Company. Mr. Mowen joined the Company in 1971. He was named Vice President and
General Manager, Polymer Modifiers, in 1991, was named Superintendent of the
Polymers Division in 1994, and was appointed President, Carolina Eastman
Division, in 1996. Mr. Mowen assumed his current position in 1998.
B. Fielding Rolston, age 57, 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.
Garland S. Williamson, age 54, is Vice President, Worldwide Manufacturing of the
Company. Mr. Williamson joined the Company in 1967. He was named Vice President,
Asia Pacific Manufacturing, in 1992, and was appointed President, Texas Eastman
Division, in 1996. Mr. Williamson assumed his current position in 1998.
13
<PAGE> 14
ITEM 2. PROPERTIES
PROPERTIES
A summary of the Company's principal manufacturing sites and the operating
segment(s) for which products are 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 Segment
- ---------------------------- ------------------------------------------ ---------------------------
<S> <C> <C>
Batesville, Arkansas Arkansas Eastman Specialty and Performance
Chemical Intermediates
Columbia, South Carolina Carolina Eastman Specialty and Performance
Core Plastics
Cosoleacaque, Mexico Eastman Chemical Industrial de Mexico Specialty and Performance
Core Plastics
Dusseldorf, Germany Ernst Jager Fabrik Chemischer Rohstoffe Specialty and Performance
Hamburg, Germany Ernst Jager Fabrik Chemischer Rohstoffe Specialty and Performance
Hartlepool, England Eastman Chemical Ectona, Ltd. Specialty and Performance
Core Plastics
Hong Kong Eastman Chemical Hong Kong Limited Specialty and Performance
Kingsport, Tennessee Tennessee Eastman Specialty and Performance
Core Plastics
Chemical Intermediates
Kuantan, Malaysia Eastman Chemical (Malaysia) Sdn. Bhd. Specialty and Performance
Core Plastics
Llangefni, Wales Eastman Chemical (UK) Limited Specialty and Performance
Longview, Texas Texas Eastman Specialty and Performance
Core Plastics
Chemical Intermediates
Rochester, New York Distillation Products Division Specialty and Performance
Roebuck, South Carolina ABCO Industries, Inc. Specialty and Performance
Rotterdam, Netherlands Eastman Chemical Netherlands B.V. Specialty and Performance
Core Plastics
San Roque, Spain Eastman Chemical Espana, S.A. Specialty and Performance
Core Plastics
Singapore* Eastman Chemical Singapore Pte. Ltd. Specialty and Performance
Chemical Intermediates
Toronto, Ontario, Canada Eastman Chemical Canada, Inc. Core Plastics
Workington, England Eastman Chemical Ectona, Ltd. Specialty and Performance
Core Plastics
Zarate, Argentina Eastman Chemical Argentina S.R.L. Specialty and Performance
Core Plastics
</TABLE>
*Limited production began in 1998. Full operations are expected in 1999.
14
<PAGE> 15
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 owns or
leases over 90 stand-alone distribution facilities in the United States and 18
other 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.
ITEM 3. LEGAL PROCEEDINGS
GENERAL
The Company's operations are parties to or targets of lawsuits, claims,
investigations, and proceedings, including product liability, personal injury,
patent and intellectual property, 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 those described in the following paragraphs, will have a material
adverse effect on the Company's overall financial position or results of
operations. However, adverse developments could negatively impact earnings in a
particular period.
SORBATES LITIGATION
As previously reported, on September 30, 1998, Eastman entered into a voluntary
plea agreement with the Department of Justice and agreed to pay an $11 million
fine to resolve a charge brought against the Company for violation of Section
One of the Sherman Act. Under the agreement, Eastman entered a plea of guilty to
one count of price-fixing for sorbates, a class of food preservatives, from
January 1995 through June 1997. The plea agreement was approved by the United
States District Court for the Northern District of California on October 21,
1998. The Company recognized the entire fine in third quarter 1998 and will pay
the fine in installments over a period of five years.
In addition, the Company, along with other companies, has been named as a
defendant in seven antitrust lawsuits brought subsequent to the Company's plea
agreement as putative class actions on behalf of certain purchasers of sorbates.
In each case, the plaintiffs allege that the defendants engaged in a conspiracy
to fix the price of sorbates and that the class members paid more for sorbates
than they would have paid absent the defendants' conspiracy. Three of the suits
were filed in Superior Court for the State of California under various state
antitrust and consumer protection laws on behalf of classes of indirect
purchasers of sorbates; two of the proceedings are pending in United States
District Court for the Northern District of California, one under federal
antitrust laws on behalf of a class of all direct purchasers of sorbates and one
under California's antitrust and consumer protection laws on behalf of a class
of all indirect purchasers of sorbates; and two cases were filed in Circuit
Courts in the state of Tennessee under the antitrust and consumer protection
laws of various states, including Tennessee, on behalf of a class of all
indirect purchasers of sorbates in those states. The plaintiffs in each case
seek treble damages of unspecified amounts, attorneys' fees and costs, and other
unspecified relief; in addition, certain of the actions claim restitution,
injunction against alleged illegal conduct, and other equitable relief. Each
proceeding is in preliminary pretrial motion and discovery stage, and none of
the proposed classes has been certified.
15
<PAGE> 16
The Company intends vigorously to defend these actions unless they can be
settled on terms acceptable to the parties. These matters could result in the
Company being subject to monetary damages and expenses. The Company recognized a
charge to earnings in the fourth quarter of 1998 of $8 million for the estimated
costs, including legal fees, related to the pending sorbates litigation
described above. Because of the early stage of these putative class action
lawsuits, however, the ultimate outcome of these matters cannot presently be
determined, and they may result in greater or lesser liability than that
currently provided for in the Company's financial statements.
ENVIRONMENTAL MATTER
As previously reported, 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.
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 1998.
- --------------------------------
RESPONSIBLE CARE is a registered service mark of the chemical industry.
EASTAPAK, EASTOTAC, EpB, MXSTEN, SPECTAR, TENITE, and TENITE HIFOR are
trademarks of Eastman Chemical Company.
16
<PAGE> 17
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 1997 and 1998.
<TABLE>
<CAPTION>
CASH DIVIDENDS
HIGH LOW DECLARED
<S> <C> <C> <C>
1998
1st Quarter 68 1/8 56 13/16 $ .44
2nd Quarter 72 15/16 60 5/8 .44
3rd Quarter 62 7/16 48 15/16 .44
4th Quarter 62 5/8 43 1/2 .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 December 31, 1998 there were 79,263,548 shares of the Company's Common
Stock issued and outstanding, which shares were held by 79,994 shareowners of
record. These shares include 158,424 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 1999, 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 1998
in transactions not registered under the Securities Act of 1933. For information
concerning issuance of shares and option grants in 1998 under compensation and
benefit plans and shares held by the Company's charitable foundation, see Part
II--Item 8--"Financial Statements and Supplementary Data" -- Notes 7 and 9 to
Consolidated Financial Statements.
17
<PAGE> 18
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts) 1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
SUMMARY OF OPERATING DATA
Sales $ 4,481 $ 4,678 $ 4,782 $ 5,040 $ 4,329
Operating earnings 434 506 663 964 636
Earnings from operations
before income taxes 360 446 607 899 550
Net earnings 249 286 380 559 336
Basic earnings per share 3.15 3.66 4.84 6.84 4.06
Diluted earnings per share 3.13 3.63 4.79 6.78 4.04
STATEMENT OF FINANCIAL POSITION DATA
Current assets $ 1,415 $ 1,490 $ 1,345 $ 1,487 $ 1,248
Properties at cost 8,594 8,104 7,530 6,791 6,389
Accumulated depreciation 4,534 4,223 4,010 3,742 3,483
Total assets 5,876 5,778 5,266 4,872 4,395
Current liabilities 985 954 787 873 793
Long-term borrowings 1,649 1,714 1,523 1,217 1,195
Total liabilities 3,942 4,025 3,627 3,344 3,100
Total shareowners' equity 1,934 1,753 1,639 1,528 1,295
Dividends declared per share 1.76 1.76 1.72 1.64 1.60
</TABLE>
18
<PAGE> 19
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 diluted earnings per share
unless otherwise noted.
RESULTS OF OPERATIONS
EARNINGS
<TABLE>
<CAPTION>
(Dollars in millions, except per share amounts) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
Operating earnings $ 434 $ 506 (14)% $ 663
Net earnings 249 286 (13) 380
Earnings per share
- --Basic 3.15 3.66 (14) 4.84
- --Diluted 3.13 3.63 (14) 4.79
</TABLE>
1998 COMPARED WITH 1997
Results for 1998 were significantly impacted by global economic conditions that
produced extreme pressure on selling prices. For the year, downward pressure on
selling prices was particularly evident for fibers, flexible plastics,
industrial intermediates, coatings, inks and resins. Average selling prices for
EASTAPAK polymers ("PET") for the year were level with 1997 but declined
significantly in fourth quarter due to competitive activity. Sales volumes
improved slightly for the year and were higher in all three segments, partially
offsetting the overall decline in selling prices. The Company recognized volume
improvements in part due to the 1998 startup of new manufacturing facilities.
The Company's 1998 net earnings reflect returns of 14% on equity and 9% on
capital. Net earnings for 1998 were impacted by nonrecurring items recorded in
the third and fourth quarters, including charges for violation of the Sherman
Act and related civil litigation, charges related to certain underperforming
assets and discontinued projects, and the effect of a lower tax rate. Net
earnings for 1997 were impacted by nonrecurring items, including a gain from
damages awarded for patent infringement and a charge for partial settlement and
curtailment of pension and other postemployment benefit liabilities arising from
a large number of employee retirements. For additional information see Notes to
Consolidated Financial Statements.
Costs for most major raw materials, including propane feedstock, paraxylene,
purified terephthalic acid ("PTA"), ethylene glycol and natural gas, were below
1997 levels but the effect of the decline in selling prices generally offset the
effect of lower raw materials costs. Unit costs were unfavorably impacted by
unused available manufacturing capacity resulting from lower demand and
inventory reductions occurring primarily in fourth quarter. Higher net interest
costs resulted from lower capitalized interest following the completion of
several substantial capital projects in 1998. Depreciation also increased as a
result of capital projects completed in 1998 and 1997. Selling and general
administrative expenses were positively impacted by a reduction in labor hours
and lower incentive compensation expense. The Company continued to achieve
productivity gains and cost structure improvements as a result of the Advantaged
Cost 2000 initiative.
The U.S. dollar produced an unfavorable effect on sales denominated in
currencies other than U.S. dollars, although the earnings impact was generally
offset by gains realized on currency hedging transactions.
19
<PAGE> 20
SUMMARY BY OPERATING SEGMENT
SPECIALTY AND PERFORMANCE SEGMENT (1)
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
Sales $2,736 $2,878 (5)% $2,923
Operating earnings 357 452 (21) 554
</TABLE>
(1) Prior period amounts have been reclassified to conform to the 1998
presentation, which is prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
1998 COMPARED WITH 1997
Sales volume increased for the year but revenue declined, reflecting the effect
of lower selling prices caused by global economic conditions, industry
overcapacities and competitive market conditions. Strong volume growth for
SPECTAR copolymer and growing market acceptance of new specialty plastics such
as MXSTEN and TENITE HIFOR were partially offset by a decline in sales volumes
for cellulosic plastics. Sales volumes for coatings, inks and resins improved
slightly from 1997, but prices reflected industry oversupply, particularly for
neopentyl glycols ("NPG"). Sales volumes for fibers for the year were lower than
1997. Performance chemicals volumes for the year were negatively affected by
competitive market conditions, including the effect of industry oversupply of
sorbates. Fine chemicals sales volumes declined for the year, reflecting
decreased sales into photographic markets and customer delays of custom
manufacturing projects.
Operating earnings were significantly decreased by nonrecurring charges which
included recognition of an impairment loss related to the CHDA plant in
Kingsport, Tennessee and costs related to abandonment of certain capital
projects (see Note 8 to Consolidated Financial Statements), and charges for
violation of the Sherman Act and related civil litigation (see Note 19 to
Consolidated Financial Statements). Operating earnings were also negatively
impacted by operational and maintenance problems which occurred primarily in
fourth quarter 1998, including a power outage at the Kingsport, Tennessee
manufacturing site. Operating earnings for the segment overall were positively
impacted by lower costs for raw materials, energy, selling and general
administrative expenses, and cost structure improvements resulting from the
Company's Advantaged Cost 2000 initiative.
CORE PLASTICS SEGMENT (1)
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
Sales $1,071 $1,067 -% $1,143
Operating earnings (loss) (40) (92) 57 (36)
</TABLE>
(1) Prior period amounts have been reclassified to conform to the 1998
presentation, which is prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
1998 COMPARED WITH 1997
Sales revenue for the segment overall was relatively unchanged as global
economic conditions pressured selling prices, effectively offsetting higher
sales volume. The effect of higher selling prices for EASTAPAK polymers achieved
earlier in the year was mitigated by a significant downturn in pricing late in
the year. Sales volumes for commodity grade polyethylenes were higher but
selling prices were lower, reflecting competitive market conditions.
Operating losses reflect lower selling prices and operational and maintenance
problems which occurred primarily in the fourth quarter including a power
outage at the Kingsport, Tennessee manufacturing site, offset somewhat by lower
raw materials costs. Operating earnings were positively impacted by lower
selling and general administrative expenses and cost structure improvements
resulting from the Company's Advantaged Cost 2000 initiative.
20
<PAGE> 21
CHEMICAL INTERMEDIATES SEGMENT
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
Sales $674 $733 (8)% $716
Operating earnings 117 146 (20) 145
</TABLE>
1998 COMPARED WITH 1997
Sales volumes for chemical intermediates increased slightly for the year but
excess industry capacity, strong competitive activity, and overall global
economic conditions negatively impacted revenues and earnings. Earnings were
also impacted by operational and maintenance problems which occurred primarily
in fourth quarter, including a power outage at the Kingsport, Tennessee
manufacturing site, and preproduction costs related to new manufacturing
facilities in Singapore. Lower raw materials costs positively affected results.
Operating earnings were positively impacted by lower selling and general
administrative expenses and cost structure improvements resulting from the
Company's Advantaged Cost 2000 initiative.
(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) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
United States and Canada $ 2,933 $3,051 (4)% $3,183
Europe, Middle East, and Africa 752 780 (4) 745
Asia Pacific 429 506 (15) 548
Latin America 367 341 8 306
------- ------ ------
Total $ 4,481 $4,678 $4,782
======= ====== ======
</TABLE>
1998 COMPARED WITH 1997
Sales in the United States for 1998 were $2.764 billion, down 4% from 1997 sales
of $2.875 billion. Although sales volume was up slightly, selling prices
declined as a result of global economic conditions, particularly for
polyethylenes and oxo products.
Sales to customers outside the United States for 1998 were $1.717 billion, down
5% from 1997 sales of $1.803 billion. Sales outside the United States were 38%
of total sales in 1998 compared with 39% for 1997. Decreased sales volumes and
prices for fibers were experienced in Asia Pacific and Middle Eastern regions,
although sales volumes in Asia Pacific improved during fourth quarter. Latin
American sales revenue improvement primarily reflected increased manufacturing
capacity in Argentina and growth in customer demand for EASTAPAK polymers.
With a substantial portion of 1998 sales to customers outside the United States
and approximately 12% of its products manufactured outside the United States in
1998 based on sales volume, 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. A strong U.S. dollar against foreign
currencies resulted in unfavorable currency exchange effects, primarily in
Europe and Asia Pacific. See Note 11 to Consolidated Financial Statements and
Part II--Item 7A--"Quantitative and Qualitative Disclosures About Market Risk."
21
<PAGE> 22
SUMMARY OF CONSOLIDATED RESULTS
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
SALES $4,481 $4,678 (4)% $4,782
</TABLE>
Sales volumes were slightly higher in all three segments for the year, but
revenues declined as a result of lower selling prices attributable to global
economic conditions. Sales were negatively affected by the strength of the U.S.
dollar against foreign currencies, primarily in Europe and Asia Pacific.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
GROSS PROFIT $ 935 $1,096 (15)% $1,179
As a percentage of sales 20.9% 23.4% 24.7%
</TABLE>
Gross profit declined primarily as a result of significantly lower selling
prices. In addition, gross profit was negatively affected by recognition of
nonrecurring charges including an impairment loss related to the CHDA plant in
Kingsport, Tennessee, costs related to abandonment of certain capital projects,
costs related to a power outage at the Kingsport, Tennessee manufacturing site,
and charges for violation of the Sherman Act and related civil litigation. Lower
costs for raw materials, cost structure improvements and productivity gains
partially offset the decline in selling prices and nonrecurring charges.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
SELLING AND GENERAL ADMINISTRATIVE EXPENSES $316 $337 (6)% $332
As a percentage of sales 7.1% 7.2% 6.9%
RESEARCH AND DEVELOPMENT COSTS $185 $191 (3)% $184
As a percentage of sales 4.1% 4.1% 3.8%
</TABLE>
Selling and general administrative expenses and research and development costs
were positively impacted by a reduction in labor hours and lower incentive
compensation expense.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
INTEREST COSTS $127 $128 $ 95
LESS CAPITALIZED INTEREST 31 41 28
---- ---- ----
NET INTEREST EXPENSE $ 96 $ 87 10% $ 67
==== ==== ====
</TABLE>
Capitalized interest peaked in 1997 and declined in 1998 as several substantial
projects in the Company's major capital investment program were completed during
1998.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
OTHER INCOME, NET $ 22 $ 27 (19)% $ 11
</TABLE>
Other income and other charges include interest income, royalty income, gains
and losses on asset sales, results from equity investments, foreign exchange
transactions, and other items. Included in 1997 is a gain from damages awarded
for patent infringement. In 1996 the Company recognized a gain from the sale of
the Company's food emulsifier business.
22
<PAGE> 23
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 CHANGE 1996
<S> <C> <C> <C> <C>
PROVISION FOR INCOME TAXES $ 111 $ 160 (31)% $ 227
Effective tax rate 30.8% 35.8% 37.4%
</TABLE>
The Company recorded an income tax benefit of $15 million in 1998 attributable
to amended returns reflecting redetermined foreign sales corporation results and
the results of the completed Internal Revenue Service examination for the years
1994 to 1996.
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 and 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.
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.
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.
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.
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. Sales outside the United States in 1997 were
relatively unchanged from 1996 and were 39% of total sales compared to 37% of
23
<PAGE> 24
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 11% of its products manufactured outside the United States
based on sales volume, 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.
24
<PAGE> 25
LIQUIDITY, CAPITAL RESOURCES, AND OTHER FINANCIAL DATA
<TABLE>
<CAPTION>
FINANCIAL INDICATORS 1998 1997 1996
<S> <C> <C> <C>
Ratio of earnings to fixed charges 3.2x 3.7x 6.1x
Current ratio (1) 1.4x 1.6x 1.7x
Percent of long-term borrowings to total capital (1) 46% 49% 48%
Percent of floating-rate borrowings to total borrowings (1) 13% 12% 21%
</TABLE>
- -------------
(1) At end of year.
<TABLE>
<CAPTION>
CASH FLOW
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Net cash provided by (used in)
Operating activities $ 731 $ 698 $ 746
Investing activities (545) (745) (809)
Financing activities (186) 52 (13)
----- ----- -----
Net change in cash and cash equivalents $ - $ 5 $ (76)
===== ===== =====
Cash and cash equivalents at end of period $ 29 $ 29 $ 24
===== ===== =====
</TABLE>
Cash provided by operating activities includes the effect of lower net earnings
over the periods presented resulting from business conditions previously
discussed. Other changes in cash provided by operating activities resulted from
changes in receivables, inventories and timing of expenditures, related
primarily to international expansion activities and working capital management.
Cash provided by operating activities was also impacted by timing of
expenditures related to pension funding. Cash used in investing activities
peaked in 1996 due to significant global expansion activities underway at that
time, and declined in 1997 and 1998 as projects were completed. Cash used in
financing activities in 1998 reflects a decrease in commercial paper borrowings
and proceeds received from a $23 million issuance of tax-exempt bonds. Cash
provided by financing activities in 1997 reflects treasury stock purchases and
proceeds received from a $300 million issuance of 7.60% debentures due February
1, 2027 which were used to repay commercial paper borrowings outstanding at that
time. Cash used in financing activities in 1996 reflect treasury stock purchases
and an increase in commercial paper borrowings. Also reflected in cash flows
from financing activities is the payment of dividends in all years presented.
CAPITAL EXPENDITURES AND OTHER COMMITMENTS
For 1999 the Company estimates that depreciation will be $360 million and that
capital expenditures will be equal to or less than depreciation. Long-term
commitments related to planned capital expenditures are not material. The
Company had various purchase commitments at the end of 1998 for materials,
supplies, and energy incident to the ordinary conduct of business. These
commitments approximate $2 billion over 15 years. 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
.075% in 1998, 1997, and 1996. The Credit Facility contains a number of
covenants and events of default, including the maintenance of certain financial
ratios. Eastman was in compliance with all such covenants for all periods.
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
25
<PAGE> 26
December 31, 1998, the Company's commercial paper outstanding balance was $123
million, at interest rates ranging between 5.25% and 5.81%. At December 31,
1997, a total of $213 million of commercial paper was outstanding, at interest
rates ranging between 6.10% and 6.90%. 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.
During 1998 the Securities and Exchange Commission declared effective the
Company's registration statement to issue up to $1 billion of debt or equity
securities. No securities have been sold from this shelf registration.
Also during 1998 the Company issued $23 million tax-exempt bonds at variable
interest rates, the proceeds of which are to be used for the construction of
certain solid waste disposal facilities in Kingsport, Tennessee. The proceeds
from this issuance are held in trust and become available to the Company as
expenditures are made for construction of the designated solid waste disposal
facilities. Approximately $4 million of qualifying expenditures related to these
projects had been made as of December 31, 1998.
The Company repurchased a total of 5,935,301 shares of its common stock during
1995, 1996, and 1997 at a cost of $369 million, and is currently authorized to
purchase up to an additional $400 million of its common stock. In first quarter
1999 the Company announced its intention to resume stock repurchases.
Repurchased shares may be used to meet common stock requirements for
compensation and benefit plans and other corporate purposes.
Existing sources of capital, together with cash flows from operations, are
expected to be sufficient to meet foreseeable cash flow requirements.
<TABLE>
<CAPTION>
DIVIDENDS 1998 1997 1996
<S> <C> <C> <C>
Cash dividends declared per share $1.76 $1.76 $1.72
</TABLE>
ENVIRONMENTAL
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 $190 million, $220 million, and $175 million in 1998, 1997, and
1996, 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.
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, significant 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.
26
<PAGE> 27
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 date-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. This is a significant issue
for most, if not all, companies, with far reaching implications, some of which
cannot be anticipated or predicted with any degree of certainty. Year 2000
problems could affect many of the Company's processes, including production,
distribution, research and development, financial, administrative and
communications operations.
The Company's date dependent systems can be summarized in three categories:
computerized business systems; computerized distributed control systems for
manufacturing; and other devices using embedded chips.
Internal identification of all business systems, manufacturing systems and
embedded chip devices for year 2000 compliance is complete. An outside
consultant has evaluated the Company's identification, assessment, and testing
process related to manufacturing and embedded equipment and concluded that the
results of the internal processes are reliable.
The Company considers its key enterprise business computer systems capable of
accurately handling year 2000 dates. Final integrated acceptance testing of the
Company's existing key enterprise business computer systems was completed
successfully by December 31, 1998. Very few problems were encountered in this
area, primarily because of the Company's aggressive implementation of enterprise
software and standardized desktop/office software earlier this decade. The
Company will continue its year 2000 assessment and testing efforts for new or
modified business computer systems throughout 1999.
Parallel assessment and remediation of date dependent manufacturing control
systems and devices are proceeding. Manufacturers of these products are being
contacted to ascertain year 2000 compliance and product compliancy responses
have been received for more than ninety percent of identified products. A
minimal number of devices have been determined to be non-compliant, with most
requiring software upgrades at minimal cost. A testing plan approved by senior
management is being used to evaluate all manufacturing control systems for date
sensitive issues and to test a representative sample of these control systems.
The Company's current plan for manufacturing control systems is to complete
assessment, testing and most of the remediation or workaround solutions on
critical control systems by June 1999. This plan is on schedule. However,
because of plant scheduling and equipment lead times, some upgrade work may not
occur until the second half of 1999. Additionally, some lower priority embedded
devices may not be tested or remediated but will be managed by contingency
plans. Although some risk is inherent with this plan, the Company believes the
risk is controllable with contingency plans being developed and that this plan
does not pose significant problems for the Company's various manufacturing
control systems.
As a result of assessments, modifications, upgrades, or replacements planned,
ongoing or already completed, the Company believes the year 2000 issue as it
relates to the Company's own date dependent systems will not pose significant
problems for the Company's business, processes and operations. The Company
believes that the costs of modifications, upgrades, or replacements of software,
hardware, or capital equipment which would not be incurred but for year 2000
compatibility requirements have not and will not have a material impact on the
Company's financial position or results of operations. Overall costs
attributable to the Company's year 2000 efforts, incurred over a period of
several years, are expected to be less than $20 million.
The Company has identified and is communicating with key suppliers and other
service providers to determine if entities with which the Company transacts
business have an effective plan in place to address the year 2000 issue, and to
determine the extent of the Company's vulnerability to the failure of third
parties to remediate their own year 2000 issue. While all customers have not
been surveyed directly, the Company has exchanged information with certain
customers as they contact Eastman about its year 2000 compliance. In addition,
the Company is currently identifying key customers with whom more detailed
information will be exchanged. The Company has received year 2000 disclosure
statements from ninety-nine percent of raw materials suppliers surveyed,
27
<PAGE> 28
ninety-two percent of mechanical suppliers surveyed and eighty-five percent of
other service providers surveyed. The Company is proceeding with a more detailed
assessment of selected critical suppliers, service providers and key customers
to further assess the Company's risk. The Company expects to complete these
assessments by June 1999. Assessment of suppliers, service providers and
customers is entirely dependent upon the accuracy and validity of their year
2000 disclosure statements.
A business contingency planning team composed of key business managers has been
assigned to develop company-wide contingency plans. This team is actively
assessing the internal and external risks posed by the year 2000 issue, such as
power, energy, telecommunications, transportation and material supply
disruptions, and will be using existing business continuity plans while taking
into account issues unique to the year 2000 issue. Major elements of the plan
will be completed by June 1999 with refinement and execution continuing up to
and through the year 2000 rollover.
Based on current plans and efforts to date, the Company does not anticipate that
the year 2000 issue will have a material effect on results of operations or
financial condition. However, the above expectations are subject to
uncertainties. For example, if the Company is unsuccessful in identifying or
remediating all year 2000 problems in its critical operations, or if it is
affected by the inability of suppliers or major customers to continue operations
due to such a problem, then the Company's results of operations or financial
condition could be materially impacted.
HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly owned subsidiary of the
Company, managed the government-owned Holston Army Ammunition Plant in
Kingsport, Tennessee (the "Facility") under contract with the Department of Army
("DOA") from 1949 until expiration of the contract (the "Contract") on
December 31, 1998. The DOA awarded a contract to manage the Facility to a third
party effective January 1, 1999.
The Contract provides for reimbursement of allowable costs incurred by Holston.
The Company has recognized liabilities associated with Holston's curtailment of
pension, other postretirement benefits and other termination costs in accordance
with generally accepted accounting principles and expects the DOA to reimburse
substantially all such costs and payments. The recording during second quarter
1998 of previously unrecognized liabilities for pension and other termination
costs had no effect on earnings because the Company also recorded a receivable
from the DOA for reimbursement of such amounts. Reimbursement of certain
previously recognized pension and postretirement benefit costs will be credited
to earnings at the time of receipt of reimbursement from the DOA. A delay in
reimbursement by the DOA resulted in the Company advancing funds in early 1999
to pay a portion of such costs. The Company will likely be required to advance
additional funds to pay pension benefit liabilities, as well as other
postretirement and termination costs, if there are further delays in payment or
reimbursement by the DOA. The Company expects no significant impact on financial
position or results of operations related to expiration of the Contract. See
Note 17 to Consolidated Financial Statements.
THE EURO
The Treaty on European Union provided that an economic and monetary union
("EMU") be established in Europe whereby a single European currency, the euro,
was introduced to replace the currencies of participating member states. The
euro was introduced on January 1, 1999, at which time the value of participating
member state currencies were irrevocably fixed against the euro and the European
Currency Unit ("ECU"). For the three year transitional period ending
December 31, 2001, the national currencies of member states will continue to
circulate but be subunits of the euro. New public debt will be issued in euro
and existing debt may be denominated into euro. At the end of the transitional
period, euro banknotes and coins will be issued, and the national currencies of
the member states will cease to be legal tender no later than June 30, 2002.
The countries that adopted the euro on January 1, 1999 were Austria, Belgium,
Finland, France, Germany, Ireland, Italy, Luxembourg, The Netherlands, Portugal,
and Spain. Other countries are expected to join following the transition period.
28
<PAGE> 29
The Company has operations in many of the euro participating countries. The
introduction of the euro is expected to exert a general downward pressure on
prices as comparability of prices among countries becomes easier. This price
transparency is not expected to have a material impact on the Company. Currency
exchange and hedging costs are expected to be lower. The functional currency of
the Company's operations in affected countries will remain unchanged until
yearend 2000, when it will switch to the euro. The Company has reviewed and is
making changes required for euro readiness in areas such as marketing,
purchasing, pricing, treasury, cash management, systems, taxes, accounting,
contracts, and payroll. The systems costs associated with implementing the euro
are projected to be less than $500,000 through utilization of existing
enterprise software functionality.
RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998 the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which standardizes the accounting for
derivative instruments, including certain derivative instruments embedded in
other contracts, by requiring that an entity recognize those items as assets or
liabilities in the statement of financial position and measure them at fair
value. The Company is evaluating the effect of this standard on its financial
statements and will comply with requirements of the new standard which become
effective for the Company's 2000 financial reporting cycle. Given current
activities, the Company expects no material effect on net earnings, but the
standard will likely have an impact on other comprehensive income.
Statement of Position ("SOP") 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use," was issued by the American
Institute of Certified Public Accountants in March 1998 and requires
capitalization of certain internal-use computer software costs which will
subsequently be amortized over a three year period. The Company will comply with
the requirements of this SOP effective for the Company's 1999 financial
reporting. The Company's current practice has been to expense such costs as
incurred. The standard will have an immaterial effect on earnings during 1999.
OUTLOOK
Given the current economic environment and continued pressure on selling prices,
the Company anticipates that it will be a challenge to improve earnings in 1999
over those of 1998. Current global economic conditions and industry
overcapacities are expected to continue to negatively impact selling prices for
many products. First quarter 1999 results, however, are expected to improve over
fourth quarter 1998 due to volume gains from increased capacity utilization,
improved plant operations, and continuing cost reduction efforts.
The Company expects Asia Pacific sales volume will improve due to new available
capacities, although selling prices in the region will likely be depressed.
Given the current Brazilian economic situation and its impact on the region, the
Company anticipates it will be a challenge to improve sales and earnings for
Latin America. Growth in Europe is expected to moderate following the startup in
1998 of new manufacturing facilities in Rotterdam. The Company anticipates that
sales prices and volumes in North America will be pressured.
Demand for EASTAPAK polymers is expected to continue to grow although pricing
will remain under pressure due to excess capacity worldwide. SPECTAR copolymer
volume growth is expected to continue due to strong demand for heavy gauge sheet
and display applications. Sales volumes for new polyethylene performance
polymers, MXSTEN and TENITE HIFOR, are expected to grow, although customer
qualification time has taken longer than originally anticipated. Although
improvement is expected in fine chemicals volumes as a result of converting
existing manufacturing facilities to cGMP status and new cGMP facilities to be
constructed at the Batesville, Arkansas plant site, declining volume in the
photographic market may precede anticipated growth in the pharmaceutical and
agricultural chemical areas. Fibers volumes are expected to improve slightly,
but pricing is expected to be level to slightly down. Continued price pressure
on solvents is expected, but volumes should improve with the startup in early
1999 of the Singapore oxo facility, assuming current levels of demand.
The Company will continue to pursue alternatives to diminish the impact of the
container plastics business on its portfolio, while improving cash flow from
this business.
29
<PAGE> 30
The Company estimates that depreciation in 1999 will be approximately $360
million and plans capital expenditures equal to or less than depreciation.
Interest cost is expected to remain level with 1998, but capitalized interest is
expected to decrease as capital expenditures decline and capital improvements
now underway are completed.
In 1999, the Company will place an increased priority on cash flow through
increased sales volumes, reduced capital expenditures, working capital reduction
efforts, continued emphasis on cost structure improvements and productivity
gains through its Advantaged Cost 2000 initiative, reinforced by basing annual
incentive payments for senior management on free cash flow.
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; additional available manufacturing capacity; capital spending and
depreciation; the year 2000 issue; global economic conditions; and supply and
demand, volumes, prices, costs, margins, and sales and earnings and cash flow
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 underlying 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: continued pressure on selling prices from global economic
conditions and industry overcapacities; continued good demand overall for the
Company's products; continued demand growth worldwide for EASTAPAK polymers;
continued capacity additions within the PET industry worldwide; capacity
additions within the ethylene industry worldwide; stabilization of acetate tow
demand and selling prices; availability of key purchased raw materials with
stabilization of or no significant increase in costs; continued market reception
of new polyethylene products and continued shift of polyethylene product mix to
less commodity products; availability of recent or planned manufacturing
capacity increases for container plastics, SPECTAR, coatings, and oxo products;
improved manufacturing plant operations and maintenance; and labor and material
productivity gains sufficient to meet targeted cost structure reductions.
- ----------------------------
EASTAPAK, EASTOTAC, EpB, SPECTAR, MXSTEN, TENITE and TENITE HIFOR are trademarks
of Eastman Chemical Company.
30
<PAGE> 31
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT 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.
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 $92 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 $37 million and an additional $3
million for an additional one percentage point adverse 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.
31
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
<TABLE>
<CAPTION>
ITEM PAGE
<S> <C>
Management's responsibility for financial statements 33
Report of independent accountants 34
Consolidated statements of earnings, comprehensive income, and retained earnings 35
Consolidated statements of financial position 36
Consolidated statements of cash flows 37
Notes to consolidated financial statements 38-60
</TABLE>
32
<PAGE> 33
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 35 through 60. 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
PricewaterhouseCoopers 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 PricewaterhouseCoopers 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/ Allan R. Rothwell
--------------------------------- ----------------------------
Earnest W. Deavenport, Jr. Allan R. Rothwell
Chairman of the Board and Senior Vice President and
Chief Executive Officer Chief Financial Officer
January 29, 1999
33
<PAGE> 34
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 63 present
fairly, in all material respects, the financial position of Eastman
Chemical Company and subsidiaries at December 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. These financial statements
are the responsibility of the Company's management; our responsibility
is to express an opinion on these financial statements based on our
audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for the opinion expressed
above.
/s/ PricewaterhouseCoopers LLP
----------------------------------------
PRICEWATERHOUSECOOPERS LLP
New York, New York
January 29, 1999
34
<PAGE> 35
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS, COMPREHENSIVE
INCOME, AND RETAINED EARNINGS
(Dollars in Millions, Except Per Share Amounts)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Sales $ 4,481 $ 4,678 $ 4,782
Cost of sales 3,546 3,582 3,603
------- ------- -------
Gross profit 935 1,096 1,179
Selling and general administrative expenses 316 337 332
Research and development costs 185 191 184
Early retirement charge - 62 -
------- ------- -------
Operating earnings 434 506 663
Interest expense, net 96 87 67
Other income, net 22 27 11
------- ------- -------
Earnings before income taxes 360 446 607
Provision for income taxes 111 160 227
------- ------- -------
Net earnings $ 249 $ 286 $ 380
======= ======= =======
Basic earnings per share $ 3.15 $ 3.66 $ 4.84
======= ======= =======
Diluted earnings per share $ 3.13 $ 3.63 $ 4.79
======= ======= =======
COMPREHENSIVE INCOME
Net earnings $ 249 $ 286 $ 380
Other comprehensive income (loss) 19 (68) 18
------- ------- -------
Comprehensive income $ 268 $ 218 $ 398
======= ======= =======
RETAINED EARNINGS
Retained earnings at beginning of year $ 2,078 $ 1,929 $ 1,684
Net earnings 249 286 380
Cash dividends declared (139) (137) (135)
------- ------- -------
Retained earnings at end of year $ 2,188 $ 2,078 $ 1,929
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
35
<PAGE> 36
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
(Dollars in Millions)
<TABLE>
<CAPTION>
DECEMBER 31,
1998 1997
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 29 $ 29
Receivables 776 793
Inventories 493 511
Other current assets 117 157
------- -------
Total current assets 1,415 1,490
------- -------
Properties
Properties and equipment at cost 8,594 8,104
Less: Accumulated depreciation 4,534 4,223
------- -------
Net properties 4,060 3,881
------- -------
Other noncurrent assets 401 407
------- -------
Total assets $ 5,876 $ 5,778
======= =======
LIABILITIES AND SHAREOWNERS' EQUITY
Current liabilities
Payables and other current liabilities $ 985 $ 954
------- -------
Total current liabilities 985 954
Long-term borrowings 1,649 1,714
Deferred income tax credits 415 397
Postemployment obligations 712 724
Other long-term liabilities 181 236
------- -------
Total liabilities 3,942 4,025
------- -------
Shareowners' equity
Common stock ($0.01 par - 350,000,000 shares authorized;
shares issued -- 84,432,114 and 84,144,672) 1 1
Paid-in capital 94 77
Retained earnings 2,188 2,078
Other comprehensive income (loss) (18) (37)
------- -------
2,265 2,119
Less: Treasury stock at cost (5,326,990 and 5,889,311 shares) 331 366
------- -------
Total shareowners' equity 1,934 1,753
------- -------
Total liabilities and shareowners' equity $ 5,876 $ 5,778
======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.
36
<PAGE> 37
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities
Net earnings $ 249 $ 286 $ 380
----- ----- -----
Adjustments to reconcile net earnings to
net cash provided by operating activities
Depreciation 351 327 314
Provision for deferred income taxes 66 7 8
(Increase) decrease in receivables 19 (53) 66
(Increase) decrease in inventories 19 (65) 10
Increase (decrease) in employee benefit liabilities
and incentive pay 57 134 (69)
Increase (decrease) in liabilities excluding borrowings,
employee benefit liabilities, and incentive pay (35) 60 31
Other items, net 5 2 6
----- ----- -----
Total adjustments 482 412 366
----- ----- -----
Net cash provided by operating activities 731 698 746
----- ----- -----
Cash flows from investing activities
Additions to properties and equipment (500) (749) (789)
Acquisitions and investments in joint ventures (27) 5 (26)
Proceeds from sales of assets 3 20 43
Capital advances to suppliers (21) (21) (37)
----- ----- -----
Net cash used in investing activities (545) (745) (809)
----- ----- -----
Cash flows from financing activities
Proceeds from long-term borrowings 24 295 -
Net increase (decrease) in commercial paper borrowings (90) (82) 273
Repayment of borrowings - (22) -
Dividends paid to shareowners (138) (138) (134)
Treasury stock purchases - (8) (161)
Other items 18 7 9
----- ----- -----
Net cash provided by (used in) financing activities (186) 52 (13)
----- ----- -----
Net change in cash and cash equivalents - 5 (76)
Cash and cash equivalents at beginning of year 29 24 100
----- ----- -----
Cash and cash equivalents at end of year $ 29 $ 29 $ 24
===== ===== =====
</TABLE>
The accompanying notes are an integral part of these financial statements.
37
<PAGE> 38
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 component of comprehensive income
and 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 incentives, 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 in the United States 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.
38
<PAGE> 39
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 British pound, French franc, German mark,
Italian lira, 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 are generally included
in other noncurrent assets and are amortized over the life of the
contract. The related obligation for payment is generally included in
other liabilities and is 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.
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.
39
<PAGE> 40
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.
COMPREHENSIVE INCOME
Components of other comprehensive income (loss) are cumulative
translation adjustments and additional minimum pension liabilities.
Amounts of other comprehensive income (loss) are presented net of
applicable taxes. Because cumulative translation adjustments are
considered a component of permanently invested unremitted earnings of
subsidiaries outside the United States, no taxes are provided on such
amounts.
RECLASSIFICATIONS
The Company has reclassified certain 1997 and 1996 amounts to conform to
the 1998 presentation.
2. INVENTORIES
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1998 1997
<S> <C> <C>
At FIFO or average cost (approximates current cost)
Finished goods $ 409 $ 436
Work in process 138 140
Raw materials and supplies 203 211
--------- ---------
Total inventories 750 787
Reduction to LIFO value (257) (276)
--------- ---------
Total inventories at LIFO value $ 493 $ 511
========= =========
</TABLE>
Inventories valued on the LIFO method were approximately 70-75% of total
inventories in 1998 and 1997.
3. PROPERTIES AND ACCUMULATED DEPRECIATION
PROPERTIES AT COST
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Balance at beginning of year $ 8,104 $ 7,530 $ 6,791
Additions 539 749 796
Deductions (49) (175) (57)
--------- --------- ---------
Balance at end of year $ 8,594 $ 8,104 $ 7,530
========= ========= =========
</TABLE>
40
<PAGE> 41
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Properties at end of year
Land $ 45 $ 42 $ 41
Buildings and building equipment 766 702 640
Machinery and equipment 7,414 6,757 6,315
Construction in progress 369 603 534
--------- --------- ---------
Total $ 8,594 $ 8,104 $ 7,530
========= ========= =========
ACCUMULATED DEPRECIATION
Balance at beginning of year $ 4,223 $ 4,010 $ 3,742
Provision for depreciation 351 327 314
Deductions (40) (114) (46)
--------- --------- ---------
Balance at end of year $ 4,534 $ 4,223 $ 4,010
========= ========= =========
</TABLE>
Construction-period interest of $325 million, $295 million, and $257
million, reduced by accumulated depreciation of $141 million, $125
million, and $111 million, is included in cost of properties at
December 31, 1998, 1997, and 1996, 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, 1998 and
1997, Eastman's equity in the joint venture was $148 million and $142
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 engaged in the manufacture of cellulose esters
at its Kingsport, Tennessee plant, 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, 1998 and 1997, Eastman had a negative investment in the
joint venture of $41 million and $42 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 ($218 million and $196 million
of which have been paid through December 31, 1998 and 1997,
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 $96 million and $79 million at December 31, 1998 and 1997,
respectively.
41
<PAGE> 42
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During 1998 the Company issued $23 million tax-exempt bonds at variable
interest rates, the proceeds of which are to be used for the construction
of certain solid waste disposal facilities in Kingsport, Tennessee. The
proceeds from this issuance are held in trust and become available to the
Company as expenditures are made for construction of the designated solid
waste disposal facilities. The remaining available proceeds are included
in other noncurrent assets in the Consolidated Statements of Financial
Position.
5. PAYABLES AND OTHER CURRENT LIABILITIES
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1998 1997
<S> <C> <C>
Trade creditors $ 316 $ 281
Accrued payrolls and vacation 100 99
Accrued variable-incentive compensation 74 92
Accrued pension liabilities 182 140
Accrued taxes 58 95
Other 255 247
--------- ---------
Total $ 985 $ 954
========= =========
</TABLE>
6. LONG-TERM BORROWINGS
<TABLE>
<CAPTION>
DECEMBER 31,
(Dollars in millions) 1998 1997
<S> <C> <C>
6 3/8% notes due 2004 $ 500 $ 500
Variable interest rate tax-exempt bonds due 2022 23 -
7 1/4% debentures due 2024 495 495
7 5/8% debentures due 2024 200 200
7.60% debentures due 2027 296 296
Commercial paper and other 135 223
--------- ---------
Total $ 1,649 $ 1,714
========= =========
</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 .075% in 1998, 1997, and
1996. The Credit Facility contains a number of covenants and events of
default, including the maintenance of certain financial ratios. Eastman
was in compliance with all such covenants for all periods.
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, 1998, the Company's commercial
paper outstanding balance was $123 million, at interest rates ranging
between 5.25% and 5.81%. At December 31, 1997, a total of $213 million of
commercial paper was outstanding, at interest rates ranging between 6.10%
and 6.90%. 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 1998 the Company issued $23 million
tax-exempt bonds at variable interest rates, the proceeds of which are to
be used for the construction of certain solid waste disposal facilities
in Kingsport, Tennessee. The remaining available proceeds from this
issuance are included in other noncurrent assets and are held in trust
until such time as needed to fund the qualifying projects. Approximately
$4 million of qualifying expenditures related to these projects had been
made as of December 31, 1998. During 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.
42
<PAGE> 43
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SHAREOWNERS' EQUITY
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Common stock at par value $ 1 $ 1 $ 1
------------- ------------- --------------
Paid-in capital
Balance at beginning of year 77 37 30
Additions 17 40 7
------------- ------------- --------------
Balance at end of year 94 77 37
------------- ------------- --------------
Retained earnings 2,188 2,078 1,929
------------- ------------- --------------
Accumulated other comprehensive income
Balance at beginning of year $ (37) $ 31 $ 13
Change in cumulative translation
adjustment 24 (52) 18
Change in unfunded minimum pension
liability (5) (16) -
------------- ------------- --------------
Balance at end of year (18) (37) 31
------------- ------------- --------------
Treasury stock at cost (331) (366) (359)
------------- ------------- --------------
Total $ 1,934 $ 1,753 $ 1,639
============= ============= ==============
Shares of common stock issued (1)
Balance at beginning of year 84,144,672 83,386,459 83,250,683
Issued for employee compensation
and benefit plans 287,442 758,213 135,776
------------- ------------- --------------
Balance at end of year 84,432,114 84,144,672 83,386,459
============= ============= ==============
</TABLE>
(1) Includes shares held in treasury.
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 1998, $1.76 per share in 1997, and $1.72
per share in 1996.
The Company established a benefit security trust in 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.
43
<PAGE> 44
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company repurchased 140,801 shares of Eastman common stock at a cost
of $8 million and 2,486,300 shares at a cost of $161 million in 1997 and
1996, 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 $33 million (536,188 shares), $1
million (18,018 shares) and $2 million (27,972 shares) was reissued in
1998, 1997, and 1996, respectively. The Company's charitable foundation
held 158,424 shares, 184,557 shares, and 202,575 shares of Eastman common
stock at December 31, 1998, 1997, and 1996, respectively.
For 1998, 1997, and 1996, respectively, the weighted average number of
common shares outstanding used to compute basic earnings per share was
78.9 million, 78.1 million, and 78.5 million and for diluted earnings per
share was 79.5 million, 78.8 million, and 79.3 million, reflecting the
effect of dilutive options outstanding. Certain options outstanding at the
end of 1998, 1997, and 1996, 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 994,503 shares of common stock at a
range of prices from $56.875 to $74.25; 790,324 shares of common stock at
a range of prices from $59.00 to $74.25; and 566,490 shares of common
stock at a range of prices from $57.125 to $74.25, outstanding at the end
of 1998, 1997, and 1996, respectively.
8. IMPAIRMENT OF ASSETS
In fourth quarter 1998 the Company recorded a pretax charge to earnings of
$20.3 million ($14.1 million after tax) for the write-down of property,
plant and equipment used in the production of CHDA, a product sold in the
Specialty and Performance segment. Based on responses from customers
surveyed in the fourth quarter 1998, market outlook and estimated future
cash flows for this product declined significantly. The carrying values of
assets related to CHDA production were written down to fair market value
based on estimated discounted future cash flows. The charge was recorded
in Cost of Sales for the Specialty and Performance segment.
The Company also recorded in fourth quarter 1998 a pretax charge to
earnings of $12.4 million ($8.6 million after tax) for the write-off of
construction in progress related to an EASTOTAC expansion project and an
epoxybutene ("EpB") plant project. Process improvements leading to
increased EASTOTAC manufacturing capacity at the existing Longview, Texas
plant and a planned joint venture in China lead to cancellation of the
EASTOTAC expansion project. A portion of work done to date on an EpB plant
project had no future value. The EASTOTAC expansion project and EpB plant
project costs were written off and recorded in Cost of Sales for the
Specialty and Performance segment.
9. 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
44
<PAGE> 45
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 typically
become exercisable 50% one year after grant and 100% after two years and
expire 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.
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, 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) 1998 1997 1996
<S> <C> <C> <C> <C>
Net earnings As reported $ 249 $ 286 $ 380
Pro forma $ 248 $ 285 $ 375
Basic earnings per share As reported $ 3.15 $ 3.66 $ 4.84
Pro forma $ 3.14 $ 3.65 $ 4.78
Diluted earnings per share As reported $ 3.13 $ 3.63 $ 4.79
Pro forma $ 3.12 $ 3.62 $ 4.73
</TABLE>
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
1998, 1997, and 1996, respectively, include: average expected volatility
of 20.87%, 21.61%, and 25.23%; average expected dividend yield of
45
<PAGE> 46
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3.07%, 2.92%, and 2.56%; and average risk-free interest rates of 5.48%,
6.14%, and 5.76%. An expected option term of 5.9 years for all periods
was developed based on historical experience 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, 1996 calculations 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>
1998 1997 1996
------------------------ ----------------------- ------------------------
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 3,716,208 $ 50 3,216,437 $ 47 2,850,532 $ 45
Granted 479,446 57 623,735 60 542,591 55
Exercised 316,360 42 123,964 40 176,686 40
Forfeited or canceled 14,193 64 - - - -
--------- ----- --------- ------ --------- -------
Outstanding at end
of year 3,865,101 $ 51 3,716,208 $ 50 3,216,437 $ 47
========= ========= =========
Options exercisable at
year-end 3,267,275 2,842,573 2,461,995
========= ========= =========
Weighted-average fair
value of options granted
during the year $12.40 $14.65 $ 14.66
Available for grant at end
of year 8,439,445 8,766,755 2,384,543
========= ========= =========
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------------- --------------------------------
NUMBER WEIGHTED-AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED-AVERAGE EXERCISABLE WEIGHTED-AVERAGE
EXERCISE PRICES AT 12/31/98 CONTRACTUAL LIFE EXERCISE PRICE AT 12/31/98 EXERCISE PRICE
--------------- ----------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$31-$40 299,660 2.7 years $34 299,660 $34
43-44 1,455,980 5.1 43 1,455,980 43
48-63 1,539,818 7.2 57 942,882 57
64-74 569,643 6.4 65 568,753 65
---------- ----------
$31-$74 3,865,101 6.0 $51 3,267,275 $50
========== ==========
</TABLE>
46
<PAGE> 47
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 substantially 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 2,626,880, 2,289,826, and 1,887,003
as of December 31, 1998, 1997, and 1996, 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 $66 million, $81 million, and $131 million for 1998, 1997, and 1996,
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 1998, 1997, and 1996
were $8 million, $11 million, and $6 million, respectively.
10. INCOME TAXES
Components of earnings before income taxes and the provision for U.S. and
other income taxes follow:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
Earnings (loss) before income taxes
United States $ 463 $ 541 $ 679
Outside the United States (103) (95) (72)
----- ----- -----
Total $ 360 $ 446 $ 607
===== ===== =====
Provision (benefit) for income taxes
United States
Current $ 35 $ 134 $ 190
Deferred 64 14 19
Non-United States
Current 6 6 4
Deferred (3) (8) (12)
State and other
Current 4 13 25
Deferred 5 1 1
----- ----- -----
Total $ 111 $ 160 $ 227
===== ===== =====
</TABLE>
47
<PAGE> 48
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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) 1998 1997 1996
<S> <C> <C> <C>
Amount computed using the statutory rate $ 126 $ 156 $ 212
State income taxes 6 9 17
Foreign rate variance (3) (4) 13
Foreign sales corporation benefit (24) (8) (14)
Other 6 7 (1)
----- ----- -----
Provision for income taxes $ 111 $ 160 $ 227
===== ===== =====
</TABLE>
The 1998 foreign sales corporation benefit includes $12 million
attributable to amended returns reflecting redetermined foreign sales
corporation results for the years prior to 1998.
The significant components of deferred tax assets and liabilities follow:
<TABLE>
<CAPTION>
(Dollars in millions) DECEMBER 31,
1998 1997
<S> <C> <C>
Deferred tax assets
Postemployment obligations $272 $292
Payroll and related items 43 51
Inventories 1 17
Deferred revenue 17 19
Miscellaneous reserves 29 40
Preproduction and start-up costs 14 8
Other 53 36
---- ----
Total $429 $463
==== ====
Deferred tax liabilities
Depreciation $747 $728
Other 29 30
---- ----
Total $776 $758
==== ====
</TABLE>
Unremitted earnings of subsidiaries outside the United States totaling
$26 million at December 31, 1998, 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 $16 million and $53 million are
included in current liabilities at December 31, 1998 and 1997,
respectively.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
<TABLE>
<CAPTION>
DECEMBER 31, 1998 DECEMBER 31, 1997
--------------------- -------------------
RECORDED FAIR RECORDED FAIR
(Dollars in millions) AMOUNT VALUE AMOUNT VALUE
<S> <C> <C> <C> <C>
Long-term borrowings $1,649 $1,650 $1,714 $1,800
Foreign exchange contracts 46 67 62 149
</TABLE>
48
<PAGE> 49
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
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 $960 million and $1.275 billion at December 31, 1998
and 1997, respectively. The net unrealized gain (loss) deferred on such
options was $31 million and $87 million as of December 31, 1998 and 1997,
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.
12. 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:
(Dollars in millions)
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1999 $ 53
2000 45
2001 42
2002 29
2003 18
2004 and beyond 55
------
Total minimum payments required $ 242
======
</TABLE>
49
<PAGE> 50
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
<TABLE>
<CAPTION>
RENTAL EXPENSE 1998 1997 1996
(Dollars in millions)
<S> <C> <C> <C>
Gross rentals $84 $81 $66
Less: Sublease income 1 1 2
--- --- ---
Total $83 $80 $64
=== === ===
</TABLE>
OTHER COMMITMENTS
The Company had various purchase commitments at the end of 1998 for
materials, supplies, and energy incident to the ordinary conduct of
business. These commitments approximate $2 billion over 15 years. Eastman
has other long-term commitments relating to joint venture agreements as
described in Note 4 to Consolidated Financial Statements.
13. 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.
Eastman participated in Kodak's U.S. defined benefit pension plans
covering substantially all U.S. employees prior to the spin-off of the
Company from Kodak as of midnight December 31, 1993. 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.
A summary balance sheet of the change in plan assets during 1998 and
1997, the funded status of the plans, amount recognized in the statement
of financial position, and the assumptions used to develop the projected
benefit obligation for the Company's U.S. defined pension plans are
provided in the following tables. Non-U.S. plans are not material.
50
<PAGE> 51
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 1,346 $ 1,410
Service cost 47 49
Interest cost 100 110
Plan amendments - 23
Actuarial loss 133 273
Curtailments 20 11
Benefits paid (135) (530)
------- -------
Benefit obligation, end of year $ 1,511 $ 1,346
======= =======
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 857 $ 1,223
Actual return on plan assets 137 143
Company contributions 128 12
Benefits paid (132) (521)
------- -------
Fair value of plan assets, end of year $ 990 $ 857
======= =======
Projected benefits in excess of plan assets $ 521 $ 489
Unrecognized actuarial loss (279) (226)
Unrecognized prior service cost (40) (48)
Unrecognized net transition asset 27 33
------- -------
Net amount recognized, end of year $ 229 $ 248
======= =======
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Accrued benefit cost $ 229 $ 248
Additional minimum liability 33 25
Intangible asset - (3)
Accumulated other comprehensive income (33) (22)
------- -------
Net amount recognized, end of year $ 229 $ 248
======= =======
</TABLE>
Eastman's worldwide net pension cost was $93 million, $59 million, and
$57 million in 1998, 1997, and 1996, respectively.
51
<PAGE> 52
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the components of net periodic benefit cost recognized for
Eastman's U.S. defined benefit pension plans follow:
SUMMARY OF BENEFIT COSTS
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 47 $ 49 $ 49
Interest cost 93 103 92
Expected return on assets (73) (99) (93)
Amortization of:
Transition asset (4) (7) (7)
Prior service cost 5 5 12
Actuarial loss 19 3 -
---- ----- ----
Net periodic benefit cost $ 87 $ 54 $ 53
==== ===== ====
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 6.75% 7.25% 7.75%
Expected return on plan assets 9.50% 9.50% 9.50%
Rate of compensation increase 3.75% 4.00% 4.00%
</TABLE>
A partial settlement and curtailment of pension and other postemployment
benefit liabilities in 1998 resulted from the expiration of the Holston
Defense Corporation contract. This resulted in recognition of
approximately $35 million of previously unrecognized liabilities, but had
no effect on earnings because the Company also recorded a receivable from
the Department of Army for expected reimbursement of such amounts (see
Note 17 to Consolidated Financial Statements). In 1997, the Company
recorded a $62 million charge ($40 million after tax) for the partial
settlement and curtailment of pension and other postemployment benefit
liabilities resulting from a large number of employee retirements.
14. POST RETIREMENT WELFARE PLANS
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
yearend 1993 while Eastman was a wholly owned business of Kodak.
A few of the Company's non-U.S. operations have supplemental health
benefit plans for certain retirees, the cost of which is not significant
to the Company.
The following tables set forth the status of the Company's U.S. plans at
December 31, 1998 and 1997:
52
<PAGE> 53
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY BALANCE SHEET
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation, beginning of year $ 584 $ 506
Service cost 8 9
Interest cost 39 38
Plan amendments - (52)
Actuarial loss - 92
Curtailments 4 4
Benefits paid (18) (13)
----- -----
Benefit obligation, end of year $ 617 $ 584
===== =====
CHANGE IN PLAN ASSETS:
Fair value of plan assets, beginning of year $ 34 $ 25
Actual return on plan assets 3 2
Company contributions 27 19
Benefits paid (19) (12)
----- -----
Fair value of plan assets, end of year $ 45 $ 34
===== =====
Funded status of plan $ 572 $ 551
Unrecognized actuarial loss (101) (98)
Unrecognized prior service cost 42 49
----- -----
Net amount recognized, end of year $ 513 $ 502
===== =====
AMOUNTS RECOGNIZED IN THE STATEMENT OF FINANCIAL
POSITION CONSIST OF:
Accrued benefit cost $ 513 $ 502
----- -----
Net amount recognized, end of year $ 513 $ 502
===== =====
</TABLE>
A 1% increase in health care trend would increase the 1998 service and
interest costs by $2.5 million, and the 1998 benefit obligation by $35.8
million. A 1% decrease in health care trend would decrease the 1998
service and interest costs by $2.2 million, and the 1998 benefit
obligation by $30.4 million.
53
<PAGE> 54
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The net periodic postretirement benefit cost follows:
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
COMPONENTS OF NET PERIODIC BENEFIT COST:
Service cost $ 8 $ 9 $ 12
Interest cost 39 38 34
Expected return on assets (2) (2) (1)
Amortization of:
Prior service cost (4) (2) -
Actuarial (gain)/loss 1 - -
-------- -------- --------
Net periodic benefit cost $ 42 $ 43 $ 45
======== ======== ========
WEIGHTED-AVERAGE ASSUMPTIONS AS OF END OF YEAR:
Discount rate 6.75% 7.25% 7.75%
Expected return on plan assets 9.00% 9.00% 9.00%
Rate of compensation increase 3.75% 4.00% 4.00%
Health care cost trend
Initial 7.00% 7.00% 8.25%
Decreasing to ultimate trend of 4.75% 5.00% 5.25%
In Year 2004 2002 2002
</TABLE>
A partial settlement and curtailment of pension and other postemployment
benefit liabilities in 1998 resulted from the expiration of the Holston
Defense Corporation contract. This resulted in recognition of
approximately $35 million of previously unrecognized liabilities, but had
no effect on earnings because the Company also recorded a receivable from
the Department of Army for expected reimbursement of such amounts (see
Note 17 to Consolidated Financial Statements). In 1997, the Company
recorded a $62 million charge ($40 million after tax) for the partial
settlement and curtailment of pension and other postemployment benefit
liabilities resulting from a large number of employee retirements.
15. SEGMENT INFORMATION
Eastman is an international chemical company that manufactures and sells
a broad range of products. The Company believes its businesses operate in
three segments: Specialty and Performance, Core Plastics, and Chemical
Intermediates. Segments are based on how senior management strategically
directs and manages the business, including resource allocation and
performance assessment.
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
plastics and specialty packaging applications. Competitive factors for
this segment include price, reliability of supply, customer service,
environmental responsibility, and technical competence. Specialty
plastics are sold to selected niche markets primarily in North America
for value-added end uses. Coatings and paint raw materials are sold
primarily to North American industrial concerns. The principal markets
54
<PAGE> 55
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for Eastman's fine chemicals are largely U.S. photographic, agricultural,
and pharmaceutical companies. Performance chemicals are sold primarily to
North American industries as additives for fibers and plastics, raw
materials for adhesives and sealants, food and beverage ingredients and
other performance products. 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 (see Note 17 to Consolidated Financial
Statements).
The Core Plastics segment includes the Company's major plastics products,
EASTAPAK polymers and TENITE polyethylene. These container and general
film 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.
Certain specialty plastics previously reported in the Core Plastics
segment were moved to the Specialty and Performance segment in 1998 to
appropriately reflect the way the business is managed. Prior periods have
been restated to conform with the 1998 presentation.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies. Corporate and certain
other costs are allocated to operating segments using systematic
allocation methods consistently applied. Senior management believes
presenting the operating segments' performance with these costs allocated
is appropriate in the circumstances. Non-operating income and expense,
including interest cost, are not allocated to operating segments.
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
SALES
Specialty and Performance $ 2,736 $ 2,878 $ 2,923
Core Plastics 1,071 1,067 1,143
Chemical Intermediates 674 733 716
------- ------- -------
Segment Total $ 4,481 $ 4,678 $ 4,782
======= ======= =======
Consolidated Eastman Total $ 4,481 $ 4,678 $ 4,782
======= ======= =======
OPERATING EARNINGS (LOSS)
Specialty and Performance $ 357 $ 452 $ 554
Core Plastics (40) (92) (36)
Chemical Intermediates 117 146 145
------- ------- -------
Segment Total $ 434 $ 506 $ 663
======= ======= =======
Consolidated Eastman Total $ 434 $ 506 $ 663
======= ======= =======
</TABLE>
55
<PAGE> 56
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
(Dollars in millions) 1998 1997 1996
<S> <C> <C> <C>
ASSETS
Specialty and Performance $3,441 $3,382 $3,152
Core Plastics 1,790 1,775 1,589
Chemical Intermediates 645 621 525
------ ------ ------
Segment Total $5,876 $5,778 $5,266
====== ====== ======
Consolidated Eastman Total $5,876 $5,778 $5,266
====== ====== ======
DEPRECIATION EXPENSE
Specialty and Performance $ 202 $ 187 $ 184
Core Plastics 110 102 99
Chemical Intermediates 39 38 31
------ ------ ------
Segment Total $ 351 $ 327 $ 314
====== ====== ======
Consolidated Eastman Total $ 351 $ 327 $ 314
====== ====== ======
CAPITAL EXPENDITURES
Specialty and Performance $ 264 $ 263 $ 332
Core Plastics 109 354 358
Chemical Intermediates 127 132 99
------ ------ ------
Segment Total $ 500 $ 749 $ 789
====== ====== ======
Consolidated Eastman Total $ 500 $ 749 $ 789
====== ====== ======
GEOGRAPHIC INFORMATION
REVENUES
United States $2,764 $2,875 $2,990
All foreign countries 1,717 1,803 1,792
------ ------ ------
Total $4,481 $4,678 $4,782
====== ====== ======
LONG-LIVED ASSETS, NET
United States $3,135 $3,117 $2,981
All foreign countries 925 764 539
------ ------ ------
Total $4,060 $3,881 $3,520
====== ====== ======
</TABLE>
Revenues are attributed to countries based on customer location. No
individual foreign country is material with respect to revenues or
long-lived assets.
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) 1998 1997 1996
<S> <C> <C> <C>
Interest (net of amounts capitalized) $107 $ 88 $ 79
Income taxes 80 131 236
</TABLE>
Cash flows from operating activities include gains (losses) from equity
investments of $12 million, $11 million, and $(3) million for 1998, 1997,
and 1996, 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 1998 and 1997, the Company issued 536,188 and 611,962 shares of
its common stock with a market value of $33 million and $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.
17. HOLSTON DEFENSE CORPORATION
Holston Defense Corporation ("Holston"), a wholly owned subsidiary of the
Company, managed, as its primary business, the government-owned Holston
Army Ammunition Plant in Kingsport, Tennessee (the "Facility") under a
series of contracts with the Department of Army (the "DOA") from 1949
until expiration of the Contract (the "Contract") on December 31, 1998.
The DOA awarded a contract to manage the Facility to a third party
commencing January 1, 1999.
The Contract provides for payment of a management fee to Holston and
reimbursement by the DOA of allowable costs incurred for the operation of
the Facility. Holston's operating results historically have been
insignificant to the Company's consolidated sales and earnings.
Pension and other postretirement benefits have been provided to Holston's
present and past employees under the terms of Holston's employee benefit
plans. Prior to the expiration of the Contract, the Company had
recognized, in accordance with generally accepted accounting principles,
pension and other postretirement benefit obligations related to Holston
of approximately $93 million. The Company expects that the DOA will
reimburse these pension and other postretirement benefit obligations and
such amounts will be credited to earnings at the time of receipt of
reimbursement from the DOA. The reimbursement may or may not occur in a
single payment.
The ending of Holston's operation of the Facility results in obligations
for severance pay to eligible Holston employees (the amount based on
length of service) and will require additional funding for the
acceleration of obligations under the pension and other postretirement
benefit plans. During 1998, the Company recognized additional liabilities
of approximately $35 million for termination and pension curtailment. The
recognition of these liabilities had no effect on earnings because the
Company recorded a receivable from the DOA for the reimbursement of such
amounts.
Holston terminated its pension plan in a standard termination as of
January 1, 1999. In order to terminate the pension plan in a standard
termination, the assets of the plan had to be sufficient to provide all
benefit liabilities with respect to each participant. A delay in
reimbursement by the DOA resulted in the Company advancing approximately
$35 million in January 1999 toward the funding of these liabilities.
57
<PAGE> 58
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company will likely be required to advance additional funds to pay
pension benefit liabilities, as well as other termination costs, if there
are further delays in payment or reimbursement by the DOA.
As previously reported, the Company is negotiating with the DOA the
settlement of certain postretirement benefit obligations. The Company's
potential obligation for these postretirement benefit obligations, if
any, in excess of the negotiated amount will be recognized as a liability
at such time that it is probable and reasonably estimable that projected
benefit obligations exceed assets provided by the DOA. The Company
expects that the DOA will reimburse the Company for all costs associated
with operation of the Facility and expiration of the Contract.
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 postretirement obligations, it is the opinion of the
Company, based on the Contract terms, applicable law, and legal and
equitable precedents, that substantially all of the other postretirement
benefit costs will 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 or results of operations 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 $190 million, $220 million, and $175 million in 1998,
1997, and 1996, 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 and intellectual property, 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 those described in
the following paragraph, will have a material adverse effect on the
Company's overall financial position or results of operations. However,
adverse developments could negatively impact earnings in a particular
period.
58
<PAGE> 59
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As previously reported, on September 30, 1998, Eastman entered into a
voluntary plea agreement with the Department of Justice and agreed to pay
an $11 million fine to resolve a charge brought against the Company for
violation of Section One of the Sherman Act. Under the agreement, Eastman
entered a plea of guilty to one count of price-fixing for sorbates, a
class of food preservatives, from January 1995 through June 1997. The
plea agreement was approved by the United States District Court for the
Northern District of California on October 21, 1998. The Company
recognized the entire fine in third quarter 1998 and will pay the fine in
installments over a period of five years. In addition, the Company, along
with other companies, has been named as a defendant in seven antitrust
lawsuits brought subsequent to the Company's plea agreement as putative
class actions on behalf of certain purchasers of sorbates. The Company
recognized a charge to earnings in the fourth quarter of 1998 of $8
million for the estimated costs, including legal fees, related to the
pending sorbates litigation.
59
<PAGE> 60
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. QUARTERLY SALES AND EARNINGS DATA - UNAUDITED
(Dollars in millions, except per share amounts)
<TABLE>
<CAPTION>
1998 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR.(2)
<S> <C> <C> <C> <C>
Sales $ 1,148 $ 1,165 $ 1,131 $ 1,037
Gross profit 254 297 261 123
Operating earnings (loss) 133 164 141 (4)
Earnings before income taxes 114 149 123 (26)
Provision (benefit) for income taxes 40 52 43 (24)
Net earnings (loss) 74 97 80 (2)
Basic earnings (loss) per share (1) .95 1.22 1.01 (.02)
Diluted earnings (loss) per share (1) .94 1.21 1.00 (.02)
</TABLE>
<TABLE>
<CAPTION>
1997 1ST QTR. 2ND QTR. 3RD QTR. 4TH QTR. (3)
<S> <C> <C> <C> <C>
Sales $ 1,171 $ 1,208 $ 1,145 $ 1,154
Gross profit 260 283 288 265
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 (1) .93 1.15 1.23 .36
Diluted earnings per share (1) .92 1.14 1.22 .35
</TABLE>
-------------------------
(1) Each quarter is calculated as a discrete period; the sum of the four
quarters may not equal the calculated full-year amount.
(2) Fourth quarter 1998 includes charges related to certain
underperforming assets, discontinued projects, a power outage at the
Kingsport, Tennessee manufacturing site, reserve for sorbates civil
litigation, and other items, partially offset by the effect of a
lower tax rate which favorably affected net earnings.
(3) Fourth quarter 1997 includes a charge for partial settlement and
curtailment of pension and other postemployment benefit liabilities
due to a large number of employee retirements.
60
<PAGE> 61
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
None.
61
<PAGE> 62
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The material under the heading "Election of Directors -- General" in the 1999
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 1999 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 1999 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 1999 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.
62
<PAGE> 63
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
<TABLE>
<CAPTION>
Page
(a) 1. Consolidated financial statements:
<S> <C> <C>
Management's responsibility for financial statements 33
Report of independent accountants 34
Consolidated statements of earnings, comprehensive income, and retained earnings 35
Consolidated statements of financial position 36
Consolidated statements of cash flows 37
Notes to consolidated financial statements 38 - 60
</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 66.
(b) Reports on Form 8-K
During the quarter ended December 31, 1998, no reports on Form 8-K
were filed.
(c) The Exhibit Index and required Exhibits to this report are included
beginning at page 66.
(d) There are no applicable financial statement schedules required to be
filed as part of this report.
63
<PAGE> 64
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 5, 1999
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 5, 1999
- ------------------------------ Board and Chief
Earnest W. Deavenport, Jr. Executive Officer
PRINCIPAL FINANCIAL OFFICER:
/s/ Allan R. Rothwell Senior Vice President and March 5, 1999
- ------------------------------- Chief Financial Officer
Allan R. Rothwell
PRINCIPAL ACCOUNTING OFFICER:
/s/ Patrick R. Kinsey Vice President and March 5, 1999
- ------------------------------- Comptroller
Patrick R. Kinsey
</TABLE>
64
<PAGE> 65
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------- ----- ----
<S> <C> <C>
DIRECTORS:
/s/ R. Wiley Bourne, Jr. Vice Chairman March 5, 1999
- ------------------------- of the Board
R. Wiley Bourne, Jr. and Executive
Vice President
/s/ H. Jesse Arnelle Director March 5, 1999
- -------------------------
H. Jesse Arnelle
/s/ Calvin A. Campbell, Jr. Director March 5, 1999
- ---------------------------
Calvin A. Campbell, Jr.
/s/ Jerry E. Dempsey Director March 5, 1999
- -------------------------
Jerry E. Dempsey
/s/ John W. Donehower Director March 5, 1999
- -------------------------
John W. Donehower
/s/ Lee Liu Director March 5, 1999
- --------------------------
Lee Liu
/s/ Marilyn R. Marks Director March 5, 1999
- -------------------------
Marilyn R. Marks
/s/ Gerald B. Mitchell Director March 5, 1999
- -------------------------
Gerald B. Mitchell
/s/ John A. White Director March 5, 1999
- -------------------------
John A. White
</TABLE>
65
<PAGE> 66
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 4, 1999 70-78
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% Debentures 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>
66
<PAGE> 67
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 Eastman Chemical
Company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1998 (the "March 31, 1998 10-Q"))
*10.02 Eastman Performance Plan (incorporated herein by reference to
Exhibit 10.02 to the March 31, 1998 10-Q)
*10.03 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)
*10.04 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"))
*10.05 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"))
*10.06 Director Deferred Compensation Plan, as amended 79-88
*10.07 Executive Deferred Compensation Plan, as amended 89-101
*10.08 Form of Executive Severance Agreements (incorporated herein by
reference to Exhibit 10.06 to the 1995 10-K)
*10.09 Employment Agreement between Eastman Chemical
Company and Harold L. Henderson (incorporated herein by reference
to Exhibit 10.08 to the 1996 10-K)
*10.10 Eastman Excess Retirement Income Plan (incorporated herein by
reference to Exhibit 10.10 to the Form 10)
*10.11 Eastman Unfunded Retirement Income Plan (incorporated herein by
reference to Exhibit 10.11 to the Form 10)
</TABLE>
67
<PAGE> 68
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<S> <C> <C>
*10.12 Eastman Employee Stock Ownership Plan Excess Plan, as amended
(incorporated by reference to Exhibit 10.01 to the September
30, 1998 10-Q)
*10.13 Eastman 1995-1997 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated by
reference to Exhibit 10.05 to the September 30, 1996 10-Q)
*10.14 Eastman 1996-1998 Long-Term Performance Subplan (as amended)
of 1994 Omnibus Long-Term Compensation Plan (incorporated by
reference to Exhibit 10.03 to the March 31, 1998 10-Q)
*10.15 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)
*10.16 Eastman 1998-2000 Long-Term Performance Subplan (as amended)
of 1997 Omnibus Long-Term Compensation Plan (incorporated
herein by reference to Exhibit 10.04 to the March 31, 1998
10-Q)
*10.17 Eastman 1999-2001 Long-Term Performance Subplan of 1997 Omnibus
Long-Term Compensation Plan 102-110
*10.18 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)
*10.19 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)
*10.20 Eastman Chemical Company Benefit Security Trust dated December
24, 1997 (incorporated herein by reference to Exhibit 10.18 to
Eastman Chemical Company's Annual Report on Form 10-K for the
year ended December 31, 1997)
10.21 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)
10.22 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)
</TABLE>
68
<PAGE> 69
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT DESCRIPTION SEQUENTIAL
NUMBER PAGE
NUMBER
<S> <C> <C>
10.23 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)
10.24 Intellectual Property Agreement Non-Imaging, dated as of December
31, 1993, between Eastman Kodak Company and Eastman Chemical
Company (incorporated herein by reference to Exhibit 10.12 to the
S-1)
10.25 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 111
21.01 Subsidiaries of the Company 112-113
23.01 Consent of Independent Accountants 114
27.01 Financial Data Schedule (for SEC use only)
99.01 Supplemental Business Segment Information 115
99.02 Restated Operating Segment Information 116
</TABLE>
- ------------------------------
* Management contract or compensatory plan or arrangement filed pursuant to
Item 601(b)(10)(iii) of Regulation S-K.
69
<PAGE> 1
EXHIBIT 3.02
EASTMAN CHEMICAL COMPANY BYLAWS
AMENDED AND RESTATED AS OF FEBRUARY 4, 1999
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.
70
<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. Notice of each meeting of stockholders, shall be
made in writing, or electronically to such stockholders as have consented to the
receipt of such notice by electronic means, or by any such other means permitted
by the Delaware General Corporation Law. Such notice shall state 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.
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
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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). 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
proxy, for each share held of record by such stockholder who is entitled to vote
generally in the election of directors. Each stockholder voting by proxy
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shall grant such authority in writing, by electronic or telephonic transmission
or communication, or by any such other means permitted by the Delaware General
Corporation Law. 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.
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
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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.
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.
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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.
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.
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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.
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.
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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
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.
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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.
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.
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EXHIBIT 10.06
FOURTH AMENDED AND RESTATED
EASTMAN DIRECTORS' DEFERRED COMPENSATION PLAN
EASTMAN CHEMICAL COMPANY
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FOURTH AMENDED AND RESTATED
EASTMAN DIRECTORS' DEFERRED COMPENSATION PLAN
<TABLE>
<CAPTION>
TABLE OF CONTENTS Page
<S> <C> <C>
Section 1. Definitions
Section 2. Deferral of Compensation
Section 3. Time of Election of Deferral
Section 4. Hypothetical Investments
Section 5. Deferrals and Crediting Amounts to Accounts
Section 6. Deferral Period
Section 7. Investment in the Stock Account and Transfers Between Accounts
Section 8. Payment of Deferred Compensation
Section 9. Payment of Deferred Compensation After Death
Section 10. Withdrawals
Section 11. Participant's Rights Unsecured
Section 12. No Right to Continued Service
Section 13. Statement of Account
Section 14. Deductions
Section 15. Administration
Section 16. Amendment
Section 17. Change in Control
Section 18. Governing Law
Section 19. Successors and Assigns
Section 20. Compliance with SEC Regulations
</TABLE>
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FOURTH AMENDED AND RESTATED
EASTMAN DIRECTORS' DEFERRED COMPENSATION PLAN
Preamble. The Fourth Amended and Restated Eastman Directors' Deferred
Compensation Plan is an unfunded, non-qualified deferred compensation
arrangement for non-employee members of the Board of Directors of Eastman
Chemical Company (the "Company"). Under the Plan, each Eligible Director is
annually given an opportunity to elect to defer payment of part of his or her
compensation for serving as a Director. This Plan originally was adopted
effective January 1, 1994, was amended and restated effective as of December 1,
1994 and as of May 2, 1996, and of October 10, 1996, as of further amended and
restated effective as of December 3, 1998.
Section 1. Definitions.
Section 1.1. "Account" means the Interest Account or the Stock Account.
Section 1.2. "Board" means the Board of Directors of the Company.
Section 1.3. "Change In Control" means a change in control of the Company
of a nature that would be required to be reported (assuming such event
has not been "previously reported") in response to Item 1(a) of a Current
Report on Form 8-K, as in effect on August 1, 1993, pursuant to Section
13 or 15(d) of the Exchange Act; provided that, without limitation, a
Change In Control shall be deemed to have occurred at such time as (i)
any "person" within the meaning of Section 14(d) of the Exchange Act,
other than the Company, a subsidiary of the Company, or any employee
benefit plan(s) sponsored by the Company or any subsidiary of the
Company, is or has become the "beneficial owner," as defined in Rule
13d-3 under the Exchange Act, directly or indirectly, of 25% or more of
the combined voting power of the outstanding securities of the Company
ordinarily having the right to vote at the election of directors;
provided, however, that the following will not constitute a Change In
Control: any acquisition by any corporation if, immediately following
such acquisition, more than 75% of the outstanding securities of the
acquiring corporation ordinarily having the right to vote in the election
of directors is beneficially owned by all or substantially all of those
persons who, immediately prior to such acquisition, were the beneficial
owners of the outstanding securities of the Company ordinarily having the
right to vote in the election of directors; or (ii) individuals who
constitute the Board on January 1, 1994 (the "Incumbent Board") have
ceased for any reason to constitute at least a majority thereof, provided
that: any person becoming a director subsequent to January 1, 1994 whose
election, or nomination for election by the Company's shareowners, was
approved by a vote of at least three-quarters (3/4) of the directors
comprising the Incumbent Board (either by a specific vote or by approval
of the proxy statement of the Company in which such person is named as a
nominee for director without objection to such nomination) shall be, for
purposes of the Plan, considered as though such person were a member of
the Incumbent Board; or (iii) upon approval by the Company's shareowners
of a reorganization, merger or consolidation, other than one with respect
to which all or substantially all of those persons who were the
beneficial owners, immediately prior to such reorganization, merger or
consolidation, of outstanding securities of the Company ordinarily having
the right to vote in the election of directors own, immediately after
such transaction, more than 75% of the outstanding securities of the
resulting corporation ordinarily having the right to vote in the election
of directors; or (iv) upon approval by the Company's stockholders of a
complete liquidation and dissolution of the Company or the sale or other
disposition of all or substantially all of the assets of the Company
other than to a subsidiary of the Company. Notwithstanding the occurrence
of any of the foregoing, the Board of Directors may determine, if it
deems it to be in the best interest of the Company, that an event or
events otherwise constituting a Change in Control shall not be so
considered. Such determination shall be effective only if it is made by
the Board of Directors prior to the occurrence of an event that otherwise
would be or probably will lead to a Change In Control or after such event
if made by the Board of Directors a majority of which is composed of
directors who were members of the Board immediately prior to the event
that otherwise would be or probably will lead to a Change In Control.
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Section 1.4. "Committee on Directors" means the Committee on Directors
of the Board.
Section 1.5. "Common Stock" means the $.01 par value common stock of the
Company.
Section 1.6. "Company" means Eastman Chemical Company.
Section 1.7. "Deferrable Amount" means an amount equal to the sum of the
Eligible Director's cash compensation, including retainer, meeting fees,
and any other compensation otherwise payable in cash.
Section 1.8. "Eligible Director" means a member of the Board of Directors
of the Company who is not an employee of the Company or any subsidiary of
the Company.
Section 1.9. "Enrollment Period" means the period designated by the
Committee on Directors each year; provided however, that such period
shall end on or before December 31 of each year.
Section 1.10. "Exchange Act" means the Securities Exchange Act of 1934,
as amended.
Section 1.11. "Interest Account" means the account established by the
Company for each Participant for compensation deferred pursuant to this
Plan and which shall bear interest as described in Section 4.1 below. The
maintenance of individual Interest Accounts is for bookkeeping purposes
only.
Section 1.12. "Interest Rate" means the monthly average of bank prime
lending rates to most favored customers as published in The Wall Street
Journal, such average to be determined as of the last day of each month.
Section 1.13. "Market Value" means the closing price of the shares of
Common Stock on the New York Stock Exchange on the day on which such
value is to be determined or, if no such shares were traded on such day,
said closing price on the next business day on which such shares are
traded; provided, however, that if at any relevant time the shares of
Common Stock are not traded on the New York Stock Exchange, then "Market
Value" shall be determined by reference to the closing price of the
shares of Common Stock on another national securities exchange, if
applicable, or if the shares are not traded on an exchange but are traded
in the over-the-counter market, by reference to the last sale price or
the closing "asked" price of the shares in the over-the-counter market as
reported by the National Association of Securities Dealers Automated
Quotation System (NASDAQ) or other national quotation service.
Section 1.14. "Plan" means this Fourth Amended and Restated Eastman
Directors' Deferred Compensation Plan.
Section 1.15. "Participant" means an Eligible Director who elects for one
or more years to defer compensation pursuant to this Plan.
Section 1.16. "Stock Account" means the account established by the
Company for each Participant, the performance of which shall be measured
by reference to the Market Value of Common Stock. The maintenance of
individual Stock Accounts is for bookkeeping purposes only.
Section 1.17. "Valuation Date" means each business day.
Section 2. Deferral of Compensation. An Eligible Director may elect to defer
receipt of all or any portion of his or her Deferrable Amount to his or her
Interest Account and/or Stock Account. No deferral shall be made of any
compensation payable after termination of the Eligible Director's service on the
Board.
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Section 3. Time of Election of Deferral. An Eligible Director who wishes to
defer compensation must irrevocably elect to do so during the applicable
Enrollment Period. The Enrollment Period shall end on or before December 31 of
the calendar year immediately preceding the year in which the Eligible
Director's applicable Deferrable Amount will be earned. Elections shall be made
annually.
Section 4. Hypothetical Investments.
Section 4.1. Interest Account. Amounts in a Participant's Interest
Account are hypothetically invested in an interest bearing account which
bears interest computed at the Interest Rate, compounded monthly.
Section 4.2. Stock Account. Amounts in a Participant's Stock Account are
hypothetically invested in units of Common Stock. Amounts deferred into a
Stock Account are recorded as units of Common Stock, and fractions
thereof, with one unit equating to a single share of Common Stock. Thus,
the value of one unit shall be the Market Value of a single share of
Common Stock. The use of units is merely a bookkeeping convenience; the
units are not actual shares of Common Stock. The Company will not reserve
or otherwise set aside any Common Stock for or to any Stock Account. The
maximum number of Common Stock units that may be hypothetically purchased
by deferral of compensation to Stock Accounts under this Plan is 80,000.
Section 5. Deferrals and Crediting Amounts to Accounts.
Section 5.1. Manner of Electing Deferral. An Eligible Director may elect
to defer compensation by executing and returning to the Committee on
Directors a deferred compensation form provided by the Company. The form
shall indicate: (i) the amount of Deferrable Amount to be deferred; and
(ii) the portion of the deferral to be credited to the Participant's
Interest Account and Stock Account, respectively. An election to defer
compensation shall be irrevocable following the end of the applicable
Enrollment Period, but the portion of the deferral to be credited to the
Participant's Interest Account and Stock Account, respectively, may be
reallocated by the Participant in the manner specified by the Committee
on Directors or its authorized designee through and including the
business day immediately preceding the date on which the deferred amount
is credited to the Participant's Accounts pursuant to Section 5.2.
Section 5.2. Crediting of Amounts to Accounts. Amounts to be deferred
shall be credited to the Participant's Interest Account and/or Stock
Account, as applicable, as of the date such amounts are otherwise
payable.
Section 6. Deferral Period. Subject to Sections 9, 10 and 17 hereof, the
compensation which a Participant elects to defer under this Plan shall be
deferred until the Participant ceases to serve as a member of the Board. Any
such election shall be made during the applicable Enrollment Period on the
deferred compensation form referenced in Section 5 above. The payment of a
Participant's account shall be governed by Sections 8, 9, 10 and 17, as
applicable.
Section 7. Investment in the Stock Account and Transfers Between Accounts.
Section 7.1. Election Into the Stock Account. If a Participant elects to
defer compensation into his or her Stock Account, his or her Stock
Account shall be credited, as of the date described in Section 5.2, with
that number of units of Common Stock, and fractions thereof, obtained by
dividing the dollar amount to be deferred into the Stock Account by the
Market Value of the Common Stock as of such date.
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Section 7.2. Transfers Between Accounts. A Participant may direct that
all or any portion, designated as a whole dollar amount, of the existing
balance of one of his or her Accounts be transferred to his or her other
Account, effective as of (i) the date such election is made, if and only
if such election is made prior to the close of trading on the New York
Stock Exchange on a day on which the Common Stock is traded on the New
York Stock Exchange, or (ii) if such election is made after the close of
trading on the New York Stock Exchange on a given day or at any time on a
day on which no sales of Common Stock are made on the New York Stock
Exchange, then on the next business day on which the Common Stock is
traded on the New York Stock Exchange (the date described in (i) or (ii),
as applicable, is referred to hereinafter as the election's "Effective
Date"). Such election shall be made in the manner specified by the
Committee on Directors or its authorized designee; provided, however,
that a Participant may only elect to transfer between his or her Accounts
if he or she has made no election within the previous six months to
effect an "opposite way" fund-switching (i.e., transfer out versus
transfer in) transfer into or out of the Stock Account or any other
"opposite way" intra-plan transfer or plan distribution involving a
Company equity securities fund which constitutes a "Discretionary
Transaction" as defined in Rule 16b-3 under the Exchange Act.
Section 7.3. Transfer Into the Stock Account. If a Participant elects
pursuant to Section 7.2 to transfer an amount from his or her Interest
Account to his or her Stock Account, effective as of the election's
Effective Date, (i) his or her Stock Account shall be credited with that
number of units of Common Stock, and fractions thereof, obtained by
dividing the dollar amount elected to be transferred by the Market Value
of the Common Stock on the Valuation Date immediately preceding the
election's Effective Date; and (ii) his or her Interest Account shall be
reduced by the amount elected to be transferred.
Section 7.4. Transfer Out of the Stock Account. If a Participant elects
pursuant to Section 7.2 to transfer an amount from his or her Stock
Account to his or her Interest Account, effective as of the election's
Effective Date, (i) his or her Interest Account shall be credited with a
dollar amount equal to the amount obtained by multiplying the number of
units to be transferred by the Market Value of the Common Stock on the
Valuation Date immediately preceding the election's Effective Date; and
(ii) his or her Stock Account shall be reduced by the number of units
elected to be transferred.
Section 7.5. Dividend Equivalents. Effective as of the payment date for
each cash dividend on the Common Stock, the Stock Account of each
Participant who had a balance in his or her Stock Account on the record
date for such dividend shall be credited with a number of units of Common
Stock, and fractions thereof, obtained by dividing (i) the aggregate
dollar amount of such cash dividend payable in respect of such
Participant's Stock Account (determined by multiplying the dollar value
of the dividend paid upon a single share of Common Stock by the number of
units of Common Stock held in the Participant's Stock Account on the
record date for such dividend); by (ii) the Market Value of the Common
Stock on the Valuation Date immediately preceding the payment date for
such cash dividend.
Section 7.6. Stock Dividends. Effective as of the payment date for each
stock dividend on the Common Stock, additional units of Common Stock
shall be credited to the Stock Account of each Participant who had a
balance in his or her Stock Account on the record date for such dividend.
The number of units that shall be credited to the Stock Account of such a
Participant shall equal the number of shares of Common Stock, and
fractions thereof, which the Participant would have received as stock
dividends had he or she been the owner on the record date for such stock
dividend of the number of shares of Common Stock equal to the number of
units credited to his or her Stock Account on such record date.
Section 7.7. Recapitalization. If, as a result of a recapitalization of
the Company, the outstanding shares of Common Stock shall be changed into
a greater number or smaller number of shares, the number of units
credited to a Participant's Stock Account shall be appropriately adjusted
on the same basis.
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Section 7.8. Distributions. Amounts in respect of units of Common Stock
may only be distributed out of the Stock Account by transfer to the
Interest Account (pursuant to Sections 7.2 and 7.4 or 7.10) or withdrawal
from the Stock Account (pursuant to Section 8, 9, 10, or 17), and shall
be distributed in cash. The number of units to be distributed from a
Participant's Stock Account shall be valued by multiplying the number of
such units by the Market Value of the Common Stock as of the Valuation
Date immediately preceding the date such distribution is to occur.
Section 7.9. Responsibility for Investment Choices. Each Participant is
solely responsible for any decision to defer compensation into his or her
Stock Account and to transfer amounts to and from his or her Stock
Account and accepts all investment risks entailed by such decision,
including the risk of loss and a decrease in the value of the amounts he
or she elects to defer into his or her Stock Account.
Section 7.10. Liquidation of Stock Account. Upon the date that a
Participant ceases to serve on the Board, the entire balance, if any, of
the Participant's Stock Account shall automatically be transferred to his
or her Interest Account. For purposes of valuing the units of Common
Stock subject to such a transfer, the approach described in Section 7.8
shall be used.
Section 8. Payment of Deferred Compensation.
Section 8.1. Background. No withdrawal may be made from a Participant's
Account except as provided in this Section 8 and Sections 9, 10 and 17.
Section 8.2. Manner of Payment. Payment of a Participant's Account shall
be made in a single lump sum or annual installments, in the sole
discretion of the Committee on Directors. The maximum number of annual
installments is ten. All payments from the Plan shall be made in cash.
Section 8.3. Timing of Payments. Payments shall be made by the fifth
business day in March and shall commence in any year designated in the
sole discretion of the Committee on Directors, up through the tenth year
following the year in which the Participant ceases to be a member of the
Board for any reason, but in no event shall payment commence later than
the year the Participant reaches age 71.
Section 8.4. Valuation. The amount of each payment shall be equal to the
value, as of the preceding Valuation Date, of the Participant's Account,
divided by the number of installments remaining to be paid.
Section 9. Payment of Deferred Compensation After Death. If a Participant dies
prior to complete payment of his or her Accounts, the balance of such Accounts,
valued as of the Valuation Date immediately preceding the date payment is made,
shall be paid in a single, lump-sum payment to: (i) the beneficiary or
contingent beneficiary designated by the Participant on forms supplied by the
Committee on Directors; or, in the absence of a valid designation of a
beneficiary or contingent beneficiary, (ii) the Participant's estate within 30
days after appointment of a legal representative of the deceased Participant.
Section 10. Withdrawals.
Section 10.1 Acceleration of Payment for Hardship. Upon written approval
from the Company's Vice President, Human Resources, with respect to
Participants other than executive officers of the Company, and by the
Compensation Committee, with respect to Participants who are executive
officers of the Company, and subject to the restrictions in the next two
sentences, a Participant, whether or not he or she is still employed by
the Company or any of its U.S. Subsidiaries, may be permitted to receive
all or part of his or her Accounts if the Company's Vice President, Human
Resources, or the Compensation Committee, as applicable, determines that
an emergency event beyond the Participant's control exists which would
cause such Participant severe financial hardship if the payment of his or
her Accounts were not approved. Any such distribution for hardship shall
be limited to the amount needed to meet such emergency.
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Section 10.2 Payment to Individuals. Any participant in the Eastman
Executive Deferred Compensation Plan may at his or her discretion
withdraw at any time all or part of that person's account balance under
the Plan; provided, if this option is exercised the individual will
forfeit to the Corporation 10% of his or her account balance or $50,000,
whichever is less, and will not be permitted to participate in this plan
for a period of 36 months from date any payment to a participant is made
under this section.
Section 10.3 Accelerated Payment. If under Eastman Executive Deferred
Compensation Plan one-half or more of the Participants or one-fifth or
more of the Participants with one-half or more of the value of all
benefits owed exercise their option for immediate distribution in any
consecutive six-month period this will trigger immediate payment to all
Participants of all benefits owed under the terms of the plan. Immediate
payout under this section will not involve reduction of the amounts paid
to Participants as set forth in section 10.2. Any individual that has
been penalized in this six-month period for electing immediate withdrawal
will be paid that penalty, and continuing participation will be allowed,
if payout to all Participants under this section occurs.
Section 10.4 Section 16. A Section 16 Insider may only receive a
withdrawal from his or her Stock Account pursuant to this Section 10 if
he or she has made no election within the previous six months to effect a
fund-switching transfer into the Stock Account or the Eastman Stock Fund
of the Eastman Investment Plan or the Savings and Investment Plan
Appendix, or any other "opposite way" intra-plan transfer into a Company
equity securities fund which constitutes a "Discretionary Transaction" as
defined in Rule 16b-3 under the Exchange Act. If such a distribution
occurs while the Participant is employed by the Company or any of its
U.S. Subsidiaries, any election to defer compensation for the year in
which the Participant receives a withdrawal shall be ineffective as to
compensation earned for the pay period following the pay period during
which the withdrawal is made and thereafter for the remainder of such
year and shall be ineffective as to any other compensation elected to be
deferred for such year.
Section 11. Participant's Rights Unsecured.
The benefits payable under this Plan shall be paid by the Company each year out
of its general assets. To the extent a Participant acquires the right to receive
a payment under this Plan, such right shall be no greater than that of an
unsecured general creditor of the Company. No amount payable under this Plan may
be assigned, transferred, encumbered or subject to any legal process for the
payment of any claim against a Participant. No Participant shall have the right
to exercise any of the rights or privileges of a shareowner with respect to
units credited to his or her Stock Account.
Section 12. No Right to Continued Service. Participation in the Plan shall not
give any Participant any right to remain a member of the Board.
Section 13. Statement of Account. Statements will be sent no less frequently
than annually to each Participant or his or her estate showing the value of the
Participant's Accounts.
Section 14. Deductions. The Company will withhold to the extent required by law
all applicable income and other taxes from amounts deferred or paid under the
Plan.
Section 15. Administration.
Section 15.1. Responsibility. Except as expressly provided otherwise
herein, the Committee on Directors shall have total and exclusive
responsibility to control, operate, manage and administer the Plan in
accordance with its terms.
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Section 15.2. Authority of the Committee on Directors. The Committee on
Directors shall have all the authority that may be necessary or helpful
to enable it to discharge its responsibilities with respect to the Plan.
Without limiting the generality of the preceding sentence, the Committee
on Directors shall have the exclusive right: to interpret the Plan, to
determine eligibility for participation in the Plan, to decide all
questions concerning eligibility for and the amount of benefits payable
under the Plan, to construe any ambiguous provision of the Plan, to
correct any default, to supply any omission, to reconcile any
inconsistency, and to decide any and all questions arising in the
administration, interpretation, and application of the Plan.
Section 15.3. Discretionary Authority. The Committee on Directors shall
have full discretionary authority in all matters related to the discharge
of its responsibilities and the exercise of its authority under the Plan
including, without limitation, its construction of the terms of the Plan
and its determination of eligibility for participation and benefits under
the Plan. It is the intent that the decisions of the Committee on
Directors and its action with respect to the Plan shall be final and
binding upon all persons having or claiming to have any right or interest
in or under the Plan and that no such decision or action shall be
modified upon judicial review unless such decision or action is proven to
be arbitrary or capricious.
Section 15.4. Delegation of Authority. The Committee on Directors may
delegate some or all of its authority under the Plan to any person or
persons provided that any such delegation be in writing.
Section 15.5. Restriction on Authority of the Committee on Directors.
Under any circumstances where the Committee on Directors is authorized to
make a discretionary decision concerning a payment of any type under this
Plan to a member of such Committee, the member of the Committee who is to
receive such payment shall take no part in the deliberations or have any
voting or other power with respect to such decision.
Section 16. Amendment. The Board may suspend or terminate the Plan at any time.
In addition, the Board may, from time to time, amend the Plan in any manner
without shareowner approval; provided, however, that the Board may condition any
amendment on the approval of shareowners if such approval is necessary or
advisable with respect to tax, securities, or other applicable laws. No
amendment, modification, or termination shall, without the consent of a
Participant, adversely affect such Participant's accruals in his or her Accounts
as of the date of such amendment, modification, or termination.
Section 17. Change in Control.
Section 17.1. Background. The terms of this Section 17 shall immediately
become operative, without further action or consent by any person or
entity, upon a Change in Control, and once operative shall supersede and
control over any other provisions of this Plan.
Section 17.2. Acceleration of Payment Upon Change in Control. Upon the
occurrence of a Change in Control, each Participant, whether or not he or
she is still a Director, shall be paid in a single, lump-sum cash payment
the balance of his or her Accounts as of the Valuation Date immediately
preceding the date payment is made. Such payment shall be made as soon as
practicable, but in no event later than 90 days after the date of the
Change in Control.
Section 17.3. Amendment On or After Change in Control. On or after a
Change in Control, no action, including, but not by way of limitation,
the amendment, suspension or termination of the Plan, shall be taken
which would affect the rights of any Participant or the operation of this
Plan with respect to the balance in the Participant's Accounts.
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Section 17.4 Attorney Fees. The Corporation shall pay all reasonable
legal fees and related expenses incurred by a participant in seeking to
obtain or enforce any payment, benefit or right such participant may be
entitled to under the plan after a Change in Control; provided, however,
the participant shall be required to repay any such amounts to the
Corporation to the extent a court of competent jurisdiction issues a
final and non-appealable order setting forth the determination that the
position taken by the participant was frivolous or advanced in bad faith.
Section 18. Governing Law. The Plan shall be construed, governed and enforced in
accordance with the law of Tennessee, except as such laws are preempted by
applicable federal law.
Section 19. Successors and Assigns. This Plan shall be binding upon the
successors and assigns of the parties hereto.
Section 20. Compliance with SEC Regulations. It is the Company's intent that the
Plan comply in all respects with Rule 16b-3 of the Exchange Act, and any
regulations promulgated thereunder. If any provision of the Plan is found not to
be in compliance with such rule, the provision shall be deemed null and void.
All transactions under the Plan, including, but not by way of limitation, a
Participant's election to defer compensation or transfer Account balances under
Section 7 and hardship withdrawals under Section 10, shall be executed in
accordance with the requirements of Section 16 of the Exchange Act, as amended
and any regulations promulgated thereunder. To the extent that any of the
provisions contained herein do not conform with Rule 16b-3 of the Exchange Act
or any amendments thereto or any successor regulation, then the Committee may
make such modifications so as to conform the Plan to the Rule's requirements.
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EXHIBIT 10.07
AMENDED AND RESTATED
EASTMAN EXECUTIVE DEFERRED COMPENSATION PLAN
EASTMAN CHEMICAL COMPANY
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AMENDED AND RESTATED
EASTMEN EXECUTIVE DEFERRED COMPENSATION PLAN
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Title Page
- ------- ----- ----
<S> <C> <C>
Preamble
Section 1. Definitions
Section 2. Deferral of Compensation
Section 3. Time of Election of Deferral
Section 4. Hypothetical Investments
Section 5. Deferrals and Crediting Amounts to Accounts
Section 6. Deferral Period
Section 7. Investment in the Stock Account and Transfers Between Accounts
Section 8. Payment of Deferred Compensation
Section 9. Payment of Deferred Compensation After Death
Section 10. Acceleration of Payment for Hardship
Section 12. Participant's Rights Unsecured
Section 13. No Right to Continued Employment
Section 14. Statement of Account
Section 15. Deductions
Section 16. Administration
Section 17. Amendment
Section 18. Governing Law
Section 19. Change in Control
Section 20. Compliance with SEC Regulations
</TABLE>
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AMENDED AND RESTATED
EASTMAN EXECUTIVE DEFERRED COMPENSATION PLAN
Preamble. The Amended and Restated Eastman Executive Deferred
Compensation Plan is an unfunded, nonqualified deferred compensation
arrangement for eligible employees of Eastman Chemical Company ("the Company")
and certain of its subsidiaries. Under the Plan, each Eligible Employee is
annually given an opportunity to elect to defer payment of part of his or her
cash compensation. This Plan also assumed the liabilities accrued under the
Kodak Executive Deferred Compensation Plan, as of January 1, 1994, in respect
of each Eligible Employee who was actively employed by the Company as of such
date and who chose to transfer his or her deferred compensation account to the
Company. This Plan originally was adopted effective January 1, 1994, was
amended effective March 2, 1994, and is further amended and restated effective
as of October 10, 1996.
Section 1: Definitions.
Section 1.1. "Account" means the Interest Account or the Stock
Account.
Section 1.2. "Board" means the Board of Directors of the Company.
Section 1.3. "Change In Control" means a change in control of the
Company of a nature that would be required to be reported (assuming
such event has not been "previously reported") in response to Item 1
(a) of a Current Report on Form 8-K, as in effect on August 1, 1993,
pursuant to Section 13 or 15(d) of the Exchange Act; provided that,
without limitation, a Change In Control shall be deemed to have
occurred at such time as (i) any "person" within the meaning of
Section 14(d) of the Exchange Act, other than the Company, a
subsidiary of the Company, or any employee benefit plan(s) sponsored
by the Company or any subsidiary of the Company, is or has become the
"beneficial owner," as defined in Rule 13d-3 under the Exchange Act,
directly or indirectly, of 25% or more of the combined voting power of
the outstanding securities of the Company ordinarily having the right
to vote at the election of directors; provided, however, that the
following will not constitute a Change In Control: any acquisition by
any corporation if, immediately following such acquisition, more than
75% of the outstanding securities of the acquiring corporation
ordinarily having the right to vote in the election of directors is
beneficially owned by all or substantially all of those persons who,
immediately prior to such acquisition, were the beneficial owners of
the outstanding securities of the Company ordinarily having the right
to vote in the election of directors, or (ii) individuals who
constitute the Board on January 1, 1994 (the "Incumbent Board") have
ceased for any reason to constitute at least a majority thereof,
provided that: any person becoming a director subsequent to January 1,
1994 whose election, or nomination for election by the Company's
stockholders, was approved by a vote of at least three-quarters (3/4)
of the directors comprising the Incumbent Board (either by a specific
vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for director without objection to
such nomination) shall be, for purposes of the Plan, considered as
though such person were a member of the Incumbent Board, (iii) upon
approval by the Company's stockholders of a reorganization, merger or
consolidation, other than one with respect to which all or
substantially all of those persons who were the beneficial owners,
immediately prior to such reorganization, merger or consolidation, of
outstanding securities of the Company ordinarily having the right to
vote in the election of directors own, immediately after such
transaction, more than 75% of the outstanding securities of the
resulting corporation ordinarily having the right to vote in the
election of directors; or (iv) upon approval by the Company's
stockholders of a complete liquidation and dissolution of the Company
or the sale or other disposition of all or substantially all of the
assets of the Company other than to a subsidiary of
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the Company. Notwithstanding the occurrence of any of the foregoing,
the Compensation Committee may determine, if it deems it to be in the
best interest of the Company, that an event or events otherwise
constituting a Change In Control shall not be so considered. Such
determination shall be effective only if it is made by the
Compensation Committee prior to the occurrence of an event that
otherwise would be or probably will lead to a Change In Control or
after such event if made by the Compensation Committee a majority of
which is composed of directors who were members of the Board
immediately prior to the event that otherwise would be or probably
will lead to a Change In Control.
Section 1.4. "Common Stock" means the $.01 par value common stock
of the Company.
Section 1.5. "Company" means Eastman Chemical Company.
Section 1.6. "Compensation Committee" shall mean the Compensation
and Management Development Committee of the Board.
Section 1.7. "Deferrable Amount" means, for a given fiscal year
of the Company, an amount equal to the sum of the Eligible Employee's
(i) annual base cash compensation; (ii) annual cash payments under the
Eastman Performance Plan and the Annual Performance Plan of the
Company; and (iii) stock and stock-based awards under the Omnibus Plan
which, under the terms of the Omnibus Plan and the award, are payable
in cash and required or allowed to be deferred into this Plan;
provided, however, that the Deferrable Amount shall not include any
amount that must be withheld from the Eligible Employee's wages for
income or employment tax purposes. In addition, each Eligible Employee
as of January 1, 1994, who had previously participated in the Kodak
Executive Deferred Compensation Plan could elect to transfer the
amount then in his or her account in the Kodak Executive Deferred
Compensation Plan into the Plan. Furthermore, "Deferred Amount"
included, for 1993, annual cash payments under the Kodak Wage Dividend
policy and Success Sharing program payable in 1994 and attributable to
1993 service.
Section 1.8. "Eligible Employee" means a U.S.-based employee of
the Company or any of its U.S. Subsidiaries who, as of the first day
of the applicable Enrollment Period (i) has a salary grade
classification of SG 49 or above; or (ii) is not covered under clause
(i), but who was an Eligible Employee under the Kodak Executive
Deferred Compensation Plan, as in effect on January 1, 1994. Any
employee who becomes eligible to participate in this Plan and in a
future year does not qualify as an Eligible Employee because of a
change in position level shall nevertheless be eligible to participate
in such year.
Section 1.9. "Enrollment Period" means the period designated by
the Compensation Committee each year, provided however, that such
period shall end on or before the last business day before the last
Sunday in December of each year.
Section 1.10. "Exchange Act" means the Securities Exchange Act of
1934, as amended.
Section 1.11. "Interest Account" means the account established by
the Company for each Participant for compensation deferred pursuant to
this Plan and which shall bear interest as described in Section 4.1
below. The maintenance of individual Interest Accounts is for
bookkeeping purposes only.
Section 1.12. "Interest Rate" means the monthly average of bank
prime lending rates to most favored customers as published in The Wall
Street Journal, such average to be determined as of the last day of
each month.
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Section 1.13. "Market Value" means the closing price of the shares
of Common Stock on the Now York Stock Exchange on the day on which
such value is to be determined or, if no such. shares were traded on
such day, said closing price on the next business day on which such
shares are traded, provided, however, that if at any relevant time the
shares of Common Stock are not traded on the New York Stock Exchange,
then "Market Value" shall be determined by reference to the closing
price of the shares of Common Stock on another national securities
exchange, if applicable, or if the shares are not traded on an
exchange but are traded in the over-the-counter market, by reference
to the last sale price or the closing "asked" price of the shares in
the over-the-counter market as reported by the National Association of
Securities Dealers Automated Quotation System (NASDAQ) or other
national quotation service.
Section 1.14. "Omnibus Plan" means the Eastman Chemical Company
1994 Omnibus Long-Term Compensation Plan or any successor plan to the
Omnibus Plan providing for awards of stock and stock-based
compensation to Company employees.
Section 1.15. "Participant" means an Eligible Employee who elects
for one or more years to defer compensation pursuant to this Plan.
Section 1.16. "Plan" means this Amended and Restated Eastman
Executive Deferred Compensation Plan.
Section 1.17. "Section 16 Insider" means a Participant who is,
with respect to the Company, subject to Section 16 of the Exchange
Act.
Section 1.18. "Stock Account" means the account established by the
Company for each Participant, the performance of which shall be
measured by reference to the Market Value of Common Stock. The
maintenance of individual Stock Accounts is for bookkeeping purposes
only.
Section 1.19. "U.S. Subsidiaries" means the United States
subsidiaries of the Company listed on Schedule A.
Section 1.20. "Valuation Date" means each business day.
Section 2. Deferral of Compensation. An Eligible Employee may elect to
defer receipt of all or any portion of his or her Deferrable Amount to his or
her Interest Account and/or Stock Account. A Participant in this Plan need not
participate in the Eastman Investment Plan. If an Eligible Employee terminates
employment with the Company or any of its U.S. Subsidiaries, any previous
deferral election with respect to a Wage Dividend, Success Sharing, Eastman
Performance Plan, Annual Performance Plan or Omnibus Plan payment or award
shall remain in effect with respect to such items of compensation payable after
termination of employment
Section 3. Time of Election of Deferral. An Eligible Employee who wishes
to defer compensation must irrevocably elect to do so during the applicable
Enrollment Period. Except as provided in the next sentence, the Enrollment
Period shall end prior to the first day of the calendar year in which the
applicable Deferrable Amount will first be paid, earned, or awarded. The
Enrollment Period with respect to payouts (if any) in 1997 under the 1994-1996
Long-Term Performance Subplan of the Omnibus Plan shall end prior to October
31, 1996. Elections shall be made annually.
This Plan was first adopted January 1, 1994, and is generally effective with
respect to compensation earned on or after such date. However, (i) if a person
who is eligible to participate in this Plan made an election under the Kodak
Executive Deferred Compensation Plan with respect to a payment under the
Management Annual Performance Plan (MAPP) that would be paid in calendar year
1994, such election remained in force and was effective under this Plan for
such MAPP payment, and (ii) Participants could elect to defer under this Plan a
Wage Dividend or Success Sharing payment payable in calendar year 1994 but
attributable to 1993 service.
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Section 4. Hypothetical Investments.
Section 4.1. Interest Account. Amounts in a Participant's
Interest Account are hypothetically invested in an interest bearing
account which bears interest computed at the Interest Rate, compounded
monthly.
Section 4.2. Stock Account. Amounts in a Participant's Stock
Account are hypothetically invested in units of Common Stock. Amounts
deferred into a Stock Account are recorded as units of Common Stock,
and fractions thereof with one unit equating to a single share of
Common Stock. Thus, the value of one unit shall be the Market Value of
a single share of Common Stock. The use of units is merely a
bookkeeping convenience; the units are not actual shares of Common
Stock. The Company will not reserve or otherwise set aside any Common
Stock for or to any Stock Account the maximum number of Common Stock
units that may be hypothetically purchased by deferral of compensation
to Stock Accounts under this Plan is 4,500,000.
Section 5. Deferrals and Crediting Amounts to Accounts.
Section 5.1. Manner of Electing Deferral. An Eligible Employee
may elect to defer compensation by executing and returning to the
Compensation Committee a deferred compensation form provided by the
Company. The form shall indicate (i) the amount and sources of
Deferrable Amount to be deferred; (ii) whether deferral of annual base
cash compensation is to be at the same rate throughout the year, or at
one rate for part of the year and at a second rate for the remainder
of the year; and (iii) the portion of the deferral to be credited to
the Participant's Interest Account and Stock Account respectively. An
election to defer compensation shall be irrevocable following the end
of the applicable Enrollment Period, but the portion of the deferral
to be credited to the Participant's Interest Account and Stock
Account, respectively, may be reallocated by the Participant in the
manner specified by the Compensation Committee or its authorized
designee through and including the business day immediately preceding
the date on which the deferred amount is credited to the Participant's
Accounts pursuant to Section 5.2.
Section 5.2. Crediting of Amounts to Accounts. Amounts to be
deferred shall be credited to the Participant's Interest Account
and/or Stock Account, as applicable, as of the date such amounts are
otherwise payable.
Section 6. Deferral Period. Subject to Sections 9, 10, and 19 hereof,
the compensation which a Participant elects to defer under the Plan will be
deferred until the Participant retires or otherwise terminates employment with
the Company or any of its U.S. Subsidiaries. Any such election shall be made
during the applicable Enrollment Period on the deferred compensation form
referenced in Section 5 above. The payment of a Participant's Account shall be
governed by Sections 8, 9, 10, and 19, as applicable.
Notwithstanding the foregoing, any fixed date election made by an Eligible
Employee under the Kodak Executive Deferred Compensation Plan shall remain in
force under this Plan, provided he or she continues as an employee of the
Company or any of its U.S. Subsidiaries during the period of deferral. Payment
of such amount pursuant to a deferral election made under such Kodak Plan shall
be made in cash in a single lump sum on the fifth business day in March in the
year following the termination of such deferral period, and the amount of the
lump sum due the Participant shall be valued as of the last Valuation Date in
February in the year following the termination of the deferral period. If such
Participant ceases to be an employee of the Company or any of its U.S.
Subsidiaries prior to the end of the fixed period, Section 8 shall govern the
payment of his or her Accounts.
Section 7. Investment in the Stock Account and Transfers Between
Accounts.
Section 7.1 Election Into the Stock Account. If a Participant
elects to defer compensation into his or her Stock Account, his or her
Stock Account shall be credited, as of the date described in Section
5.2, with that number of units of Common Stock, and fractions thereof,
obtained by dividing the dollar amount to be deferred into the Stock
Account by the Market Value of the Common Stock as of such date.
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Section 7.2. Transfers Between Accounts. A Participant may direct
that all or any portion, designated as a whole dollar amount, of the
existing balance of one of his or her Accounts be transferred to his
or her other Account, effective as of (i) the date such election is
made, if and only if such election is made prior to the close of
trading on the New York Stock Exchange on a day on which the Common
Stock is traded on the New York Stock Exchange, or (ii) if such
election is made after the close of trading on the New York Stock
Exchange on a given day or at any time on a day on which no sales of
Common Stock are made on the New York Stock Exchange, then on the next
business day on which the Common Stock is traded on the New York Stock
Exchange (the date described in (i) or (ii), as applicable, is
referred to hereinafter as the election's "Effective Date"). Such
election shall be made in the manner specified by the Committee or its
authorized designee; provided however, that a Section 16 Insider may
only elect to transfer between his or her Accounts if he or she has
made no election within the previous six months to effect an "opposite
way" fund-switching (i.e., transfer out versus transfer in) transfer
into or out of the Stock Account or the Eastman Stock Funds of the
Eastman Investment Plan or the Savings and Investment Plan Appendix,
or any other "opposite way" intra-plan transfer or plan distribution
involving a Company equity securities fund which constitutes a
"Discretionary Transaction" as defined in Rule 16b-3 under the
Exchange Act.
Section 7.3. Transfer Into the Stock Account. If a Participant
elects pursuant to Section 7.2 to transfer an amount from his or her
Interest Account to his or her Stock Account, effective as of the
election's Effective Date, (his or her Stock Account shall be credited
with that number of units of Common Stock; and fractions thereof,
obtained by dividing the dollar amount elected to be transferred by
the Market Value of the Common Stock on the Valuation Date immediately
preceding the election's Effective Date; and (ii) his or her Interest
Account shall be reduced by the amount elected to be transferred.
Section 7.4. Transfer Out of the Stock Account. If a Participant
elects pursuant to Section 7.2 to transfer an amount from his or her
Stock Account to his or her Interest Account, effective as of the
election's Effective Date; (i) his or her Interest Account shall be
credited with a dollar amount equal to the amount obtained by
multiplying the number of units to be transferred by the Market Value
of the Common Stock on the Valuation Date immediately preceding the
election's Effective Date; and (ii) his or her Stock Account shall be
reduced by the number of units elected to be transferred.
Section 7.5. Dividend Equivalents. Effective as of the payment
date for each cash dividend on the Common Stock, the Stock Account of
each Participant who had a balance in his or her Stock Account on the
record date for such dividend shall be credited with a number of units
of Common Stock, and fractions thereof, obtained by dividing (i) the
aggregate dollar amount of such cash dividend payable in respect of
such Participant's Stock Account (determined by multiplying the dollar
value of the dividend paid upon a single share of Common Stock by the
number of units of Common Stock held in the Participant's Stock
Account on the record date for such dividend); by (ii) the Market
Value of the Common Stock on the Valuation Date immediately preceding
the payment date for such cash dividend.
Section 7.6. Stock Dividends. Effective as of the payment date
for each stock dividend on the Common Stock, additional units of
Common Stock shall be credited to the Stock Account of each
Participant who had a balance in his or her Stock Account on the
record date for such dividend. The number of units that shall be
credited to the Stock Account of such a Participant shall equal the
number of shares of Common Stock and fractions thereof, which the
Participant would have received as stock dividends had he or she been
the owner on the record date for such stock dividend of the number of
shares of Common Stock equal to the number of units credited to his or
her Stock Account on such record date.
Section 7.7. Recapitalization. If, as a result of a
recapitalization of the Company, the outstanding shares of Common
Stock shall be changed into a greater number or smaller number of
shares, the number of units credited to a Participant's Stock Account
shall be appropriately adjusted on the same basis.
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Section 7.8. Distributions. Amounts in respect of units of Common
Stock may only be distributed out of the Stock Account by transfer to
the interest Account (pursuant to Sections 7.2 and 7.4 or 7.10) or
withdrawal from the Stock Account (pursuant to Section 8, 9, 10, or
19), and shall be distributed in cash. The number of units to be
distributed from a Participant's Stock Account shall be valued by
multiplying the number of such units by the Market Value of the Common
Stock as of the Valuation Date immediately preceding the date such
distribution is to occur. Pending the complete distribution under
Section 8.2 or liquidation under Section 7. 10 of the Stock Account of
a Participant who has terminated his or her employment with the
Company or any of its U.S. Subsidiaries, the Participant shall
continue to be able to make elections pursuant to Sections 7.2, 7.3,
and 7.4 and his or her Stock Account shall continue to be credited
with additional units of Common Stock pursuant to Sections 7.5, 7.6,
and 7.7.
Section 7.9. Responsibility for Investment Choices. Each
Participant is solely responsible for any decision to defer
compensation into his or her Stock Account and to transfer amounts to
and from his or her Stock Account and accepts all investment risks
entailed by decision, including the risk of loss and a decrease in the
value of the amounts he or she elects to transfer into his or her
Stock Account.
Section 7.10. Liquidation of Stock. The provisions of this Section
7.10 shall be applicable if the Vice President, Human Resources, or
the Compensation Committee, as applicable, determines pursuant to
Section 8 to pay a Participant's Accounts in annual and, on the second
Anniversary of the Participant's retirement or, if earlier,
termination of employment from the Company or any of its U.S.
Subsidiaries, the Participant has a balance remaining in his or her
Stock Account. In such case, effective as of the first day of the
first calendar month immediately following the date of such second
anniversary, the entire balance of the Participant's Stock Account
shall automatically be transferred to his or her Interest Account and
he or she shall thereafter be ineligible to transfer any amounts to
his or her Stock Account. For purposes of valuing the units of Common
Stock subject to such a transfer, the approach described in Section
7.8 shall be used.
Section 8. Payment of Deferred Compensation.
Section 8.1. Background. No withdrawal may be made from a
Participant's Accounts except as provided in this Section 8 and
Sections 9, 10, and 19.
Section 8.2. Manner of Payment. Payment of a Participant's
Accounts shall be made in a single lump sum or annual installments, as
elected by the Participant pursuant to this Section 8. The maximum
number of annual installments is ten. The minimum annual installment
payment permitted under such election (determined based on the value
of the Participant's Accounts as of the last Valuation Date of the
calendar year in which the Participant terminates employment, and
disregarding any earnings under this Plan after such date) shall be
one thousand dollars ($1,000); this minimum shall be applied by
dividing by $1,000 the value of the Participant's Accounts as of the
last Valuation Date of the calendar year in which the Participant
terminates employment, and the result, rounded down to the next
largest whole number, shall be the maximum number of annual
installments permitted. All payments from the Plan shall be made in
cash.
Section 8.3. Timing of Payments. Payments shall be made by the
fifth business day in March and shall commence in any year elected by
the Participant pursuant to this Section 8, up through the tenth year
following the year in which the Participant retires, becomes disabled,
or for any other reason, ceases to be an employee of the Company or
any of its U.S. Subsidiaries, but in no event shall payment commence
later than the year the Participant reaches age 71.
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Section 8.4. Valuation. The amount of each payment shall be equal
to the value, as of the preceding Valuation Date, of the Participant's
Accounts, divided by the number of remaining to be paid. If payment of
a Participant's Accounts is to be paid in installments and the
Participant has a balance in his or her Stock Account at the time of
the payment of an installment, the amount that shall be distributed
from his or her Stock Account shall be the amount obtained by
multiplying the total amount of the installment determined in
accordance with the immediately preceding sentence by the percentage
obtained by dividing the balance in the Stock Account as of the
immediately preceding Valuation Date by the total value of the
Participant's Accounts as of such date. Similarly, in such case, the
amount that shall be distributed from the Participant's Interest
Account shall be the amount obtained by multiplying the total amount
of the installment determined in accordance with the first sentence of
this Section 8.4 by the percentage obtained by dividing the balance in
the Interest Account as of the immediately preceding Valuation Date by
the total value of the Participant's Accounts as of such date.
Section 8.5. Participant Payment Elections. Except as provided in
Section 8.6, an election by a Participant concerning the method of
payment under Section 8.2 or the commencement of payments under
Section 8.3 must be made at least one (1) year before the
Participant's termination of employment, and must be made on forms
provided by the Company. If a Participant does not have a valid
election in force at the time of termination of employment, then (i)
if the value of his Accounts as of the last Valuation Date of the
calendar year in which he terminates employment is less than ten
thousand dollars ($10,000), then his Accounts shall be paid in a
single lump sum; (ii) if the value of his Accounts as of the last
Valuation Date of the calendar year in which he terminates employment
is ten thousand dollars ($10,000) or more, then his Accounts shall be
paid in ten (10) annual installments; and (iii) regardless of whether
payment is made in a single lump sum or installments, payment shall
commence by the fifth business day in March following the calendar
year in which the Participant terminates employment.
Section 8.6. Special Payment Election Rules. Notwithstanding Sections 8.2,
8.3, and 8.5, if a Participant terminates employment less than one (1) year
before the date he first becomes eligible to participate in this Plan, then an
election made by the Participant under this Section 8 no later than thirty (30)
days after the date he first becomes eligible to participate in this Plan shall
be valid. Also notwithstanding Sections 8.2, 8.3, and 8.5, Participants who
retire or otherwise terminate employment no later than January 1, 1999 shall,
subject to the restrictions of Sections 8.2 and 8.3, have the manner and
commencement of payment of their Account determined by the Vice President,
Human Resources, with respect to Participants who are not executive officers of
the Company, and by the Compensation Committee, with respect to Participants
who are executive officers of the Company; and in such event (i) the Vice
President, Human Resources and the Compensation Committee, as applicable, may
expressly designate any such decision under Sections 8.2 or 8.3 concerning time
of payment of benefits and/or form of payment as being irrevocable, and if such
designation is made, such decision may be changed only with the consent of the
Participant, or, if the Participant is deceased, the Participant's beneficiary
under this Plan (if any); and (ii) once payments have commenced to a
Participant or beneficiary under this Plan, the form of payment shall be
considered irrevocable within the meaning of the immediately preceding
sentence, regardless of whether it is designated as such by the Vice President,
Human Resources or the Compensation Committee.
Section 9. Payment of Deferred Compensation After Death. If a
Participant dies prior to complete payment of his or her Accounts, the balance
of such Accounts, valued as of the Valuation Date immediately preceding the
date payment is made, shall be paid in a single, lump sum Payment to: (i) the
beneficiary or contingent beneficiary designated by the Participant on forms
supplied by the Compensation Committee; or, in the absence of a valid
designation of a beneficiary or contingent beneficiary, (ii) the Participant's
estate within 30 days after appointment of a legal representative of the
deceased Participant.
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Section 10.
10.1 Acceleration of Payment for Hardship. Upon written approval
from the Company's Vice President, Human Resources, with
respect to Participants other than executive officers of the
Company, and by the Compensation Committee, with respect to
Participants who are executive officers of the Company, and
subject to the restrictions in the next two sentences, a
Participant, whether or not he or she is still employed by the
Company or any of its U.S. Subsidiaries, may be permitted to
receive all or part of his or her Accounts if the Company's
Vice President, Human Resources, or the Compensation
Committee, as applicable, determines that an emergency event
beyond the Participant's control exists which would cause such
Participant severe financial hardship if the payment of his or
her Accounts were not approved. Any such distribution for
hardship shall be limited to the amount needed to meet such
emergency.
10.2. Payment to Individuals. Any participant in the Eastman
Executive Deferred Compensation Plan may at his or her
discretion withdraw at any time all or part of that person's
account balance under the Plan; provided, if this option is
exercised the individual will forfeit to the Corporation 10%
of his or her account balance, and will not be permitted to
participate in this plan for a period of 36 months from date
any payment to a participant is made under this section.
10.3 Accelerated Payment. If under Eastman Executive Deferred
Compensation Plan one-half or more of the Participants or
one-fifth or more of the Participants with one-half or more
of the value of all benefits owed exercise their option for
immediate distribution in any consecutive six-month period
this will trigger immediate payment to all Participants of
all benefits owed under the terms of the plan, immediate
payout under this section will not involve reduction of the
amounts paid to Participants as set forth in section 10.2.
Any individual that has been penalized in this six-month
period for electing immediate withdrawal will be paid that
penalty, and continuing participation will be allowed, if
payout to all Participants under this section occurs.
10.4 A Section 16 Insider may only receive a withdrawal from his
or her Stock Account pursuant to this Section 10 if he or she
has made no election within the previous six months to effect
a fund-switching transfer into the Stock Account or the
Eastman Stock Fund of the Eastman Investment Plan or the
Savings and Investment Plan Appendix, or any other "opposite
way" intra-plan transfer into a Company equity securities
fund which constitutes a "Discretionary Transaction" as
defined in Rule 16b-3 under the Exchange Act. If such a
distribution occurs while the Participant is employed by the
Company or any of its U.S. Subsidiaries, any election to
defer compensation for the year in which the Participant
receives a withdrawal shall be ineffective as to compensation
earned for the pay period following the pay period during
which the withdrawal is made and thereafter for the remainder
of such year and shall be ineffective as to any other
compensation elected to be deferred for such year.
Section 11. Non-Competition and Non-Disclosure Provision. Participant
will not, without the written consent of the Company, either during his or her
employment by Company or any of its U.S. Subsidiaries or thereafter, disclose
to anyone or make use of any confidential information which he or she has
acquired during his or her employment relating to any of the business of the
Company or any of its subsidiaries, except as such disclosure or use may be
required in connection with his or her work as an employee of Company or any of
its U.S. Subsidiaries. During Participant's employment by the Company or any of
its U.S. Subsidiaries, and for a period of two years after the termination of
such employment, he or she will not, without the written consent of the
Company, either as principal, agent, consultant, employee or otherwise, engage
in any work or other activity
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in competition with the Company in the field or fields in which he or she has
worked for the Company or any of its U.S. Subsidiaries. The agreement in this
Section 11 applies separately in the United States and in other countries but
only to the extent that its application shall be reasonably necessary for the
protection of the Company. if the Participant does. not comply with the terms
of this Section 11, the Company's Vice President, Human Resources, with respect
to Participants other than executive officers of the Company, or the
Compensation Committee, with respect to executive officers of the Company may,
in his or its sole discretion, direct the Company to pay to the Participant the
balance credited to his or her Interest Account and/or Stock Account.
Section 12. Participant's Rights Unsecured. The benefits payable under
this Plan shall be paid by the Company each year out of its general assets. To
the extent a Participant acquires the right to receive a payment under this
Plan, such right shall be no greater than that of an unsecured general creditor
of the Company. No amount payable under this Plan may be assigned, transferred,
encumbered or subject to any legal process for the payment of any claim against
a Participant. No Participant shall have the right to exercise any of the
rights or privileges of a shareowner with respect to the units credited to his
or her Stock Account.
Section 13. No Right to Continued Employment. Participation in the Plan
shall not give any employee any right to remain in the employ of the Company or
any of its U.S. Subsidiaries. The Company and each employer U S. Subsidiary
reserve the right to terminate any Participant at any time.
Section 14. Statement of Account. Statements will be sent no less
frequently than annually to each Participant or his or her estate showing the
value of the Participant's Accounts.
Section 15. Deductions. The Company will withhold to the extent required
by law a applicable income and other taxes from amounts deferred or paid under
the Plan.
Section 16. Administration.
Section 16.1. Responsibility. Except as expressly provided
otherwise herein, the Compensation Committee shall have total and
exclusive responsibility to control, operate, manage and administer
the Plan in accordance with its terms.
Section 16.2. Authority of the Compensation Committee. The
Compensation Committee shall have all the authority that may be
necessary or helpful to enable it to discharge its responsibilities
with respect to the Plan. Without limiting the generality of the
preceding sentence, the Compensation Committee shall have the
exclusive right to interpret the Plan, to determine eligibility for
participation in the Plan, to decide all questions concerning
eligibility for and the amount of benefits payable under the Plan, to
construe any ambiguous provision of the Plan, to correct any default,
to supply any omission, to reconcile any inconsistency, and to decide
any and all questions arising in the administration, interpretation,
and application of the Plan.
Section 16.3. Discretionary Authority. The Compensation Committee
shall have full discretionary authority in all matters related to the
discharge of its responsibilities and the exercise of its authority
under the Plan including, without limitation, its construction of the
terms of the Plan and its determination of eligibility for
participation and benefits under the Plan. It is the intent that the
decisions of the Compensation Committee and its action with respect to
the Plan shall be final and binding upon all persons having or
claiming to have any right or interest in or under the Plan and that
no such decision or action shall be modified upon judicial review
unless such decision or action is proven to be arbitrary or
capricious.
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Section 16.4. Authority of Vice President Human Resources. Where
expressly provided for under Sections 8, 10 and 11, the authority of
the Compensation Committee is delegated to the Company's Vice
President, Human Resources, and to that extent the provisions of
Section 16.1 through 16.3 above shall be deemed to apply to such Vice
President.
Section 16.5. Delegation of Authority. The Compensation Committee
may provide additional delegation of some or all of its authority
under the Plan to any person or persons provided that any such
delegation be in writing.
Section 17. Amendment. The Board may suspend or terminate the Plan at any
time. In addition, the Board may, from time to time, amend the Plan in any
manner without shareowner approval; provided however, that the Board may
condition any amendment on the approval of shareowners if such approval is
necessary or advisable with respect to tax, securities, or other applicable
laws. However, no amendment, modification, or termination shall, without the
consent of a Participant, adversely affect such Participant's accruals in his
or her Accounts as of the date of such amendment, modification, or termination.
Section 18. Governing Law. The Plan shall be construed, governed and
enforced in accordance with the law of Tennessee, except as such laws are
preempted by applicable federal law.
Section 19. Change in Control.
Section 19.1. Background. The terms of this Section 19 shall
immediately become operative, without further action or consent by any
person or entity, upon a Change in Control, and once operative shall
supersede and control over any other provisions of this Plan.
Section 19.2. [Reserved]
Section 19.3. Amendment On or After Change in Control. On or after
a Change in Control, no action, including, but not by way of
limitation, the amendment, suspension or termination of the Plan,
shall be taken which would affect the rights of any Participant or the
operation of this Plan with respect to the balance in the
Participant's Accounts without the written consent of the Participant,
or, if the Participant is deceased, the Participant's beneficiary
under this Plan (if any).
Section 19.4. Attorney Fees The Corporation shall pay all
reasonable legal fees and related expenses incurred by a participant
in seeking to obtain or enforce any payment, benefit or right such
participant may be entitled to under the plan after a Change in
Control; provided, however, the participant shall be required to repay
any such amounts to the Corporation to the extent a court of competent
jurisdiction issues a final and non-appealable order setting forth the
determination that the position taken by the participant was frivolous
or advanced in bad faith.
Section 20. Compliance with SEC Regulations. It is the Company's intent
that the Plan comply in all respects with Rule 16b-3 of the Exchange Act, and
any regulations promulgated thereunder. If any provision of the Plan is found
not to be in compliance with such rule, the provision shall be deemed null and
void. All transactions under the plan, including, but not by way of limitation,
a Participant's election to defer compensation or transfer Account balances
under Section 7 and hardship withdrawals under Section 10, shall be executed in
accordance with the requirements of Section 16 of the Exchange Act, as amended
and any regulations promulgated thereunder. To the extent that any of the
provisions contained herein do not conform with Rule 16b-3 of the Exchange Act
or any amendments thereto or any successor regulation, then the Committee may
make such modifications so as to conform the Plan to the Rule's requirements.
Section 21. Successors and Assigns. This Plan shall be binding upon the
successors and assigns of the parties hereto.
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SCHEDULE A
Holston Defense Corporation
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<PAGE> 1
EXHIBIT 10.17
LONG-TERM PERFORMANCE SUBPLAN
OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN
1999-2001 PERFORMANCE PERIOD
EASTMAN CHEMICAL COMPANY
Effective January 1, 1999
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<PAGE> 2
LONG-TERM PERFORMANCE SUBPLAN
OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN
1999-2001 PERFORMANCE PERIOD
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Section Title Page
- ------- ----- ----
<S> <C> <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>
103
<PAGE> 3
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE SUBPLAN
OF THE 1997 OMNIBUS LONG-TERM COMPENSATION PLAN
1999-2001 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 1999-2001 Performance
Period specified herein, effective as of January 1, 1999 (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, 1999.
(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, 1999 through December
31, 2001.
(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, in the period beginning on the tenth trading day
preceding the beginning of the Performance Period and ending
on the tenth trading day of the Performance Period and (II)
the average of such closing or last sale prices for such stock
in the period beginning on the tenth trading day preceding the
end of the Performance Period and ending on the tenth trading
day following the end of the Performance Period) plus (B)
dividends declared, assuming reinvestment of dividends, and
expressed as a percentage return on a shareowners's
hypothetical investment.
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<PAGE> 4
(b) Any capitalized terms used but not otherwise defined in this Subplan
shall have the respective meanings set forth in the Plan.
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 1999,
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 1999 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 1999 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 1999 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,
105
<PAGE> 5
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
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(c) and
9(d), 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) Tax Withholding. The company may withhold or require the grantee to
remit a cash amount sufficient to satisfy federal, state, and local
taxes (including the participant's FICA obligation) required by law to
be withheld. Further, either the Company or the grantee may elect to
satisfy the withholding requirement by having the Company withhold
shares of common stock having a fair market value on the date the tax
is to be determined equal to the minimum statutory total tax which
could be imposed on the transaction.
(c) 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.
106
<PAGE> 6
(d) 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.
(e) 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(c) or 9(d), 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.
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.
107
<PAGE> 7
EXHIBIT A
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE SUBPLAN GRANT TABLE
1999-2001 CYCLE
Original on File in
Management Compensation
108
<PAGE> 8
EXHIBIT B
COMPANIES IN THE PEER GROUP
Air Products and Chemicals, Inc.
Crompton & Knowles Corporation
Cytec Industries, Inc.
Dow Chemical Company
E. I. du Pont de Nemours and Company
H. B. Fuller Company
The Geon Company
Great Lakes Chemical Corporation
M. A. Hanna Company
Hercules Chemical Corporation
Imperial Chemical Industries PLC
Lyondell Petrochemical Company
Millennium Chemicals, Inc.
Morton International, Inc.
Rohm and Haas Company
Solutia
Union Carbide Corporation
Wellman, Inc.
Witco Corporation
109
<PAGE> 9
EXHIBIT C
EASTMAN CHEMICAL COMPANY
LONG-TERM PERFORMANCE SUBPLAN
1999-2001 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>
110
<PAGE> 1
EXHIBIT 12.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES
(Dollars in Millions)
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Earnings from continuing
operations before provision
for income taxes $ 360 $ 446 $ 607 $ 899 $ 550
Add:
Interest expense 96 87 67 79 87
Rental expense (1) 28 27 22 16 7
Amortization of
capitalized interest 16 16 14 13 15
--------- --------- --------- --------- ---------
Earnings as adjusted $ 500 $ 576 $ 710 $ 1,007 $ 659
========= ========= ========= ========= =========
Fixed charges:
Interest expense $ 96 $ 87 $ 67 $ 79 $ 87
Rental expense (1) 28 27 22 16 7
Capitalized interest 31 41 28 9 11
--------- --------- --------- --------- ---------
Total fixed charges $ 155 $ 155 $ 117 $ 104 $ 105
========= ========= ========= ========= =========
Ratio of earnings to fixed charges 3.2x 3.7x 6.1x 9.7x 6.3x
========= ========= ========= ========= =========
</TABLE>
- ---------------------------
(1) For all periods presented, the interest component of rental expense is
estimated to equal one-third of such expense.
111
<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.R.L. 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 Deutschland GmbH Germany
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 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
</TABLE>
112
<PAGE> 2
SUBSIDIARIES
<TABLE>
<CAPTION>
JURISDICTION OF
INCORPORATION
NAME OF SUBSIDIARY OR ORGANIZATION
<S> <C>
Eastman Chemical Netherlands B.V. Netherlands
Eastman Chemical S. Com P.A. Spain
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
Ernst Jager Fabrik Chemischer Rohstoffe GmbH & Co. KG Germany
Hartlepet, Limited United Kingdom
Holston Defense Corporation Virginia
Jager Chemie AG, Lichtenstein Switzerland
Jager Chemie France SARL France
Jager Chemie Nederland B.V. The Netherlands
Jager Verwaltungs - GmbH Germany
Mustang Pipeline Company Texas
Pinto Pipeline Company of Texas Texas
Union-Chemie Singapore PTE LTD Singapore
Workington Investments Limited United Kingdom
</TABLE>
113
<PAGE> 1
EXHIBIT 23.01
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statement on Form S-3 (No. 333-62597) of
Eastman Chemical Company of our report dated January 29, 1999 appearing on page
34 of this Form 10-K.
We also 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 29, 1999 appearing on page
34 of this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- ------------------------------
PRICEWATERHOUSECOOPERS LLP
New York, New York
March 5, 1999
114
<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 31,1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<CASH> 29
<SECURITIES> 0
<RECEIVABLES> 776<F1>
<ALLOWANCES> 0
<INVENTORY> 493
<CURRENT-ASSETS> 1,415
<PP&E> 8,594
<DEPRECIATION> 4,534
<TOTAL-ASSETS> 5,876
<CURRENT-LIABILITIES> 985
<BONDS> 1,649
0
0
<COMMON> 1
<OTHER-SE> 1,933
<TOTAL-LIABILITY-AND-EQUITY> 5,876
<SALES> 4,481
<TOTAL-REVENUES> 4,481
<CGS> 3,546
<TOTAL-COSTS> 3,546
<OTHER-EXPENSES> 501
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 96
<INCOME-PRETAX> 360
<INCOME-TAX> 111
<INCOME-CONTINUING> 249
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 249
<EPS-PRIMARY> 3.15
<EPS-DILUTED> 3.13
<FN>
<F1>ASSET VALUES REPRESENT NET AMOUNTS
</FN>
</TABLE>
<PAGE> 1
EXHIBIT 99.01
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
SUPPLEMENTAL OPERATING SEGMENT INFORMATION
1998 CHANGE FROM 1997
<TABLE>
<CAPTION>
FOURTH QUARTER TWELVE MONTHS
% CHANGE % CHANGE
SALES OPER. (1) SALES OPER. (1)
REVENUE EARNINGS REVENUE EARNINGS
=====================================================================================================
<S> <C> <C> <C> <C>
SPECIALTY & PERFORMANCE
SEGMENT (6)% (74)% (5)% (21)%
=====================================================================================================
Products primarily included:
Specialty plastics (2) (6)% - 0% ++
Performance chemicals (15)% -- (12)% --
Fine chemicals 7% ++ (1)% --
Fibers (3)% -- (9)% --
Coatings, inks & resins (10)% -- (5)% --
=====================================================================================================
CORE PLASTICS SEGMENT (14)% (26)% -% 57%
=====================================================================================================
Products primarily included:
Container plastics (13)% -- 5% ++
Flexible plastics (2) (17)% -- (17)% --
=====================================================================================================
CHEMICAL INTERMEDIATES
SEGMENT (21)% (58)% (8)% (20)%
=====================================================================================================
=====================================================================================================
TOTAL EASTMAN (10)% (106)% (4)% (14)%
=====================================================================================================
</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) The 1997 amounts have been reclassified to conform to the 1998
presentation, which is prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
115
<PAGE> 1
EXHIBIT 99.02
EASTMAN CHEMICAL COMPANY AND SUBSIDIARIES
RESTATED OPERATING SEGMENT INFORMATION
QUARTERLY SALES AND EARNINGS INFORMATION(1)
(Dollars in Millions)
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH TOTAL
QUARTER QUARTER QUARTER QUARTER YEAR
<S> <C> <C> <C> <C> <C>
SPECIALTY & PERFORMANCE
Sales
1998 $ 685 $ 709 $ 700 $ 642 $ 2,736
1997 742 746 710 680 2,878
1996 731 751 736 705 2,923
Operating earnings
1998 $ 105 $ 115 $ 122 $ 15 $ 357
1997 138 133 123 58 452
1996 126 150 147 131 554
CORE PLASTICS
Sales
1998 $ 275 $ 283 $ 270 $ 243 $ 1,071
1997 245 280 260 282 1,067
1996 355 308 249 231 1,143
Operating earnings (losses)
1998 $ (10) $ 12 $ (8) $ (34) $ (40)
1997 (32) (16) (17) (27) (92)
1996 33 (3) (22) (44) (36)
</TABLE>
- ------------------------
(1) Prior period amounts have been reclassified to conform to the 1998
presentation, which is prepared in accordance with SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information."
116
